ACC/555 Week 5 Midterm Exam – Strayer NEW
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Chapters 1 Through 6
Chapter 1 An Introduction to Taxation
1) The federal income tax is the dominant form of taxation by the federal government.
2) The Sixteenth Amendment permits the passage of a federal income tax.
3) When a change in the tax law is deemed necessary by Congress, the entire Internal Revenue Code must be revised.
4) The largest source of federal revenues is the corporate income tax.
5) A progressive tax rate structure is one where the rate of tax increases as the tax base increases.
6) The terms “progressive tax” and “flat tax” are synonymous.
7) A proportional tax rate is one where the rate of the tax is the same for all taxpayers, regardless of income levels.
8) Regressive tax rates decrease as the tax base increases.
9) The marginal tax rate is useful in tax planning because it measures the tax effect of a proposed transaction.
10) A taxpayer’s average tax rate is the tax rate applied to an incremental amount of taxable income that is added to the tax base.
11) If a taxpayer’s total tax liability is $30,000, taxable income is $100,000, and economic income is $120,000, the average tax rate is 30 percent.
12) If a taxpayer’s total tax liability is $4,000, taxable income is $20,000, and total economic income is $40,000, then the effective tax rate is 20 percent.
13) All states impose a state income tax which is generally based on an individual’s federal adjusted gross income (AGI) with minor adjustments.
14) The unified transfer tax system, comprised of the gift and estate taxes, is based upon the total property transfers an individual makes during lifetime and at death.
15) Gifts between spouses are generally exempt from transfer taxes.
16) The primary liability for payment of the gift tax is imposed upon the donee.
17) For gift tax purposes, a $14,000 annual exclusion per donee is permitted.
18) An individual will be subject to gift tax on gifts made to a charity
19) Property is generally included on an estate tax return at its historical cost basis.
20) Property transferred to the decedent’s spouse is exempt from the estate tax because of the estate tax marital deduction provision.
21) Gifts made during a taxpayer’s lifetime may affect the amount of estate tax paid by the taxpayer’s estate.
22) While federal and state income taxes as well as the federal gift and estate taxes are generally progressive in nature, property taxes are proportional.
23) Adam Smith’s canons of taxation are equity, certainty, convenience and economy.
24) The primary objective of the federal income tax law is to achieve various economic and social policy objectives.
25) Individuals are the principal taxpaying entities in the federal income tax system.
26) The various entities in the federal income tax system may be classified into two general categories, taxpaying entities (such as individuals and C [regular] corporations) and flow-through entities such as sole proprietorships, partnerships, S corporations, and limited liability companies.
27) Dividends paid from most U.S. corporations are taxed at the same rate as the recipients’ salaries and wages.
28) Flow-through entities do not have to file tax returns since they are not taxable entities.
29) S Corporations result in a single level of taxation.
30) In a limited liability partnership, a partner is not liable for his partner’s acts of negligence or misconduct.
31) Limited liability companies may elect to be taxed as corporations.
32) Limited liability company members (owners) are responsible for the liabilities of their limited liability company.
33) The tax law encompasses administrative and judicial interpretations, such as Treasury regulations, revenue rulings, revenue procedures, and court decisions, as well as statutes.
34) Generally, tax legislation is introduced first in the Senate and referred to the Senate Finance Committee.
35) The Internal Revenue Service is the branch of the Treasury Department responsible for administering the federal tax law.
36) Generally, the statute of limitations is three years from the later of the date the tax return is filed or the due date.
37) The largest source of revenues for the federal government comes from
A) individual income taxes.
B) corporate income taxes.
C) Social Security and Medicare taxes (FICA).
D) estate and gift taxes.
38) Arthur pays tax of $5,000 on taxable income of $50,000 while taxpayer Barbara pays tax of $12,000 on $120,000. The tax is a
A) progressive tax.
B) proportional tax.
C) regressive tax.
D) None of the above.
39) Which of the following taxes is progressive?
A) sales tax
B) excise tax
C) property tax
D) federal income tax
40) Which of the following taxes is proportional?
A) gift tax
B) income tax
C) sales tax
D) Federal Insurance Contributions Act (FICA)
41) Which of the following taxes is regressive?
A) Federal Insurance Contributions Act (FICA)
B) excise tax
C) property tax
D) gift tax
42) Sarah contributes $25,000 to a church. Sarah’s marginal tax rate is 35% while her average tax rate is 25%. After considering her tax savings, Sarah’s contribution costs
43) Helen, who is single, is considering purchasing a residence that will provide a $28,000 tax deduction for property taxes and mortgage interest. If her marginal tax rate is 25% and her effective tax rate is 20%, what is the amount of Helen’s tax savings from purchasing the residence?
44) Charlotte pays $16,000 in tax deductible property taxes. Charlotte’s marginal tax rate is 28%, effective tax rate is 22% and average rate is 25%. Charlotte’s tax savings from paying the property tax is
45) Anne, who is single, has taxable income for the current year of $38,000 while total economic income is $43,000 resulting in a total tax of $5,356. Anne’s average tax rate and effective tax rate are, respectively,
A) 14.09% and 12.46%.
B) 12.46% and 14.09%.
C) 14.09% and 25%.
D) 12.46% and 25%.
46) The unified transfer tax system
A) imposes a single tax upon transfers of property during an individual’s lifetime only.
B) imposes a single tax upon transfers of property during an individual’s life and at death.
C) imposes a single tax upon transfers of property only at an individual’s death.
D) none of above.
47) When property is transferred, the gift tax is based on
A) replacement cost of the transferred property.
B) fair market value on the date of transfer.
C) the transferor’s original cost of the transferred property.
D) the transferor’s depreciated cost of the transferred property.
48) Paul makes the following property transfers in the current year:
• $22,000 cash to his wife
• $34,000 cash to a qualified charity
• $220,000 house to his son
• $3,000 computer to an unrelated friend
The total of Paul’s taxable gifts, assuming he does not elect gift splitting with his spouse, subject to the unified transfer tax is
49) Charlie makes the following gifts in the current year: $40,000 to his spouse, $30,000 to his church, $18,000 to his nephew, and $25,000 to a friend. Assuming Charlie does not elect gift splitting with his wife, his taxable gifts in the current year will be
50) Shaquille buys new cars for five of his friends. Each car cost $70,000. What is the amount of Shaquille’s taxable gifts?
51) In 2014, an estate is not taxable unless the sum of the taxable estate and taxable gifts made after 1976 exceeds
52) Eric dies in the current year and has a gross estate valued at $6,500,000. The estate incurs funeral and administrative expenses of $100,000 and also pays off Eric’s debts which amount to $250,000. Eric bequeaths $600,000 to his wife. Eric made no taxable transfers during his life. Eric’s taxable estate will be
53) Thomas dies in the current year and has a gross estate valued at $3,000,000. During his lifetime (but after 1976) Thomas had made taxable gifts of $400,000. The estate incurs funeral and administrative expenses of $100,000 and also pays off Thomas’ debts which amount to $300,000. Thomas bequeaths $500,000 to his wife. What is the amount of Thomas’ tax base, the amount on which the estate tax is computed?
54) Which of the following statements is incorrect?
A) Property taxes are levied on real estate.
B) Excise taxes are assessed on items such as gasoline and telephone use.
C) Gift taxes are imposed on the recipient of a gift.
D) The estate tax is based on the fair market value of property at death or the alternate valuation date.
55) Denzel earns $130,000 in 2014 through his job as a sales manager. What is his FICA tax?
56) Jillian, a single individual, earns $230,000 in 2014 through her job as an accounting manager. What is her FICA tax?
57) Martha is self-employed in 2014. Her business profits are $140,000. What is her self-employment tax?
D) None of the above.
58) Which of the following is not one of Adam Smith’s canons of taxation?
D) paid by all citizens
59) Horizontal equity means that
A) taxpayers with the same amount of income pay the same amount of tax.
B) taxpayers with larger amounts of income should pay more tax than taxpayer’s with lower amounts of income.
C) all taxpayers should pay the same tax.
D) none of the above.
60) Vertical equity means that
A) taxpayers with the same amount of income pay the same amount of tax.
B) taxpayers with larger amounts of income should pay more tax than taxpayer’s with lower amounts of income.
C) all taxpayers should pay the same tax.
D) none of the above.
61) Which of the following is not an objective of the federal income tax law?
A) Stimulate private investment.
B) Reduce employment.
C) Encourage research and development activities.
D) Prevent taxpayers from paying a higher percentage of their income in personal income taxes due to inflation.
62) Which of the following is not a social objective of the tax law?
A) prohibition of a deduction for illegal bribes, fines and penalties
B) a deduction for charitable contributions
C) an exclusion for interest earned by large businesses
D) creation of tax-favored pension plans
63) Which of the following is not a taxpaying entity?
D) All of the above are taxpayers.
64) All of the following are classified as flow-through entities for tax purposes except
B) C corporations.
C) S corporations.
D) limited liability companies.
65) Rocky and Charlie form RC Partnership as equal partners. Rocky contributes $100,000 into RC while Charlie contributes real estate with a fair market value of $100,000. During the current year, RC earned net income of $600,000. The partnership distributes $200,000 to each partner. The amount that Rocky should report on his individual tax return is
66) AB Partnership earns $500,000 in the current year. Partners A and B are equal partners who do not receive any distributions during the year. How much income does partner A report from the partnership?
D) None of the above.
67) In an S corporation, shareholders
A) are taxed on their proportionate share of earnings.
B) are taxed only on dividends.
C) may allocate income among themselves in order to consider special contributions.
D) are only taxed on salaries.
68) All of the following statements are true except
A) the net income earned by a sole proprietorship is reported on the owner’s individual income tax return.
B) the net income of an S corporation is subject to double taxation because it is taxed at the entity level and dividends paid from the S corporation to individual shareholders are also taxed.
C) the net income of C corporation is subject to double taxation because it is taxed at the entity level and dividends paid from the C corporation to individual shareholders is also taxed.
D) LLCs are generally taxed as partnerships.
69) Which of the following is not an advantage of a limited liability company (LLC)?
A) limited liability for all members of a LLC
B) ability to choose between taxation as a partnership or corporation
C) default tax treatment as a corporation, unless otherwise elected
D) All of the above are advantages of an LLC.
70) What is an important aspect of a limited liability partnership?
A) It is the same as a limited partnership where the general partner has unlimited liability.
B) A partner has unlimited liability arising from his or her own acts of negligence or misconduct or similar acts of any person under his or her direct supervision, but does not have unlimited liability in other matters.
C) All partners have limited liability regarding all partnership activities.
D) All partners have unlimited liability.
71) The term “tax law” includes
A) Internal Revenue Code.
B) Treasury Regulations.
C) judicial decisions.
D) all of the above.
72) Which of the following serves as the highest authority for tax research, planning, and compliance activities?
A) Internal Revenue Code
B) Income Tax Regulations
C) Revenue Rulings
D) Revenue Procedures
73) All of the following are executive (administrative) sources of tax law except
A) Internal Revenue Code.
B) Income Tax Regulations.
C) Revenue Rulings.
D) Revenue Procedures.
74) Which of the following steps, related to a tax bill, occurs first?
A) signature or veto by the President of the United States
B) consideration by the Senate
C) consideration by the House Ways and Means Committee
D) consideration by the Joint Conference Committee
75) A tax bill introduced in the House of Representatives is then
A) referred to the House Ways and Means Committee for hearings and approval.
B) referred to the full House for hearings.
C) forwarded to the Senate Finance Committee for consideration.
D) voted upon by the full House.
76) When new tax legislation is being considered by Congress,
A) the tax bill will usually originate in the Senate.
B) different versions of the House and Senate bills are reconciled by the Speaker of the House and the President of the Senate.
C) different versions of the House and Senate bills are reconciled by a Joint Conference Committee.
D) after the President of the U.S. approves a tax bill, the Joint Conference Committee must then vote on passage of the bill.
77) The Senate equivalent of the House Ways and Means Committee is the Senate
A) Joint Committee on Taxation.
B) Ways and Means Committee.
C) Finance Committee.
D) Joint Conference Committee.
78) When returns are processed, they are scored to determine their potential for yielding additional tax revenues. This program is called
A) Taxpayer Compliance Measurement Program.
B) Discriminant Function System.
C) Standard Audit Program.
D) Field Audit Program.
79) Which of the following individuals is most likely to be audited?
A) Lola has AGI of $35,000 from wages and uses the standard deduction.
B) Marvella has a $145,000 net loss from her unincorporated business (a horse farm). She also received $950,000 salary as a CEO of a corporation.
C) Melvin is retired and receives Social Security benefits.
D) Jerry is a school teacher with two children earning $55,000 a year. He also receives $200 in interest income on a bank account.
80) Alan files his 2014 tax return on April 1, 2015. His return contains no misstatements or omissions of income. The statute of limitations for changes to the return expires
A) April 1, 2018.
B) April 15, 2018.
C) April 15, 2017.
D) The statute of limitations never expires.
81) Peyton has adjusted gross income of $20,000,000 on his 2014 tax return, filed April 15, 2015. He accidentally failed to include $200,000 that he received for a television advertisement. How long does the IRS have to audit Peyton’s federal tax return?
A) until April 15, 2017
B) until April 15, 2018
C) until April 15, 2021
D) The IRS can audit Peyton’s return at any future date.
82) Latashia reports $100,000 of gross income on her 2014 tax return, filed April 15, 2015. She omits $30,000 of income, but the error was not fraudulent. When does the statute of limitations for examining her tax return expire?
A) April 15, 2017
B) April 15, 2018
C) April 15, 2021
D) It never expires.
83) The IRS must pay interest on
A) all tax refunds.
B) tax refunds paid later than 30 days after the due date.
C) tax refunds paid later than 45 days after the due date.
D) The IRS never pays interest on tax refunds.
84) Kate files her tax return 36 days after the due date. When she files the return, she sends a check for $2,000 which is the balance of the tax owed by her. Kate’s penalty for failure to file a return will be
A) 0.5% per month (or factor thereof) up to a maximum of 25%.
B) 5% per month (or factor thereof) up to a maximum of 25%.
C) 20% per month (or factor thereof).
85) What are the correct monthly rates for calculating failure to file and failure to pay penalties?
Failure to file Failure to pay
Failure to file Failure to pay
Failure to file Failure to pay
Failure to file Failure to pay
86) Which is not a component of tax practice?
A) providing clients tax refund advance loans
B) tax research
C) tax planning and consulting
87) Larry and Ally are married and file a joint return. They are considering purchasing a personal residence that will generate two deductions: $10,000 in home mortgage interest and $8,000 in real estate taxes. Their marginal tax rate is 25%. What is the total tax savings if Larry and Ally purchase the residence?
88) Vincent makes the following gifts during 2014:
$15,000 cash gift to wife
Gift of automobile valued at $35,000 to his adult son
Gift of golf clubs valued at $5,000 to a friend
$10,000 contribution to church
Although he is married, none of the gifts are considered joint gifts with his wife. What are the total taxable gifts subject to the unified transfer tax?
89) Jeffery died in 2014 leaving a $16,000,000 gross estate. Six months after his death, the gross assets are valued at $16,100,000. In years prior to 2014 (but after 1976), Jeffery had made taxable gifts of $300,000. Of the $16,000,000 gross estate, estate assets valued at $3 million were transferred to his wife and $100,000 was used to pay administrative and funeral expenses. Jeffery had debts of $200,000, and the remainder of the estate was transferred to his children.
a. What is the amount of Jeffery’s taxable estate?
b. What is the tax base for computing Jeffery’s estate?
c. What is the amount of estate tax owed if the unified credit is $2,081,800?
d. Alternatively, if six months after his death, the gross assets in Jeffery’s estate declined in value to $15,000,000, can the administrator of Jeffery’s estate elect the alternate valuation date?
90) Mia is self-employed as a consultant. During 2013, Mia earned $180,000 in self-employment income. What is Mia’s self-employment tax?
91) Brad and Angie had the following income and deductions during 2014:
Interest income 10,000
Itemized deductions 16,000
Taxes withheld during year 15,000
Calculate Brad and Angie’s tax liability due or refund, assuming that they have 2 personal exemptions. They file a joint tax return.
92) Chris, a single taxpayer, had the following income and deductions during 2014:
Interest on bank account 300
Tax-exempt interest 200
Deduction for AGI 4,000
Itemized deductions 8,000
Taxes withheld 6,500
Calculate Chris’s tax liability due or refund for 2014.
93) During the current tax year, Frank Corporation generated gross income of $1,900,000 and had ordinary and necessary deductions of $1,400,000. What is the amount of Frank Corporation’s corporate income tax for the year?
94) During the current tax year, Charlie Corporation generated gross income of $1,800,000 and had ordinary and necessary deductions of $1,300,000, resulting in taxable income of $500,000. If Charlie Corporation paid qualifying dividends of $200,000 to shareholders, all of whom are in the 25% marginal tax bracket, what is the total tax paid on both corporate income and the corporate dividends?
95) Doug and Frank form a partnership, D and F Advertising, each contributing $50,000 to start the business. During the first year of operations, D and F earns $80,000, which is allocated $40,000 each to Doug and Frank. At the beginning of the second year, Doug sells his interest to Marcus for $90,000. What is the amount of Doug’s taxable gain on the sale?
96) Leonard established a trust for the benefit of his son. The principal amount of the trust is $400,000. The trust is projected to earn approximately 5% per year. In the current year, the trust earned $20,000. Expenses of $4,000 were incurred. Assume that $14,000 is distributed to Leonard’s son.
a. How much income is taxed to the trust?
b. How much income is taxed to Leonard’s son?
97) Frederick failed to file his 2014 tax return on a timely basis. In fact, he filed his 2014 income tax return on October 31, 2015, (the due date was April 15, 2015) and paid the amount due at that time. He failed to make timely extensions. Below are amounts from his 2014 return:
Taxable income $120,000
Total tax liability on taxable income 26,776
Total tax withheld from his salary 25,000
Frederick sent a check for $1,776 in payment of his liability. He thinks that he has met all of his financial obligations to the government for 2014. For what additional amounts may Frederick be liable assuming any applicable interest rate is 6%?
98) A presidential candidate proposes replacing the income tax with a national sales tax. The sales tax would have a flat rate. Describe the impact of this change in terms of tax structure and equity.
99) Describe the steps in the legislative process for major tax reform.
100) Explain how returns are selected for audit.
101) Describe the types of audits that the IRS conducts.
102) What does the statute of limitations mean? Describe the different statutes of limitations that apply to tax returns.
103) Describe the nondeductible penalties imposed upon taxpayers for failure to comply.
104) Describe the components of tax practice.
Chapter 2 Determination of Tax
1) Gross income is income from whatever source derived less exclusions.
2) Although exclusions are usually not reported on an individual’s income tax return, interest income on state and local government bonds must be reported on the tax return.
3) Generally, deductions for (not from) adjusted gross income are personal expenses specifically allowed by tax law.
4) Generally, itemized deductions are personal expenses specifically allowed by the tax law.
5) Taxpayers have the choice of claiming either the personal and dependency exemption or the standard deduction.
6) Refundable tax credits are allowed to reduce or totally eliminate a taxpayer’s tax liability but any credits in excess of the tax liability are lost.
7) Nonrefundable tax credits are allowed to reduce or totally eliminate a taxpayer’s tax liability but any credits in excess of the tax liability are lost.
8) The standard deduction is the maximum amount of itemized deductions which may be claimed by a taxpayer, and is based on an individual’s filing status, age, and vision.
9) Nonresident aliens are allowed a full standard deduction.
10) The standard deduction may not be claimed by one married taxpayer filing a separate return if the other spouse itemizes deductions.
11) An individual who is claimed as a dependent by another person is not entitled to a personal exemption on his or her own return.
12) A qualifying child of the taxpayer must meet the gross income test.
13) For purposes of the dependency exemption, a qualifying child must be under age 19, a full-time student under age 24, or a permanently and totally disabled child.
14) For purposes of the dependency exemption, a qualifying child may not provide more than one-half of his or her own support during the year.
15) An individual may not qualify for the dependency exemption as a qualifying child but may still qualify as a dependent.
16) One requirement for claiming a dependent other than a qualifying child is that the taxpayer provides more than 50 percent of the dependent’s support (assuming it is not a multiple support agreement situation).
17) When two or more people qualify to claim the same person as a dependent, a taxpayer who is entitled to the exemption through the qualified child rules has priority over a taxpayer who meets the requirements for other relatives.
18) The person claiming a dependency exemption under a multiple support declaration must provide more than 25% of the dependent’s support.
19) Generally, in the case of a divorced couple, the parent who has physical custody of a child for the greater part of the year is entitled to the dependency exemption.
20) A child credit is a partially refundable credit.
21) A married couple need not live together to file a joint return.
22) A legally married same-sex couple can file a joint return.
23) A widow or widower may file a joint tax return and claim an exemption for the deceased spouse in the year of the spouse’s death as long as the surviving spouse does not remarry before the end of the year.
24) An unmarried taxpayer may file as head of household if he maintains a home for his qualifying child.
25) For 2014, unearned income in excess of $2,000 of a child under age 18 is generally taxed at the parents’ rate.
26) Kelly is age 23 and a full-time student with interest and dividend income of $2,600 in the current year. The total cost of her support for the year is $19,000. She is not subject to the kiddie tax.
27) If a 13-year-old has earned income of $500 and unearned income of $2,500, all of the income can be reported on the parent’s return.
28) Suri, age 8, is a dependent of her parents and has unearned income of $6,000. She must file her own tax return.
29) The only business entity that pays income taxes is the C corporation.
30) A $10,000 gain earned on stock held 13 months is taxed in a more favorable manner than a $10,000 gain earned on stock held 11 months.
31) A building used in a business is sold after five years of use for a gain. The gain will be treated as a long-term capital gain.
32) A married couple in the top tax bracket has a new baby. Due to the birth of the baby their taxable income will be reduced in 2014 by $3,950.
33) Mia is a single taxpayer with projected AGI of $250,000 in 2014. She is considering selling a long-term investment before year-end. She expects to realize a gain of $25,000. If Mia sells the investment by December 31, her 2014 taxable income will increase by $25,000.
34) Charishma is a taxpayer with taxable income exceeding $500,000. She sells a stock for a $50,000 gain. She acquired the stock 13 months earlier. The gain will be taxed at the 20% rate.
35) Generally, when a married couple files a joint return, each spouse is liable for one-half of the entire tax and any penalties incurred.
36) A taxpayer is able to change his filing status from married filing jointly to married filing separately by filing amended return.
37) The requirement to file a tax return is based on the individual’s adjusted gross income.
38) Tax returns from individual and corporate taxpayers are due on the 15th day of the third month following the close of the tax year.
39) Taxable income for an individual is defined as
A) AGI reduced by itemized deductions.
B) AGI reduced by personal and dependency exemptions.
C) total income reduced by the standard deduction.
D) AGI reduced by deductions from AGI and personal and dependency exemptions.
40) All of the following items are generally excluded from income except
A) child support payments.
B) interest on corporate bonds.
C) interest on state and local government bonds.
D) life insurance proceeds paid by reason of death.
41) All of the following items are included in gross income except
A) alimony received.
B) rent income.
C) interest earned on a bank account.
D) child support payments received.
42) All of the following items are deductions for adjusted gross income except
A) alimony paid.
B) trade or business expenses.
C) rent and royalty expenses.
D) state and local income taxes.
43) All of the following items are deductions for (not from) adjusted gross income except
A) moving expenses.
B) unreimbursed employee business expenses.
C) qualifying contributions to individual retirement accounts.
D) one-half of self-employment taxes paid.
44) Which of the following credits is considered a refundable credit?
A) child and dependent care credit
B) earned income credit
C) adoption expense credit
D) lifetime learning credit
45) A single taxpayer provided the following information for 2014:
Interest on local government bonds
(qualifies as a tax exclusion) 4,000
Allowable itemized deductions 13,000
What is taxable income?
46) Which of the following types of itemized deductions are included in the category of miscellaneous expenses that are deductible only if the aggregate amount of such expenses exceeds 2% of the taxpayer’s adjusted gross income?
A) unreimbursed employee business expenses
B) charitable contributions
C) medical expenses
D) home mortgage interest expense
47) In 2014 the standard deduction for a married taxpayer filing a joint return and who is 67 years old with a spouse who is 65 years old is
48) In 2014 Brett and Lashana (both 50 years old) file a joint tax return claiming as a dependent their son who is blind. Their standard deduction is
49) Annisa, who is 28 and single, has adjusted gross income of $55,000 and itemized deductions of $5,000. In 2014, Annisa will have taxable income of
50) On June 1, 2014, Ellen turned 65. Ellen has been a widow for five years and has no dependents. Her standard deduction is
51) The regular standard deduction is available to which one of the following taxpayers?
A) married taxpayer filing a separate return where the other spouse itemizes
B) a person who has only unearned income and is a dependent of another
C) an individual filing a return for a period of less than 12 months because of a change in accounting period
D) an abandoned spouse
52) Husband and wife, who live in a common law state, are eligible to file a joint return for 2014, but elect to file separately. They do not have dependents. Wife has adjusted gross income of $25,000 and has $2,200 of expenditures which qualify as itemized deductions. She is entitled to one exemption. Husband deducts itemized deductions of $11,200. What is the taxable income for the wife?
53) Lewis, who is single, is claimed as a dependent on his parents’ tax return. He received $2,000 during the year in dividends, which was his only income. What is his standard deduction?
54) Charlie is claimed as a dependent on his parents’ tax return in 2014. He received $8,000 during the year from a part-time acting job, which was his only income. What is his standard deduction?
55) Deborah, who is single, is claimed as a dependent on her parents’ tax return. She had a part-time job during 2014 and earned $850 during the year, which was her only income. What is her standard deduction?
56) Cheryl is claimed as a dependent on her parents’ tax return. She had a part-time job during 2014 and earned $4,900 during the year, in addition to $600 of interest income. What is her standard deduction?
57) A married person who files a separate return can claim a personal exemption for his spouse if the spouse is not the dependent of another and has
A) gross income that is less than the personal exemption.
B) adjusted gross income that is less than the personal exemption.
C) no gross income.
D) no taxable income.
58) Ben, age 67, and Karla, age 58, have two children who live with them and for whom they provide total support. Their daughter is 21 years old, blind, is not a full-time student and has no income. Her twin brother is 21 years old, has good sight, is a full-time student and has income of $4,500. Ben and Karla can claim how many personal and dependency exemptions on their tax return?
59) Sarah, who is single, maintains a home in which she, her 15-year old brother, and her 21-year-old niece live. Sarah provides the majority of the support for her brother, her niece, and her cousin, age 18, who is enrolled full-time at the university and lives in an apartment. While the niece and cousin have no income, her brother has a part-time job and earns $4,000 per year. How many personal and dependency exemptions may Sarah claim?
60) Anita, who is divorced, maintains a home in which she and her 16 year old daughter live. Anita provides the majority of the support for her daughter and for a son, age 23, who is enrolled part-time at the university and lives in the dorm. The son also works in the campus bookstore and earns spending money of $4,500. How many personal and dependency exemptions may Anita claim?
61) Amber supports four individuals: Erin, her stepdaughter, who lives with her; Amy, her cousin, who lives in another state; Britney, her friend, who lives legally in Amber’s home all year long; and Charlie, her father, who lives in another state. Assume that the dependency requirements other than residence are all met. How many personal and dependency exemptions may Amber claim?
62) John supports Kevin, his cousin, who lived with him throughout 2014. John also supports three other individuals who do not live with him:
Donna, who is John’s mother
Melissa, who John’s stepsister
Morris, who is Kevin’s brother
Assume that Donna, Melissa, Morris and Kevin each earn less than $3,950. How many personal and dependency exemptions may John claim?
63) Julia provides more than 50 percent of the support for three individuals: Theresa, an unrelated child who lives with Julia all year long; Margaret, Julia’s cousin, who lives in another city; and Emma, Julia’s daughter who lives in her own home. Each of the potential dependents earned less than $3,950. How many dependency exemptions can Julia claim on her 2014 tax return?
64) Tony supports the following individuals during the current year: Miranda, his former mother-in-law who lives in her own home and has no gross income; his cousin, Jeff, age 23, who is a full-time student, earns $7,000 during the year, and lives with Tony all year long; and Matt, age 22, who is Tony’s brother, is a full-time student living on campus and earns $8,000 during the year. How many dependency exemptions may Tony claim?
65) David’s father is retired and receives $14,000 per year in social security benefits. David’s father saves $4,000 of the benefits and spends the remaining $10,000 for his support. How much support must David provide for his father to meet the dependent support requirement?
66) Which of the following is not considered support for the dependent support test?
C) rental value of lodging
D) value of services rendered by the taxpayer for the dependent
67) Juanita’s mother lives with her. Juanita purchased clothing for her mother costing $1,000 and provided her with a room that Juanita estimates she could have rented for $4,000. Juanita spent $5,000 on groceries she shared with her mother. Juanita also paid $700 for her mother’s health insurance coverage. How much of these costs is considered support?
68) Anna is supported entirely by her three sons John, James, and Joseph who provide for her support in the following percentages:
John: 10%, James: 40%, Joseph: 50%
Assuming a multiple support declaration exists, which of the brothers may claim his mother as a dependent?
A) any of the sons
B) James or Joseph
C) Joseph only
D) None of them
69) Blaine Greer lives alone. His support comes from the following sources:
Buddy (his son) $2,600
Ken (his brother) 4,200
Martha (his daughter) 2,300
Natalie (a friend) 1,000
Total support $10,100
Assuming a multiple support declaration exists, which of the individuals may claim Blaine as a dependent?
A) Ken or Martha
B) Buddy, Ken, or Martha
C) Ken, Martha, or Natalie
D) None of them
70) The child credit is for taxpayers with dependent children under the age of
71) Steven and Susie Tyler have three dependent children ages 13, 15, and 17. Their modified AGI is $108,000. What is the amount of the child credit to which they are entitled?
72) Nate and Nikki have three dependent children ages 12, 15, and 17. Their modified AGI is $120,000. What is the amount of the child credit to which they are entitled?
73) Ryan and Edith file a joint return showing $130,000 of AGI (with no exclusions under Secs. 911, 931, and 933). They have three dependent children ages 7, 9, and 13. What is the amount of their child credit?
74) Paul and Sally file a joint return showing $87,000 of AGI (with no exclusions under Secs. 911, 931, and 933). They have three dependent children ages 6, 8, and 13. What is the amount of their child credit?
75) Amanda has two dependent children, ages 10 and 12. She earned $15,000 from her waitress job. How much of her child credit is refundable?
76) You may choose married filing jointly as your filing status if you are married and both you and your spouse agree to file a joint return. Which of the following facts would prevent you from being considered married for filing purposes?
A) You were married for several years, but your divorce became final in December.
B) You are married but living apart until some problems can be solved.
C) Your spouse died during the year.
D) None of the above.
77) Tom and Alice were married on December 31 of last year. What is their filing status for last year?
A) They file as single.
B) They file as married joint or married separate.
C) They file as single for half the year and married for the other half.
D) They file as single for 364 days and married for one day.
78) When a spouse dies, the surviving spouse for the year of death
A) may file a married filing jointly return.
B) must file a tax return using the single filing status.
C) must file a tax return using the head of household filing status.
D) may file a married filing jointly return only if the death occurred in the last half of the year.
79) In 2011, Leo’s wife died. Leo has two small children, ages 2 and 4, living at home whom he supports entirely. Leo does not remarry and is not claimed as a dependent on another’s return during any of this period. In 2012, 2013, and 2014, Leo’s most advantageous filing status is, respectively
A) single for all three years.
B) head of household for all three years.
C) surviving spouse, surviving spouse, head of household.
D) surviving spouse, surviving spouse, single.
80) Carter dies on January 1, 2013. A joint return election is made in 2013 and Marjorie properly qualifies as a surviving spouse for the two following years. Marjorie has one child that she claims as a dependent for this same period. The number of personal and dependency exemptions allowed Marjorie in 2013 and in 2014 is, respectively
A) 1 and 1.
B) 2 and 2.
C) 3 and 2.
D) 3 and 3.
81) Edward, a widower whose wife died in 2011, maintains a household for himself and his daughter who qualifies as his dependent. Edward’s most favorable filing status for 2014 is
B) surviving spouse.
C) head of household.
D) married filing jointly.
82) In order to qualify to file as surviving spouse, all of the following criteria must be met by the widow or widower except
A) he or she and the decedent must have shared the same household as of date of death.
B) he or she must be a U.S. citizen or resident.
C) he or she be qualified to file a joint return in the year of death.
D) he or she must have at least one dependent child living at home the entire year and pay over half of the expenses of the home.
83) Which of the following dependent relatives does not have to live in the same household as the taxpayer who is claiming head of household filing status?
84) Sally divorced her husband three years ago and has not remarried. Since the divorce she has maintained her home in which she and her now sixteen-year-old daughter reside. The daughter is a qualified child. Sally signed the dependency exemption over to her ex-spouse. What is Sally’s filing status for the current year and how many exemptions may she claim?
A) single and one
B) surviving spouse and one
C) head of household and one
D) head of household and two
85) Dave, age 59 and divorced, is the sole support of his mother age 83, who is a resident of a local nursing home for the entire year. Dave’s mother had no income for the year. Dave’s filing status and exemptions claimed are
A) head of household and one exemption.
B) single and one exemption.
C) head of household and two exemptions.
D) single and two exemptions.
86) Liz and Bert divorce and Liz receives custody of their child. Bert is ordered by the court to pay child support of $10,000 per year, and Liz agrees in writing to allow Bert to claim the dependency exemption for the child. If Liz maintains the home in which she and her child live, her filing status and exemptions claimed will be
A) single and one exemption.
B) single and two exemptions.
C) head of household and one exemption.
D) head of household and two exemptions.
87) The filing status in which the rates increase most rapidly is
B) head of household.
C) married filing separately.
D) married filing jointly.
88) A married taxpayer may file as head of household under the abandoned spouse provisions if all of the following are met except
A) the taxpayer lived apart from his or her spouse for the last six months of the year.
B) the taxpayer is a U.S. citizen or resident.
C) the taxpayer pays over half of the cost of maintaining a household in which the taxpayer and a dependent son or daughter live for over half of the year.
D) the taxpayer must have been married for at least two years.
89) To qualify as an abandoned spouse, the taxpayer is not required to
A) be a U.S. citizen or resident.
B) live apart from the spouse for the last six months of the year.
C) pay more than half the cost of maintaining the home.
D) have a son or daughter in the home for the entire year.
90) In October 2013, Joy and Paul separated and have not lived with each other since, but they are still legally married. They do not file a joint return. Joy supports their children after the separation and pays the cost of maintaining their home. Joy’s filing status in 2013 and 2014 is, respectively,
A) single for both years.
B) head of household and single.
C) married filing separately for both years.
D) married filing separately and head of household.
91) The oldest age at which the “Kiddie Tax” could apply to a dependent child is
92) Elise, age 20, is a full-time college student with earned income from wages of $4,400 and interest income of $500. Elise’s parents provide more than half of her support. Elise’s taxable income is
93) Michelle, age 20, is a full-time college student with earned income from wages of $5,200 and interest income of $700. Michelle’s parents provide more than half of Michelle’s support. Michelle’s taxable income is
94) Frank, age 17, received $4,000 of dividends and $1,500 from a part-time job. Frank is a dependent of his parents who are in the 28% percent bracket. Frank’s taxable income is
95) Satish, age 11, is a dependent of his parents. His only source of income for the year is $3,000 of interest income on bonds given him by his grandparents. Satish’s marginal rate is 10%, and his parent’s marginal rate is 28%. Satish’s tax is
96) Vincent, age 12, is a dependent of his parents. During 2014, Vincent’s earned income from wages is $2,600 and Vincent received $3,000 of interest income. The parent’s marginal rate is 28% and Vincent’s marginal rate is 10%. Vincent’s tax is
D) none of the above.
97) Keith, age 17, is a dependent of his parents. During 2014, he received $3,000 of dividend income. The parent’s marginal rate is 28% and Keith’s rate is 10%. Keith’s tax is
D) None of the above.
98) A corporation has revenue of $350,000 and deductible business expenses of $240,000. What is the federal income tax, before credits?
99) Ray is starting a new business and trying to decide between a C corporation, S corporation and partnership. Which of the following statements regarding his decision is correct?
A) An S corporation owner must pay income taxes only on the salary received.
B) A partner in a partnership is taxed on his or her share of partnership income.
C) A shareholder in a C corporation is taxed on his or her share of corporate income.
D) S corporations pay taxes on their current year income.
100) If an individual with a marginal tax rate of 15% has a long-term capital gain, it is taxed at
101) Lila and Ted are married and have AGI of $332,000 in 2014. They had their first children this year, twins. Lila and Ted will be allowed a deduction for personal and dependency exemptions of
102) Shane and Alyssa (a married couple) have AGI of $345,050 in 2014. They bought a house this year and paid $16,000 of interest expense on the mortgage and paid $6,500 of property taxes. They will be allowed a deduction from AGI of
103) Rena and Ronald, a married couple, each earn a salary of $200,000. They will be required to pay additional payroll taxes in 2014 of
104) Rob is a taxpayer in the top tax bracket, with over a million in taxable income. He plans to sell stock held long-term for a $100,000 gain. This sale will result in an increase to his tax liability of
105) In order to shift the taxation of dividend income from a parent to a child,
A) the parent must direct the corporation to pay the dividend to the child.
B) the parent must transfer ownership of the stock to the child.
C) the parent can deposit the dividend in the child’s bank account.
D) all of the above will result in shifting the taxation to the child.
106) Married couples will normally file jointly. Identify a situation where a married couple may prefer to file separately.
A) The spouse with lower income has substantial medical expenses.
B) A couple is separated and contemplating divorce.
C) One spouse can be held responsible for the entire tax liability.
D) All of the above.
107) A taxpayer can receive innocent spouse relief if
A) the understated tax is attributable to erroneous items of the other spouse.
B) the innocent spouse did not know and had no reason to know that there was an understatement of tax.
C) under the circumstances, it would be inequitable to hold the innocent spouse liable for the understated tax.
D) All of the above conditions apply.
108) Form 4868, a six-month extension of time to file, allows a taxpayer to
A) avoid interest on underpayment of taxes due.
B) extend the filing date of the return as well as payment of the tax due.
C) extend the filing date of the return but the estimated amount of tax due must still be paid by the original due date of the return.
D) extend the filing date only at the discretion of the IRS.
109) Lester, a widower qualifying as a surviving spouse, has $209,000 of salary, five personal and dependency exemptions and itemizes deductions. Lester must use which form to report his taxable income?
A) Form 1040ES
B) Form 1040EZ
C) Form 1040A
D) Form 1040
110) Bill and Tessa have two children whom they support and who live in their home. Timmy is 17 and has earned income of $5,000 for the year. Their other child, Tommy, is 15. Tessa’s mother also lives with them and may be claimed as their dependent. She is 89 years old. Their adjusted gross income is $130,000.
Required: Compute Bill and Tessa’s taxable income for 2014 if they file a joint return and they do not itemize deductions.
111) Hannah is single with no dependents and has a salary of $102,000 for 2014, along with tax exempt interest income of $3,000 from a municipality. Her itemized deductions total $6,600.
Required: Compute her taxable income
112) The following information is available for Bob and Brenda Horton, a married couple filing a joint return, for 2014. Both Bob and Brenda are age 32 and have no dependents.
Interest income 12,000
Deductible IRA contributions 11,000
Itemized deductions 22,600
a. What is the amount of their gross income?
b. What is the amount of their adjusted gross income?
c. What is the amount of their taxable income?
d. What is the amount of their tax liability (gross tax)?
e. What is the amount of their tax due or (refund due)?
113) Steve Greene, age 66, is divorced with no dependents. In 2014 Steve had income and expenses as follows:
Gross income from salary $80,000
Total itemized deductions 5,500
Compute Steve’s taxable income for 2014. Show all calculations.
114) Sean and Martha are both over age 65 and Martha is considered blind by tax law standards. Their total income in 2014 from part-time jobs and interest income from a bank savings account is $60,000. Their itemized deductions are $12,000.
Required: Compute their taxable income.
115) Kate is single and a homeowner. In 2014, she has property taxes on her home of $3,000, makes charitable contributions of $2,000, and pays home mortgage interest of $7,000. Kate’s adjusted gross income for 2014 is $77,000.
Required: Compute her taxable income for 2014.
116) In 2014, Sam is single and rents an apartment for which he pays $800 per month and makes charitable contributions of $1,000. Sam’s adjusted gross income is $47,000.
Required: Compute his taxable income. Show all calculations.
117) Eliza Smith’s father, Victor, lives with Eliza who is a single taxpayer. During the year, Eliza purchased clothing for her father costing $1,200 and provided him with a room that could have been rented for $6,000. In addition, Eliza spent $4,000 for groceries she shared with her father. Eliza purchased a new television for $900 which she placed in the living room for both her father and her use.
What is the amount of support provided by Eliza to her father?
118) The following information for 2014 relates to Emma Grace, a single taxpayer, age 18:
Interest income 1,200
Itemized deductions 500
a. Compute Emma Grace’s taxable income assuming she is self-supporting.
b. Compute Emma Grace’s taxable income assuming she is a dependent of her parents.
119) Maxine, who is 76 years old and single, is appropriately claimed as a dependent on her daughter Beth’s tax return. During 2014 she received $500 interest on a savings account. She had a part time job that earned $3,000. Her total itemized deductions were $1,300.
Required: Compute Maxine’s taxable income for 2014. Show all calculations.
120) Adam attended college for much of 2014, during which time he was supported by his parents. Erin married Adam in December 2014. They live in a common law state. Adam graduated and will commence work in January 2015. Erin worked during 2014 and earned $20,000. Adam’s only income was interest of $1,100. Adam’s parents are in the 28% tax bracket. Thus, claiming Adam as a dependent would save them $1,106 ($3,950 × .28).
a. What is Erin and Adam’s tax liability if they file a joint return?
b. What is Erin and Adam’s total tax liability if they file separate returns and Adam’s parents claim him as a dependent?
121) For each of the following independent cases, indicate the total number of exemptions (personal and dependents) that may be claimed by the taxpayer in 2014.
a. Cassie is a single mother providing the sole support of her three children, who all live with her. Her 16 year-old daughter, Tammy, earned $15,200 modeling during the year and her two sons, R.J. and Will, ages 10 and 8, have no income.
b. Olivia, 35 years old, provided eighty percent of the support of her grandmother who lived in another state. Her grandmother’s only income was from non-taxable social security of $6,500.
c. Vanessa and Matt Reardon are married and under 65 years of age. During 2014, they furnish more than half of the support of their 25 year-old son, Bill, who lives with them. Bill earns $2,000 from a part-time job, most of which he sets aside for future college expenses. Bill is not currently a student. Vanessa’s father, Henry, who died on January 3, 2014, at age 80, had for many years qualified as their dependent.
d. Douglas and Marjorie are husband and wife and file a joint return. Both are under 65 years of age. They provide more than half of the support of their daughter, Ellen (age 23), who is a full-time medical student. Ellen receives a $3,400 taxable scholarship covering her room and board at college. They furnish all of the support of Henry (Douglas’s grandfather), who is age 70 and lives in a nursing home. They also support Meg (age 69), who is a friend of the family and lives with them.
e. Blair, who is divorced, maintains a home in which she, her twin sons, and her baby daughter live all year. The children’s father, Ross, provides over half their support. No special arrangements exist between Blair and Ross.
122) Indicate for each of the following the most favorable filing status for the 2014 tax year.
a. Kenny died on March 2, 2013. Marge, his wife, and Bart, their son, survive. Marge filed a joint return in 2013. Bart, age 18 in 2014, is a part-time college student and continues to live at home with his mother. He works part-time, earning $6,200. What is Marge’s filing status in 2014?
b. Alan Spaulding is single and provides over 50% support of his niece Alicia who lives with him all year long. Alan maintains the household and claims Alicia as a dependent. Alicia makes $3,600 at a part-time job. She is a full-time student, age 18. What is Alan’s filing status?
c. Lily, who was divorced on July 27, 2013, provides 100% of the support for her parents who live in a nursing home in Kansas and have no income. What is Lily’s filing status?
d. Holly was abandoned by her husband Fletcher in September of the current year. She has not seen or communicated with him since then. What is Holly’s filing status?
e. Rick, whose wife died in December 2011, filed a joint tax return for 2011. He did not remarry, but has continued to maintain his home in which his two dependent children live. What is Rick’s filing status for 2014?
123) Gina Lewis, age 12, is claimed as a dependent on her parent’s return. She is their only child. During 2014, she earned $2,300 from a summer job. She also earned interest of $2,750. Her parents’ marginal tax rate is 28 percent.
a. Compute the amount of Gina’s tax liability for 2014.
b. Can Gina’s parents take a child tax credit for her?
124) Paige is starting Paige’s Poodle Parlor and is considering alternative organizational forms. She anticipates the business will earn $100,000 from operating before compensating her for her services and before charitable contributions. Page, who is single, has $3,000 of income from other sources and other itemized deductions of $12,000. Her compensation for services will be $50,000. Charitable contributions to be made by the business are expected to be $5,000. Other distributions (dividends) to her from the business are expected to be $14,000.
Required: Compare her current income tax assuming she operates the business as a proprietorship, an S corporation, and a C corporation. Ignore payroll and other taxes.
125) Steve and Jennifer are in the 33% tax bracket for ordinary income and the 15% bracket for capital gains. They have owned several blocks of stock for many years. They are considering the sale of two blocks of stock. The sale of one would produce a gain of $12,000 while the sale of the other would produce a loss of $18,000. For purposes of this problem, ignore personal exemptions, itemized deductions, phase-outs and additional investment taxes. They have no other gains and losses this year.
a. How much tax will they save if they sell the block of stock that produces a loss?
b. How much additional tax will they pay if they sell the block of stock that produces a gain?
c. What will be the impact on their taxes if they sell both blocks of stock?
126) Brett, a single taxpayer with no dependents, earns salary of $500,000 and dividend income of $50,000. Itemized deductions for home mortgage interest, property taxes and charitable contributions total $35,000. Calculate Brett’s total federal income taxes for 2014.
127) Kelsey is a cash-basis, calendar-year taxpayer. Her salary is $30,000, and she is single. She plans to purchase a residence in 2015. She anticipates her property taxes and interest will total $8,000 in 2015. Each year, Kelsey contributes approximately $1,500 to charity. Her other itemized deductions total $2,000. For purposes of this problem, assume 2015 tax rates, exemptions, and standard deductions are the same as 2014.
a. What will her gross tax be in 2014 and 2015 if she contributes $1,500 to charity in each year?
b. What will her gross tax be in 2014 and 2015 if she contributes $3,000 to charity in 2014 but makes no contribution in 2015?
c. What will her gross tax be in 2014 and 2015 if she makes no contribution in 2014 but contributes $3,000 to charity in 2015?
d. Why does alternative “c” yield the lowest tax?
128) In 2014 Carol and Robert have salaries of $35,000 and $27,000, respectively. Their itemized deductions total $8,000. They are married, under 65, and live in a common law state.
a. Compute their taxable income assuming that they file a joint return.
b. Compute their taxable income assuming that they file separate returns and that Robert claims all of the itemized deductions.
129) For each of the following taxpayers indicate the applicable filing status, the number of personal and dependency exemptions available, and the number of children who qualify for the child credit.
a. Jeffrey is a widower, age 71, who receives a pension of $10,000, nontaxable social security benefits of $12,000, and interest of $2,000. He has no dependents.
b. Selma is a single, full-time college student, age 20, who earned $6,800 working part-time. She has $1,700 of interest income and received $1,000 support from her parents.
c. Olivia is married, but her husband left her three years ago and she has not seen or heard from him since. She supports herself and her six-year-old daughter. She paid all the household expenses. Her income consists of salary of $18,500 and interest of $800.
d. Ruben is a single, full-time college student, age 20, who earned $6,800 working part-time. He has $250 of interest income and received $10,000 support from his parents.
e. Cathy is divorced and received $12,000 alimony from her former husband and earned $35,000 working as an administrative assistant. She also received $2,500 of child support for her daughter who lives with her. According to a written agreement, she gave up the dependency exemption to her former husband.
130) What options are available for reporting and paying tax on the unearned income of a child under age 24?
Answer: One option allows the child to report the unearned income on his or her own tax return while calculating the tax by reference to the parents’ tax rate. Only unearned income in excess of $2,000 is taxed at the parents’ rates.
131) Avi and Rianna are considering marriage before year-end. They each earn a salary of about $150,000, have some investment income and some itemized deductions. What additional taxes will Avi and Rianna face as a married couple?
132) Discuss reasons why a married couple may choose not to file a joint return.
133) Discuss why Congress passed the innocent spouse provision and detail the requirements to be met in order to qualify as an innocent spouse and be relieved of liability for tax on unreported income.
134) Oscar and Diane separated in June of this year although they continue to live in the same town. They have twin sons, Blake and Cliff, who remain in the family home with Diane. Oscar’s income this year was $45,000 while Diane worked only part-time and made $15,000. Oscar also gambles heavily but told Diane that he had no winnings this year. What tax issues should they consider?
135) Paul and Hannah, who are married and file a joint return, are in the process of adopting a child who is born in December 2014. The child, a son, comes to live with them a week after his birth on December 12. The adoption is not finalized until February of 2015. What tax issues are present in this situation?
136) Foreign exchange student Yung lives with Harold and Betty while he studies in the US. He moved into their home January 5, 2014 and has resided with them for the remainder of the year. Yung does not pay anything for his room and board. Harold and Betty provide all of Yung’s meals. Yung receives a scholarship to pay for his tuition, books and fees. He works on campus, earning $4,000 a year. What tax issues should Harold and Betty consider?
137) Mary Ann pays the costs for her Aunt Hazel to live in a nursing home. Aunt Hazel receives Social Security benefits of $7,000 a year which are turned over to the nursing home. Mary Ann pays the remaining cost of $33,000. Hazel has no other income. Mary Ann visits Hazel twice a week and meets with doctors and nurses regarding Hazel’s medical care. What tax issues should Mary Ann consider?
138) Alexis and Terry have been married five years and file joint tax returns. Alexis began embezzling funds from her employer during the third year of their marriage. Last year, Alexis suddenly left the country and Terry does not know where she is. In the current year, Terry learned that the IRS had assessed him $27,000 in unpaid taxes due to Alexis’s embezzlement. What tax issue(s) are present in Terry’s situation? What questions would you ask Terry to determine his appropriate response to the IRS?
Chapter 3 Gross Income: Inclusions
1) Except as otherwise provided, gross income means all income from whatever source derived.
2) Under the economist’s definition, unrealized gains, as well as gifts and inheritances, are income.
3) Under both the accounting and tax law concepts of income, income must be “realized.”
4) Under the tax concept of income, all realized income is recognized and subject to tax.
5) The wherewithal-to-pay concept provides that a tax should be collected when the taxpayer has the financial resources to pay the tax.
6) Internal Revenue Code Section 61 provides an inclusive list of all possible items taxed under the Code.
7) Gross income is limited to amounts received in the form of cash.
8) Gross income may be realized when a taxpayer receives economic benefit even if no cash is received.
9) Gregory receives 100 shares of stock from his employer as a year-end bonus. The fair market value of the stock is included in Gregory’s income for the year.
10) Ellen, a CPA, prepares a tax return for Frank, a farmer, in exchange for twenty bushels of rice. Since no cash changed hands, neither taxpayer reports income.
11) AAA Corporation distributes an automobile to Alexandria, a shareholder, in lieu of a cash dividend. Alexandria must report the value of the automobile as dividend income.
12) The portion of a taxpayer’s wages that are garnished by court order and forwarded to pay a delinquent bank loan are not taxable income to the taxpayer.
13) A taxpayer may not avoid responsibility for payment of income taxes by assigning the income to a third party.
14) For federal income tax purposes, income is allocated between a husband and wife depending on the state of residence.
15) In community property states, income from separate property owned before marriage is always considered separate income after marriage.
16) Earnings of a minor child are taxed to the child regardless of the state’s property law system.
17) If a taxpayer’s method of accounting does not clearly reflect income, the IRS may specify a different accounting method which must be used by the taxpayer.
18) The cash receipts and disbursements method of accounting is used by most individual taxpayers and most noncorporate businesses that do not have inventories.
19) Under the cash method of accounting, income is reported in the year the taxpayer actually or constructively receives the income.
20) A cash-basis taxpayer can defer income recognition by refusing to accept payment.
21) A check received after banking hours is considered constructively received by the payee even though the check can not be converted to cash.
22) Interest credited to a bank savings account is taxed regardless of whether or not it is withdrawn.
23) Interest on Series E and Series EE U.S. savings bonds need not be reported until the bonds mature.
24) An individual buys 200 shares of General Electric Corporation stock. In lieu of receiving quarterly dividends, the individual signs an agreement to have dividends re-invested by GE into additional shares of stock. The individual does not receive dividend checks so he need not recognize the quarterly dividends for tax purposes.
25) Under the accrual method of accounting, income is considered earned when all the events have occurred which fix the right to receive the income and when the amount of income can be determined with reasonable accuracy.
26) An accrual basis taxpayer receives advance payment for services to be provided over three future years. The taxpayer can recognize the income over the three-year period as services are provided, consistent with its financial statements.
27) Gains realized from property transactions are included in gross income unless a nonrecognition rule applies.
28) Interest on the obligations of the U.S. government, states, territories, and U.S. possessions and their political subdivisions are tax-exempt.
29) For a cash basis taxpayer, security deposits received on rental property are taxable to the landlord upon receipt.
30) Improvements to leased property made by a lessee are includable in the lessor’s gross income only if made in lieu of rent or if rent is reduced because of the improvements.
31) Qualified dividends received by individuals are taxed at the same rate as ordinary income.
32) Distributions in excess of a corporation’s current and accumulated earnings and profits are treated as a nontaxable recovery of capital unless they exceed the basis of the stock.
33) XYZ Corporation declares a 10 percent stock dividend distributable to all shareholders. There is only the one class of stock outstanding, and shareholders do not have any choices with respect to the distribution. Carol had owned 100 shares of stock, and she received 10 new shares as a result of the stock dividend. The stock is trading at $25 per share as of the distribution. Carol will recognize $250 of dividend income.
34) The recipient of a taxable stock dividend includes the value of the stock received in gross income and that amount becomes the basis for the stock received.
35) Alimony received is taxable to the recipient while child support payments are not.
36) In order to be treated as alimony for tax purposes, payments must be made in cash.
37) Property settlements made incident to a divorce have no immediate tax consequences; that is, the transfer from one spouse to another is not taxable.
38) Payments from an annuity purchased from an insurance company are not taxable until the taxpayer has recovered the purchase price of the annuity.
39) A key factor in determining tax treatment of distributions from qualified retirement plans is whether the employee made pre-tax or after-tax contributions.
40) With some exceptions, amounts withdrawn from a pension plan prior to the normal starting date are subject to a ten percent nondeductible penalty.
41) Becky wins a car and furniture on a television game show. The fair market value of these items is taxable to Becky.
42) Mike won $700 in a football pool. This amount is not taxable.
43) Income from illegal activities is taxable.
44) Unemployment compensation is exempt from federal income tax.
45) Social Security benefits are excluded from taxation for all taxpayers.
46) “Gross income” is a key term in the tax law and is defined in IRC Sec. 61. Gross income is not reported on Form 1040.
47) Which of the following criteria is not required under the tax concept of income?
A) There must be economic benefit.
B) Income must be realized.
C) Income must be recognized.
D) Cash must be received.
48) Which one of the following items is not considered gross income for tax purposes?
A) gambling winnings
B) illegal income
C) face amount of life insurance received due to the death of the insured
D) cash dividends
49) Frasier and Marcella, husband and wife, file separate returns. Frasier and Marcella live in a community property state that considers separate property income to be separate. Frasier’s salary is $42,000 and Marcella’s salary is $46,000. Marcella receives dividend income of $4,000 from stock inherited from her parents. Frasier receives interest income of $1,000 from bonds purchased with his salary after marriage. Frasier and Marcella receive $3,200 dividend income from stock they purchased jointly. Marcella’s income would be
50) Todd and Hillary, husband and wife, file separate returns. Todd and Hillary live in a community property state that considers separate property income to be community income. Todd’s salary is $82,000 and Hillary’s salary is $80,000. Hillary receives dividend income of $7,000 from stock inherited from her parents. Todd receives interest income of $5,000 from bonds purchased with his salary after marriage. Todd and Hillary receive $10,000 dividend income from stock they purchased jointly. Todd’s income would be
51) Norah, who gives music lessons, is a calendar year taxpayer using the cash basis method of accounting. On October 1 of this year, she received $1,200 for a one-year contract beginning on that date to provide 10 lessons. She gave 6 lessons this year. How much should Norah include in income this year?
52) Examples of income which are constructively received include all of the following except
A) interest credited to a savings account.
B) a check received after banking hours.
C) a paycheck received from employer, when employer does not have funds in the bank to cover the check.
D) dividends available on December 31; unclaimed dividends will be mailed out.
53) Ms. Marple’s books and records for 2014 reflect the following information:
Salary earned this year $65,000
Interest on savings account (credited to her account
in 2014, withdrawn in 2015) 1,000
Interest on county bonds earned and collected in 2014 2,000
What is the amount Ms. Marple should include in her gross income in 2014?
54) One of the requirements that must be met in order to defer recognition of income for advance payments for goods is
A) the taxpayer’s method of accounting for the sale for tax purposes is the same as the method used for financial reporting purposes.
B) the goods are on the taxpayer’s premises on the last day of the tax year.
C) the goods are produced in the United States.
D) the amount received is more than the taxpayer’s cost of the goods.
55) Which of the following advance payments cannot qualify for income tax deferral?
A) advance collection for services
B) advance collection for merchandise
C) advance collection of rent without associated services
D) advance collection of rent with associated services
56) Norah’s Music Lessons Inc. is a calendar year taxpayer using the accrual method of accounting. On October 1 of this year, the corporation received $1,200 for a one-year contract beginning on that date to provide 10 lessons. The company provided 6 lessons this year under the contract. How much should corporation include in income this year with respect to this contract?
57) Speak Corporation, a calendar year accrual basis taxpayer, sells packages of foreign language lessons to individuals planning to work overseas. In December, 2014, it sold and received payment for $600,000 of 24-month lesson packages to be provided evenly through 2015 and 2016. Speak Corporation will recognize the $600,000 of income
A) all in 2014.
B) half in 2015 and half in 2016.
C) all in 2015.
D) all in 2016.
58) CT Computer Corporation, an accrual basis taxpayer, sells service contracts on the computers it sells. At the beginning of January of this year, CT Corporation sold contracts with service to begin immediately:
One for three months $200
One for 20 months 800
One for 48 months 4,000
The amount of income CT Corporation must report for this year is
59) Alex is a calendar year sole proprietor. He began business on December 1, this year. He uses the accrual method of accounting. Alex had the following collections in December:
• Collected $7,000 in December, from clients who paid cash for services to be performed next year.
• Collected $5,000 in December, for services performed during December; deposited in an operating account on December 31, this year.
• Collected $12,000 in December; on accounts receivable for services performed in December; deposited in operating account on January 2, next year.
What is the amount Alex must include in his income for December?
60) Which of the following statements is false?
A) Under the cash method, prepaid income such as rent is usually taxed when received rather than when earned.
B) Municipal bond interest is taxable.
C) Alimony received by the taxpayer is taxable.
D) Income earned by selling goods on the Internet is taxable.
61) Amy’s employer provides her with several fringe benefits. Which of the following are included in her taxable income?
A) Christmas bonus check
B) group term life insurance premium paid by employer for $40,000 coverage for Amy
C) employee discount
D) employer’s contribution to retirement plans on Amy’s behalf
62) Which of the following bonds do not generate tax-exempt Federal income?
A) U.S. Treasury bonds
B) bonds issued by fire districts
C) school district bonds
D) bonds issued by cities
63) Carla redeemed EE bonds which qualify for the educational exclusion. The redemption consisted of $14,000 principal and $6,000 interest. The net qualifying educational expenses are $10,000. Her AGI is below the threshold for phase-out of the exclusion. The taxable interest is
64) In December of this year, Jake and Stockard, a married couple, redeemed qualified Series EE U.S. Savings Bonds which they had purchased in January 2003. The proceeds were used to help pay for their daughter’s college tuition. Jake and Stockard received proceeds of $8,000 representing principal of $5,000 and interest of $3,000. The qualified higher educational expenses they paid this year totaled $6,000. Their AGI is below the threshold for phase-out of the exclusion. What is the amount of interest income Jake and Stockard can exclude from their income this year?
65) Jacob, who is single, paid educational expenses of $16,000 in the current year. He redeemed Series EE bonds and received principal of $8,000 and interest of $3,000. Jacob has other adjusted gross income of $80,000. The $3,000 exclusion must be reduced by
66) In December 2014, Max, a cash basis taxpayer, rents an apartment to Kadeem. Max receives both the first and last months’ rent totaling $1,800 plus a security deposit of $400. The amount of income reported as taxable in 2014 is
67) Hoyt rented office space two years ago to Harris, receiving the first and last months’ rent plus a security deposit of $1,000. In early January of this year, Harris moves and Hoyt refunds $250 of the deposit and keeps the remainder to cover $500 which is spent for repairs to the office space and one week of unpaid rent that amounts to $250. How would this information be reflected on Hoyt’s tax return this year?
A) $750 income and $500 deduction
B) $750 income and no deduction
C) $250 income and $500 deduction
D) No income is recognized, but a $250 deduction is allowed.
68) Which of the following is not included in gross income when received?
A) interest received on bank accounts
B) royalties paid to an author
C) amounts received to cancel or modify a lease
D) refundable security deposit
69) Tyler has rented a house from Camarah since last year. The rent is usually $1,200 per month, but Camarah reduced the monthly rent down to $200 for all twelve months this year in exchange for Tyler putting in an inground pool in the backyard. The improvement has a fair market value of $20,000. How much total rental income must Camarah report this year?
70) Distributions from corporations to the shareholders in a nonliquidating distribution will usually be classified as a dividend up to the amount of the corporation’s
A) earnings and profits.
B) retained earnings.
C) taxable income for the year.
D) stock basis.
71) Natasha is a single taxpayer with a 28% marginal tax rate. She received distributions of earnings this year as follows:
CE Corp., a C corporation $1,000
SE Corp., an S corporation $2,000
Paris Corp., a foreign corporation $3,000
How much of the $6,000 distribution will be taxed at the 15% tax rate?
72) In 2014, Richard, a single taxpayer, has adjusted gross income of $40,000. His AGI includes $4,000 of qualified dividends. Richard has no dependents and does not itemize deductions. What is his 2014 federal income tax?
73) Edward, a single taxpayer, has AGI of $50,000 which includes $1,000 of qualified dividends. Edward has $7,000 of itemized deductions. What is his 2014 federal income tax?
74) Bridget owns 200 shares of common stock of Jones Corporation. During the current year, Jones gives its shareholders the choice of receiving cash of $2 per share or one additional share of Jones common stock for each 5 shares of stock owned. The stock has a fair market value of $10 per share. Bridget chooses to take the additional shares of stock. How much income does Bridget have from the stock dividend?
75) Julia owns 1,000 shares of Orange Corporation. This year, Orange declared a 10% stock dividend. There was no option for shareholders to receive cash. When Julia received 100 shares of Orange stock, it had a fair market value of $50 a share. How much income does Julia have from the dividend?
76) Mark purchased 2,000 shares of Darcy Corporation for $13,200. This year, Darcy declared a 10% nontaxable stock dividend, and Mark received 200 shares. After the dividend Mark’s per share basis will be
77) Which of the following is least likely to result in a constructive dividend?
A) an unreasonable salary paid to a shareholder
B) a sale of a corporation’s asset to a shareholder at fair market value
C) a payment by a corporation of a shareholder’s debts
D) a payment by a corporation of a shareholder’s personal expenses
78) Alimony is
A) deductible by both the payor and the payee.
B) deductible by the payor and included in income by the payee.
C) included in income by the payor and deducted by the payee.
D) an item which does not affect the payor’s or the payee’s tax reporting.
79) Child support is
A) deductible by both the payor and the payee.
B) deductible by the payor and included in income by the payee.
C) included in income by the payor and deducted by the payee.
D) an item which does not affect the payor’s or the payee’s tax reporting.
80) With respect to alimony and property settlements in a divorce or separation, all of the following are true with the exception of
A) a property settlement does not result in income to either spouse.
B) no tax deduction is allowed for payment of a property settlement.
C) the spouse receiving a property settlement has a basis equal to the basis of that property to the paying spouse prior to payment.
D) no deduction is allowed for alimony paid to the former spouse if a property settlement is also paid.
81) The requirements for a payment to be considered as alimony include all of the following except
A) be made in cash or property.
B) be made pursuant to a divorce, separation or a written agreement between the spouses.
C) terminate at the death of the payee.
D) not be designated as being other than alimony.
82) Thomas and Sally were divorced last year. As a result, Thomas must pay Sally alimony of $100,000 per year starting this year and relinquish the house and car with a combined value of $170,000 and a combined cost basis of $155,000. The house and car are given as a property settlement. As a result of these transactions Thomas has a deduction of
83) Carolyn, who earns $400,000, is required to pay John, her ex-husband, $200,000 as part of the property settlement as a result of their divorce. In turn, John transfers stock worth $50,000 to Carolyn. What is the amount of Carolyn’s adjusted gross income for the year?
84) Under the terms of their divorce agreement executed in August of this year, Clint transferred Beta, Inc. stock to his former wife, Rosa, as a property settlement. At the time of the transfer, the stock had a basis to Clint of $55,000 and a fair market value of $68,000. Rosa subsequently sold the stock for $75,000. What is the tax consequence of first the stock transfer and then the stock sale to Rosa?
From Stock Transfer Rosa’s Income
From Stock Sale
$0 $20,000 capital gain
From Stock Transfer Rosa’s Income
From Stock Sale
$0 $7,000 capital gain
From Stock Transfer Rosa’s Income
From Stock Sale
$13,000 $7,000 capital gain
From Stock Transfer Rosa’s Income
From Stock Sale
$13,000 $20,000 capital gain
85) Under the terms of their divorce agreement, Humphrey transferred Corporation H stock to his former wife, Greta as a property settlement. At the time of the transfer, the stock had a basis to Humphrey of $40,000 and a fair market value of $55,000. What is the tax consequence of this transaction to Humphrey, and what is Greta’s basis in the Corporation H stock?
A) Humphrey has no gain or loss; Greta’s basis is $55,000.
B) Humphrey has no gain or loss; Greta’s basis is $40,000.
C) Humphrey has a gain of $15,000; Greta’s basis is $55,000.
D) Humphrey has a gain of $15,000; Greta’s basis is $40,000.
86) As a result of a divorce, Matthew pays Jasmine alimony of $75,000 in year one and $25,000 per year in subsequent years. How much is deductible by Matthew in year one?
87) As a result of a divorce, Michael pays Judy $75,000 in year one and $25,000 per year in subsequent years. How much of the $75,000 in year one is properly characterized as alimony and will not be recaptured later?
88) Thomas purchased an annuity for $20,000 that will pay him $500 per month for ten years. What amount should Thomas include in his income each year?
89) Natasha, age 58, purchases an annuity for $40,000. Natasha will receive $400 per month for the rest of her life. The expected return multiple is 20.0. At age 65, the amount that Natasha may exclude from income is
90) Julia, age 57, purchases an annuity for $33,600. Julia will receive $400 per month for the rest of her life. The expected return multiple is 20.0. At age 88, the amount that Julia may exclude from income is
91) David, age 62, retires and receives $1,000 per month annuity from his employer’s qualified pension plan. David made $65,000 of after-tax contributions to the plan prior to his retirement. Under the simplified method, David’s number of anticipated payments is 260. What is the amount includible in income in the first year of withdrawals assuming 12 monthly payments?
92) Eva and Lisa each retired this year and started receiving distributions from their respective retirement plans. Eva’s plan was funded with all pre-tax contributions, whereas Lisa’s plan was funded with only after-tax contributions (Roth plan). With respect to the tax treatment of their retirement plan distributions,
A) distributions from both retirement plans will be fully taxable.
B) Eva’s distributions will be fully taxable, and Lisa’s distributions will not be taxable.
C) Eva’s distributions will not be taxable, but Lisa’s distributions will be fully taxable.
D) neither Eva’s nor Lisa’s distributions will be taxable.
93) Jonathon, age 50 and in good health, withdrew $6,000 from his pension plan during the current year. The withdrawal was not eligible for any exception to the 10% penalty. Jonathon had made $40,000 of after-tax contributions to the plan while his employer had contributed $80,000. In addition to relevant income taxes, how much penalty must Jonathon pay?
94) Jan purchased an antique desk at auction. For two years, the desk sat in Jan’s garage until she decided to restore it. This year, while cleaning and restoring the desk, Jan discovered $1,500 in a hidden compartment inside one drawer. With respect to the $1,500, Jan must
A) report nothing.
B) amend her previous tax return and report the $1,500.
C) report only $750 due to the statute of limitations.
D) report $1,500 on this year’s tax return.
95) While using a metal detector at the beach during spring break, Toni uncovered some rare coins with a current fair market value of $9,000. What are her tax consequences regarding this find?
A) Because it was a “find” she only reports half of the FMV as income.
B) She reports the entire FMV as income.
C) Since she “found” the coins, she does not have to report any amount of income until she sells the coins.
D) Under the discovery rules in the tax law, she will never report any amount as taxable since the value is under $10,000.
96) A taxpayer had the following income and losses in the current year:
Sold AT&T stock at a loss ( 5,000)
Lottery prize 4,500
Gambling winnings 8,000
Gambling losses ( 5,000)
What is the taxpayer’s adjusted gross income (not taxable income)?
97) Lily had the following income and losses during the current year:
Prize from quiz show 25,000
Unemployment compensation 8,000
Embezzled funds 30,000
Partnership Income 35,000
What is Lily’s adjusted gross income (not taxable income)?
98) Lori had the following income and losses during the current year:
Share of partnership income 18,000
Unemployment compensation 12,000
Gambling winnings 2,000
Gambling losses ( 5,000)
Prize won on a game show 30,000
What is Lori’s adjusted gross income (not taxable income)?
99) The term “Social Security benefits” does not include
A) supplementary Medicare benefits.
B) tier-one railroad retirement benefits.
C) disability benefits received under Social Security.
D) retirement benefits received under Social Security.
100) In addition to Social Security benefits of $8,000, Mr. and Mrs. Wells have adjusted gross income of $32,000 and tax-exempt interest of $1,000. They will file a joint return. The taxable portion of their social security benefits will be
101) Mr. & Mrs. Bronson are both over 65 years of age and are filing a joint return. Their income this year consisted of the following:
Taxable interest $ 6,000
Taxable dividends 9,000
Social Security payments (combined) 20,000
Tax-exempt interest 5,000
Taxable pension 11,000
They did not have any adjustments to income. What amount of Mr. & Mrs. Bronson’s social security benefits is taxable this year?
102) Reva is a single taxpayer with a taxable pension of $24,000, tax-exempt interest of $8,000, and Social Security benefits of $10,000. What is the amount of her taxable Social Security benefits?
103) Insurance proceeds received because of the destruction of property are
A) included in gross income in all cases.
B) excluded from gross income completely.
C) included in gross income to the extent the proceeds are less than the adjusted basis of the replacement property.
D) included in gross income only to the extent the proceeds exceed the adjusted basis of the replacement property.
104) Homer Corporation’s office building was destroyed by fire. Homer collected insurance of $250,000, which equaled the building’s basis, and $150,000 for profits lost during the time the company was rebuilding the office building. What is the amount taxable this year?
105) During 2013, Christiana’s employer withheld $1,500 from her wages for state income taxes. She claimed the $1,500 as an itemized deduction on her 2013 federal income tax return which included $8,000 of itemized deductions. Christiana is single. On her 2013 state income tax return, her state income tax was $900. As a result, Christiana received a $600 refund in 2014. What amount must Christiana include in income in 2014?
106) During 2013, Mark’s employer withheld $2,000 from his wages for state income tax. Mark claimed the $2,000 as an itemized deduction on his 2013 federal income tax return. His total itemized deductions for 2013 were $6,000. Mark’s taxable income for 2013 was a negative $20,000 due to substantial business losses. Mark received the $2,000 as a refund from the state during 2014. What amount must Mark include in income in 2014?
107) An electrician completes a rewiring job and is paid $1,000 by the customer in November. The customer has a small fire in his house and sues the electrician for the repayment of the $1,000 fee plus damages in December. The electrician reaches a settlement with the customer in the following February and refunds the $1,000 fee. How should the electrician treat these events when he files his tax return in April?
A) No income will be reported.
B) The income will be reported for the year of receipt, and a tax deduction will be claimed on the tax return for the year of repayment.
C) The income will be reported for the year of receipt, and then an amended return will be filed in the following year to claim the refund.
D) Both the income and the deduction will be reported on the same tax return (for the year of receipt).
108) Gwen’s marginal tax bracket is 25%. Gwen pays alimony of $24,000 per year. Gwen’s after tax cost for the $24,000 payment is
109) Daniel plans to invest $20,000 in either a corporate bond paying 5% or a tax-exempt bond with a 4% interest rate. The bonds have an equivalent level of risk. Daniel has a 33% marginal tax rate and wants to maximize his after-tax earnings. Daniel should
A) invest in the corporate bond due to its higher stated interest rate.
B) invest in the tax-exempt bond since its yield is more than the after-tax return on the corporate bond.
C) invest in the corporate bond because its after-tax earnings are more than the return on the tax-exempt bond.
D) allocate his money equally between the two investments.
110) Chance Corporation began operating a new retail business in the current year and had $500,000 of sales, $70,000 of which had not been collected by year-end. Total purchases were $350,000 on which $30,000 is still owed. Ending inventory is $60,000; operating expenses are $170,000, $50,000 of which is still owed at year-end.
a. Compute net income from the business under the accrual method.
b. Compute net income from the business under the cash method.
c. Would paying the $50,000 she owes for operating expenses before year-end change her net income under the accrual method? Under the cash method?
111) The Cable TV Company, an accrual basis taxpayer, allows its customers to pay by the month, by the year, or two years in advance. In December 2014, the company collected the following amounts applicable to future services:
Jan 2015 services (monthly contracts) $10,000
Dec 2014 – Nov 2015 services (annual contracts) 48,000
Dec 2014 – Nov 2016 contracts (2-year contracts) 72,000
Assuming Cable TV wants to minimize income reported for 2014, what is the amount of gross income that must be reported for 2014 and how much of the income from these contracts will be reported in 2015?
112) Gabe Corporation, an accrual-basis taxpayer that uses the calendar year as its tax year, sells CPE (continuing professional education) courses under contracts ranging from three months to two years. Assume that Gabe Corporation sold three contracts on July 1, 2014; one for six months costing $300; one for one year costing $500; and one for two years costing $800.
Required: What is the minimum amount of income that must be recognized in 2014 and 2015?
113) Leigh inherited $65,000 of City of New York bonds in January 2014. In March 2014, she received $4,000 of interest on the bonds. In July 2014, she sold the bonds at a $10,000 gain. Leigh also redeemed Series E U.S. Savings bonds in October 2014 that she had purchased several years ago and received accumulated interest of $2,600. In December 2014, she received $800 of interest on City of Paris, France, bonds. What amount, if any of gross income must Leigh report?
114) Rocky owns The Palms Apartments. During the year, Molly Ann, a tenant, moved to another state. Molly Ann paid Rocky $1,500 to cancel the two-year lease she had signed. Rocky then rented the apartment to Elvis who paid the first and last months’ rents of $500 each and a security deposit of $800. Rocky also owns a building used as a dance club. The owner of the club requested that Rocky add on another room to be used for private parties. Rocky refused but allowed the club owner to make the addition at a cost of $20,000. What amount should be included in Rocky’s income with regard to these items?
115) Ellen is a single taxpayer with qualified dividend income of $5,000, and itemized deductions of $13,000.
Required: Determine Ellen’s taxable income and tax liability in 2014, assuming the following salaries—
116) Emma is the sole shareholder in Pacific Corporation and has owned the stock for five years. The basis in her stock is $50,000. Pacific distributes $35,000 to Emma. Accumulated earnings and profits at the beginning of the year equal $25,000 and current earnings and profits equal $5,000.
a. What are the tax consequences of this information?
b. What are the tax consequences of this information if, instead of distributing $35,000 to Emma, Pacific distributes $100,000 to Emma?
117) Under the terms of a divorce agreement dated January 1, 2014, Edmond was to pay his wife Donna $3,000 per month in alimony and $500 per month in child support. Payments began on 1/1/14. In addition, Donna received the family residence with a cost basis of $210,000 and a fair market value of $260,000.
a. What is the amount that Donna must include in income for the twelve-month period ended December 31, 2014?
b. What is the basis in the home which Donna received as a result of the divorce?
118) Marisa and Kurt divorced in 2012. Under the terms of the divorce agreement, Marisa was to pay Kurt $110,000 in 2012 and $60,000 each year following until Kurt’s death or remarriage. What must Kurt report on his tax return for 2014 regarding these transactions?
119) On January 1, 1996, Erika Greene purchased a single premium annuity for $15,000 that will pay her $5,000 every year for life beginning on January 1, 2014. Based on actuarial tables published by the IRS, her life expectancy multiple is 10.
a. What is the amount to be excluded Erika’s income for 2014?
b. What is the amount to be excluded in Erika’s income for the year 2024?
120) On April 1, 2014, Martha, age 67, begins receiving payments of $3,000 monthly from her employer’s qualified retirement plan. She had contributed $90,000 to the plan in after-tax dollars. The anticipated number of payments is 210. Using the simplified method, how much of the payments are taxable in 2014?
121) Jeannie, a single taxpayer, retired during the year, to take over the management of some rental property. She had the following items of income and expense:
Salary prior to retirement date $34,000
Dividends from domestic corporation 4,000
Interest from City of Los Angeles bonds 5,000
Annuity (60% exclusion ratio) 12,000
Share of partnership income 14,000
Partnership distribution 10,000
Rent income 17,000
Rent expenses 9,000
What is Jeannie’s adjusted gross income for the year?
122) Kevin is a single person who earns $70,000 in salary for 2014 and has other income from a variety of investments, as follows:
Bank savings account interest $5,500
Interest from State of Missouri Bonds 3,500
Dividends from XYZ Corp. 7,000
Kevin received tax refunds when he filed his 2013 tax returns in April of 2014. His federal refund was $600 and his state refund was $300. Kevin claimed the $300 state tax overpayment as an itemized deduction on his 2013 return. Due to changes in circumstances, Kevin is not itemizing deductions on his 2014 return.
Compute Kevin’s taxable income for 2014.
123) Adanya’s marginal tax rate is 39.6% and she is trying to decide whether to invest in tax-exempt bonds which pay 5% interest or taxable bonds paying 7% interest. The bonds have equivalent risk. Which of the bonds would yield the highest amount of income after taxes?
124) James and Colleen have reached an agreement with Kelsey in which she will give birth to a baby, and then give the baby to James and Colleen. In return, James and Colleen will pay Kelsey $40,000 cash and pay for her medical expenses. What tax issues should Kelsey consider?
125) Aaron found a prototype of a new pair of glasses with Internet service and other computing capabilities while in a bar one evening. He offered the prototype to the owner of a magazine and blog that reviews new digital devices. The owner paid Aaron $10,000 in return for the prototype. What tax issues should Aaron consider?
126) Raoul sells household items on an Internet website. He receives $3,340 cash and a pair of high-power binoculars from this activity during the year. What tax issues should Raoul consider?
127) Billy, age 10, found an old baseball glove while exploring his new home. His father, Al, took the glove to a dealer in baseball memorabilia who verified that the glove belonged to Babe Ruth. Al sold the glove for $75,000. What tax issues should Al consider?
128) Which of the following constitutes constructive receipt in 2014 ?
a. A check received on December 29, 2014. The check was postdated January 5, 2015.
b. A check received on January 4, 2015. It had been mailed on December 29, 2014.
c. A rent check, received on December 31, 2014, by the manager of an apartment complex. The manager normally collects rent for the owner who is out of town.
d. A salary check received at 5:30 p.m. on December 31, 2014, after all banks are closed.
e. A paycheck received on December 26, 2014. The check was not honored by the bank because the employer’s account did not have sufficient funds
129) Edward is considering returning to work part-time to supplement his pension and Social Security benefits. His current marginal tax rate is 15%. What should he consider from a tax perspective before returning to work?
130) Buzz is a successful college basketball coach. In April 2013, he signed a contract to coach at Mountain State University. In April 2014, Buzz accepted a position as head basketball coach at Beach University. The terms of his contract with Mountain State require that Buzz repay the university $150,000 he received in 2013. Discuss the tax issues encountered by Buzz and your recommendation for their treatment.
131) Marcia and Dave are separated and negotiating a divorce agreement. They live in a common law state and have two children who will remain with Marcia. Dave is willing to transfer the jointly owned home to Marcia. He wishes to keep the couple’s jointly owned boat. Dave will either transfer securities to Marcia ($100,000 adjusted basis, $150,000 fair market value) or will pay her $30,000 for 5 years with interest of 8%. What issues should Marcia and Dave consider when formulating their divorce agreement?
132) While certain income of a minor is taxed at the parent’s tax rate, discuss how income shifting may still be accomplished and any constraints that may exist on income shifting.
Chapter 4 Gross Income: Exclusions
1) Loan proceeds are taxable in the year received in cash.
2) Each year a taxpayer must include in gross income the rental value of his or her personal residence.
3) Upon the sale of property, a portion of the selling price equal to the basis in the property is considered a return of capital to the seller and is therefore not taxable.
4) Many exclusions exist due to the benevolence of Congress or as a result of the government’s attempts to encourage particular social behavior.
5) A taxpayer may avoid tax on income by having the payment made to another taxpayer.
6) Sumedha is the beneficiary of her mother’s $500,000 life insurance policy. She receives $54,000 per year over ten years in settlement of her mother’s policy. Sumedha will exclude the $54,000 proceeds received each year from the life insurance company.
7) In general, if a life insurance policy is sold or surrendered for a lump sum before the death of the insured, the amount received is taxable to the extent it exceeds the premiums paid.
8) Accelerated death benefits received by a terminally ill person may be excluded from taxable income.
9) An individual is considered terminally ill for tax purposes if a physician certifies that he is reasonably likely to die within 36 months.
10) Dividends on life insurance policies are generally excludable income because they are considered a return of premium.
11) Sam received a scholarship for room and board. This scholarship is excludable from income.
12) Amounts withdrawn from Qualified Tuition Plans are tax-free if the amounts are used for qualified higher education expenses including tuition, fees, books, and room and board for students attending on at least a half-time basis.
13) Any distribution from a Qualified Tuition Plan not used for qualified higher education expenses is both included in income and subject to a 10% penalty.
14) While payments received because a person has been physically injured are excluded from gross income, payments on account of non-physical injury must be included in gross income.
15) Awards for emotional distress attributable to a physical injury are excluded from gross income.
16) Punitive damages are taxable unless they are awarded for physical injuries.
17) Amounts collected under accident and health insurance policies purchased by the taxpayer are excludable from income.
18) Katie, a self-employed CPA, purchased an accident & disability insurance policy. As the result of an auto accident, Katie was unable to work and received $3,000 of disability benefits per month for seven months. The benefits were based on her estimated monthly income and should be reported as gross income.
19) John, an employee of a manufacturing company, suffered a heart attack and was unable to work for six months. He received $1,500 per month of disability benefits as a result of an employer-provided group policy. The benefits are includible in John’s gross income.
20) Payments received from a workers’ compensation plan are taxable.
21) Premiums paid by an employer for employee disability coverage are excluded from the employee’s gross income.
22) The value of health, accident, and disability insurance premiums paid by an employer are generally not included in an employee’s gross income.
23) Mattie has group term life insurance coverage of $120,000 provided by her employer on a nondiscriminatory basis. She must include premiums for $120,000 coverage in gross income using IRS tables.
24) “Working condition fringe benefits,” such as memberships in professional organizations paid for by the employer, are generally excluded from the employee’s gross income.
25) Nondiscrimination requirements do not apply to working condition fringe benefits.
26) The exclusion for employee discounts on services is limited to 30% of the price charged regular customers.
27) “No additional cost” benefits are excluded from an employee’s gross income if the services are the same type that are sold to customers and in the line of business in which the employee works.
28) Martina, who has been employed by the Smythe Corporation for ten years, receives a $400 watch as a length of service award in a meaningful presentation. The fair value of the watch is taxable.
29) Jeff, who has been employed by the Peach Corporation for twelve years, receives $400 cash for his years of hard work. The cash award is taxable.
30) Meals may be excluded from an employee’s gross income provided they are furnished on the employer’s business premises and are for the convenience of the employer.
31) The fair value of lodging cannot be excluded from gross income unless the employee is required to accept the lodging as a condition of employment.
32) A nursing home maintains a cafeteria that is used by employees, patients, and visitors. The value of free meals provided to employees while on duty so that they may be available for emergency calls is not taxable.
33) All payments made by an employer to the family of a deceased employee are excluded from the recipient’s gross income regardless of the reason for payment.
34) The amount of cash fringe benefits received under a cafeteria plan is taxable to an employee.
35) A business provides $45,000 of group-term life insurance to all workers, including the partners who work in the business. All of the workers can exclude the value of this fringe benefits from their gross income.
36) In the case of foreign-earned income, U.S. citizens may avoid double taxation of income by both the U.S. and the host country by utilizing a foreign tax credit or by electing the foreign earned income exclusion.
37) Kelly was sent by her employer to work on a special assignment in Paris for six months. Kelly will be able to exclude some of her income earned in Paris.
38) Which of the following items will result in an inclusion in gross income?
A) Receipt of a $10,000 check from the bank. The check is for a student loan.
B) Receiving a $10,000 award from a university for high grades and high SAT scores. The award is used to pay tuition.
C) Preparing a mechanic’s tax return in exchange for the mechanic replacing the muffler on your car.
D) None of the above will be included in gross income.
39) Which of the following is not excluded from income? (Assume that any amounts received by the taxpayer were kept.)
A) public assistance payments.
B) fair market value of prize won on a game show.
C) gifts and inheritances.
D) life insurance proceeds paid by reason of death.
40) During the year, Cathy received the following:
• Dividends of $4,000 from Lindsay Corporation. Cathy’s father owned the stock and directed the corporation to send the dividends to Cathy.
• A car worth $30,000 for being the 1,000th customer at a car dealership.
• $5,500 cash gift from her uncle.
• $10,000 inheritance from her grandmother.
What amount must Cathy include in gross income?
41) Mae Li is beneficiary of a $70,000 insurance policy on her father’s life. Upon his death, she elects to receive the proceeds in installments from the insurance company that carries the policy. She will receive $16,000 per year for five years. What are the tax consequences each year?
A) All $16,000 each year is taxable.
B) $10,000 interest is taxable in the first year.
C) There is no taxable income.
D) $2,000 of the $16,000 payment is taxable each year.
42) Rebecca is the beneficiary of a $500,000 insurance policy on her husband’s life. She elects to receive $52,000 per year for 10 years rather than receive the entire amount in a lump sum. Of the amount received each year
A) $2,000 is taxable income.
B) $50,000 is taxable income.
C) $52,000 is taxable income.
D) $5,000 per year is tax free as a death benefit.
43) Britney is beneficiary of a $150,000 insurance policy on her father’s life. Upon his death, she may elect to receive the proceeds in five yearly installments of $32,000 or may take the $150,000 lump sum. She elects to take the lump sum payment. What are the tax consequences in year one?
A) All $32,000 each year is taxable.
B) $10,000 interest is taxable in the first year.
C) There is no taxable income.
D) The lump sum payment is taxable.
44) Cameron is the owner and beneficiary of a $300,000 policy on the life of his mother. Cameron sells the policy to his brother, Parker, for $100,000. Parker subsequently pays premiums of $55,000. Upon his mother’s death, how much of the insurance proceeds must Parker include in income?
45) Greg is the owner and beneficiary of a $100,000 policy on the life of his mother. Greg gives the policy to his brother, Don. Don subsequently pays premiums of $40,000. Upon his mother’s death, how much of the insurance proceeds must Don include in income?
46) Over the years Rianna paid $65,000 in premiums on a life insurance policy with a face value of $100,000. Upon reaching 65, while still in good health, Rianna surrendered the policy and collected $95,000. In the year of collection, Rianna will report
A) no income.
B) $30,000 of taxable income.
C) $5,000 of tax loss.
D) $95,000 of taxable income.
47) David has been diagnosed with cancer and is expected to live less than 18 months. David is covered by a life insurance policy with a $400,000 face amount. David cashes in the policy early under a special option and receives 80% of the face amount or $320,000. In the year of collection, David will report
A) no income.
48) Julia suffered a severe stroke and has been admitted to a private hospital where she is expected to remain for the rest of her life. She is certified by a licensed health care practitioner as being a “chronically ill individual.” Her hospital expenses amount to $280 per day. She will receive $270 per day from a $500,000 life insurance policy as an accelerated death benefit. In 2014, she was in the hospital for 10 days and received $2,700. How much of this amount is taxable?
49) Brad suffers from congestive heart failure and has been admitted to a nursing home where he is expected to spend the remainder of his life. His doctor has certified him as chronically ill. Brad receives $320 per day from his life insurance policy for 100 days ($32,000) as accelerated death benefits. Brad’s nursing home care costs $300 per day ($30,000 for the 100 days of care). Brad will be allowed to exclude
50) Bret carries a $200,000 insurance policy on his life and has paid premiums of $10,000 over the years. Dividends on the policy have totaled $8,500. Each year Bret has left the dividends with the insurance company. In the current year, the insurance company credited $800 of interest on the accumulated dividends to Bret’s account. In addition, $600 of dividends was added by the insurance company. In the current year, Bret must report income of
51) Hope receives an $18,500 scholarship from State University. The university specifies that $8,500 is for tuition, books, supplies, and equipment, while $10,000 is for room and board. In addition, Hope works part-time at the campus library and earns $5,000. Hope’s gross income is
52) Sarah receives a $15,000 scholarship from City University. The university specifies that $8,000 is for tuition, books, supplies, and equipment for classes. The other $7,000 is for room and board. Sarah works ten hours per week as a grader, for which she is paid $7,500 for the year. Of the total amount received, Sarah must include the following amount in gross income
53) Which of the following statements regarding qualified tuition programs is incorrect?
A) Distributions from income earned by a qualified tuition program are tax-free if used for qualified higher education expenses.
B) Distributions of income are taxed to the donor if the proceeds are not used for higher education expenses.
C) A qualified tuition program may be established by parents or grandparents.
D) Contributions to a qualified tuition program are distributed tax-free.
54) Which of the following statements regarding the qualified tuition plans (QTP) is incorrect?
A) Distributions can be made tax-free to pay for room and board at college.
B) Distributions made from the QTP for college tuition will be tax-free in addition to qualifying for the American Opportunity credit or lifetime learning credit.
C) Katie’s parents had established a QTP for Katie, but she has received a “full-ride” scholarship. Katie’s parents can name her sister as a replacement beneficiary of the QTP.
D) Distributions of income not used for qualified higher education expenses are taxable and subject to a 10% penalty.
55) Amanda, who lost her modeling job, sued her employer for age discrimination. She was awarded $75,000 in lost wages, $25,000 for emotional distress, and $150,000 punitive damages. The amount taxable is
56) Elisa sued her former employer for discrimination. She was awarded $200,000 for lost wages, $30,000 for medical expenses related to emotional distress resulting from the discrimination, and $300,000 in punitive damages. The amount taxable is
57) Derrick was in an automobile accident while he was going to work. The doctor advised him to stay home for eight months due to his physical injuries. The resulting lawsuit was settled and Derrick received the following amounts:
Compensatory damages for physical injury $80,000
Punitive damages 95,000
How much of the settlement must Derrick include in ordinary income on his tax return?
58) Linda was injured in an automobile accident caused by another driver. Her son, Matthew, was in the automobile but not physically injured. The other driver’s insurance company was required by a court to pay Linda $75,000 to cover medical bills relating to her injuries, $30,000 to compensate her for emotional distress attributable to the injuries and $40,000 of punitive damages. Matthew was paid $15,000 to compensate him for emotional distress attributable to his witnessing his mother’s injuries. What is the amount taxable to Linda?
59) John is injured and receives $16,000 of income from a disability policy. John’s employer paid 75% of the disability policy premiums and John paid the remainder. In addition, John’s employer has paid all the $3,000 of premiums on a health policy that paid John’s doctor bills of $10,000. How much of the benefits must John include in income?
60) Liza’s employer purchased a disability income policy from an insurance company on behalf of all of its employees. The employer paid for two-thirds of the premiums, and the employees paid for the other one-third. Subsequently, Liza received $3,000 per month for 6 months she was unable to work. Liza will be taxed on
61) Nelda suffered a serious stroke and was admitted to a nursing home for 140 days. Nursing home charges, including physician fees and other related expenses were $33,000. Under Nelda’s long-term care insurance contract, she received reimbursements of $36,000. How much of the $36,000 reimbursement must be included in Nelda’s gross income in 2014?
62) Sharisma suffered a serious stroke and was admitted to a nursing home for 140 days. Nursing home charges, including physician fees and other related expenses were $63,000. Under Sharisma’s long-term care insurance contract, she received reimbursements of $56,000. How much of the $56,000 reimbursement must be included in Sharisma’s gross income in 2014?
63) Joe Black, a police officer, was injured in the line of duty. He received the following during the current year:
Workers’ compensation 5,000
Compensatory damages for physical injury 18,000
Punitive damages for physical injury 14,000
Cash reward for preventing a break-in 2,000
What is the amount that is taxable?
64) Richard is a key employee of Winn Corporation. The corporation provides Richard with $120,000 of group-term life insurance coverage. Only company executives receive life insurance coverage. The premium attributable to the coverage is $1,600. The uniform one-month group-term premium is one dollar per $1,000 of coverage. How much must Richard include in income due to the policy?
65) Miranda is not a key employee of AB Corporation. AB provides Miranda with group term life insurance coverage of $140,000. The premiums attributable to the excess coverage are $1,300. The uniform one-month group-term premium is one dollar per $1,000 of coverage. How much must Miranda include in income?
66) All of the following items are excluded from gross income except
A) working condition benefits.
B) de minimis benefits.
C) no additional cost benefits for employees.
D) disability income from an employer-financed policy.
67) Which one of the following fringe benefits allows for discrimination between highly compensated employees and other employees to be present?
A) no-additional cost
B) qualified employee discounts
C) recreation and athletic facilities
D) working condition
68) An electronics store sold a home theater system to an employee for $300, even though the retail price was $500. The gross profit percentage is 40%. Such discounts are available to all employees. How much income should be recognized by the employee from these transactions?
69) Michael is an employee of StayHere Hotels, Inc. in Washington, DC. On his vacation, Michael travels to San Francisco and stays at a StayHere Hotel for six nights free of charge. The regular rate for a hotel room at StayHere in San Francisco is $300 a night. His ability to stay in the hotel without charge is based on the availability of empty rooms. How much income must Michael report due to the use of the San Francisco hotel room?
70) Benefits covered by Section 132 which may be excluded from an employee’s gross income do not include
A) employee’s use of an employer-owned health club.
B) membership fees in professional organizations.
C) employer-provided vehicle for personal use.
D) hotel employee’s use of a vacant hotel room.
71) All of the following fringe benefits paid for by the employer may be excluded from an employee’s gross income except
A) discounts on services of 25 percent.
B) subscriptions to professional publications.
C) recreational facilities on employer’s premises.
D) unused airline seats for airline employees where the employee is required to fly “standby.”
72) All of the following are requirements for excluding employee achievement awards except for
A) tangible personal property other than cash.
B) based on safety records or length of service.
C) part of a meaningful presentation.
D) if paid in cash, must be less than $400.
73) Healthwise Ambulance requires its employees to be on 24-hour call and consequently gives them $800 per month housing allowance and a $200 per month food allowance. Ron, an employee of Healthwise, receives a salary of $40,000 per year (this does not include the allowances). Ron will be taxed each year on
74) Which of the following item(s) must be included in the income of the respective employees?
A) ABC Hospital Corporation provides free meals in the hospital cafeteria to employees while on duty in order that they be available for emergency calls.
B) The state of California highway patrol organization provides its officers with a daily meal allowance to compensate them for meals eaten at any location while they are on duty.
C) IBX Corporation requires its employees to work overtime three evenings each year when the company takes inventory. The corporation pays to provide catered dinners on its premises on these evenings.
D) More than one, but not all, of the amounts must be included in income.
75) Lindsay Corporation made the following payments to the family of Luke Marshall, an employee who died during the year.
$5,000 for Luke’s final paycheck that he failed to collect
$10,000 for accrued vacation days as required by the employment contract
$25,000 in admiration of Luke’s outstanding service to the community
What is the total amount that Luke’s family must include in income?
76) Fatima’s employer funds childcare for all employees’ children. She pays nothing for this service. The cost of Fatima’s child care is $7,200 a year. How much of the child care benefits are taxable to Fatima?
77) Chad and Jaqueline are married and have AGI of $150,000. In 2014 they adopted a child, while taking advantage of their employer’s written adoption assistance program. The adoption cost $9,500, all of which was paid by the employer in accordance with the adoption plan. How much of the employer paid adoption costs may be excluded from their income?
78) Ahmad’s employer pays $10,000 in tuition this year for Ahmad to attend a graduate business program. How much of the employer-provided tuition is taxable to Ahmad?
79) Carl filed his tax return, properly claiming the head of household filing status. Carl’s employer paid or provided the following to Carl:
Fair market value of qualified dependent care services 4,000
Premiums for $50,000 qualified group term life insurance 500
Medical insurance premiums 600
How much of this income should Carl report?
80) Rick chose the following fringe benefits under his employer’s cafeteria plan. Which of his chosen benefits will be taxable?
A) $150 cash per pay period
B) medical insurance on his family
C) dental insurance
D) group term life insurance of $20,000
81) Tim earns a salary of $40,000. This year, Tim’s employer establishes a cafeteria plan under which Tim signed a salary reduction of $2,500 for which $1,500 is to cover his health insurance premiums and $1,000 is available to reimburse medical expenses. During the year, he is reimbursed $900 for medical expenses. What is the total taxable to Tim this year?
82) Jan has been assigned to the Rome office of ABC Corporation. She arrives in Rome on November 1, 2012 and does not return to the U.S. until March 5, 2015. During her stay in Rome, Jan earned $102,000 in 2014. Jan may exclude
83) Jeremy, an American citizen, earned $200,000 during 2014 while employed in Switzerland. Jeremy is entitled to the maximum foreign-earned income exclusion. Jeremy also incurred $40,000 of deductible expenses attributable to the foreign-earned income. Jeremy may deduct how much in expenses?
84) Melanie, a U.S. citizen living in Paris, France, for the last three years earns a salary of $110,000 in 2014. Melanie’s housing costs are $24,000 per year, which is reasonable. How much can Melanie exclude from income?
85) In 2013 Betty loaned her son, Juan, $10,000 to help him buy a car. In 2014, before he repaid the $10,000, Betty told Juan that she was “tearing up” the $10,000 note as a graduation present. How should Juan treat the amount forgiven?
A) taxable income in year of loan
B) taxable income in year of forgiveness
C) excludable gift in year of loan
D) excludable gift in year of forgiveness
86) For a taxpayer who is not insolvent nor under bankruptcy proceedings, the discharge of debt is generally
C) partially taxable.
D) none of the above.
87) Connor owes $4 million and has assets of only $1 million. He declares and files personal and business bankruptcy and his creditors approve a payment plan of $.25 per dollar. Connor has a net operating loss carryover of $2 million. The remaining 75 percent of his debt will be canceled. Connor must recognize income of
B) $1 million.
C) $2 million.
D) $3 million.
88) Exter Company is experiencing financial difficulties. It has assets worth $2 million, but owes liabilities of $2.1 million. It has a longstanding relationship with the bank. The bank has agreed to forgive $300,000 of debt principal. Because of this debt forgiveness, Exter will recognize income of
89) The discharge of certain student loans is excluded from income if all of the following are present except for
A) the loan must have been made by governmental, educational, or charitable organizations.
B) the loan proceeds must have been used to pay the cost of attending an education institution or used to refinance outstanding student loans.
C) the loan forgiveness must be contingent upon the individual’s working for a specified period of time in certain professions.
D) the loan forgiveness is based on age.
90) This year, Jason sold some qualified small business stock that he acquired in 2006. His basis in the stock was $95,000 and he sold it for a $30,000 gain. How much of Jason’s gain is taxable?
91) In September of 2014, Michelle sold shares of qualified small business stock for $1,000,000 that had a basis of $200,000. She had held the stock for 7 months. Forty-five days after the sale she purchased other qualified small business stock for $1,100,000. How much of the gain will she recognize?
A) $ 0
92) In September of 2014, Michelle sold shares of qualified small business stock for $1,000,000 that had a basis of $200,000. She had held the stock for 7 months. Forty-five days after the sale she purchased other qualified small business stock for $1,100,000. What is the basis in the new stock she purchased?
93) Bob, an employee of Modern Corp., receives a fringe benefit (in lieu of a salary increase) of $1,000. Bob is in a 33% tax bracket. The fringe benefit is nontaxable to Bob and is not deductible as an itemized deduction. Bob’s after-tax savings from receiving the tax-free benefit is
94) After he was denied a promotion, Daniel sued his employer claiming sex discrimination. He was awarded $20,000 to cover medical bills he incurred because of the related emotional distress, $80,000 to punish his employer for discrimination, and $50,000 to compensate him for lost wages. What is the amount that must be included in Daniel’s gross income for the year?
95) Randy and Sharon are married and have two dependent children. They also fully support Sharon’s mother who lives with them and has no income. Their 2014 tax and other related information is as follows:
Total salaries $160,000
Bank account interest income 3,500
Municipal bond interest income 1,500
Value of employer provided medical insurance 500
Employer paid premiums for $50,000 of group term life insurance 5,500
Dividend income from ABC stock 2,000
Loan from Randy’s parents 5,000
Gift from Randy’s parents 15,000
Gain from the sale of qualified small business stock acquired in 2006 18,000
Total itemized deductions 16,000
Compute Randy and Sharon’s taxable income. (Show all calculations in good form.)
96) Mark, a cash basis taxpayer, died on September 30, 2014. His wife, Charlotte, provides you with the following information.
From January 1, 2014 until his death, Mark received a salary of $35,000. Charlotte received a salary of $68,000 during 2014. Mark had earned commissions of $20,000 which Charlotte received after his death. Charlotte was the beneficiary of a $100,000 whole life policy purchased by Mark and a $50,000 group term life insurance policy purchased by Mark’s employer. The employer had paid premiums of $250 on Mark’s behalf. In addition, the corporation paid Charlotte a $10,000 employee death benefit in Mark’s name. All employees’ families received similar benefits regardless of financial need. Mark and Charlotte had itemized deductions of $15,600. They have no children but provide 100% support for Mark’s widowed mother who lives with them and has no income. What is the amount of their taxable income on their 2014 tax return?
97) Jamal, age 52, is a human resources manager for Triple W Company. His annual salary is $110,000 and he receives the following fringe benefits during the current year:
• Triple W pays for all employees’ health and accident insurance. Triple W pays $7,000 for Jamal’s health insurance during the year.
• Triple W provides Jamal with group-term life insurance coverage of $200,000 during the year. The monthly inclusion amount per $1,000 of coverage is $.23.
• Triple W has a flexible benefits plan in which employees may participate to pay any qualifying medical costs not reimbursed by their health insurance. Jamal has $1,600 withheld from his salary under the plan. During the year he receives reimbursements of $1,300.
• Triple W pays parking costs for all management employees. Jamal’s parking costs $220 month.
• Triple W pays Jamal’s annual membership dues of $450 to the Society of Human Resource Management Association. The company also subscribes to several management journals for Jamal costing $650 a year.
• Jamal took a college class on financial accounting and Triple W reimbursed his tuition of $6,000 through its tuition assistance program for all employees.
• Jamal’s consumption of coffee provided by Triple W is valued at $250 a year.
How much income must Jamal report from his job?
98) Faye is a marketing manager for Healthy Corp. She earns a salary of $100,000 and has received the following benefits:
• Healthy pays 75% of all employees’ health and accident insurance coverage. Healthy paid $6,000 towards the cost of Faye’s health insurance during the year.
• Faye participates in the cafeteria plan and had elected to have $2,000 withheld from her pay to cover the remaining cost of the health insurance premiums and an additional $1,500 to cover dental and other health care costs not paid by insurance (i.e. funding a flexible spending account). The full $1,500 was used to pay for various qualifying medical costs.
• Healthy pays the cost of disability insurance coverage for all employees. The insurance will pay 75% of salary if employees are out of work for a significant period. The cost of Faye’s premiums was $600.
• Healthy pays for the cost of veterinary insurance for all employees. The cost of coverage for Faye’s dog was $400.
• Healthy pays for the cost of daycare for its employees’ children. The cost for Faye’s two children was $8,000.
• All employees receive a 20% discount on Healthy’s products. The typical markup on their products is 25%. Faye enjoyed $1,200 of savings through the discount program.
• Faye won the manager of the year award earlier in the year and received an all-expense paid week at a desert spa valued at $3,500.
• Healthy pays Faye’s annual membership dues of $500 to the American Marketing Association.
• Healthy paid for the full $2,500 cost of Faye’s attendance at the American Marketing Association’s annual conference in Orlando.
How much income must Faye recognize from her employment?
99) In 2006, Gita contributed property with a basis of $500,000 and a fair market value of $3,000,000 to a qualified small business corporation for all of its common stock. She sells the stock in 2014 for $4,000,000. What is the amount of taxable gain on the transaction?
100) Adam purchased stock in 2006 for $100,000. He is considering selling it in 2014. It is currently worth $2,100,000 so he would realize a $2,000,000 gain. Adam is in the top tax bracket. Determine the taxes due under the following independent situations (ignore any additional Medicare taxes on investment income):
(a) Adam sells the stock, and no special circumstances apply.
(b) The stock is qualified small business corporation stock.
(c) The stock is qualified small business corporation stock. Within 60 days Adam invests $2,500,000 in new qualifying small business corporation stock.
(d) The stock is qualified small business corporation stock. Within 60 days Adam invests $2,000,000 in new qualifying small business corporation stock.
101) Daniel purchased qualified small business corporation stock for $200,000. After five years, he sells the stock for $2,200,000, realizing a $2,000,000 gain. Determine the taxes due under the following independent situations (apply current tax rates, but ignore any additional Medicare taxes on investment income):
(a) Daniel purchased the stock on February 1, 2006.
(b) Daniel purchased the stock on March 1, 2009.
(c) Daniel purchased the stock on October 1, 2010.
102) Discuss the requirements for meals provided by employers to be excluded from their employees’ income. How is the de minimis rule distinguished from these requirements?
103) Discuss briefly the options available for avoiding double taxation for the U.S. citizen earning income from sources outside the United States.
104) John, who is President and CEO of ZZZ Corporation which owns the ZZZ hotel chain, is working with his Human Resources department to design an employee fringe benefits package. He would like employees to receive discounts on goods and services provided by the corporation, would like to provide free hotel rooms to employees, would like to provide transit passes or pay for parking in metropolitan areas, and would like to provide recreational and athletic facilities. What issues should John consider in designing his package?
105) Benedict serves in the U.S. Congress. In the current year, a lobbyist paid for Benedict to take a one-week vacation to Bermuda. Benedict did not incur any expense for the trip. What income tax issues should Benedict consider?
106) Chloe receives a student loan from a foundation which encourages students to pursue teaching careers. Under the terms of the loan, Chloe will not have to repay the loan if she teaches in a public school for ten years. What tax issues should Chloe consider?
107) Taylor begins a new job as a logistics manager. His company advises him that he may need to travel internationally on occasion, so he should obtain a passport. The company reimburses Taylor for the cost of the passport. Taylor uses the passport when he vacations in Europe later in the year. What tax issues should Taylor consider?
Chapter 5 Property Transactions: Capital Gains and Losses
1) All recognized gains and losses must eventually be classified either as capital or ordinary.
2) Five different capital gain tax rates could apply to long-term capital assets sold by noncorporate taxpayers.
3) A taxpayer sells an asset with a basis of $25,000 to an unrelated party for $28,000. The taxpayer has a realized gain of $3,000.
4) Gains and losses are recognized when property is disposed of by gift or bequest.
5) On January 1 of this year, Brad purchased 100 shares of stock at $4,000. By December 31 of this year, the stock had declined in value to $2,200, but Brad still held the shares. Brad has recognized a $1,800 loss for tax purposes this year.
6) Rick sells stock of Ty Corporation, which has an adjusted basis of $20,000, for $22,000. He pays a sales commission of $500. In computing his gain or loss, the amount realized by Rick is $1,500.
7) The initial adjusted basis of property depends upon how the property is acquired.
8) Expenditures which do not add to the value or prolong the life of property may be expensed in the year in which they are incurred.
9) A taxpayer purchased an asset for $50,000 several years ago. He is now planning to sell it. Under the recovery of basis doctrine the taxpayer will not recognize any gain or pay any related taxes unless he sells the asset for more than $50,000.
10) All realized gains and losses are recognized for tax purposes.
11) Losses are generally deductible if incurred in carrying on a trade or business or incurred in an activity engaged in for profit.
12) If Houston Printing Co. purchases a new printing press during the current year for $30,000, pays sales taxes of $2,000, and pays $1,000 for installation, the cost basis for the printing press is $33,000.
13) Funds borrowed and used to pay for an asset are not included in the cost until the borrowed funds are repaid.
14) Interest incurred during the development and manufacture of a machine must be capitalized.
15) Capitalization of interest is required if debt is incurred to construct real property.
16) If stock sold or exchanged is not specifically identified, the FIFO (first-in, first-out) method of identification must be used.
17) An uncle gifts a parcel of land to his niece, and he has to pay gift taxes. The land has appreciated substantially since he purchased it 20 year ago. A portion of gift taxes paid by the uncle will increase the niece’s basis of the land.
18) With regard to taxable gifts after 1976, no gift tax is added to the basis of the property if the donor’s basis is greater than the FMV of the property.
19) Unless the alternate valuation date is elected, the basis of property received from a decedent is generally the property’s fair market value at the date of decedent’s death.
20) For purposes of calculating depreciation, property converted from personal use to business use will take on a basis equal to the greater of its FMV or its adjusted basis on the date of the conversion.
21) In a basket purchase, the total cost is apportioned among the assets purchased according to the relative adjusted basis of the assets.
22) If the stock received as a nontaxable stock dividend is not the same type as the stock owned prior to the dividend, the allocation of basis is based on relative fair market values of the stock.
23) Section 1221 of the Code includes a comprehensive list of assets properly classified as capital assets.
24) Section 1221 specifically states that inventory or property held primarily for sale to customers is not classified as a capital asset of the trade or business.
25) A building used in a trade or business is a capital asset.
26) Normally, a security dealer reports ordinary income on the sale of securities unless it is specifically identified as a security being held for investment.
27) Bad debt losses from nonbusiness debts are deductible as short-term or long-term capital losses depending on how long the debt was outstanding.
28) A nonbusiness bad debt is deductible only in the year in which the debt becomes totally worthless.
29) If a capital asset held for one year or more is sold at a gain, the gain is classified as long-term capital gain.
30) Net long-term capital gains receive preferential tax treatment if they exceed net short-term capital losses.
31) Adjusted net capital gain is taxed at 15% for taxpayers with marginal tax rates of 15% or higher, but less than 39.6%.
32) Generally, gains resulting from the sale of collectibles such as antiques, stamps, or artwork are taxed at a maximum rate of 25%.
33) If the taxpayer’s net long-term capital losses exceed the net short-term capital gains, the excess may be offset against ordinary income up to $3,000 per year. Any excess losses over $3,000 may be carried over indefinitely.
34) When a taxpayer has NSTCL and NLTCG, the loss is offset against NLTCG from the 28% group, then NLTCG from the 25% group, and finally against NLTCG from the 15% or 20% group.
35) Taxpayers who own mutual funds recognize their share of capital gains even if no distributions are received.
36) Unlike an individual taxpayer, the corporate taxpayer does not utilize the 25% and 28% specialty capital gain rates, but it does apply the 15% tax rate to adjusted net capital gain.
37) Corporate taxpayers may offset capital losses only against capital gains and may carry excess losses back three years and then forward five years.
38) Stock purchased on December 15, 2013, which becomes worthless in March 2014 produces a STCL since the holding period is one year or less.
39) Galvin Corporation has owned all of the stock of Rialto Corporation for five years. Rialto Corporation has been actively engaged in manufacturing in Kansas, but it is now bankrupt, and the stock is worthless. Galvin Corporation will recognize a long-term capital loss.
40) Gain on sale of a patent by an inventor generally is ordinary income.
41) The gain or loss on an asset purchased on March 31, 2013, and sold on March 31, 2014, is classified as short-term.
42) If property received as a gift has a basis of the fair market value of the property on the date of the gift, the donee’s holding period starts on the day after the date of the gift.
43) The holding period of property received from a decedent is based on the actual time the property is held by the decedent.
44) Because of the locked-in effect, high capital gains tax rates may discourage taxpayer’s from selling appreciated capital assets.
45) Antonio owns land held for investment with a basis of $28,000. The city of Lafayette exercises the right of eminent domain and Antonio receives a payment of $48,000. What is Antonio’s realized gain?
46) Will exchanges a building with a basis of $35,000, and subject to a liability of $30,000, for land with a FMV of $50,000 owned by Jane. Jane takes the land subject to the liability. The amount realized by Will is
47) Richard exchanges a building with a basis of $35,000, and subject to a liability of $25,000, for land with a FMV of $50,000 owned by Bill. Bill takes the building subject to the liability. What is the amount of Richard’s realized gain?
48) Jack exchanged land with an adjusted basis of $65,000 subject to a liability of $22,000 for $50,000 (FMV) of stock owned by Hayden. Hayden takes the land subject to the liability. Jack incurs $500 of selling expenses. What is the amount of Jack’s realized gain on the exchange?
A) ($14,000) loss
B) ($14,500) loss
C) $6,500 gain
D) $7,000 gain
49) Michelle purchased her home for $150,000, and subsequently added a garage costing $25,000 and a new porch costing $5,000. Repairs to the home’s plumbing cost $1,000. The adjusted basis in the home is
50) Which one of the following does not affect the adjusted basis of a house held as rental property?
A) depreciation deduction
B) adding a new room to the house
C) painting of more than 50% of the rooms in the home
D) installation of a completely new heating system
51) Jordan paid $30,000 for equipment two years ago and has claimed total depreciation deductions of $15,600 for the two years. The cost of repairs during the same time period was $2,000 while a major overhaul which extended the life of the equipment cost $7,000. What is Jordan’s adjusted basis in the equipment at the end of the two-year period?
52) Allison buys equipment and pays cash of $50,000, signs a note of $10,000 and assumes a liability on the property for $3,000. Also, Allison pays an installation cost of $500 and a delivery cost of $800. Allison’s basis in the asset is
53) Dennis purchased a machine for use in his business. Mr. Dennis’ costs in connection with this purchase were as follows:
Note to seller $33,000
Cash paid to seller 5,000
State sales tax 2,400
Freight to place of business 1,500
Wages paid to workers to install machine 4,200
What is the amount of Mr. Dennis’ basis in the machine?
54) During the current year, Tony purchased new car wash equipment for use in his service station business. Tony’s costs in connection with the new equipment this year were as follows:
Cost of the equipment $45,000
Sales tax on the equipment 4,000
Delivery charges 600
Installation and testing charges 3,000
Expenses of operating the equipment 2,000
What is Tony’s basis in the car wash equipment?
55) Terra Corp. purchased a new enterprise software system and incurred the following costs:
Cost of the system $800,000
Installation of system 5,000
Testing of system 6,000
Initial training of employees 9,000
What is Terra Corp.’s basis in the software system?
56) Empire Corporation purchased an office building for $500,000 cash on April 1. Prior to renting it out to tenants on July 1, Empire spent $200,000 on materials and labor to renovate the property. It funded $50,000 of the renovation cost with its own funds and borrowed the remaining $150,000. As of July 1, $2,000 of interest had been paid to the bank, but none of the principal had been repaid. The basis of the building on July 1 is
57) Edward purchased stock last year as follows:
Month Shares Total Cost
March 100 $ 270
July 200 600
October 600 $1,200
In April of this year, Edward sells 80 shares for $250. Edward cannot specifically identify the stock sold. The basis for the 80 shares sold is
58) Kathleen received land as a gift from her grandfather. At the time of the gift, the land had a FMV of $105,000 and an adjusted basis of $85,000 to Kathleen’s grandfather. The grandfather did not have any gift taxes due. One year later, Kathleen sold the land for $110,000. What was her gain or (loss) on this transaction?
A) no gain or loss
B) ($ 5,000)
59) Kathleen received land as a gift from her grandfather. At the time of the gift, the land had a FMV of $85,000 and an adjusted basis of $110,000 to Kathleen’s grandfather. One year later, Kathleen sold the land for $80,000. What was her gain or (loss) on this transaction?
A) no gain or loss
60) Dale gave property with a basis of $16,000 to Sarah when it had a FMV of $12,000. No gift taxes were due. Sarah later sold the property for $22,000 resulting in a recognized gain of
61) In the current year, Andrew received a gift of property from his uncle. At the time of the gift, the property had a FMV of $114,000 and an adjusted basis to his uncle of $70,000. After deducting the annual exclusion, the amount of the gift was $100,000. Andrew’s uncle paid a gift tax on the property of $24,000. What is the amount of Andrew’s basis in the property?
62) During the current year, Don’s aunt Natalie gave him a house. At the time of the gift, the house had a FMV of $144,000 and his aunt’s adjusted basis was $133,000. After deducting the annual exclusion, the amount of the gift was $130,000. His aunt paid a gift tax of $20,000 on the house. What is Don’s basis in the house for purposes of determining gain?
63) David gave property with a basis of $133,000 to Hannah when the property had a FMV of $100,000 and paid gift taxes of $8,000. If Hannah later sells the property for $140,000, Hannah’s basis (to determine gain) in the property immediately before the sale is
64) Joycelyn gave a diamond necklace to her granddaughter Emma. Joycelyn had purchased the necklace in 1980 for $15,000. The FMV of the necklace at the time of the gift was $44,000. After deducting the annual exclusion, the amount of the gift was $30,000. Gift taxes of $10,000 were paid. What is Emma’s adjusted basis in the necklace?
65) Monte inherited 1,000 shares of Corporation Zero stock from his father who died on March 4 of the current year. His father paid $30 per share for the stock on September 2, 2005. The FMV of the stock on the date of death was $50 per share. On September 4 this year, the FMV of the stock was $55 per share. The executor did not elect the alternate valuation date. Monte sold the stock for $65 per share on December 3. What is the amount and nature of any gain or loss?
A) $ 10,000 LTCG
B) $ 35,000 LTCG
C) $ 15,000 LTCG
D) $ 15,000 STCG
66) Melody inherited 1,000 shares of Corporation Zappa stock from her mother who died on March 4 of the current year. Her mother paid $30 per share for the stock on September 2, 2005. The FMV of the stock on the date of death was $65 per share. On September 4 of the current year, the FMV of the stock was $70 per share. Melody sold the stock for $85 per share on December 3. The estate qualified for, and the executor elected, the alternate valuation method for these and other assets in the estate. An estate tax return was filed. What was Melody’s basis in the stock on the date of the sale?
A) $ 30,000
B) $ 65,000
C) $ 70,000
D) $ 85,000
67) Douglas and Julie are a married couple who live in Louisiana, a community property state. They jointly own property with an adjusted basis of $140,000. On December 2 of this year, Julie died when the property had a fair market value of $160,000. Douglas’s basis in the property after Julie’s death is
68) Terrell and Michelle are married and living in New York, which is a not a community property state. They jointly own property with an adjusted basis of $240,000. On December 2 of this year, Michelle died when the property had a fair market value of $260,000. Terrell’s basis in the property after Michelle’s death is
69) Billy and Sue are married and live in Texas, a community property state. They jointly own real property with an adjusted basis of $200,000. When the property has a FMV of $450,000, Billy dies leaving all of the property to Sue. If she later sells the property for $650,000, what is Sue’s gain on the sale?
70) DeMarcus and Brianna are married and live in a common law state. They jointly own real property with an adjusted basis of $200,000. When the property has a FMV of $450,000, DeMarcus dies leaving all of the property to Brianna. If she later sells the property for $650,000, what is Brianna’s gain on the sale?
71) In a community property state, jointly owned property left to the surviving spouse will have a basis after the estate is settled equal to
A) the decedent’s basis before death.
B) the total fair market value of the entire property at the date of death (if the alternative valuation date was not elected).
C) half of the fair market value of the entire property at the date of death (if the alternative valuation date was not elected).
D) half of the basis just before death, plus half of the fair market value at the date of death (if the alternative valuation date was not elected).
72) In a common law state, jointly owned property left to the surviving spouse will have a basis after the estate is settled equal to
A) the decedent’s basis before death.
B) the total fair market value of the entire property at the date of death (the alternative valuation date was not elected).
C) half of the fair market value of the entire property at the date of death (the alternative valuation date was not elected).
D) half of the basis just before death, plus half of the fair market value at the date of death (the alternative valuation date was not elected).
73) Tina purchases a personal residence for $278,000, but subsequently converts the property to rental property when its FMV is $275,000. Assume depreciation of $65,000 has been deducted after conversion to rental use. If Tina sells the property for $200,000, her realized gain or loss will be
A) ($10,000) loss.
B) ($13,000) loss.
C) ($75,000) loss.
D) ($78,000) loss.
74) Josh purchases a personal residence for $278,000 but subsequently converts the property to rental property when its FMV is $275,000. Assume depreciation of $65,000 has been deducted after conversion to rental use. If Josh sells the property for $280,000, his gain or loss will be
A) $2,000 gain.
B) $5,000 gain.
C) $67,000 gain.
D) $70,000 gain.
75) Dustin purchased 50 shares of Short Corporation for $500. During the current year, Short declared a 10% stock dividend. What is the basis per share before and after the stock dividend is distributed?
76) In 2011 Toni purchased 100 shares of common stock in Blue Corporation for $5,280. In 2012, Blue declared a stock dividend of one share of its common stock for each 10 shares held. This year, 2014, Blue’s common stock split 2 for 1 at a time when the FMV was $80 a share. What is Toni’s basis in each of her shares of the Blue Corporation stock if both distributions were tax-free?
A) $24 per share
B) $48 for 110 shares and $0 for all additional shares
C) $52.80 for 100 shares and $0 for all additional shares
D) $80 per share
77) If a nontaxable stock dividend is received and is not the same type of stock as that owned before the dividend, the original stock’s basis is allocated to all shares
A) based on the par value of the stock.
B) equally to all shares owned after the stock dividend.
C) based on relative fair market values at the time of the stock dividend.
D) none of the above.
78) Bob owns 100 shares of ACT Corporation common stock with a basis of $3,500 and a FMV of $12,000. Bob receives 10 stock rights as a nontaxable distribution, and no basis is allocated to the stock rights. With each stock right, Bob may acquire one share of stock for $25. Bob exercises all 10 stock rights. The total basis of the newly acquired stock is
A) $ 0.
B) $ 250.
C) $ 350.
79) Jessica owned 200 shares of OK Corporation with a basis of $12,000 and a FMV of $24,000. Jessica received 20 stock rights as a nontaxable distribution with a total FMV of $8,000. Jessica sold the stock rights for $4,000. Jessica’s gain or loss on the sale was
80) Brad owns 100 shares of AAA Corporation with a basis of $6,000 and a FMV of $24,000. Brad receives 15 stock rights as a nontaxable distribution with a total FMV of $6,000. Brad allows the stock rights to expire. Brad’s loss recognized and the basis of the original 100 shares after expiration of the stock rights is
A) $0 and $4,800.
B) $0 and $6,000.
C) ($1,200) and $4,800.
D) ($1,200) and $6,000.
81) All of the following are capital assets with the exception of
A) personal residence.
B) corporate stock held for investment.
C) equipment used in a trade or business.
D) a Rembrandt painting held in a private collection.
82) Which one of the following is a capital asset?
A) automobile held by car dealer for sale
B) automobile used for personal purposes
C) automobile used in taxpayer’s trade or business
D) B and C only
83) Mike, a dealer in securities and calendar-year taxpayer, purchased a security for inventory on November 18, 2013 for $15,000. The FMV on December 31, 2013 was $16,000. The security was sold on December 19, 2014 for $16,500. These transactions result in
A) $0 ordinary income in 2013; $1,500 ordinary income in 2014.
B) $0 ordinary income in 2013; $1,500 LTCG in 2014.
C) $1,000 ordinary income in 2013; $500 LTCG in 2014.
D) $1,000 ordinary income in 2013; $500 ordinary income in 2014.
84) Kate subdivides land held as an investment and Section 1237 is satisfied. The lots sell for $30,000 per lot (basis $10,000). Kate sells five lots in the first year. Kate’s ordinary income is
85) Coretta sold the following securities during 2014:
Date Acquired Date Sold Sales Price Basis
A 6-15-2010 3-30-2014 $ 6,500 $12,500
B 7-12-2014 10-1-2014 $ 2,000 $ 9,000
C 1-15-2014 6-21-2014 $14,000 $13,000
D 4-2-2011 12-29-2014 $36,000 $15,000
What is Coretta’s net capital gain or loss result for the year?
A) NSTCL of $3,000 and NLTCG of $15,000
B) $9,000 ANCG
D) $12,000 ANCG
86) Antonio is single and has taxable income of $150,000 without considering the sale of a capital asset (land held for investment) in September of 2014 for $25,000. That asset was purchased six years earlier and has a tax basis of $5,000. The tax liability applicable to only the capital gain (without consideration of the additional Medicare tax) is
87) Sanjay is single and has taxable income of $13,000 without considering the sale of a capital asset in November of 2014 for $15,000. That asset was purchased six years earlier and has a tax basis of $5,000. The tax liability applicable to only the capital gain is
88) Sari is single and has taxable income of $33,000 without considering the sale of a capital asset in November of 2014 for $15,000. That asset was purchased six years earlier and has a tax basis of $5,000. The tax liability applicable to only the capital gain is
89) Renee is single and has taxable income of $480,000 without considering the sale of a capital asset (land held for investment) in September of 2014 for $25,000. That asset was purchased six years earlier and has a tax basis of $5,000. The tax liability applicable to only the capital gain (without consideration of the additional Medicare tax) is
90) Nate sold two securities in 2014:
Purchased Sold Sales Price Basis
MASH 1-1-2010 5-10-2014 $12,000 $10,000
KMZ 12-2-2013 9-22-2014 $4,000 $5,000
Nate has a 25% marginal tax rate. What is the additional tax resulting from the above sales?
91) Darla sold an antique clock in 2014 for $3,000. She had purchased the clock in 2009 for $2,000. If she is otherwise in the 35% marginal tax bracket, what is the maximum tax rate on the capital gain on the sale of the clock?
92) To be considered a Section 1202 gain, the stock being sold must meet all of the following characteristics except
A) the stock must be issued after August 10, 1993.
B) the stock must be held more than five years.
C) the corporation which issued the stock must be a C corporation.
D) at least 50% of the value of the corporation’s assets must be used in the active conduct of one or more qualified trades or businesses.
93) The taxable portion of a gain from qualified small business stock is taxed at a top tax rate of
94) Andrea died with an unused capital loss carryover of $3,300. The carryover
A) may be carried back three years.
B) will be fully used on Andrea’s final income tax return.
C) will be inherited by Andrea’s heirs.
D) expires with death.
95) This year, Lauren sold several shares of stock held for investment. The following is a summary of her capital transactions for 2014:
Acquired Sold This Year Selling Price Cost
09/25/2014 12/15 $800 $1,000
02/15/2014 07/15 2,200 1,750
06/25/2010 08/01 3,500 2,300
12/28/2012 06/15 750 900
What are the amounts of Lauren’s capital gains (losses) for this year?
$ 1,300 $0
$ 850 $450
$ 1,050 $250
96) Joel has four transactions involving the sale of capital assets during the year resulting in a STCG of $5,000, a STCL of $12,000, a LTCG of $1,800 and a LTCL of $1,000. As a result of these transactions, Joel will
A) deduct net losses of $6,200 against ordinary income.
B) deduct losses of $3,000 against ordinary income and carry $3,200 of STCL forward.
C) deduct losses of $3,000 against ordinary income and carry $3.200 of LTCL forward.
D) deduct losses of $3,000 against ordinary income and carry $3,200 of losses back two years.
97) Stella has two transactions involving the sale of capital assets during the year resulting in a STCL of $5,200 and LTCL of $2,400. As a result, Stella can offset
A) $5,200 of ordinary income and have a LTCL carryforward of $2,400.
B) $3,000 of ordinary income and have a $4,600 STCL carryforward.
C) $3,000 of ordinary income and have a $2,200 STCL carryforward and $2,400 LTCL carryforward.
D) $7,600 of ordinary income.
98) Gertie has a NSTCL of $9,000 and a NLTCG of $5,500 during the current taxable year. After gains and losses are offset, Gertie reports
An offset against
ordinary income Loss carryforward
$ 3,000 $ 0
An offset against
ordinary income Loss carryforward
$ 3,000 $ 500
An offset against
ordinary income Loss carryforward
$ 3,500 $ 0
An offset against
ordinary income Loss carryforward
$ 3,000 $ 6,000
99) During the current year, Nancy had the following transactions:
Short-term capital loss ($1,800)
Short-term capital gain 3,600
Short-term capital loss carryover from last year ( 2,200)
Long-term capital gain 7,000
Long-term capital loss ( 15,000)
What is the amount of her capital loss deduction for the current year, and what is the amount and character of her capital loss carryover?
$4,000 $400 short-term and $5,000 long-term
$3,000 $5,400 LTCL carryover
$3,000 $5,000 long-term
$12,100 $ 0
100) Kendrick, who has a 35% marginal tax rate, had the following results from transactions during the year:
Collectibles gain $20,000
Short-term capital loss 4,000
Long-term capital gain 8,000
After offsetting the STCL, what is (are) the resulting gain(s)?
A) $16,000 collectibles gain, $8,000 LTCG
B) $20,000 collectibles gain, $4,000 LTCG
C) $24,000 LTCG
D) $20,000 collectibles gain, $8,000 LTCG
101) Amanda, whose tax rate is 33%, has NSTCL of $25,000, a $30,000 LTCG from sale of a rare coin held 15 months and a $18,000 LTCG from the sale of stock held for three years. By what amount will Amanda’s tax liability increase?
102) Candice owns a mutual fund that reinvests her dividends and capital gains earned during the year. The mutual fund reported to her that her share of earnings was: $500 in dividends, $1,500 in short-term net capital gains, and $1,300 in long-term net capital gains. She reported the items on her tax return and paid the appropriate tax on these earnings. If her basis in the fund was $25,000 at the beginning of the year, what is her basis at the end of the year?
103) Olivia, a single taxpayer, has AGI of $280,000 which includes $220,000 of salary and $60,000 of investment income. She will pay Medicare tax on the $60,000 of investment income of
104) Melanie, a single taxpayer, has AGI of $220,000 which includes $160,000 of salary and $60,000 of investment income. She will pay Medicare tax on the $60,000 of investment income of
105) In the current year, ABC Corporation had the following items of income, expense, gains, and losses:
Cost of sales 270,000
Operating expenses 100,000
Interest on savings account 14,000
Gain on sale of AT&T stock 6,000
Loss on sale of IBM stock 15,000
What is taxable income for the year?
106) Topaz Corporation had the following income and expenses during the current year:
Gains on sale of capital assets 5,000
Losses on sale of capital assets (25,000)
What is Topaz’s taxable income?
107) Everest Inc. is a corporation in the 35% marginal tax bracket. It sold two stockholdings this year, resulting in a long-term capital gain of $15,000 on stock A and a short-term capital loss of $5,000 on stock B. What is the extra tax that Everest will pay due to the sales of these stocks?
108) On January 31 of this year, Jennifer pays $700 for an option to acquire 100 shares of Lifetime Corporation common stock for $70 per share. Jennifer exercises the option on June 2. Jennifer sells the stock on April 30 of next year for $10,000. Jennifer’s basis for the stock immediately before the sale is
109) On January 31 of this year, Mallory pays $800 for an option to acquire 100 shares of Mesa Corporation common stock for $85 per share. As a result of an increase in the market value of the Mesa stock, the market price of the option increases and Mallory sells the option for $1,000 on August 4. As a result of the sale, Mallory must recognize
A) $200 STCG.
B) $800 STCG.
C) $200 ordinary income.
D) $800 ordinary income.
110) On January 31 of the current year, Sophia pays $1,000 for an option to acquire 100 shares of Texas Corporation common stock for $105 per share at any time prior to December 31. As of December 31 Sophia had not exercised the option or sold it. Which of the following statements is correct?
A) Sophia may recognize a $1,000 STCL.
B) Sophia may recognize a $1,000 LTCL.
C) Sophia may recognize a $1,000 ordinary income.
D) Sophia may not recognize a loss.
111) How long must a capital asset be held to qualify for long-term treatment?
A) 6 months
B) one year
C) one year and one day
D) same trade date one year from purchase
112) On July 25, 2013, Marilyn gives stock with a FMV of $7,500 and a basis of $5,000 to her nephew Darryl. Marilyn had purchased the stock on March 18, 2013. Darryl sold the stock on April 18, 2014 for $7,800. As a result of the sale, what will Darryl report on his 2014 tax return?
A) $300 STCG
B) $300 LTCG
C) $2,800 STCG
D) $2,800 LTCG
113) On July 25, 2013, Karen gives stock with a FMV of $7,500 and a basis of $8,000 to her nephew Bill. Karen had purchased the stock on March 18, 2013. Bill sold the stock on April 18, 2014 for $6,000. As a result of the sale, what must Bill report on his 2014 tax return?
A) ($1,500) STCL
B) ($1,500) LTCL
C) ($2,000) STCL
D) ($2,000) LTCL
114) Rita died on January 1, 2014 owning an asset with a FMV of $730,000 that she purchased in 2010 for $600,000. Bert inherited the asset from Rita. When Bert sells the asset for $800,000 on August 20 of this year, he must recognize a
A) STCG of $70,000.
B) LTCG of $70,000.
C) STCG of $200,000.
D) LTCG of $200,000.
115) Margaret died on September 16, 2014, when she owned securities with a basis of $50,000 and a FMV of $60,000. Caroline inherited the property and sold it on December 19, 2014 for $67,000. What is Caroline’s reported gain on this sale?
A) $7,000 STCG
B) $7,000 LTCG
C) $17,000 STCG
D) $17,000 LTCG
116) Rita, who has marginal tax rate of 39.6%, is planning to make a gift to her grandson who is in the lowest tax bracket. Which of the following holdings of stock would be the most tax advantageous gift from Rita’s perspective?
Stock FMV Adjusted Basis
A $25,000 $12,000
Stock FMV Adjusted Basis
B $25,000 $25,000
Stock FMV Adjusted Basis
A $25,000 $32,000
D) For income tax purposes, Rita will be indifferent as to choice of stock to gift.
117) Arthur, age 99, holds some stock purchased many years ago for $10,000 which is now worth $100,000. He is trying to plan for the eventual disposition of this stock. Arthur’s only remaining family member is his grandson. For income tax purposes, Arthur should
A) sell the stock and gift the proceeds to his grandson.
B) gift the stock to his grandson.
C) leave the stock to his grandson as an inheritance.
D) All of the above will result in the same income tax consequences.
118) Joy purchased 200 shares of HiLo Mutual Fund on July 15, 2009, for $10,500, and has been reinvesting dividends. On December 15, 2014, she sells 100 shares.
Amount No. of shares
Purchase July 15, 2010 $10,500 200
Reinvested dividends, Oct 1, 2011 800 10
Reinvested dividends, Oct 1, 2012 970 20
Reinvested dividends, Oct 1, 2013 980 20
$ 13,250 250
What is the basis for the shares sold assuming (1) FIFO and (2) average cost method?
119) Emma Grace acquires three machines for $80,000, which have FMVs of $32,000, $28,000, and $20,000 respectively. The delivery cost is $500, and installation costs amount to $2,500. What is the basis of each machine?
120) Gina owns 100 shares of XYZ common stock with a $12,000 basis and a $25,000 FMV. She receives 100 stock rights with a total FMV of $15,000. Answer the following:
a. What is the basis of the 100 shares of stock?
b. What is the basis of the 100 stock rights?
121) Tina, whose marginal tax rate is 33%, has the following capital gains this year:
LTCG (General Electric stock) 40,000
LTCG (qualified small business stock held more than 5 years) 20,000
LTCG (artwork) 10,000
What is the increase in income tax caused by these items (ignore the Medicare tax on net investment income)?
122) Mike sold the following shares of stock in 2014:
Date Purchased Adjusted Basis Date Sold Sales Proceeds
S Corp. 7/25/2007 $4,800 9/25 $9,500
O Corp. 5/17/2008 1,600 6/07 1,100
C Corp. 1/04/2009 3,900 8/25 7,500
K Corp. 11/02/2013 2,500 10/01 1,800
What are the tax consequences of these transactions, assuming his marginal tax rate is (a) 33% and (b) 39.6%? Ignore the medicare tax on net investment income.
123) Chen had the following capital asset transactions during 2014:
Date acquired Date sold Basis Sales Price
Sydney stock 2/5/2007 3/2/2014 $ 5,000 $ 7,000
Lawrence stock 4/2/2004 5/1/2014 10,000 14,500
Collectibles 9/1/2008 9/1/2014 300 1,000
Autumn stock 1/2/2014 8/1/2014 6,700 5,500
What is the adjusted net capital gain or loss and the related tax due to the above transactions, assuming Chen has a 25% marginal tax rate?
124) Niral is single and provides you with the following tax information for 2014:
Bank account interest 1,000
Capital gain on an asset (stock) held for 11 months 4,000
Capital gain on an asset (stock) held for 16 months 9,000
Capital gain on an asset (antique doll) held for 30 months 5,000
Itemized deductions 8,000
Compute her tax liability. [Show all calculations in good form.]
125) Max sold the following capital assets this year:
250 shares of E.Com stock held 4 months (1,400) loss
20 shares of ABC stock held 3 months 2,200 gain
100 shares of K Corp stock held 22 months (4,700) loss
Personal jewelry held 2 years 800 gain
Personal car held 1 year (200) loss
What is the amount of and nature of (LT or ST) capital gain or loss?
126) Trista, a taxpayer in the 33% marginal tax bracket sold the following capital assets this year:
250 shares of E.Com stock held 4 months (2,500) loss
20 shares of ABC stock held 3 months 4,000 gain
100 shares of K Corp stock held 22 months (1,700) loss
Personal jewelry held 2 years 4,800 gain
What is the amount of and nature of (LT or ST) capital gain or loss? Be specific as to the rates at which gains, if any, are taxed.
127) Jade is a single taxpayer in the top tax bracket, with salary of $450,000 and investment income of $100,000. She is considering the sale of some shares of stock which will result in a $50,000. She purchased the shares three years ago. Taking all taxes into account, how much tax will she pay due to this gain?
128) In 2006, Regina purchased a home in Las Vegas which cost $280,000. Due to increase in the market value of the home, she refinanced her mortgage and her debt on the home totaled $300,000 at the end of 2007. Regina accepted a new job in Dallas in April 2012. Unable to sell her home, she rented it in November 2012, at which time its fair market value was $240,000. In June, 2014, she sold the home for $230,000. What tax issues should Regina consider?
129) Donald has retired from his job as a corporate manager. He buys and sells stocks on a daily basis. He spends 8-9 hours daily studying prospective stock purchases and market news. What tax issues should Donald consider?
130) Armanti received a football championship ring in college. During difficult economic times, Armanti sold the ring at a pawn shop. What are the tax issues of the sale to Armanti?
131) Distinguish between the Corn Products doctrine and the ruling in the Arkansas Best Corporation case.
132) What are arguments for and against preferential treatment of capital gains?
133) What type of property should be transferred to heirs at a decedent’s death and why? Should estate planning also mean that some property is transferred prior to death? Why?
Chapter 6 Deductions and Losses
1) Expenses are deductible only if connected to trade or business or property held for the production of income.
2) A deduction will be allowed for an expenditure unless the Internal Revenue Code specifically disallows it.
3) Itemized deductions are deductions for AGI.
4) According to the tax formula, individuals can deduct the greater of for AGI deductions or from AGI deductions.
5) Expenses incurred in a trade or business generally are deductions for AGI.
6) Individuals are allowed to deduct the greater of the standard deduction or itemized deductions.
7) Adjusted gross income (AGI) is the basis for a number of phase-outs of deductions.
8) Generally, expenses incurred in an investment activity other than those incurred to produce rent and royalties are deductions from AGI.
9) Fees paid to prepare a taxpayer’s Schedule C of the tax return (Profit or Loss from Business) are for AGI deductions.
10) Taxpayers may deduct legal fees incurred in the acquisition of property.
11) In order for an expense to be ordinary, it must be reasonable in amount and it must bear a reasonable and proximate relationship to the income-producing activity or property.
12) An expense is considered necessary if it is “appropriate and helpful” in the taxpayer’s business.
13) Capital expenditures add to the value, substantially prolong the useful life, or restore the life property.
14) Interest expense on debt incurred to purchase or carry tax-exempt securities is not tax deductible.
15) Kickbacks and bribes paid to federal officials are deductible only if related to the taxpayer’s trade or business.
16) Fines and penalties are tax deductible if related to the taxpayer’s trade or business.
17) Contributions to political candidates are not deductible even if made through the taxpayer’s trade or business.
18) Taxpayers may deduct lobbying expenses incurred to influence legislation at any governmental level if the legislation is of direct interest to the taxpayer’s trade or business.
19) Sue Swank owns a local accounting firm in New Orleans, Louisiana. The city of New Orleans has proposed legislation to increase the hotel room tax. Swank incurs $1,000 lobbying expenses. Because the legislation is local, Swank may deduct the $1,000.
20) At the election of the taxpayer, a current deduction is allowed for the lesser of actual business start-up expenditures incurred or $5,000 with the remainder capitalized and amortized over 180 months. A phaseout of the current deduction applies in the case of start-up expenditures exceeding $50,000.
21) Business investigation expenses incurred by a taxpayer who is already involved in a similar business and who enters the new business are deductible currently.
22) Rachel has significant travel and entertainment expenses for her work, but she has not kept receipts. She will be able to deduct a reasonable amount of these ordinary and necessary expenses under the Cohan rule.
23) Expenses paid with a credit card are deductible at the time a cash-basis taxpayer pays for the charge.
24) Points paid in connection with the purchase of a principal residence may be deducted in the year paid.
25) Points paid to refinance a mortgage on a principal residence are fully deductible in the year paid.
26) Accrual-basis taxpayers are allowed to deduct expenses when they meet either the economic performance test or the all-events test.
27) An accrual-basis taxpayer may elect to accrue real property taxes ratably over the period to which the taxes relate.
28) Losses incurred on wash sales of stock or securities are generally disallowed in the year of sale.
29) A wash sale occurs when a taxpayer realizes a loss on the sale of stock or securities and the taxpayer acquires substantially identical stock or securities within a 61 day period after the date of sale.
30) Under the wash sale rule, if all of the sold shares are not re-purchased within the relevant time period, a portion of the loss on the sale is allowed.
31) Losses on sales of property between a taxpayer and his/her siblings are disallowed.
32) Losses on the sale of property between a taxpayer and his/her more than 50-percent-owned corporation are disallowed.
33) If a loss is disallowed under Section 267, a gain on a subsequent sale of the property by the related purchaser may be offset by the previously unrecognized loss.
34) Generally, Section 267 requires that the deduction of unpaid (accrued) expenses be deferred until the year in which the related payee recognizes the amount as income.
35) If an activity produces a profit for at least two years during a consecutive five-year period, the burden of proof shifts to the IRS to show that the activity is not profit-motivated.
36) Hobby expenses are deductible as for AGI deductions.
37) Expenses related to a hobby are deductible only to the extent of the gross income from the hobby.
38) The vacation home limitations of Section 280A may also apply to boats and mobile homes.
39) Expenses attributable to the rental use of a taxpayer’s personal residence are limited to the gross income generated by the property.
40) If property that qualifies as a taxpayer’s residence is rented for less than 15 days per year, the taxpayer includes no rental income in gross income and similarly may claim no expenses related to the property other than interest and taxes.
41) The term “principal place of business” includes a home office used by a taxpayer for administrative or management activities of the business if no fixed location exists where the taxpayer conducts these activities.
42) Generally, deductions for adjusted gross income on an individual’s tax return include all the following types of expenses except those
A) incurred in gambling activities.
B) incurred in a trade or business.
C) incurred in the production of rent income.
D) incurred in the production of royalty income.
43) On Form 1040, deductions for adjusted gross income include the amounts paid for all of the following except
B) home mortgage interest.
C) student loan interest.
D) moving expenses.
44) Deductions for adjusted gross income include all of the following except
A) contributions to certain retirement plan arrangements.
C) expenses attributable to production of rental income.
D) unreimbursed employee business expenses.
45) Self-employed individuals may claim, as a deduction for adjusted gross income, 50 percent of their
A) traditional IRA contributions.
B) disability insurance premiums.
C) health insurance premiums.
D) self-employment tax.
46) Charles is a single person, age 35, with no dependents. In 2014, Charles has gross income of $75,000 from his sole proprietorship. Charles also incurs $80,000 of deductible business expenses in connection with his proprietorship. He has interest and dividend income of $22,000. Charles has no itemized deductions. Charles’s taxable income is
47) In 2014, Sean, who is single and age 44, received $55,000 of gross income and had $5,000 of deductions for AGI and $4,600 of itemized deductions. Sean’s taxable income is
48) In 2014, Venkat, who is single and age 37, received $60,000 of gross income and had $6,800 of itemized deductions. Venkat’s taxable income is
49) Liz, who is single, lives in a single family home and owns a second single family home that she rented for the entire year at a fair rental rate. Liz had the following items of income and expense during the current year.
Gross salary and commissions from Ace Corporation $50,000
Rent received from tenant in Liz’s rental house 13,000
Dividends received on her portfolio of stocks 5,000
Unreimbursed professional dues 200
Subscriptions to newsletters recommending stocks 900
Taxes, interest and repair expenses on rental house 3,500
Depreciation expense on rental house 2,300
What is her adjusted gross income for the year?
50) Assume Congress wishes to encourage healthy eating and is considering a deduction for broccoli purchases. In order to maximize the value of this tax deduction for taxpayers, Congress should provide for a
A) miscellaneous deduction.
B) deduction for AGI.
C) deduction from AGI.
D) All of the above would provide the same tax savings to taxpayers
51) Deductions for AGI may be located
A) on the front page of Form 1040.
B) on Schedule C as a deduction.
C) on Schedule E as a deduction.
D) All of the above are true.
52) To be tax deductible, an expense must be all of the following except
A) ordinary and necessary.
B) paid in cash.
C) reasonable in amount.
D) an expense of the taxpayer.
53) Which of the following is not required for an expenditure to be deductible as a business or investment expense?
A) recurring in nature
B) ordinary and necessary
C) reasonable in amount
D) incurred by the taxpayer
54) Various criteria will disqualify the deduction of a business or investment related expenditure. Which of the following criteria will not disqualify a business or investment expenditure?
A) capital expenditure
B) expenses related to tax-exempt income
C) expenses are not incurred annually
D) expenses are illegal or in violation of public policy
55) Maria pays the following legal and accounting fees during the year:
Legal fees in connection with ongoing operations of a trade or business $4,000
Legal fees related to purchase of personal residence 2,600
Legal fees related to tax deficiency related to Schedule A
itemized deductions 500
Tax return preparation fees:
Allocable to preparation of Schedule C 2,000
Tax return preparation fees:
Allocable to preparation of remainder of return 2,100
What is the total amount of her for AGI deduction for these fees?
56) Leigh pays the following legal and accounting fees during the year:
Legal fees in connection with a contract dispute in her trade or business $8,800
Legal fees related to resolving a tax deficiency related to business 4,000
Tax return preparation fees:
Allocable to Schedules A and B 1,000
Tax return preparation fees:
Allocable to Schedule C 1,200
Legal fees incident to a divorce 5,000
What is the total amount of her for AGI deduction for these fees?
57) During the current year, Martin purchases undeveloped land as an investment. Martin intends to rent the land as pastureland and hopefully sell it later for a profit. In the current year, Martin receives no rent but he does pay taxes of $2,800, mortgage interest of $900 and liability insurance of $500. How much of these expenses can Martin deduct (before any limitations) on his current tax return?
58) Pamela was an officer in Green Restaurant which subsequently went bankrupt. Pamela started a new restaurant and, to establish goodwill, paid off the debts of $100,000 of Green Restaurant. She was under no obligation to do so. The $100,000 is
A) deductible currently as an itemized deduction.
B) capitalized because the expenses are not ordinary.
C) deductible currently as a trade or business expense since the expenses are considered ordinary and necessary business expenses.
D) None of the above.
59) Laura, the controlling shareholder and an employee of Southwest Corporation, receives an annual salary of $750,000. Based on several factors including the size of the corporation’s operations and a comparison of salary received by officers of comparably-sized corporations, the IRS contends that Laura’s salary should be no higher than $600,000. The Court upheld the IRS’s position. As a result, which of the following is true?
A) $600,000 is deductible by the corporation; $600,000 is taxable to Laura.
B) $600,000 is deductible by the corporation; $750,000 is taxable to Laura.
C) $750,000 is deductible by the corporation; $750,000 is taxable to Laura.
D) $750,000 is deductible by the corporation; $600,000 is taxable to Laura.
60) Carole owns 75% of Pet Foods, Inc. As CEO, Carole must travel extensively and does so on the company jet. In addition, she also uses the jet to take several personal vacations. Carole reports the value of the personal use of the jet, $140,000, as additional compensation. Which of the following is true in terms of the corporation?
A) The corporation includes $140,000 as miscellaneous income.
B) The $140,000 has no impact on the corporation’s income tax.
C) The corporation takes a deduction of $140,000 for compensation expense.
D) The corporation takes a deduction of $140,000 for dividend expense.
61) Mark and his brother, Rick, each own farms. Rick is experiencing severe financial difficulties and cannot afford to buy feed for his cattle. Mark purchases $2,000 of feed and gives Rick one-half of the feed. Mark tells Rick that there is no need to repay him and to consider the feed a gift. Which of the following statements is true?
A) Mark can deduct $2,000 for the feed.
B) Mark can deduct $1,000 for the feed.
C) Rick must report $1,000 as income.
D) None of the above is true.
62) Which of the following factors is important in distinguishing between capital and revenue expenditures?
A) The expenditure improves the property, adding to the value of the property.
B) The expenditure provides a betterment, adding to the value of the property.
C) The expenditure restores the property.
D) All of the above.
63) During 2014 and 2015, Danny pays property taxes of $3,500 each year on a piece of land. During 2014, the land is vacant and unproductive. In 2015, Danny uses the land as a parking lot and generates $16,000 in income. Which of the following is true regarding the property taxes?
A) Capitalize $3,500 each year.
B) Deduct $3,500 each year.
C) Capitalize $3,500 in 2014 and deduct $3,500 in 2015.
D) Either B or C is acceptable.
64) During the current year, Ivan begins construction of an office building and a hotel. He incurs $10,000 in property taxes during the construction of the office building and $15,000 for the hotel. Which of the following statements is true of the property taxes during the construction period?
A) Ivan must capitalize the property taxes on both properties each year if an election is made.
B) Ivan must deduct the property taxes on both properties each year.
C) Ivan may elect to capitalize the property taxes on one of the properties while deducting the property taxes on the other for each year.
D) Ivan may elect to capitalize the property taxes for the properties in one year and then deduct the property taxes on the properties the next year.
65) Emeril borrows $340,000 to finance taxable and tax-exempt investments. He incurs $18,000 investment interest expense, allocated equally between the taxable and tax-exempt investments. Ignore any possible investment interest expense limitation. How much of the interest expense is deductible, and where is it deductible?
A) $18,000 for AGI
B) $18,000 from AGI
C) $9,000 for AGI
D) $9,000 from AGI
66) Sacha, a dentist, has significant investment assets. She holds corporate bonds, municipal bonds, stocks and mutual funds. Sacha paid $1,500 to an investment adviser to conduct a portfolio review and to prepare a recommendation for rebalancing her portfolio. Which of the following statements is correct regarding the tax treatment of the $1,500 fee?
A) Sacha can include the full fee as an investment-related expense in her miscellaneous itemized deductions.
B) Sacha can include the full fee as an investment-related expense in her “for AGI” deductions.
C) Part of the $1,500 fee will be disallowed due to the holding of the municipal bonds.
D) The $1,500 fee is not deductible.
67) Jimmy owns a trucking business. During the current year he incurred the following:
Gasoline and Oil $ 100,000
Maintenance $ 15,000
Fines for Speeding and Illegal parking $ 8,000
Bribes to Government Inspection Officials $ 21,000
What is the total amount of deductible expenses?
68) During the current year, the United States files criminal and civil actions against Joe, the CEO of Box Corporation, and Jane, the president of Cable Corporation, for price fixing. Both enter pleas of no contest and appropriate judgments are entered. Subsequent to this action, Square Corporation sues both Box and Cable for treble damages of $6,000,000. In settlement, Box and Cable each pay Square $1,200,000. What is the maximum amount that Box and Cable may each deduct?
69) Troy incurs the following expenses in his business, an illegal gambling establishment:
Salaries to employees $200,000
Insurance expense 60,000
Utilities expense 70,000
Bribes to police 50,000
His deductible expenses are
70) Pat, an insurance executive, contributed $1,000,000 to the re-election campaign of Governor Stephens, in hopes that Stephens will appoint her to a coveted position on the State Board of Insurance. How much of the contribution can Pat deduct?
71) American Healthcare (AH), an insurance company, is trying to persuade Congress to enact nationwide anti-smoking legislation. As part of this effort, AH paid $500,000 to hire a lobbying firm to discuss its concerns with members of Congress. AH also contributed $100,000 to candidates for political office who support limiting public smoking. What amount of these expenditures can AH deduct?
72) In March of the current year, Marcus began investigating the possibility of opening a specialty clothing store. From March through June, he spent $2,300 on a market survey, $2,700 in consulting fees to find the best location and $3,600 in professional fees setting up an accounting and inventory system. Although he had never run his own business before, on August 1 he opened his doors for business. What is the maximum amount of deduction for the current year attributable to these expenditures?
73) Toby, owner of a cupcake shop in New York, is considering opening a similar business (i.e., a cupcake shop) in Phoenix. After spending $4,200 investigating such possibilities in Phoenix, Toby decides against opening the store. What is the maximum amount of deduction for the current year attributable to these expenditures?
74) Paul, a business consultant, regularly takes clients and potential clients out to dinner. In order to deduct these expenses, Paul must maintain records substantiating all of the following except:
A) the time and place of the dinners.
B) the business relationship with the person invited.
C) the business purpose of the dinners.
D) All of the above information must be substantiated in order to deduct the entertainment costs.
75) Jones, Inc., a calendar-year taxpayer, is in the air conditioner repair business. The business uses the cash method. In December of the current year, Jones charged $100 of supplies at Refrigeration, Inc., (he will pay the credit card bill in January) and also purchased $600 of supplies at XYZ on open account (he will make a payment on the open account in January). What is the amount that is deductible by Jones, Inc., in the current year?
D) The amounts must be capitalized and charged to expense as used.
76) On August 1 of this year, Sharon, a cash method taxpayer, signs a lease for office space and begins business. The lease is for 3 years. At the time the lease is signed, Sharon pays the $12,600 rent for the entire 36-month lease term. How much can Sharon deduct this year?
77) On December 1, Robert, a cash method taxpayer, borrows $10,000 from the bank for use in his business. Under the terms of the loan, the bank discounts the loan by $300, paying Robert the $9,700 cash proceeds. If Robert repays the loan next year, he may deduct
A) $300 next year.
B) $300 this year.
C) $25 this year and $275 next year.
D) nothing since the note is “noninterest-bearing.”
78) In which of the following situations are points paid on a home mortgage loan not deductible in the year of payment?
79) On August 1 of the current year, Terry refinances her home and borrows $240,000. Terry is required to pay two points on the loan. The loan is secured by the residence and the charging of points is an established business practice in the area. The term of the loan is 20 years, beginning on August 1 of the current year. How much, if any, of the points may Terry deduct in the current year?
80) On July 1 of the current year, Marcia purchases a new home and borrows $320,000. Marcia is required to pay two points on the loan. The loan is secured by the residence and the charging of points is an established business practice in the area. The term of the loan is 20 years, beginning on July 1 of the current year. How much, if any, of the points may Marcia deduct in the current year?
81) Which of the following is not required for an accrual method taxpayer to currently deduct the cost of services received?
A) The liability must be paid.
B) The existence of a liability must be established.
C) The amount of the liability is determined with reasonable accuracy.
D) The services must actually be provided.
82) Which of the following statements is false?
A) A tax deduction is allowed to a taxpayer for estimated warranty expense.
B) A tax deduction is allowed in association with a warranty only in the year in which warranty work is performed.
C) A tax deduction is allowed for a contested amount if the amount is paid prior to final settlement.
D) No tax deduction is allowed to an accrual basis taxpayer for the amount of a down payment for a non-recurring expense when the work is to be performed in a subsequent period.
83) Under the accrual method, recurring liabilities may be deducted currently and paid in the next period if all of the following are present except for
A) the all-events test is met.
B) the expense is recurring.
C) the expense is material.
D) economic performance occurs within the shorter of 8 1/2 months after the close of the year or a reasonable period after the close of the year.
84) Victor, a calendar year taxpayer, owns 100 shares of AB Corporation stock, which was purchased three years ago for $5,000. Victor sells all 100 shares on December 27, of the current year, for $4,000 and on January 5, of the following year, purchases 60 shares of AB Corporation stock. Victor’s recognized loss will be
85) Ashley, a calendar year taxpayer, owns 400 shares of Yale Corporation stock that she purchased two years ago for $4,000. In the current year Ashley sells all 400 shares of the Yale Corporation stock for $2,400 on December 27. On January 4 of the following year, Ashley purchases 300 shares of Yale Corporation stock for $800. Ashley’s recognized loss and her basis in the newly purchased 300 shares of Yale Corporation stock are
Recognized Loss Basis
Recognized Loss Basis
Recognized Loss Basis
Recognized Loss Basis
$1,600 $ 800.
86) Samuel, a calendar year taxpayer, owns 100 shares of R Corporation common stock which was purchased two years ago for $3,600. Samuel sells all 100 shares on December 27 of the current year for $1,000. On January 4 of the following year, Samuel purchases 40 shares of R Corporation preferred stock. Samuel’s recognized loss will be
87) Which of the following individuals is not considered a relative for purposes of the related parties loss disallowance rules under Sec. 267?
88) Erin, Sarah, and Timmy are equal partners in EST Partnership. Sarah also owns 40% of Elton Corporation. The remaining shareholders of Elton Corporation are: Erin (24%) and Sarah’s uncle (36%). What percent ownership does Sarah directly or constructively own in Elton Corporation?
89) Jason sells stock with an adjusted basis of $66,000 to JJ Inc., his 60% owned corporation, for its fair market value of $60,000. JJ Inc. sells the stock three years later for $67,000. JJ Inc.’s recognized gain or loss on the sale will be
90) Donald sells stock with an adjusted basis of $38,000 to his son, Kiefer, for its fair market value of $30,000. Kiefer sells the stock three years later for $32,000. Kiefer will recognize a gain on the subsequent sale of
91) Dana purchased an asset from her brother for $15,000. Her brother’s basis was $20,000. If Dana sells the asset to an unrelated party for $12,000, she will recognize
B) ($1,000) loss.
C) ($3,000) loss.
D) ($4,000) loss.
92) Sheila sells stock, which has a basis of $12,000, to her daughter for $7,000, the stock’s fair market value. Subsequently, the daughter sells the stock to an unrelated party for $5,000. Which of the following is true for the Sheila and the Daughter?
recognizes no loss recognizes loss of $2,000
recognizes no loss recognizes loss of $5,000
recognizes loss of $3,000 recognizes loss of $5,000
recognizes loss of $3,000 recognizes loss of $2,000
93) Rob sells stock with a cost of $3,000 to his daughter for $2,200, which is its fair market value. Later the daughter sells the stock for $3,200 to an unrelated party. Which of the following describes the tax treatment to Rob and Daughter?
Recognizes no loss Recognizes gain of $1,000
Recognizes no loss Recognizes gain of $200
Recognizes $800 loss Recognizes gain of $1,000
Recognizes $800 loss Recognizes gain of $200
94) Bart owns 100% of the stock of Octo Corporation, which uses the accrual method. Bart’s sister Samantha, a cash method taxpayer, did some advertising work for Octo in November 2014. In December, Octo received a billing statement from Samantha for $5,000 and paid Samantha the $5,000 in January 2015. Samantha is a calendar year taxpayer. When may Octo deduct the $5,000?
C) Either 2014 or 2015
D) The expense is not deductible since Samantha is Bart’s sister.
95) Which of the following factors is not used to determine whether an activity is a hobby or a business?
A) the taxpayer’s expertise in the activity
B) the taxpayer’s financial status
C) the personal pleasure derived from the activity
D) the success of the taxpayer in other dissimilar activities
96) For the years 2010 through 2014 (inclusive) Max, a surgeon, has been involved in bowling competitions. Only in 2013 and 2014 did his revenue exceed the expenses from the activity. Which statement is correct?
A) The activity is a business. The IRS cannot prove it is a hobby.
B) The activity is a hobby. Max cannot prove it is a business.
C) The activity is presumed to be a business. However, the IRS may prove it is a hobby.
D) The activity is presumed to be a hobby. However, Max may prove it is a business.
97) For the years 2010 through 2014 (inclusive) Mary, a best-selling author, has been involved in operating an antique store. In 2010, 2011 and 2012 her revenue exceeded the expenses from the activity. In 2013 and 2014, the antique store generated a loss. Which statement is correct?
A) The activity is a business. The IRS cannot prove it is a hobby.
B) The activity is a hobby. Mary cannot prove it is a business.
C) The activity is presumed to be a business. However, the IRS may prove it is a hobby.
D) The activity is presumed to be a hobby. However, Mary may prove it is a business.
98) Kelsey enjoys making cupcakes as a hobby and occasionally sells them for parties. Kelsey receives $1,000 in revenues from cupcake sales this year and pays $1,300 for supplies. Kelsey takes the standard deduction each year. The net effect of the cupcake activity on Kelsey’s taxable income is
B) an increase of $1,000.
C) a decrease of $300.
D) a decrease of $280.
99) Abigail’s hobby is sculpting. During the current year, Abigail sold three of her sculptures for a total of $3,200. Her related expenses include $1,500 in utilities, $1,200 in supplies and $900 in depreciation. Of the total expenses incurred, Abigail may deduct
B) $1,500 in utilities and $1,200 in supplies.
C) $1,500 in utilities, $1,200 in supplies, and $500 in depreciation.
D) $1,500 in utilities, $1,200 in supplies and $900 in depreciation.
100) Kyle drives a race car in his spare time and on weekends. His records regarding this activity reflect the following information for the year.
Entry fees 2,100
Depreciation on car 1,700
Interest on home equity loan for race car 800
Insurance premiums 2,500
What is the allowable deduction (before any AGI limitation) for depreciation assuming that this activity is not engaged in for profit and Kyle can itemize his deductions?
101) Juanita knits blankets as a hobby and sells them. In the current year, she earns $5,000 from her blanket sales and incurs expenses of $600. Juanita does not itemize deductions. On her tax return, she should
A) report $5,000 of hobby income and deduct $500 of hobby expenses from AGI.
B) report $5,000 of hobby income and deduct $400 of hobby expenses for AGI.
C) report $5,000 of hobby income and deduct nothing from AGI since Juanita does not itemize deductions.
D) report no hobby income and no hobby deductions.
102) Vanessa owns a houseboat on Lake Las Vegas that she personally uses for 25 days out of the year and rents for 280 days. For tax purposes, the houseboat is classified as
A) neither a residence nor rental property. Because it is rented a nominal number of personal use days, both revenue and expenses (other than those otherwise allowable) are ignored.
B) rental property. Expenses in excess of income may be deducted although net income or loss is subject to the passive activity rules.
C) property that is treated as a hobby which gives rise to from AGI deductions only.
D) a combination of the taxpayer’s residence and rental property. The deduction for expenses is limited to the amount of income generated by the property.
103) Mackensie owns a condominium in the Rocky Mountains. During the year, Mackensie uses the condo a total of 23 days. The condo is also rented to tourists for a total of 77 days and generates rental income of $10,900. Mackensie incurs the following expenses in the condo:
Mortgage interest $ 5,000
Property taxes 3,500
Using the court’s method of allocating expenses, the amount of depreciation that Mackensie may take with respect to the rental property will be
104) Abby owns a condominium in the Great Smokey Mountains. During the year, Abby uses the condo a total of 21 days. The condo is also rented to tourists for a total of 79 days and generates rental income of $12,500. Abby incurs the following expenses:
Mortgage interest $ 4,100
Property taxes 1,900
Using the IRS method of allocating expenses, the amount of depreciation that Abby may take with respect to the rental property will be
A) $ 5,074.
B) $ 8,515.
C) $ 7,900.
105) Nikki is a single taxpayer who owns a vacation cottage on the lake. During the year, she rented it for $2,000 for 14 days, lived in it for 56 days, and left it vacant the remainder of the year. The year’s expenses amounted to $5,000 interest expense, $800 property taxes, $1,500 utilities and maintenance, and $2,400 depreciation. Using the IRS method of allocating expenses, how much of the property-related expenses will be deductible for AGI?
106) Gabby owns and operates a part-time art gallery, now in its fifth year. She views it as a business activity, but she is concerned that the IRS will challenge her classification and consider it a hobby. Her business results, using the cash method of accounting, were net losses in the first and fourth years and small profits in the second and third years. It is now almost year-end and based on projections, the business is showing a small profit of $6,000. Repairs to the security system and to the heating/cooling system were recently completed and these bills total $7,000. When should Gabby pay these bills?
A) before year-end to get the current year deduction
B) next year
C) split into $6,000 this year and $1,000 next year
D) It does not matter when she pays the bills. The work was performed this year, so the costs will be deducted this year.
107) Brent must substantiate his travel and entertainment expenses. Which of the following is not required for documentation?
A) company expense report
B) business relationship to the taxpayer of individuals entertained
C) purpose of the expenditure
D) time and place of the travel or entertainment
108) During the current year, Donna, a single taxpayer, reports the following items income of income and expenses:
Municipal bond interest 1,300
Bank account interest 2,300
Alimony received 24,000
Capital gain on an asset held less than one year 3,000
Rental income from residential rental house 12,500
Interest on principal residence 8,000
Real estate taxes on principal residence 1,000
Capital loss on an asset held less than one year 7,000
Expenses related to rental property
Mortgage interest 6,000
Compute Donna’s taxable income. (Show all calculations in good form.)
109) During the current year, Lucy, who has a sole proprietorship, pays legal and accounting fees for the following:
Services performed to resolve a business contract $ 5,000
Services rendered in resolving a federal tax deficiency
relating to her business 2,000
Tax return preparation fees:
Allocable to Schedule C (her sole proprietorship) 1,800
Allocable to Schedule E (a rental property she owns) 800
Allocable to remainder of Form 1040 900
Legal fees incident to her divorce (no tax advice) 2,000
What amount is deductible for AGI?
110) Desi Corporation incurs $5,000 in travel, market surveys, and legal expenses to investigate the feasibility of opening a new coffee house in one of the new suburban malls in town. Desi already owns a similar coffee house across town.
a. What is the proper tax treatment of these expenses if Desi decides not to open the new coffee house?
b. What is the proper tax treatment of these expenses if Desi decides to open the new coffee house?
c. Assume that Desi Corp is currently in the cleaning services business and incurs the noted expenses. because it is considering opening a coffee house. Reconsider your responses to parts a and b.
111) Lloyd purchased 100 shares of Gold Corporation common stock for $20 per share for a total basis of $2,000. Several years later, on May 1 of the current year, Lloyd sells all 100 shares for $500. On May 29 of the current year, Lloyd purchases 30 shares of Gold Corporation common stock for $180.
a. How much loss is Lloyd allowed to recognize?
b. What is Lloyd’s basis in the 30 new shares?
112) During the current year, Paul, a single taxpayer, reported the following items:
Interest on original loan incurred to purchase home 14,000
Taxes on home 3,500
Revenue from hobby 5,000
Interest on home equity loan incurred to purchase hobby assets 800
Expenses of hobby 8,500
Compute Paul’s taxable income for the year.
113) Lindsey Forbes, a detective who is single, operates a small pottery activity in her spare time. This year she reported the following income and expenses from this activity:
Revenue from sale of pottery $ 9,000
Depreciation on potter’s wheel ( 3,000)
Property taxes on shed where she does pottery ( 1,200)
Supplies used such as clay, etc. ( 6,500)
In addition, she had salary of $70,000 and itemized deductions, not including expenses listed above, of $6,800.
a. What is the amount of Lindsey’s taxable income assuming the activity is classified as a hobby?
b. What is the amount of Lindsey’s taxable income assuming the activity is classified as a trade or business?
114) Margaret, a single taxpayer, operates a small pottery activity in her spare time. During the current year, she reported the following income and expenses from this activity which is classified as a hobby:
Revenue from sale of pottery $ 4,000
Depreciation on potter’s wheel ( 3,000)
Property taxes on shed where she does work ( 1,100)
Supplies used such as clay, etc. ( 6,500)
In addition, she had salary of $75,000 and itemized deductions, not including those listed above, of $2,200.
What is the amount of her taxable income?
115) Discuss why the distinction between deductions for AGI and from AGI is important to individuals.
116) List those criteria necessary for an expenditure to be deductible as business or investment expenses.
117) Ben is a well-known professional football quarterback. His team’s owners expect him to be a role model for young people. Any endorsement contracts that he receives are based on his reputation. In the current year, Ben is charged with assault. Ben hires an attorney to represent him in this matter. Ultimately, the charges are dismissed. What tax issues should Ben consider?
119) Ronna is a professional golfer. In order to correct her vision, Ronna has eye surgery. The costs of the surgery and subsequent medical care are not covered by insurance. What tax issues should Ronna consider?
120) Super Development Company purchased land in the current year from Riverside Chemicals, Inc. The land was contaminated with harmful pollutants, so Super Development paid $1,000,000 to remove the contaminants. What tax issue(s) should be considered before Super files its current year tax return?
121) During the current year, Charlene borrows $10,000 to purchase Kansas City bonds. Charlene incurs $800 of interest on her outstanding loan. How much interest expense may Charlene deduct in the current year?
122) Eugene, a hardware store owner in Detroit, incurs $7,000 in an attempt to influence the Detroit City Council on the matter of a new tax assessment on hardware stores in Detroit. Explain what amount Eugene can deduct.
123) Why can business investigation expenditures be deducted currently by a taxpayer who is engaged in a line of business similar to the one being investigated, while the same costs must be capitalized and amortized to be deductible by a taxpayer who is not engaged in a similar business?
124) What must a taxpayer do to properly document a deductible travel or entertainment expense?
125) Discuss when expenses are deductible under the accrual method of accounting.
126) Anita has decided to sell her stock in TOM, Inc. She purchased the stock 5 years ago for $1,000. The current fair market value is $600. Anita’s sister, Kathy, is interested in buying the stock as is Anita’s friend, Marcia. What tax issues should Anita consider when deciding to whom the stock should be sold?
127) Diane, a successful accountant with an annual income of $150,000, also enjoys raising and training race horses, an activity in which she spends about 10 hours per week. Over the past five years her winnings from races have amounted to $20,000. She employs neighborhood children to feed the horses but has a professional trainer who works with the horses about 5 hours per week. Discuss some of the factors that might enter into the determination of whether or not this activity is a hobby or a trade/business.
128) During the current year, Jack personally uses his summer home for 25 days. He also rented his summer home to a group of vacationers for 12 days for $600 per day. How much income does Jack report from the rental of his summer home?
129) Explain the rules for determining whether a home is considered a rental property or a vacation home and the tax consequences of this classification.
130) Discuss tax planning considerations which a taxpayer may use to possibly avoid classification of an activity as a hobby.