1. Which one of the following is not the role of the Federal courts once Congress has legislated Federal income tax code?

a. interpret the statutoy provisions of the Federal income tax code

b. define terms contained in the Federal income tax code but left undefined by Congress

c. amend the Federal income tax code

d. formulate concepts that serve as guidelines in the application of the Federal income tax code.

2. For purposes of determining gross income, which one of the following is true?

a. A taxpayer who finds and keeps a wallet full of money is not required to recognize income at that time.

b. A mechanic completes repairs on an automobile during the year and collects money from the customer. The customer is not satisfied with the repairs and sues the mechanic for a refund. The mechanic cannot defer recognition of the income until the lawsuit is settled.

c. Embezzlement proceeds are not included in the embezzlers gross income because the embezzler has an obligation to repay the owner.

d. A taxpayer who finds and keeps a valuable piece of jewelry is required to recognize income at that time.

3. Taupe Corporation is considering deferred compensation plans for its executive employees over age 55. One plan is to allow the employee to make an election at the beginning of the year to defer 10% of his or her pay earned during that year until retirement, at which time the executive would receive the deferred payment plus 6% interest.

a. The interest is original issue discount and must be included in gross income before retirement.

b. The employee cannot defer the income for tax purposes because it is constructively received each year.

c. The employee must recognize the 10% each year but can defer the interest.

d. The 10% of his or her pay and the related interest can be deferred from inclusion in gross income until they are received.

4. The annual increase in the cash surrender value of a life insurance policy

a. is taxed according to the original issue discount rules.

b. is not included in gross income.

c. reduces the deduction for life insurance expense.

d. none of the above.

5. Under the original issue discount (OID) rules as applied to three-year certificate of deposit

a. all of the income must be recognized in the year of purchase.

b. the OID will not be included in gross income until the third year.

c. the interest income for the first year will be greater than the interest income for the second year.

d. the original issue discount must be amortized using the effective interest method.

6. Dorothy purchased a certificate of deposit for $10,000 on January 1, 2016. The certificates maturity value in two years (December 31, 20107 is $10,816, yielding 4% before-tax interest.

a. Dorothy must recognize $400 gross income in 2016 and $416 gross income in 2017.

b. Dorothy must recognize $816 gross income in 2017.

c. Dorothy must recognize $816 gross income in 2016.

d. Dorothy must recognize $408 gross income in 2016 and $408 gross income in 2017.