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Various Income Tax Questions

1. A taxpayer may litigate a tax dispute without first paying the tax in the:
a) U.S. District Court
b) U.S. Tax Court
c) U.S. Court of Federal Claims
d) All of the above

2. A business bad debt is deductible for tax purposes as a(n):
a) Short-term capital loss
b) Long-term capital loss
c) Ordinary business deduction
d) None of the above

3. Under the cash method of tax accounting, tax deductions are generally taken when:
a) The liability arises
b) Payment is made
c) The expense is actually incurred
d) None of the above

4. Which of the following constitutes tax evasion?
a) Arranging your affairs to keep your tax liability as low as possible under the tax law.
b) Avoiding taxes.
c) Failing to disclose a tax liability from a completed transaction.
d) Trying to minimize your tax liability.

5. Which of the following items is not subject to federal income tax?
a) Interest on U.S. Treasury bonds.
b) Gambling winnings.
c) Interest on loans made in the ordinary course of business.
d) Life insurance proceeds.

6. Sam owes Bob $8,000. Bob cancels (forgives) the debt. The cancellation is not a gift and Sam is neither insolvent nor bankrupt. Which of the following statements is correct concerning the impact of this transaction?
a) Both Bob and Sam recognize $8,000 of taxable income.
b) Bob recognizes $8,000 of taxable income.
c) Sam recognizes $8,000 of taxable income.
d) Neither Bob nor Sam has any taxable income from this transaction.

7. Jane purchased an annuity contract that pays her $800 per month. The annuity cost her $60,000 and it has an expected return of $100,000. How much of each monthly annuity payment is includible in Jane's gross income?
a) $400
b) $320
c) $480
d) $0

8. Section 197 intangible assets such as goodwill are amortized for tax purposes over:
a) 15 years
b) 3 years
c) 6 years
d) Goodwill is not amortized

Solution Preview

1. A taxpayer may litigate a tax dispute without first paying the tax in the:

The only court which does not require payment of the disputed tax before litigation is the U.S. Tax Court. ("Tax Court has jurisdiction over federal income tax disputes. Though taxpayers may choose to litigate tax matters in a variety of legal settings, the Tax Court is the only forum in which taxpayers outside of bankruptcy may challenge the IRS without first paying the disputed tax in full. The taxpayer may also bring a tax dispute in any United States District Court or in the United States Court of Federal Claims. Pursuant to the "full payment rule," established in Flora v. United States, 357 U.S. 63 (1958), the taxpayer must pay the disputed tax before filing a suit in these forums to recover the contested amount of tax paid." Therefore, answer b is correct.

2. A business bad debt is deductible for tax purposes as a(n):

IRC Section 162(a) states that "There shall be allowed as a deduction all the ordinary and necessary expenses paid or incurred during the taxable year in carrying on any trade or business." Because bad debt expense is an ordinary and necessary business expense, answer c is correct.

3. Under the cash method of tax accounting, ...

Solution Summary

This solution discusses where a taxpayer may litigate a case without paying the tax first, how a business bad debt is categorized, when deductions are taken under the cash method, the definition of tax evasion, tax-exempt income items, the impact of a non-business bad debt, the includible portion of annuity income, and the amortization period for Section 197 intangibles.