©THEBRIGHT EXAM SOLUTIONS
11/05/2024 12:06 PM
Tax Midterm Chapter 1 Questions With
Correct Answers
1)In the following independent situations, is the tax position of the taxpayer likely to change? Explain
why or why not.
a.John used to make casual purchases and sales of real estate as an investor. Currently, he does so on a
regular basis and has obtained a license as a dealer.
b.Theresa quit her job as a staff accountant and has established her own practice as a CPA.
c.After saving enough for a down payment, Paul has purchased a personal residence. - answer✔(LO 1)
a.By becoming a dealer, any gains and losses John has are converted from capital to ordinary
classification.
b.Theresa has become self-employed. Now she will be subject to self-employment tax and will have to
make quarterly installment payments of estimated income and payroll taxes.
c.Due to the home mortgage interest deduction and property tax deduction, most new home-
owners will itemize their deductions from AGI. Thus, Paul probably will no longer claim the standard
deduction on his income tax return.
2)Marvin is the executer and sole heir of his aunt's estate. The estate includes her furnished home,
which Marvin is considering converting to rental property to generate additional cash flow. What are
some of the tax problems Marvin may confront? - answer✔(LO 1) The income tax consequences that
result are Marvin's principal concern. Any rent he receives is taxed as income, but operating expenses
and depreciation will generate deductions that offset some or all of the income or even yield a loss.
Marvin must also consider the effect of other taxes. Because the property is being converted from
residential to commercial use, he can expect an increase in the ad valorem property taxes levied by the
local (and perhaps even the state) taxing authorities. Besides the real estate taxes, personal property
taxes could be imposed on the furnishings.
3)The sixteenth amendment to the U.S. Constitution was passed to overturn a Supreme Court decision
that had invalidated the Federal income tax. Do you agree? Why or why not? - answer✔(LO 2) The
statement is only partly correct. The Federal income tax on corporations was not a problem as it had
previously been sanctioned by the Supreme Court. What had been declared unconstitutional was the
tax on individuals as it applied to the income from property.
, ©THEBRIGHT EXAM SOLUTIONS
11/05/2024 12:06 PM
4)World war II converted the Federal income tax into a mass tax. Explain. - answer✔(LO 2) To finance
our participation in World War II, the scope of the income tax was expanded considerably—from a
limited coverage of 6% to over 74% of the population. Hence, the description of the income tax as being
a "mass tax" became appropriate.
5)How does the pay-as-you-go procedure apply to wage earners? To persons who have income from
sources other than wages? - answer✔(LO 2) For wage earners, the tax law requires employers to
withhold a specified dollar amount from wages paid to the employee to cover income taxes and payroll
taxes. Persons with nonwage income generally are required to make quarterly payments to the IRS for
estimated taxes. Both procedures ensure that taxpayers will be financially able to meet their annual tax
liabilities. That is, the amounts withheld are meant to prepay the employee's income taxes and payroll
taxes related to the wages earned.
6)Using Adam Smith's canon on economy, evaluate the federal income tax. - answer✔(LO 3) As to Adam
Smith's canon on economy, the Federal income tax yields a mixed result. From the standpoint of the IRS,
economy exists as collection costs are nominal (when compared with revenue generated). The
government's cost of collecting Federal taxes amounts to less than one-half of 1 percent of the revenue
collected. Economy is not present, however, if one looks to the compliance effort and costs expended by
taxpayers. According to recent estimates, about 56% of individual taxpayers who file a return pay a
preparer, and one-third purchase tax software.
7)Distinguish between taxes that are proportional and those that are progressive. - answer✔(LO 3) A tax
is proportional if the rate of tax remains constant for any given income level. The tax is progressive if a
higher rate of tax applies as the tax base increases.
8)Several years ago Ethan purchased the former parsonage of St. James Church to use a personal
residence. To date, Ethan has not received any ad valorem property tax bills from either city or the
county tax authorities.
a.What is a reasonable explanation for this oversight?
b.What should Ethan do? - answer✔(LO 4)
a.The parsonage probably was not listed on the property tax rolls because it was owned by a tax-exempt
church. Apparently, the taxing authorities are not aware that ownership has changed.
b.Ethan should notify the authorities of his purchase. This will force him to pay back taxes but will
eliminate future interest and penalties.
9) The Adam's independent School district wants to sell a parcel of unimproved land that it does not
need. Its three best offers are as follows: from the state's Department of Public Safety (DPS), $2.3
Million; from the Second Baptist Church, $2.2 Million; and Baker Motors, $2.1 Million. DPS would use
the property for a new state highway patrol barracks, Second Baptist would start a church school, and
Baker would open a car dealership. If you are the financial advisor for the school district, which offer
would you prefer? Why? - answer✔(LO 4) Although the Baker Motors bid is the lowest, from a long-term
11/05/2024 12:06 PM
Tax Midterm Chapter 1 Questions With
Correct Answers
1)In the following independent situations, is the tax position of the taxpayer likely to change? Explain
why or why not.
a.John used to make casual purchases and sales of real estate as an investor. Currently, he does so on a
regular basis and has obtained a license as a dealer.
b.Theresa quit her job as a staff accountant and has established her own practice as a CPA.
c.After saving enough for a down payment, Paul has purchased a personal residence. - answer✔(LO 1)
a.By becoming a dealer, any gains and losses John has are converted from capital to ordinary
classification.
b.Theresa has become self-employed. Now she will be subject to self-employment tax and will have to
make quarterly installment payments of estimated income and payroll taxes.
c.Due to the home mortgage interest deduction and property tax deduction, most new home-
owners will itemize their deductions from AGI. Thus, Paul probably will no longer claim the standard
deduction on his income tax return.
2)Marvin is the executer and sole heir of his aunt's estate. The estate includes her furnished home,
which Marvin is considering converting to rental property to generate additional cash flow. What are
some of the tax problems Marvin may confront? - answer✔(LO 1) The income tax consequences that
result are Marvin's principal concern. Any rent he receives is taxed as income, but operating expenses
and depreciation will generate deductions that offset some or all of the income or even yield a loss.
Marvin must also consider the effect of other taxes. Because the property is being converted from
residential to commercial use, he can expect an increase in the ad valorem property taxes levied by the
local (and perhaps even the state) taxing authorities. Besides the real estate taxes, personal property
taxes could be imposed on the furnishings.
3)The sixteenth amendment to the U.S. Constitution was passed to overturn a Supreme Court decision
that had invalidated the Federal income tax. Do you agree? Why or why not? - answer✔(LO 2) The
statement is only partly correct. The Federal income tax on corporations was not a problem as it had
previously been sanctioned by the Supreme Court. What had been declared unconstitutional was the
tax on individuals as it applied to the income from property.
, ©THEBRIGHT EXAM SOLUTIONS
11/05/2024 12:06 PM
4)World war II converted the Federal income tax into a mass tax. Explain. - answer✔(LO 2) To finance
our participation in World War II, the scope of the income tax was expanded considerably—from a
limited coverage of 6% to over 74% of the population. Hence, the description of the income tax as being
a "mass tax" became appropriate.
5)How does the pay-as-you-go procedure apply to wage earners? To persons who have income from
sources other than wages? - answer✔(LO 2) For wage earners, the tax law requires employers to
withhold a specified dollar amount from wages paid to the employee to cover income taxes and payroll
taxes. Persons with nonwage income generally are required to make quarterly payments to the IRS for
estimated taxes. Both procedures ensure that taxpayers will be financially able to meet their annual tax
liabilities. That is, the amounts withheld are meant to prepay the employee's income taxes and payroll
taxes related to the wages earned.
6)Using Adam Smith's canon on economy, evaluate the federal income tax. - answer✔(LO 3) As to Adam
Smith's canon on economy, the Federal income tax yields a mixed result. From the standpoint of the IRS,
economy exists as collection costs are nominal (when compared with revenue generated). The
government's cost of collecting Federal taxes amounts to less than one-half of 1 percent of the revenue
collected. Economy is not present, however, if one looks to the compliance effort and costs expended by
taxpayers. According to recent estimates, about 56% of individual taxpayers who file a return pay a
preparer, and one-third purchase tax software.
7)Distinguish between taxes that are proportional and those that are progressive. - answer✔(LO 3) A tax
is proportional if the rate of tax remains constant for any given income level. The tax is progressive if a
higher rate of tax applies as the tax base increases.
8)Several years ago Ethan purchased the former parsonage of St. James Church to use a personal
residence. To date, Ethan has not received any ad valorem property tax bills from either city or the
county tax authorities.
a.What is a reasonable explanation for this oversight?
b.What should Ethan do? - answer✔(LO 4)
a.The parsonage probably was not listed on the property tax rolls because it was owned by a tax-exempt
church. Apparently, the taxing authorities are not aware that ownership has changed.
b.Ethan should notify the authorities of his purchase. This will force him to pay back taxes but will
eliminate future interest and penalties.
9) The Adam's independent School district wants to sell a parcel of unimproved land that it does not
need. Its three best offers are as follows: from the state's Department of Public Safety (DPS), $2.3
Million; from the Second Baptist Church, $2.2 Million; and Baker Motors, $2.1 Million. DPS would use
the property for a new state highway patrol barracks, Second Baptist would start a church school, and
Baker would open a car dealership. If you are the financial advisor for the school district, which offer
would you prefer? Why? - answer✔(LO 4) Although the Baker Motors bid is the lowest, from a long-term
