A guaranteed payment is a payment made to a partner for specific services performed
by the partner and is made without regard to the partnership’s income.
a. True
b. False
Wayne purchases a new home during the year, borrowing $725,000 from Century
National Bank to finance the purchase. He also pays $7,250 in points and $4,500 in
loan origination fees. During the year he pays interest of $71,000 on the loan. What is
Wayne’s allowable interest deduction?
a. $- 0 –
b. $7,250
c. $71,000
d. $78,250
e. $82,750
The income tax treatment of payments from annuity contracts is based on the:
I. Capital Recovery Concept
II. Assignment of Income Doctrine
III. Annual Accounting Period Concept
IV. Arm’s-Length Transaction Concept
a. Only statement I is correct.
b. Only statement IV is correct.
c. Only statements II and III are correct.
d. Only statements I and IV are correct.
e. Only statements I and III are correct.
As a result of their divorce this year, Carlos made the following payments to Michelle,
his former wife:
” He transferred the family car to Michelle. The car cost them $20,000 and was worth
$10,000 at the time that he gave it to Michelle.
” Carlos paid Michelle 12 monthly cash payments of $1,000 each. These payments are
to continue as long as Michelle lives or until their son is age 19. When their son attains
age 19, the payments will be reduced to $600 a month.
” On June 6, Carlos paid Michelle a single cash payment of $70,000 to help her settle in
a new home. Carlos kept the family home.
How much gross income should Michelle report as a result of the above transfers?
a. $7,200
b. $12,000
c. $17,200
d. $87,200
e. $92,000
Commonalties of nonrecognition transactions include that
I. deferring a loss is mandatory on like-kind exchanges.
II. deferring a loss is mandatory on involuntary conversions.
a. Only statement I is correct.
b. Only statement II is correct.
c. Both statements are correct.
d. Neither statement is correct.
Partnership debts assumed by a partner is deemed to be a cash contribution and
increases the partner’s basis in the partnership.
a. True
b. False
Andy has the following capital gains and losses during the current year:
Short-term capital gain $4,000
Short-term capital loss (9,000)
Collectibles loss (2,000)
Long-term capital gain 1,000
Andy’s capital gains and losses will
a. Increase taxable income by $2,000.
b. Decrease taxable income by $6,000.
c. Decrease taxable income by $3,000.
d. Decrease taxable income by $4,000.
To obtain the rehabilitation expenditures tax credit certain criteria must be satisfied.
Which of the following are correct statements about the credit?
I. Rehabilitation of business-use, investment-use, and personal-use residential real
estate that is certified as historic qualifies for the historic structures rehabilitation credit.
II. The rehabilitation work cannot remove more than 25% of the internal walls and
framework.
a. Only statement I is correct.
b. Only statement II is correct.
c. Both statements are correct.
d. Neither statement is correct.
Wintrop has $4,000 of state income taxes withheld from his salary during 2014. On his
2014 income tax return, Wintrop properly deducts the $4,000 as state taxes paid. Upon
filing his 2014 state tax return on April 15, 2015, he determines that his actual State
income tax for 2014 is only $3,300. He receives a $700 refund on May 25, 2015 from
the amounts withheld by the state. What concept(s), construct(s), or doctrine(s) dictate
that the $700 is included in Wintrop’s 2015 income?
I. Claim of Right Doctrine.
II. Constructive Receipt Doctrine.
a. Only statement I is correct.
b. Only statement II is correct.
c. Both statements are correct.
d. Neither statement is correct.
Marianne’s uncle Mike gives her $20,000 of 8% bonds on July 1st of the current year.
The bonds pay interest on June 30 and December 31.
I. Marianne has $20,000 of income from the receipt of the bonds.
II. Marianne has $1,600 of interest income from the bonds in the year of the gift.
III. Marianne has $800 of interest income from the bonds in the year of the gift.
IV. Mike has $800 of interest income from the bonds in the year of the gift.
a. Only statement I is correct.
b. Only statement II is correct.
c. Statements I and III are correct.
d. Statements I and II are correct.
e. Statements III and IV are correct.
Omicron Corporation had the following capital gains and losses for 2013 through 2015:
2013 2014 2015
$15,000 $(30,000) $60,000
Omicron’s net capital gain for 2015 is:
a. $20,000
b. $30,000
c. $45,000
d. $60,000
Mike purchases a computer (5-year property) for $3,000 during the current year. He
uses the computer 40% of the time in his consulting business. Mike would like to
maximize his cost recovery deduction. What is his allowable cost recovery deduction
on the computer?
a. $- 0 –
b. $120
c. $180
d. $300
e. $1,200
Carlos received an antique dresser from his aunt. Since the dresser is worth $6,000
more than what his aunt paid for it, the holding period begins with the date of the gift.
a. True
b. False
The rules that limit self-dealing through the related party provisions is a result of the
a. Ability to Pay Concept.
b. Administrative Convenience Concept.
c. Arm’s-Length Transaction Concept.
d. Capital Recovery Concept.
e. Pay-as-You-Go Concept.
Joy receives a used car worth $13,000 from her uncle as a graduation present. As a
result of the gift
I. Joy will have $13,000 of taxable income.
II. Joy’s uncle’s gift will subject him to the gift tax.
a. Only statement I is correct.
b. Only statement II is correct.
c. Both statements are correct.
d. Neither statement is correct.
On June 1, 2015, AZ Construction Corporation places a $25,000 crane (7 year life) in
service. It placed no other assets in service during the year. What is the amount of AZ
Construction’s maximum depreciation deduction for the crane for 2015?
a. $3,573
b. $5,000
c. $7,555
d. $10,500
e. $25,000
Kobe receives a gift of rare books valued at $10,000. The books have an adjusted basis
of $6,000 to the donor. Several months later, Kobe sells the books to a professional
collector for $7,000. What is Kobe” gain or (loss) on the sale?
a. No gain or (loss) is recognized
b. $1,000 gain
c. $4,000 gain
d. $1,000 loss
e. $3,000 loss
Juan and Dorothy purchase a new residence on May 1, 2015. Juan and Dorothy pay the
full amount of the 2015 property taxes of $7,200 on their new house when the taxes
became due in December of 2015. What amount of the taxes that Juan and Dorothy pay
in December 2015 can they deduct on their 2015 tax return?
a. Zero, no amount is deductible.
b. $2,400
c. $4,800
d. $7,200
Hugh donates investment real estate to Habitat for Humanity. The property cost him
$10,000 six years ago. The fair market value of the property at the date of the
contribution is $18,000. Hugh’s AGI is $80,000. What is the maximum amount Hugh
can deduct as a charitable contribution?
a. $- 0 –
b. $5,000
c. $10,000
d. $18,000
e. $24,000
Partners have extensive flexibility in choosing their tax year-end for their partnership.
a. True
b. False
An asset’s adjusted basis is the amount of unrecovered investment after considering any
increases and decreases in the original purchase price.
a. True
b. False
A college student who is a candidate for a degree may exclude the value of a
scholarship received for
I. Meals.
II. Books.
III. Computer.
IV. Tuition.
V. Housing.
a. Statements I and V are correct.
b. Statements II, III, and IV are correct.
c. Only statement IV is correct.
d. Statements II and IV is correct.
e. Statements I, II, III, IV, and V are correct.
The taxpayer will be able to benefit from capital recovery on business equipment over
the life of the asset and any remaining capital will be recovered when the asset is sold.
a. True
b. False
Morris is considering investing in some bonds. Morris is in the 33% tax bracket. His
broker tells him about City of Fargo, North Dakota, bonds with a yield of 6%.
a. A U.S. Treasury bond paying 6% interest will have a greater after-tax yield than the
City of Fargo bonds.
b. A U.S. Treasury bond paying 6% interest will have the same after-tax yield as the
City of Fargo bonds.
c. The after-tax yield on City of Fargo bonds is 4% [(1.0 – .33) 6%].
d. A taxable bond will have to pay 9% (6% .67) interest to provide an after-tax yield
equal to the yield on the City of Fargo bonds.
Bender borrows $200,000 from his uncle’s bank and invests the proceeds in various
common stocks. He pays $9,000 in interest on the loan during the current year. The
stocks produce $7,200 of dividend income, all taxed at the rate of 15%. Bender reports
adjusted gross income of $100,000 in the current year. If the dividend income is his
only investment income, how much of the interest expense is deductible by Bender?
a. $7,000
b. $7,200
c. $9,000
d. None of this interest is deductible.
Indicate which of the following statements concerning the following tax rate structures
is/are correct.
When Income Total Tax
Equals Equals
Structure #1 10,000 600
100,000 5,000
Structure #2 15,000 900
75,000 4,500
Structure #3 13,000 975
86,000 6,600
I. Tax Structure #1 is proportional.
II. Tax Structure #1 is regressive
III. Tax Structure #2 is progressive.
IV. Tax Structure #3 is progressive
a. Only statement I is correct.
b. Only statement III is correct.
c. Statements I and II are correct.
d. Statements II and IV are correct.
e. Statements I, II, and IV are correct.
Olivia owns 40% of Addison Company, a partnership. Olivia’s adjusted basis in the
partnership is $22,000 at the beginning of the year. During the current year, Olivia
receives a $10,000 cash distribution from the partnership. Addison Company reports a
$100,000 operating loss for the current year. If Olivia is a material participant in
Addison Company, how much of the partnership loss can she deduct on her income tax
return?
a. $-0-
b. $10,000
c. $12,000
d. $40,000
Peter owns 30% of Bear Company, an electing S corporation. Peter’s adjusted basis in
the stock is $44,000 at the beginning of the current year. During the current year, Bear
distributes a $60,000 dividend. Bear Company reports a $200,000 operating loss for the
current year. If Peter is a material participant in Bear Company, how much of the loss
can he deduct on his income tax return?
a. $-0-
b. $18,000
c. $26,000
d. $44,000
e. $60,000
The employee’s contribution to a nonqualified pension plan cannot be deferred, and the
employer is not allowed a tax deduction for the contribution even though the employee
includes the contribution in their income.
a. True
b. False
To be considered predominately used in a trade or business under the listed property
rules, more than 75% of an asset’s total use for each taxable year must be related to the
taxpayer’s trade or business.
a. True
b. False
An ordinary expense
I. is an expense commonly incurred in an income-producing activity.
II. is an expenditure that provides future benefits to an income-producing activity.
a. Only statement I is correct.
b. Only statement II is correct.
c. Both statements are correct.
d. Neither statement is correct.
No income is taxed until the taxpayer is allowed the return of the original investment
due to the
a. Ability to Pay Concept.
b. Administrative Convenience Concept.
c. Arm’s-Length Transaction Concept.
d. Capital Recovery Concept.
e. Business Purpose concept
Violet exchanges investment real estate with Russell. Violet’s adjusted basis in her
two-year old property is $280,000. The property is encumbered by a mortgage of
$100,000 and has a fair market value of $320,000 when exchanged. Russell assumes
that debt. Russell paid $80,000 cash for his property in 1999 and it is appraised at
$150,000 on the day of the exchange. Russell pays Violet enough in cash to balance the
exchange. What is Russell’s recognized gain (loss) on the exchange?
a. $-0-
b. $70,000
c. $80,000
d. $150,000
Lindsey exchanges investment real estate parcels with Donna. Her adjusted basis in the
property is $400,000, and it is encumbered by a mortgage liability of $200,000. Donna
assumes the mortgage. Donna’s property is appraised at $1,000,000 and is subject to a
$100,000 liability. Lindsey assumes the liability. If no cash is exchanged, what is the
amount of gain recognized by Lindsey?
a. $- 0 –
b. $100,000
c. $200,000
d. $500,000
e. $900,000
Depreciation
Qualified Small Business stock gain
Dominic and Lois sell their home for $775,000, incurring selling expenses of $40,000.
They had purchased the residence in 1990 for $185,000 and made capital improvements
totaling $45,000. They buy a new residence for $310,000. What is their realized gain
and recognized gain on the sale? What is their basis in the new house?
Match each statement with the correct term below.
a. Unmarried without dependents.
b. Generally used when financial disagreement exists.
c. Unmarried and provides a household for a dependent.
d. Use the same tax rate schedule as married, filing jointly.
e. Determines which tax rate schedule and standard deduction amount is applicable.
Surviving spouse
Each of the numbered items below is accorded only one of the following lettered
treatments. Use the existing law as it applies to the current year, match the best answer
to the statements below.
a. Fully excluded from gross income.
b. Fully included in gross income.
c. Partially excluded from gross income.
Tina receives 100 shares of Welby stock as a result of a 2 for 1 stock split. The shares
have a value of $7,000 the day of the split.
Match each statement with the correct term below.
a. Not deductible.
b. Short-term capital loss.
c. Limited to $25 per person.
d. Deductible as an ordinary loss
e. Only 50% of the cost is deductible.
f. Must be away from tax home overnight to be deductible.
g. General area where a taxpayer conducts principal activity.
h. If the “directly-related” test fails; this test may allow the deduction.
Associated with
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
Premiums the insured taxpayer pays for life insurance
Christine, age 23, is an employee of Higgins Hardware Distributors whose annual
salary is $35,000. Higgins provides employees with free group-term life insurance at
twice their annual gross salary, free health and accident insurance, a qualified pension
plan, and a flexible benefits plan. Christine’s health and accident insurance cost Higgins
$1,920. The cost of her group-term life insurance coverage is $520. Higgins pension
plan allows employees to contribute up to 6% of their annual salary, which Higgins
matches. Christine elects to have the maximum pension plan contribution made into the
plan and has $400 of her salary paid into the flexible benefits plan. She submits medical
insurance claims totaling $900 to the health insurance policy and is reimbursed $550.
She receives the remaining $350 of medical insurance claims from the flexible benefits
plan. How much gross income does Christine have from her employment with Higgins?
Match each term with the correct statement below.
a. Ad valorem tax
b. Deduction
c. Excise tax
d. Exclusion
e. Expense
f. Gain
g. Loss
h. Ordinary income
i. Pay-as-you-go concept
j. Personal property
k. Real property
l. Self-assessment
m. Standard deduction
n. Statute of limitations
o. Tax base
p. Tax credit
Any asset that is not real estate.
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.
Ordinary Expense
Gloria owns 750 shares of the Greene Company that she acquired in 2008 for $9,000.
On June 12 of the current year, she sells 500 shares of Greene for $4,000. Two weeks
later on June 26, Gloria purchases 200 shares of Greene for $2,200. What are the effects
of the June 12 sale? Explain.
A tax rate that remains the same at all levels of the tax base.
Summary Problem: Tommy, a single taxpayer with no dependents, has the following
items that may affect his taxable income. What is his adjusted gross income?
Employee salary received $70,000
Child support paid to ex-wife 12,000
Total allowable itemized deductions 3,000
Cash gift received from parents 7,000
Gain on the sale of stock 5,000
Loss on the sale of personal residence (10,000)
Loss on the sale of stock (6,000)
Amount collected from a life insurance policy 40,000
Health insurance premiums paid by his employer 3,000
Winnings from gambling trip to Las Vegas 800
Cost of employer paid parking space 1,200
Government pension benefits received 15,000
Amount his dog earned from being in a television commercial 2,000
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
Organization costs
Match each statement with the correct term below.
a. An employee may exclude up to $5,000 annually of these employer-provided
services.
b. If cash is received under this program, taxpayers are taxed on the amount of cash
received.
c. A salary reduction plan that allows employees to pay for medical and child care costs
with before-tax dollars.
d. A transfer of property without any profit motivation with an intention that includes
affection, charity, and respect.
e. Payments made into an employee’s account are not taxable in the current period;
taxation is deferred until funds are withdrawn.
f. Employer provided benefit that may be excluded from income because the dollar
amounts are too small for a reasonable accounting.
Cafeteria plan
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.
Transaction loss