The document contains sample questions from an accounting final exam that cover various topics in taxation including: 1) The broad definition of income under the Internal Revenue Code and how it differs from economic concepts of income. 2) The distinction between "above the line" and "below the line" deductions, how they developed, differences in tax consequences and limitations. 3) Determining basis for inherited and gifted property, and tax deductions associated with business property purchases. The document also provides hypothetical client scenarios regarding tax treatment of employee benefits and choosing a business entity, as well as a scenario where the student is asked to write a tax column for the local newspaper.

1. ACCT 429 Final Exam 100% Correct Answers
Description:
1. (TCOs 2, 3, and 5) As we know, Congress devised a very broad definition of income and
codified this definition in Section 61 of the Internal Revenue Code. Explain the Code’s definition
of income and how it
is generally applied to taxpayers. In particular, explain how the Code’s definition of income is
different than other potential definitions of income, such as the economic concept of income, and
use an example to illustrate the difference between the two systems. Explain how the Code
approaches whether or not particular items should be included in income and how a taxpayer’s
taxable income is generally determined under the Code. (Points : 25)
2. (TCOs 2, 4, and 5) We spent quite a bit of time this term learning about deductions. One of the
important distinctions between various types of deductions that we examined was the distinction
between
“for AGI” and “from AGI” deductions. Explain how the names for these two types of deductions
developed, as well as the fundamental differences between the two types of deductions and the
general types of
deductions that fall within each category. In particular, focus on the different tax consequences
that each might have, any applicable limitations, and the significance of being classified as a
from AGI deduction instead of for AGI. (Points : 25)
3. (TCOs 2, 5, 6, and 7) As a tax practitioner, you often get people asking questions concerning
the tax effect of property transactions. This year is no exception. You’ve had individual clients
ask you the following questions this year:
I. I inherited property from my grandfather, and I received a gift of property from another family
member. How do I determine the basis in each piece of property?
II. I bought a piece of property that is used in a trade or business. Are there any tax deductions
associated with this purchase of property? If so, how do I determine the amount of those
deductions?
Answer each of these questions, explaining the applicable rules and possibilities of each. (Points
: 50)
4. (TCOs 2, 3, and 4) One of your corporate clients has approached you about whether or not its
employees are required to include certain benefits provided by the corporation in their
income. In particular, the corporation has inquired whether the following benefits provided by
the corporation to employees would be included in an employee’s taxable income:

2. 5. (TCOs 1, 2, 8, 9, and 10) One of your best individual clients is thinking about starting up a
new business, and he is seeking your advice on which business form he should select. In
particular, he’s trying to decide whether to operate the business as a partnership or a C
corporation. Explain to him the significant tax and nontax issues that will arise from choosing
each of these entities compared to the other, including how
income will be treated by the entity, the overall tax burden, and the effect of distributions of
property or earnings from the entity to your client. (Note: Do not spend time addressing other
types of business entities. Credit will only be given for discussion of the two business entities at
issue.) (Points : 50)
6. (TCO 2, 3, 6, 8, 9, and 10) You are chief counsel to the chairman of the Joint Committee on
Taxation, the body primarily responsible for identifying taxation issues and their consequences
as Congress seeks to implement a comprehensive and coherent tax
policy. Currently, the United States is in a bit of an economic slump. Corporate earnings reports
are relatively weak; the stock market is about 25% off of its five-year highs, and tax revenues are
down. Largely as a result of the last issue, the government finds itself operating under an annual
deficit, and the national debt hovers around $7,000,000,000. Interest rates, however, remain at
historic lows. The president has suggested a multiple-pronged attack
to revitalize the economy. First, he has proposed going to a flat tax rather than the current
progressive tax system. (No recommendation regarding what that flat tax rate should be has been
made, although the president has indicated he would not be likely to accept any figure above
15%.) As part of this plan, however, the president has proposed eliminating many of the current
individual income tax deductions, including
(I) the home mortgage interest deduction and
(II) the property tax deduction. He has also proposed eliminating the deduction for dependents.
Furthermore, he has proposed eliminating the child care and earned income credits to help make
up for any potential shortfalls in revenue.
7. (TCO 1, 2, 3, 4, 8, and 10) As a newly minted CPA, you obtain your first significant position
as a tax professional: senior tax accountant for one of the offices of a regional accounting firm.
Of course, the firm runs a notice of your hiring in the local newspaper. A few days later, the
editor of the newspaper calls you and asks if you might be interested in writing a monthly
column for the newspaper on tax issues. Figuring that it would be a good way to get your name
out in the community as an expert in the field (and a little free advertising to boot!),
you tell him that you would be more than happy to do so. “Great! ” he says. “By the way, I have
already blocked out space for this column in the next edition of the paper. Is there any way that
you can get me your article by the end of the day today?” After you commit to doing so, he also
proceeds to tell you that you will not be paid for these articles. “I figure that
it is just a sort of public service that you could offer to the community. I am sure you
understand.” (And so it begins…. Get used to a lot of this.) You spend the next 10 minutes
thinking about what you could discuss in your first article. You would like to shake people up a
little bit, and perhaps challenge their opinions about some issues of tax law. That way, you could
perhaps build up some interest in your column, which, as you know, will be difficult to achieve
under the best of circumstances! (After all, who wants to read newspaper articles about taxes?)