Connie was walking her dog when she came across a paper bag with $20,000 in it. She
turned the money into the police. After the appropriate period of time, no one claimed
the money and the police returned the money to Connie. Connie does not have to
recognize any taxable income since it was not derived from capital or labor.
a. True
b. False
The Serenity Corporation distributes $200,000 in cash to its shareholder during 2015.
Accumulated earnings and profits are $80,000 as of January 1, 2015. Current earnings
and profits for 2015 are $84,000. Jonas, the sole shareholder of Serenity Corporation,
has a basis of $48,000 in his stock. What is the tax effect of the distribution for Jonas?
a. Jonas will recognize ordinary income of $164,000 and a capital gain of $36,000.
b. Jonas will recognize ordinary income of $84,000, capital gain of $80,000 and a
tax-free recovery of capital of $36,000.
c. Jonas will recognize ordinary income of $164,000 and a tax-free return of capital of
$36,000.
d. Jonas will recognize ordinary income of $164,000 and a capital loss of $12,000.
e. Jonas will recognize ordinary income of $200,000 and a capital loss of $12,000.
Valmont owns 98% of the stock of Barnes Corporation, a manufacturer. 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 Barnes’ taxable income for the
current year?
a. $34,000
b. $48,600
c. $54,000
d. $62,000
e. $74,000
Sole proprietors are allowed to deduct owner-employee salaries and fringe benefits.
a. True
b. False
Which of the following sources of tax law authority has the highest tax validity?
a. Cumulative Bulletin.
b. Tax Court Decision.
c. Revenue Ruling.
d. Internal Revenue Code Section.
e. Regulation Section.
Calvin Corporation, has the following items of income and expense for the current year.
Calculate (a) Calvin’s taxable income and (b) income tax liability.
Sales revenue $500,000
Cost of goods sold 360,000
Gross profit $140,000
Other revenue:
Dividends (less than 2% ownership) $5,000
Interest received from municipal bonds 30,000
Expenses:
Utilities $25,000
Insurance 15,000
Meals and entertainment 60,000
Charitable contributions 10,000
Net operating loss (from the previous year) $60,000
Charlotte purchases a residence for $105,000 on April 13, 2007. On July 1, 2013, she
marries Howard and they use Charlotte’s house as their principal residence. On May 12,
2015, they sell their home for $390,000, incurring $20,000 of selling expenses and
purchase another residence costing $350,000. What is their realized and recognized
gain?
Realized Recognized
a. $ 265,000 $-0-
b. $ 265,000 $15,000
c. $ 285,000 $65,000
d. $ 265,000 $45,000
e. $ 285,000 $-0-
Will and Brenda of New York City are both age 66 and always file a joint tax return.
During the current year they provide all the support for their son who is 20, has no
income, and is a part-time college student. Their daughter, age 22 and a full-time
student at Columbia University, has $4,800 of income. What is the total number of
personal and dependency exemptions Will and Brenda can claim?
a. 1
b. 2
c. 3
d. 4
Duncan purchased State of Wisconsin general-purpose bonds at a cost of $3,400 in
2013. He receives $170 interest on the bonds in 2013, 2014, and 2015. In 2015, he sells
the bonds for $3,800. Duncan excludes the bond interest, but must include a $400
capital gain in his 2015 gross income. Which of the following Concepts, Constructs,
and/or Doctrines help in forming the basis for this treatment?
I. Capital Recovery Concept.
II. Legislative Grace Concept.
a. Only statement I is correct.
b. Only statement II is correct.
c. Both statements are correct.
d. Neither statement is correct.
Sylvia owns 1,000 shares of Sidney Sails, Inc., for which she paid $18,000 several
years ago. On March 15, she purchases 400 additional shares for $5,000. Sylvia sells
the original 1,000 shares for $13,500 on April 1. These are her only stock transactions
during the year. Sylvia’s capital loss deduction for the current year and her basis in the
new shares are:
Capital loss Basis
a. $3,000 $5,000
b. $2,700 $6,800
c. $4,500 $5,000
d. $3,000 $ 6,800
e. $2,700 $5,000
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. Ellis is a part-time bookkeeper for Gilmore Company. The owner of Gilmore told
Ellis that if he earns an accounting degree and passes the CPA exam, he would hire him
as Gilmore’s accountant. Ellis spends $5,600 taking classes towards an accounting
degree at City College.
b. Harry owns Circus City Condiments, a wholesaler of circus food. In 2010 he loaned
his friend Joanna $8,000 at 6% annual interest with the balance due in 5 years. Joanna
used the loan to open a beauty salon. In December 2015, Joanna tells Harry that she has
filed for bankruptcy and that he will be lucky to get $2,000 of his money back. The
bankruptcy proceedings had not been completed at the end of 2015.
c. Audrey is a self-employed computer consultant. Harvey calls Audrey and asks her for
information on installing a new Lan-based workstation system in his business. Audrey
meets Harvey at Franco’s Chop House. They have dinner while Audrey explains how
such a system will work and what it will cost. Audrey pays for the dinner, which costs
$100. Harvey calls Audrey the next day and tells her that he has decided that the system
costs too much and that he will not need her services.
Katie pays $10,000 in tax-deductible property taxes. Katie’s marginal tax rate is 25%,
average tax rate is 24%, and effective tax rate is 20%. Katie’s tax savings from paying
the property tax is:
a. $1,600
b. $2,000
c. $2,400
d. $2,500
e. $10,000
Dean is a singer. After a singing engagement in a night club in Dallas, an article
inDallas City magazine identified him as a local celebrity who had a drug dependency.
Dean sues the magazine for slander. The court determines that the article is false and
awards Dean $20,000 for humiliation, $50,000 for loss of singing engagements, and
$175,000 in punitive damages. Which of the following statements about the receipt of
these payments is/are correct?
I. The $50,000 for loss of singing engagements is taxable.
II. All of the payments are nontaxable because they are made on account of injury to
Dean’s reputation
a. Only statement I is correct.
b. Only statement II is correct.
c. Both statements are correct.
d. Neither statement is correct.
A gain on a like-kind exchange is always recognized to the extent of any boot received.
a. True
b. False
In order to take a business deduction, the taxpayer engaged in a business must be able
to establish a business purpose for each expenditure.
a. True
b. False
Brandon is the operator and owner of a cleaning service who uses the cash method of
accounting. He receives the following payments on December 31, 2015, the last
business day of his tax year:
$3,000 – Checks received from customers for services rendered during November and
December 2015. The checks are deposited in his bank account on January 4, 2016.
$4,000 – Checks received from customers for services to be rendered during 2016. The
checks are received in the morning mail and deposited in his bank account on
December 31, 2015.
$2,400 – A check received from a customer for a service contract. The services under
the contract are to be rendered over 24 months, beginning in January 2016. The
customer met Brandon at a New Year’s Eve party and gives Brandon the check at 11:30
p.m. The check is deposited in his bank account on January 4, 2016
How much of the $9,400 collected by Brandon on December 31 must be included in his
2015 gross income?
a. $2,400
b. $3,000
c. $5,400
d. $7,000
e. $9,400
On May 10, 2013, Rafter Corporation granted Peter an option to acquire 500 shares of
the company’s stock for $10 per share. The fair market price of the stock on the date of
grant was $12. The fair market value of the option at the date of grant was $3. Peter
exercises the option on July 1, 2015, when the fair market value of the stock is $20.
How much income must Peter report at the date of exercise?
a. $-0-
b. $1,200
c. $1,800
d. $3,600
e. $5,400
Drew is a partner with Peyton LLP. Peyton maintains a money purchase Keogh plan for
its partners and employees. Drew owns a 30% partnership interest in Peyton. Determine
the maximum deductible contribution Drew can make to the plan in each of the
following situations:
a. Drew ‘s net self-employment income is $85,000.
b. Drew’s net self-employment income is $270,000.
During the current year, Metcalf Corporation has the following items of income and
expense:
Sales $450,000
Cost of goods sold 320,000
Dividends received 20,000
Metcalf owns 37% of the corporation that distributed the dividend to Metcalf.
Determine the amount reported as income before special deductions for the current year.
a. $130,000
b. $134,000
c. $150,000
d. $454,000
e. $470,000
Lidia, age 62, retires this year from her job as executive vice-president of Western Inc.
She will receive a pension of $3,000 per month from Rollerderby’s qualified pension
plan. Lidia contributed $100,000 to the plan. Her contributions were never subject to
tax. In addition, she will receive $1,600 per month from an annuity she purchased many
years ago at a cost of $96,000. The pension and the annuity will be paid until she dies.
At the date of her retirement, her life expectancy is 30 years. Which of the following
statements regarding the taxability of the payments is/are correct?
I. Under the capital recovery concept, Lidia will not have to recognize any income from
the annuity payment until she has recovered her $96,000 investment.
II. Lidia will not have to recognize as income the portion of each pension plan payment
that is considered a return of her $100,000 contribution to the plan.
III. Lidia will not have to recognize as income the portion of each annuity payment that
is a return of her $96,000 investment.
IV. Because none of the contributions were taxed, Lidia will be taxed on the entire
$3,000 from the pension plan.
a. Only statement I is correct.
b. Only statements II and III are correct.
c. Only statement III is correct.
d. Only statements III and IV are correct.
e. Only statement IV is correct.
Nigel and Frank form NFS, Inc. an electing S corporation, by combining the assets of
their respective businesses. Nigel contributes $10,000 and assets worth $90,000
(adjusted basis of $60,000) for a 1/3 interest. Frank contributes $90,000 and assets
worth $270,000 (adjusted basis of $150,000) for a 2/3 interest. NFS also assumes
$60,000 of debt on Frank’s assets. What is Nigel’s basis in his stock?
a. $70,000
b. $90,000
c. $100,000
d. $120,000
e. $160,000
Wilson owns a condominium in Gatlinburg, Tennessee. During the current year, she
incurs the following expenses before allocation related to the property:
Mortgage interest $10,000
Property taxes 4,000
Utilities 1,000
Maintenance fees 1,300
Repairs 800
Depreciation 6,000
a. For each of the following scenarios indicate whether Wilson would treat the
condominium for income tax purposes as personal use property, a rental or a vacation
home.
Case Rental
Income Rental
Days Personal
Use Days
Personal, rental, or vacation
A $10,000 300 0
B 7,000 60 10
C 15,000 60 20
D 2,000 10 40
E 11,000 280 20
b. Consider Case C. Determine Wilson’s deductions related to the condominium.
Indicate the amount of each expense that can be deducted and how it would be
deducted.
Which of the following trade or business assets are Section 1245 properties?
I. Racehorses.
II. Livestock held for breeding purposes
III. Manufacturing equipment.
IV. Residential rental property placed in service in 2008.
a. Only statement I is correct.
b. Statements II and IV are correct.
c. Statements I, II, and III are correct.
d. Statements I and IV are correct.
e. Statements I, II, III, and IV are correct.
“Recapture of depreciation” refers to:
a. Downward adjustments of past depreciation charges by IRS review.
b. Increasing depreciation charges by changing accounting method.
c. Filing an amended return where less than maximum depreciation charges have been
claimed as deductions.
d. Taxing the smaller of past depreciation or gain as ordinary income on the disposition
of equipment.
During the current year, Mars Corporation receives dividend income of $20,000 from
an 85%-owned domestic corporation. What is Mars’ maximum allowable
dividend-received deduction for the current year?
a. $- 0 –
b. $14,000
c. $16,000
d. $18,000
e. $20,000
The Gilpin Partnership has an operating loss of $400,000 for the current year. Hawkins
is a general partner and owns a 40% interest in the partnership. At the beginning of the
year, Hawkins’ adjusted basis in the partnership interest is $30,000. During the year the
partnership borrows $120,000 with a recourse note. How much of the partnership loss
can Hawkins deduct on his current-year income tax return?
a. $- 0 –
b. $30,000
c. $70,000
d. $78,000
e. $200,000
Laurie and Lodi are dentists who have incorporated their practice. Laurie owns 60% of
the stock of DENT-LL’s Corporation and Lodi owns 40%. During the current year, the
dentistry corporation has operating income of $125,000, interest income of $22,000
from investments, and losses from investments in limited partnerships of $24,000. The
corporation pays $14,000 in dividends. What is DENT-LL’s taxable income for the
current year?
a. $73,800
b. $88,200
c. $123,000
d. $133,000
e. $147,000
Margarita, a single individual, has $2,000 in state taxes withheld from her salary in
2014. Her total itemized deductions are $7,500. She claims the $2,000 as an itemized
deduction on her 2014 tax return. In 2015, she receives a state income tax refund of
$400. Under the tax benefit rule she has to report income in 2015 of
a. $2,000.
b. $ 400.
c. $ 200.
d. $ -0-.
e. $ -0-, but Margarita must file an amended 2014 tax and reduce her itemized
deductions by $400.
Sarah gave her granddaughter, Alice, some Eli Lilly Co. stock last year when its fair
market value was $25,000. Gift taxes of $4,000 were paid on this transfer. Sarah
acquired the stock in 2004 at a cost of $35,000. Alice sold the Eli Lilly stock this year
for $32,000. What amount of gain (loss) will Alice recognize from her sale of the stock?
a. No gain or loss is recognized.
b. $7,000
c. ($7,000)
d. ($3,000)
Tucker Estates places an apartment building in service on November 22, 2012. The
building’s depreciable basis is $3,300,000. Tucker Estates sells the building on March 5,
2015. What is Tucker Estates’ 2015 depreciation deduction on the property?
a. $15,015
b. $21,828
c. $24,998
d. $119,988
Concerning individual retirement accounts (IRAs),
I. A single taxpayer that is an active participant in a qualified plan and has adjusted
gross income of $64,000 may contribute and deduct up to $5,500 of the annual
contribution.
II. A taxpayer who is not an active participant and whose spouse does not work may
contribute $11,000 into two separate IRAs but can only deduct $5,500 for AGI.
a. Only statement I is correct.
b. Only statement II is correct.
c. Both statements are correct.
d. Neither statement is correct.
Janet is the business manager for Greenville Auto Mart. She buys a new car from the
dealership for $35,000. The basis of the car to the dealership was $30,000. The car lists
for $42,00, but the dealer would sell the car for $40,000. What is Janet’s basis in the
new car?
a. $30,000
b. $35,000
c. $40,000
d. $42,000
e. $47,000
Phil and Faye are married and have 3 children ages 11, 14, and 17. Phil and Faye’s
adjusted gross income for the year is $200,000. The maximum they can contribute to
their children’s Coverdell Education Savings accounts is
Each Account Total Contribution
a. $- 0 – $-0-
b. $1,333 $4,000
c. $2,000 $4,000
d. $2,000 $6,000
e. $6,000 $6,000
On December 20, 2015, Thomas, the CEO of Lifetime Corporation issues a $10,000
bonus check to Ana Maria. Thomas asks Ana Maria to hold the check until at least
January 4, 2016, when there will be enough deposits to cover the check. Ana Maria is
not required to recognize the $10,000 in 2015 because of which of the following?
a. Claim-of-Right Doctrine.
b. Substance-Over-Form Doctrine.
c. Entity Concept.
d. Constructive Receipt Doctrine.
e. Arm’s Length Transaction Concept.