Question 1

Guzman Corporation has its expenditure of $700,000 for salary to its president and sole shareholder disallowed as a deduction by the IRS. Comparable salaries for presidents of similarly sized firms in the same industry average $300,000. The IRS reclassified $400,000 as a nondeductible cash dividend. Which of the following form the basis for the IRS disallowance?
I.Lack of Business Purpose.
II.Administrative Convenience Concept.
III.Capital Recovery Concept.
IV.Substance over Form Doctrine.
​

Accepted Answer

Statement I is correct because the excessive salary paid to the president and sole shareholder without any valid business purpose is one of the common sources for the disallowance of deductions by the IRS. 
Statement IV is also correct because the Substance over Form Doctrine allows the IRS to reclassify a transaction according to its substance rather than its legal form, i.e., reclassify excessive salary paid to the president and sole shareholder as a nondeductible dividend. 
Statement II is not relevant to this situation because the disallowance of the deduction is not due to administrative convenience. 
Statement III is not relevant to this situation because the Capital Recovery Concept refers to the recovery of the cost of assets over their useful life, which is not relevant to the excessive salary payment.

Question 2

Mario is an employee of Flores Company. The company regularly pays its employees by direct deposit on or before the last day of each month. Mario's regular paycheck is deposited on December 31, 2018, but Mario was away on vacation and didn't return until January 15, 2019. The gross amount of the check is included in Mario's 2018 income. Which of the following concepts or doctrines best explains this treatment?

Accepted Answer

The constructive receipt doctrine applies in this situation. This doctrine holds that income has been received by a taxpayer when it's credited to their account or made available to them, even if they haven't physically received it yet. Since the paycheck was deposited on December 31, 2018, it's considered constructively received in that tax year, even though Mario didn't physically receive it until January 15, 2019.

Question 3

Deduction concepts and constructs include which of the following?
I.Legislative Grace Concept.
II.Business Purpose Concept.
​

Accepted Answer

Both the Legislative Grace Concept and the Business Purpose Concept are integral to understanding deductions in tax law. The Legislative Grace Concept suggests that deductions are allowances by the government, not inherent rights, while the Business Purpose Concept requires that expenses must be ordinary and necessary for a business to be deductible.

Question 4

A corporation is allowed to deduct all of its ordinary and necessary business expenses. Which of the following Concepts is least helpful in determining this treatment?

Accepted Answer

The All-inclusive Income Concept is primarily concerned with defining what constitutes income, not with the deduction of expenses. The other concepts are more directly related to the rationale for allowing business expense deductions.

Question 5

Monica's Lawn Service, Inc., purchases a heavy-duty tri-cut lawn mower on March 17, 2018, for $4,500. The depreciation on the lawn mower in 2018 was $500. In July, a tire on the lawn mower is repaired at a cost of $650. Maintenance costs on the lawn mower for 2018 total $175. What is Monica's basis in the lawn mower at the end of 2018?

Accepted Answer

Monica's basis in the lawn mower at the end of 2018 is the purchase price minus the depreciation. Therefore, $4,500 - $500 = $4,000. Repair and maintenance costs do not affect the basis.

Question 6

The primary difference(s) between the claim-of-right doctrine and the constructive receipt doctrine is/are
I.Claim of right applies when the taxpayer has not yet physically received an item of income.
II.Constructive receipt applies after the taxpayer has received an item of income.
​

Accepted Answer

The claim-of-right doctrine applies when a taxpayer has received income and has an unrestricted right to it, even if they choose not to use or spend it. Constructive receipt applies when income is made available to a taxpayer without restrictions, even if not physically in possession. Both statements as presented are incorrect in describing these doctrines.

Question 7

It was stated in the text that realized gains from certain types of transactions (e.g., like-kind exchanges) are deferred for recognition in a future period. The basis of this treatment is the
I.Annual Accounting Period Concept.
II.Legislative Grace Concept.
III.Wherewithal-to-Pay Concept.
IV.Capital Recovery Concept.
​

Accepted Answer

The Wherewithal-to-Pay Concept relates to deferral of gains from certain types of transactions, where the taxpayer lacks the ability to pay the tax in the period of recognition. The Legislative Grace Concept is not relevant to this treatment. The Annual Accounting Period Concept refers to the requirement that taxpayers must adopt an accounting period for tax purposes that is generally consistent from year to year. The Capital Recovery Concept relates to the concept of recovering the cost or basis of an asset over the period of its useful life, through depreciation or amortization.

Question 8

Jane owns 100% of the stock of Lacy Corporation. Jane's son, Lee, is employed by Lacy Corporation as a consultant. Which of the following concepts or doctrines is least helpful in determining the tax consequences of any payments Lacy makes to Lee?

Accepted Answer

The Entity Concept is least helpful in this context because it primarily deals with the distinction between the business entity and its owners for legal and tax purposes, rather than the specifics of transactions between the company and its employees or consultants. The other options (Arm's-Length Transaction Concept, Substance Over Form Doctrine, Assignment of Income Doctrine, and Business Purpose Concept) are more directly relevant to analyzing the tax implications of payments made to an employee or consultant, especially in situations involving related parties.

Question 9

Arnold sells a parcel of investment real estate to Oswald for $600,000 in 2018. Arnold will receive $200,000 annually, plus interest at 8%, from 2019 through 2021. Arnold will recognize no gross income on this sale in 2018. Which of the following determines this treatment?

Accepted Answer

The Wherewithal-to-Pay Concept is the principle that determines this treatment. It suggests that income should be recognized when the taxpayer has the actual or constructive receipt of income, in a manner that aligns with their ability to pay the tax. Since Arnold will receive the payments over time, this concept allows for the recognition of income as it is received, rather than all at once at the time of sale, reflecting his ability to pay taxes on the income as it is actually received.

Question 10

Tyrone sells his personal-use car that had cost $15,000 for $10,000. Why is the loss realized on this transaction disallowed as a deduction?
I.Legislative Grace is lacking.
II.Personal losses are disallowed.
III.Business purpose is lacking.
​

Accepted Answer

The answer of Tyrone sells his personal-use car that had...

Question 11

In which of the following will the Constructive Receipt Doctrine require reporting income in 2018?
I.Cornell's December 2018 salary check is withheld until January 15, 2019, because the employer does not have sufficient cash to cover its December payroll.
II.Donnie is an employee of Holt Corporation. The corporation regularly mails payroll checks to employees to arrive on or before the last day of each month. Donnie's check arrives in the mail at his house on December 31, 2018. However, Donnie was vacationing in Cancun and did not return until January 8, 2019. Donnie deposited the check into his account the next day.
III.In December 2018, Cory signs a contract to play basketball for the Rhythms. He receives a signing bonus of $2,000,000 to be paid over 5 years beginning in 2019. His regular salary of $800,000 will be paid monthly during the season that begins in 2019.
​

Accepted Answer

The Constructive Receipt Doctrine requires income to be reported when it is made available to the taxpayer without substantial limitations. In statement II, Donnie's check was available to him on December 31, 2018, even though he did not physically receive it until January 2019. Statements I and III do not meet the criteria for constructive receipt in 2018.

Question 12

Sandra directed her employer to withhold $500 of her wages each month for deposit to her mother's checking account. Which of the following concepts, constructs, or doctrines is the least helpful in determining how Sandra should report the arrangement for tax purposes?

Accepted Answer

The ability-to-pay concept is not relevant in determining how Sandra should report the arrangement for tax purposes. This concept refers to the idea that taxpayers should pay taxes based on their ability to pay, which is not applicable to this situation. The other concepts listed are more relevant to determining how the arrangement should be reported for tax purposes. The Assignment of Income Doctrine determines who should report income when there is an assignment of income. The Claim of Right Doctrine determines the year in which income is taxable. The All-inclusive Income Concept requires taxpayers to report all income, including income received on behalf of another person. The Constructive Receipt Doctrine requires taxpayers to report income in the year it is credited to their account, even if it is not physically received.

Question 13

Tax law generally disallows deductions for personal expenditures. However, due to legislative grace, there are certain exceptions to this general provision of tax law. These exceptions include
I.Itemized Deductions.
II.Standard Deduction amount.
III.Personal Exemption amounts.
IV.Dependency Exemption amounts.
​

Accepted Answer

Exceptions to the general provision of tax law that disallows deductions for personal expenditures include itemized deductions and the standard deduction amount.

Question 14

Occasionally, realized gains are not recognized for tax purposes. These situations occur because
I.certain gains are excluded due to legislative grace.
II.gains are deferred on certain types of property transactions where the wherewithal-to-pay the tax resulting from the transaction is lacking.
​

Accepted Answer

Both statements are correct. Statement I refers to specific tax exemptions or exclusions that are allowed by law. Statement II refers to deferring gains when the taxpayer does not have the funds to pay the tax resulting from the transaction. This is often seen in situations such as like-kind exchanges or installment sales.

Question 15

Silvia is a single individual who has income of $80,000. Todd is a single individual who has income of $35,000. Neither of them itemizes their deductions. Both taxpayers will take a standard deduction of $12,000 in 2018. The concept that allows both Silvia and Todd to take this deduction is

Accepted Answer

The concept that allows both Silvia and Todd to take the standard deduction is administrative convenience. This is because it simplifies the tax filing process for individuals and the IRS. By providing a standard deduction, individuals do not need to spend time and resources to calculate and deduct their actual expenses. It also reduces the burden on the IRS to verify and audit individual deductions.

Question 16

Alexis, a cash basis contractor, builds a storage building for Jones. The building is completed, and the bill is given to Jones. Jones pays $60,000 in 2018. Subsequently, Jones files suit for damages based on alleged faulty construction. Alexis required to recognize $60,000 of income in 2018 based upon
I.Constructive Receipt Doctrine.
II.Claim-of-right Doctrine.
​

Accepted Answer

The claim-of-right doctrine applies because Alexis received the payment without restriction, despite the subsequent lawsuit. The constructive receipt doctrine does not apply as Alexis is a cash basis taxpayer and recognizes income when actually received.

Question 17

Laurie's Lawn Service, Inc., purchases a heavy-duty tri-cut lawn mower on March 17, 2018, for $5,500. Under a special election, Laurie's expenses the $5,500 cost of the lawn mower in 2018. In July, a tire on the lawn mower is repaired at a cost of $450. Maintenance costs on the lawn mower for 2018 total $175. What is Laurie's basis in the lawn mower at the end of 2018?

Accepted Answer

The answer of Laurie's Lawn Service, Inc., purchases a heavy-duty...

Question 18

Deduction concepts need to resolve certain questions. Some of these are:
I.How much is deductible?
II.When can the deduction be taken?
III.What types of expenditures are deductible?
IV.What entity is entitled to the deduction?
​

Accepted Answer

All four statements are correct as they represent fundamental questions that need to be addressed when considering deduction concepts in taxation. These include determining the amount that can be deducted, the timing of the deduction, the nature of the expenditures that qualify for deductions, and the entity that is eligible to claim the deduction.

Question 19

Deduction concepts include which of the following?
I.Capital Recovery Concept.
II.Legislative Grace Concept.
III.Business Purpose Concept.
IV.Ability to Pay Concept.
​

Accepted Answer

All four concepts are part of the deduction concepts in tax law. 
I. Capital Recovery Concept allows taxpayers to recover the cost of their capital investment through depreciation and amortization deductions. 
II. Legislative Grace Concept implies that taxpayers are entitled to deductions only if they are explicitly authorized by the tax code or regulations. 
III. Business Purpose Concept requires that the expenses deducted by taxpayers must be related to their trade or business. 
IV. Ability to Pay Concept implies that taxpayers should be taxed according to their ability to pay, which means that those who earn more should pay more taxes.

Question 20

When Kerri filed her 2018 tax return on April 15, 2019, she did not include a $2,000 bonus received from her employer on January 10, 2019 relating to her work performance during 2018. What concept, construct, or doctrine supports Kerri's actions?

Accepted Answer

The constructive receipt doctrine states that income is taxable when it is available to the taxpayer, rather than when it is actually received. In Kerri's case, the bonus was made available to her on January 10, 2019, which is when she should have included it in her 2018 tax return, even if she didn't physically receive the payment until a later date. By not including it, she violated the constructive receipt doctrine.

Quiz 2: Income Tax Concepts

Deduction concepts and constructs include which of the following? I.Legislative Grace Concept. II.Business Purpose Concept. ​

A corporation is allowed to deduct all of its ordinary and necessary business expenses. Which of the following Concepts is least helpful in determining this treatment?

The primary difference(s) between the claim-of-right doctrine and the constructive receipt doctrine is/are I.Claim of right applies when the taxpayer has not yet physically received an item of income. II.Constructive receipt applies after the taxpayer has received an item of income. ​

Jane owns 100% of the stock of Lacy Corporation. Jane's son, Lee, is employed by Lacy Corporation as a consultant. Which of the following concepts or doctrines is least helpful in determining the tax consequences of any payments Lacy makes to Lee?

Arnold sells a parcel of investment real estate to Oswald for $600,000 in 2018. Arnold will receive $200,000 annually, plus interest at 8%, from 2019 through 2021. Arnold will recognize no gross income on this sale in 2018. Which of the following determines this treatment?

Tyrone sells his personal-use car that had cost $15,000 for $10,000. Why is the loss realized on this transaction disallowed as a deduction? I.Legislative Grace is lacking. II.Personal losses are disallowed. III.Business purpose is lacking. ​

Sandra directed her employer to withhold $500 of her wages each month for deposit to her mother's checking account. Which of the following concepts, constructs, or doctrines is the least helpful in determining how Sandra should report the arrangement for tax purposes?

Occasionally, realized gains are not recognized for tax purposes. These situations occur because I.certain gains are excluded due to legislative grace. II.gains are deferred on certain types of property transactions where the wherewithal-to-pay the tax resulting from the transaction is lacking. ​

Silvia is a single individual who has income of $80,000. Todd is a single individual who has income of $35,000. Neither of them itemizes their deductions. Both taxpayers will take a standard deduction of $12,000 in 2018. The concept that allows both Silvia and Todd to take this deduction is

Deduction concepts need to resolve certain questions. Some of these are: I.How much is deductible? II.When can the deduction be taken? III.What types of expenditures are deductible? IV.What entity is entitled to the deduction? ​

Deduction concepts include which of the following? I.Capital Recovery Concept. II.Legislative Grace Concept. III.Business Purpose Concept. IV.Ability to Pay Concept. ​

When Kerri filed her 2018 tax return on April 15, 2019, she did not include a $2,000 bonus received from her employer on January 10, 2019 relating to her work performance during 2018. What concept, construct, or doctrine supports Kerri's actions?

Deduction concepts and constructs include which of the following? I.Legislative Grace Concept. II.Business Purpose Concept.

The primary difference(s) between the claim-of-right doctrine and the constructive receipt doctrine is/are I.Claim of right applies when the taxpayer has not yet physically received an item of income. II.Constructive receipt applies after the taxpayer has received an item of income.

Tyrone sells his personal-use car that had cost $15,000 for $10,000. Why is the loss realized on this transaction disallowed as a deduction? I.Legislative Grace is lacking. II.Personal losses are disallowed. III.Business purpose is lacking.

Occasionally, realized gains are not recognized for tax purposes. These situations occur because I.certain gains are excluded due to legislative grace. II.gains are deferred on certain types of property transactions where the wherewithal-to-pay the tax resulting from the transaction is lacking.

Deduction concepts need to resolve certain questions. Some of these are: I.How much is deductible? II.When can the deduction be taken? III.What types of expenditures are deductible? IV.What entity is entitled to the deduction?

Deduction concepts include which of the following? I.Capital Recovery Concept. II.Legislative Grace Concept. III.Business Purpose Concept. IV.Ability to Pay Concept.