Dustin buys 200 shares of Monroe Corporation common stock on December 1, 2014,
for $2,000. He buys an additional 200 shares for $1,800 on December 23, 2015. On
December 28, 2015, Dustin sells the first 200 shares for $1,700. He sells the last 200 for
$1,600 on June 15, 2016. What is (are) the amount(s) and the year of recognition of
losses that Dustin can recognize?
2014 2015
a. – 0 – $200
b. – 0 – $500
c. $300 $200
d. $300 $500
Arlene, a criminal defense attorney inherits $500,000 from her grandmother. Unsure of
how to invest the money, Arlene attends a three-day investment seminar in New York.
Arlene attends all the sessions and receives a certificate for successfully completing the
seminar. Her expenses to attend the seminar are as follows:
Airfare $450
Hotel daily rate 110
Meals @ $40 per day 40
Incidentals @ $15 per day 15
Entertainment 140
What amount may she deduct as travel expenses for the seminar?
a. $- 0 –
b. $780
c. $825
d. $885
e. $955
MACRS applies to new and used depreciable personal property used for the production
of income.
a. True
b. False
Morgan has the following capital gains and losses for the current tax year
Short-term capital gains $12,000
Long-term capital gains 3,000
Short-term capital losses (7,000)
Long-term capital losses (6,000)
What is Morgan’s net capital gain or loss position for the year?
a. $5,000 net short-term capital gain.
b. $2,000 net long-term capital loss.
c. $2,000 net short-term capital gain.
d. $3,000 net long-term capital loss.
e. $4,000 net short-term capital loss.
When a partner receives a cash distribution from a partnership, the distribution is never
taxable even if the amount of cash received is greater than the partner’s basis in the
partnership.
a. True
b. False
The IRS may acquiesce or nonacquiesce to decisions from which of the following
courts:
a. U.S. Tax Court.
b. U.S. District Court.
c. U.S. Court of Appeals.
d. U.S. Court of Federal Claims.
e. All of the above.
Clarance rented office space to an attorney who left town before the lease was
completed. The attorney left several bookcases and other improvements to cover the
remaining rent. Clarance must include in income the value of the leasehold
improvements to the extent of the remaining rent that was due.
a. True
b. False
Which of the following is not a capital asset?
a. Office building used as a rental property by a real estate professional..
b. Antique automobile.
c. Land held for investment.
d. Stock held for investment.
Denise receives an academic scholarship to Pollytech College. Under the scholarship
agreement, she receives tuition ($1,500), books ($400), and room and board ($5,000).
How much of the scholarship is included in Denise’s gross income?
a. $- 0 –
b. $400
c. $1,500
d. $5,000
e. $6,900
Rodrigo works as a salesperson for a auto parts manufacturer. His job requires that he
spend most of his time outside the office calling on customers. In addition, to
supplement his income he works 1 night a week and on weekends as a waiter at an
exclusive seafood restaurant in the city. During the year, he keeps the following record
of his travel:
Miles
Home to office 850
Office to home 425
Office to restaurant 300
Restaurant to home 1,200
Home to restaurant 725
Office to customers to office 7,100
Customers to restaurant 400
Total miles 11,000
If he uses the standard mileage rate, what amount can she deduct as a business
automobile expense?
a. $3,621
b. $3,774
c. $3,941
d. $4,485
e. $6,105
Which of the following is (are) AMT tax preference item(s)?
I. Tax-exempt interest from private activity bonds.
II. Percentage depletion in excess of basis.
a. Only statement I is correct.
b. Only statement II is correct.
c. Both statements are correct.
d. Neither statement is correct.
Homer and Marge are married and have an adjusted gross income of $183,000.
Currently, neither is covered by an employer sponsored pension plan. They have never
established an Individual Retirement Account until this year, when they opened a Roth
IRA. What is the maximum amount they can each contribute to Roth IRAs?
a. $1,000
b. $2,000
c. $2,750
d. $4,950
e. $5,500
Joline operates Adventure Tours as a sole proprietorship. For the year, Adventure Tours
has the following income and expense items:
Sales revenues $325,000
Short-term capital gains 5,000
Short-term capital losses (9,000)
Trade and business expenses (185,000)
Taxable income $136,000
If Joline has other income of $6,000, what is her adjusted gross income?
a. $141,000
b. $142,000
c. $143,000
d. $146,000
Laurie’s Lawn Service, Inc., purchases a heavy-duty tri-cut lawn mower on March 17,
2015, for $5,500. Under a special election, Laurie’s expenses the $5,500 cost of the
lawn mower in 2015. In July, a tire on the lawn mower is repaired at a cost of $450.
Maintenance costs on the lawn mower for 2015 total $175. What is Laurie’s basis in the
lawn mower at the end of 2015?
a. $- 0 –
b. $450
c. $5,500
d. $5,950
e. $6,125
For each of the following IRA situations, determine the amount the taxpayer can
deduct. Discuss any limitations, which might be placed, on the deduction.
a. Marissa is single and is an active participant in a qualified employee pension plan.
Determine the maximum Roth IRA contribution that she can make if her adjusted gross
income for the year is $73,000.
b. David and Donna are married and file a joint return. Each is covered by an
employee-sponsored pension plan, and their adjusted gross income is $103,000.
Determine their maximum IRA contribution and deduction for the current year.
c. Pedro and Roxanne are married and have two children, ages 8 and 4. Their adjusted
gross income for the year is $196,000. What is maximum amount they can contribute to
each child’s Coverdell Education Savings Account (CESA) for the year?
In which of the following situations does the taxpayer have a claim of right to the
payment received?
I. Ellen is on the Carlyle city council. She accepts $5,000 from a contractor who is
seeking rezoning of his land before the commission on the condition that Ellen supports
the rezoning. The payment is illegal under state law and Ellen will have to repay the
$5,000 if the arrangement with the contractor is discovered.
II. Alan’s automobile is damaged in an automobile accident. Because he uses the
automobile in his job, his employer gives him $4,000 to have the car repaired. The
employer will withhold $100 per paycheck until the $4,000 is repaid.
a. Only statement I is correct.
b. Only statement II is correct.
c. Both statements are correct.
d. Neither statement is correct.
Fender Corporation makes a cash distribution of $40,000 to Gibson in complete
liquidation of the corporation. Gibson’s basis in Fender stock is $18,000. What must
Gibson report as income from the cash distribution?
a. $- 0 –
b. $18,000
c. $22,000
d. $40,000
Luisa, Lois, and Lucy operate a boutique named Mariabelle’s Dreams. Based on advice
from Luisa’s sister, an accountant, the three form a partnership. Luisa owns 40% and
Lois and Lucy each own 30%. For the year, Mariabelle’s Dreams reports the following:
Sales revenues $300,000
Short-term capital gains 3,000
Short-term capital losses (7,000)
Trade and business expenses (160,000)
Investment expenses (1,000)
Taxable income $135,000
What amount will Mariabelle’s Dreams report to Luisa as her ordinary income from the
partnership?
a. $54,000
b. $54,400
c. $54,800
d. $55,600
e. $ 56,000
The mid-year convention is used for personal property only.
a. True
b. False
To obtain the rehabilitation expenditures tax credit certain criteria must be satisfied.
Which of the following are correct statements about the credit?
I. If the rehabilitated structure is sold before the end of the ten-year period following the
year of the tax credit, recapture occurs.
II. The amount of the credit can be either 10% or 20% of qualified expenditures,
depending on the classification of the building.
a. Only statement I is correct.
b. Only statement II is correct.
c. Both statements are correct.
d. Neither statement is correct.
Sarah purchased a diamond bracelet for $3,000 while vacationing in Hong Kong during
2008. Sarah gives the bracelet to her daughter Amy when she graduates from college in
2015. The bracelet is appraised at $8,000 on that date. In October 2015, Amy sells the
bracelet for $9,000. What is the amount of gain Amy should recognize on the sale?
a. No gain or (loss) is recognized
b. $1,000
c. $4,000
d. $5,000
e. $6,000
Pomeroy Corporation has a company health-care plan for all employees. Albert, an
employee, owns 15% of the stock. Philip, also an employee, owns 1% of the stock. The
cost to the company of Albert’s health plan is $3,000 and Philip’s is $2,100. What
amount of the health plan must Albert and Philip report as income?
Albert Philip
a. $-0- $-0-
b. $3,000 $2,100
c. $3,000 $-0-
d. $-0- $2,100
Jolie purchased her residence in 2010 for $500,000 by borrowing $450,000. In 2015,
she becomes unemployed and can no longer afford to make the full monthly payment
on the mortgage. When the mortgage balance is $430,000, the bank agrees to reduce her
mortgage to avoid foreclosure. What is Jolie’s basis in her residence if the bank agrees
to reduce the mortgage on the residence to $300,000?
a. $- 0 –
b. $300,000
c. $370,000
d. $430,000
e. $500,000
Secondary sources of tax law include
I. Internal Revenue Code of 1986.
II. United States Tax Reporter (RIA)
III. Taxes: The Tax Magazine.
IV. Tax Court Memo Decision.
a. Only statement III is correct.
b. Statements II and III are correct.
c. Only statement I is correct.
d. Statements I, II, and III are correct.
e. Statements I, II, III, and IV are correct.
Lauren owns an annuity that pays her $400 per month until she dies. Which of the
following income tax concepts provides for the tax treatment of the annuity payments
Lauren receives?
I. Annual Accounting Period Concept.
II. All-inclusive Income Concept.
III. Constructive Receipt Doctrine.
IV. Capital Recovery Concept.
a. Statements I and II are correct.
b. Statements II and III are correct.
c. Statements I and IV are correct.
d. Statements II, III, and IV are correct.
e. Only statement IV is correct.
Which of the following assets would be allowed a depreciation deduction?
I. A truck used to provide transportation to a job site.
II. A car used for personal purposes.
III. An apartment building rented out for the production of rental income.
IV. A personal-use computer of the taxpayer.
a. Only statement II is correct.
b. Statements II and IV are correct.
c. Only statement I is correct.
d. Statements I and III are correct.
e. All of the assets are depreciable.
How much additional Social Security tax does Betty pay in 2015 on her $10,000
Christmas bonus? Her total earnings for the year (before the bonus) are $100,000.
a. $145.00
b. $269.20
c. $461.20
d. $641.00
e. $765.00
Edward and Inez purchased their home in 2002 for $600,000. They financed the
purchase with a $550,000 mortgage. In 2015, they fall upon hard times and cannot
make the mortgage payments. They sell their home for $425,000. At the time of the
sale, the mortgage balance is $450,000 on their home. The mortgage company cancels
the remaining debt. Which of the following is true?
I. Edward and Inez will recognize no income on the cancellation of the mortgage loan.
II. Edward and Inez will realize a loss on the sale of their home.
a. Only statement I is correct.
b. Only statement II is correct.
c. Both statements are correct.
d. Neither statement is correct.
While Congress has enacted several different depreciation methods, all currently owned
assets are depreciated using the method in effect when the asset was placed in service.
a. True
b. False
Which of the following interest-free loans is subject to the imputed interest rules (i.e.,
interest must be imputed on the loan)?
I. Marilyn loans $24,000 to her grandmother and she uses the money to pay personal
expenses and take a vacation. Her grandmother’s sole income is from Social Security.
II. Pineview Corporation loans $20,000 to Catherine, an employee. Catherine uses the
proceeds as a down payment on a house. Catherine’s net investment income for the year
is $300.
III. Scott loans $65,000 to his son. His son uses the money to open a new business.
During the current year, the business shows a loss and his son has no other sources of
income.
IV. Alaric Corporation loans $27,000 to its principal shareholder. The shareholder uses
the funds to buy additional shares of stock in Alaric. The shareholder is deemed to
receive $8,500 of dividends from Alaric during the year.
a. Only statement II is correct.
b. Only statements I and III are correct.
c. Only statements II and IV are correct.
d. Only statements I and IV are correct.
e. Only statements II and III are correct.
Angel owns a gourmet Mexican restaurant. His head chef, Carmen, is arrested for a
parole violation. Because Angel needs Carmen back to work as soon as possible, Angel
pays her bail of $250, attorney’s fees of $300, and a court fine of $200.
I. A business purpose exists for the payments.
II. If Carmen were required to repay the expenditures, it would constitute a loan and not
be deductible for Angel.
III. If Angel does not require Carmen to repay the amounts paid on Carmen’s behalf, the
payments constitute compensation and Angel gets a deduction for the expenses paid.
a. Only statement I is correct.
b. Statements I and III are correct.
c. Statements I and II are correct.
d. Statements I, II and III are correct.
Material participation requires that an individual participates in an activity for more
than 200 hours per year or spends more than 50 hours a year in the activity and the time
spent is more than anyone else spends on the activity.
a. True
b. False
Kenzie and Ross equally own rental real estate. The rental property generated a loss of
$20,000. Kenzie is also employed as a part-time Tupperware salesperson and full time
as a real estate agent. For her share of the loss to be fully deductible, she must:
I. Not have an adjusted gross income in excess of $100,000.
II. Spend more than 750 hours, in total, as a realtor
III. Spend more than 100 hours managing the rental activity, and spend more time than
Ross.
IV. She must spend more than 50% of her time as a realtor and must own more than 5%
of the real estate agency.
a. Only statement I is correct.
b. Only statement II is correct.
c. Statements I and II are correct.
d. Statements II, III, and IV are correct.
e. Statements I, II, III, and IV are correct.
An asset’s holding period normally begins on the day after it is acquired and ends on the
day of its disposition.
a. True
b. False
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.
Active participant
Eileen pays $14,000 of interest related to her purchase of investments. During the
current year, Eileen’s adjusted gross income is $80,000, which includes investment
related income of $19,000. Her other investment expenses are $9,000. Determine
whether the interest is deductible, how it would be deducted on the taxpayer’s return (if
there are alternatives possible, discuss the conditions which would determine the
treatment) and any limitations that might be placed on the deduction.
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.
Non-deductible expense
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.
All-events Test
Wherewithal-to-pay
COMPREHENSIVE TAX CALCULATION PROBLEM. Girardo and Gloria are
married with 3 children, ages 14, 11, and 8. Gloria is a senior vice-president for a
security firm and Girardo is a househusband who spends 15 hours a week doing
volunteer work for local organizations. Girardo inherited $800,000 from his grandfather
in 1999. He spends 10 hours a week managing the rental property they purchased with
part of the inheritance and the family’s stock portfolio. Prior to becoming a
househusband, Girardo was an award winning high school accounting teacher. In
February of 2015, Girardo is approached by the high school principal about returning to
his former position. Girardo would receive an annual salary of $50,000. He is a little
hesitant about accepting the offer, because he enjoys his volunteer work. Girardo’s
accountant has provided him with the following projection of their 2015 tax liability:
Gloria’s salary $130,000
Interest income 6,500
Short-term capital gains 2,500
Rental loss (5,000)
Adjusted gross income $134,000
Itemized deductions:
State taxes $3,330
Home mortgage interest 5,440
Real estate taxes 1,800
Personal property taxes 420
Charitable contributions 1,610
Total itemized deductions (12,600)
Exemptions (20,000)
Taxable income $101,450
Tax liability before tax credit $16,950
Child credit ($1,000 3) – ($50 24) (1,800)
Net tax liability $15,150
Girardo’s projection from his accountant does not include his salary from teaching.
Assume that Girardo’s pro-rata salary for the year will be $30,000. Calculate Girardo
and Gloria’s tax liability, if Girardo decides to return to teaching. Also determine the
marginal and effective tax rates on Girardo’s salary.
Match the proper deduction method with the correct expenditures.
a. Capitalized and amortized over a number of accounting periods
b. Expensed in the period incurred
c. Not deductible
d. Can be capitalized and amortized or deductible depending on the amount of the
expenditure
Hobby loss
The value or amount that is subject to taxation.
Joint Conference Committee
Eileen is a single individual with no dependents. Her adjusted gross income for 2015 is
$60,000. She has the following items that qualify as itemized deductions. What is the
amount of Eileen’s AMT adjustment for itemized deductions for 2015?
Medical expenses (before limitations) $12,000
Mortgage interest on a qualified residence 8,000
Charitable contribution of a Rockwell portrait
($12,000 FMV; $10,000 basis) 12,000
State income taxes paid and withheld 3,000
Real estate taxes paid 1,500
Unreimbursed employee expenses (before limitation) 2,400
Income tax return preparation fee (before limitation) 400
Roscoe is a religion professor. During the summer, he spends 3 months in Israel touring
historical landmarks. The cost of the summer trip includes $1,300 for airfare, $2,750 for
lodging, $1,175 for meals, and $850 for incidental expenses. The following semester he
incorporates many of the items he collected and the knowledge he gained from his
experiences into his lectures. How much of the travel costs can Roscoe deduct?
Explain.
Tax Benefit Rule
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.
Hobby expense
Percentage of completed contract method
Section 1231 property
Match each statement with the correct term below.
a. Limited to $3,000 annually for individuals.
b. When an asset is disposed of for less than its basis.
c. An excess of business deductions over business income.
d. A trade or business in which the taxpayer is not a material participant.
e. A loss that results from some sudden, unexpected, or unusual event.
f. Any asset that is not a receivable, inventory, or depreciable or real property used in a
trade or business.
Capital asset
Mavis is a schoolteacher with an annual salary of $28,000. Last year she sold a
substantial block of securities that she had inherited from her grandmother several years
before. She used the proceeds to buy an apartment building in a neighboring
community. She realized a $15,000 capital loss on the sale. She carries over $12,000 of
the capital loss to the current year. During the current year, a fire destroys the apartment
building when its adjusted basis is $100,000. Mavis receives an insurance check for
$110,000 and immediately invests it in another apartment building. Advise Mavis how
she should deal with these situations for the current tax year.