Chestnut Furniture Company purchases a delivery van on June 14, 2015, at a cost of
$30,000. The delivery van has a 5-year MACRS life and an ADS recovery period of 5
years. What is Chestnut’s minimum cost recovery deduction on the van in 2015?
a. $- 0 –
b. $3,000
c. $4,500
d. $6,000
e. $26,850
A tax treaty with a foreign country negotiated by the president is considered a
legislative source of tax law.
a. True
b. False
Income realization may occur as a result of
I. Relief from a liability.
II. Exchange of property.
III. Payment of the taxpayer’s indebtedness by another.
IV. A barter transaction where only goods and services are exchanged.
a. Only statement I is correct.
b. Only statement II is correct.
c. Only statements I and IV are correct.
d. Only statements I, II, and IV are correct.
e. Statements I, II, III, and IV are all correct.
If the U.S. Supreme Court denies a writ of certiorari, it means
I. The court did not feel the case was important enough to review.
II. The decision of the lower court is correct.
III. The decision of the circuit court of appeals is effectively reversed.
IV. The Supreme Court has agreed to hear the case.
a. Only statement I is correct.
b. Statements I and II are correct.
c. Statements II and IV are correct.
d. Only statement III is correct.
e. Statements I, III, and IV are correct.
Explain why the taxpayer in each of the following situations either does or does not
have taxable income and determine the amount, if any, that the taxpayer would have to
recognize.
a. On December 1, 2015, Tomlin, a cash basis taxpayer, bills a customer $5,000 for
services rendered throughout 2015. The customer comes to Tomlin’s office on
December 30, 2015, and offers to pay him the $5,000 amount owed. Tomlin suggests
that the customer mail the check to him so he could see how quickly the post office
could get the check to him through the mail. The post office delivers the check to
Tomlin on January 10, 2016. Tomlin promptly deposits the check in the bank.
b. Patty, age 65, will retire this year. Twenty years ago she purchased a retirement
annuity contract at a cost of $6,000. Under the terms of the contract, Patty is to receive
$150 per month for 10 years after reaching age 65. During the current year, Patty
receives $1,200 (8 payments).
c. Bud is an accountant for Big Oil Company. In his spare time, Bud collects unique
beer cans and bottles. During a party at his house, one of his friends tells him that his
can of Billy Beer is a hot item in the professional collector’s market. Bud investigates
and instead of selling the Billy Beer, he trades the can of Billy Beer for a bottle of
Leinenkugles beer.
d. Rosemary is awarded the “Outstanding Teaching Award” at DePauw University. She
receives a plaque and $3,500. She assigns the $3,500 to DePauw to establish a
scholarship for economics majors.
On February 19, 2013, Woodbridge Corporation granted Harvey an option to acquire
200 shares of the company’s stock for $10 per share. The fair market price of the stock
on the date of grant was $16. The stock requires that Harvey remain with the company
for one year after the date of exercise. The option did not have a readily ascertainable
fair market value. Harvey exercises the option on September 23, 2014, when the fair
market value of the stock is $19. He makes a Section 83(b) election at the exercise date.
On September 23, 2015, the fair market value of the stock is $25 per share. How much
must he report as income in 2015?
a. $-0-
b. $1,200
c. $1,800
d. $2,000
e. $3,000
Jerry’s wife dies in September. His wife had paid $20,000 of premiums on a $150,000
face value whole life insurance policy. Jerry elects to receive the life insurance policy
proceeds in 20 annual installments of $10,000. Jerry receives his first $10,000 payment
this year. How much of the payment should Jerry report as gross income?
a. $- 0 –
b. $2,500
c. $5,000
d. $7,500
e. $10,000
Betty hires Sam to prepare her federal income tax return. In preparing the return, Sam
erroneously decided to exclude consulting fees because he estimated that Betty’s
expenses should have exceeded the income she received. If the IRS detects Betty’s
underpayment of tax, what is the likely result?
I. Betty is not subject to the negligence penalty since she relied on a professional tax
preparer and reported her income in good faith.
II. Sam is liable for payment of Betty’s tax due plus interest and negligence penalty.
a. Only statement I is correct.
b. Only statement II is correct.
c. Both statements are correct
d. Neither statement is correct
Cornell is a building contractor who builds 25-30 homes a year. Charlotte is a real
estate broker who sells all of Cornell’s homes. Charlotte has recently referred a couple
to Cornell who wanted him to build a $400,000 home for them. Knowing that Charlotte
and her husband enjoy skiing, he bought her a nice pair of skis and boots.
I. The “gift” appears to be a form of compensation.
II. The skis are considered a gift for income tax purposes.
III. Substance-over-form applies to this situation.
IV. Charlotte recognizes gross income from the receipt of the skis.
a. Only statement I is correct.
b. Only statement II is correct.
c. Statements I, III, and IV are correct.
d. Statements II and IV are correct.
e. Statements II, III, and IV are correct.
Concerning individual retirement accounts (IRAs),
I. A single taxpayer that is not an active participant in a qualified plan may deduct up to
$6,000 of the annual contribution.
II. A taxpayer that is not working outside of the home may not deduct any amount if
their spouse is an active participant in a qualified plan, unless their AGI is below
$61,000.
a. Only statement I is correct.
b. Only statement II is correct.
c. Both statements are correct.
d. Neither statement is correct.
During the current year, Paul came down with a serious illness. Paul’s uncle paid many
of Paul’s expenses during the period of rehabilitation. For tax purposes, how are Paul’s
mortgage interest and real estate property taxes handled?
I. Paul can deduct both items.
II. Paul’s uncle can deduct both items.
III. Neither Paul nor his uncle can deduct the expenses.
a. Only statement I is correct.
b. Only statement II is correct.
c. Only statement III is correct.
d. Statements I and II are correct.
James rents his vacation home for 30 days during the year and lives in it personally for
10 days. He receives rents of $4,000 and incurs the following expenses before
allocation:
Property taxes $2,000
Utilities 800
Depreciation 4,200
What is James’ income or loss from the rental property?
a. $- 0 –
b. $1,000 loss
c. $1,250 loss
d. $1,000 income
e. $1,200 income
Victor is a sales representative for Valley Winery. Victor receives a monthly travel
allowance from Valley to cover his travel costs (transportation, food, lodging,
entertainment, etc.). If Victor is required to account to Valley for the use of the travel
advance and to return any excess travel advance
I. To the extent Victor is reimbursed for less than his costs, part of his expenses are
deducted for AGI and part are deducted from AGI.
II. Victor must include the travel allowance in his gross income. His actual costs are
deductible from AGI, subject to all applicable limits on such deductions.
a. Only statement I is correct.
b. Only statement II is correct.
c. Both statements are correct.
d. Neither statement is correct.
The Cox Accounting Firm places the following property in service during the 2015 tax
year:
Property Placed in
Description Service MACRS Life Cost Basis
Computers Feb 6 5 years $8,000
Office furniture June 24 7 years $27,000
Copier Aug 3 5 years $10,000
Phone system Dec 11 5 years $5,000
Cox wants to obtain the maximum possible first year depreciation deduction for these
property acquisitions including full utilization of the election to expense property under
Section 179. Cox will report 2015 taxable income in the amount of $100,000 before
consideration of depreciation on their 2015 property acquisitions. What is the maximum
combined amount of depreciation and Section 179 expense that may be obtained under
this set of fact circumstances?
a. $5,800
b. $8,458
c. $29,886
d. $29,907
e. $50,000
Safina, a single taxpayer with adjusted gross income of $100,000, works as an engineer
for the Wabash Corporation. The corporation reimburses all its employees 80% of
tuition, fees and books for courses taken at the local university. Safina incurs $8,000 of
expenses and can deduct the remaining 20% of the education expense
I. Only if the course improves her skills as an engineer.
II. Is not a deduction for adjusted gross income.
a. Only statement I is correct.
b. Only statement II is correct.
c. Both statements are correct.
d. Neither statement is correct.
Malcolm receives a liquidating distribution of land with a fair market value of $14,000
and a basis of $19,000 from Blithe Corporation, an S corporation. Malcolm’s basis in
the stock is $21,000. What must Malcolm and Blithe report as income (loss) from the
property distribution?
Malcolm Blithe
a. $-0- $-0-
b. $(2,000) $(5,000)
c. $(7,000) $-0-
d. $(7,000) $(5,000)
Cory is a 32 years old, unmarried, and has no children. Cory’s father lives in a nursing
home.
I. Because Cory’s father does not live in the same household, Cory cannot file as a head
of household.
II. If his father’s taxable income is less than $4,000 and the other dependency tests are
met, Cory will file as head of household.
a. Only statement I is correct.
b. Only statement II is correct.
c. Both statements are correct.
d. Neither statement is correct.
Tippecanoe Corporation has the following income and expense items during the current
year:
Net income from operations $60,000
Dividend income from 10% owned corporation 180,000
What is Tippecanoe ‘s dividends-received deduction?
a. $42,000
b. $126,000
c. $144,000
d. $168,000
e. $192,000
Todd and Fiona are negotiating a divorce settlement. Todd has offered to pay Fiona
$12,000 each year for 10 years, but payments cease upon Fiona’s death. What are the
tax implications of this proposition?
I. Fiona must recognize Gross Income when the money is received.
II. Todd has a deduction for Adjusted Gross Income in the year of payment.
III. Since the payments are in cash and there is no obligation to pay more after Fiona’s
death, the payments are classified as alimony.
IV. If the payments qualify as child support, Fiona recognizes no gross income and
Todd has no deduction from Adjusted Gross Income.
a. Only statement I is correct.
b. Only statement IV is correct.
c. Only statements I and II are correct.
d. Only statements I, II, and III are correct.
e. Statements I, II, III, and IV are correct.
MACRS requires the use of one of three conventions. For personal property, the general
and most common convention is
a. mid-life
b. mid-quarter.
c. mid-month.
d. mid-year.
Jerry is a furniture salesman for Ashland’s Furniture Mart. Jerry purchases a bedroom
suite from Ashland’s for $10,000. The sticker price is $14,000. Ashland’s policy is to
“discount” all customer purchases for up to $2,000 off of the sticker price for purchases
over $10,000. What is the tax treatment of Jerry’s furniture purchase?
I. Jerry must include $4,000 in his gross income.
II. Ashland’s Furniture Mart can deduct $2,000 as compensation expense in addition to
properly accounting for the sale of the furniture.
a. Only statement I is correct.
b. Only statement II is correct.
c. Both statements are correct.
d. Neither statement is correct.
James purchased land costing $22,000 in 2014. He paid $2,000 in legal fees and other
expenses to complete the purchase. In 2015, James spends $24,000 subdividing the land
and running utilities to the property. Interest paid on the loan used to finance the
purchase and subdividing total $1,750 in 2014 and $3,200 in 2015. James paid $350 of
property taxes in 2014 and $750 of property taxes in 2015. What is James’s basis in the
land at the end of 2015?
a. $24,000
b. $46,000
c. $48,000
d. $50,950
e. $52,050
Rachael purchased 500 shares of Qualified Small Business Stock (QSB) for $900,000
on March 2, 2009. On November 29, 2014, she sells the stock for $1,000,000. Rachael
also sells 100 shares of stock she acquired two years ago realizing a loss of $10,000.
Which of the following explain(s) tax consequences of the QSB stock sale?
I. The effective tax rate applied to the net gain on the sale of the QSB stock is 15%.
II. Rachael nets her $10,000 loss with her $100,000 gain before applying her exclusion
rate.
III. Rachael is eligible for a 75% exclusion of the gain from the QSB stock sale.
IV. The QSB stock is QSB stock partly because Rachael held the stock for the required
3-year minimum.
a. Statements I and II are correct.
b. Statements II and III are correct.
c. Statements III and IV are correct.
d. Statements I, II, and III are correct.
e. Statements I, II, III, and IV are correct.
Terri is driving down a road when she sees that Sonny is having trouble changing a tire.
Terri stops and helps Sonny. As Sonny is leaving, he gives Terri $50 and thanks her.
What are the effects of the $50 receipt?
I. The $50 is a gift because it is from detached and disinterested generosity.
II. The $50 is compensation received for services rendered.
a. Only statement I is correct.
b. Only statement II is correct.
c. Both statements are correct.
d. Neither statement is correct.
Mark has an adjusted gross income of $154,000. Not included in his adjusted gross
income is a $16,000 loss from a passive activity. Which of the following statements
regarding the effect of the passive loss on his adjusted gross income is/are correct?
I. If the activity does not involve rental real estate, he can only deduct the loss as a
miscellaneous itemized deduction.
II. If the activity is rental real estate and Mark is an active participant, he can deduct the
$16,000 loss for adjusted gross income.
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 events is a “casualty” loss?
I. Lightning damage.
II. Loss of the topsoil on a farm from a flood.
a. Only statement I is correct.
b. Only statement II is correct.
c. Both statements are correct.
d. Neither statement is correct.
Ford’s automobile that he uses 100% for business is vandalized. The adjusted basis
before the vandalism is $3,000. The fair market value of the car before the vandalism is
$7,000, and the fair market value of the property after the vandalism is $2,000. Ford’s
insurance does not cover vandalism. What is Ford’s loss deduction for the year?
a. $- 0 –
b. $1,000
c. $2,000
d. $3,000
e. $5,000
Carrie owns a business building with an adjusted basis of $95,000 and an appraised fair
market value of $98,000. The city of Millerville condemns the property for a new
highway. The condemnation award is $98,000. Carrie invests $90,000 of the proceeds
into a new building on the other side of the city. What is the gain or loss that Carrie
must recognize due to the transactions?
a. No gain or loss
b. $3,000 gain
c. $3,000 loss
d. $8,000 gain
e. $5,000 loss
The Tax Court will not necessarily follow a U.S. Court of Appeal decision unless the
taxpayer lives in the geographic jurisdiction of the appellate court.
a. True
b. False
Which of the following is an example of a business purpose as dominant motive?
I. Darren is a full-time plumber and a part-time Amway salesman. He is taking his
family to Disney World and plans to take his Amway products with him so that he may
deduct most of his cost of the trip.
II. Larry is a full-time plumber. He is taking his family with him to a convention in
Orlando featuring the latest in plumbing products and techniques. He plans to deduct
most of his cost of the trip.
a. Only statement I is correct.
b. Only statement II is correct.
c. Both statements are correct.
d. Neither statement is correct.