During 2015, Marsha, an employee of G&H CPA firm, drove her car 24,000 miles. The
detail of the mileage is as follows:
Personal Use 3,000 miles
Transportation between home and office 3,000 miles
Transportation to and from clients’ offices 18,000 miles
Marsha’s 2015 records show that her car expenses totaled $14,320. The details of the
expenses are as follows:
Gas, oil, and repairs 9,260
Insurance and licensing 1,500
Depreciation 2,960
Interest on car loan 400
Tolls and parking at clients’ offices 200
What is the amount of her deduction for her use of the car?
a. $9,000
b. $9,990
c. $10,490
d. $10,670
e. $10,790
Serena owns a van that she paid $22,000 for in 2010 and used exclusively for personal
purposes until May 9, 2014, when she began using the van in her plumbing business.
On May 9, 2014, a comparable van was selling for $13,000. Serena sells the van on
October 28, 2016. Assuming that the van is 5-year MACRS property, it is not listed
property, and that Serena did not make the Section 179 election to expense on the van,
what is her allowable depreciation deduction in 2016?
a. $749
b. $1,248
c. $1,267
d. $2,112
e. $2,496
Carlotta finds a chest inscribed “Sinbad” that contains $250,000 of cash while diving
among the coral reefs off the Virgin Islands. The US Customs and the DEA deny
knowledge of the cash, so Carlotta keeps it.
I. Carlotta would not recognize any gross income if the chest contained jewels valued at
$250,000, rather than the cash.
II. Recognition is necessary because Carlotta has an increase in wealth.
III. Recognition will not occur because the windfall would not be considered as derived
from capital or from labor.
IV. The All-inclusive Income Concept explains the recognition of the cash as income.
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. Only statements II, III, and IV are correct.
Using the general tests for deductibility, explain why the following expenses are not
fully deductible.
a. Irene spends $1,600 on a trip to Florida to investigate opening up a consulting firm.
Irene currently works for a consulting firm.
b. Augie and his wife divorce during the current year. Augie pays $3,000 in legal fees
related to the divorce.
c. Peter owns a hardware store. During the current year, he pays $328,000 to acquire a
new warehouse.
d. Paul contributes $25 to a fund to be used for advertising to persuade voters to vote
against a candidate running for Congress.
Which of the following qualify as replacement property under the involuntary
conversion rules?
I. Smooth Yogurt Company’s warehouse for storing its yogurt curds is condemned by
the port authority. The warehouse will be replaced with a new office building in a
neighboring community.
II. Smooth Yogurt Company’s other warehouse, which was fully leased to another
company, is destroyed by a tornado. The warehouse will be replaced with a rental office
building adjacent to the company’s new office building and will be leased to various
tenants.
a. Only statement I is correct.
b. Only statement II is correct.
c. Both statements are correct.
d. Neither statement is correct.
Thomas maintains an IRA account. During the year he wins $10,000 in the state lottery
and contributes it to his IRA account. Because he is an active participant in a qualified
pension plan, he does not take a deduction for any part of his contribution. At the end of
2015 the total assets in the account are $30,000. Thomas is subject to a penalty on his
contribution of
a. $-0-
b. $180
c. $270
d. $1,000
e. $1,800
Nontax characteristics that should be considered in choosing an entity form include
which of the following?
I. Number of owners.
II. Limited liability for owners.
III. Ability to participate in management.
IV. Transferability of ownership interests.
a. Only statement I is correct.
b. Only statement II is correct.
c. Statements II and IV are correct.
d. Statements I, II, and IV are correct.
e. Statements I, II, III, and IV are correct.
A U.S. formed multinational corporation
I. Can avoid the payment of tax on appreciated property by transferring the appreciated
property to a controlled foreign corporation and then selling the property.
II. Is not subject to the transfer pricing rules that a foreign multinational must observe.
a. Only statement I is correct.
b. Only statement II is correct.
c. Both statements are correct.
d. Neither statement is correct.
Mollie is single and is an employee of the Royal Corporation. She is an active
participant in the company’s pension plan. Mollie’s adjusted gross income is $116,000
and she has never established an IRA account. How much can Mollie contribute to a
Roth IRA?
a. $- 0 –
b. $1,000
c. $2,750
d. $4,400
e. $5,500
Which of the following businesses must use the accrual method of accounting?
I. Pryor and Ransom, a local law firm with annual gross receipts of $650,000.
II. Mayson Manufacturing, which has annual gross receipts of $20,000,000.
a. Only statement I is correct.
b. Only statement II is correct.
c. Both statements are correct.
d. Neither statement is correct.
Roscoe receives real estate appraised at $200,000 and cash of $10,000 from Cathy in
exchange for his investment realty with a basis of $170,000. Roscoe plans to hold the
new realty for investment. What is his recognized gain?
a. $- 0 –
b. $10,000
c. $20,000
d. $30,000
e. $40,000
Which of the following taxes paid by the Sill Engineering Company can be deducted
during 2015?
I. Federal taxes withheld from employees.
II. Sill Engineering’s share of employee’s Social Security taxes.
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 businesses can use the cash method?
I. The Hateris Group, a partnership with 3 equal partners, of which one is The Hillard
Corporation. Average revenues for the Hateris Group, a financial planning firm, over
the last three years are $4,000,000.
II. The Glidder Corporation, a clothing retailer that has average annual sales over the
last three years are $2,100,000.
a. Only statement I is correct.
b. Only statement II is correct.
c. Both statements are correct.
d. Neither statement is correct.
Raisor Corporation pays an annual premium of $12,000 on the whole life insurance
policy on the life of Wilson, the founder and CEO of the corporation. The corporation is
the beneficiary of the multi-million dollar policy.
I. The corporation can deduct the premiums.
II. If Wilson dies, the corporation will receive the policy proceeds tax-free.
III. If Wilson’s wife is the beneficiary instead of the corporation, the amount of the
premiums paid is a tax-free fringe benefit for Wilson.
IV. If Wilson’s wife is the beneficiary instead of the corporation, the corporation can
deduct the amount of premiums paid as compensation.
a. Statements I, II, and III are correct.
b. Statements I and II are correct.
c. Only statement II is correct.
d. Statements II and IV are correct.
e. Statements I, II, and IV are correct.
The American Opportunity Scholarship Tax Credit provides for a 100% tax credit on
the first $2,000 of qualifying expenses and a 50% tax credit for the next $2,000 of
qualifying expenses paid during the year for each qualifying student.
a. True
b. False
During the past week, Dennis contacted his CPA to obtain advice on the most
advantageous way to make a generous contribution to the accounting program at his
alma mater. The CPA’s work is
a. A tax planning situation.
b. A tax compliance situation.
c. A closed-fact situation.
d. A mediation situation.
e. An unknown-fact situation.
Nora, a single individual age 60, receives a gold watch worth $700 during her
retirement luncheon, based upon her long tenure with the company. How much of the
award must Nora recognize in her gross income for the current year?
a. $- 0 –
b. $300
c. $400
d. $500
e. $700
Personal Service Corporations (PSCs) have certain special characteristics. Which of the
following describes a PSC?
I. A PSC is not permitted to reduce any of its income from portfolio investments with a
passive activity loss.
II. The owner-employees aggregately own more than 95% of the corporate stock.
III. The performance of personal services by owner-employees is the principal activity.
IV. PSCs are subject to a flat income tax of 35% of taxable income.
a. Only statement I is correct
b. Only statement III is correct.
c. Only statements III and IV are correct.
d. Only statements II, III, and IV are correct.
e. Statements I, II, III, and IV are correct.
Pamela purchased 500 shares of Qualified Small Business Stock (QSB) for $900,000 on
October 2, 2012. On November 29, 2017, she sells the stock for $1,000,000. Pamela
also sells 100 shares of stock she acquired two years ago realizing a loss of $10,000.
Pamela has $100,000 of other income. Which of the following statements about the
stock sale is/are true?
I. Pamela will pay no tax on the two stock sales.
II. Pamela can only deduct $3,000 of the $10,000 loss on the sale of the stock.
a. Only statement I is correct.
b. Only statement II is correct.
c. Both statements are correct.
d. Neither statement is correct.
Peter opened his IRA in 2003 and withdrew money to purchase a house in 2015. Since
the distribution qualified as a “qualified first-time-homebuyer expenses,” it is not
subject to the 10% early withdrawal penalty.
a. True
b. False
Carl, age 59, and Cindy, age 49, are married and file a joint return. During the current
year, Carl had a salary of $41,000 and Cindy had a salary of $35,000. Both Carl and
Cindy are covered by an employer-sponsored pension plan. Their adjusted gross income
for the year is $94,000. Determine the maximum IRA contribution and deduction
amounts.
Maximum Maximum
Contribution Deduction
a. $12,000 $12,000
b. $11,000 $11,000
c. $12,000 $11,000
d. $11,000 $9,000
e. $13,000 $13,000
Hank bought a small ranch for $300,000 in 2010. In 2015, oil is discovered on
neighboring property. The county assessor re-valued Hank’s property at $1,550,000.
Hank does not recognize any income due to the
a. All-inclusive Income Concept.
b. Capital Recovery Concept.
c. Realization Concept.
d. Claim of Right Doctrine.
e. Ability-to-Pay Concept.
Dana purchases an automobile for personal use for $27,000. After using it for three
years, Dana converts the automobile to business use when the fair market value is
$19,000. After a few months of business use, Dana sells the automobile for $18,000.
What is the amount of gain or loss recognized on the sale of the automobile?
a. No gain or loss
b. $1,000 loss
c. $8,000 loss
d. $9,000 loss
e. $8,000 gain
During 2015, Linda has a $12,000 net loss from her beauty salon. Her spouse, Bart,
earns $23,000 as a tennis professional. During 2015, Bart purchases $15,000 of Section
179 equipment for his business. What is the amount of Linda and Bart’s Section 179
deduction for 2015?
a. $- 0 –
b. $4,000
c. $11,000
d. $15,000
e. $23,000
A CPA may prepare tax returns using estimates provided by the taxpayer if it is
impracticable to obtain exact data and the estimates are reasonable.
a. True
b. False
A corporation in which the performance of personal activities is the principal pursuit,
services are performed by owner-employees, and the owner-employees own 95% or
more of the stock is taxed at a flat rate of 35%.
a. True
b. False
During the current year, Cathy realizes
” a $3,000 loss on the sale of her personal use automobile held 4 years.
” a $4,000 loss on the sale of Itoham Corporation stock held 3 years for investment.
” a $2,000 gain on the sale of Sterling, Inc., bonds held 7 months for an investment.
Determine the tax consequences of these events.
a. Cathy deducts a $5,000 net capital loss.
b. Cathy deducts a $3,000 net capital loss.
c. Cathy deducts a $2,000 net capital loss.
d. Cathy deducts a $1,000 net capital loss.
e. Cathy deducts a $7,000 net capital loss.
Determine whether the taxpayer has realized income in each of the following cases.
Explain why there has (or has not) been a realization and when the income will be
realized if there is not a current realization.
a. Jaime appears on a TV game show in December 2015. She wins $25,000 in cash and
a new sailboat worth $12,000. She receives a check for the cash she won on December
28, 2015. However, the sailboat was not ready for her to pick up until the following
February.
b. Barry owns 30% of Thurman Corporation. Thurman, an S corporation, reports a
taxable income of $2,000,000 and pays cash dividends of $1,000,000 in 2015.
c. Yolanda signs a contract to be Athletic Director of Higgins University for 5 years.
Upon signing the contract she receives a $50,000 bonus. The terms of the contract
provide that Yolanda will have to repay the bonus if she terminates her relationship with
the University before the end of the contract.
d. Randy was arrested for reckless driving. Because it was his third offense, his fine was
set at $1,000. Randy’s employer needed Randy at work, so he paid the fine. He told
Randy that he would not have to repay the $1,000 if he was not arrested again.
On July 3, 2015, Cynthia receives a gift of a collection of books valued at $10,000. The
books have an adjusted basis of $6,000 to the donor. They had been purchased in 2005.
Several months after receiving the gift, Cynthia sells the books to a professional
collector for $9,000. How is Cynthia’s holding period for the books 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. Gifts are always considered to be held
long-term.
Ken is a 15% partner in the Robinson & Sons and has net self-employment income of
$98,000, $100,000 and $102,000 in his highest three consecutive years. The maximum
amount that Ken can receive under a Keogh defined benefit plan is
a. $13,045
b. $75,000
c. $100,000
d. $160,000
e. $205,000
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. Betty is liable for payment of the tax due plus interest and a negligence penalty.
III. Sam is liable for payment of Betty’s tax due plus interest and negligence penalty.
IV. Sam is liable for payment of Betty’s negligence penalty. Betty is liable for the
payment of the tax due plus interest.
a. Only I is correct.
b. Only II is correct.
c. Only III is correct.
d. I and III are correct.
e. I and IV are correct.
Rinaldo owns 20% of Mahoney Company, a partnership. Rinaldo’s adjusted basis in the
partnership is $32,000 at the beginning of the current year. During the current year,
Rinaldo receives a $10,000 cash distribution from the partnership. Mahoney Company
reports a $200,000 operating loss for the current year. Which of the following
statements is/are correct?
I. Rinaldo’s maximum loss deduction is limited to $22,000.
II. If Rinaldo is a material participant in Mahoney, he can deduct a $40,000 loss.
a. Only statement I is correct.
b. Only statement II is correct.
c. Both statements are correct.
d. Neither statement is correct.
On her 18th birthday, Anna’s grandfather gave her stock worth $100,000. During the
current year, Anna receives $5,000 of dividends on the stock, which she uses to pay
college expenses. The cost of Anna’s tuition, fees, and books is $4,000. Anna’s income
from this event is:
a. $- 0 –
b. $1,000
c. $4,000
d. $5,000
e. $75,000
During the current year, Hope Corporation has the following items of income and
expense:
Sales $420,000
Expenses from operations 470,000
Dividends received 100,000
Hope owns 10% of the domestic corporation that distributed the dividends to Hope.
Determine Hope Corporation’s net operating loss for the current year.
a. $(50,000)
b. $(70,000)
c. $(30,000)
d. $(20,000)
e. $(40,000)
Matt has a substantial portfolio of securities. As of December 2 of the current year, Matt
has a net capital gain position of $22,000. Discuss Matt’s optimal tax-planning strategy
for capital gains and losses.
Tax planning using legal methods to minimize the tax liability.
Current period expenditure incurred in order to earn income.
Match each statement with the correct term below.
a. A separate, parallel tax system designed to ensure a taxpayer pays some tax.
b. A compensation tool that is based on potential price increases of the company’s stock.
c. An individual trust account maintained for the exclusive benefit of an individual or
beneficiary.
d. A type of defined contribution pension plan in which the company and the employee
contribute a fixed percentage of the employee’s salary to the plan.
e. A pension plan in which the benefits are based on the number of years an employee
has worked for a company and on the employee’s annual salary.
f. A pension plan whose benefits are determined by the amount of contributions the
employee and the company contribute to the plan and the earnings of the plan.
Alternative minimum tax
Ed travels from one construction site to another pursuing his work as an insulator.
Because of family problems and being on the road so much, Ed overlooked filing his
2010 tax return. Ed hasn’t filed any returns since 2010 because he is afraid the IRS will
find the missed returns and put him in jail and he won’t be able to support his family. Ed
carefully makes sure that his employers withhold more income tax than is necessary. Ed
knows for certain that if he filed the late returns he would get a tax refund for each of
the years. Has Ed evaded the income tax? Explain.
Money purchase plan
Morrison received a gift of income-producing property with an adjusted basis of
$50,000 to the donor and a fair market value of $40,000 on the date of the gift
(December 31, 2015). The donor paid a gift tax of $1,000. Morrison sells the property
on September 17, 2015 for $45,000. What is the gain or loss on the property?
Defined benefit plan
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
Travel and lodging expense of $800 incurred by an employee on a business related trip
(no reimbursement). Amount: $800
S corporation
Match each statement with the correct term below.
a. Specifically disallowed.
b. Appropriate and helpful.
c. Considered a trade or business.
d. Not considered a trade or business.
e. Problems with this generally arise with related parties.
f. This is met when services or property are provided to the taxpayer.
g. Normal, common, and accepted but not necessarily regularly recurring.
h. This is met when the existence and the amount of a liability have been established.
Personal Expense
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.
Capital loss
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.
Dick lives rent-free in an apartment (value $675/month) in a complex where he is the
apartment manager and must be on the premises to handle problems.