Troy Company purchased a printing press on April 13, 2012 at a cost of $30,000. Troy
sells the printing press on January 3, 2015 for $16,000. Regular MACRS depreciation
on the printing press would be $18,500, while straight-line MACRS depreciation would
total $12,000.
I. If Troy used straight-line depreciation, it would have a Section 1231 loss of $2,000.
II. If Troy used regular MACRS depreciation, it would have Section 1245 ordinary
income of $4,500.
a. Only statement I is correct.
b. Only statement II is correct.
c. Both statements are correct.
d. Neither statement is correct.
Nellie, a single individual age 77, receives Social Security benefits of $7,000 during the
current year. Her only other income consists of $5,000 of interest from bank CDs and
$1,000 of tax exempt interest distributed from a trust fund. Nellie’s gross income is:
a. $- 0 –
b. $5,000
c. $8,500
d. $12,000
e. $13,000
Indicate which of the following statements is/are correct:
I. An accrual basis taxpayer who gives a creditor his note payable in payment of a claim
may deduct the related expense when the note is given.
II. When a cash basis taxpayer uses a credit card to pay for an expense it can deduct the
expense when the expense is charged to the credit card..
a. Only statement I is correct.
b. Only statement II is correct.
c. Both statements are correct.
d. Neither statement is correct.
Dan and Dawn are married and file a joint return. During the current year, Dan had a
salary of $30,000 and Dawn had a salary of $36,000. Both Dan and Dawn are covered
by an employer-sponsored pension plan. Their adjusted gross income for the year is
$95,000. Determine the maximum IRA contribution and deduction amounts.
Maximum Maximum
Contribution Deduction
a. $11,000 $11,000
b. $11,000 $- 0 –
c. $11,000 $5,500
d. $5,500 $-0-
e. $8,000 $8,000
Deductions for adjusted gross income include
I. Transportation of household goods for a qualified move.
II. Unreimbursed employee business expenses for a nonaccountable plan.
a. Only statement I is correct.
b. Only statement II is correct.
c. Both statements are correct.
d. Neither statement is correct.
Randolph borrows $100,000 from his uncle’s bank and invests the proceeds in various
corporate bonds. He pays $9,000 in interest on the loan during the current year. The
bonds produce $7,200 of interest income. Randolph reports adjusted gross income of
$100,000 in the current year. If the interest income is his only investment income, how
much of the interest expense is deductible by Randolph?
a. $7,000
b. $7,200
c. $9,000
d. None of this interest is deductible.
Boris, a single individual, has two sales of stock during the current year. The first sale
produces a short-term loss of $27,000 and the second sale results in a long-term gain of
$57,000. Boris’s taxable income without considering the gain is $125,000. Boris’s stock
transactions will increase his taxable income by:
a. $-0-
b. $30,000
c. $34,000
d. $54,000
Dawn’s employer, Rourke Enterprises, pays $260 monthly for her covered parking
space while at work. Rourke pays $160 monthly for uncovered parking space for Art,
and does not pay anything toward Dan’s parking.
a. Dawn is allowed to exclude the cost of the parking from her income because if
Rourke did not pay for the space, Dawn could deduct her cost.
b. Dawn is allowed to exclude all of the cost of the parking from her income even
though not all employees receive free parking.
c. Dawn must include the $260 cost of the parking in her gross income.
d. Dawn must include the $100 difference between the cost for Art’s space and her
space.
e. Dawn must include $10 monthly in her gross income.
Rose has an adjusted gross income of $130,000. Not included in her adjusted gross
income is a $15,000 loss from a passive activity. Which of the following statements
regarding the effect of the passive loss on his adjusted gross income is/are correct?
I. If the activity is rental real estate and Rose meets the real estate professional
exception, she can deduct the $15,000 loss for adjusted gross income.
II. If the activity is rental real estate and Rose is an active participant, she can deduct
$5,000 of the loss for adjusted gross income.
a. Only statement I is correct.
b. Only statement II is correct.
c. Both statements are correct.
d. Neither statement is correct.
Occasionally, realized gains are not recognized for tax purposes. These situations occur
because
I. certain gains are excluded due to legislative grace.
II. gains are deferred on certain types of property transactions where the
wherewithal-to-pay the tax resulting from the transaction is lacking.
a. Only statement I is correct.
b. Only statement II is correct.
c. Both statements are correct.
d. Neither statement is correct.
Walter recently received a notice of an income tax deficiency of $21,000 from the IRS.
He hires an attorney to handle his IRS problems. Walter’s legal expenses are $4,000.
Can Walter deduct the legal expenses?
I. He can deduct the full amount if the tax deficiency relates to his business.
II. He can deduct the full amount if the tax deficiency relates to income other than
business income.
III. He can deduct the legal fees if the income tax deficiency is personal in nature.
a. Only statement I is correct.
b. Only statement II is correct.
c. Only statement III is correct.
d. Statements I and II are correct.
e. Statements I and III are correct.
The amount of the dividend on a nonliquidating corporate distribution of property is the
fair falue of the property.
a. True
b. False
A corporation has a net capital loss. The significance of a net capital loss in 2015 for a
corporation is that it can be carried back 3 years and carried forward 5 years by a
corporation to offset capital gains in other taxable years.
a. True
b. False
The most important source of current federal income tax law is the
a. Internal Revenue Code of 1986, as amended.
b. IRS.
c. U.S. Supreme Court.
d. U.S. Tax Court.
During 2015, Jimmy incorporates his data processing business. Jimmy is the sole
shareholder. The following assets are transferred to the corporation:
Cash $2,000
Computer Equipment:
Fair market value 20,000
Adjusted basis 12,000
Original cost 24,000
Furniture:
Fair market value 20,000
Adjusted basis 32,000
Original cost 64,000
How much gain (loss) will Jimmy recognize from the transfer of the assets to the
corporation?
a. $-0-
b. $(4,000)
c. $8,000
d. $20,000
e. $(12,000)
Which of the following statements is/are correct?
I. Danny falls off a ladder at work and is hospitalized for two weeks. He receives $650
from the state worker’s compensation fund, his regular $1,800 salary, and $925
disability pay from his employer’s health and accident insurance plan. Danny must
recognize $2,725 of income from the payments.
II. Donna’s grandfather dies and leaves her City of Goldsboro bonds that are worth
$57,000. The bonds have a face value of $50,000 and pay 5% annual interest. Donna
must include the $2,500 of interest she receives in her gross income.
a. Only statement I is correct.
b. Only statement II is correct.
c. Both statements are correct.
d. Neither statement is correct.
Which of the following is/are correct regarding the deferral of gain attributable to the
involuntary conversion of personal property (personalty)?
I. Gain deferral is mandatory.
II. Replacement property must be acquired within one year of the close of the tax year
in which gain is realized from an involuntary property damage conversion.
a. Only statement I is correct.
b. Only statement II is correct.
c. Both statements are correct.
d. Neither statement is correct.
Rachel paid $1,000 for supplies in 2014. In 2015, the vendor finds a $200 mistake on
the invoice and refunds the overpayment to Rachel. Which of the following doctrines or
concepts is the least helpful in determining how the 2015 transaction should be reported
for tax purposes?
a. Accounting Period.
b. Tax Benefit Rule.
c. Claim of Right.
d. Assignment of Income.
e. All-Inclusive Income.
Which of the following is not true of the Supreme Court’s appellate jurisdiction?
a. All appealed cases can reach the Supreme Court through the Writ of Certiorari and be
heard at that level.
b. Review by the Supreme Court is almost entirely discretionary.
c. For most taxpayers, the final review is at the Court of Appeals level because the
Supreme Court does not hear many tax cases.
d. The Supreme Court’s decision not to grant a Writ of Certiorari means that the
decision of the lower court still stands.
Tax evasion usually involves certain elements. Which of the following are elements
necessary for tax evasion to occur?
I. Nondisclosure of the relevant facts on the taxpayer’s tax return.
II. Underpayment of tax.
III. Avoiding detection by the IRS.
IV. Willfulness on the part of the taxpayer.
V. An affirmative act by the taxpayer to misrepresent.
a. Statements I, II, and III are correct.
b. Statements I, II, IV, and V are correct.
c. Statements I and III are correct.
d. Only statement IV is correct.
e. All of the five listed elements are 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 Rodrigo’s basis in his partnership interest?
a. $180,000
b. $220,000
c. $240,000
d. $300,000
e. $360,000
A fire destroyed Josh’s Scuba Shop. The business had an adjusted basis of $500,000 and
a fair market value of $600,000. Josh received $550,000 from the insurance company
and used the cash to go to Hawaii.
I. Josh has a realized gain of $100,000.
II. Josh has a recognized gain of $50,000.
a. Only statement I is correct.
b. Only statement II is correct.
c. Both statements are correct.
d. Neither statement is correct.
Which of the following always generate taxable income?
I. Interest free loan over $10,000 from family member.
II. Interest free loan over $10,000 from employer.
III. Interest free loan under $10,000.
IV. Interest free loan over $100,000.
a. Only statement I, II and IV are correct.
b. Only statements II and III are correct.
c. Only statements I and IV are correct.
d. Only statement IV is correct.
e. Only statements II and IV are correct.
Cory and Leslie are married and have two children in college. Jason is a sophomore,
and Justine is a senior. They pay $2,500 in tuition and fees for Jason, $900 for his books
and $3,000 for his room and board. Justine’s tuition and fees are $5,000, her book
expense is $800, and her room and board expenses are $2,600. Their adjusted gross
income is $50,000. What amount can they claim as a tax credit for the higher education
expenses she pays?
a. $2,250
b. $3,125
c. $3,250
d. $3,540
e. $4,850
Sadie is a full time nurse and a part time painter. Her painting qualifies as a hobby. Her
gross income from painting is $7,000. Her expenses include $800 of interest on
inventory loans, $5,200 of expenses in conducting business activities, and $2,000 of
depreciation of equipment. Which of the following statements about Sadie’s hobby
activity is/are correct?
I. Sadie will not recognize any taxable income as a result of her hobby.
II. Sadie can deduct the interest of $800 plus $6,200 of other hobby expenses for the
year.
III. Sadie will lose at least $1,000 of her depreciation deduction for the current year.
IV. If Sadie uses the standard deduction she will not receive any tax benefit from the
hobby expenses.
a. Statements I and II are correct.
b. Statements II and III are correct.
c. Statements III and IV are correct.
d. Statements I, II, and III are correct.
e. Statements II, III, and IV are correct.
In October of the current year, Brandy and her husband Ben split up and do not speak to
each other. Neither individual will cooperate with the other on finalizing the divorce.
Ben supports their two children after the split up and maintains their household. What is
Ben’s filing status for the current year?
a. Single.
b. Head of household.
c. Surviving spouse.
d. Married, filing separately.
Which of the following best describes the tax treatment of losses from uncollectible
business debts?
a. Such losses are not deductible.
b. Such losses are limited to $3,000 per year.
c. Such losses are treated as short-term capital losses.
d. Such losses are deductible without limitation as an ordinary loss.
In July of this year, Sam performs financial consulting services for William. On August
1, Sam sends William a bill for $1,200. As of September 30, Sam had not heard from
William. After repeated efforts to collect the fee, Sam discovers in November that
William has left the state and cannot be found. If Sam is an accrual basis taxpayer, for
the current year he can deduct
a. $- 0 –
b. A $800 ordinary loss
c. A $1,200 ordinary loss
d. A $1,200 short-term capital loss
e. A $1,200 long-term capital loss
Sammy buys a 20% interest in Duvall Corporation paying $100,000 cash on January 1,
2014. During 2014, Duvall Corporation reports a loss of $60,000 and pays cash
dividends to shareholders of $5,000. For 2015, Duvall Corporation has income of
$200,000 and pays cash dividends of $40,000. If Duvall Company is organized as an S
Corporation, Sammy’s basis in the Duvall Corporation stock at the end of 2015 is:
a. $88,000
b. $89,000
c. $100,000
d. $119,000
e. $128,000
Davis owns and operates a convenience store on the north side of the city. He has
always wanted to operate a sports bar. When he hears of a new shopping center
development in the south part of the city, he contacts the developer and begins
negotiations to open his dream enterprise.
I. If negotiations are successful and Davis incurs $40,000 in start-up costs to open his
new business, he can deduct up to $5,000 of the start-up costs and must capitalize the
costs of investigation and start-up exceeding $5,000.
II. If Davis decides not to open his bar and restaurant, the investigation expenses are
fully deductible.
a. Only statement I is correct.
b. Only statement II is correct.
c. Both statements are correct.
d. Neither statement is correct.
Drew Corporation purchased machinery costing $825,000 in 2014. Drew paid $5,000
for installation and testing of the machinery. Under a special election, Drew expensed
$500,000 of the cost of the machinery in 2014. Drew also deducted depreciation on the
machinery of $46,443 in 2014 and $79,593 in 2015. Drew’s repair and maintenance
costs on the machinery were $10,200 in 2014 and $13,300 in 2015. What is Drew
Corporation’s adjusted basis in the machinery at the end of 2015?
a. $175,468
b. $198,964
c. $203,964
d. $325,000
e. $698,964
Hannah is an employee of Bolero Corporation. Bolero pays the medical insurance
premiums of all of its employees. Because of large deductible levels and limitations on
the payment of certain medical expenses, the basic health insurance policy does not
cover all medical costs. During the current year, Bolero adopted a Flexible Benefits
Plan that employees can contribute into to pay for any medical expenses not covered by
insurance. Hannah pays $2,500 into the plan during the current year. Premiums paid by
Bolero for Hannah’s medical insurance were $5,000.
I. Hannah’s gross income from her Bolero salary is reduced by the $2,500 payment into
the Flexible Benefits Plan.
II. Amounts paid for medical costs by the medical insurance policy are excluded from
Hannah’s gross income.
a. Only statement I is correct.
b. Only statement II is correct.
c. Both statements are correct.
d. Neither statement is correct.
The result when two similarly situated taxpayers are taxed the same.
Based on the value of the property being taxed.
Hubert and Jared are both involved in automobile accidents, which totally destroy their
automobiles this year. Hubert and Jared purchased the automobiles at the same time for
the same cost, and neither of them receives any insurance reimbursement for the
destruction of their automobiles. Before considering the effect of their casualties,
Hubert and Jared have identical adjusted gross incomes. Although Hubert and Jared are
seemingly alike in every aspect regarding the automobiles, Hubert is allowed a
deduction of $2,000 for the destruction of his automobile and Jared is not allowed any
deduction for his automobile. What causes this disparity of treatments between Hubert
and Jared? Explain. Use examples if necessary.
Bonita, age 23, is an employee of Watson Hardware Distributors whose annual salary is
$40,000. Watson provides employees with free group-term life insurance at twice their
annual gross salary, free health and accident insurance, a qualified pension plan, and a
cafeteria plan. Bonita’s health and accident insurance cost Watson $1,920. The cost of
her group-term life insurance coverage is $520. Watson pension plan allows employees
to contribute up to 6% of their annual salary, which Watson matches. Bonita elects to
have the maximum pension plan contribution made into the plan. Watson’s cafeteria
plan provides for $4,000; she elect to have dental coverage for $3,000 and elects to take
the other $1,000 in cash. She submits medical insurance claims totaling $900 to the
health insurance policy and is reimbursed $550. She receives the remaining $350 of
medical insurance claims from the flexible benefits plan. How much gross income does
Bonita have from her employment with Watson?
Samantha receives 100 shares of Burnet Corporation stock as a gift from her cousin. At
the date of the gift the stock is valued at $60 per share. It cost her cousin $10 per share
several years before. One month later, Samantha’s uncle dies and she inherits 100 shares
of Crockett Corporation stock from her uncle’s estate. The stock cost her uncle $10 per
share twenty-five years ago. On the date of death the stock has a value of $60 per share.
Samantha needs money to invest in her business, but she does not need to sell both
blocks of stock this year. Which stock would you recommend Samantha to sell?
Match each term with the correct statement below.
a. Allocates income, losses, and deductions to its owners for inclusion in their personal
returns.
b. Each tax unit must keep separate records and report the results of its operations
separate and apart from other tax units.
c. Income from services must be taxed to the taxpayer rendering the service and income
from property must be taxed to the owner of the property.
d. Any tax year that ends on the last day of a month other than December.
e. All taxpayers must report the results of their operations on an annual basis.
f. A tax year that ends on December 31.
g. A tax entity that is liable for the payment of tax.
All-Inclusive Income Concept
Match each term with the correct statement below.
a. Allocates income, losses, and deductions to its owners for inclusion in their personal
returns.
b. Each tax unit must keep separate records and report the results of its operations
separate and apart from other tax units.
c. Income from services must be taxed to the taxpayer rendering the service and income
from property must be taxed to the owner of the property.
d. Any tax year that ends on the last day of a month other than December.
e. All taxpayers must report the results of their operations on an annual basis.
f. A tax year that ends on December 31.
g. A tax entity that is liable for the payment of tax.
Assignment of Income
Match each statement with the correct term below.
a. Income is subject to tax when it is received without restrictions as to its use or
disposition.
b. Income is considered received when it is credited to the taxpayer’s account or made
unconditionally available to the taxpayer.
c. A concept that is fundamental to the progressive tax rate structure.
d. To be deductible, an expenditure must be made for a business or economic purpose
that is greater than any tax avoidance motive of the taxpayer.
e. The amount of a deduction may not exceed its cost.
f. Income should be recognized and a tax paid when the taxpayer has the resources to
pay the tax.
g. A type of deductible expenditure that embodies the profit motive requirement.
h. Allows the omission of items from the tax base for which the costs of compliance
exceeds the revenue generated.
i. A category of expenses that is specifically disallowed.
Investment Expense
Match each statement with the correct term below.
a. Dues, uniforms, subscriptions.
b. Intended to punish and are taxable.
c. Taxable if from an employer-provided policy.
d. Any personal wrong, such as libel, slander, or assault.
e. Excludable amount limited to gross profit percentage.
f. Gratuitous and not a form of compensation for services.
g. Excludability requires that it must be a condition of employment.
h. Excluded if for compensatory payments for sickness or personal physical injury.
i. To replace lost earnings and is excluded if due to personal physical injury.
j. Excluded if provided on the employer’s business premises and for the convenience of
employer.
Punitive damages
George regularly invests unneeded business cash in Eli Lilly common stock. He has
bought 200 shares of stock on May 1 of each year from 1986 through 2012. Because of
an urgent need for cash, he sells 100 shares of the stock at an $850 gain on March 28,
2015. Because the stock is held in a brokerage account, he did not have any paper
shares of stock to surrender. He merely told his broker to sell 100 shares.
Match the term with the entity to which it applies.
a. Sole Proprietorship.
b. Partnership.
c. Corporation.
d. S Corporation.
Dividends-received deduction
Which of the following qualify as a like-kind exchange?
a. qualifies as a like-kind exchange
b. does not qualify as a like-kind exchange
Inventory for office supplies.
Match each statement with the correct term below.
a. Not deductible.
b. Short-term capital loss.
c. Limited to $25 per person.
d. Deductible as an ordinary loss
e. Only 50% of the cost is deductible.
f. Must be away from tax home overnight to be deductible.
g. General area where a taxpayer conducts principal activity.
Business gift
Which of the following qualify as a like-kind exchange?
a. qualifies as a like-kind exchange
b. does not qualify as a like-kind exchange
Inventory for inventory.
Robin owns an appliance store. Robin gives Tim a stereo unit to paint the front of her
store building. The stereo unit, included in Robin’s inventory at a cost of $400, normally
retails for $700. If Tim had billed Robin for his work like he charged other customers,
he would have sent Robin a bill for $600. Does Tim have income from the receipt of the
stereo unit? If so, what amount should Tim report as gross income? Explain in terms of
the Income Tax Concepts.