Mario’s delivery van is completely destroyed when a tree fell on it. Mario’s insurance
company pays him $11,000 for the accident. The van cost $20,000 three years ago. Tax
depreciation deductions of $6,000 have been taken to date. The “Blue Book value” (i.e.,
fair market value) of the van is $12,000 on the accident date. What is Mario’s casualty
loss on the van?
a. $- 0 –
b. $ 1,000
c. $ 3,000
d. $ 8,000
e. $13,000
Tim owns 3 passive investments. During the current year, he has the following income
and loss from each activity:
Activity 1 $(7,000)
Activity 2 (3,000)
Activity 3 4,000
What is the amount of suspended loss allocated to Activity 2?
a. $- 0 –
b. $1,800
c. $3,000
d. $4,200
e. $6,000
Which of the following can be income deferral transactions?
I. Sale of municipal bonds.
II. Involuntary conversions of property.
a. Only statement I is correct.
b. Only statement II is correct.
c. Both statements are correct.
d. Neither statement is correct.
If the executor of a decedent’s estate elects the alternate valuation date and none of the
estate’s property is sold or distributed before the alternate date, the estate’s assets are
valued as of how many months after the date of death?
a. 0, date of death is the correct valuation date.
b. 3 months.
c. 6 months.
d. 9 months.
e. 12 months.
Determine the MACRS cost recovery deductions for 2015 and 2016 on the following
assets that were purchased for use in a farming business on July 15, 2015. The taxpayer
does not wish to use the Section 179 election.
Assets Cost
Breeding hogs $20,000
Dairy cattle 20,000
Tractor 20,000
a. Breeding hogs depreciation:
Total 2015 Breeding hogs Cost Recovery Deduction (show your calculations)
Total 2016 Breeding hogs Cost Recovery Deduction (show your calculations)
b. Dairy cattle depreciation:
Total 2015 Dairy Cattle Cost Recovery Deduction (show your calculations)
Total 2016 Dairy Cattle Cost Recovery Deduction (show your calculations)
c. Tractor depreciation:
Total 2015 Tractor Cost Recovery Deduction (show your calculations)
Total 2016 Tractor Cost Recovery Deduction (show your calculations)
d. Assume the Breeding hogs are sold for $25,000 on February 1, 2017. Determine the
adjusted basis of the hogs as of the sale date and the realized gain (loss) on the sale.
Show your calculations.
Adjusted basis __________
Realized gain (loss) __________
Under the deferral method of accounting for advance receipt of revenues, which of the
following statements is/are correct?
I. Receipts of service revenue colleted in advance are included in gross income in the
current year to the extent they included in revenue for financial accounting purposes.
II. Receipts of rents and interest collected in advance are included in gross income in
the current year to the extent they are included in revenue for financial accounting
purposes.
a. Only statement I is correct.
b. Only statement II is correct.
c. Both statements are correct.
d. Neither statement is correct.
One of the benefits of an incentive stock option is that the employee can sell the option
at any time.
a. True
b. False
Which of the following statements regarding a partnership’s tax year is/are correct?
I. A partnership formed on July 1 must adopt a tax year ending on June 30.
II. A valid business purpose can no longer be claimed as a reason for adoption of a tax
year other than the generally required tax year.
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 pertaining to tax law is true?
I. A tax textbook is considered a primary source.
II. Secondary sources help locate and interpret primary sources.
III. Primary sources emanate from the three branches of the federal government.
IV. An article in a law journal written by a former commissioner of the Internal
Revenue Service is considered a secondary source of tax law.
a. Only statement I is correct.
b. Statements I and II are correct.
c. Statements I, II, and III are correct.
d. Statements II, III, and IV are correct.
e. Statements I, II, III, and IV are correct.
Nora is the CEO of the publicly traded Micro Tech Corporation. The company paid her
a salary of $1,030,000 and made mortgage payments of $30,000 on her behalf. How
much is deductible as compensation expense?
a. $- 0 –
b. $ 510,000
c. $1,000,000
d. $1,060,000
e. $1,030,000
According to the U.S. Supreme Court, income may be defined as the gain derived from
capital, from labor, or from both combined provided it is understood to include profit
gained through sale or conversion of capital assets.
a. True
b. False
If the IRS loses a case in a court proceeding, they may issue an acquiescence that means
they will not follow the decision in similar cases.
a. True
b. False
The split basis rules for business property prevent the deduction of the disallowed
personal loss through depreciation or a loss from the sale of business property.
a. True
b. False
A fire destroys David’s business building that cost $200,000 in 2005 and had an
adjusted basis of $160,000. David’s insurance company reimburses him $250,000 for
his loss. David promptly reconstructs the building for $230,000.
a. What is the amount and the character of David’s minimum recognized gain (loss)?
b. What is the basis of David’s new building?
Mary inherits an interest in Laser Partnership from her Aunt Lillian during 2015. The
fair market value of the interest as of the primary valuation date is $28,000. Aunt
Lillian’s adjusted basis was $16,000. What is Mary’s initial basis and holding period in
the partnership interest if she sells the interest seven months after inheriting it?
a. $16,000, short-term.
b. $16,000, long-term.
c. $28,000, short-term.
d. $28,000, long-term.
e. Both depend on whether it is sold at a gain or a loss.
Robert receives a car as a gift from his mother. The car’s purchase price was $20,000,
and it was used personally prior to the gift. Robert uses the car 80% of the time in his
pizza business. The car’s value at the date of the gift is $9,000. What is Robert’s basis in
the car for depreciation purposes?
a. $- 0 –
b. $7,200
c. $9,000
d. $16,000
e. $20,000
For a taxpayer to be engaged in a trade or business, the activity must meet all of the
following tests: it must produce a profit every year; must be continuous and regular
activity; and must be the taxpayer’s livelihood not their hobby.
a. True
b. False
Bruce, 65, supports his mother who lives with him. What is the maximum amount of
the 2015 standard deduction that Bruce qualifies for?
a. $6,300
b. $8,700
c. $9,250
d. $10,500
e. $10,800
An individual is indifferent whether an expense is deducted for or deducted from
adjusted gross income.
a. True
b. False
Sylvester is a U.S. citizen living in Canada working as a computer programmer for
Excel Designs, Inc., a U.S. company.
I. Sylvester is a nonresident alien for U.S. tax purposes.
II. If Sylvester earns $10,000 for a consulting job in London, this income will be
subject to U.S. tax.
a. Only statement I is correct.
b. Only statement II is correct.
c. Both statements are correct.
d. Neither statement is correct.
Cruz Copy Shop purchases a new copy machine in July 2015 for $30,000. No other
depreciable assets are placed in service in 2015. Since Cruz Copy Shop expects to be in
a much higher tax bracket in future years, it desires to minimize its current cost
recovery amount to the fullest extent possible. What is the amount of Cruz Copy Shop’s
MACRS straight-line depreciation for 2015?
a. $1,500
b. $2,143
c. $3,000
d. $3,213
e. $4,500
The final step in the tax research process is to reach a conclusion, make a
recommendation and communicate the results to the client.
a. True
b. False
If a taxpayer owes interest, economic performance occurs
I. with the passage of time.
II. when the all-events test is met.
III. when payments are made by the taxpayer.
a. Only statement I is correct.
b. Only statement II is correct.
c. Only statement III is correct.
d. Statements II and III are correct.
e. Statements I, II, and III are correct.
Which of the following is a characteristic of U.S. District Courts?
a. A District Court is a national court that hears cases from taxpayers anywhere in the
U.S.
b. The District Court judges are tax specialists who hear only tax cases.
c. A taxpayer need not pay any alleged deficiency in order to bring an action against the
IRS.
d. The taxpayer may obtain a jury trial; the jury decides matters of fact but not matters
of law.
Sergio and Chris agree to combine their sole proprietorships and form a corporation.
Sergio will contribute cash of $20,000 and business property worth $120,000 (adjusted
basis of $50,000) for a 25% interest. Chris will contribute cash of $200,000 and
business property worth $220,000 (adjusted basis of $200,000) for a 75% interest.
Which of the following statements concerning the tax treatment of Sergio and Chris’s
exchange of assets is/are correct?
I. Because neither owner owns more than 80% of the stock in the corporation, the
transfers do not qualify for tax-free treatment.
II. Based on the wherewithal-to-pay concept, each owner is taxed on the cash they
contributed to the corporation.
III. Sergio will recognize a $70,000 gain and Chris will recognize a $20,000 gain.
IV. No gain or loss is recognized on the exchange.
a. Only statement IV is correct.
b. Statements I and III are correct.
c. Only statement II is correct.
d. Only statement III is correct.
e. None of the statements are correct.
Randy owns 115 acres of land with a fair market value of $57,000. He purchased the
land as an investment for $35,000 in 1993. Randy trades the land for a 122-acre parcel
adjacent to other property he owns. The 122 acres has a value of $57,000, and the
exchange qualifies for like-kind deferral treatment. What is Randy’s realized gain on the
exchange?
a. $- 0 –
b. $22,000
c. $35,000
d. $57,000
e. $79,000
Which of the following individuals can be claimed as a dependent in the current year?
(Assume any test not mentioned has been satisfied).
I. Carl and Diane are divorced. Carl has custody of their 6-year-old son. Diane pays
Carl $500 per month in child support. Carl pays the other $400 per month it costs to
support their son. The divorce decree does not stipulate who gets custody of the son.
Carl claims his son as a dependent.
II. Lorraine is a 25-year-old college student. She lives with her parents, who also
provide her with $500 monthly support. Lorraine earns $4,600 working part-time for
other support. She may be claimed as a dependent of her parents.
a. Only statement I is correct.
b. Only statement II is correct.
c. Both statements are correct.
d. Neither statement is correct.
Under the all-inclusive income concept, the tax law always starts with the proposition
that all receipts of cash are taxable.
a. True
b. False
Pamela owns the building where her plumbing supply business is located. This year she
put on vinyl siding to replace the weathered wood siding on her building. The cost of
the new siding can be expensed in the current year.
a. True
b. False
Under the like-kind exchange rules, when like-kind property is traded for like-kind
property, a loss on a trade-in is:
a. recognized and treated as a capital loss.
b. recognized and treated as an ordinary loss.
c. not recognized and increases the basis of the replacement property.
d. not recognized and decreases the basis of the replacement property.
e. none of the above.
Zeppo and Harpo are equal owners of the Marx Corporation. During the current year,
they agree to admit Groucho as a shareholder. Groucho will contribute $25,000 in cash
and property worth $50,000 (adjusted basis of $35,000) for 25% of Marx Corporation’s
stock. What is Groucho’s basis in the Marx Corporation stock?
a. $45,000
b. $50,000
c. $60,000
d. $75,000
e. $90,000