Gross selling price includes
I. the amount of a seller’s debt assumed by the buyer.
II. the fair market value of services received by the seller from the buyer.
a. Only statement I is correct.
b. Only statement II is correct.
c. Both statements are correct.
d. Neither statement is correct.
Marlene is a single taxpayer with an adjusted gross income of $140,000. In addition to
her personal residence, Marlene owns a ski cabin in Vail. She uses the cabin for 40 days
during the current year and rents it out to unrelated parties for 80 days, receiving rent of
$10,000. Marlene’s costs before any allocation related to the cabin are as follows:
Mortgage interest and property taxes $9,000
Utilities, maintenance, and repairs 4,500
Depreciation 6,000
Based on the above information, what is her allowable depreciation deduction?
a. $- 0 –
b. $1,000
c. $3,000
d. $4,000
e. $6,000
David owes $120,000 to Second National Bank. David is having financial difficulties
during the current year and Second National agrees to reduce David’s debt to $80,000 to
help him get his financial affairs in order and avoid bankruptcy.
I. If David’s assets were $300,000 and his liabilities were $290,000 before the
discharge, he is taxed on $10,000 of the $40,000 debt reduction.
II. If David’s assets were $300,000 and his liabilities were $400,000 before the
discharge, he is not taxed on any of the $40,000 debt reduction.
a. Only statement I is correct.
b. Only statement II is correct.
c. Both statements are correct.
d. Neither statement is correct.
Kelly purchases a warehouse for her sole proprietorship on January 5, 2015 for
$1,000,000. She claims MACRS depreciation of $25,641 for the year. The depreciation
under the Alternative Depreciation System (ADS) is $25,000. What is the amount of
Kelly’s AMT adjustment for depreciation on the warehouse?
a. no adjustment is necessary
b. a positive $ 641
c. a negative $ 641
d. a positive $25,641
e. a negative $25,641
Rayburn owns all the shares of Newcastle Corporation that operates as an S
corporation. Rayburn’s basis in the stock is $15,000. During the year he receives a cash
distribution of $22,000 from Newcastle. What must Rayburn and Newcastle report as
income from the cash distribution?
Rayburn Newcastle
a. $-0- $-0-
b. $7,000 $-0-
c. $-0- $7,000
d. $7,000 $7,000
Kim owns a truck that cost $35,000 several years ago. After using it personally for two
years, she converts the truck to business use when the truck’s fair market value is
$20,000. She uses the truck in her business and appropriately deducts $5,000 in
depreciation. Then, she sells the truck for $42,000. What is Kim’s recognized gain or
loss on the sale?
a. No gain or loss
b. $12,000 gain
c. $27,000 gain
d. $32,000 gain
e. $ 7,000 gain
Julie travels to Mobile to meet with a client. While in Mobile, she spends 4 days
meeting with the client and one-day sightseeing. Her husband Harry goes with her and
spends all 5 days sightseeing and playing golf. The cost of the trip is as follows:
Airfare $540 for each person.
Lodging at hotel $150/day (Single Occupancy Rate = $125).
Meals $75/day for each person.
Incidental expenses $20/day for Julie. $15/day for Harry.
If Julie is self-employed, what is the amount of the deduction she may claim for the
trip?
a. $730
b. $1,270
c. $1,370
d. $1,420
e. $1,520
Coffin Corporation (a domestic corporation) has $200,000 of U.S. source taxable
income and $600,000 of foreign source taxable income from operations in Latvia.
Latvia levied $67,000 in taxes on the foreign source income. U.S. taxes before credits
are $280,000. The foreign tax credit limitation is
a. $67,000
b. $70,000
c. $159,750
d. $210,000
e. $280,000
Ann is the sole owner of a computer store and established a simplified employee
pension plan (SEP) for herself and her two full-time employees. Her net
self-employment income for the year is $70,000. The maximum amount she can
contribute to her SEP is
a. $9,130
b. $10,500
c. $14,000
d. $17,500
e. $49,000
Sean Corporation’s operating income totals $200,000 for the current year, including a
deduction of $30,000 for actual charitable contributions. Dividend income of $10,000
was received from unaffiliated corporations and is not included in the $200,000. The
related dividend received deduction has yet to be determined. To calculate the
maximum allowable deduction for contributions, Sean should apply the percentage
limitation to the base amount of
a. $200,000
b. $220,000
c. $230,000
d. $240,000
e. $242,000
Alex and Alicia are married and have two children ages 5 and 9. Their adjusted gross
income for the year is $86,000. During the year they establish a Coverdell Education
Savings Account (CESA) for each child.
I. They can contribute $2,000 to each child’s CESA.
II. They can deduct the CESA contributions for their 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.
Charles purchases an interest in a uranium mine for $2,500,000 on June 7, 2015.
Recoverable tonnage is estimated at 500,000. During 2015, 25,000 tons are mined and
sold for $800,000. Charles incurs $500,000 of expenses during 2015. The percentage
depletion rate for uranium is 22%. What is the depletion deduction for 2015?
a. $125,000
b. $150,000
c. $176,000
d. $200,000
e. $250,000
The Ross CPA 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 $40,000
Office furniture June 24 7 years $80,000
Switchboard system Nov 3 5 years $130,000
Ross wants to obtain the maximum possible depreciation deduction for these property
acquisitions including full utilization of the election to expense property under Section
179. Ross will report 2015 taxable income in the amount of $20,000 before
consideration of depreciation on their 2015 property acquisitions. What is Ross’
maximum depreciation from these additions?
a. $20,000
b. $25,000
c. $29,694
d. $34,780
e. $45,432
Which of the following statements is/are correct?
I. Belle is retired. Her only sources of income are her $1,500 per month pension and
$12,000 of Social Security benefits. Belle must include $6,000 of the Social Security
benefits in her gross income.
II. Eileen and Daren divorce during the current year. Per the divorce agreement, Daren
is to receive alimony of $600 per month, $400 per month for child support, and the
family house that is valued at $200,000. Daren must recognize $600 per month as
income.
a. Only statement I is correct.
b. Only statement II is correct.
c. Both statements are correct.
d. Neither statement is correct.
Ward and June are in the 28% tax bracket. Included in their assets is a Dell Corporation
bond with a face value of $10,000. The bond pays $1,000 a year in interest. Ward and
June make a gift to their son, Wally (age 19) of the $1,000 in interest income. Wally is
in the 10% tax bracket. What is Ward and June’s tax liability related to the bond and the
bond interest for the current year?
a. $-0-
b. $100
c. $280
d. $1,000
e. $2,800
Lindsey exchanges investment real estate parcels with Donna. Lindsay’s adjusted basis
in the property is $400,000, and it is encumbered by a mortgage liability of $200,000.
Donna assumes the mortgage. Donna’s property is appraised at $1,000,000 and is
subject to a $100,000 liability. Lindsey assumes the liability. If no cash is exchanged,
what is Lindsey’s basis in the new real estate?
a. $- 0 –
b. $100,000
c. $200,000
d. $400,000
e. $600,000
The Tax Court strictly follows the precedent of prior decisions of the Court of Appeals
for a particular circuit when
a. the taxpayer requests it to do so.
b. the IRS requests it to do so.
c. the taxpayer resides in the United States.
d. the taxpayer resides in that circuit.
Which of the following is/are based on an ability-to-pay concept?
I. A flat tax .
II. Johson City charges all households a flat fee of $25 per month for water usage.
III. Boone County recently established Route 89 as a toll road. All cars traveling from
East Johnson City to Appleton pay $1.
a. Only statement I is correct.
b. Only statement II is correct.
c. Statements II and III are correct
d. Statements I, II, and III are correct.
e. None of the statements are correct.
Roscoe receives real estate appraised at $200,000 and cash of $10,000 from Cathy in
exchange for Roscoe’s investment realty with a basis of $170,000. Roscoe plans to hold
the new realty for investment. What is the amount realized for the property given up by
Roscoe?
a. $160,000
b. $170,000
c. $190,000
d. $200,000
e. $210,000
A taxpayer may use either the actual cost method or the standard mileage rate for
deducting auto expenses.
a. True
b. False
Leroy purchased an annuity from an insurance company for $42,000. He has been
receiving $940 monthly from the annuity. Leroy began receiving the payments when he
was 72 years old and he has now received annuity payments for 13.33 years. How much
of each subsequent $940 payment must Leroy include in his gross income?
I. The Capital Recovery Concept explains the result.
II. Leroy may exclude 100% of the annuity payments received.
III. Leroy must recognize 100% of the annuity payments received.
IV. Leroy will continue to recognize the same amount that he recognized in all prior
years.
a. Only statement I is correct.
b. Only statement III is correct.
c. Only statement IV is correct.
d. Only statements I and III are correct.
e. Only statements I and IV are correct.
Rosalee has the following capital gains and losses during the current year:
Short-term capital loss $(4,000)
Long-term capital gain 3,000
Unrecaptured Section 1250 gain 6,000
If Rosalee is in the 33% marginal tax rate bracket before considering her capital gains
and losses, how much tax does she pay on her capital gains?
a. $ 950
b. $1,100
c. $1,250
d. $1,500
Nancy acquired office equipment for her business in 2011 at a cost of $15,000. During
the current year, she exchanges the equipment for different equipment with a fair
market value of $9,000. MACRS depreciation on the original equipment was $9,828.
The exchange qualifies as a like-kind exchange. Immediately after the exchange Nancy
sells the new equipment for $9,000 cash. What is the amount and character of the gain
recognized?
a. No gain or loss.
b. $3,828 Section 1231 gain.
c. $3,828 Section 1245 ordinary income.
d. $6,000 Section 1245 ordinary income
e. $9,828 section 1245 ordinary income and $6,000 Section 1231 loss.
If a sole proprietorship has a net operating loss for the current period, the loss can only
be used to offset other business income in the current year. Any current loss can be
carried back three years and forward five years and used to offset business income in
those years.
a. True
b. False
Joanne, a single individual, has $2,000 in state taxes withheld from her salary in 2015.
Her total itemized deductions are $6,150. She claims the $2,000 as an itemized
deduction on her 2015 tax return. In 2016 she receives a state income tax refund of
$700. Under the tax benefit rule she has to report income in 2016 of
a. $2,000
b. $ 700.
c. $ 50.
d. $ -0-.
e. $ -0-, but Joanne must file an amended 2015 tax and reduce her itemized deductions
by $700.
Eric, who is 18 years old, sells magazine subscriptions door-to-door for commissions.
He earned $2,900 this year and he will have to pay tax on this income at his parent’s tax
rate.
a. True
b. False
Riley owns some land, which has an oil deposit underneath it. His annual royalties are
usually around $100,000. Because Riley is in the highest marginal tax rate bracket, he
would like to have some (or all) of the royalty income taxed to his son, Mark, thus
lowering the overall tax on the royalty income. To do this
I. Riley can gift part of the land to Mark.
II. Riley can gift all of the land to Mark.
a. Only statement I is correct.
b. Only statement II is correct.
c. Both statements are correct.
d. Neither statement is correct.
Gordon’s family health insurance costs $6,000 annually. Gordon and his wife are in the
28% marginal tax rate bracket. His employer offers a cafeteria plan that would allow
him to cover the insurance premium. How much would the insurance coverage
effectively cost if he took advantage of his employer’s cafeteria plan?
a. $1,680
b. $3,000
c. $4,320
d. $5,000
Pedro sells land that he held as an investment with a basis of $40,000 for $50,000. The
terms of the sale require the buyer to pay Pedro $10,000 at the closing of the sale and
$20,000 per year for the next 2 years with interest at 7% on the unpaid balance. What is
the proper amount of gain to be reported from the sale during each year Pedro receives
payments?
Current First Second
Year Year Year
a. $2,000 $4,000 $4,000
b. $10,000 $-0- $ -0-
c. $ -0- $4,000 $6,000
d. $ 3,333 $3,333 $3,334
e. $-0- $ -0- $10,000
Which of the following statements is/are correct?
I. Terry’s divorce decree provides that his ex-wife is to pay him alimony of $500 per
month until their son reaches age 18 or dies, at which time the payment will be reduced
to $300. Terry recognizes $300 of alimony income each month.
II. Jerry is the manager of Northgate apartments. He is required to live in an apartment
in the complex that normally rents for $600 per month. Jerry must recognize $600 per
month as income from his management job.
III. Lorraine’s aunt dies during the current year. The aunt’s $20,000 life insurance policy
names Lorraine as the beneficiary. Lorraine receives $20,000 from the policy in
December. Lorraine must include the $20,000 in her gross income.
IV. Helen receives a teaching assistantship from the music department that pays her
$300 per month. Helen must work as a lab assistant 15 hours per week. Helen’s total
direct education costs are $9,000. Helen includes the $300 per month in her income.
a. Statements I and IV are correct.
b. Statements II and III are correct.
c. Statements II and IV are correct.
d. Statements I and III are correct.
On May 1, 2014, Peyton is granted the right to acquire 500 shares of the Simon
Corporation for $18 per share. The option qualifies under the company’s incentive stock
option plan. The current fair market value of the stock is $10. On September 18, 2015
when the stock is selling for $20 per share, Peyton exercises his option to purchase the
stock. Peyton sells the shares on November 15, 2016, for $30 per share. Determine the
tax consequences for Peyton and the Simon Corporation on the
a. Date of grant
b. Date of exercise
c. Date of sale