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Fay "hires" her four-year-old son to be the office manager of her real estate firm. She
deducts his $20,000 annual salary as a business expense. The IRS disallows the
deduction upon examination of Fay's tax return. Which of the following supports the
IRS position?
a. All-Inclusive Income Concept.
b. Annual Accounting Period Concept.
c. Entity Concept.
d. Realization Concept.
e. Business Purpose Concept
Maureen is injured on the job and has to retire. Before her retirement, Maureen earned
$20,000 in wages. After her retirement, her employer pays her $5,000 for vacation time
that accrued before she was injured. In addition, she receives $10,000 to compensate
her for sick pay from an accident and health insurance plan that was paid for by her
employer. How much of the above payments should Maureen include in her gross
income?
a. $10,000
b. $20,000
c. $25,000
d. $30,000
e. $35,000
Meritt is a partner in the McPherson Partnership. At the close of the current year,
Meritt's basis in the partnership is $25,000.
I. If the partnership distributes cash of $7,500 to Meritt, she must report the cash as
income.
II. If the partnership distributes property with a basis of $12,000 and a fair market value
of $15,000, Meritt must report $3,000 as income.
a. Only statement I is correct.
b. Only statement II is correct.
c. Both statements are correct.
d. Neither statement is correct.
Tracey sells General Electric stock (owned 10 years) for a $40,000 gain in the current
year. In addition, she has a loss of $20,000 on the sale of one acre of land used in her
trade or business. The land was purchased five years ago. Tracey's net capital gain
(loss) for the current year is:
a. $(20,000)
b. $- 0 -
c. $20,000
d. $40,000
Lynnette is a single individual who receives a salary of $36,000. During 2015, she has
$6,800 withheld for payment of her federal income taxes and $2,900 for her 2015 state
income taxes. In 2016, she receives a $450 refund after filing her 2015 federal tax
return and a $750 refund after filing her 2015 state tax return.
I If Lynnette has total itemized deductions of $6,000 on her 2015 federal tax return, she
must include the entire $750 refund in her 2016 gross income.
II. If Lynnette uses the standard deduction in filing her 2015 federal income tax return,
the $750 refund is not taxable in 2016.
a. Only statement I is correct.
b. Only statement II is correct.
c. Both statements are correct.
d. Neither statement is correct.
Lu is interested in purchasing the assets of Idaho Potato Chip Company. Idaho's assets
are:
Adjusted Basis Fair Market Value
Cash $2,300 $2,300
Inventory $16,500 $19,200
Equipment $13,000 $ 9,000
Land $10,000 $40,500
Building $76,600 $129,000
$118,400 $200,000
All of the following statements are correct except:
a. If Lu pays $225,000 for the assets, Lu's basis in the tangible assets will be $200,000.
b. If Lu buys the stock of Idaho for $225,000, the basis in the assets will be $118,400.
c. If Lu pays $225,000 for the assets, Lu will have a basis in the building of $129,000.
d. If Lu buys the stock of Idaho for $225,000, he will recognize goodwill of $25,000.
To keep the employees on the premises in case an emergency arises, the Riverview
Hotel provides meals to its employees in a room adjacent to their restaurant. Since the
meals are provided as a convenience to the employer and on their premises, the value of
the meals is excluded in the income of the employees.
a. True
b. False
Kenneth owns all of the stock of Kearney Corporation. Kenneth is also the President of
Kearney and works full-time running the corporation. During the current year, Kearney
has a loss of $40,000 from its operations.
I. If Kearney is an S Corporation, the corporation may carryback the loss 2 years (and
obtain a refund of taxes paid) with any remaining loss carried forward 20 years.
II. If Kearney is a regular corporation, Kenneth may deduct the loss for AGI on his
personal tax return because the corporation is a flow through entity.
a. Only statement I is correct.
b. Only statement II is correct.
c. Both statements are correct.
d. Neither statement is correct.
Janine is an engineering professor at Southern College. Her annual salary is $110,000.
She owns two 3-unit apartment buildings near the university. Because of the proximity
to campus, Janine actively manages the property. During the current year, the rental of
the property produced a $29,500 loss. How much of the loss may Janine deduct for the
current year?
a. $- 0 -
b. $14,750
c. $20,000
d. $25,000
e. $29,500
Lindale Rentals places an apartment building in service on November 22, 2015. The
building's depreciable basis is $3,300,000. What is Lindale Homes' 2015 depreciation
deduction on the property?
a. $7,507
b. $15,015
c. $59,994
d. $104,990
Punitive damage awards received because of a personal injury
a. Are the same as loss-of-income damages.
b. Are included in gross income regardless of the cause.
c. Will be excluded from gross income if the award resulted from a physical personal
injury.
d. Will be excluded from gross income because punitive awards are meant to punish the
offender for gross negligence.
e. Are never taxable.
Depreciation recapture provisions
I. are reclassification provisions.
II. apply to depreciable assets sold at a gain.
a. Only statement I is correct.
b. Only statement II is correct.
c. Both statements are correct.
d. Neither statement is correct.
Morris and Marianne have a $310,000 mortgage on their personal residence and a
$90,000 mortgage on their mountain retreat. The interest on both of them qualifies as
deductible qualified home mortgage interest.
a. True
b. False
Cindy is an employee of Silvertone Corporation. Silvertone pays the medical insurance
premiums of all of its employees. Because of large deductible levels and limitations on
the payment of certain medical expenses, the basic health insurance policy does not
cover all medical costs. During the current year, Silvertone adopted a Cafeteria Plan
funded entirely by Silvertone. The plan provides for $3,000 per employee, and Cindy
elects $2,500 for her medical costs not covered by the basic policy. She takes the
remaining $500 in cash. Actual payments for Cindy's medical care of $1,500 are made
from the Cafeteria Plan.
I. Cindy's gross income is increased by the $1,000 of the $2,500 allocation not used for
additional medical expenses.
II. Cindy's gross income is increased by the $1,500 paid out of the Cafeteria Plan.
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 citations denotes a regular decision of the U.S. Tax Court?
a. 247 F.Supp. 1519
b. 49 TCM 769
c. 54 TC 1873
d. 531 F.2d 1165
e. 1987-2 CB 674
A limitation exists on the annual amount of deductible depreciation for passenger
automobiles. The limitation rules include which of the following?
I. If the automobile is used less than 100% for business, the annual limitation amount is
reduced by multiplying it by the business-use percentage.
II. Section 179 expensing is available for passenger automobiles, but often is not
advantageous.
a. Only statement I is correct.
b. Only statement II is correct.
c. Both statements are correct.
d. Neither statement is correct.
On January 5, 2015, Mike acquires a 50% interest in Precision Tools Partnership by
contributing property with an adjusted basis of $20,000 and a fair market value of
$24,000, subject to a mortgage of $16,000. What is Mike's basis in Precision Tools
Partnership as of January 5, 2015?
a. $- 0 -
b. $10,000
c. $12,000
d. $16,000
e. $20,000
Gabrielle has the following gains and losses for the current year:
Short-term capital loss $(8,000)
Long-term capital gain 3,000
Section 1231 gain 3,000
Section 1231 loss (5,000)
What is Gabrielle's net capital gain or loss position for the year?
a. $7,000 net short-term capital loss.
b. $3,000 net short-term capital gain.
c. $5,000 net short-term capital loss.
d. $3,000 net short-term capital gain.
Sandra sells a business-use warehouse to her wholly owned corporation. Sandra realizes
a loss of $13,000 on the sale. (Sales price, $102,000, less adjusted basis, $115,000). Tax
law does not permit Sandra a deduction for the $13,000 loss. Which of the following
explain(s) this tax result?
I. Arm's-length Transaction Concept.
II. Pay-As-You-Go Concept.
III. Legislative Grace Concept
IV. Business Purpose Concept.
a. Only statement I is correct.
b. Only statement II is correct.
c. Statements III and IV are correct.
d. Statements I and III are correct.
e. Statements I, II, III, and IV are correct.
Which of the following payments received on December 31, 2015, would be recognized
by a cash basis taxpayer in 2014, but would not be recognized in 2015 by an accrual
basis taxpayer?
I. Checks received from customers for services rendered during November and
December 2015. The checks are deposited in the bank account on January 4, 2016.
II. Checks received from customers for services to be rendered during 2016. The checks
are received in the morning mail and deposited in the bank account on December 31,
2015.
III. 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 check is
deposited in the bank account on January 4, 2015.
a. Only statement I is correct.
b. Only statements I and II are correct
c. Only statement III is correct.
d. Only statements II and III are correct.
e. Only statement II is correct.
Benton leases a Park City condominium from Walnut Rental for $750 a month. Benton
operates a carpet store in Park City. During October and November Benton does not
make his monthly payments. Instead, Walnut allows him to replace the carpeting in
another rental property of his instead of paying rent. What is Walnut's tax treatment of
these events?
I. Walnut can capitalize the $1,500 and depreciate it.
II. Walnut can deduct the $1,500 as an operating expense.
III. Walnut includes the $1,500 in its gross income for the year.
IV. The $1,500 must be added to the basis of the condominium.
a. Statements II and III are correct.
b. Statements I, II, and III are correct.
c. Statements I and III are correct.
d. Only statement II is correct.
e. Only statement I is correct.
In 2015, Oscar purchases $150,000 of equipment. The taxable income of the business is
$20,000. What is Oscar's maximum Section 179 deduction in 2015?
a. $20,000
b. $25,000
c. $35,000
d. $45,000
e. $150,000
Susan is 17 and is claimed as a dependent by her parents. In 2015, she earns $1,000
from a summer job and receives $2,400 of interest from a savings account. How much
of Susan's income is taxable at her parents' marginal rate?
a. $- 0 -
b. $300
c. $2,100
d. $2,400
Alan is a 23-year old student at Upper State College. He earned $4,200 at a summer
job.
I. Because he earns over $4,000 his parents cannot claim him as a dependent on their
return.
II. Alan cannot claim a personal exemption for himself if his parents can claim him as a
dependent.
a. Only statement I is correct.
b. Only statement II is correct.
c. Both statements are correct.
d. Neither statement is correct.
Listed property rules include the following:
I. If listed property is not predominantly used in the taxpayer's business, the
business-use portion of the asset cannot be depreciated.
II. If more than 50 percent of the listed property's total use for each year is related to the
taxpayer's business, the asset is treated the same as any other mixed-use business asset.
III. When listed property is used 50% or less in the taxpayer's business, the Section 179
expense election does not apply to the asset.
IV. Listed property includes computers, and passenger automobiles.
a. Statements I and III are correct.
b. Only statement IV is correct.
c. Statements II and III are correct.
d. Statements II, III, and IV are correct.
e. Statements I, II, III, and IV are correct.
Which of the following intangible assets is subject to the 15-year amortization period?
a. The ownership rights to the TV program "Wheel of Fortune".
b. A professional football franchise purchased and relocated to Los Angeles.
c. Covenant not to compete for five years as part of the purchase of a business.
d. A purchased interest in a high tech partnership.
e. An interest under an existing lease of a oil rig.
Rodrigo and Gwen are married and have 2 children. Gwen earns $65,000, and Rodrigo
has a part-time job from which he earns $4,000 during the year. They pay $6,000 in
qualified child-care expenses during the year. Rodrigo and Gwen can claim a child-care
credit of:
a. $- 0 -
b. $800
c. $1,200
d. $4,000
e. $6,000.
Discuss whether the following persons are currently engaged in a trade or business:
a. Darlene has expenses related to managing her portfolio of securities. The trading of
the securities generates most of her annual income. She generally does not hold
securities long-term. She buys and sells continuously. She has no other job.
b. Mark incurs expenses related to investing in stocks and bonds. Mark is a Sociology
professor at Indiana University but spends 10-15 hours per week on his investments.
Approximately 70% of Mark's annual income come from his investments as dividends
and interest.
c. Paul leases real estate to Floyd's Barber Shop for a parking lot. The only expense he
incurs is legal expense regarding the lease, which he renegotiates annually.
d. Mandy owns several rental apartments. She arranges for repairs and maintenance,
pays for the expenses related to the properties, and handles all leasing activities.
Conzo is injured in an accident while working at his job. He received $1,500 in
worker's compensation benefits for 5 weeks of lost work. How much should Conzo
report as gross income from the receipt of these benefits?
a. $- 0 -
b. $300
c. $750
d. $900
e. $1,500
All tax practitioners are governed by the AICPA's Code of Professional Conduct.
a. True
b. False
Alex is 37 years old, single and employee of Ellis Company.
I. If Alex is an active participant in the company's pension plan, he is allowed to make a
contribution to his IRA account only if his adjusted gross income is less than $61,000.
II. If Alex is an active participant in the company's pension plan, and has adjusted gross
income of $66,000, he is allowed to contribute $5,500 to his IRA account, but he is only
allowed a deduction of $2,750 for the contribution because his adjusted gross income is
between $61,000 - $71,000.
a. Only statement I is correct
b. Only statement II is correct
c. Both statements are correct.
d. Neither statement is correct.
Abaco Corp. has gross income of $230,000 and taxable income of $50,000. The
company did not include any special deductions in the calculation of taxable income.
While reviewing the tax return, Abaco's accountant finds $20,000 of charitable
contributions improperly classified as advertising and promotion expense. He sends the
return back to the tax department for correction. What is Abaco's corrected taxable
income?
a. $35,000
b. $55,000
c. $57,000
d. $63,000
e. $65,000
Computer for delivery truck.
Match each statement with the correct term below.
a. Income is subject to tax when it is received without restrictions as to its use or
disposition.
b. Income is considered received when it is credited to the taxpayer's account or made
unconditionally available to the taxpayer.
c. A concept that is fundamental to the progressive tax rate structure.
d. To be deductible, an expenditure must be made for a business or economic purpose
that is greater than any tax avoidance motive of the taxpayer.
e. The amount of a deduction may not exceed its cost.
f. Income should be recognized and a tax paid when the taxpayer has the resources to
pay the tax.
g. A type of deductible expenditure that embodies the profit motive requirement.
h. Allows the omission of items from the tax base for which the costs of compliance
exceeds the revenue generated.
i. A category of expenses that is specifically disallowed.
Administrative Convenience
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.
Related party
On December 28, 2015, Doris and Dan are considering one last financial decision for
2015, a contribution of $1,000 to the American Diabetes Association. If they make the
$1,000 contribution, it will be fully deductible on their 2015 income tax return. Their
filing status is married filing jointly. Their 2015 taxable income before this contribution
is $150,000. If they make this contribution, what is its after-tax cost?
Pedro, a cash basis taxpayer, would like to sell ordinary income property that will result
in an increase in his taxable income of $20,000. Pedro also owes $12,000 of property
taxes that are deductible. He is flexible and can properly report either or both of the
items on his 2015 or 2016 tax return. Pedro expects his marginal tax rate to be 25% for
2015 and 28% for 2016. If the applicable interest rate is 9% (.917 present value factor),
when should Pedro report each item? Show your calculations and explain.
Julia is single and earns a salary of $65,000. Her allowable deductions for adjusted
gross income total $1,200 and she has $4,200 of allowable itemized deductions. What is
Julia's taxable income and income tax liability for 2015?
Match each statement with the correct term below.
a. Automobile used 75% for business.
b. Investment expenses on municipal bonds.
c. Cost of investigating a new trade or business that the taxpayer enters.
d. Can be separated into two classifications.
e. Safety-deposit box for taxable investments.
f. Expenditure to influence legislation.
g. Cost of a new roof for office building.
h. Relates to an income producing activity mainly carried on for recreation or personal
enjoyment.
i. Deductibility depends on income and amount of personal and rental use.
j. Deductibility depends on whether the area is used exclusively for trade or business
activities.
Vacation home expense
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.
Personal use property
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
Hobby expenses of $2,500. Hobby income is $2,000. Amount $2,000, subject to 2% of
AGI
Match each statement with the correct term below.
a. A loss that is generally not deductible.
b. The borrower is personally liable for the debt.
c. The loss is used to offset income in future periods.
d. A liability that is only secured by the underlying property.
e. The loss may be used to offset income from prior periods.
f. A type of stock that receives some ordinary loss treatment.
g. Involved in a rental activity for more than 500 hours in a year.
h. Cash or other assets contributed plus recourse debts of the activity.
i. Owns at least a 10% interest and is significantly involved in the rental activity.
j. The amount of the loss for fully destroyed property is the property's adjusted basis.
k. The amount of loss is limited to the lower of the property's adjusted basis, or the
reduction in fair market value.
l. Management is left to at least one general partner whose liability is not limited and
who is responsible for the on-going activities of the business.
NOL carryback
Match the proper deduction method with the correct expenditures.
a. Capitalized and amortized over a number of accounting periods
b. Expensed in the period incurred
c. Not deductible
d. Can be capitalized and amortized or deductible depending on the amount of the
expenditure
Repair-and-maintenance expenditures
Match each statement with the correct term below.
a. A loss that is generally not deductible.
b. The borrower is personally liable for the debt.
c. The loss is used to offset income in future periods.
d. A liability that is only secured by the underlying property.
e. The loss may be used to offset income from prior periods.
f. A type of stock that receives some ordinary loss treatment.
g. Involved in a rental activity for more than 500 hours in a year.
h. Cash or other assets contributed plus recourse debts of the activity.
i. Owns at least a 10% interest and is significantly involved in the rental activity.
j. The amount of the loss for fully destroyed property is the property's adjusted basis.
k. The amount of loss is limited to the lower of the property's adjusted basis, or the
reduction in fair market value.
l. Management is left to at least one general partner whose liability is not limited and
who is responsible for the on-going activities of the business.
At-risk amount
Not a separate entity
Match each statement with the correct term below.
a. Dues, uniforms, subscriptions.
b. Intended to punish and are taxable.
c. Taxable if from an employer-provided policy.
d. Any personal wrong, such as libel, slander, or assault.
e. Excludable amount limited to gross profit percentage.
f. Gratuitous and not a form of compensation for services.
g. Excludability requires that it must be a condition of employment.
h. Excluded if for compensatory payments for sickness or personal physical injury.
i. To replace lost earnings and is excluded if due to personal physical injury.
j. Excluded if provided on the employer's business premises and for the convenience of
employer.
Employer-provided lodging
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.
Net operating 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.
Katrina receives $1,000 interest income from U.S. Treasury bonds that her uncle had
given to her.
Principal residence
Match each statement with the correct term below.
a. Prepaid interest.
b. An amount that each taxpayer who is neither a qualifying child nor a qualifying
relative, and who files a return, is allowed to deduct.
c. One test for a qualifying relative.
d. The minimum amount a taxpayer can deduct for personal expenditures.
e. A deduction in this category is always allowed. That is, there is no minimum
allowable amount and generally no income limitation placed on these deductions.
f. Generally, these deductions are for specifically allowed personal expenditures.
g. An exception to this test is a custodial parent.
h. Interest paid on debt used to buy securities.
i. Interest paid on credit cards, personal loans, car loans, etc.
j. Interest paid on a mortgage secured by the taxpayer's residence. The proceeds of the
loan can be used for any purpose and the interest is still deductible.
k. A tax designed to prevent the shifting of unearned income to children of the taxpayer.
Personal exemption amount
