Helen receives stock worth $1,000 from her grandfather as a graduation gift in May
2015 (her grandfather paid $100 for the stock many years ago). In December 2015, she
receives a $100 cash dividend on the stock. Helen is not taxed on the value of the stock
received in 2015, but she must include the $100 cash dividend in her 2015 gross
income. Which of the following form the basis for this treatment?
I. Capital Recovery Concept.
II. Legislative Grace Concept.
III. All-inclusive Income Concept.
IV. Constructive Receipt Doctrine.
a. Statements II and III are correct.
b. Statements I and IV are correct.
c. Statements II, III, and IV are correct.
d. Statements II and IV are correct.
e. Only statement I is correct.
Snoopy Corporation, Garfield Corporation, and Dogbert Corporation are partners in
Comic Partnership. The partners’ fiscal year ends and ownership interests follow:
Snoopy Corporation March 31 FYE 15% Interest
Garfield Corporation May 31 FYE 30% Interest
Dogbert Corporation October 31 FYE 55% Interest
I. Comic Partnership must use a calendar year end, unless the IRS approves an election
for a different tax year.
II. Comic Partnership must use a October 31 fiscal year end.
a. Only statement I is correct.
b. Only statement II is correct.
c. Both statements are correct.
d. Neither statement is correct.
Baylen, whose adjusted gross income is $60,000, purchases a new home during the
year, borrowing $300,000 from Century National Bank to finance the purchase. He also
pays $3,000 in points and $4,500 in loan origination fees. During the year he pays
interest of $14,000 on the loan. What is Baylen’s allowable interest deduction?
a. $14,000
b. $15,800
c. $17,000
d. $18,800
e. $23,300
Employment taxes are
a. revenue neutral.
b. regressive .
c. value-added.
d. progressive.
e. proportional.
Which of the following losses are generally deductible?
I. Loss on the sale of corporate stock.
II. Losses incurred in carrying on a trade or business.
a. Only statement I is correct.
b. Only statement II is correct.
c. Both statements are correct.
d. Neither statement is correct.
Karl is scheduled to receive an annuity distribution of $10,000 from his pension plan in
2015. Due to his recent success in the stock market, he has requested that he receive
only $5,000 in 2015. Because Karl will fail to receive the required annuity distribution
in 2015, he is subject to a penalty of
a. $-0-
b. $500
c. $1,000
d. $2,500
e. $5,000
For the current year, Steven’s tentative alternative minimum tax is $24,360. His regular
tax liability is $23,000. Steven has $24,000 in taxes withheld from his salary.
I. Steven’s alternative minimum tax is $1,360
II. Steven’s tax liability is $23,000.
III. Steven will have to pay an additional $360 in tax.
IV. Steven’s total tax liability is $24,360
a. Only statement I is correct.
b. Statements II and III are correct.
c. Statements I and IV are correct.
d. Statements I, III, and IV are correct.
e. None of the above are correct.
Sarah owes a deductible expense that she can either pay (and deduct) this year or next
year. She is in the 25% marginal tax rate bracket. Which of the following statements
about this payment is/are correct?
I. Deductions should always be taken in the current year. Sarah should pay the expense
this year.
II. If Sarah expects to be in the 28% marginal tax rate bracket next year, she should pay
the expense next year.
a. Only statement I is correct.
b. Only statement II is correct.
c. Both statements are correct.
d. Neither statement is correct.
The IRS has a penalty for underpayment of estimated taxes. This penalty exists because
of which of the following concepts, constructs, or doctrines?
a. Pay-As-You-Go.
b. Tax Benefit Rule.
c. Substance-Over-Form.
d. Administrative Convenience.
e. Ability-To-Pay.
Waldo and Fern are negotiating a divorce settlement. Waldo has offered to pay Fern
$12,000 each year for a guaranteed 10 years. What are the tax implications of this
proposition?
I. Since the payments are periodic and in cash, the payments qualify as alimony.
II. If the payments qualify as child support, Fern recognizes gross income and Waldo
has 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.
Stan sells a piece of land he used in his auto repair business at a gain of $9,000 in 2015.
In addition, Stan sells equipment he purchased in 2012 for $8,000. He paid $20,000 for
the equipment that had an adjusted basis of $12,000 when it was sold. He also sells
some stock in 2015 at a loss of $11,000. No losses on the disposition of assets were
recognized in prior years. The effect of these transactions on Stan’s 2015 taxable
income is:
a. Decrease of $6,000.
b. Decrease of $3,000.
c. Increase of $6,000.
d. Zero, with a long-term capital loss carryback of $2,000.
e. Zero, with a long-term capital loss carryback of $6,000.
Mandy is a self-employed plumber. She spends $24,000 of her personal savings to buy
an Airstream camper to use on camping trips. Why is this expenditure not currently
deductible?
I. It is a capital expenditure.
II. It is a personal expenditure.
a. Only statement I is correct.
b. Only statement II is correct.
c. Both statements are correct.
d. Neither statement is correct.
For each of the following situations, determine the amount of the allowable deduction.
Be sure to show any necessary calculations and provide explanations of how you
determined the deductible amount.
a. Ukarie has an adjusted gross income of $40,000. She made the following
contributions to qualified charities:
Property Given
Basis Fair
Market Value
Household Furniture $8,000 $3,000
Inventory from her retail store 6,000 10,000
GE stock (purchased in 1978) 2,000 20,000
b. Carla purchased her home in 1994 by paying $60,000 in cash and borrowing
$140,000. The home is currently worth $400,000 and her mortgage is $110,000. Carla
is involved in a lawsuit (unrelated to any business interests) during the current year and
she borrows $125,000 using the equity in her home as collateral for the loan to pay her
legal fees and court costs. She pays $9,800 of interest on her original mortgage and
$8,000 of interest on the home equity loan during the current year.
c. Tracy is a resident of Kansas and the sole owner of The Bakery. During 2015, Tracy
makes the following payments:
Estimated federal income taxes $8,000
Estimated state income taxes 3,300
Self-employment taxes 5,600
Sales tax from Federal Sales tax table 2,100
Property tax on personal residence 900
Tax assessment for sidewalk in front of personal residence 3,000
2014 state tax paid in 2015 with 2014 state tax return 200
How much additional Social Security tax does Elise pay in 2015 on her $10,000
Christmas bonus? Her total earnings for the year (before the bonus) are $130,000.
a. $ 0
b. $ 145
c. $ 620
d. $ 765
Why might a taxpayer elect to depreciate assets using the Alternative Depreciation
System (ADS)?
I. The taxpayer desires rapid write off of assets.
II. The taxpayer may be close to being subject to the alternative minimum tax.
III. The taxpayer is experiencing a low income time period.
a. Statements I and III are correct.
b. Only statement I is correct.
c. Statements II and III are correct.
d. Statements I and II are correct.
e. Statements I, II, and III are correct.
Self-employed people are required to make quarterly payments of their estimated tax
liability.
a. True
b. False
Ursula owns an annuity that pays her $850 per month until she dies. Which of the
following income tax concepts provides for the tax treatment of the annuity payments
Ursula receives (and the treatment in the year of death)?
I. Administrative Convenience Concept
II. Annual Accounting Period Concept
III. Capital Recovery Concept
IV. Constructive Receipt Doctrine
a. Only statements I and II are correct.
b. Only statements II and III are correct.
c. Only statements I and IV are correct.
d. Only statement IV is correct.
e. Only statement II is correct.
Qualified Section 179 property for a retail store includes
I. Store shelving.
II. Company auto used by salesmen.
III. Sidewalks in front of the store.
IV. Delivery van owned by the store.
a. Only statement I is correct.
b. Only statement III is correct.
c. Statements I and IV are correct.
d. Statements II and III are correct.
e. Statements I, II, and IV are correct.
Sigma Corporation had the following capital gains and losses for 2011 through 2015:
2011 2012 2013 2014 2015
$30,000 $(20,000) $15,000 $(30,000) $60,000
Sigma’s net capital gain for 2015 is:
a. $25,000
b. $30,000
c. $35,000
d. $55,000
e. $60,000
On her 18th birthday, Patti’s grandfather gave her $8,000 of dividends on stock he
owned, which she uses to pay college expenses. The cost of Patti’s tuition, fees, and
books is $6,000. Patti’s gross income from this event is:
a. $- 0 –
b. $2,000
c. $6,000
d. $8,000
Net collectibles gains are taxed at a maximum rate of 28%.
a. True
b. False
Brent is single and owns a passive activity that has a basis of $25,000 and a suspended
passive loss of $8,000. He acquired the passive activity in 2010. Brent’s taxable income
from active and portfolio income is $85,000, and he has no other capital gains or losses
for the year.
a. What is the effect on Brent’s taxable income if he sells the passive activity for
$42,000?
b. What is the effect on Brent’s taxable income if he sells the passive activity for
$13,000?
c. What is the effect on Brent’s taxable income if he dies this year while the fair market
value of the passive activity is $30,000?
d. What is the effect on Brent’s taxable income if he dies this year while the fair market
value of the passive activity is $18,000?
e. What is the effect on Brent’s taxable income if he gives the passive activity to his
brother Norm when the fair market value of the passive activity is $30,000?
Portfolio income consists of unearned income from dividends, interest, royalties,
annuities, and other assets held as investments.
a. True
b. False
Toby, a single taxpayer with no dependents, is an employee of a large consulting firm.
During the year he incurs the following business expenses that are not reimbursed by
his employer:
Business entertainment and other meals $3,400
Transportation and lodging 4,200
Toby’s AGI is $100,000 and is in the 28% marginal tax rate. In addition to the
expenditures described above, his only other qualified itemized deductions are home
mortgage interest of $6,000 and property taxes of $2,000. What is the after-tax cost to
Toby of his unreimbursed employee business expenses?
a. $- 0 –
b. $5,600
c. $6,088
d. $6,508
e. $7,600
Which of the following is/ are appellate level courts for tax cases?
I. U.S. Court of Federal Claims.
II. U.S. Supreme Court.
III. U.S. Court of Appeals for the Federal Circuit.
IV. U.S. Court of Appeals for the Tenth Circuit.
V. U.S. District Court.
a. Only statement V is correct.
b. Only statement II is correct.
c. Statements I and V are correct.
d. Statements II, III, and IV are correct.
e. Statements I, II, III, IV, and V are correct.
When calculating AMTI, individual taxpayers must add back the following:
I. The standard deduction amount.
II. Casualty and theft losses.
a. Only statement I is correct.
b. Only statement II is correct.
c. Both statements are correct.
d. Neither statement is correct.
Trang is in the 15% marginal tax bracket in the current year. She owes a $10,000 bill for
business expenses. Since she reports taxable income on a cash basis, she can deduct the
$10,000 in either this year or next year, depending on when she makes the payment.
She can pay the bill at any time before January 31 of next year, without incurring the
normal 12% interest charge. She expects to be in the 25% marginal bracket next year.
Without considering the time value of money, what are her tax savings if she pays the
bill after January 1?
a. Current year $1,000.
b. Current year $1,500.
c. Next year $1,000.
d. Next year $2,500.
e. Next year $1,500.
Tax characteristics of corporations include which of the following?
I. At higher income levels, the lower tax rates phase out by the use of a surtax.
II. The corporate tax rates are 10%, 15%, 25%, 28%, 33%, 35% and 39.6%.
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 expenses is/are deductible?
I. Transportation and lodging expenses of $4,000 to influence state legislation that may
affect the taxpayer’s business.
II. A $4,000 contribution to the mayor’s campaign fund.
a. Only statement I is correct.
b. Only statement II is correct.
c. Both statements are correct.
d. Neither statement is correct.
Ralph buys a new truck (5-year MACRS property) to use in his landscaping business on
May 13, 2015, at a cost of $18,000. On November 5, 2015, Ralph takes advantage of an
end of the season clearance sale to purchase various landscaping equipment (7-year
MACRS property) costing $34,000. Assuming that Ralph does not wish to immediately
expense any of the cost of the property purchased this year, what is his 2015 maximum
allowable cost recovery deduction?
a. $2,114
b. $5,714
c. $8,459
d. $2,086
e. $15,500
Search engines used in computer-assisted tax research tools provide advantages over
manual searches.
a. True
b. False
The income tax concept that is primarily responsible for the treatment of installment
sales of property is the:
a. Administrative Convenience Concept.
b. Arm’s-Length Transaction Concept.
c. Entity Concept.
d. Realization Concept.
e. Wherewithal-to-Pay Concept.
Adam Smith identified efficient, certainty, convenience, and economy as the four basic
requirements for a good tax system.
a. True
b. False
Armando has AGI of $80,000 and makes the following charitable contributions:
” $10,000 cash to American Heart Society.
” $8,000 cash to Redemption Church.
” $24,000 worth of AOL stock acquired in 2005 with a basis of $10,000 to Upper State
University.
What is Armando’s maximum charitable deduction in the current year?
a. $18,000
b. $24,000
c. $28,000
d. $40,000
e. $42,000
George’s wife sells stock she purchased 10 months ago at a gain of $212.
Walter is a cash basis taxpayer with a drapery cleaning business. In the current year he
determines he will never receive payment from Davis for cleaning services provided to
Davis. Can Walter record a deduction for the bad debt? Explain.
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.
Direct purchase
Microsoft common stock for Merrill Lynch common stock.
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.
Personalty
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.
Material participant
COMPREHENSIVE TAX RETURN PROBLEM. Your cousin, Antonia, who is 30
years old, single and a restaurant manager, heard that you have enrolled in the Masters
of Taxation program at State University. She has asked you for help in preparing her
2014 tax return and provides you with the following information:
Salary $50,000
Alimony received 3,600
Interest on GMAC Bonds 800
Interest on City of New Orleans Bonds 1,300
Interest on a bank savings account 600
Berlinco, Inc. (a foreign corporation) (nonqualified dividend) 100
Long-term capital gain 2,000
Long-term capital loss (1,000)
Short-term capital gain 5,000
Short-term capital loss (3,000)
Short-term capital loss carryover from 2014 (5,000)
Cash award from local United Way [1] 300
Christmas turkey [2] 30
Parking at office [2] 500
Membership in professional organizations [2] 100
Group term life insurance ($40,000 policy) [2] 135
Unreimbursed medical expenses:
Medical insurance premiums $1,900
Prescription drugs 250
Dentist 2,250
Emergency room fee 885
Cold pills, aspirin, other over-the-counter medicine 120
Rental fee for crutches 80
Real estate taxes $600
State income tax withheld 1,150
State income tax paid in 2015 for 2014 tax return 150
Home mortgage interest 3,800
Home equity interest [3] 500
Charitable contributions – cash 350
Charitable contributions – clothes [4]
Tax preparation fee for 2014 return, paid in 2015 300
Unreimbursed business expenses [5] 888
Note:
[1] Antonia kept the award from the United Way.
[2] Benefits paid by the employer.
[3] Antonia borrowed $12,000 and used the proceeds to purchase a new car.
[4] The original cost of the clothes were $480 and the current FMV is $200
[5] Of the $888 in expenses, $180 are for meals and entertainment.
Compute Antonia’s: adjusted gross income, taxable income, and tax liability.
Match each statement with the correct term below.
a. Income is subject to tax when it is received without restrictions as to its use or
disposition.
b. Income is considered received when it is credited to the taxpayer’s account or made
unconditionally available to the taxpayer.
c. A concept that is fundamental to the progressive tax rate structure.
d. To be deductible, an expenditure must be made for a business or economic purpose
that is greater than any tax avoidance motive of the taxpayer.
e. The amount of a deduction may not exceed its cost.
f. Income should be recognized and a tax paid when the taxpayer has the resources to
pay the tax.
g. A type of deductible expenditure that embodies the profit motive requirement.
h. Allows the omission of items from the tax base for which the costs of compliance
exceeds the revenue generated.
i. A category of expenses that is specifically disallowed.
Wherewithal-to-Pay Concept
Each of the numbered items below is accorded only one of the following lettered
treatments. Use the existing law as it applies to the current year, match the best answer
to the statements below.
a. Fully excluded from gross income.
b. Fully included in gross income.
c. Partially excluded from gross income.
Sarah, the managing partner in an accounting firm, has her downtown parking space
($325/per month) paid by the firm. None of the accounting staff receive parking
privileges.
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.
Loss-of-income damages
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.
Kiddie tax
Why did Congress enact the at-risk rules?
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
Self-employed salesman spends $1,000 on “directly related” entertainment of his
customers. Amount: $500
Gordon is the sole shareholder of Whitman Corporation, an S corporation. At the
beginning of the year, Gordon’s basis in his Whitman stock is $100,000. During the
year, Whitman Corporation has operating income of $50,000; dividends from domestic
corporations of $15,000; tax-exempt interest of $5,000; nontaxable life insurance
proceeds of $10,000 on the death of a key employee; and a capital loss of $15,000.
Whitman pays no dividends. What is Gordon’s year-end basis in Whitman stock (after
the distribution)?
Like-kind property
Revenue Ruling 86-457
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.
Working condition fringe
Based on a quantity of a product sold.
Mo is a single taxpayer reporting $95,000 of gross income. In addition, Mo receives
$5,000 of tax-exempt interest.
Compute the following:
a. Mo’s taxable income is ___________________.
b. Mo’s tax liability is ____________________.
c. Mo’s marginal tax rate is ____________________.
d. Mo’s average tax rate is ____________________.
e. Mo’s effective tax rate is ____________________.