Sandi and Jodie are partners who operate Household Humanities. Sandi owns 60% and
Jodie owns 40% of Household. During the current year, Household has the following
results:
Revenues $165,000
Operating expenses 45,000
Sandi’s salary 50,000
Jodie’s salary 45,000
Municipal bond interest income 3,000
Long-term capital loss 30,000
Charitable contributions 10,000
a. How must Household report these results to Sandi and Jodie? Show calculations.
b. Sandi is a head of household with two dependent children (ages 17 and 18). She has
$19,000 of other income, which includes a $6,000 short-term capital gain. Sandi has
$16,750 of other allowable itemized deductions. Calculate Sandi’s taxable income and
income tax liability.
Which of the following correctly describe(s) cost recovery of automobiles placed in
service in 2014?
a. Total depreciation, including bonus depreciation, cannot exceed $9,600.
b. No cost recovery is allowed if the automobile is used 50% or less for trade or
business.
c. The amount of the depreciation deduction cannot exceed $11,160.
d. No cost recovery is allowed for automobiles used for production of income activities.
Which of the following qualify as replacement property under the involuntary
conversion rules?
I. Mayfield Ice Cream Company’s production plant is destroyed by a hurricane. The
insurance proceeds are used to replace the plant with a refrigerated storage container.
II. Mayfield Ice Cream Company’s production plant is destroyed by a fire. They sign a
five year lease for a replacement production facility, and the insurance proceeds are
then used to buy an office building
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 Administrative sources has the highest level of authority?
a. Revenue Ruling
b. Nonacquiescence
c. Treasury Regulation
d. General Counsel Memorandum
e. Private Letter Ruling
After a tax bill has been enacted, the House Ways and Means committee prepares a
general explanation of the bill as approved by the president.
a. True
b. False
Determine the proper classification(s) of a house owned and used by Rhonda as her
insurance agency office.
I. Personal use property. IV. Intangible property.
II. Business use property. V. Real estate.
III. Tangible property. VI. Personal property.
a. Statements I, III, and V are correct.
b. Statements II, III, and V are correct.
c. Only statements I and V are correct.
d. Only statement V is correct.
e. Only statement II is correct.
George and Kelly have their three children in daycare at an exclusive River Oaks
pre-kindergarten center. They incur $20,000 in expenses to keep their children in
daycare. George is a physician and Kelly is an assistant district attorney. Together their
adjusted gross income is $450,000. What amount can they claim as a child-care credit?
a. $- 0 –
b. $600
c. $1,200
d. $1,800
e. $4,000
Byron loaned $5,000 to his friend Alan in 2011. They drew up a formal loan agreement
that called for a reasonable rate of interest. Alan used the loan proceeds to pay expenses
during his last year in college. Byron was recently informed that his friend Alan was
struck by lightning and died. Byron will never be able to collect the proceeds of this
loan because Alan died with no assets. What tax benefit, if any, will Byron will be able
to claim in 2015, the year that the loan became worthless.
a. $5,000 tax credit.
b. $5,000 ordinary loss.
c. $5,000 short-term capital loss.
d. This is a personal non-deductible loss.
Jerry purchased an annuity contract at the beginning of 2003 for $144,000. The contract
specified that he and his wife would receive $1,000 per month for life. Jerry receives
his first payment on February 1, 2015 when he is 59 years old and his wife is 56 years
old. What amount of gross income should Jerry and his wife report on their 2015
income tax return from this annuity contract?
a. $-0-
b. $4,400
c. $6,600
d. $11,000
Milton is experiencing cash flow problems during the current year. Rather than
foreclose on the $120,000 mortgage loan on his principal residence, his bank agrees to
reduce the debt to $90,000. Prior to the debt reduction, Milton’s total assets were
$400,000 and his total liabilities were $390,000. How much income must Milton
recognize from the reduction of his bank loan?
a. – 0 –
b. $10,000
c. $20,000
d. $30,000
Discuss whether the following persons are currently engaged in a trade or business:
a. Katerina owns 35 home sites in and around Orlando. She bought these vacant lots
several years ago in hopes to developing them into a subdivision. She begins to develop
the lots in the current year.
b. John spends 2 hours a day, 5 days a week, managing his investment portfolio. He
watches the market and buys and sells securities when he thinks the market is right. His
investment strategy is to realize dividends, interest, and long-term gains from holding
the investments.
c. Bill lives in Miami and works full-time betting on dog races. Although he intends to
win large sums, he has failed to win the big one. He considers his betting activities his
job and relies on his meager winnings to support his family. He is devoted to the races
and has rarely missed a day betting in over 3 years.
On January 1, Sandi borrows $40,000 from G&H Accounting firm, her employer, to
pay-off charge accounts and other personal loans. Sandi must repay the $40,000 loan at
the end of 5 years. Because Sandi has been loyal to her job, G&H is not charging Sandi
interest on the $40,000 loan. The applicable federal interest rate is 6%. If Sandi has total
net investment income for the current year of $200:
I. Sandi has compensation income of $2,400.
II. Sandi has a nontaxable gift from her employer of $2,400.
III. G&H is allowed a deduction for $2,400 of compensation paid to Sandi.
IV. There are no tax effects because Sandi’s net investment income is less than $1,000.
a. Only statement I is correct.
b. Only statement II is correct.
c. Only statements I and III are correct.
d. Only statements II and IV are correct.
e. Only statements II and III are correct.
The broadest income concept
I. considers all income received (e.g., cash, property, services, etc.) taxable.
II. implies that anything of value received may be taxable.
III. is referred to as the legislative grace concept.
IV. implies that all increases in wealth may be taxable
a. Only statement II is correct.
b. Statements I, II and III are correct.
c. Statements I, II, and IV are correct.
d. Statements I and IV are correct.
e. Statements I, II, III, and IV are correct.
Art is supported entirely by his 3 children who provide for his support as follows:
Allie 48%
Barney 42%
Carrie 10%
If the children file a multiple support agreement, which of the children will be eligible
to claim Kenneth as a dependent?
a. None.
b. Only Allie.
c. Only Barney.
d. Only Allie or Barney.
e. Either Allie, Barney, or Carrie.
Willis is a cash basis taxpayer who is in the commercial lending business. Which of the
following statements regarding loans that he made in the current year is/are correct?
I. A $10,000 one-year loan with interest at 12% made on April 1. The principal and
interest are due at maturity. Willis must recognize $900 of interest income this year.
II. A $10,000 one-year loan discounted at 12% made on April 1. Willis gave the
borrower $8,800. The borrower will repay the $10,000 principal at maturity. Willis does
not have to recognize any interest income in the current year.
III. A $50,000 two-year loan discounted at 10% made on July 1. Willis gave the
borrower $41,300 on July 1. The borrower will repay the $50,000 principal at maturity.
Willis does not have to recognize any interest income in the current year.
IV. A $70,000 two-year loan with interest at 10% made on July 1. The interest payments
on the loan are due annually on July 1 and the principal is due at maturity. Willis does
not have to recognize any interest income in the current year.
a. Only statements I and III are correct.
b. Only statements I and IV are correct.
c. Only statements II, III, and IV are correct.
d. Only statements II and III are correct.
e. Only statements I and IV are correct.
Samantha is a self-employed electrician. During 2015, her net self-employment income
is $120,000. What is Samantha’s self-employment tax?
a. $15,570.00
b. $15,606.80
c. $16,845.30
d. $18,174.00
e. $18,360.00
Which of the following are numbered to match the Code section to which they are
related?
a. Private Letter Rulings.
b. Revenue Rulings.
c. Treasury Regulations.
d. All of the above.
Julian is operating an illegal gambling operation. Even though the income is not legal, it
is classified as earned.
a. True
b. False
Cary is experiencing cash flow problems during the current year. Rather than foreclose
on an $80,000 business loan, his bank agrees to reduce the debt to $50,000. Prior to the
debt reduction, Cary’s total assets were $500,000 and his total liabilities were $510,000.
How much income must Cary recognize from the reduction of his bank loan?
a. – 0 –
b. $10,000
c. $20,000
d. $30,000
Greg pays sales tax of $7.20 on the purchase of a lamp for $120. Michelle paid sales tax
of $9 on the purchase of a similar lamp for $150. Greg’s taxable income for the current
year is $40,000. Michelle’s taxable income is $55,000.
I. The structure of the sales tax is progressive if based on taxable income.
II. The structure of the sales tax is proportional if based on sales price.
a. Only statement I is correct.
b. Only statement II is correct.
c. Both statements are correct.
d. Neither statement is correct.
During 2015, Williams Company purchases and places in service office equipment with
a cost of $40,000. The equipment is 7-year MACRS property. What is its 2015
depreciation deduction for purposes of the alternative minimum tax?
a. $2,000
b. $2,856
c. $3,000
d. $4,000
e. $5,714
Three requirements must be met in order to deduct a trade or business expense. Also,
deductible trade or business expenses may not be which of the following:
I. a capital expenditure.
II. reasonable in amount.
III. a payment that frustrates public policy.
IV. an expense related to tax-exempt income.
a. Only statement I is correct.
b. Only statement II is correct.
c. Statements III and IV are correct.
d. Statements I, II, and III are correct.
e. Statements I, III, and IV are correct.
Janine and Johnny are single taxpayers who own the Queen’s Inn Tavern. Janine owns
70% and Johnny owns 30% of Crossbow. Janine receives a payment of $40,000 and
Johnny receives a payment of $60,000. Crossbow’s taxable income is $200,000 before
considering the payments to Janine and Johnny. Janine’s net taxable income from other
sources is $30,000 and Johnny’s net taxable income from other sources is $10,000.
Determine the total income tax liability for each of the following entity forms.
a. Queen’s Inn Tavern is organized as a partnership. The payments are guaranteed
payments.
b. Queen’s Inn Tavern is organized as a corporation. The payments are salaries.
William, a CPA, owns a 75% interest in Burglar Concrete Company (BCC). BCC is
organized as a partnership. During the current year, William prepares BCC’s tax return
and receives his normal $300 fee for the preparation of the return.
I. BCC cannot deduct the $300 fee because of the related party rules.
II. William must recognize the $300 fee as income.
a. Only statement I is correct.
b. Only statement II is correct.
c. Both statements are correct.
d. Neither statement is correct.
Jane owns 100% of the stock of Lacy Corporation. Jane’s son, Lee, is employed by
Lacy Corporation as a consultant. Which of the following concepts or doctrines is least
helpful in determining the tax consequences of any payments Lacy makes to Lee?
a. Arm’s-Length Transaction Concept.
b. Substance Over Form Doctrine.
c. Assignment of Income Doctrine.
d. Business Purpose Concept.
e. Entity Concept.
If related parties complete a qualified like-kind exchange, how long must the parties
wait before disposing of the property exchanged to insure that any realized gain on the
transfer is not recognized?
a. No waiting.
b. 30 days.
c. 6 months.
d. 1 year.
e. 2 years.
To compute cost depletion, you must know the basis subject to depletion, the
recoverable quantity of the natural resource, and the quantity of the natural resource
sold during the year.
a. True
b. False
Which of Adam Smith’s requirements for a good tax system best supports the argument
that the federal income tax rate structure should be progressive?
a. Certainty.
b. Convenience.
c. Equality.
d. Neutrality.
e. Sufficiency.
Which of the following would be allowed a depreciation deduction?
I. Inventory.
II. Land acquired as an investment.
III. Residence used as rental property.
IV. Airplane used by company controller to attend accounting conference.
a. Only statement III is correct.
b. Only statement IV is correct
c. Statements III and IV are correct.
d. Statements II, III, and IV are correct.
e. All of the assets are depreciable.
Which of the following business expenses is/are subject to a 50% deduction limit for
2015?
I. Meals while traveling
II. Lodging while traveling
a. Only statement I is correct.
b. Only statement II is correct.
c. Both statements are correct.
d. Neither statement is correct.
Ester is a sales representative for a pharmaceutical company. She receives a monthly
travel allowance from the company to cover her travel costs (transportation, food,
lodging, entertainment, etc.). If Ester is not required to account to the company for the
use of the travel advance
I. Ester will only have gross income to the extent her travel allowance exceeds her
actual costs.
II. Ester must include the travel allowance in her gross income. Her actual costs are
deductible from AGI, subject to all applicable limits on such deductions.
a. Only statement I is correct.
b. Only statement II is correct.
c. Both statements are correct.
d. Neither statement is correct.