Ted purchases some forest land in 2013 with the intention of building a log cabin to use
as a vacation home. To obtain the land, Ted pays $10,000 cash, assumes the seller’s
$19,000 mortgage on the land and pays $3,000 in commissions and legal fees related to
the purchase. In 2014, Ted pays a contractor $4,000 to bulldoze and level the site of the
log cabin. In 2015, Ted has a well dug and water and sewer lines laid in the ground at a
cost of $6,000. Ted paid $2,000 of property taxes in 2013 and $5,000 of property taxes
in 2014 and 2015 on the land. What is Ted’s basis in the land at the end of 2015?
a. $54,000
b. $42,000
c. $38,000
d. $36,000
e. $32,000
Which of the following authorities can help the taxpayer interpret a new tax law soon
(i.e. during the first few months) after it becomes law?
a. Treasury Regulations.
b. Committee Reports.
c. Revenue Rulings.
d. Internal Revenue Code.
e. Court Cases.
David, an employee of Lima Corporation, is a U.S. citizen and the regional sales
manager for South America. His office is in Miami and he spends nine months each
year on business in South America. Which of the following statements about the
treatment of his income from Lima Corporation is correct?
a. He must include his Lima income in his gross income and is not allowed a tax credit
for any South American taxes paid.
b. He has the option of either excluding $99,200 of his Lima income or taking a tax
credit for the South American taxes paid.
c. Because he is in South America only nine months of the year, he is only allowed to
exclude $74,400 of Lima income.
d. Because he is in South America only nine months of the year, he is not allowed to
exclude any of his Lima income, but he can take a tax credit for any South American
taxes paid.
S corporation status is attained when a qualifying corporation elects this status.
a. True
b. False
For each tax treatment described below, explain the income tax concept(s) which is
(are) responsible for the treatment.
a. Atlas Construction Inc., an accrual basis taxpayer, billed a client $12,000 for services
performed in December 2015. In March 2016, Atlas Construction receives a check from
the client for $10,000. Included with the check is a letter indicating that some of the
services had not been performed to specifications. After investigating the matter, Atlas
Construction determined that the customer was right and corrected its account
receivable with the client. Atlas Construction must include $12,000 in its 2015 income
and takes a deduction for $2,000 in 2016.
b. Katie is the Mayor of Coal Creek. During the current year, she accepts $5,000 from a
local banker for her promise that the banker would receive the contract for a new city
bond issue. The payment is illegal under state law and will have to be returned if
discovered. Katie must include the $5,000 in her gross income.
c. Little Company purchased machinery in 2011 at a cost of $40,000. In 2011 through
2015, Little properly deducts $14,000 in depreciation on the machinery. In 2015, the
machinery is sold for $20,000. Little is allowed to deduct a $6,000 loss on the sale of
the machinery.
d. In 2015 Raptor Corporation properly deducted a $5,000 expense it paid to Colfax
Inc. In 2016 Raptor receives a $500 check from Colfax. A letter accompanying the
check indicates that Colfax overcharged Raptor and the $500 refund was made to
correct the overcharge. Raptor must include the $500 in its 2016 gross income.
After buying books at the beginning of the semester, Iris finds a $50 bill outside the
door of the bookstore. The $50 is considered gross income. Which of the following
supports this treatment?
a. All-inclusive Income Concept.
b. Capital Recovery Concept.
c. Wherewithal-To-Pay Concept.
d. Administrative Convenience.
e. Constructive Receipt Doctrine.
Ariel has two children, Christopher and Pat. Christopher is 25 years old and Pat is 22.
Both are full time students at Southern College, have full tuition scholarships, and live
at school during the year. Christopher graduated in June. Which test will prevent Ariel
from claiming both Pat and Christopher as dependents?
a. Age test.
b. Gross income test.
c. Principal residence test.
d. Non-support test.
e. Full time student test.
Section 1231 assets include
a. Inventory.
b. Stocks and bonds.
c. Personal residence.
d. Business-use realty.
e. Personal automobile.
In 2015, a husband and wife who are less than 50 and qualify may contribute $12,000
to two separate IRA accounts as long as their total income exceeds $12,000. The total
amount contributed to each account cannot exceed $6,000.
a. True
b. False
Carter is a podiatrist in Minneapolis. He travels to Milwaukee to attend a two-day
seminar for health professionals about investing in commodities. Transportation
expenses are $140, the hotel cost $125/day, and meals cost $60/day. How much can
Carter deduct for travel to the seminar?
a. $- 0 –
b. $140
c. $390
d. $450
e. $510
Louise makes the following contributions during the current year:
Purchase of raffle ticket from church $50
Cash given to church 200
Chamber of Commerce dues 500
Stock acquired in 2003 donated to State University
(Cost = $1,000; FMV = $1,800)
Clothing donated to Goodwill
(Cost = $800; FMV = $200)
Volunteer work at local hospital
(Candy-striper uniform @ $40)
If Louise’s gross income is $35,000, what is her allowable charitable contribution?
a. $1,440
b. $2,240
c. $2,290
d. $2,790
e. $2,840
Ricardo owns interests in 3 passive activities: A, B, and C. During the current year,
activity A realizes income of $8,000 while activities B and C realize losses of $16,000
and $24,000, respectively. Determine the amount of suspended loss attributable to
activity C.
a. $- 0 –
b. $ 8,000
c. $12,800
d. $19,200
e. $24,000
Based on the definition given in Chapter 1 of the text, which of the following is a tax?
I. A registration fee paid to the state to get a car license plate.
II. 2% special sales tax for funding public education.
III. A special property tax assessment for installing sidewalks in the taxpayer’s
neighborhood.
IV. An income tax imposed by Chicago on persons living or working within the city
limits.
a. Only statement I is correct.
b. Only statement III is correct.
c. Only statement IV is correct.
d. Statements I and IV are correct.
e. Statements II and IV are correct.
For 2015, Nigel and Lola, married taxpayers without children, calculated their total
allowable itemized deductions to be $17,100. Accordingly, Nigel and Lola file jointly
and should deduct from adjusted gross income
I. the standard deduction amount of $12,600
II. total itemized deductions equal to $17,100.
III. one personal and one dependency exemption amount.
IV. exemption amounts totaling $8,000.
a. Only statement I is correct.
b. Statements I and IV are correct.
c. Statements I, III, and IV are correct.
d. Statements II and IV are correct.
e. Statements I, II, III, and IV are correct.
Which of the following non-cash employee benefits would be excluded from the
taxable income of the employee? Unless indicated otherwise all benefits are provided
on a non-discriminatory basis.
a. Executives of Handyware receive a free automobile every 2 years.
b. The top salesman for Genesis in each sales district receives a free two-week vacation
in Hawaii.
c. Carter, a flight attendant for Western Airlines, flew roundtrip from Houston to Dallas
45 times during the tax year to visit her boyfriend at no cost. Airline employees fly free
on a space available basis.
d. Mike receives a free apartment from his employer who owns hundreds of apartment
complexes all over the country. Mike is the internal auditor for the apartment company.
He has the option to live in a free apartment or receive additional compensation.
e. All of the above non-cash benefits can be provided to employees on a tax-free basis.
Susan and Kyle are married and have two children ages 16 and 14. Their adjusted gross
income for 2015 is $108,000. What amount can they claim for the child tax credit?
a. $- 0 –
b. $600
c. $1,000
d. $1,200
e. $2,000
Bob and Linda are married and have a 2015 taxable income of $280,000. They also
received $20,000 of tax-exempt income. Their marginal tax rate is:
a. 23.1%
b. 24.8%
c. 28.0%
d. 33.0%
e. 35.0%
Gifts to qualified charitable organizations may be deducted as a contribution, but not to
exceed 50% of an individual taxpayer’s adjusted gross income.
a. True
b. False
Elizabeth paid $400,000 for a warehouse. Using 39-year straight-line depreciation,
Elizabeth deducts $24,868 for the first two years of usage. At the beginning of the third
year, Elizabeth sells the warehouse for $380,000. How much of the gain is recaptured as
Section 1250 ordinary income?
a. $- 0 –
b. $4,868
c. $24,868
d. $380,000
e. $400,000
Karl has the following income (loss) during the current year:
Net business income $45,500
Dividends and interest 12,000
Actively managed rental property (34,000)
What is Karl’s adjusted gross income for this year?
a. $23,500
b. $31,400
c. $32,500
d. $45,500
e. $57,500
Betty hires Sam to prepare her federal income tax return. In preparing the return, Sam
erroneously decided to exclude consulting fees because he estimated that Betty’s
expenses should have exceeded the income she received. If the IRS detects Betty’s
underpayment of tax, what is the likely result?
I. Betty is liable for payment of the tax due plus interest and a negligence penalty.
II. Sam is liable for payment of Betty’s negligence penalty. Betty is liable for the
payment of the tax due plus interest.
a. Only statement I is correct.
b. Only statement II is correct.
c. Both statements are correct
d. Neither statement is correct
Joline is a cash basis taxpayer. A renter pays Joline the January 2015 rent in December
2014. What are the tax effects of this transaction?
I. Joline will recognize rent income for tax purposes in 2015.
II. The wherewithal-to-pay concept is the basis for Joline’s recognition of the income in
2015.
a. Only statement I is correct.
b. Only statement II is correct.
c. Both statements are correct.
d. Neither statement is correct.
If the House and the Senate both approve similar but not identical tax bills, any
differences between the two pieces of legislation are resolved by the
a. Joint Conference Committee
b. Ways and Means Committee
c. Finance Committee
d. House Appropriations Committee.
Georgia sells stock she purchased for $20,000 to her brother Billy for $12,000. Two
years later, Billy sells the stock to Allie, an unrelated individual, for $22,000. What is
Billy’s recognized gain or loss?
a. $- 0 –
b. $ 2,000 gain
c. $10,000 gain
d. $ 8,000 loss
e. $ 6,000 loss
On February 3 of the current year, Caroline converts her house to a rental property.
Caroline’s adjusted basis in the house is $120,000 and the fair market value is $150,000
on the date of conversion. What is Caroline’s adjusted basis in the rental property for
depreciation purposes?
a. $30,000
b. $120,000
c. $150,000
d. $170,000
e. $180,000
Pay-as-you-go withholding is consistent with Adam Smith’s criteria of
a. Certainty.
b. Convenience.
c. Economy.
d. Fairness.
e. Transparency.
Art has worked for Denver’s Diamond Dealers (DDD) for ten years. During the current
year, Art marries and moves from his downtown apartment to a house in the suburbs.
Before he was married, Art always rode the bus to work. Because there is no bus
service to his new home, Art needs to purchase a car. Wayne, the owner of DDD gives
Art $17,000 to purchase a used car. Which of the following statements concerning the
$17,000 payment is/are correct?
I. If DDD does not require Art to repay the $17,000, Art has $17,000 of compensation
income.
II. If DDD requires Art to repay the $17,000, Art has no compensation income from the
receipt of the $17,000.
a. Only statement I is correct.
b. Only statement II is correct.
c. Both statements are correct.
d. Neither statement is correct.
A disadvantage of electing to use the small claims division of the Tax Court is that
a. it is a more formal proceeding.
b. the decision is final and can not be appealed.
c. it tends to be more expensive.
d. it can cause many delays.
e. All of the above.
Richard pays his license plate fee for his car in July of the current year. Of the $400 he
paid $10 represented a registration fee, $140 represented a charge based on the weight
of the car, and a $200 charge based on the value of the car. How much of the $400 can
Richard deduct on his current-year tax return?
a. $- 0 –
b. $60
c. $140
d. $200
e. $400
Paul won the Nobel Prize for Literature. He is awarded $1,000,000. His tax situation is
I. In general, the award must be included in gross income.
II. The award may be excluded if he gives it to a qualified charity.
III. The award may be excluded if he gives it to the U.S. Government.
IV. Awards for literary achievement are not taxable.
a. Only statement I is correct.
b. Only statement II is correct.
c. Only statements I, II, and III are correct.
d. Only statement IV is correct.
e. Only statements I, II, and IV are correct.
Wanda owns and operates a restaurant on the north side of Cleveland. She is
considering opening a second restaurant on the south side of town and incurs $13,600
of investigation expenses. In July of the current year, Wanda decides not to open a
second restaurant. How much of the investigation expenses can Wanda deduct in the
current year?
a. $- 0 –
b. $5,000
c. $5,120
d. $5,600
e. $13,600