Chapter 1
I:1 Chapter An Introduction to Taxation True-False I:1-1. The federal income tax is the dominant
form of taxation by the federal government. T, p. I:1-2. I:1-2. The Sixteenth Amendment permits
the passage of a federal income tax. T, p. I:1-2. I:1-3. When a change in the tax law is deemed
necessary by Congress, the entire Internal Revenue Code must be revised. F, p. I:1-3. Solution:
The federal income tax law is changed on an incremental basis. I:1-4. A progressive tax rate
structure is one where the rate of tax increases as the tax base increases. T, p. I:1-4. I:1-5. The
terms "progressive tax" and "flat tax" are synonymous. F, p. I:1-4. Solution: A proportional tax
and flat tax are synonymous. I:1-6. A proportional tax rate is one where the rate of the tax is the
same for all taxpayers, regardless of income levels. T, p. I:1-4. I:1-7. Regressive tax rates
decrease as the tax base increases. T, p. I:1-4. I:1-8. The marginal tax rate is useful in tax
planning because it measures the tax effect of a proposed transaction. T, p. I:1-5. I:1-9. A
taxpayers average tax rate is the tax rate applied to an incremental amount of taxable income that
is added to the tax base. F, p. I:1-5. Solution: The marginal tax rate is the tax rate applied to an
incremental amount of taxable income. I:1-10. If a taxpayer's total tax liability is $30,000,
taxable income is $100,000, and economic income is $120,000, the average tax rate is 30
percent. T, p. I:1-5. I:TB1-1 I:1-11. If a taxpayer's total tax liability is $4,000, taxable income is
$20,000 and total economic income is $40,000, then the effective tax rate is 20 percent. F, p. I:1-
5. Solution: The effective rate would be $4,000/$40,000 = 10 percent. I:1-12. Although each
different type of taxpayer determines taxable income in the same manner, the determination of
tax liability differs because of differing tax rate schedules. F, p. I:1-7. Solution: Each different
type of taxpayer (individuals, corporations, etc.) computes taxable income in a slightly different
manner. I:1-13. All states impose a state income tax which is generally based on an individuals
federal adjusted gross income (AGI) with minor adjustments. F, p. I:1-7. Solution: While many
states impose a state income tax, not all states do. In those states that do impose tax, the taxes
vary greatly in both form and rates. I:1-14. The unified transfer tax system, comprised of the gift
and estate taxes, is based upon the total property transfers an individual makes during lifetime
and at death. T, p. I:1-7. I:1-15. Gifts between spouses are generally exempt from transfer taxes.
T, p. I:1-8. I:1-16. The primary liability for payment of the gift tax is imposed upon the donee. F,
p. I:1-8. Solution: The gift tax is imposed on the donor. I:1-17. For gift tax purposes, a $12,000
annual exclusion per donee is permitted. T, p. I:1-8. I:1-18. Property is generally valued on an
estate tax return at the fair market value at the date of death or alternate valuation date. T, p. I:1-