Adjustments to gross selling price include
I. the amount of a seller’s expenses paid by the buyer.
II. the amount of the buyer’s debt assumed by the seller.
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 is correct?
I. The history of a cited case refers to all other decisions by higher or lower courts in the
same case.
II. The citator gives information about how the decision of a cited case has been
interpreted by other courts.
a. Only statement I is correct.
b. Only statement II is correct.
c. Both statements are correct.
d. Neither statement is correct.
Olivia sells some stock she purchased several years ago for $9,000 to her brother Jack
for $12,000. One year later Jack sells the stock for $15,000. The tax consequences to
Olivia and Jack are:
Olivia Jack
a. $3,000 gain $3,000 gain
b. No gain or loss $6,000 gain
c. No gain or loss $3,000 gain
d. $3,000 gain $6,000 gain
e. No gain or loss No gain or loss
Darien owns a passive activity that has a basis of $36,000 and a suspended loss of
$22,000. If Darien dies during the year when the passive activity has a fair market value
of $52,000, how will the information be presented on his tax return?
I. Darien will report an ordinary loss of $6,000.
II. Darien will report a capital gain of $16,000.
a. Only statement I is correct.
b. Only statement II is correct.
c. Both statements are correct.
d. Neither statement is correct.
The basis of replacement property in a nonrecognition transaction is the adjusted basis
of the property received less any deferred gain.
a. True
b. False
Which of the following citations denotes a regular decision of the Tax Court?
a. 35 T.C. 1083
b. 93-1 USTC 9865
c. 39 AFTR 2d 77-640
d. All of the above could refer to a regular decision of the Tax Court
Vertical equity
I. means that those taxpayers who have the greatest ability to pay the tax should pay the
greatest proportion of the tax.
II. means that two similarly situated taxpayers are taxed the same.
III. is reflected in the progressive nature of the federal income tax system.
IV. exists when Avis, a single individual with 4 dependent children, and Art, a single
individual with no dependents, both pay $2,400 income tax on equal $26,000 annual
salaries.
a. Statements III and IV are correct.
b. Statements II and III are correct.
c. Statements I and III are correct.
d. Only statement IV is correct.
e. Statements I, II, III, and IV are correct.
After buying a new sofa at the furniture store, Hilda finds a $1,000 bill in the parking
lot near her car. What are the tax effects of this find?
I. Hilda must recognize $1,000 of income for this tax year.
II. The all-inclusive-income concept applies in this situation.
III. Hilda will not recognize the $1,000 because the IRS will never know about the
windfall.
IV. Hilda will not recognize the $1,000 because there is not a specific tax law provision
requiring it.
a. Only statement I is correct.
b. Only statement II is correct.
c. Only statement IV is correct.
d. Statements I and II are correct.
e. Statements II and III are correct.
Marty owns 30% of the stock of Myron Corporation. Myron reports taxable income of
$100,000 and pays $80,000 in dividends to shareholders. What is Marty’s income from
Myron Corporation?
a. $-0-
b. $24,000
c. $30,000
d. $54,000
e. $80,000
Terry owns 100% of Terry Manufacturing, Inc, and has the corporation pay his son’s
college tuition. Terry must include the payments in his taxable income.
a. True
b. False
At the beginning of the current year, Harrison’s adjusted basis in FLM Partnership is
$50,000. During the year, Harrison receives a cash distribution of $25,000. How much
income must Harrison recognize because of the cash received?
a. $- 0 –
b. $10,000
c. $15,000
d. $20,000
e. $25,000
When the Supreme Court grants a writ of certiorari, they are agreeing to review a lower
court’s decision.
a. True
b. False
Which of the following factors are used to aid in determining whether an activity that
earns income is profit motivated and should be treated as a business or is subject to the
hobby loss rules?
I. The taxpayer’s financial status.
II. Elements of personal pleasure derived from the activity.
a. Only statement I is correct.
b. Only statement II is correct.
c. Both statements are correct.
d. Neither statement is correct.
A passive activity
I. includes any trade or business in which a taxpayer does not materially participate.
II. includes rentals of apartment buildings, rental houses, etc., where no significant
personal services are involved.
a. Only statement I is correct.
b. Only statement II is correct.
c. Both statements are correct.
d. Neither statement is correct.
Victor bought 100 shares of stock of Wabash Manufacturing Corporation from an
unrelated individual paying $1 per share on December 20, 2014. On April 17, 2015, the
corporation is declared bankrupt and the shares are deemed worthless. What is the
amount and character of Victor’s recognized loss as a result of the bankruptcy?
a. $100 short-term capital loss.
b. $100 long-term capital loss.
c. $100 ordinary loss.
d. No gain or loss until the stock is sold.
e. The amount is $100, but the character is indeterminable from the information given.
Janine, a cash-basis taxpayer, borrowed $15,000 for her business from a local bank
three years ago. To increase her deductions for 2015, she pays December interest of
$150 and prepays January and February interest totaling $300. The maturity date of the
note is November 30, 2016. How much of the interest is deductible in 2015?
a. $-0-
b. $150
c. $300
d. $450
On January 22, 2013, Dalton Corporation granted Kathleen an option to acquire 1,500
shares of the company’s stock for $7 per share. The fair market price of the stock on the
date of grant was $13. The stock requires that Kathleen remain with the company for
one year after the date of exercise. The option did not have a readily ascertainable fair
market value. Kathleen exercises the option on August 10, 2014, when the fair market
value of the stock is $17. She makes a Section 83 (b) election at the exercise date. On
August 10, 2015, the fair market value of the stock is $23 per share. How much must
she report as income in 2014 and 2015
2014 2015
a. $-0- $15,000
b. $-0- $24,000
c. $10,500 $4,500
d. $15,000 $-0-
In 2010, Merlin received the right to acquire 1,200 shares of Noble Corporation stock
through the company’s incentive stock option plan at an exercise price of $17 per share.
On January 4, 2015, Merlin exercises the option when the fair market value of the stock
is $22 per share. Which of the following is(are) correct statements?
I. Noble can deduct $6,000 as compensation expense in 2015.
II. Merlin does not recognize any income but must include $6,000 as a tax preference
item in computing his alternative minimum taxable income.
a. Only statement I is correct.
b. Only statement II is correct.
c. Both statements are correct.
d. Neither statement is correct.
Global Corporation distributes property with a basis of $22,000 and a fair market value
of $30,000 to Arturo in complete liquidation of the corporation. Arturo’s basis in the
stock is $14,000. What must Arturo and Global report as income upon the liquidation of
Global?
Arturo Global
a. $16,000 $8,000
b. $16,000 $-0-
c. $30,000 $-0-
d. $30,000 $30,000
On August 3, 2015, Yang purchases office furniture (7-year property) costing $21,000
for use in her business. She does not wish to use the Section 179 election and makes the
election to use the straight-line method over the MACRS recovery period. What is
Yang’s 2015 cost recovery deduction?
a. $ 500
b. $ 1,500
c. $ 3,000
d. $20,000
e. $21,000
Gifts received are not subject to income taxation; however the donor is subject to the
gift tax rules on the making of a gift.
a. True
b. False
Lisa sells some stock she purchased several years ago for $10,000 to her brother Bart
for $8,000. One year later Bart sells the stock for $12,000. The tax consequences to
Lisa and Bart are:
Lisa Bart
a. $2,000 loss $4,000 gain
b. No gain or loss $4,000 gain
c. No gain or loss $2,000 gain
d. $2,000 gain No gain or loss
e. $2,000 loss $2,000 gain
Helena and Irwin are married taxpayers who file jointly. Their taxable income before
considering capital gains and losses is $120,000. They have long-term capital gains of
$8,000, short-term capital losses of $4,000, and short-term capital gains of $5,000.
What are the tax effects of these events?
I. The short-term capital losses can offset only $3,000 of the short-term capital gains.
II. The net capital gains will add $1,450 to the couple’s tax liability.
a. Only statement I is correct.
b. Only statement II is correct.
c. Both statements are correct.
d. Neither statement is correct.
Citators provide the full text of court decisions.
a. True
b. False
Judy and Larry are married and their combined salaries for the current year are
$115,000. They actively participate in the rental of two houses. For the current year
they have the following losses:
Income/(Loss)
Limited Partnership A $(5,000)
Limited Partnership B 8,000
Rental house X (5,000)
Rental house Y (2,000)
What is Judy and Larry’s adjusted gross income?
a. $108,000
b. $111,000
c. $114,000
d. $115,000
e. $118,000
Frank rents an apartment to Pete and collects a cleaning deposit to be repaid at the end
of the lease. Under the claim-of-right doctrine, Frank includes the deposit in income
when collected.
a. True
b. False
Nestor receives the right to acquire 1,000 shares of Knolls Corporation stock through
the company’s incentive stock option plan. The fair market value of the stock at the date
of the grant is $20 and the exercise price of the option is $24 per share. For the option
to qualify as an incentive stock option
I. Nestor must exercise the option within 10 years of the date of grant.
II. Nestor must hold the stock for at least 2 years after the date of exercise before selling
it.
a. Only statement I is correct.
b. Only statement II is correct.
c. Both statements are correct.
d. Neither statement is correct.
June is a 20% owner-employee in the Woodbourne Corporation, an S corporation. She
is not paid a salary and her share of the corporation’s income is $57,000.
I. June must pay self-employment tax at the rate of 15.3% on her share of the S
corporation’s income.
II. June must pay Social Security at a rate of 7.65% on her share of the S corporation
income.
a. Only statement I is correct.
b. Only statement II is correct.
c. Both statements are correct.
d. Neither statement is correct.
Roland is an employee with the Belmont Corporation. Belmont maintains a money
purchase plan for all its employees. Determine the maximum deductible contribution
Belmont can make to the pension plan in each of the following situations:
a. Roland’s salary is $100,000.
b. Roland’s salary is $225,000.
Which of the following statement is/are included in Adam Smith’s four requirements for
a good tax system?
I. Changes in the tax law should be made as needed to raise revenue and for proper
administration.
II. A tax should be imposed in proportion to a taxpayer’s ability to pay.
III. A taxpayer should be required to pay a tax when it is most likely to be convenient
for the taxpayer to make the payment.
IV. The government must collect taxes equal to it’s expenses.
a. Statements I and II are correct.
b. Statements I and IV are correct.
c. Statements II and III are correct.
d. Statements II and IV are correct.
e. Statements III and IV are correct.
In addition to his salary, Peter realizes a $1,000 short-term capital gain and a $5,000
long-term capital loss. The net effect of the capital asset transactions on Peter’s adjusted
gross income is
a. $-0-
b. $1,000
c. $(3,000)
d. $(4,000)
e. $(5,000)
Sergio is a 15% partner in the Hopkins Group and has net self-employment income of
$100,000 in 2015. The maximum amount that Sergio can contribute to a Keogh money
purchase plan is
a. $3,000
b. $13,045
c. $20,000
d. $25,000
e. $50,000
Taxpayers who construct property for their own use must capitalize both the direct and
indirect construction costs.
a. True
b. False
Lane Inc., an electing S corporation, realizes $150,000 from sales during the current
year. Lane also receives $20,000 of dividends from a 3% owned corporation. Operating
expenses total $155,000. Lane’s operating income is
a. $(19,000)
b. $( 5,000)
c. $1,000
d. $4,500
e. $15,000
Madeline operates a janitorial service. The business is organized as a corporation. She
has a crew of 100 employees that clean offices and commercial buildings on a set
schedule. Madeline also runs a maid service. Since persons paying for the maid services
are individuals, the amounts paid to Madeline are not reported to the IRS. Madeline has
developed a tax plan. She will deposit the maid service fees to her personal bank
account. As a result, she can draw a smaller salary from the janitorial service. She will
pay the maids for their services through the corporation. Since she is not deducting her
salary from the corporation to the extent she keeps the maid fees, she does not report
income from the maid fees. Has Madeline evaded the income tax? Explain.
Raquel is a recent law school graduate. She is upset by an IRS Revenue Agent’s Report
on her income tax return that she must pay an additional $2,000 in tax on last year’s
income. Raquel tells you that she “… will take her case all the way to the Supreme
Court.” What is the probability Raquel will be able to take her case to the Supreme
Court.
Winfield Corporation recently purchased equipment that qualifies for a new tax
incentive. The new incentive allows Winfield to either expense $100,000 of the cost of
the equipment or claim a tax credit of 15% of the cost of the equipment. The cost of the
equipment is $200,000. If the credit is elected, the first year depreciation will be
$34,000. If Winfield chooses to expense $100,000 of the cost, the first year depreciation
will be $20,000 on the remaining cost. Winfield’s tax rate is either 34% or 39%. Under
what conditions should Winfield elect to take the tax credit? Explain and show any
calculations to support your answer.
Unearned income
Treasury Department
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.
Home office deduction
Match each statement with the correct term below.
a. Begins on the day after acquisition and ends on the day of disposition.
b. The initial investment in an asset.
c. An asset’s basis transfers from one owner to another.
d. The capital investment remaining in an asset at the date of its disposition.
e. Sales price less expenses of disposition.
f. A purchase of all of the assets of a business.
g. Amount realized is less than adjusted basis.
h. A purchase of all of the assets of a business by buying the stock of a corporation.
i. A term used to identify a situation in which an asset has a different basis for
determining gain than for determining loss.
j. The date of death used to value a decedent’s estate in the absence of any special
election.
k. Six months after the date of death, used to value a decedent’s estate when the
executor of the estate makes election.
l. Amount realized is greater than adjusted basis.
Realized gain
Match each statement with the correct term below.
a. Income is subject to tax when it is received without restrictions as to its use or
disposition.
b. Income is considered received when it is credited to the taxpayer’s account or made
unconditionally available to the taxpayer.
c. A concept that is fundamental to the progressive tax rate structure.
d. To be deductible, an expenditure must be made for a business or economic purpose
that is greater than any tax avoidance motive of the taxpayer.
e. The amount of a deduction may not exceed its cost.
f. Income should be recognized and a tax paid when the taxpayer has the resources to
pay the tax.
g. A type of deductible expenditure that embodies the profit motive requirement.
h. Allows the omission of items from the tax base for which the costs of compliance
exceeds the revenue generated.
i. A category of expenses that is specifically disallowed.
Ability-to-Pay Concept
Kuo Corporation uses the following assets in its business in 2015:
Asset Date Purchased Cost MACRS Life ADS Life
Office Building 5-12-2010 $400,000 39 yr 40 yr
Furniture 6-19-2013 15,000 7 yr 10 yr
Equipment 6-15-2011 (sold 9-9-15) 10,000 7 yr 10 yr
Truck 7-1-2012 30,000 5 yr 5 yr
Computer 12-24-2012 30,000 5 yr 5 yr
Assume Kuo Corporation does not utilize Sec 179 expense, has not disposed of any
asset since 2002, and has never expensed an asset previously. The equipment was sold
on 9-9-15 for $4,000.
What is Kuo’s 2015 depreciation expense using MACRS and for ADS?
2015 MACRS 2015 ADS
Building _____________ ____________
Furniture _____________ ____________
Equipment _____________ ____________
Truck _____________ ____________
Computer _____________ ____________
Match each statement with the correct term below.
a. Prepaid interest.
b. An amount that each taxpayer who is neither a qualifying child nor a qualifying
relative, and who files a return, is allowed to deduct.
c. One test for a qualifying relative.
d. The minimum amount a taxpayer can deduct for personal expenditures.
e. A deduction in this category is always allowed. That is, there is no minimum
allowable amount and generally no income limitation placed on these deductions.
f. Generally, these deductions are for specifically allowed personal expenditures.
g. An exception to this test is a custodial parent.
h. Interest paid on debt used to buy securities.
i. Interest paid on credit cards, personal loans, car loans, etc.
j. Interest paid on a mortgage secured by the taxpayer’s residence. The proceeds of the
loan can be used for any purpose and the interest is still deductible.
k. A tax designed to prevent the shifting of unearned income to children of the taxpayer.
Standard deduction
Match each statement with the correct term below.
a. Begins on the day after acquisition and ends on the day of disposition.
b. The initial investment in an asset.
c. An asset’s basis transfers from one owner to another.
d. The capital investment remaining in an asset at the date of its disposition.
e. Sales price less expenses of disposition.
f. A purchase of all of the assets of a business.
g. Amount realized is less than adjusted basis.
h. A purchase of all of the assets of a business by buying the stock of a corporation.
i. A term used to identify a situation in which an asset has a different basis for
determining gain than for determining loss.
j. The date of death used to value a decedent’s estate in the absence of any special
election.
k. Six months after the date of death, used to value a decedent’s estate when the
executor of the estate makes election.
l. Amount realized is greater than adjusted basis.
Primary valuation date
Carl purchased a building costing $120,000 in 2000 for use in his landscape business.
In 2009, he built an addition to the building at a cost of $30,000. In 2012, a tornado
damaged the building. The cost of repairing the building was $22,000 and Carl’s
insurance company paid $16,000 of the cost of the repairs. Depreciation deducted on
the building for 2000 through 2015 totaled $18,000. What is Carl’s adjusted basis in the
building at the end of 2015? Explain.
Kiki fell asleep one night while driving home from work and severely damaged her car.
Repairs to the car cost $4,600. Her insurance company reimbursed her for $4,100 of the
repairs. Has Kiki realized a loss? Under what conditions can she deduct the loss?
Discuss two tax-planning techniques that can be used by a 100% owner-employee to
reduce his/her tax liability.