South-Western Federal Taxation 2025: Essentials of Taxation: Individuals and Busine
Entities , 28th Edition Nellen, Young
Chapter 01 2025 Essentials
Indicate whether the statement is true or false.
Answers Included ✅
1. One of the motivations for making a gift is to save on income taxes.
a. True
b. False
2. Tomas owns a sole proprietorship, and Lucy is the sole shareholder of a C corporation. In the current year, both
businesses make a net profit of $60,000. Neither business distributes any funds to the owners in the year. For
the current year, Tomas must report $60,000 of income on his individual tax return, but Lucy is not required to
report any income from the corporation on her individual tax return.
a. True
b. False
3. Unlike FICA, FUTA requires that employers comply with state as well as Federal rules.
a. True
b. False
4. Various tax provisions encourage the creation of certain types of retirement plans. Such provisions can be
justified on both economic and social grounds.
a. True
b. False
5. Donald owns a 45% interest in a partnership that earned $130,000 in the current year. He also owns 45% of the
stock in a C corporation that earned $130,000 during the year. Donald received $20,000 in distributions from
each of the two entities during the year. With respect to this information, Donald must report $78,500 of income
on his individual income tax return for the year.
a. True
b. False
6. Some states use their state income tax return as a means of collecting unpaid use tax.
a. True
b. False
7. A major advantage of a flat tax type of income tax is its simplicity.
a. True
b. False
8. A provision in the law that compels accrual basis taxpayers to pay a tax on prepaid income in the year received
and not when earned is consistent with generally accepted accounting principles.
a. True
b. False
9. The Federal excise tax on gasoline has a proportional effect on all taxpayers (that is, neither progressive or
regressive).
a. True
b. False
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Chapter 01 2025 Essentials
10. The annual exclusion, currently $18,000, is available for gift and estate tax purposes.
a. True
b. False
11. Because it is consistent with the wherewithal to pay concept, the tax law requires a seller to recognize a gain in
the year the installment sale occurs.
a. True
b. False
12. The formula for the Federal income tax on corporations is the same as that applicable to individuals.
a. True
b. False
13. Eagle Company, a partnership, had a short-term capital loss of $10,000 during the current year. Aaron, who
owns 25% of Eagle, will report $2,500 of Eagle’s short-term capital loss on his individual tax return.
a. True
b. False
14. In cases of doubt, courts have held that tax relief provisions should be broadly construed in favor of taxpayers.
a. True
b. False
15. Rajib is the sole shareholder of Cardinal Corporation, a calendar year S corporation. In the current year,
Cardinal generated a net profit of $350,000 ($520,000 gross income – $170,000 operating expenses) and
distributed $80,000 to Rajib. Rajib must report the Cardinal Corporation profit of $350,000 on his Federal income
tax return.
a. True
b. False
16. 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.
a. True
b. False
17. The Medicare component of the FICA tax (1.45% on wages) is progressive as the tax due increases as wages
increase.
a. True
b. False
18. Quail Corporation is a C corporation that generates net income of $125,000 during the current year. If Quail
paid dividends of $25,000 to its shareholders, the corporation must pay tax on $100,000 of net income.
Shareholders must report the $25,000 of dividends as income.
a. True
b. False
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Chapter 01 2025 Essentials
19. A parent employs her twin daughters, age 17, in her sole proprietorship. The daughters are not subject to FICA
coverage.
a. True
b. False
20. There is a Federal excise tax on hotel occupancy.
a. True
b. False
21. The tax law provides various tax credits, deductions, and exclusions that are designed to encourage taxpayers to
obtain additional education. These provisions can be justified on both economic and equity grounds.
a. True
b. False
22. The objective of pay-as-you-go (paygo) is to improve administrative feasibility.
a. True
b. False
23. Mona inherits her mother’s personal residence, which she converts to a furnished rental house. These changes
should affect the amount of ad valorem property taxes levied on the properties.
a. True
b. False
24. Julius, a married taxpayer, makes gifts to each of his six children. A maximum of twelve annual exclusions could
be allowed as to these gifts.
a. True
b. False
25. A tax cut enacted by Congress that contains a sunset provision will make the tax cut temporary.
a. True
b. False
26. Even if property tax rates are not changed, the amount of ad valorem taxes imposed on realty may not remain
the same.
a. True
b. False
27. Currently, the Federal corporate income tax is less progressive than the individual income tax.
a. True
b. False
28. As a matter of administrative convenience, the IRS would prefer to have Congress decrease (rather than
increase) the amount of the standard deduction allowed to individual taxpayers.
a. True
b. False
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Chapter 01 2025 Essentials
29. In 2024, José, a widower, sells land (fair market value of $100,000) to his daughter, Linda, for $50,000. José has
not made a taxable gift.
a. True
b. False
30. States impose either a state income tax or a general sales tax, but not both types of taxes.
a. True
b. False
31. Ultimately, most taxes are paid by individuals.
a. True
b. False
32. For Federal income tax purposes, there never has been a general amnesty period.
a. True
b. False
33. No state may offer an income tax amnesty program more than once.
a. True
b. False
34. Not all of the states that impose a general sales tax also have a use tax.
a. True
b. False
35. One of the major reasons for the enactment of the Federal estate tax was to prevent large amounts of wealth
from being accumulated within a family unit.
a. True
b. False
36. Sales made over the internet are not exempt from the application of a general sales (or use) tax.
a. True
b. False
37. Under state amnesty programs, all delinquent and unpaid income taxes are forgiven.
a. True
b. False
38. On transfers by death, the Federal government relies on an estate tax, while states may impose an estate tax, an
inheritance tax, both taxes, or neither tax.
a. True
b. False
39. For state income tax purposes, some states allow a credit for dependents rather than a deduction.
a. True
b. False
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