Brad, an engineering consultant, was given stock valued at $3,000 for services
rendered. His basis in the stock he received for the services is zero since he received no
cash.
a. True
b. False
Gary won the Nobel Prize in Economics. He receives $1.2 million from the Royal
Academy of Sciences in Stockholm. Does he have taxable income from this award?
I. If he keeps the prize money, he must include the award in his gross income.
II. If he tells the Academy to contribute the award to a charitable organization, the
amount of the award is excludable from gross income.
a. Only statement I is correct.
b. Only statement II is correct.
c. Both statements are correct.
d. Neither statement is correct.
Harrison Corporation sells a building for $330,000 in the current year. Harrison
purchased the building in 2008 for $250,000 and had taken $20,000 in depreciation on
the building up to the date of its sale. How should Harrison report the gain on the sale
of the building?
a. Section 1231 gain of $100,000.
b. Ordinary income of $100,000.
c. Section 1231 gain of $80,000 and ordinary income of $20,000.
d. Section 1231 gain of $96,000 and ordinary income of $4,000.
e. Ordinary income of $96,000 and Section 1231 gain of $4,000.
Johnson Corporation’s 2015 business operating income is $200,000. Johnson also
recognizes an $8,000 Section 1231 loss, an $11,000 Section 1231 gain, and a $5,000
long-term capital loss from the sale of investment securities. What is Johnson
Corporation’s 2015 taxable income?
a. $195,000
b. $198,000
c. $200,000
d. $203,000
e. $211,000
Start-up and organizational costs can be expensed or capitalized and amortized over 60
months based on the election of the taxpayer.
a. True
b. False
Jaun plans to give $5,000 to the American Diabetes Association. Jaun’s marginal tax
rate is 28%. His average tax rate is 25%. Jaun’s after-tax cost of the contribution is
a. $1,250
b. $1,400
c. $3,600
d. $3,750
e. $5,000
Which of the following is true concerning capital losses and net operating losses for
corporations:
Capital loss Net operating loss
a. Carried back 5 years Carried back 2 years
b. Carried back 5 years Carried forward 20 years
c. Carried back 3 years Carried forward 20 years
d. Carried back 5 years Carried forward 5 years
e. Carried back 3 years Carried forward 5 years
The Wondercress Advertising agency rents a skybox at the Metrodome where the
Minnesota Vikings plays its home games. The cost of the skybox for the season is
$60,000 and includes ten tickets to each game. The team plays 8 games a year at the
arena. The most expensive non-luxury box seat is $125. After acquiring a new
advertising client, the president of the agency invites 9 business associates to watch a
game in the company skybox. Food and drinks cost $900. What amount can
Wondercress deduct as meal and entertainment expense?
a. $- 0 –
b. $1,075
c. $2,100
d. $2,150
e. $4,200
An annual loss results from an excess of allowable deductions for a tax year over the
reported income.
a. True
b. False
Will is a partner in Oil Exploration Limited Partnership. For the current year, the
partnership reports net income of $130,000. Will’s share of the income is $1,300. Will
reports that amount in his gross income. The partnership pays no income tax on its
earnings. What concept, construct, or doctrine applies here?
a. Annual Accounting Period Concept.
b. Arms-length Transaction Concept.
c. Assignment of Income Doctrine.
d. Entity Concept.
e. Substance Over Form Doctrine.
Alan has the following capital gains and losses during the current year:
Short-term capital loss $(4,000)
Collectibles gain 3,000
Long-term capital gain 8,000
Alan’s capital gain/loss position for the year is:
a. Long-term gain $8,000; short-term capital loss $1,000.
b. Net long-term capital gain $7,000.
c. Short-term capital loss $4,000; long-term capital gain $11,000
d. Collectibles gain $3,000; long-term capital gain $4,000
Sally purchased new equipment for her consulting business. She allocates the Section
179 deduction among the new assets. One piece of equipment cost $112,500 and was
allocated one-half of the allowable Section 179 deduction and therefore has a
depreciable basis of $100,000.
a. True
b. False
Chad is a senior manager with Gusto, Inc. Chad’s secretary, Loretta, takes care of
several of Chad’s personal tasks when time permits. Loretta arranges for the weekly
pickup and delivery of Chad’s laundry and dry cleaning. Loretta also books reservations
to the theater and arranges for tickets to basketball games for Chad. Chad hopes that
Loretta’s services are classified as
a. No additional cost services.
b. An employee discount.
c. A de minimis fringe benefit.
d. Dependent care services.
e. Bonus pay.
Fred and Irma are married with salaries of $49,000 and $44,000, respectively. Their
combined AGI is $108,000. Both are active participant in their companies’ qualified
pension plans. Determine their maximum combined IRA contribution and deduction
amounts?
Maximum Maximum
Contribution Deduction
a. $5,500 $ 2,750
b. $11,000 $2,750
c. $11,000 $5,500
d. $11,000 $7,500
e. $11,000 $11,000
Brees Co. requires its employees to adequately account for all reimbursed business
expenses. Tracy, an employee of Brees Co. has AGI of $50,000 and submitted for
reimbursement the following valid business expenses:
Transportation costs $1,000
Meals 700
Entertainment costs 500
Hotel costs 800
What are the tax consequences if Brees reimburses Tracy $2,400?
I. Tracy must report $2,400 of income.
II. Tracy can deduct $2,400 of the expenses for AGI and $-0- as miscellaneous itemized
deductions, after limitations.
a. Only statement I is correct.
b. Only statement II is correct.
c. Both statements are correct.
d. Neither statement is correct.
Allie, a well-known artist, gave one of her paintings to her nephew Alfred. When Alfred
sells the painting he will have a capital gain.
a. True
b. False
Which of the following statements is/are correct?
I. There is a minimum allowable standard deduction from adjusted gross income of
individuals.
II. Corporations are allowed deductions from adjusted gross income.
III. Corporations are allowed a standard deduction.
IV. Personal exemptions of individuals are deductible for adjusted gross income.
a. Only statement I is correct.
b. Only statement II is correct.
c. Statements II and IV are correct.
d. Statements I and IV are correct.
e. Statements I and III are correct.
Baker Corporation suffers a net operating loss (NOL) of $65,000 in 2014. Baker was
incorporated in 2012. Baker had a NOL of $20,000 in 2012 and taxable income of
$35,000 in 2013. The corporation expects a taxable income of $200,000 in 2015. What
valid alternatives are available to Baker concerning the $50,000 loss?
I. Baker can carryback the loss to 2015 and will receive a refund of $2,250.
II. Baker can elect to carryforward the loss and expect to receive tax savings of
$19,500.
a. Only statement I is correct.
b. Only statement II is correct.
c. Both statements are correct.
d. Neither statement is correct.
For depreciable real property, all depreciation taken must be recaptured and treated as
ordinary income.
a. True
b. False
Morrris, an attorney, performs 5 hours of legal work for Andy. Morrris ‘s normal billing
rate is $120 per hour. Andy, a software consultant, gives Morrris a new computer for his
office in payment of the bill. The computer’s adjusted basis was $500 and its fair market
value is $550 Morrris ‘ basis in the computer is
a. $- 0 –
b. $500
c. $550
d. $600
e. $1,150
Serenity has the following capital gains and losses for the current year:
Short-term capital loss $(8,000)
Long-term capital gain 3,000
Collectible gain 2,000
Collectible loss (4,000)
If Serenity is single and has taxable income from other sources of $75,000, what is the
impact of her capital gains and losses on her income tax liability?
a. $690 decrease.
b. $750 decrease.
c. $840 decrease.
d. $1,050 decrease.
e. $1,960 decrease.
Pedro sells a building for $170,000 in 2015. He paid $145,000 for the building and it
had an adjusted basis of $110,000 as of the sale date.
I. If the building was purchased in 1993 and MACRS straight-line depreciation is used,
$35,000 of the gain is recaptured under section 1250.
II. If the building is an apartment building purchased in 1985, only the gain which is
attributable to excess depreciation is recaptured as ordinary income under Section 1250.
III. If the building was purchased in 1993, $35,000 of the gain is unrecaptured section
1250 gain, and $25,000 of the gain is a section 1231 gain.
a. Statements I and II are correct.
b. Statements II and III are correct.
c. Statements I, II, and III are correct.
d. Only statement III is correct.
Roger owns 65% of Silver Trucking, a partnership. During the current year, Roger sells
a truck with an adjusted basis of $30,000 to Silver for $20,000.
I. Silver’s basis in the truck is $30,000.
II. Roger can deduct the $10,000 loss on the sale of the truck.
a. Only statement I is correct.
b. Only statement II is correct.
c. Both statements are correct.
d. Neither statement is correct.
Samuel owns some land, which has an oil deposit underneath it. His annual royalties
vary from $50,000 to $60,000. Because Samuel is in the highest marginal tax rate
bracket, he would like to have some (or all) of the royalty income taxed to his son, Jack,
thus lowering the overall tax on the royalty income. To do this
I. Samuel can gift part of the land to Jack.
II. Samuel can gift part of each year’s royalties to Jack.
a. Only statement I is correct.
b. Only statement II is correct.
c. Both statements are correct.
d. Neither statement is correct.
Barney’s sailboat is destroyed in an unusual accident. The sailboat, which he used for
personal purposes, caught fire forcing him and his friends to jump ship and swim for
shore. The boat exploded and sank. Barney purchased the boat in 1998 for $75,000. At
the time that it is destroyed, the boat has a value of $45,000. Barney’s insurance
company pays him $25,000 in full settlement of this loss. Barney’s adjusted gross
income is $60,000. If this is his only casualty loss during the year, what amount can he
deduct as a casualty loss?
a. $13,900
b. $14,000
c. $19,900
d. $44,900
e. None of the above.
For each tax treatment described below, explain the income tax concept(s) which is
(are) responsible for the treatment.
a. Leon sells stock to his sister Margie at a loss of $3,000. Leon is not allowed to deduct
the $3,000 loss.
b. Jorge owns an appliance repair business. During the current year, he pays $5,000 of
interest on the van he uses to call on customers and $5,000 of interest on his personal
automobile. Jorge can deduct $5,000 of the interest.
c. Pepper Corporation, an accrual basis taxpayer, rents lawn equipment. In May of the
current year, Pepper receives $4,000 from the rental of lawn equipment on 2-year rental
contracts. Pepper must recognize the $4,000 income from the contracts in the current
year.
d. Todd sells stock for $2,000 that he paid $3,500 for several years ago. After
remodeling his residence, he sells all of his old furniture at a garage sale for $800. The
furniture cost $4,000. Todd can deduct the $1,500 loss on the sale of the stock, but
cannot deduct the loss on the furniture sale.
e. Marsha is single and earns $80,000 per year in her job as an executive vice-president
for County Bank. Hasid is married, has two dependent children and earns $80,000 per
year as a professor of history. Marsha’s tax liability is $14,470. Hasid’s tax liability is
$7,780.
Melissa is a corporate sales representative for Computer City. Melissa receives a
monthly travel allowance from Computer City to cover her travel costs (transportation,
food, lodging, entertainment, etc.). If Melissa is required to account to Computer City
for the use of the travel advance and to return any excess travel advance
I. Melissa will not have to show any aspect of the travel reimbursement or expenses
incurred if she spends all of the reimbursement on valid travel expenses.
II. Melissa will have gross income to the extent her travel allowance used for travel
expenses reimbursed.
a. Only statement I is correct.
b. Only statement II is correct.
c. Both statements are correct.
d. Neither statement is correct.
Bonita’s employer has a nondiscriminatory childcare reimbursement plan (a type of
flexible benefits plan). Bonita expects that her childcare expenses will total $2,000 for
the current year. If she does not participate in the reimbursement plan, she will be
allowed a $400 tax credit for childcare. Bonita’s marginal tax rate is 25%. What are the
tax effects of Bonita’s alternatives?
I. Bonita will save $2,000 by using the reimbursement plan.
II. The reimbursement plan is $100 more favorable than the tax credit for Bonita.
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 individuals or couples qualify for the child and dependent-care
credit?
I. Lois is single and earns $45,000 for the year. She pays $2,600 in child-care costs for
her 8-year-old daughter.
II. Patrick and Carol are married and together they earn $67,000 ($42,000 and $25,000
respectively). They pay $5,000 in child-care costs for their twin boys, age 11.
a. Only statement I is correct.
b. Only statement II is correct.
c. Both statements are correct.
d. Neither statement is correct.
Tax regulations are first issued in
a. Proposed form
b. Revised form
c. Temporary form
d. Final form
e. Either A or C
Match each statement with the correct term below.
a. Where federal tax legislation generally originates.
b. Has jurisdiction over all tax matters in the U.S. Senate.
c. The committee responsible for initial hearings and deliberations on a tax bill.
d. Responsible for negotiating a resolution of the differences in the House and Senate
versions of a tax bill.
e. The agency within the administrative branch of government with overall
responsibility for administration of tax law.
f. 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.
Finance Committee
Baron pays $4,000 in legal fees. Under what conditions can Baron deduct the legal
fees?
Match each term with the correct statement below.
a. Average tax rate
b. Effective tax rate
c. Horizontal equity
d. Marginal tax rate
e. Progressive rate structure
f. Proportional rate structure
g. Regressive rate structure
h. Tax avoidance
i. Tax evasion
j. Vertical equity
A tax rate that increases as the tax base increases.
Fran Holloway is an active dealer in used automobiles. While preparing her income tax
return, you notice that she purchased one automobile for $7,000 and sold it one month
later for $5,800 to Brian Holloway Enterprises. Explain, in terms of the income tax
concepts, why the $1,200 loss on the sale of the automobile may not be deductible.
Franco and Melanie start a new business called F&M Delivery. Franco contributes
$50,000 in cash and Melanie contributes a fleet of vans worth $80,000. The business
assumes Melanie’s $30,000 debt on the van. The business borrows $500,000 to
purchase necessary buildings and for working capital. They anticipate that the business
will suffer losses for at least three years before it becomes profitable. Which entity
forms would be appropriate for Franco and Melanie’s new business?
Discuss why listed property gets special attention.
Match each statement with the correct term below.
a. Automobile used 75% for business.
b. Investment expenses on municipal bonds.
c. Cost of investigating a new trade or business that the taxpayer enters.
d. Can be separated into two classifications.
e. Safety-deposit box for taxable investments.
f. Expenditure to influence legislation.
g. Cost of a new roof for office building.
h. Relates to an income producing activity mainly carried on for recreation or personal
enjoyment.
i. Deductibility depends on income and amount of personal and rental use.
j. Deductibility depends on whether the area is used exclusively for trade or business
activities.
Amortizable or deductible expense
George sells a fully depreciated air compressor that cost $975 for $650. The compressor
was used to operate air tools.
Amy hired Carey, a CPA, to prepare her 2015 federal income tax return. Amy had
prepared her own 2014 return. In reviewing her records, Carey discovered that Amy had
recorded $5,000 of consulting income she received by check in December 2014 as
though it had been received in 2015. What should Carey do about this situation?
A taxpayer is responsible for determining his/her tax liability and timely paying the tax
due.
Discuss the general differences between Section 1245 and Section 1250 recapture
provisions.
If a corporation incurs a net operating loss, what would cause it to elect to carry the loss
forward and forsake the carryback? Explain.
In 2004, the Force Partnership purchased an apartment building for $600,000 and paid
an additional $10,000 in acquisition fees. Tthe partnership properly claimed $130,000
in depreciation on the building. In 2015, Force allows the building to be foreclosed by
the bank for $490,000, the amount of the outstanding loan principal. What is the
realized gain or loss, if any, for the partnership resulting from the foreclosure?
Child-support payment
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.
Recognition
Subtractions from gross income specifically allowed by the tax law.
Journal of Taxation
Discuss the concepts underlying the determination of the basis of property received in a
nontaxable exchange.
Match each statement with the correct term below.
a. Losses are never deferred.
b. Can be within the same NAICS Code.
c. Not considered like-kind property.
d. A taxpayer can have only one at a time.
e. The maximum amount that can be recognized on a like-kind exchange.
f. This type of exchange must be completed within 180 days of first property transfer.
g. The concept upon which the ability to defer gains on certain nontaxable transactions
relies.
Boot