C237 Taxation I Practice Questions - Set 3 - Part 1

Correct Answer: b) Value Added Tax

A Value Added Tax (VAT) is imposed on the value added at each stage of production and distribution. It is commonly used in Europe.

Correct Answer: b) An increasing tax rate as income rises

A progressive tax system imposes higher tax rates on higher income levels, making the tax rate increase as the taxpayer's income increases.

Correct Answer: c) The individual who owns the property

The Assignment of Income Doctrine ensures that income from property is taxed to the person who owns the property, preventing avoidance of taxes by transferring income to others.

Correct Answer: a) Reporting income and deductions for sole proprietors

Schedule C is used by sole proprietors to report their business income and deductions on their personal tax return.

Correct Answer: b) A doctrine that requires transactions to have a substantial purpose and economic impact beyond tax benefits

The Economic Substance Doctrine prevents taxpayers from structuring transactions solely for tax benefits without a legitimate business purpose or economic effect.

Correct Answer: b) Partially excluded from capital gains tax

Qualified Small Business Stock (QSBS) may be eligible for a partial exclusion from capital gains tax if held for more than five years, providing favorable tax treatment for long-term investments in small businesses.

Correct Answer: b) A tax that decreases as income increases

A regressive tax system imposes a lower effective tax rate on higher-income taxpayers, meaning the tax burden decreases as income rises.

Correct Answer: b) When the right to the income becomes fixed and there are no restrictions on its use

The Claim of Right Doctrine requires income to be recognized when the taxpayer has an unrestricted right to it, even if they have not yet received the payment.

Correct Answer: a) Property that generates ordinary income when sold

Ordinary income property includes assets such as inventory or accounts receivable that generate ordinary income when sold, rather than capital gains.

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

Capital gain property, such as appreciated stocks, can be deducted at fair market value when donated to a charity, but the deduction is limited to 30% of the taxpayer’s adjusted gross income (AGI).

Correct Answer: b) The transactions are combined into one for tax purposes

The Step Transaction Doctrine treats a series of related steps or transactions as a single transaction for tax purposes, ensuring that the true economic effect is considered.

Correct Answer: b) To exceed the standard deduction by grouping multiple years of deductions into one year

The bunching strategy allows taxpayers to exceed the standard deduction by paying multiple years' worth of deductible expenses in one year, maximizing the tax benefit.

Correct Answer: b) Taxable to the extent of the gain realized in the transaction

"Boot" refers to non-like-kind property received in a like-kind exchange, and it is taxable to the extent of the gain realized on the transaction.

Correct Answer: b) All income from whatever source derived

The All-Inclusive Income concept means that all income, from any source, is considered gross income unless specifically excluded by law.

Correct Answer: a) Three years from the original due date or the date the return was filed, whichever is later

The statute of limitations for filing an amended tax return is generally three years from the later of the original due date or the actual filing date.

Correct Answer: b) Medicare Tax

The Medicare Tax helps fund medical costs for qualifying individuals, primarily retirees and those with disabilities, once they meet eligibility requirements.

Correct Answer: b) It governs the practice of tax professionals before the IRS

Circular 230 contains rules and regulations that govern the conduct of tax professionals, ensuring ethical practices and competency when dealing with the IRS.

Correct Answer: b) It ensures that taxpayers pay a minimum amount of tax, regardless of deductions or exclusions

The AMT was designed to ensure that taxpayers with significant deductions, exclusions, and credits still pay a minimum amount of tax each year.

Correct Answer: b) It allows deferral of tax on gains until the replacement property is received

A deferred like-kind exchange allows taxpayers to defer taxes on gains realized from the exchange of property, provided certain conditions are met, including receiving the replacement property within specific time limits.

Correct Answer: b) A deduction for certain capital expenditures on tangible personal property used in a trade or business

The Section 179 Deduction allows businesses to deduct the cost of certain tangible personal property used in a trade or business in the year it is placed in service, rather than depreciating it over time.