In July 2015, Harriet sells a stamp from her stamp collection at a gain of $500. Harriet
purchased the stamp in 2009. If Harriet is in the 33% marginal tax rate bracket and has
no other capital asset sales in 2015, what is her tax on the sale of the stamp?
a. $50
b. $75
c. $125
d. $140
e. $165
Which of the following businesses can use the cash method?
I. The Donner Group, a partnership with 3 equal partners, of which one is The Garden
Corporation. Average revenues for the Donner Group, a consulting firm, over the last
three years are $4,000,000.
II. The Mongoose Corporation, a computer software consultant that has average annual
fees from services over the last three years are $2,100,000.
a. Only statement I is correct.
b. Only statement II is correct.
c. Both statements are correct.
d. Neither statement is correct.
Francine operates an advertising agency. To show her appreciation to her 10 best
customers, she sends a box of fancy chocolate, costing $75 a box, to each of them. How
much of the cost of the chocolates can Francine deduct as a business gift?
a. $- 0 –
b. $125
c. $250
d. $375
e. $750
Which of the following would not be allowed a depreciation deduction?
I. Inventory.
II. Business equipment.
III. Land acquired as an investment.
IV. Cattle used in a dairy herd.
a. Only statement I is correct.
b. Statements I and III are correct.
c. Statements I, III and IV are correct.
d. Only statement IV is correct.
e. All of the assets are depreciable.
Which of the following requirements does not have to be met for a business or
investment expense to be deductible:
a. Be ordinary and necessary.
b. Be reasonable in amount.
c. Be recurring.
d. Be the taxpayer’s own expense.
e. All of the above must be met.
Velma is 16. Her income consists of municipal bond interest of $400 and interest
credited to her savings account of $2,340. If her parent’s taxable income is $88,000,
what is Velma’s 2015 tax liability?
a. $139
b. $165
c. $224
d. $305
e. $448
Kate bought residential rental property for $500,000. She reported a total of $100,000
of straight-line depreciation. Kate sells the building in 2015 for $425,000. What are the
immediate tax consequences of the sale? (Do not consider Kate’s other transactions).
I. If Kate’s rental activity is a production-of-income (investment) activity, she will
report a $25,000 long-term capital gain.
II. If Kate’s rental activity is a trade or business, she will report $25,000 of
Unrecaptured Section 1250 gain.
a. Only statement I is correct.
b. Only statement II is correct.
c. Both statements are correct.
d. Neither statement is correct.
Pension plans are subject to excess contribution penalties. Which of the following are
correct:
I. There is an excess contribution penalty for IRAs or Roth IRAs that equal 6% of the
amount in excess of $5,500 or the value of the individual’s IRA whichever is less.
II. A 10% excess contribution penalty applies to IRAs and Roth IRAs.
a. Only statement I is correct.
b. Only statement II is correct.
c. Both statements are correct.
d. Neither statement is correct.
Mei-Ling is a candidate for a master’s degree in taxation from Western State University.
During the current year she receives the following cash payments:
State allocated tuition waiver scholarship $2,200
A Microsoft scholarship (for fees and books) 800
Check from her grandmother 1,700
Loan proceeds from the college financial aid office 2,500
Prize won from a “rub and scratch” lottery ticket 300
Loan from her roommate 100
Interest received from National Bank CD 400
How much must be included in Mei-Ling’s gross income?
a. $- 0-
b. $700
c. $1,500
d. $3,700
e. $8,000
Devery, Inc. sells high tech machine parts that are fully warranted against defects.
Based on prior years experience they can expect to incur $20,000 of warranty expense
on current sales. They are on the accrual basis, and the warranty expense is based on a
reasonable estimate, so Devery can deduct the $20,000.
a. True
b. False
Assets eligible for preferential treatment under Section 1231 include
I. Certain assets held for less than a year.
II. Real estate used in a business held for more than a year.
III. Horses held for more than two years.
IV. Lumber held by a lumber store.
a. Only statement I is correct.
b. Statements II, III, and IV are correct.
c. Statements I, III, and IV are correct.
d. Statements II and III are correct.
e. Statements I, II, III, and IV are correct.
Determine the amount of income that Sarah would have from Micon Company in each
of the following situations. Sarah is a 50% owner and receives a salary of $40,000 from
Micon Company. The salaries are not included in the Micon Company’s $250,000
taxable income.
a. Micon Company is a corporation and pays $50,000 in dividends.
b. Micon Company is an S corporation and pays $50,000 in dividends.
c. Micon Company is a partnership and it distributes $50,000 in cash to the partners.
Sarah’s salary is not a guaranteed payment.
d. Micon Company is a partnership and it distributes $50,000 in cash to the partners.
Sarah’s salary is a guaranteed payment.
For the past seven years Karen, an attorney, has directed litigation clients to Rebecca, a
CPA, for accounting investigatory work. Because of the amount of litigation work
Karen directed to Rebecca, Rebecca’s business is now comprised solely of litigation
support work. Karen began taking tennis lessons this year. Rebecca gives Karen a new
tennis racquet so they could share afternoons by playing tennis together.
I. The “gift” appears to be a form of compensation.
II. Substance-over-form applies to this situation.
III. The tennis racquet meets the income tax definition of a gift.
IV. Karen recognizes no gross income from the receipt of the tennis racquet.
a. Only statement I is correct.
b. Only statement IV is correct.
c. Statements I and II are correct.
d. Statements III and IV are correct.
e. Statements I, II, and IV are correct.
For each of the following situations, determine whether the expenses are deductible as
an education expense. Explain.
a. Marvin owns a real estate development firm and his adjusted gross income is
$60,000. He enrolls as a part-time student at Northern College. His primary motivation
for taking the classes is to obtain a greater understanding of the accounting issues
associated with his real estate development business. He also believes that he can save
25% of the amount he pays in accounting expenses. The cost of the 2 courses he enrolls
in is $900.
b. Nancy is employed as a computer manager for a data processing company and her
adjusted gross income is $90,000. She enrolls in a night course ($225) at the local
college. The course is not required by her employer, but does improve her job skills.
c. Janine is a recent graduate of Western University and has been hired by a local
accounting firm. The firm expects Janine to pass the CPA exam on her initial attempt.
To help her prepare for the CPA exam, she takes the Booker CPA Review Course that
costs $1,500.
d. Cam runs a licensed day-care center. To maintain his license he is required to attend a
minimum of 30 hours a year of continuing education. During the year, Cam attends 40
hours of continuing education seminars at a cost of $1,500.
Determine the proper classification(s) of the asset discussed in the following scenario:
Jack bought a new table saw for his home.
I. Personal use property. IV. Intangible property.
II. Business use property. V. Real estate.
III. Tangible property. VI. Personal property.
a. Statements I and III are correct.
b. Only statement VI is correct.
c. Statements II and III are correct.
d. Statements II, III, and VI are correct.
e. Statements I, III, and VI are correct.
Kim owns and operates a restaurant on the north side of Indianapolis. She is
considering opening a day care center on the south side of town and incurs $10,400 of
investigation expenses. In July of the current year, Kim opens the day care center. How
much of the investigation expenses can Kim deduct in the current year?
a. $- 0 –
b. $5,000
c. $1,540
d. $5,180
e. $10,400
Dana purchases an automobile for personal use for $27,000. After using it for three
years, Dana converts the automobile to business use when the fair market value is
$19,000. What is Dana’s basis for depreciation purposes?
a. $- 0 –
b. $19,000
c. $27,000
d. The automobile cannot be depreciated.
Tien purchases an office building for $400,000, paying a $75,000 cash down payment
and borrowing $325,000 from Atlantic Meridian Mortgage Co. The purchase price is
properly allocated 90% to the building and 10% to the land. Two years after the
purchase, Tien remodeled one floor of the building at a cost of $25,000. Annual
maintenance costs and property taxes total $4,000. A total depreciation of $36,000 is
deducted over the 3 years. Determine the adjusted basis of the building and the land as
of the end of year 3:
a. $56,500 building; $7,500 land
b. $89,000 building; $10,000 land
c. $346,500 building; $42,500 land
d. $349,000 building; $40,000 land
e. $353,000 building; $40,000 land
Charlotte purchases a residence for $105,000 on April 13, 2004. On July 1, 2013, she
marries Howard and they use Charlotte’s house as their principal residence. If they sell
their home for $390,000, incurring $20,000 of selling expenses and purchase another
residence costing $350,000. Which of the following statements is/are correct
concerning the sale of their personal residence?
I If they sell the residence on June 1, 2015, they must recognize a gain of $15,000 on
the sale.
II. If they sell the residence on August 1, 2015, they will recognize no gain on the sale.
a. Only statement I is correct.
b. Only statement II is correct.
c. Both statements are correct.
d. Neither statement is correct.
What is the MACRS recovery period for a warehouse placed in service on August 31,
2015?
a. 10 years.
b. 27.5 years.
c. 31.5 years.
d. 39 years.
e. 40 years.
Ronald 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 (from Federal Sales tax table) 1,000
State income taxes 1,400
Federal income taxes 5,400
What is the amount Ronald can deduct for taxes as an itemized deduction for the year?
a. $3,500
b. $3,900
c. $4,900
d. $6,900
e. $12,300
All of the gain from the sale of qualified small business stock, purchased between
9/27/2010 and 1/1/2014, and held more than five years is excluded from tax.
a. True
b. False
Indicate which of the following statements concerning the following tax rate structures
is/are correct.
When Income Total Tax
Equals Equals
Structure #1 10,000 750
100,000 6,000
Structure #2 15,000 900
75,000 4,000
Structure #3 13,000 1,200
86,000 9,600
I. Tax Structure #1 is regressive.
II. Tax Structure #1 is proportional
III. Tax Structure #2 is progressive.
IV. Tax Structure #3 is progressive
a. Only statement I is correct.
b. Only statement III is correct.
c. Statements I and IV are correct.
d. Statements II and IV are correct.
e. Statements I, II, and IV are correct.
During the year, Shipra’s apartment is burglarized and her TV and stereo are taken. Her
basis in the TV is $1,200 and it has a fair market value of $700. Her basis in the stereo
is $400 and it has a fair market value of $600. What is Shipra’s theft loss deduction
(before considering the annual limitation based upon AGI)?
a. $- 0 –
b. $900
c. $1,000
d. $1,200
e. $1,300
Which income tax concepts/constructs might taxpayers who take depletion deductions
be violating?
I. Accounting method construct.
II. All-inclusive income concept.
III. Capital recovery concept.
a. Only statement I is correct.
b. Only statement II is correct.
c. Only statement III is correct.
d. Statements I and III are correct.
e. Statements I, II, and III are correct.
Moran pays the following expenses during the current year:
Subscription to Time magazine $80
Dues paid to professional organizations 300
Attorney’s fee for tax advice related to his divorce 200
Life insurance premiums 600
Valid business entertainment 500
Fees for investment advise to acquire taxable securities 300
If Moran itemizes his deductions and his adjusted gross income is $35,000, what is his
allowable deduction for the above expenses?
a. $- 0 –
b. $350
c. $700
d. $1,050
e. $1,300
Since Wisher, Inc. owns 80% of Patriot, Inc. (a U.S. corporation) the dividend received
deduction rate is 100%.
a. True
b. False
Orrill is single and has custody of his 8-year-old son Jack. Orrill has gross income of
$46,000, deductions for adjusted gross income of $2,200 and itemized deductions of
$6,000. What is his tax liability for 2015?
a. $3,535
b. $4,039
c. $4,333
d. $4,431
e. $4,521
The Section 1231 netting procedure involves several steps. What is the proper order of
these steps?
I. All Section 1231 gains and losses for the year are netted.
II. All casualty (theft) gains and losses on Section 1231 property are netted.
III. Current-year net Section 1231 gain is netted against any Section 1231 ordinary loss
deductions taken in the previous 5 years.
a. Statements I, III, and II.
b. Statements II, I, and III.
c. Statements III, I, and II.
d. Statements III, II, and I.
e. Statements I, II, and III.
In each of the following cases, determine the amount of realized gain or loss and the
recognized gain or loss:
a. Silvia sells her house for $100,000 and she pays $8,000 in commissions on the sale.
She paid $110,000 for the house 2 years earlier.
b. In July 2014, Carmen, who is single, is transferred to Dallas. She had purchased a
new home in June 2015 for $130,000. Carmen sells the house for $165,000 and pays a
commission of $10,000 on the sale.
c. Conrad is single and sells his principal residence for $350,000. He pays selling
expenses of $20,000. Conrad purchased the house for $65,000 in 1986.
Match each statement with the correct term below.
a. The depreciation method for real estate.
b. A term used synonymously with the term depreciation.
c. The depreciation system for assets placed in service after 1986.
d. The initial basis of an asset minus the amount of capital recovered.
e. The term used to describe the amount multiplied by the MACRS percentages to
calculate the annual depreciation deduction.
f. A provision intended to provide relief to small companies by allowing an immediate
deduction for small purchases of business equipment and by simplifying record
keeping.
Adjusted basis
Limited Partnership
Installment sale
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.
Personal casualty loss
Sergio owns Sergio’s Auto Restoration as a sole proprietorship. His business has fallen
on hard times and his bank has agreed to reduce the debt on his warehouse from
$175,000 to $150,000. The warehouse, which was purchased in 1995 at cost of
$190,000, has a fair market value of $160,000 and an adjusted basis of $140,000.
Before the debt reduction Sergio’s total assets are $680,000 and his total liabilities are
$700,000. Discuss the tax effect of the debt reduction and determine the minimum
amount of income Sergio must recognize from the discharge.
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.
Single
The tax rate that will apply to the next dollar of taxable income.
Section 179
Match each statement with the correct term below.
a. Specifically disallowed.
b. Appropriate and helpful.
c. Considered a trade or business.
d. Not considered a trade or business.
e. Problems with this generally arise with related parties.
f. This is met when services or property are provided to the taxpayer.
g. Normal, common, and accepted but not necessarily regularly recurring.
h. This is met when the existence and the amount of a liability have been established.
Necessary Expense
Greene is an individual taxpayer residing in Colorado (the Tenth Circuit). She has a
disagreement with the IRS on a transaction. Her former accountant told her that she has
“less than a 50/50 chance of winning.” However, she was recently told of one case with
similar facts that was decided in a way that would favor Greene. The U.S. Circuit Court
of Appeals for the Fifth Circuit decided that case. If Greene takes her case to the U.S.
Tax Court, should she feel confident of prevailing? Explain.
Annuity
On January 1 of the current year, Beverly borrows $100,000 from her employer, Happy
Hills Nursing Home. Beverly uses this loan to pay off credit cards and consumer loans.
Happy Hills considers Beverly to be a loyal employee, and allows her up to five years
to repay the loan. Beverly is not a shareholder or officer in the Happy Hills. Happy
Hills does not charge any interest on the loan. Both Happy Hills and Beverly are on a
December 31 fiscal year end. What is the income tax issue for Happy Hills? You do not
need to do any calculations.
Match each statement with the correct term below.
a. Automobile used 75% for business.
b. Investment expenses on municipal bonds.
c. Cost of investigating a new trade or business that the taxpayer enters.
d. Can be separated into two classifications.
e. Safety-deposit box for taxable investments.
f. Expenditure to influence legislation.
g. Cost of a new roof for office building.
h. Relates to an income producing activity mainly carried on for recreation or personal
enjoyment.
i. Deductibility depends on income and amount of personal and rental use.
j. Deductibility depends on whether the area is used exclusively for trade or business
activities.
Capital expenditure
Melissa is currently working with her divorce attorney on her impending divorce from
her husband David. She recently discovered that she is pregnant with David’s child.
Melissa intends to keep and raise the child. David’s attorney has submitted a proposal
that David pay Melissa alimony of $1,500 per month. The proposed alimony contract
satisfies the IRS tests for alimony. As a tax planner, what advice do you have for
Melissa? Is there a way to structure the payments to minimize Melissa’s income taxes?
Coke-Cola bonds for General Foods bonds.
Give a major difference between a regulation and a revenue ruling.
Phong is a life insurance salesman for Swan Insurance and spends 4 days a month in the
office. His office is 12 miles from home. He also has a part-time job as a salesman in a
clothing store. Typically, he works 2 nights during the week and 1 day on the weekend.
The clothing store where he works is 6 miles from his office and 7 miles from his home.
What portion(s) of Phong’s travel is (are) considered business?
On January 3, 2015, Great Spirit Inc., grants Jordan a nonqualified stock option to
acquire 1,000 shares of the company’s stock for $12 per share. The fair market price of
the stock on the date of grant is $15. The option does not have a readily ascertainable
fair market value. On October 1, 2015, when the fair market value of the stock is $18,
Jordan exercises the stock option. Determine the tax consequences for Jordan and Great
Spirit Inc., on the grant date of the option and the exercise date.
Perry inherits stock from his Aunt Margaret that had a basis of $40,000 to Margaret and
a fair market value of $54,000 on May 20, 2015, the date of her death. Paul sells the
stock on June 21, 2015 for $65,000. What is the amount and character of the gain or
loss on the sale?