Exam 1: An Introduction to Taxation and Understanding the Federal Tax Law

Jason's business warehouse is destroyed by fire.As the insurance proceeds exceed the basis of the property, a gain results.If Jason shortly reinvests the proceeds in a new warehouse, no gain is recognized due to the application of the wherewithal to pay concept.

No state has offered an income tax amnesty program more than once.

The value added tax (VAT) has had wide acceptance in the international community.

The Federal excise tax on cigarettes is an example of a proportional tax.

The FICA tax (Medicare component) on wages is progressive since the tax due increases as wages increase.

In preparing a tax return, all questions on the return must be answered.

A characteristic of the fraud penalties is:

On occasion, Congress has to enact legislation that clarifies the tax law in order to change a result reached by the U.S.Supreme Court.

For the negligence penalty to apply, the underpayment must be caused by intentional disregard of rules and regulations without intent to defraud.

A CPA firm in California sends many of its less complex tax returns to be prepared by a group of accountants in India.If certain procedures are followed, this outsourcing of tax return preparation is proper.

For omissions from gross income in excess of 25% of that reported, there is no statute of limitations on additional income tax assessments by the IRS.

Using the choices provided below, show the justification for each provision of the tax law listed.Note: In some cases, more than one answer is appropriate. More rapid expensing for tax purposes of the costs of installing pollution control devices.

Property can be transferred within the family group by gift or at death.One motivation for preferring the gift approach is:

To lessen, or eliminate, the effect of multiple taxation, a taxpayer who is subject to both foreign and U.S.income taxes on the same income is allowed either a deduction or a credit for the foreign tax paid.

In 1985, Roy leased real estate to Drab Corporation for 20 years.Drab Corporation made significant capital improvements to the property.In 2005, Roy decides not to renew the lease and vacates the property.At that time, the value of the improvements is $800,000.Roy sells the real estate in 2012 for $1,200,000 of which $900,000 is attributable to the improvements.How and when is Roy taxed on the improvements made by Drab Corporation?

An inheritance tax is a tax on a decedent's right to pass property at death.

A use tax is imposed by:

Scott files his tax return 65 days after the due date.Along with the return, Scott remits a check for $50,000 which is the balance of the tax owed.Disregarding the interest element, Scott's total failure to file and to pay penalties are:

For state income tax purposes, a majority of states allow a deduction for Federal income taxes.