FUNDAMENTALS OF INCOME TAXATION
TEST 1 2026 QUESTIONS AND CORRECT
ANSWERS COMPREHENSIVE EXAM
REVIEW A+ STUDY GUIDE
A U.S. Supreme Court interpretation of tax law is the law of the land until
which of the following happen(s)?
I. Congress enacts a new statute, tantamount to overturning a Court
decision.
II. The Court overrides its own prior decision.
A. I only
B. II only
C. Both I and II
D. Neither I nor II - CORRECT ANSWER-(C). Both I and II are correct.
Which of the following statements concerning the personal-holding-
company tax is (are) correct?
I. One requirement to be treated as a personal holding company is that
more than 50 percent of the value of the company's stock must be held by
five or fewer individuals.
,II. The personal-holding-company tax can be avoided by the payment of
dividends by the company.
A. I only
B. II only
C. Both I and II
D. Neither I nor II - CORRECT ANSWER-(C). Both I and II are correct.
Which of the following is (are) included in the gross income of an individual
taxpayer?
I. damages other than punitive damages received on account of a physical
personal injury suffered by the taxpayer
II. property received by the taxpayer as an inheritance
A. I only
B. II only
C. Both I and II
D. Neither I nor II - CORRECT ANSWER-(D). I is incorrect because
damages (other than punitive damages) received on account of a physical
personal injury are generally not taxable. II is incorrect because property
received by inheritance is generally not taxable.
,Which of the following statements concerning the limitations on passive
activity losses is (are) correct?
I. The limitations are generally designed to limit tax benefits with respect to
activities in which the taxpayer does not materially participate.
II. Excess passive losses disallowed under the limitations are allowed in the
year the taxpayer disposes of his or her entire interest in the passive activity
in a taxable disposition.
A. I only
B. II only
C. Both I and II
D. Neither I nor II - CORRECT ANSWER-(C). Both I and II are correct.
To substantiate entertainment deductions for business purposes, a record
must be kept of which of the following?
I. the business relationship to the taxpayer of the person entertained
II. the date and place of the entertainment
A. I only
B. II only
C. Both I and II
D. Neither I nor II - CORRECT ANSWER-(C). Both I and II are correct.
, A shareholder must meet which of the following requirements to avoid
having the family attribution rules applied to an IRC Sec. 302 complete
redemption?
I. The shareholder must receive the proceeds in cash at the time the stock is
redeemed by the corporation.
II. The shareholder must repay all debts owed to the corporation at the time
the stock is redeemed by the corporation.
A. I only
B. II only
C. Both I and II
D. Neither I nor II - CORRECT ANSWER-(D). I is incorrect because it is
immaterial under the attribution rules whether the shareholder receives
cash at the time of the redemption. II is incorrect because there is no
requirement that the shareholder repay debts to the corporation in order to
avoid family attribution.
Which of the following statements concerning stock redemptions under
IRC Sec. 303 is (are) correct?
I. The value of the stock used to qualify for a Sec. 303 redemption must
generally exceed 35 percent of the decedent's adjusted gross estate.
II. The proceeds of a stock redemption under Sec. 303 will be treated as a
dividend for income tax purposes.
TEST 1 2026 QUESTIONS AND CORRECT
ANSWERS COMPREHENSIVE EXAM
REVIEW A+ STUDY GUIDE
A U.S. Supreme Court interpretation of tax law is the law of the land until
which of the following happen(s)?
I. Congress enacts a new statute, tantamount to overturning a Court
decision.
II. The Court overrides its own prior decision.
A. I only
B. II only
C. Both I and II
D. Neither I nor II - CORRECT ANSWER-(C). Both I and II are correct.
Which of the following statements concerning the personal-holding-
company tax is (are) correct?
I. One requirement to be treated as a personal holding company is that
more than 50 percent of the value of the company's stock must be held by
five or fewer individuals.
,II. The personal-holding-company tax can be avoided by the payment of
dividends by the company.
A. I only
B. II only
C. Both I and II
D. Neither I nor II - CORRECT ANSWER-(C). Both I and II are correct.
Which of the following is (are) included in the gross income of an individual
taxpayer?
I. damages other than punitive damages received on account of a physical
personal injury suffered by the taxpayer
II. property received by the taxpayer as an inheritance
A. I only
B. II only
C. Both I and II
D. Neither I nor II - CORRECT ANSWER-(D). I is incorrect because
damages (other than punitive damages) received on account of a physical
personal injury are generally not taxable. II is incorrect because property
received by inheritance is generally not taxable.
,Which of the following statements concerning the limitations on passive
activity losses is (are) correct?
I. The limitations are generally designed to limit tax benefits with respect to
activities in which the taxpayer does not materially participate.
II. Excess passive losses disallowed under the limitations are allowed in the
year the taxpayer disposes of his or her entire interest in the passive activity
in a taxable disposition.
A. I only
B. II only
C. Both I and II
D. Neither I nor II - CORRECT ANSWER-(C). Both I and II are correct.
To substantiate entertainment deductions for business purposes, a record
must be kept of which of the following?
I. the business relationship to the taxpayer of the person entertained
II. the date and place of the entertainment
A. I only
B. II only
C. Both I and II
D. Neither I nor II - CORRECT ANSWER-(C). Both I and II are correct.
, A shareholder must meet which of the following requirements to avoid
having the family attribution rules applied to an IRC Sec. 302 complete
redemption?
I. The shareholder must receive the proceeds in cash at the time the stock is
redeemed by the corporation.
II. The shareholder must repay all debts owed to the corporation at the time
the stock is redeemed by the corporation.
A. I only
B. II only
C. Both I and II
D. Neither I nor II - CORRECT ANSWER-(D). I is incorrect because it is
immaterial under the attribution rules whether the shareholder receives
cash at the time of the redemption. II is incorrect because there is no
requirement that the shareholder repay debts to the corporation in order to
avoid family attribution.
Which of the following statements concerning stock redemptions under
IRC Sec. 303 is (are) correct?
I. The value of the stock used to qualify for a Sec. 303 redemption must
generally exceed 35 percent of the decedent's adjusted gross estate.
II. The proceeds of a stock redemption under Sec. 303 will be treated as a
dividend for income tax purposes.
