Federal Taxation Midterm UPDATED
ACTUAL Exam Questions and CORRECT
Answers
What are 3 ways government can alter their tax system to increase revenues? - CORRECT
ANSWER - increase taxes, create new tax base, and expand on existing tax base
What is the Jurisdiction Variable? - CORRECT ANSWER - deals with finding lowest
marginal tax rate and doesn't matter with federal but matters greatly with local and state
What is the Entity Variable? - CORRECT ANSWER - determines taxability and tax rates
What is the Character Variable? - CORRECT ANSWER - determines tax rate and has two
main components: oridinary income= the basic income from operations and capital gains=
income from investments
What is the Time Period Variable? - CORRECT ANSWER - impacts tax through the deferral
of income and the acceleration of deductible expenses
What is the taxpayer? - CORRECT ANSWER - the entity that physically pays the tax
What is the incidence? - CORRECT ANSWER - the entity that bears the burden of the tax
List the 3 sources of tax authority (beginning with the highest) - CORRECT ANSWER -
Legislative, Judicial, Executive
What does the Legislative Authority produce? - CORRECT ANSWER - tax code from
Congress (the ultimate authority)
, What does the Judicial Authority produce? - CORRECT ANSWER - court cases and stare
decesis (precedential matters)
What does the Executive Authority produce? - CORRECT ANSWER - revenue rules and
regulations (interprets the tax code)
What is an Arm's-length transaction? - CORRECT ANSWER - when each party acts in its
own best interest
List the 4 standards of a good tax - CORRECT ANSWER - Fair and equittable, efficient,
convenient, sufficient
What does the fair and equittable standard mean? - CORRECT ANSWER - the tax has ability
to be paid and it is distributed equally among taxpayers
What does the efficient standard mean? - CORRECT ANSWER - tax follows the classical or
keynesian view. Classical view is that a tax is efficient if it doesn't affect economic and social
behavior. Keynesian view states that a tax is efficient if it does affect economic and social
behavior.
What does the convenient standard mean? - CORRECT ANSWER - tax is easy to administer,
understand, and remit
What does the sufficient standard mean? - CORRECT ANSWER - tax generates enough funds
to pay for public goods and services provided by the government
What is nexus? - CORRECT ANSWER - tax presence within a jurisdiction
Does the NPV of future cash flows increase or decrease as the discount rate increases? Explain
your answer. - CORRECT ANSWER - The NPV of future cash flows would decrease because
the higher the rate you mutiply the cash flows by, the smaller the present day values must be.
ACTUAL Exam Questions and CORRECT
Answers
What are 3 ways government can alter their tax system to increase revenues? - CORRECT
ANSWER - increase taxes, create new tax base, and expand on existing tax base
What is the Jurisdiction Variable? - CORRECT ANSWER - deals with finding lowest
marginal tax rate and doesn't matter with federal but matters greatly with local and state
What is the Entity Variable? - CORRECT ANSWER - determines taxability and tax rates
What is the Character Variable? - CORRECT ANSWER - determines tax rate and has two
main components: oridinary income= the basic income from operations and capital gains=
income from investments
What is the Time Period Variable? - CORRECT ANSWER - impacts tax through the deferral
of income and the acceleration of deductible expenses
What is the taxpayer? - CORRECT ANSWER - the entity that physically pays the tax
What is the incidence? - CORRECT ANSWER - the entity that bears the burden of the tax
List the 3 sources of tax authority (beginning with the highest) - CORRECT ANSWER -
Legislative, Judicial, Executive
What does the Legislative Authority produce? - CORRECT ANSWER - tax code from
Congress (the ultimate authority)
, What does the Judicial Authority produce? - CORRECT ANSWER - court cases and stare
decesis (precedential matters)
What does the Executive Authority produce? - CORRECT ANSWER - revenue rules and
regulations (interprets the tax code)
What is an Arm's-length transaction? - CORRECT ANSWER - when each party acts in its
own best interest
List the 4 standards of a good tax - CORRECT ANSWER - Fair and equittable, efficient,
convenient, sufficient
What does the fair and equittable standard mean? - CORRECT ANSWER - the tax has ability
to be paid and it is distributed equally among taxpayers
What does the efficient standard mean? - CORRECT ANSWER - tax follows the classical or
keynesian view. Classical view is that a tax is efficient if it doesn't affect economic and social
behavior. Keynesian view states that a tax is efficient if it does affect economic and social
behavior.
What does the convenient standard mean? - CORRECT ANSWER - tax is easy to administer,
understand, and remit
What does the sufficient standard mean? - CORRECT ANSWER - tax generates enough funds
to pay for public goods and services provided by the government
What is nexus? - CORRECT ANSWER - tax presence within a jurisdiction
Does the NPV of future cash flows increase or decrease as the discount rate increases? Explain
your answer. - CORRECT ANSWER - The NPV of future cash flows would decrease because
the higher the rate you mutiply the cash flows by, the smaller the present day values must be.
