C237 Taxation I Practice Questions - Set 1 - Part 1

Correct Answer: Excludable from gross income

Under the IRS rules for accelerated death benefits, life insurance proceeds received by a terminally ill individual are excludable from gross income. These benefits are considered non-taxable as they compensate for the anticipated death.

Correct Answer: Depreciable property used in a business and held for more than one year

Section 1231 assets refer to depreciable property or real estate used in a trade or business and held for more than one year. These assets receive favorable tax treatment when sold.

Correct Answer: Prepaid expenses are deductible if the benefit does not extend beyond 12 months and does not exceed the tax year after the year of payment

The 12 Month Rule allows businesses to deduct prepaid expenses if the benefit does not extend beyond 12 months and does not go beyond the tax year after the payment.

Correct Answer: The non-cash property received that can trigger taxable gain

In a like-kind exchange, "boot" refers to any non-cash property received, such as money, that may trigger taxable gain for the recipient.

Correct Answer: To require 1231 gains to be treated as ordinary income to the extent of unrecaptured 1231 losses from the prior five years

The 1231 Look Back Rule prevents taxpayers from benefiting from 1231 gains at favorable tax rates if they have previously deducted 1231 losses as ordinary losses in the last five years.

Correct Answer: Tangible personal property and intangible property subject to cost recovery deductions

Section 1245 property refers to tangible personal property and certain intangible property subject to depreciation or amortization deductions, such as machinery and patents.

Correct Answer: All-Inclusive Income Doctrine

The All-Inclusive Income Doctrine states that gross income includes all income from whatever source derived, including bartering transactions.

Correct Answer: 30 days

Audited individuals are given 30 days to either request a conference with an appeals officer or agree to the proposed adjustment.

Correct Answer: Substance Over Form Doctrine

The Substance Over Form Doctrine allows the IRS to consider the true substance of a transaction, rather than its legal form, when determining tax consequences.

Correct Answer: Half a year’s worth of depreciation is allowed in the first year, regardless of when the property was placed in service

The Half-Year Convention applies to personal property and allows for half a year of depreciation in both the first and last year, regardless of when the asset was actually placed in service.

Correct Answer: Corporations that retain earnings without a valid business purpose

The Accumulated Earnings Tax penalizes corporations that accumulate earnings beyond reasonable business needs, as this can be seen as an attempt to avoid dividend distributions.

Correct Answer: Qualifying Widow(er)

The Qualifying Widow(er) status allows a surviving spouse to use this status for up to two years if they remain unmarried and maintain a household for a dependent child.

Correct Answer: To assign a score to tax returns to identify the likelihood of underreporting

The DIF (Discriminant Function) system assigns a score to each tax return, representing the likelihood that the tax liability has been underreported. A higher score means a higher likelihood of underreporting.

Correct Answer: Ad Valorem tax

Ad Valorem taxes are based on the assessed value of property, typically imposed on real estate and personal property.

Correct Answer: Real property subject to cost recovery deductions

Section 1250 property includes real estate, such as office buildings and warehouses, subject to depreciation deductions.

Correct Answer: Income must be recognized when a taxpayer has a clear and unrestricted right to it

The Claim of Right Doctrine holds that income must be included in gross income when it is received, and there are no restrictions on the taxpayer’s right to use the income.

Correct Answer: To determine when income is earned for tax purposes

The All Events Test is used to decide when income is earned and expenses are incurred by determining when all events have occurred that fix the right to receive income or liability for expenses.

Correct Answer: Additional Medicare Tax

The Additional Medicare Tax applies at a rate of 0.9% on earnings above $200,000 for individuals, $250,000 for married couples filing jointly, and $125,000 for married individuals filing separately.

Correct Answer: Deductible at fair market value but limited to 30% of AGI

Donating capital gain property, such as stocks or real estate, to a qualified charity allows the taxpayer to deduct the fair market value, but the deduction is limited to 30% of their AGI.

Correct Answer: A rule that converts part of the gain on real property into ordinary income

Section 1250 depreciation recapture for corporations converts a portion of the gain on real property, which was depreciated, into ordinary income rather than capital gain.