Alli is 23 years old, a full time student, and a dependent of her parents. She earns
$2,000 from her job as a waitress and receives $3,000 of interest on a savings account
established by her grandparents.
a. What is Alli’s taxable income?
b. What is Alli’s tax liability on the taxable income (assume that her parent’s taxable
income is $200,000)?
Samantha incurs the following medical expenses for the current year:
Face-lift for cosmetic purposes $800
Dentist fees 500
Doctors’ fees for Samantha’s daughter 400
How much may Samantha include as qualified medical expenses on her current tax
return before any limitation?
a. $400
b. $500
c. $900
d. $1,300
e. $1,700
Jane receives a nonliquidating distribution of land with a fair market value of $30,000
and a basis of $18,000 from Strickland Corporation, an S corporation. Jane’s basis in
the stock is $46,000. What must Jane and Strickland report as income from the property
distribution?
Jane Strickland
a. $-0- $-0-
b. $12,000 $-0-
c. $-0- $12,000
d. $12,000 $12,000
Which of the following qualify for the medical expense deduction?
I. Insulin.
II. Medicare insurance premiums.
a. Only statement I is correct.
b. Only statement II is correct.
c. Both statements are correct.
d. Neither statement is correct.
Sandra, who owns a small accounting firm, pays $1,500 to the local country club for
food and entertainment for her annual employee Christmas party. How much of the
$1,500 in meals and entertainment cost can Sandra deduct?
a. $- 0 –
b. $500
c. $750
d. $1,000
e. $1,500
Ling owns 3 passive investments. During the last two years, she has the following
income and loss from each activity:
2014 2015
Activity 1 $(14,000) $(6,000)
Activity 2 (6,000) (1,000)
Activity 3 8,000 12,000
At the end of 2015 what is the amount of suspended loss allocated to Activity 2?
a. $1,695
b. $1,815
c. $5,185
d. $5,305
e. $7,000
Harry sells an apartment building for $117,000. The building was held as an
investment, it cost $95,000 and had an basis of $83,000 at the date of the sale. If Harry
is in the 33% marginal tax rate bracket without considering the effect of the sale, how
much tax is paid on the gain on the sale of the apartment building?
a. $5,100
b. $6,300
c. $7,300
d. $8,500
Brenda travels to Cleveland on business for her employer. She spends 4 days in
meetings with a client. Brenda’s plane fare for the trip is $400. Meals cost $40 per day.
Hotel and incidental costs amount to $150 per day. Brenda receives no reimbursement
for any expenses. Brenda’s adjusted gross income for the year is $40,000. What is
Brenda’s deduction for the trip?
a. $- 0 –
b. $280
c. $1,080
d. $1,160
e. $2,320
Jay obtains a new job in Boston and moves from Reno during the current year. He
incurs the following moving expenses:
Transportation of household goods $5,700
House-hunting trips to Boston 600
Cost of transporting Jay’s family 2,300
Meals incurred while moving the family 200
Temporary living expenses while waiting for the new residence to be ready 1,000
What is Jay’s moving expense deduction?
a. $- 0 –
b. $5,700
c. $8,000
d. $9,700
e. $9,800
Which of the following is/are correct concerning a principal residence?
I. A principal residence can be a house, condominium, mobile home, or houseboat.
II. A taxpayer can have more than one principal residence at a time.
a. Only statement I is correct.
b. Only statement II is correct.
c. Both statements are correct.
d. Neither statement is correct.
On June 10, 2014, Wilhelm receives a gift of gold coins with a fair market value of
$10,000. The gold coins had an adjusted basis of $12,000 to the donor. Wilhelm sells
the gold coins August 1, 2015, for $8,000. What is the amount of the recognized gain or
loss on the sale?
a. $- 0 –
b. $2,000 loss
c. $3,000 loss
d. $4,000 loss
e. $5,000 loss
John discovers that termites have destroyed the front porch of his office building. The
damage occurred over a 3-year period. He is eligible for a casualty loss deduction.
a. True
b. False
Sonya owes a deductible expense that she can pay either (and deduct) this year or next
year. She is in the 25% marginal tax rate bracket. Which of the following statements
about this payment is/are correct?
I. Deductions should always be taken as soon as possible. Sonya should pay the
expense this year.
II. If Sonya expects to be in the 28% marginal tax rate bracket next year, she should pay
the expense this year.
III. If Sonya expects to be in the 15% marginal tax rate bracket next year, she should
pay the expense this year.
IV. If Sonya expects to be in the 25% marginal tax rate bracket next year, she should
pay the expense this year.
a. Only statement II is correct.
b. Only statement IV is correct.
c. Statements I and III are correct.
d. Statements I and IV are correct.
e. Statements III and IV are correct.
A taxpayer can take a deduction for a portion of his phone bill if he is eligible for the
home office deduction.
a. True
b. False
Kevin buys one share of Mink, Inc., common stock for $100. On February 3 of the
current year, the corporation makes a nontaxable distribution of one share of preferred
stock to all holders of record of common stock. On the distribution date, the common
stock is trading at $250 and the preferred stock is trading at $50. After the distribution,
Kevin’s bases in the two shares of stock are:
Common Preferred
a. $50.00 $50.00
b. $100.00 $- 0 –
c. $83.33 $16.67
d. $250.00 $50.00
e. $80.00 $20.00
During 2015, Thomas has a net Section 1231 gain of $57,000. In 2014, Thomas
reported a net Section 1231 loss of $60,000. What is the character of the 2015 gain?
a. $60,000 long-term capital gain.
b. $60,000 ordinary gain.
c. $57,000 ordinary gain.
d. $57,000 long-term capital loss.
e. $57,000 long-term capital gain.
Bison Financial Group has a health-care plan for all employees. Dan, an employee, is
single and owns 10% of Bison Financial. In 2015, the company paid $2,000 for Dan’s
health plan. Which of the following are correct statements?
I. If Bison Financial Group is an S corporation, Dan must report the $2,000 as income
and can deduct the $2,000 as an itemized medical expense deduction.
II. If Bison Financial Group is a partnership, Dan must report the $2,000 as income and
can deduct $2,000 as a deduction for AGI.
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 involuntary conversions?
I. Gains may be deferred if the property involuntarily converted is replaced with
property that is similar to or related in service or use to the converted property.
II. Deferral of gains is elective only if direct conversion is made into similar property.
a. Only statement I is correct.
b. Only statement II is correct.
c. Both statements are correct.
d. Neither statement is correct.
Rex is a programmer with Monon Electronics Corporation. His annual salary is
$50,000. As part of his compensation package, he receives a term-life insurance policy
equal to his annual salary. All members of the programming staff receive this benefit.
Members of the sales staff have a cafeteria plan from which to select various benefits
including life and health insurance coverage.
I. Rex has an excludable amount of income because of the nature of his employment
benefit.
II. Rex must include $50,000 in his gross income because that is the value of the
insurance benefit.
III. Rex must include the cost of the insurance policy in his gross income.
IV. If the benefit is only available to “key” employees and Rex is a “key” employee, he
may exclude the cost of the premiums paid from his gross income.
a. Only statement I is correct.
b. Only statement II is correct.
c. Only statement III is correct.
d. Statements I and IV are correct.
e. Statements II and IV are correct.
A nonacquiescence
a. is issued when the IRS wins a court case.
b. is issued by the Joint Committee on Taxation.
c. means that the IRS disagrees with a decision of the court.
d. means that the IRS will follow the decision in similar situations.
What body oversees the operation and administration of the tax system as a whole, and
prepares a general explanation of any tax bill signed by the president?
a. Joint Conference Committee.
b. Joint Committee on Taxation.
c. House Ways and Means Committee.
d. Judiciary Committee.
e. Senate Finance Committee.
Shara’s 2015 taxable income is $44,000 before considering charitable contributions.
Shara is a single individual. She makes a donation of $5,000 to the American Heart
Association in December 2015. By how much did Shara’s marginal tax rate decline
simply because of the donation?
a. 0%
b. 7%
c. 3%
d. 5%
e. 10%
Mike and Pam own a cabin near Teluride, Colorado. In the current year the cabin was
rented for 8 days to friends. Mike and Pam used the cabin a total of 82 days during the
same year. After allocating the expenses between personal and rental use, the following
rental loss was determined:
Rental income $700
Property taxes (250)
Mortgage interest (300)
Repairs and maintenance (100)
Utilities (150)
Rental loss $(100)
How should Mike and Pam report the rental income and expenses for last year?
a. Report the $100 loss for AGI.
b. Include the $700 in gross income, but no deductions are allowed.
c. Only expenses up to the amount of $700 rental income may be deducted.
d. Report the interest ($300) and taxes ($250) as itemized deductions and the other
expenses for AGI.
e. No reporting for the rental activity is necessary.
Determine the largest possible MACRS cost recovery deduction for 2015 on the
following assets, which were purchased for use in Greg’s Accounting Services on July
1, 2015.
Asset Cost
Office equipment $86,000
Computer and printers 40,000
Office building (exclusive of land) 150,000
a. Office equipment depreciation for 2015:
MACRS recovery period __________
Depreciable basis __________
Depreciation __________
b. Computer and printer depreciation for 2015:
MACRS recovery period __________
Depreciable basis __________
Depreciation __________
c. Office building depreciation for 2015:
MACRS Class Life __________
Depreciable basis __________
Depreciation __________
d. Assume the office equipment is sold on December 2, 2017. Determine the cost
recovery deduction for the year 2017.
Depreciation:
e. Assume the building is sold on December 2, 2017. Determine the cost recovery
deduction for the year 2017.
Depreciation:
Which of the following is/ are trial level courts for tax cases?
I. U.S. Court of Federal Claims.
II. U.S. Supreme Court.
III. U.S. Court of Appeals for the Federal Circuit.
IV. U.S. Court of Appeals for the Tenth Circuit.
V. U.S. District Court.
a. Only statement V is correct.
b. Only statement II is correct.
c. Statements I and V are correct.
d. Statements II, III, and IV are correct.
e. Statements I, II, III, IV, and V are correct.
Rae is a retired corporate executive. He and his wife, Pat, receive pensions totaling
$82,000 and $8,000 of Social Security benefits during the current year. Rae and Pat’s
adjusted gross income is
a. $82,000
b. $86,000
c. $87,400
d. $88,800
e. $90,000
Kevin wants to know if he can claim his brother, Richard, as a qualifying relative for
income tax purposes. Richard is 18 and is a part-time student at City Community
College. He lives with Kevin in his home for the entire tax year. Kevin provides the
majority of Richard’s support. During the year Richard has the following items of
income:
State of Oklahoma bond interest $1,000
Dividends on General Motors stock $700
Employee wages from part-time work $2,900
Can Kevin claim his brother Richard as a dependent for income tax purposes?
a. Yes.
b. No, Richard fails the relationship test.
c. No, Richard fails the gross income test.
d. No, Richard fails the student test.
e. No, Richard fails the residency test.
Betty is a house painter and owns Trim Beautiful Painting Company. Last month she
painted the lake cottage of Anne, a local attorney who performed some litigation work
for Betty to help in some delinquent bill collection. The painting, valued at $1,000, was
done in exchange for the litigation work. Neither party charged fees. What should be
the tax consequences of these events?
I. Anne reports $1,000 of income when the painting is completed.
II. No cash was received. Therefore, neither party reports income.
III. Neither individual reports income because there is no reporting of the event to the
IRS.
IV. Both parties report income because there is no exclusion for barter transactions..
a. Only statement I is correct.
b. Statements II and IV are correct.
c. Only statement II is correct.
d. Statements I and IV are correct.
e. Only statement IV is correct.
Dallas Wildcat Drilling Co. sells an oil-drilling rig for $3,000,000. The drilling rig was
purchased in 2007 for $2,000,000. Depreciation deductions of $1,200,000 have been
taken up to the time of sale. What amount and character of gain will Dallas report from
the sale of this asset?
a. $2,200,000 Section 1245 ordinary income.
b. $2,200,000 long-term capital gain.
c. $1,200,000 Section 1245 ordinary income, $1,000,000 Sec 1231 gain.
d. $1,200,000 Section 1245 ordinary income, $1,000,000 long-term capital gain.
Concerning the credit for child and dependent care
I. If a taxpayer’s adjusted gross income exceeds $43,000, the child and dependent care
credit rate is reduced to 20%.
II. No credit is allowed for expenses incurred outside the home.
a. Only statement I is correct.
b. Only statement II is correct.
c. Both statements are correct.
d. Neither statement is correct.
Sanford gives Mitchell 100 shares of stock that cost Sanford $5,000 several years ago.
On the date of the gift, the stock is valued at $3,000. Mitchell holds the stock until the
value increases and sells it for $4,000. What is Mitchell’s recognized gain or loss on the
sale?
a. No gain or (loss) is recognized
b. $1,000 loss
c. $1,000 gain
d. $2,000 loss
e. $4,000 gain
On May 5, 2013, Elton Corporation granted Germaine an option to acquire 100 shares
of the company’s stock for $8 per share. The fair market price of the stock on the date of
grant was $14. The stock requires that Germaine remain with the company for one year
after the date of exercise. The option did not have a readily ascertainable fair market
value. Germaine exercises the option on June 12, 2014, when the fair market value of
the stock is $18. On June 12, 2015, the fair market value of the stock is $21 per share.
How much must he report as income in 2014 and 2015?
2014 2015
a. $1,000 $300
b. $1,000 $-0-
c. $ 400 $-0-
d. $-0- $1,300
Which of the following qualifies as a like-kind exchange of property?
I. Registered trademark for a copyright.
II. A 2009 Chevy, business-use automobile for a 2010 Ford, business-use automobile
a. Only statement I is correct.
b. Only statement II is correct.
c. Both statements are correct.
d. Neither statement is correct.
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.
Meals provided by employer
Dorothy operates a pet store as a sole proprietorship. During the year she sells the
business to Florian for $200,000. The assets sold and the allocation of the purchase
price are as follows:
Adjusted Basis Purchase Price
Inventory $20,000 $20,000
Building 60,000 105,000
Land 20,000 35,000
Equipment -0- 30,000
Goodwill -0- 10,000
Total Assets $100,000 $200,000
Dorothy acquired the building in 1997 for $100,000 of which $20,000 was allocated to
the land. She paid $40,000 for the equipment in the same year. What are the tax
consequences of the liquidation for Dorothy?
Match each statement with the correct term below.
a. Begins on the day after acquisition and ends on the day of disposition.
b. The initial investment in an asset.
c. An asset’s basis transfers from one owner to another.
d. The capital investment remaining in an asset at the date of its disposition.
e. Sales price less expenses of disposition.
f. A purchase of all of the assets of a business.
g. Amount realized is less than adjusted basis.
h. A purchase of all of the assets of a business by buying the stock of a corporation.
i. A term used to identify a situation in which an asset has a different basis for
determining gain than for determining loss.
j. The date of death used to value a decedent’s estate in the absence of any special
election.
k. Six months after the date of death, used to value a decedent’s estate when the
executor of the estate makes election.
l. Amount realized is greater than adjusted basis.
Amount realized
Match each statement with the correct term below.
a. Limited to $3,000 annually for individuals.
b. When an asset is disposed of for less than its basis.
c. An excess of business deductions over business income.
d. A trade or business in which the taxpayer is not a material participant.
e. A loss that results from some sudden, unexpected, or unusual event.
f. Any asset that is not a receivable, inventory, or depreciable or real property used in a
trade or business.
Casualty loss
Sally and Kelly are both enrolled in a graduate accounting course at Deacon University.
Discuss how it is possible that Sally can deduct the cost of her tuition as an education
expense while Kelly’s tuition is not deductible.
Dana is considering investing $20,000 in one of two investments. The income from
Investment A is $2,300. The income from Investment B is $3,000. The income from
Investment A would be received at the end of the current year and would be excluded
from tax. The income from Investment B would also be received at the end of the
current year, but would be subject to tax in 3 years under a special deferral provision.
How would you advise Dana? Discuss the factors that are necessary to determine which
of the two investments provides the greater after-tax yield.
Each of the numbered items below is accorded only one of the following lettered
treatments. Use the existing law as it applies to the current year, match the best answer
to the statements below.
a. Fully excluded from gross income.
b. Fully included in gross income.
c. Partially excluded from gross income.
Julia receives $6.3 million in compensatory damages for a personal physical injury.
During the year, Arlene donates stock she had purchased in 2005 for $30,000 to a
qualified public charitable organization. The fair market value of the stock at the time of
the donation is $40,000. Her adjusted gross income for the year is $80,000. If the stock
donation is her only charitable contribution, what is Arlene’s charitable contribution
deduction? What should she consider in determining the amount of the deduction?
Twenty years ago Pricilla purchased an annuity costing $19,500 that will pay her $250
per month from age 65 until she dies. Polly is an employee of Evergreen Corporation.
During her employment with Evergreen, Polly has paid a total of $20,000 into
Evergreen’s qualified employee pension plan. Under the plan, Polly is to receive $250
per year from age 65 until she dies. Pricilla and Polly turn 65 during the current year
and retire. Each of them has a life expectancy of 12 years from the date of retirement.
Discuss the differences in the treatment of the $250 payments each of them receives.
Match each statement with the correct term below.
a. Prepaid interest.
b. An amount that each taxpayer who is neither a qualifying child nor a qualifying
relative, and who files a return, is allowed to deduct.
c. One test for a qualifying relative.
d. The minimum amount a taxpayer can deduct for personal expenditures.
e. A deduction in this category is always allowed. That is, there is no minimum
allowable amount and generally no income limitation placed on these deductions.
f. Generally, these deductions are for specifically allowed personal expenditures.
g. An exception to this test is a custodial parent.
h. Interest paid on debt used to buy securities.
i. Interest paid on credit cards, personal loans, car loans, etc.
j. Interest paid on a mortgage secured by the taxpayer’s residence. The proceeds of the
loan can be used for any purpose and the interest is still deductible.
k. A tax designed to prevent the shifting of unearned income to children of the taxpayer.
Deductions for AGI
Shannon and Art are each 10% partners in the Such-A-Deal Partnership. Due to several
years of partnership operating losses, both Shannon and Art have a zero basis in their
partnership interests. For the current year, the partnership is incurring a loss of
$100,000. When he hears the news about the loss, Shannon tells Art he wishes the
partnership management would go to the local bank and borrow “a couple of hundred
thousand dollars.” Art does not understand why Shannon would want the partnership to
go into debt. The concept of debt makes Art very nervous; Art personally does not
borrow money. In fact, Art does not even use credit cards. Explain to Art why Shannon
wants the partnership to incur more debt. Also, comment on why Art’s general concerns
about debt have merit, specifically focusing on the partnership debt.
Earned income
Chad pays $2,000 of interest on $20,000 of debt incurred for the purchase of municipal
bonds and corporate bonds. Chad receives $800 of interest on the municipal bonds and
$800 of interest on the corporate bonds. What is his allowable deduction on the $2,000
of interest? Explain your answer and show all calculations.
Summary Problem: Ralph, age 44, is an account executive for Cobb Advertising, Inc.
Ralph’s annual salary is $90,000. Other benefits paid by Cobb Advertising were:
Health and Accident Insurance Premiums $1,500
Group-Term Life Insurance Policy ($135,000 of coverage) 250
Payment of Country Club Dues 3,660
Dues to professional organizations, trade journals 550
Parking space in downtown garage 3,180
In addition to the benefits above, Cobb Advertising has a qualified pension plan into
which employees can contribute (and Cobb matches) up to 5% of their annual salary.
Ralph contributes the maximum allowable to the plan.
Ralph has never been able to itemize his allowable personal deductions (i.e., he always
uses the standard deduction). In 2015, Ralph receives a refund of $300 of his 2014 State
income taxes and a 2014 Federal tax refund of $400.
Other sources of income:
Interest credited to savings account $980
Value of stock received from Western Power & Light Company
(Ralph had the option to take the dividend in cash) 400
Sale of Sea Island Adventures Common Stock
(cost of the stock was $2,200) 3,500
Value of land inherited from grandfather 80,000
Crop-share payments received on inherited land 2,820
