Fillmore’s net Section 1231 gains and losses reported for the past five years is presented
below.
2010 $15,000
2011 12,000
2012 5,000
2013 (28,000)
2014 (13,000)
In 2015, Fillmore has a $15,000 net Section 1231 gain. What amounts and character of
income will Fillmore ultimately report in 2015 as a result of this net Section 1231 gain?
a. $6,000 LTCG; $9,000 ordinary income
b. $15,000 ordinary income
c. $15,000 Section 1231 gain
d. $9,000 LTCG; $6,000 ordinary income
e. None of the above.
During 2014, Virginia, an architect, made a bona fide $7,500 loan to her friend Joe
when he was in a time of need. Joe died in 2015. Virginia has been informed by Joe’s
estate that he was insolvent. Virginia should record the nonpayment of the loan as
a. An ordinary loss.
b. An itemized deduction.
c. A short-term capital loss.
d. A long-term capital loss.
e. Nothing. It cannot be deducted.
Shasta has the following capital gains and losses and Qualified dividend income during
the current year:
Short-term capital loss $(4,000)
Collectibles gain 6,000
Long-term capital gain 2,000
Qualified dividend income 3,000
If Shasta’s marginal tax rate is 33%, what is the effect of the above on her taxable
income and income tax liability?
Income Tax Liability
a. $7,000 increase $1,050 increase
b. $7,000 increase $1,310 increase
c. $8,000 increase $1,590 increase
d. $7,000 increase $1,960 increase
e. $9,000 increase $1,850 increase
Congress is required to insure that the tax law has the following characteristics:
equality, certainty, convenience, and economy.
a. True
b. False
All of the following are capital assets, except
a. Personal residence.
b. Land used for business parking lot.
c. Pickup truck used for personal transportation..
d. Corporate bonds held for investment purposes.
e. A hand-written letter by Dwight Eisenhower held in a private collection.
Meredith, age 14, earns wages of $2,100 from her modeling. Since the funds are
collected by Meredith’s father and used for some of Meredith’s living expenses, her
father intends to include it in his gross income.
I. The person that actually earns the income will recognize it, Meredith in this case.
II. The Assignment of Income Doctrine prohibits the father from recognizing the
$2,100.
a. Only statement I is correct.
b. Only statement II is correct.
c. Both statements are correct.
d. Neither statement is correct.
Income tax accounting methods and financial accounting methods differ in many ways.
Which of the following tax law provisions are likely to create permanent differences
between taxable income and financial (or book) income of an entity?
I. The cost of certain property is allowed to be deducted in the year of acquisition rather
than through regular depreciation methods.
II. Tax depreciation is computed over a statutory life rather than the asset’s useful life.
a. Only statement I is correct.
b. Only statement II is correct.
c. Both statements are correct.
d. Neither statement is correct.
Harry owed $10,000 to his employer. The employer forgave the indebtedness due to
Harry’s hard work. Also, Harry allowed the holder of the mortgage on his vacation
home to foreclose on the property. Although Harry is solvent, he wanted to get out from
under the indebtedness. Therefore, the vacation home, which had a fair market value of
$200,000, an original cost of $180,000, and a mortgage encumbering the property of
$200,000, was surrendered. How much gross income resulted from these events?
a. $- 0 –
b. $10,000
c. $20,000
d. $30,000
e. $210,000
Which of the following expenditures are not deductible because they are personal in
nature?
I. Premiums paid on liability insurance for the taxpayer.
II. Education costs that improves the taxpayer’s skills in his/her trade or business.
a. Only statement I is correct.
b. Only statement II is correct.
c. Both statements are correct.
d. Neither statement is correct.
Any income earned subsequent to the death of the decedent from inherited property is
excludable from the heir’s taxable income.
a. True
b. False
Which of the following taxpayers can claim a business bad debt deduction for the
current year?
I. Sylvia lent her neighbor $4,000 to put a new roof on his home. Because they have
been friends for over 15 years, Sylvia trusted her neighbor to pay her back and didn’t
make him sign a note with interest. The neighbor has left town and Sylvia will not get
any of her money back. Her loss is properly related to this year using the cash basis of
accounting.
II. Saul is an attorney using the cash basis of accounting. One of his clients is short of
money to pay the utilities in the office building Saul rents from him. Saul advances the
client $5,000. Saul has just learned that the client has filed bankruptcy and that Saul
will not be repaid for any part of the loan.
a. Only statement I is correct.
b. Only statement II is correct.
c. Both statements are correct.
d. Neither statement is correct.
Rosa is a single parent who maintains a home in Durham in which she and her
16-year-old daughter reside. She also provides most of the support for her son,
Carmelo, age 25, who is a full-time student at Duke Law School, lives at home, and
earns $3,500 as a part-time waiter at a local diner. How many personal and dependency
exemptions can Rosa claim?
a. 0
b. 1
c. 2
d. 3
Ted sells 200 shares of common stock for $2,000. The stock cost Ted $500 several years
ago. Ted’s realized gain from the sale is only $1,500. Which of the following provides
support for this treatment?
a. Annual Accounting Period Concept.
b. Capital Recovery Concept.
c. Wherewithal-To-Pay Concept.
d. Claim of Right Doctrine.
e. Constructive Receipt Doctrine.
When items of income are omitted because the cost of the time and effort of the
taxpayer to accumulate the information, it is an 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.
On February 3 of the current year, Samantha converts her house to a rental property.
Samantha’s adjusted basis in the house is $150,000 and the fair market value is
$120,000 on the date of conversion. Samantha uses the rental for 3 years and properly
deducts depreciation totaling $12,000. Then, she sells the house for $130,000. What is
the amount of the gain or (loss) recognized on the sale?
a. No gain or loss
b. $8,000 gain
c. $20,000 loss
d. $22,000 gain
e. $ 8,000 loss
The initial appeal from the U.S. Court of Federal Claims is to the
a. U.S. District Court..
b. U.S. Tax Court.
c. U.S. Supreme Court.
d. U.S. Court of Appeals for the Federal Circuit.
Lester uses his personal automobile in his business of selling insurances. He bought a
new car in 2015 and drove it a total of 30,000 miles of which 3,000 miles were for
commuting and other personal uses. Actual gas, oil, repairs, licensing, insurance, and
depreciation totaled $16.500 for 2015. Actual parking expenses for business were $200.
What is the maximum amount Lester can deduct for 2015?
a. $13,050
b. $13,970
c. $14,850
d. $15,050
e. $15,725
Periodic capital recovery deductions for tax purposes include
I. Depletion.
II. Amortization.
III. Depreciation.
IV. Proration.
a. Statements I and III are correct.
b. Only statement I is correct.
c. Statements I, II and III are correct.
d. Statements I, II, and IV are correct.
e. Statements I, II, III, and IV are correct.
Sanderson has the following capital gains and losses and Qualified dividend income
during the current year:
Short-term capital gain $6,000
Collectibles loss (5,000)
Long-term capital gain 1,000
Qualified dividend income 3,000
If Sanderson’s marginal tax rate is 33%, what is the effect of these transactions on his
taxable income and income tax liability?
Taxable Income Tax Liability
a. $7,000 increase $1,770 increase
b. $5,000 increase $ 633 increase
c. $5,000 increase $1,650 increase
d. $5,000 increase $ 750 increase
e. $5,000 increase $1,110 increase
Toliver Corporation incurs a long-term capital loss of $38,000 and a short-term capital
gain of $33,000. Also, Toliver has operating income of $175,000. What is Toliver’s
taxable income?
a. $45,000
b. $170,000
c. $172,000
d. $175,000
e. $208,000
Ramsey Corporation allows an employee, Corrine, to use a company car for her
vacation to San Diego.
I. Corrine will not need to recognize the value of the use of the car since it was not cash.
II. A “cash equivalent approach” is used to measure the amount of income that must be
recognized by Corrine.
III. The employer/employee relationship indicates that the receipt of the use of the car is
a type of compensation for services rendered.
IV. Income recognition is not necessary in this case.
a. Only statement I is correct.
b. Only statement IV is correct.
c. Only statements II and III are correct.
d. Only statements I and IV are correct.
e. Only statements II, III, and IV are correct.
The general rule for determining the basis of inherited property is that the basis in the
hands of the heir is its fair market value at the date of death or at the alternative
valuation date.
a. True
b. False
Under the ability-to-pay concept, taxpayers are required to have tax withheld from
income or to make estimated tax payments so that the taxpayer avoids a large tax
liability at the end of the year.
a. True
b. False
During 2015, Mercedes incorporates her accounting practice. Mercedes is the sole
shareholder. The following assets are transferred to the corporation:
Cash $1,000
Computer equipment:
Fair market value 10,000
Adjusted basis 6,000
Original cost 12,000
What is the corporation’s total basis in all of the transferred assets?
a. $6,000
b. $7,000
c. $10,000
d. $11,000
e. $13,000
Jim places a new lift truck (7-year MACRS property) into service on January 16, 2015.
He pays $30,000 for the truck. This is the only business asset placed into service during
this year. Jim does not desire to use the Section 179 election. How much depreciation
may Jim deduct for 2015?
a. $- 0 –
b. $4,287
c. $6,000
d. $8,574
e. $15,000
Phyllis is an electrician employed by Bogie Company. Phil is a self-employed
electrician. During the current year, Phyllis’s salary is $75,000 and Phil’s net
self-employment income is $75,000. Which of the following statements about the
Social Security and self-employment taxes paid is/are correct?
I. Phil’s self-employment tax is greater than the Social Security tax paid on Phyllis’s
income.
II. Phil pays more self-employment tax than Phyllis pays in Social Security tax.
III. Phil and Phyllis pay the same amount of tax.
IV. Phil’s self-employment tax is equal to the Social Security tax paid on Phyllis’s
income.
a. Only statement I is correct.
b. Only statement I is correct.
c. Only statement IV is correct.
d. Statements I and III are correct.
e. Statements II and IV are correct.
The maximum contribution that can be made on behalf of an employee in a Keogh
defined contribution money purchase plan is:
a. The lower of 15% of employee’s taxable compensation or $53,000
b. The lower of 13.0435% of employee’s taxable compensation or $53,000
c. The lower of 20% of employee’s taxable compensation or $53,000
d. The lower of 25% of employee’s taxable compensation or $53,000
What is the MACRS recovery period for a video game used in an arcade?
a. 3 years.
b. 5 years.
c. 6 years.
d. 7 years.
e. 10 years.
Reggie and Ramona are married and have two children in college. Jason is a
sophomore, and Justine is a senior. They pay $2,500 in tuition and fees for Jason, $900
for his books and $3,000 for his room and board. Justine’s tuition and fees are $5,000,
her book expense is $800, and her room and board expenses are $2,600. Their adjusted
gross income is $170,000. What amount can they claim as a tax credit for the higher
education expenses she pays?
a. $-0-
b. $2,425
c. $3,125
d. $3,638
e. $4,850
If someone provides a taxpayer with either property or services, economic performance
occurs when
a. The taxpayer actually uses the property.
b. The property or services are actually provided.
c. The liability to pay for the property or services exists.
d. The taxpayer pays the other person for the property or services.
The actual cost method is a more-flexible way to compute the auto expense deduction
and often results in a larger tax savings.
a. True
b. False
Whenever the donor’s adjusted basis is used to compute a gain or loss on the donee’s
disposition of property received by gift, the donee’s holding period is always the period
of time the property was owned by the donee only.
a. True
b. False
Brock incurs $950 interest on his GMAC auto loan, $150 interest on a loan with
Computer Express to buy a multi-media equipped computer (personal use), $500
interest on his credit cards, and $1,000 investment interest. Brock’s net investment
income is $650. Brock’s deductible interest amount is
a. $- 0 –
b. $350
c. $650
d. $1,000
e. $1,600