C237 Taxation I Practice Questions - Set 4 - Part 1

Correct Answer: b) An exchange where the taxpayer transfers property but receives the replacement property later

A deferred like-kind exchange allows the taxpayer to transfer property and receive the replacement property at a later date, with the deferral of tax on the gain.

Correct Answer: b) Regular taxable income minus tax preferences and adjustments

The AMT Base is calculated by adjusting regular taxable income for certain preference items and adjustments, ensuring that taxpayers with substantial tax benefits still pay a minimum amount of tax.

Correct Answer: b) To tax transactions based on their true economic substance, regardless of legal form

The Substance Over Form Doctrine allows the IRS to look beyond the legal structure of a transaction to tax it based on its true economic reality.

Correct Answer: b) They are carried forward to offset future 1231 gains

Nonrecaptured net 1231 losses are carried forward and used to offset future 1231 gains, preventing the taxpayer from receiving favorable capital gain treatment until the losses are recaptured.

Correct Answer: b) Taxed at a special capital gains rate of 28%

Collectibles, such as art and antiques, are subject to a special maximum capital gains tax rate of 28% when held for more than one year.

Correct Answer: b) Income is recognized when all events have occurred that fix the right to receive the income

Under the All Events Test, income must be recognized when all events determining the taxpayer's right to receive the income have occurred and the amount can be determined with reasonable accuracy.

Correct Answer: b) To penalize closely held corporations that retain passive income without distributing it

The Personal Holding Company Tax is intended to penalize closely held corporations that retain income from passive sources, such as dividends or rent, rather than distributing it to shareholders.

Correct Answer: b) Business-related travel expenses

The IRS allows deductions for ordinary and necessary business expenses, which are expenses that are helpful and appropriate for the business, such as travel expenses directly related to business activities.

Correct Answer: a) Deferral of taxes through the use of multiple steps in a transaction

The Step Transaction Doctrine prevents taxpayers from structuring a single transaction as multiple steps in order to achieve a more favorable tax outcome.

Correct Answer: b) Ensure that taxpayers with large deductions still pay a minimum amount of tax

The AMT ensures that taxpayers who claim significant deductions, exclusions, or credits still pay a minimum level of tax, by requiring them to calculate their tax liability under an alternative system.

Correct Answer: b) A concept that predicts taxpayers will substitute nontaxable activities for taxable ones when tax rates increase

The Substitution Effect suggests that when taxes increase, taxpayers may shift from taxable activities to nontaxable ones, reducing their overall tax burden.

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

In a progressive tax system, the tax rate increases as the taxpayer’s income increases, meaning higher-income individuals pay a higher percentage of their income in taxes.

Correct Answer: a) Three years from the filing date of the return

The IRS generally has three years from the filing date of the return (or the original due date, if later) to assess a tax deficiency against a taxpayer.

Correct Answer: b) To protect taxpayers from penalties if certain requirements are met

Safe Harbor Provisions protect taxpayers from penalties if they comply with specific rules or meet certain conditions set by the IRS, providing certainty in tax compliance.

Correct Answer: a) The conversion of capital gain into ordinary income based on depreciation deductions for real property

Under Section 1245, depreciation recapture requires that the portion of the gain attributable to prior depreciation deductions on tangible personal property be taxed as ordinary income, rather than capital gain.

Correct Answer: b) Half of the annual depreciation is allowed in both the first and last year of the asset's useful life

The Half-Year Convention allows for half of the annual depreciation to be taken in both the year the asset is placed in service and the year it is disposed of, regardless of the exact dates.

Correct Answer: b) A rule that allows for deferral of taxes on gains from the exchange of like-kind real property

Section 1031 allows taxpayers to defer the recognition of gains or losses when they exchange real property used in business or held for investment for similar property.

Correct Answer: b) To exceed the standard deduction by paying multiple years' worth of deductible expenses in one year

The bunching strategy allows taxpayers to maximize their deductions in one year by grouping deductible expenses to exceed the standard deduction, thus reducing their taxable income.

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

Under the Constructive Receipt Doctrine, income is considered received and taxable when it is credited to the taxpayer’s account or otherwise made available, even if not physically in hand.

Correct Answer: b) To tax a child's unearned income over a certain threshold at the parents' tax rate

The Kiddie Tax applies to unearned income, such as interest and dividends, earned by children under a certain age, taxing it at their parents' higher tax rate to prevent income shifting.