Francisco’s employer establishes Health Savings Accounts (HSA’s) for its employees.
The plan provides for his employer to pay $1,000 into Francisco’s HSA, and Francisco
to also contribute $1,000 to his HSA. During the year, the plan pays for $1,500 of
Francisco’s medical expenses not covered by the employer’s regular medical insurance
plan.
I. Francisco must include the $1,000 contribution by his employer in his adjusted gross
income.
II. The $500 still in the account at the end of the year carries forward to the following
year.
a. Only statement I is correct.
b. Only statement II is correct.
c. Both statements are correct.
d. Neither statement is correct.
Sophi finds a chest inscribed “Captain Hook” that contains $500,000 of cash while
fishing off the shore around New Orleans. The US Customs and the DEA denied
knowledge of the cash, so Sophi keeps it.
I. Sophi will not recognize any gross income if the chest contained jewels valued at
$500,000, rather than cash at the time of discovery.
II. Recognition is necessary because this is a treasure trove and it is comprised of cash.
a. Only statement I is correct.
b. Only statement II is correct.
c. Both statements are correct.
d. Neither statement is correct.
Lydia purchased a sapphire bracelet for $3,000 while vacationing in Hong Kong during
2005. Lydia gives the bracelet to her daughter Amy when she graduates from college in
2015. The bracelet is appraised at $8,000 on that date. In October 2015, Amy sells the
bracelet for $9,000. How is Amy’s holding period for the bracelet determined?
a. It depends on whether a gift tax was paid at the time of the gift.
b. It begins in 2005.
c. It begins in 2015.
d. It is irrelevant because the transfer was a gift and gifts are always considered to be
held long-term.
Lillian and Michael were divorced last year. Michael has custody of their two children.
Lillian pays $8,600 in child support payments during the current year. The total cost of
supporting the children is $12,500. Michael and Lillian do not have any special
agreement about dependency exemptions. How many total exemptions may Michael
claim for the current year?
a. 0
b. 1
c. 2
d. 3
e. 4
Linda’s personal records for the current year show the following facts:
” Pays $11,000 to St. John’s Church. $4,000 is for her daughter’s tuition in the church’s
middle school and she contributes the balance when she attends church.
” Linda has diabetes and gives $800 to the American Diabetes Association in hopes that
she will benefit from a cure
” Pays $300 in annual dues to the Moose Lodge.
” National Airways, Inc., common stock with a fair market value of $2,000 to the
March of Dimes. The stock was purchased 4 years ago for $3,000.
Linda’s AGI for the current year is $32,000. What is her charitable contribution
deduction?
a. $7,000
b. $9,000
c. $9,800
d. $10,800
e. $13,800
Long-term capital gain classification is advantageous to taxpayers because of which of
the following?
I. Long-term capital gains are generally taxed at a lower rate than ordinary income.
II. Part of a long-term capital game is excluded from income.
a. Only statement I is correct.
b. Only statement II is correct.
c. Both statements are correct.
d. Neither statement is correct.
Corky receives a gift of property from her Aunt Cynthia. Cynthia purchased the
property 17 years ago for $375,000. On the date of the gift, the property is appraised at
$500,000. What is Corky’s holding period for the property if she sells it one month after
the gift was completed?
a. Short-term.
b. Long-term.
c. Holding period is not relevant since the gain is ordinary.
d. Holding period classification cannot be determined without knowing the selling
price.
An exemption amount is allowed for the AMT calculation
I. as a deduction from tentative AMTI.
II. to provide the average individual taxpayer with the opportunity to not be effected by
the AMT provisions.
III. through legislative grace for taxpayers with moderate amounts of taxable income
and without significant preferences and/or adjustments.
IV. In the amount of $53,600 for married taxpayers filing jointly.
a. Only statement I is correct.
b. Only statement IV is correct.
c. Statements II and III are correct.
d. Statements I, II, and III are correct.
e. Statements I, II, III, and IV are correct.
A crucial question concerning income is when to recognize it (in which accounting
period income should income be taxed?). Which of the following help resolve the
problems of timing?
I. Realization Concept.
II. Accounting Method.
III. Constructive Receipt.
IV. Substance-Over-Form Doctrine.
a. Statements I and II are correct.
b. Only statement I is correct.
c. Only statement II is correct.
d. Statements I, II, and III are correct.
e. Statements I, II, III, and IV are correct.
Wellington Company purchases a new warehouse on August 24, 1995, for $1,000,000
(exclusive of the cost allocated to the land). What is the 2015 MACRS depreciation
deduction?
a. $11,900
b. $25,640
c. $31,740
d. $48,694
Dewey and Louie agree to combine their sole proprietorships into one business. They
will be equal partners in the Dewlou Diner. Dewey will contribute a building worth
$100,000 (adjusted basis of $80,000), and $10,000 in cash. Louie will contribute
inventory worth $80,000 (adjusted basis of $85,000) and $30,000 cash. What is
Dewlou’s basis in the assets?
Building Inventory
a. $80,000 $85,000
b. $80,000 $80,000
c. $100,000 $85,000
d. $100,000 $80,000
William, a single taxpayer, has $3,500 state income tax withheld from his paychecks in
2014. When he filed his 2014 state income tax return on April 15, 2015, he calculated
and received a $600 refund. The $600 refund was received on May 27, 2015. What are
the federal tax effects of the state income tax events of 2014 and 2015?
I. If his itemized deductions total $6,000 in 2014, William includes $300 in gross
income for 2015,
II. If he did not itemize his deductions in 2014, none of the refund is included in 2015
gross income.
a. Only statement I is correct.
b. Only statement II is correct.
c. Both statements are correct.
d. Neither statement is correct.
Lynn is a sales representative for Textbook Publishing Company. He receives a monthly
travel allowance from Textbook to cover his travel costs (transportation, food, lodging,
entertainment, etc.). If Lynn is not required to account to Textbook for the use of the
travel advance
I. Lynn will not have to show any aspect of the travel reimbursement or expenses
incurred if he spends all of the reimbursement on valid travel expenses.
II. To the extent Lynn is reimbursed for his costs he will get 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.
Wan-Ying, age 64, retired from the Meadowbrook Corporation during the current year.
Wan-Ying’s defined contribution profit sharing plan is valued at $300,000 at her
retirement date. Which of the following are correct statements?
I. Beginning on April 1 of the following tax year, Wan-Ying must receive either a lump
sum distribution from her pension plan or begin to receive an annuity distribution.
II. By electing to receive a lump-sum distribution at the date of her retirement,
Wan-Ying can wait 5 years before receiving the lump sum distribution.
a. Only statement I is correct.
b. Only statement II is correct.
c. Both statements are correct.
d. Neither statement is correct.
In which of the following independent situations is the taxpayer entitled to deduct
expenses related to the home office?
I. A real estate agent employed by a local real estate agency owns several rental
properties. She regularly and exclusively uses a second bedroom in her home solely as
an office for bookkeeping and other activities related to management of the rental
properties. She has no other place to perform these functions.
II. An attorney employed by a large law firm frequently brings work home from the
office. She uses a study in her home for doing this work as well as managing her
investment portfolio.
a. Only statement I is correct.
b. Only statement II is correct.
c. Both statements are correct.
d. Neither statement is correct.
Andy lives in New York and rents his house for two weeks during the U.S. Open Tennis
tournament for $3,500. He must include the rent in his income.
a. True
b. False
Winslow owns a residential rental property with an adjusted basis of $200,000 at the
beginning of the current year. The county treasurer sends Winslow a tax bill payable by
December 31. The bill is for real estate property taxes of $1,200 for the current calendar
year and for a $6,000 special assessment for a new sewer line. On November 1,
Winslow sells the property to Edwin for $225,000. As part of the sale contract, Winslow
will pay the special assessment at closing and Edwin agrees to pay the realty taxes on
the due date. What is Winslow’s gain on the sale?
a. $19,000
b. $20,000
c. $21,000
d. $25,000
e. $26,000
Joline works as a sales manager for the Washington Manufacturing Company. Although
the company has an accountable reimbursement plan, as a cost containment measure the
company will only reimburse its sales personnel for 80% of their business expenses.
During the year, Joline incurred the following business expenses:
Airfare $3,000
Hotels 3,700
Meals 1,200
Entertainment 1,000
If Joline’s adjusted gross income is $62,000, what amount can Joline deduct as a
miscellaneous itemized deduction?
a. $320
b. $540
c. $890
d. $1,560
e. $1,780
Which of the following entities directly bear the burden of income taxes?
I. Limited Liability Company
II. Corporations
III. Partnerships
a. Only statement I is correct.
b. Only statement II is correct.
c. Statements I and II are correct.
d. Statements I, II, and III are correct.
In 2015, Eileen, a self-employed nurse, drives her car 20,000 miles, of which 12,000
miles pertain to business. Expenses concerning the car include the following:
Gas and oil $5,720
Auto license tag 90
Insurance 900
Repairs 700
Tires 400
Parking during business use 300
Tolls during business use 150
Depreciation 2,960
Assuming Eileen purchases the car in 2015 and she wants to use the most advantageous
method to determine her 2015 deduction for automobile expense, what amount can
Eileen deduct as auto expenses?
a. $5,964
b. $6,780
c. $6,912
d. $7,350
e. $11,220
Which of the following statements pertaining to acquiescence and nonacquiescence is
not true?
a. Acquiescence means the IRS will follow the decision of the court in cases.
b. An announcement of nonacquiescence would prevent a taxpayer with similar
circumstances from following that court decision.
c. The IRS may issue an acquiescence or nonacquiescence to opinions of the Tax Court
and other federal court decisions.
d. An announcement of acquiescence may be withdrawn, modified or reversed.
Which of the following statements is/are correct?
I. Maria receives a necklace worth $300 from her employer in recognition of her
production unit’s safety record at the company’s annual meeting. Maria is not taxed on
the $300.
II. Reggie opens a savings account at Mid Financial Savings and Loan. For opening the
account he receives a microwave worth $200. On December 31, his account is credited
for $300 of interest income. Reggie must report $500 of income.
III. Manu receives a salary of $80,000 as CEO of Camp’s Cooking Crockery. Manu
owns 60% of Camp’s, which is organized as an S corporation. Camp’s taxable income
for the current year is $300,000 and Camp’s pays $100,000 of dividends. Manu must
recognize $360,000 of income.
a. Statements I, II, and III are correct.
b. Only statements I, and II are correct.
c. Only statements II and III are correct
d. No statement is correct.
Wendell owns 115 acres of land with a fair market value of $57,000. He purchased the
land as an investment for $35,000 in 1993. Wendell trades the land for a 122-acre parcel
adjacent to other property he owns. The 122 acres has a value of $57,000, and the
exchange qualifies for like-kind deferral treatment. What is Wendell’s recognized gain
on the exchange?
a. $- 0 –
b. $22,000
c. $35,000
d. $57,000
e. $79,000
Belinda exchanges investment real estate with Russell. Belinda’s adjusted basis in her
two-year old property is $280,000. The property is encumbered by a mortgage of
$100,000 and has a fair market value of $320,000 when exchanged. Russell assumes
that debt. Russell paid $80,000 cash for his property in 1999 and it is appraised at
$150,000 on the day of the exchange. Russell pays Belinda enough in cash to balance
the exchange. What is Belinda’s basis in the new land?
a. $20,000
b. $150,000
c. $280,000
d. $320,000
Trojan Inc. was incorporated in 2012. In 2012, it had no Section 1231 transactions. In
2013, Trojan had a net Section 1231 loss of $35,000. In 2014, Trojan had a Net Section
1231 gain of $10,000. In 2015 Trojan has a $50,000 net Section 1231 gain. Trojan
should treat the 2015 gain as
a. An ordinary gain of $40,000.
b. A long-term capital gain of $50,000.
c. An ordinary gain of $35,000 and a long-term capital gain of $15,000.
d. An ordinary gain of $25,000 and a long-term capital gain of $25,000.
e. An ordinary gain of $15,000 and a long-term capital gain of $35,000.
Tonya purchased 500 shares of Home Depot, Inc. common stock on December 13,
2012, at a cost of $3,600. She paid a commission of $150 on the purchase. On February
18, 2014, she received 250 shares of Home Depot, Inc. common stock as a tax-free
dividend. Tonya sells 600 shares for $3,700 on January 8, 2015, and pays a $100
commission on the sale. Tonya’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 loss of $50.
d. Short-term capital gain of $600.
When her property was fully depreciated and was still encumbered by a mortgage of
$6,000, Jamelle sells it subject to the mortgage to David for $1,000. What is Jamelle’s
realized gain or loss?
a. $ – 0 –
b. $1,000 gain
c. $5,000 gain
d. $6,000 gain
e. $7,000 gain
Jason travels to Miami to meet with a client. While in Miami, he spends 2 days meeting
with his client and 3 days sightseeing. Mary, his wife, goes with him and spends all 5
days sightseeing and shopping. The cost of the trip is as follows:
Airfare $540 for each person.
Lodging at hotel $150 per day (same rate for single and double rooms).
Meals $75 per day for each person.
Incidental expenses $20 per day for Jason. Mary kept no records.
If Jason is self-employed, what is the amount of the deduction he may claim for the
trip?
a. $- 0 –
b. $415
c. $490
d. $955
e. $1,765
Adam Smith’s concept of vertical equity is found in a tax rate structure that is
a. Regressive.
b. Proportional.
c. Horizontal.
d. Progressive.
e. Economical.
A taxable entity has the following capital gains and losses in 2015:
Short-term capital loss $(22,000)
Long-term capital gain 15,000
I If the entity is an individual, a $3,000 deduction is allowed in 2015.
II. If the entity is a corporation, a $7,000 deduction is allowed in 2015.
a. Only statement I is correct.
b. Only statement II is correct.
c. Both statements are correct.
d. Neither statement is correct.
Courtney is interested in purchasing The Matrix Company. Matrix’s assets are:
Adjusted Basis Fair Market Value
Cash $2,300 $2,300
Inventory 16,500 19,200
Equipment 13,000 9,000
Land 25,000 40,500
Building 66,600 $129,000
Totals $123,400 $200,000
I. If Courtney buys the stock of The Matrix for $225,000, the total basis in the assets
will be $200,000.
II. If Courtney pays Matrix $240,000 for the Matrix assets, Courtney’s total basis in all
of the assets of the business will be $123,400.
a. Only statement I is correct.
b. Only statement II is correct.
c. Both statements are correct.
d. Neither statement is correct.
Ester is employed by Montgomery Enterprises and will retire at the end of the current
year after 22 years of service. Under the company’s defined benefit plan, she can retire
at 80% of the average of her three highest consecutive years’ salary. Her average salary
over these three years is $80,000. What is the maximum amount Ester can receive from
Montgomery’s pension plan?
a. $35,000
b. $64,000
c. $80,000
d. $100,000
e. $125,000
Marsh Harbor Company manufactures fishing gear. Its taxable income in 2015 before
the Qualifying Production Activities Deduction (QPAD) is $4,000,000 and its qualified
production activities income is $3,500,000. Its qualifying W-2 wages paid are $300,000.
How much may Marsh Harbour claim as its QPAD deduction in 2015?
a. $150,000
b. $175,000
c. $210,000
d. $300,000
e. $315,000
A business use automobile for a personal use automobile.
Match each statement with the correct term below.
a. Unmarried without dependents.
b. Generally used when financial disagreement exists.
c. Unmarried and provides a household for a dependent.
d. Use the same tax rate schedule as married, filing jointly.
e. Determines which tax rate schedule and standard deduction amount is applicable.
Married, filing separately
Indicate the proper treatment in the current year for the underlined amounts. Treat
each item as an independent event. Indicate whether the amount is deductible or not; if
deductible whether it is deductible FOR or FROM AGI; and indicate the amount of the
deduction for the current year considering any relevant limitations. Assume the
taxpayer has deductions greater than the standard deduction, has AGI of $69,000
without regard to the following transactions and has no “total” income limitations
related to itemized deductions.
a. Not Deductible
b. Deductible – For AGI
c. Deductible – From AGI
Moving expenses incurred on a job related move consisting of $2,500 for the moving
van, $300 for lodging en route, $100 for mileage during the move, and $80 for meals.
Amount: $2,900
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
Covenant not to compete for 4 years
Drake and Cynthia sell their home for $475,000, incurring selling expenses of $20,000.
They had purchased the residence in 1998 for $105,000 and made capital improvements
totaling $25,000. They buy a new residence for $210,000. What is their realized gain
and recognized gain on the sale? What is their basis in the new house?
Joint Committee on Taxation
A flood destroys Franklin’s manufacturing facility. The building had a basis of $600,000
when destroyed. Franklin’s insurance company reimburses him $850,000, the appraised
replacement cost of the building. Franklin purchases a qualified replacement facility for
$1,100,000. Discuss the tax effects of these transactions applying the concepts of
taxation that drive your answers.
Indicate the proper treatment in the current year for the underlined amounts. Treat
each item as an independent event. Indicate whether the amount is deductible or not; if
deductible whether it is deductible FOR or FROM AGI; and indicate the amount of the
deduction for the current year considering any relevant limitations. Assume the
taxpayer has deductions greater than the standard deduction, has AGI of $69,000
without regard to the following transactions and has no “total” income limitations
related to itemized deductions.
a. Not Deductible
b. Deductible – For AGI
c. Deductible – From AGI
Taxpayer contribution of $250 to the Democratic Party.
Rosemary is single and works for Big B Corporation. Her only income consists of her
Big B salary and interest on a savings account. During the year, she has $400 withheld
from her salary for state income taxes and $7,800 for federal income taxes. Her brother
provides her with the following calculation of her taxable income and income tax
liability:
Salary $36,000
Interest income 3,100
Less: State tax withheld (400)
Equals: Gross income $38,700
Less: Deductions for adjusted gross income
Standard deduction (6,200)
Equals: Taxable income $32,500
Income tax liability ($32,500 25%) $8,125
Less: Federal withholding (7,800)
Equals: Tax due $325
Explain the errors that Rosemary ‘s brother has made in calculating her taxable income
and/or her income tax liability. A recalculation is not necessary, but you must
adequately explain the errors that were made.
Match each statement with the correct term below.
a. Income is subject to tax when it is received without restrictions as to its use or
disposition.
b. Income is considered received when it is credited to the taxpayer’s account or made
unconditionally available to the taxpayer.
c. A concept that is fundamental to the progressive tax rate structure.
d. To be deductible, an expenditure must be made for a business or economic purpose
that is greater than any tax avoidance motive of the taxpayer.
e. The amount of a deduction may not exceed its cost.
f. Income should be recognized and a tax paid when the taxpayer has the resources to
pay the tax.
g. A type of deductible expenditure that embodies the profit motive requirement.
h. Allows the omission of items from the tax base for which the costs of compliance
exceeds the revenue generated.
i. A category of expenses that is specifically disallowed.
Claim of Right Doctrine
Incentive stock option
Mr. and Mrs. Bachman, both age 65, file a joint return. In 2015 they have wages of
$30,000, dividends of $6,200, municipal bond interest of $3,000 and received $10,300
for the sale of stock that cost $4,000 in 1992. They made a $3,000 contribution to their
Roth IRA, paid $4,100 in deductible mortgage interest and real estate taxes and made a
$2,500 charitable contribution. What is their gross income, adjusted gross income, and
taxable income?
Match each statement with the correct term below.
a. A loss that is generally not deductible.
b. The borrower is personally liable for the debt.
c. The loss is used to offset income in future periods.
d. A liability that is only secured by the underlying property.
e. The loss may be used to offset income from prior periods.
f. A type of stock that receives some ordinary loss treatment.
g. Involved in a rental activity for more than 500 hours in a year.
h. Cash or other assets contributed plus recourse debts of the activity.
i. Owns at least a 10% interest and is significantly involved in the rental activity.
j. The amount of the loss for fully destroyed property is the property’s adjusted basis.
k. The amount of loss is limited to the lower of the property’s adjusted basis, or the
reduction in fair market value.
l. Management is left to at least one general partner whose liability is not limited and
who is responsible for the on-going activities of the business.
Personal-use loss
Match each term with the correct statement below.
a. Allocates income, losses, and deductions to its owners for inclusion in their personal
returns.
b. Each tax unit must keep separate records and report the results of its operations
separate and apart from other tax units.
c. Income from services must be taxed to the taxpayer rendering the service and income
from property must be taxed to the owner of the property.
d. Any tax year that ends on the last day of a month other than December.
e. All taxpayers must report the results of their operations on an annual basis.
f. A tax year that ends on December 31.
g. A tax entity that is liable for the payment of tax.
Realization
George’s construction company completed 5 homes during February 2014. He sells one
of the homes in March 2015 at a $37,000 gain.
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
Betterment
Describe the steps of the tax research process.
Straight line
The payment of tax throughout the year as income is earned.