WGU C237 TAXATION 1 COMPREHENSIVE EXAM
2025/2026 QUESTIONS AND ANSWERS GUARANTEE A+
✔✔Business purpose doctrine - ✔✔IRS has the power to disallow business expenses
for transactions that don't have a business purpose.
✔✔Step-transaction doctrine - ✔✔IRS has the power to collapse a series of
transactions into one to determine tax liability.
✔✔Substance-over-form doctrine - ✔✔IRS can reclassify a transaction according to its
substance (instead of its form).
✔✔Economic substance doctrine: - ✔✔Transactions must meet two criteria:
1. Transaction must meaningfully change a taxpayer's economic position (excluding any
federal income tax effects).
2. Taxpayer must have a substantial purpose (other than tax avoidance) for the
transaction.
✔✔Tax Avoidance vs. Tax Evasion - ✔✔Tax avoidance is legal. Tax evasion is hiding,
misrepresenting, or otherwise not recognizing income so as to illegally avoid taxation.
>Taxpayer under no moral obligation to pay more taxes than required by law.
✔✔TRUE OR FALSE. If tax rates will be lower next year, taxpayers should accelerate
their deductions regardless of their after-tax rate of return? - ✔✔True
✔✔return rate of municipal bond/(1-marginal tax rate) - ✔✔rate needed to yield the
same return on corporate bonds
✔✔Which date determines filing status (single, married, etc.)? - ✔✔December 31st
✔✔Dependents - ✔✔> A taxpayer may be allowed to claim another as a dependent
even if the taxpayer has no family relationship with the other person.
>An individual who qualifies as a dependent of another taxpayer may not claim any
dependents.
>An individual cannot qualify as a dependent of another as a qualifying relative taxpayer
if the individual's gross income exceeds a certain amount.
>To qualify as a dependent of another, an individual must be a resident of the United
States, Canada, or Mexico.
>There is no gross income test for a qualifying child but there is for a qualifying relative.
✔✔Married Filing Jointly - who is liable for underpayment of taxes? - ✔✔Both Partners
✔✔Is money received from debt (ex. a loan) included in gross income? - ✔✔No, debt
does not generate economic benefit.
, ✔✔Is the amount of debt forgiven by a lender included in gross income? - ✔✔Yes
✔✔Can qualified fringe benefits received by an employee be excluded from gross
income? - ✔✔Yes
✔✔Tax Benefit Rule - ✔✔Refunds of expenditures deducted in a prior year are included
in gross income to the extent that the refund reduced taxes in year of the deduction
✔✔Gross income - ✔✔all income from whatever source derived unless excluded by law
✔✔What is included in gross income? - ✔✔Economic Benefit - receive an item of value
(ex. Paycheck, proceeds from property sale, income from investments)
Realization Principle:
1) Taxpayer engages in a transaction with another party.
2) Transaction results in a measurable change in property rights.
✔✔What is recognized income? - ✔✔Realized income - any deferral or exclusion =
Recognized income
For tax purposes it matters not whether income is obtained through legal or illegal
activities.
✔✔Is the exchange of property for payment (such as bartering) considered in gross
income? - ✔✔Property is included in gross income if it is capable of valuation.
✔✔Are dividends paid in stock considered in gross income? - ✔✔No, unless the
taxpayer has the option to receive the dividend in cash (instead of stock).
✔✔What kind of asset is a personal automobile? - ✔✔Capital asset
✔✔What kind of asset is inventory? - ✔✔Ordinary asset
✔✔What kind of asset is Accounts Receivable? - ✔✔Ordinary asset
✔✔How much can individual taxpayers (including married filing jointly) deduct of net
capital losses against ordinary income in a given year? - ✔✔up to $3,000
✔✔Are losses associated with personal-use assets, sales to related parties, and wash
sales currently deductible? - ✔✔No
2025/2026 QUESTIONS AND ANSWERS GUARANTEE A+
✔✔Business purpose doctrine - ✔✔IRS has the power to disallow business expenses
for transactions that don't have a business purpose.
✔✔Step-transaction doctrine - ✔✔IRS has the power to collapse a series of
transactions into one to determine tax liability.
✔✔Substance-over-form doctrine - ✔✔IRS can reclassify a transaction according to its
substance (instead of its form).
✔✔Economic substance doctrine: - ✔✔Transactions must meet two criteria:
1. Transaction must meaningfully change a taxpayer's economic position (excluding any
federal income tax effects).
2. Taxpayer must have a substantial purpose (other than tax avoidance) for the
transaction.
✔✔Tax Avoidance vs. Tax Evasion - ✔✔Tax avoidance is legal. Tax evasion is hiding,
misrepresenting, or otherwise not recognizing income so as to illegally avoid taxation.
>Taxpayer under no moral obligation to pay more taxes than required by law.
✔✔TRUE OR FALSE. If tax rates will be lower next year, taxpayers should accelerate
their deductions regardless of their after-tax rate of return? - ✔✔True
✔✔return rate of municipal bond/(1-marginal tax rate) - ✔✔rate needed to yield the
same return on corporate bonds
✔✔Which date determines filing status (single, married, etc.)? - ✔✔December 31st
✔✔Dependents - ✔✔> A taxpayer may be allowed to claim another as a dependent
even if the taxpayer has no family relationship with the other person.
>An individual who qualifies as a dependent of another taxpayer may not claim any
dependents.
>An individual cannot qualify as a dependent of another as a qualifying relative taxpayer
if the individual's gross income exceeds a certain amount.
>To qualify as a dependent of another, an individual must be a resident of the United
States, Canada, or Mexico.
>There is no gross income test for a qualifying child but there is for a qualifying relative.
✔✔Married Filing Jointly - who is liable for underpayment of taxes? - ✔✔Both Partners
✔✔Is money received from debt (ex. a loan) included in gross income? - ✔✔No, debt
does not generate economic benefit.
, ✔✔Is the amount of debt forgiven by a lender included in gross income? - ✔✔Yes
✔✔Can qualified fringe benefits received by an employee be excluded from gross
income? - ✔✔Yes
✔✔Tax Benefit Rule - ✔✔Refunds of expenditures deducted in a prior year are included
in gross income to the extent that the refund reduced taxes in year of the deduction
✔✔Gross income - ✔✔all income from whatever source derived unless excluded by law
✔✔What is included in gross income? - ✔✔Economic Benefit - receive an item of value
(ex. Paycheck, proceeds from property sale, income from investments)
Realization Principle:
1) Taxpayer engages in a transaction with another party.
2) Transaction results in a measurable change in property rights.
✔✔What is recognized income? - ✔✔Realized income - any deferral or exclusion =
Recognized income
For tax purposes it matters not whether income is obtained through legal or illegal
activities.
✔✔Is the exchange of property for payment (such as bartering) considered in gross
income? - ✔✔Property is included in gross income if it is capable of valuation.
✔✔Are dividends paid in stock considered in gross income? - ✔✔No, unless the
taxpayer has the option to receive the dividend in cash (instead of stock).
✔✔What kind of asset is a personal automobile? - ✔✔Capital asset
✔✔What kind of asset is inventory? - ✔✔Ordinary asset
✔✔What kind of asset is Accounts Receivable? - ✔✔Ordinary asset
✔✔How much can individual taxpayers (including married filing jointly) deduct of net
capital losses against ordinary income in a given year? - ✔✔up to $3,000
✔✔Are losses associated with personal-use assets, sales to related parties, and wash
sales currently deductible? - ✔✔No
