A tax provision has been discussed that would add an additional marginal tax rate of
42% to be applied to an individual’s taxable income in excess of $800,000. If this
provision were to become law, what overall distributional impact would it have on our
current income tax system?
a. Proportional.
b. Regressive.
c. Progressive.
d. Disproportional.
e. None of the above.
Roy receives a nonliquidating distribution from Ageless Corporation. Which of the
following statements concerning nonliquidating distributions from a corporation are
correct?
I. A nonliquidating cash distribution is taxable if the distribution comes from the
corporation’s current or accumulated earnings and profits.
II. The amount of the dividend on a nonliquidating distribution of property is the basis
of the property distributed.
a. Only statement I is correct.
b. Only statement II is correct.
c. Both statements are correct.
d. Neither statement is correct.
Drew traded his office copier in for a new one. The old copier had an adjusted basis of
$400. The new copier cost $1,350, and he was given a trade-in allowance of $500.
I. The amount realized is $400.
II. Drew has a realized gain of $100.
a. Only statement I is correct.
b. Only statement II is correct.
c. Both statements are correct.
d. Neither statement is correct.
Rosilyn trades her old business-use car with an adjusted basis of $13,000 and an
outstanding loan liability balance of $2,000 for a new business-use car valued at $9,000
plus $3,000 cash from Bob’s Auto Sales and Loan Company. Bob assumes Rosilyn’s
loan balance. What is Rosilyn’s realized gain on the transaction?
a. $- 0 –
b. $1,000
c. $2,000
d. $3,000
e. $5,000
For any unrecovered portion of an annuity investment, the taxpayer is allowed a
deduction in the year of death.
a. True
b. False
Which of the following taxable years are allowable by a newly formed partnership
without obtaining prior approval from the IRS?
I. A January 31 year-end if it is a retail enterprise with a natural business year ending
January 31 and all of its principal partners are on a calendar year.
II. A calendar year if majority partners and principal partners have varied year-ends.
III. A taxable year that is the same as that of its majority partners.
a. Only statement I is correct.
b. Only statement III is correct.
c. Only statement II is correct.
d. Statements II and III are correct.
e. Statements I, II, and III are correct.
Which of the following is not a capital asset?
a. Office building used by a CPA firm.
b. Antique automobile held by an antique automobile collector.
c. Land held for investment.
d. Stock held for investment.
Which of the following payments meets the IRS definition of a tax?
a. A fee paid on the value of property transferred from one individual to another by gift.
b. A one-time additional property tax assessment to add a sidewalk to the neighborhood.
c. A fee paid on the purchase of aerosol producing products to fund ozone research.
d. A fee for a sticker purchased from a city that must be attached to garbage bags before
the city garbage trucks will pick up the bags.
e. All of the above meet the definition of a tax.
Karl is an employee of Cars-R-Us. As part of their employment agreement, Cars-R-Us
loans Karl $1,000,000 interest-free to assist in the purchase of a car dealership. Assume
the federal rate of interest is 8%. What is the tax treatment of the loan?
I. The arrangement has no tax consequences to Karl.
II. Cars-R-Us is deemed to have paid Karl compensation of $80,000.
III. Karl is deemed to have paid Cars-R-Us $80,000 of interest.
IV. Cars-R-Us’ net income tax effect is zero due to this arrangement.
a. Only statement I is correct.
b. Only statements I, II, and IV are correct.
c. Only statement III is correct.
d. Only statements I, II, and III are correct.
e. Only statements II, III, and IV are correct.
Sally is an electrician employed by Bogie Company. Sam is a self-employed electrician.
During the current year, Sally’s salary is $85,000 and Sam’s net self-employment
income is $85,000. Which of the following statements about the Social Security and
self-employment taxes paid is/are correct?
I. Sam pays more self-employment tax than Sally pays in Social Security tax.
II. Sam’s self-employment tax is equal to the Social Security tax paid on Sally’s income.
a. Only statement I is correct.
b. Only statement II correct.
c. Both statements are correct.
d. Neither statement is correct.
Elise sells a painting that has a fair market value of $9,000 to Jon for $6,000. Which of
the following statements about the tax effect of the sale is/are correct?
I. If Jon is an employee of Elise’s, no income is recognized from the sale.
II. If Jon is Elise’s brother, Jon does not recognize any income from the sale.
a. Only statement I is correct.
b. Only statement II is correct.
c. Both statements are correct.
d. Neither statement is correct.
During the current year, his three children, Simon, Alvin, and Theodore and his
life-long friend, Arlo, with whom he lives, provide Durbin’s support. Durbin’s support
distribution follows:
Simon 20%
Theodore 55%
Arlo 10%
Alvin 15%
If the children file a multiple support agreement, which of the following are eligible to
claim Durban as a dependent?
a. Only Theodore.
b. Only Theodore or Arlo.
c. Only Arlo.
d. Theodore, Simon, or Alvin.
e. Theodore, Simon, Arlo, or Alvin
Jenny purchased 1,000 shares of Hewlett Corporation preferred stock for $66,000 two
years ago. During the current year, Jenny receives a 10% nontaxable stock dividend at a
time when the stock has a fair market value of $40. What is Jenny’s basis in the stock
dividend shares?
a. $- 0 –
b. $6,000
c. $6,600
d. $8,000
e. $8,800
Brandon is retired and lives with his son, Charles. Charles and his sister and brother,
Heloise and Barney, provide Brandon’s total support:
Charles $7,000
Heloise 4,000
Barney 2,000
Social Security 7,500
If the children file a multiple support agreement, which of the children are eligible to
claim Bramdon as a dependent?
a. None.
b. Only Charles.
c. Only Heloise.
d. Only Charles and Heloise.
e. Charles, Heloise, or Barney.
Victor receives a $4,000 per year scholarship from Southern College. The college
specifies that $2,500 is for tuition, books, supplies, and equipment for classes. The other
$1,500 is for room and board. As part of the conditions of the scholarship, Victor must
also work ten hours per week as a grader, for which he is paid $1,700 for the year. Of
the total amount received, Victor will include in income:
a. $1,500
b. $1,700
c. $2,500
d. $3,200
e. $5,700
Marian, a schoolteacher in Duluth, Minnesota, owns a rental house in Scottsdale,
Arizona. She travels to Arizona during spring break to inspect her property and discuss
property improvements with the tenant and property manager. Marian’s brother, Brian,
lives in Scottsdale. She stays at his house during her week in Arizona and borrows his
car to travel across town for her day of meetings. Her trip accomplishes several
objectives: a visit with her brother, a trip away from Wisconsin’s winter weather, and a
review of her investment property. The expenses of traveling to Scottsdale
I. have a dominant business purpose.
II. are deductible as expenses for the production of income.
a. Only statement I is correct.
b. Only statement II is correct.
c. Both statements are correct.
d. Neither statement is correct.
The term tax shelter refers to investment property that involves residential and
commercial real estate.
a. True
b. False
During the current year, Eleanor receives land valued at $30,000 from the estate of her
grandfather. Her grandfather’s basis in the land was $8,000. Eleanor sells the land for
$34,000 late in the year. Eleanor’s gross income is:
a. $- 0 –
b. $4,000
c. $8,000
d. $16,000
e. $26,000
Alexis Corporation allows an employee, Cynthia, to use a company car for her vacation
to San Diego.
I. Cynthia will not need to recognize the value of the use of the car since it was not
cash.
II. A “cash equivalent approach” is used to measure the amount of income that must be
recognized by Cynthia.
a. Only statement I is correct.
b. Only statement II is correct.
c. Both statements are correct.
d. Neither statement is correct.
Donna owns a cleaning service. Reed, a customer, receives Donna’s bill for October
2015 services of $65 on October 31, 2015. Reed pays the $65 on January 4, 2016.
I. If Donna is a cash-basis taxpayer, she recognizes the income in 2016.
II. If Donna is an accrual-basis taxpayer, she will recognize the $65 in 2015.
III. Donna will recognize the $65 in 2015 regardless of accounting method, because that
is when she earned the income.
a. Only statement I is correct.
b. Only statement II is correct.
c. Only statement III is correct.
d. Statements I and II are correct.
e. Statements I and III are correct.
During the year, Daniel sells both of his personal vehicles. On January 10, he realizes a
$9,000 loss on the sale of the first car. On April 5, he realizes a $1,000 gain on the sale
of the second car. Assume Daniel’s salary for the year is $50,000, and he has no other
income. What is Daniel’s Adjusted Gross Income?
a. $40,000
b. $41,000
c. $42,000
d. $50,000
e. $51,000
Boomtown Construction, Inc. enters into a contract to build a new football stadium for
the Maine Lobster’s football team. The contract price is $6,000,000 and Boomtown
estimates the total cost of the contract to be $5,000,000. During the first year of work
on the contract, Boomtown completes 40% of the work on the stadium at a cost of
$2,000,000. Boomtown receives $1,000,000 when it signed the contract and an
additional $1,800,000 payment in the first year based on the degree of completion.
Which of the following statements concerning the income to be recognized from the
contract is/are correct?
I. Boomtown must include the $2,800,000 payment it received in gross income.
II. Because the work is not yet completed, Boomtown has the option of not recognizing
any income from the contract.
III. Boomtown includes the $1,800,000 payment in gross income based on the degree of
completion because it does not have a claim of right to the $1,000,000.
IV. Boomtown must include $2,400,000 in gross income.
a. Only statement I is correct.
b. Only statements I and IV are correct.
c. Only statement III is correct.
d. Only statement IV is correct.
e. Only statements II and III are correct.
During the current year, Diane disposes of Fine Foods Limited Partnership, at a gain of
$12,000. Diane’s adjusted gross income from non-passive sources is $120,000. She has
a suspended loss from Fine Foods of $22,000, and a loss from other passive activities of
$4,500. What is the amount of Diane’s adjusted gross income for the current year?
a. $95,550
b. $105,500
c. $110,000
d. $115,500
e. $120,000
Morris is a single individual who has total itemized deductions in 2015 of $6,400. His
itemized deductions include $2,000 for state income taxes. After filing his 2015 state
income tax return he receives a refund of $275.
a. Morris must include $275 as income on his 2016 federal income tax return.
b. Morris must amend his 2015 federal tax return to reflect state income taxes of $1,725
($2,000 – $275).
c. If Morris itemizes his tax return in 2016 he must reduce his state tax deduction by
$275.
d. Morris must include $200 as income on his 2016 federal income tax return.
e. Morris does not have to report any of the state income tax refund on his 2016 tax
return.
Rachael purchased 300 shares of Smelt, Inc. stock for $25 per share. At the end of the
year, the stock price has risen to $30 per share. Rachael does not recognize taxable
income even though there has been a $1,500 increase in wealth.
a. True
b. False
Capital gain and loss planning strategies include
I. the optimal action of using capital gains to reduce an individual taxpayer’s net capital
loss for a year to zero.
II. selling enough capital assets to create a $3,000 capital loss.
a. Only statement I is correct.
b. Only statement II is correct.
c. Both statements are correct.
d. Neither statement is correct.
Larry is a single parent with an 11-year-old daughter. Larry’s adjusted gross income is
$27,000, and he pays $2,100 in qualified child-care expenses. Larry can claim a child
and dependent-care credit of:
a. $420
b. $441
c. $609
d. $735
e. $2,100
A taxpayer has the following income (losses) for the current year:
Active Income Portfolio Income Passive Income
$98,000 $22,000 $(30,000)
What is the taxable income (loss) of the taxpayer if:
a. The taxpayer is a publicly held corporation?
b. The taxpayer is a closely held corporation?
c. The taxpayer is an individual and the passive income is not from a rental activity?
d. The taxpayer is an individual and the passive income is the result of a rental activity
for which the taxpayer qualifies as a real estate professional.
e. The taxpayer is an individual and the passive income is the result of a rental activity
for which the taxpayer fails to qualify as a real estate professional but meets the active
participation test?
Tim purchased State of Idaho 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. Tim 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. Constructive Receipt Doctrine.
II. All-inclusive Income Concept.
a. Only statement I is correct.
b. Only statement II is correct.
c. Both statements are correct.
d. Neither statement is correct.
Determine the adjusted basis of the following assets.
a. Dennis buys land by paying $45,000 in cash and assuming a loan for $45,000. He
incurs legal fees and commissions of $5,000. He pays $3,000 to have tree seedlings
planted on the property. A flood causes $6,000 of damage to the property. Dennis does
not carry flood insurance, so he deducts the total loss on his tax return. His property tax
liability for this year is $750 and his interest on the loan is $1,850.
b. Tyler buys 100 shares of Oliver Corporation stock at $150 per share plus
commissions of $300. At the end of the year, Oliver pays a $10 per share cash dividend
and informs shareholders that $6 per share is taxable as a dividend and $4 is a
nontaxable dividend.
c. Taylor Corporation acquires an asset for $8,000 in its first year of operation. Since
the company suffers a loss during this first year of operation, the bookkeeper decides to
deduct only half of the depreciation that was allowable on this asset and claims a
depreciation deduction of $800, instead of $1,600.
Lorraine is an employee of National Corporation. National 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, National adopted a Flexible Benefits
Plan into which employees can contribute to pay for any medical expenses not covered
by insurance. Lorraine pays $2,500 into the plan during the current year. Premiums paid
by National for Lorraine’s medical insurance were $2,400.
I. There is no tax effect from the $2,500 payment into the Flexible Benefits Plan.
II. Lorraine’s gross income from her National salary is reduced by the $3,000 payment
into the Flexible Benefits Plan.
III. If Lorraine does not use the entire $2,500 paid into the Flexible Benefits Plan during
the current year, she may obtain a refund of any amounts not spent from National.
IV. Amounts paid for medical costs by the medical insurance policy are excluded from
Lorraine’s gross income.
a. Statements II and IV are correct.
b. Statements I and IV are correct.
c. Statements III and IV are correct.
d. Only statement II is correct.
e. Only statement IV is correct.
Boston Company, an electing S corporation, has an operating loss of $400,000 for the
current year. Hank owns a 40% interest in the company and is a material participant. At
the beginning of the year, Hank’s adjusted basis in the stock is $30,000. During the year
the company borrows $100,000 with a recourse note. How much of the loss can Hank
deduct on his current-year income tax return?
a. $- 0 –
b. $ 30,000
c. $ 70,000
d. $160,000
e. $200,000
Horizontal equity exists when two similarly situated taxpayers are taxed the same.
a. True
b. False
Which of the following individuals or couples qualify for the 2015 earned income
credit?
I. Dennis is single and 25 years old. He is a recent graduate of Holly Technical College.
During the year, Dennis cannot find a full-time job, but makes $7,000 as a waiter.
II. Matthew and Joan, are both 27, married, and have two children. Joan attends medical
school while Matthew stays home with the children. Joan also works part-time at the
hospital and earns $9,000. In addition, Joan inherits a substantial amount of money
from her grandfather, which pays $5,000 of interest during the year.
a. Only statement I is correct.
b. Only statement II is correct.
c. Both statements are correct.
d. Neither statement is correct.
Graham and Lucy purchased their home in 2003 for $400,000. They finance the
purchase with a $350,000 mortgage. In 2011, when their original mortgage balance was
$340,000, they took out a second mortgage for $100,000 and added a second garage. In
2015, they fall upon hard times and cannot make the mortgage payments. The mortgage
company sells their home for $350,000. At the time of the sale, the mortgage balances
are $330,000 on their home and $90,000 on their second mortgage. The mortgage
company cancels the remaining debt. What are the income tax consequences of the sale
of the residence and cancellation of the debt by the mortgage company?
Match each statement with the correct term below.
a. Begins on the day after acquisition and ends on the day of disposition.
b. The initial investment in an asset.
c. An asset’s basis transfers from one owner to another.
d. The capital investment remaining in an asset at the date of its disposition.
e. Sales price less expenses of disposition.
f. A purchase of all of the assets of a business.
g. Amount realized is less than adjusted basis.
h. A purchase of all of the assets of a business by buying the stock of a corporation.
i. A term used to identify a situation in which an asset has a different basis for
determining gain than for determining loss.
j. The date of death used to value a decedent’s estate in the absence of any special
election.
k. Six months after the date of death, used to value a decedent’s estate when the
executor of the estate makes election.
l. Amount realized is greater than adjusted basis.
Holding period
Owner basis adjusted for liabilities
Involuntary conversion
Match each statement with the correct term below.
a. The category of income that includes interest, dividends, and rents.
b. Income from wages, salaries, and trade or businesses.
c. Interest income resulting from making an interest-free gift loan of $200,000.
d. A taxable amount received from a state plan to provide a substitute for an employee’s
earned income.
e. A series of equal payments received over equal time periods.
f. A receipt of cash from a former spouse that is included in gross income.
g. A payment received from a former spouse that is not included in gross income.
h. A division of marital assets that does not result in any income recognition.
i. A sale of property in which at least one payment is received in a tax year after the
year of sale
j. A method of accounting that must be used to recognize income from long-term
construction contracts.
k. A debt instrument that has the interest paid at maturity rather than throughout the life
of the debt.
Alimony
Regular Tax Court decision
Listed property
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.
Scholarship
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
Start-up costs over $5,000.
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.
Production-of-income expense
Sita loans her next-door neighbor, Ivan, $800 to pay his rent and cover his utilities for
last month. Ivan promises Sita he will repay her at the end of next month when he
receives his next payroll check. Two weeks after loaning Ivan the money, Sita discovers
Ivan had left town. No one knows his whereabouts. Sita is told that Ivan also hasn’t paid
his rent or utility bills. Discuss whether Sita can deduct the $800. Completely explain
your reasoning.
MACRS
Discuss the type of property that is qualified replacement property for involuntary
conversion provisions for gain deferrals.
Byron, 54, is a single, self-employed, carpenter. During 2015, he earns gross revenues
of $60,000 and incurs $6,000 of business expenses. His itemized deductions for the
year are $8,000. Determine Byron’s taxable income and his total tax liability.
Separate entity that never pays income taxes
Section 1245 property