Chapter 1

Question 1

Why was the corporate income tax, enacted in 1909, held to be constitutional?

Answer 1

The U.S. Supreme Court found this tax to be constitutional because it was treated as an excise tax. In essence, it was a tax on the right to do business in corporate form.

Question 2

What did the ratification of the 16th Amendment do?

Answer 2

It sanctioned both the Federal individual and corporate income taxes and, as a consequence, neutralized the continuing effect of the Pollock decision.

Question 3

Estimated income tax collections from individuals and corporations amount to ____ percent of the total receipts.

Answer 3

59

Question 4

The need for revenues to finance the war effort during World War II converted the income tax into a __________ tax.

Answer 4

mass

Question 5

What is the pay-as-you-go income tax system?

Answer 5

It requires employers to withhold for taxes a specified portion of an employee’s wages.

Question 6

What are the canons of taxation?

Answer 6

1. Equality: Each taxpayer enjoys fair or equitable treatment by paying taxes in proportion to his or her income level.
2. Convenience: If a tax is easily assessed and collected and its administrative costs are low, it should be favored.
3. Certainty: A tax structure is good if the taxpayer can readily predict when, where, and how a tax will be levied.
4. Economy: A good tax system involves only nominal collection costs b the government and minimal compliance costs on the part of the taxpayer.

Question 7

_____ is present as long as one accepts ability to pay as an ingredient of this component. _____ exists due to a heavy reliance on pay-as-you-go procedures. _____ probably generates the greatest controversy. _____ is present if only the collection procedure of the IRS is considered.

Answer 7

Equality
Convenience
Certainty
Economy

Question 8

What is a tax base?

Answer 8

A tax base is the amount to which the tax rate is applied. (i.e. taxable income)

Question 9

What are tax rates?

Answer 9

Tax rates are applied to the tax base to determine the taxpayer’s liability. The tax rates may be proportional or progressive.

Question 10

A tax is __________ if the rate of tax remains constant for any given income level. A tax is __________ if a higher rate of tax applies as the tax base increases.

Answer 10

proportional

progressive

Question 11

What is incidence of tax?

Answer 11

The degree to which the tax burden is shared by taxpayers.

Question 12

In addition, the AICPA suggests that the tax system should be:

Answer 12

1. Simple
2. Neutral in terms of its effect on business
3. Clear and readily understandable
4. Structured to minimize noncompliance
5. Should enable the IRS to predict the amount and timing of revenue
6. Should not reduce economic growth and efficiency

Question 13

What are property (ad valorem) taxes?

Answer 13

• Based on the value of the asset (a tax on wealth or capital)
• Generally imposed on realty or personalty
• Exclusive jurisdiction of states and their local political subdivisions
• Deductible for Federal income tax purposes

Question 14

What are ad valorem taxes on realty?

Answer 14

Property taxes on realty are used exclusively by states and their local political subdivisions, such as cities, counties, and school districts. They represent a major source of revenue for local governments, but their importance at the state level has waned over the past few years.

Question 15

A __________ is something so permanently attached to the real estate that its removal will cause irreparable damage.

Answer 15

fixture

Question 16

What are the characteristics of ad valorem taxes on realty?

Answer 16

1. Property owned by the Federal government is exempt from tax.
2. Some states provide for lower valuations on property dedicated to agricultural use or other special uses (e.g., wildlife sanctuaries).
3. Some states partially exempt the homestead, or personal residence from taxation.
4. Lower taxes may apply to a residence owned by a taxpayer aged 65 or older.
5. When non-income-producing property (e.g. personal residence) is converted to income-producing property (e.g. rental house), typically appraised value increases.
6. Some jurisdictions extend tax holidays to new or relocated businesses.

Question 17

What is a tax holiday?

Answer 17

Immunity from tax for a specified period of time.

Question 18

What is personalty?

Answer 18

It can be defined as all assets that are not realty.

Question 19

Personalty can also be classified as __________ property or __________ property.

Answer 19

tangible

intangible

Question 20

What is an excise tax?

Answer 20

A tax on the manufacture, sale, or use of goods; on the carrying on of an occupation or activity; or on the transfer of property. Thus, the Federal estate and gift taxes are theoretically, excise taxes.

Question 21

What happened in the Pollock v. Farmers’ Loan and Trust Co.?

Answer 21

The U.S. Supreme Court found that taxes on income of real and personal property were the legal equivalent of a tax on the property involved and, therefore, required apportionment.