Kevin, single, is an employee of the Colonial Company and is an active participant in
its pension plan. Kevin’s adjusted gross income for the current year is $59,000. Kevin
contributes $1,000 to his conventional individual retirement account. Which of the
following statements about Kevin contributions and deduction amounts is (are) true?
I. He is allowed to deduct his $1,000 contribution to his conventional IRA.
II. Kevin can also contribute but not deduct $4,500 to his Roth IRA.
a. Only statement I is correct.
b. Only statement II is correct.
c. Both statements are correct.
d. Neither statement is correct.
Jim operates a business out of his home. One room in his home is used for business and
qualifies as a home office. Which of the following allocable expenditures can Jim use in
computing his home office expense deduction?
I. Jim pays his housekeeper $25 a week to sweep, dust and straighten-up his office.
II. Jim’s fire and casualty insurance premiums on his home are $800.
a. Only statement I is correct.
b. Only statement II is correct.
c. Both statements are correct.
d. Neither statement is correct.
National Corporation allows an employee, Phyllis, to use a company car for her
vacation to San Diego.
I. The employer/employee relationship indicates that the receipt of the use of the car is a
type of compensation for services rendered.
II. Income recognition is not necessary in this case.
a. Only statement I is correct.
b. Only statement II is correct.
c. Both statements are correct.
d. Neither statement is correct.
With the exception of personal service and closely-held corporations, regular
corporations are not subject to the passive activity rules.
a. True
b. False
Grand Corporation has $100,000 of U.S. source taxable income and $200,000 of
foreign source taxable income from operations in Poland. Poland levied $80,000 in
taxes on the foreign source income. U.S. taxes before credits are $105,000. The overall
foreign tax credit limitation is
a. $35,000
b. $53,334
c. $70,000
d. $80,000
e. $105,000
Which of the following properties from an income tax standpoint will be the best one
for Juan to contribute to his favorite charity?
a. Stock acquired in 1992, basis = $13,000, FMV = $10,000.
b. Stock acquired in 1996, basis = $7,000, FMV = $10,000.
c. Inventory items acquired in 2004, basis = $8,000, FMV = $10,000.
d. Inventory items acquired in 2010, basis = $18,000, FMV = $10,000.
e. Juan should be indifferent between giving any of the above properties from an
income tax standpoint because they each have the same fair market value.
During 2015, Myca sells her car for $5,000. She acquired the car in 2011 for $11,000
and has used it 60% for business and 40% for personal use. She deducted $5,280 in
depreciation. What is the taxable gain or loss from the sale of the car attributable to her
business use?
a. $3,680 gain
b. $432 gain
c. $720 loss
d. $2,280 loss
e. $1,680 gain
A fire destroyed Jimmy’s Teeshirt Shop. The business had an adjusted basis of $500,000
and a fair market value of $600,000 before the fire. Jimmy received $550,000 from the
insurance company and opened a new Teeshirt Shop with the proceeds.
I. Jimmy has a realized gain of $50,000.
II. Jimmy has a recognized gain of $50,000.
a. Only statement I is correct.
b. Only statement II is correct.
c. Both statements are correct.
d. Neither statement is correct.
Dunn Company bought an old building in downtown Lafayette for $75,000. The land
was not purchased; it is being leased. The building was originally placed into service in
1918. Dunn spends $100,000 to rehabilitate the building with the intent to develop a
microbrewery on the site. The company retained 80% of the external and internal walls
and framework. Assume the amount of the older building rehabilitation credit Dunn can
claim is $10,000. What is the basis in the building for depreciation purposes?
a. $100,000
b. $145,000
c. $105,000
d. $165,000
e. $175,000
Income tax accounting methods and financial accounting methods differ in many ways.
Which of the following tax law provisions are likely to create permanent differences
between taxable income and financial (or book) income of a single entity?
I. Treatment of payment of penalties and fines.
II. Disallowance of 50% of the cost of business meals and entertainment.
a. Only statement I is correct.
b. Only statement II is correct.
c. Both statements are correct.
d. Neither statement is correct.
An accrual basis taxpayer may deduct expenses in the year in which certain tests are
met. These tests include
I. when services or property are provided to the taxpayer or when the taxpayer uses the
property.
II. when the “all-events test” is met.
III. when “economic performance” has occurred.
IV. when all events have occurred to determine that a liability exists and the amount of
the liability can be determined with reasonable accuracy.
a. Only statement I is correct.
b. Only statement II is correct.
c. Statements I and IV are correct.
d. Statements II and III are correct.
e. Statements I, II, III, and IV are correct.
Terri owns 1,000 shares of Borneo Corporation common stock. On March 31 of the
current year, when the stock is trading at $2 per share, Borneo declares a 5% stock
dividend with the option to receive $2 cash per dividend share in lieu of taking the
dividend shares. The dividend is distributed on April 30. Terri elects to receive the stock
shares rather than the cash dividend. What are the tax effects for Terri?
I. Terri’s stock dividend is nontaxable.
II. Terri’s basis in her new shares is $100.
a. Only statement I is correct.
b. Only statement II is correct.
c. Both statements are correct.
d. Neither statement is correct.
Sarah extensively buys and sells securities . The IRS has determined upon examination
that she is in a trade or business concerning the securities’ transactions and therefore,
Sarah is
a. a day trader.
b. an active trader.
c. an active investor.
d. a securities’ dealer.
Katarina, a single taxpayer, has total income from all sources of $100,000 for 2015. Her
taxable income after taking into consideration $25,000 in deductions and $10,000 in
exclusions is $65,000. Katarina’s tax liability is $12,049. What are Katarina’s marginal,
average, and effective tax rates?
a. 28% marginal; 18.5% average; 18.5% effective.
b. 25% marginal; 16.1% average; 16.1% effective.
c. 25% marginal; 16.1% average; 18.5% effective.
d. 25% marginal; 18.5% average; 16.1% effective.
e. 28% marginal; 16.1% average; 18.5% effective.
Patricia contributes artwork to the art museum at Tech University. Her AGI is $50,000.
She paid $10,000 for the artwork in 1987, but its fair market value at the contribution
date is $30,000. What is Patricia’s maximum current year charitable deduction?
a. $- 0 –
b. $10,000
c. $15,000
d. $25,000
e. $30,000
Bob and Linda purchased their vacation home in 2012 for $400,000. They financed the
purchase with a $350,000 mortgage. In 2015, they fall upon hard times and cannot
make the mortgage payments, and their mortgage is foreclosed. The mortgage company
sells the house for $300,000. At the time of the sale, the mortgage balance is $325,000.
The mortgage company cancels the remaining debt on the mortgage. How much income
do Bob and Linda have from the cancellation of the remaining debt on their home?
a. $- 0 –
b. $25,000
c. $75,000
d. $100,000
Entertainment, auto, travel, and gift expenses are subject to strict documentation
requirements. Taxpayers are required to keep records that show
I. The business purpose of the event.
II. The time and place of the event.
a. Only statement I is correct.
b. Only statement II is correct.
c. Both statements are correct.
d. Neither statement is correct.
Due to a shortage of cash, East Coast Entertainment Company, an accrual basis
taxpayer, could not pay its November 2015 utility bill on time. In February of 2016,
East Coast Entertainment pays the utility bill.
I. East Coast can deduct the expense on either its 2015 or 2016 tax return.
II. East Coast cannot deduct the utility expense in 2015 because it is paid in 2016.
a. Only statement I is correct.
b. Only statement II is correct.
c. Both statements are correct.
d. Neither statement is correct.
Carolyn purchases a new delivery truck (5-year MACRS property) costing $30,000 for
use in her floral business on January 5, 2015. If Carolyn’s taxable income from the
floral business before any special elections is $8,000 for 2015, what is her maximum
allowable cost recovery on the delivery truck in 2015?
a. $4,400
b. $6,000
c. $12,400
d. $14,000
e. $30,000
Sergio wants to know if he can claim his daughter, Sarah, as a dependent on his income
tax return. Sarah lives at home with her parents all year. Sergio provides $11,500 for her
support (i.e., food, shelter, and transportation). Sarah, age 18, made $13,250 last year by
acting and working as a cashier at a restaurant. Sarah saved $9,000 of her income and
spent $4,250 on clothes and entertainment. Can Sergio claim his daughter, Sarah, as a
dependent for income tax purposes?
a. Yes.
b. No, Sarah fails the relationship test.
c. No, Sarah fails the gross income test.
d. No, Sarah fails the student test.
e. No, Sarah fails the support test.
Southview Construction Company enters into a contract to build a 30 mile cross
country ski trail for $36,000 in the current year. Southview estimates the cost of
building the trail to be $12,000. During the first year, Southview completes 10 miles of
trail at a cost of $5,000. Southview receives $13,000 in advanced payments on the
contract price in the first year. How much gross income must Southview recognize from
the construction project in the first year?
a. $- 0 –
b. $5,000
c. $12,000
d. $13,000
e. $15,000
Which of the following payments are currently deductible?
I. Steve is a self-employed attorney. He pays another attorney $14,000 to represent him
in a lawsuit that alleged that he was liable in a personal auto accident.
II. Connie has an investment portfolio in excess of $600,000. She pays Chris $1,000 to
do an analysis of her investments and make recommendations on restructuring the
portfolio.
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 statements concerning prizes and awards is/are correct?
I. Most all prizes and awards are exempt from taxation.
II. Employee awards of tangible, personal property for length of service are at least
partially excludable.
III. Any prize or award received can be excluded if it is given to a governmental or
charitable organization.
IV. Employee awards for safety achievements are always excluded from income.
a. Only statement I is correct.
b. Only statement II is correct.
c. Only statements II and III are correct.
d. Only statements I and IV are correct.
Travis inherits $50,000 from his grandfather. He receives the $50,000 on January 2 and
immediately invests $25,000 in General Motors bonds that pay 8% annual interest and
$25,000 in West Lafayette City municipal bonds with a 6% annual interest rate. How
much gross income does Travis report from these transactions?
a. $1,500
b. $2,000
c. $50,000
d. $52,000
e. $53,500
Corporations can use a 52- to 53-week fiscal year end, but the year must end on
Saturday each year.
a. True
b. False
To be deductible, meals and entertainment must be both an ordinary and necessary
business expense and must be either directly related to or associated with the active
conduct of an activity for which the taxpayer has a business purpose.
a. True
b. False
Ona is a retired schoolteacher who receives a pension of $800 per month (Ona made no
payments into the pension plan) and $2,000 of Social Security benefits per month.
Ona’s adjusted gross income is:
a. $9,600
b. $13,900
c. $21,900
d. $24,000
e. $33,600
Mountainview Corporation sells depreciable residential real estate for $525,000. The
property cost $675,000, and $200,000 of accelerated depreciation was deducted on the
property. Allowable straight-line depreciation for the same period would have been
$180,000. Which of the following correctly states the character of the gain from the sale
of the property?
a. $ 50,000 ordinary gain.
b. $ 50,000 Section 1231 gain.
c. $ 30,000 Section 1231 gain and $20,000 Section 1250 ordinary income.
d. $ 20,000 Section 1231 gain and $30,000 Section 1250 ordinary income.
e. $150,000 Section 1231 gain and $20,000 Section 1250 ordinary gain.
Perry owns all of the stock of Sound Corporation. Perry is also the President of Sound
and works full-time running Sound. During the current year, Sound has a loss of
$75,000 from its operations.
I. If Sound is an S Corporation, Perry deducts the loss on his personal tax return as a
deduction from AGI.
II. If Sound is a regular corporation, the corporation can elect to carryforward the loss
to reduce taxable income during the next 20 years.
a. Only statement I is correct.
b. Only statement II is correct.
c. Both statements are correct.
d. Neither statement is correct.
Exemption amounts and itemized deductions are two types of reductions used to
calculate taxable income. Which of the following are characteristics of these types of
deductions?
I. Taxpayers deduct the larger of itemized deductions or the standard deduction.
II. Exemption amounts are dependent on amounts of expenditures for dependents.
III. Deductions for adjusted gross income are limited to those incurred in a trade or
business, incurred in the earning of income, and certain specifically allowed personal
expenses of individuals.
a. Only statement III is correct.
b. Statements I and II are correct.
c. Statements I and III are correct.
d. Statements II and III are correct.
e. Statements I, II, and III are correct.
How long does a taxpayer have to file a petition with the U.S. Tax Court after receiving
a Statutory Notice of Deficiency?
a. 10 days
b. 30 days
c. 90 days
d. 120 days
e. 180 days