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Exam 1: An Introduction to Taxation and Understanding the Federal Tax Law

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Question 31

Multiple Choice

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A characteristic of the fraud penalties is:

A) Civil fraud can result in a fine and a prison sentence.
B) When negligence and civil fraud apply to a deficiency, the civil fraud penalty predominates.
C) The criminal fraud penalty is 75% of the deficiency attributable to the fraud.
D) The IRS has the same burden of proof in the case of criminal fraud than with civil fraud.
E) None of the above.

F) A) and B)
G) D) and E)

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Question 32

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The annual exclusion,currently $13,000,is available for gift but not estate tax purposes.

A) True
B) False

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Question 33

Multiple Choice

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Which,if any,of the following taxes are proportional (rather than progressive) ?

Congress has enacted a provision to allow a deduction for state and local sales taxes.Such a provision can be justified on social grounds.

For individual taxpayers,the interest rate for income tax refunds (overpayments)is not the same as that applicable to assessments (underpayments).

Molly,a widow,makes cash gifts to her five married children (including their spouses)and to her eight grandchildren.

Indicate which,if any,statement is incorrect.State income taxes:

To lessen,or eliminate,the effect of multiple taxation,a taxpayer who is subject to both foreign and U.S.income taxes on the same income is allowed either a deduction or a credit for the foreign tax paid.

The tax law allows an income tax deduction for state and local income taxes or state and local sales taxes paid.Explain the justification for each.

As a matter of administrative convenience,the IRS would prefer to have Congress increase (rather than decrease)the amount of the standard deduction allowed to individual taxpayers.

In 1985,Roy leased real estate to Drab Corporation for 20 years.Drab Corporation made significant capital improvements to the property.In 2005,Roy decides not to renew the lease and vacates the property.At that time,the value of the improvements is $800,000.Roy sells the real estate in 2011 for $1,200,000 of which $900,000 is attributable to the improvements.How and when is Roy taxed on the improvements made by Drab Corporation?

Brayden files his Federal income tax return by April 15,but does not pay the tax.Although he expects to pay interest on the large amount of tax he still owes,he feels that the timely filing has avoided any penalties.Is Brayden's assumption correct?

On occasion,Congress has to enact legislation that clarifies the tax law in order to change a result reached by the U.S.Supreme Court.

Burt and Lisa are married and live in a common law state.Burt wants to make gifts to their five children in 2011.What is the maximum amount of the annual exclusion they will be allowed for these gifts?

Upon audit by the IRS,Faith is assessed a deficiency of $40,000 of which $25,000 is attributable to negligence.The 20% negligence penalty will apply to only $25,000.

Allowing a domestic production activities deduction for certain manufacturing income can be justified:

The ad valorem tax on business use personalty is more often avoided by taxpayers than the ad valorem tax on personal use personalty.

Mona inherits her mother's personal residence,which she converts to a furnished rent house.These changes should affect the amount of ad valorem property taxes levied on the properties.

Currently,the Federal income tax is more progressive than it ever has been in the past.

Comment on the following items relating to IRS audit situations: