Richard, a cash basis taxpayer, is an 80% owner and president of WLFI TV. WLFI TV
is an S corporation and uses the accrual method of accounting. On December 1, 2015,
WLFI TV accrues a bonus of $50,000 to Richard. The bonus is payable on January 31,
2016. In what year does Richard report the income and WLFI TV take the deduction?
Richard WLFI TV
a. 2016 2015
b. 2016 2016
c. 2015 2015
d. 2015 2016
Christy’s 2014 tax return was audited during November 2015. The auditor proposed
additional tax due of $1,500. Christy disagreed. What should Christy do next?
I. Within 30 days, she must file a protest.
II. She must respond with a written protest letter.
III. She may respond with an oral protest.
a. Only statement I is correct.
b. Only statement II is correct.
c. Only statement III is correct.
d. Statements I and III are correct.
e. Statements I and II are correct.
The court that a taxpayer may not select for trial is
a. the Tax Court.
b. the U.S. Claims Court.
c. the U.S. District Court.
d. the U.S. Court of Appeals.
Norm acquired office equipment for his business at a cost of $10,000. After two years
of use, Norm exchanges the equipment for different equipment with a fair market value
of $7,000. MACRS depreciation on the original equipment was $4,753 The exchange
qualifies as a like-kind exchange. Immediately after the exchange Norm sells the new
equipment for $7,000 cash. What is the amount and character of the gain recognized?
a. No gain or loss.
b. $1,753 Section 1231 gain.
c. $1,753 Section 1245 ordinary income.
d. $4,753 Section 1231 gain.
e. $4,753 section 1245 ordinary income, and $3,000 Section 1231 loss.
Julian and Judy divorced and Julian received custody of their child. Judy must pay child
support of $24,000 annually. Therefore, Julian agreed in writing to allow Judy to claim
the dependency exemption for the child. Julian maintains a home for himself and the
child. For the current year, Julian’s filing status and total exemptions claimed are
a. Single and one exemption.
b. Single and two exemptions.
c. Head of household and two exemptions.
d. Head of household and one exemption.
Jennifer owns 60% of the stock in Heath Corporation. During the current year, Heath
Corporation has taxable income of $80,000 and pays dividends of $30,000. Which of
the following statements about Jennifer’s income from Heath Corporation is/are
correct?
I. If Heath Corporation is an S corporation, Jennifer must recognize $48,000 of income.
II. If Heath Corporation is a corporation, Jennifer must recognize $18,000 of income.
a. Only statement I is correct.
b. Only statement II is correct.
c. Both statements are correct.
d. Neither statement is correct.
Safina is a high school teacher. She has set aside one room in her home exclusively as a
home office where she grades papers, prepares for class, etc. No revenues are generated
from her activities. Depreciation and maintenance are $800 on the home office space.
How much of the expenses are deductible by Safina?
a. $- 0 –
b. $200
c. $400
d. $500
e. $800
Jerome, a self-employed attorney, is scrambling around to refigure his estimated 2015
income tax liability, because he needs to mail his third quarter estimated tax payment
tomorrow (September 15, 2015). What concept, construct, or doctrine is causing Jerome
to scramble?
a. Administrative Convenience Concept.
b. Ability To Pay Concept.
c. Arms-length Transaction Concept.
d. Pay- As-You-Go Concept.
e. Assignment of Income Doctrine.
According to the IRS definition, which of the following is not a characteristic of a tax?
a. The payment to the governmental authority is required by law.
b. The payment relates to the receipt of a specific benefit.
c. The payment is required pursuant to the legislative power to tax.
d. The purpose of requiring the payment is to provide revenue to be used for the public
or governmental purposes.
Constance owns a boutique. During the current year, she has gross income of $400,000
and allowable deductions related to the business of $425,000.
I. Constance has incurred a transaction loss, which represents her unrecovered cost of
capital.
II. Constance has suffered an annual loss, which may be carried back 2 years or forward
20 years if not used in the current year.
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 categorized as itemized deduction(s)?
I. Trade or business expenses.
II. Rental expenses.
III. Property taxes on personal residence.
IV. Investment interest expense.
a. Only statement I is correct.
b. Only statement IV is correct.
c. Statements I and III are correct.
d. Statements III and IV are correct.
e. Statements I, II, and IV are correct.
Curtis is 31 years old, single, self-employed, and has no qualified pension plan. His net
self-employment income is $33,000 and he contributes the maximum amount to his
Keogh account during the current year. How much can Curtis deduct for AGI this year?
a. $- 0 –
b. $1,000
c. $3,100
d. $5,000
e. $6,600
Cost recoverable intangible properties include
I. Uranium ore.
II. Patents.
III. Agreements not to compete.
IV. Copyrights.
a. Statements I and IV 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 can be income deferral transactions?
I. Exchanges of like-kind property.
II. Involuntary conversions of property.
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 exchanges of property are like-kind exchanges?
I. Common stock of Intel traded for preferred stock of Intel.
II. Principal residence traded for 20 acres of undeveloped investment land.
a. Only statement I is correct.
b. Only statement II is correct.
c. Both statements are correct.
d. Neither statement is correct.
The marginal tax rate is the rate of tax that will be paid on the next dollar of income or
the rate of tax that will be saved by the next dollar of deduction.
a. True
b. False
Lavery Corporation has two equal shareholders, and has been an electing S corporation
since its inception. In the current year, Lavery has taxable income of $60,000. This
amount includes $50,000 from operations and $10,000 from investment interest
income. Because of these events, each shareholder’s adjusted basis in the stock will
increase by
a. $- 0 –
b. $10,000
c. $25,000
d. $30,000
e. $50,000
Mercedes has a net long-term capital gain of $3,000 and a net short-term capital loss of
$10,000. She can deduct $3,000 of the $7,000 net loss as a deduction for adjusted gross
income in the current year. She must defer realizing any tax benefit from the remaining
$4,000 loss until the next year.
a. True
b. False
During 2015, Marla earns $2,700 from a summer job. She also has interest income of
$2,400. Marla, age 19, is a full-time student at Western College. Her parents claim her
as a dependent. Their taxable income is $100,000. What is Marla’s tax liability for
2015?
a. $210
b. $265
c. $300
d. $450
e. $525
Nonresidential commercial realty placed in service on March 2, 2015, is depreciated
over
a. 27.5 years, 200%-declining-balance method, mid-year convention.
b. 31.5 years, straight-line method, mid-month convention.
c. 31.5 years, 200%-declining-balance method, mid-year convention.
d. 39 years, straight-line method, mid-month convention.
e. 40 years, straight-line method, mid-month convention.
MACRS eliminates several sources of potential conflict between the IRS and taxpayers
concerning an asset’s useful life and the calculation of the depreciation deduction.
a. True
b. False
Delta Freight Company purchases 10 delivery vans on April 4, 2015, at a total cost of
$366,000. Delta uses the regular MACRS system on all of its delivery vans (the
delivery vans are 5-year MACRS property and are not limited by listed property rules).
Delta’s annual income is $15,000 before the depreciation deduction. What is Delta’s
maximum cost recovery deduction on the vans in 2015?
a. $15,000
b. $69,200
c. $73,200
d. $85,200
e. $91,200
Stephanie and Matt are married with 2 dependent children. During 2015, they have total
gross income of $140,000. Their allowable deductions for adjusted gross income total
$6,000 and they have $6,000 of allowable itemized deductions. Compute Stephanie and
Matt’s 2015 taxable income and 2015 income tax liability.
a. Assume that in addition to the above information, Stephanie sold some land that she
had held as an investment at a gain of $5,000. What is the effect of the gain on their
taxable income and income tax liability? You do not need to recalculate, just explain the
general effect of the sale of the land.
b. Assume the same facts as in part (a) and that Matt also sold some stock he purchased
several years ago at a $12,000 loss. What is the effect of the gain on the land and the
loss on the stock on their taxable income? Explain.
Carter sold 100 shares of Mitsui, Inc. for $8,000 but he only recognized $2,000 as
income because the original purchase price was $6,000. This is due to the
a. Ability to Pay Concept.
b. Administrative Convenience Concept.
c. Arm’s-Length Transaction Concept.
d. Capital Recovery Concept.
e. Business Purpose Concept.
The Data Company employs John and Jesse. John has worked for Data for 4 years,
whereas Jesse has worked for the company for only 18 months. Both are 27 years old.
I. John is eligible to participate in Data’s qualified pension plan.
II. Jesse is eligible to participate in Data’s qualified pension plan.
a. Only I is correct.
b. Only II is correct.
c. Both statements are correct.
d. Neither statement is correct.
Sidney, a cash basis contractor, builds an apartment building for Jerry. The building is
completed, and the bill is given to Jerry. Jerry pays $200,000 (1/4 of the bill) in 2015.
Subsequently, Jerry files suit for damages based on alleged faulty construction. Sidney
is required to recognize $200,000 of income in 2015 based upon
I. Constructive Receipt Doctrine.
II. Claim-of-Right Doctrine.
III. Realization Concept.
IV. Tax Benefit Rule.
a. Statements I and IV are correct.
b. Statements II and III are correct.
c. Only statement III is correct.
d. Statements I, II, and III are correct.
e. Statements I, II, III, and IV.
Which of the following constitutes a realization?
I. Oak Ridge Coal Company’s coal mine reserves were recently appraised at $5,750,000
more than the previous year’s appraisal.
II. Lea’s employer gives her (and all other salaried employees) a weekend in Chicago in
recognition of their efforts to make this a successful year.
a. Only statement I is correct.
b. Only statement II is correct.
c. Both statements are correct.
d. Neither statement is correct.
The Polaris S Corporation has operating income of $50,000. Andrew is the sole
shareholder of the corporation that has had the S election in effect since its inception. At
the beginning of the current year, Andrew’s basis in his S corporation stock is $2,000.
During the year Andrew receives cash distributions totaling $55,000. How much
income must Andrew recognize for the current tax year?
a. $50,000 ordinary income; $55,000 dividend income.
b. $50,000 ordinary income.
c. $50,000 ordinary income; $3,000 capital gain.
d. $55,000 dividend income; $3,000 capital gain.
e. $55,000 dividend income.
Kelly buys a new Lexus for $48,750 in the current year to use in her commercial real
estate business. Kelly cannot deduct the cost of the automobile in the current year,
because
a. it is unreasonable in amount.
b. it is not a regularly recurring item.
c. it is a capital expenditure.
d. it is not necessary
In each of the following independent cases determine the total number of personal and
dependency exemptions Ivan may claim. Assume that Ivan is single, 32 years old and
any dependency test not mentioned has been met.
a. Ivan provides 80% support of his nephew (age 17), who lives with him. During the
year, the nephew has gross income of $4,800 and is a full time student.
b. Ivan and his two brothers each provide 20% of the support of their mother. The
mother derives the remainder of her support from Social Security benefits of $9,300.
c. Ivan provides 60% support of his mother, age 69. His mother received dividend
income of $3,350 and Social Security benefits of $8,500.
Horizontal equity
I. means that those taxpayers who have the greatest ability to pay the tax should pay the
greatest proportion of the tax.
II. means that two similarly situated taxpayers are taxed the same.
III. is reflected in the progressive nature of the federal income tax system.
IV. exists when Avis, a single individual with 4 dependent children, and Art, a single
individual with no dependents, both pay $2,400 income tax on equal $26,000 annual
salaries.
a. Statements III and IV are correct.
b. Statements II and III are correct.
c. Statements I and III are correct.
d. Only statement IV is correct.
e. Statements I, II, III, and IV are correct.
Given below are Belinda’s capital gains and losses for two consecutive years. What is
the effect of the gains and losses on Belinda’s taxable income for each year?
First Second
Year Year
Short-term capital gain $-0- $4,000
Long-term capital gain 13,000 6,000
Short-term capital loss (3,000) (15,000)
Long-term capital loss (12,000) -0-
First Second
Year Year
a. $10,000 $ 7,000
b. $(2,000) $ (3,000)
c. $(3,000) $ (3,000)
d. $(2,000) $ (5,000)
e. $1,000 $ 3,000
Connie received a $1,000 scholarship to attend State University from a local civic
group based on her grades and community activities. The $1,000 is included in income.
a. True
b. False