Larry and Louise are both 49 years of age and file a joint return. They provide all of the
support for their son, Dylan, who is 20 years old and is at home until he gets called into
the army. His income at part-time jobs is $4,500. Their daughter, Phyllis, is a
23-year-old full-time student at State University. She lived at school 9 months and
provided two thirds of her own support with a summer job. How many personal and
dependency exemptions can Larry and Louise claim on their income tax return?
a. 1
b. 2
c. 3
d. 4
During 2002, Trump Corporation bought a factory building for $500,000. It deducted
$180,000 of cost recovery deductions using straight-line depreciation while the building
was in service. Trump sells the building in 2015 for $500,000. What are the tax
consequences of the sale? (Do not consider Trump’s other transactions).
a. $180,000 Section 1231 gain.
b. $180,000 unrecaptured Section 1250 gain.
c. $180,000 recaptured under Section 1245.
d. $180,000 Section 1250 gain
e. $ 90,000 Section 1231 income; and $ 90,000 ordinary income, recaptured under
Section 1250.
IRS scrutiny of reasonable compensation usually deals with excess compensation paid
to the shareholders of closely held corporations and unreasonably low salaries to
shareholders of an S corporation.
a. True
b. False
Which of the following items are included in the computation of the sole
proprietorship’s taxable income?
I. Charitable contributions.
II. Section 1231 gains and losses.
III. Investment income and expenses.
a. Only statement I is correct.
b. Only statement II is correct.
c. Statements I, II, and III are correct.
d. Only statement III is correct.
e. None are correct.
Under the imputed interest rules, gift loans between a daughter (lender) and her mother
(borrower) may result in
I. No imputed interest income recognized by the mother.
II. No imputed interest deduction by the daughter.
III. Imputed interest income recognized by the daughter.
IV. Deduction allowed for imputed interest expense by the mother.
a. Only statements I, II, and III are correct.
b. Only statements I and IV are correct.
c. Only statements I and II are correct.
d. Only statement III is correct.
e. Only statements III and IV are correct.
Brock exchanges property with an adjusted basis of $40,000 subject to a mortgage of
$20,000 for other property owned by Reese with a fair market value of $80,000. Reese
assumes the mortgage. No cash or other assets were part of the trade. Brock’s amount
realized is
a. $40,000
b. $50,000
c. $80,000
d. $90,000
e. $100,000
A new corporation’s choice for its annual accounting period
I. must be approved by the IRS.
II. must be the same as its majority shareholder.
a. Only statement I is correct.
b. Only statement II is correct.
c. Both statements are correct.
d. Neither statement is correct.
Steve is an employee of Giant Valley Auto City. The company allows all employees to
receive a 35% discount on service to their personal vehicles. Steve paid $975 for work
done on his truck that normally costs $1,500. How much gross income must Steve
recognize because of the discount?
a. $- 0 –
b. $225
c. $300
d. $525
e. $975
Betty is a single individual. In 2015, she receives $5,000 of tax-exempt income in
addition to her salary and other investment income. Betty’s 2015 tax return showed the
following information:
Gross income $90,000
Deductions for adjusted gross income ( 4,000)
Adjusted gross income $86,000
Itemized deductions (14,600)
Personal exemption (4,000)
Taxable income $67,400
Income tax $12,644
Less: Income tax withheld from wages (12,600)
Balance of tax due $44
Which of the following statements concerning Betty’s tax rates is (are) correct?
I. Betty’s average tax rate is 18.8%.
II. Betty’s average tax rate is 17.5%.
III. Betty’s effective tax rate is 18.8%.
IV. Betty’s effective tax rate is 17.5%.
a. Statements I and III are correct.
b. Statements I and IV are correct.
c. Statements II and III are correct.
d. Statements II and IV are correct.
The mid-quarter convention
I. never applies to real estate.
II. is required when more than 30% of the depreciable basis of certain property is
placed into service during the last 3 months of the tax year.
a. Only statement I is correct.
b. Only statement II is correct.
c. Both statements are correct.
d. Neither statement is correct.
Any charitable contributions made in excess of the individual’s limitation on charitable
contributions can be carried forward seven years.
a. True
b. False
Arthur’s employer establishes Health Savings Accounts (HSAs) for its employees.
Arthur pays $2,100 into his HSA. During the year, the HSA earns $90 interest and
Arthur receives $1,850 from the MSA for reimbursement of medical expenses.
I. Arthur must include $90 in gross income from the HSA arrangement.
II. Arthur loses the $250 in contributions that are not spent on medical expenses in the
current year.
a. Only statement I is correct.
b. Only statement II is correct.
c. Both statements are correct.
d. Neither statement is correct.
The deferral of a gain realized on an involuntary conversion is mandatory.
a. True
b. False
Explain why the taxpayer in each of the following situations either does or does not
have taxable income and determine the amount, if any, that the taxpayer would have to
recognize.
a. Rafael works as a salesman of Dependable Cars Inc. Because Rafael is the year’s top
salesman, Dependable Cars allows Rafael to purchase a car for $30,000, which
normally sells for $35,000 (Dependable Car’s cost was $28,000).
b. Janine’s brother Barry is laid off from his job for the first half of the year. Because
Barry is having trouble paying all of his bills, Janine tells Barry that she will help him
out and pay the property taxes on Barry’s house. The property taxes amount to $1,000.
c. Thomas works as a production manager for Healthy Body, Inc. Because Thomas’s
unit had not had a work related accident for 2 years, Healthy Body gives Thomas a
weight machine that was worth $500.
d. Emmett was out for his daily walk when he spots an old shirt on the side of the road.
Upon inspection, he determines it to be an old baseball uniform, which is in good
enough condition that he takes it home and washes it. At a party two months later,
Mark, a baseball memorabilia collector, tells him that it might be worth something.
Emmett takes the shirt down to the local collector’s shop where he learns that the shirt
was once worn by Willie Mays and is worth at least $7,000.
e. Helen invests $10,000 for a 25% interest in Lockport Landscaping, an S corporation,
on January 1, 2015. During 2015, Lockport pays Helen $45,000 in wages for her
services as the general manager and $2,000 in cash dividends on her stock. Lockport
reports a 2015 net income of $80,000.
f. Amber wins $10,000 in the state lottery from a ticket given to her by her cousin,
Beverly.
The Nadal Company mails its annual dividend check on December 31. Even when the
shareholders receive their check in the following year, they must report the income in
the year the check was written and mailed.
a. True
b. False
Melvin was in an accident which was the other driver’s fault. Melvin received $15,000
for pain and suffering, emotional distress, and lost wages. Melvin may exclude the
entire $15,000.
a. True
b. False