Marie earns $80,000 as a sales manager for Household Books. How much Social
Security and medicare tax does Marie have to pay for 2015?
a. $4,960.00
b. $6,120.00
c. $6,400.00
d. $2,240.00
Rosie inherits 1,000 shares of Northern Skies Airline Corporation stock from the estate
of her Uncle Tony. Tony died on July 2, 2015. The stock’s value on July 2, 2015, is
$4,000. Tony’s basis in the stock was $3,000. The stock has a fair market vale of $7,000
on October 1, 2015, when it is transferred to her. Rosie sells the stock October 11, 2016.
What is Rosie’s basis in the stock?
a. $- 0 –
b. $1,000
c. $3,000
d. $4,000
e. $7,000
Claire and Harry own a house on Hilton Head Island. During the year, Claire and Harry
rent the house for 30 days to friends from Texas for $2,000. Claire and Harry use the
house a total of 60 days during the year. After making the appropriate allocation of
expenses between personal and rental use, the following rental loss was determined:
Rental income $2,000
Property taxes (250)
Mortgage interest (950)
Repairs and maintenance (200)
Utilities (300)
Depreciation (400)
Rental loss $(100)
How should Claire and Harry report the rental income and expenses for the forthcoming
year?
I. Report the $100 loss for AGI.
II. Only expenses up to the amount of $2,000 rental income may be deducted for the
year.
III. Include the $2,000 in gross income, but no deductions are allowed.
IV. Nothing needs to be reported.
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 and III are correct.
It was stated in the text that realized gains from certain types of transactions (e.g.,
like-kind exchanges) are deferred for recognition in a future period. The basis of this
treatment is the
I. Annual Accounting Period Concept.
II. Legislative Grace Concept.
III. Wherewithal-to-Pay Concept.
IV. Capital Recovery Concept.
a. Only statement II is correct.
b. Only statement III is correct.
c. Statements I and II are correct.
d. Statements II and III are correct.
e. Statements I, II, III and IV are correct.
An involuntary conversion occurs whenever a loss (but not a gain) is realized from a
transaction that occurs against the taxpayer’s will.
a. True
b. False
All of the following citations are to trial court decisions except:
a. George E. Jones, 21 B.T.A. 431 (1940)
b. Harper Smith, 577 F.2d 212 (CA-3, 1978)
c. George F. Dowell v. U.S. 370 F.Supp. 69 (D. Ct. Tx. 1974)
d. Raymond R. Windle, 65 T.C. 694 (1976)
e. Jerome Prizant, 30 TCM 817 (1971)
The first step in tax research is to locate the relevant legal authorities.
a. True
b. False
In May 2015, Preston purchases 5-year MACRS property costing $150,000 and 7-year
MACRS property costing $60,000. Preston’s income is $100,000. If Preston wishes to
maximize his total 2015 cost recovery deduction, what will his total cost recovery
deduction be on the properties purchased in 2015?
a. $100,000
b. $30,430
c. $51,430
d. $42,000
e. $34,430
Adjusted basis is equal to the initial basis, plus or minus the cumulative effects of
adjustments.
a. True
b. False
Michael, age 42 and single, has a 13-year-old son, Tony. Tony resides with his mother,
Jennifer, in her home. Pursuant to the terms of their divorce, Michael properly claims
Tony as a dependent on his income tax return. Michael pays child support payments to
his ex-wife for support of his child. Jennifer does not claim Tony as her dependent but
she does bear the economic burden of supporting the household in which they reside.
What is the maximum amount of the 2015 standard deduction that Michael qualifies
for?
a. $6,300
b. $12,600
c. $9,250
d. $5,000
Watson sells equipment he used in his business. The equipment cost $50,000 and had an
adjusted basis of $32,000 on the date of sale.
a. If Watson sells the equipment for $23,000, what is the amount and character of the
recognized gain or loss?
b. If Watson sells the equipment for $55,000 what is the amount and character of the
recognized gain or loss?
Under a Roth IRA
I. Any taxpayer may contribute and deduct up to $5,500 deductible contributions per
year.
II. The maximum contribution is phased-out for unmarried taxpayers with adjusted
gross income between $116,000 and $131,000.
a. Only statement I is correct.
b. Only statement II is correct.
c. Both statements are correct.
d. Neither statement is correct.
All of the following are requirements of a qualified pension plan except:
a. The plan must be in writing.
b. The plan cannot discriminate in favor of highly paid employees.
c. The plan must be for the exclusive benefit of the employees or their beneficiaries.
d. The plan must cover all employees who have worked for the company more than 18
months.
e. The plan must limit the amount of contributions that can be made to the plan and/or
the benefits received from the plan.
An exception to the economic performance test allows the deduction of year-end
accruals if
I. Either the expense is not material for both tax and financial purposes or the accrual
results in a better matching of revenue and expenses.
II. The taxpayer consistently treats the item as incurred in the year the all events test is
met.
a. Only statement I is correct.
b. Only statement II is correct.
c. Both statements are correct.
d. Neither statement is correct.
Nicole has the following transactions related to her investments and her sole
proprietorship during 2015:
(1) Stock that was purchased in 2009 is sold at a loss of $12,000.
(2) Bonds that were purchased in 2015 are sold at a gain of $6,000.
(3) A building used in her business is sold at a gain of $17,000. The building was
purchased in 1996 and $24,000 of depreciation had been taken on the building.
(4) Equipment purchased in 2009 is sold at a loss of $16,000. Depreciation of $25,000
had been taken prior to the sale.
(5) A delivery van is destroyed in an accident. Nicole realizes a gain of $5,000 on the
van. She had deducted $3,000 of depreciation on the van prior to the accident. She does
not intend to replace the van.
a. Determine the character of each gain or loss:
b. Determine the effect of the gains and losses on Nicole’s current-year adjusted gross
income.
The Holden Corporation maintains a SIMPLE-IRA retirement plan for its employees.
The company has notified its employees that for 2015 it will fund the SIMPLE-IRA by
matching an employee’s contribution up to a maximum of 3% of the employee’s salary.
Harrison’s salary in 2015 is $50,000 and he contributed $2,000 to the plan. What
amount must Holden contribute on Harrison’s behalf?
a. $-0-
b. $600
c. $1,500
d. $2,000
e. $4,600
There must be at least one member of a Limited Liability Company who is personally
liable for the debts of the business.
a. True
b. False
On March 3, 2012, Craig bought a business-use vehicle for $20,000. He used the
vehicle for three years and properly deducted a total of $12,000 as depreciation expense
during this period. At the end of 2015, Craig sells the vehicle for $7,500. Why is Craig’s
deductible loss $500?
I. Craig has already recovered $12,000 of his investment through the depreciation
deduction.
II. The adjusted basis of the vehicle was $12,000 at the date of sale.
III. $7,500 of the adjusted basis was recovered because of the sale.
IV. The realized loss is recognized because it was incurred with business-use property.
a. Statements I and III are correct.
b. Statements I, III and IV are correct.
c. Statements II and III are correct.
d. Only statement IV is correct.
e. Statements I, II, III, and IV are correct.
Rosilyn trades her old business-use luxury car with an adjusted basis of $13,000 and an
outstanding loan liability balance of $2,000 for a new business-use economy car valued
at $9,000 plus $3,000 cash from Bob’s Auto Sales and Loan Company. Bob assumes
Rosilyn’s loan balance. What is Rosilyn’s amount realized on the transaction?
a. $3,000
b. $9,000
c. $12,000
d. $13,000
e. $14,000
For a transaction to qualify as a third-party exchange,
I. The exchange must be completed within 1 year of the first exchange.
II. The property exchanged must be identified within 45 days of the first exchange.
a. Only statement I is correct.
b. Only statement II is correct.
c. Both statements are correct.
d. Neither statement is correct.
Ally served as chairperson of the local school board. Upon completion of her term in
office, the organization awards her a silver-serving tray in recognition of her
outstanding service to the organization. The value of the tray is $200. What are the tax
effects of the award?
I. The value of the tray is included in gross income because of services rendered.
II. The tray is a gift because it is from a detached and disinterested generosity.
a. Only statement I is correct.
b. Only statement II is correct.
c. Both statements are correct.
d. Neither statement is correct.
Posie is an employee of Geiger Technology and earns $90,000 in 2015. The maximum
amount Geiger can contribute to a profit sharing plan on behalf of Posie is
a. $6,000
b. $13,500
c. $22,500
d. $25,000
e. $49,000
Mariana is a partner in the Benson Partnership. At the close of the current year,
Mariana’s basis in the partnership is $23,000. At that time, the partnership distributes
cash of $6,000 and property with a basis of $4,000 and a fair market value of $7,000 to
each partner. What amount must Mariana report as income from the distribution in the
current year?
a. $- 0 –
b. $4,000
c. $6,000
d. $10,000
e. $13,000
Paris is a CPA and a partner in a small firm. To limit her liability from the negligence or
misconduct of her partners, they can form the firm as a Limited Liability Partnership.
a. True
b. False
Chicago Cleaning Services provides nightly janitorial services at a monthly rate of
$300. Customers have three payment options:
Month-by-month payments $300
One year advance payment 3,360 ($280 per month)
Two year advance payment 6,480 ($270 per month)
If Chicago Cleaning is a cash basis taxpayer:
I. All cash payments are taxable when they are received.
II. One-year advance payments may be deferred: $280 would be included in income for
each month of service provided.
a. Only statement I is correct.
b. Only statement II is correct.
c. Both statements are correct.
d. Neither statement is correct.
Bart’s spouse, Carla, dies during the current year. Carla’s life insurance policy names
Bart the sole beneficiary of the $2 million proceeds. Bart invests the $2 million in a
bank certificate of deposit (CD). For the current year, Bart earns $98,000 interest from
the CD. What are the tax effects of these events for Bart?
I. The $98,000 is included in gross income.
II. The $2 million is included in gross income.
a. Only statement I is correct.
b. Only statement II is correct.
c. Both statements are correct.
d. Neither statement is correct.
During the current year the Newport Partnership is liquidated. Which of the following
statements is correct concerning the liquidation of the partnership?
I. If only cash is distributed by the partnership, the partners must recognize a gain but
cannot recognize a loss.
II. Gain is recognized only if the amount of cash and property distributed exceeds the
partner’s basis in the partnership.
a. Only statement I is correct.
b. Only statement II is correct.
c. Both statements are correct.
d. Neither statement is correct.
On April 1, Sally is given $20,000 worth of General Motors bonds for her 18th birthday.
On June 30, Sally receives the $800 annual interest payment on the bonds. How much
income should Sally recognize due to these two events?
a. $- 0 –
b. $200
c. $800
d. $20,000
e. $20,800
Carlota sells her personal automobile for $1,000. The car cost her $10,000 nine years
ago. What are the tax effects of the current sale?
I. Carlota realizes a transaction loss of $9,000 due to the capital recovery concept.
II. Carlota realizes income of $1,000 due to the all-inclusive-income concept.
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 generally accorded the highest level of authority?
a. Private Letter Ruling.
b. A legislative regulation.
c. Revenue Ruling.
d. Decisions of a U.S. District Court.
e. Internal Revenue Bulletin.
Nancy owns a truck she uses personally. It cost her $18,000 two years ago. Doug offers
Nancy $19,000 for the truck. What would be the tax effects if the transaction is
completed this year?
I. Nancy will realize a capital gain of $1,000 due to the capital recovery concept.
II. Nancy must recognize income of $19,000 due to the all-inclusive-income concept.
III. Nancy must recognize a capital gain of $1,000 on her current-year tax return
because there is no legislative provision to exclude this gain..
IV. Nancy will recognize no gain on her tax return due to lack of business purpose with
the automobile.
a. Statements I and IV are correct.
b. Statements I, II, and III are correct.
c. Statements I and III are correct.
d. Statements II and IV are correct.
e. Only statement IV is correct.
Evelyn can avoid the 2 percent limitation on her investment expenses by having her
partnership pay them.
a. True
b. False
Hector and Nicole are retired. During the current year, they receive $11,000 from a
qualified pension plan, $3,000 of dividends on common stock holdings, $6,000 of
tax-exempt interest, and $10,000 of Social Security benefits. Hector and Nicole’s
adjusted gross income is:
a. $14,000
b. $19,000
c. $24,000
d. $30,000
Brent purchases a new warehouse building on May 16, 2014, for $6,000,000 (exclusive
of the cost of the land). What is Brent’s 2015 depreciation deduction?
a. $- 0 –
b. $76,924
c. $153,840
d. $119,040
e. $400,000
Sandi sells 100 shares of Gray Corporation stock on December 4, 2015. She inherited
the stock from Christine, who died on January 30, 2015. The executor of the estate used
the primary valuation date. Sandi’s holding period for the stock is
a. Long-term.
b. Short-term.
c. Long-term if sold at a gain; short-term if sold at a loss.
d. Short-term if sold at a gain; long-term if sold at a loss.