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Jason purchases a patent at a cost of $24,000. The patent has 8 years of legal life
remaining from the date of purchase.
I. If the patent is the only asset Jason purchased, he must amortize the patent over 15
years.
II. If the patent was part of the purchase of all the assets of a business, he must amortize
the patent over 15 years.
a. Only statement I is correct.
b. Only statement II is correct.
c. Both statements are correct.
d. Neither statement is correct.
In July, Bruce leases a building to Vanessa for a period of twenty years at a monthly
rental of $1,500. As part of the lease agreement, Vanessa pays a $3,000 security deposit.
In addition, the lease agreement states that any improvements that Vanessa made to the
building become Bruce's property. Prior to moving in on July 1, Vanessa makes
improvements to the building at a cost of $13,000. How much gross income does Bruce
have from the lease arrangement in the first year of the lease?
a. $9,000
b. $12,000
c. $22,000
d. $25,000
e. None of the above.
Contributions to a Roth IRA:
I. May be rolled-over from a regular IRA in a nontaxable transaction.
II. May be tax deductible.
III. Are not taxed when withdrawn if they have been in an established account for at
least five years and the taxpayer is at least 591/2 before withdrawals are made.
a. Only statement I is correct.
b. Only statement II is correct.
c. Only statement III is correct.
d. Statements I, II, and III are correct.
Ronald is exploring whether to open a franchise of Quick Tax. He plans on forming an
S corporation and investing $15,000 of his own money while borrowing $45,000 from
the bank to finance the purchase of the necessary computing equipment and software.
The bank has proposed two financing options. Under the first option, the interest rate is
only 10%, but the loan is recourse. The second option increases the interest rate to 15%,
but the loan is nonrecourse.
a. Discuss the tax and non-tax aspects of the two options.
b. If Ronald incurs a $20,000 loss in the first year of operations, how much, if any, of
the loss can he deduct if the loan is recourse? Nonrecourse?
On June 1, 2015, Sutton Corporation grants Anne an option under its nonqualified stock
option plan to acquire 300 shares of the company's stock for $12 per share. The fair
market price of the stock on the date of grant is $18. The fair market value of the option
is $4. How much must Anne report as income at the date of grant?
a. $-0-
b. $1,200
c. $1,800
d. $3,600
e. $5,400
Travis is a 30% owner of 3 rental houses. He spends 625 hours a year managing the
properties. In addition, he owns a 20% interest in a real estate business to which he
devotes 1,800 hours a year. The rental units generate a total loss of $22,000, and Travis'
adjusted gross income in the current year, before considering the rental properties, is
$120,000. How much of the loss can Travis deduct?
a. $- 0 -
b. $4,500
c. $6,600
d. $15,000
e. $22,000
A corporation's excess charitable contributions over the amount deductible
a. May be carried back two years and forward 20 years.
b. May be carried back or forward for two years at the corporation's election.
c. May be carried forward for a maximum of five succeeding years.
d. Is not deductible in any future or prior year.
Rewrite each of the following citations in proper form:
a. Subsection (b) of the third treasury regulation issued under Code Section 614
(Income Tax).
b. Revenue Ruling 72-151, found on page 88 of the second cumulative bulletin of 1972.
c. Metropolitan Laundry Co., case 52-1 USTC 9129 Vol 100 Federal Supplement at
page 803 District Court of California.
d. Henry M. Rodney (Tax Court 1969), volume 53 Reports of the U.S Tax Court, page
287.
e. Paragraph 3 of subsection b, Section 217 of the Internal Revenue Code of 1986.
Intangible property lacks a physical existence; the rights exist only because of
economic rights the property possesses.
a. True
b. False
Robert trades an office building located in Tennessee to John for an apartment complex
located in New Jersey. Details of the two properties:
Robert John
Tennessee N. Jersey
Fair Market Value $9,000,000 $4,000,000
Adjusted Basis 3,000,000 3,000,000
Liabilities transferred with property 2,000,000 -0-
In addition, John pays Robert $3,000,000 cash as part of this transaction. What is the
gain (loss) recognized by Robert in this transaction and what is his basis in the New
Jersey property?
Gain Recognized Adjusted Basis
a. $6,000,000 $4,000,000
b. $5,000,000 $3,000,000
c. $3,000,000 $2,000,000
d. $5,000,000 $4,000,000
e. Some other amounts
For its financial accounting records Addison Company uses the allowance method to
account for bad debts and estimates the balance in the "Allowance for Bad Debts"
account using the aging method. For tax purposes, the allowance method cannot be
used. The rationale for not allowing this method is
a. The arm's length transaction concept has not been met.
b. The all-events test has not been met.
c. The Business Purpose Concept has not been met.
d. Lack of constructive payment.
Nigel and Frank form NFS, Inc. an electing S corporation, by combining the assets of
their respective businesses. Nigel contributes $10,000 and assets worth $90,000
(adjusted basis of $60,000) for a 1/3 interest. Frank contributes $90,000 and assets
worth $270,000 (adjusted basis of $150,000) for a 2/3 interest. NFS also assumes
$60,000 of debt on Frank's assets. What is Frank's basis in his stock?
a. $180,000
b. $220,000
c. $240,000
d. $300,000
e. $360,000
During 2015, Duncan Company purchases and places in service office equipment with
a cost of $40,000. The equipment is 7-year MACRS property with an ADS recovery
period of 10 years. Duncan desires to avoid the AMT. What is its minimum 2015
depreciation deduction?
a. $2,000
b. $2,857
c. $3,000
d. $4,000
e. $5,714
Melissa owns 40,000 shares of Wilkerson Corporation common stock that cost $99,000
four years ago. During the current year, Wilkerson distributes a 10% stock dividend to
shareholders. Melissa receives 4,000 new shares when the market value of the stock is
$9 per share. Later in the year, the corporation distributes a cash dividend of $0.50 per
share. What are the tax effects of these distributions to Melissa?
I. The $22,000 cash dividend is included in gross income.
II. The $36,000 stock dividend is included in gross income.
III. Only $20,000 of the cash dividend is included in gross income.
IV. At the end of the year, the per share basis in the stock is $2.25.
a. Statements I and II are correct.
b. Statements III and IV are correct.
c. Statements I and IV are correct.
d. Only statement IV is correct.
e. Only statement I is correct.
During the current year, Hope Corporation paid a $3,250 premium for a life insurance
policy on the life of the chief executive officer, Joel. Determine the deductibility of the
$3,250.
I. Hope could deduct the premium as compensation if Joel's daughter is the stated
beneficiary of the policy.
II. The premium is not deductible if Hope Corporation is the beneficiary.
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 correct regarding the sale of a principal residence?
I. A single taxpayer can only use the $250,000 exclusion once every 3 years.
II. Married taxpayers who both meet the ownership and use tests and file jointly can
each exclude $250,000 of gain ($500,000 total) on the sale of their principal residence.
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 trade or business expenses?
I. Solly incurs legal expenses related to real estate he leases to Bucko Burger
Hamburger Haven for a parking lot. Solly does little but negotiate the lease every year..
II. Susan owns several rental apartments. She negotiates new rental contracts, arranges
for repairs and maintenance, and handles all leasing activities.
a. Only statement I is correct.
b. Only statement II is correct.
c. Both statements are correct.
d. Neither statement is correct.
During 2015, Witt Processing Corporation places $210,000 of Section 179 property in
service for use in its business. What is the amount of Witt Processing's maximum
Section 179 deduction for 2015?
a. $15,000
b. $20,000
c. $25,000
d. $10,000
e. $5,000
The National Office of the IRS issues private letter rulings and technical advice
memoranda and these pronouncements are binding on the IRS.
a. True
b. False
Pablo owns 30% of Cancun Company, an electing S corporation. Pablo's adjusted basis
in the stock is $44,000 at the beginning of the current year. During the current year,
Cancun distributes a $60,000 dividend. Cancun Company reports a $200,000 operating
loss for the current year. If Pablo is not a material participant in Cancun Company, how
much of the loss can he deduct on his income tax return?
a. $-0-
b. $18,000
c. $26,000
d. $44,000
e. $60,000
Philip purchased an apartment building in 2001 for $1,000,000. During 2015, the
building is sold for $800,000. The accumulated depreciation on the building as of the
sale date was $300,000. What is the amount and character of the gain recognized on the
sale?
a. $100,000 Section 1250 ordinary income.
b. $100,000 Section 1231 long term capital gain.
c. $100,000 unrecaptured Section 1250 gain.
d. $100,000 ordinary income.
Orville and Olivia are single taxpayers who own and operate Brimstone Company.
Orville owns 60% and Olivia owns 40% of Brimstone. Orville receives a salary of
$30,000 and Olivia receives a salary of $70,000. Brimstone Company's taxable income
is $150,000 before considering the salary payments to the owners. Brimstone pays a
$50,000 dividend during the current year. Orville's net taxable income from other
sources is $40,000 and Olivia's net taxable income from other sources is $10,000.
Determine the total income tax liability for each of the following entity forms.
a. Brimstone Company is a corporation.
b. Brimstone Company is an S corporation.
Natural Power Corporation owns a warehouse with an adjusted basis of $195,000 and
an appraised fair market value of $185,000. The city of Springfield condemns the
property for a new airport. The condemnation award is $185,000. Natural Power invests
the $185,000 in a new warehouse on the other side of the city. What is the gain or loss
that Natural Power Corporation must recognize due to the transactions?
a. No gain or loss
b. $10,000 gain
c. $10,000 loss
d. $185,000 gain
Ralph and Renee are negotiating a divorce settlement. Renee has an option of taking a
property settlement of $100,000 or alimony payments of $12,000 per year for 10 years.
Without considering the time value of money, which of the following statements is
true?
I. If Renee expects that she will be in the 25% marginal tax bracket, she should take the
property settlement of $100,000.
II. If Renee expects that she will be in the 25% marginal tax bracket, she should take
the alimony of $12,000 per year for 10 years.
a. Only statement I is correct.
b. Only statement II is correct.
c. Both statements are correct.
d. Neither statement is correct.
The Claim-of-Right Doctrine
I. explains why Carla does not report $10,000 of income on her tax return when she
borrows $10,000 from the First Savings Bank.
II. differs from the constructive receipt doctrine in that constructive receipt applies
where an amount has been received, and the tax question is whether the amount is
taxable in the current year.
III. explains why Samuel reports $45 of interest credited to his savings account on
December 31, 2015, on his 2015 tax return, even though he does not actually receive
the cash in 2015.
IV. applies when a taxpayer has no definitive obligation to repay the amount received.
a. Statements I and IV are correct.
b. Statements II and III are correct.
c. Statements II and IV are correct.
d. Statements I and III are correct.
e. Statements II, III, and IV are correct.
The tax law allows the exclusion of general types of employment-related fringe benefits
provided they are made available to employees on a nondiscriminatory basis. Which of
the following must be provided on a nondiscriminatory basis to be excluded from
income?
I. De minimis fringe benefits.
II. Employee discounts.
III. No additional cost services.
IV. Working-condition fringes.
a. Only statement I is correct.
b. Only statement II is correct.
c. Statements II and III are correct.
d. Statements III and IV are correct.
e. Statements I, II, III, and IV are correct.
Nathan loans $50,000 to Ramona on January 1 of the current year. The terms of the loan
require Ramona to pay Nathan $5,000 per year on December 31 each year for the next
10 years (i.e., no interest is charged on the loan). Assuming that the applicable federal
rate is 6% and Ramona has total investment income of $1,200 during the current year:
I. If Ramona is Nathan's sister, Nathan must recognize $3,000 of interest income from
the loan.
II. If Ramona is an employee of Nathan's, Nathan must recognize interest income of
$3,000 and receives a deduction for compensation paid of $3,000.
a. Only statement I is correct.
b. Only statement II is correct.
c. Both statements are correct.
d. Neither statement is correct.
Roseanne sells her personal automobile for $1,000. The car cost her $12,000 nine years
ago. What are the tax effects of the current sale?
I. Roseanne recognizes a deductible loss of $11,000 on her current-year tax return due
to the capital recovery concept.
II. Roseanne recognizes no loss on her tax return due to lack of business purpose with
the automobile.
a. Only statement I is correct.
b. Only statement II is correct.
c. Both statements are correct.
d. Neither statement is correct.
Norman exchanges a machine he uses in his pool construction business for a used
machine worth $6,000 to use in the same business. He purchased the machine 3 years
ago for $22,000 and had taken depreciation of $9,000 on the machine. In the exchange,
Norman also receives $3,000 of cash. As a result of the exchange,
I. Norman realizes a loss of $4,000 on the exchange.
II. Norman's basis in the acquired machine is $13,000.
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 payments meets the IRS definition of a tax?
a. Sewer fee charged added to a city trash collection bill.
b. A special assessment paid to the county to pave a street.
c. A levy on the value of a deceased taxpayer's estate.
d. Payment of $300 to register an automobile. The $300 consists of a $50 registration
fee and $250 based on the weight of the auto.
On December 24 of the current year, Louise is given a certificate by her employer
entitling her to $1,500 worth of lodging at a Vail Village resort. The certificate states
that it represents a "thank you" for graciously taking care of some client problems that
were beyond the scope of normal business activities. The certificate is nontransferable.
How much gross income must Louise recognize in the current year due to the
certificate? Explain.
Match each statement with the correct term below.
a. A loss that is generally not deductible.
b. The borrower is personally liable for the debt.
c. The loss is used to offset income in future periods.
d. A liability that is only secured by the underlying property.
e. The loss may be used to offset income from prior periods.
f. A type of stock that receives some ordinary loss treatment.
g. Involved in a rental activity for more than 500 hours in a year.
h. Cash or other assets contributed plus recourse debts of the activity.
i. Owns at least a 10% interest and is significantly involved in the rental activity.
j. The amount of the loss for fully destroyed property is the property's adjusted basis.
k. The amount of loss is limited to the lower of the property's adjusted basis, or the
reduction in fair market value.
l. Management is left to at least one general partner whose liability is not limited and
who is responsible for the on-going activities of the business.
Match each statement with the correct term below.
a. A loss that is generally not deductible.
b. The borrower is personally liable for the debt.
c. The loss is used to offset income in future periods.
d. A liability that is only secured by the underlying property.
e. The loss may be used to offset income from prior periods.
f. A type of stock that receives some ordinary loss treatment.
g. Involved in a rental activity for more than 500 hours in a year.
h. Cash or other assets contributed plus recourse debts of the activity.
i. Owns at least a 10% interest and is significantly involved in the rental activity.
j. The amount of the loss for fully destroyed property is the property's adjusted basis.
k. The amount of loss is limited to the lower of the property's adjusted basis, or the
reduction in fair market value.
l. Management is left to at least one general partner whose liability is not limited and
who is responsible for the on-going activities of the business.
Limited partnership
Belinda purchases a computer system costing $6,000. During the current year, 70% of
the use of the computer is for keeping the books and records of her Plasticware
business, 20% of the use is for tracking her investments, and 10% of the use is personal.
Explain the treatment of the computer according to the income tax concepts.
Sidney owns unimproved land in Chicago, Illinois. In 2006, Sidney leased the land for
10 years to the U-Store-It Storage Company. The lease terms require annual lease
payments of $12,000 that are paid at the beginning of each year. U-Store-It immediately
constructed a storage facility on the leased land. The storage facility building was worth
$105,000 when it was constructed. In 2015, the lease expires and legal ownership of the
building reverts to Sidney. The building is worth $125,000 when the lease expires.
Sidney has reported the lease income annually, but will not report any income from the
improvements the lessee made to the building. Explain in terms of the income tax
concepts why Sidney has reported his income in this manner.
Randall is given five acres of land in 2005. At the time of the gift, the land had a fair
market value of $182,000, and its adjusted basis to the donor was $160,000. What is
Randall's gain if he sells the land for $184,000?
Real property
Realized gain
Monty is a licensed Certified Public Accountant. Last year he prepared an individual
income tax return for Apple Bakeries, Inc. This year Apple Bakeries switched to a
different tax return preparer. This year he is preparing income tax returns for a
completely separate business, Cinnamon Roll Bakery, Inc. The owner of Cinnamon
Roll asked Monty to give him the tax return data from Apple Bakeries, to help estimate
the tax liability of Cinnamon Roll Bakery, Inc.
Is there a professional responsibility issue for Monty to consider in satisfying
Cinnamon Roll's request? If so, what is the issue?
Match each statement with the correct term below.
a. Not deductible.
b. Short-term capital loss.
c. Limited to $25 per person.
d. Deductible as an ordinary loss
e. Only 50% of the cost is deductible.
f. Must be away from tax home overnight to be deductible.
g. General area where a taxpayer conducts principal activity.
Nonbusiness bad debt
Match each statement with the correct term below.
a. Prepaid interest.
b. An amount that each taxpayer who is neither a qualifying child nor a qualifying
relative, and who files a return, is allowed to deduct.
c. One test for a qualifying relative.
d. The minimum amount a taxpayer can deduct for personal expenditures.
e. A deduction in this category is always allowed. That is, there is no minimum
allowable amount and generally no income limitation placed on these deductions.
f. Generally, these deductions are for specifically allowed personal expenditures.
g. An exception to this test is a custodial parent.
h. Interest paid on debt used to buy securities.
i. Interest paid on credit cards, personal loans, car loans, etc.
j. Interest paid on a mortgage secured by the taxpayer's residence. The proceeds of the
loan can be used for any purpose and the interest is still deductible.
k. A tax designed to prevent the shifting of unearned income to children of the taxpayer.
Home equity loan interest
Partnership
Direct reduction in the income tax liability often created by Congress to further a public
purpose.
The tax rate obtained by dividing total tax liability by taxable income.
Match each statement with the correct term below.
a. Land and structures permanently attached to land.
b. Property that lacks a physical existence.
c. Property that is used by the taxpayer for purely personal purposes.
d. Any property that has form, shape, and substance.
e. Property with a physical existence that is not real estate.
f. A single property used in more than one category.
Intangible property
Martina, an unmarried individual with no dependents, owns and operates an office
supply store as a sole proprietorship. The net income from the business is consistently
$100,300 annually. Based solely on income taxes, consider whether the corporate form
of business will produce tax savings. Assume Martina uses the standard deduction
amount.
