When a partnership distributes property that has a fair market value greater than its
basis, the partnership must recognize the income as if it sold the property.
a. True
b. False
Using the tests for deductibility discussed in Chapter 5, explain why the following
expenses are not deductible.
a. Mel is a sprint car racer. He does repair and maintenance on his cars in the garage at
his home. After repairing the cars, he tests them on city streets. He received 15 citations
(totaling $2,900) for speeding, running stop signs, and reckless driving.
b. Albert, a carpenter, pays his 10-year-old son $150 a week to empty waste cans in his
work shop. Albert’s son works each evening and two hours on Saturday morning.
c. Sharon contributes $25 to a local organization that is campaigning against a foreign
trade bill. The legislation would damage Sharon’s business.
d. Marline borrows $5,000 and pays $500 in interest. The loan is used to purchase
bonds issued by the City of Lafayette School District.
e. Christine is the wife of a physician, and she is an experienced horseman. She has
raised horses for ten years and occasionally shows them for prize money. She also
boards horses for monthly fees. She enjoys her horse activity but has never made a
profit in any year. Her horses are appraised at $200,000.
Isabelle and Marshall are married with salaries of $50,000 and $45,000, respectively.
Adjusted gross income on their jointly filed tax return is $102,000. Both individuals are
active participants in employer provided qualified pension plans. What are Isabelle and
Marshall’s maximum combined IRA contribution and deduction amounts?
Contribution Deduction
a. $-0- $-0-
b. $11,000 $2,500
c. $11,000 $5,500
d. $11,000 $7,700
e. $11,000 $11,000
Which of the following facts would prevent an S Corporation election?
I. Magnificent Corporation has125 shareholders.
II. Simms Corporation, incorporated in Kansas, has only one class of common stock
issued and outstanding.
a. Only statement I is correct.
b. Only statement II is correct.
c. Both statements are correct.
d. Neither statement is correct.
Sally is a corporate sales representative for Computer City. Sally receives a monthly
travel allowance from Computer City to cover her travel costs (transportation, food,
lodging, entertainment, etc.). If Sally is not required to account to Computer City for
the use of the travel advance
I. Sally will not have to show any aspect of the travel reimbursement or expenses
incurred if she spends all of the reimbursement on valid travel expenses.
II. Sally will only have gross income to the extent her travel allowance exceeds her
actual costs.
a. Only statement I is correct.
b. Only statement II is correct.
c. Both statements are correct.
d. Neither statement is correct.
Ramona’s employer pays 100% of the cost of all employees’ group-term life insurance.
The life insurance plan is not discriminatory. Ramona’s annual salary is $100,000. What
is the maximum amount of coverage that can be provided tax-free?
a. $- 0 –
b. $5,000
c. $10,000
d. $50,000
e. $100,000
Net collectibles gains are taxed at a maximum rate of 25 percent.
a. True
b. False
During the current year, Campbell Corporation receives dividend income of $40,000
from a 5%-owned domestic corporation. What is Campbell’s maximum allowable
dividend-received deduction for the current year?
a. $- 0 –
b. $28,000
c. $32,000
d. $36,000
e. $40,000
The Wilson Corporation incurs the following expenses. Explain whether the following
expenses should be capitalized or deducted in the current period.
a. Paid $2,500 to blacktop a gravel parking lot.
b. Paid $1,900 for new tires on the truck.
c. Paid $3,000 for a new fire and security alarm system for the factory.
d. Paid $6,250 to paint the interior and exterior of the office and factory building that it
just acquired.
e. Paid $1,200 for a new compressor for the factory’s central air conditioning system.
Anita receives a state income tax refund of $550 in May 2015. When she filed her 2014
federal income tax return, she used the standard deduction amount. Although the
all-inclusive income concept would require Anita to report the $550 in her federal gross
income for 2015, she may exclude it. What tax concept explains why the exclusion is
permitted in this case?
a. Wherewithal to pay.
b. Tax benefit rule.
c. Ability to pay.
d. Assignment of income.
e. Administrative convenience.
Which of the following courts is a trial court for tax cases?
a. U.S. Supreme Court.
b. U.S. District Court.
c. U.S. Court of Appeals.
d. U.S. Court of Appeals for the Federal Circuit.
In May, Josefina receives stock worth $10,000 from the estate of her Uncle. The
following November she receives a $500 cash dividend on the stock. Josefina must
I. include the $500 dividend in her gross income.
II. include the $10,000 value of the stock received 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.
Glenna put money in savings accounts in 50 different banks. She knows a bank is not
required to report to the IRS any interest it pays her that totals less than $10. Because
the banks do not report the payments to the IRS, Glenna does not report the interest
received as taxable income. Which of the following is (are) true?
I. Glenna’s actions are tax evasion because she intentionally misrepresented facts on a
tax return to avoid paying tax.
II. Glenna’s actions are tax avoidance because the IRS will never know about the
interest income.
III. Glenna’s actions are tax evasion because she took steps to conceal the income.
a. Only statement I is correct.
b. Only statement II is correct.
c. Statements I and III are correct.
d. Statements II and III are correct.
e. Statements I, II, and III are correct.
Which of the following is/are correct with respect to limited liability companies
(LLCs)?
I. An advantage of an LLC when compared to a regular corporation is the ability to pass
through tax attributes to owners.
II. A disadvantage of a general partnership when compared with an LLC is the inability
of owners to have limited liability.
a. Only statement I is correct.
b. Only statement II is correct.
c. Both statements are correct.
d. Neither statement is correct.
Commonalties of nonrecognition transactions include that
I. gains on all transactions must be recognized when the taxpayer has the
wherewithal-to-pay.
II. tax attributes carryover from the original asset to the replacement asset.
a. Only statement I is correct.
b. Only statement II is correct.
c. Both statements are correct.
d. Neither statement is correct.
Wilshire Corporation purchased a commercial building in 2001 for $975,000. During
2015, the building is sold for $775,000. The actual depreciation on the building as of
the sale date was $300,000. What is the amount and character of the gain recognized on
the sale?
a. $100,000 Section 1250 ordinary income.
b. $100,000 Section 1231gain.
c. $100,000 Unrecaptured Section 1250 gain.
d. $100,000 Section 1245 gain.
Which of the following never generate taxable income?
I. Interest free loan from family member.
II. Interest free loan from employer.
III. Interest free loan under $10,000.
IV. Interest free loan over $100,000.
a. Only statement I is correct.
b. Only statements I and III are correct.
c. Only statements I and II and III are correct.
d. Only statement III is correct.
e. Only statements II and III are correct.
Virginia, a practicing CPA, receives $11,000 from the sale of rare orchids that she
grows. Her expenses of operating this hobby activity follow:
Property taxes on the structures $4,500
Seeds, fertilizer, and bug sprays. 8,000
Depreciation on the structures 5,000
How much of the expenses that Virginia incurs can be deducted as hobby expenses?
a. $- 0 –
b. $4,500
c. $11,000
d. $12,500
e. $17,500
Which of the following credits can not be used to reduce the alternative minimum tax?
a. Adoption credit
b. Foreign tax credit
c. Child-and dependent-Care credit
d. Lifetime Learning credit
e. Research and experimental credit
The allowance of deductions in calculating taxable income and the use of a progressive
tax rate structure are a direct application of the
a. Ability to Pay Concept.
b. Administrative Convenience Concept.
c. Arm’s-Length Transaction Concept.
d. Capital Recovery Concept.
e. Pay-as-You-Go Concept.
Posey Corporation distributes land with a fair market value of $20,000 and a basis of
$12,000 to Brock, a shareholder. Posey’s earnings and profits are $125,000. What must
Brock report as income from the property distribution?
a. $- 0 –
b. $8,000
c. $12,000
d. $20,000
Fran dies on January 14, 2015. Her spouse, Carl, is the beneficiary of a $100,000 life
insurance policy. Carl elects to receive the proceeds in 10 equal installments of $11,000.
In 2015, Carl receives $11,000. The amount included in Carl’s 2015 gross income is
a. $- 0 –
b. $1,000
c. $10,000
d. $11,000
e. $111,000
All tax practitioners who prepare tax returns for a fee are subject to which of the
following?
I. IRS Circular 230
II. AICPA Code of Professional Conduct
III. Statements on Standards for Tax Services
IV. American Bar Association Code of Professional Conduct
a. Only statement I is correct.
b. Statements I, II, and III are correct.
c. Statements II and III are correct.
d. Statements II and IV are correct.
e. Statements I, II, III, and IV are correct.
Sally is a single individual. In 2015, she receives $10,000 of tax-exempt income in
addition to her salary and other investment income of $100,000. Sally’s 2015 tax return
showed the following information:
Gross income $100,000
Deductions for adjusted gross income ( 4,000)
Adjusted gross income $96,000
Itemized deductions (16,100)
Personal exemption ( 4,000)
Taxable income $75,900
Total tax $14,769
Less: Income tax withheld from wages (14,800)
Balance of tax due $ 31
Which of the following statements concerning Sally’s tax rates is (are) correct?
I. Sally’s average tax rate is 19.5%.
II. Sally’s average tax rate is 25.0%.
III. Sally’s marginal tax rate is 25%.
IV. Sally’s marginal tax rate is 28%.
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.
e. Only statement IV is correct.
Business and nonbusiness bad debts are both deductible as a short-term capital loss.
a. True
b. False
The primary difference(s) between the claim-of-right doctrine and the constructive
receipt doctrine is/are
I. Claim of right applies when the taxpayer has not yet physically received an item of
income.
II. Constructive receipt applies after the taxpayer has received an item of income.
a. Only statement I is correct.
b. Only statement II is correct.
c. Both statements are correct.
d. Neither statement is correct.
Donna is a student at Eastern State University. She receives a $4,000 academic
scholarship from the Silverman Foundation. She also has a $2,000 assistantship to
grade and tutor for the Department of Economics. Tuition, books, fees, and supplies are
$5,000. How much gross income must Donna recognize from the scholarship and
assistantship?
a. $- 0 –
b. $1,000
c. $2,000
d. $5,000
e. $6,000
All judicial citations follow the same format: case name, volume number of the reporter
in which the case is published, name of the reporter, and the page of the reporter on
which the case begins.
a. True
b. False
Monterey Developers purchases 10 acres of land for $15,000 on January 14, 2015. They
also pay $2,000 in legal and other fees related to the purchase. Monterey spends $3,000
for legal fees, permit licenses, and city franchise fees to subdivide the land into 10
one-acre plots. Sewer and utility line easements cost an additional $5,000. Interest paid
on the loan that financed the purchase is $1,200 for 2015. Monterey also pays $800 in
property taxes in 2015. What is Monterey’s adjusted basis in the land at the end of
2015?
a. $17,000
b. $25,000
c. $25,800
d. $26,200
e. $27,000
Section 1231 assets are certain trade or business assets that are not capital assets but are
treated as such when sold at a gain or a loss.
a. True
b. False
Angie’s employer has a qualified pension plan. The employer makes all payments into
the plan; employees do not contribute to the plan. During the current year, the employer
pays $5,000 into the plan on Angie’s behalf. Which of the following statements is true?
I. Angie is not taxed on the $5,000 in the current year.
II. The $5,000 payment is excluded from her income in the current year, but she will
pay tax on the $5,000 as she receives it.
a. Only statement I is correct.
b. Only statement II is correct.
c. Both statements are correct.
d. Neither statement is correct.
Rockhill Corporation operates a women’s clothing boutique. Taxable income for the
current year is $60,000. What is Rockhill’s income tax liability?
a. $- 0 –
b. $6,000
c. $9,000
d. $10,000
e. $15,000
One type of imputed income that always escapes taxation is
a. Bargain purchases by employees.
b. Value of growing one’s own vegetables for personal consumption.
c. Payment of personal expenses by a corporation in which stock is owned.
d. Interest free loan from parents.
The general mechanism used to defer gains and losses from a transaction includes
certain adjustments to the fair market value of the replacement property. These
adjustments include
I. adding boot received.
II. subtracting deferred gains.
a. Only statement I is correct.
b. Only statement II is correct.
c. Both statements are correct.
d. Neither statement is correct.