Chapter 1
Introduction to Taxation
True-False: Insert T for True and F for False before the questions.
_____ 1. The 16th Amendment to the US Constitution that provided for an income tax was
ratified in 1913.
_____ 2. The first codification of the Internal Revenue Code took place in 1954.
_____ 3. There are three basic taxable entities: the individual, the fiduciary, and the C
corporation.
_____ 4. All interest paid to a taxpayer must be included in gross income.
_____ 5. A taxpayer’s filing status determines the basic standard deduction allowed.
_____ 6. A married person filing a separate return has the lowest standard deduction
amount.
_____ 7. The lowest tax rate on the tax rate schedules for taxable incomes is the same for
individuals and C corporations.
_____ 8. The alternative minimum tax is a tax determined on a broadened definition of
income with no deductions permitted.
,_____ 9. Only corporations are allowed to carry their operating losses both backwards and
forwards.
_____ 10. All limited liability companies (LLCs) can file their tax returns as partnerships,
or electively, as corporations.
_____ 11. Partnerships and S corporations are flow-through entities.
_____ 12. Both sales and use taxes are collected in the state in which the sale takes place.
_____ 13. The person giving the gift pays the gift tax.
_____ 14. The value added tax is a type of consumption tax.
_____ 15. A flat tax generally would be considered a regressive tax.
_____ 16. Adam Smith’s four canons of taxation are Equity, Certainty, Economy and
Convenience.
Test Bank Answers: True-False
1. True 2. False 3. True 4. False 5. True 6. False
7. False 8. False 9. False 10. False 11. True 12. False
13. True 14. True 15. False 16. True
Short-Answer Questions: Provide a brief written answer to each of the following
questions.
,1. Explain the difference between a business’s gross revenue and its gross income.
2. Explain how horizontal equity differs from vertical equity.
3. Why are S corporations and partnerships called flow-through entities?
4. When does a seller realize a loss of the sale of an asset?
5. When would an individual use the standard deduction instead of itemizing deductions?
6. Which is more advantageous a deduction for or a deduction from adjusted gross income?
Why?
7. What uses are made of adjusted gross income (AGI) in the individual tax model?
8. Explain the difference in owner’s liability for the general business debts of a limited
liability company (LLC) and a limited liability partnership (LLP).
9. What is the purpose of the alternative minimum tax?
10. What are the fiduciary entities and how are they created?
11. Name and describe two other types of taxes besides the income tax. Give example of
each.
12. Compare progressive, proportional, and regressive taxes.
, 13. Compare a sales tax to a use tax.
14. What are Adam Smith’s four canons of taxation? Briefly describe each.
Test Bank Answers: Short-Answer Questions
1. Gross revenue is the total of all revenue, normally from sales of goods or services. Gross
income is gross revenue less cost of goods sold.
2. Horizontal equity would require taxpayers with similar incomes to pay a like amount of
taxes. Vertical equity would require taxpayers with greater (lesser) incomes to pay a
greater (lesser) amount of taxes.
3. S corporations and partnerships are called flow-through entities because they do not
pay taxes on their incomes and gains. Instead the revenue and expense items flow
through to the entity’s owners and are included in and taxed along with the owners’
other income.
4. A seller realizes a loss on the sale of an asset if the amount received for the asset is less
than the basis of the asset in the seller’s hands.
5. An individual uses the standard deduction when the sum of his or her itemized
deductions after all limitations are applied does not exceed the standard deduction.
6. A deduction for adjusted gross income is more valuable than an equal amount of
deduction from adjusted gross income because many of deductions from AGI have some
limitation imposed on their deductibility based on AGI. The deductions for AGI generally
are not subject to any reduction but they do reduce the amount of AGI before the
limitations on deductions from AGI are imposed—meaning the limitations based on AGI
are smaller. In addition, deductions for AGI are allowed to be deducted regardless of the
Introduction to Taxation
True-False: Insert T for True and F for False before the questions.
_____ 1. The 16th Amendment to the US Constitution that provided for an income tax was
ratified in 1913.
_____ 2. The first codification of the Internal Revenue Code took place in 1954.
_____ 3. There are three basic taxable entities: the individual, the fiduciary, and the C
corporation.
_____ 4. All interest paid to a taxpayer must be included in gross income.
_____ 5. A taxpayer’s filing status determines the basic standard deduction allowed.
_____ 6. A married person filing a separate return has the lowest standard deduction
amount.
_____ 7. The lowest tax rate on the tax rate schedules for taxable incomes is the same for
individuals and C corporations.
_____ 8. The alternative minimum tax is a tax determined on a broadened definition of
income with no deductions permitted.
,_____ 9. Only corporations are allowed to carry their operating losses both backwards and
forwards.
_____ 10. All limited liability companies (LLCs) can file their tax returns as partnerships,
or electively, as corporations.
_____ 11. Partnerships and S corporations are flow-through entities.
_____ 12. Both sales and use taxes are collected in the state in which the sale takes place.
_____ 13. The person giving the gift pays the gift tax.
_____ 14. The value added tax is a type of consumption tax.
_____ 15. A flat tax generally would be considered a regressive tax.
_____ 16. Adam Smith’s four canons of taxation are Equity, Certainty, Economy and
Convenience.
Test Bank Answers: True-False
1. True 2. False 3. True 4. False 5. True 6. False
7. False 8. False 9. False 10. False 11. True 12. False
13. True 14. True 15. False 16. True
Short-Answer Questions: Provide a brief written answer to each of the following
questions.
,1. Explain the difference between a business’s gross revenue and its gross income.
2. Explain how horizontal equity differs from vertical equity.
3. Why are S corporations and partnerships called flow-through entities?
4. When does a seller realize a loss of the sale of an asset?
5. When would an individual use the standard deduction instead of itemizing deductions?
6. Which is more advantageous a deduction for or a deduction from adjusted gross income?
Why?
7. What uses are made of adjusted gross income (AGI) in the individual tax model?
8. Explain the difference in owner’s liability for the general business debts of a limited
liability company (LLC) and a limited liability partnership (LLP).
9. What is the purpose of the alternative minimum tax?
10. What are the fiduciary entities and how are they created?
11. Name and describe two other types of taxes besides the income tax. Give example of
each.
12. Compare progressive, proportional, and regressive taxes.
, 13. Compare a sales tax to a use tax.
14. What are Adam Smith’s four canons of taxation? Briefly describe each.
Test Bank Answers: Short-Answer Questions
1. Gross revenue is the total of all revenue, normally from sales of goods or services. Gross
income is gross revenue less cost of goods sold.
2. Horizontal equity would require taxpayers with similar incomes to pay a like amount of
taxes. Vertical equity would require taxpayers with greater (lesser) incomes to pay a
greater (lesser) amount of taxes.
3. S corporations and partnerships are called flow-through entities because they do not
pay taxes on their incomes and gains. Instead the revenue and expense items flow
through to the entity’s owners and are included in and taxed along with the owners’
other income.
4. A seller realizes a loss on the sale of an asset if the amount received for the asset is less
than the basis of the asset in the seller’s hands.
5. An individual uses the standard deduction when the sum of his or her itemized
deductions after all limitations are applied does not exceed the standard deduction.
6. A deduction for adjusted gross income is more valuable than an equal amount of
deduction from adjusted gross income because many of deductions from AGI have some
limitation imposed on their deductibility based on AGI. The deductions for AGI generally
are not subject to any reduction but they do reduce the amount of AGI before the
limitations on deductions from AGI are imposed—meaning the limitations based on AGI
are smaller. In addition, deductions for AGI are allowed to be deducted regardless of the
