Louise is the marketing manager and a 30% owner of Walker Company. At the
beginning of the current year, Louise’s basis in Walker Company is $22,000. During the
year, Walker borrows $50,000 to finance the construction of a new building. For the
year, Walker suffers a $100,000 net operating loss and distributes $60,000 in cash to its
owners. Determine Louise’s deductible loss if Walker is organized as
a. A partnership
b. A corporation
c. An S corporation
Fran owns a commercial office building with a fair market value of $850,000. She
purchased the building as an investment for $815,000 in 2006. She has deducted
$115,000 in depreciation. Fran trades the building for an apartment complex. The
apartment complex has a value of $850,000, and the exchange qualifies for like-kind
deferral treatment. What is Fran’s recognized gain on the exchange?
a. $- 0 –
b. $35,000
c. $115,000
d. $150,000
e. $850,000
b. Give two characteristics of each of the trial courts listed in part a.
Determine the year-end adjusted basis of Roberto’s 1/2 interest in the Halifax
Partnership. At the beginning of the year, Roberto’s adjusted basis is $80,000. The net
operating profit of the partnership is $90,000. Also, Halifax distributes $15,000 of cash
to Roberto.
a. $65,000
b. $110,000
c. $140,000
d. $155,000
e. $185,000
The earlier the depreciation deduction can be taken, the greater the present value of the
tax savings will be to the taxpayer.
a. True
b. False
Unrecaptured Section 1250 gain is taxed at a maximum rate of 25%.
a. True
b. False
Franco is owner and operator of a cleaning service who uses the accrual method of
accounting. He receives the following payments on December 31, 2015, the last
business day of his tax year:
$5,000 – Checks received from customers for services rendered during November and
December 2015. The checks are deposited in his bank account on January 4, 2016.
$4,000 – Checks received from customers for services to be rendered during 2016. The
checks are received in the morning mail and deposited in his bank account on
December 31, 2015.
$2,400 – A check received from a customer for a service contract. The services under
the contract are to be rendered in 2016. The customer met Franco at the New Year’s Eve
party and gives Franco the check at 11:30 p.m. The check is deposited in his bank
account on January 4, 2016.
How much of the $11,400 collected by Franco on December 31 must be included in his
2015 gross income?
a. $5,000
b. $6,400
c. $7,400
d. $9,000
e. $11,400
Pidgeon, Inc. has the following gains and losses from Section 1231 property during
2015:
Casualty losses $(4,000)
Casualty gains 5,000
Section 1231 gains 6,000
Section 1231 losses (3,000)
No net Section 1231 losses have been deducted as ordinary losses in prior years. How
much of the 2015 Section 1231 gains and losses are recognized as long-term capital
gains?
a. $- 0 –
b. $1,000
c. $3,000
d. $4,000
e. $6,000
Brooks Corporation distributes property with a basis of $20,000 and a fair market value
of $25,000 to Caroline in complete liquidation of the corporation. Caroline’s basis in the
stock is $32,000. What must Caroline and Brooks report as income (loss) upon the
liquidation of Brooks?
Caroline Brooks
a. $(12,000) $(7,000)
b. $(12,000) $5,000
c. $(12,000) $-0-
d. $(7,000) $5,000
Which of the following are types of IRS examinations?
I. Information matching program.
II. Office examination.
III. Field examination.
IV. Revenue agent report.
a. Statements II and III are correct.
b. Only statement III is correct.
c. Statements I and IV are correct.
d. Statements I, II and III are correct.
e. Only statement II is correct.
Roger owns 25% of Silver Trucking, a partnership. During the current year, Roger sells
a truck with an adjusted basis of $25,000 to Silver for $18,000.
I. Silver’s basis in the truck is $25,000.
II. Roger can deduct the $7,000 loss on the sale of the truck.
a. Only statement I is correct.
b. Only statement II is correct.
c. Both statements are correct.
d. Neither statement is correct.
Nick and Rodrigo form the NRC Partnership by combining the assets of their respective
businesses. Nick contributes $10,000 and assets worth $90,000 (adjusted basis of
$60,000) for a 1/3 interest. Rodrigo contributes $90,000 and assets worth $270,000
(adjusted basis of $150,000) for a 2/3 interest. NRC also assumes $60,000 of debt on
Rodrigo’s assets. What is Nick’s basis in his partnership interest?
a. $70,000
b. $90,000
c. $100,000
d. $120,000
e. $160,000
Alexis, a cash basis contractor, builds a storage building for Jones. The building is
completed, and the bill is given to Jones. Jones pays $60,000 in 2015. Subsequently,
Jones files suit for damages based on alleged faulty construction. Alexis required to
recognize $60,000 of income in 2015 based upon
I. Constructive Receipt Doctrine.
II. Claim-of-right Doctrine.
a. Only statement I is correct
b. Only statement II is correct
c. Both statements are correct
d. Neither statement is correct
Sandra directed her employer to withhold $500 of her wages each month for deposit to
her mother’s checking account. Which of the following concepts, constructs, or
doctrines is the least helpful in determining how Sandra should report the arrangement
for tax purposes?
a. Assignment of Income Doctrine.
b. Claim of Right Doctrine.
c. All-inclusive Income Concept.
d. Ability-to-pay Concept.
e. Constructive Receipt Doctrine.
Buffey operates a delivery service. She purchased a van in 2013 for $25,000, and she
sold it in 2015 for $15,000. Buffey did not deduct any depreciation on the van from
2013 through 2015, although total allowable depreciation on the van would have been
$17,000. What is the amount of Buffey ‘s recognized gain or loss on the sale of the van?
a. $10,000 loss
b. $7,000 gain
c. $8,000 gain
d. $15,000 gain
e. $17,000 gain
When a security becomes worthless
I. no loss can be deducted because a realization has not occurred.
II. the measure of the loss is the adjusted basis of the securities.
a. Only statement I is correct.
b. Only statement II is correct.
c. Both statements are correct.
d. Neither statement is correct.
“Active participation” and “real estate professional” are both exceptions to the general
rule for passive activity losses with rental real estate.
I. One of the tests that an individual must meet to qualify as a real estate professional is
that the taxpayer spends more than 50% of his/her time in real property trades or
businesses.
II. A taxpayer with an AGI of $190,000 qualifying under the real estate professional
exception may deduct an unlimited amount of rental real estate losses.
a. Only statement I is correct.
b. Only statement II is correct.
c. Both statements are correct.
d. Neither statement is correct.
The administrative convenience concept explains why some items are not treated
consistently when the cost of implementing a concept exceeds the benefit of using it.
a. True
b. False
Which regulation deals with Code Section 170?
a. Reg. Sec. 1.170-5
b. Reg. Sec. 170.162-5
c. Reg. Sec. 1.5-170
d. Reg. Sec. 170
e. Reg. Sec. 170.25-5
A taxpayer who loses in the U.S. Tax Court may appeal directly to the:
a. Supreme Court.
b. U.S. Court of Federal Claims.
c. U.S. District Court.
d. U.S. Circuit Court of Appeals.
e. Any of the above.
Aunt Bea sold some stock she purchased several years ago for $10,000 to her nephew,
Andy, for $6,000.
I. If this is Aunt Bea’s only stock transaction, she can deduct only $3,000 of the loss.
II. If Andy sells the stock for $10,000, his taxable gain is $4,000.
a. Only statement I is correct.
b. Only statement II is correct.
c. Both statements are correct.
d. Neither statement is correct.
The Boatright Accounting Firm places the following property in service during the
2015 tax year:
Property Placed in
Description Service MACRS Life Cost Basis
Computers Feb 6 5 years $60,000
Office furniture June 24 7 years $110,000
Fax machine Aug 3 5 years $100,000
Sidewalk Dec 11 15 years $50,000
Boatright wants to obtain the maximum possible first year depreciation deduction for
these property acquisitions including full utilization of the election to expense property
under Section 179. Boatright will report 2015 taxable income in the amount of $5,000
before consideration of depreciation on their 2015 property acquisitions. What is the
maximum combined amount of depreciation and Section 179 expense that may be
obtained under this set of fact circumstances?
a. $34,500
b. $45,650
c. $50,219
d. $100,564
e. $210,219
Carmen owns 10% of the stock of Fitness Design Corporation, and is its manager.
Fitness Design reports taxable income of $70,000 and pays $60,000 in dividends to
shareholders before considering payments to Carmen. Carmen receives a $50,000
salary. What is Carmen’s income from Fitness Design?
a. $6,000
b. $7,000
c. $50,000
d. $56,000
e. $57,000
Tory sells General Electric stock (owned 10 years) for a $40,000 gain in the current
year. In addition, she had a loss of $20,000 on the sale of one acre of land used in her
trade or business. The land was purchased five years ago. Tory’s net Section 1231 gain
(loss) for the current year is:
a. $- 0 –
b. $20,000
c. $(20,000)
d. $40,000
For each of the following situations, determine whether the item is deductible, and
discuss any limitations that might be placed on the deduction.
Rioters damage Margarita’s business building, which has an adjusted basis of $50,000,
during the current year.
a. Assume the building is totally destroyed. The cost of replacing the building is
estimated to be $55,000. Margarita’s insurance reimburses her $32,000.
b. Assume the building is severely damaged. Before the riot, the building is worth
$55,000. The insurance adjuster estimates the value of the building after the damage at
$20,000. Margarita’s insurance reimbursed her $32,000.
Samantha sells the following assets and realizes the following gains (losses) during the
current year:
Home computer (personal) $(600)
Municipal bonds 6,000
Stamp collection 3,000
Carpeting from residence (2,000)
1956 Chevrolet auto 4,000
As a result of these sales, Samantha’s adjusted gross income will:
a. Increase by $5,000.
b. Increase by $10,400.
c. Increase by $11,000.
d. Increase by $13,000.
e. Decrease by $ 600.
Nelson is the owner of an apartment complex. He actively participates in the
management of the building. During the current year, it generates a taxable loss of
$33,000. Nelson’s other sources of income are salary of $148,000 and interest of
$12,000. What is Nelson’s allowable loss from the apartment?
a. $- 0 –
b. $ 1,000
c. $12,000
d. $25,000
e. $33,000.
Warren’s 2015 adjusted gross income consists of the following items:
Salary $150,000
Interest income 15,000
Rental income 18,000
Section 1245 gains 25,000
Section 1231 gains 22,000
Section 1231 losses (13,000)
LTCG 22,000
LTCL (8,000)
STCG 2,000
STCL Carryover (9,000)
Warren’s combined 1231 gains and losses recognized over the prior five tax years
included a net loss of $10,000. The STCL carryover arose from a loss reported in 2010.
What net amounts of ordinary income, LTCG income and STCG income will Warren’s
2015 adjusted gross income consist of? (i.e. what amounts are reported after completing
the netting process?)
Ordinary
Income LTCG STCG
a. $208,000 $16,000 $- 0 –
b. $217,000 $14,000 $(7,000)
c. $208,000 $23,000 $(7,000)
d. $217,000 $7,000 $- 0 –
Using the tests for deductibility discussed in Chapter 5, explain why the following
expenses may not be fully deductible in the current year.
a. Antonio is the owner of a restaurant. His business has been growing, and Antonio
determines that he needed to add more seating capacity. He builds a patio garden
section onto the back of the restaurant at a cost of $70,000.
b. Tina owns a construction company. Because she is behind schedule on a project, she
pays a city building inspector $500 to get him to come out and do his inspection a week
before he had scheduled the inspection.
c. Claude is a graduate of State University and an avid supporter of the school’s athletic
program. During the summer he employed State’s star running back in his pool cleaning
business. He paid the football player $15 an hour, although other employees doing
similar work are only paid $10 per hour.
d. Melody owns a chain of coffeehouses. When she opened a coffeehouse in a new city
this year, she spent $20,000 advertising the new store. Even though this is much more
than she typically spends on advertising, she felt that it was reasonable because the new
coffeehouse has the potential to be a very profitable venture for many years.
Carlyle purchases a new personal residence for $230,000. He makes a down payment of
$30,000 and finances the balance at a very favorable interest rate. To obtain the
favorable rate, points equal to 3% of the loan balance are paid at the closing. What
amount of the points can Carlyle deduct in the current year?
a. $- 0 –
b. $3,000
c. $4,000
d. $6,000
e. $6,600
Which of the following information is not required for substantiation of business
entertainment expenditures?
a. Time and place of event.
b. Specific business purpose of the event.
c. Receipt to provide evidence of amount of expenditure.
d. Identity of, and business relationship to, those persons attending the event.
e. All of the above information is required to substantiate business entertainment.
To qualify as a qualifying child, an individual must meet five tests. These are the age
test; the non-support test; the principal residence test; relationship test; and the citizen
or residency test.
a. True
b. False