Lynne is a 15% partner with Webb Brothers and has net self-employment income of
$100,000 in 2015. The maximum amount that Lynne can contribute to a Keogh profit
sharing plan is
a. $5,000
b. $13,045
c. $15,000
d. $20,000
e. $25,000
The ability-to-pay concept is fundamental to the income tax structure. Constructs used
to implement this concept include
I. Deductions
II. Progressive tax rates
III. Exclusions
IV. Business losses
a. Only statement II is correct.
b. Statements I, III, and IV are correct.
c. Statements I, II, and IV are correct.
d. Statements I and III are correct.
e. Statements I, II, III, and IV are correct.
For each of the following situations, determine whether the item 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.
a. Monica took a client out to dinner to discuss the tax aspects of the client’s proposed
acquisition of a rival company. After dinner, Monica took the client to see a
play.Assume Monica is self-employed Assume Monica is an employee of GHQ
Corporation. GHQ does not reimburse its employees for entertaining clients.
b. Sergio owes Edward $5,000. During the current year, Sergio files for bankruptcy.
Sergio’s attorney indicates that due to Sergio’s poor financial condition his creditors will
be lucky to get $.80 on the dollar for their debts.Assume Sergio is a customer of
Edward’s (an accrual basis taxpayer) and the $5,000 debt is from an account receivable
related to Edward’s business. Assume Sergio is a business associate of Edward’s.
Edward loans Sergio the $5,000 to pay off some gambling debts. Edward owns a meat
packing plant.
When a taxpayer sells only a portion of the securities that they own, the average cost
method is used to establish the cost basis for the shares sold.
a. True
b. False
Walker, an employee of Lakeview Corporation, drives his automobile 18,000 business
miles during 2015. He pays tolls of $145 while traveling on business. What amount can
Walker deduct as unreimbursed transportation expenses before considering any
limitations on itemized deductions?
a. $10,350 for AGI.
b. $10,495 for AGI.
c. $10,350 from AGI.
d. $10,495 from AGI.
Thelma can get the 10% penalty on the early withdrawal from her IRA waived if the
money is used to pay her son’s college tuition.
a. True
b. False
The legislative grace concept dictates that deductible business expenses be grouped into
certain categories that include
I. Personal expenses.
II. Trade or business expenses.
III. Expenses for the production of income.
a. Statements I and II are correct.
b. Statements I and III are correct.
c. Statements I, II, and III are correct.
d. Statements II and III is correct.
Which of the following tax rates applies to an individual taxpayer in the 33% marginal
tax rate bracket?
Type of gain/loss Tax Rate
a. Collectibles loss 28%
b. Short-term gain 28%
c. Long-term gain 15%
d. Long-term loss 15%
e. Collectibles gain 33%
Benito owns an office building he purchased five years ago at a cost of $600,000. The
property is currently worth $800,000, has an adjusted basis of $300,000 and is
encumbered by a $400,000 mortgage.
Mitch owns an apartment complex he purchased three years ago at a cost of $600,000.
The property is currently worth $750,000, has an adjusted basis of $500,000 and is
encumbered by a $325,000 mortgage.
Benito and Mitch would like to exchange the properties and their respective mortgages.
Answer the following questions regarding the exchange.
a. Any boot is to be paid in cash. Who must pay the boot and how much must be paid?
b. Does Benito have to recognize any gain on the exchange? If so, indicate the amount
of gain to be recognized and why it must be recognized.
The split basis rule for determining the basis of gifts allows for one basis for
determining losses and another for calculation of gains.
a. True
b. False
If a taxpayer has the following for the current year:
Active Portfolio Passive
Income Income Income
Income $75,000 $22,000 $55,000
Deductions (45,000) (16,000) (110,000)
Income(Loss) $30,000 $6,000 $(55,000)
I. If the taxpayer is a regular corporation, taxable income from the three activities is a
loss of $19,000.
II. If the taxpayer is an individual and the passive income is related to a rental real
estate activity in which the taxpayer is an active participant, taxable income is $11,000.
a. Only statement I is correct.
b. Only statement II is correct.
c. Both statements are correct.
d. Neither statement is correct.
A family entity combines the tax-planning aspects of the progressive tax rate structure
with the use of the owner’s family to minimize the overall tax liability of the entire
family.
a. True
b. False
During the current year, Schmidt Corporation has operating income of $75,000 and a
net capital loss of $25,000. What is Schmidt’s taxable income?
a. $- 0 –
b. $50,000
c. $72,000
d. $75,000
e. $90,000
Marvin and Marshall own and operate MM Company, an electing S corporation.
Marvin owns 75% and Marshall owns 25% of MM’s stock. During the current year,
MM has the following results:
Revenues $350,000
Operating expenses 185,000
Marvin’s salary 40,000
Marshall’s salary 85,000
Municipal bond interest income 12,000
Long-term capital loss 30,000
Charitable contributions 20,000
a. How must MM report these results to Marvin and Marshall? Show calculations.
b. Marvin is a single taxpayer with no dependents. He has total income from other
sources of $68,000, which includes a $26,000 long-term capital gain. He has $11,400 of
other allowable itemized deductions. Calculate Marvin’s taxable income and his income
tax liability.
Unreimbursed meals and entertainment paid by employees are subject to the 2-percent
of adjusted gross income annual limitation on miscellaneous deductions
a. True
b. False
Sally owns 700 shares of Fashion Styles Clothing common stock. Sally purchased the
700 shares as follows:
Purchase Date Number of Shares Total Cost
March 2012 200 $ 2,000
August 2012 300 $ 3,600
January 2013 200 $ 3,000
As of December 29, 2015, Sally has not sold any securities. She needs to send a tuition
payment of $5,200 to her daughter’s boarding school in Zurich before year-end. Since
the Fashion Styles Clothing stock is selling for $13 per share, Sally plans to dispose of
400 shares to cover the tuition. Ignoring commissions and transaction costs, what is the
optimal tax result of selling 400 shares?
a. $- 0 – gain or loss.
b. $200 long-term capital loss.
c. $100 long-term capital gain.
d. $800 long-term capital loss
e. $800 long-term capital gain
Ying pays $170,000 for an office building on August 27, 2014, to use in his consulting
business. He properly allocates $150,000 to the building and $20,000 to the land. What
is Ying’s 2015 depreciation deduction on the property?
a. $1,124
b. $1,443
c. $1,923
d. $3,846
e. $5,454
For each of the following situations, identify the property’s adjusted basis and briefly
explain how you determined the adjusted basis amount.
a. Mei-ling purchased 150 shares of MAPCO stock for $5,400 in 2004. On February 28,
2015, Mei-ling purchased another lot of 150 shares of identical stock for $3,750.
Mei-ling sells the original 150 shares of MAPCO stock for $3,300 on March 15, 2015.
What is Mei-ling’s basis in the 150 shares she purchased February 28, 2015?
b. Ralph gives Linda 500 shares of Money Maker common stock. The stock cost Ralph
$30,000 several years earlier. The stock is worth $50,000 on the date it is given to
Linda, and Ralph pays $1,500 of gift tax on the transfer. What is Linda’s basis in the
stock if she sells it for $20,000?
c. Assume the same facts as in part b, except that the fair market value of the stock on
the date of the gift is $25,000.
d. Leon receives a van as a gift from his father. His father’s basis in the van is $30,000.
The fair market value at the date of the gift is $20,000. A gift tax of $2,000 is paid on
the gift. Geroge uses the van in his pizza delivery service for three years, at which time
he sells it for $8,000. During the three years he used the van in his business, Geroge
deducts $10,000 in depreciation on the van.
e. Bonita owns a house that she used as a residence until this year. She paid $150,000
for the house on November 4, 2002. On April 4, 2015, Bonita purchases a new
residence and converts the former residence into office space to use in her real estate
business. The former residence is worth $180,000 on April 4, 2015.
Maryanne is the senior chef for Bistro 501 Restaurant. Discuss whether the following
losses are affected by the passive activity rules.
a. Maryanne has a $4,500 loss from her ownership interest in a catfish-farm limited
partnership. Maryanne is a limited partner.
b. Maryanne has a $7,000 loss from her ownership interest in a feeder-lamb limited
partnership. Maryanne is a general partner and is responsible for day-to-day
management decisions.
c. Maryanne has a $11,000 loss from her ownership of a low-income housing project.
d. Maryanne owns a rental house across the street from North Forest College and
actively participates in managing the rental property. The rental property generates a
loss of $5,000 for the current year.
To recognize such basic personal living costs as food and clothing, each individual
taxpayer is allowed a personal exemption of $3,950 in 2014.
a. True
b. False
The acquiescence policy of the IRS extends to
a. the U.S. Tax Court
b. the U.S. District Court
c. the U.S. Circuit Court of Appeals
d. All of the above
Capital assets include which of the following?
I. Depreciable equipment used in Robbie’s business.
II. A new car held for resale by Andrews Auto Sales.
III. Accounts receivable held by Jessica because of sales on credit while operating her
store.
IV. A set of golf clubs, belonging to a surgeon.
a. Only statement I is correct.
b. Only statement IV is correct.
c. Statements III and IV is correct.
d. Statements I, III, and IV are correct.
e. Statements I, II, III, and IV are correct.
The wash sale provisions apply to which of the following?
I. Tom realizes an $8,000 loss on the June 17, 2015, sale of 650 shares of Roadrunner
Corporation common stock. He replaces the 650 shares with Hawke Inc., stock on July
8, 2015.
II. Rosie realizes a $6,000 loss on the December 29, 2014, sale of 40 Billings corporate
bonds. Each bond has a face value of $1,000. She replaces the Billings corporate bonds
with 30 Redeemer corporate bonds, each with a face value of $1,000 on January 16,
2015. The Redeemer bonds have the same interest rate, maturity date, but a different
bond rating (AAA) as the Billings bonds.
a. Only statement I is correct.
b. Only statement II is correct.
c. Both statements are correct.
d. Neither statement is correct.
For related parties to qualify for a like-kind exchange, the property received must be
held for six months.
a. True
b. False
Sara constructs a small storage shed for resale to customers and incurs the following
costs:
$3,000 Direct labor
1,500 Direct materials
700 Other direct costs
300 Allocated indirect costs
a. What is Sara’s basis in this storage shed?
b. Sara normally sells the storage sheds for $7,000 each. John, one of the workers who
builds the storage sheds, buys one for $5,000. What is John’s basis in his storage shed?
Pluto Corporation contributes $30,000 to qualified charitable organizations during
2015. Pluto’s 2015 taxable income before any charitable contribution deduction is
$280,000. Included in that amount is a $10,000 dividend-received deduction amount.
Pluto also has a carryover charitable contribution of $2,000 from 2014. What is the
maximum amount Pluto Corporation can deduct as a charitable contribution for 2015?
a. $- 0 –
b. $28,000
c. $29,000
d. $30,000
e. $35,000
Gomer is admitted to the Mouton Partnership on July 1, 2015. Gomer contributes ABC
common stock purchased in 1991 for $20,000 with a fair market value of $100,000 on
July 1, 2015, for a 25% interest in the partnership. After Gomer’s admission to the
partnership, Mouton’s net asset fair market value is $400,000. What is Gomer’s taxable
gain or income due to the exchange of ABC stock for the Mouton Partnership interest?
a. $- 0 –
b. $80,000 long-term capital gain.
c. $80,000 ordinary income.
d. $80,000 short-term capital loss.
e. $100,000 ordinary income.
Linc’s annual salary is $80,000. His employer, Riddle Corporation, has a qualified
pension plan that allows employees to contribute up to 10% of their salaries, which is
matched by the employer. Linc and Riddle Corporation each pay $7,500 into the plan.
Riddle provides all employees with health and accident insurance by paying 75% of the
cost of the policy. Linc’s policy cost $3,200. Riddle also offers a flexible benefits plan
that employees can use to pay their share of the cost of the medical insurance, other
medical costs, and child-care costs. Linc elects to have $2,500 paid into the plan. He
uses $800 to pay his share of the medical insurance costs and was reimbursed for
$1,700 of medical and childcare costs from the plan. As an officer, Riddle Corporation
pays Linc’s $3,240 parking cost. Riddle Corporation has a workout room in its office
building that is used exclusively by employees and their families. Dues to a comparable
facility would be $100 per month. What is Linc’s 2015 taxable income from Riddle
Corporation?
a. $70,000
b. $70,240
c. $71,500
d. $71,620
e. $73,240
Serenity receives a nonliquidating distribution from the Hickock Corporation, an S
corporation. Which of the following statements concerning nonliquidating distributions
from an S corporation are correct?
I. A nonliquidating cash distribution is taxable if the amount distributed exceeds
Serenity’s basis in Hickock.
II. The amount of the dividend on a nonliquidating distribution of property is the fair
market value of the property distributed.
a. Only statement I is correct.
b. Only statement II is correct.
c. Both statements are correct.
d. Neither statement is correct.
Patrick ran up a large credit card debt. Since the bank wanted to keep Patrick’s account
they forgave $5,000 of his balance. Patrick was solvent before and after the forgiveness.
He has to include the $5,000 in his income.
a. True
b. False
Fonzi purchases a personal computer for $4,000 on March 19, 2015. He used it
personally for correspondence, keeping track of personal finances, and on-line data base
services. His children used it for schoolwork and games. On June 1, 2015, Fonzi starts a
new secretarial service business and he converts the personal computer to 100%
business use. The computer is worth $2,500 at the time (similar computers were selling
for that amount in the used-computer market).
a. What is Fonzi’s depreciable basis? Briefly explain your reasoning.
b. Fonzi desires to minimize depreciation deductions on the computer. What is the
minimum allowable depreciation for 2015?
Jenny, an individual cash basis taxpayer, has $6,000 of state income taxes withheld
from her salary during 2015. When she filed her 2014 state income tax return during
April 2015, she paid an additional $500 in state income taxes. When she filed her 2015
state income tax return in April 2016, she received a $200 refund. What is her state
income tax deduction for 2015 for federal income tax purposes?
a. $500
b. $5,800
c. $6,000
d. $6,300
e. $6,500