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Isabel is a self-employed electrician. All cash payments she receives from customers are
deposited into a bank account held in the name of her son. Isabel does not have use of
the funds. Therefore, she does not think she needs to include the cash receipts in her
gross income. What concept or doctrine applies to this situation?
a. Pay As You Go Concept.
b. Assignment of Income Doctrine.
c. Annual Accounting Period Concept.
d. Substance Over Form Doctrine
e. Arms-length Transaction Concept.
Harriet is an employee of Castiron Inc. and earns $200,000 in 2015. The maximum
amount Castiron can contribute to a money purchase plan on behalf of Harriet is
a. $40,000
b. $45,000
c. $46,000
d. $49,000
e. $50,000
A limited partner
I. Can lose any or all of their investment in the partnership.
II. Can participate in the management of the partnership.
a. Only statement I is correct.
b. Only statement II is correct.
c. Both statements are correct.
d. Neither statement is correct.
When planning for an investment that will extend over several years, the ability to
predict how the results of the investment will be taxed is important. This statement is an
example of
a. Certainty.
b. Transparency
c. Equality.
d. Neutrality.
e. Fairness.
For each of the following tax treatments, explain the application of the income tax
concept(s) that form the basis for the treatment.
a. Antonio uses his automobile 60% of the time in his insurance business and 40% of
the time for personal purposes. Antonio is only allowed to deduct 60% of the cost of
operating the automobile.
b. Teresa is a University student majoring in accounting. Teresa became a friend with
her neighbor who owns an electronics store. In return for setting up an accounting
system for her neighbor's store, Teresa is given an i-pod worth $600. Teresa must
include the value of the i-pod in her gross income.
c. Larry bought 300 shares of Shamrock Common Stock in April for $6 per share. At
December 31, Shamrock Common Stock is selling for $8 per share. Larry does not have
to recognize any income from the Shamrock Common Stock in the current year.
d. Allan bought $10,000 Par Value of 8% Lake City Water Improvement District bonds
for $9,200 several years ago. During the current year, Allan receives $400 in interest on
the bonds before selling them for $9,600. Allan's only recognized income from the
bonds is the $400 gain on the sale of the bonds.
e. Anita is an author of history books. In 2014, she signs a contract to write a book on
the "History of the Tea Party." At that time, she received a $5,000 advance on her
royalty payments. The terms of her contract require her to return the advance if she does
not complete the book or if her royalties are insufficient to cover the advance. Anita
finishes the book in 2014. Her total royalties from sales in 2015 are $12,000. Anita
must include $5,000 in income in 2014 and $7,000 in income in 2015.
Which of the following must be classified as "portfolio income?"
I. Interest income on CDs from First National Bank.
II. Loss realized from the sale of one-half of his stock shares in Lockleed Corp.
Lockleed is qualified small business stock.
a. Only statement I is correct.
b. Only statement II is correct.
c. Both statements are correct.
d. Neither statement is correct.
In the current year, Paul acquires a car for $16,000. He uses the car in his advertising
business and for personal purposes. His records indicate the car is used 60% for
business and that the total operating expenses, including depreciation, are $4,700. Paul
expects to use the car for 5 years in his business. What amount can Paul deduct as the
operating costs of the car?
a. $- 0 -
b. $2,400
c. $2,820
d. $4,700
e. $12,000
When a security is sold at a loss and and a substantially identical security has been
purchased within 30 days before the sale date the loss is disallowed because it is
classified as a wash sale.
a. True
b. False
Foster owns 27% of the Baxter Corporation, whose ordinary income is $100,000. His
salary for the year is $50,000. What amount must Foster pay in Social Security taxes if
Baxter is a(n)
Corporation S Corporation
a. $-0- $3,825
b. $3,825 $-0-
c. $3,825 $3,825
d. $3,825 $7,650
e. $3,825 $11,475
The holding period for receiving long-term capital gain treatment is 12 months or more.
a. True
b. False
Which of the following expenditures are not deductible because they are personal in
nature?
I. Legal costs to acquire a personal residence.
II. Losses resulting from the sale of personal residences.
a. Only statement I is correct.
b. Only statement II is correct.
c. Both statements are correct.
d. Neither statement is correct.
Benson Company purchased a drill press on November 13, 2011, at a cost of $30,000.
Benson sells the drill press on January 3, 2014, for $16,000. Regular MACRS
depreciation on the drill press would be $18,500, while straight-line MACRS
depreciation would total $12,000.
I. If Benson used regular MACRS depreciation, it would have a Section 1231 gain of
$4,500.
II. If Benson used straight-line depreciation, it would have a Section 1231 loss of
$2,000.
III. If Benson used regular MACRS depreciation, it would have Section 1245 ordinary
income of $4,500.
IV. If Benson used straight-line depreciation, it would have an ordinary loss of $4,500.
a. Only statement I is correct.
b. Only statement II is correct.
c. Statements I and II are correct.
d. Statements I and IV are correct.
e. Statements II and III are correct.
Ona is a professional musician. She prepared her music teacher's tax return in exchange
for music lessons. Since she is a cash basis taxpayer, she cannot take a deduction for the
music lessons.
a. True
b. False
Using the tests for deductibility discussed in Chapter 5, explain why the following
expenses may not be fully deductible in the current year
a. Janet pays $900 in interest on debt she incurred to purchase municipal bonds. The
bonds pay $1,500 of interest in the current year.
b. Andrew owns a retail-clothing store. Andrew has the opportunity to obtain a
franchise to operate a discount sporting goods store. He spends $5,000 investigating the
possibility of opening a sporting goods store in a neighboring town.
c. Jane owns a fitness center. She employs the star basketball player at Local University
as an aerobics instructor. Because of his reputation, she pays him $20 an hour. Jane
pays her other aerobics instructors $10 an hour.
d. Alvin makes a vacation trip to Florida, and while there spends two days investigating
the feasibility of opening up a new office of his optometry practice.
In what circumstances would some portion of the Social Security benefits received by a
single taxpayer be subject to taxation? Assume that all sources of income are listed.
a. Taxpayer's only income consists of $24,000 in Social Security benefits.
b. Taxpayer receives $12,000 in Social Security benefits, dividend income of $6,000,
and municipal bond interest of $3,000.
c. Taxpayer receives $10,000 in Social Security benefits, qualified pension plan benefits
of $13,000, and municipal bond interest of $8,000.
d. Taxpayer receives $20,000 in Social Security benefits and qualified pension plan
benefits of $14,000.
e. One-half of Social Security benefits are always taxable
Explain why the taxpayer in each of the following situations either does or does not
have a Claim of Right to the income received.
a. Thomas works as a purchasing agent for Local City Government. During the current
year, he takes a $5,000 kickback from a supplier seeking a lucrative contract with Local
City. The kickback is illegal under State law and will have to be repaid to Local City if
it is ever discovered.
b. Bernice is an agent for Drew, quarterback of the LA Tigers. During the current year,
Bernice negotiates a new contract for Drew that includes a $5,000,000 signing bonus.
Bernice receives the signing bonus from the Tigers and places it in her business
account. As per her contract agreement with Drew, Bernice writes a check for $600,000
to Drew's mother, gives Drew a check for $3,900,000 and retains the remaining
$500,000 as her standard 10% fee.
c. Karl, an attorney, is hired by Dominic Manufacturing Company to represent it in a
lawsuit. Because the lawsuit will likely drag out for a number of years, Karl requests
that Dominic Manufacturing pay him a retainer representing two years of services.
Dominic Manufacturing agrees to pay the $150,000 retainer; however, Dominic insists
that Karl agree to refund, pro-rata, any of the retainer fee not yet earned should
Dominic decide to terminate their relationship.
A corporation's calculation of the maximum allowable deduction for charitable
contributions includes using what percentage limitation of the appropriate taxable
income amount?
a. 0%
b. 3%
c. 10%
d. 30%
e. 50%
Kristin has AGI of $120,000 in 2014 and 2015. She makes cash contributions to the
American Cancer Society of $63,000 in 2014 and $65,000 in 2015. Kristin's charitable
contribution carryover from 2015 is:
a. $- 0 -
b. $3,000
c. $5,000
d. $8,000
e. $34,000
During the current year, Terry has a short-term capital loss of $9,000 and a long-term
capital gain of $3,000. Due to these transactions Terry reports
a. A capital loss deduction of $3,000 and a loss carryforward of $3,000
b. A capital loss deduction of $3,000 and a loss carryforward of $6,000.
c. A capital loss deduction of $9,000.
d. A capital gain of $3,000 and a loss carryforward of $9,000.
e. A capital loss deduction of $6,000
In planning situations, tax research is undertaken
I. To always attempt to minimize taxes.
II. Considering the client's nontax objectives.
III. To find the best way to accomplish a desired result.
IV. Considering the client's tax objectives.
a. Only statement I is correct.
b. Only statement IV is correct.
c. Statements II and III are correct.
d. Statements II, III, and IV are correct.
e. Statements I, II, III, and IV are correct.
Which of the following is/are currently deductible trade or business expenses?
I. Membership dues to an environmental lobbying group.
II. Cost of acquiring a new business automobile.
a. Only statement I is correct.
b. Only statement II is correct.
c. Both statements are correct.
d. Neither statement is correct.
Tax articles in law review journals are primary sources of federal income tax law.
a. True
b. False
Wu Copy Shop purchases a new copy machine in July 2015 for $30,000. No other
depreciable assets are placed in service in 2015. Since Wu Copy Shop expects to be in a
much higher tax bracket in future years, it desires to minimize its current cost recovery
amount to the fullest extent possible. What is the amount of Wu Copy Shop's ADS
depreciation for 2015?
a. $1,500
b. $3,000
c. $4,500
d. $5,400
e. $6,000
Indicate the classification of each of the following assets as personal property, real
property, intangible property, personal use property or business use property.
a. A dentist purchases a sofa for the waiting room at his dental office.
b. A dentist purchases a sofa for his living room at home.
c. A dentist has a landscape architect plant shrubbery and trees around his office
building.
d. A dentist pays a landscaper to grade his land and install fencing for a baseball
practice field for his son.
e. A dentist obtains a patent for a procedure he developed.
Mitaya purchased 500 shares of Sundown Inc., common stock on December 13, 2013,
at a cost of $3,600. She paid a commission of $150 on the purchase. On February 18,
2014, she received 250 shares of Sundown Inc., common stock as a tax-free dividend.
Mitaya sells 600 shares for $3,700 on January 8, 2015, and pays a $100 commission on
the sale. Mitaya's gain (loss) on the sale is characterized as:
a. Long-term capital gain of $600.
b. Long-term capital gain of $500; short-term capital gain of $100.
c. Long-term capital gain of $100; short-term capital gain of $500.
d. Short-term capital gain of $600.
The exclusion of a percentage of the capital gain realized on the sale of qualified small
business stock acquired after September 27, 2010, and before January 1, 2014, results in
an effective tax rate on these capital gains of
a. 0%
b. 7.0%
c. 14.0%
d. 15.0%
e. 28.0%
Marvin and Simone are a retired couple living on income from their investments and
Social Security benefits. During the current year, they receive the following:
Consulting fee from Burton Industries $35,000
Interest on municipal bonds 7,000
Social Security benefits 20,000
Marvin and Simone's adjusted gross income is:
a. $45,000
b. $47,800
c. $52,000
d. $55,000
e. $61,000
Which of the following statements are correct concerning the general business credit?
I. The general business tax credit only applies to an individual or corporation with a tax
liability in excess of $100,000.
II. The general business credit only applies to an individual or corporation that has a tax
credit carryover or can claim more than one general business credit during the year.
a. Only statement I is correct.
b. Only statement II is correct.
c. Both statements are correct.
d. Neither statement is correct.
A partner in a limited liability partnership (LLP)
I. Has no liability for acts of malfeasance of any of the other partners.
II. Has no liability for the debts of the partnership.
a. Only statement I is correct.
b. Only statement II is correct.
c. Both statements are correct.
d. Neither statement is correct.
Zeppo and Harpo are equal owners of the Marx Corporation. During the current year,
they agree to admit Groucho as a shareholder. Groucho will contribute $35,000 in cash
and property worth $75,000 (adjusted basis of $55,000) for 40% of Marx Corporation's
stock. How much gain will Groucho recognize from the transfer of the assets to the
corporation?
a. $-0-
b. $20,000
c. $35,000
d. $55,000
e. $75,000
Which of the following assets would not be allowed a depreciation deduction?
I. A business computer used to process payroll and maintain a company's general ledger.
II. A personal residence of a taxpayer.
III. A building rented out for the production of rental income.
IV. A yacht rented to a fishing party.
a. Only statement II is correct.
b. Statements II and IV are correct.
c. Only statement I is correct.
d. Statements I and III are correct.
e. All of the assets are depreciable.
