C237 Taxation I Practice Questions - Set 2 - Part 1

Correct Answer: b) To determine when revenue is earned and can be recognized

The All Events Test ensures that income is recognized when all events have occurred that fix the taxpayer's right to receive the income and the amount can be determined with reasonable accuracy.

Correct Answer: b) It is equally owned by both spouses

In community property states, income earned during the marriage is treated as jointly owned by both spouses, regardless of which spouse earned it.

Correct Answer: c) Half of the annual depreciation is allowed in both the year the asset is placed in service and the year it is disposed of

The Half-Year Convention allows a business to claim half a year of depreciation in both the first and last year the property is used.

Correct Answer: b) A closely held corporation generating primarily passive income

A Personal Holding Company is a closely held corporation that earns most of its income from passive sources such as dividends, interest, and rent.

Correct Answer: b) An expenditure that is neither excessive nor extravagant

For an expense to be deductible, it must be "reasonable in amount," meaning it cannot be excessively high or extravagant in relation to the business benefit.

Correct Answer: c) It may qualify for a partial exclusion from capital gains tax if held for at least five years

Qualified Small Business Stock may allow for a significant exclusion from capital gains tax if certain conditions are met, such as holding the stock for more than five years.

Correct Answer: b) Net 1231 gains are treated as ordinary income to the extent of previously deducted 1231 losses

The 1231 Look Back Rule prevents taxpayers from benefiting from favorable capital gain treatment when they have deducted 1231 losses as ordinary losses in prior years.

Correct Answer: b) Excludable from income

Life insurance proceeds received by a terminally ill individual are generally excluded from gross income, as they are treated as accelerated death benefits.

Correct Answer: a) The IRS can ignore the legal form of a transaction and tax it based on its economic reality

The Substance Over Form Doctrine allows the IRS to reclassify transactions based on their true economic substance rather than their legal structure.

Correct Answer: c) Business expenses for a sole proprietor

Business expenses for a sole proprietor are considered "Above the Line" deductions, reducing gross income to arrive at Adjusted Gross Income (AGI).

Correct Answer: a) Accumulated Earnings Tax

The Accumulated Earnings Tax is designed to penalize corporations that retain earnings without a reasonable business purpose, in an effort to avoid paying dividends.

Correct Answer: b) The individual who performed the services

The Assignment of Income Doctrine holds that income is taxed to the individual who earned it through services, preventing assignment of income to others to avoid tax.

Correct Answer: b) Tangible personal property or intangible property subject to cost recovery deductions

Section 1245 Property includes tangible personal property, such as machinery, as well as certain intangible property that is subject to depreciation or amortization.

Correct Answer: c) Taxpayers from benefiting from capital gain treatment if they have deducted 1231 losses as ordinary losses in previous years

The 1231 Look Back Rule ensures that taxpayers treat current-year 1231 gains as ordinary income to the extent of previously deducted ordinary losses.

Correct Answer: b) Income is taxed when credited to the taxpayer's account or otherwise made available

Under the Constructive Receipt Doctrine, income is taxable when it is made available to the taxpayer, regardless of whether they have physically received it.

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

Capital gain property, such as stocks or real estate, can be deducted at its fair market value when donated to a qualified charity, but the deduction is limited to 30% of the taxpayer's AGI.

Correct Answer: d) Gradual wear and tear on property

Casualty losses must result from sudden, unexpected, or unusual events, such as natural disasters or accidents. Gradual wear and tear does not qualify.

Correct Answer: b) Tax Court will follow the rulings of the appellate court in the circuit to which the case is appealable

The Golsen Rule dictates that the U.S. Tax Court will follow the decisions of the appellate court in the jurisdiction where the case could be appealed.

Correct Answer: a) An exchange where the taxpayer transfers property but receives the replacement property at a later time

In a deferred like-kind exchange, the taxpayer transfers property but may not receive the replacement property until later, allowing the deferral of tax on any gain.

Correct Answer: c) It simplifies tax reporting and aligns income recognition with cash flow

The cash method of accounting is simpler for small businesses because it recognizes income when received and deductions when paid, aligning with the business’s cash flow.