Chapter 1. An Introduction to Taxation and Understanding the Federal Tax Law

Test bank Income Tax



CHAPTER 1: AN INTRODUCTION TO TAXATION AND UNDERSTANDING THE FEDERAL TAX LAW

1. The ratification of the Sixteenth Amendment to the U.S. Constitution was necessary to validate the
Federal income tax on corporations.
a. True
b. False


ANSWER: False
RATIONALE: The Sixteenth Amendment validated only the tax on individuals. The income tax on corporations
had been previously sanctioned by the courts.


2. Before the Sixteenth Amendment to the Constitution was ratified, there was no valid Federal income
tax on individuals.
a. True
b. False


ANSWER: False
RATIONALE: There existed a Federal income tax during the Civil War that was sanctioned by the U.S.
Supreme Court.


3. The first income tax on individuals (after the ratification of the Sixteenth Amendment to the
Constitution) levied tax rates from a low of 2% to a high of 6%.
a. True
b. False


ANSWER: True


4. The Federal income tax on individuals generates more revenue than the Federal income tax on
corporations.
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,a. True
b. False


ANSWER: True


5. The payasyougo feature of the Federal income tax on individuals conforms to Adam Smith’s canon of
certainty.
a. True
b. False


ANSWER: False
RATIONALE: Pay-as-you-go refers to the withholding provisions applicable to wages and other types of income
and adds convenience to the tax system.


6. Because the law is complicated, most individual taxpayers are not able to complete their Federal
income tax returns without outside assistance.
a. True
b. False


ANSWER: True
RATIONALE: Approximately 60% use tax return preparers, while slightly more than 32% purchase tax return
software.
7. The FICA tax (Medicare component) on wages is progressive since the tax due increases as wages
increase.
a. True
b. False


ANSWER: False
RATIONALE: The FICA tax (Medicare component) is proportional because the rate is constant regardless of the
wages earned.



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,8. The Federal estate and gift taxes are examples of progressive taxes.
a. True
b. False


ANSWER: True


9. The Federal excise tax on cigarettes is an example of a proportional tax.
a. True
b. False


ANSWER: True
RATIONALE: The tax is a flat $1.01 per pack.


10. Currently, the Federal income tax is less progressive than it ever has been in the past.
a. True
b. False


ANSWER: False
RATIONALE: Currently, the Federal income tax has six rates. At one time, it had two rates.


11. Mona inherits her mother’s personal residence, which she converts to a furnished rent house. These
changes should affect the amount of ad valorem property taxes levied on the properties.
a. True
b. False


ANSWER: True
RATIONALE: Conversion from residential to rental use will increase the taxes. Furthermore, Mona’s mother
may have had a senior citizen exemption on the property, which will no longer be appropriate. Lastly, the
furnishings in the rent house could now be subject to an ad valorem tax on personalty.



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, 12. A fixture will be subject to the ad valorem tax on personalty rather than the ad valorem tax on realty.
a. True
b. False


ANSWER: False
RATIONALE: By definition, a fixture becomes part of the real estate to which it is attached.


13. Even if property tax rates are not changed, the amount of ad valorem taxes imposed on realty may not
remain the same.
a. True
b. False


ANSWER: True
RATIONALE: Property taxes will vary in accordance with changes in the assessed value of the property.


14. The ad valorem tax on personal use personalty is more often avoided by taxpayers than the ad valorem
tax on business use personalty.
a. True
b. False


ANSWER: True


15. A Federal excise tax is no longer imposed on admission to theaters.
a. True
b. False


ANSWER: True
RATIONALE: Such tax has been rescinded.


16. There is a Federal excise tax on hotel occupancy.
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