INCOME TAX-M8: MULTIPLE CHOICE
Tax-Law:
Which-of-the-following-are-the-sources-of-federal-tax-law?
-A.-Treasury-regulations
-B.-Tax-newsletters
-C.-The-mainstream-media---ans-✔✔A.-The-Internal-Revenue-Code-and-Treasury-
regulations-are-the-primary-sources-of-all-tax-law.
Federal-Tax-Law:
Why-is-it-important-for-a-financial-planner-to-understand-the-objectives-of-federal-taxation?
-A.-Clients-want-to-know-the-mission-statement-of-the-IRS.
-B.-It-aids-the-planner-in-anticipating-changes-and-allows-him-to-plan-ahead.
-C.-These-objectives-incentivize-corporations-to-move-their-tax-domicile-overseas.---ans-
✔✔B.-Understanding-the-objectives-of-federal-taxation-aids-the-planner-in-anticipating-
changes-in-a-given-area-and-allows-him-or-her-to-plan-accordingly.
Tax-Management:
Jenna-is-in-a-meeting-with-her-financial-planner.-She-is-30-and-has-just-been-promoted-to-
a-position-where-she-is-compensated-in-the-six-figures.-Income-tax-liability-has-suddenly-
become-an-important-concern.-Her-advisor-has-been-explaining-various-methods-of-
avoiding,-deferring,-and-minimizing-her-income-tax-exposure.-Investing-in-a-Section-
401(k)-retirement-plan-and-municipal-bonds-are-examples-of-what-forms-of-the-tax-
management-of-federal-income-tax-liabilities?
-i.-Deferral
-ii.-Avoidance
-iii.-Conversion-to-capital-gain-income
-iv.-Conversion-to-tax-exempt-income
-
-A.-I,-II,-III,-and-IV
-B.-I-and-IV
-C.-II-only
-D.-II-and-III---ans-✔✔A.-Statements-I,-II,-III,-and-IV-are-correct.-
Investing-in-a-Section-401(k)-retirement-plan-is-an-example-of-an-income-tax-deferral-
management-technique.-Distributions-from-this-plan-are-taxable-as-ordinary-income-(not-
capital-gains)-and-are-not-tax-exempt.-The-interest-earned-on-the-municipal-bond-avoids-
federal-income-tax-and,-upon-a-sale-of-the-bond,-any-gain-on-the-sale-is-taxable-as-a-
capital-gain-if-held-long-term.Taxpayer-Compliance:
, Taxpayer-Compliance:
Jerry-is-a-long-term-client-of-Ted,-a-CFP®-professional.-Jerry-wants-Ted-to-prepare-his-
tax-returns.-Ted-has-learned-that-Jerry-has-had-several-large,-taxable-transactions-during-
the-year,-but-Jerry-has-not-given-Ted-any-documentation-on-them-for-income-tax-
purposes.-Jerry-told-Ted-the-transactions-were-"off-the-table"-and-that-he-has-given-Ted-
everything-he-needs-to-file-income-tax-returns.-Jerry-is-a-very-good-client-and-has-
referred-several-new-clients-to-Ted-over-the-years.-Jerry-insists-that-the-information-not-
be-on-the-tax-return-and-has-said-he-will-take-his-business-elsewhere-if-Ted-will-not-
comply-with-his-request.-What-should-Ted-do-next?
-A.-If-Jerry-continues-to-refuse-to-provide-the-documentation-for-the-transactions-in-
question,-Ted-should-terminate-the-client-planner-relationship-with-Jerry.
-B.-Ted-should-prepare-an-income-tax-return-with-the-documentation-given-and-be-
prepared-f---ans-✔✔
Filing-Requirements:
Which-of-the-following-is-NOT-a-determining-factor-in-establishing-filing-requirements-for-
taxpayers?
-A.-Gross-income
-B.-Filing-status
-C.-Whether-they-itemize-or-use-the-standard-deduction
-D.-Taxpayer's-age---ans-✔✔C.-Whether-the-taxpayer-itemizes-or-uses-the-standard-
deduction-does-not-affect-the-filing-requirement-for-the-taxpayer;-it-is-only-whether-the-
income-exceeds-the-standard-deduction-amount.-Whether-a-taxpayer-is-under-age-65,-or-
65-or-older,-affects-the-minimum-gross-income-for-filing-a-return.
Penalties:
Chet-files-a-timely-tax-return-but-is-later-required-to-pay-an-additional-$15,000-in-tax.-Of-
this-amount,-$6,000-is-attributable-to-the-taxpayer's-negligence.-The-negligence-penalty-
will-be
-A.-$500-because-there-is-a-maximum-penalty-of-$500.
-B.-$1,200-because-a-20%-penalty-is-applied-to-the-$6,000-underpayment.
-C.-$1,800-because-a-30%-penalty-is-applied-to-the-$6,000-underpayment.
-D.-$3,000-because-a-20%-penalty-is-applied-to-all-tax-due.---ans-✔✔B.-A-20%-penalty-
applies-to-the-negligence-component;-
therefore,-the-total-amount-of-penalty-imposed-on-Chet-is-$1,200-($6,000-×-0.20).
1.-Which-of-the-following-sources-of-authority-on-a-tax-issue-may-be-relied-upon-in-tax-
research?
-I.-Treasury-Regulation
-II.-Tax-Court-opinion
-III.-United-States-Supreme-Court-opinion
-A.-I-and-III
-B.-II-and-III
-C.-I-and-II
-D.-I,-II,-and-III---ans-✔✔D.-I,-II,-and-III
Tax-Law:
Which-of-the-following-are-the-sources-of-federal-tax-law?
-A.-Treasury-regulations
-B.-Tax-newsletters
-C.-The-mainstream-media---ans-✔✔A.-The-Internal-Revenue-Code-and-Treasury-
regulations-are-the-primary-sources-of-all-tax-law.
Federal-Tax-Law:
Why-is-it-important-for-a-financial-planner-to-understand-the-objectives-of-federal-taxation?
-A.-Clients-want-to-know-the-mission-statement-of-the-IRS.
-B.-It-aids-the-planner-in-anticipating-changes-and-allows-him-to-plan-ahead.
-C.-These-objectives-incentivize-corporations-to-move-their-tax-domicile-overseas.---ans-
✔✔B.-Understanding-the-objectives-of-federal-taxation-aids-the-planner-in-anticipating-
changes-in-a-given-area-and-allows-him-or-her-to-plan-accordingly.
Tax-Management:
Jenna-is-in-a-meeting-with-her-financial-planner.-She-is-30-and-has-just-been-promoted-to-
a-position-where-she-is-compensated-in-the-six-figures.-Income-tax-liability-has-suddenly-
become-an-important-concern.-Her-advisor-has-been-explaining-various-methods-of-
avoiding,-deferring,-and-minimizing-her-income-tax-exposure.-Investing-in-a-Section-
401(k)-retirement-plan-and-municipal-bonds-are-examples-of-what-forms-of-the-tax-
management-of-federal-income-tax-liabilities?
-i.-Deferral
-ii.-Avoidance
-iii.-Conversion-to-capital-gain-income
-iv.-Conversion-to-tax-exempt-income
-
-A.-I,-II,-III,-and-IV
-B.-I-and-IV
-C.-II-only
-D.-II-and-III---ans-✔✔A.-Statements-I,-II,-III,-and-IV-are-correct.-
Investing-in-a-Section-401(k)-retirement-plan-is-an-example-of-an-income-tax-deferral-
management-technique.-Distributions-from-this-plan-are-taxable-as-ordinary-income-(not-
capital-gains)-and-are-not-tax-exempt.-The-interest-earned-on-the-municipal-bond-avoids-
federal-income-tax-and,-upon-a-sale-of-the-bond,-any-gain-on-the-sale-is-taxable-as-a-
capital-gain-if-held-long-term.Taxpayer-Compliance:
, Taxpayer-Compliance:
Jerry-is-a-long-term-client-of-Ted,-a-CFP®-professional.-Jerry-wants-Ted-to-prepare-his-
tax-returns.-Ted-has-learned-that-Jerry-has-had-several-large,-taxable-transactions-during-
the-year,-but-Jerry-has-not-given-Ted-any-documentation-on-them-for-income-tax-
purposes.-Jerry-told-Ted-the-transactions-were-"off-the-table"-and-that-he-has-given-Ted-
everything-he-needs-to-file-income-tax-returns.-Jerry-is-a-very-good-client-and-has-
referred-several-new-clients-to-Ted-over-the-years.-Jerry-insists-that-the-information-not-
be-on-the-tax-return-and-has-said-he-will-take-his-business-elsewhere-if-Ted-will-not-
comply-with-his-request.-What-should-Ted-do-next?
-A.-If-Jerry-continues-to-refuse-to-provide-the-documentation-for-the-transactions-in-
question,-Ted-should-terminate-the-client-planner-relationship-with-Jerry.
-B.-Ted-should-prepare-an-income-tax-return-with-the-documentation-given-and-be-
prepared-f---ans-✔✔
Filing-Requirements:
Which-of-the-following-is-NOT-a-determining-factor-in-establishing-filing-requirements-for-
taxpayers?
-A.-Gross-income
-B.-Filing-status
-C.-Whether-they-itemize-or-use-the-standard-deduction
-D.-Taxpayer's-age---ans-✔✔C.-Whether-the-taxpayer-itemizes-or-uses-the-standard-
deduction-does-not-affect-the-filing-requirement-for-the-taxpayer;-it-is-only-whether-the-
income-exceeds-the-standard-deduction-amount.-Whether-a-taxpayer-is-under-age-65,-or-
65-or-older,-affects-the-minimum-gross-income-for-filing-a-return.
Penalties:
Chet-files-a-timely-tax-return-but-is-later-required-to-pay-an-additional-$15,000-in-tax.-Of-
this-amount,-$6,000-is-attributable-to-the-taxpayer's-negligence.-The-negligence-penalty-
will-be
-A.-$500-because-there-is-a-maximum-penalty-of-$500.
-B.-$1,200-because-a-20%-penalty-is-applied-to-the-$6,000-underpayment.
-C.-$1,800-because-a-30%-penalty-is-applied-to-the-$6,000-underpayment.
-D.-$3,000-because-a-20%-penalty-is-applied-to-all-tax-due.---ans-✔✔B.-A-20%-penalty-
applies-to-the-negligence-component;-
therefore,-the-total-amount-of-penalty-imposed-on-Chet-is-$1,200-($6,000-×-0.20).
1.-Which-of-the-following-sources-of-authority-on-a-tax-issue-may-be-relied-upon-in-tax-
research?
-I.-Treasury-Regulation
-II.-Tax-Court-opinion
-III.-United-States-Supreme-Court-opinion
-A.-I-and-III
-B.-II-and-III
-C.-I-and-II
-D.-I,-II,-and-III---ans-✔✔D.-I,-II,-and-III
