Janelle receives a sterling silver tea set valued at $500 from her employer during her
retirement dinner for her long years of service. The employer has a tradition of giving
awards to some retiring employees, but has no qualified plan.
I. $400 is excludable from Janelle’s Gross Income.
II. The $500 is excludable even if her employer only gives awards to its top executives.
a. Only statement I is correct.
b. Only statement II is correct.
c. Both statements are correct.
d. Neither statement is correct.
In each of the following independent cases determine Mei-ling’s filing status.
a. Mei-ling’s husband died in 2014. She maintains a household for her unmarried son
during 2015, who did not qualify as her dependent.
b. Mei-ling is unmarried and lives in an apartment. Mei-ling’s parents do not live with
her. She is not able to claim them as dependents for 2015.
Children under 18 and full time students under 24 are taxed differently than other
taxpayers if
I. Their unearned income exceeds $2,100.
II. Their parents’ marginal tax rate exceeds 15%.
a. Only statement I is correct.
b. Only statement II is correct.
c. Both statements are correct.
d. Neither statement is correct.
Donna is an audit supervisor with the IRS and on January 4, 2015 she uses her car in
the following manner.
Personal residence to her office at the IRS. 8 miles
IRS office to X Corp to supervise new audit activities. 10 miles
X Corp to Y Corp to supervise ongoing audit activities 6 miles
From Y Corp. to personal residence 7 miles
What amount of Donna’s mileage for this day is qualified business mileage?
a. 10 miles.
b. 16 miles.
c. 17 miles.
d. 23 miles.
e. 31 miles.
Monica’s Lawn Service, Inc., purchases a heavy-duty tri-cut lawn mower on March 17,
2015, for $4,500. The depreciation on the lawn mower in 2015 was $500. In July, a tire
on the lawn mower is repaired at a cost of $650. Maintenance costs on the lawn mower
for 2015 total $175. What is Monica’s basis in the lawn mower at the end of 2015?
a. $650
b. $4,000
c. $4,650
d. $5,150
e. $5,325
Melissa sells stock she purchased in 2004 for a $7,500 gain in 2015. In August 2015,
she also sells land she purchased as an investment in December 2014 at a loss of
$12,000.
I. Melissa’s tax on the $7,500 gain is $1,125.
II. Melissa has a deductible capital loss of $3,000 in 2015.
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 Letter Rulings might have been issued on January 3, 1991?
a. PLR 9103001
b. PLR 9110303
c. PLR 9101027
d. All of the above
Which of the following people are currently engaged in a trade or business?
I. Willie devotes 45 hours per week to betting on horse races. Although he intends to
win large sums, he has failed to win the big one. He considers his betting activities his
job and relies on his meager winnings to support his family.
II. Daryl owns 214 home sites in and around Orlando, Florida. He bought these vacant
lots several years ago in hoping that they would appreciate in value so he could sell
them at a profit. Because of the recreational activities in the area, the building lots are
worth several times his original cost. He is getting the lots ready to sell this year.
a. Only statement I is correct.
b. Only statement II is correct.
c. Both statements are correct.
d. Neither statement is correct.
For each of the following situations explain why the expenditure is or is not deductible
and any limitations that may be placed on the amount of the deduction.
a. Akira is self-employed as a personal financial planner. He went out-of-town for two
days to visit three of his best clients and incurs the following expenses:
Airfare $350
Rental car 160
Lodging 240
Incidentals 90
Meals 220
Entertainment 130
b. Woodrow is President and CEO of ISPEP, a closely held corporation with assets of
$20,000,000. Woodrow, who owns 60% of the company, decides to hire his twin
daughters who have just completed their freshman year at Aztec State to work in the
promotions department of the company. His daughters will be paid $5,000 each for the
summer. Other college students who are hired for the summer to perform similar tasks
will be paid $4,000.
c. Felix is a Realtor. To show his appreciation, he gives each client who buys a home
from him a $75 wall clock. During the year Felix gives 64 clocks to his clients.
d. Sandy sues Harrison for divorce. Originally, Sandy asks for one-half of all their
assets, including 50% of Harrison’s car dealership. Harrison’s lawyer has worked out a
compromise with Sandy and her attorney that allows Harrison to retain 100%
ownership of the dealership. Harrison pays his lawyer $10,000 in legal fees.
While staying at Vail Heights Resort, Jared falls over a pool cleaning vacuum hose left
near the edge of the swimming pool, and suffers severe internal injuries. As part of the
settlement, Jared receives the following amounts:
Pain and Suffering $105,000
Loss of Wages 16,200
How much of the settlement must be included in Jared’s Gross Income?
a. $- 0 –
b. $16,200
c. $60,600
d. $105,000
e. $121,200
Helen receives the right to acquire 700 shares of Smith Corporation stock through the
company’s incentive stock option plan. The fair market value of the stock at the date of
the grant is $8 and the exercise price of the option is $15 per share. The fair market
value of the stock at the date of exercise is $19. Helen will recognize income at the date
of grant and the exercise date of
Date of grant Exercise date
a. $-0- $-0-
b. $-0- $2,800
c. $-0- $4,900
d. $5,600 $-0-
On October 23, 2015, McIntyre sells 700 shares of stock at $26 per share. McIntyre
acquired the stock on June 1, 2014, when he exercised his option to purchase the shares
through his company’s incentive stock option plan. The exercise price was $12 per
share and the fair market value of the stock at the date of exercise was $16 per share.
For 2015, McIntyre must report
Ordinary Capital
Income Gain
a. $-0- $7,000
b. $-0- $9,800
c. $9,800 $-0-
d. $2,800 $7,000
The term “tax law” as used in your textbook includes
I. Treasury regulations.
II. College textbooks (i.e. “Concepts in Federal Income Taxes”).
III. Internal Revenue Code of 1986.
IV. Tax related decisions of a U.S. Circuit Court of Appeals.
a. Only statement III is correct.
b. Statements I, III, and IV are correct.
c. Statements I and III are correct.
d. Only statement II is correct.
e. All four statements are correct
Which regulation citation concerns Code Section 469?
a. Reg. Sec. 469
b. Reg. Sec. 469-3
c. Reg. Sec. 1.3-469
d. Reg. Sec. 1.469-3
e. Reg. Sec. 469.72-3
The holding period of an asset received in a like-kind exchange includes the holding
period of the transferred asset.
a. True
b. False
Virginia is the sole shareholder in Barnes Inc., an electing S corporation. During the
current year, Barnes has operating income of $64,000, interest income of $10,000 from
investments, and passive losses from investments in limited partnerships of $20,000.
Barnes Corporation pays $12,000 in dividends. What is Virginia’s taxable income from
Barnes for the current year?
a. $12,000
b. $46,000
c. $54,000
d. $74,000
e. $76,000
During the current year, Walter invests $35,000 in each of two separate corporations.
Each investment gives him a 20% ownership interest. Corporation X is a C corporation
that has taxable income of $200,000 and pays dividends totaling $50,000. Corporation
Z is an S corporation that has taxable income of $100,000 and pays $50,000 of
dividends. As a result of these two investments, Walter
I. Has $10,000 of taxable income from Corporation X.
II. Has $10,000 of taxable income from Corporation Z.
a. Only statement I is correct.
b. Only statement II is correct.
c. Both statements are correct.
d. Neither statement is correct.
Taxpayers are allowed to structure transactions through third parties that qualify as
exchanges if they meet certain time requirements for identifying properties and closing
the transaction.
a. True
b. False
Ernest went to Boston to negotiate several new contracts with clients. His airfare was
$400 and he spent $150 per day on lodging, $40 per day on meals, and a total of $60 on
cab fare.
I. If Ernest spends 2 days on business and 3 days on personal activities, he can deduct
$160 of his airfare.
II. If Ernest spends 3 days on business and 2 days on personal activities, he can deduct
$120 of the meal costs.
a. Only statement I is correct.
b. Only statement II is correct.
c. Both statements are correct.
d. Neither statement is correct.
Marge, age 35, is an employee of Troy, Inc. Her annual salary is $50,000. After
considering the following list of benefits provided Marge, determine her gross income
for the year.
” Marge has $2,000 of her salary withheld and paid into the company’s qualified
pension plan. The company matches the contribution at the rate of $.50 for each $1.00
paid in.
” Group-term life insurance policy at twice her annual salary paid by the company.
Premium cost is $1.08 per $1,000 of coverage.
” Health and accident insurance policy costing $1,500 paid by the company.
” Marge elects to have $1,800 of her salary paid into a flexible benefits plan to cover
childcare costs. She incurs $2,100 of childcare costs during the year.
a. $44,700
b. $44,754
c. $46,254
d. $48,054
e. $50,000
During the current year, Robbie and Anne pay the following taxes:
State income tax (balance due for last year) $1,000
Estimated state income tax 2,400
Estimated federal income tax 3,250
Sales tax (Federal Sales tax table) 600
State gift tax 700
Property tax on personal residence 2,450
Real estate tax on condominium in Breckinridge, CO. 1,100
What amount can Robbie and Anne claim as an itemized deduction for taxes on their
federal income tax return for the year?
a. $5,850
b. $6,950
c. $7,550
d. $8,050
e. $11,300
During the current year, Swallowtail Corporation receives dividend income of $40,000
from a 15%-owned domestic corporation. What is Swallowtail’s maximum allowable
dividend-received deduction for the current year?
a. $- 0 –
b. $28,000
c. $32,000
d. $36,000
e. $40,000
Hilda, age 11, earns wages of $2,700 from her modeling. Since the funds are collected
by Hilda’s father and used for Hilda’s living expenses, her father intends to include it in
his gross income.
I. The Assignment of Income Doctrine prohibits the father from recognizing the $2,700.
II. Even if Hilda desired to gift the $2,700 to her father, Hilda must recognize the
income she earned.
a. Only statement I is correct.
b. Only statement II is correct.
c. Both statements are correct.
d. Neither statement is correct.
Gary receives $40,000 worth of Quantro, Inc., common stock from the estate of his late
grandmother. He receives a $100 cash dividend six months later. Before the end of the
year, Gary sells the stock for $42,000. Due to these events, how much must Gary
include in his gross income for the year?
a. $-0-
b. $100
c. $2,000
d. $2,100
e. $42,100
Carmen purchased a business for $150,000 by investing $40,000 of her own funds and
borrowing $110,000 from Local National Bank. Carmen signed the note payable as a
personal guarantor. In the first year of operations the business had an operating loss of
$120,000. During the second year, the business has an operating loss of $45,000. How
much of the year two loss is deductible against Carmen’s income from other business
activities? Assume that Carmen materially participates in the business.
a. $- 0 –
b. $15,000
c. $30,000
d. $45,000
e. $120,000
Homer has AGI of $41,500, and makes the following donations in the current year:
” $1,000 cash to the United Way.
” 100 hours contributed to the Red Cross to help flood victims (Homer’s normal billing
rate is $40 per hour in his consulting business).
” 15 old dress shirts to Goodwill Industries, (original cost $300; fair market value $60).
” $1,000 cash to an old friend, Sam, to help cover his medical bills
What is Homer’s charitable contribution deduction for the current year?
a. $1,000-
b. $1,060
c. $1,300
d. $2,060
e. $6,300
Daisy’s warehouse is destroyed by a tornado. The warehouse has an adjusted basis of
$130,000 when destroyed. Daisy receives an insurance reimbursement check for
$150,000 and immediately reinvests $120,000 of the proceeds in a new warehouse.
What are Daisy’s recognized gain or (loss) and her basis in the replacement warehouse?
Recognized New
Gain (Loss) Basis
a. $ – 0 – $120,000
b. $20,000 $120,000
c. $30,000 $110,000
d. $10,000 $130,000
e. $20,000 $100,000
Weston purchases equipment classified as 7-year property on January 5, 2014, at a cost
of $80,000. Section 179 was not elected. He sells the equipment on February 12, 2016.
What is Weston’s 2016 depreciation deduction?
a. $- 0 –
b. $3,498
c. $6,996
d. $9,794
e. $13,992
Which of the following is (are) AMT tax preference item(s)?
I. Net operating loss deduction.
II. Exclusion of gain on 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.
All of the following are a required test for the deduction of a business expense except?
a. GAAP approved.
b. Ordinary.
c. Necessary.
d. Business purpose.
e. Reasonable in amount.
Which of the following interest-free loans is subject to the imputed interest rules?
I. Lena needed $5,000 to pay off some gambling debts. Her employer loans her the
$5,000.
II. Sherry loans her son $130,000 to purchase a motor home to use in his landscaping
business. Her son has no investment income for the year.
a. Only loan I.
b. Only loan II.
c. Both loans.
d. Neither loan.
What body prepares a compromise version of tax legislation when the House and
Senate versions are not in agreement?
a. Arbitration Committee.
b. Joint Committee on Taxation.
c. House Ways and Means Committee.
d. Judiciary Committee.
e. Joint Conference Committee.
Jose is exploring his options to minimize his tax liability for this year. Earlier in the
year Jose sold a substantial number of his securities and recognized a $15,000 gain. He
would like to mitigate the tax effects of that gain. The remainder of Jose’s portfolio
consists of 1,000 shares of Garfield Corporation stock. Jose has not sold it because it
has a history of paying large dividends. Jose paid $20,000 for the stock, but it is
currently trading for $5 per share. Jose is considering selling all of his Garfield stock,
realizing the loss, netting it against his capital gains, and then repurchasing 1,000 shares
a few days later. He knows he will lose some money due to transaction and brokerage
costs, but he feels it may be worth it. Discuss Jose’s plan. Relate your analysis to the
basic tax concepts that help drive your position.
Darren is a single individual who worked the entire year for Woodworks Company in
Brazil. He paid $15,000 in Brazilian taxes on his Woodworks salary of $70,000. What
is Darren’ lowest tax liability if his taxable income is $40,000, before considering the
Woodworks salary?
In December 2015, Arnold is considering one last financial decision for 2015. He has
$5,000 that he would like to spend before the end of the year. His options include
donating the money to a qualified charity (and receiving an itemized deduction) or
using the money as a down payment on the purchase of $30,000 of equipment for his
business. If he purchases the equipment, he will receive an 8% tax credit for the entire
purchase price. He does not need the equipment until early next year, so the purchase at
this time is not critical. Assume that Arnold is in the 33% marginal tax rate bracket in
2015 and itemizes his deductions. Which option will provide him with the greatest tax
benefit? Explain and show any calculations that support your answer.
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.
Laura’s employer pays the first $5,000 in childcare benefits under their childcare
assistance plan.
Match each statement with the correct term below.
a. Taxpayer reports income when received in cash or its equivalent and takes deductions
as they are paid.
b. A deduction taken in one year that is recovered in a later year is reported as income in
the year of recovery to the extent that the deduction reduced taxable income.
c. Taxpayer reports income as earned and deductions as incurred.
d. The result of an arms-length transaction.
e. Exclusions and deductions result from specific acts of Congress that must be strictly
applied and interpreted.
f. The taxability of a transaction is determined by the reality of the transaction rather
than some contrived appearance.
g. The reporting of an item of income or expense on a tax return
h. No income is realized until the taxpayer’s invested capital is recovered.
i. All income received is taxable unless some specific provision of the tax law allows
exclusion of the item.
j. These taxpayers are not deemed to transact at arms-length.
Accrual Method
Monica acquires a 25% interest in Terrapin Partnership during 2012 by contributing
land with a fair market value of $35,000, an adjusted basis of $18,000, and subject to a
mortgage of $12,000. The partnership assumes the mortgage. What is Monica’s adjusted
basis in her partnership interest? Discuss how you arrived at that adjusted basis amount,
and the underlying reasoning behind the rules you applied.
IRA
Land and any structures permanently attached to the land.
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.
Fiscal year
Cornelius owns a condominium in Orlando. During the year, Cornelius uses the condo a
total of 25 days. The condo is also rented to vacationers for a total of 75 days and
generates rental income of $9,000. Cornelius incurs the following expenses:
Mortgage interest $4,000
Property taxes 1,800
Utilities 2,000
Insurance 1,200
Depreciation 10,000
Determine Cornelius’s deduction related to the condominium. Indicate the amount of
each expense that can be deducted and how it would be deducted.
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.
Capital Recovery Concept
Discuss the general differences between Section 1245 and Section 1250 property.
Match each statement with the correct term below.
a. Land and structures permanently attached to land.
b. Property that lacks a physical existence.
c. Property that is used by the taxpayer for purely personal purposes.
d. Any property that has form, shape, and substance.
e. Property with a physical existence that is not real estate.
f. A single property used in more than one category.
Mixed-use property
Victoria is an employee of The Bellamy Corporation. During a recent business trip, one
of Victoria’s connecting flights was overbooked. Because Victoria did not have a
business meeting until the next day, she volunteered to take the next available flight.
The airline gave Victoria a $20 meal ticket and a coupon worth $100 off any future
flight on the airline for giving up her seat on the overbooked flight. Has Victoria
realized income from the receipt of the meal ticket and the coupon? Explain in terms of
the income tax concepts.
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
Self-employed sports agent pays $6,000 of self-employment tax. Amount: $3,000
What type of tax rate structure is indicated in the following example? Explain.
When income equals Total tax equals
$10,000 $300
$75,000 $4,500
$100,000 $8,000