Paul, age 40 and single, has an 8-year-old son, Larry. Larry resides with his mother,
Susan, in her home. Pursuant to the terms of their divorce, Paul properly claims Larry
as a dependent on his income tax return. Paul pays child support payments to his
ex-wife for support of his child. Susan does not claim Larry as her dependent but she
does bear the economic burden of supporting the household in which they reside. What
is the maximum amount of the 2015 standard deduction that Susan qualifies for?
a. $6,300
b. $9,250
c. $9,600
d. $12,600
e. Susan does not qualify to claim a standard deduction.
Which of the following qualifies as a like-kind exchange of property?
I. Commercial retail building and its land for an office building and its land.
II. Louisiana Oil, Inc. common stock for Louisiana Oil, Inc. corporate bonds.
a. Only statement I is correct.
b. Only statement II is correct.
c. Both statements are correct.
d. Neither statement is correct.
Mary and Philip purchased an apartment building in January 2011, which they actively
manage. During the current year, the apartment building generates a loss of $35,000.
Their other income is as follows:
Salaries $80,000
Dividends and interest 8,000
Loss from limited partnership acquired in 2009 (4,000)
What is Mary and Philip’s adjusted gross income?
a. $59,000
b. $63,000
c. $84,000
d. $88,000
e. None of the above.
A deferral is like an exclusion in that it does not have a current tax effect, but it differs
in that an exclusion is never subject to taxation, whereas a deferral will be subject to tax
at some point of time in the future.
a. True
b. False
Bowden is a single individual and has the following income (loss) for the current tax
year:
Salary $85,000
Dividends and interest 24,000
Actively managed rental property (23,000)
What is Bowden’s adjusted gross income for this year?
a. $ 85,000
b. $ 86,000
c. $ 88,500
d. $ 89,500
e. $109,000
Alan is a single taxpayer with a gross income of $88,000, a taxable income of $66,000,
and an income tax liability of $12,294 for 2015. Josh also has $8,000 of tax-exempt
interest income. What are Alan’s marginal, average, and effective tax rates?
a. 25% marginal; 16.6% average; 18.6% effective.
b. 28% marginal; 15.9% average; 21.5% effective.
c. 28% marginal; 16.6% average; 21.5% effective.
d. 25% marginal; 18.6% average; 16.6% effective.
Frank is a self-employed architect who maintains a qualifying office in his home. Frank
has $80,000 gross income from his practice and incurs $72,000 in salaries, supplies,
computer services, etc. Frank’s mortgage interest and real estate taxes allocable to the
office total $3,000. Other expenses total $9,000 and consist of depreciation, utilities,
insurance, and maintenance. Frank’s total office in home deductions are
a. $3,000
b. $5,000
c. $8,000
d. $9,000
e. $12,000
Jack and Cheryl own a cabin near Copper Mountain, Colorado. During the year, Jack
and Cheryl rent the cabin for 30 days to friends for $1,800. Jack and Cheryl use the
cabin a total of 60 days during the year. After making the appropriate allocation of
planned expenses between personal and rental use, the following rental loss was
determined:
Rental income $1,800
Property taxes (250)
Mortgage interest (950)
Repairs and maintenance (200)
Utilities (300)
Depreciation (400)
Rental loss $(300)
How should Jack and Cheryl report the rental income and expenses for the forthcoming
year?
I. Only expenses up to the amount of $1,800 rental income may be deducted for the
year.
II. Only depreciation in the amount of $100 may be deducted.
III. The amount of the disallowed depreciation deduction ($300) can be carried forward.
IV. Nothing needs to be reported.
a. Only statement I is correct.
b. Statements II and III are correct.
c. Statements I, II and III are correct.
d. Statements III and IV are correct.
e. Statements I, II, III, and IV.
Alfred uses his personal automobile in his business of selling party supplies to local
businesses. He bought a new car in 2015 and drove it a total of 20,000 miles of which
2,000 miles were for commuting and other personal uses. Actual gas, oil, repairs,
licensing, insurance, and depreciation totaled $11,000 for 2015. Actual parking
expenses for business were $200. What is the maximum amount Alfred can deduct for
2015?
a. $9,750
b. $10,100
c. $10,170
d. $10,550
e. $11,200
Garcia is single, 65 years old, and has no dependents. Garcia will not have to file a tax
return in 2015 if:
I. his gross income does not exceed $11,700.
II. his only income is $21,000 of social security benefits.
a. Only statement I is correct.
b. Only statement II is correct.
c. Both statements are correct.
d. Neither statement is correct.
Terry and Elsa form Egret Company by contributing assets of their respective
businesses. Terry contributes $5,000 cash and land with a fair market value of $35,000
(adjusted basis of $20,000) for a 40% interest. Elsa will contribute services in
organizing the startup of the company worth $20,000 and contributes $15,000 cash and
inventory worth $75,000 (adjusted basis of $80,000) for a 60% interest. Determine the
amount of gain or loss recognized on the transfer of the assets, each owner’s basis in the
ownership interest, and Egret Company’s basis in the assets received for each of the
following entities.
a. Egret Company is a partnership.
b. Egret Company is a corporation.
Which of the following statements concerning the Internal Revenue Code is true?
I. The most current tax laws may be found in the Internal Revenue Code of 2011.
II. A tax treaty may override the Code.
III. The most common references to a particular part of the Code are to a section.
IV. The Internal Revenue Code is considered a secondary source of tax law.
a. Statements I and II are correct.
b. Statements I and III are correct.
c. Statements II and III are correct.
d. Statements II and IV are correct.
e. Only II is correct.
Assume a corporation’s status as an S corporation is revoked or terminated. How many
years must the corporation wait before making a new S corporation election, in absence
of IRS consent to an earlier election?
a. 1
b. 3
c. 5
d. 7
e. A new election is not permitted.
Mary pays $25,000 and secures a mortgage note for $75,000 to purchase a vacation
home. She pays $200 to her attorney for reviewing the purchase agreement and $1,500
in points to the mortgage company. Mary’s initial basis in the vacation home is
a. $- 0 –
b. $25,000
c. $26,700
d. $100,200
e. $101,700
Roscoe receives real estate appraised at $200,000 and cash of $10,000 from Cathy in
exchange for Roscoe’s investment realty with a basis of $170,000. What is his basis in
the new real estate?
a. $160,000
b. $170,000
c. $180,000
d. $200,000
e. $210,000
Melonie purchased 100 shares of Wake Corporation stock for $6 per share on August 3,
2013. On December 18, 2014, Melonie sells all 100 shares for $4 per share. On January
5, 2015, Melonie purchases 50 shares of Wake stock for $5 per share. What is the basis
of the 50 shares Melonie holds on January 5, 2015?
a. – 0 –
b. $50
c. $250
d. $450
e. $650
Jered and Samantha are married. Their 2015 taxable income is $90,000 before
considering their mortgage interest deduction. If the mortgage interest totals $10,000
for 2015, what are the tax savings attributable to their interest deduction?
a. $1,500
b. $2,500
c. $2,800
d. $3,300
e. $10,000
Shaheen owns 2 rental properties. She hires her 21 year old son, who is a junior at State
College, to obtain tenants, negotiate leases, make arrangements for repairs, and pay
expenses related to the properties.
I. Shaheen’s sale of the properties will result in a capital gain or loss.
II. Shaheen’s sale of the properties at a loss results in a current-year loss deduction of no
more than $3,000.
a. Only statement I is correct.
b. Only statement II is correct.
c. Both statements are correct.
d. Neither statement is correct.
Bronco Corporation realizes $270,000 from sales during the current year. Bronco also
receives $20,000 of dividends from a 2% owned corporation. Operating expenses totals
$275,000. Bronco’s taxable income is
a. $(19,000)
b. $(5,000)
c. $1,000
d. $4,500
e. $15,000
Carlos incurs the following medical expenses during the current tax year:
Surgeon’s fees $2,000
Medical insurance premiums 600
Hospital fees 800
Prescription drugs 310
Wheel chair 200
Carlos’s adjusted gross income for the year is $32,000. He receives a $500
reimbursement from his insurance company. Determine the amount of his medical
expense deduction for the current year.
a. $- 0 –
b. $210
c. $2,360
d. $2,400
e. $2,610
Victor receives a $2,000 tax credit for childcare. The credit was earned because of
Victor’s expenditures for daycare for his son while Victor worked. What concept,
construct, or doctrine helps explain why Victor receives this tax credit?
a. Ability to Pay Concept.
b. Administrative Convenience Concept.
c. Arm’s-Length Transaction Concept.
d. Capital Recovery Concept.
e. Pay-as-You-Go Concept.
Unrecaptured Section 1250 gain
I. is subject to a maximum tax rate of 25%.
II. applies only to real property owned by individuals.
a. Only statement I is correct.
b. Only statement II is correct.
c. Both statements are correct.
d. Neither statement is correct.
Under the Wherewithal to Pay concept, income should be recognized and a tax paid on
the income when the taxpayer has the resources to pay the tax.
a. True
b. False
David pays $35,000 cash and issues a mortgage note for $95,000 to purchase land. He
pays $750 to his attorney for reviewing the purchase agreement. David’s initial basis in
the land is
a. $- 0 –
b. $35,000
c. $35,750
d. $130,000
e. $130,750
Willie owns 115 acres of land with a fair market value of $57,000. He purchased the
land as an investment for $35,000 in 1993. Willie trades the land for a 122-acre parcel
adjacent to other property he owns. The 122 acres has a value of $57,000, and the
exchange qualifies for like-kind deferral treatment. What is Willie’s basis in the new
parcel of land?
a. $- 0 –
b. $17,000
c. $35,000
d. $57,000
e. $74,000
Carlos is single and has a 7 year-old child. Carlos’ adjusted gross income for the year is
$101,000. The maximum amount he can contribute to his child’s Coverdell Education
Savings Account is
a. $- 0 –
b. $800
c. $1,200
d. $2,000
e. $4,000
Which of the following regulations deals with Income Tax?
a. Reg. Sec. 1.165-1
b. Reg. Sec. 20.2014-5
c. Reg. Sec. 25.2518-5
d. Reg. Sec. 301.7002-5
Diana bought 1,500 shares of Dalton Protection, Inc., common stock for $10 per share.
She paid her broker a $300 commission to close the purchase. The following year,
Diana sold 1,000 of the shares for $17 per share and paid a commission of $175 on the
sale. What is Diana’s capital gain on the sale of the stock?
a. $1,525
b. $2,000
c. $6,625
d. $6,825
e. $7,000
Dogg Corporation, Katt Corporation, and Rabitt Corporation are equal partners in
Critter Partnership. The partner’s fiscal year ends follow:
Dogg Corporation February 28
Katt Corporation May 31
Rabitt Corporation August 31
Which of the following statements is (are) correct?
I. Critter Partnership may elect to use any of the three dates that the partners use.
II. Critter Partnership must use the tax year of the partner that creates the least amount
of deferral.
a. Only statement I is correct.
b. Only statement II is correct.
c. Both statements are correct.
d. Neither statement is correct.
Makemore Company purchases a factory for $800,000. The purchase price is properly
allocated 90% to the building and 10% to the land. In the first year, Makemore adds a
storage shed to the building at a cost of $8,000. The utility company pays Makemore
$1,500 for an easement to run utility lines across the land. A total depreciation of
$45,000 is deducted over the 3 years. Determine the adjusted basis of the building and
the land as of the end of year 3:
a. $728,000 building; $78,500 land
b. $683,000 building; $80,000 land
c. $683,000 building; $78,500 land
d. $728,000 building; $80,000 land
Tax avoidance occurs when a taxpayer uses fraudulent methods or deceptive behavior
to hide actual tax liability.
a. True
b. False
Erline begins investing in various activities during the current year. Unfortunately, her
tax advisor fails to warn her about the passive loss rules. The results of the three passive
activities she purchased for the current year are:
Income (Loss)
Passive Activity 1 $(36,000)
Passive Activity 2 22,000
Passive Activity 3 (4,000)
a. If Erline’s adjusted gross income is $170,000 before considering the effect of the
passive activities, what will Erline’s adjusted gross income be for the current year?
Fully explain the effect of the passive activity investments on her adjusted gross
income.
b. Because Passive Activity 1 has been such a loser, Erline is considering selling it.
However, she is concerned about the effect of the sale on her taxable income because
her tax advisor told her that her basis in the activity is only $14,000 and she could sell it
for $32,000. Explain the effect on her taxable income if she sells Activity 1 for $32,000.
Which of the following expenditures or losses incurred in the context of a trade or
business activity is deductible at the time it is incurred?
a. Aaron owns a local restaurant. He pays the local health inspector a fee of $125 per
week, as provided by city regulation.
b. Beth owns a local delivery company and pays $750 in parking fines during the year
with respect to her delivery vehicles. These fines were unavoidable in the context of her
business activity.
c. Brad hires the son of the police chief as the night watchman at his business. The son
is paid at the same weekly rate as other night watchmen in the area, but he does not
show up for work on a regular basis.
d. Dotty owns a local nightclub that features live music. She pays $4,600 to purchase a
full page ad in the local newspaper urging citizens to vote against a noise ordinance in
the next election that will force her out of business if passed.
Increases in wealth and recoveries of capital that Congress has decided should not be
subject to income tax.
Fraudulent methods are used to reduce the actual tax liability.
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
Taxpayer’s only passive activity is a rental activity that results in a loss of $8,000.
Amount: $8,000, since AGI is less than $100,000
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.
Economic Performance
Section 179 expense
Explain the rationale for disallowing the deduction for interest expense attributable to
money borrowed to acquire tax-exempt municipal bonds.
What are the differences between a cafeteria plan and a flexible benefits (salary
reduction) plan?
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.
Julian’s tenant improves her side of the duplex by making improvements to the
bathroom and kitchen that are worth $750. Julian does not adjust her rent for the $750
improvements.
Harriet and Harry are married and have total gross income of $65,000. Their allowable
deductions for adjusted gross income total $1,500 and they have $4,400 of allowable
itemized deductions. What are Harriet and Harry’s taxable income and income tax
liability for 2015?
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.
Michelle’s employer pays for her graduate school classes. Tuition during the year totals
$2,500 (her employer does not have a qualified plan).
A tax rate that decreases as the tax base increases.
Hank’s employer gives him fishing gear that is worth $1,250 at his retirement party.
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.
Substance Over Form Doctrine
Depreciable basis