C237 Taxation I Practice Questions - Set 3 - Part 2

Correct Answer: b) Estate Tax

The estate tax is levied on the transfer of wealth from a deceased individual to their heirs if the value of the estate exceeds a specific exemption threshold.

Correct Answer: a) Tax evasion through the use of multiple transactions to achieve a single purpose

The Step Transaction Doctrine prevents taxpayers from disguising a single transaction as multiple steps to obtain favorable tax treatment, ensuring the true intent is considered for tax purposes.

Correct Answer: b) They are non-taxable to the extent they are used for business purposes

Fringe benefits such as health insurance and company cars may be non-taxable to employees if they are used for business purposes or qualify under specific exclusions.

Correct Answer: a) Require net 1231 gains to be treated as ordinary income to the extent of prior 1231 losses deducted as ordinary losses

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

Correct Answer: b) A tax that covers both Social Security and Medicare contributions for self-employed individuals

Self-employment tax is paid by individuals who work for themselves and covers both the employer and employee portions of Social Security and Medicare taxes.

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) 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) A tax that covers both Social Security and Medicare contributions for self-employed individuals

The self-employment tax is paid by individuals who work for themselves and covers both the employer and employee portions of Social Security and Medicare taxes.

Correct Answer: a) A refundable tax credit designed to help offset the effect of employment taxes for low-income taxpayers

The Earned Income Credit is a refundable tax credit aimed at reducing the tax burden on low-income individuals and families, encouraging employment by offsetting payroll taxes.

Correct Answer: a) Adoption Credit

The Adoption Credit is a nonrefundable tax credit, meaning it can reduce a taxpayer’s liability to zero but cannot result in a refund if the credit exceeds the liability.

Correct Answer: b) When income is credited to the taxpayer's account or made available without substantial limitations

Under the Constructive Receipt Doctrine, income is considered received when it is credited to the taxpayer’s account or otherwise made available without restrictions.

Correct Answer: b) Income is recognized when it is received, and expenses are deducted when paid

Under the cash method of accounting, income is recognized when it is actually or constructively received, and expenses are deducted when paid, aligning tax reporting with cash flow.

Correct Answer: b) A rule that defers the recognition of income until a later year

Nonrecognition provisions allow taxpayers to defer recognizing realized income in certain circumstances, such as in a like-kind exchange, until a future period.

Correct Answer: b) A privately sponsored foundation that directly funds and conducts charitable activities

Private operating foundations are nonprofit organizations that directly engage in charitable activities, in contrast to non-operating foundations that primarily distribute funds to other charities.

Correct Answer: a) To penalize corporations for retaining earnings without a valid business purpose

The Accumulated Earnings Tax is intended to penalize corporations that retain earnings beyond reasonable business needs, preventing tax avoidance by deferring dividend distributions.

Correct Answer: b) It provides accelerated depreciation for tangible personal property, resulting in larger deductions in earlier years

MACRS provides accelerated depreciation methods, allowing businesses to take larger deductions in the earlier years of an asset’s useful life, which can result in significant tax savings.

Correct Answer: b) Bad debts are deducted when they become worthless

The Direct Write-Off Method requires businesses to deduct bad debts only when the debt becomes wholly or partially worthless, as opposed to when the debt is merely anticipated.

Correct Answer: b) Treated as capital gain to the extent it exceeds prior 1231 losses

For noncorporate taxpayers, Section 1231 gains are treated as capital gains to the extent that they exceed prior 1231 losses, allowing for favorable tax treatment on long-term assets used in a trade or business.

Correct Answer: c) Depreciation of personal property under MACRS

Accelerated depreciation under the MACRS system is a tax preference item that can trigger AMT liability, as it provides greater tax benefits than straight-line depreciation.

Correct Answer: b) Gain on real estate attributable to depreciation deductions taxed at a maximum rate of 25%

Unrecaptured Section 1250 Gain is the portion of gain on real property attributable to depreciation deductions, which is taxed at a maximum rate of 25%, rather than the lower capital gains rate.