Chance Corporation has a $20,000 deficit in earnings and profits as of January 1, 2015.
During 2015, the corporation has current earnings and profits of $40,000 and makes a
$70,000 cash distribution to its shareholders. What part of the distribution is taxable as
dividend income to Chance’s shareholders?
a. $- 0 –
b. $20,000
c. $30,000
d. $40,000
e. $70,000
Wanda bought 5 acres of land near Antler Mountain 13 years ago for $5,000. Recently,
the U.S. Forest Service announced that a new ski area would be built on Antler
Mountain next year. Wanda receives a telephone call from a representative of Omni Ski
Corporation offering her $100,000 for the property. She rejected the offer saying she
plans to hold onto the property for her grandchildren. What are the tax effects of these
events?
I. Wanda will not report income because of the increased value of the property on her
tax return for this year.
II. Realization occurs when the offer is given to Wanda.
III. Ability to pay occurred when the offer was extended to Wanda.
IV. Recognition only occurs when a sale is completed because of the realization
concept.
a. Statements I and II are correct.
b. Statements II and III are correct.
c. Only statement IV is correct.
d. Statements I and IV are correct.
e. Statements I, III, and IV are correct.
How much additional Social Security tax does Connie pay in 2015 on her $10,000
Christmas bonus? Her total earnings for the year (before the bonus) are $42,000.
a. $ 0
b. $145.00
c. $620.00
d. $765.00
Morgan, a banker, is an amateur photographer who takes pictures at weddings and
parties. He earned $1,000 but incurred $1,200 in related expenses. Since he takes a
standard deduction, he will have to include the $1,000 in income but will not get any
benefit from the expenses.
a. True
b. False
Olga is a technical sales consultant for Interactive Systems Corporation (ISC) based in
San Diego. While on business in Boise, she entertains several clients at a cost of $600.
When she returns to San Diego, Olga gives ISC receipts and other information to
account for the entertainment expense. ISC reimburses Olga $600. How much can Olga
and ISC deduct?
Olga ISC
a. $- 0 – $- 0 –
b. $- 0 – $300
c. $- 0 – $600
d. $300 $- 0 –
e. $600 $300
To qualify as a head of household, an unmarried taxpayer must pay more than half of
the cost of maintaining a home that is the principal residence for more than half the year
of a qualified dependent or an unmarried child who qualifies as a dependent.
a. True
b. False
Angelica has the following capital gains and losses during the current year:
Short-term capital loss $(10,000)
Collectibles loss (4,000)
Long-term capital gain 5,000
Qualified dividend income 10,000
If Angelica’s marginal tax rate is 33%, what is the effect of the above transactions on
her taxable income and income tax liability?
Income Tax Liability
a. $1,000 increase $ 510 increase
b. $7,000 increase $ 510 increase
c. $1,000 increase $1,050 increase
d. $7,000 increase $1,050 increase
e. $1,000 increase $ 150 increase
Rebecca trades in her four-wheel drive truck for a new one. Rebecca’s truck cost
$20,000 and has an $8,000 basis on the date of the trade-in. The price of the new truck
is $27,000 and the dealer gives Rebecca a $10,000 trade in allowance on her old truck.
She uses the trucks in her business. What is Rebecca’s basis in the new truck?
a. $8,000
b. $18,000
c. $25,000
d. $27,000
e. $29,000
Which of the following business expenses is/are subject to a 50% deduction limit for
2015?
I. Gifts
II. Incidental expenses while traveling
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) secondary sources of tax law?
I. Joint Conference Committee Reports.
II. Journal of Taxation
III. Revenue Procedures.
IV. Tax Treaty with France.
V. U.S. Tax Court Memorandum Decisions.
a. Only statement IV is correct.
b. Only statement II is correct.
c. Statements II and III are correct.
d. Statements I, II, III, and V are correct.
e. Statements I, II, III, IV, and V are correct.
Gomez, a self-employed consultant, is involved in a traffic accident with his
business-use automobile. The car is totally destroyed and Gomez’s insurance policy
reimburses him $8,000 for the fair market value of the car immediately before the
accident. His basis in the car is $11,000. What is the amount of Gomez’s casualty loss
deduction?
a. $- 0 –
b. $ 2,000
c. $ 3,000
d. $ 8,000
e. $11,000
The Baskerville Corporation has a net $6,500 capital loss during the current taxable
year. They will be able to deduct $3,000 this year and carries the remaining $3,500
forward.
a. True
b. False
Charles bought an annuity for $30,000 several years ago. The annuity will pay him
$250 per month from age 62 until he dies. During the current year, Charles turns 62 and
receives his first annuity payment.
I. If Charles dies after receiving 192 monthly payments, he must amend prior returns
and correct the income reported based on 192 monthly payments.
II. If Charles receives more than 260 payments, the total of each payment received after
the 260th payment is included from income.
a. Only statement I is correct.
b. Only statement II is correct.
c. Both statements are correct.
d. Neither statement is correct.
Virginia and Dan each own investment realty that they would like to trade. Virginia’s
property is subject to mortgage debt of $2,000 and has a net of mortgage value of
$6,000. Dan’s property is subject to mortgage debt of $30,000 and has a net of mortgage
value of $5,000. Virginia and Dan agree to exchange properties and assume each other’s
debt. Dan pays Virginia $1,000 cash, and the exchange is completed. What is the gross
selling price of Virginia’s property?
a. $2,000
b. $6,000
c. $8,000
d. $5,000
e. $35,000
Kyle is married and a self-employed landscaper. During the current year, Kyle pays
$3,000 for health insurance coverage for himself. He pays another $400 for coverage
for his employee, Tabatha. How should Kyle deduct the health insurance cost?
I. Kyle deducts a total of $3,400 for AGI.
II. Kyle cannot deduct any portion of his premium of $3,000 for AGI if his spouse is
covered by a health plan through her employer.
a. Only statement I is correct.
b. Only statement II is correct.
c. Both statements are correct.
d. Neither statement is correct.
Employers are required to pay a Federal Unemployment Tax of 6.2% of the first
$10,000 in wages to each employee less a credit of up to 5.4% of state unemployment
taxes paid.
a. True
b. False
On May 21, 2013, Becker Corporation granted Howard an option to acquire 200 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 option did not have a readily ascertainable fair market value.
Howard exercises the option on July 7, 2015, when the fair market value of the stock is
$20. How much must she report as income at the date of exercise?
a. $-0-
b. $1,200
c. $2,400
d. $7,200
e. $10,800
Arnold is single and has two children in college. Maureen is a sophomore, and Rick is a
senior. Arnold pays $3,000 in tuition and fees for Maureen and $6,000 for her room and
board. Rick’s tuition and fees are $5,000, and his room and board expenses are $3,600.
Arnold’s adjusted gross income is $80,000. What amount can he claim as a higher
education tax credit?
a. $2,500
b. $3,250
c. $3,500
d. $4,750
e. $5,470
The information that follows applies to the current year for Aaron and Janelle, a married
couple.
” Aaron is employed as a shoe salesman; his compensation is $75,000.
” Janelle is employed by the state of Indiana; her compensation is $35,000.
” Aaron and Janelle have total allowable itemized deductions of $12,000.
” Aaron and Janelle have two dependent children.
” Aaron and Janelle have other economic income as follows:
– Interest on U.S. Treasury notes $1,000.
– Interest on Compost Computer bonds $1,500.
– Interest on German government bonds $750.
– Interest on City of Nashville. bonds $1,200.
– Aaron’s wealthy uncle gives him $1,000.
– Janelle sold Aaron’s football card collection for $3,000. It cost $800.
– Janelle sells Aaron’s fishing boat for $2,000. Aaron had purchased the boat 3 years ago
for $2,800.
Based on the above information, what is Aaron and Janelle ‘s adjusted gross income?
a. $114,450
b. $114,700
c. $115,450
d. $116,450
e. $116,650
The interest from Guam Water Authority bonds is excluded from income as “Municipal
Bond Interest.”
a. True
b. False
Kristine is the controller of Evans Company. Evans provides all management level
employees with medical insurance through a self-insured plan. During the current year,
Kristine has $2,650 in medical expenses reimbursed by the plan. The income tax effect
of the reimbursements Kristine receives is:
I. Kristine excludes the value of the reimbursement.
II. Kristine includes $2,650 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.
Terry is a worker in the country Pretoria. His salary is $46,000 and his taxable income
is $52,000. Pretoria imposes a Worker Tax as follows:
Employers withhold a tax of 20% of all wages and salaries. If taxable income as
reported on the employee’s income tax return is greater than $50,000, an additional 10%
tax is withheld on all income. Terry’s marginal tax rate is:
a. 0%
b. 10%
c. 20%
d. 30%
Which of the following expenses is/are deductible?
I. Transportation and lodging expenses of $3,000 incurred to monitor state legislation
that may affect the taxpayer’s business.
II. Lobby expenses of $300 during the year to influence local town legislators to
support pro-business legislation.
a. Only statement I is correct.
b. Only statement II is correct.
c. Both statements are correct.
d. Neither statement is correct.
Alice is a plumber and collector of rare stamps. Instead of always receiving cash
payments for her work, she occasionally has her customers send their payments to a
stamp broker. The broker then makes stamp purchases on Alice’s behalf and mails the
stamps to her. Alice never reports the value of the stamps received as income on her tax
return.
I. Alice’s actions are a form of tax evasion.
II. Alice’s actions are subject to payment of tax, interest, and penalty if detected by the
IRS.
a. Only statement I is correct.
b. Only statement II is correct.
c. Both statements are correct.
d. Neither statement is correct.
Classify and briefly explain the proper classification for each of the income-generating
activities below. The classifications are either, “active,” “passive,” or “portfolio.”
a. Ford Motor Company Bond interest.
b. Commissions earned from insurance sales.
c. Sale of Microsoft common stock held as an investment.
d. Income from a limited partnership investment.
e. Rental income from an apartment building and the individual owner does not qualify
as a real estate professional.
f. Gain from the sale of rental real estate and the individual owner does not qualify as a
real estate professional.
Tom and RoseMary own a cabin near Stowe, Vermont. During the current year the
cabin is rented for 31 days for $1,800. Tom and RoseMary used the cabin a total of 12
days during the year. After making the appropriate allocation of expenses between
personal and rental use, the following rental loss was determined:
Rental income $1700
Property taxes (150)
Mortgage interest (950)
Repairs and maintenance (400)
Utilities (300)
Depreciation (200)
Rental loss $(300)
How should Tom and RoseMary report the rental income and expenses for the current
year?
a. Include the $1,700 in gross income, but no deductions are allowed.
b. Report the $300 loss for AGI.
c. Only expenses up to the amount of $1,700 rental income may be deducted in the
current year.
d. Report the interest ($950) and taxes ($150) as itemized deductions and the other
expenses for AGI.
e. No reporting for the rental activity should be reported.
Unrecaptured Section 1250 gain
I. applies to real property owned by individuals and corporations.
II. is the gain on the sale of real estate not already classified as ordinary income if the
property were Section 1245 property.
a. Only statement I is correct.
b. Only statement II is correct.
c. Both statements are correct.
d. Neither statement is correct.
Olive Company sells factory equipment with an adjusted basis of $30,000 for $33,000.
Allowable depreciation of $8,000 had been deducted as of the sale date. What is the
amount and character of the gain or (loss) on the sale of the equipment?
a. $- 0 –
b. $3,000 Section 1245 ordinary income.
c. $8,000 Section 1245 ordinary income.
d. $3,000 long-term capital gain, and $8,000 Section 1245 ordinary income.
e. $3,000 long-term capital gain.
Amanda, who is single, owns 40% of the Sherwood Partnership. During the current
year, Sherwood has the following results:
Sales $380,000
Long-term capital gain 20,000
Operating expenses 280,000
a. Amanda withdraws $30,000 from the partnership. In addition, Amanda has a $30,000
long-term capital loss from the sale of an investment. What is Amanda’s gross income
from this information? Explain and show your calculations.
b. Assume that in the next year, Sherwood Publishing has $80,000 of ordinary income,
Amanda has a $24,000 short-term capital gain and taxable income from other sources
of $20,000. What is her adjusted gross income? Explain and show your calculations.
Carlos is the contoller for Rooney Corporation. Carlos owns a 20% interest in Rooney.
He receives a salary of $60,000 and fringe benefits costing $6,000. Rooney’s taxable
income before considering the payments to and on behalf of Carlos is $250,000.
Rooney distributes a $50,000 dividend to its shareholders. How much income does
Carlos have from Rooney?
a. $60,000
b. $70,000
c. $76,000
d. $96,800
e. $102,800
Jack owns a 50% interest in the Westhaven Partnership. Jack receives a distribution of
$100,000 from Westhaven and is provided with medical insurance and a $50,000
group-term life insurance policy that costs the company $4,000. Westhaven’s taxable
income before considering the payments to and on behalf of Jack is $180,000. How
much income does Jack have from Westhaven?
a. $4,000
b. $90,000
c. $92,000
d. $94,000
e. $100,000
“Double taxation” occurs
a. because corporate tax rates are double that of individual taxpayers for the same
amount of taxable income.
b. when corporations pay taxable dividends to shareholders.
c. because corporations receive a deduction for the distribution of dividends to
shareholders.
d. when individual taxpayers pay for their shares of corporate stock.
Salvador owns a passive activity that has a basis of $44,000 and a suspended loss of
$18,000. Salvador’s taxable income from active and portfolio income is $55,000. If
Salvador’s sells the passive activity for $56,000 how will he report the transaction on
his tax return?
I. Salvador will report an ordinary loss of $18,000.
II. Salvador will report a capital gain of $12,000.
a. Only statement I is correct.
b. Only statement II is correct.
c. Both statements are correct.
d. Neither statement is correct.
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.
Marline receives $14 million in punitive damages for a personal physical injury.
Match each statement with the correct term below.
a. An employee may exclude up to $5,000 annually of these employer-provided
services.
b. If cash is received under this program, taxpayers are taxed on the amount of cash
received.
c. A salary reduction plan that allows employees to pay for medical and child care costs
with before-tax dollars.
d. A transfer of property without any profit motivation with an intention that includes
affection, charity, and respect.
e. Payments made into an employee’s account are not taxable in the current period;
taxation is deferred until funds are withdrawn.
f. Employer provided benefit that may be excluded from income because the dollar
amounts are too small for a reasonable accounting.
De minimus fringe
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.
Passive activity
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.
Gross income test
Land held as an investment for land used in a business.
Tony receives an automobile from his uncle, Ned, as a graduation gift. Ned used the
vehicle only for commuting to his office during the 3 years he owned it. Ned paid
$20,000 for the vehicle. It is valued at $8,000 on the date of the gift. Tony will use the
automobile 100% of the time for his business. Determine Tony’s basis in the automobile
for depreciation purposes. Explain your answer in terms of the concepts of taxation.
Arnold is the President of Conrad Corporation. Arnold owns 30% of Conrad, which is
organized as an S corporation. Arnold’s salary is $100,000. Conrad reports the
following for the current year:
Sales $4,000,000
Cost of goods sold (1,700,000)
Operating expenses (1,200,000)
Salaries (includes Arnold’s salary) (600,000)
Capital loss (200,000)
Net income $300,000
Conrad Corporation pays $400,000 of dividends. Explain the effect of the above
information on Arnold’s taxable income.
Explain the non-support test and the principle residence test to be a qualifying child.
Match the proper deduction method with the correct expenditures.
a. Capitalized and amortized over a number of accounting periods
b. Expensed in the period incurred
c. Not deductible
d. Can be capitalized and amortized or deductible depending on the amount of the
expenditure
Political contributions
This problem requires determining the type of tax law authority and the relative
importance within that authority category. Indicate “1” for the highest-ranking item
within each category. Indicate “2” for the next-highest ranking item within each
category. Each column may have zero, one, or more items ranked.
Legislative Judicial Administrative Secondary
Internal Revenue Code
Treasury Regulations
US Constitution
Standard Federal Tax Reporter (CCH)
Revenue Procedures
Supreme Court
Tax Court
After using a house as his personal home for 20 years, George converts it in 2006 to an
office building for use in his construction business. He sells the building at a $65,000
loss in 2015.
Match each statement with the correct term below.
a. An employee may exclude up to $5,000 annually of these employer-provided
services.
b. If cash is received under this program, taxpayers are taxed on the amount of cash
received.
c. A salary reduction plan that allows employees to pay for medical and child care costs
with before-tax dollars.
d. A transfer of property without any profit motivation with an intention that includes
affection, charity, and respect.
e. Payments made into an employee’s account are not taxable in the current period;
taxation is deferred until funds are withdrawn.
f. Employer provided benefit that may be excluded from income because the dollar
amounts are too small for a reasonable accounting.
Gift
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.
Alternate valuation date
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.
Indirect purchase
Collectible gain (loss)
Barrett is a real estate broker. He actively advertises his own and his clients’ real estate
for sale. He had the following transactions for one segment of his business:
1/15/06 Purchased property A for $50,000
2/15/10 Paid $10,000 to put up fencing on property A
6/20/10 Purchased property C for $18,000
1/15/15 Sold property C for $23,000
7/30/15 Sold property A for $95,000
How should Barrett account for the sales in 2015?
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.
Frank receives $1,000 interest income from City of St Louis bonds.
Section 1250 property