C237 Taxation I Practice Questions - Set 5 - Part 1

Correct Answer: b) Subject to an additional tax if income is not distributed to shareholders

A personal holding company is subject to an additional tax if it retains passive income, such as dividends or interest, rather than distributing it to shareholders.

Correct Answer: a) The percentage of each payment that is considered return of principal and therefore not taxable

The exclusion ratio determines the portion of each annuity payment that is considered a tax-free return of principal, with the remainder being taxable income.

Correct Answer: b) A rule that taxes the refund of an amount deducted in a prior year only to the extent the deduction reduced taxable income

Under the Tax Benefit Rule, if a taxpayer receives a refund of an amount deducted in a prior year, it is only taxable to the extent the deduction reduced taxable income in the prior year.

Correct Answer: a) To determine the current status of a tax case or ruling

A citator is a tax research tool that helps researchers check the history, authority, and current status of tax cases, rulings, and regulations.

Correct Answer: b) Income is recognized when earned, and expenses are recognized when incurred

Under the accrual method, income is recognized when it is earned, regardless of when payment is received, and expenses are recognized when liabilities are incurred, regardless of when they are paid.

Correct Answer: a) Income from an indirect economic benefit received by a taxpayer

Imputed income refers to income that arises from an indirect economic benefit, such as fringe benefits or below-market interest loans, that may be subject to taxation.

Correct Answer: b) To calculate depreciation deductions for tangible personal property

MACRS is the tax depreciation system used to recover the cost of tangible personal and real property over a specified period, allowing accelerated depreciation in earlier years.

Correct Answer: b) An adjustment to taxable income due to a change in accounting methods

A Section 481 adjustment is made to taxable income when a taxpayer changes their accounting method, ensuring that income or deductions are properly accounted for to prevent omissions or duplications.

Correct Answer: b) The U.S. Tax Court will follow the rulings of the circuit court that has appellate jurisdiction for the case

Under the Golsen Rule, the U.S. Tax Court follows the rulings of the circuit court with appellate jurisdiction over the taxpayer, ensuring consistency with higher court decisions.

Correct Answer: a) Tax transactions based on their true economic substance, not just their legal form

The Substance Over Form Doctrine allows the IRS to reclassify transactions based on their economic reality, ensuring that tax benefits are only available for legitimate business purposes.

Correct Answer: b) A rule that allows a simplified calculation of the home office deduction

The Safe Harbor Rule for home office deductions allows taxpayers to use a simplified method to calculate the deduction, based on a set rate per square foot of the home used for business.

Correct Answer: a) A doctrine that requires taxpayers to treat a series of related steps as a single transaction for tax purposes

The Step Transaction Doctrine ensures that taxpayers cannot manipulate the tax system by dividing a transaction into multiple steps to achieve a more favorable tax outcome.

Correct Answer: b) A tax rate that increases 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: b) To penalize corporations for retaining earnings beyond their reasonable business needs

The Accumulated Earnings Tax is intended to prevent corporations from avoiding dividend distributions, thereby avoiding related taxes, by retaining earnings without a valid business purpose.

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 set standards for tax professionals practicing before the IRS

Circular 230 provides ethical guidelines and rules for tax professionals who practice before the IRS, ensuring their conduct is compliant with professional and legal standards.

Correct Answer: b) Gross income minus above-the-line deductions

Adjusted Gross Income (AGI) is calculated by subtracting above-the-line deductions from gross income and is a key figure in determining eligibility for various tax credits and deductions.

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

The AMT was created to ensure that taxpayers with substantial deductions and exclusions still pay a minimum level of tax by calculating an alternative tax base with fewer deductions.

Correct Answer: a) A doctrine that requires taxpayers to treat a series of related steps as a single transaction for tax purposes

The Step Transaction Doctrine ensures that taxpayers cannot manipulate the tax system by dividing a transaction into multiple steps to achieve a more favorable tax outcome.

Correct Answer: b) A strategy to pay several years' worth of deductible expenses in one year to exceed the standard deduction

Bunching itemized deductions involves timing deductible expenses, such as medical or charitable contributions, so that they are paid in one year, allowing the taxpayer to exceed the standard deduction.