In which of the following will the Constructive Receipt Doctrine require reporting
income in 2015?
I. Cornell’s December 2015 salary check is withheld until January 15, 2016, because the
employer does not have sufficient cash to cover its December payroll.
II. Donnie is an employee of Holt Corporation. The corporation regularly mails payroll
checks to employees to arrive on or before the last day of each month. Donnie’s check
arrives in the mail at his house on December 31, 2015. However, Donnie was
vacationing in Cancun and did not return until January 8, 2016. Donnie deposited the
check into his account the next day.
III. In December 2015, Cory signs a contract to play basketball for the Rhythms. He
receives a signing bonus of $2,000,000 to be paid over 5 years beginning in 2016. His
regular salary of $800,000 will be paid monthly during the season that begins in 2016.
a. Statements I, II, and III are correct.
b. Statements II and III are correct.
c. Statements I and II are correct.
d. Only statement II is correct.
e. Only statement III is correct.
Which of the following is (are) primary sources of tax law?
I. Joint Conference Committee Reports.
II. Journal of Taxation.
III. Revenue Procedures.
IV. Tax Treaty with France.
V. U.S. Tax Court Memorandum Decisions.
a. Only statement IV is correct.
b. Only statement I is correct.
c. Statements II and III are correct.
d. Statements I, III, IV, and V are correct.
e. Statements I, II, III, IV, and V are correct.
Samuel slips on an icy spot in front of an apartment and is hospitalized for three weeks.
The owner of the apartment pays Samuel’s $14,000 medical expenses and gives him
$4,000 for his pain and suffering. Samuel receives his regular $1,800 salary from his
employer while he couldn’t work and also receives $7,000 in disability pay from a plan
that he had purchased. Samuel’s gross income from these payments is:
a. $-0-
b. $1,800
c. $2,500
d. $5,800
e. $8,800
Ronald is a consultant for Economic Forecasters, Inc. In an effort to minimize his tax
liability he enters into a legal contract transferring 25% of the fees from a new
consulting contract to his son Ken, who is 42, and owns a pest control business. Which
of the following statements concerning the transaction is correct?
I. The assignment-of-income doctrine does not apply if Ken and Ronald are in the same
marginal tax bracket.
II. The assignment-of- income doctrine does not apply if Ronald’s son is under age 14.
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 characteristics distinguish a corporation from other forms of
businesses?
I. Centralization of management
II. Continuity of life
III. Free transferability of ownership interests
IV. Limited liability
V. Profit motive
a. All are distinguishing characteristics.
b. Statements I, II, III and IV are correct.
c. Only statement III is correct.
d. Statements IV and V are correct.
e. Statements I, II, IV, and V are correct.
Which of the following payments are deductible?
I. Wilcox pays $1,000 to run an add in the program of the state Independent Party
convention
II. Wilcox is in the construction business. In January, he sends his chief financial officer
to Washington, D.C., to monitor current legislation affecting the real estate industry.
Expenses totaled $2,100.
III. In March, Wilcox personally travels to Washington, D.C., to testify before the
banking subcommittee on the effects of proposed legislation on the construction
industry. Expenses totaled $2,300.
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 and II are correct.
Guzman Corporation has its expenditure of $700,000 for salary to its president and sole
shareholder disallowed as a deduction by the IRS. Comparable salaries for presidents of
similarly sized firms in the same industry average $300,000. The IRS reclassified
$400,000 as a nondeductible cash dividend. Which of the following form the basis for
the IRS disallowance?
I. Lack of Business Purpose.
II. Administrative Convenience Concept.
III. Capital Recovery Concept.
IV. Substance over Form Doctrine.
a. Only statement I is correct.
b. Only statement IV is correct.
c. Statements I and IV are correct.
d. Statements I, II, and IV are correct.
e. Statements I, II, III, and IV are correct.
Which of the following taxes is deductible from adjusted gross income when paid by an
individual taxpayer?
I. State income tax.
II. Property tax on property owned in Alberta, Canada.
a. Only statement I is correct.
b. Only statement II is correct.
c. Both statements are correct.
d. Neither statement is correct.
Hector receives a gift of rare books valued at $7,000. The books have an adjusted basis
of $11,000 to the donor. Several months later, Hector sells the books to a professional
collector for $8,000. What is Hector’s gain or (loss) on the sale?
a. $1,000 gain
b. $4,000 gain
c. No gain or loss is recognized
d. $1,000 loss
e. $3,000 loss
In 2015, Billie decides to purchase a house by withdrawing $15,000 from his IRA.
Brandan qualifies as a first-time home- buyer. The $15,000 consists of $12,600 in
nondeductible contributions and $2,400 in income earned on the plan’s assets. Billie
will have to pay an early withdrawal penalty of
a. $-0-
b. $240
c. $500
d. $1,260
e. $1,500
Sigma Company provides its employees with $25,000 of group-term life insurance.
How much is included in gross income because of the life insurance?
a. $- 0 –
b. $25,000
c. $50,000
d. The cost of the premium to purchase $25,000 of group term life insurance.
e. The value of the premium to acquire $25,000 of group term life insurance from IRS
tables.
Martin purchased an annuity contract at the beginning of 2002 for $84,000. The
contract specifies that he will receive $2,000 per month for life. Martin receives his first
payments on July 1, 2014, when he was 67 years old. Martin dies on August 15, 2019
(the August payment was received prior to his death). What amount, if any, should be
deducted on Martin’s 2019 tax return as a result of failing to receive his expected return
on the annuity contract?
a. $54,400 can be claimed as a deduction on his final return.
b. $59,200 can be claimed as a deduction on his final return.
c. $1,600 can be claimed as a deduction on his final return.
d. No deduction is reported because a decedent is not required to file a final return.
Under the legislative grace concept, Congress allows certain personal expenses to be
deducted when they exceed the standard deduction.
a. True
b. False
Anna receives a salary of $42,000 during the current year. She sells some land that she
held as an investment at a loss of $7,000 and some stock at a gain of $11,000. Anna’s
adjusted gross income is:
a. $42,000
b. $46,000
c. $50,000
d. $53,000
Robert’s employer provides all of its employees a $40,000 group term life insurance
policy. The cost of this policy must be included in Robert’s income.
a. True
b. False
Drew incurs the following expenses in his grocery store business. Drew can deduct the
following as business expenses in the current year
I. $3,750 for advertising on the web.
II. $2,000 of interest expense related to the purchase of a new delivery truck.
a. Only statement I is correct.
b. Only statement II is correct.
c. Both statements are correct.
d. Neither statement is correct.
Sidney owns a residential rental property with an adjusted basis of $200,000 at the
beginning of the current year. The county treasurer sends Sidney a tax bill payable by
December 31. The bill is for real estate property taxes of $1,200 for the current calendar
year and for a $6,000 special assessment for a new sewer line. On November 1, Sidney
sells the property to Donald for $225,000. As part of the sale contract, Sidney will pay
the real estate taxes of $1,200 at closing and Donald agrees to pay the special
assessment of $6,000 on the due date. What is Sidney’s gain on the sale?
a. $19,800
b. $20,000
c. $21,000
d. $24,800
e. $29,800
Mark and Cindy are married with salaries of $45,000 and $42,000, respectively.
Adjusted gross income on their jointly filed tax return is $98,000. Both individuals are
active participants in employer provided qualified pension plans. What is the maximum
amount each person may deduct for AGI with regard to IRA contributions?
Mark Cindy
a. $1,000 $1,000
b. $5,225 $5,225
c. $3,200 $3,200
d. $- 0 – $-0-
e. $ 5,500 $5,500
Sophia purchases a completely furnished condominium in Breckenridge, Colorado. She
uses the condo as a rental property. Which of the following assets are subject to periodic
cost recovery?
I. Land.
II. Furniture.
III. Building.
IV. Trout fishing equipment.
V. Kitchen appliances.
a. Only statement III is correct.
b. Statements II and III are correct.
c. Statements II, III, IV, and V are correct.
d. Statements I, and III are correct.
e. Statements II, III, and V are correct.
Maria, an engineer, has adjusted gross income of $167,000 before considering the
following losses. The passive activity rules disallow the deduction for the loss in which
of the following?
I. Maria has a $21,000 loss from her ownership of Family Apartment Village, a
low-income housing project.
II. Maria owns and actively participates in managing a rental house across the street
from East State College. This activity generates a $7,000 loss in the current year.
a. Only statement I is correct.
b. Only statement II is correct.
c. Both statements are correct.
d. Neither statement is correct.
The cash method of accounting for income tax purposes
I. is allowed for interest received from Series EE savings bonds.
II. requires a taxpayer who receives services from another taxpayer in exchange for
property to include the value of the services in income.
III. is allowed for taxpayers who receive interest income from the issuance of original
issue discount securities with a term of more than one year.
a. Only statement I is correct.
b. Only statement II is correct.
c. Only statement III is correct.
d. Only statements I and II are correct.
e. Statements I, II, and III are correct.
Title 26 of the United States Code is commonly referred to as the Internal Revenue
Code.
a. True
b. False
Dragonian Corporation sells a depreciable asset. Dragonian paid $50,000 for the asset.
Accelerated depreciation on the asset is $12,000 up to the date of sale. Straight-line
depreciation is $8,000. Determine the amount and character of the gain (loss) on the
sale under each of the following assumptions:
a. The asset is equipment. Dragonian deducted the maximum depreciation and the sales
price is $44,000.
b. The asset is an office building purchased in 1984. Dragonian deducted the maximum
depreciation and the sales price is $54,000.
c. The asset is an office building purchased in 2006. Dragonian deducted straight-line
depreciation and the sales price is $54,000.
On June 10, 2014, Akira receives a gift of a rare marble statue with a fair market value
of $9,000. The marble statue had an adjusted basis of $12,000 to the donor and was
purchased in 2013. Akira sells the marble statue July 5, 2015, for $8,000. When does
Akira’s holding period for the rare marble statue begin?
a. It begins in 2013.
b. It begins in 2015.
c. It is irrelevant because the transfer was a gift and gifts are always considered to be
held long-term.
d. It depends on whether a gift tax was paid at the time of the gift.
e. It begins in 2014.
Which of the following payments would not be considered a tax?
a. An assessment based on the selling price of the vehicle.
b. A local assessment for new sewers based on the amount of water used.
c. A local assessment for schools based on the value of the taxpayer’s property.
d. A surcharge based upon the amount of income tax already calculated.
Matt, a U.S. citizen, can exclude all of his $100,000 salary he earned as a bullfighter in
Spain where he lived all year, from his U.S. tax return.
a. True
b. False
Stan sells a piece of land he used in his auto repair business at a gain of $13,000 in
2015. In addition, Stan sells equipment he purchased in 2012 for $8,000. He paid
$20,000 for the equipment that had an adjusted basis of $12,000 when it was sold. He
also sells some stock in 2015 at a loss of $11,000. No losses on the disposition of assets
were recognized in prior years. The effect of these transactions on Stan’s 2015 taxable
income is:
a. Decrease of $2,000.
b. Decrease of $3,000.
c. Increase of $6,000.
d. Increase of $10,000.
Rona owns 3% of Theta Corporation and has a basis of $500 in her stock. During the
year, Theta distributes a $40,000 taxable dividend and a $30,000 nontaxable dividend.
As a result of the dividend, Rona has
a. $1,200 of dividend income and a $400 capital gain.
b. $ 300 of dividend income.
c. $1,200 of dividend income and a $900 tax free return of capital.
d. $1,200 of dividend income and no capital gain.
e. $ 500 capital gain.
Paul owns a lumber yard in Portland. He has decided to expand his business interests
and is considering opening a golf course in Seattle. He has incurred $51,000 of
expenses investigating whether to open the new golf course. In January of the current
year he finds the perfect location and opens the golf course on July 1. What amount of
the investigation expenses can he deduct in the current year?
a. $- 0 –
b. $5,100
c. $5,567
d. $6,533
e. $51,000
General partners
I. Are liable for all debts of the partnership.
II. Are taxed on distributions received from the partnership.
a. Only statement I is correct.
b. Only statement II is correct.
c. Both statements are correct.
d. Neither statement is correct.
Alfred is a consultant for Data Planners. In an effort to minimize his tax liability he
enters into a legal contract transferring 25% of the fees from a new consulting contract
to his son Ken, who is 42, and owns a pest control business. Which of the following
statements concerning the transaction is correct?
I. The assignment-of-income doctrine prevents Alfred from transferring taxation of the
income to his son.
II. The assignment-of- income doctrine does not apply because the transfer is supported
by a legal contract.
a. Only statement I is correct.
b. Only statement II is correct.
c. Both statements are correct
d. Neither statement is correct.