Income Tax Chapter 6

13668 words 55 pages
a. True
b. False

ANSWER: False
RATIONALE: Deductions are a matter of legislative grace. The only deductions allowed are those specifically provided for by statute, rulings, etc.

2. Mitch is in the 28% tax bracket. He may receive a different tax benefit for a $2,000 expenditure that is classified as a deduction from AGI than he will receive for a $1,000 expenditure that is classified as a deduction for AGI.
a. True
b. False

ANSWER: True
RATIONALE: The value of the tax benefit to Mitch for the deduction from AGI may be less than that for the deduction for AGI. The value of the deduction for AGI for a taxpayer in the 28% bracket for a $2,000 expenditure is $560 ($2,000 × 28%). If Mitch takes the standard deduction rather than
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a. True
b. False

ANSWER: False
RATIONALE: A reserve for estimated expenses (e.g., bad debt) is not allowed to an accrual method taxpayer for tax purposes because the economic performance test cannot be satisfied. For a cash method taxpayer, there is no addition to the reserve for bad debts because income has not been recognized that would have generated a debt.

22. All domestic bribes (i.e., to a U.S. official) are disallowed as deductions.
a. True
b. False

ANSWER: True
RATIONALE: However, a payment to a foreign official is deductible if it is not in violation of the Foreign Corrupt Practices Act of 1977.

23. Fines and penalties paid for violations of the law (e.g., illegal dumping of hazardous waste) are deductible only if they relate to a trade or business.
a. True
b. False

ANSWER: False
RATIONALE: Fines and penalties paid for violations of laws are never deductible.

24. Susan is a sales representative for a U.S. weapons manufacturer. She makes a $100,000 “grease” payment to a U.S. government official associated with a weapons purchase by the U.S. Army. She makes a similar payment to a Saudi Arabian government official associated with a similar sale. Neither of these payments is deductible by Susan’s employer.
a. True
b. False

ANSWER: False
RATIONALE: The payment to the U.S. official is not deductible. However, unless the

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