Which of the following taxes is deductible from adjusted gross income when paid by an
individual taxpayer?
I. State income tax.
II. State excise tax on gasoline.
a. Only statement I is correct.
b. Only statement II is correct.
c. Both statements are correct.
d. Neither statement is correct.
Phyllis purchased an automobile for $3,000 down and a note for $15,000. During the
year she paid interest of $1,000. Her basis is $18,000.
a. True
b. False
To be deductible, the dominant motive for incurring an expense must be
a. the relationship to a business activity.
b. to reduce income taxes.
c. tax avoidance.
d. the intent to earn a profit.
e. personal.
Norma is in the 33% marginal tax bracket. Because of her high tax rate, Norma would
like to reinvest a $10,000, 6%, certificate of deposit in a tax-exempt bond. What is the
minimum rate of interest Norma would have to receive to make the tax exempt-bond a
more profitable investment?
a. 4.1%
b. 6.0%
c. 8.4%
d. 9.0%
Which of the following losses are generally deductible?
I. Loss on the sale of a personal residence.
II. Loss due to the theft of business inventory.
a. Only statement I is correct.
b. Only statement II is correct.
c. Both statements are correct.
d. Neither statement is correct.
Jessica is single and has a 2015 taxable income of $199,800. She also received $15,000
of tax-exempt income. Jessica’s marginal tax rate is:
a. 22.8%
b. 23.5%
c. 25.0%
d. 28.0%
e. 33.0%
Which of the following is (are) correct concerning the time test for deducting moving
expenses?
I. Self-employed individuals must work in the new location for 39 weeks during a
2-year period.
II. A transfer of the employee by the employer waives the time requirement.
a. Only statement I is correct.
b. Only statement II is correct.
c. Both statements are correct.
d. Neither statement is correct.
Rationale for nonrecognition includes which of the following?
I. A refinement of the realization concept, which postpones recognition of appreciation
in value until the taxpayer disposes of a property, or its replacement.
II. Under the Substance-over-form doctrine, new property acquired in a transaction is
viewed as a continuation of the original investment.
III. The taxpayer lacks wherewithal to pay the tax on a realized gain because the
amount realized on the transaction is reinvested in the replacement asset.
a. Only II is correct.
b. Only I is correct.
c. II and III are correct.
d. I, II, and III are correct.
e. Only III is correct.
When posed with a particularly complex tax question, a researcher with little previous
experience with the issue would be best served at the outset by consulting:
a. the applicable legislative history.
b. the Treasury Regulations.
c. the Internal Revenue Code.
d. a “tax service” (e.g. CCH, RIA).
Andrea is single and has a 2015 taxable income of $199,800. She also received $15,000
of tax-exempt income. Andrea’s average tax rate is:
a. 22.8%
b. 23.5%
c. 24.8%
d. 28.5%
e. 33.0%
Gerald purchases a new home on June 30, 2015. During January 2016, he receives his
real estate tax statement for calendar year 2015 showing $1,800 payable. Gerald pays
the $1,800 on March 1, 2016. The seller of the residence had credited Gerald with $900
of the 2015 taxes on the closing statement. What is the amount of real estate taxes that
Gerald may claim as an itemized deduction in 2016?
a. $- 0 –
b. $450
c. $900
d. $1,800
e. $2,700
Tax Research
a. What are two of the trial courts that a taxpayer may use to litigate disputes with the
IRS?
The Lovell Accounting Firm places the following new property in service during the
2015 tax year:
Property Placed in
Description Service MACRS Life Cost Basis
Computers Feb 6 5 years $60,000
Office furniture June 24 7 years $110,000
Fax machine Aug 3 5 years $100,000
Sidewalk Dec 11 15 years $50,000
Lovell wants to obtain the maximum possible first year depreciation deduction for these
property acquisitions including full utilization of the election to expense property under
Section 179. Lovell will report 2015 taxable income in the amount of $10,000 before
consideration of depreciation on their 2015 property acquisitions. What is the maximum
combined amount of depreciation and Section 179 expense that may be obtained under
this set of fact circumstances?
a. $10,000
b. $25,000
c. $49,719
d. $50,219
e. $60,219
George purchased a commercial building in 1999 for $900,000. During 2015, the
building is sold for $700,000. The actual accelerated depreciation on the building as of
the sale date was $400,000. Straight-line depreciation for the same period would have
been $350,000. What is the amount and character of the gain recognized on the sale?
a. $200,000 Section 1250 ordinary income.
b. $50,000 Section 1250 ordinary income.
c. $50,000 Section 1250 ordinary income, and $150,000 unrecaptured Section 1250
gain.
d. $200,000 unrecaptured Section 1250 gain.
Sonya is an employee of Gardner Technology and will retire at the end of the current
year after 8 years of service. Under Gardner’s pension plan she can retire at 60% of the
average of her three highest consecutive years’ salary. Her average for the highest
consecutive years’ salary was $30,000. What is the maximum amount Sonya can
receive from Gardner’s pension plan?
a. $6,000
b. $14,400
c. $18,000
d. $24,000
e. $30,000
Which of the following items is not a capital asset in the hands of the taxpayer?
a. Taxpayer has a set of wrenches he uses to work on his personal auto.
b. Taxpayer has a $6,000 wedding dress she keeps as a remembrance of her wedding.
c. Taxpayer owns city of Topeka bonds.
d. Taxpayer is an amateur golfer but has a set of championship golf clubs
e. All of the above items are capital assets.
The Business Purpose Concept means
I. that the economic purpose of the transaction must exceed the tax avoidance motive.
II. that the taxpayer’s dominant motive for an expenditure is to reduce taxation.
a. Only statement I is correct.
b. Only statement II is correct.
c. Both statements are correct.
d. Neither statement is correct.
On a nonliquidating distribution of cash from a partnership, the partner will recognize
gain if
I. the cash distributed exceeds his/her basis in the partnership.
II. the cash distributed exceeds his/her share of the net income of the partnership for the
year.
a. Only statement I is correct.
b. Only statement II is correct.
c. Both statements are correct.
d. Neither statement is correct.
Sorensen Corporation purchases equipment in 2015 for $200,000. Sorensen has
substantial taxable income and desires to minimize this amount to the fullest extent
possible. How much can Sorensen deduct under Section 179?
a. $25,000
b. $30,000
c. $50,000
d. $20,000
e. $10,000
Shannon purchases equipment classified as 3-year property on December 19, 2015, at a
cost of $100,000. Section 179 is not elected and Shannon does not use the straight-line
method. Shannon purchased no other depreciable property in 2015. What is the amount
of the MACRS depreciation deduction for 2015?
a. $5,000
b. $8,330
c. $20,000
d. $33,333
Michelle is a bank president and a weekend artist. She regularly sells her paintings at
flea markets and spends an average of 9 hours a week painting or selling. Although she
made about $6,000 last year from sales of artwork, she tells her friends she would do it
for free. For the current tax year, she incurs expenses of $800 primarily for admission
fees to flee markets and art fairs. The $800 is
I. deductible for AGI as a business expense.
II. a miscellaneous itemized deduction.
III. is deductible only because she has revenue from the activity.
a. Only statement III is correct.
b. Only statement I is correct.
c. Statements I and II are correct.
d. Statements II and III are correct.
e. Statements I, II, and III are correct.
Hank, whose adjusted gross income is $100,000, purchases a new principal residence in
the current year for $250,000. He borrows $220,000 from a local mortgage company
and pays loan origination fees of $1,600. During the year, Hank pays $7,000 of interest
on the loan. What is Hank’s allowable interest deduction for the year?
a. $7,000
b. $7,750
c. $8,500
d. $8,600
e. $10,100
Cornell and Joe are equal partners in Jones Company. For the current year, Jones
reports the following items of income and expense:
Sales revenues $500,000
Long-term capital gains 14,000
Short-term capital losses (30,000)
Trade and business expenses (200,000)
Limited partnership loss (50,000)
Taxable income $234,000
In addition to his Jones earnings, Joe has other net taxable income of $45,000. Included
in the $45,000 is $10,000 in income from a passive activity. Joe’s income is:
a. $152,000
b. $157,000
c. $162,000
d. $167,000
e. $182,000
Which of the following will render a corporation ineligible for S corporation status?
I. The corporation has 125 stockholders.
II. One of the stockholders is another corporation.
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 constructs have developed from the Annual Accounting Period
Concept?
I. Entity Concept.
II. Capital Recovery.
III. Related Party.
IV. Tax Benefit Rule.
a. Only statement I is correct.
b. Statements II and III are correct.
c. Statements III and IV are correct.
d. Only statement IV is correct.
e. Statements II, III, and IV are correct.
All deductions are allowed because of the legislative grace concept.
a. True
b. False
On March 11, 2013, Carlson Corporation granted Lana an option to acquire 200 shares
of the company’s stock for $6 per share. The fair market price of the stock on the date of
grant was $10. The stock requires that Lana remain with the company for one year after
the date of exercise. The option did not have a readily ascertainable fair market value.
Lana exercises the option on June 12, 2014, when the fair market value of the stock is
$15. On June 12, 2015, the fair market value of the stock is $20 per share. How much
must she report as income in 2015?
a. $-0-
b. $1,200
c. $1,800
d. $2,800
e. $4,000
Ricardo pays the following taxes during the year:
Real estate taxes on his personal residence $2,500
Real estate taxes on rental property 2,000
State sales taxes 600
State income taxes 4,000
City income taxes 1,000
Federal income taxes 5,400
What is the amount Ricardo can deduct for taxes as an itemized deduction for the year?
a. $7,500
b. $8,100
c. $9,500
d. $12,900
e. $15,500
Grant exchanges an old pizza oven from his business for a new oven. In addition to the
old oven, which has a basis of $10,000, Grant pays $4,000 cash and takes out a loan on
the new oven for $6,000. The new oven is valued at $22,000. What is Grant’s
recognized gain or loss due on this transaction?
a. $- 0 –
b. $2,000
c. $12,000
d. $16,000
e. $22,000
Hamlet, a calendar year taxpayer, owns 1,000 shares of Vanity Corporation common
stock, which he purchased two years ago for $4,000. Hamlet sells all of his shares on
December 29, 2015, for $2,500. On January 23, 2016, he purchases 600 shares of
Vanity Corporation common stock. What is the amount of Hamlet’s recognized loss in
2015?
a. $- 0 –
b. $600
c. $900
d. $1,500
e. $4,000
Erin is 67, single and has an adjusted gross income of $14,300. She has no dependents
and her itemized deductions are $6,000. What is her 2015 taxable income?
a. $2,450
b. $3,350
c. $4,650
d. $4,750
e. $6,000
Which of the following entities can provide fringe benefits to owner/employees that are
not taxable to the owner/employee?
I. Sole proprietorships
II. S corporations
III. Partnerships
IV. Corporations
a. Statements I and II are correct.
b. Statements II, III and IV are correct.
c. Statements II and IV are correct.
d. Only statement IV is correct.
e. Statements I and III are correct.
The mechanism for effecting a deferral in a nonrecognition transaction is an adjustment
of the replacement asset’s basis.
a. True
b. False
The Section 179 election promotes which of the following tax concept(s) or
doctrine(s)?
I. Claim of Right Doctrine.
II. Administrative Convenience Concept.
III. Tax benefit rule.
IV. Substance-Over-Form Doctrine.
a. Only statement I is correct.
b. Only statement II is correct.
c. Statements I, II, and IV are correct.
d. Statements II and IV are correct.
e. Statements I, II, III, and IV are correct.
Explain the similarities and differences of the Claim of Right doctrine and the
Constructive Receipt doctrine.
Indicate the proper treatment in the current year for the underlined amounts. Treat
each item as an independent event. Indicate whether the amount is deductible or not; if
deductible whether it is deductible FOR or FROM AGI; and indicate the amount of the
deduction for the current year considering any relevant limitations. Assume the
taxpayer has deductions greater than the standard deduction, has AGI of $69,000
without regard to the following transactions and has no “total” income limitations
related to itemized deductions.
a. Not Deductible
b. Deductible – For AGI
c. Deductible – From AGI
Qualified contribution of $6,500 to an IRA by a 52 year old married taxpayer who is
covered by his employer’s pension plan. Amount: $6,500
Match each statement with the correct term below.
a. Unmarried without dependents.
b. Generally used when financial disagreement exists.
c. Unmarried and provides a household for a dependent.
d. Use the same tax rate schedule as married, filing jointly.
e. Determines which tax rate schedule and standard deduction amount is applicable.
Filing status
Discuss the characteristics of a personal service corporation (PSC).
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.
Tangible property
Match each statement with the correct term below.
a. An employee may exclude up to $5,000 annually of these employer-provided
services.
b. If cash is received under this program, taxpayers are taxed on the amount of cash
received.
c. A salary reduction plan that allows employees to pay for medical and child care costs
with before-tax dollars.
d. A transfer of property without any profit motivation with an intention that includes
affection, charity, and respect.
e. Payments made into an employee’s account are not taxable in the current period;
taxation is deferred until funds are withdrawn.
f. Employer provided benefit that may be excluded from income because the dollar
amounts are too small for a reasonable accounting.
Qualified pension plan
Match each statement with the correct term below.
a. An employee may exclude up to $5,000 annually of these employer-provided
services.
b. If cash is received under this program, taxpayers are taxed on the amount of cash
received.
c. A salary reduction plan that allows employees to pay for medical and child care costs
with before-tax dollars.
d. A transfer of property without any profit motivation with an intention that includes
affection, charity, and respect.
e. Payments made into an employee’s account are not taxable in the current period;
taxation is deferred until funds are withdrawn.
f. Employer provided benefit that may be excluded from income because the dollar
amounts are too small for a reasonable accounting.
Child & dependent care
Double taxation
Eduardo is a single taxpayer with a farming operation that suffered a net loss of $30,000
in 2015. In addition, he earned $50,000 from his accounting firm. Eduardo purchased
$50,000 of equipment for his farm. He wants to maximize his cost recovery deduction
and believes the Section 179 election will help achieve that goal. What is the amount of
the maximum Section 179 deduction Eduardo can use? Explain the optimum approach
to attain his goal. Assume Eduardo’s total taxable business income in 2016 will be
$60,000, and he plans to add about $20,000 of equipment to the farm operation.
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.
NOL carryforward
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.
Travel expenses
On November 1, 2015, Milton Consultants Inc., enters into a 2-year lease agreement for
the use of a photocopier. The lease agreement requires Milton Consultants to pay a
fixed fee of $4,800 on November 1 and one cent for each copy made on a monthly
basis. Milton made the $4,800 payment on November 1, 2015. It paid $450 on
December 10, 2015 for copies made in November and $560 on January 12, 2016 for
copies made in December. Milton Consultants Inc., uses the cash basis of accounting.
Explain, in terms of the income tax concepts, the amount of the deduction for the use of
the copier that Milton can take in 2015.
Dwayne is upset by an IRS agent’s decision after an audit of Dwayne’s tax return.
Dwayne tells you, “I’m taking this case all the way to the Supreme Court.” Comment on
the appropriateness of Dwayne’s statement.
Discuss the difference(s) between the real estate professional exception and the active
participation exception when dealing with rental properties.