FUNDAMENTALS OF FEDERAL TAXATION
MULTIPLE CHOICE
AND
TRUE OR FALSE QUESTIONS
1
TRUE/FALSE [ 2 point each]
1. All tax legislation must originate in the Senate. False
2. Tax laws are codified in Title 26. True
3. Tax Court judges are Article 3 judges. False
4. The Tax Court is divided into districts across the country, and
headquartered in Washington, DC. False
5. Tax Court decisions are appealable to the federal District Court where
the case is heard. False
6. A taxpayer may choose to sue the federal government for a refund in
either federal District Court, or the Court of Federal Claims, but only
after the taxpayer has paid the assessed deficiency. False
7. A taxpayer may only petition the Tax Court if they have not paid the
IRS’s assessed deficiency. True
8. The Code of Federal Regulations (CFR) is where final Treasury
Regulations are found. True
9. Treasury Regulations for Code section 61 are cited as 26 USC section
61. False
10. Gross income and income are the same. False
11. To be gross income, there must be realization and recognition. True
12. All income realized, is recognized. False
2
13. All recognized income, is realized. True
14. The U.S. tax system is a regressive system. False
15. The term tax bracket refers to the highest percentage rate of tax that a
particular taxpayer pays on any part of their taxable income. True
16. Gross income and taxable income are one and the same. False
17. The effective tax rate and marginal rate of a person are the same.
False
18. The value of a person’s labor to themselves is it’s FMV. False
19. The value of a person’s labor to a third-party is $0. False
20. Value means money, property, or services. Income is all value
received or enjoyed, to the extent that it exceeds the value for which it
is directly, immediately, consciously and deliberately exchanged.
True
21. When unrelated parties exchange property in an arm’s length
transaction, the law considers the exchange to be of equal value. True
22. Assume B’s property has an adjusted basis equal to its FMV. When
A purchases property from B, and B receives cash, and A receives the
property, B has gross income. False
23. In the question above, A does not have gross income because A
received and gave up equal value. True
3
24. When A labors, and B gives A cash, A has gross income, because A
has received more value than A parted with. True
25. When A labors, and B pays A cash, A has gross income, and B does
not have gross income. True
26. When 2 taxpayers exchange labor, neither has gross income. False
27. If A rents her property to B, and B pays rent, A has gross income.
True
28. In the previous question, B has no gross income, because to B the
property has value, and B exchanged equal value. True
29. When a person temporarily parts with their property, they have parted
with no value. True
30. When a person permanently parts with their property, they have
parted with no value. False
31. When a taxpayer borrows money, they have gross income because
they have had an accession to wealth. False
32. Appreciation of a one’s property results in income. True
33. Value produced by a person that he/she keeps for themselves results
in income, but not gross income. True
34. The basis to a donee is an exchange basis. False
35. Substituted basis includes both transferred and exchange basis. True
4
36. At the time of a gift, donor’s basis is more than the items FMV;
donee’s basis will always be the items FMV. False
37. For a gift that is part sale and part gift, the donee’s basis is either the
amount paid or the donor’s basis at the time of the gift/sale. True
38. A heir’s basis is the basis of the decedent on the day of death. False
39. When property is transferred between spouses, or incident to divorce,
gain is not recognized but loss is. Either way, the recipient has a
transferred basis. False
40. Amount realized includes cash, property, closing costs, and
purchaser’s assumption of seller’s liabilities. True
41. In the question above, assumption of liabilities only included recourse
debt. False
42. The holding period for long term capital gains is 1 year. False
43. Short term capital gains are taxed at ordinary income rates. True
44. Long term capital losses are only used to offset long term capital
gains. False
45. Payment of a gift tax by the donor has no affect on the donee’s basis.
False
5
MULTIPLE CHOICE [2 points each]
51. The Constitutional power to tax is:
A) In the 24th Amendment
B) Reserved to the states
C) Article 1, section 2, 8, and 9
D) Article 3, sections 3 and 5
E) All of the above
52. Precisely, what did the 16th Amendment accomplish?
A) Removed the apportionment among the states requirement.
B) Removed apportionment requirement from direct taxes
C) Removed apportionment from incomes, from whatever source derived
D) All of the above
53. The “Code” is shorthand for
A) Tax Court cases
B) The Internal Revenue Code of 1986, as amended in 2022, codified in Title 26 of
the US Code.
C) The Internal Revenue Code of 1986
D) The Internal Revenue Code, codified in Title 28 of the US Code
E) All of the above
F) None of the above
6
54. Gross income is defined by all of the following except:
A) income from whatever source derived
B) a net accession to wealth, clearly realized, and under the dominion of the taxpayer
C) return one derives on his/her labor
D) return one derives from his/her capital
E) All of the above
55. Taxable income is
A) Gross income, as defined in section 61, minus deductions as allowed in section
63
B) Gross income, as defined in section 63
C) Both A and B
D) Neither A and B
56. Under section 1, if a married couple filing jointly, has $190,000 of taxable
income which is correct:
A) 15% on the first $36,900 totaling $5,535; 28% on the next $52,259 totaling
$14,630; 31% on the next 50,580 totaling $15,763; 36% on the next $50,000 totaling
$18,000, for a total tax of $53,928, or an effective tax rate of 28.38%
B) 36% tax rate, or a total tax of $68,400
C) 15% of the first $18, 450 totaling $2,767.50; 28% on the next $26,125 totaling
$7,315; 31% on the next $25,425 totaling $7,881.75; 36% on the next 55,000 totaling
$19,800; and 39.6% on the next $65,000 totaling $25,740, for a tax total of
$63,504.25, or an effective tax rate of 33.42%
D) None of the above
7