The Ottomans own a winter cabin in Durango, Colorado. They purchased the cabin in
2004 for $65,000. During the current year, a blizzard partially destroys the cabin. The
fair market value of the cabin after the blizzard is $70,000. The insurance company
estimates that the cost of repairing the cabin will be $40,000. The insurance company
will reimburse the Ottomans for 70% of the repair cost. What can they deduct as a
casualty loss if their adjusted gross income for the year is $80,000?
a. $3,900
b. $4,000
c. $8,000
d. $11,900
e. $12,000
The adjustment for three-fourths of the excess adjusted current earnings (ACE) over
AMTI before the ACE adjustment applies only to corporations.
a. True
b. False
Kim and Martina are equal owners of Roundball Company. They agree to admit Darcy
as an equal owner. Darcy will contribute $10,000 in cash and property worth $40,000
(adjusted basis of $25,000) for a 1/3 interest in Roundball. How much gain (loss) will
Darcy recognize and what is her basis in Roundball Company if Roundball is organized
as a
a. Partnership
b. Corporation
Tony died on April 5, 2015. As part of his will, he leaves land that he paid $6,000 for in
2003 to his son Philip. On April 5, 2015, the land is worth $11,000. However, due to
local real estate conditions, the land continues to decline in value. On July 28 it is worth
only $10,000; it declines further to $9,000 on October 5 and plunges to $7,000 on
December 18.
I. In the absence of any special elections, Philip’s basis in the land is $6,000.
II. If the executor distributes the land to Philip on July 28, Philip’s basis in the land will
be $10,000.
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 an example of tax evasion?
a. Beth invests money in tax exempt municipal bonds instead of corporate bonds.
b. Bryan uses the cafeteria plan offered by his employer to fund pension plan
contributions for his retirement.
c. Bauregard, a very wealthy 87-year-old individual, gives bonds to each of his
grandchildren so that the interest income on them would be taxed at a lower tax rate.
d. Bertha won $500 cash in an amateur mud-wrestling contest but doesn’t report it on
her tax return.
e. All of the above are examples of tax evasion.
Santana Corporation operates a golf shop. It properly elected Subchapter S status on
March 1 of the current year. Taxable income for the current year is $120,000. What is
Santana Corporation’s income tax liability?
a. $- 0 –
b. $3,000
c. $18,000
d. $30,050
e. $40,800
Which of the following payments are currently deductible?
I. Sweeney Corporation pays tuition to an MBA program for Phyllis, the controller.
II. Amber’s Construction Company pays the tuition for Karl’s son. Karl is a local
building inspector and has no other relationship with the company.
a. Only statement I is correct.
b. Only statement II is correct.
c. Both statements are correct.
d. Neither statement is correct.
Benjamin has a $15,000 Section 1231 gain from the sale of business-use real estate and
a $3,500 long-term capital gain from the sale of Rhyne Corporation stock. Also, he
suffers an $18,000 (net of insurance reimbursements and the $100 floor) personal-use
property casualty loss. No net Section 1231 losses have been deducted as ordinary
losses in prior years. Benjamin’s current-year adjusted gross income will increase
(decrease) by what amount?
a. $500
b. $3,500
c. $15,000
d. $15,800
e. $18,500
Ron won a $25,000 award for his research in microbiology and he immediately
transferred the prize to his brother who does similar research. The income is excluded
from Ron’s taxable income.
a. True
b. False
Courtney and Nikki each own investment realty that they would like to trade.
Courtney’s property is subject to mortgage debt of $10,000, and its appraised fair
market value is $25,000. Nikki’s property is subject to mortgage debt of $17,000, and
its appraised fair market value is $25,000. Courtney and Nikki agree to exchange the
properties and assume each other’s debt. To complete the exchange, who pays cash and
how much will that person have to pay?
a. Courtney pays $15,000.
b. Nikki pays $7,000.
c. Nikki pays $8,000.
d. Courtney pays $7,000.
e. Neither person pays anything.
Tisha’s husband died in 2012. She has not remarried and maintains a home for herself
and her dependent son. What is Tisha’s filing status for 2015?
a. Single.
b. Head of household.
c. Married, filing separately.
d. Surviving spouse.
Lilly and her husband Ben have a serious argument. In fact, Lilly moved out in August,
left town, and has not been heard from since. Ben supports their two children after the
split up and maintains their household. What is Ben’s filing status for the current year?
a. Single.
b. Head of household.
c. Surviving spouse.
d. Married, filing separately.
Maria is on a “full ride” tennis scholarship at Western University. Her $12,500
scholarship covers tuition and books ($7,000) and room and board ($5,500). Maria’s
gross income is
a. $- 0 –
b. $2,000
c. $5,500
d. $7,000
e. $12,500
Ed and Elise got married during the year and they each sold their homes to buy a new
house for them to live in. As long as they file a joint return they can each claim a
$250,000 exclusion.
a. True
b. False
Simon exchanged his Mustang for Michael’s Econovan so that he could go hunting. The
exchange does not qualify as a like-kind exchange since the assets are personal.
a. True
b. False
Which of the following are included among Adam Smith’s criteria for evaluating a tax?
I. Convenience.
II. Fairness.
III. Neutrality.
IV. Economy.
a. Statements I and II are correct.
b. Statements I, II, and III are correct.
c. Statements I and IV are correct.
d. Statements II and III are correct.
e. Statements I, II, III, and IV are correct.
In which of the following circumstances would a cash basis taxpayer be required to
account for an item of income or deduction under the accrual method of accounting?
a. Alice receives advance payment for services that she will perform and complete by
the end of the following tax year.
b. Ben paid his business property taxes at year-end even though they were not due until
the end of January.
c. Cheryl received six months of pre-paid rent on her rental property just before the end
of the year.
d. Donald prepaid a one-year service contract on his copy machine just before year-end.
e. A cash basis taxpayer will not be required to use the accrual basis method of
accounting in any of the above circumstances.
When Rick found out that Ryan’s liabilities exceeded his assets by $15,000, he forgave
Ryan the $1,000 he owed Rick in hoping that Ryan might get back on his feet. Ryan is
allowed to exclude the $1,000 from income.
a. True
b. False
Susan purchased a lot for investment purposes. She paid $10,000 for the lot. Three
years later she sold the lot to her daughter for $8,000. Susan cannot deduct the loss due
to
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.
Martin and Joe are equal partners in Ferrell Company. For the current year, Ferrell
Company reports the following items of income and expense:
Sales revenues $500,000
Long-term capital gains 14,000
Short-term capital losses (10,000)
Trade and business expenses (200,000)
Limited partnership loss (50,000)
Taxable income $254,000
In addition to his Ferrell Company earnings, Martin has other income of $35,000.
Included in the $35,000 is a $10,000 loss from the sale of land held as an investment.
Martin’s adjusted gross income is:
a. $162,000
b. $167,000
c. $172,000
d. $187,000
e. $192,000
Sheila extensively buys and sells securities. The IRS has determined upon examination
that she is not in a trade or business concerning the securities’ transactions and
therefore, Shelia must be
a. a broker.
b. an active trader.
c. an active investor.
d. a securities’ dealer.
Hector is a 54-year-old head of household and a self-employed taxpayer. He contributed
the maximum amount to his IRA account during the current year, and his net earnings
from his business totaled $36,000. How much can Hector deduct for AGI this year?
a. $- 0 –
b. $3,200
c. $5,500
d. $6,000
e. $6,500
Jennifer pays the following expenses for her dependent 30-year old daughter while the
daughter was ill during the current year:
Real estate taxes on daughter’s house $3,000
Utilities on daughter’s house 1,000
Interest on the daughter’s home mortgage 8,000
Interest on daughter’s car 800
Daughter’s medical expenses 6,000
How much of the above expenditures may Jennifer use in computing her itemized
deductions?
a. $- 0 –
b. $6,000
c. $9,000
d. $14,800
e. $17,000
A capital asset includes which of the following?
I. real estate held as an investment in rental property.
II. the copyright to a song held by its writer.
III. real estate used in a trade or business.
IV. accounts receivable.
a. Only statement I is correct.
b. Statements I and II are correct.
c. Statements III and IV are correct.
d. Statements I, II, and III are correct.
e. Statements I, II, III, and IV are correct.
Susan is the owner of a 35-unit apartment complex. She spends 950 hours a year
managing the property. In addition, she works part-time for a mortgage company. She
spends 1,150 hours a year as a bookkeeper at the mortgage company. The apartment
complex generated a loss of $32,000, and Susan’s adjusted gross income for the current
year, before considering the apartment complex, is $48,000. How much of the loss can
Susan deduct?
a. $- 0 –
b. $14,476
c. $16,727
d. $25,000
e. $32,000
For each of the following situations, determine whether the item is deductible, how it
would be deducted on the taxpayer’s return (if there are alternatives possible, discuss
the conditions that would determine the treatment) and any limitations, which might be
placed on the deduction.
a. Tony and Rika are married and file a joint return. Only Tony is covered by an
employee-sponsored pension plan and their adjusted gross income is $183,000.
Determine their maximum IRA contribution and deduction for the current year.
b. Elise graduated from Southern University in May of 2014 and immediately started
working as a financial analyst for Simone Financial Group. To finance her college
education, she borrowed $30,000 from a local bank. In January of 2014, she begins
paying back her student loans and pays $2,400 of interest expense during the year. Her
adjusted gross income for the year is $63,000.
c. During the current year, Rowland accepts a job as a computer programmer with
Davenport Industries. He incurs the following expenses in moving from East
Brunswick, New Jersey to Durham, North Carolina. Davenport Industries reimburses
him $4,000 for his move.
Transportation of household goods $2,800
Airfare 340
Temporary living:
Lodging 430
Meals 120
House-hunting trip:
Transportation 330
Lodging 280
Meals 110
Which of the following is true of revenue rulings?
a. Lower courts are bound by them.
b. They are a subset of Treasury Regulations.
c. Once affirmed by an appellate court, they have the force of law.
d. Although they represent the official policy of the IRS, courts may overrule them.
e. All of the above.
Determine the proper classification(s) of a house owned and used by John as his
principal residence.
I. Personal use property. IV. Intangible property.
II. Business use property. V. Real estate.
III. Tangible property. VI. Personal property.
a. Statements I, III, and V are correct.
b. Statements I, III, and VI are correct.
c. Only statement I and V are correct.
d. Only statement V is correct.
e. Only statement I is correct.
Imputed interest rules and policies include which of the following?
I. Gift loans have no income tax effect to the lender.
II. Any loan of $10,000 or less is exempted from imputed interest rules.
III. On gift loans of $100,000 or less, the imputed interest on the loan cannot exceed the
borrower’s net investment income for the year.
IV. With a loan to a shareholder, a corporation can deduct the imputed payment.
a. Only statement I is correct.
b. Only statements I and IV are correct.
c. Only statement II is correct.
d. Only statements II, and III are correct.
e. Only statements II, III, and IV are correct.
For each of the following situations, determine the amount of gross income that the
taxpayer should recognize. Explain why any amounts are excluded from gross income.
a. Harvey is injured in an automobile accident. The driver of the other car is found to be
at fault. A judge awards Harvey $10,000 for pain and suffering, $20,000 in punitive
damages, and $15,000 for medical expenses. Harvey’s total medical costs are $25,000
and his employer provided insurance policy pays $8,000 of the remaining medical
costs. He also receives $800 of worker’s compensation while he was unable to work. In
addition, his employer provided insurance pays him $450 of disability pay while he
recuperated and a separate plan that Harvey purchased paid $300 of disability
payments.
b. Heather owes $35,000 of credit card debt to First City Bank. Heather is having
financial difficulties during the current year and First City agrees to reduce her debt to
$20,000 to help her get her financial affairs in order and avoid bankruptcy. Heather’s
assets were $100,000 and her liabilities were $110,000 before the discharge.
c. On May 1, Ernie receives 1,000 shares of Glimmer Company stock as a graduation
present from his uncle. The shares have a fair market value of $5 per share on May 1.
Ernie receives an additional 100 shares on July 25 as a result of a 10% stock dividend
that Glimmer had declared on July 1. On December 1, Glimmer declares and distributes
a $.50 per share cash dividend.
d. Garry works as a reservations clerk for Big Apple Hotels. Big Apple Hotels also
owns Mideastern Airlines. Big Apple allows all employees to fly on Mideastern Airlines
and to stay in Big Apple Hotels free, on a space available basis. Garry takes advantage
of Big Apple’s generosity and took a trip to Reno to visit the casinos. The cost of the
airfare would have been $480 and the lodging would have cost $600 if he had not been
an employee of Big Apple.
Sundown, Inc., purchases a term life insurance plan only for its corporate officers.
Harold receives $250,000 of insurance at a cost to the company of $3,500. The IRS
Table of Premium value indicates that premiums are $1.08 annually per $1,000 of
protection. How much gross income does Harold have from the purchase of the life
insurance by Sundown, Inc.?
a. $216
b. $270
c. $2,800
d. $3,500
e. $5,000
Roberta invests $16,000 for a 10% interest in Bowie Partnership. In the first year of
operations, Bowie reports net income from operations of $80,000 and distributes $6,000
cash to Roberta. How much gross income must Roberta recognize from her investment
in Bowie?
a. $2,000
b. $6,000
c. $8,000
d. $80,000