During 2015, Jimmy incorporates his data processing business. Jimmy is the sole
shareholder. The following assets are transferred to the corporation:
Cash $2,000
Computer Equipment:
Fair market value 20,000
Adjusted basis 12,000
Original cost 24,000
Furniture:
Fair market value 20,000
Adjusted basis 32,000
Original cost 64,000
What will be the basis of the assets to the corporation after the transfer?
Computer Equipment Furniture
a. $20,000 $20,000
b. $12,000 $20,000
c. $20,000 $32,000
d. $12,000 $32,000
e. $24,000 $64,000
Ludwig died on April 5, 2015. As part of his will, he leaves land for which he paid
$6,000 on December 31, 2014, to his son Don. On April 5, 2015, the land is worth
$11,000. However, due to local real estate conditions, the land declines in value. On
July 28 it is worth only $10,000; it declines further to $9,000 on October 5 and plunges
to $7,000 on December 18.
I. In the absence of any special elections, Don’s basis in the land is $11,000.
II. If the executor elects the alternate valuation date and distributes the land to Don on
July 28, Don’s basis in the land will be $9,000.
III. If the executor elects the alternate valuation date and distributes the land to Don on
December 18, Don’s basis will be $7,000.
IV. In the absence of any special elections, if the executor distributes the land to Don on
October 5, Don’s basis in the land will be $9,000.
a. Only I is correct.
b. I and II are correct.
c. I, II and IV are correct.
d. I and IV are correct.
e. All the statements are correct.
Withdrawals of cash by a partner are taxable.
a. True
b. False
Eduardo and Ana Maria own their home, purchased in 2003 for $600,000. They
financed the purchase with a mortgage for $550,000. In 2011 they bought a vacation
cottage for $100,000, financed with a second mortgage of $95,000 on their home. In
2015, they fall upon hard times and cannot make the mortgage payments. The mortgage
company sells their home for $425,000 and the cottage for $85,000. At the time of the
sale, the mortgage balances are $450,000 on their home and $90,000 on their second
mortgage. The mortgage company cancels the remaining debt. How much income do
Eduardo and Ana Maria recognize on the cancellation of their debt?
a. $-0-
b. $5,000
c. $15,000
d. $25,000
e. $30,000
Under the pay-as-you-go concept, the tax base used to compute the taxpayer’s income
tax liability is a net income number.
a. True
b. False
Santana purchased 200 shares of Neffer, Inc. Common Stock on November 13, 2014,
for $3,400 and paid a $200 commission. On December 28, 2014, Santana received a $2
per share cash dividend from Neffer. On June 17, 2015, Neffer declares and distributes
a 2 for 1 stock split. On August 4, 2015, Santana purchased an additional 300 shares of
Neffer, Inc. Common Stock for $4,200 plus a $300 commission. On November 22,
2015, Santana sells 500 shares of Neffer, Inc. stock for $6,000 and pays a $400
commission on the sale. Santana’s gain (loss) on the sale is
a. $500 loss
b. $500 gain
c. $2,700 loss
d. $2,000 gain
e. $3,600 loss
Which of the following taxes paid by the Fowlers Company can be deducted during
2015?
I. State sales tax on utilities.
II. Federal income tax paid in 2015 when filing Fowlers’ 2014 corporate tax return.
a. Only statement I is correct.
b. Only statement II is correct.
c. Both statements are correct.
d. Neither statement is correct.
Kathy and Patrick are married with salaries of $28,000 and $21,000, respectively.
Adjusted gross income on their jointly filed tax return is $54,000. Both individuals are
active participants in employer provided qualified pension plans. What are Kathy and
Patrick’s maximum combined IRA contribution and deduction amounts?
Contribution Deduction
a. $-0- $-0-
b. $11,000 $-0-
c. $5,500 $5,500
d. $11,000 $8,000
e. $11,000 $11,000
Nancy teaches school in a Chinese university. She is a U.S. citizen and has been
teaching in China for 5 years. In the current year she will earn $100,000. What are some
of Nancy’s options for reporting U.S. gross income?
I. She may include the foreign earned income in her gross income, calculate her U.S.
income tax, and take a tax credit for foreign taxes paid.
II. She may exclude up to $100,800 in foreign earned income for the current year.
III. She may exclude all of her income because it is earned outside of the U.S.
a. Only I is correct.
b. Only II is correct.
c. Only III is correct.
d. I and II are correct.
e. II and III are correct.
Dunbar, a single taxpayer, purchased 300 shares of Sweetwater, Inc., stock on October
14, 2013, for $3,000. He sells the stock on August 22, 2015, for $4,000. Dunbar has no
other capital asset transactions in 2015.
I. If Dunbar’s taxable income without considering the stock sale is $93,000, the sale of
the stock will increase his income tax liability by $250.
II. If Dunbar’s taxable income without considering the stock sale is $13,000, the sale of
the stock will not increase his income tax liability.
a. Only statement I is correct.
b. Only statement II is correct.
c. Both statements are correct.
d. Neither statement is correct.
The gain from the sale of qualified small business stock held for more than six months
can be rolled over if stock from another qualified small business is purchased within 60
days.
a. True
b. False
Which of the following individuals is involved in a trade or business?
I. Lil owns a farm near Lafayette, Indiana. She leases the property to Cal, who operates
the farm for himself. Lil receives 10% of Cal’s net income as part of the lease
agreement but has no responsibilities for the farming operation.
II. Lorraine owns a warehouse located in Brooklyn NY. She paid $250,000 for the real
estate several years ago. It is now appraised at over $1,000,000, but she still uses the
building only to store her painting collection.
a. Only statement I is correct.
b. Only statement II is correct.
c. Both statements are correct.
d. Neither statement is correct.
Brenda sells stock she purchased in 2004 for a $7,500 gain in 2015. In August 2015, she
also sells land she purchased as an investment in December 2014 at a loss of $9,000.
I. For 2015, Brenda’s tax on the $7,500 gain is $1,125.
II. Brenda can deduct $3,000 of the $9,000 loss in 2015.
III. For 2015, Brenda has a net long-term capital loss of $9,000.
IV. Brenda can only deduct a capital loss of $1,500 in 2015.
a. Statements I and II are correct.
b. Statements I, II and IV are correct.
c. Only statement II is correct.
d. Only statement IV is correct.
e. Statements I, II and III are correct.
Chelsea operates an illegal gambling enterprise out of her restaurant. Considering only
the following expenses, what amount can Samantha deduct?
Building rent $34,000
Secretarial services 12,000
Payments to off-duty policemen to provide security 20,000
Lease payments for cars given to health inspectors 18,000
a. $- 0 –
b. $46,000
c. $66,000
d. $72,000
e. $84,000
The Brooks Corporation, an S corporation, has a company health-care plan for all
employees. Lars, an employee, owns 20% of the corporate stock. Dorothy, also an
employee, owns 1%. The cost to the company of Lars’ health plan is $2,800 and
Dorothy’s is $3,000. What amount of the health plan must Lars and Dorothy report as
income?
Lars Dorothy
a. $-0- $-0-
b. $-0- $200
c. $2,800 $200
d. $2,800 $-0-
e. $2,800 $3,000
Television station Channel 2 receives $200,000 from Harry’s Auto Parts, Inc., to air
Harry’s commercials during a local automotive repair talk show in December 2015.
December’s ratings drop sharply when the show’s star quits to work as a mechanic with
a NASCAR team. Shortly thereafter, Harry contacts Channel 2 indicating that he wants
to discontinue his sponsorship and requests return of $125,000 of the payment. The
station continues to air the commercials and keeps the $200,000. Harry initiates a legal
suit to recover the $125,000. Why is the $200,000 included in Channel 2’s 2015 gross
income?
I. All-inclusive Income Concept.
II. Capital Recovery Concept.
III. Wherewithal-To-Pay Concept.
IV. Claim of Right Doctrine.
V. Constructive Receipt Doctrine.
a. Only statement I is correct.
b. Only statement IV is correct.
c. Statements I, III, and IV are correct.
d. Statements I, III, and V are correct.
e. Statements II, III, and IV are correct.
Describe the rules that apply to individual taxpayers for determining the deductibility of
each of the following types of interest. Include in your discussion whether the interest is
deducted for or from AGI, and any limitations that apply.
a. Interest associated with trade or business activities
b. Interest associated with investment activities
c. Interest associated with constructing or purchasing a taxpayer’s residence
d. Interest associated with personal purchases and activities
Jennifer’s business storage shed is damaged by a hail storm. The shed is uninsured. Its
adjusted basis is $8,000. Just before the accident the shed is appraised for $10,000. In
its damaged condition, the shed can be sold for $4,000. What is Jennifer’s loss from the
storm?
a. $- 0 –
b. $ 4,000
c. $ 6,000
d. $ 8,000
e. $10,000
During the current year, Eve receives the following interest payments:
City of Toronto, Ontario Bonds $750
Florida Turnpike Authority Bonds 420
Virgin Islands Transportation Authority Bonds 630
General Electric Corporate Bonds 850
How much gross income does Eve have from the interest payments?
a. $1,050
b. $1,480
c. $1,600
d. $1,800
e. $1,900
Daniel purchases 5-year class listed property (a computer) on March 2, 2015, for
$30,000. It is used 75% for business, and the remainder for personal use. Daniel wishes
to maximize his 2015 depreciation deduction. What is Daniel ‘s 2015 depreciation
deduction?
a. $2,250
b. $2,700
c. $3,375
d. $4,500
e. $6,000
Discuss whether the following expenditures meet the ordinary, necessary, and
reasonable requirements for deductibility.
a. Mortimer owns a shoe store. Every August Mortimer has a “Back-to-School” sale. To
promote that event Mortimer spends $2,000 on newspaper and radio advertising.
Generally, this event generates about $85,000 in sales. These sales revenues are about
twice the level of sales in other months.
b. Wilma bought a small manufacturing business that had been declared bankrupt. To
retain the current sales force, she pays some of the obligations owed to these people by
the former owners. Wilma has no legal obligation to pay these debts.
c. Ned owns a large sporting goods store. Nick’s 17-year-old son, Tony, works in the
store when time permits. Nick pays Tony $10 per hour because he has worked in the
store several years. Other high school age individuals also work at the store and
perform functions requiring less experience than Tony. They are paid $8 per hour.
d. Art is a self-employed CPA. Last month he attended an AICPA Continuing Education
course that cost him $750. In addition to the course registration fee, Art incurred $800
in travel expenses to attend the course.
e. Elvira is a stockholder in over 100 different corporations. However, she does not own
more than 10 shares of stock in any one company. She enjoys attending annual
stockholder meetings and often gives her “two cents worth” about issues affecting the
companies’ operations. In the past year Elvira spent $7,540 to attend the stockholder
meetings to help protect her investments.
Anna owns a passive activity that has a basis of $30,000 and a suspended loss of
$7,000. Anna gifts the passive activity to her daughter Patricia when the property has a
fair market value of $42,000.
I. Anna will report an ordinary loss of $7,000.
II. Patricia’s basis in the passive activity is $30,000.
a. Only statement I is correct.
b. Only statement II is correct.
c. Both statements are correct.
d. Neither statement is correct.
Beth is an accrual basis taxpayer. A renter pays Beth the January 2015 rent in December
2014. What are the tax effects of this transaction?
I. Beth will recognize rent income in 2014.
II. The wherewithal-to-pay concept requires Beth to recognize the income in 2014.
a. Only statement I is correct.
b. Only statement II is correct.
c. Both statements are correct.
d. Neither statement is correct.
Lu-Yin purchased her consulting business with $75,000 of her own funds and she
borrowed $125,000 from the local bank. If she is personally responsible for the loan,
she is at risk only for $50,000.
a. True
b. False
The Big Easy Company leases a luxury box and purchases 20 tickets to the New
Orleans Saints home games. The entire amount is deductible as an entertainment
expense as long as all the requirements are met.
a. True
b. False
Howard is a partner in the Smithton Partnership with a basis of $20,000. During the
current year, the partnership is liquidated and the partnership distributes cash of
$22,000 and property with a basis of $8,000 and a fair market value of $15,000 to each
partner. What amount must Howard report as a gain from the liquidation?
a. $- 0 –
b. $2,000
c. $10,000
d. $15,000
e. $17,000
Taxpayers may elect to use the small claims division of the U.S. Tax Court if the
amount of tax in dispute is less than
a. $1,000
b. $2,500
c. $5,000
d. $10,000
e. $50,000
During 2014, Wendy, a biologist, made a bona fide $10,000 loan to her friend Ben when
he was in a time of need. Ben dies in 2015. Wendy has been informed by Ben’s estate
that creditors can expect to receive 40% of amounts owed to them. No payments to
creditors are made from Ben’s estate in 2015. Wendy’s maximum deduction in 2015 is
a. $- 0 –
b. $3,000
c. $4,000
d. $6,000
Tony and Faith sell their home for $495,000, incurring selling expenses of $25,000.
They purchased the residence for $85,000 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. $365,000 $-0-
b. $365,000 $115,000
c. $385,000 $135,000
d. $385,000 $-0-
e. $390,000 $-0-
Deduction concepts need to resolve certain questions. Some of these are:
I. How much is deductible?
II. When can the deduction be taken?
III. What types of expenditures are deductible?
IV. What entity is entitled to the deduction?
a. Statements I and II are correct.
b. Statements II, III, and IV are correct
c. Statements I, II, and III are correct.
d. Only statement II is correct.
e. Statements I, II, III, and IV are correct.
Moses is a 20% partner in an auto parts store where he works full-time. His share of the
partnership income is $70,000, which is also his net-self-employment income.
I. Moses must pay self-employment tax at the rate of 15.3% on 92.35% of the
partnership income.
II. Moses is allowed a deduction for AGI for 50% of the self-employment tax he pays
during the year.
a. Only statement I is correct.
b. Only statement II is correct.
c. Both statements are correct.
d. Neither statement is correct.