Federal Taxation II Exam 1 UPDATED
ACTUAL Exam Questions and CORRECT
Answers
The Federal tax law is the vehicle for accomplishing many objectives of the nation such as: -
CORRECT ANSWER - -Raising revenue: the major objective of the tax system but not the
sole objective
-Economic Considerations
-Social Considerations
-Equity (Fairness) Considerations
-Political Considerations
Economic Considerations for taxation may include - CORRECT ANSWER - -Control the
economy (favorable depreciation deductions for purchase of business property)
-Encourage certain activities
-Encourage certain industries (special tax treatment for agriculture activities, development of
natural resources, railroad and banking industries)
-Encourage small business (example: ordinary loss deduction on stock in small business)
Social Considerations for taxation may include - CORRECT ANSWER - -Tax-free medical
coverage provided by employers to encourage health insurance
-Tax benefits to encourage additional education and to encourage adoption
-Deduction of contributions made to qualified charities, to encourage funding of socially
desirable programs by private individuals and companies
-Disallowed deductions for expenditures against public policy (example: illegal bribes and
kickbacks
,Measure of equity is whether a tax is - CORRECT ANSWER - -Progressive (e.g., federal
income tax on individuals)
-Regressive (e.g., gasoline excise tax)
Equity considerations may include - CORRECT ANSWER - -Alleviating the effect of
multiple taxation
-Wherewithal to pay concept
-Annual accounting periods
-Coping with inflation
What are equity considerations that help alleviate the effects of multiple taxation? - CORRECT
ANSWER - -Deduction for state and local taxes
-Credit or deduction for certain foreign taxes
-Deduction for dividends received by corporate shareholders from certain domestic corporations
Wherewithal to pay concept - CORRECT ANSWER - income should be recognized and a tax
paid on the income when the taxpayer has the resources to pay the tax
-Defers taxation when a taxpayer's economic position has not changed significantly, for example,
for a gain realized from an exchange of assets where cash is not transacted, the tax liability is
deferred
Equity Considerations that are talked about in annual accounting periods? - CORRECT
ANSWER - -In some cases (example: start-up businesses), a revenue-generating cycle may be
greater than 12 months which is the maximum tax reporting period. To accommodate this, net
operating loss rules allow losses from one year to be used in another year. this minimizes the
adverse impact of arbitrary reporting periods
How is taxation adjusted in coping with inflation? - CORRECT ANSWER - -Inflation
adjustments are made through an indexation procedure
,-If earnings increase solely by cost-of-living amount, taxes will not be imposed at higher rates on
the increase
Political considerations in taxation - CORRECT ANSWER - -Special interest legislation
-Response to public opinion (political expediency)
-State and local government influences
How does the IRS act as a Protector of the Revenue? - CORRECT ANSWER - -IRS works to
get Congress to "close loopholes"
-Laws passed by Congress enables IRS to make adjustments based on the substance of a
transaction
-If the taxpayer's method of accounting does not clearly reflect income, Congress allows the IRS
to make adjustments to the method of accounting
What is the judicial influence on statutory provisions? - CORRECT ANSWER - -Some court
decisions highlight undesirable aspects of present law, which has led Congress to incorporate
them in the Internal Revenue Code (example: tax benefit rule)
The primary sources of tax law include information from - CORRECT ANSWER - all three
branches of government:
-Legislative (or statutory)
-Executive
-Judicial
Working with the tax law involves three basic steps: - CORRECT ANSWER - -Familiarity
with the sources of the law
-Application of research techniques
-Effective use of planning procedures
, Three statutory sources of tax law - CORRECT ANSWER - -Constitution
-Internal Revenue Code
-Tax Treaties
Code § 2(a)(1)(A) - CORRECT ANSWER - § = Abbreviation for "Section"
2 = Section number
(a) = Subsection designation
(1) = Paragraph designation
(A) = Subparagraph designation
Administrative Sources of Tax Law - CORRECT ANSWER - -Treasury department
regulations
-Revenue rulings
-Revenue procedures
-Notices
-Various other administrative pronouncements
Treasury Department Regulations - CORRECT ANSWER - -Issued by US Treasury
Department
-Provide general interpretations and guidance in applying the Code
Treasury department regulations can be issued in what three forms? - CORRECT ANSWER -
-Proposed: a preview of final regulations
-Temporary: Issued when guidance needed quickly- same authoritative value as final regulations
-Final: Force and effect of law
ACTUAL Exam Questions and CORRECT
Answers
The Federal tax law is the vehicle for accomplishing many objectives of the nation such as: -
CORRECT ANSWER - -Raising revenue: the major objective of the tax system but not the
sole objective
-Economic Considerations
-Social Considerations
-Equity (Fairness) Considerations
-Political Considerations
Economic Considerations for taxation may include - CORRECT ANSWER - -Control the
economy (favorable depreciation deductions for purchase of business property)
-Encourage certain activities
-Encourage certain industries (special tax treatment for agriculture activities, development of
natural resources, railroad and banking industries)
-Encourage small business (example: ordinary loss deduction on stock in small business)
Social Considerations for taxation may include - CORRECT ANSWER - -Tax-free medical
coverage provided by employers to encourage health insurance
-Tax benefits to encourage additional education and to encourage adoption
-Deduction of contributions made to qualified charities, to encourage funding of socially
desirable programs by private individuals and companies
-Disallowed deductions for expenditures against public policy (example: illegal bribes and
kickbacks
,Measure of equity is whether a tax is - CORRECT ANSWER - -Progressive (e.g., federal
income tax on individuals)
-Regressive (e.g., gasoline excise tax)
Equity considerations may include - CORRECT ANSWER - -Alleviating the effect of
multiple taxation
-Wherewithal to pay concept
-Annual accounting periods
-Coping with inflation
What are equity considerations that help alleviate the effects of multiple taxation? - CORRECT
ANSWER - -Deduction for state and local taxes
-Credit or deduction for certain foreign taxes
-Deduction for dividends received by corporate shareholders from certain domestic corporations
Wherewithal to pay concept - CORRECT ANSWER - income should be recognized and a tax
paid on the income when the taxpayer has the resources to pay the tax
-Defers taxation when a taxpayer's economic position has not changed significantly, for example,
for a gain realized from an exchange of assets where cash is not transacted, the tax liability is
deferred
Equity Considerations that are talked about in annual accounting periods? - CORRECT
ANSWER - -In some cases (example: start-up businesses), a revenue-generating cycle may be
greater than 12 months which is the maximum tax reporting period. To accommodate this, net
operating loss rules allow losses from one year to be used in another year. this minimizes the
adverse impact of arbitrary reporting periods
How is taxation adjusted in coping with inflation? - CORRECT ANSWER - -Inflation
adjustments are made through an indexation procedure
,-If earnings increase solely by cost-of-living amount, taxes will not be imposed at higher rates on
the increase
Political considerations in taxation - CORRECT ANSWER - -Special interest legislation
-Response to public opinion (political expediency)
-State and local government influences
How does the IRS act as a Protector of the Revenue? - CORRECT ANSWER - -IRS works to
get Congress to "close loopholes"
-Laws passed by Congress enables IRS to make adjustments based on the substance of a
transaction
-If the taxpayer's method of accounting does not clearly reflect income, Congress allows the IRS
to make adjustments to the method of accounting
What is the judicial influence on statutory provisions? - CORRECT ANSWER - -Some court
decisions highlight undesirable aspects of present law, which has led Congress to incorporate
them in the Internal Revenue Code (example: tax benefit rule)
The primary sources of tax law include information from - CORRECT ANSWER - all three
branches of government:
-Legislative (or statutory)
-Executive
-Judicial
Working with the tax law involves three basic steps: - CORRECT ANSWER - -Familiarity
with the sources of the law
-Application of research techniques
-Effective use of planning procedures
, Three statutory sources of tax law - CORRECT ANSWER - -Constitution
-Internal Revenue Code
-Tax Treaties
Code § 2(a)(1)(A) - CORRECT ANSWER - § = Abbreviation for "Section"
2 = Section number
(a) = Subsection designation
(1) = Paragraph designation
(A) = Subparagraph designation
Administrative Sources of Tax Law - CORRECT ANSWER - -Treasury department
regulations
-Revenue rulings
-Revenue procedures
-Notices
-Various other administrative pronouncements
Treasury Department Regulations - CORRECT ANSWER - -Issued by US Treasury
Department
-Provide general interpretations and guidance in applying the Code
Treasury department regulations can be issued in what three forms? - CORRECT ANSWER -
-Proposed: a preview of final regulations
-Temporary: Issued when guidance needed quickly- same authoritative value as final regulations
-Final: Force and effect of law
