Winston is the sole shareholder of Winston Inc, an S corporation. In 2014, he paid
$50,000 for his shares of stock. During the current year, he contributes a building and
land to the corporation. No additional shares of stock are issued. The basis of this
property is $75,000, and its fair market value is $200,000. What is Winston’s basis in
his Winston stock at the end of 2015?
a. $50,000
b. $75,000
c. $125,000
d. $150,000
e. $225,000
James bought an annuity for $42,000 several years ago. The annuity will pay him $250
per month from age 66 until he dies. During the current year, James turns 66 and
received his first annuity payment. His life expectancy is 25 years.
I. If James receives more than 260 payments, all payments received after those are
totally included in income.
II. James should include $50 of each payment in 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.
Marian owns 40% of Addison Company, a partnership. Marian’s adjusted basis in the
partnership is $32,000 at the beginning of the year. During the current year, Marian
receives a $10,000 cash distribution from the partnership. Addison Company reports a
$100,000 operating loss for the current year. If Marian is not a material participant in
Addison Company and has no other passive activities, how much of the partnership loss
can she deduct on her income tax return?
a. $-0-
b. $10,000
c. $22,000
d. $40,000
Bonnie’s sister, Diane, wants to open a restaurant. Because Diane is short of funds,
Bonnie purchases the building and leases it to Diane. No agreement is signed, and
Bonnie tells Diane not to worry about paying rent until the cash flow can support it.
Also, Bonnie promises not to sell the property to anyone other than Diane.
I. Any expenditures Bonnie makes regarding the building would be classified as
production of income expenses.
II. The building rental has the characteristics of a gift.
III. The dominant motive in acquiring the building is to earn an economic benefit
(profit).
IV. Bonnie’s property tax expenses related to the property are deductible.
a. Only statement II is correct.
b. Only statement III is correct.
c. Statements I, II, and IV are correct.
d. Statements II and IV are correct.
e. Statements I, II, III, and IV are correct.
Hawkins Corporation has $50,000 of taxable income before special deductions. Taxable
income includes an operating loss carryforward of $10,000 and $60,000 of dividend
income received from other corporations in which Hawkins owns less than a 20%
interest. What is Hawkins’ taxable income?
a. $8,000
b. $15,000
c. $18,000
d. $25,000
e. $50,000
When a stock dividend is nontaxable, part of the basis of the original stock must be
allocated to the new stock received as a dividend.
a. True
b. False
Anna owns 20% of Cross Co., an electing S corporation. Anna’s adjusted basis in the
stock is $32,000 at the beginning of the current year. During the current year, Cross
pays a $50,000 cash dividend to its shareholders. Cross Co. reports a $200,000
operating loss for the current year. Which of the following statements is/are correct?
I. If Anna is a material participant in Chris Co., she can deduct a $40,000 loss.
II. Anna’s maximum loss deduction is limited to $22,000.
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 capital assets with the exception of
a. Stocks and bonds.
b. Office furniture used in a business
c. Monet painting privately held.
d. Apartment building held for investment.
e. Personal residence.
Frank and Lilly are negotiating a divorce settlement. Frank has offered to pay Lilly
$12,000 each year for 10 years, but payments cease upon Lilly’s death. What are the tax
implications of this proposition?
I. Lilly must recognize Gross Income when the money is received.
II. Frank has a deduction for Adjusted Gross Income in the year of payment.
a. Only statement I is correct.
b. Only statement II is correct.
c. Both statements are correct.
d. Neither statement is correct.
Karen owns a commercial office building with a fair market value of $140,000. She
purchased the building as an investment for $102,000 in 2003. She has claimed $18,000
in depreciation deductions. Karen trades the building for an apartment complex. The
apartment complex has a value of $140,000, and the exchange qualifies for like-kind
deferral treatment. What is Karen’s basis in the apartment complex?
a. $- 0 –
b. $ 58,000
c. $ 84,000
d. $140,000
e. $198,000
The Anderson 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
Anderson 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. Anderson will report 2015 taxable income in the amount of $20,000
before consideration of depreciation on their 2015 property acquisitions. What is the
maximum combined amount of cost recovery expense that may be obtained under this
set of fact circumstances?
a. $28,001
b. $56,003
c. $150,000
d. $170,001
e. $178,001
During 2015, Pamela worked two “jobs.” She performed financial consulting activities
for 1,000 hours and real estate development and rental activities for 1,200 hours. Her
real estate development and rental activities produced a loss of $35,000. Her financial
consulting generated a net business income of $40,000. How much of the loss can
Pamela deduct against her financial consulting income?
a. $-0-
b. $17,500
c. $25,000
d. $35,000
e. $40,000
Ricardo is the marketing manager and owns a 40% interest in the Fielder Partnership.
Fielder’s taxable income before considering payments to partners is $80,000. Ricardo
withdraws $40,000 for his personal living expenses. How much income must Ricardo
report from Fielder?
a. $32,000
b. $40,000
c. $56,000
d. $72,000
Loren owns three passive activities that had the following results for the current year:
Passive Activity A $25,000
Passive Activity B (10,000)
Passive Activity C (40,000)
If none of the passive activities are rental real estate activities, what is the amount of
suspended loss attributable to Activity C?
a. $- 0 –
b. $18,750
c. $20,000
d. $25,000
e. $40,000
On October 2, 2015, Miriam sells 1,000 shares of stock at $20 per share. Miriam
acquired the stock on November 12, 2014, when she exercised her option to purchase
the shares through her company’s incentive stock option plan. The exercise price was
$11 per share and the fair market value of the stock at the date of exercise was $14 per
share. For 2015, Miriam must report
Ordinary Capital
Income Gain
a. $3,000 $6,000
b. $6,000 $3,000
c. $9,000 $-0-
d. $-0- $9,000
Gain deferral is fundamental to the nonrecognition transactions. In which of the
following is gain deferral mandatory?
I. Involuntary conversion of business real estate.
II. Like-kind exchange of business real estate.
a. Only statement I is correct.
b. Only statement II is correct.
c. Both statements are correct.
d. Neither statement is correct.
Once a corporation is formed, an exchange of the corporation’s stock for property is
always a nontaxable event.
a. True
b. False
Mountain View Development Co. purchases a new high volume paper shredder for use
in their document management department for $20,000 on November 7 of 2015. It was
the only piece of depreciable property placed in service during 2015. The paper
shredder is 7-year MACRS property, the Section 179 election to expense was not
exercised. What is Mountain View’s 2015 depreciation deduction on the paper
shredder?
a. $714
b. $2,498
c. $2,812
d. $2,980
For each of the following situations, determine whether the item is deductible, how it
would be deducted on the taxpayer’s return (if there are alternatives possible, discuss
the conditions that would determine the treatment) and any limitations, which might be
placed on the deduction.
a. Allison is self-employed. She pays the following taxes during the current year:
State income tax $1,200
Federal income tax 4,000
Self-employment tax 3,200
Property tax on residence 700
Tax on business equipment 200
b. A customer who owed Leon $5,000 declared bankruptcy last year. At that time, the
customer’s accountant estimated that only 40% of the customer’s debts would be paid.
In the current year, Leon receives $1,000 from the bankruptcy court as final payment on
the $5,000 debt.
Canfield is single, 70 years old, and has no dependents. Canfield will not have to file a
tax return in 2015 if:
I. his gross income does not exceed $11,850.
II. his only income is $4,000 of self-employment 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 expenses is not deductible for AGI?
a. Alimony paid.
b. Contributions to an IRA.
c. Moving expenses.
d. Interest on qualified student loans.
e. Interest expense related to an investment.
The return selection program designed to select returns with the highest probability of
errors is
a. The TCMP.
b. The DIF program.
c. The special audit program.
d. The document perfection program.
e. The information-matching program.
Land in London, England for land in San Francisco, California.
Corporations that sell depreciable real property are not subject to depreciation recapture
rules
a. True
b. False
Billingsworth Corporation has the following net capital gains and losses for 2012
through 2015. Billingsworth’ marginal tax rate is 34% for all years.
2012 2013 2014 2015
$8,000 $3,000 $6,500 $(9,000)
In 2014, Billingsworth Corporation earned net operating income of $30,000. What
is/are the tax effect(s) of the $9,000 net capital loss in 2015?
I. Corporate taxable income is $21,000.
II. The net capital loss will provide income tax refunds totaling $3,060.
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 is/are correct regarding the sale of a principal residence?
I. A taxpayer who is single and fails to meet the ownership or use test due to change in
employment is entitled to a pro rata share of the $250,000 exclusion.
II. A single taxpayer can exclude up to $250,000 of the gain on the sale of a vacation
home.
a. Only statement I is correct.
b. Only statement II is correct.
c. Both statements are correct.
d. Neither statement is correct.
Walter pays a financial adviser $2,100 to help him manage his investment portfolio
during the current year. Walter receives $5,000 in interest from investments in General
Motors and Xerox bonds, and $2,500 in interest from investments in City of San
Francisco bonds. How much may Walter deduct for the current year?
a. $- 0 –
b. $ 700
c. $1,050
d. $1,400
e. $4,200
Charlotte’s apartment building that has an adjusted basis of $200,000 is destroyed by
fire. Early the following year, Charlotte receives a $425,000 insurance check and
reinvests $400,000 of the proceeds in an apartment building. What is the basis in the
new building?
a. $- 0 –
b. $425,000
c. $400,000
d. $200,000
e. $175,000
Mario is a real estate and financial consultant who owns and operates his own business
as a sole proprietor. His adjusted gross income, excluding the items below is $48,000.
The following information relates to his current year activities and income tax.
a. Land adjacent to his office was purchased during 2015 for an anticipated expansion.
It cost $10,000 but was sold later in the year for $17,000.
b. His office building is sold for $250,000 in anticipation of moving to a different
location. The building was purchased in 1994 for $200,000 with 10% of the cost
allocated to the land. Depreciation taken on the building was $100,000.
c. Office furniture that cost $20,000 and was fully depreciated is sold for $6,000.
d. A color copier purchased two years ago for $50,000 is traded for 200 shares of
Microsoft stock that were worth $24,000 on the date of the exchange. The copier had a
basis to Mario of $35,000 but is worth only $24,000 on the date of the exchange.
e. Mario’s automobile, which he used 100% for business and had cost him $18,000 in
2010 is sold for $8,000. Depreciation of $6,000 had been taken on the automobile.
REQUIRED: Fill in the following table by listing the amount and proper treatment of
the recognized gain or loss
from each of the above transactions. Identify by letter a-e.
Ordinary Sec. 1231 Capital Gain (Loss) Unrecaptured
Income Gain (Loss) Short-term/Long term Sec. 1250 Gain
a.
b.
c.
d.
e.
What is Mario’s net Capital Gain (Loss) for the current year? _____________
The Statements on Standards for Tax Services (SSTS) have common concepts running
through most of them. Which of the following statements are parts of the SSTSs?
I. The preparer may in good faith rely upon, without verification, information furnished
by the client.
II. There is confidentiality of the CPA-client relationship.
III. Taxpayer supplied estimates may be used to prepare returns if it is impractical to
obtain exact data and the estimates are reasonable.
IV. The preparer must never disclose to the IRS any facts about the client’s tax return
information — unless the client approves disclosure, or the preparer is required to do so
by law.
a. Only statement II is correct.
b. Statements I, II, and IV are 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.
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 are
Dewey and Louie’s basis in the partnership?
Dewey Louie
a. $80,000 $85,000
b. $90,000 $115,000
c. $90,000 $110,000
d. $110,000 $110,000
Gus owes $50,000 in credit card debt to Neighbor’s Bank. Gus was having financial
difficulties during the current year and Neighbor’s Bank agreed to reduce Gus’s debt to
$20,000 to help him get his financial affairs in order and avoid bankruptcy.
I. If Gus’s assets were $100,000 and his liabilities were $150,000 before the discharge,
he is not taxed on any of the $30,000 debt reduction.
II. If Gus’s assets were $80,000 and his liabilities were $100,000 before the discharge,
he is taxed on all $30,000 of the debt reduction.
a. Only statement I is correct.
b. Only statement II is correct.
c. Both statements are correct.
d. Neither statement is correct.