In which of the following circumstances will income of the child be taxed at the
marginal tax rate of the child’s parent?
I. Nicole, age 17, has $4,000 of interest income from Microsoft bonds.
II. Catherine, age 19, has $2,300 of royalty income from oil producing property.
a. Only statement I is correct.
b. Only statement II is correct.
c. Both statements are correct.
d. Neither statement is correct.
Sanford’s employer has a qualified pension plan that allows employees to contribute up
to 10% of their gross salaries to the plan. The employer matches the contribution at the
rate of 50% of the employee’s contribution. Sanford’s current annual salary is $80,000.
This is his only source of income. If he contributes the maximum amount to the pension
plan, what is Sanford’s gross income for the current year?
a. $72,000
b. $76,000
c. $80,000
d. $84,000
e. $88,000
Karen is single and graduated from Marring University in May of 2014. In January of
2015, she begins repaying her student loans and in 2015 pays $2,800 of interest on the
loans. Her adjusted gross income is $51,000.
I. Karen can deduct $2,500 of interest as a deduction for adjusted gross income.
II. Karen can deduct $2,800 of interest as a deduction from adjusted gross income.
a. Only statement I is correct.
b. Only statement II is correct.
c. Both statements are correct.
d. Neither statement is correct.
Cary is an employee with the Bayview Corporation. Bayview maintains a defined
contribution plan for all its employees. Determine the maximum deductible contribution
Bayview can make to the pension plan in each of the following situations:
a. Cary’s salary is $90,000.
b. Cary’s salary is $220,000.
The mid-quarter convention under MACRS provides that
a. Depreciation is allowable in the year of acquisition of qualified property only if the
property is placed in service in the first one-fourth of that year.
b. One half of the year-of-acquisition depreciation is allowed regardless of when the
property is placed in service during the year. One-half year’s depreciation is allowable
for the year of disposition.
c. The cost recovery deduction is based on the number of months the property was in
service in the year of acquisition. Therefore, one-half month’s cost recovery is allowable
for the month in which the property is place in service and for the month of disposition.
d. Any property placed in service in the last 3 months of a tax year is depreciated using
this convention.
e. Depreciation is calculated from the middle of the quarter in which an asset is placed
in service through the end of the year.
Dahlia rents a condo owned by Bonnie. Both individuals are cash basis taxpayers.
Dahlia uses the condo as her personal residence. Dahlia pays Bonnie $1,000 monthly,
and pays $1,200 on October 1st and April 1st of each year as part of the lease agreement.
The $1,200 payments are made directly to the county treasurer for real estate property
taxes. What is the income tax treatment of these events?
I. Bonnie can deduct the $1,200 payments for adjusted gross income as a property tax.
II. Bonnie includes the $1,000 monthly receipts in her gross income.
III. Bonnie must include the $1,200 payments in her gross income.
IV. Dahlia can deduct the $1,000 monthly payments from her adjusted gross income.
a. Only statement II 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.
Natasha is an employee of The Johnson Company. She incurs a total of $7,500 in
business expenses as follows:
Lodging $2,500
Transportation (no commuting) 3,500
Dues and subscriptions 1,500
Natasha receives reimbursement of $5,600 after an adequate accounting to her
employer. Natasha’s itemized deductions before any limitations would be:
a. $- 0 –
b. $1,500
c. $1,900
d. $5,600
e. $7,500
Valerie receives a painting as a gift from her aunt. The painting is valued at $6,000 on
the date of the gift. Valerie’s aunt’s basis in the painting is $13,000. Three years later
Valerie sold the painting for $8,000. What is the amount of gain or (loss) recognized by
Valerie on the sale?
a. No gain or (loss) is recognized
b. $5,000 loss
c. $2,000 gain
d. $7,000 loss
e. $2,000 loss
Ramon is a waiter at Trucker’s Delight Restaurant. He eats two meals each day at the
restaurant at no charge. One is eaten just before he begins work; the other is eaten
during working hours. The value of meals consumed by Ramon during the current year
is $2,500, evenly distributed between the two meals. What are the tax effects of this
situation?
I. Ramon will have to recognize $1,250 of income.
II. None are taxable because the meals are for the convenience of the employer.
III. If Ramon has the option of receiving his choice of either a cash payment or the two
meals, the $2,500 is taxable.
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.
Roscoe and Amy are married and own 12,000 shares of qualifying small business stock
that they purchased for $150,000. During the current year, they sell 10,000 shares of the
small business stock to an unrelated third party for $30,000. Eager to sell the remaining
shares, they sell the other 2,000 shares to Amy’s sister for $4,000. In addition, they sell
stock with a basis of $5,000 for $10,000. The stock was acquired in 2007. In 2010,
Roscoe and Amy loaned her brother, Carl, $8,000 to start his business. Carl has only
repaid $2,000 on his documented loan. During the year, Carl has filed for bankruptcy.
The bankruptcy court liquidates all of Carl’s assets and Roscoe and Amy receive
nothing from the liquidation.
I. Roscoe and Amy can deduct $120,000 as an ordinary loss on the small business
stock.
II. Roscoe and Amy have a net short-term capital loss of $1,000.
a. Only statement I is correct.
b. Only statement II is correct.
c. Both statements are correct.
d. Neither statement is correct.
Barbara was the legal owner of a $100,000 life insurance policy on herself. Glenna is
the stated beneficiary. Shortly before her death, Barbara transfers ownership of the
policy to Glenna for $15,000. Glenna makes one premium payment in the amount of
$1,000 before Barbara dies. Glenna subsequently receives the $100,000 life insurance
proceeds. How much of the $100,000 is taxable to Glenna?
a. $- 0 –
b. $15,000
c. $84,000
d. $85,000
e. $100,000
Binney is a retired auto mechanic. He and his wife, Jennie, receive taxable pensions
totaling $35,000, $8,000 of tax-exempt interest income and $6,000 of Social Security
benefits during the current year. Assuming that they had no other items of income or
deductions for adjusted gross income, Binney and Jennie’s adjusted gross income is:
a. $35,000
b. $36,700
c. $38,000
d. $39,700
e. $40,100
Donald and Candice sell their home for $695,000, incurring selling expenses of
$30,000. They purchased the residence for $125,000 and made capital improvements
totaling $20,000 during the 20 years they lived there. What is their realized gain and
recognized gain on the sale?
Realized Recognized
a. $665,000 $20,000
b. $520,000 $-0-
c. $520,000 $20,000
d. $540,000 $40,000
e. $520,000 $270,000
Unmarried taxpayers who are not active participants in a pension plan are allowed to
deduct their entire contribution to an IRA regardless of the amount of their adjusted
gross income.
a. True
b. False
Discharges of debt are generally taxable. However, in certain circumstances, part or all
of the income from a discharge of indebtedness may be excluded. Which of the
following concepts form(s) the basis for the income tax treatment of a discharged debt?
I. Wherewithal-to-Pay Concept.
II. Legislative Grace Concept.
III. Realization Concept.
IV. Substance Over Form Doctrine.
a. Statements I and III are correct.
b. Statements II and III are correct.
c. Statements I and IV are correct.
d. Statements I, II, and III are correct.
e. Statements II, III, and IV are correct.
Charlie is single and operates his barber shop as a sole proprietorship. During the
current year, Charlie paid $2,200 for his personal health insurance plan and $4,000 for
health insurance for his employees. How much of these premiums can be deducted for
Charlie’s adjusted gross income?
a. $- 0 –
b. $2.200
c. $4,000
d. $5,100
e. $6,200
In 2007, Gaylord purchased 100 shares of stock of Chisel Corporation for $200 per
share. In 2015, Gaylord sells all of the shares for $19,000. What are the effects of these
events?
I. The capital recovery concept prevents the recognition of any income.
II. Gaylord reports $1,000 of ordinary income for tax year 2015.
a. Only statement I is correct.
b. Only statement II is correct.
c. Both statements are correct.
d. Neither statement is correct.
Marci is single and her adjusted gross income is $30,000. In addition, she pays the
following expenses during the year:
Psychiatrist’s fee $800
Hospital bill for medical services and room 1,800
Transportation to/from hospital 100
Prescription drugs 750
Over-the-counter vitamins 200
Chiropractor’s fees 700
Marci pays $600 for medical insurance premiums and receives a reimbursement of
$1,000 from the insurance company for her medical expenses. Compute her medical
deduction.
a. $- 0 –
b. $550
c. $750
d. $1,250
e. $1,450
Teresa won $9,000 playing the Illinois lottery. Which of the following statements is/are
correct?
I. Teresa must include the $9,000 in gross income.
II. The All-inclusive Income Concept applies to this situation.
III. Legislative Grace allows Teresa to exclude lottery winnings from recognition.
a. Only statement I is correct.
b. Only statement II is correct.
c. Only statement III is correct.
d. Only statements I and II are correct.
e. Statements I, II, and III are correct.
Tax planning involves the timing of income and deductions. General rules of thumb to
follow when planning include
I. deferring recognition of income.
II. putting deductions into the year with highest marginal tax rate.
a. Only statement I is correct.
b. Only statement II is correct.
c. Both statements are correct.
d. Neither statement is correct.
A property tax
I. is levied on the value of property.
II. is referred to as ad valorem.
III. on personal property is more common than a tax on real property.
IV. is based upon assessed value rather than actual transactions.
a. Only statement I is correct.
b. Statements II and III are correct.
c. Statements I, II, and IV are correct.
d. Statements I, II, III, and IV are correct.
Which of the following is not deductible?
a. Expenses related to earning dividends on a portfolio of “blue chip” stocks.
b. Expenses related to interest income from municipal bonds.
c. Legal expenses related to rental real estate property.
d. Medical expenses of the taxpayer’s dependent child.
Carmelo, an employee of the Rondo Corporation, is granted an option to acquire 400
shares of the company’s stock under its nonqualified stock option plan. Which of the
following are correct statements?
I. If the option has a readily ascertainable fair market value, Carmelo must report
income equal to the fair market value of the option times the number of shares granted
(i.e., 400 shares).
II. If the option does not have a readily ascertainable fair market value Carmelo will not
report any income at the date of grant.
a. Only statement I is correct.
b. Only statement II is correct.
c. Both statements are correct.
d. Neither statement is correct.
How should the following citation be interpreted? Hewlett Packard Co. v. Comm., 67
T.C. 736 (1975).
a. A 1967 decision of the Tax Court, found on page 736.
b. A decision of the Court of Claims, found in Volume 67, on page 736.
c. A 1975 decision of the Tax Court, found in Volume 736.
d. A decision of the Tax Court, found on page 736, in Volume 67.
After negotiating a new supply contract with Jim, Beth takes him to dinner at the
Magnolia Cafe. The dinner costs $94. The amount includes tip ($15) and sales tax ($5).
Cab fare to and from the restaurant is $20. How much can Beth deduct for the evening’s
expenditures?
a. $ 47
b. $ 52
c. $ 67
d. $ 94
e. $114
Robbie and Mike exchange machinery in a qualified like-kind exchange. Robbie’s old
machine, which originally cost $42,000, has an adjusted basis of $26,000. His old
machine is worth $32,000. Since the machine Mike is trading is worth only $27,000
(Mike’s basis is $18,000), Mike will even up the exchange by giving Robbie $5,000 in
cash.
a. What is Robbie’s realized gain (loss) on the machine?
b. What is Robbie’s recognized gain (loss) on the machine?
c. What is the character of Robbie’s gain or loss on the machine?
d. What is Robbie’s basis in his new machine?
On June 1, Don receives a rental house from his Uncle Sidney as a graduation present.
The monthly rental on the house is $1,000. On June 25, the tenant pays Uncle Sidney
the $1,000 rent payment for June by mistake. Which of the following concepts,
constructs, or doctrines is the most relevant in determining the tax treatment of the
$1,000 rental payment?
a. Capital Recovery Concept.
b. Assignment of Income Doctrine.
c. Constructive Receipt Doctrine.
d. Wherewithal-to-Pay Concept.
e. Substance Over Form Doctrine.
Which of the following interest-free loans is subject to the imputed interest rules (i.e.,
interest must be imputed on the loan)?
I. Benito loans $250,000 to his son. His son uses the money to open a new business.
During the current year, the business shows a loss and his son has no other sources of
income.
II. Bisbane Corporation loans $8,000 to its principal shareholder. The shareholder uses
the funds to buy additional shares of stock in Arcane. The shareholder is deemed to
receive $4,000 of dividends from Brisbane during the year.
a. Only loan I.
b. Only loan II.
c. Both loans.
d. Neither loan.
Elise is a self-employed business consultant who operates her business out of an office
in her home. The home office passes the qualifying tests for deducting office in the
home expenses. For the current tax year, Elise earns $90,000 from her business
activities. She incurs $82,000 in supplies, travel expenses, wage expense, etc. Elise’s
mortgage interest and real estate taxes allocable to the home office space were
determined to be $9,000. Also, other expenses including insurance, repairs and
maintenance, utilities, and depreciation allocable to the home office space total $11,000.
How much of the other expenses (insurance, repairs, etc.) can Elise deduct?
a. $- 0 –
b. $2,000
c. $8,000
d. $9,000
e. $11,000
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 which would determine the treatment) and any limitations which might
be placed on the deduction.
a. Cassie sells insurance and other financial products for Bison Assurance Company.
During the current year, she gives each client who has been with her for three years 2
tickets to a Willie Nelson concert. The tickets have a face value of $75 each, but Cassie
has to pay $100 per ticket to obtain a block of 100 tickets. Cassie was out of town and
did not attend the concert.
b. Randolph was the CEO and chairman of the board of directors of Vison Inc., until his
retirement 5 years ago. Although he still owns 5% of Vison’s stock, he has no other
active involvement in the company. While playing golf one day he learns that 4 of the
company’s biggest customers are coming to town to close a big deal. Randolph had
been responsible for bringing 3 of the customers to the business 30 years earlier when
he started working for the company. Because he has developed a solid business
relationship with them through the years and to help the company out, he holds a
reception for the 4 customers and top executives of the company at his country club.
The cost of the reception is $2,000. Randolph did not ask for, nor did Vison offer, a
reimbursement for the reception.
c. Ai-leng is an engineer employed by Boiler Corporation. While having lunch with one
of Boiler’s clients, she learns of a new relaxation technique that the client felt had
greatly reduced his job-related stress. Ai-leng enrolls in a night course at the local
community college to learn the new relaxation technique. The cost of the course is
$200.
Linda owns three passive activities that had the following results for the current year:
Passive Activity A $(4,500)
Passive Activity B 20,000
Passive Activity C (25,500)
If none of the passive activities are rental real estate activities, what is the amount of
suspended loss attributable to Activity A?
a. $- 0 –
b. $ 1,500
c. $ 4,500
d. $ 8,500
e. $10,000
Which of the following concepts/doctrines state(s) that items may be omitted from the
tax base whenever the cost of implementing a concept exceeds the benefit of using it?
a. Ability-to-Pay.
b. Administrative Convenience.
c. Arm’s-length Transaction.
d. Substance-Over-Form.
e. Tax Benefit Rule.