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ACC 555 Final Exam

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Chapters 7 Through 14

Prentice Hall’s Federal Taxation 2015 Comprehensive, 28e (Pope)
Chapter 7 Itemized Deductions

1) For individuals, all deductible expenses must be classified as deductions for AGI or deductions from AGI.

2) In 2014, medical expenses are deductible as a from AGI deduction to the extent that they exceed 7.5 percent of the taxpayer’s AGI.

3) Medical expenses paid on behalf of an individual who could be the taxpayer’s dependent except for the gross income or joint return tests are deductible as itemized deductions.

4) Medical expenses incurred on behalf of children of divorced parents are deductible by the parent who pays the expenses but only if that parent also is entitled to the dependency exemption.

5) The definition of medical care includes preventative measures such as routine physical examinations.

6) Due to stress on the job, taxpayer Charlie began to experience chest pains. In order to relax and relieve the pains, he and his spouse went on an ocean cruise. The cost of the cruise to alleviate this medical condition is tax deductible.

7) Expenditures for a weight reduction program are deductible if recommended by a physician to treat a specific medical condition such as hypertension caused by excess weight.

8) In order for a taxpayer to deduct a medical expense, the amount must be paid to a certified medical doctor (M.D.).

9) Jeffrey, a T.V. news anchor, is concerned about the wrinkles around his eyes. Because it is job-related, the cost of a face lift to eliminate these wrinkles is a deductible medical expense.

10) Expenditures for long-term care insurance premiums qualify as a medical expense deduction subject to an annual limit based upon the age of an individual.

11) Capital expenditures for medical care which permanently improve or better the taxpayer’s property are deductible to the extent the cost exceeds the increase in fair market value to the property attributable to the capital expenditure.

12) Expenditures incurred in removing structural barriers in the home of a physically handicapped individual are deductible only to the extent the cost exceeds the increase in fair market value to the property attributable to the capital expenditure.

13) If the principal reason for a taxpayer’s presence in an institution is the need and availability of medical care, the entire cost of lodging and meals is considered qualified medical expenditures.

14) A medical expense is generally deductible only in the year in which the expense is actually paid.

15) If a prepayment is a requirement for the receipt of the medical care, the payment is deductible in the year paid rather than the year in which the care is rendered.

16) If a medical expense reimbursement is received in a year after a deduction has been taken on a previous year’s return, the previous year’s return must be amended to eliminate the reimbursed expense.

17) Assessments or fees imposed for specific privileges or services are not deductible as taxes.

18) Foreign real property taxes and foreign income taxes are not deductible as itemized deductions.

19) A personal property tax based on the weight of the property is deductible.

20) Assessments made against real estate for the purpose of funding local improvements are not deductible in the year paid but rather should be added to the cost basis of the property.

21) Self-employed individuals may deduct the full self-employment taxes paid as a for AGI deduction.

22) Finance charges on personal credit cards are considered interest and are, therefore, deductible.

23) In general, the deductibility of interest depends on the purpose for which the indebtedness is incurred.

24) Interest expense incurred in the taxpayer’s trade or business is deductible as a for AGI deduction without limitation if the taxpayer materially participates in the business.

25) Investment interest expense which is disallowed because it exceeds the taxpayer’s net investment income may be carried over and treated as incurred in subsequent years.

26) Investment interest includes interest expense incurred to purchase tax-exempt securities.

27) Taxpayers may elect to include net capital gain as part of investment income.

28) Taxpayers may not deduct interest expense on most personal debt, including credit card debt, car loans, and other consumer debt.

29) Qualified residence interest consists of both acquisition indebtedness and home equity interest.

30) Acquisition indebtedness for a personal residence includes debt incurred to substantially improve the residence.

31) A taxpayer is allowed to deduct interest expense incurred on home equity indebtedness limited to the lesser of $100,000 or the home equity (FMV of the residence less the acquisition indebtedness).

32) While points paid to purchase a residence are deductible as interest in the period paid, points associated with the refinancing of a residence must be amortized and deducted over the life of the loan.

33) Christopher, a cash basis taxpayer, borrows $1,000 from ABC Bank by issuing a 3-month note on December 1, 2014. Christopher receives $940 but must repay $1,000 on the due date. The amount of interest expense deductible in 2014 is $20.

34) Charitable contributions made to individuals are deductible if the individuals can show extreme financial need.

35) For charitable contribution purposes, capital gain property includes property which, if sold, would produce a long-term capital gain.

36) A charitable contribution deduction is allowed for the FMV of services rendered to a qualified charitable organization.

37) A charitable contribution in excess of the deduction limit for one taxable year can be carried forward five years.

38) If a taxpayer makes a charitable contribution to a university and in return receives the right to purchase tickets to athletic events, the taxpayer may deduct only 80% of the payment.

39) An accrual-basis corporation can only deduct contributions made by year-end.

40) Corporate charitable deductions are limited to 10% of the corporation’s taxable income for the year.

41) Legal fees for drafting a will are generally deductible.

42) A taxpayer can deduct a reasonable amount for small out-of-pocket (i.e. cash) donations.

43) Van pays the following medical expenses this year:
• $1,500 for doctor bills for Van’s son who is claimed as a dependent by Van’s former spouse.
• $300 for Van’s eyeglasses.
• $900 for Van’s dental work.
• $3,800 for Van’s face lift. Van, a newscaster, is worried about the wrinkles around his eyes.

How much can Van include on his return as qualified medical expenses before limitation?
A) $1,200
B) $2,400
C) $2,700
D) $6,500

44) All of the following are deductible as medical expenses except
A) vitamins and health foods that improve a taxpayer’s general health.
B) payments for a vision exam and contact lenses.
C) payments to a hospital for laboratory fees and X-rays for diagnosis of a medical problem.
D) cosmetic surgery necessary to correct a deformity arising from a congenital abnormality.

45) All of the following payments for medical items are deductible with the exception of the payment for
A) insulin.
B) general appointment for teeth cleaning.
C) acupuncture for specific medical purposes.
D) nonprescription medicine for treatment of a specific medical condition.

46) In 2014 Sela traveled from her home in Flagstaff to San Francisco to seek medical care. Because she was unable to travel alone, her mother accompanied her. Total expenses included:

Hotel room en route ($150 × 2 rooms × 3 nights) $900
Mileage, 1,000 miles
Doctors bills in San Francisco 1,600

The total medical expenses deductible before the 10% limitation are
A) $1,600.
B) $2,135.
C) $2,500.
D) $2,460.

47) Leo spent $6,600 to construct an entrance ramp and to widen doorways in his personal residence to make the home accessible for his wife, who is disabled and confined to a wheelchair. The $6,600 expenditure increased the value of the residence by $2,000. How much of the $6,600 is a deductible medical expense (before considering limits based on AGI)?
A) $0
B) $2,000
C) $4,600
D) $6,600

48) Linda had a swimming pool constructed at her house. Her physician advised and prescribed to her that the pool would slow the effects of her degenerative disease. The pool was not suitable for recreational use. Prior to the construction of the pool, the fair market value of her house was $172,000. After the construction of the pool, the appraised fair market value of the house was $181,000. The cost of the pool was $13,000. What is the amount of Linda’s qualified medical expense (before considering limits based on AGI)?
A) $0
B) $4,000
C) $9,000
D) $13,000

49) Alan, who is a security officer, is shot while on the job. As a result, Alan suffers from a chronic leg injury and must use a wheelchair and undergo therapy to regain and retain strength. Alan’s physician recommends that he install a whirlpool bath in his home for therapy. During the year, Alan makes the following expenditures:

Wheelchair $ 1,200
Whirlpool bath 2,000
Maintenance of the whirlpool 250
Increased utility bills associated with whirlpool 450
Entrance ramp, various home modifications 7,200

A professional appraiser tells Alan that the whirlpool has increased the value of his home by $1,000. Alan’s deductible medical expenses (before considering limitations based on AGI) will be
A) $6,000.
B) $10,100.
C) $7,000.
D) $7,700.

50) Mitzi’s medical expenses include the following:

Medical premiums $10,850
Doctors fees 2,000
Hospital fees 3,350
Prescription drugs 600
Eyeglasses 350
General purpose vitamins 100

Mitzi’s AGI for the year is $33,000. She is single and age 49. None of the medical costs are reimbursed by insurance. After considering the AGI floor, Mitzi’s medical expense deduction is
A) $12,900.
B) $13,850.
C) $14,675.
D) $16,325.

51) Caleb’s medical expenses before reimbursement for the year include the following:

Medical premiums $11,000
Doctors, hospitals 3,500
Prescriptions 600

Caleb’s AGI for the year is $50,000. He is single and age 58. Caleb also receives a reimbursement for medical expenses of $1,000. Caleb’s deductible medical expenses that will be added to the other itemized deduction will be
A) $10,350.
B) $9,100.
C) $14,500.
D) $15,100.

52) A review of the 2014 tax file of Gregory, a single taxpayer who is age 40, provides the following information regarding Gregory’s 2014 tax status:

Adjusted gross income $40,000
Medical expenses (before percentage limit) 5,000
Itemized deductions other than medical 5,400
2014 potential standard deduction 6,200

In 2015, Gregory receives a reimbursement for last year’s medical expenses of $1,200. As a result, Gregory must
A) include $200 in gross income for 2015.
B) include $1,200 in gross income for 2015.
C) reduce 2015’s medical expenses by $1,200.
D) amend the 2014 return.

53) Mr. and Mrs. Thibodeaux, who are filing a joint return, have adjusted gross income of $75,000. During the tax year, they paid the following medical expenses for themselves and for Mrs. Thibodeaux’s mother, Mrs. Watson (age 63). Mrs. Watson provided over one-half of her own support.

Prescription drugs for Mr. Thibodeaux $3,600
General vitamins for Mrs. Thibodeaux $ 100
Doctor bill for Mr. Thibodeaux $1,800
Doctor bill for Mrs. Thibodeaux $4,000
Hospital bill for Mrs. Watson $2,200

Mr. and Mrs. Thibodeaux received no reimbursement for the above expenditures. What is the amount of their deductible itemized medical expenses?
A) $1,900
B) $2,000
C) $4,100
D) $9,400

54) Mr. and Mrs. Gere, who are filing a joint return, have adjusted gross income of $50,000. During the tax year, they paid the following medical expenses for themselves and for Mrs. Gere’s mother, Mrs. Williams. The Gere’s could claim Mrs. Williams as their dependent, but she has too much gross income.

Insulin for Mr. Gere $1,000
Health insurance premiums for Mrs. Gere $3,100
Hospital bill for Mrs. Williams $5,200
Doctor bill for Mrs. Gere $4,000

Mr. and Mrs. Gere received no reimbursement for the above expenditures. What is the amount of their deductible itemized medical expenses?
A) $5,200
B) $8,300
C) $4,300
D) $13,300

55) The following taxes are deductible as itemized deductions with the exception of
A) state income taxes.
B) federal income taxes.
C) foreign real property taxes.
D) local personal property taxes.

56) Matt paid the following taxes in 2014:

Real estate taxes on rental property he owns $4,000
Real estate taxes on his own residence 3,600
Federal income taxes 8,000
State income taxes 3,400
Local city income taxes 500
State sales taxes 700

What amount can Matt deduct as an itemized deduction on his tax return?
A) $7,500
B) $11,500
C) $15,500
D) $19,500

57) In 2014, Carlos filed his 2013 state income tax return and paid taxes of $800. Also in 2014, Carlos’s employer withheld state income tax of $750 from Carlos’s salary. In 2015, Carlos filed his 2014 state income tax return and paid an additional $600 of state income tax due for 2014. How much state income tax can Carlos deduct on his 2014 federal income tax return for state income tax?
A) $1,350
B) $1,400
C) $1,550
D) $2,150

58) Doug pays a county personal property tax on his automobile of $1,500. The $1,500 includes $800 based on the weight of the car and $700 based on the value of the car. How much of the tax can Doug deduct on his tax return?
A) $0
B) $700
C) $800
D) $1,500

59) During the year Jason and Kristi, cash basis taxpayers, paid the following taxes:

State gift tax $1,000
Property tax on home in the United States 4,100
State income tax (withholdings) 3,000
Estimated federal income tax 4,500
Estimated state income tax (paid by check) 800
Special assessment by city for sidewalks and street lighting
on their street 2,000

What amount can Kristi and Jason claim as an itemized deduction for taxes on their federal income tax return in the current year?
A) $7,900
B) $8,900
C) $10,900
D) $15,400

60) In February of the current year (assume a non-leap year), Ken and Kelsey received their property tax statement for last calendar-year taxes of $1,600, which they paid to the taxing authority on March 1 of the current year. They had purchased their home on May 1 last year. What amount of property tax on this statement may they claim as an itemized deduction this year?
A) $0
B) $1,069
C) $1,074
D) $1,600

61) On September 1, of the current year, James, a cash-basis taxpayer, sells his farm to Bill, also a cash-basis taxpayer, for $100,000. James’ basis in the farm is $65,000. The real property tax year is the calendar year. Real estate taxes on the property for the year are $3,650 and are payable in November of the current year. The sales agreement does not provide for apportionment of real estate taxes between the buyer and seller. Assume Bill pays all of the real estate taxes in the current year. The effects of this sales structure will be:

A)
Taxes allocated to James Taxes allocated to Bill Effect on James’ Gain
$0 $3,650 no effect on gain

B)
Taxes allocated to James Taxes allocated to Bill Effect on James’ Gain
$3,650 $0 decrease gain by $1,220

C)
Taxes allocated to James Taxes allocated to Bill Effect on James’ Gain
$2,430 $1,220 increase gain by $2,430

D)
Taxes allocated to James Taxes allocated to Bill Effect on James’ Gain
$1,220 $2,430 increase gain by $1,220

62) On September 1, of the current year, Samuel, a cash-basis taxpayer, sells his farm to Edward, also a cash-basis taxpayer for $100,000. Samuel’s basis in the farm is $65,000. The real property tax year is the calendar year. Real estate taxes on the property for the year are $3,650 and are payable on April 1 of the following year. The sales agreement does not provide for apportionment of real estate taxes between the buyer and seller. Assume Samuel pays all of the real estate taxes prior to the sale. The effects of this sales structure will be:

A)
Taxes allocated to Samuel Taxes allocated to Edward Effect on Samuel’s Gain
$1,220 $2,430 increase gain by $1,220

B)
Taxes allocated to Samuel Taxes allocated to Edward Effect on Samuel’s Gain
$2,430 $1,220 increase gain by $2,430

C)
Taxes allocated to Samuel Taxes allocated to Edward Effect on Samuel’s Gain
$2,430 $1,220 decrease gain by $1,220

D)
Taxes allocated to Samuel Taxes allocated to Edward Effect on Samuel’s Gain
$1,220 $2,430 decrease gain by $1,220

63) Peter is assessed $630 for street improvements in front of his house. Which of the following statements is correct?
A) Peter must deduct the assessment as a tax.
B) Peter must reduce the property basis by $630.
C) Peter must increase the property basis by $630.
D) Peter can elect to deduct the $630 currently or increase the basis in the property.

64) Hui pays self-employment tax on her sole proprietorship income, supplemental Medicare surtaxes on excess wages and self-employment income (the .09% tax) and supplemental Medicare taxes on investment income (the 3.8% tax). Which of the following statements is correct regarding the deductibility of these taxes?
A) All three of the taxes are deductible as itemized deductions.
B) One-half of the self-employment tax is deductible for AGI, and the .09% and 3.8% taxes are itemized deductions.
C) None of the taxes are allowed as a deduction.
D) One-half of the self-employment tax is deductible for AGI, but the .09% and 3.8% taxes are not allowed as deductions.

65) Which of the following is deductible as interest expense?
A) personal credit card interest
B) interest to purchase tax-exempt bonds
C) bank service charges on personal account
D) interest on a home equity loan to purchase a car

66) Riva borrows $10,000 that she intends to use for purchasing supplies for her business. She temporarily deposits the funds in her personal checking account. Prior to the deposit, the checking account held $40,000 of personal funds. Riva books a vacation for $6,000 and writes a check to the travel agency from her personal account. Later in the month, the business supplies bill arrives and Riva writes a check for $10,000 from the personal account. With respect to the interest expense on the $10,000 loan,
A) it will all be treated trade or business expense.
B) 60 percent will be treated as personal interest expense and 40 percent as trade or business expense.
C) it will all be treated as personal expense.
D) 20 percent will be treated trade or business expense.

67) When both borrowed and owned funds are mingled in the same account, for purposes of categorizing interest expense, a repayment of the debt is allocated first to
A) personal expenditures.
B) trade or business expenditures.
C) investment expenditures.
D) passive activity expenditures in real estate.

68) All of the following statements are true except
A) investment interest expense is deductible to the extent of a taxpayer’s net investment income.
B) short-term capital gains meet the definition of net investment income.
C) investment interest expense includes interest expense to purchase or carry tax-exempt securities.
D) net investment income is the taxpayer’s investment income in excess of investment expenses.

69) In the current year, Julia earns $9,000 in net investment income and incurs $14,000 of investment interest expense. What is the maximum amount of investment interest expense she is allowed to deduct this year?
A) $0
B) $3,000 deductible this year; $11,000 carried forward to next year
C) $9,000 deductible this year; $5,000 carried forward to next year
D) $14,000 deductible this year; nothing to be carried forward to next year

70) Ted pays $2,100 interest on his automobile loan, $120 interest on a loan to purchase a computer for personal use, $630 interest on credit cards, and $1,100 investment interest expense. Ted has net investment income of $850. Ted’s deductible interest is
A) $850.
B) $1,100.
C) $2,950.
D) $3,200.

71) Takesha paid $13,000 of investment interest expense in a year in which she earned $4,500 in dividends, $5,400 in interest income, and had a short-term capital gain of $1,000 and a long-term capital gain of $2,200. The capital gains resulted from the sale of stock held as an investment. She has no other investment-related expenses. What is her maximum deduction for investment interest expense, assuming Takesha does not make any elections?
A) $5,400
B) $6,400
C) $13,100
D) $13,000

72) Dana paid $13,000 of investment interest expense in a year in which she earned $4,500 in dividends, $5,400 in interest income, and had a short-term capital gain of $1,000 and a long-term capital gain of $2,200. The capital gains resulted from the sale of stock held as an investment. She has no other investment-related expenses. What is her maximum deduction for investment interest expense if Dana makes the proper elections to raise her ceiling as high as possible?
A) $5,400
B) $9,900
C) $13,100
D) $13,000

73) Faye earns $100,000 of AGI, including $90,000 of salary and $10,000 of interest income. Faye does itemize her deductions. The miscellaneous category of her itemized deductions consists of $1,500 of unreimbursed employee business expenses and a $900 fee paid for investment advice. Faye has paid $11,000 of interest expense on a loan used to purchase stocks. How much of the $11,000 interest expense can be deducted this year?
A) $11,000
B) $10,000
C) $9,100
D) $9,600

74) Teri pays the following interest expenses during the year:

Home mortgage interest on personal residence $8,500
Credit card interest on personal purchases 550
Interest on loans used to purchase investments (Net investment
income is $2,000) 2,400
Interest on loans used for a business conducted as a sole proprietorship 3,800
Interest on a credit card used exclusively in the business 470

What is the amount of interest expense that can be deducted as an itemized deduction?
A) $10,500
B) $10,900
C) $14,300
D) $14,700

75) On July 31 of the current year, Marjorie borrows $120,000 to purchase a new fishing boat. The loan is secured by her personal residence. On the date of the loan, the outstanding balance on the original debt incurred to purchase the residence is $300,000 and the FMV of the home is $450,000. What is the total amount of debt on which Marjorie can deduct interest in the current year?
A) $300,000
B) $400,000
C) $420,000
D) $450,000

76) Wayne and Maria purchase a home on April 1 of the current year. In order to obtain a thirty-year mortgage, they are required to pay $7,200 in points at closing. Charging points is a customary business practice in the area. In addition, they pay $4,400 of interest during the year. What is their current year deduction related to their home?
A) $4,400
B) $4,580
C) $7,200
D) $11,600

77) Claudia refinances her home mortgage on June 1 of the current year. She obtains a 30 year mortgage at 5%. As part of the refinancing, she pays points of $3,600 (a customary practice in her location). What amount, if any, of the points are deductible?
A) $0
B) $70
C) $120
D) $3,600

78) Leslie, who is single, finished graduate school this year and began repaying her student loan. The proceeds of the loan were used to pay her qualified higher education expenses. She has not received any type of educational assistance or scholarships. The amount of interest paid during the year amounted to $3,800. What is the amount and classification of her student loan interest education deduction if her modified AGI is $40,000?
A) $2,500 for AGI
B) $2,500 from AGI
C) $3,800 for AGI
D) $3,800 from AGI

79) Marcia, who is single, finished graduate school this year and began repaying her student loan. The proceeds of the loan were used to pay her qualified higher education expenses. She has not received any type of educational assistance or scholarships. The amount of interest paid during the year amounted to $3,000. What is the amount and classification of her student loan interest deduction if her AGI is $68,000?
A) $500 for AGI
B) $2,000 for AGI
C) $2,500 for AGI
D) $3,000 for AGI

80) Don’s records contain the following information:
1. Donated stock having a fair market value of $3,600 to a qualified charitable organization. He acquired the stock five months previously at a cost of $2,400.
2. Paid $700 to a church school as a requirement for the enrollment of his daughter.
3. Paid $200 for annual homeowner’s association dues.
4. Drove 400 miles in his personal auto at 14 cents per mile. The travel was directly related to volunteer services he performed for his church (actual costs were not available).

What is Don’s charitable contribution deduction?
A) $2,456
B) $3,156
C) $3,356
D) $3,656

81) Erin’s records reflect the following information:

1. Paid $200 dues to a fraternal organization (such as the Elks Club)
2. Donated stock having a fair market value of $3,500 to a qualified charitable organization. She purchased the stock 2 years earlier for $3,000.
3. Paid $1,600 cash to qualified public charitable organizations

Erin’s adjusted gross income for this year was $50,000. What is the amount of her charitable contribution deduction for the year?
A) $4,600
B) $4,800
C) $5,100
D) $5,300

82) Sacha purchased land in 2010 for $35,000 that she held as a capital asset. This year, she contributed the land to the Boy Scouts of America (a charitable organization) for use as a site for a summer camp. The market value of the land at the date of contribution is $40,000. Sacha’s adjusted gross income is $90,000. Assuming no special elections, Sacha’s maximum deductible contribution this year is
A) $13,000.
B) $27,000.
C) $35,000.
D) $40,000.

83) Doris donated a diamond brooch recently appraised at $25,000 to her local church. Doris had purchased it many years ago for $10,000. The church sold the brooch to provide funding for church programming. Doris’ AGI is $40,000. Doris will be able to take a charitable deduction of
A) $10,000.
B) $25,000.
C) $12,000.
D) $20,000.

84) Clayton contributes land to the American Red Cross for use as a future site for a new building. His AGI is $50,000. Clayton paid $20,000 for the land eight months ago but its market value at the date of contribution is $25,000. With no special elections, Clayton’s deductible contribution this year is
A) $7,000.
B) $18,000.
C) $20,000.
D) $25,000.

85) Carl purchased a machine for use in his trade or business two years ago for $30,000. During the current year, Carl donates the machine to the local community college. At the time of the contribution, the machine’s adjusted basis is $10,000 and its FMV is $15,000. Carl’s AGI for the year is $48,000. What is the amount of his charitable contribution deduction?
A) $10,000
B) $14,000
C) $15,000
D) $25,000

86) During the current year, Jane spends approximately 90 hours of her time in developing computer software for a church. As a programmer and data analyst, Jane normally bills her clients at $130 per hour for her time. Jane also drives her car a total of 800 miles in performing her voluntary work. Jane’s deductible contribution is
A) $0.
B) $112.
C) $11,700.
D) $11,812.

87) Carol contributes a painting to a local museum for display. Her AGI is $60,000. Carol paid $22,000 for the painting in 2006, but its market value at the date of the contribution is $25,000. With no special elections, Carol’s deductible contribution this year is
A) $ 7,000.
B) $18,000.
C) $22,000.
D) $25,000.

88) Hugh contributes a painting to a local museum for display. His AGI is $35,000. Hugh paid $16,000 for the painting in 2000, but its market value at the date of the contribution is $22,000. If Hugh makes the election to maximize the current year deduction, his deductible contribution for this year will be
A) $10,500.
B) $16,000.
C) $17,500.
D) $22,000.

89) Patrick’s records for the current year contain the following information. He donated stock having a fair market value of $5,000 to a qualified charitable organization. Patrick acquired the stock two years ago at a cost of $3,000. He paid $1,000 for membership in an athletic scholarship program maintained by the university. The only benefit of the membership is that Patrick is entitled to purchase a season ticket to the university’s home football games. He also donated $7,500 cash to a qualified charitable organization. Patrick’s adjusted gross income for the year is $100,000. What is the amount of his charitable contribution deduction?
A) $11,300
B) $11,500
C) $13,300
D) $13,500

90) Grace has AGI of $60,000 in 2013 and 2014. She makes cash contributions to public charities of $34,000 in 2013 and $31,000 in 2014. Grace’s charitable contribution carryover to 2015 is
A) $0.
B) $1,000.
C) $4,000.
D) $5,000.

91) Daniel had adjusted gross income of $60,000, which consisted of $55,000 in wages and $5,000 in dividend income from taxable domestic corporations. His expenses include:

Investment counseling fee $800
Attorney fee for preparing a will 200
Union dues 350
Tax return preparation fee 450

What is the net amount deductible by Daniel for the above items?
A) $400
B) $600
C) $1,000
D) $1,600

92) Wang, a licensed architect employed by Skye Architects, incurred the following unreimbursed expenses this year:

Subscription to architectural journals $800
Dues to Professional Architecture Society 400
Tax return preparation 600
Investment advice 500

Wang’s AGI is $75,000. What is his net deduction for miscellaneous itemized deductions?
A) $0
B) $1,900
C) $800
D) $1,500

93) Tasneem, a single taxpayer has paid the following amounts in 2014:

State income taxes $10,000
Property taxes on home 4,000
Mortgage interest on home 12,000
Charitable contributions 14,000

Tasneem’s AGI is $360,000. What is her net itemized deduction allowed?
A) $40,000
B) $38,352
C) $36,826
D) None of the above.

94) Christa has made a $25,000 pledge to the American Red Cross (a public charity). Christa expects AGI of $200,000 this year. Which of the following assets should she donate?
A) $25,000 of cash
B) stock purchased three years ago for $18,000 with a current FMV of $25,000
C) stock purchased six months ago for $28,000 with a current FMV of $25,000
D) Christa should be indifferent among the three choices.

95) Which of the following is not required substantiation for a noncash charitable contribution?
A) name and address of charitable organization
B) method used to determine the donated property’s fair market value
C) date and location of property donated
D) use of donation by charitable organization

96) During the current year, Deborah Baronne, a single individual, paid the following amounts:

Federal income tax $10,000
State income tax $4,000
Real estate taxes on land in France $1,500
Real estate taxes on land in U.S. $1,700
State sales taxes $2,000
State occupational license fee $ 600

How much can Deborah deduct in taxes as itemized deductions?

97) Phoebe’s AGI for the current year is $120,000. Included in this AGI is $100,000 salary and $20,000 of interest income. In earning the investment income, Phoebe paid investment interest expense of $30,000. She also incurred the following expenditures subject to the 2% of AGI limitation:

Investment expenses:
Subscriptions to investment journals $ 500
Investment counseling 1,500
Safe-deposit box rental for stock certificates 100
Noninvestment expenses:
Unreimbursed employee business expenses $1,800
Tax return preparation fees (non-business-related) 500

What is Phoebe’s investment interest expense deduction for the year?

98) On December 1, 2014, Delilah borrows $2,000 from her credit union to use in her business. Under the terms of the contract, Delilah actually receives $1,940 but is required to repay $2,000 in three months.
a. What amount may Delilah deduct as interest expense in 2014 and in 2015 if she is a cash basis taxpayer?
b. What amount may Delilah deduct as interest expense in 2014 and in 2015 if she is an accrual basis taxpayer?

99) During 2014 Richard and Denisa, who are married and have two dependent children, have the following income and losses:

Total salaries $150,000
Bank account interest 25,000
Short-term capital gains 4,000
Short-term capital losses ( 1,500)

They also incurred the following expenses:
Qualified medical expenses $ 8,000
State income taxes paid 12,000
Property taxes on home 2,300
Qualified residence interest 9,000
Investment interest expense 7,500
Cash charitable contributions 15,000
Tax return preparation fees 3,600
Unreimbursed employee business expenses 4,000

Compute Richard and Denisa’s taxable income for the year. (Show all calculations in good form.)

100) Hope is a marketing manager at a local company. Information about her 2014 income and expenses is as follows:

Income received
Salary $150,000
Taxes withheld from salary:
Federal income tax $30,000
State income tax 8,000
Social Security tax 7,254
Medicare tax 2,175

Interest income from bank 6,000
Dividend income from U.S. stocks 4,000
Short-term capital gain 2,000
Long-term capital gain 3,000
State income tax refund from last year 500
Expenses paid:
Unreimbursed dental and eyecare costs $1,800
Property taxes on her home 3,900
Fees paid to town for garbage pick-up 400
Stock donated to American Red Cross; FMV $5,000; purchased three years ago for $3,100
Dues paid to American Marketing Association 600
Subscription to professional marketing journals 300
Fee for preparation of 2013 tax return and IRS audit assistance 2,000
Investment advisor fee 1,000
Home mortgage interest 10,000
Interest on borrowing to purchase investment assets 11,000
Interest on car loan 1,100

Compute Hope’s taxable income for the year in good form. Show all supporting computations. Hope is single, and she elects to itemize her deductions each year. Assume she does not make any elections regarding the investment interest expense. Also assume that her tax profile was similar in the preceding year.

101) Explain under what circumstances meals and lodging en route to a medical facility may be deductible.

102) Explain when the cost of living in an institution other than a hospital may be deductible.

103) Discuss the timing of the allowable medical expense deduction.

104) Patrick and Belinda have a twelve year old son, Aidan, who is autistic. Patrick and Belinda pay tuition of $20,000 annually for Aidan to attend a school for autistic children. What tax issues should be considered? What additional information would you need?

105) Discuss what circumstances must be met for personal property taxes to be deductible.

106) Explain why interest expense on investments is limited to net investment income.

107) When are points paid on a loan deductible as interest expense?

108) Sharif is planning to buy a new car for personal use and will need to take out a loan. His sources of the financing include (1) a loan from the car dealership charging 6% interest, (2) a loan from his brokerage firm secured against his stock portfolio charging 6.2% and (3) a home equity bank loan secured against his home charging 7%. Sharif has AGI of $150,000 and does itemize his deductions. He is in the 28% tax bracket. Discuss how income taxes can influence his decision regarding the source of financing.

109) May an individual deduct a charitable contribution for services rendered to a charitable organization?

110) What is the result if a taxpayer makes a contribution to a college or university and in return receives the right to purchase tickets to athletic events?

111) What is the treatment of charitable contributions in excess of the applicable limits for the current year?

112) Explain how tax planning may allow a deduction of qualified medical expenses.

113) Explain what types of tax planning are available for taxpayers making charitable contributions.

114) Jill is considering making a donation to her church. She wants to give $50,000 for the new church building. She has some stock with a FMV of $50,000 and an adjusted basis of $10,000 that she has held for 3 years. She is planning to sell the stock and donate the $50,000 proceeds to the church. What should she consider before taking that action?

Chapter 8 Losses and Bad Debts

1) In order to be recognized and deducted on a tax return, a loss must first be realized.

2) The amount of loss realized on the sale of property is computed by subtracting adjusted basis from amount realized.

3) A loss incurred on the sale or exchange of property is deductible only if the property is used in a trade or business or held for investment.

4) The sale of inventory at a loss results in an ordinary loss.

5) Losses incurred in the sale or exchange of personal-use property are deductible as capital losses.

6) A loss on business or investment property which is abandoned is deductible as an ordinary loss to the extent of the property’s adjusted basis on the date of abandonment.

7) The total worthlessness of a security generally results in an ordinary loss.

8) A capital loss may arise from the sale or exchange of a capital asset.

9) The destruction of a capital asset by a casualty gives rise to a capital rather than ordinary loss.

10) One of the requirements which must be met for stock to be considered Section 1244 stock is that the stock must be owned by an individual or a partnership.

11) One of the requirements which must be met for stock to be considered Section 1244 stock is that the corporation cannot have more than $10 million of total capital and paid in surplus as of the stock issuance.

12) When applying the limitations of the passive activity rules, a taxpayer’s AGI is classified into active income, portfolio income and passive income. For this purpose, portfolio income includes dividends, interest, annuities, and royalties.

13) Losses from passive activities that cannot be deducted currently are carried over for up to 5 subsequent years.

14) Individual taxpayers can offset portfolio income with passive losses.

15) If a taxpayer disposes of an interest in a passive activity, unused carryover losses are available to the purchaser of the interest.

16) A taxpayer may deduct suspended losses of a passive activity when the taxpayer completely terminates his or her ownership of the activity.

17) Once an activity has been classified as passive, it is considered passive with regard to that taxpayer until it is sold.

18) A passive activity includes any rental activity or any trade or business in which the taxpayer does not materially participate.

19) Two separate business operations conducted at the same location may be treated as separate activities under the passive activity rules.

20) Partnerships and S corporations must identify their business and rental activities by applying the passive activity rules at the partnership or S corporation level and then must report the results of their operations by activity to the partners or shareholders.

21) Material participation by a taxpayer in a passive activity is satisfied if the individual participates in the activity for more than 500 hours during the year.

22) For purposes of the application of the passive loss limitations, a closely held C corporation is a C corporation where more than 50 percent of the stock is owned by five or fewer individuals at any time during the last half of the taxable year.

23) A closely held C Corporation’s passive losses may offset its active income.

24) Individuals who actively participate in the management of rental real property may deduct up to $25,000 in losses, subject to AGI limitations.

25) For purposes of applying the passive loss limitations for rental real estate, active participation requires a greater time commitment by the taxpayer than does material participation.

26) Taxpayers are allowed to recognize net passive losses from all activities up to a ceiling of $25,000.

27) A taxpayer may deduct a loss resulting from the theft of business and investment property but not a theft of personal-use property.

28) When business property involved in a casualty is totally destroyed, the amount of the loss is limited to the lesser of the taxpayer’s adjusted basis in the property or the reduction in FMV.

29) In the case of casualty losses of personal-use property, the losses sustained in each separate casualty are reduced by both $100 and 10 percent of the taxpayer’s AGI for the year.

30) A theft loss is deducted in the year in which the theft is discovered.

31) When personal-use property is covered by insurance, no deduction is available for a casualty loss of the property unless the taxpayer timely files an insurance claim for the loss.

32) When the taxpayer anticipates a full recovery on a casualty loss of personal-use property but receives less than full recovery in a subsequent year, the unrecovered portion may be deducted.

33) If a taxpayer suffers a loss attributable to a disaster in an area subsequently declared a disaster area, the casualty loss may be deducted in the year preceding the year in which the loss actually occurs.

34) For a bad debt to be deductible, the taxpayer must have a basis in the debt.

35) A bona fide debtor-creditor relationship can never exist in the case of related parties.

36) A taxpayer guarantees another person’s obligation and is forced to pay the debt under the terms of the guarantee. The original debtor does not repay the taxpayer. The taxpayer/guarantor may deduct the loss.

37) Lisa loans her friend, Grace, $10,000 to finance a new business. If Grace defaults on the loan, Lisa may take a deduction for a business bad debt in the year of total worthlessness.

38) A business bad debt gives rise to an ordinary deduction while a nonbusiness bad debt is treated as a short-term capital loss.

39) No deduction is allowed for a partially worthless nonbusiness debt.

40) A net operating loss (NOL) occurs when taxable income for any year is negative because itemized deductions and total exemptions exceed business income.

41) A net operating loss can be carried back three years or carried forward five years.

42) All of the following losses are deductible except
A) decline in value of securities.
B) total worthlessness of securities.
C) sale or exchange of business property.
D) destruction of personal use property by fire, storm, or casualty.

43) The amount realized by Matt on the sale of property to Caitlin includes all of the following with the exception of
A) cash received by Matt.
B) mortgage on the property that is assumed by Caitlin.
C) mortgage on the property paid off by Matt prior to the sale.
D) the FMV of any other property received by Matt in the transaction.

44) In 2000, Michael purchased land for $100,000. Over the years, economic conditions deteriorated, and the value of the land declined to $60,000. Michael sells the property in this year, when it is subject to a $30,000 nonrecourse mortgage. The buyer pays Michael $34,000 cash and takes the property subject to the mortgage. Michael incurs $5,000 in real estate commissions. Michael’s gain or loss on the sale is
A) $4,000 gain.
B) $1,000 loss.
C) $36,000 loss.
D) $41,000 loss.

45) Lucia owns 100 shares of Cronco Inc. which she purchased on December 1 of last year for $10,000. The stock is not Sec. 1244 stock. On July 1 of the current year, Lucia receives notice from the bankruptcy court that Conco Inc. has been liquidated, and there are no assets remaining for shareholders. As a result, Lucia will have
A) a short-term capital loss of $10,000.
B) a long-term capital loss of $10,000.
C) an ordinary loss of $10,000.
D) no loss allowed.

46) Jamie sells investment real estate for $80,000, resulting in a $15,000 loss. Jamie’s loss is
A) an ordinary loss.
B) a capital loss.
C) a Sec. 1231 loss.
D) a Sec. 1244 loss.

47) Juan has a casualty loss of $32,500 on investment property after receiving an insurance settlement. This is Juan’s only casualty transaction this year. Juan’s loss is
A) an ordinary loss.
B) a capital loss.
C) a Sec. 1231 loss.
D) a Sec. 1244 loss.

48) All of the following are true of losses from the sale or worthlessness of small business corporation (Section 1244) stock with the exception of
A) the stock must be owned by an individual or a partnership.
B) the stock must have been issued by a domestic corporation.
C) the stock must have been issued for cash or property other than stock or securities.
D) a single taxpayer may deduct, as ordinary losses, up to a maximum of $100,000 per tax year with the remainder treated as capital losses.

49) Stacy, who is married and sole shareholder of ABC Corporation, sold all of her stock in the corporation for $100,000. Stacy had organized the corporation in 2009 by contributing $225,000 and receiving all of the capital stock of the corporation. ABC Corporation is a domestic corporation engaged in the manufacturing of ski boots. The stock in ABC Corporation qualified as Sec. 1244 stock. The sale results in a(n)
A) ordinary loss of $125,000.
B) long-term capital loss of $125,000.
C) long-term capital loss of $100,000 and ordinary loss of $25,000.
D) ordinary loss of $100,000 and long-term capital loss of $25,000.

50) Amy, a single individual and sole shareholder of Brown Corporation, sold all of the Brown stock for $30,000. The stock basis was $150,000. Amy had owned the stock for 3 years. Brown Corporation meets the Section 1244 requirements. Amy has
A) a $50,000 ordinary loss and $70,000 LTCL.
B) a $50,000 STCL and a $70,000 LTCL.
C) a $100,000 ordinary loss and a $20,000 LTCL.
D) a $100,000 LTCL and a $20,000 ordinary loss.

51) Sarah had a $30,000 loss on Section 1244 stock, a $15,000 loss on sale of a personal use automobile and a $8,000 loss on stock that is not classified as Section 1244. Without regard to net capital loss limitations, Sarah should recognize
A) a ordinary loss of $38,000.
B) a capital loss of $53,000.
C) an ordinary loss of $30,000 and a capital loss of $8,000.
D) an ordinary loss of $30,000 and a capital loss of $23,000.

52) During the year, Mark reports $90,000 of active business income from his law practice. He also owns two passive activities. From Activity A, he earns $20,000 of income, and from Activity B, he incurs a $30,000 loss. As a result, Mark
A) reports AGI of $80,000.
B) reports AGI of $90,000 with a $10,000 passive loss carryover.
C) reports AGI of $90,000 with a $30,000 passive loss carryover.
D) reports AGI of $110,000 with a $30,000 passive loss carryover.

53) Joy reports the following income and loss:

Salary $ 120,000
Income from activity A 60,000
Loss from activity B ( 35,000)
Loss from activity C ( 55,000)

Activities A, B, and C are all passive activities.

Based on this information, Joy has
A) adjusted gross income of $90,000.
B) salary of $120,000 and deductible net losses of $30,000.
C) salary of $120,000 and net passive losses of $30,000 that will be carried over.
D) salary of $120,000, passive income of $60,000, and passive loss carryovers of $90,000.

54) Jana reports the following income and loss:

Salary $ 120,000
Income from activity A 60,000
Loss from activity B ( 30,000)
Loss from activity C ( 70,000)

Activities A, B, and C are all passive activities.
Based on this information, Joy has the following suspended losses:

A)
Activity B Activity C
$30,000 $70,000

B)
Activity B Activity C
$0 $0

C)
Activity B Activity C
$18,000 $42,000

D)
Activity B Activity C
$12,000 $28,000

55) Jeff owned one passive activity. Jeff sold the activity and realized a $2,000 gain on the sale. Prior to the sale, he realized a current year loss from the activity of $6,000. In addition, he has suspended losses from prior years of $7,000. What is the net impact on Jeff’s AGI this year due to the passive activity?
A) increase of $2,000
B) no net change
C) decrease of $4,000
D) decrease of $11,000

56) Nancy reports the following income and loss in the current year.

Salary $ 60,000
Income from activity A 18,000
Loss from activity B ( 9,000)
Loss from activity C ( 13,000)

All three activities are passive activities with respect to Nancy. Nancy also has $21,000 of suspended losses attributable to activity C carried over from prior years. During the year, Nancy sells activity C and realizes a $15,000 taxable gain. What is Nancy’s AGI as a result of these transactions?
A) $50,000
B) $55,000
C) $64,000
D) $71,000

57) Lewis died during the current year. Lewis owned passive activity property with a FMV of $61,000 and a basis of $48,000. Suspended losses of $15,000 were attributable to the property. How much of the suspended loss is deductible on Lewis’s final income tax return?
A) $0
B) $2,000
C) $13,000
D) $15,000

58) Mara owns an activity with suspended passive losses from prior years of $13,000. In the current year, Mara becomes a material participant in the activity. This year the activity generates $6,000 of income. The net effect of this activity on Mara’s current year AGI is a(n)
A) increase of $6,000.
B) decrease of $13,000.
C) 0.
D) decrease of $7,000.

59) Charlie owns activity B which was considered a passive activity and generated a $17,000 suspended loss. Charlie increases his involvement with activity B so that this year activity B is not considered passive for Charlie. During this year, activity B produces a $9,000 loss. In addition, Charlie acquires an investment in activity X, a passive activity, this year. Charlie’s share of activity X’s income is $13,000. Charlie’s salary this year is $70,000. As a result, this year Charlie must
A) offset B’s loss carryover against X’s current income and carry over $9,000 loss from activity B to next year.
B) offset B’s carryover loss and current loss against X’s income first and then offset any remaining loss against salary.
C) offset B’s $9,000 loss against X’s $13,000 income and offset B’s loss carryover against the remaining $4,000 of X’s income.
D) offset B’s current $9,000 loss against his salary and offset B’s loss carryover against X’s income and carry over $4,000 of loss to next year.

60) Jorge owns activity X which produced a $20,000 passive loss last year. Jorge’s only income last year was wages of $30,000. Jorge is a material participant in activity X this year when it produces a $14,000 loss. This year, Jorge’s wages are $40,000. This year, Jorge also has passive activity income from activity Y of $16,000. What is the total passive activity loss carryover to next year?
A) $0
B) $3,000
C) $4,000
D) $18,000

61) Which of the following is not generally classified as a passive activity?
A) an activity in which the taxpayer does not materially participate
B) a limited partnership interest
C) rental real estate
D) a business in which the taxpayer owns an interest and works 1,000 hours a year

62) An individual is considered to materially participate in an activity if any of the following tests are met with the exception of
A) the individual participates in the activity for more than 500 hours during the year.
B) the individual participates in the activity for 75 hours during the year, and that participation is more than any other individual’s participation for the year.
C) the individual has materially participated in the activity in any five years during the immediate preceding 10 taxable years.
D) the individual’s participation in the activity for the year constitutes substantially all of the participation in the activity by all individuals.

63) Tom and Shawn own all of the outstanding stock of Brady Corporation (a retail store operated as a C corporation). This year, Brady generates taxable income of $20,000 from active business operations, and also reports investment interest of $22,000 and losses of $28,000 from a passive activity. As a result, Brady Corporation reports
A) net income of $42,000.
B) interest income of $22,000 and a passive loss carryover of $8,000.
C) business income of $20,000 and a passive loss carryover of $6,000.
D) business income of $20,000, interest income of $22,000, and a passive loss carryover of $28,000.

64) A taxpayer’s rental activities will be considered a trade or business, rather than a passive activity, if
A) the taxpayer performs more than 750 hours of work during the year managing the rental properties
B) the taxpayer performs more than 500 hours of work during the year managing the rental properties.
C) more than half of the taxpayers personal services performed in all business activities during the year are spent managing the rental properties.
D) conditions A and C, but not B, are satisfied.

65) Justin has AGI of $110,000 before considering his $30,000 loss from rental property, which he actively manages. How much of the rental loss can Justin deduct this year?
A) $10,000
B) $20,000
C) $25,000
D) $30,000

66) Joseph has AGI of $170,000 before considering the $20,000 rental loss for property which he actively manages. How much of the rental loss can he deduct?
A) $0
B) $10,000
C) $20,000
D) $25,000

67) Shaunda has AGI of $90,000 and owns rental property generating a $27,000 loss. She actively manages the property. Her deductible loss is
A) $0.
B) $13,500.
C) $25,000.
D) $27,000.

68) Brandon, a single taxpayer, had a loss of $48,000 from a rental real estate activity in which he actively participated. He also had $27,000 of income from another rental real estate activity in which he actively participated. He acquired both investments in 2014. If Brandon has no other passive income or losses and has adjusted gross income of $84,000 before considering passive activities, how much loss from rental activities can he use to offset his nonpassive income?
A) $21,000
B) $24,000
C) $25,000
D) $45,000

69) Which of the following is most likely not considered a casualty?
A) fire loss
B) water damage caused by a busted water heater
C) death of a pine tree due to a two-day infestation of pine beetles
D) water damage to the walls and ceiling of a taxpayer’s personal residence as the result of gradual deterioration of the roof

70) Nicole has a weekend home on Pecan Island that she purchased in 2005 for $250,000. Recently, the home was appraised at $260,000. After the appraisal, a hurricane hit Pecan Island, severely damaging Nicole’s home. An appraisal placed the value of the home at $140,000 after the hurricane. Because of its prohibitive cost, Nicole had no hurricane insurance. Before any reductions or limitations, Nicole’s casualty loss amount is
A) $0.
B) $10,000.
C) $120,000.
D) $140,000.

71) A fire totally destroyed office equipment and furniture which Monica uses in her business. The equipment had an adjusted basis of $15,000 and a FMV of $10,000 before the fire. The furniture’s adjusted basis was $5,000 and its FMV was $2,000 before the fire. Monica’s AGI for the year is $60,000. Monica does not have insurance on the destroyed assets. How much is Monica’s deductible casualty loss?
A) $5,900
B) $12,000
C) $13,900
D) $20,000

72) Lena owns a restaurant which was damaged by a tornado. The following assets were partially destroyed:

Basis Reduction in FMV Insurance Payment
Building $150,000 $200,000 $100,000
Equipment $30,000 $20,000 $10,000

Lena has AGI of $50,000. What is the amount of Lena’s deductible casualty loss?
A) $54,900
B) $60,000
C) $70,000
D) $180,000

73) Leonard owns a hotel which was damaged by a hurricane. The hotel had an adjusted basis of $1,000,000 before the hurricane. A recent appraisal determined that the hotel’s FMV was $1,500,000 before the hurricane and $700,000 afterwards. Leonard received insurance proceeds of $500,000. His AGI is $60,000. What is the amount of his deductible casualty loss?
A) $293,900
B) $300,000
C) $793,900
D) $800,000

74) Jarrett owns a mountain chalet that he purchased in 2008 for $175,000. This year, the home appraised at $300,000. Shortly after the appraisal, a blizzard hit the area in spring of the current year, destroying trees and severely damaging several homes, including Jarrett’s chalet. Its value was reduced to $135,000. Jarrett does not have insurance. Jarrett’s AGI is $200,000. Jarrett’s deductible loss after limitations is
A) $135,000.
B) $144,900.
C) $164,900.
D) $165,000.

75) Hope sustained a $3,600 casualty loss due to a severe storm. She also incurred a $800 loss from a theft in the same year. Both the casualty and theft involved personal-use property. Hope’s AGI for the year is $25,000 and she does not have insurance coverage. Hope’s deductible casualty loss is
A) $1,700.
B) $1,800.
C) $4,200.
D) $4,300.

76) In the current year, Marcus reports the following casualty gains and losses on personal-use property. Assets X and Y are destroyed in the first casualty while Z is destroyed in a second casualty.

Asset Reduction
in FMV Adjusted Basis Insurance Holding Period
X $8,000 $2,000 $7,000 2 years
Y 3,000 5,000 2,000 10 months
Z 2,500 1,300 1,000 8 months

As a result of these losses and insurance recoveries, Marcus must report
A) a net gain of $3,700.
B) a long-term gain of $4,900 on asset X; a short-term capital loss of $900 on asset Y; and a short-term capital loss of $200 on asset Z.
C) a long-term capital gain of $5,000 on asset X; a short-term capital loss of $900 on asset Y; and a short-term capital loss of $200 on asset Z.
D) a long-term capital gain of $5,000 on asset X; a short-term capital loss of $900 on asset Y; and a short-term capital loss of $300 on asset Z.

77) Wesley completely demolished his personal automobile in a car accident. Damage to the auto was estimated at $35,000. Wesley had purchased the car a few years ago for $60,000. He received an insurance reimbursement of $28,000. His adjusted gross income this year was $55,000 and he incurred no other losses during the year. What amount can he deduct as a casualty loss on his income tax return after limitations?
A) $1,400
B) $1,500
C) $6,900
D) $7,000

78) A flood damaged an auto owned by Mr. and Mrs. South on June 15 of this year. The car was only used for personal purposes.

Fair market value before the flood $18,500
Fair market value after the flood 2,000
Cost basis 20,000
Insurance proceeds 13,000
Adjusted gross income for this year 25,000
Business use of auto 0

Based on these facts, what is the amount of the South’s casualty loss deduction after limitations for this year?
A) $900
B) $1,000
C) $4,400
D) $4,500

79) In February 2014, Amelia’s home, which originally cost $150,000, is damaged by a windstorm. Amelia had refinanced the home shortly before the storm, and it was appraised at $200,000. After the storm, the home appraised at $120,000. Amelia has received no insurance reimbursement by December 31, but expects to recover 90 percent of the loss. In the subsequent year, the insurance company pays Amelia $50,000. Amelia’s AGI is $85,000 in 2014, and her 2015 AGI is $80,000. Amelia suffers no other casualty losses in either year. Amelia may deduct
A) $7,900 in 2014.
B) $22,000 in 2015.
C) $13,900 in 2015.
D) $14,000 in 2015.

80) This summer, Rick’s home (which has a basis of $80,000) is damaged by a tornado. An appraisal by a realtor placed the FMV of the home at $120,000 before the tornado and at $85,000 after the tornado. Rick estimates that the insurance company will reimburse him for 60% of the loss. Next year, the insurance company pays Rick $20,000. Rick’s current year’s AGI is $50,000 and his next year’s AGI is $55,000. Rick suffers no other casualty losses in either year. After limitations, Rick may deduct a casualty loss this year of
A) $ 8,900.
B) $ 9,900.
C) $15,000.
D) $35,000.

81) Juanita, who is single, is in an automobile accident in 2014 and her car sustains $6,200 in damages. Because both drivers received tickets in the accident, Juanita does not expect to recover any of the loss from her insurance company. Juanita’s 2014 AGI is $31,000, and she deducts a $3,000 loss on her 2014 tax return. Her other itemized deductions in 2014 exceed $12,000. In 2015, Juanita’s insurance company reimburses her $2,800. Juanita’s 2015 AGI is $28,000. As a result, Juanita must
A) amend 2014 to show a $200 loss.
B) do nothing and simply keep the $2,800.
C) do nothing to the 2014 return but report $2,800 of income on her 2015 return.
D) amend the 2014 return to show $0 loss and file her 2015 return to show a $200 loss.

82) Constance, who is single, is in an automobile accident in 2014, and her car sustains $6,200 in damages. Because both drivers received tickets in the accident, Constance does not expect to recover any of the loss from her insurance company. Constance’s 2014 AGI is $31,000. Her casualty loss is $3,000; she has other itemized deductions of $1,200. In 2015, Constance’s insurance company reimburses her $2,800. Constance’s 2015 AGI is $28,000. As a result, Constance must
A) amend the 2015 return to show the $200 loss.
B) do nothing and simply keep the $2,800.
C) amend the 2014 return to show $0 loss and file her 2015 return to show $200 loss.
D) do nothing to the 2014 return but report $2,800 of income on her 2015 return.

83) Last year, Abby loaned Pat $10,000 as a gesture of their friendship. Although Pat had signed a note payable that contained interest payments and a maturity date, the loan had not been repaid this year when Pat died insolvent. For this year, assuming that the loan was bona fide, Abby should account for nonpayment of the loan as a(n)
A) itemized deduction.
B) ordinary loss.
C) long-term capital loss.
D) short-term capital loss.

84) In October 2014, Jonathon Remodeling Co., an accrual-method taxpayer, remodels and renovates an office building for Dale and bills him $30,000. Dale signs a note for the debt. Dale keeps delaying payment and files bankruptcy in 2015. Creditors are informed that no assets are available for payment. Jonathon Remodeling Co. will report
A) $0 income in both years.
B) $30,000 income in 2014 and a bad debt deduction of $30,000 in 2015.
C) $30,000 income in 2014 and a STCL of $30,000 in 2015 limited to $3,000 after netting.
D) $30,000 income in 2014 and then must amend last year’s return to show $0 income when advised of the bankruptcy.

85) Martha, an accrual-method taxpayer, has an accounting practice. In 2013, she performs tax analyses for Arnold and sends him an invoice for $10,000. In 2014, Martha sells her practice and all accounts to David. Arnold’s debt becomes worthless that year after David has purchased the practice. The result is
A) Martha deducts a nonbusiness bad debt in 2014.
B) Martha deducts a business bad debt in 2014.
C) David deducts a business bad debt in 2014.
D) David deducts a nonbusiness bad debt in 2014.

86) Vera has a key supplier for her business who was facing cash flow problems which would impair Vera’s ability to get shipments of key components for her production. Vera made a $10,000 loan to the supplier. Unfortunately the supplier filed for bankruptcy and has gone out of business without repaying Vera. Vera will be able to recognize a loss of
A) $10,000.
B) $3,000.
C) $7,000.
D) 0.

87) In 2013 Grace loaned her friend Paula $12,000 to invest in various stocks. Paula signed a note to repay the principal with interest. Unfortunately the market for that industry sector plunged, and Paula incurred large losses. In 2014 Paula declared personal bankruptcy and Grace was unable to collect any of her loan. Grace had no other gains or losses last year or this year. The result is
A) Grace deducts a business bad debt of $12,000 in 2014.
B) Grace deducts a $12,000 nonbusiness bad debt as a short-term capital loss in 2014.
C) Grace deducts a $3,000 nonbusiness bad debt as a short-term capital loss in 2014 and carries $9,000 over to subsequent years.
D) Grace deducts a business bad debt of $3,000 in 2014 and carries $9,000 over to subsequent years.

88) Which of the following expenses or losses could create a net operating loss for an individual taxpayer?
A) large losses on sales of investment assets
B) an operating loss from a sole proprietorship
C) large charitable contributions
D) all of the above

89) An individual taxpayer has negative taxable income for the year. In calculating the net operating loss created, which of the following expenses or losses will be added back to the negative taxable income?
A) capital losses
B) personal and dependency exemptions
C) nonbusiness deductions in excess of nonbusiness income
D) all of the above

90) A taxpayer incurs a net operating loss in the current year. With respect to the application of the NOL,
A) the taxpayer will carry back the NOL three years first, then carry forward any balance for five years.
B) the taxpayer must carry forward the loss and has up to 20 years to use it.
C) the taxpayer can carry forward the loss indefinitely until there is sufficient taxable income to use it up.
D) the taxpayer will first carry back the NOL for two years, then carryforward the balance for a period of 20 years, or the taxpayer can elect to only carry forward the loss for the 20-year allowable period.

91) Kendal reports the following income and loss:

Salary $120,000
Income from activity A 36,000
Loss from activity B ( 30,000)
Loss from activity C ( 60,000)

Activities A, B, and C are all passive activities, but none are rental properties. What is the amount of the suspended loss attributable to each activity?

92) During the year, Patricia realized $10,000 of taxable income from activity A, $4,000 loss from activity B, and $6,000 of taxable income from activity C. All three activities are passive activities with regard to Patricia, but are not rental properties. In addition, $32,000 of passive losses from activity C is carried over from prior years. During the current year, Patricia sells activity C for an $18,000 taxable gain. Patricia’s salary for the year is $100,000. What is the amount of Patricia’s deduction against salary income?

93) Hersh realized the following income and loss this year:

Net taxable income from chocolate shop $50,000
Interest income 10,000
Loss from passive activity (not a rental property) (58,000)

a. Assume Hersh is an individual taxpayer and the chocolate shop is his sole proprietorship. Determine Hersh’s AGI and any carryovers.
b. Assume the taxpayer is Hersh Inc., a C corporation, owned 100% by the Hersh family. Determine Hersh Inc.’s taxable income and any carryovers.

94) Adam owns interests in partnerships A and B, both of which are Publicly Traded Partnerships. During the current year, Adam’s share of the income from A is $12,000. Adam’s share of B’s loss is $3,500. B also generates portfolio income of which Adam’s share is $2,000. What are the tax consequences of these income and loss items?

95) Parveen is married and files a joint return. He reports the following items of income and loss for the year:

Salary $ 135,000
Activity A (passive) 13,000
Activity B (nonbusiness rental real estate) ( 45,000)

If Parveen actively participates in the management of Activity B, what is his AGI for the year and what is the passive loss carryover to next year?

96) Aretha has AGI of less than $100,000 and a 25% marginal tax rate. During the year, she reports a $36,000 loss from Activity A and a $24,000 loss from Activity B. Additionally, Activity A generates $8,000 of tax credits. Both activities A and B are passive real estate rental activities in which Anita actively participates and owns over 10% of each activity.
a. How much loss can be recognized from each activity?
b. What is the amount of Aretha’s suspended loss from each activity?
c. How much of the tax credits can be applied this year?

97) Wes owned a business which was destroyed by fire in May 2014. Details of his losses follow:

Adj. FMV FMV Insurance
Asset Basis Before After Reimbursement
A $1,000 $2,000 $ 0 $2,000
B 15,000 10,000 3,000 2,000
C 2,400 5,000 2,500 1,000

His AGI without consideration of the casualty is $45,000.

What is Wes’s net casualty loss deduction for 2013?

98) Determine the net deductible casualty loss on the Schedule A for Alan Michael when his adjusted gross income was $40,000 in 2014 and the following occurred:

Adj. FMV FMV Insurance
Asset Basis Before After Reimbursement
A $1,200 $2,000 $ 500 $ 100
B 14,000 12,000 5,000 1,100
C 600 3,000 2,775 125

A and B were destroyed in the same casualty in March. C was destroyed in a separate casualty in July.

All casualty losses were nonbusiness personal use property losses and none occurred in a federally declared disaster area.

What is the amount of the net deductible casualty loss?

99) Frank loaned Emma $5,000 in 2012 with the agreement that the loan would be repaid in three years. In 2013, Emma filed for bankruptcy and based on available information from the bankruptcy court, it was estimated that Frank could expect to receive $.65 on the dollar. In 2014, final settlement was made and Frank received $600.
a. Assuming the loan is a business bad debt, what is the amount of and the nature of Frank’s deduction in 2013?
b. Assuming the loan is a business bad debt, what is the amount of and the nature of Frank’s deduction in 2014?
c. Assuming instead that the loan is a nonbusiness bad debt, what is the amount of and the nature of Frank’s deduction in 2013 and 2014?

100) Becky, a single individual, reports the following taxable items in 2014:

Gross income from business $ 93,000
Minus: Business expenses ( 105,000)
($ 12,000)
Interest income 1,500
AGI ($ 10,500)

Itemized deductions:
Interest expense $ 3,100
State Income Taxes 1,900
Casualty 3,000
Total itemized deductions ( 8,000)
Minus: Personal exemption ( 3,950)
Taxable income ($22,450)

What is Barbara’s NOL for the year?

101) Harley, a single individual, provided you with the following information for this year:

Income:
Salary from part-time employment $ 16,000
Interest income from savings 1,000
Net long-term capital gain from investment property 3,000

Deductions:
Net business loss
(sales of $100,000 less expenses of $130,000) ($30,000)
Personal exemption ( 3,950)
Standard deduction ( 6,200)
Net-operating loss carryover from last year ( 3,000)

What is the amount of Harley’s net operating loss for this year?

102) Businesses can recognize a loss on abandoned property. What types of factors would indicate that property had been abandoned?

103) What must an individual taxpayer prove to receive a worthless security deduction?

104) Erin, a single taxpayer, has 1,000 shares of 1244 stock she purchased directly from AAA Corporation for $120,000 five years ago. The stock has a FMV of $30,000, and Erin is thinking of selling the stock. She has no other capital gains or losses for the year. Discuss the tax consequences and planning opportunities relating to selling the stock.

105) Why was Section 1244 enacted by Congress? Specifically, consider and discuss some of the individual qualifying requirements of Sec. 1244.

106) Why did Congress enact restrictions and limitations on losses from passive activities?

107) What is required for an individual to be considered as actively participating in a real estate activity for purposes of utilizing the $25,000 ceiling on rental real estate losses?

108) What is or are the standards that must be present to warrant a casualty loss deduction?

109) A taxpayer suffers a casualty loss on personal-use property for which he has insurance coverage. However, to avoid a premium adjustment, the taxpayer fails to make a timely claim. In this situation is the full deduction for the casualty, after the normal floors, available to the taxpayer? Why or why not?

110) If a loan has been made to a related party, what are some considerations for determining whether the loan is a bona fide debt or is, in fact, merely a gift?

111) Distinguish between the accrual-method taxpayer and the cash-method taxpayer with regard to basis in a receivable.

112) What are some factors which indicate that a debt may be worthless?

113) If an NOL is incurred, when would a taxpayer elect to forgo the carryback period and only carry the loss deduction forward?

114) How is a claim for refund of taxes filed by an individual who carries an NOL deduction back to a prior year?

Chapter 9 Employee Expenses and Deferred Compensation

1) Deferred compensation refers to methods of compensating employees based upon their current service where the benefits are deferred until future periods.

2) If an individual is self-employed, business-related expenses are deductions for AGI.

3) Unreimbursed employee business expenses are deductions for AGI.

4) An employer-employee relationship exists where the employer has the right to control and direct the individual providing services with regard to the end result and the means by which the result is accomplished.

5) A nondeductible floor of 2% of AGI is imposed on unreimbursed employee business expenses, investment expenses, and many other miscellaneous itemized deductions such as tax preparation fees.

6) Gambling losses are miscellaneous itemized deductions subject to the 2% of AGI floor.

7) Personal travel expenses are deductible as miscellaneous itemized deductions subject to the 2% of AGI floor.

8) The deduction for unreimbursed transportation expenses for employees is subject to the 2% of AGI floor.

9) If an individual is not “away from home,” expenses related to local transportation are never deductible.

10) Jason, who lives in New Jersey, owns several apartment buildings in Baltimore. His travel expenses to Baltimore to inspect his property are tax deductible.

11) According to the IRS, a person’s tax home is the location of the family residence regardless of the location of the taxpayer’s principal place of employment.

12) In determining whether travel expenses are deductible, a general rule is that if a person is reassigned for an indefinite period, the individual’s tax home shifts to the new location and travel expenses are not deductible.

13) Travel expenses related to temporary work assignments of one year or less are deductible.

14) If the purpose of a trip is primarily personal and only secondarily related to business, the transportation costs to and from the destination are deductible.

15) Incremental expenses of an additional night’s lodging and additional day’s meals that are incurred to obtain “excursion” air fare rates with respect to employees whose business travel extends over Saturday night are not deductible business expenses.

16) Travel expenses for a taxpayer’s spouse are deductible if the spouse is an employee, the travel is for a bona fide purpose, and the expenses are otherwise deductible.

17) Travel expenses related to foreign conventions are disallowed unless the meeting is directly related to the taxpayer’s business or is employment related and it is reasonable for the meeting to be held outside of North America.

18) Commuting to and from a job location is a deductible expense.

19) Transportation expenses incurred to travel from one job to another are deductible if a taxpayer has more than one job.

20) Taxpayers may use the standard mileage rate method when five vehicles are used simultaneously for business.

21) If the standard mileage rate is used in the first year, the actual expense method may not be used in future years.

22) A taxpayer goes out of town to a business convention. The 50% reduction applies to the cost of food, entertainment and transportation expenses.

23) Self-employed individuals receive a for AGI deduction for 50% of entertainment expenses paid or incurred in the trade or business.

24) If an employee incurs business-related entertainment expenses that are fully reimbursed, it is the employer who is subject to the 50% limitation.

25) A tax adviser takes a client to a major league hockey game following the conclusion of a meeting involving the signing of a major planning engagement. As it is not “directly related,” the entertainment cannot be deductible.

26) “Associated with” entertainment expenditures generally must occur on the same day that business is discussed.

27) Dues paid to social or athletic clubs are deductible if they meet a primary-use test, requiring that more than 50% of the use of the facility be for business purposes.

28) Generally, 50% of the cost of business gifts is deductible up to $25 per donee per year.

29) A gift from an employee to his or her superior does not qualify as a business gift.

30) An accountant takes her client to a hockey game following a business meeting. Because it is a playoff game, and the tickets were purchased that day, a premium was paid. The deduction for the tickets is limited to 50% of the face value.

31) If an employee incurs travel expenditures and is fully reimbursed by the employer, neither the reimbursement nor the deduction is reported on the employee’s tax return if reporting is pursuant to an accountable plan.

32) Kim currently lives in Buffalo and works in Rochester, a 60-mile commute each way. Kim accepts a new job in a town outside of Rochester, and the new commute is 75-miles each way. Kim decides the commute for the new job is too long, and she moves to Rochester. Kim is eligible to deduct her moving expenses.

33) Deductible moving expenses include the cost of moving household goods and personal effects as well as temporary living expenses.

34) When a public school system requires advanced education for a teacher to continue employment, the teacher’s expenses are a deductible education expense.

35) Educational expenses incurred by a CPA for courses necessary to meet continuing education requirements are fully deductible.

36) Educational expenses incurred by a bookkeeper for courses necessary to sit for the CPA exam are fully deductible.

37) In-home office expenses are deductible if the office is used exclusively on a regular basis as the principal place of business for any trade or business of the taxpayer.

38) In addition to the general requirements for in-home office expenses, employees must also prove that the exclusive use of the office is for the convenience of the employer.

39) In-home office expenses for an office used by the taxpayer for administrative or management activities of the taxpayer’s trade or business are never deductible.

40) In-home office expenses which are not deductible in the year in which the costs were incurred due to limitations may be carried forward to subsequent years.

41) An employer receives an immediate tax deduction for pension and profit-sharing contributions made on behalf of employees.

42) In a defined contribution pension plan, fixed amounts are contributed based upon a specific formula and retirement benefits are based on the value of a participant’s account at the time of retirement.

43) A qualified pension plan requires that employer-provided benefits must be 100 percent vested after five years of service.

44) Under a qualified pension plan, the employer’s deduction is usually deferred until the employee recognizes income.

45) Nonqualified deferred compensation plans can discriminate in favor of highly compensated executives.

46) Corporations issuing incentive stock options receive a tax deduction for compensation expense.

47) Employees receiving nonqualified stock options recognize ordinary income at the grant date or exercise date if there is a readily ascertainable fair market value.

48) A sole proprietor establishes a Keogh plan. The highest effective percentage of earned income she can contribute is 25 percent.

49) SIMPLE retirement plans allow a higher level of employer contributions than do SEP IRAs.

50) The maximum tax deductible contribution to a traditional IRA in 2014 is $5,500 ($6,500 for a taxpayer age 50 or over).

51) The maximum tax deductible contribution to a Roth IRA in 2014 is $5,500 ($6,500 for a taxpayer age 50 or over).

52) A contributor may make a deductible contribution to a Coverdell Education Savings Account for a qualified designated beneficiary of up to $2,000.

53) All taxpayers are allowed to contribute funds to Health Savings Accounts to supplement their health insurance.

54) In which of the following situations is the individual is an independent contractor rather than an employee?
A) a nurse who is directly supervised by doctors in an office
B) a computer programmer who is instructed as to what projects to undertake, programming language and format, and hours of work
C) a nurse who travels to several different patients. She sets her own hours and is responsible for the delivery of nursing care and end result
D) a teacher whose hours, classroom responsibilities, content and methods of instruction are established by the school

55) Which of the following statements regarding independent contractors and employees is true (ignore temporary provisions)?
A) Independent contractors pay Social Security and Medicare tax of 15.3%.
B) Employees must pay unemployment taxes.
C) Independent contractors and employees pay the same Social Security and Medicare tax rates.
D) Independent contractors deduct their business expenses “from AGI.”

56) West’s adjusted gross income was $90,000. During the current year he incurred and paid the following:

Publications (unreimbursed and related to employment) $2,000
Tax return preparation fee 1,000
Dues to professional organizations 1,500
Fees for will preparation (no tax advice) 800
Life insurance premiums 1,400

Assuming he can itemize deductions, how much should West claim as miscellaneous itemized deductions (after limitations have been applied)?
A) $2,700
B) $4,500
C) $3,500
D) $5,300

57) Allison, who is single, incurred $4,000 for unreimbursed employee expenses, $10,000 for mortgage interest and real estate taxes on her home, and $500 for investment counseling fees. Allison’s AGI is $80,000. Allison’s allowable deductions from AGI are (after limitations have been applied)
A) $10,500.
B) $12,900.
C) $14,000.
D) $14,500.

58) All of the following are allowed a “For AGI” deduction except:
A) Cora owns her own CPA firm and travels from Lafayette, LA. to Washington, D.C. to attend a tax conference.
B) Jennifer, who lives in Houston, is the owner or several apartment buildings in Salt Lake City and travels there to inspect and manage her investments.
C) Alan is self-employed and is away from home overnight on job-related business.
D) Alison is an employee who is required to travel to company facilities throughout the U.S. in the conduct of her management responsibilities. She is not reimbursed by her employer.

59) Ron is a university professor who accepts a visiting position at another university for six months and
obtains a leave of absence from his current employer. Ron rents an apartment near the university and purchases his food. These living expenses incurred by Ron while visiting the university will be
A) deductible for AGI.
B) deductible from AGI, without application of a floor.
C) deductible from AGI, subject to the 2% of AGI floor.
D) nondeductible.

60) Gwen traveled to New York City on a business trip for her employer. Gwen spent 4 days in business meetings and conferences and then spent 2 days sightseeing in the area. Gwen’s plane fare for the trip was $250. Meals cost $160 per day. Hotels and other incidental expenses amounted to $250 per day. Gwen was not reimbursed by her employer for any expenses. Her AGI for the year is $50,000 and she itemizes but has no other miscellaneous itemized deductions. Gwen may deduct (after limitations)
A) $570.
B) $890.
C) $1,890.
D) $1,570.

61) Norman traveled to San Francisco for four days on vacation, and while there spent another two days conducting business for his employer. Norman’s plane fare for the trip was $500; meals cost $150 per day; hotels cost $300 per day; and a rental car cost $150 per day that was used for all six days. Norman was not reimbursed by his employer for any expenses. Norman’s AGI for the year is $40,000 and he did not have any other miscellaneous itemized deductions. Norman may deduct (after limitations)
A) $250.
B) $800.
C) $1,050.
D) $1,200.

62) Gayle, a doctor with significant investments in the stock market, traveled on a cruise ship to Bermuda. Investment specialists provided daily seminars which Gayle attended. The cost of the cruise for four days is $2,500. Gayle can deduct (before application of any floors)
A) $0.
B) $1,250.
C) $2,000.
D) $2,500.

63) Chelsea, who is self-employed, drove her automobile a total of 20,000 business miles in 2014. This represents about 75% of the auto’s use. She has receipts as follows:

Parking (business only) $500
Tolls (business only) 200
Repairs $1,000

Chelsea has an AGI for the year of $50,000. Chelsea uses the standard mileage rate method. After application of any relevant floors or other limitations, she can deduct
A) $10,900.
B) $11,900.
C) $11,750.
D) $12,900.

64) Brittany, who is an employee, drove her automobile a total of 20,000 business miles in 2014. This represents about 75% of the auto’s use. She has receipts as follows:

Parking (business only) $500
Tolls (business only) 200
Repairs $1,000

Brittany’s AGI for the year of $50,000, and her employer does not provide any reimbursement. She uses the standard mileage rate method. After application of any relevant floors or other limitations, Brittany can deduct
A) $10,900.
B) $11,900.
C) $10,750.
D) $12,900.

65) Rajiv, a self-employed consultant, drove his auto 20,000 miles this year, 15,000 to meetings with clients and 5,000 for commuting and personal use. The cost of operating the auto for the year was as follows:

Gasoline and repairs $7,000
Insurance 1,000
Depreciation 4,000

Rajiv’s AGI is $100,000 before considering the auto costs. Rajiv has used the actual cost method in the past. What is Rajiv’s deduction for the use of the auto after application of all relevant limitations?
A) $8,325
B) $9,000
C) $6,325
D) $7,000

66) Jordan, an employee, drove his auto 20,000 miles this year, 15,000 to meetings with clients and 5,000 for commuting and personal use. The cost of operating the auto for the year was as follows:

Gasoline and repairs $7,000
Insurance 1,000
Depreciation 4,000

Jordan submitted appropriate reports to his employer, and the employer paid a reimbursement of $ .50 per mile. Jordan has used the actual cost method in the past. Jordan’s AGI is $50,000. What is Jordan’s deduction for the use of the auto after application of all relevant limitations?
A) $1,500
B) $500
C) $1,000
D) $8,000

67) Sarah incurred employee business expenses of $5,000 consisting of $3,000 business meals and $2,000 customer entertainment. She provided an adequate accounting to her employer’s accountable plan and received reimbursement for one-half of the total expenses. How much of the meals and entertainment will be deductible by Sarah without consideration of the 2% of AGI limit?
A) $0
B) $1,250
C) $2,500
D) $5,000

68) Austin incurs $3,600 for business meals while traveling for his employer, Tex, Inc. Austin is reimbursed in full by Tex pursuant to an accountable plan. What amounts can Austin and Tex deduct?

A)
Austin Tex
$0 $1,800

B)
Austin Tex
$0 $3,600

C)
Austin Tex
$1,800 $1,800

D)
Austin Tex
$3,600 $0

69) Joe is a self-employed tax attorney who frequently entertains his clients at his country club. Joe’s club expenses include the following:

Annual dues $ 5,400
Initiation fees 1,200
Charges for personal meals with his family 3,100
Meal and entertainment charges related to business use 4,000

Assuming the business meals and entertainment qualify as deductible entertainment expenses, Joe may deduct
A) $2,000.
B) $4,700.
C) $5,300.
D) $4,000.

70) Shane, an employee, makes the following gifts, none of which are reimbursed:

Shane’s manager $30
Shane’s personal assistant 40
4 customers ($27 each) 108

What amount of the gifts is deductible before application of the 2% of AGI floor for miscellaneous itemized deductions?
A) $125
B) $150
C) $75
D) $178

71) Steven is a representative for a textbook publishing company. Steven attends a convention which will also be attended by many potential customers. During the week of the convention, Steven incurs the following costs in entertaining potential customers.

Meal costs $ 1,500
Entertainment of customers 3,500

Having recently been to a company seminar on the new tax laws, Steven makes sure that business is discussed at the various dinners, and that the entertainment is on the same day as the meetings with customers. Steven is reimbursed $2,000 by his employer under an accountable plan. Steven’s AGI for the year is $50,000, and while he itemizes deductions, he has no other miscellaneous itemized deductions. What is the amount and character of Steven’s deduction after any limitations?
A) $500 from AGI
B) $500 for AGI
C) $2,000 from AGI
D) $2,000 for AGI

72) Matt is a sales representative for a local company. He entertains customers as part of his job. During the current year he spends $3,000 on business entertainment. The company provides him an expense allowance of $2,000 under a nonaccountable plan. How will Matt treat the $2,000 partial reimbursement and the $3,000 entertainment expense?
A) He will deduct the $1,000 net expense as a miscellaneous itemized deduction, subject to the 2% of AGI floor.
B) He will deduct $500 of the net expense as a miscellaneous itemized deduction, subject to the 2% of AGI floor.
C) He will recognize $2,000 of income and deduct $3,000 as a miscellaneous itemized deduction, subject to the 2% of AGI floor.
D) He will recognize $2,000 of income and deduct $1,500 as a miscellaneous itemized deduction, subject to the 2% of AGI floor.

73) Donald takes a new job and moves to a new residence. The distances are as follows:

Old residence to new job 70 miles
Old residence to old job 8 miles

By how many miles does the move exceed the minimum distance requirement for the moving expense deduction?
A) 12 miles
B) 20 miles
C) 62 miles
D) none of the above

74) In which of the following situations is the taxpayer not allowed a deduction for moving expenses?
A) Pam moves from Phoenix to Los Angeles to take a new job. She works at the Los Angeles job for 45 weeks before starting a new job in Las Vegas.
B) Paul moves from Boston to Miami to start a new business selling t-shirts. The business is not successful and Paul returns to Boston after 52 weeks.
C) Phyllis opens a coffee bar after moving from Seattle to San Francisco. She still owns the coffee bar and lives in San Francisco 90 weeks after her move.
D) Marva moves from Dallas to Washington D.C. in her job as an IRS agent. She is still working at the IRS Washington office after one year.

75) Bill obtained a new job in Boston. He incurred the following moving expenses:

Transportation of household goods and personal effects $2,600
Cost of transporting Bill’s family 2,000
House-hunting trip 1,700
Payments to lessor to cancel a lease 500

Assuming Bill is entitled to deduct moving expenses, what is the amount of the deduction?
A) $2,600
B) $4,600
C) $6,300
D) $6,800

76) Ron obtained a new job and moved from Houston to Washington. He incurred the following moving expenses:

Transportation of household goods $3,200
House-hunting trips 1,500
Temporary living expenses (20 days) 3,400
Commissions on new lease 500
Costs of settling old lease 250
Mileage for personal automobile 1,400 miles

Assuming Ron is eligible to deduct his moving expenses, what is the amount of the deduction?
A) $3,529
B) $6,600
C) $9,179
D) $3,984

77) Edward incurs the following moving expenses:

Direct moving expenses $4,000
Indirect moving expense 6,000

The employer reimburses Edward for the full $10,000. What is the amount to be reported as income by Edward?
A) $0
B) $4,000
C) $6,000
D) $10,000

78) All of the following may deduct education expenses except:
A) Richard is a self-employed dentist who incurs expenses to attend a convention on new techniques in oral surgery.
B) Paige is an accountant who incurs expenses to take a CPA exam review course.
C) Hope is a business executive who incurs expenses to pursue an MBA degree.
D) Marvin is a high school teacher who incurs expenses for education courses to meet new course requirements to maintain his job.

79) The following individuals maintained offices in their home:
(1) Dr. Austin is a self-employed surgeon who performs surgery at four hospitals. He uses his home for administrative duties as he does not have an office in any of the hospitals.
(2) June, who is a self-employed plumber, earns her living in her customer’s homes. She maintains an office at home where she bills clients and does other paperwork related to her plumbing business.
(3) Cassie, who is an employee of Montgomery Electrical, is provided an office at the work but does significant administrative work at home. Her employer does not require her to do extra work but she feels it is necessary.

Who is entitled to a home office deduction?
A) Dr Austin
B) Dr. Austin and June
C) Cassie and June
D) All of the taxpayers are entitled to a deduction.

80) Alex is a self-employed dentist who operates a qualifying office in his home. Alex has $180,000 gross income from his practice and $160,000 of expenses directly related to the business, i.e., non-home office expenses. Alex’s allocable home office expenses for mortgage interest expenses and property taxes are $14,000 and other home office expenses are $9,000. What is Alex’s total allowable home office deduction?
A) $9,000
B) $14,000
C) $20,000
D) $23,000

81) Charles is a self-employed CPA who maintains a qualifying office in his home. Charles has $110,000 gross income from his practice and incurs $88,000 in salaries, supplies, computer services, etc. Charles’s mortgage interest and real estate taxes allocable to the office total $10,000. Other expenses total $14,000 and consist of depreciation, utilities, insurance, and maintenance. What is Charles’ total home office expense deduction?
A) $10,000
B) $14,000
C) $22,000
D) $24,000

82) In a contributory defined contribution pension plan, all of the following are true with the exception of
A) a separate account is established for each participant.
B) both the employee and employer can make contributions to the plan.
C) amounts are contributed to the plan based upon a specific formula.
D) retirement benefits are a fixed amount based on the level of compensation earned by the employee during the working years.

83) Characteristics of profit-sharing plans include all of the following with the exception of:
A) A predetermined formula is used to allocate employer contributions to individual employees and to establish benefit payments.
B) Forfeitures of benefits under the plan may be reallocated to the remaining participants.
C) The company must make contributions to the plan if it has profits during the year.
D) Annual employer contributions are not required, but substantial, recurring contributions must be made to satisfy the requirement that the plan be permanent.

84) Ross works for Houston Corporation, which has a contributory defined contribution pension plan. The employer’s monthly contribution to the plan is 8 percent of each participating employee’s monthly salary, while the employee contributes only 6 percent. Ross’s monthly salary is $3,000. Which of the following statements best describes the benefits of the plan?
A) Houston receives a deduction for its contributions to the plan when Ross receives a distribution from the plan.
B) While Ross is taxed on the employer’s contributions to the plan, his own contributions are not taxed until he receives a distribution from the plan.
C) Ross may deduct his own contributions to the pension plan, and Ross reports income from the plan each year until he receives distributions from the plan.
D) The earnings on amounts contributed to the plan are not taxed to Ross until he retires or receives a distribution from the plan.

85) Sam retired last year and will receive annuity payments for life from his employer’s qualified
retirement plan of $30,000 per year starting this year. During his years of employment, Sam contributed $130,000 to the plan on an after-tax basis. Based on IRS tables, his life expectancy is 260 months. All of the contributions were on a pre-tax basis. This year, Sam will include what amount in income?
A) 0
B) $6,000
C) $24,000
D) $30,000

86) Hunter retired last year and will receive annuity payments for life from his employer’s qualified retirement plan of $30,000 per year starting this year. During his years of employment, Hunter contributed $130,000 to the plan. Based on IRS tables, his life expectancy is 260 months. All of the contributions were on a pre-tax basis. This year, Hunter will include what amount in income?
A) $0
B) $6,000
C) $24,000
D) $30,000

87) Which of the following statements is incorrect regarding unfunded deferred compensation plans?
A) The employee is not taxed on the compensation amount when it is deposited in an escrow account.
B) An accrual-basis employer can deduct the compensation amount when it is accrued in the year service.
C) An employee is taxed when the amount is actually paid or made available.
D) A 20% excise tax will apply if the employee can voluntarily elect to receive payment early.

88) Tobey receives 1,000 shares of YouDog! stock as part of his compensation package. Tobey’s employment contract with YouDog!, Inc. states that if he leaves before completion of three years of employment, he will forfeit the stock. The stock currently has a fair market value of $12 per share. Which of the following statements regarding Tobey’s choices is not true?
A) Tobey does not have to recognize any income from receiving the stock until his rights to the stock are fully vested.
B) Tobey must report $12,000 as income due to the receipt of the stock in the current year.
C) Tobey may elect to report the $12,000 FMV of the stock as ordinary income in the current year.
D) If Tobey elects to report $12,000 as income in the current year and the stock price falls to $5 per share when his rights to the stock are vested, Tobey is not allowed to deduct a loss.

89) All of the following characteristics are true of an incentive stock option with the exception of
A) the option price must be equal to or greater than the stock’s FMV on the option’s grant date.
B) the employee cannot own more than ten percent of the voting power of the employer corporation’s stock immediately prior to the option’s grant date.
C) the option must be granted within ten years from the date the plan is adopted and the employee must exercise the stock option within ten years from the grant date.
D) there is no limit to the value of the options that become exercisable to an employee in a single year.

90) Wilson Corporation granted an incentive stock option to Reva on January 1, two years ago. The option price was $300, and the FMV of the Wilson stock was also $300 on the grant date. The option allowed Reva to purchase 150 shares of Wilson stock. Reva exercised the option on August 1, this year, when the stock’s FMV was $400. Unless otherwise stated, assume Reva is a qualifying employee. The results of the above transactions to Reva will be
A) no income to Reva on the grant date or exercise date but there is an alternative minimum tax adjustment item to Reva of $15,000.
B) no income tax or alternative minimum tax effect for Reva.
C) ordinary income to Reva on the exercise date of $15,000.
D) capital gain to Reva on the exercise date of $15,000.

91) Mirasol Corporation granted an incentive stock option to employee Josephine two years ago. The option price was $150 and the FMV of the Mirasol stock was also $150 on the grant date. The option allowed Josephine to purchase 160 shares of Mirasol stock. Josephine exercised the option this year when the stock’s FMV was $250. Unless otherwise stated, assume Josephine is a qualifying employee. The results of the above transactions to Mirasol Corporation will be
A) no compensation deduction.
B) a compensation deduction of $16,000 on the grant date.
C) a tax preference item of $16,000 on the exercise date.
D) a compensation deduction of $16,000 on the exercise date.

92) Martin Corporation granted an incentive stock option to employee Caroline on January 1, 2011. The option price was $150, and the FMV of the Martin stock was also $150 on the grant date. The option allowed Caroline to purchase 160 shares of Martin stock. Caroline exercised the option on August 1, 2013 when the stock’s FMV was $250. Unless otherwise stated, assume Caroline is a qualifying employee. If Caroline sells the stock on September 5, 2014 for $350 per share, she must recognize (ignore alternative minimum tax)
A) 0. No gain or loss is recognized at exercise or sale with incentive stock options.
B) long-term capital gain of $16,000 in 2014.
C) ordinary income of $16,000 on the exercise date and a long-term capital gain of $16,000 in 2014.
D) long-term capital gain of $32,000 in 2014.

93) Jackson Corporation granted an incentive stock option to employee Caroline on January 1, two years ago. The option price was $150, and the FMV of the Jackson stock was also $150 on the grant date. The option allowed Caroline to purchase 160 shares of Jackson stock. Caroline exercised the option on August 1, 2013, when the stock’s FMV was $250. Unless otherwise stated, assume Caroline is a qualifying employee. If Caroline sells the stock on July 5, 2014 for $400 per share, she must recognize
A) long-term capital gain of $40,000 in the year of sale.
B) long-term capital gain of $24,000 in the year of sale.
C) ordinary income of $16,000 on the exercise date and a long-term capital gain of $24,000 in the year of sale.
D) ordinary income of $16,000 and a short-term capital gain of $24,000 in the year of sale.

94) Martin Corporation granted a nonqualified stock option to employee Caroline on January 1, 2011. The option price was $150, and the FMV of the Martin stock was also $150 on the grant date. The option allowed Caroline to purchase 1,000 shares of Martin stock. The option itself does not have a readily ascertainable FMV. Caroline exercised the option on August 1, 2014 when the stock’s FMV was $250. If Caroline sells the stock on September 5, 2015 for $300 per share, she must recognize

A)
2014 2015
$100,000 ordinary income $50,000 LTCG

B)
2014 2015
0 $150,000 LTCG

C)
2014 2015
$100,000 ordinary income $50,000 ordinary income

D)
2014 2015
0 $150,000 ordinary income

95) Martin Corporation granted a nonqualified stock option to employee Caroline on January 1, 2011. The option price was $150, and the FMV of the Martin stock was also $150 on the grant date. The option allowed Caroline to purchase 1,000 shares of Martin stock. The option itself does not have a readily ascertainable FMV. Caroline exercised the option on August 1, 2014 when the stock’s FMV was $250. Caroline sells the stock on September 5, 2015 for $300 per share. Martin Corporation will be allowed a deduction of
A) $150,000 in 2011.
B) $100,000 in 2014.
C) $50,000 in 2015.
D) $100,000 in 2014 and $50,000 in 2015.

96) A partnership plans to set up a retirement plan to benefit the partners and the employees. All of the following retirement plans are appropriate except
A) an H.R. 10 (Keogh) plan.
B) a SEP IRA.
C) a SIMPLE plan.
D) a Solo 401(k).

97) Frank is a self-employed CPA whose 2014 net earnings from his trade or business (before the H.R. 10 plan contribution but after the deduction for one-half of self-employment taxes) is $240,000. What is the maximum contribution that Frank can make on his behalf to his H.R. 10 (Keogh) plan in 2014?
A) $65,000
B) $48,000
C) $52,000
D) $60,000

98) Tessa is a self-employed CPA whose 2014 net earnings from her business (before the H.R. 10
plan contribution but after the deduction for one-half of self-employment taxes) is $400,000. What is the maximum contribution that Tessa can make on her behalf to her H.R. 10 (Keogh) plan in 2014?
A) $100,000
B) $80,000
C) $65,000
D) $52,000

99) Which of the following is true about H.R.10 (Keogh) plans?
A) The plan must be established before the end of the tax year, and contributions must be made before the due date of the tax return, plus extensions.
B) The plan must be established and contributions must be made before the end of the tax year.
C) The plan must be established and contributions must be made before April 1.
D) The plan must be established and contributions must be made before the due date of the tax return, plus extensions.

100) Which of the following statements is incorrect regarding the SEP IRA?
A) Both employers and employees can contribute to the plan.
B) Contributions made by the due date of the tax return can be treated as made on the last day of the related tax year.
C) Employer contributions must be nondiscriminatory.
D) The maximum contribution for 2014 is $52,000.

101) Which statement is correct regarding SIMPLE retirement plans?
A) SIMPLE plans are not subject to nondiscrimination rules.
B) This plan can only be adopted by employers with 50 or fewer employees.
C) Only the employer can contribute to the plan.
D) Employer contributions must vest within three years.

102) Tyne is a 48-year-old an unmarried taxpayer who is not an active participant in an employer-sponsored qualified retirement plan. Before IRA contributions, her AGI is $63,000 in 2014. What is the maximum amount she may contribute to a tax deductible IRA?
A) $ 0
B) $4,400
C) $5,500
D) $6,500

103) Hannah is a 52-year-old an unmarried taxpayer who is not an active participant in an employer-sponsored qualified retirement plan. Before IRA contributions, her AGI is $63,000 in 2014. What is the maximum amount she may contribute to a tax deductible IRA?
A) $4,400
B) $5,200
C) $5,500
D) $6,500

104) H (age 50) and W (age 48) are married but only W is employed. She is not covered by a retirement plan at work. She earns $75,000 during the year and they have combined AGI of $78,000 before any IRA contribution. In 2014, the maximum amount together they may contribute to tax deductible IRAs is
A) $5,500.
B) $6,500.
C) $11,000.
D) $12,000.

105) Tyler (age 50) and Connie (age 48) are a married couple. Tyler is covered under a qualified retirement plan at his job and earned $175,000 in 2014. Connie is employed as a lab technician and earned $30,000 but is not covered under a qualified retirement plan. They file a joint return; have interest and dividend income of $30,000. What is their maximum for AGI deduction for contributions to a traditional IRA?
A) $0
B) $5,500
C) $6,500
D) $12,000

106) Tucker (age 52) and Elizabeth (age 48) are a married couple. Tucker is covered under a qualified retirement plan at his job and earned $90,000 in 2014. Elizabeth is employed as a lab technician and earned $30,000 but is not covered under a qualified retirement plan. They file a joint return; have interest and dividend income of $25,000. What is the maximum amount of tax deductible contributions may be made to a traditional IRA?
A) $0
B) $11,000
C) $5,500
D) $12,000

107) During 2014, Marcia, who is single and is covered under a pension plan at work, contributes $5,500 into a Roth IRA. If her AGI is $64,000, which of the following is true?
A) All of the contribution is deductible.
B) None of the contribution is deductible.
C) She must withdraw all of the contribution immediately since she is covered under a plan at work.
D) Only 60% of the contribution is deductible since her AGI exceeds $60,000 by $4,000 and her maximum contribution is phased out by 40%.

108) Feng, a single 40 year old lawyer, is covered by a qualified retirement at work. His salary is $109,000, and his total AGI is $123,000. The maximum contribution he can make to a Roth IRA in 2014 is
A) 0.
B) $3,300.
C) $2,200.
D) $5,500.

109) Which of the following is true about future qualified distributions from a Roth IRA by a person who will be 65 years old at the time the distributions begin? Assume the individual opened the account before age 60.
A) The entire amount of the distributions will be tax-free.
B) Only the accumulated earnings will be tax-free.
C) Only the previous contributions will be tax-free.
D) The entire amount of the distribution will be taxable.

110) All of the following are true with regard to a Roth IRA except
A) contributions to Roth IRAs are subject to special modified AGI limitations that are higher than those for traditional IRAs.
B) contributions to Roth IRAs are never tax deductible.
C) contributions to Roth IRAs must cease after the owner has reached age 70 1/2.
D) contributions to existing Roth IRAs must be made by the due date of the return.

111) Which of the following statements regarding Coverdell Education Savings Accounts is incorrect, disregarding any AGI limits?
A) Distributions cannot be used for elementary and secondary education expenses.
B) Distributions to the beneficiary are not taxable as long as they are used for tuition, fees, room and board.
C) Contributions can be made until the beneficiary reaches 18.
D) Contributors can make nondeductible contributions of up to $2,000 for each beneficiary.

112) Which of the following statements regarding Health Savings Accounts is incorrect?
A) Taxpayers are allowed to deduct contributions to a health savings account for AGI.
B) All taxpayers are eligible to establish a health savings account.
C) Distributions from a health savings account are excluded from gross income if used to pay qualified medical expenses.
D) Health savings account contributions are limited to the lesser of 100% of annual deductible under high deductible health plan or $3,300 for taxpayers without family coverage.

113) Which of the following conditions would generally not favor the rollover of an untaxed retirement fund (e.g. traditional IRA or 401(k) plan) to a Roth account?
A) expected higher tax rates at retirement
B) significant after-tax funds available to pay taxes
C) an advanced age of the taxpayer
D) All of the above create favorable conditions for a rollover to a Roth.

114) Richard traveled from New Orleans to New York for both business and vacation. He spent 4 days conducting business and some days vacationing. He incurred the following expenses:

Airfare $460
Lodging-per day 175
Meals-per day 100
Business Entertainment 800

What is his miscellaneous itemized deduction (before the floor), assuming Richard is an employee and is not reimbursed, under the following two circumstances?

a. He spends three days on vacation, in addition to the business days.
b. He spends six days on vacation, in addition to the business days.

115) David acquired an automobile for $30,000 for use in his unincorporated business in 2011 and used the standard mileage rate method in 2012 and 2013. He switches to the actual expense method for 2014. The automobile was used 25,000 miles in 2012 and 20,000 miles in 2013. What is the amount of the adjusted basis of the automobile for purposes of computing depreciation in 2014?

116) Sarah purchased a new car at the beginning of the year. She makes an adequate accounting to her employer and receives a $2,400 (12,000 miles × 20 cents per mile) reimbursement in 2014 for employment-related business miles. She incurs the following expenses related to both business and personal use:

Gas and oil $6,000
Repairs and maintenance 2,500
Depreciation 3,000
Insurance 1,800
Total $13,300

She also spent $200 on parking and tolls that were related to business. During the year she drove a total 20,000 miles.

What are the possible amounts of Sarah’s deductible transportation expenses?

117) Rita, a single employee with AGI of $100,000 before consideration of the items below, incurred the following expenses during the year, all of which were unreimbursed unless otherwise indicated:

Transportation expenses for business trip $3,000
Registration fees for business conference 700
Business-related meals and entertainment 700
Country club dues (used 60% for business) 4,000
Local meals eaten alone during regular business hours after visiting client 400
Qualified moving expenses 1,000
Tax return preparation fees 900
Safe deposit box rental for stock certificates 50

In addition, Rita paid $300 for dues to her professional business association. The company reimbursed her after she submitted the appropriate documentation. What is Rita’s net miscellaneous itemized deduction for the year after application of all relevant limitations?

118) Ellie, a CPA, incurred the following deductible education expenses to maintain or improve her skills:

Travel and transportation $1,700
Tuition 6,000
Books 800
Ellie’s AGI for the year is $60,000.

a. If Ellie is self-employed, what are the amount of and the nature of the deduction for these expenses?
b. If, instead, Ellie is an employee who is not reimbursed by his employer, what are the amount of and the nature of the deduction for these expenses (after limitations)?

119) Dighi, an artist, uses a room in his home (250 square feet) as a studio exclusively to paint. The studio meets the requirements for a home office deduction. (Painting is considered his trade or business.) The following information appears in Dighi’s records:

Revenue from sale of paintings $4,000
Expenses attributable to business of painting such as supplies 1,800
Expenses related to home office:
Property taxes on portion of home where he paints 900
Utilities, insurance, etc 700
Depreciation of portion of home 800

(a) What is the amount of Dighi’s home office deduction if he is self-employed?
(b) If some amount is not allowed under the tax law, how is the disallowed amount treated?
(c) Assume all of Dighi’s records of expenses relating to the room were destroyed in a major paint spill. How much of a home office deduction, if any, will he be allowed?

120) Ruby Corporation grants stock options to Iris on February 1, 2013. The options do not have a readily ascertainable value. The option price is $100, and the FMV of the Ruby stock is also $100 on the grant date. The option allows Iris to purchase 200 shares of Ruby stock. Iris exercises the option on August 1, 2014, when the stock’s FMV is $150. Iris sells the stock on December 5, 2015 for $400. Determine the amount and character (i.e. ordinary, LTCG or STCG) of income recognized by Iris and the deduction allowed Ruby Corporation in 2013, 2014 and 2015 under the following assumptions:

a. The stock option is an incentive stock option.
b. The stock option is a nonqualified stock option.

121) Tia is a 52-year-old an unmarried taxpayer who is an active participant in an employer-sponsored qualified retirement plan. Before IRA contributions, her AGI is $64,000 in 2014.
a. What is the maximum amount she can contribute and the maximum deduction she can receive for a contribution to a traditional IRA?
b. What is the maximum amount she can contribute and the maximum deduction she can receive for a contribution to a Roth IRA?
Answer:

122) Raul and Jenna are married and are both working. They are both over age 50. Jenna participates in her employer’s Sec. 401(k) plan and makes the maximum contribution and enjoys a company matching contribution. Raul’s employer does not maintain a retirement plan so he would like to save as much as possible in a tax-advantaged manner for retirement. They expect to report $185,000 of AGI for 2014.
a. What is the maximum amount that Raul can contribute to a traditional IRA and how much can he deduct?
b. What is the maximum amount that Raul can contribute to a Roth IRA and how much can he deduct?
c. How could Raul contribute to both the traditional IRA and Roth IRA to maximize current and future tax savings?

123) Jack takes a $7,000 distribution from his Health Savings Account. $2,000 is used to pay for X-rays and dental surgery. The other $5,000 to make a down payment on a new car. What are the tax consequences to Jack?

124) What factors are considered in determining whether an expense is a deductible travel expense?

125) What two conditions are necessary for moving expenses to be deductible?

126) Explain when educational expenses are deductible for an employee.

127) When are home-office expenses deductible?

128) Gina is an instructor at State University in Birmingham. Her university has asked her if she would be interested in taking a temporary assignment at their Montgomery campus. In addition to her salary, the University would pay her living expenses while in Montgomery. What should Gina consider with regard to taxes in deciding whether or not to accept the offer?

129) Fiona is about to graduate college with a management degree. She has been offered a job as a sales representative for a pharmaceutical company. The job will require significant travel and entertainment expenses for which she will be given a salary supplement. What tax issues should Fiona consider in her decision?

130) Chuck, who is self-employed, is scheduled to fly from Minneapolis to London on a business trip. His flight schedule included a connection through New York City. When Chuck arrived in New York City, he learned that his flight to London had been cancelled due to a volcanic eruption in Iceland. All air travel to Europe was delayed for five days because of significant amounts of ash in the air, causing Chuck to incur costs for hotel and meals in New York City. Since Chuck had never been to New York City before, he spent the time sightseeing. What tax issues are present?

131) Josiah is a human resources manager of a large software company. He is considering asking for a leave of absence to pursue an MBA degree. Josiah will pay for his MBA tuition of $45,000 a year without any employer assistance. Josiah will incur a large debt if he pursues an MBA. Upon completing his MBA, he would want to consider various job opportunities. Discuss the tax issues affecting Josiah’s decision?

132) Daniel has accepted a new job and is reviewing the retirement plan information. He has a choice of participating in the company’s conventional Sec. 401(k) plan or a Roth 401(k) plan. Explain the difference between the two plans in terms of employee contributions and retirement distributions from the plan.

133) Discuss the tax treatment of a nonqualified stock option plan.

134) Johanna is single and self-employed as a technology consultant. She wants to set money aside for her retirement. What tax and financial issues should she consider?

135) Why did Congress establish Health Savings Accounts (HSAs)? How do HSAs operate?

Chapter 10 Depreciation, Cost Recovery, Amortization, and Depletion

1) On its tax return, a corporation will use the same depreciation, amortization and depletion methods used in its financial statements issued to shareholders.

2) Depreciable property includes business, investment, and personal-use assets.

3) In order for an asset to be depreciated in the year of purchase, it must be placed in service before year’s end.

4) The basis of an asset must be reduced by the depreciation allowable.

5) Land, buildings, equipment, and stock are examples of tangible property.

6) If personal-use property is converted to trade or business use, the basis for depreciation is the lesser of adjusted basis or FMV on the date of conversion.

7) Under the MACRS rules, salvage value is not considered in the computation of the cost-recovery or depreciation amount.

8) Under the MACRS system, depreciation rates for real property must always use the mid-month convention in the year of acquisition.

9) Under MACRS, tangible personal property used in trade or business purchased and placed into service on March 1, 2014 should be depreciated for 10 months in 2014. Assume the business uses a calendar tax year.

10) MACRS recovery property includes tangible personal and real property that is used in a trade or business.

11) Under the MACRS system, automobiles and computers are classified as seven-year property.

12) In computing MACRS depreciation in the year of disposition of personal property used in a trade or business, the half-year convention must be applied to the amounts in the tables if the half-year convention was used in the year the asset was placed into service.

13) Intangible assets are subject to MACRS depreciation.

14) Section 179 allows taxpayers to immediately expense up to $25,000 (for 2014), subject to limitations, of the cost of real and personal property placed into service in a trade or business.

15) The Section 179 expensing election is available on an annual basis for property purchased during the year.

16) Personal property used in a rental activity held for investment qualifies for the Section 179 expensing election.

17) Sec. 179 tax benefits are recaptured if at any time an asset is converted to personal use.

18) Any Section 179 deduction that is not allowed currently due to the taxable income limitation may be carried over and deducted in future years.

19) Under the MACRS system, if the aggregate basis of all personal property placed in service during the last three months of the year exceeds 40% of the cost of all personal property placed in service during the tax year, the mid-quarter convention is required.

20) The mid-quarter convention applies to personal and real property.

21) Under the MACRS system, the same convention that applies in the year of acquisition (e.g., half-year, mid-quarter, or mid-month) also applies in the year of disposition.

22) Residential rental property is defined as property from which more than 80% of the gross rental income is rental income from dwelling units.

23) The MACRS system requires that residential real property and nonresidential rental property be depreciated using the straight-line method.

24) Capital improvements to real property must be depreciated over the remaining life of the property on which the improvements were made.

25) Expenditures that enlarge a building, any elevator or escalator, any structural component that benefits a common area or the internal structural framework are not considered qualified leasehold improvement property.

26) The straight-line method may be elected for depreciating tangible personal property placed in service after 1986.

27) The election to use ADS is made on a year-by-year, property-class by property-class basis for real and personal property.

28) If the business use of listed property is 50% or less of the total usage, the alternative depreciation system must be used.

29) If the business use of listed property decreases to 50% or less of the total usage, the property is subject to depreciation recapture.

30) Once the business use of listed property falls to 50% or below, the alternative depreciation system must be used for the current year and all subsequent years, even if the business use percentage increases to more than 50% in a subsequent year.

31) If a new luxury automobile is used 100% for business and placed in service in 2014, the maximum MACRS depreciation on the vehicle for 2014 is $3,160.

32) A large SUV is place in service in 2014. MACRS depreciation on an SUV weighing over 6,000 pounds is limited to $3,160 for the first year placed in service.

33) When a taxpayer leases an automobile for 100% business purposes, the entire lease payment is deductible.

34) If a company acquires goodwill in connection with the acquisition of a business, the goodwill is amortizable over a 60-month period.

35) Amounts paid in connection with the acquisition of a business which represent a covenant not to compete are amortizable over the covenant’s remaining life.

36) Unless an election is made to expense or defer and amortize research and experimental expenditures, these costs must be capitalized.

37) Most taxpayers elect to expense R&E expenditures because of the immediate tax benefit.

38) Off-the-shelf computer software that is purchased for use in the taxpayer’s trade or business is amortized over 36 months, or it can be immediately expensed under a Sec. 179 election.

39) Taxpayers are entitled to a depletion deduction if they have an economic interest in the natural resource property.

40) A taxpayer owns an economic interest in an oil and gas property. She is allowed to deduct the smaller of cost depletion or percentage depletion.

41) Intangible drilling and development costs (IDCs) may be deducted as an expense or may be capitalized.

42) Joan bought a business machine for $15,000 on January 1, 2013, and later sold the machine for $12,800 when the total allowable depreciation is $8,500. The depreciation actually taken on the tax returns totaled $8,000. Joan must recognize a gain (or loss) of
A) no gain or loss.
B) ($3,200).
C) $6,800.
D) $6,300.

43) In April 2014, Emma acquired a machine for $60,000 for use in her business. The machine is classified as 7-year property. Emma does not expense the asset under Sec. 179. Emma’s depreciation on the machine this year is
A) $30,000.
B) $60,000.
C) $6,428.
D) $8,574.

44) In May 2014, Cassie acquired a machine for $30,000 to use in her business. The machine is classified as 5-year property. Cassie does not expense the property under Sec. 179. Cassie’s depreciation on the machine this year is
A) $3,000.
B) $6,000.
C) $12,000.
D) $15,000.

45) On January 3, 2011, John acquired and placed into service business tools costing $10,000. The tools have a 3-year class life. No other assets were purchased during that year. The depreciation in 2014 for those tools is (Sec. 179 and bonus depreciation were not applied)
A) $0.
B) $741.
C) $1,920.
D) $3,333.

46) When depreciating 5-year property, the final year of depreciation will be year
A) 3.
B) 4.
C) 5.
D) 6.

47) Prithi acquired and placed in service $190,000 of equipment on August 1, 2014 for use in her sole proprietorship. The equipment is 5-year recovery property. No other acquisitions are made during the year. Prithi elects to expense the maximum amount under Sec. 179. Prithi’s total deductions for the year (including Sec. 179 and depreciation) are
A) $38,000.
B) $25,000.
C) $63,000.
D) $58,000.

48) Fred purchases and places in service in 2014 personal property costing $221,000. What is the maximum Sec. 179 deduction that Fred can deduct, ignoring any taxable income limitation?
A) $25,000
B) $21,000
C) $4,000
D) $200,000

49) Cate purchases and places in service property costing $150,000 in 2014. She wants to elect the maximum Sec. 179 deduction allowed. Her business income is $20,000. What is the amount of her allowable Sec. 179 deduction and carryover, if any?

A)
179 deduction Carryover
$25,000 0

B)
179 deduction Carryover
$150,000 0

C)
179 deduction Carryover
$20,000 $130,000

D)
179 deduction Carryover
$20,000 $5,000

50) Ilene owns an unincorporated manufacturing business. In 2014, she purchases and places in service $206,000 of qualifying five-year equipment for use in her business. Her taxable income from the business before any Sec. 179 deduction is $17,000. Elaine takes the maximum allowable deduction under section 179. Which of the following statements is true regarding the Sec. 179 election?
A) Ilene can deduct $25,000 as a section 179 deduction in 2014, with no carryover to next year.
B) Ilene can deduct $19,000 as a section 179 deduction in 2014.
C) IIene can deduct $17,000 as a section 179 deduction in 2014; $2,000 may be carried over to next year.
D) Ilene can deduct $17,000 as a section 179 deduction in 2014 ,with no carryover to next year.

51) Terra Corporation, a calendar-year taxpayer, purchases and places into service machinery with a 7-year life that cost $125,000. The mid-quarter convention does not apply. Terra elects to depreciate the maximum under Sec. 179. Terra’s taxable income for the year before the Sec. 179 deduction is $700,000. What is Terra’s total depreciation deduction related to this property?
A) $17,863
B) $42,863
C) $25,000
D) $39,290

52) Tessa owns an unincorporated manufacturing business. In 2014, she purchases and places in service $207,000 of qualifying five-year equipment for use in her business. Her taxable income from the business before any Sec. 179 deduction is $15,000. Tessa elects to expense the maximum under Sec. 179. What is Tessa’s maximum total cost recovery deduction for 2014?
A) $53,400
B) $52,800
C) $15,000
D) $41,400

53) Which of the following statements regarding Sec. 179 is true?
A) If a taxpayer places in service property costing more than the Sec. 179 ceiling on the amount of property placed in service, the excess can be carried over to subsequent years.
B) Amounts of the Sec. 179 election in excess of the taxable income limitation are carried forward.
C) Sec. 179 carryforwards expire after five years.
D) All of the above statements are true.

54) In November 2014, Kendall purchases a computer for $4,000. She does not use Sec. 179 expensing. She only uses the most accelerated depreciation method possible. The computer is the only personal property which she places in service during the year. What is her total depreciation deduction for 2014?
A) $200
B) $572
C) $800
D) $1,000

55) On October 2, 2014, Dave acquired and placed into service 5-year business equipment costing $70,000. No other acquisitions were made during the year. Dave does not use Sec. 179 expensing. The depreciation for this year is using the most accelerated method possible is
A) $0.
B) $3,500.
C) $7,000.
D) $10,003.

56) On November 3, this year, Kerry acquired and placed into service 7-year business equipment costing $80,000. In addition, on May 5th of this year, Kerry had also placed in business use 5-year recovery property costing $15,000. Kerry did not elect Sec. 179 immediate expensing. No other assets were purchased during the year. The depreciation for this year is
A) $3,606.
B) $6,606.
C) $13,576.
D) $14,432.

57) Paul bought a computer for $15,000 for business use on March 18, 2012. This was his only purchase for that year. Paul used the most accelerated depreciation method available, but did not elect Sec. 179. Bonus depreciation was not available. Paul sells the machine in 2014. The depreciation on the computer for 2014 is
A) $0.
B) $1,440.
C) $1,500.
D) $2,880.

58) On April 12, 2013, Suzanne bought a computer for $20,000 for business use. This was the only purchase for that year. Suzanne used the most accelerated depreciation method available but did not elect Sec. 179. Bonus depreciation was not available. Suzanne sells the machine in 2014. The depreciation on the computer for 2014 is
A) $2,000.
B) $3,200.
C) $4,000.
D) $6,400.

59) Harrison acquires $65,000 of 5-year property in June 2012 that is required to be depreciated using the mid-quarter convention (because of other purchases that year). He did not elect Sec. 179 immediate expensing. Bonus depreciation was not available. If Harrison sells the property on August 23, 2014, what is the amount of depreciation claimed in 2014?
A) $6,500.00
B) $7,312.50
C) $11,700.00
D) $9,289.00

60) For real property placed in service after 1986, depreciation under the MACRS system is calculated using the
A) straight-line method and a half-year convention in the year of acquisition and in the year of disposition.
B) straight-line method and a mid-month convention in the year of acquisition and in the year of disposition.
C) 200% DB method and a mid-month convention in the year of acquisition and in the year of disposition.
D) 200% DB method and a half-year convention in the year of acquisition and in the year of disposition.

61) On August 11, 2014, Nancy acquired and placed into service residential rental property, which cost $430,000; the cost of the land has been excluded. Nancy annually elects the maximum allowed Sec. 179 deduction. The total depreciation for the year is (rounded)
A) $5,865.
B) $4,141.
C) $5,117.
D) $15,636.

62) Lincoln purchases nonresidential real property costing $300,000 and places it in service in March 2013. What is Lincoln’s 2014 depreciation on the property?
A) $6,099
B) $7,692
C) $8,637
D) $10,908

63) Atiqa took out of service and sold a residential rental property on October 31 of this year. She had originally acquired the property ten years ago. The building (excluding the value of the land) cost $1,000,000. How much is her current year depreciation deduction?
A) $30,300
B) $36,360
C) $18,182
D) $28,785

64) All of the following are true with regard to the alternative depreciation system except
A) the principal type of property for which ADS is required is any tangible property which is used predominantly outside of the United States.
B) the ADS election is available to real property on a property by property basis.
C) the ADS election is available to personal property on a property by property basis.
D) once the ADS election is made for specified property, it is irrevocable.

65) If the business usage of listed property is less than or equal to 50% of its total usage, depreciation is calculated using the
A) regular MACRS tables.
B) alternative depreciation system.
C) it may not be depreciated.
D) regular MACRS tables and a mid-month convention.

66) Eric is a self-employed consultant. In May of the current year, Eric acquired a computer system (5-year property) for $6,000 and used the computer 80% for business and 20% for personal purposes. Eric does not take any Sec. 179 deduction. The maximum depreciation deduction for is
A) $600.
B) $800.
C) $960.
D) $1,200.

67) Eric is a self-employed consultant. In May of the current year, Eric acquired a computer system (5-year property) for $7,000 and used the computer 30% for business. Eric does not use Sec. 179. The maximum depreciation deduction for is
A) $210.
B) $420.
C) $700.
D) $2,100.

68) In the current year George, a college professor, acquired a computer system (5-year property) for $1,000 and used the computer 80% for teaching and research-related activities and the remaining 20% for personal use. Because George’s employer provides him with a computer in his office at the university, the employer does not require him to have a computer at home. No election was made regarding Sec. 179. The maximum depreciation deduction is
A) $0.
B) $200.
C) $160.
D) $800.

69) In April of 2013, Brandon acquired five-year listed property (not an automobile) for $30,000 and used it 70% for business. No election was made regarding Sec. 179 and bonus depreciation was not available. In 2014, his business use of the property dropped to 40%. Which of the following statements is true?
A) The change does not affect Brandon’s previous depreciation.
B) Brandon must recapture $2,100 as ordinary income.
C) Brandon must recapture $4,200 as ordinary income.
D) Brandon must amend the previous tax return and recompute depreciation.

70) In July of 2014, Pat acquired a new automobile for $28,000 and used the automobile 80% for business. No election is made regarding Sec. 179. Assuming her business use remains at 80%, Pat can take a maximum depreciation deduction in 2014 of
A) $2,528.
B) $3,160.
C) $5,600.
D) $4,480.

71) On January l Grace leases and places into service an automobile with a FMV of $39,000. The business use of the automobile is 60%. The “inclusion amount” for the initial year of the lease from the IRS tables is $20. The annual lease payments are $8,000. What are the tax consequences of this lease?
A) deduction for lease payments of $4,782
B) deduction for lease payments of $4,800
C) deduction for lease payments of $6,000
D) deduction for lease payment of $8,982

72) On January 1, 2014, Charlie Corporation acquires all of the net assets of Rocky Corporation for $2,000,000. The following intangible assets are included in the purchase agreement:

Assets Acquisition Cost
Goodwill and going concern value $105,000
Licenses $ 45,000
Patents $ 60,000
Covenant not to compete for five years $120,000

What is the total amount of amortization allowed in 2014?
A) $15,000
B) $22,000
C) $31,000
D) $38,000

73) In accounting for research and experimental expenditures, all of the following alternatives are available with the exception of
A) expense R&E costs in the year paid or incurred.
B) expense R&E costs in the year in which a product or process becomes marketable.
C) defer and amortize R&E costs as a ratable deduction over a period of 60 months or more.
D) capitalize and write off R&E costs only when the research project is abandoned or is worthless.

74) Costs that qualify as research and experimental expenditures include all of the following except
A) depreciation of laboratory equipment.
B) management studies.
C) costs incurred in developing product improvements.
D) costs of obtaining a patent such as attorney fees.

75) This year Bauer Corporation incurs the following costs in development of new products:

Laboratory supplies $ 55,000
Laboratory equipment purchased
(5-year recovery property) 50,000
Salaries (lab personnel) 90,000
Utilities 20,000
Total $215,000

No benefits are realized from the research expenditures until next year. If Bauer Corporation elects to expense the research expenditures, the deduction is
A) $10,000 this year and $175,000 next year.
B) $175,000 next year.
C) $175,000 this year.
D) $215,000 this year.

76) Galaxy Corporation purchases specialty software from a software development firm for use in its business as of January 1 of the current year at a cost of $90,000. No hardware was acquired. How much of the cost can Galaxy deduct this year?
A) $18,000
B) $15,000
C) $30,000
D) $90,000

77) In calculating depletion of natural resources each period,
A) cost depletion must be used.
B) percentage depletion must be used.
C) the greater of cost depletion or percentage depletion must be used.
D) the smaller of cost depletion or percentage depletion must be used.

78) J.R. acquires an oil and gas property interest for $300,000. J.R. expects to recover 50,000 barrels of oil. Intangible drilling and development costs are $80,000 and are charged to expense. Other expenses are $20,000. During the year, 13,000 barrels of oil are sold for $170,000. J.R.’s depletion deduction is
A) $25,500.
B) $35,000.
C) $70,000.
D) $78,000.

79) Everest Corp. acquires a machine (seven-year property) on January 10, 2014 at a cost of $212,000. Everest makes the election to expense the maximum amount under Sec. 179.
a. Assume that the taxable income from trade or business is $500,000.
(1) What is the amount of the Section 179 expensing deduction for the current year?
(2) What is the amount of the Section 179 carryover to the next tax year?
(3) What is the amount of depreciation allowed?
b. Assume instead that the taxable income from trade or business is $10,000.
(1) What is the amount of the Section 179 expensing deduction for the current year?
(2) What is the amount of the Section 179 carryover to the next tax year?
(3) What is the amount of depreciation allowed this year?

80) In August 2014, Tianshu acquires and places into service 7-year business equipment (tangible personal property qualifying under Sec. 179) for $70,000. This is the only asset that she purchased during the year; her taxable income from her trade or business is $23,000. She decides to limit her 179 election to the maximum amount currently deductible in her business for the current year. What is her maximum cost recovery (Sec. 179 and depreciation) deduction for 2014?

82) Mehmet, a calendar-year taxpayer, acquires 5-year tangible personal property in 2014 and does not use Sec. 179. Mehmet places the property in service on the following schedule:

Date placed in service Acquisition Cost
January 15 $50,000
May 25 $100,000
November 8 $200,000

What is the total depreciation for 2012?

83) Greta, a calendar-year taxpayer, acquires 5-year tangible personal property in 2014 and places the property in service on the following schedule:

Date placed in service Acquisition Cost
January 15 $ 7,000
May 25 $10,000
November 8 $33,000

Greta elects to expense the maximum under Section 179, and selects the property placed into service on November 8. Her business ‘s taxable income before section 179 is $190,000. What is the total cost recovery deduction (depreciation and Sec. 179) for 2014?

84) During the year 2014, a calendar year taxpayer, Marvelous Munchies, a chain of specialty food shops, purchased equipment as follows:

Date Asset Cost
March 3 Refrigerators 600,000
October 9 Equipment 1,200,000

Assume the property is all 5-year property. What is the maximum depreciation that may be deducted for the assets this year, 2014, assuming the alternative depreciation system is not chosen?

85) On May 1, 2008, Empire Properties Corp., a calendar year taxpayer, purchased an apartment building for $1,000,000, of which $400,000 was allocable to the land. The corporation sold the property this year on September 23, 2013.
a. What was the corporation’s depreciation for the building, using statutory percentages under MACRS for 2008?
b. What was the corporation’s depreciation for the building, using statutory percentages under MACRS for 2013?

86) On May 1, 2012, Empire Properties Corp., a calendar year taxpayer, purchased an office building for $1,000,000, of which $400,000 was allocable to the land. The corporation sold the property this year on September 23, 2014.
a. What was the corporation’s depreciation for the building, using statutory percentages under MACRS for 2012?
b. What was the corporation’s depreciation for the building, using statutory percentages under MACRS
for 2014?

87) In January of 2014, Brett purchased a Porsche for $100,000 to be used in his business. Brett drove the car 83 percent of the time for business. What is the maximum amount that Brett may deduct in 2014?

88) Stellar Corporation purchased all of the assets of Bellavia Company as of January 1 this year for $1 million. Included in the assets acquired are the following intangible assets:

Asset Useful Life Cost
Patent 10 year $120,000
Covenant not to complete 3 years 30,000
Goodwill Indefinite 300,000

What is Stellar’s maximum amortization deduction for the year?

89) Jack purchases land which he plans on developing as a golf course. The land costs $20,000,000 and the cost of clearing the land, earthmoving, constructing hazards, bunkers and greens, and installing irrigation systems will cost an additional $6,000,000. What tax issues should Jack consider?

90) Bert, a self-employed attorney, is considering either purchasing or leasing a $50,000 automobile for use in his business. What are the issues he should consider in making his decision?

91) Why would a taxpayer elect to capitalize and amortize intangible drilling costs (IDCs) rather than expense such costs?

92) Discuss the options available regarding treatment of an amount paid in excess of the FMV of an acquired company’s net assets in a business combination.

93) Why would a taxpayer elect to use the alternative depreciation system rather than the MACRS rules?

Chapter 11 Accounting Periods and Methods

1) A taxpayer’s tax year must coincide with the year used to keep the taxpayer’s books and records.

2) A fiscal year is a 12-month period that ends on the last day of any month other than December.

3) A partnership must generally use the same tax year of the partners who own the majority of partnership income and capital.

4) If the majority of the partners do not have the same tax year, the partnership must use the tax year of its principal partners.

5) All C corporations can elect a tax year other than a calendar year.

Explanation: Personal service corporations are generally required to use a calendar year.

6) An improper election to use a fiscal year automatically places the taxpayer on the calendar year.

7) If Jett Corporation receives a charter in 2012 but does not begin operations and file its first tax return until 2014, Jett may elect a fiscal year on the 2014 return.

8) Partnerships, S corporations, and personal service corporations may elect a taxable year which results in a tax deferral of four months or less.

9) An S corporation elects a September 30 taxable year. The S corporation, as a pass-through entity does not need to make tax payments to the IRS.

10) Except in a few specific circumstances, once adopted, an accounting period may be changed without IRS approval.

11) A newly married person may change tax years to conform to that of his or her spouse so that a joint return may be filed.

12) Generally, an income tax return covers an accounting period of 12 months.

13) A subsidiary corporation filing a consolidated return with its parent corporation must change its accounting period to conform with its parent’s tax year.

14) Misha, a single taxpayer, died on July 31, 2014. Her final income tax return (ignoring extensions) is due November 15, 2014.

15) Taxpayers who change from one accounting period to another must annualize their income for the resulting short period.

16) Generally, if inventories are an income-producing factor to the business, the accrual method must be used for sales and cost of goods sold.

17) Alvin, a practicing attorney who also owns an office supplies store, may use the cash basis for his legal practice and the accrual basis for his office supplies store.

18) A taxpayer must use the same accounting method on the personal tax return that the taxpayer uses in the taxpayer’s trade or business.

19) C corporations and partnerships with a corporate partner may use the cash method of accounting if average annual gross receipts for the three preceding tax years do not exceed $10 million.

20) Under the cash method of accounting, income is reported for the tax year in which payments are actually or constructively received.

21) Under the cash method of accounting, all expenses are deductible when paid.

22) Points paid on a mortgage to buy a personal residence are deductible in the year paid.

23) Under the cash method of accounting, payment by credit card entitles the taxpayer to deduct the expenditure at the time the charge is made.

24) If a cash basis taxpayer gives a note in payment of an expense, the deduction may not be taken until the note is paid.

25) The all-events test requires that the accrual-basis taxpayer report income when all events have occurred that fix the taxpayer’s right to the income and when the amount can be determined with reasonable accuracy.

26) Under the accrual method of accounting, the two tests to determine when income must be reported and expenses deducted are the all-events test and the economic performance test.

27) One criterion which will permit a deduction for an expenditure by the accrual-basis taxpayer prior to economic performance is that either the amount is not material or the earlier accrual of the item results in a better matching of income and expense.

28) A taxpayer who uses the cash method in computing gross income from his or her business must use the cash method in computing expenses of such business.

29) A business which provides a warranty on goods sold will deduct a reserve for warranty expense consistent with the reporting on its financial statements.

30) A taxpayer may use a combination of accounting methods as long as income is clearly reflected.

31) A taxpayer who uses the LIFO method of inventory valuation may use the lower of cost or market method.

32) The uniform capitalization rules (UNICAP) require the capitalization of some overhead costs that are expensed for financial accounting purposes.

33) Many taxpayers use the LIFO method of inventory valuation because during inflationary periods, LIFO normally results in the lowest inventory value and hence the lowest taxable income.

34) A taxpayer may use the FIFO or average cost methods for financial statement purposes, while using the LIFO method for tax purposes.

35) For tax purposes, the lower of cost or market method must ordinarily be applied to each separate inventory item.

36) For tax purposes, “market” for purposes of applying the lower of cost or market method means the price at which the taxpayer can sell the inventory item.

37) Contracts for services including accounting, legal and architectural services do not qualify for long-term contract treatment.

38) A taxpayer must use the same accounting method, either percentage of completion or completed contract method, for all long-term contracts in the same trade or business.

39) The installment method is not applicable to sales of inventory and marketable securities.

40) The installment sale method may be used on the sale of property at a loss.

41) Interest is not imputed on a gift loan between two individuals totaling $14,000 except when the borrowed funds are used to purchase income-producing property.

42) Interest is not imputed on a gift loan between two individuals totaling $100,000 except when the borrowed funds are used to purchase income-producing property.

43) In general, a change in accounting method must be approved by the IRS.

44) Vector Corporation has been using an incorrect method in accounting for supplies expense. It can change to the correct method without filing 3115.

45) A corporation is starting to produce glasses with smart phone capabilities. Generally, a business producing this type of product will want to elect the LIFO inventory method.

46) A new business is established. It is not a seasonal business. All of the following are acceptable accounting tax years with the exception of
A) an S corporation year ending October 31.
B) a C corporation (not a personal service corporation) tax year ending on February 15.
C) a C corporation (not a personal service corporation) tax year ending on April 30.
D) a partnership tax year ending on October 31 with three equal partners whose tax years end on September 30, October 31, and November 30.

47) When preparing a tax return for a short period, the taxpayer should annualize the income if the short period return
A) is the last return for a decedent who died on June 15.
B) is the first return for a corporation created on June 1.
C) is the last return for a partnership, which was terminated on October 12.
D) is a return for June 1 to December 31, for a corporation changing from a fiscal year to a calendar year.

48) Emma, a single taxpayer, obtains permission to change from a calendar year to a fiscal year ending June 30, 2014. During the six months ending June 30, 2014, she earns $40,000 and has $8,000 of itemized deductions. What is the amount of her annualized income?
A) $30,025
B) $64,000
C) $60,050
D) $64,300

49) All of the following statements are true except:
A) once adopted, an accounting period normally cannot be changed without approval by the IRS.
B) taxpayers who change from one accounting period to another must annualize their income for the resulting short period.
C) taxpayers filing an initial tax return are required to annualize the year’s income and prorate exemptions and credits.
D) an existing partnership can change its tax year without prior approval if the partners with a majority interest have the same tax year to which the partnership changes.

50) Which of the following partnerships can elect the cash basis method of accounting?
A) a CPA firm with average revenues of $20 million
B) a chocolate manufacturer with average revenues of $3 million
C) a cleaning service partnership generating average revenues of $5.5 million whose partners are Joe, Larry and Smith Inc.
D) None of the above.

51) Under the cash method of accounting, all of the following are true with the exception of:
A) Fixed assets are always expensed as the taxpayer pays for the assets.
B) Gross income includes the value of property received.
C) To some extent, a taxpayer may control the year in which an expense is deductible by choosing when to make the payment.
D) Income is reported in the tax year in which payments are actually or constructively received.

52) For purposes of the accrual method of accounting, the economic performance test is met when
A) the property or services are actually provided.
B) the amount of the item can be reasonably estimated.
C) all events have occurred that establish the fact of a liability.
D) all events have occurred that fix the taxpayer’s right to receive income.

53) Under UNICAP, all of the following overhead costs are included in inventory except
A) factory utilities, rent, insurance and depreciation.
B) officers’ salaries and factory administration.
C) research and experimentation.
D) factory payroll, purchasing and warehouse costs.

54) Which of the following statements regarding UNICAP is incorrect?
A) The UNICAP rules result in more costs being included in inventory for tax purposes than for financial accounting.
B) Taxpayers with gross receipts averaging more than $10,000,000 or more for the prior three years must apply the UNICAP provisions.
C) Interest must be included in inventory if the property produced is real property or long-lived property.
D) UNICAP requires that advertising and selling costs be allocated between inventory and cost of sales.

55) In 2014, Richard’s Department Store changes its inventory method from FIFO to LIFO. Richard’s uses the simplified LIFO method. Richard’s year-end inventory under FIFO is as follows: 2013 – $300,000; 2014 – $350,000. The 2013 price index is 110% and the 2014 index is 120%. The 2014 layer is
A) $19,097.
B) $20,833.
C) $22,727.
D) $50,000.

56) Inventory may be valued on the tax return at the lower of cost or market unless
A) replacement cost is higher than historical cost.
B) the taxpayer determines inventory cost using the LIFO method.
C) the taxpayer determines inventory cost using the FIFO method.
D) the cash method of accounting is used by the taxpayer.

57) When accounting for long-term contracts (other than those for services), all of the following accounting methods may be acceptable with the exception of
A) the cash method of accounting.
B) the completed contract method.
C) the percentage of completion method.
D) the modified percentage of completion method.

58) Under the percentage of completion method, gross income is reported
A) when the contract is completed.
B) using a percentage that is determined by dividing current year costs by the expected total revenue.
C) based on the portion of work that is incomplete.
D) based on the portion of work that has been completed.

59) This year, Hamilton, a local manufacturer of off-shore drilling platforms, entered into a contract to construct a drilling platform that will be placed in the North Atlantic Ocean. The total contract price is $5,000,000, and Hamilton estimates the total construction cost at $3,000,000. Actual costs incurred this year are $600,000. If Hamilton uses the percentage of completion method, the gross profit for this year is
A) $0.
B) $400,000.
C) $600,000.
D) $2,000,000.

60) Bergeron is a local manufacturer of off-shore drilling platforms. This year, Bergeron entered into a contract to construct a drilling platform, which will be placed in the North Atlantic Ocean. The total contract price is $5,000,000, and Bergeron estimates the total construction cost at $2,000,000. Actual costs incurred this year are $600,000. If Bergeron uses the completed contract method, the gross profit for this year is
A) $0.
B) $400,000.
C) $600,000.
D) $2,000,000.

61) In year 1 a contractor agrees to build a building for $2,500,000 by the end of year 2. The builder’s cost is estimated to be $1,800,000. The actual costs year 1 are $900,000 and year 2’s actual costs are $1,300,000. Under the completed contract method the gross profit for year 1 is
A) $0.
B) $300,000.
C) $350,000.
D) $700,000.

62) In year 1 a contractor agrees to build a building for $2,500,000 by the end of year 2. The builder’s cost is estimated to be $1,800,000. The actual costs year 1 are $900,000 and year 2’s actual costs are $1,300,000. Under the completed contract method the gross profit for year 2 is
A) $0.
B) $300,000.
C) $350,000.
D) $700,000.

63) In year 1 a contractor agrees to build a building for $2,500,000 by the end of year 2. The builder’s cost is estimated to be $1,800,000. The actual costs year 1 are $900,000 and year 2’s actual costs are $1,100,000. Under the percentage of completion method year 1’s gross profit is
A) $0.
B) $300,000.
C) $350,000.
D) $700,000.

64) In year 1 a contractor agrees to build a building for $2,500,000 by the end of year 2. The builder’s cost is estimated to be $1,800,000. The actual costs year 1 are $900,000 and year 2’s actual costs are $1,100,000. Under the percentage of completion method year 2’s gross profit is
A) $150,000.
B) $500,000.
C) $700,000.
D) $350,000.

65) The look-back interest adjustment involves the
A) calculation of interest on an installment sale.
B) calculation of gross profit on an installment sale collection.
C) calculation of additional tax due if actual cost rather than estimated cost had been used on the percentage of completion method.
D) calculation of interest on additional tax that would have been due if actual cost rather than estimated cost had been used on the percentage of completion method.

66) This year, a contractor agrees to build a building for $2,000,000, which will be completed by the end of next year. The builder’s cost is estimated to be $1,700,000. The actual costs this year are $800,000 and next year’s actual costs are $800,000. If the tax rate is 20% and the interest rate is 10%, the look back interest for the percentage of completion method is
A) $ 0.
B) $1,176.
C) $2,000.
D) $6,000.

67) An installment sale is best defined as
A) any disposition of property in which at least three payments are received.
B) any disposition of property in which the installment method is elected by the taxpayer.
C) any disposition of property where at least one payment is received after the close of the taxable year in which disposition occurs.
D) any disposition of publicly traded property or inventory where at least one payment is received after the close of the taxable year in which disposition occurs.

68) The installment method may be used for sales of all kinds of property with the exception of
A) real property.
B) personal property.
C) capital assets.
D) marketable securities.

69) The installment sale method can be used for all of the following transactions except
A) the sale of an antique by a collector.
B) the sale of shares of publicly-traded corporate stock.
C) the sale of farmland used in a farming business.
D) the sale of a boat held for personal use.

70) The installment sale method can be used for all of the following transactions except
A) the sale of an painting by an art collector.
B) the sale of a sole proprietor’s office building.
C) the sale of an individual’s personal car.
D) the sale of a yacht by a shipbuilder.

71) Freida is an accrual-basis taxpayer who owns a furniture store. The furniture store had the following sales of inventory:

Year of sale Installment sales Profit Collections in 2014
2012 $60,000 $30,000 $20,000
2013 100,000 50,000 30,000
2014 250,000 125,000 40,000

For tax purposes, Freida should report gross profit for 2014 of
A) $40,000.
B) $65,000.
C) $90,000.
D) $125,000.

72) Which of the following conditions are required for the use of the installment method?
A) The taxpayer must realize a gain on the sale of the property.
B) The taxpayer cannot be on the cash method.
C) The value of the obligations received is determinable at the date of sale.
D) All of the above are required.

73) Kyle sold land on the installment basis for $100,000. His basis in the land was $70,000. Kyle received a $40,000 down payment and a real estate installment sale contract calling for $60,000 in additional payments in future years. In addition, Kyle paid $6,000 in commissions on the sale. What is the gross profit to be recognized in the current year?
A) $0
B) $9,600
C) $12,000
D) $24,000

74) Kevin sold property with an adjusted basis of $58,000. The buyer assumed Kevin’s existing mortgage of $40,000 and agreed to pay an additional $60,000 consisting of a cash down payment of $40,000, and payments of $4,000, plus interest, per year for the next 5 years. Kevin paid selling expenses totaling $2,000. What is Kevin’s gross profit percentage?
A) 33 1/3%
B) 40%
C) 60%
D) 66 2/3%

75) This year, John purchased property from William by assuming an existing mortgage of $40,000 and agreed to pay an additional $60,000, plus interest, in the 3 years following the year of sale (i.e. $20,000 annual payments for three years, plus interest). William had an adjusted basis of $44,000 in the building. What are the sales price and the contract price in this transaction?

A)
Sales Price Contract Price
$40,000 $60,000

B)
Sales Price Contract Price
$100,000 $40,000

C)
Sales Price Contract Price
$100,000 $60,000

D)
Sales Price Contract Price
$100,000 $100,000

76) On July 25 of this year, Raj sold land with a cost of $15,000 for $40,000. Raj collected $20,000 this year and is scheduled to receive $5,000 each year for four years starting next year plus an acceptable rate of interest. Raj’s gain recognized this year is
A) $7,500.
B) $12,500.
C) $20,000.
D) $25,000.

77) On June 11, of last year, Derrick sold land with a cost of $15,000 for $45,000. Derrick collected $20,000 last year and is scheduled to receive $5,000 each year for five years starting this year plus an acceptable rate of interest. Derrick receives the $5,000 installment required this year. Derrick’s recognized gain this year is
A) $0.
B) $1,667.
C) $3,333.
D) $5,000.

78) Sela sold a machine for $140,000. The machine originally cost $90,000 and $10,000 of MACRS depreciation had been allowable. The buyer assumed an existing loan of $40,000, paid $20,000 cash down and agreed to pay $10,000 per year for eight years plus interest. Selling expenses are $10,000. The total gross profit for installment sale recognition purposes is
A) $30,000.
B) $40,000.
C) $50,000.
D) $60,000.

79) Malea sold a machine for $140,000. The machine originally cost $90,000 and $10,000 of MACRS depreciation had been allowable. The buyer assumed an existing loan of $40,000, paid $20,000 cash down and agreed to pay $10,000 per year for eight years plus interest. Selling expenses are $10,000. The contract price is
A) $40,000.
B) $80,000.
C) $100,000.
D) $130,000.

80) On June 11, two years ago, Gia sold land with a cost of $15,000 for $45,000. Gia collected $20,000 initially and is scheduled to receive $5,000 each year for five years starting last year plus an acceptable rate of interest. This year, Gia decided to sell one installment note to a bank that agreed to pay $4,100. As a result of the sale of the note, Gia must report
A) $0.
B) $1,667 gain.
C) $2,433 gain.
D) ($900) loss.

81) On May 18, of last year, Carter sells unlisted stock with a cost of $24,000 for $60,000. Carter collects $20,000 initially and is scheduled to receive $10,000 each year for four years starting this year plus an acceptable rate of interest. After receiving the first $10,000 scheduled installment payment, Carter is unable to collect any further payments. After incurring legal fees of $1,000, Carter recovers a portion of the stock valued at $26,000. As a result of the repossession, Carter must report
A) ordinary income of $9,000.
B) capital gain of $9,000.
C) ordinary income of $13,000.
D) capital gain of $13,000.

82) On May 18, of last year, Yuji sold unlisted stock with a cost of $12,000 for $30,000. Yuji collected $10,000 initially and is scheduled to receive $5,000 each year for four years starting this year plus an acceptable rate of interest. After receiving the first scheduled $5,000 payment, Yuji was unable to collect any further payments. After incurring legal fees of $500, Yuji recovered a portion of the stock valued at $13,000. Yuji’s basis in the recovered stock is
A) $6,500.
B) $7,000.
C) $12,500.
D) $13,000.

83) Andrew sold land to Becca, Andrew’s daughter. The fair market value of the land was $300,000 (basis $250,000). Becca agreed to pay Andrew $300,000 over 8 years. Becca immediately sold the land to Olga for $300,000 cash. The gain of $50,000 must be recognized
A) by Becca in installments.
B) by Becca when Becca sells to Olga.
C) by Andrew when Andrew sells to Becca.
D) by Andrew when Becca sells to Olga.

84) On September 2, of this year, Keshawn sold land to Rex, his nephew, for $400,000. Keshawn’s basis in the land was $100,000. Rex agreed to pay his uncle $40,000 this year, and $60,000 each year for the next six years plus interest. One month later, Rex sold the land to Theo, an unrelated party, for $450,000. Based on this information, Keshawn must report
A) $0. Rex reports gain of $300,000.
B) gain of $225,000 this year.
C) gain of $225,000 this year plus interest in following six years.
D) gain of $30,000 this year, and gain in each of the following six years of $45,000 plus interest.

85) All of the following are considered related for purposes of Section 453(e) installment sales except
A) parents.
B) children.
C) sister.
D) controlled corporation.

86) All of the following transactions are exempt from rules regarding imputed interest with the exception of
A) taxpayer purchases newly issued bond for $700 (face value of $1,000).
B) taxpayer sells land for $135,000 with payment due in 5 years and no stated interest.
C) taxpayer sells his home gym equipment for $2,800 with payment due in one year and no stated interest.
D) taxpayer purchases a sailboat costing $2,500 for week-end boating trips; the full price payable in five months and no stated interest.

87) Jennifer made interest-free gift loans to each of her four children as follows:
(1) John borrowed $9,500 to purchase an automobile. His net investment income is $1,500.
(2) Rick borrowed $50,000 to purchase a trailer. His net investment income is $900.
(3) Bert borrowed $25,000 to purchase stock. His net investment income is $1,200.
(4) Elizabeth borrowed $110,000 to purchase a home. Her net investment income is $800.

Assuming a 5% interest rate, on which loans must interest be imputed?
A) loan to John and Bert
B) loan to Bert and Elizabeth
C) loan to Rick, Bert, and Elizabeth
D) All of the loans are subject to the imputed interest rules.

88) Imputation of interest could be required on all of the following loans with the exception of
A) a loan between a partnership and a 55% partner.
B) a loan between a mother and son.
C) a loan between an employer and employee.
D) a loan between two best friends.

89) Prior Corp. plans to change its method of accounting for supplies. Both the old and new methods are acceptable. Which of the following statements is correct regarding the change?
A) The taxpayer will need to amend prior returns to reflect the new method.
B) The taxpayer will report the full amount of change in the current tax return.
C) The taxpayer will report the net adjustment over four years.
D) The taxpayer will report the net adjustment and pay the tax when it files the Form 3115.

90) Which of the following businesses is most likely to benefit from an election to account for its inventory under LIFO?
A) a company producing the newest version of a tablet with ultra-long battery life. It believes it has a one-year lead over the competition.
B) a company producing products with copper as a key component. Copper prices fluctuate widely.
C) a company producing parts for the auto industry. Costs in this field tend to steadily climb.
D) None of the above.

91) Lloyd Corporation, a calendar year accrual basis taxpayer, pays its insurance premium each year on June 1, the anniversary of the policy. The premium paid this year is $9,600 while last year’s was $9,000. How much of is Lloyd’s deduction for insurance this year?

92) In 2013 Anika Co. adopted the simplified dollar-value LIFO method. Inventory under FIFO in 2013 and 2014 is $400,000 and $600,000, respectively. The Consumer Price Index for 2013 is 115 and the Consumer Price Index in 2014 is 125 percent. How much is Anika’s inventory at the end of year 2014 under simplified LIFO?

93) In 2014, Modern Construction Company entered into a contract to construct a building for $5,000,000. The estimated cost to complete the building is $4,000,000 and the project will be completed in 2015. Modern incurred actual construction costs of $1,600,000 and $1,800,000 in 2014 and 2015, respectively. How much gross profit is recognized using the percentage-of-completion method in 2014 and 2015?

94) Tonya sold publicly-traded stock with an adjusted basis of $76,000 for $90,000. Tonya received a down payment of $15,000 with the balance due in equal payments over the next four years. What is the amount of gross profit to be recognized in the year of sale?

95) Natalie sold a machine for $140,000. The machine originally cost $95,000 and $15,000 of MACRS depreciation had been allowable. The buyer assumed an existing loan of $40,000, paid $30,000 cash down and agreed to pay $10,000 per year for seven years plus interest. Selling expenses are $10,000. What is the amount of gain to be reported in the year of sale?

96) Marissa sold stock of a non-publicly traded corporation with an adjusted basis of $36,000 for $48,000. Marissa received a down payment of $12,000 with the balance due in equal payments over the next two years.
a. What is the amount of gross profit to be recognized in the year of sale?
b. Assume that the buyer defaulted on the final payment. Marissa sued and was able to repossess the stock. The fair market value of the stock on the date of repossession is $36,000; legal fees were $1,500. What is the gain or loss on the repossession?

97) Nick sells land with a $7,000 adjusted basis for $10,000. Nick receives a $2,000 down payment with the balance of $8,000 due the following year. Nick is unable to collect the remaining $8,000 and, after incurring legal fees of $500, he repossesses the land when it has a fair market value of $9,000.
a. What is the amount of gain that Nick must report in the first year?
b. What is the amount of gain that Nick must report in the second year?
c. What is the basis in the repossessed stock?

98) Emily made the following interest free loans to her children:
(1) $10,000 to Erin for a down payment on a new home. Her net investment income for the year is $1,300.
(2) $50,000 to Sasha to purchase stock. Her net investment income for the year is $800.
(3) $60,000 to Tim to purchase a new boat. His net investment income for the year is $2,800.

The applicable federal interest rate on similar loans is 5%. What is the amount of interest income that Emily must report from these transactions?

99) Winnie made a $70,000 interest-free loan to her son, Tod, who used the money to retire a mortgage on his personal residence. Tod’s only source of income was salary of $35,000 and $990 interest income on a savings account. The relevant Federal interest rate was 5% and the loan was outstanding all year long.

What amount must Winnie include as interest income as a result of this transaction?

100) Which entities may elect a fiscal year? Discuss how certain tax entities may circumvent the requirement of using a calendar year.

101) Generally, economic performance must occur before an expense may be deducted. In some cases, this requirement of economic performance may be waived. Discuss the conditions under which economic performance may be waived and an earlier deduction may be allowed.

102) What is the significance of the Thor Power Tool Co. case?

103) Xerxes Manufacturing, in its first year of operations, produces solar panels which are sold through large building supply and home improvement stores. Xerxes’ year-end results include the following:

Office rent and utilities $15,000
Salaries of office staff 100,000
Salaries of factory workers 500,000
Direct materials used in production of solar panels 400,000
Factory rent 30,000
Factory utilities 10,000

You are preparing Xerxes’ first year tax return. Xerxes has elected a calendar year as its tax accounting period and the accrual method. What additional information would you need to prepare the tax return?

104) Doug is going to sell land for $100,000. The terms of the sale include $20,000 down and $20,000 plus interest for the next 4 years. He wishes to recognize income using the installment method. Both his brother and his son wish to buy the land from him. What are the tax considerations?

105) Discuss the purpose of the imputed interest rules.

106) Arnie is negotiating the sale of land to Phil. Arnie’s basis in the land is $3,000,000, and it currently has a fair market value of $5,000,000. Phil wants to pay the purchase price over three years. Arnie suggests that Phil pays $2,000,000 at closing, then pay $1,200,000 each of the next three years. Arnie would not require that Phil pay any interest under these terms. Discuss the tax issues that Arnie should consider.

107) Jared wants his daughter, Jacqueline, to learn about the stock market. He loans Jacqueline $30,000, but does not require Jacqueline to pay interest. Jared tells Jacqueline that she can repay him from the proceeds of future stock sales. Discuss the tax issues that Jared should consider.

Chapter 12 Property Transactions: Nontaxable Exchanges

1) Realized gain or loss must be recognized unless a specific Code section provides for nonrecognition treatment.

2) In a like-kind exchange, both the property transferred and the property received must be held by the taxpayer either for productive use in a trade or business or for investment.

3) The exchange of a personal-use automobile for stock in an automobile manufacturer held as an investment qualifies for like-kind treatment.

4) If an exchange qualifies as a like-kind exchange, nonrecognition of gain or loss is elective.

5) Real property exchanged for personal property qualifies as a like-kind exchange.

6) An investor exchanges an office building located in Niagara Falls, NY for an office building located in Niagara Falls, Ontario. The exchange does not qualify as like-kind.

7) An exchange of inventory for inventory of a like kind qualifies as a like-kind exchange.

8) The exchange of a partnership interest for an interest in another partnership qualifies as a like-kind exchange.

9) A sale of property and subsequent purchase of like-kind property may be treated as a like-kind exchange if the two transactions are interdependent.

10) For purposes of nontaxable exchanges, cash and non-like-kind property constitute boot.

11) The receipt of boot as part of a nontaxable exchange causes a realized loss to be recognized.

12) Where non-like-kind property other than cash is received as boot, the amount of the boot is the property’s fair market value.

13) If each party in a like-kind exchange assumes a liability of the other party, only the net liability given or received is boot.

14) The basis of non-like-kind property received is the basis in the hands of the transferor at the date of the exchange.

15) If related taxpayers exchange property qualifying for a like-kind exchange, the properties must be retained for three years after the exchange to prevent recognition of gain resulting from the original exchange on a subsequent disposition of the property.

16) The holding period of like-kind property received in a nontaxable exchange begins on the day of the exchange.

17) The holding period for boot property received begins on the day after the date of the exchange.

18) The involuntary conversion provisions which allow deferral of gain are mandatory.

19) If a gain is realized on the involuntary conversion of property, the gain may be deferred if qualifying replacement property is acquired within a specified time period at a cost equal to or greater than the amount realized on the involuntary conversion.

20) All or part of gain realized on an involuntary conversion is deferred but not permanently excluded if qualifying replacement property is acquired within the requisite period of time.

21) In an involuntary conversion, the basis of replacement property is its cost reduced by the gain deferred.

22) A taxpayer may elect to defer recognition of a loss resulting from an involuntary conversion.

23) If the threat of condemnation exists and the taxpayer has reasonable grounds to believe that the property will be condemned, the taxpayer may elect to defer gain even if the taxpayer sells the property to a party other than the governmental unit that is threatening to condemn the property.

24) When the cost of replacement property is less than the amount realized on an involuntary conversion, gain will be recognized. The recognized gain will be equal to the amount realized over the cost of the replacement property, but not more than the total realized gain.

25) If property is involuntarily converted into similar property, the basis and holding period of the converted property carry over to the basis and holding period of the replacement property.

26) If the taxpayer elects to defer the gain on an involuntary conversion, the holding period of the replacement property begins on the date of purchase.

27) Replacing a building with land qualifies as replacement property under the involuntary conversion rules relevant to a casualty.

28) If real property used in a trade or business or held for investment is condemned, it must be replaced with property having a similar functional use.

29) Vector Inc.’s office building burns down on October 31, 2014. Vector, a calendar year taxpayer, finally settles with the insurance company on February 3, 2015. In order to defer the gain realized on the building, Vector must acquire another office building by February 3, 2017.

30) When an involuntary conversion is due to the condemnation of real property held for productive use in a trade or business or for investment, the replacement period will end three years after the close of the first tax year in which any part of the gain is realized.

31) A loss on the sale of a taxpayer’s personal residence is deductible if the taxpayer owned and lived in the home for two of five years.

32) In order for the gain on the sale of a personal residence to be excluded under Section 121, a replacement residence must be purchased within two years.

33) In the case of married taxpayers, an individual may claim the Sec. 121 exclusion even if the individual’s spouse used the exclusion within the past two years.

34) The taxpayer must be occupying the residence at the time of the sale in order for Sec. 121 to apply.

35) If a taxpayer owns more than one home, she can designate the home that will be considered her principal residence for purposes of the Sec. 121 exclusion.

36) If a principal residence is sold before satisfying the ownership and use tests, part of the gain may be excluded if the sale is due to a change in employment, health, or unforeseen circumstances.

37) Ron and Fay live in Buffalo. They also own a condominium in Orlando (purchased in 2009) which they rent to vacationers. Ron and Fay will be retiring. They plan to live in the Orlando property for two and a half years. When they sell it, they will be able to exclude the full gain which is expected to be about $200,000.

38) All of the following qualify as a like-kind exchange except
A) an apartment building held for investment for farmland used in a trade or business.
B) a printer used in trade or business for a computer used in trade or business.
C) improved real estate held for investment for unimproved real estate held for investment.
D) an airplane used in trade or business for a general purpose truck used in trade or business.

39) Which of the following statements with respect to a like-kind exchange is false?
A) Property of one class must be exchanged for property of the same class.
B) An exchange of inventory does not qualify as a like-kind exchange.
C) Personal property must be exchanged for personal property.
D) Sale of property and subsequent purchase of like-kind property will always qualify as a like-kind exchange.

40) A owns a ranch in Wyoming, which B offers to purchase. A is not willing to sell the ranch but is willing to exchange the ranch for an apartment complex in Louisiana. The complex is available for sale. B purchases the apartment complex in Louisiana from C and transfers it to A in exchange for A’s ranch. The ranch and the complex each have a $1,000,000 fair market value. Which of the following is true?
A) The transaction qualifies as a like-kind exchange for B but not for A.
B) The transaction qualifies as a like-kind exchange for both B and A.
C) The transaction qualifies as a like-kind exchange for A but not for B.
D) The transaction does not qualify as a like-kind exchange for either B or A.

41) Landry exchanged land with an adjusted basis of $50,000 for another parcel of land worth $35,000 plus $10,000 of cash. Landry held the original land for investment purposes and will do the same with the new parcel. Due to the exchange, Landry will recognize
A) $10,000 gain.
B) $5,000 gain.
C) $5,000 loss.
D) $0.

42) Dean exchanges business equipment with a $120,000 adjusted basis for $40,000 cash and business equipment with a $140,000 FMV. What is the amount of gain which Dean recognizes on the exchange?
A) $0
B) $20,000
C) $40,000
D) $60,000

43) Daniella exchanges business equipment with a $100,000 adjusted basis for $10,000 cash and business equipment with a $96,000 FMV. What is the amount of gain recognized on the exchange?
A) $0
B) $4,000
C) $6,000
D) $10,000

44) Gena exchanges land held as an investment with a $60,000 basis for other land with a $80,000 FMV and a motorcycle with a $10,000 FMV. The acquired land is to be held for investment and the motorcycle is for personal use. What is the amount of recognized gain?
A) $0
B) $10,000
C) $20,000
D) $30,000

45) Pamela owns land for investment purposes. The land is worth $300,000 (basis of $260,000 to Pamela). Pamela exchanges the land, plus $20,000 cash, for a warehouse to be used in her business. The FMV of the warehouse is $400,000, but the warehouse is subject to a mortgage of $80,000, which is assumed by Pamela. Pamela must recognize a gain of
A) $ 0.
B) $ 40,000.
C) $ 120,000.
D) $ 140,000.

46) Bob owns a warehouse that is used in business while Rebecca owns land. Bob exchanges the warehouse for the land, which will be held for investment. The FMV of the warehouse is $440,000 (basis $240,000), but the warehouse is subject to a mortgage of $80,000, which is assumed by Rebecca. Bob receives $40,000 cash and the land, which has a FMV of $320,000. Bob realizes a gain (loss) on the exchange of
A) $80,000.
B) $120,000.
C) $190,000.
D) $200,000.

47) Emily owns land for investment purposes that has a FMV of $300,000 (basis of $260,000). She exchanges the land, plus $40,000 cash, for a warehouse to be used in her business. The warehouse is worth $420,000, but is subject to a mortgage of $80,000 which Emily will assume. The gain realized by Emily on the exchange is
A) $40,000.
B) $80,000.
C) $120,000.
D) $160,000.

48) Glen owns a building that is used in business. The building is worth $200,000, but is subject to a mortgage of $40,000. Glen’s basis in the building is $120,000. Glen exchanges the building for investment land worth $150,000 plus $10,000 cash. In addition, the other party assumes the mortgage which will be held for investment. Glen must recognize a gain of
A) $0.
B) $10,000.
C) $50,000.
D) $80,000.

49) Kai owns an apartment building held for investment purposes. The apartment building is worth $500,000, although it is subject to a mortgage of $100,000. Kai’s basis in the apartment building is $380,000. Kai exchanges the apartment building for an office building. The office building has an FMV of $350,000. Kai receives $50,000 cash in addition to receiving the office building, and the other party assumes the apartment building mortgage. What is Kai’s recognized gain on this exchange?
A) $0
B) $50,000
C) $120,000
D) $150,000

50) In a nontaxable exchange, Henri traded in a truck having an adjusted basis of $8,500 and a FMV of $10,000, for a new truck having a FMV of $15,000. In addition, Henri paid cash of $5,000. What is Henri’s basis in the new truck?
A) $5,000
B) $8,500
C) $13,500
D) $15,000

51) Bobbie exchanges business equipment (adjusted basis $160,000) for other business equipment that has a FMV of $140,000. Bobbie also receives $30,000 cash. Bobbie’s basis in the new equipment is
A) $130,000.
B) $140,000.
C) $160,000.
D) $170,000.

52) Jason owns a warehouse that is used in business. The FMV of the warehouse is $200,000 (basis $120,000), and the warehouse is subject to a mortgage of $40,000. Jason exchanges the warehouse for land valued at $150,000. The other party also pays him $10,000 cash and assumes the mortgage on the warehouse. Jason’s basis in the land received will be
A) $120,000.
B) $150,000.
C) $180,000.
D) $200,000.

53) Laurie owns land held for investment. The land’s FMV is $150,000. Laurie’s basis in the land is $130,000. Laurie exchanges the land, plus $20,000 of cash, for a warehouse owned by Trey. The warehouse is worth $210,000, but is subject to a mortgage of $40,000 which Laurie will assume. Trey’s basis in the warehouse is $120,000. Laurie’s basis in the warehouse received will be
A) $150,000.
B) $170,000.
C) $190,000.
D) $210,000.

54) Rosa exchanges business equipment with a $60,000 adjusted basis for a like-kind piece of equipment with a $100,000 FMV and $20,000 of marketable securities. What is Rosa’s basis for the new equipment?
A) $60,000
B) $80,000
C) $100,000
D) $120,000

55) If there is a like-kind exchange of property between related parties, how long do they have to wait to dispose of the property received in order to avoid having to recognize any gain on the exchange?
A) 6 months
B) 1 year
C) 2 years
D) no waiting period

56) Rolf exchanges an office building worth $150,000 for investment land worth $175,000. He also provided stock worth $25,000. Rolf’s adjusted basis in the building and stock is $130,000 and $11,000, respectively. How much gain will Rolf recognize on the exchange?
A) $0
B) $14,000
C) $20,000
D) $34,000

57) Yael exchanges an office building worth $150,000 for investment land worth $175,000. He also provided
stock worth $25,000. Yael’s adjusted basis in the building and stock is $180,000 and $11,000, respectively. How much gain or loss will Yael recognize on the exchange?
A) $0
B) ($30,000)
C) ($16,000)
D) $14,000

58) Which of the following statements is not true with regard to like-kind exchanges?
A) Nonrecognition of gains and losses is mandatory if the exchange is a like-kind exchange.
B) The holding period of like-kind property received includes the holding period of the property exchanged.
C) A loss is always recognized if the taxpayer transfers non-like-kind personal use property (e.g. a personal use car) in an otherwise like-kind exchange.
D) The basis of property received in an exchange is equal to the basis of the property exchanged less the boot received plus the gain recognized and less any loss recognized.

59) All of the following are true except:
A) A nonsimultaneous exchange may never qualify as a like-kind exchange.
B) Nonrecognition of gains and losses is mandatory if the exchange is a like-kind exchange.
C) A loss may be recognized on non-like-kind property (boot) if the taxpayer transfers the boot in an otherwise like-kind exchange.
D) The holding period of like-kind property received includes the holding period of the property exchanged.

60) Cassie owns a Rembrandt painting she acquired on June 1, 2008 as an investment. She exchanges the painting on September 5, 2014, for a Picasso sculpture and marketable securities to be held as an investment. On what date does the sculpture’s holding period begin?
A) June 1, 2008
B) June 2, 2008
C) September 5, 2014
D) September 6, 2014

61) Juan’s business delivery truck is destroyed in an accident. He paid $40,000 for the truck, and $30,000 of depreciation has been deducted during its period of use. The insurance company pays Juan $32,000 due to the accident. What is the minimum amount that Juan must spend on a new truck to avoid any gain recognition?
A) $40,000
B) $32,000
C) $10,000
D) $22,000

62) Stephanie’s building, which was used in her business, was destroyed in a fire. Stephanie’s adjusted basis in the building was $175,000, and its FMV was $210,000. Stephanie filed an insurance claim and was reimbursed $200,000. In that same year, Stephanie invested $180,000 of the insurance proceeds in another business building. If the proper election is made, Stephanie will recognize gain of
A) $ 0.
B) $15,000.
C) $20,000.
D) $25,000.

63) Stephanie’s building, which was used in her business, was destroyed in a fire. Stephanie’s adjusted basis in the building was $175,000, and its FMV was $210,000. Stephanie filed an insurance claim and was reimbursed $200,000. In that same year, Stephanie invested $180,000 of the insurance proceeds in another business building. Assuming the proper election is made to defer gain, Stephanie’s basis in the new building will be
A) $175,000.
B) $180,000.
C) $200,000.
D) $210,000.

64) Ron’s building, which was used in his business, was destroyed in a fire. Ron’s adjusted basis in the building was $210,000, and its FMV was $330,000. Ron filed an insurance claim and was reimbursed $300,000. In that same year, Ron invested $240,000 of the insurance proceeds in another business building. Ron will recognize gain of
A) $0.
B) $30,000.
C) $60,000.
D) $90,000.

65) Ron’s building, which was used in his business, was destroyed in a fire. Ron’s adjusted basis in the building was $210,000, and its FMV was $330,000. Ron filed an insurance claim and was reimbursed $300,000. In that same year, Ron invested $240,000 of the insurance proceeds in another business building. Ron’s basis in the new building is
A) $180,000.
B) $210,000.
C) $240,000.
D) $330,000.

66) Which of the following statements is false regarding involuntary conversions?
A) A taxpayer must replace the destroyed property within the same tax year in which the gain is realized.
B) A taxpayer cannot elect to defer recognition of a loss resulting from an involuntary conversion.
C) If deferral of gain is elected, the holding period of the converted property carries over to the replacement property.
D) Gain may be deferred if the property is involuntarily converted into property that is similar or related in service or use to the converted property.

67) The building used in Tim’s business was condemned by the city of Lafayette. Tim received a condemnation award of $125,000. He paid $1,200 in lawyer’s fees and $800 for an appraisal of the property. Tim’s adjusted basis in the building was $60,000. Tim reinvests in similar property costing $110,000, and Tim makes the proper election regarding the property. What is the amount of Tim’s realized (not recognized) gain on the condemnation?
A) $ 0
B) $50,000
C) $63,000
D) $65,000

68) The building used in Terry’s business was condemned by the city of St. Louis. Terry received a condemnation award of $125,000. He paid $1,200 in lawyer’s fees and $800 for an appraisal of the property. Terry’s adjusted basis in the building was $60,000. Terry reinvests in similar property costing $110,000, and Terry makes the proper election regarding the property. What is the amount of Terry’s recognized gain on the condemnation?
A) $15,000
B) $13,000
C) $50,000
D) $63,000

69) Ed owns a racehorse with a $600,000 basis used for breeding purposes. The racehorse is killed in a tornado, and Ed collects $1,000,000 from the insurance company. He purchases another horse for $550,000. What is the amount of gain recognized on the transaction?
A) $0
B) $50,000
C) $350,000
D) $400,000

70) The building used in Manuel’s business was condemned by the city of Mobile. Manuel received a condemnation award of $220,000. He paid $800 in lawyer’s fees and $600 for an appraisal of the property. Manuel’s adjusted basis in the building was $120,000. Manuel reinvests in similar property costing $200,000, and Manuel makes the proper election regarding the property. Manuel’s basis in the new building is
A) $102,400.
B) $121,400.
C) $120,000.
D) $200,000.

71) Which of the following statements regarding involuntary conversions is incorrect?
A) With some exceptions, the replacement property must be similar or related in service or use to the property converted.
B) The functional-use test is more restrictive than the like-kind test.
C) The taxpayer-use test applies to the involuntary conversion of rental property owned by an investor.
D) Real property used in a trade or business that is condemned must be replaced with property which has the same functional use as the converted property.

72) Each of the following is true of deferral of gain attributable to the involuntary conversion of personal property with the exception of
A) gain deferral is elective, except for direct conversions.
B) the replacement property may be acquired by gift, inheritance, or purchase.
C) qualifying replacement property must be acquired within a specified time period.
D) replacement property must be similar or related in service or use to the converted property.

73) Alex owns an office building which the state condemns on January 15, 2014. Alex receives the condemnation award on April 1, 2014. In order to qualify for nonrecognition of gain on this involuntary conversion, what is the last date for Alex to acquire qualified replacement property?
A) January 15, 2016
B) January 15, 2017
C) December 31, 2016
D) December 31, 2017

74) According to Sec. 121, individuals who sell or exchange their personal residence may exclude part or all of the gain if the house was owned and occupied as a principal residence for
A) at least five years immediately before the sale date.
B) at least one year of the three-year period before the sale date.
C) at least two years of the five-year period before the sale date.
D) at least five years of the ten-year period before the sale date.

75) Mitchell and Debbie, both 55 years old and married, sell their personal residence to Sophie. Sophie pays $225,000 and assumes their $70,000 mortgage. To make the sale they pay $4,000 in commissions and $1,000 in legal costs. They have owned and lived in the house for seven years and their tax basis is $125,000. What is the amount of gain recognized on the sale?
A) $0
B) $100,000
C) $165,000
D) $170,000

76) Bob and Elizabeth, both 55 years old and married, sell their personal residence to Wolfgang. Wolfgang pays $660,000 and assumes their $90,000 mortgage. To make the sale they pay $20,000 in commissions and $10,000 in legal costs. They have owned and lived in the house for seven years and their tax basis is $200,000. What is the amount of gain recognized on the sale?
A) $0
B) $20,000
C) $50,000
D) $520,000

77) Frank, a single person age 52, sold his home this year. He had lived in the house for 10 years.
He signed a contract on March 4 to sell his home and closed the sale on May 3.

Sales price $202,000
Selling expenses 12,000
Replaced and paid for a broken window on March 2 200
Basis of old home before repairs and improvements 150,000

Based on these facts, what is the amount of his recognized gain?
A) $0
B) $39,800
C) $40,000
D) $52,000

78) Pierce, a single person age 60, sold his home this year. He had lived in the house for 10 years. He signed a contract on March 4 to sell his home.

Sales price $600,000
Selling expenses 15,000
Replaced and paid for a broken window on March 2 800
Basis of old home before repairs and improvements 310,000

Based on these facts, what is the amount of his recognized gain?
A) $0
B) $25,000
C) $40,000
D) $275,000

79) On May 1 of this year, Ingrid sold her personal residence for $250,000. Commissions on the sale were $20,000. Ingrid also incurred $10,000 of costs for painting and repairs, which were all completed and paid for two weeks prior to the sale of her home. Ingrid’s basis in her old home was $180,000. Ingrid’s realized gain upon the sale of her first home is
A) $ 0.
B) $40,000.
C) $50,000.
D) $70,000.

80) William and Kate married in 2014 and purchased a new home together. Each had owned and lived in separate residences for the past 5 years. William’s adjusted basis in his old residence was $200,000; Kate’s adjusted basis in her old residence was $120,000. In late 2014, William sells his residence for $500,000 while Kate sells her residence for $190,000. What is the total gain to be excluded from these transactions in 2014?
A) $0
B) $250,000
C) $320,000
D) $370,000

81) All of the following statements are true with regard to personal residences except:
A) Temporarily renting property that was formerly the taxpayer’s principal residence does not automatically preclude the use of Sec. 121.
B) To qualify for favorable tax treatment under Sec. 121, the residence must be either the taxpayer’s principal residence or a secondary residence.
C) In the case of married taxpayers, an individual may claim the exclusion even if the individual’s spouse used the exclusion within the past two years.
D) Houseboats, house trailers, and condominium apartments may qualify as a principal residence.

82) Generally, a full exclusion of gain under Sec. 121 upon the sale of a personal residence applies to only one sale or exchange every
A) six months.
B) year.
C) two years.
D) five years.

83) Jenna, who is single, sold her principal residence on December 1, 2013, and excluded the $150,000 gain because she met the ownership and usage requirements under Sec. 121. Jenna purchased another residence in Pensacola on January 1, 2014 that she occupied until July 1, 2014 when she receives a new job offer from an employer in Miami. She sells the Pensacola residence on October 1, 2014 and realizes a gain of $40,000. Jenna may exclude what amount of the gain from the sale on October 1, 2014?
A) $0
B) $10,000
C) $20,000
D) $40,000

84) Which of the following statements is false with regard to the ownership and use tests under Sec. 121?
A) The taxpayer must be occupying the residence at the time of the sale in order for Sec. 121 to apply.
B) If a principal residence is sold before satisfying the ownership and use tests, part of the gain may be excluded if the sale is due to a change in employment, health, or unforeseen circumstances.
C) For purposes of the two-year ownership rule, a taxpayer’s period of ownership includes the period during which the taxpayer’s deceased spouse owned the residence.
D) When a taxpayer receives a residence from a spouse or an ex-spouse incident to a divorce, the taxpayer’s period of owning the property includes the time the residence was owned by the spouse or ex-spouse.

85) Under what circumstances can a taxpayer obtain a partial exclusion if a home is sold before the use and ownership tests are satisfied?
A) change in employment that meets the requirement for a moving expense deduction
B) increased traffic due to widening of a road
C) birth of one child
D) divorce

86) Which of the following is not an unforeseen circumstance for purposes of obtaining a partial exclusion of a gain on the sale of a home?
A) loss of employment by the qualified individual if the individual is eligible for unemployment compensation
B) natural or man-made disaster resulting in a casualty to the residence
C) birth of one child
D) divorce or legal separation

87) Sometimes taxpayers should structure a transaction to avoid the application of like-kind provisions. Which of the following conditions is likely to cause a taxpayer to avoid like-kind treatment?
A) Expected higher tax rates in the future.
B) Less accelerated depreciation provisions expected in the future.
C) A decline in the value of the asset being disposed of.
D) None of the above.

88) Which of the following statements in not correct regarding the compliance requirements of an involuntary conversion?
A) The taxpayer elects the deferral by not reporting the gain as income for the first year in which the gain is realized although all relevant information regarding the vent will be reported.
B) A taxpayer who recognized the full gain and paid the taxes can later file a refund claim to elect the deferral if qualified property is acquired before the expiration of the replacement period.
C) A taxpayer elects to defer the full gain in the year the gain is realized (year one), and no gain is reported on that year’s tax return. Qualified replacement property is acquired in the following year (year two), but the full insurance proceeds are not spent so some gain must be recognized. The partial gain recognition will be reported on the tax return for year two.
D) A taxpayer properly elected to defer the full realized gain in year one and provides appropriate information on the replacement property. The taxpayer cannot later revoke the election and designate a different property as the replacement property.

89) Indicate with a “yes” or a “no” which of the following are like-kind exchanges.
a. Computer used in trade or business for office furniture used in trade or business.
b. Apartment building held as an investment for an office building used in trade or business.
c. Land used in trade or business for equipment used in trade or business.
d. Printer used in trade or business for printer used for personal purposes.
e. Exchange of improved real estate held for investment for unimproved real estate held for investment.

90) Indicate with a “yes” or a “no” which of the following are like-kind exchanges (assume all assets are held for business or investment purposes).
a. Exchange of common stock held as an investment for land held as an investment.
b. Exchange of farmland for an apartment building.
c. Exchange of office furniture used in trade or business for computer used in a trade or business
d. Exchange of unimproved real estate for improved real estate.
e. Exchange of automobile used in trade or business for office building used in trade or business

91) Amelia exchanges an office building with a $350,000 adjusted basis for an airplane with a $560,000 fair market value to be used in business.
a. What is the amount of gain or loss realized by Amelia?
b. What is the amount of gain or loss recognized by Amelia?

92) Cheryl owns 200 shares of Cornerstone Corporation common stock which has an adjusted basis of $60,000 and a fair market value of $75,000. John owns 200 shares of Cable Corporation with a $75,000 fair market value.
a. If Cheryl and John exchange their stock, what is the amount of Cheryl’s realized gain?
b. If Cheryl and John exchange their stock, what is the amount of Cheryl’s recognized gain?

93) Kevin exchanges an office building used in his business for another office building worth $200,000 plus $30,000 cash. The FMV of Kevin’s old building is $280,000 (basis $150,000) and it is subject to a mortgage of $50,000. The mortgage is assumed by the other party.
a. What is the amount of gain realized by Kevin?
b. What is the amount of gain recognized by Kevin?
c. What is the basis of the new building to Kevin?

94) Summer exchanges an office building used in her business for another office building. Summer’s office building has a FMV of $250,000 (basis of $180,000). The FMV of the new building is $300,000, and it is subject to a mortgage of $60,000, which is assumed by Summer. Summer also pays the other party $40,000 cash.
a. What is the amount of gain realized by Summer?
b. What is the amount of gain recognized by Summer?
c. What is the basis of the new building to Summer?

95) Trent, who is in the business of racing horses, exchanges a racehorse with a basis of $80,000 for $40,000 cash and a trotter (another racehorse) with a $150,000 fair market value.
a. What is the amount of gain realized by Trent?
b. What is the amount of gain recognized by Trent?
c. What is the adjusted basis of the trotter?

96) Patricia exchanges office equipment with an adjusted basis of $20,000 for $5,000 cash and office equipment with a fair market value of $12,000.
a. What is the gain or loss realized?
b. What is the gain or loss recognized?
c. What is the adjusted basis of the new office equipment?

97) Eric exchanges a printing press with an adjusted basis of $64,000 for a smaller model with a $100,000 fair market value. In addition, he receives $20,000 of marketable securities.
a. What is the amount of gain realized by Eric?
b. What is the amount of gain recognized by Eric?
c. What is Eric’s basis in the new printing press?
d. What is Eric’s basis in the marketable securities?

98) Olivia exchanges land with a $50,000 basis plus marketable securities with a $20,000 basis for a larger parcel of land worth $110,000 in a transaction that otherwise qualifies as a like-kind exchange. The FMV of the land and marketable securities exchanged by Olivia is $75,000 and $35,000 respectively.
a. What is the amount of gain realized and recognized by Olivia on each asset?
b. What is the amount of Olivia’s basis in the new land?

99) Whitney exchanges timberland held as an investment for undeveloped land with a $300,000 FMV. Whitney’s basis for the timberland is $150,000. She also transfers her tractor with a $15,000 basis and a $10,000 FMV as part of the exchange.
a. What is the amount, if any, of gain or loss recognized on the transaction?
b. What is the basis of the undeveloped land?

100) Marinda exchanges an office building worth $800,000 (basis is $820,000) for a warehouse worth $850,000. A part of the exchange she also transfers $50,000 worth of securities which she purchased for $40,000.
a. What are Marinda’s realized and recognized gains (losses) on the two assets exchanged?
b. What is Marinda’s basis in the warehouse acquired?

101) Luke’s offshore drilling rig with a $700,000 adjusted basis is destroyed by a hurricane. He collects $620,000 from the insurance company and purchases a new drilling rig for $600,000.
a. What are the tax consequences of these transactions?
b. What is the basis of the new rig?

102) An office building owned by Abby and used in her business was destroyed in a fire. Abby’s adjusted basis in the building was $145,000 and its FMV was $180,000. Abby filed an insurance claim and she was reimbursed $160,000. In that same year, Abby invested $150,000 of the insurance proceeds in another business building.
a. Assume Abby made the proper election with regard to the involuntary conversion. What is the amount of gain to be recognized by Abby?
b. What is Abby’s basis in the new building?

103) Mick owns a racehorse with a $500,000 basis used for breeding purposes. The racehorse is killed in an accident and Mick receives $750,000 from the insurance company. Mick purchases another racehorse for $400,000.
a. What is the amount of Mick’s realized gain?
b. What is the amount of Mick’s recognized gain?

104) Theresa owns a yacht that is held for personal use and has a $100,000 basis. The yacht is destroyed by a storm and Theresa collects $120,000 from the insurance company. She purchases a new $150,000 yacht for personal use and elects to defer any gain on the transaction. What is the basis of the new yacht?

105) Kareem’s office building is destroyed by fire on April 11, 2014. Settlement is reached with the insurance company on November 1, 2014 when he receives a check for $900,000. The property had recently been appraised for $920,000. Kareem’s adjusted basis in the building was $800,000.
a. What is Kareem’s realized gain or loss?
b. Assume Kareem wishes to defer the maximum amount of gain. Indicate:
(1) the minimum amount that must be spent on a new property.
(2) any restrictions on the new property in order for it to qualify.
(3) the deadline for placing the new property in service.
c. Assume that instead of a fire, the state forces Kareem to sell the property. Indicate how your responses to part b would differ.

106) Nicki is single and 46 years old. She sells her principal residence (adjusted basis $200,000) that she purchased ten years ago for $435,000.
a. What is the amount of Nicki’s recognized gain on the sale?
b. Assume instead that Nicki sells the residence for $485,000. What is the amount of Nicki’s recognized gain on the sale?
c. Assume instead that Nicki has been married to Mike for the entire time they have owned and lived in the home. If they sell the home for $485,000, what is the amount of their recognized gain on the sale?

107) In 1997, Paige paid $200,000 to purchase a new residence. She paid a realtor $5,000 to help locate the house and paid legal fees of $3,000 to make certain that the seller had legal title to the property. Under the provisions of tax law in effect at the time of the purchase, she deferred a gain of $30,000 from the sale of a former residence in 1996. In 1999, she added a new porch to the house at a cost of $15,000 and installed central air conditioning at a cost of $12,000. Since purchasing the house, she has paid $2,000 in repairs. What is the adjusted basis of the home?

108) James and Ellen Connors, who are both 50 years old and married, sell their personal residence on July 25, 2014 for $950,000. They have lived in the home for 20 years. The basis of the home is $350,000. They purchased a new home for $1,000,000 in August 2014. After living in that home for 219 days, the Connors were forced to sell their new home in 2015 for $1,300,000 and move to another climate due to Ellen’s severe health problems.
a. What is the amount of gain recognized on the home sale in 2014?
b. What is the amount of the gain recognized on the home sale in 2015?

109) Amber receives a residence ($750,000 FMV, $500,000 adjusted basis) owned for eight years by Jonathan, her former spouse, as part of a divorce settlement. Amber and Jonathan had lived in the home for the four years before the divorce. Seven months after the transfer of the residence, Amber sells it for $790,000. What is the amount of Amber’s recognized gain on the sale of the home?

110) The Smiths owned and used their principal residence, with an adjusted basis of $250,000, for ten years. The house is destroyed by a tornado and the Smiths receive insurance proceeds of $800,000. Six months later, they purchase another residence for $850,000.
a. What is the amount of gain the Smiths must recognize?
b. What is the basis of the new residence?

111) Discuss the basis rules of property received in a nontaxable like-kind exchange.

112) Discuss the rules regarding the holding period for like-kind property received in a nontaxable exchange.

113) May a taxpayer elect under Sec. 1033 to defer recognition of loss resulting from an involuntary conversion?

114) Ike and Tina married and moved into their new home (purchase price $800,000) 18 months ago. They are thinking of selling the home which is now worth $1,300,000. They plan to reinvest in a smaller home costing approximately $600,000. What should they consider before selling their home?

115) Discuss why a taxpayer would want to avoid like-kind exchange provisions.

Chapter 13 Property Transactions: Section 1231 and Recapture

1) Mark owns an unincorporated business and has $20,000 of Section 1231 gains and $22,000 of Section 1231 losses. He must report a capital loss of $2,000 on his tax return.

2) A net Sec. 1231 gain is treated as ordinary income to the extent of any nonrecaptured net Sec. 1231 losses for the preceding five years.

3) In 2014, Thomas, who has a marginal tax rate of 15%, sells land that is Sec. 1231 property at a gain of $4,000. If he has no other 1231 transactions or capital asset transactions and has no nonrecaptured 1231 gain, Thomas will pay no tax on the $4,000 gain.

4) Sec. 1231 property must satisfy a holding period of more than one year.

5) Depreciable property used in a trade or business for one year or less is considered Sec. 1231 property.

6) Any gain or loss resulting from the sale or disposition of depreciable property used in trade or business and held one year or less is considered ordinary.

7) The sale of inventory results in ordinary gain or loss.

8) Gains and losses from involuntary conversions of property used in a trade or business generally are classified as capital gains and losses.

9) Gains and losses resulting from condemnations of Sec. 1231 property and capital assets held more than one year are classified as ordinary gains and losses.

10) If the recognized losses resulting from involuntary conversions arising from casualty or theft exceed the recognized gains from such events (i.e. a net loss from the casualty), all of the involuntary conversions are treated as ordinary gains and losses.

11) If realized gain from disposition of business equipment exceeds total depreciation or cost recovery, a portion of the gain will receive Sec. 1231 treatment if the equipment’s holding period is more than one year.

12) The purpose of Sec. 1245 is to eliminate the advantage taxpayers would have if they were able to reduce ordinary income by depreciation deductions and also receive favorable Sec. 1231 treatment when the asset was sold.

13) Sec. 1245 applies to gains on the sale of depreciable personal property, but it generally does not apply to depreciable real property.

14) If a taxpayer has gains on Sec. 1231 assets, Secs. 1245 and 1250 must be applied first to determine any amounts recaptured as ordinary income, and any excess gain may then be netted with Sec. 1231 losses for possible long-term capital gain treatment.

15) Sec. 1245 ordinary income recapture can apply to buildings placed in service prior to 1987.

16) Sec. 1245 can increase the amount of gain recognized on an asset.

17) Section 1250 could convert a portion of Sec. 1231 gain into ordinary income if the real property was placed in service prior to 1987 and accelerated depreciation was used.

18) For noncorporate taxpayers, depreciation recapture is not required on real property placed in service after 1986.

19) When corporate and noncorporate taxpayers sell real property placed in service after 1986, all depreciation taken will be taxed at a maximum rate of 25%.

20) Unrecaptured 1250 gain is the amount of long-term capital gain which would be taxed as ordinary income if Sec. 1250 provided for the recapture of all depreciation and not just additional depreciation.

21) The amount recaptured as ordinary income under either Sec. 1245 or Sec. 1250 can never exceed the realized gain.

22) Section 1250 does not apply to assets sold or exchanged at a loss.

23) In addition to the normal recapture rules of Sec. 1250, corporations which sell depreciable real estate are subject to additional recapture rules of Sec. 291.

24) The additional recapture under Sec. 291 is 25% of the difference between the amount that would have been recaptured if the property was Sec. 1245 property and the actual recapture under Sec. 1250.

25) Frisco Inc., a C corporation, placed a building in service in 2002 and deducted straight-line depreciation under the MACRS system in the normal manner. It sold the building this year for a substantial gain. Because straight-line depreciation was used, Frisco will not need to recognize any ordinary gain.

26) Gifts of appreciated depreciable property may trigger recapture of depreciation or cost-recovery deductions to the donor.

27) When a donee disposes of appreciated gift property, the recapture amount for the donee is computed by including the recapture amount attributable to the donor.

28) When appreciated property is transferred at death, the recapture potential carries over to the person who receives the property from the decedent.

29) If no gain is recognized in a nontaxable like-kind exchange involving Sec. 1245 or Sec. 1250 property, the recapture potential carries over to the replacement property.

30) When gain is recognized on an involuntary conversion, gain is subject to recapture under Sec. 1245 or Sec.1250.

31) Installment sales of depreciable property which result in recaptured income under Secs. 1245 or 1250 require that the recaptured income be recognized in the year of sale.

32) Costs of tangible personal business property which are expensed under Sec. 179 are subject to recapture if the property is converted to nonbusiness use before the end of the MACRS recovery period.

33) Gain recognized on the sale or exchange of property between related parties is capital if the property is subject to depreciation in the hands of the transferee.

34) Why did Congress establish favorable treatment for 1231 assets?
A) to encourage the mobility of capital
B) to allow a larger deduction for losses
C) to help business owners replace assets which had declined in value
D) All of the above

35) Jeremy has $18,000 of Section 1231 gains and $23,000 of Section 1231 losses. The gains and losses are characterized as

A)
Capital Gain Capital Loss Ordinary Income Ordinary Loss
$18,000 $23,000

B)
Capital Gain Capital Loss Ordinary Income Ordinary Loss
$18,000 $23,000

C)
Capital Gain Capital Loss Ordinary Income Ordinary Loss
$18,000 $23,000

D)
Capital Gain Capital Loss Ordinary Income Ordinary Loss
$18,000 $3,000 $20,000

36) Pierce has a $16,000 Section 1231 loss, a $12,000 Section 1231 gain, and a salary of $50,000. What is the treatment of these items in Pierce’s AGI?
A) Pierce has a LTCG of $12,000 and a net ordinary income of $34,000.
B) The 1231 gains and losses are treated as ordinary gains and losses making Pierce’s AGI for the year $46,000.
C) Pierce has a $3,000 LTCL which is deductible for AGI making AGI $47,000. He also has a $1,000 LTCL carryover.
D) Pierce has net LTCG of $9,000 and $37,000 of net ordinary income.

37) Daniel recognizes $35,000 of Sec. 1231 gains and $25,000 of Sec. 1231 losses during the current year. The only other Sec. 1231 item was a $4,000 loss three years ago. This year, Daniel must report
A)
NLTCG Ordinary Income
$10,000 $ 0

B)
NLTCG Ordinary Income
$ 6,000 $ 4,000

C)
NLTCG Ordinary Income
$ 4,000 $ 6,000

D)
NLTCG Ordinary Income
$ 4,000 $10,000

38) During the current year, Danika recognizes a $30,000 Section 1231 gain and a $22,000 Section 1231 loss. Prior to this, Danika’s only Section 1231 item was a $15,000 loss two years ago. Danika must report a(n)
A) $8,000 net LTCG.
B) $8,000 ordinary income.
C) $15,000 ordinary income.
D) $8,000 ordinary income and $7,000 net LTCG.

39) During the current year, George recognizes a $30,000 Section 1231 gain on sale of land and a $18,000 Section 1231 loss on the sale of land. Prior to this, George’s only Section 1231 item was a $14,000 loss six years ago. George must report a
A) $12,000 net LTCG.
B) $12,000 ordinary income.
C) $14,000 ordinary income.
D) $10,000 ordinary income and $2,000 net LTCG.

40) During the current year, Kayla recognizes a $40,000 Section 1231 gain on sale of land and a $22,000 Section 1231 loss on the sale of land. Prior to this, Kayla’s only Section 1231 item was a $10,000 loss six years ago. Kayla is in the 28% marginal tax bracket. The amount of tax resulting from these transactions is
A) $2,700.
B) $3,600.
C) $4,000.
D) $5,040.

41) Blair, whose tax rate is 28%, sells one tract of land at a gain of $29,000 and another tract of land at a gain of $11,000. Both tracts of land are Sec. 1231 property. She has never had any other Sec. 1231 transactions. How are the gains taxed?
A) ordinary income of $40,000 taxed at 28%
B) a net capital gain of $40,000 which is not taxed
C) a net capital gain of $40,000 taxed at 15%
D) ordinary income of $40,000 taxed at 25%

42) For a business, Sec. 1231 property does not include
A) timber, coal, or domestic iron ore.
B) inventory purchased 24 months ago.
C) an office building purchased five years ago.
D) land used in the business that was purchased two years ago.

43) Which of the following assets is 1231 property?
A) a machine used in the company’s manufacturing operations
B) an investment in corporate stock
C) land held for investment
D) items held for resale by a retailer

44) Section 1231 property will generally have all the following characteristics except
A) real or depreciable property.
B) used in trade or business.
C) held for sale to customers.
D) held for more than one year.

45) A corporation owns many acres of timber, which it acquired three years ago, and which has a $120,000 basis. The timber was cut last year for use in the corporation’s business. The FMV of the timber on the first day of last year was $270,000. The corporation made the appropriate election to treat the cutting as a sale or exchange. The timber is sold for $300,000 this year. The tax result this year is
A) recognition of capital gain of $30,000.
B) recognition of Sec. 1231 gain of $30,000.
C) recognition of ordinary income of $30,000.
D) no income recognized since all recognition occurs in the year of the cutting of the timber.

46) A corporation owns many acres of timber, which it acquired three years ago, and which has a $150,000 basis for depletion. The timber is cut during the current year for use in the corporation’s business. The FMV of the timber on the first day of the current year is $280,000. If the corporation makes the appropriate election, the tax result is
A) recognition of a Sec. 1231 gain of $130,000.
B) no recognition of gain or loss since the timber is used in the business.
C) recognition of a gain at the time of sale if the timber is later sold with the gain equal to the sales price less the basis in the timber.
D) recognition of a gain if the timber is later sold with the gain equal to the sales price less $280,000 (FMV on the first day of the year of the cutting).

47) In order to be considered Sec. 1231 property, all of the following livestock must be held for 12 months or more from date of acquisition except
A) goats.
B) hogs.
C) sheep.
D) cattle.

48) For livestock to be considered Section 1231 property,
A) the livestock must be held for draft, breeding or dairy purposes, but not for sport.
B) cattle and horses must be held for at least 12 months from the date of acquisition.
C) cattle and horses must be held for at least 24 months from the date of acquisition.
D) livestock other than cattle and horses must be held for at least 24 months from the date of acquisition.

49) If Section 1231 applies to the sale or exchange of an unharvested crop sold with land, the costs of producing the crop are
A) capitalized.
B) deducted as an expense of operations when incurred and also deducted from the sales price at the time of the sale.
C) deducted when incurred if the land is sold but capitalized if the land is exchanged.
D) deducted as an expense of operations when incurred.

50) Dinah owned land with a FMV of $130,000 (adjusted basis $120,000) which is investment property (a capital asset). Dinah owned a second tract of land, a 1231 asset, with a FMV of $46,000 (adjusted basis $50,000). Both tracts were acquired in 2001 and condemned by the state this year. The state paid an amount equal to FMV. If there are no other transactions involving capital assets or 1231 assets, Dinah must report on her current year return
A) $6,000 net ordinary income.
B) $6,000 net section 1231 gain treated as a net capital gain.
C) a LTCG of $10,000 and a 1231 loss of $4,000.
D) a LTCG of $10,000 and a nondeductible loss of $4,000.

51) Emma owns a small building ($120,000 basis and $123,000 FMV) and equipment ($35,000 basis and $22,000 FMV). Both assets were acquired three years ago, are used in Emma’s business, and are depreciated using straight-line depreciation. Both are destroyed by fire. Insurance proceeds were equal to their FMVs. Only one other transfer of an asset occurs during the year, and a $3,000 LTCL is recognized. After considering all transactions, the tax result to Emma is a
A) $13,000 NLTCL.
B) $13,000 ordinary loss.
C) $3,000 LTCG; $3,000 LTCL; and $13,000 ordinary loss.
D) $10,000 net ordinary loss and a $3,000 NLTCL.

52) Cassie owns equipment ($45,000 basis and $30,000 FMV) and a building ($152,000 basis and $158,000 FMV), which are used in Cassie’s business. Cassie has used straight-line depreciation for both assets, which were acquired two years ago. Both the equipment and the building are destroyed in a fire, and Cassie collects insurance proceeds equal to the assets’ FMV. The tax result to Cassie for this transaction is a
A) $15,000 Sec. 1231 loss and a $6,000 ordinary gain.
B) $15,000 ordinary loss and a $6,000 ordinary gain.
C) $15,000 ordinary loss and a $6,000 Sec. 1231 gain.
D) $15,000 Sec. 1231 loss and a $6,000 Sec. 1231 gain.

53) Harry owns equipment ($50,000 basis and $38,000 FMV) and a building ($140,000 basis and $156,000 FMV), which are used in his business. Harry uses straight-line depreciation for both assets, which were acquired several years ago. Both the equipment and the building are destroyed in a fire, and Harry collects insurance proceeds equal to the assets’ FMV. The tax result to Harry for this transaction is
A) the involuntary conversions are treated as ordinary gains and losses.
B) the involuntary conversions are treated as Sec. 1231 gains and losses.
C) the loss on involuntary conversion is treated as a Sec. 1231 loss while the gain is treated as an ordinary gain.
D) the loss on involuntary conversion is treated as an ordinary loss while the gain is treated as a Sec. 1231 gain.

54) Terry has sold equipment used in her business. She acquired the equipment three years ago for $50,000 and has recognized $30,000 of depreciation across the years in use. In order to recognize any Sec. 1231 gain, she must sell the equipment for more than
A) $0.
B) $20,000.
C) $30,000.
D) $50,000.

55) During the current year, Hugo sells equipment for $150,000. The equipment cost $175,000 when placed in service two years ago, and $55,000 of depreciation deductions were allowed. The results of the sale are
A) LTCG of $30,000.
B) Sec. 1231 gain of $30,000.
C) Sec. 1245 ordinary income $30,000.
D) Sec. 1250 ordinary income of $30,000.

56) During the current year, a corporation sells equipment for $300,000. The equipment cost $270,000 when purchased and placed in service two years ago and $60,000 of depreciation deductions were allowed. The results of the sale are
A) ordinary income of $90,000.
B) Sec. 1231 gain of $90,000.
C) ordinary income of $60,000 and LTCG of $30,000.
D) ordinary income of $60,000 and Sec. 1231 gain of $30,000.

57) Section 1245 recapture applies to all the following except
A) depreciable personal property.
B) assets sold or exchanged at a loss.
C) total depreciation or amortization allowed or allowable.
D) amortizable intangible personal property.

58) All of the following statements are true regarding Sec. 1245 are true except
A) Sec. 1245 does not apply to any buildings placed in service after 1986.
B) Sec. 1245 applies to assets sold or exchanged at a gain or at a loss.
C) Sec. 1245 property includes nonresidential real estate that qualified as recovery property under the ACRS rules unless the taxpayer elected to use the straight-line method of cost recovery.
D) Sec. 1245 ordinary applies to total depreciation or amortization allowed or allowable but not more than the realized gain.

59) An unincorporated business sold two warehouses during the current year. The straight-line depreciation method was used for the first building and the accelerated method (ACRS) was used for the second building. Information about those buildings is presented below.

Building No. 1 Building No. 2
Date acquired 1986 1986
Cost $800,000 $900,000
Accum. Depreciation
Straight-line 800,000
ACRS depreciation 900,000
Selling Price 80,000 400,000

How much gain from these sales should be reported as section 1231 gain and ordinary income due to depreciation recapture by the owner of the business?

A)
Section 1231 Gain Ordinary Income
$480,000 $0

B)
Section 1231 Gain Ordinary Income
$ 80,000 $400,000

C)
Section 1231 Gain Ordinary Income
$ 0 $480,000

D)
Section 1231 Gain Ordinary Income
$400,000 $ 80,000

60) A building used in a business for more than a year is sold. Sec. 1250 will not cause depreciation recapture if
A) the building is fully depreciated.
B) the building was placed in service after 1986.
C) straight-line depreciation was used.
D) all of the above.

61) With respect to residential rental property
A) 80% or more of the gross rental income from the building or structure must be rental income from dwelling units in order for it to be classified as residential rental property.
B) hotels are not included in this category if less than half of the units are used on a transient basis.
C) 80% or more of the net rental income from the building or structure must be rental income from dwelling units in order for it to be classified as residential rental property.
D) gain is not subject to the depreciation recapture provisions if the property is held more than one year.

62) Marta purchased residential rental property for $600,000 on January 1, 1985. Total ACRS deductions for 1985 through the date of sale amounted to $600,000. If the straight-line method of depreciation had been used, depreciation would have been $600,000. The property is sold for $750,000 on January 1 of the current year. The amount and character of the gain is
A) $750,000 Sec. 1231 gain.
B) $150,000 Sec. 1231 gain and $600,000 ordinary income.
C) $750,000 ordinary gain due to Sec 1245.
D) $750,000 ordinary gain due to Sec. 1250.

63) Emily, whose tax rate is 28%, owns an office building which she purchased for $900,000 on March 18 of last year. The building is sold for $950,000 on February 20 of this year when the adjusted basis of the building was $876,000. The tax results to Emily are
A) $74,000 1231 gain taxed at 15%.
B) $74,000 ordinary income taxed at 28%.
C) $24,000 1250 unrecaptured gain taxed at 25% and $50,000 1231 gain taxed at 15%.
D) $24,000 1231 gain taxed at 15% and $50,000 ordinary income taxed at 28%.

64) In 1980, Mr. Lyle purchased a factory building to use in business for $480,000. When Mr. Lyle sells
the building for $580,000, he has taken depreciation of $470,000. Straight-line depreciation would have been $400,000. Mr. Lyle must report
A) $570,000 of ordinary gain.
B) $570,000 of Sec. 1231 gain.
C) $70,000 of ordinary income and $500,000 of Sec. 1231 gain.
D) $470,000 of ordinary gain and $100,000 of Sec. 1231 gain.

65) Ross purchased a building in 1985, which he uses in his manufacturing business. Ross uses the ACRS statutory rates to determine the cost-recovery deduction for the building. Ross’s original cost for the building is $500,000 and cost-recovery deductions allowed are $500,000. If the building is sold for $340,000, the tax results to Ross are
A) $340,000 LTCG.
B) $340,000 Sec. 1231 gain.
C) $340,000 Sec. 1245 ordinary income.
D) $340,000 Sec. 1250 ordinary income.

66) Eric purchased a building in 2003 that he uses in his business. Eric uses the straight-line method for the building. Eric’s original cost for the building is $420,000 and cost-recovery deductions are $120,000. Eric is in the top tax bracket and has never sold any other business assets. If the building is sold for $560,000, the tax results are
A) $260,000 Sec. 1231 gain, all taxable at 20%.
B) $260,000 unrecaptured Sec. 1250 gain, all taxable at 25%.
C) $260,000 Sec. 1231 gain, of which $120,000 is unrecaptured Sec. 1250 gain taxable at 25% and the $140,000 balance is taxable at 20%.
D) $120,000 Sec. 1245 ordinary income, $140,000 Sec. 1231 gain taxable at 20%.

67) With regard to noncorporate taxpayers, all of the following statements are true regarding Sec. 1250 recapture except
A) Sec. 1250 affects the character of the gain, not the amount of the gain.
B) Sec. 1250 applies to assets sold or exchanged at either a gain or a loss.
C) Sec. 1250 ordinary income does not exist if the straight-line method of depreciation is used.
D) Sec. 1250 ordinary income is never more than the additional depreciation allowed.

68) In 1980, Artima Corporation purchased an office building for $400,000 for use in its business. The
building is sold during the current year for $550,000. Total depreciation allowed for the building was $350,000; straight-line would have been $320,000. As result of the sale, how much section 1231 gain will Artima Corporation report?
A) $350,000
B) $406,000
C) $320,000
D) $500,000

69) A corporation sold a warehouse during the current year. The straight-line depreciation method was used. Information about the building is presented below:

Date acquired 1984
Cost $800,000
Accumulated Depreciation – Straight-line 620,000
Selling Price 890,000

How much gain should the corporation report as section 1231 gain?
A) $124,000
B) $620,000
C) $586,000
D) $710,000

70) Octet Corporation placed a small storage building in service in 1999. Octet’s original cost for the building is $800,000 and the cost recovery deductions are $300,000. This year the building is sold for $1,100,000. The amount and character of the gain are
A) Ordinary gain of $60,000 and Sec. 1231 gain of $540,000.
B) Ordinary gain of $300,000 and Sec. 1231 gain of $300,000.
C) Ordinary gain of $600,000.
D) Sec. 1231 gain of $600,000.

71) Maura makes a gift of a van to a local food bank run by a charity. Maura had used the van in her trade or business. The van has a FMV of $6,500; a cost of $31,000; and $27,000 depreciation claimed. What is the amount of Maura’s charitable contribution deduction?
A) $6,500
B) $31,000
C) $4,000
D) $2,500

72) A taxpayer purchased a factory building in 1985 for $800,000. After claiming ACRS-accelerated depreciation of $800,000, she sells the asset for $1,000,000 during the current year. No payment is received during the current year, and the $1,000,000 balance to be paid with interest at the interest rate in four annual payments beginning one year from date of sale. The installment sales method is adopted. How much ordinary income is recognized in the current year?
A) $ 0
B) $200,000
C) $800,000
D) $1,000,000

73) Douglas bought office furniture two years and four months ago for $25,000 to use in his business and elected to expense all of it under Sec. 179. Depreciation of $3,500 would have been taken under the MACRS rules. If Douglas converts the furniture to nonbusiness use today, Douglas must
A) amend the prior two years tax returns.
B) include $3,500 in gross income in year of conversion.
C) include $21,500 in gross income in year of conversion.
D) include $25,000 in gross income in year of conversion.

74) Clarise bought a building three years ago for $180,000 to use in her business. The straight-line method of depreciation was used and $15,000 of depreciation deductions were allowed. During the current year, Clarise sells the building to her wholly-owned corporation for $235,000. The tax results to Clarise are
A) $70,000 ordinary income.
B) $70,000 of Sec. 1231 gain.
C) $55,000 ordinary income and $15,000 Sec. 1231 gain.
D) $15,000 of ordinary income and $55,000 Sec. 1231 gain.

75) All of the following are considered related parties for purposes of Sec. 1239 recapture with the exception of
A) an individual and a partnership where the individual has a one-fourth interest in the partnership.
B) an individual and a corporation where the individual owns more than 50% of the value of the outstanding stock of the corporation.
C) an individual and a corporation where the individual’s spouse owns more than 50% of the value of the outstanding stock of the corporation.
D) an individual and a partnership where the individual owns more than 50% of the capital of the partnership.

76) Cobra Inc. sold stock for a $25,000 loss five years ago. It has been carrying over the capital loss for five years, and the loss will expire at the end of this year because Cobra has not had any capital gains. Earlier this year Cobra sold a parcel of land held four years for business use and will recognize a $30,000 gain. Cobra is thinking about selling some machinery used in its business for the past three years. During this time technology has dramatically changed so Cobra will recognize a $32,000 loss on the sale of the machinery. Cobra is trying to decide whether to sell the machinery at year-end or early next year. Cobra is profitable and has a consistent marginal tax rate of 35%. When should Cobra sell the equipment?
A) current year
B) early next year
C) current year, but arrange an installment sale to spread the loss recognition over the two years
D) either the current year or next year

77) Lucy, a noncorporate taxpayer, experienced the following Section 1231 gains and losses during the years 2009 through 2014. Her first disposition of a Sec. 1231 asset occurred in 2009. Assuming Lucy had no capital gains and losses during that time period, what is the tax treatment in each of the years listed?

Section 1231 Gains Section 1231 Losses
2009 $10,000 $ 8,000
2010 $18,000 $23,000
2011 $ 9,000 $13,000
2012 $22,000 $16,000
2013 $25,000 $17,000
2014 $11,000 $18,000

78) Jillian, whose tax rate is 39.6%, had the following sales of Section 1231 property this year:

Sale of land at a gain of $15,000
Sale of land at a gain of $12,000
Sale of land at a loss of $8,000

a. What is the amount of her resulting tax liability?
b. Assume instead that Jillian has a 15% marginal tax rate. What is the amount of her resulting tax liability?
c. Assume instead that Jillian has a 28% marginal tax rate. What is the amount of her resulting tax liability?

79) Hilton, a single taxpayer in the 28% marginal tax bracket, has $16,000 of nonrecaptured net Sec. 1231 losses, at the beginning of a year in which he had the following transactions:

-Sale of Asset A at a $10,000 1231 gain, all of which is unrecaptured Sec. 1250 gain
-Sale of Asset B at a $13,000 1231 gain

How are the items reported this year and at which rate(s) are the amounts taxed?

80) Indicate whether each of the following assets are capital assets, Sec. 1231 assets, or ordinary income property (property which, if sold, results in ordinary income). Assume that all of the property is held for more than one year.
a. XYZ Corporation owns land used as an employee parking lot. How is the parking lot classified for tax purposes?
b. Montana Corporation owns land held as an investment. How is the land classified for tax purposes?
c. John, a self-employed electrician, owns an automobile he uses strictly for personal use. How is the automobile classified for tax purposes?
d. Jan, a self-employed contractor, owns a truck she uses exclusively in her trade or business. How is the truck classified for tax purposes?
e. Leslie owns an office building where her accounting practice is located. What is the classification of the building?
f. Yvonne owns a computer for use in her job as a sales representative. She does not use the computer for personal purposes. How is the computer classified for tax purposes?

81) Sarah owned land with a FMV of $150,000 (adjusted basis $135,000) which is investment property (a capital asset). Sarah owned a second tract of land, a 1231 asset, with a FMV of $38,000 (adjusted basis $55,000). Both tracts were acquired in 2000 and condemned by the state this year. The state paid an amount equal to FMV. If there are no other transactions involving capital assets or 1231 assets, what is the amount that Sarah must report on her current year return?

82) Elaine owns equipment ($23,000 basis and $15,000 FMV) and a building ($136,000 basis and $148,000 FMV), which are used in her business. Elaine uses straight-line depreciation for both assets, which were acquired several years ago. Both the equipment and the building are destroyed in a fire, and Elaine collects insurance proceeds equal to the assets’ FMV.
a. What is the tax treatment of these two transactions?
b. Assume that Elaine is only able to collect $3,000 from the insurance company for the equipment loss. What is the tax treatment of the two transactions (assume the basis and insurance reimbursement remain the same for the building).

83) The following gains and losses pertain to Jimmy’s business assets that qualify as Sec. 1231 property. Jimmy does not have any nonrecaptured net Sec. 1231 losses from previous years, and the portion of gain recaptured as ordinary income due to the depreciation recapture provisions has been eliminated.

Gain due to insurance reimbursement for hurricane damage $24,000
Loss due to condemnation $21,000
Gain due to the sale of Sec. 1231 property $18,000

Describe the specific tax treatment of each of these transactions.

84) The following gains and losses pertain to Arnold’s business assets that qualify as Sec. 1231 property. Arnold does not have any nonrecaptured net Sec. 1231 losses from previous years, and the portion of gain recaptured as ordinary income due to the depreciation recapture provisions has been eliminated.

Loss from hurricane damage $25,000
Loss due to condemnation $20,000
Gain due to the sale of Sec. 1231 property $16,000

Describe the specific tax treatment of each of these transactions.

85) The following are gains and losses recognized in 2014 on Ann’s business assets that were held for more than one year. The assets qualify as Sec. 1231 property.

Gain due to insurance reimbursement for casualty $20,000
Gain due to a condemnation 30,000
Loss due to the sale of Sec. 1231 property 17,000

A summary of Ann’s net Sec. 1231 gains and losses for the previous five-year period is as follows:

Cumulative Nonrecaptured
Year Sec. 1231 Gain Sec. 1231 Loss Net 1231 Losses
2009 $5,000 $0
2010 $3,000 $3,000
2011 $17,000 $20,000
2012 $12,000 $8,000
2013 $10,000 $18,000

Describe the specific tax treatment of each of the current year transactions.

86) Network Corporation purchased $200,000 of five-year equipment on March 24, 2012. They elected to expense $60,000 of the cost under Sec. 179 in effect that year. After depreciating the equipment $28,000 in 2012 and $22,400 in 2013, the equipment was sold for $190,000.
a. What is the amount of the realized gain (or loss) on the sale?
b. How is the gain or loss taxed?

87) On June 1, 2011, Buffalo Corporation purchased and placed in service 7-year MACRS tangible property costing $100,000. On November 10, 2014, Buffalo sold the property for $102,000 after having taken MACRS $47,525 in depreciation deductions. What is the amount and character of Buffalo’s gain?

88) An unincorporated business sold two warehouses during the current year. The straight-line depreciation method was used for Building No. 1 and the accelerated method (ACRS) was used for Building No. 2. Information about those buildings is presented below.

Building No. 1 Building No. 2
Date acquired 1984 1984
Cost $510,000 $650,000
Accum. Depreciation
Straight-line 510,000
ACRS depreciation 650,000
Selling Price 750,000 825,000

How much gain from these sales should be reported as section 1231 gain and ordinary income due to depreciation recapture?

89) Jed sells an office building during the current year for $800,000. The building was purchased in 1980 for $350,000. Jed had depreciated the building under an accelerated method, but it is now fully depreciated. Jed has never had any other Sec. 1231 transactions.
a. What is the recognized gain or loss on the sale of the building and the character of the gain?
b. How will the gain be taxed?

90) Pam owns a building used in her trade or business that was placed into service in 2002. The building cost $450,000 and depreciation to date amounts to $200,000. Pam sells the building for $380,000. It is the only asset she sells this year, and she has no nonrecaptured Sec. 1231 losses. What is the amount of recognized gain and the nature of the gain? How will the gain be taxed?

91) Julie sells her manufacturing plant and land originally purchased in 1980. Accelerated depreciation had been taken on the building, but the building is now fully depreciated. Julie is in the 39.6% marginal tax bracket. Other information is as follows:

Property Original cost Total depreciation Adjusted basis Selling price
Plant $2,800,000 $2,800,000 $0 $3,000,000
Land $ 500,000 $500,000 $800,000

She has not sold any other assets this year. A review of her file indicates that the only asset dispositions in the past five years was a truck sold for a $10,000 loss last year. What are the tax consequences of the sale (type of gain; rates at which taxed)?

92) Connors Corporation sold a warehouse during the current year for $980,000. The building had been acquired in 1980 at a cost of $830,000. The building is fully depreciated.

What is the amount and nature of the gain or loss on the sale of the warehouse?

93) WAM Corporation sold a warehouse during the current year for $830,000. The building had been acquired in 1989 at a cost of $730,000 and had total straight-line depreciation of $510,000.

What is the amount and nature of the gain or loss on the sale of the warehouse?

94) Describe the tax treatment for a noncorporate taxpayer in the 39.6% marginal tax bracket who sells each of the first two assets for $500,000 and each of the second two assets for $750,000. Each asset was purchased in 2010 and is used in a trade or business. There are no other gains and losses and no nonrecaptured Section 1231 losses.

Original Basis Adjusted Basis
Land $350,000 $350,000
Equipment $600,000 $450,000
Equipment $600,000 $500,000
Building $550,000 $450,000

95) Jacqueline dies while owning a building with a $1,000,000 FMV. The building is classified as Sec. 1245 property acquired in 1985 for $850,000. Cost-recovery deductions of $850,000 have been claimed. Pam inherits the property.
a. What is the amount of Pam’s basis in the property?
b. What is the amount of cost-recovery deductions that Pam must recover if she immediately sells the building?

96) Melissa acquired oil and gas properties for $600,000. During 2013 she elected to expense the $180,000 of IDC. Total depletion allowed was $50,000. During the current year, Melissa sells the property for $700,000.
a. What is the amount of and nature of her gain using the facts above?
b. What is the amount of and nature of her gain assuming that she sold the property for $850,000?

97) Pete sells equipment for $15,000 to Marcel, his son. The equipment cost $20,000 and has accumulated depreciation of $12,000. Marcel will use the equipment in his business.
a. What is the amount and character of Pete’s gain on the sale?
b. How does your answer change if the sales price is $22,000?

98) What is the purpose of Sec. 1245 and what is its significance?

99) Jesse installed solar panels in front of his office building in 2013. The panels are not attached to the building. After using the solar panels for 13 months, Jesse decided to replace them with a newer model to obtain a greater savings on electricity costs. Jesse sold the old solar panels for an amount greater than his original purchase price. What tax issues should be considered with purchase, use and sale of the original solar panels?

100) Brian purchased some equipment in 2014 which he intends to use in his trade or business. He approaches you to assist him in planning for the ultimate disposal of the asset—whether it be by sale, charitable contribution to the local university, gift to his sister for use in her business, or some other means. Discuss the tax considerations.

Chapter 14 Special Tax Computation Methods, Tax Credits, and Payment of Tax

1) The alternative minimum tax applies to individuals, corporations, estates, and trusts.

2) The alternative minimum tax applies to individuals only if it exceeds the taxpayer’s regular income tax liability.

3) For purposes of the AMT, the standard deduction, but not the personal and dependency exemptions, is allowed.

4) An example of an AMT tax preference is the excess of MACRS depreciation on equipment over depreciation computed by using the the 150% declining balance method.

5) All tax-exempt bond interest income is classified as an AMT preference.

6) Casualty and theft losses in excess of 10% of AGI are deductible for AMT purposes.

7) Medical expenses in excess of 10% of AGI are deductible when computing AMT.

8) For purposes of the AMT, only the foreign tax credit and refundable personal credits are allowed to reduce the tentative minimum tax.

9) A taxpayer who paid AMT in prior years, but is not subject to the AMT in the current year, may be entitled to an AMT credit against his regular tax liability in the current year.

10) If an individual is classified as an employee, the employer is required to withhold the employee’s share of the FICA tax and to provide a matching amount.

11) Self-employed individuals are subject to the self-employment tax if their net earnings are more than the personal exemption amount.

12) One-half of the self-employment tax imposed is allowed as a for AGI deduction.

13) If an individual is an employee and also has self-employment income, the maximum tax base for computing self-employment tax is reduced by the wages that are subject to the FICA tax.

14) A self-employed individual has earnings from his business of $300,000. For the earnings in excess of the $117,000, he will only have to pay the 2.9% Medicare tax.

15) When a husband and wife file a joint return and both have self-employment income, the self-employment tax must be computed separately.

16) Nonrefundable credits may offset tax liability but may not result in additional payments to the taxpayer.

17) The child and dependent care credit provides relief for working taxpayers who pay for care for younger children or an incapacitated dependent or spouse.

18) For purposes of the child and dependent care credit, qualifying employment-related expenses cannot include payments to a relative.

19) For purposes of the limitation on qualifying expenses for the child and dependent care credit, a spouse who is either a full-time student or is incapacitated is deemed to have earned income of $250 per month, or $500 per month if there are two or more qualifying individuals in the household.

20) The adoption credit based on qualified adoption expenses is generally allowed in the year the adoption is finalized.

21) Taxpayers with income below phase-out amounts are allowed a child credit of $1,000 for each qualifying child under age 17.

22) Qualified tuition and related expenses eligible for the American Opportunity Tax Credit are limited to those incurred the first two years of postsecondary education.

23) Brad and Shelly’s daughter is starting her freshman year of college. Brad and Shelly will be able to claim the American Opportunity Tax Credit for a percentage of the cost of tuition and room and board.

24) To claim the Lifetime Learning Credit, a student must take at least one-half of a full-time course load during the year.

25) The qualified retirement savings contributions credit is based on a maximum contribution of $2,000.

26) In lieu of a foreign tax credit, a taxpayer may elect to take a deduction for foreign taxes paid or accrued.

27) The foreign tax credit is equal to the smaller of foreign taxes paid or accrued in the tax year or the portion of the U.S. income tax liability attributable to the income earned in all foreign countries.

28) The general business credits are refundable credits.

29) A credit for rehabilitation expenditures is available to a business for the purchase price of a building originally placed in service before 1936.

30) The nonrefundable disabled access credit is available to eligible small businesses for expenditures incurred to make existing business facilities accessible to disabled individuals.

31) Research expenses eligible for the research credit include costs that are incident to the development or improvement of a product or component.

32) A taxpayer’s tentative minimum tax exceeds his net income tax so he will be paying the alternative minimum tax this year. The taxpayer has a sole proprietorship through which he has earned general business credits. The taxpayer can reduce his AMT to the extent of his general business credits.

33) The earned income credit is refundable only if a tax has been withheld.

34) The earned income credit is available only to taxpayers with qualifying children.

35) The health insurance premium assistance credit is designed to help lower and middle income taxpayers who purchase their own health insurance insurance directly from an insurance company or through a state or federal exchange.

36) If an employee has more than one employer during the year, all employers must withhold federal income taxes but only one employer must withhold FICA tax.

37) If estimated tax payments equal or exceed 100% of the actual tax liability for the prior year, there is generally (assuming AGI less than or equal to $150,000) no penalty for underpayment of estimated taxes.

38) Bob’s income can vary widely from year-to-year because much of his compensation comes from sales commissions and bonuses. It generally is in the $200,000 to $300,000 range. To minimize the risk of underpayment penalties for estimated tax he should pay in, through payroll withholding and estimated tax payments, 100% of the prior year tax liability.

39) Nonrefundable personal tax credits are allowed against the taxpayer’s tax liability before other credits are claimed.

40) Jake and Christina are married and file a joint return for 2014 with taxable income of $100,000 and tax preferences and adjustments of $20,000 for AMT purposes. Their regular tax liability is $16,713. What is the amount of their total tax liability?
A) $6,859
B) $9,854
C) $16,713
D) $26,567

41) In computing the alternative minimum taxable income, no deduction is allowed for
A) alimony.
B) moving expenses.
C) personal exemptions.
D) individual retirement account contributions.

42) Harley’s tentative minimum tax is computed by multiplying the AMT tax rates by her
A) taxable income.
B) alternative minimum tax base.
C) alternative minimum taxable income.
D) tentative alternative taxable income.

43) In 2014 Charlton and Cindy have alternative minimum taxable income of $130,000 and file a joint return. For purposes of computing the alternative minimum tax, their exemption is
A) $0.
B) $7,900.
C) $52,800.
D) $82,100.

44) Reva and Josh Lewis had alternative minimum taxable income of $350,000 in 2014 and file a joint return. For purposes of computing the alternative minimum tax, their exemption is
A) $33,725.
B) $52,800.
C) $48,375.
D) $82,100.

45) In computing AMTI, tax preference items are
A) excluded.
B) added only.
C) subtracted only.
D) either added or subtracted.

46) In computing AMTI, adjustments are
A) limited.
B) added only.
C) subtracted only.
D) either added or subtracted.

47) All of the following are allowable deductions under the alternative minimum tax except
A) charitable contributions.
B) gambling losses.
C) qualified housing interest.
D) personal property taxes.

48) Suzanne, a single taxpayer, has the following tax information for the current year.
• Charitable contribution of real property with a FMV of $25,000 (adjusted basis $20,000) for which a $25,000 deduction was taken.
• Research and experimental expenses of $40,000 deducted in full for regular tax.

Suzanne’s total tax preferences and adjustments equals
A) $5,000.
B) $36,000.
C) $41,000.
D) $45,000.

49) Rex has the following AMT adjustments:
-Depreciation of real property acquired in 1996 using MACRS is $22,000 while depreciation for AMT purposes is $15,000.
-R&E expenditures amounting to $60,000 are expensed.

The net adjustment is
A) $7,000.
B) $54,000.
C) $61,000.
D) $67,000.

50) Lavonne has a regular tax liability of $13,356 on taxable income of $70,000. She also has tax preferences of $25,000 and positive adjustments attributable to limitations on itemized deductions of $15,000. Lavonne is single and takes a $3,950 personal exemption for herself only. Lavonne’s alternative minimum tax for 2014 is
A) $0.
B) $2,543.
C) $16,271.
D) none of the above.

51) Self-employment taxes include components for
A) Medicare hospital insurance and SUTA.
B) Social Security and FUTA.
C) FICA and FUTA.
D) Social Security and Medicare hospital insurance.

52) A wage cap does not exist for which of the following self-employment taxes?
A) Social Security tax
B) FICA
C) FUTA
D) Medicare hospital insurance

53) If an individual is liable for self-employment tax, a portion of the self-employment tax is
A) a for AGI deduction.
B) from AGI as an itemized deduction.
C) a Schedule C business expense.
D) nondeductible.

54) John has $55,000 net earnings from a sole proprietorship. John is also employed by a major corporation and is paid $25,000. John’s self-employment tax (rounded) for 2014 is
A) $3,886.
B) $4,208.
C) $7,771.
D) $8,415.

55) Joe has $130,000 net earnings from a sole proprietorship. Joe’s self-employment tax (rounded) for 2014 is
A) $17,990.
B) $18,368.
C) $19,890.
D) None of the above.

56) Hong earns $127,300 in her job as a physician’s assistant. She also has her own business selling cosmetics. This business generated $10,000 of earnings. What is Hong’s self-employment tax for 2014?
A) $268
B) $290
C) $1,412
D) $1,530

57) Ava has net earnings from self-employment of $125,000. She also earned salary of $170,000 from a job held earlier in the year. How much Additional Medicare Tax will be owed on the self-employment income?
A) $0
B) $769
C) $855
D) $3,625

58) All of the following statements regarding self-employment income/tax are true except:
A) The self-employment tax is imposed on net earnings from self-employment over $400.
B) Self-employment tax is computed separately for married individuals filing joint returns.
C) Independent contractors are subject to self-employment tax on the amount of net earnings from the self-employment activity.
D) Employees who have a business in addition to their regular employment are not subject to the self-employment tax since FICA is withheld on their wages.

59) All of the following are self-employment income except
A) net income of a sole proprietorship.
B) dividends received by a corporate shareholder.
C) fees received for serving as a director of a corporation.
D) distributive share of partnership income from a partnership operating a business.

60) Nonrefundable tax credits
A) only offset a taxpayer’s tax liability.
B) may only be used if the taxpayer is receiving a refund.
C) can be carried back two years and carried forward 15 years if they exceed tax liability in the current year.
D) allow the excess over the taxpayer’s tax liability to be paid to the taxpayer.

61) Refundable tax credits
A) only offset a taxpayer’s tax liability.
B) may only be used if the taxpayer is receiving a refund.
C) have all expired but may be reinstated with new tax legislation.
D) allow the excess over the taxpayer’s tax liability to be paid to the taxpayer.

62) Which statement is correct?
A) Tax credits reduce tax liability on a dollar-for-dollar basis.
B) Tax deductions reduce tax liability on a dollar-for-dollar basis.
C) The benefit of a tax credit depends on the taxpayer’s marginal tax rate.
D) Tax deductions are less valuable for high-income taxpayers than for low-income taxpayers.

63) Max and Alexandra are married and incur $5,500 of qualifying expenses to care for their two children, ages 2 and 5. Max’s earned income is $35,000 and Alexandra’s earnings from a part-time job are $5,000. What is the amount of the qualifying expenses for purposes of computing the child and dependent care credit?
A) $3,000
B) $5,000
C) $5,500
D) $6,000

64) Marvin and Pamela are married, file a joint return, and have two children, ages 9 and 11. Their combined AGI is $65,000. Marvin’s earned income is $40,000; Pamela’s is $25,000. They incur $6,500 of child-care expenses to enable them to be employed during the current year. Their child and dependent care credit is
A) $1,200.
B) $1,300.
C) $1,800.
D) $6,000.

65) Bud and Stella are married, file a joint return, and have one child, age 3. Their combined AGI is $35,000. Bud and Stella incur $3,500 of child-care expenses during the current year. The child and dependent care credit is
A) $600.
B) $700.
C) $750.
D) $875.

66) Mark and Stacy are married, file a joint return, and have one child, age 3. Their combined AGI is $55,000. Mark and Stacy incur $3,500 of child-care expenses during the current year. Mark’s employer reimburses him $1,500 under a qualified dependent care assistance plan. The child and dependent care credit is
A) $300.
B) $600.
C) $700.
D) $1,200.

67) Evan and Barbara incurred qualified adoption expenses in 2013 of $6,000, and then incurred $7,500 more in 2014 when the adoption of their child became final. Their 2013 AGI was $110,000 and their 2014 AGI was $100,000. The allowable adoption credit is
A) $13,190 in 2014.
B) $13,500 in 2014.
C) $6,000 in 2013 and $7,190 in 2014.
D) $6,000 in 2013 and $7,500 in 2014.

68) Lee and Whitney incurred qualified adoption expenses in 2013 of $2,000, and then incurred $7,000 more in 2014 when the adoption of their child became final. Their 2013 AGI was $120,000 and their 2014 AGI was $140,000. The allowable adoption credit is
A) $ 7,000 in 2014.
B) $ 9,000 in 2014.
C) $13,190 in 2014.
D) $2,000 in 2013 and $7,000 in 2014.

69) Marguerite and Josephus have two children, ages 13 and 10. Their modified AGI is $120,500.What is their child tax credit?
A) $900
B) $1,000
C) $2,000
D) None of the above.

70) The maximum amount of the American Opportunity Tax Credit for each qualified student is
A) $1,500.
B) $2,000.
C) $2,500.
D) $3,000.

71) Jeffery and Cassie, who are married with modified AGI of $90,000, are sending their son to his first year of college. Their total tuition and related payments during 2014 amounted to $5,500. They have not taken advantage of any other type of tax benefit related to educational expenses. Their American Opportunity Tax Credit for 2014 is
A) $1,500.
B) $2,000.
C) $2,500.
D) $5,000.

72) Timothy and Alice, who are married with modified AGI of $90,000, are sending their daughter to her first year of college. Their total tuition and related payments during the year amounted to $13,000. In addition, their daughter received a $10,000 scholarship to cover tuition. They have not taken advantage of any other type of tax benefit related to educational expenses. Their American Opportunity Tax Credit is
A) $2,000.
B) $2,250.
C) $2,500.
D) $3,000.

73) Joe, who is single with modified AGI of $84,000, is sending his son to his first year of college. The total tuition and related payments during the year amounted to $18,000. Joe has not taken advantage of any other type of tax benefit related to educational expenses. His American Opportunity Tax Credit is
A) $ 0.
B) $1,000.
C) $1,500.
D) $2,500.

74) In the fall of 2014, James went back to school to earn a master of accountancy degree. He incurred $7,000 of qualified educational expenses and his modified AGI for the year was $40,000. His Lifetime Learning Credit is
A) $1,000.
B) $1,400.
C) $1,800.
D) $2,500.

75) All of the following statements are true regarding the Lifetime Learning Credit except which one?
A) In order to qualify for the Lifetime Learning Credit, a student must be enrolled 1/2 time.
B) Qualifying expenses include those for tuition and related fees but not for room and board.
C) The Lifetime Learning credit may be claimed for any degree or nondegree course at a college or university that helps an individual acquire or improve their job skills.
D) The Lifetime Learning credit and the American Opportunity Tax credit may not be taken in the same tax year with respect to the same student’s tuition and related fees.

76) Which of the following is not a qualifying property for the residential energy efficient property (REEP) credit?
A) geothermal heat pumps
B) residential wind property
C) metal or asphalt roofs with special coatings
D) solar hot water heaters

77) Kerry is single and has AGI of $25,000 in 2014. During the year he contributes $5,000 to his Roth IRA. What is the amount of qualified retirement savings contributions credit to which he is entitled?
A) $200
B) $400
C) $800
D) $1,000

78) A corporation has $100,000 of U.S. source taxable income and $300,000 of foreign source taxable income from countries X and Y for a total worldwide taxable income of $400,000. Countries X and Y levy a total of $60,000 in foreign taxes upon the foreign source taxable income. U.S. taxes before credits are $140,000. The foreign tax credit limitation is
A) $35,000.
B) $60,000.
C) $80,000.
D) $105,000.

79) Carlotta, Inc. has $50,000 foreign-source income and $150,000 worldwide income. Its U.S. tax on its worldwide income is $42,000 and it paid foreign taxes of $16,000. What is the corporation’s foreign tax credit?
A) $2,000
B) $14,000
C) $16,000
D) $42,000

80) Carlotta, Inc. has $50,000 foreign-source income and $150,000 worldwide income. Its U.S. tax on its worldwide income is $42,000 and it paid foreign taxes of $12,000. What is the corporation’s foreign tax credit?
A) $4,000
B) $12,000
C) $14,000
D) $42,000

81) Current year foreign taxes paid exceed the ceiling based on U.S. tax attributable to foreign source income. These excess foreign tax credits
A) are lost.
B) can be carried forward ten years only.
C) can be carried back one year and then carried forward ten years.
D) can be carried back one year and then carried forward twenty years.

82) The general business credit includes all of the following with the exception of
A) research credit.
B) disabled access credit.
C) foreign tax credit.
D) credit for rehabilitation expenditure.

83) Octo Corp. purchases a building for use in its business at a cost of $100,000. The building was built in 1930 and needs substantantial work so it can be used. Octo spends $150,000 on qualifying renovations. Octo will earn a rehabilitation credit of
A) $15,000.
B) $25,000.
C) $5,000.
D) $30,000.

84) Runway Corporation has $2 million of gross receipts in the preceding year. For purposes of the disabled access credit, what is the maximum number of full-time employees the corporation can have in the preceding year?
A) 10
B) 15
C) 20
D) 30

85) Kors Corporation has 30 employees and $5 million of gross receipts. Kors spends $15,000 for qualified structural improvements for access for the disabled. The disabled access credit is
A) $5,000.
B) $5,125.
C) $0.
D) $7,500.

86) Which of the following expenditures will qualify as a research expenditure for purposes of the research credit?
A) An ice cream producer develops a new type of packaging that will keep ice cream frozen while driving home from the grocery store.
B) An ice cream producer develops a new design on the package that will be more pleasing to the culture of a new market it is entering.
C) An ice cream producer develops a new marketing campaign to introduce its brand to a new region of the country it is entering.
D) All of the above qualify as research expenditures for the research credit.

87) ChocoHealth Inc. is developing new chocolate products providing abundant health benefits at low calorie counts. For the past three years, it spent an average of $500,000 per year on research. ChocoHealth has spent $900,000 on research. The company has elected the simplified credit. For the current year, it will earn a research credit of
A) $54,000.
B) $126,000.
C) $80,000.
D) $91,000.

88) The general business credit may not exceed the net income tax minus the greater of the tentative minimum tax or
A) 20% of the net regular tax liability above $20,000.
B) 25% of the net regular tax liability above $20,000.
C) 20% of the net regular tax liability above $25,000.
D) 25% of the net regular tax liability above $25,000.

89) Dwayne has general business credits totaling $30,000 before limitation. His regular tax liability is $83,000 and his tentative minimum tax is $79,000. What amount of general business credit can Dwayne take this year?
A) $4,000
B) $14,500
C) $25,000
D) $30,000

90) Layla earned $20,000 of general business credits from her sole proprietorship. Her regular tax liability is $45,000, and her tentative minimum tax is $49,000. During the current year Layla will apply general business credits of
A) $0.
B) $4,000.
C) $20,000.
D) $45,000.

91) Individuals without children are eligible for the earned income credit if they meet all the following conditions except
A) file married filing separately.
B) at tax year end are at least age 25 but not more than age 64.
C) for the tax year are not a dependent of another taxpayer.
D) the United States is their principal place of residence for more than one-half of the tax year.

92) A taxpayer will be ineligible for the earned income credit if he or she has disqualified investment income of more than $3,350 in 2014. Disqualified income includes all the following except
A) net capital gains.
B) tax-exempt interest.
C) net rental income.
D) self-employment income.

93) Which one of the following is a refundable credit?
A) earned income credit
B) child and dependent care credit
C) lifetime learning credit
D) credit for the elderly and disabled

94) In 2014 Rita is divorced with one child. She has AGI of $19,500 resulting in a federal income tax liability of $250 and an earned income credit of $3,038. She has had $550 of federal income taxes withheld from her pay. Rita will receive a federal income refund of
A) $550.
B) $300.
C) $3,038.
D) $3,338.

95) Which of the following statements is incorrect regarding qualifying criteria for the health insurance premium tax credit?
A) The insurance policy must be purchased directly from an insurance company.
B) Household income must be below designated levels.
C) The taxpayer cannot have access to affordable essential coverage through an employer.
D) The individual may not be eligible as a dependent of another taxpayer.

96) An individual with AGI equal to or less than $150,000 in the prior year may generally avoid penalties for underpayment of estimated tax in each of the following cases with the exception of
A) estimated tax is less than $1,500.
B) 90% of the tax due for the current year is paid.
C) 90% of the tax due for the current year is paid when computed on an annualized basis.
D) 100% of the actual tax liability for the prior year is paid.

97) With respect to estimated tax payments for a taxpayer with AGI of $150,000 or lower in the prior year, all of the following are generally true with the exception of
A) no penalty is imposed if the estimated tax is less than $1,000.
B) no penalty is imposed if the individual has no tax liability for the prior year.
C) no underpayment penalty is imposed if the estimated payments total at least 90% of the tax due for the current year.
D) no underpayment penalty is imposed if the estimated payments total at least 90% of the actual tax liability for the prior year.

98) If a taxpayer’s AGI is greater than $150,000, no penalty will be imposed if the taxpayer pays estimated tax payments in 2014 equal to what percentage of 2013’s income tax liability?
A) 100%
B) 90%
C) 110%
D) 120%

99) Annie has taxable income of $100,000, a regular tax liability of $21,176, a positive AMT adjustment due to limitations on itemized deductions of $20,000, and tax preferences of $25,000 in 2014. Annie is single and takes a $3,950 personal exemption for herself only. What is Annie’s AMT for 2014?

100) George and Meredith who are married, have a regular tax liability of $22,963, taxable income of $125,000, tax preferences of $25,000, and positive adjustments attributable to limitations on itemized deductions of $18,700 this year. They claim $11,850 of personal and dependency exemptions for themselves and their 20-year old dependent daughter. What is George and Meredith’s alternative minimum tax for 2014?

101) Sonya started a self-employed consulting business in the last part of the year and earned $40,000. She had been employed as manager in a consulting firm prior to starting her own business and had earned $125,000.
(a) What is Sonya’s self employment tax for 2014?
(b) What is Sonya’s deduction for AGI for the SE tax?

102) Lara started a self-employed consulting business in the last part of the year and earned $60,000 of self- employment income. She had been employed as manager in a consulting firm prior to starting her own business and had earned $175,000.
(a) What is Lara’s Additional Medicare Tax for 2014, if any?
(b) What is Lara’s deduction for AGI for the Additional Medicare Tax?

103) Sam and Megan are married with two dependent children. Both Sam and Megan work, earning $50,000 and $55,000, respectively. Their AGI totals $110,000. They incur $6,500 of qualifying child care expenses of which $2,500 is reimbursed by Megan’s dependent care program at work.

What is the amount of their child and dependent care credit?

104) Nick and Nicole are both 68 years old and file a joint return. They have AGI of $15,000 and receive nontaxable Social Security payments of $4,200 during the current year. What is the amount of the tax credit for the elderly?

105) Tyler and Molly, who are married filing jointly with $210,000 of AGI in 2014, incurred the following expenses in their efforts to adopt a child:

2013: Attorney’s fees $4,500
2014: Attorney’s fees $4,500
Court costs $1,000
Adoption fees $5,500

The adoption was finalized in 2014. What is the amount of the allowable adoption credit in 2014?

106) Tom and Anita are married, file a joint return with an AGI of $165,000, and have one dependent child, Tim, who is a first-time freshman in college. The following expenses are incurred and paid in 2014:

Tuition, fees and textbooks $11,000
Room and Board $5,000

What is the maximum education credit allowed to Tom and Anita?

108) Bonjour Corp. is a U.S.-based corporation with operations in France. The operations in France generated $200,000 of taxable income whereas worldwide operations generated total taxable income of $2,000,000. Its U.S. tax liability before credits is $680,000. Determine the allowable foreign tax credit assuming taxes paid to France as follows:
a. $40,000.
b. $80,000.

109) During the year, Jim incurs $50,000 of rehabilitation expenditures in connection with a certified historic structure used in his business. The adjusted basis of the structure was $40,000 at the time the rehabilitation began.
a. What is the amount, if any, of his rehabilitation credit for the year?
b. What is the depreciable basis of the rehabilitation expenditures?

110) Hawaii, Inc., began a child care facility for its employees during the year. The corporation incurred the following expenses:

Rent of facility $30,000
Leasehold improvements 50,000
Equipment, toys, etc. 15,000
Salaries of child care employees 25,000
Other operating expenses of facility 18,000
Subtotal $138,000
Qualified child care referral fees 10,000
Total expenses $148,000

What is the amount of Hawaii’s credit for employer-provided child care?

111) Ivan has generated the following taxes and credits this year:

Regular tax $38,000
Tentative minimum tax 28,000
Dependent care credit 1,200
American Opportunity credit 800
Research credit 20,000
Rehabilitation credit 15,000

How much general business credit will he apply to the current year tax liability?

112) Beth and Jay project the following taxes for the current year:

Regular tax $50,000
AMT 10,000
Self employment tax 12,000

How much in estimated tax payments (including withholding from wages and quarterly estimated payments) should the taxpayers pay this year in order to avoid underpayment penalties under the following assumptions regarding the preceding tax year?

a. Preceding tax year—AGI of $140,000 and total taxes of $36,000.
b. Preceding tax year—AGI of $155,000 and total taxes of $50,000.

113) Discuss tax-planning options available for expenses incurred for child and dependent care.

114) Describe the differences between the American Opportunity Tax credit and the Lifetime Learning credit.

115) Assume you plan to volunteer at a Volunteer Income Tax Assistance (VITA) program for low income taxpayers and wish to prepare so you can help your clients achieve the maximum tax savings. Briefly discuss tax credits with which you should become familiar.

116) Discuss the tax planning techniques available to a U.S. citizen who is on a foreign job assignment.

117) Discuss when Form 6251, Alternative Minimum Tax, must be filed.

ACC 555 Week 11 Final Exam – Strayer University New

ACC/555 Week 11 Final Exam – Strayer New

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Chapters 7 Through 14

Prentice Hall’s Federal Taxation 2015 Comprehensive, 28e (Pope)
Chapter 7 Itemized Deductions

1) For individuals, all deductible expenses must be classified as deductions for AGI or deductions from AGI.

2) In 2014, medical expenses are deductible as a from AGI deduction to the extent that they exceed 7.5 percent of the taxpayer’s AGI.

3) Medical expenses paid on behalf of an individual who could be the taxpayer’s dependent except for the gross income or joint return tests are deductible as itemized deductions.

4) Medical expenses incurred on behalf of children of divorced parents are deductible by the parent who pays the expenses but only if that parent also is entitled to the dependency exemption.

5) The definition of medical care includes preventative measures such as routine physical examinations.

6) Due to stress on the job, taxpayer Charlie began to experience chest pains. In order to relax and relieve the pains, he and his spouse went on an ocean cruise. The cost of the cruise to alleviate this medical condition is tax deductible.

7) Expenditures for a weight reduction program are deductible if recommended by a physician to treat a specific medical condition such as hypertension caused by excess weight.

8) In order for a taxpayer to deduct a medical expense, the amount must be paid to a certified medical doctor (M.D.).

9) Jeffrey, a T.V. news anchor, is concerned about the wrinkles around his eyes. Because it is job-related, the cost of a face lift to eliminate these wrinkles is a deductible medical expense.

10) Expenditures for long-term care insurance premiums qualify as a medical expense deduction subject to an annual limit based upon the age of an individual.

11) Capital expenditures for medical care which permanently improve or better the taxpayer’s property are deductible to the extent the cost exceeds the increase in fair market value to the property attributable to the capital expenditure.

12) Expenditures incurred in removing structural barriers in the home of a physically handicapped individual are deductible only to the extent the cost exceeds the increase in fair market value to the property attributable to the capital expenditure.

13) If the principal reason for a taxpayer’s presence in an institution is the need and availability of medical care, the entire cost of lodging and meals is considered qualified medical expenditures.

14) A medical expense is generally deductible only in the year in which the expense is actually paid.

15) If a prepayment is a requirement for the receipt of the medical care, the payment is deductible in the year paid rather than the year in which the care is rendered.

16) If a medical expense reimbursement is received in a year after a deduction has been taken on a previous year’s return, the previous year’s return must be amended to eliminate the reimbursed expense.

17) Assessments or fees imposed for specific privileges or services are not deductible as taxes.

18) Foreign real property taxes and foreign income taxes are not deductible as itemized deductions.

19) A personal property tax based on the weight of the property is deductible.

20) Assessments made against real estate for the purpose of funding local improvements are not deductible in the year paid but rather should be added to the cost basis of the property.

21) Self-employed individuals may deduct the full self-employment taxes paid as a for AGI deduction.

22) Finance charges on personal credit cards are considered interest and are, therefore, deductible.

23) In general, the deductibility of interest depends on the purpose for which the indebtedness is incurred.

24) Interest expense incurred in the taxpayer’s trade or business is deductible as a for AGI deduction without limitation if the taxpayer materially participates in the business.

25) Investment interest expense which is disallowed because it exceeds the taxpayer’s net investment income may be carried over and treated as incurred in subsequent years.

26) Investment interest includes interest expense incurred to purchase tax-exempt securities.

27) Taxpayers may elect to include net capital gain as part of investment income.

28) Taxpayers may not deduct interest expense on most personal debt, including credit card debt, car loans, and other consumer debt.

29) Qualified residence interest consists of both acquisition indebtedness and home equity interest.

30) Acquisition indebtedness for a personal residence includes debt incurred to substantially improve the residence.

31) A taxpayer is allowed to deduct interest expense incurred on home equity indebtedness limited to the lesser of $100,000 or the home equity (FMV of the residence less the acquisition indebtedness).

32) While points paid to purchase a residence are deductible as interest in the period paid, points associated with the refinancing of a residence must be amortized and deducted over the life of the loan.

33) Christopher, a cash basis taxpayer, borrows $1,000 from ABC Bank by issuing a 3-month note on December 1, 2014. Christopher receives $940 but must repay $1,000 on the due date. The amount of interest expense deductible in 2014 is $20.

34) Charitable contributions made to individuals are deductible if the individuals can show extreme financial need.

35) For charitable contribution purposes, capital gain property includes property which, if sold, would produce a long-term capital gain.

36) A charitable contribution deduction is allowed for the FMV of services rendered to a qualified charitable organization.

37) A charitable contribution in excess of the deduction limit for one taxable year can be carried forward five years.

38) If a taxpayer makes a charitable contribution to a university and in return receives the right to purchase tickets to athletic events, the taxpayer may deduct only 80% of the payment.

39) An accrual-basis corporation can only deduct contributions made by year-end.

40) Corporate charitable deductions are limited to 10% of the corporation’s taxable income for the year.

41) Legal fees for drafting a will are generally deductible.

42) A taxpayer can deduct a reasonable amount for small out-of-pocket (i.e. cash) donations.

43) Van pays the following medical expenses this year:
• $1,500 for doctor bills for Van’s son who is claimed as a dependent by Van’s former spouse.
• $300 for Van’s eyeglasses.
• $900 for Van’s dental work.
• $3,800 for Van’s face lift. Van, a newscaster, is worried about the wrinkles around his eyes.

How much can Van include on his return as qualified medical expenses before limitation?
A) $1,200
B) $2,400
C) $2,700
D) $6,500

44) All of the following are deductible as medical expenses except
A) vitamins and health foods that improve a taxpayer’s general health.
B) payments for a vision exam and contact lenses.
C) payments to a hospital for laboratory fees and X-rays for diagnosis of a medical problem.
D) cosmetic surgery necessary to correct a deformity arising from a congenital abnormality.

45) All of the following payments for medical items are deductible with the exception of the payment for
A) insulin.
B) general appointment for teeth cleaning.
C) acupuncture for specific medical purposes.
D) nonprescription medicine for treatment of a specific medical condition.

46) In 2014 Sela traveled from her home in Flagstaff to San Francisco to seek medical care. Because she was unable to travel alone, her mother accompanied her. Total expenses included:

Hotel room en route ($150 × 2 rooms × 3 nights) $900
Mileage, 1,000 miles
Doctors bills in San Francisco 1,600

The total medical expenses deductible before the 10% limitation are
A) $1,600.
B) $2,135.
C) $2,500.
D) $2,460.

47) Leo spent $6,600 to construct an entrance ramp and to widen doorways in his personal residence to make the home accessible for his wife, who is disabled and confined to a wheelchair. The $6,600 expenditure increased the value of the residence by $2,000. How much of the $6,600 is a deductible medical expense (before considering limits based on AGI)?
A) $0
B) $2,000
C) $4,600
D) $6,600

48) Linda had a swimming pool constructed at her house. Her physician advised and prescribed to her that the pool would slow the effects of her degenerative disease. The pool was not suitable for recreational use. Prior to the construction of the pool, the fair market value of her house was $172,000. After the construction of the pool, the appraised fair market value of the house was $181,000. The cost of the pool was $13,000. What is the amount of Linda’s qualified medical expense (before considering limits based on AGI)?
A) $0
B) $4,000
C) $9,000
D) $13,000

49) Alan, who is a security officer, is shot while on the job. As a result, Alan suffers from a chronic leg injury and must use a wheelchair and undergo therapy to regain and retain strength. Alan’s physician recommends that he install a whirlpool bath in his home for therapy. During the year, Alan makes the following expenditures:

Wheelchair $ 1,200
Whirlpool bath 2,000
Maintenance of the whirlpool 250
Increased utility bills associated with whirlpool 450
Entrance ramp, various home modifications 7,200

A professional appraiser tells Alan that the whirlpool has increased the value of his home by $1,000. Alan’s deductible medical expenses (before considering limitations based on AGI) will be
A) $6,000.
B) $10,100.
C) $7,000.
D) $7,700.

50) Mitzi’s medical expenses include the following:

Medical premiums $10,850
Doctors fees 2,000
Hospital fees 3,350
Prescription drugs 600
Eyeglasses 350
General purpose vitamins 100

Mitzi’s AGI for the year is $33,000. She is single and age 49. None of the medical costs are reimbursed by insurance. After considering the AGI floor, Mitzi’s medical expense deduction is
A) $12,900.
B) $13,850.
C) $14,675.
D) $16,325.

51) Caleb’s medical expenses before reimbursement for the year include the following:

Medical premiums $11,000
Doctors, hospitals 3,500
Prescriptions 600

Caleb’s AGI for the year is $50,000. He is single and age 58. Caleb also receives a reimbursement for medical expenses of $1,000. Caleb’s deductible medical expenses that will be added to the other itemized deduction will be
A) $10,350.
B) $9,100.
C) $14,500.
D) $15,100.

52) A review of the 2014 tax file of Gregory, a single taxpayer who is age 40, provides the following information regarding Gregory’s 2014 tax status:

Adjusted gross income $40,000
Medical expenses (before percentage limit) 5,000
Itemized deductions other than medical 5,400
2014 potential standard deduction 6,200

In 2015, Gregory receives a reimbursement for last year’s medical expenses of $1,200. As a result, Gregory must
A) include $200 in gross income for 2015.
B) include $1,200 in gross income for 2015.
C) reduce 2015’s medical expenses by $1,200.
D) amend the 2014 return.

53) Mr. and Mrs. Thibodeaux, who are filing a joint return, have adjusted gross income of $75,000. During the tax year, they paid the following medical expenses for themselves and for Mrs. Thibodeaux’s mother, Mrs. Watson (age 63). Mrs. Watson provided over one-half of her own support.

Prescription drugs for Mr. Thibodeaux $3,600
General vitamins for Mrs. Thibodeaux $ 100
Doctor bill for Mr. Thibodeaux $1,800
Doctor bill for Mrs. Thibodeaux $4,000
Hospital bill for Mrs. Watson $2,200

Mr. and Mrs. Thibodeaux received no reimbursement for the above expenditures. What is the amount of their deductible itemized medical expenses?
A) $1,900
B) $2,000
C) $4,100
D) $9,400

54) Mr. and Mrs. Gere, who are filing a joint return, have adjusted gross income of $50,000. During the tax year, they paid the following medical expenses for themselves and for Mrs. Gere’s mother, Mrs. Williams. The Gere’s could claim Mrs. Williams as their dependent, but she has too much gross income.

Insulin for Mr. Gere $1,000
Health insurance premiums for Mrs. Gere $3,100
Hospital bill for Mrs. Williams $5,200
Doctor bill for Mrs. Gere $4,000

Mr. and Mrs. Gere received no reimbursement for the above expenditures. What is the amount of their deductible itemized medical expenses?
A) $5,200
B) $8,300
C) $4,300
D) $13,300

55) The following taxes are deductible as itemized deductions with the exception of
A) state income taxes.
B) federal income taxes.
C) foreign real property taxes.
D) local personal property taxes.

56) Matt paid the following taxes in 2014:

Real estate taxes on rental property he owns $4,000
Real estate taxes on his own residence 3,600
Federal income taxes 8,000
State income taxes 3,400
Local city income taxes 500
State sales taxes 700

What amount can Matt deduct as an itemized deduction on his tax return?
A) $7,500
B) $11,500
C) $15,500
D) $19,500

57) In 2014, Carlos filed his 2013 state income tax return and paid taxes of $800. Also in 2014, Carlos’s employer withheld state income tax of $750 from Carlos’s salary. In 2015, Carlos filed his 2014 state income tax return and paid an additional $600 of state income tax due for 2014. How much state income tax can Carlos deduct on his 2014 federal income tax return for state income tax?
A) $1,350
B) $1,400
C) $1,550
D) $2,150

58) Doug pays a county personal property tax on his automobile of $1,500. The $1,500 includes $800 based on the weight of the car and $700 based on the value of the car. How much of the tax can Doug deduct on his tax return?
A) $0
B) $700
C) $800
D) $1,500

59) During the year Jason and Kristi, cash basis taxpayers, paid the following taxes:

State gift tax $1,000
Property tax on home in the United States 4,100
State income tax (withholdings) 3,000
Estimated federal income tax 4,500
Estimated state income tax (paid by check) 800
Special assessment by city for sidewalks and street lighting
on their street 2,000

What amount can Kristi and Jason claim as an itemized deduction for taxes on their federal income tax return in the current year?
A) $7,900
B) $8,900
C) $10,900
D) $15,400

60) In February of the current year (assume a non-leap year), Ken and Kelsey received their property tax statement for last calendar-year taxes of $1,600, which they paid to the taxing authority on March 1 of the current year. They had purchased their home on May 1 last year. What amount of property tax on this statement may they claim as an itemized deduction this year?
A) $0
B) $1,069
C) $1,074
D) $1,600

61) On September 1, of the current year, James, a cash-basis taxpayer, sells his farm to Bill, also a cash-basis taxpayer, for $100,000. James’ basis in the farm is $65,000. The real property tax year is the calendar year. Real estate taxes on the property for the year are $3,650 and are payable in November of the current year. The sales agreement does not provide for apportionment of real estate taxes between the buyer and seller. Assume Bill pays all of the real estate taxes in the current year. The effects of this sales structure will be:

A)
Taxes allocated to James Taxes allocated to Bill Effect on James’ Gain
$0 $3,650 no effect on gain

B)
Taxes allocated to James Taxes allocated to Bill Effect on James’ Gain
$3,650 $0 decrease gain by $1,220

C)
Taxes allocated to James Taxes allocated to Bill Effect on James’ Gain
$2,430 $1,220 increase gain by $2,430

D)
Taxes allocated to James Taxes allocated to Bill Effect on James’ Gain
$1,220 $2,430 increase gain by $1,220

62) On September 1, of the current year, Samuel, a cash-basis taxpayer, sells his farm to Edward, also a cash-basis taxpayer for $100,000. Samuel’s basis in the farm is $65,000. The real property tax year is the calendar year. Real estate taxes on the property for the year are $3,650 and are payable on April 1 of the following year. The sales agreement does not provide for apportionment of real estate taxes between the buyer and seller. Assume Samuel pays all of the real estate taxes prior to the sale. The effects of this sales structure will be:

A)
Taxes allocated to Samuel Taxes allocated to Edward Effect on Samuel’s Gain
$1,220 $2,430 increase gain by $1,220

B)
Taxes allocated to Samuel Taxes allocated to Edward Effect on Samuel’s Gain
$2,430 $1,220 increase gain by $2,430

C)
Taxes allocated to Samuel Taxes allocated to Edward Effect on Samuel’s Gain
$2,430 $1,220 decrease gain by $1,220

D)
Taxes allocated to Samuel Taxes allocated to Edward Effect on Samuel’s Gain
$1,220 $2,430 decrease gain by $1,220

63) Peter is assessed $630 for street improvements in front of his house. Which of the following statements is correct?
A) Peter must deduct the assessment as a tax.
B) Peter must reduce the property basis by $630.
C) Peter must increase the property basis by $630.
D) Peter can elect to deduct the $630 currently or increase the basis in the property.

64) Hui pays self-employment tax on her sole proprietorship income, supplemental Medicare surtaxes on excess wages and self-employment income (the .09% tax) and supplemental Medicare taxes on investment income (the 3.8% tax). Which of the following statements is correct regarding the deductibility of these taxes?
A) All three of the taxes are deductible as itemized deductions.
B) One-half of the self-employment tax is deductible for AGI, and the .09% and 3.8% taxes are itemized deductions.
C) None of the taxes are allowed as a deduction.
D) One-half of the self-employment tax is deductible for AGI, but the .09% and 3.8% taxes are not allowed as deductions.

65) Which of the following is deductible as interest expense?
A) personal credit card interest
B) interest to purchase tax-exempt bonds
C) bank service charges on personal account
D) interest on a home equity loan to purchase a car

66) Riva borrows $10,000 that she intends to use for purchasing supplies for her business. She temporarily deposits the funds in her personal checking account. Prior to the deposit, the checking account held $40,000 of personal funds. Riva books a vacation for $6,000 and writes a check to the travel agency from her personal account. Later in the month, the business supplies bill arrives and Riva writes a check for $10,000 from the personal account. With respect to the interest expense on the $10,000 loan,
A) it will all be treated trade or business expense.
B) 60 percent will be treated as personal interest expense and 40 percent as trade or business expense.
C) it will all be treated as personal expense.
D) 20 percent will be treated trade or business expense.

67) When both borrowed and owned funds are mingled in the same account, for purposes of categorizing interest expense, a repayment of the debt is allocated first to
A) personal expenditures.
B) trade or business expenditures.
C) investment expenditures.
D) passive activity expenditures in real estate.

68) All of the following statements are true except
A) investment interest expense is deductible to the extent of a taxpayer’s net investment income.
B) short-term capital gains meet the definition of net investment income.
C) investment interest expense includes interest expense to purchase or carry tax-exempt securities.
D) net investment income is the taxpayer’s investment income in excess of investment expenses.

69) In the current year, Julia earns $9,000 in net investment income and incurs $14,000 of investment interest expense. What is the maximum amount of investment interest expense she is allowed to deduct this year?
A) $0
B) $3,000 deductible this year; $11,000 carried forward to next year
C) $9,000 deductible this year; $5,000 carried forward to next year
D) $14,000 deductible this year; nothing to be carried forward to next year

70) Ted pays $2,100 interest on his automobile loan, $120 interest on a loan to purchase a computer for personal use, $630 interest on credit cards, and $1,100 investment interest expense. Ted has net investment income of $850. Ted’s deductible interest is
A) $850.
B) $1,100.
C) $2,950.
D) $3,200.

71) Takesha paid $13,000 of investment interest expense in a year in which she earned $4,500 in dividends, $5,400 in interest income, and had a short-term capital gain of $1,000 and a long-term capital gain of $2,200. The capital gains resulted from the sale of stock held as an investment. She has no other investment-related expenses. What is her maximum deduction for investment interest expense, assuming Takesha does not make any elections?
A) $5,400
B) $6,400
C) $13,100
D) $13,000

72) Dana paid $13,000 of investment interest expense in a year in which she earned $4,500 in dividends, $5,400 in interest income, and had a short-term capital gain of $1,000 and a long-term capital gain of $2,200. The capital gains resulted from the sale of stock held as an investment. She has no other investment-related expenses. What is her maximum deduction for investment interest expense if Dana makes the proper elections to raise her ceiling as high as possible?
A) $5,400
B) $9,900
C) $13,100
D) $13,000

73) Faye earns $100,000 of AGI, including $90,000 of salary and $10,000 of interest income. Faye does itemize her deductions. The miscellaneous category of her itemized deductions consists of $1,500 of unreimbursed employee business expenses and a $900 fee paid for investment advice. Faye has paid $11,000 of interest expense on a loan used to purchase stocks. How much of the $11,000 interest expense can be deducted this year?
A) $11,000
B) $10,000
C) $9,100
D) $9,600

74) Teri pays the following interest expenses during the year:

Home mortgage interest on personal residence $8,500
Credit card interest on personal purchases 550
Interest on loans used to purchase investments (Net investment
income is $2,000) 2,400
Interest on loans used for a business conducted as a sole proprietorship 3,800
Interest on a credit card used exclusively in the business 470

What is the amount of interest expense that can be deducted as an itemized deduction?
A) $10,500
B) $10,900
C) $14,300
D) $14,700

75) On July 31 of the current year, Marjorie borrows $120,000 to purchase a new fishing boat. The loan is secured by her personal residence. On the date of the loan, the outstanding balance on the original debt incurred to purchase the residence is $300,000 and the FMV of the home is $450,000. What is the total amount of debt on which Marjorie can deduct interest in the current year?
A) $300,000
B) $400,000
C) $420,000
D) $450,000

76) Wayne and Maria purchase a home on April 1 of the current year. In order to obtain a thirty-year mortgage, they are required to pay $7,200 in points at closing. Charging points is a customary business practice in the area. In addition, they pay $4,400 of interest during the year. What is their current year deduction related to their home?
A) $4,400
B) $4,580
C) $7,200
D) $11,600

77) Claudia refinances her home mortgage on June 1 of the current year. She obtains a 30 year mortgage at 5%. As part of the refinancing, she pays points of $3,600 (a customary practice in her location). What amount, if any, of the points are deductible?
A) $0
B) $70
C) $120
D) $3,600

78) Leslie, who is single, finished graduate school this year and began repaying her student loan. The proceeds of the loan were used to pay her qualified higher education expenses. She has not received any type of educational assistance or scholarships. The amount of interest paid during the year amounted to $3,800. What is the amount and classification of her student loan interest education deduction if her modified AGI is $40,000?
A) $2,500 for AGI
B) $2,500 from AGI
C) $3,800 for AGI
D) $3,800 from AGI

79) Marcia, who is single, finished graduate school this year and began repaying her student loan. The proceeds of the loan were used to pay her qualified higher education expenses. She has not received any type of educational assistance or scholarships. The amount of interest paid during the year amounted to $3,000. What is the amount and classification of her student loan interest deduction if her AGI is $68,000?
A) $500 for AGI
B) $2,000 for AGI
C) $2,500 for AGI
D) $3,000 for AGI

80) Don’s records contain the following information:
1. Donated stock having a fair market value of $3,600 to a qualified charitable organization. He acquired the stock five months previously at a cost of $2,400.
2. Paid $700 to a church school as a requirement for the enrollment of his daughter.
3. Paid $200 for annual homeowner’s association dues.
4. Drove 400 miles in his personal auto at 14 cents per mile. The travel was directly related to volunteer services he performed for his church (actual costs were not available).

What is Don’s charitable contribution deduction?
A) $2,456
B) $3,156
C) $3,356
D) $3,656

81) Erin’s records reflect the following information:

1. Paid $200 dues to a fraternal organization (such as the Elks Club)
2. Donated stock having a fair market value of $3,500 to a qualified charitable organization. She purchased the stock 2 years earlier for $3,000.
3. Paid $1,600 cash to qualified public charitable organizations

Erin’s adjusted gross income for this year was $50,000. What is the amount of her charitable contribution deduction for the year?
A) $4,600
B) $4,800
C) $5,100
D) $5,300

82) Sacha purchased land in 2010 for $35,000 that she held as a capital asset. This year, she contributed the land to the Boy Scouts of America (a charitable organization) for use as a site for a summer camp. The market value of the land at the date of contribution is $40,000. Sacha’s adjusted gross income is $90,000. Assuming no special elections, Sacha’s maximum deductible contribution this year is
A) $13,000.
B) $27,000.
C) $35,000.
D) $40,000.

83) Doris donated a diamond brooch recently appraised at $25,000 to her local church. Doris had purchased it many years ago for $10,000. The church sold the brooch to provide funding for church programming. Doris’ AGI is $40,000. Doris will be able to take a charitable deduction of
A) $10,000.
B) $25,000.
C) $12,000.
D) $20,000.

84) Clayton contributes land to the American Red Cross for use as a future site for a new building. His AGI is $50,000. Clayton paid $20,000 for the land eight months ago but its market value at the date of contribution is $25,000. With no special elections, Clayton’s deductible contribution this year is
A) $7,000.
B) $18,000.
C) $20,000.
D) $25,000.

85) Carl purchased a machine for use in his trade or business two years ago for $30,000. During the current year, Carl donates the machine to the local community college. At the time of the contribution, the machine’s adjusted basis is $10,000 and its FMV is $15,000. Carl’s AGI for the year is $48,000. What is the amount of his charitable contribution deduction?
A) $10,000
B) $14,000
C) $15,000
D) $25,000

86) During the current year, Jane spends approximately 90 hours of her time in developing computer software for a church. As a programmer and data analyst, Jane normally bills her clients at $130 per hour for her time. Jane also drives her car a total of 800 miles in performing her voluntary work. Jane’s deductible contribution is
A) $0.
B) $112.
C) $11,700.
D) $11,812.

87) Carol contributes a painting to a local museum for display. Her AGI is $60,000. Carol paid $22,000 for the painting in 2006, but its market value at the date of the contribution is $25,000. With no special elections, Carol’s deductible contribution this year is
A) $ 7,000.
B) $18,000.
C) $22,000.
D) $25,000.

88) Hugh contributes a painting to a local museum for display. His AGI is $35,000. Hugh paid $16,000 for the painting in 2000, but its market value at the date of the contribution is $22,000. If Hugh makes the election to maximize the current year deduction, his deductible contribution for this year will be
A) $10,500.
B) $16,000.
C) $17,500.
D) $22,000.

89) Patrick’s records for the current year contain the following information. He donated stock having a fair market value of $5,000 to a qualified charitable organization. Patrick acquired the stock two years ago at a cost of $3,000. He paid $1,000 for membership in an athletic scholarship program maintained by the university. The only benefit of the membership is that Patrick is entitled to purchase a season ticket to the university’s home football games. He also donated $7,500 cash to a qualified charitable organization. Patrick’s adjusted gross income for the year is $100,000. What is the amount of his charitable contribution deduction?
A) $11,300
B) $11,500
C) $13,300
D) $13,500

90) Grace has AGI of $60,000 in 2013 and 2014. She makes cash contributions to public charities of $34,000 in 2013 and $31,000 in 2014. Grace’s charitable contribution carryover to 2015 is
A) $0.
B) $1,000.
C) $4,000.
D) $5,000.

91) Daniel had adjusted gross income of $60,000, which consisted of $55,000 in wages and $5,000 in dividend income from taxable domestic corporations. His expenses include:

Investment counseling fee $800
Attorney fee for preparing a will 200
Union dues 350
Tax return preparation fee 450

What is the net amount deductible by Daniel for the above items?
A) $400
B) $600
C) $1,000
D) $1,600

92) Wang, a licensed architect employed by Skye Architects, incurred the following unreimbursed expenses this year:

Subscription to architectural journals $800
Dues to Professional Architecture Society 400
Tax return preparation 600
Investment advice 500

Wang’s AGI is $75,000. What is his net deduction for miscellaneous itemized deductions?
A) $0
B) $1,900
C) $800
D) $1,500

93) Tasneem, a single taxpayer has paid the following amounts in 2014:

State income taxes $10,000
Property taxes on home 4,000
Mortgage interest on home 12,000
Charitable contributions 14,000

Tasneem’s AGI is $360,000. What is her net itemized deduction allowed?
A) $40,000
B) $38,352
C) $36,826
D) None of the above.

94) Christa has made a $25,000 pledge to the American Red Cross (a public charity). Christa expects AGI of $200,000 this year. Which of the following assets should she donate?
A) $25,000 of cash
B) stock purchased three years ago for $18,000 with a current FMV of $25,000
C) stock purchased six months ago for $28,000 with a current FMV of $25,000
D) Christa should be indifferent among the three choices.

95) Which of the following is not required substantiation for a noncash charitable contribution?
A) name and address of charitable organization
B) method used to determine the donated property’s fair market value
C) date and location of property donated
D) use of donation by charitable organization

96) During the current year, Deborah Baronne, a single individual, paid the following amounts:

Federal income tax $10,000
State income tax $4,000
Real estate taxes on land in France $1,500
Real estate taxes on land in U.S. $1,700
State sales taxes $2,000
State occupational license fee $ 600

How much can Deborah deduct in taxes as itemized deductions?

97) Phoebe’s AGI for the current year is $120,000. Included in this AGI is $100,000 salary and $20,000 of interest income. In earning the investment income, Phoebe paid investment interest expense of $30,000. She also incurred the following expenditures subject to the 2% of AGI limitation:

Investment expenses:
Subscriptions to investment journals $ 500
Investment counseling 1,500
Safe-deposit box rental for stock certificates 100
Noninvestment expenses:
Unreimbursed employee business expenses $1,800
Tax return preparation fees (non-business-related) 500

What is Phoebe’s investment interest expense deduction for the year?

98) On December 1, 2014, Delilah borrows $2,000 from her credit union to use in her business. Under the terms of the contract, Delilah actually receives $1,940 but is required to repay $2,000 in three months.
a. What amount may Delilah deduct as interest expense in 2014 and in 2015 if she is a cash basis taxpayer?
b. What amount may Delilah deduct as interest expense in 2014 and in 2015 if she is an accrual basis taxpayer?

99) During 2014 Richard and Denisa, who are married and have two dependent children, have the following income and losses:

Total salaries $150,000
Bank account interest 25,000
Short-term capital gains 4,000
Short-term capital losses ( 1,500)

They also incurred the following expenses:
Qualified medical expenses $ 8,000
State income taxes paid 12,000
Property taxes on home 2,300
Qualified residence interest 9,000
Investment interest expense 7,500
Cash charitable contributions 15,000
Tax return preparation fees 3,600
Unreimbursed employee business expenses 4,000

Compute Richard and Denisa’s taxable income for the year. (Show all calculations in good form.)

100) Hope is a marketing manager at a local company. Information about her 2014 income and expenses is as follows:

Income received
Salary $150,000
Taxes withheld from salary:
Federal income tax $30,000
State income tax 8,000
Social Security tax 7,254
Medicare tax 2,175

Interest income from bank 6,000
Dividend income from U.S. stocks 4,000
Short-term capital gain 2,000
Long-term capital gain 3,000
State income tax refund from last year 500
Expenses paid:
Unreimbursed dental and eyecare costs $1,800
Property taxes on her home 3,900
Fees paid to town for garbage pick-up 400
Stock donated to American Red Cross; FMV $5,000; purchased three years ago for $3,100
Dues paid to American Marketing Association 600
Subscription to professional marketing journals 300
Fee for preparation of 2013 tax return and IRS audit assistance 2,000
Investment advisor fee 1,000
Home mortgage interest 10,000
Interest on borrowing to purchase investment assets 11,000
Interest on car loan 1,100

Compute Hope’s taxable income for the year in good form. Show all supporting computations. Hope is single, and she elects to itemize her deductions each year. Assume she does not make any elections regarding the investment interest expense. Also assume that her tax profile was similar in the preceding year.

101) Explain under what circumstances meals and lodging en route to a medical facility may be deductible.

102) Explain when the cost of living in an institution other than a hospital may be deductible.

103) Discuss the timing of the allowable medical expense deduction.

104) Patrick and Belinda have a twelve year old son, Aidan, who is autistic. Patrick and Belinda pay tuition of $20,000 annually for Aidan to attend a school for autistic children. What tax issues should be considered? What additional information would you need?

105) Discuss what circumstances must be met for personal property taxes to be deductible.

106) Explain why interest expense on investments is limited to net investment income.

107) When are points paid on a loan deductible as interest expense?

108) Sharif is planning to buy a new car for personal use and will need to take out a loan. His sources of the financing include (1) a loan from the car dealership charging 6% interest, (2) a loan from his brokerage firm secured against his stock portfolio charging 6.2% and (3) a home equity bank loan secured against his home charging 7%. Sharif has AGI of $150,000 and does itemize his deductions. He is in the 28% tax bracket. Discuss how income taxes can influence his decision regarding the source of financing.

109) May an individual deduct a charitable contribution for services rendered to a charitable organization?

110) What is the result if a taxpayer makes a contribution to a college or university and in return receives the right to purchase tickets to athletic events?

111) What is the treatment of charitable contributions in excess of the applicable limits for the current year?

112) Explain how tax planning may allow a deduction of qualified medical expenses.

113) Explain what types of tax planning are available for taxpayers making charitable contributions.

114) Jill is considering making a donation to her church. She wants to give $50,000 for the new church building. She has some stock with a FMV of $50,000 and an adjusted basis of $10,000 that she has held for 3 years. She is planning to sell the stock and donate the $50,000 proceeds to the church. What should she consider before taking that action?

Chapter 8 Losses and Bad Debts

1) In order to be recognized and deducted on a tax return, a loss must first be realized.

2) The amount of loss realized on the sale of property is computed by subtracting adjusted basis from amount realized.

3) A loss incurred on the sale or exchange of property is deductible only if the property is used in a trade or business or held for investment.

4) The sale of inventory at a loss results in an ordinary loss.

5) Losses incurred in the sale or exchange of personal-use property are deductible as capital losses.

6) A loss on business or investment property which is abandoned is deductible as an ordinary loss to the extent of the property’s adjusted basis on the date of abandonment.

7) The total worthlessness of a security generally results in an ordinary loss.

8) A capital loss may arise from the sale or exchange of a capital asset.

9) The destruction of a capital asset by a casualty gives rise to a capital rather than ordinary loss.

10) One of the requirements which must be met for stock to be considered Section 1244 stock is that the stock must be owned by an individual or a partnership.

11) One of the requirements which must be met for stock to be considered Section 1244 stock is that the corporation cannot have more than $10 million of total capital and paid in surplus as of the stock issuance.

12) When applying the limitations of the passive activity rules, a taxpayer’s AGI is classified into active income, portfolio income and passive income. For this purpose, portfolio income includes dividends, interest, annuities, and royalties.

13) Losses from passive activities that cannot be deducted currently are carried over for up to 5 subsequent years.

14) Individual taxpayers can offset portfolio income with passive losses.

15) If a taxpayer disposes of an interest in a passive activity, unused carryover losses are available to the purchaser of the interest.

16) A taxpayer may deduct suspended losses of a passive activity when the taxpayer completely terminates his or her ownership of the activity.

17) Once an activity has been classified as passive, it is considered passive with regard to that taxpayer until it is sold.

18) A passive activity includes any rental activity or any trade or business in which the taxpayer does not materially participate.

19) Two separate business operations conducted at the same location may be treated as separate activities under the passive activity rules.

20) Partnerships and S corporations must identify their business and rental activities by applying the passive activity rules at the partnership or S corporation level and then must report the results of their operations by activity to the partners or shareholders.

21) Material participation by a taxpayer in a passive activity is satisfied if the individual participates in the activity for more than 500 hours during the year.

22) For purposes of the application of the passive loss limitations, a closely held C corporation is a C corporation where more than 50 percent of the stock is owned by five or fewer individuals at any time during the last half of the taxable year.

23) A closely held C Corporation’s passive losses may offset its active income.

24) Individuals who actively participate in the management of rental real property may deduct up to $25,000 in losses, subject to AGI limitations.

25) For purposes of applying the passive loss limitations for rental real estate, active participation requires a greater time commitment by the taxpayer than does material participation.

26) Taxpayers are allowed to recognize net passive losses from all activities up to a ceiling of $25,000.

27) A taxpayer may deduct a loss resulting from the theft of business and investment property but not a theft of personal-use property.

28) When business property involved in a casualty is totally destroyed, the amount of the loss is limited to the lesser of the taxpayer’s adjusted basis in the property or the reduction in FMV.

29) In the case of casualty losses of personal-use property, the losses sustained in each separate casualty are reduced by both $100 and 10 percent of the taxpayer’s AGI for the year.

30) A theft loss is deducted in the year in which the theft is discovered.

31) When personal-use property is covered by insurance, no deduction is available for a casualty loss of the property unless the taxpayer timely files an insurance claim for the loss.

32) When the taxpayer anticipates a full recovery on a casualty loss of personal-use property but receives less than full recovery in a subsequent year, the unrecovered portion may be deducted.

33) If a taxpayer suffers a loss attributable to a disaster in an area subsequently declared a disaster area, the casualty loss may be deducted in the year preceding the year in which the loss actually occurs.

34) For a bad debt to be deductible, the taxpayer must have a basis in the debt.

35) A bona fide debtor-creditor relationship can never exist in the case of related parties.

36) A taxpayer guarantees another person’s obligation and is forced to pay the debt under the terms of the guarantee. The original debtor does not repay the taxpayer. The taxpayer/guarantor may deduct the loss.

37) Lisa loans her friend, Grace, $10,000 to finance a new business. If Grace defaults on the loan, Lisa may take a deduction for a business bad debt in the year of total worthlessness.

38) A business bad debt gives rise to an ordinary deduction while a nonbusiness bad debt is treated as a short-term capital loss.

39) No deduction is allowed for a partially worthless nonbusiness debt.

40) A net operating loss (NOL) occurs when taxable income for any year is negative because itemized deductions and total exemptions exceed business income.

41) A net operating loss can be carried back three years or carried forward five years.

42) All of the following losses are deductible except
A) decline in value of securities.
B) total worthlessness of securities.
C) sale or exchange of business property.
D) destruction of personal use property by fire, storm, or casualty.

43) The amount realized by Matt on the sale of property to Caitlin includes all of the following with the exception of
A) cash received by Matt.
B) mortgage on the property that is assumed by Caitlin.
C) mortgage on the property paid off by Matt prior to the sale.
D) the FMV of any other property received by Matt in the transaction.

44) In 2000, Michael purchased land for $100,000. Over the years, economic conditions deteriorated, and the value of the land declined to $60,000. Michael sells the property in this year, when it is subject to a $30,000 nonrecourse mortgage. The buyer pays Michael $34,000 cash and takes the property subject to the mortgage. Michael incurs $5,000 in real estate commissions. Michael’s gain or loss on the sale is
A) $4,000 gain.
B) $1,000 loss.
C) $36,000 loss.
D) $41,000 loss.

45) Lucia owns 100 shares of Cronco Inc. which she purchased on December 1 of last year for $10,000. The stock is not Sec. 1244 stock. On July 1 of the current year, Lucia receives notice from the bankruptcy court that Conco Inc. has been liquidated, and there are no assets remaining for shareholders. As a result, Lucia will have
A) a short-term capital loss of $10,000.
B) a long-term capital loss of $10,000.
C) an ordinary loss of $10,000.
D) no loss allowed.

46) Jamie sells investment real estate for $80,000, resulting in a $15,000 loss. Jamie’s loss is
A) an ordinary loss.
B) a capital loss.
C) a Sec. 1231 loss.
D) a Sec. 1244 loss.

47) Juan has a casualty loss of $32,500 on investment property after receiving an insurance settlement. This is Juan’s only casualty transaction this year. Juan’s loss is
A) an ordinary loss.
B) a capital loss.
C) a Sec. 1231 loss.
D) a Sec. 1244 loss.

48) All of the following are true of losses from the sale or worthlessness of small business corporation (Section 1244) stock with the exception of
A) the stock must be owned by an individual or a partnership.
B) the stock must have been issued by a domestic corporation.
C) the stock must have been issued for cash or property other than stock or securities.
D) a single taxpayer may deduct, as ordinary losses, up to a maximum of $100,000 per tax year with the remainder treated as capital losses.

49) Stacy, who is married and sole shareholder of ABC Corporation, sold all of her stock in the corporation for $100,000. Stacy had organized the corporation in 2009 by contributing $225,000 and receiving all of the capital stock of the corporation. ABC Corporation is a domestic corporation engaged in the manufacturing of ski boots. The stock in ABC Corporation qualified as Sec. 1244 stock. The sale results in a(n)
A) ordinary loss of $125,000.
B) long-term capital loss of $125,000.
C) long-term capital loss of $100,000 and ordinary loss of $25,000.
D) ordinary loss of $100,000 and long-term capital loss of $25,000.

50) Amy, a single individual and sole shareholder of Brown Corporation, sold all of the Brown stock for $30,000. The stock basis was $150,000. Amy had owned the stock for 3 years. Brown Corporation meets the Section 1244 requirements. Amy has
A) a $50,000 ordinary loss and $70,000 LTCL.
B) a $50,000 STCL and a $70,000 LTCL.
C) a $100,000 ordinary loss and a $20,000 LTCL.
D) a $100,000 LTCL and a $20,000 ordinary loss.

51) Sarah had a $30,000 loss on Section 1244 stock, a $15,000 loss on sale of a personal use automobile and a $8,000 loss on stock that is not classified as Section 1244. Without regard to net capital loss limitations, Sarah should recognize
A) a ordinary loss of $38,000.
B) a capital loss of $53,000.
C) an ordinary loss of $30,000 and a capital loss of $8,000.
D) an ordinary loss of $30,000 and a capital loss of $23,000.

52) During the year, Mark reports $90,000 of active business income from his law practice. He also owns two passive activities. From Activity A, he earns $20,000 of income, and from Activity B, he incurs a $30,000 loss. As a result, Mark
A) reports AGI of $80,000.
B) reports AGI of $90,000 with a $10,000 passive loss carryover.
C) reports AGI of $90,000 with a $30,000 passive loss carryover.
D) reports AGI of $110,000 with a $30,000 passive loss carryover.

53) Joy reports the following income and loss:

Salary $ 120,000
Income from activity A 60,000
Loss from activity B ( 35,000)
Loss from activity C ( 55,000)

Activities A, B, and C are all passive activities.

Based on this information, Joy has
A) adjusted gross income of $90,000.
B) salary of $120,000 and deductible net losses of $30,000.
C) salary of $120,000 and net passive losses of $30,000 that will be carried over.
D) salary of $120,000, passive income of $60,000, and passive loss carryovers of $90,000.

54) Jana reports the following income and loss:

Salary $ 120,000
Income from activity A 60,000
Loss from activity B ( 30,000)
Loss from activity C ( 70,000)

Activities A, B, and C are all passive activities.
Based on this information, Joy has the following suspended losses:

A)
Activity B Activity C
$30,000 $70,000

B)
Activity B Activity C
$0 $0

C)
Activity B Activity C
$18,000 $42,000

D)
Activity B Activity C
$12,000 $28,000

55) Jeff owned one passive activity. Jeff sold the activity and realized a $2,000 gain on the sale. Prior to the sale, he realized a current year loss from the activity of $6,000. In addition, he has suspended losses from prior years of $7,000. What is the net impact on Jeff’s AGI this year due to the passive activity?
A) increase of $2,000
B) no net change
C) decrease of $4,000
D) decrease of $11,000

56) Nancy reports the following income and loss in the current year.

Salary $ 60,000
Income from activity A 18,000
Loss from activity B ( 9,000)
Loss from activity C ( 13,000)

All three activities are passive activities with respect to Nancy. Nancy also has $21,000 of suspended losses attributable to activity C carried over from prior years. During the year, Nancy sells activity C and realizes a $15,000 taxable gain. What is Nancy’s AGI as a result of these transactions?
A) $50,000
B) $55,000
C) $64,000
D) $71,000

57) Lewis died during the current year. Lewis owned passive activity property with a FMV of $61,000 and a basis of $48,000. Suspended losses of $15,000 were attributable to the property. How much of the suspended loss is deductible on Lewis’s final income tax return?
A) $0
B) $2,000
C) $13,000
D) $15,000

58) Mara owns an activity with suspended passive losses from prior years of $13,000. In the current year, Mara becomes a material participant in the activity. This year the activity generates $6,000 of income. The net effect of this activity on Mara’s current year AGI is a(n)
A) increase of $6,000.
B) decrease of $13,000.
C) 0.
D) decrease of $7,000.

59) Charlie owns activity B which was considered a passive activity and generated a $17,000 suspended loss. Charlie increases his involvement with activity B so that this year activity B is not considered passive for Charlie. During this year, activity B produces a $9,000 loss. In addition, Charlie acquires an investment in activity X, a passive activity, this year. Charlie’s share of activity X’s income is $13,000. Charlie’s salary this year is $70,000. As a result, this year Charlie must
A) offset B’s loss carryover against X’s current income and carry over $9,000 loss from activity B to next year.
B) offset B’s carryover loss and current loss against X’s income first and then offset any remaining loss against salary.
C) offset B’s $9,000 loss against X’s $13,000 income and offset B’s loss carryover against the remaining $4,000 of X’s income.
D) offset B’s current $9,000 loss against his salary and offset B’s loss carryover against X’s income and carry over $4,000 of loss to next year.

60) Jorge owns activity X which produced a $20,000 passive loss last year. Jorge’s only income last year was wages of $30,000. Jorge is a material participant in activity X this year when it produces a $14,000 loss. This year, Jorge’s wages are $40,000. This year, Jorge also has passive activity income from activity Y of $16,000. What is the total passive activity loss carryover to next year?
A) $0
B) $3,000
C) $4,000
D) $18,000

61) Which of the following is not generally classified as a passive activity?
A) an activity in which the taxpayer does not materially participate
B) a limited partnership interest
C) rental real estate
D) a business in which the taxpayer owns an interest and works 1,000 hours a year

62) An individual is considered to materially participate in an activity if any of the following tests are met with the exception of
A) the individual participates in the activity for more than 500 hours during the year.
B) the individual participates in the activity for 75 hours during the year, and that participation is more than any other individual’s participation for the year.
C) the individual has materially participated in the activity in any five years during the immediate preceding 10 taxable years.
D) the individual’s participation in the activity for the year constitutes substantially all of the participation in the activity by all individuals.

63) Tom and Shawn own all of the outstanding stock of Brady Corporation (a retail store operated as a C corporation). This year, Brady generates taxable income of $20,000 from active business operations, and also reports investment interest of $22,000 and losses of $28,000 from a passive activity. As a result, Brady Corporation reports
A) net income of $42,000.
B) interest income of $22,000 and a passive loss carryover of $8,000.
C) business income of $20,000 and a passive loss carryover of $6,000.
D) business income of $20,000, interest income of $22,000, and a passive loss carryover of $28,000.

64) A taxpayer’s rental activities will be considered a trade or business, rather than a passive activity, if
A) the taxpayer performs more than 750 hours of work during the year managing the rental properties
B) the taxpayer performs more than 500 hours of work during the year managing the rental properties.
C) more than half of the taxpayers personal services performed in all business activities during the year are spent managing the rental properties.
D) conditions A and C, but not B, are satisfied.

65) Justin has AGI of $110,000 before considering his $30,000 loss from rental property, which he actively manages. How much of the rental loss can Justin deduct this year?
A) $10,000
B) $20,000
C) $25,000
D) $30,000

66) Joseph has AGI of $170,000 before considering the $20,000 rental loss for property which he actively manages. How much of the rental loss can he deduct?
A) $0
B) $10,000
C) $20,000
D) $25,000

67) Shaunda has AGI of $90,000 and owns rental property generating a $27,000 loss. She actively manages the property. Her deductible loss is
A) $0.
B) $13,500.
C) $25,000.
D) $27,000.

68) Brandon, a single taxpayer, had a loss of $48,000 from a rental real estate activity in which he actively participated. He also had $27,000 of income from another rental real estate activity in which he actively participated. He acquired both investments in 2014. If Brandon has no other passive income or losses and has adjusted gross income of $84,000 before considering passive activities, how much loss from rental activities can he use to offset his nonpassive income?
A) $21,000
B) $24,000
C) $25,000
D) $45,000

69) Which of the following is most likely not considered a casualty?
A) fire loss
B) water damage caused by a busted water heater
C) death of a pine tree due to a two-day infestation of pine beetles
D) water damage to the walls and ceiling of a taxpayer’s personal residence as the result of gradual deterioration of the roof

70) Nicole has a weekend home on Pecan Island that she purchased in 2005 for $250,000. Recently, the home was appraised at $260,000. After the appraisal, a hurricane hit Pecan Island, severely damaging Nicole’s home. An appraisal placed the value of the home at $140,000 after the hurricane. Because of its prohibitive cost, Nicole had no hurricane insurance. Before any reductions or limitations, Nicole’s casualty loss amount is
A) $0.
B) $10,000.
C) $120,000.
D) $140,000.

71) A fire totally destroyed office equipment and furniture which Monica uses in her business. The equipment had an adjusted basis of $15,000 and a FMV of $10,000 before the fire. The furniture’s adjusted basis was $5,000 and its FMV was $2,000 before the fire. Monica’s AGI for the year is $60,000. Monica does not have insurance on the destroyed assets. How much is Monica’s deductible casualty loss?
A) $5,900
B) $12,000
C) $13,900
D) $20,000

72) Lena owns a restaurant which was damaged by a tornado. The following assets were partially destroyed:

Basis Reduction in FMV Insurance Payment
Building $150,000 $200,000 $100,000
Equipment $30,000 $20,000 $10,000

Lena has AGI of $50,000. What is the amount of Lena’s deductible casualty loss?
A) $54,900
B) $60,000
C) $70,000
D) $180,000

73) Leonard owns a hotel which was damaged by a hurricane. The hotel had an adjusted basis of $1,000,000 before the hurricane. A recent appraisal determined that the hotel’s FMV was $1,500,000 before the hurricane and $700,000 afterwards. Leonard received insurance proceeds of $500,000. His AGI is $60,000. What is the amount of his deductible casualty loss?
A) $293,900
B) $300,000
C) $793,900
D) $800,000

74) Jarrett owns a mountain chalet that he purchased in 2008 for $175,000. This year, the home appraised at $300,000. Shortly after the appraisal, a blizzard hit the area in spring of the current year, destroying trees and severely damaging several homes, including Jarrett’s chalet. Its value was reduced to $135,000. Jarrett does not have insurance. Jarrett’s AGI is $200,000. Jarrett’s deductible loss after limitations is
A) $135,000.
B) $144,900.
C) $164,900.
D) $165,000.

75) Hope sustained a $3,600 casualty loss due to a severe storm. She also incurred a $800 loss from a theft in the same year. Both the casualty and theft involved personal-use property. Hope’s AGI for the year is $25,000 and she does not have insurance coverage. Hope’s deductible casualty loss is
A) $1,700.
B) $1,800.
C) $4,200.
D) $4,300.

76) In the current year, Marcus reports the following casualty gains and losses on personal-use property. Assets X and Y are destroyed in the first casualty while Z is destroyed in a second casualty.

Asset Reduction
in FMV Adjusted Basis Insurance Holding Period
X $8,000 $2,000 $7,000 2 years
Y 3,000 5,000 2,000 10 months
Z 2,500 1,300 1,000 8 months

As a result of these losses and insurance recoveries, Marcus must report
A) a net gain of $3,700.
B) a long-term gain of $4,900 on asset X; a short-term capital loss of $900 on asset Y; and a short-term capital loss of $200 on asset Z.
C) a long-term capital gain of $5,000 on asset X; a short-term capital loss of $900 on asset Y; and a short-term capital loss of $200 on asset Z.
D) a long-term capital gain of $5,000 on asset X; a short-term capital loss of $900 on asset Y; and a short-term capital loss of $300 on asset Z.

77) Wesley completely demolished his personal automobile in a car accident. Damage to the auto was estimated at $35,000. Wesley had purchased the car a few years ago for $60,000. He received an insurance reimbursement of $28,000. His adjusted gross income this year was $55,000 and he incurred no other losses during the year. What amount can he deduct as a casualty loss on his income tax return after limitations?
A) $1,400
B) $1,500
C) $6,900
D) $7,000

78) A flood damaged an auto owned by Mr. and Mrs. South on June 15 of this year. The car was only used for personal purposes.

Fair market value before the flood $18,500
Fair market value after the flood 2,000
Cost basis 20,000
Insurance proceeds 13,000
Adjusted gross income for this year 25,000
Business use of auto 0

Based on these facts, what is the amount of the South’s casualty loss deduction after limitations for this year?
A) $900
B) $1,000
C) $4,400
D) $4,500

79) In February 2014, Amelia’s home, which originally cost $150,000, is damaged by a windstorm. Amelia had refinanced the home shortly before the storm, and it was appraised at $200,000. After the storm, the home appraised at $120,000. Amelia has received no insurance reimbursement by December 31, but expects to recover 90 percent of the loss. In the subsequent year, the insurance company pays Amelia $50,000. Amelia’s AGI is $85,000 in 2014, and her 2015 AGI is $80,000. Amelia suffers no other casualty losses in either year. Amelia may deduct
A) $7,900 in 2014.
B) $22,000 in 2015.
C) $13,900 in 2015.
D) $14,000 in 2015.

80) This summer, Rick’s home (which has a basis of $80,000) is damaged by a tornado. An appraisal by a realtor placed the FMV of the home at $120,000 before the tornado and at $85,000 after the tornado. Rick estimates that the insurance company will reimburse him for 60% of the loss. Next year, the insurance company pays Rick $20,000. Rick’s current year’s AGI is $50,000 and his next year’s AGI is $55,000. Rick suffers no other casualty losses in either year. After limitations, Rick may deduct a casualty loss this year of
A) $ 8,900.
B) $ 9,900.
C) $15,000.
D) $35,000.

81) Juanita, who is single, is in an automobile accident in 2014 and her car sustains $6,200 in damages. Because both drivers received tickets in the accident, Juanita does not expect to recover any of the loss from her insurance company. Juanita’s 2014 AGI is $31,000, and she deducts a $3,000 loss on her 2014 tax return. Her other itemized deductions in 2014 exceed $12,000. In 2015, Juanita’s insurance company reimburses her $2,800. Juanita’s 2015 AGI is $28,000. As a result, Juanita must
A) amend 2014 to show a $200 loss.
B) do nothing and simply keep the $2,800.
C) do nothing to the 2014 return but report $2,800 of income on her 2015 return.
D) amend the 2014 return to show $0 loss and file her 2015 return to show a $200 loss.

82) Constance, who is single, is in an automobile accident in 2014, and her car sustains $6,200 in damages. Because both drivers received tickets in the accident, Constance does not expect to recover any of the loss from her insurance company. Constance’s 2014 AGI is $31,000. Her casualty loss is $3,000; she has other itemized deductions of $1,200. In 2015, Constance’s insurance company reimburses her $2,800. Constance’s 2015 AGI is $28,000. As a result, Constance must
A) amend the 2015 return to show the $200 loss.
B) do nothing and simply keep the $2,800.
C) amend the 2014 return to show $0 loss and file her 2015 return to show $200 loss.
D) do nothing to the 2014 return but report $2,800 of income on her 2015 return.

83) Last year, Abby loaned Pat $10,000 as a gesture of their friendship. Although Pat had signed a note payable that contained interest payments and a maturity date, the loan had not been repaid this year when Pat died insolvent. For this year, assuming that the loan was bona fide, Abby should account for nonpayment of the loan as a(n)
A) itemized deduction.
B) ordinary loss.
C) long-term capital loss.
D) short-term capital loss.

84) In October 2014, Jonathon Remodeling Co., an accrual-method taxpayer, remodels and renovates an office building for Dale and bills him $30,000. Dale signs a note for the debt. Dale keeps delaying payment and files bankruptcy in 2015. Creditors are informed that no assets are available for payment. Jonathon Remodeling Co. will report
A) $0 income in both years.
B) $30,000 income in 2014 and a bad debt deduction of $30,000 in 2015.
C) $30,000 income in 2014 and a STCL of $30,000 in 2015 limited to $3,000 after netting.
D) $30,000 income in 2014 and then must amend last year’s return to show $0 income when advised of the bankruptcy.

85) Martha, an accrual-method taxpayer, has an accounting practice. In 2013, she performs tax analyses for Arnold and sends him an invoice for $10,000. In 2014, Martha sells her practice and all accounts to David. Arnold’s debt becomes worthless that year after David has purchased the practice. The result is
A) Martha deducts a nonbusiness bad debt in 2014.
B) Martha deducts a business bad debt in 2014.
C) David deducts a business bad debt in 2014.
D) David deducts a nonbusiness bad debt in 2014.

86) Vera has a key supplier for her business who was facing cash flow problems which would impair Vera’s ability to get shipments of key components for her production. Vera made a $10,000 loan to the supplier. Unfortunately the supplier filed for bankruptcy and has gone out of business without repaying Vera. Vera will be able to recognize a loss of
A) $10,000.
B) $3,000.
C) $7,000.
D) 0.

87) In 2013 Grace loaned her friend Paula $12,000 to invest in various stocks. Paula signed a note to repay the principal with interest. Unfortunately the market for that industry sector plunged, and Paula incurred large losses. In 2014 Paula declared personal bankruptcy and Grace was unable to collect any of her loan. Grace had no other gains or losses last year or this year. The result is
A) Grace deducts a business bad debt of $12,000 in 2014.
B) Grace deducts a $12,000 nonbusiness bad debt as a short-term capital loss in 2014.
C) Grace deducts a $3,000 nonbusiness bad debt as a short-term capital loss in 2014 and carries $9,000 over to subsequent years.
D) Grace deducts a business bad debt of $3,000 in 2014 and carries $9,000 over to subsequent years.

88) Which of the following expenses or losses could create a net operating loss for an individual taxpayer?
A) large losses on sales of investment assets
B) an operating loss from a sole proprietorship
C) large charitable contributions
D) all of the above

89) An individual taxpayer has negative taxable income for the year. In calculating the net operating loss created, which of the following expenses or losses will be added back to the negative taxable income?
A) capital losses
B) personal and dependency exemptions
C) nonbusiness deductions in excess of nonbusiness income
D) all of the above

90) A taxpayer incurs a net operating loss in the current year. With respect to the application of the NOL,
A) the taxpayer will carry back the NOL three years first, then carry forward any balance for five years.
B) the taxpayer must carry forward the loss and has up to 20 years to use it.
C) the taxpayer can carry forward the loss indefinitely until there is sufficient taxable income to use it up.
D) the taxpayer will first carry back the NOL for two years, then carryforward the balance for a period of 20 years, or the taxpayer can elect to only carry forward the loss for the 20-year allowable period.

91) Kendal reports the following income and loss:

Salary $120,000
Income from activity A 36,000
Loss from activity B ( 30,000)
Loss from activity C ( 60,000)

Activities A, B, and C are all passive activities, but none are rental properties. What is the amount of the suspended loss attributable to each activity?

92) During the year, Patricia realized $10,000 of taxable income from activity A, $4,000 loss from activity B, and $6,000 of taxable income from activity C. All three activities are passive activities with regard to Patricia, but are not rental properties. In addition, $32,000 of passive losses from activity C is carried over from prior years. During the current year, Patricia sells activity C for an $18,000 taxable gain. Patricia’s salary for the year is $100,000. What is the amount of Patricia’s deduction against salary income?

93) Hersh realized the following income and loss this year:

Net taxable income from chocolate shop $50,000
Interest income 10,000
Loss from passive activity (not a rental property) (58,000)

a. Assume Hersh is an individual taxpayer and the chocolate shop is his sole proprietorship. Determine Hersh’s AGI and any carryovers.
b. Assume the taxpayer is Hersh Inc., a C corporation, owned 100% by the Hersh family. Determine Hersh Inc.’s taxable income and any carryovers.

94) Adam owns interests in partnerships A and B, both of which are Publicly Traded Partnerships. During the current year, Adam’s share of the income from A is $12,000. Adam’s share of B’s loss is $3,500. B also generates portfolio income of which Adam’s share is $2,000. What are the tax consequences of these income and loss items?

95) Parveen is married and files a joint return. He reports the following items of income and loss for the year:

Salary $ 135,000
Activity A (passive) 13,000
Activity B (nonbusiness rental real estate) ( 45,000)

If Parveen actively participates in the management of Activity B, what is his AGI for the year and what is the passive loss carryover to next year?

96) Aretha has AGI of less than $100,000 and a 25% marginal tax rate. During the year, she reports a $36,000 loss from Activity A and a $24,000 loss from Activity B. Additionally, Activity A generates $8,000 of tax credits. Both activities A and B are passive real estate rental activities in which Anita actively participates and owns over 10% of each activity.
a. How much loss can be recognized from each activity?
b. What is the amount of Aretha’s suspended loss from each activity?
c. How much of the tax credits can be applied this year?

97) Wes owned a business which was destroyed by fire in May 2014. Details of his losses follow:

Adj. FMV FMV Insurance
Asset Basis Before After Reimbursement
A $1,000 $2,000 $ 0 $2,000
B 15,000 10,000 3,000 2,000
C 2,400 5,000 2,500 1,000

His AGI without consideration of the casualty is $45,000.

What is Wes’s net casualty loss deduction for 2013?

98) Determine the net deductible casualty loss on the Schedule A for Alan Michael when his adjusted gross income was $40,000 in 2014 and the following occurred:

Adj. FMV FMV Insurance
Asset Basis Before After Reimbursement
A $1,200 $2,000 $ 500 $ 100
B 14,000 12,000 5,000 1,100
C 600 3,000 2,775 125

A and B were destroyed in the same casualty in March. C was destroyed in a separate casualty in July.

All casualty losses were nonbusiness personal use property losses and none occurred in a federally declared disaster area.

What is the amount of the net deductible casualty loss?

99) Frank loaned Emma $5,000 in 2012 with the agreement that the loan would be repaid in three years. In 2013, Emma filed for bankruptcy and based on available information from the bankruptcy court, it was estimated that Frank could expect to receive $.65 on the dollar. In 2014, final settlement was made and Frank received $600.
a. Assuming the loan is a business bad debt, what is the amount of and the nature of Frank’s deduction in 2013?
b. Assuming the loan is a business bad debt, what is the amount of and the nature of Frank’s deduction in 2014?
c. Assuming instead that the loan is a nonbusiness bad debt, what is the amount of and the nature of Frank’s deduction in 2013 and 2014?

100) Becky, a single individual, reports the following taxable items in 2014:

Gross income from business $ 93,000
Minus: Business expenses ( 105,000)
($ 12,000)
Interest income 1,500
AGI ($ 10,500)

Itemized deductions:
Interest expense $ 3,100
State Income Taxes 1,900
Casualty 3,000
Total itemized deductions ( 8,000)
Minus: Personal exemption ( 3,950)
Taxable income ($22,450)

What is Barbara’s NOL for the year?

101) Harley, a single individual, provided you with the following information for this year:

Income:
Salary from part-time employment $ 16,000
Interest income from savings 1,000
Net long-term capital gain from investment property 3,000

Deductions:
Net business loss
(sales of $100,000 less expenses of $130,000) ($30,000)
Personal exemption ( 3,950)
Standard deduction ( 6,200)
Net-operating loss carryover from last year ( 3,000)

What is the amount of Harley’s net operating loss for this year?

102) Businesses can recognize a loss on abandoned property. What types of factors would indicate that property had been abandoned?

103) What must an individual taxpayer prove to receive a worthless security deduction?

104) Erin, a single taxpayer, has 1,000 shares of 1244 stock she purchased directly from AAA Corporation for $120,000 five years ago. The stock has a FMV of $30,000, and Erin is thinking of selling the stock. She has no other capital gains or losses for the year. Discuss the tax consequences and planning opportunities relating to selling the stock.

105) Why was Section 1244 enacted by Congress? Specifically, consider and discuss some of the individual qualifying requirements of Sec. 1244.

106) Why did Congress enact restrictions and limitations on losses from passive activities?

107) What is required for an individual to be considered as actively participating in a real estate activity for purposes of utilizing the $25,000 ceiling on rental real estate losses?

108) What is or are the standards that must be present to warrant a casualty loss deduction?

109) A taxpayer suffers a casualty loss on personal-use property for which he has insurance coverage. However, to avoid a premium adjustment, the taxpayer fails to make a timely claim. In this situation is the full deduction for the casualty, after the normal floors, available to the taxpayer? Why or why not?

110) If a loan has been made to a related party, what are some considerations for determining whether the loan is a bona fide debt or is, in fact, merely a gift?

111) Distinguish between the accrual-method taxpayer and the cash-method taxpayer with regard to basis in a receivable.

112) What are some factors which indicate that a debt may be worthless?

113) If an NOL is incurred, when would a taxpayer elect to forgo the carryback period and only carry the loss deduction forward?

114) How is a claim for refund of taxes filed by an individual who carries an NOL deduction back to a prior year?

Chapter 9 Employee Expenses and Deferred Compensation

1) Deferred compensation refers to methods of compensating employees based upon their current service where the benefits are deferred until future periods.

2) If an individual is self-employed, business-related expenses are deductions for AGI.

3) Unreimbursed employee business expenses are deductions for AGI.

4) An employer-employee relationship exists where the employer has the right to control and direct the individual providing services with regard to the end result and the means by which the result is accomplished.

5) A nondeductible floor of 2% of AGI is imposed on unreimbursed employee business expenses, investment expenses, and many other miscellaneous itemized deductions such as tax preparation fees.

6) Gambling losses are miscellaneous itemized deductions subject to the 2% of AGI floor.

7) Personal travel expenses are deductible as miscellaneous itemized deductions subject to the 2% of AGI floor.

8) The deduction for unreimbursed transportation expenses for employees is subject to the 2% of AGI floor.

9) If an individual is not “away from home,” expenses related to local transportation are never deductible.

10) Jason, who lives in New Jersey, owns several apartment buildings in Baltimore. His travel expenses to Baltimore to inspect his property are tax deductible.

11) According to the IRS, a person’s tax home is the location of the family residence regardless of the location of the taxpayer’s principal place of employment.

12) In determining whether travel expenses are deductible, a general rule is that if a person is reassigned for an indefinite period, the individual’s tax home shifts to the new location and travel expenses are not deductible.

13) Travel expenses related to temporary work assignments of one year or less are deductible.

14) If the purpose of a trip is primarily personal and only secondarily related to business, the transportation costs to and from the destination are deductible.

15) Incremental expenses of an additional night’s lodging and additional day’s meals that are incurred to obtain “excursion” air fare rates with respect to employees whose business travel extends over Saturday night are not deductible business expenses.

16) Travel expenses for a taxpayer’s spouse are deductible if the spouse is an employee, the travel is for a bona fide purpose, and the expenses are otherwise deductible.

17) Travel expenses related to foreign conventions are disallowed unless the meeting is directly related to the taxpayer’s business or is employment related and it is reasonable for the meeting to be held outside of North America.

18) Commuting to and from a job location is a deductible expense.

19) Transportation expenses incurred to travel from one job to another are deductible if a taxpayer has more than one job.

20) Taxpayers may use the standard mileage rate method when five vehicles are used simultaneously for business.

21) If the standard mileage rate is used in the first year, the actual expense method may not be used in future years.

22) A taxpayer goes out of town to a business convention. The 50% reduction applies to the cost of food, entertainment and transportation expenses.

23) Self-employed individuals receive a for AGI deduction for 50% of entertainment expenses paid or incurred in the trade or business.

24) If an employee incurs business-related entertainment expenses that are fully reimbursed, it is the employer who is subject to the 50% limitation.

25) A tax adviser takes a client to a major league hockey game following the conclusion of a meeting involving the signing of a major planning engagement. As it is not “directly related,” the entertainment cannot be deductible.

26) “Associated with” entertainment expenditures generally must occur on the same day that business is discussed.

27) Dues paid to social or athletic clubs are deductible if they meet a primary-use test, requiring that more than 50% of the use of the facility be for business purposes.

28) Generally, 50% of the cost of business gifts is deductible up to $25 per donee per year.

29) A gift from an employee to his or her superior does not qualify as a business gift.

30) An accountant takes her client to a hockey game following a business meeting. Because it is a playoff game, and the tickets were purchased that day, a premium was paid. The deduction for the tickets is limited to 50% of the face value.

31) If an employee incurs travel expenditures and is fully reimbursed by the employer, neither the reimbursement nor the deduction is reported on the employee’s tax return if reporting is pursuant to an accountable plan.

32) Kim currently lives in Buffalo and works in Rochester, a 60-mile commute each way. Kim accepts a new job in a town outside of Rochester, and the new commute is 75-miles each way. Kim decides the commute for the new job is too long, and she moves to Rochester. Kim is eligible to deduct her moving expenses.

33) Deductible moving expenses include the cost of moving household goods and personal effects as well as temporary living expenses.

34) When a public school system requires advanced education for a teacher to continue employment, the teacher’s expenses are a deductible education expense.

35) Educational expenses incurred by a CPA for courses necessary to meet continuing education requirements are fully deductible.

36) Educational expenses incurred by a bookkeeper for courses necessary to sit for the CPA exam are fully deductible.

37) In-home office expenses are deductible if the office is used exclusively on a regular basis as the principal place of business for any trade or business of the taxpayer.

38) In addition to the general requirements for in-home office expenses, employees must also prove that the exclusive use of the office is for the convenience of the employer.

39) In-home office expenses for an office used by the taxpayer for administrative or management activities of the taxpayer’s trade or business are never deductible.

40) In-home office expenses which are not deductible in the year in which the costs were incurred due to limitations may be carried forward to subsequent years.

41) An employer receives an immediate tax deduction for pension and profit-sharing contributions made on behalf of employees.

42) In a defined contribution pension plan, fixed amounts are contributed based upon a specific formula and retirement benefits are based on the value of a participant’s account at the time of retirement.

43) A qualified pension plan requires that employer-provided benefits must be 100 percent vested after five years of service.

44) Under a qualified pension plan, the employer’s deduction is usually deferred until the employee recognizes income.

45) Nonqualified deferred compensation plans can discriminate in favor of highly compensated executives.

46) Corporations issuing incentive stock options receive a tax deduction for compensation expense.

47) Employees receiving nonqualified stock options recognize ordinary income at the grant date or exercise date if there is a readily ascertainable fair market value.

48) A sole proprietor establishes a Keogh plan. The highest effective percentage of earned income she can contribute is 25 percent.

49) SIMPLE retirement plans allow a higher level of employer contributions than do SEP IRAs.

50) The maximum tax deductible contribution to a traditional IRA in 2014 is $5,500 ($6,500 for a taxpayer age 50 or over).

51) The maximum tax deductible contribution to a Roth IRA in 2014 is $5,500 ($6,500 for a taxpayer age 50 or over).

52) A contributor may make a deductible contribution to a Coverdell Education Savings Account for a qualified designated beneficiary of up to $2,000.

53) All taxpayers are allowed to contribute funds to Health Savings Accounts to supplement their health insurance.

54) In which of the following situations is the individual is an independent contractor rather than an employee?
A) a nurse who is directly supervised by doctors in an office
B) a computer programmer who is instructed as to what projects to undertake, programming language and format, and hours of work
C) a nurse who travels to several different patients. She sets her own hours and is responsible for the delivery of nursing care and end result
D) a teacher whose hours, classroom responsibilities, content and methods of instruction are established by the school

55) Which of the following statements regarding independent contractors and employees is true (ignore temporary provisions)?
A) Independent contractors pay Social Security and Medicare tax of 15.3%.
B) Employees must pay unemployment taxes.
C) Independent contractors and employees pay the same Social Security and Medicare tax rates.
D) Independent contractors deduct their business expenses “from AGI.”

56) West’s adjusted gross income was $90,000. During the current year he incurred and paid the following:

Publications (unreimbursed and related to employment) $2,000
Tax return preparation fee 1,000
Dues to professional organizations 1,500
Fees for will preparation (no tax advice) 800
Life insurance premiums 1,400

Assuming he can itemize deductions, how much should West claim as miscellaneous itemized deductions (after limitations have been applied)?
A) $2,700
B) $4,500
C) $3,500
D) $5,300

57) Allison, who is single, incurred $4,000 for unreimbursed employee expenses, $10,000 for mortgage interest and real estate taxes on her home, and $500 for investment counseling fees. Allison’s AGI is $80,000. Allison’s allowable deductions from AGI are (after limitations have been applied)
A) $10,500.
B) $12,900.
C) $14,000.
D) $14,500.

58) All of the following are allowed a “For AGI” deduction except:
A) Cora owns her own CPA firm and travels from Lafayette, LA. to Washington, D.C. to attend a tax conference.
B) Jennifer, who lives in Houston, is the owner or several apartment buildings in Salt Lake City and travels there to inspect and manage her investments.
C) Alan is self-employed and is away from home overnight on job-related business.
D) Alison is an employee who is required to travel to company facilities throughout the U.S. in the conduct of her management responsibilities. She is not reimbursed by her employer.

59) Ron is a university professor who accepts a visiting position at another university for six months and
obtains a leave of absence from his current employer. Ron rents an apartment near the university and purchases his food. These living expenses incurred by Ron while visiting the university will be
A) deductible for AGI.
B) deductible from AGI, without application of a floor.
C) deductible from AGI, subject to the 2% of AGI floor.
D) nondeductible.

60) Gwen traveled to New York City on a business trip for her employer. Gwen spent 4 days in business meetings and conferences and then spent 2 days sightseeing in the area. Gwen’s plane fare for the trip was $250. Meals cost $160 per day. Hotels and other incidental expenses amounted to $250 per day. Gwen was not reimbursed by her employer for any expenses. Her AGI for the year is $50,000 and she itemizes but has no other miscellaneous itemized deductions. Gwen may deduct (after limitations)
A) $570.
B) $890.
C) $1,890.
D) $1,570.

61) Norman traveled to San Francisco for four days on vacation, and while there spent another two days conducting business for his employer. Norman’s plane fare for the trip was $500; meals cost $150 per day; hotels cost $300 per day; and a rental car cost $150 per day that was used for all six days. Norman was not reimbursed by his employer for any expenses. Norman’s AGI for the year is $40,000 and he did not have any other miscellaneous itemized deductions. Norman may deduct (after limitations)
A) $250.
B) $800.
C) $1,050.
D) $1,200.

62) Gayle, a doctor with significant investments in the stock market, traveled on a cruise ship to Bermuda. Investment specialists provided daily seminars which Gayle attended. The cost of the cruise for four days is $2,500. Gayle can deduct (before application of any floors)
A) $0.
B) $1,250.
C) $2,000.
D) $2,500.

63) Chelsea, who is self-employed, drove her automobile a total of 20,000 business miles in 2014. This represents about 75% of the auto’s use. She has receipts as follows:

Parking (business only) $500
Tolls (business only) 200
Repairs $1,000

Chelsea has an AGI for the year of $50,000. Chelsea uses the standard mileage rate method. After application of any relevant floors or other limitations, she can deduct
A) $10,900.
B) $11,900.
C) $11,750.
D) $12,900.

64) Brittany, who is an employee, drove her automobile a total of 20,000 business miles in 2014. This represents about 75% of the auto’s use. She has receipts as follows:

Parking (business only) $500
Tolls (business only) 200
Repairs $1,000

Brittany’s AGI for the year of $50,000, and her employer does not provide any reimbursement. She uses the standard mileage rate method. After application of any relevant floors or other limitations, Brittany can deduct
A) $10,900.
B) $11,900.
C) $10,750.
D) $12,900.

65) Rajiv, a self-employed consultant, drove his auto 20,000 miles this year, 15,000 to meetings with clients and 5,000 for commuting and personal use. The cost of operating the auto for the year was as follows:

Gasoline and repairs $7,000
Insurance 1,000
Depreciation 4,000

Rajiv’s AGI is $100,000 before considering the auto costs. Rajiv has used the actual cost method in the past. What is Rajiv’s deduction for the use of the auto after application of all relevant limitations?
A) $8,325
B) $9,000
C) $6,325
D) $7,000

66) Jordan, an employee, drove his auto 20,000 miles this year, 15,000 to meetings with clients and 5,000 for commuting and personal use. The cost of operating the auto for the year was as follows:

Gasoline and repairs $7,000
Insurance 1,000
Depreciation 4,000

Jordan submitted appropriate reports to his employer, and the employer paid a reimbursement of $ .50 per mile. Jordan has used the actual cost method in the past. Jordan’s AGI is $50,000. What is Jordan’s deduction for the use of the auto after application of all relevant limitations?
A) $1,500
B) $500
C) $1,000
D) $8,000

67) Sarah incurred employee business expenses of $5,000 consisting of $3,000 business meals and $2,000 customer entertainment. She provided an adequate accounting to her employer’s accountable plan and received reimbursement for one-half of the total expenses. How much of the meals and entertainment will be deductible by Sarah without consideration of the 2% of AGI limit?
A) $0
B) $1,250
C) $2,500
D) $5,000

68) Austin incurs $3,600 for business meals while traveling for his employer, Tex, Inc. Austin is reimbursed in full by Tex pursuant to an accountable plan. What amounts can Austin and Tex deduct?

A)
Austin Tex
$0 $1,800

B)
Austin Tex
$0 $3,600

C)
Austin Tex
$1,800 $1,800

D)
Austin Tex
$3,600 $0

69) Joe is a self-employed tax attorney who frequently entertains his clients at his country club. Joe’s club expenses include the following:

Annual dues $ 5,400
Initiation fees 1,200
Charges for personal meals with his family 3,100
Meal and entertainment charges related to business use 4,000

Assuming the business meals and entertainment qualify as deductible entertainment expenses, Joe may deduct
A) $2,000.
B) $4,700.
C) $5,300.
D) $4,000.

70) Shane, an employee, makes the following gifts, none of which are reimbursed:

Shane’s manager $30
Shane’s personal assistant 40
4 customers ($27 each) 108

What amount of the gifts is deductible before application of the 2% of AGI floor for miscellaneous itemized deductions?
A) $125
B) $150
C) $75
D) $178

71) Steven is a representative for a textbook publishing company. Steven attends a convention which will also be attended by many potential customers. During the week of the convention, Steven incurs the following costs in entertaining potential customers.

Meal costs $ 1,500
Entertainment of customers 3,500

Having recently been to a company seminar on the new tax laws, Steven makes sure that business is discussed at the various dinners, and that the entertainment is on the same day as the meetings with customers. Steven is reimbursed $2,000 by his employer under an accountable plan. Steven’s AGI for the year is $50,000, and while he itemizes deductions, he has no other miscellaneous itemized deductions. What is the amount and character of Steven’s deduction after any limitations?
A) $500 from AGI
B) $500 for AGI
C) $2,000 from AGI
D) $2,000 for AGI

72) Matt is a sales representative for a local company. He entertains customers as part of his job. During the current year he spends $3,000 on business entertainment. The company provides him an expense allowance of $2,000 under a nonaccountable plan. How will Matt treat the $2,000 partial reimbursement and the $3,000 entertainment expense?
A) He will deduct the $1,000 net expense as a miscellaneous itemized deduction, subject to the 2% of AGI floor.
B) He will deduct $500 of the net expense as a miscellaneous itemized deduction, subject to the 2% of AGI floor.
C) He will recognize $2,000 of income and deduct $3,000 as a miscellaneous itemized deduction, subject to the 2% of AGI floor.
D) He will recognize $2,000 of income and deduct $1,500 as a miscellaneous itemized deduction, subject to the 2% of AGI floor.

73) Donald takes a new job and moves to a new residence. The distances are as follows:

Old residence to new job 70 miles
Old residence to old job 8 miles

By how many miles does the move exceed the minimum distance requirement for the moving expense deduction?
A) 12 miles
B) 20 miles
C) 62 miles
D) none of the above

74) In which of the following situations is the taxpayer not allowed a deduction for moving expenses?
A) Pam moves from Phoenix to Los Angeles to take a new job. She works at the Los Angeles job for 45 weeks before starting a new job in Las Vegas.
B) Paul moves from Boston to Miami to start a new business selling t-shirts. The business is not successful and Paul returns to Boston after 52 weeks.
C) Phyllis opens a coffee bar after moving from Seattle to San Francisco. She still owns the coffee bar and lives in San Francisco 90 weeks after her move.
D) Marva moves from Dallas to Washington D.C. in her job as an IRS agent. She is still working at the IRS Washington office after one year.

75) Bill obtained a new job in Boston. He incurred the following moving expenses:

Transportation of household goods and personal effects $2,600
Cost of transporting Bill’s family 2,000
House-hunting trip 1,700
Payments to lessor to cancel a lease 500

Assuming Bill is entitled to deduct moving expenses, what is the amount of the deduction?
A) $2,600
B) $4,600
C) $6,300
D) $6,800

76) Ron obtained a new job and moved from Houston to Washington. He incurred the following moving expenses:

Transportation of household goods $3,200
House-hunting trips 1,500
Temporary living expenses (20 days) 3,400
Commissions on new lease 500
Costs of settling old lease 250
Mileage for personal automobile 1,400 miles

Assuming Ron is eligible to deduct his moving expenses, what is the amount of the deduction?
A) $3,529
B) $6,600
C) $9,179
D) $3,984

77) Edward incurs the following moving expenses:

Direct moving expenses $4,000
Indirect moving expense 6,000

The employer reimburses Edward for the full $10,000. What is the amount to be reported as income by Edward?
A) $0
B) $4,000
C) $6,000
D) $10,000

78) All of the following may deduct education expenses except:
A) Richard is a self-employed dentist who incurs expenses to attend a convention on new techniques in oral surgery.
B) Paige is an accountant who incurs expenses to take a CPA exam review course.
C) Hope is a business executive who incurs expenses to pursue an MBA degree.
D) Marvin is a high school teacher who incurs expenses for education courses to meet new course requirements to maintain his job.

79) The following individuals maintained offices in their home:
(1) Dr. Austin is a self-employed surgeon who performs surgery at four hospitals. He uses his home for administrative duties as he does not have an office in any of the hospitals.
(2) June, who is a self-employed plumber, earns her living in her customer’s homes. She maintains an office at home where she bills clients and does other paperwork related to her plumbing business.
(3) Cassie, who is an employee of Montgomery Electrical, is provided an office at the work but does significant administrative work at home. Her employer does not require her to do extra work but she feels it is necessary.

Who is entitled to a home office deduction?
A) Dr Austin
B) Dr. Austin and June
C) Cassie and June
D) All of the taxpayers are entitled to a deduction.

80) Alex is a self-employed dentist who operates a qualifying office in his home. Alex has $180,000 gross income from his practice and $160,000 of expenses directly related to the business, i.e., non-home office expenses. Alex’s allocable home office expenses for mortgage interest expenses and property taxes are $14,000 and other home office expenses are $9,000. What is Alex’s total allowable home office deduction?
A) $9,000
B) $14,000
C) $20,000
D) $23,000

81) Charles is a self-employed CPA who maintains a qualifying office in his home. Charles has $110,000 gross income from his practice and incurs $88,000 in salaries, supplies, computer services, etc. Charles’s mortgage interest and real estate taxes allocable to the office total $10,000. Other expenses total $14,000 and consist of depreciation, utilities, insurance, and maintenance. What is Charles’ total home office expense deduction?
A) $10,000
B) $14,000
C) $22,000
D) $24,000

82) In a contributory defined contribution pension plan, all of the following are true with the exception of
A) a separate account is established for each participant.
B) both the employee and employer can make contributions to the plan.
C) amounts are contributed to the plan based upon a specific formula.
D) retirement benefits are a fixed amount based on the level of compensation earned by the employee during the working years.

83) Characteristics of profit-sharing plans include all of the following with the exception of:
A) A predetermined formula is used to allocate employer contributions to individual employees and to establish benefit payments.
B) Forfeitures of benefits under the plan may be reallocated to the remaining participants.
C) The company must make contributions to the plan if it has profits during the year.
D) Annual employer contributions are not required, but substantial, recurring contributions must be made to satisfy the requirement that the plan be permanent.

84) Ross works for Houston Corporation, which has a contributory defined contribution pension plan. The employer’s monthly contribution to the plan is 8 percent of each participating employee’s monthly salary, while the employee contributes only 6 percent. Ross’s monthly salary is $3,000. Which of the following statements best describes the benefits of the plan?
A) Houston receives a deduction for its contributions to the plan when Ross receives a distribution from the plan.
B) While Ross is taxed on the employer’s contributions to the plan, his own contributions are not taxed until he receives a distribution from the plan.
C) Ross may deduct his own contributions to the pension plan, and Ross reports income from the plan each year until he receives distributions from the plan.
D) The earnings on amounts contributed to the plan are not taxed to Ross until he retires or receives a distribution from the plan.

85) Sam retired last year and will receive annuity payments for life from his employer’s qualified
retirement plan of $30,000 per year starting this year. During his years of employment, Sam contributed $130,000 to the plan on an after-tax basis. Based on IRS tables, his life expectancy is 260 months. All of the contributions were on a pre-tax basis. This year, Sam will include what amount in income?
A) 0
B) $6,000
C) $24,000
D) $30,000

86) Hunter retired last year and will receive annuity payments for life from his employer’s qualified retirement plan of $30,000 per year starting this year. During his years of employment, Hunter contributed $130,000 to the plan. Based on IRS tables, his life expectancy is 260 months. All of the contributions were on a pre-tax basis. This year, Hunter will include what amount in income?
A) $0
B) $6,000
C) $24,000
D) $30,000

87) Which of the following statements is incorrect regarding unfunded deferred compensation plans?
A) The employee is not taxed on the compensation amount when it is deposited in an escrow account.
B) An accrual-basis employer can deduct the compensation amount when it is accrued in the year service.
C) An employee is taxed when the amount is actually paid or made available.
D) A 20% excise tax will apply if the employee can voluntarily elect to receive payment early.

88) Tobey receives 1,000 shares of YouDog! stock as part of his compensation package. Tobey’s employment contract with YouDog!, Inc. states that if he leaves before completion of three years of employment, he will forfeit the stock. The stock currently has a fair market value of $12 per share. Which of the following statements regarding Tobey’s choices is not true?
A) Tobey does not have to recognize any income from receiving the stock until his rights to the stock are fully vested.
B) Tobey must report $12,000 as income due to the receipt of the stock in the current year.
C) Tobey may elect to report the $12,000 FMV of the stock as ordinary income in the current year.
D) If Tobey elects to report $12,000 as income in the current year and the stock price falls to $5 per share when his rights to the stock are vested, Tobey is not allowed to deduct a loss.

89) All of the following characteristics are true of an incentive stock option with the exception of
A) the option price must be equal to or greater than the stock’s FMV on the option’s grant date.
B) the employee cannot own more than ten percent of the voting power of the employer corporation’s stock immediately prior to the option’s grant date.
C) the option must be granted within ten years from the date the plan is adopted and the employee must exercise the stock option within ten years from the grant date.
D) there is no limit to the value of the options that become exercisable to an employee in a single year.

90) Wilson Corporation granted an incentive stock option to Reva on January 1, two years ago. The option price was $300, and the FMV of the Wilson stock was also $300 on the grant date. The option allowed Reva to purchase 150 shares of Wilson stock. Reva exercised the option on August 1, this year, when the stock’s FMV was $400. Unless otherwise stated, assume Reva is a qualifying employee. The results of the above transactions to Reva will be
A) no income to Reva on the grant date or exercise date but there is an alternative minimum tax adjustment item to Reva of $15,000.
B) no income tax or alternative minimum tax effect for Reva.
C) ordinary income to Reva on the exercise date of $15,000.
D) capital gain to Reva on the exercise date of $15,000.

91) Mirasol Corporation granted an incentive stock option to employee Josephine two years ago. The option price was $150 and the FMV of the Mirasol stock was also $150 on the grant date. The option allowed Josephine to purchase 160 shares of Mirasol stock. Josephine exercised the option this year when the stock’s FMV was $250. Unless otherwise stated, assume Josephine is a qualifying employee. The results of the above transactions to Mirasol Corporation will be
A) no compensation deduction.
B) a compensation deduction of $16,000 on the grant date.
C) a tax preference item of $16,000 on the exercise date.
D) a compensation deduction of $16,000 on the exercise date.

92) Martin Corporation granted an incentive stock option to employee Caroline on January 1, 2011. The option price was $150, and the FMV of the Martin stock was also $150 on the grant date. The option allowed Caroline to purchase 160 shares of Martin stock. Caroline exercised the option on August 1, 2013 when the stock’s FMV was $250. Unless otherwise stated, assume Caroline is a qualifying employee. If Caroline sells the stock on September 5, 2014 for $350 per share, she must recognize (ignore alternative minimum tax)
A) 0. No gain or loss is recognized at exercise or sale with incentive stock options.
B) long-term capital gain of $16,000 in 2014.
C) ordinary income of $16,000 on the exercise date and a long-term capital gain of $16,000 in 2014.
D) long-term capital gain of $32,000 in 2014.

93) Jackson Corporation granted an incentive stock option to employee Caroline on January 1, two years ago. The option price was $150, and the FMV of the Jackson stock was also $150 on the grant date. The option allowed Caroline to purchase 160 shares of Jackson stock. Caroline exercised the option on August 1, 2013, when the stock’s FMV was $250. Unless otherwise stated, assume Caroline is a qualifying employee. If Caroline sells the stock on July 5, 2014 for $400 per share, she must recognize
A) long-term capital gain of $40,000 in the year of sale.
B) long-term capital gain of $24,000 in the year of sale.
C) ordinary income of $16,000 on the exercise date and a long-term capital gain of $24,000 in the year of sale.
D) ordinary income of $16,000 and a short-term capital gain of $24,000 in the year of sale.

94) Martin Corporation granted a nonqualified stock option to employee Caroline on January 1, 2011. The option price was $150, and the FMV of the Martin stock was also $150 on the grant date. The option allowed Caroline to purchase 1,000 shares of Martin stock. The option itself does not have a readily ascertainable FMV. Caroline exercised the option on August 1, 2014 when the stock’s FMV was $250. If Caroline sells the stock on September 5, 2015 for $300 per share, she must recognize

A)
2014 2015
$100,000 ordinary income $50,000 LTCG

B)
2014 2015
0 $150,000 LTCG

C)
2014 2015
$100,000 ordinary income $50,000 ordinary income

D)
2014 2015
0 $150,000 ordinary income

95) Martin Corporation granted a nonqualified stock option to employee Caroline on January 1, 2011. The option price was $150, and the FMV of the Martin stock was also $150 on the grant date. The option allowed Caroline to purchase 1,000 shares of Martin stock. The option itself does not have a readily ascertainable FMV. Caroline exercised the option on August 1, 2014 when the stock’s FMV was $250. Caroline sells the stock on September 5, 2015 for $300 per share. Martin Corporation will be allowed a deduction of
A) $150,000 in 2011.
B) $100,000 in 2014.
C) $50,000 in 2015.
D) $100,000 in 2014 and $50,000 in 2015.

96) A partnership plans to set up a retirement plan to benefit the partners and the employees. All of the following retirement plans are appropriate except
A) an H.R. 10 (Keogh) plan.
B) a SEP IRA.
C) a SIMPLE plan.
D) a Solo 401(k).

97) Frank is a self-employed CPA whose 2014 net earnings from his trade or business (before the H.R. 10 plan contribution but after the deduction for one-half of self-employment taxes) is $240,000. What is the maximum contribution that Frank can make on his behalf to his H.R. 10 (Keogh) plan in 2014?
A) $65,000
B) $48,000
C) $52,000
D) $60,000

98) Tessa is a self-employed CPA whose 2014 net earnings from her business (before the H.R. 10
plan contribution but after the deduction for one-half of self-employment taxes) is $400,000. What is the maximum contribution that Tessa can make on her behalf to her H.R. 10 (Keogh) plan in 2014?
A) $100,000
B) $80,000
C) $65,000
D) $52,000

99) Which of the following is true about H.R.10 (Keogh) plans?
A) The plan must be established before the end of the tax year, and contributions must be made before the due date of the tax return, plus extensions.
B) The plan must be established and contributions must be made before the end of the tax year.
C) The plan must be established and contributions must be made before April 1.
D) The plan must be established and contributions must be made before the due date of the tax return, plus extensions.

100) Which of the following statements is incorrect regarding the SEP IRA?
A) Both employers and employees can contribute to the plan.
B) Contributions made by the due date of the tax return can be treated as made on the last day of the related tax year.
C) Employer contributions must be nondiscriminatory.
D) The maximum contribution for 2014 is $52,000.

101) Which statement is correct regarding SIMPLE retirement plans?
A) SIMPLE plans are not subject to nondiscrimination rules.
B) This plan can only be adopted by employers with 50 or fewer employees.
C) Only the employer can contribute to the plan.
D) Employer contributions must vest within three years.

102) Tyne is a 48-year-old an unmarried taxpayer who is not an active participant in an employer-sponsored qualified retirement plan. Before IRA contributions, her AGI is $63,000 in 2014. What is the maximum amount she may contribute to a tax deductible IRA?
A) $ 0
B) $4,400
C) $5,500
D) $6,500

103) Hannah is a 52-year-old an unmarried taxpayer who is not an active participant in an employer-sponsored qualified retirement plan. Before IRA contributions, her AGI is $63,000 in 2014. What is the maximum amount she may contribute to a tax deductible IRA?
A) $4,400
B) $5,200
C) $5,500
D) $6,500

104) H (age 50) and W (age 48) are married but only W is employed. She is not covered by a retirement plan at work. She earns $75,000 during the year and they have combined AGI of $78,000 before any IRA contribution. In 2014, the maximum amount together they may contribute to tax deductible IRAs is
A) $5,500.
B) $6,500.
C) $11,000.
D) $12,000.

105) Tyler (age 50) and Connie (age 48) are a married couple. Tyler is covered under a qualified retirement plan at his job and earned $175,000 in 2014. Connie is employed as a lab technician and earned $30,000 but is not covered under a qualified retirement plan. They file a joint return; have interest and dividend income of $30,000. What is their maximum for AGI deduction for contributions to a traditional IRA?
A) $0
B) $5,500
C) $6,500
D) $12,000

106) Tucker (age 52) and Elizabeth (age 48) are a married couple. Tucker is covered under a qualified retirement plan at his job and earned $90,000 in 2014. Elizabeth is employed as a lab technician and earned $30,000 but is not covered under a qualified retirement plan. They file a joint return; have interest and dividend income of $25,000. What is the maximum amount of tax deductible contributions may be made to a traditional IRA?
A) $0
B) $11,000
C) $5,500
D) $12,000

107) During 2014, Marcia, who is single and is covered under a pension plan at work, contributes $5,500 into a Roth IRA. If her AGI is $64,000, which of the following is true?
A) All of the contribution is deductible.
B) None of the contribution is deductible.
C) She must withdraw all of the contribution immediately since she is covered under a plan at work.
D) Only 60% of the contribution is deductible since her AGI exceeds $60,000 by $4,000 and her maximum contribution is phased out by 40%.

108) Feng, a single 40 year old lawyer, is covered by a qualified retirement at work. His salary is $109,000, and his total AGI is $123,000. The maximum contribution he can make to a Roth IRA in 2014 is
A) 0.
B) $3,300.
C) $2,200.
D) $5,500.

109) Which of the following is true about future qualified distributions from a Roth IRA by a person who will be 65 years old at the time the distributions begin? Assume the individual opened the account before age 60.
A) The entire amount of the distributions will be tax-free.
B) Only the accumulated earnings will be tax-free.
C) Only the previous contributions will be tax-free.
D) The entire amount of the distribution will be taxable.

110) All of the following are true with regard to a Roth IRA except
A) contributions to Roth IRAs are subject to special modified AGI limitations that are higher than those for traditional IRAs.
B) contributions to Roth IRAs are never tax deductible.
C) contributions to Roth IRAs must cease after the owner has reached age 70 1/2.
D) contributions to existing Roth IRAs must be made by the due date of the return.

111) Which of the following statements regarding Coverdell Education Savings Accounts is incorrect, disregarding any AGI limits?
A) Distributions cannot be used for elementary and secondary education expenses.
B) Distributions to the beneficiary are not taxable as long as they are used for tuition, fees, room and board.
C) Contributions can be made until the beneficiary reaches 18.
D) Contributors can make nondeductible contributions of up to $2,000 for each beneficiary.

112) Which of the following statements regarding Health Savings Accounts is incorrect?
A) Taxpayers are allowed to deduct contributions to a health savings account for AGI.
B) All taxpayers are eligible to establish a health savings account.
C) Distributions from a health savings account are excluded from gross income if used to pay qualified medical expenses.
D) Health savings account contributions are limited to the lesser of 100% of annual deductible under high deductible health plan or $3,300 for taxpayers without family coverage.

113) Which of the following conditions would generally not favor the rollover of an untaxed retirement fund (e.g. traditional IRA or 401(k) plan) to a Roth account?
A) expected higher tax rates at retirement
B) significant after-tax funds available to pay taxes
C) an advanced age of the taxpayer
D) All of the above create favorable conditions for a rollover to a Roth.

114) Richard traveled from New Orleans to New York for both business and vacation. He spent 4 days conducting business and some days vacationing. He incurred the following expenses:

Airfare $460
Lodging-per day 175
Meals-per day 100
Business Entertainment 800

What is his miscellaneous itemized deduction (before the floor), assuming Richard is an employee and is not reimbursed, under the following two circumstances?

a. He spends three days on vacation, in addition to the business days.
b. He spends six days on vacation, in addition to the business days.

115) David acquired an automobile for $30,000 for use in his unincorporated business in 2011 and used the standard mileage rate method in 2012 and 2013. He switches to the actual expense method for 2014. The automobile was used 25,000 miles in 2012 and 20,000 miles in 2013. What is the amount of the adjusted basis of the automobile for purposes of computing depreciation in 2014?

116) Sarah purchased a new car at the beginning of the year. She makes an adequate accounting to her employer and receives a $2,400 (12,000 miles × 20 cents per mile) reimbursement in 2014 for employment-related business miles. She incurs the following expenses related to both business and personal use:

Gas and oil $6,000
Repairs and maintenance 2,500
Depreciation 3,000
Insurance 1,800
Total $13,300

She also spent $200 on parking and tolls that were related to business. During the year she drove a total 20,000 miles.

What are the possible amounts of Sarah’s deductible transportation expenses?

117) Rita, a single employee with AGI of $100,000 before consideration of the items below, incurred the following expenses during the year, all of which were unreimbursed unless otherwise indicated:

Transportation expenses for business trip $3,000
Registration fees for business conference 700
Business-related meals and entertainment 700
Country club dues (used 60% for business) 4,000
Local meals eaten alone during regular business hours after visiting client 400
Qualified moving expenses 1,000
Tax return preparation fees 900
Safe deposit box rental for stock certificates 50

In addition, Rita paid $300 for dues to her professional business association. The company reimbursed her after she submitted the appropriate documentation. What is Rita’s net miscellaneous itemized deduction for the year after application of all relevant limitations?

118) Ellie, a CPA, incurred the following deductible education expenses to maintain or improve her skills:

Travel and transportation $1,700
Tuition 6,000
Books 800
Ellie’s AGI for the year is $60,000.

a. If Ellie is self-employed, what are the amount of and the nature of the deduction for these expenses?
b. If, instead, Ellie is an employee who is not reimbursed by his employer, what are the amount of and the nature of the deduction for these expenses (after limitations)?

119) Dighi, an artist, uses a room in his home (250 square feet) as a studio exclusively to paint. The studio meets the requirements for a home office deduction. (Painting is considered his trade or business.) The following information appears in Dighi’s records:

Revenue from sale of paintings $4,000
Expenses attributable to business of painting such as supplies 1,800
Expenses related to home office:
Property taxes on portion of home where he paints 900
Utilities, insurance, etc 700
Depreciation of portion of home 800

(a) What is the amount of Dighi’s home office deduction if he is self-employed?
(b) If some amount is not allowed under the tax law, how is the disallowed amount treated?
(c) Assume all of Dighi’s records of expenses relating to the room were destroyed in a major paint spill. How much of a home office deduction, if any, will he be allowed?

120) Ruby Corporation grants stock options to Iris on February 1, 2013. The options do not have a readily ascertainable value. The option price is $100, and the FMV of the Ruby stock is also $100 on the grant date. The option allows Iris to purchase 200 shares of Ruby stock. Iris exercises the option on August 1, 2014, when the stock’s FMV is $150. Iris sells the stock on December 5, 2015 for $400. Determine the amount and character (i.e. ordinary, LTCG or STCG) of income recognized by Iris and the deduction allowed Ruby Corporation in 2013, 2014 and 2015 under the following assumptions:

a. The stock option is an incentive stock option.
b. The stock option is a nonqualified stock option.

121) Tia is a 52-year-old an unmarried taxpayer who is an active participant in an employer-sponsored qualified retirement plan. Before IRA contributions, her AGI is $64,000 in 2014.
a. What is the maximum amount she can contribute and the maximum deduction she can receive for a contribution to a traditional IRA?
b. What is the maximum amount she can contribute and the maximum deduction she can receive for a contribution to a Roth IRA?
Answer:

122) Raul and Jenna are married and are both working. They are both over age 50. Jenna participates in her employer’s Sec. 401(k) plan and makes the maximum contribution and enjoys a company matching contribution. Raul’s employer does not maintain a retirement plan so he would like to save as much as possible in a tax-advantaged manner for retirement. They expect to report $185,000 of AGI for 2014.
a. What is the maximum amount that Raul can contribute to a traditional IRA and how much can he deduct?
b. What is the maximum amount that Raul can contribute to a Roth IRA and how much can he deduct?
c. How could Raul contribute to both the traditional IRA and Roth IRA to maximize current and future tax savings?

123) Jack takes a $7,000 distribution from his Health Savings Account. $2,000 is used to pay for X-rays and dental surgery. The other $5,000 to make a down payment on a new car. What are the tax consequences to Jack?

124) What factors are considered in determining whether an expense is a deductible travel expense?

125) What two conditions are necessary for moving expenses to be deductible?

126) Explain when educational expenses are deductible for an employee.

127) When are home-office expenses deductible?

128) Gina is an instructor at State University in Birmingham. Her university has asked her if she would be interested in taking a temporary assignment at their Montgomery campus. In addition to her salary, the University would pay her living expenses while in Montgomery. What should Gina consider with regard to taxes in deciding whether or not to accept the offer?

129) Fiona is about to graduate college with a management degree. She has been offered a job as a sales representative for a pharmaceutical company. The job will require significant travel and entertainment expenses for which she will be given a salary supplement. What tax issues should Fiona consider in her decision?

130) Chuck, who is self-employed, is scheduled to fly from Minneapolis to London on a business trip. His flight schedule included a connection through New York City. When Chuck arrived in New York City, he learned that his flight to London had been cancelled due to a volcanic eruption in Iceland. All air travel to Europe was delayed for five days because of significant amounts of ash in the air, causing Chuck to incur costs for hotel and meals in New York City. Since Chuck had never been to New York City before, he spent the time sightseeing. What tax issues are present?

131) Josiah is a human resources manager of a large software company. He is considering asking for a leave of absence to pursue an MBA degree. Josiah will pay for his MBA tuition of $45,000 a year without any employer assistance. Josiah will incur a large debt if he pursues an MBA. Upon completing his MBA, he would want to consider various job opportunities. Discuss the tax issues affecting Josiah’s decision?

132) Daniel has accepted a new job and is reviewing the retirement plan information. He has a choice of participating in the company’s conventional Sec. 401(k) plan or a Roth 401(k) plan. Explain the difference between the two plans in terms of employee contributions and retirement distributions from the plan.

133) Discuss the tax treatment of a nonqualified stock option plan.

134) Johanna is single and self-employed as a technology consultant. She wants to set money aside for her retirement. What tax and financial issues should she consider?

135) Why did Congress establish Health Savings Accounts (HSAs)? How do HSAs operate?

Chapter 10 Depreciation, Cost Recovery, Amortization, and Depletion

1) On its tax return, a corporation will use the same depreciation, amortization and depletion methods used in its financial statements issued to shareholders.

2) Depreciable property includes business, investment, and personal-use assets.

3) In order for an asset to be depreciated in the year of purchase, it must be placed in service before year’s end.

4) The basis of an asset must be reduced by the depreciation allowable.

5) Land, buildings, equipment, and stock are examples of tangible property.

6) If personal-use property is converted to trade or business use, the basis for depreciation is the lesser of adjusted basis or FMV on the date of conversion.

7) Under the MACRS rules, salvage value is not considered in the computation of the cost-recovery or depreciation amount.

8) Under the MACRS system, depreciation rates for real property must always use the mid-month convention in the year of acquisition.

9) Under MACRS, tangible personal property used in trade or business purchased and placed into service on March 1, 2014 should be depreciated for 10 months in 2014. Assume the business uses a calendar tax year.

10) MACRS recovery property includes tangible personal and real property that is used in a trade or business.

11) Under the MACRS system, automobiles and computers are classified as seven-year property.

12) In computing MACRS depreciation in the year of disposition of personal property used in a trade or business, the half-year convention must be applied to the amounts in the tables if the half-year convention was used in the year the asset was placed into service.

13) Intangible assets are subject to MACRS depreciation.

14) Section 179 allows taxpayers to immediately expense up to $25,000 (for 2014), subject to limitations, of the cost of real and personal property placed into service in a trade or business.

15) The Section 179 expensing election is available on an annual basis for property purchased during the year.

16) Personal property used in a rental activity held for investment qualifies for the Section 179 expensing election.

17) Sec. 179 tax benefits are recaptured if at any time an asset is converted to personal use.

18) Any Section 179 deduction that is not allowed currently due to the taxable income limitation may be carried over and deducted in future years.

19) Under the MACRS system, if the aggregate basis of all personal property placed in service during the last three months of the year exceeds 40% of the cost of all personal property placed in service during the tax year, the mid-quarter convention is required.

20) The mid-quarter convention applies to personal and real property.

21) Under the MACRS system, the same convention that applies in the year of acquisition (e.g., half-year, mid-quarter, or mid-month) also applies in the year of disposition.

22) Residential rental property is defined as property from which more than 80% of the gross rental income is rental income from dwelling units.

23) The MACRS system requires that residential real property and nonresidential rental property be depreciated using the straight-line method.

24) Capital improvements to real property must be depreciated over the remaining life of the property on which the improvements were made.

25) Expenditures that enlarge a building, any elevator or escalator, any structural component that benefits a common area or the internal structural framework are not considered qualified leasehold improvement property.

26) The straight-line method may be elected for depreciating tangible personal property placed in service after 1986.

27) The election to use ADS is made on a year-by-year, property-class by property-class basis for real and personal property.

28) If the business use of listed property is 50% or less of the total usage, the alternative depreciation system must be used.

29) If the business use of listed property decreases to 50% or less of the total usage, the property is subject to depreciation recapture.

30) Once the business use of listed property falls to 50% or below, the alternative depreciation system must be used for the current year and all subsequent years, even if the business use percentage increases to more than 50% in a subsequent year.

31) If a new luxury automobile is used 100% for business and placed in service in 2014, the maximum MACRS depreciation on the vehicle for 2014 is $3,160.

32) A large SUV is place in service in 2014. MACRS depreciation on an SUV weighing over 6,000 pounds is limited to $3,160 for the first year placed in service.

33) When a taxpayer leases an automobile for 100% business purposes, the entire lease payment is deductible.

34) If a company acquires goodwill in connection with the acquisition of a business, the goodwill is amortizable over a 60-month period.

35) Amounts paid in connection with the acquisition of a business which represent a covenant not to compete are amortizable over the covenant’s remaining life.

36) Unless an election is made to expense or defer and amortize research and experimental expenditures, these costs must be capitalized.

37) Most taxpayers elect to expense R&E expenditures because of the immediate tax benefit.

38) Off-the-shelf computer software that is purchased for use in the taxpayer’s trade or business is amortized over 36 months, or it can be immediately expensed under a Sec. 179 election.

39) Taxpayers are entitled to a depletion deduction if they have an economic interest in the natural resource property.

40) A taxpayer owns an economic interest in an oil and gas property. She is allowed to deduct the smaller of cost depletion or percentage depletion.

41) Intangible drilling and development costs (IDCs) may be deducted as an expense or may be capitalized.

42) Joan bought a business machine for $15,000 on January 1, 2013, and later sold the machine for $12,800 when the total allowable depreciation is $8,500. The depreciation actually taken on the tax returns totaled $8,000. Joan must recognize a gain (or loss) of
A) no gain or loss.
B) ($3,200).
C) $6,800.
D) $6,300.

43) In April 2014, Emma acquired a machine for $60,000 for use in her business. The machine is classified as 7-year property. Emma does not expense the asset under Sec. 179. Emma’s depreciation on the machine this year is
A) $30,000.
B) $60,000.
C) $6,428.
D) $8,574.

44) In May 2014, Cassie acquired a machine for $30,000 to use in her business. The machine is classified as 5-year property. Cassie does not expense the property under Sec. 179. Cassie’s depreciation on the machine this year is
A) $3,000.
B) $6,000.
C) $12,000.
D) $15,000.

45) On January 3, 2011, John acquired and placed into service business tools costing $10,000. The tools have a 3-year class life. No other assets were purchased during that year. The depreciation in 2014 for those tools is (Sec. 179 and bonus depreciation were not applied)
A) $0.
B) $741.
C) $1,920.
D) $3,333.

46) When depreciating 5-year property, the final year of depreciation will be year
A) 3.
B) 4.
C) 5.
D) 6.

47) Prithi acquired and placed in service $190,000 of equipment on August 1, 2014 for use in her sole proprietorship. The equipment is 5-year recovery property. No other acquisitions are made during the year. Prithi elects to expense the maximum amount under Sec. 179. Prithi’s total deductions for the year (including Sec. 179 and depreciation) are
A) $38,000.
B) $25,000.
C) $63,000.
D) $58,000.

48) Fred purchases and places in service in 2014 personal property costing $221,000. What is the maximum Sec. 179 deduction that Fred can deduct, ignoring any taxable income limitation?
A) $25,000
B) $21,000
C) $4,000
D) $200,000

49) Cate purchases and places in service property costing $150,000 in 2014. She wants to elect the maximum Sec. 179 deduction allowed. Her business income is $20,000. What is the amount of her allowable Sec. 179 deduction and carryover, if any?

A)
179 deduction Carryover
$25,000 0

B)
179 deduction Carryover
$150,000 0

C)
179 deduction Carryover
$20,000 $130,000

D)
179 deduction Carryover
$20,000 $5,000

50) Ilene owns an unincorporated manufacturing business. In 2014, she purchases and places in service $206,000 of qualifying five-year equipment for use in her business. Her taxable income from the business before any Sec. 179 deduction is $17,000. Elaine takes the maximum allowable deduction under section 179. Which of the following statements is true regarding the Sec. 179 election?
A) Ilene can deduct $25,000 as a section 179 deduction in 2014, with no carryover to next year.
B) Ilene can deduct $19,000 as a section 179 deduction in 2014.
C) IIene can deduct $17,000 as a section 179 deduction in 2014; $2,000 may be carried over to next year.
D) Ilene can deduct $17,000 as a section 179 deduction in 2014 ,with no carryover to next year.

51) Terra Corporation, a calendar-year taxpayer, purchases and places into service machinery with a 7-year life that cost $125,000. The mid-quarter convention does not apply. Terra elects to depreciate the maximum under Sec. 179. Terra’s taxable income for the year before the Sec. 179 deduction is $700,000. What is Terra’s total depreciation deduction related to this property?
A) $17,863
B) $42,863
C) $25,000
D) $39,290

52) Tessa owns an unincorporated manufacturing business. In 2014, she purchases and places in service $207,000 of qualifying five-year equipment for use in her business. Her taxable income from the business before any Sec. 179 deduction is $15,000. Tessa elects to expense the maximum under Sec. 179. What is Tessa’s maximum total cost recovery deduction for 2014?
A) $53,400
B) $52,800
C) $15,000
D) $41,400

53) Which of the following statements regarding Sec. 179 is true?
A) If a taxpayer places in service property costing more than the Sec. 179 ceiling on the amount of property placed in service, the excess can be carried over to subsequent years.
B) Amounts of the Sec. 179 election in excess of the taxable income limitation are carried forward.
C) Sec. 179 carryforwards expire after five years.
D) All of the above statements are true.

54) In November 2014, Kendall purchases a computer for $4,000. She does not use Sec. 179 expensing. She only uses the most accelerated depreciation method possible. The computer is the only personal property which she places in service during the year. What is her total depreciation deduction for 2014?
A) $200
B) $572
C) $800
D) $1,000

55) On October 2, 2014, Dave acquired and placed into service 5-year business equipment costing $70,000. No other acquisitions were made during the year. Dave does not use Sec. 179 expensing. The depreciation for this year is using the most accelerated method possible is
A) $0.
B) $3,500.
C) $7,000.
D) $10,003.

56) On November 3, this year, Kerry acquired and placed into service 7-year business equipment costing $80,000. In addition, on May 5th of this year, Kerry had also placed in business use 5-year recovery property costing $15,000. Kerry did not elect Sec. 179 immediate expensing. No other assets were purchased during the year. The depreciation for this year is
A) $3,606.
B) $6,606.
C) $13,576.
D) $14,432.

57) Paul bought a computer for $15,000 for business use on March 18, 2012. This was his only purchase for that year. Paul used the most accelerated depreciation method available, but did not elect Sec. 179. Bonus depreciation was not available. Paul sells the machine in 2014. The depreciation on the computer for 2014 is
A) $0.
B) $1,440.
C) $1,500.
D) $2,880.

58) On April 12, 2013, Suzanne bought a computer for $20,000 for business use. This was the only purchase for that year. Suzanne used the most accelerated depreciation method available but did not elect Sec. 179. Bonus depreciation was not available. Suzanne sells the machine in 2014. The depreciation on the computer for 2014 is
A) $2,000.
B) $3,200.
C) $4,000.
D) $6,400.

59) Harrison acquires $65,000 of 5-year property in June 2012 that is required to be depreciated using the mid-quarter convention (because of other purchases that year). He did not elect Sec. 179 immediate expensing. Bonus depreciation was not available. If Harrison sells the property on August 23, 2014, what is the amount of depreciation claimed in 2014?
A) $6,500.00
B) $7,312.50
C) $11,700.00
D) $9,289.00

60) For real property placed in service after 1986, depreciation under the MACRS system is calculated using the
A) straight-line method and a half-year convention in the year of acquisition and in the year of disposition.
B) straight-line method and a mid-month convention in the year of acquisition and in the year of disposition.
C) 200% DB method and a mid-month convention in the year of acquisition and in the year of disposition.
D) 200% DB method and a half-year convention in the year of acquisition and in the year of disposition.

61) On August 11, 2014, Nancy acquired and placed into service residential rental property, which cost $430,000; the cost of the land has been excluded. Nancy annually elects the maximum allowed Sec. 179 deduction. The total depreciation for the year is (rounded)
A) $5,865.
B) $4,141.
C) $5,117.
D) $15,636.

62) Lincoln purchases nonresidential real property costing $300,000 and places it in service in March 2013. What is Lincoln’s 2014 depreciation on the property?
A) $6,099
B) $7,692
C) $8,637
D) $10,908

63) Atiqa took out of service and sold a residential rental property on October 31 of this year. She had originally acquired the property ten years ago. The building (excluding the value of the land) cost $1,000,000. How much is her current year depreciation deduction?
A) $30,300
B) $36,360
C) $18,182
D) $28,785

64) All of the following are true with regard to the alternative depreciation system except
A) the principal type of property for which ADS is required is any tangible property which is used predominantly outside of the United States.
B) the ADS election is available to real property on a property by property basis.
C) the ADS election is available to personal property on a property by property basis.
D) once the ADS election is made for specified property, it is irrevocable.

65) If the business usage of listed property is less than or equal to 50% of its total usage, depreciation is calculated using the
A) regular MACRS tables.
B) alternative depreciation system.
C) it may not be depreciated.
D) regular MACRS tables and a mid-month convention.

66) Eric is a self-employed consultant. In May of the current year, Eric acquired a computer system (5-year property) for $6,000 and used the computer 80% for business and 20% for personal purposes. Eric does not take any Sec. 179 deduction. The maximum depreciation deduction for is
A) $600.
B) $800.
C) $960.
D) $1,200.

67) Eric is a self-employed consultant. In May of the current year, Eric acquired a computer system (5-year property) for $7,000 and used the computer 30% for business. Eric does not use Sec. 179. The maximum depreciation deduction for is
A) $210.
B) $420.
C) $700.
D) $2,100.

68) In the current year George, a college professor, acquired a computer system (5-year property) for $1,000 and used the computer 80% for teaching and research-related activities and the remaining 20% for personal use. Because George’s employer provides him with a computer in his office at the university, the employer does not require him to have a computer at home. No election was made regarding Sec. 179. The maximum depreciation deduction is
A) $0.
B) $200.
C) $160.
D) $800.

69) In April of 2013, Brandon acquired five-year listed property (not an automobile) for $30,000 and used it 70% for business. No election was made regarding Sec. 179 and bonus depreciation was not available. In 2014, his business use of the property dropped to 40%. Which of the following statements is true?
A) The change does not affect Brandon’s previous depreciation.
B) Brandon must recapture $2,100 as ordinary income.
C) Brandon must recapture $4,200 as ordinary income.
D) Brandon must amend the previous tax return and recompute depreciation.

70) In July of 2014, Pat acquired a new automobile for $28,000 and used the automobile 80% for business. No election is made regarding Sec. 179. Assuming her business use remains at 80%, Pat can take a maximum depreciation deduction in 2014 of
A) $2,528.
B) $3,160.
C) $5,600.
D) $4,480.

71) On January l Grace leases and places into service an automobile with a FMV of $39,000. The business use of the automobile is 60%. The “inclusion amount” for the initial year of the lease from the IRS tables is $20. The annual lease payments are $8,000. What are the tax consequences of this lease?
A) deduction for lease payments of $4,782
B) deduction for lease payments of $4,800
C) deduction for lease payments of $6,000
D) deduction for lease payment of $8,982

72) On January 1, 2014, Charlie Corporation acquires all of the net assets of Rocky Corporation for $2,000,000. The following intangible assets are included in the purchase agreement:

Assets Acquisition Cost
Goodwill and going concern value $105,000
Licenses $ 45,000
Patents $ 60,000
Covenant not to compete for five years $120,000

What is the total amount of amortization allowed in 2014?
A) $15,000
B) $22,000
C) $31,000
D) $38,000

73) In accounting for research and experimental expenditures, all of the following alternatives are available with the exception of
A) expense R&E costs in the year paid or incurred.
B) expense R&E costs in the year in which a product or process becomes marketable.
C) defer and amortize R&E costs as a ratable deduction over a period of 60 months or more.
D) capitalize and write off R&E costs only when the research project is abandoned or is worthless.

74) Costs that qualify as research and experimental expenditures include all of the following except
A) depreciation of laboratory equipment.
B) management studies.
C) costs incurred in developing product improvements.
D) costs of obtaining a patent such as attorney fees.

75) This year Bauer Corporation incurs the following costs in development of new products:

Laboratory supplies $ 55,000
Laboratory equipment purchased
(5-year recovery property) 50,000
Salaries (lab personnel) 90,000
Utilities 20,000
Total $215,000

No benefits are realized from the research expenditures until next year. If Bauer Corporation elects to expense the research expenditures, the deduction is
A) $10,000 this year and $175,000 next year.
B) $175,000 next year.
C) $175,000 this year.
D) $215,000 this year.

76) Galaxy Corporation purchases specialty software from a software development firm for use in its business as of January 1 of the current year at a cost of $90,000. No hardware was acquired. How much of the cost can Galaxy deduct this year?
A) $18,000
B) $15,000
C) $30,000
D) $90,000

77) In calculating depletion of natural resources each period,
A) cost depletion must be used.
B) percentage depletion must be used.
C) the greater of cost depletion or percentage depletion must be used.
D) the smaller of cost depletion or percentage depletion must be used.

78) J.R. acquires an oil and gas property interest for $300,000. J.R. expects to recover 50,000 barrels of oil. Intangible drilling and development costs are $80,000 and are charged to expense. Other expenses are $20,000. During the year, 13,000 barrels of oil are sold for $170,000. J.R.’s depletion deduction is
A) $25,500.
B) $35,000.
C) $70,000.
D) $78,000.

79) Everest Corp. acquires a machine (seven-year property) on January 10, 2014 at a cost of $212,000. Everest makes the election to expense the maximum amount under Sec. 179.
a. Assume that the taxable income from trade or business is $500,000.
(1) What is the amount of the Section 179 expensing deduction for the current year?
(2) What is the amount of the Section 179 carryover to the next tax year?
(3) What is the amount of depreciation allowed?
b. Assume instead that the taxable income from trade or business is $10,000.
(1) What is the amount of the Section 179 expensing deduction for the current year?
(2) What is the amount of the Section 179 carryover to the next tax year?
(3) What is the amount of depreciation allowed this year?

80) In August 2014, Tianshu acquires and places into service 7-year business equipment (tangible personal property qualifying under Sec. 179) for $70,000. This is the only asset that she purchased during the year; her taxable income from her trade or business is $23,000. She decides to limit her 179 election to the maximum amount currently deductible in her business for the current year. What is her maximum cost recovery (Sec. 179 and depreciation) deduction for 2014?

82) Mehmet, a calendar-year taxpayer, acquires 5-year tangible personal property in 2014 and does not use Sec. 179. Mehmet places the property in service on the following schedule:

Date placed in service Acquisition Cost
January 15 $50,000
May 25 $100,000
November 8 $200,000

What is the total depreciation for 2012?

83) Greta, a calendar-year taxpayer, acquires 5-year tangible personal property in 2014 and places the property in service on the following schedule:

Date placed in service Acquisition Cost
January 15 $ 7,000
May 25 $10,000
November 8 $33,000

Greta elects to expense the maximum under Section 179, and selects the property placed into service on November 8. Her business ‘s taxable income before section 179 is $190,000. What is the total cost recovery deduction (depreciation and Sec. 179) for 2014?

84) During the year 2014, a calendar year taxpayer, Marvelous Munchies, a chain of specialty food shops, purchased equipment as follows:

Date Asset Cost
March 3 Refrigerators 600,000
October 9 Equipment 1,200,000

Assume the property is all 5-year property. What is the maximum depreciation that may be deducted for the assets this year, 2014, assuming the alternative depreciation system is not chosen?

85) On May 1, 2008, Empire Properties Corp., a calendar year taxpayer, purchased an apartment building for $1,000,000, of which $400,000 was allocable to the land. The corporation sold the property this year on September 23, 2013.
a. What was the corporation’s depreciation for the building, using statutory percentages under MACRS for 2008?
b. What was the corporation’s depreciation for the building, using statutory percentages under MACRS for 2013?

86) On May 1, 2012, Empire Properties Corp., a calendar year taxpayer, purchased an office building for $1,000,000, of which $400,000 was allocable to the land. The corporation sold the property this year on September 23, 2014.
a. What was the corporation’s depreciation for the building, using statutory percentages under MACRS for 2012?
b. What was the corporation’s depreciation for the building, using statutory percentages under MACRS
for 2014?

87) In January of 2014, Brett purchased a Porsche for $100,000 to be used in his business. Brett drove the car 83 percent of the time for business. What is the maximum amount that Brett may deduct in 2014?

88) Stellar Corporation purchased all of the assets of Bellavia Company as of January 1 this year for $1 million. Included in the assets acquired are the following intangible assets:

Asset Useful Life Cost
Patent 10 year $120,000
Covenant not to complete 3 years 30,000
Goodwill Indefinite 300,000

What is Stellar’s maximum amortization deduction for the year?

89) Jack purchases land which he plans on developing as a golf course. The land costs $20,000,000 and the cost of clearing the land, earthmoving, constructing hazards, bunkers and greens, and installing irrigation systems will cost an additional $6,000,000. What tax issues should Jack consider?

90) Bert, a self-employed attorney, is considering either purchasing or leasing a $50,000 automobile for use in his business. What are the issues he should consider in making his decision?

91) Why would a taxpayer elect to capitalize and amortize intangible drilling costs (IDCs) rather than expense such costs?

92) Discuss the options available regarding treatment of an amount paid in excess of the FMV of an acquired company’s net assets in a business combination.

93) Why would a taxpayer elect to use the alternative depreciation system rather than the MACRS rules?

Chapter 11 Accounting Periods and Methods

1) A taxpayer’s tax year must coincide with the year used to keep the taxpayer’s books and records.

2) A fiscal year is a 12-month period that ends on the last day of any month other than December.

3) A partnership must generally use the same tax year of the partners who own the majority of partnership income and capital.

4) If the majority of the partners do not have the same tax year, the partnership must use the tax year of its principal partners.

5) All C corporations can elect a tax year other than a calendar year.

Explanation: Personal service corporations are generally required to use a calendar year.

6) An improper election to use a fiscal year automatically places the taxpayer on the calendar year.

7) If Jett Corporation receives a charter in 2012 but does not begin operations and file its first tax return until 2014, Jett may elect a fiscal year on the 2014 return.

8) Partnerships, S corporations, and personal service corporations may elect a taxable year which results in a tax deferral of four months or less.

9) An S corporation elects a September 30 taxable year. The S corporation, as a pass-through entity does not need to make tax payments to the IRS.

10) Except in a few specific circumstances, once adopted, an accounting period may be changed without IRS approval.

11) A newly married person may change tax years to conform to that of his or her spouse so that a joint return may be filed.

12) Generally, an income tax return covers an accounting period of 12 months.

13) A subsidiary corporation filing a consolidated return with its parent corporation must change its accounting period to conform with its parent’s tax year.

14) Misha, a single taxpayer, died on July 31, 2014. Her final income tax return (ignoring extensions) is due November 15, 2014.

15) Taxpayers who change from one accounting period to another must annualize their income for the resulting short period.

16) Generally, if inventories are an income-producing factor to the business, the accrual method must be used for sales and cost of goods sold.

17) Alvin, a practicing attorney who also owns an office supplies store, may use the cash basis for his legal practice and the accrual basis for his office supplies store.

18) A taxpayer must use the same accounting method on the personal tax return that the taxpayer uses in the taxpayer’s trade or business.

19) C corporations and partnerships with a corporate partner may use the cash method of accounting if average annual gross receipts for the three preceding tax years do not exceed $10 million.

20) Under the cash method of accounting, income is reported for the tax year in which payments are actually or constructively received.

21) Under the cash method of accounting, all expenses are deductible when paid.

22) Points paid on a mortgage to buy a personal residence are deductible in the year paid.

23) Under the cash method of accounting, payment by credit card entitles the taxpayer to deduct the expenditure at the time the charge is made.

24) If a cash basis taxpayer gives a note in payment of an expense, the deduction may not be taken until the note is paid.

25) The all-events test requires that the accrual-basis taxpayer report income when all events have occurred that fix the taxpayer’s right to the income and when the amount can be determined with reasonable accuracy.

26) Under the accrual method of accounting, the two tests to determine when income must be reported and expenses deducted are the all-events test and the economic performance test.

27) One criterion which will permit a deduction for an expenditure by the accrual-basis taxpayer prior to economic performance is that either the amount is not material or the earlier accrual of the item results in a better matching of income and expense.

28) A taxpayer who uses the cash method in computing gross income from his or her business must use the cash method in computing expenses of such business.

29) A business which provides a warranty on goods sold will deduct a reserve for warranty expense consistent with the reporting on its financial statements.

30) A taxpayer may use a combination of accounting methods as long as income is clearly reflected.

31) A taxpayer who uses the LIFO method of inventory valuation may use the lower of cost or market method.

32) The uniform capitalization rules (UNICAP) require the capitalization of some overhead costs that are expensed for financial accounting purposes.

33) Many taxpayers use the LIFO method of inventory valuation because during inflationary periods, LIFO normally results in the lowest inventory value and hence the lowest taxable income.

34) A taxpayer may use the FIFO or average cost methods for financial statement purposes, while using the LIFO method for tax purposes.

35) For tax purposes, the lower of cost or market method must ordinarily be applied to each separate inventory item.

36) For tax purposes, “market” for purposes of applying the lower of cost or market method means the price at which the taxpayer can sell the inventory item.

37) Contracts for services including accounting, legal and architectural services do not qualify for long-term contract treatment.

38) A taxpayer must use the same accounting method, either percentage of completion or completed contract method, for all long-term contracts in the same trade or business.

39) The installment method is not applicable to sales of inventory and marketable securities.

40) The installment sale method may be used on the sale of property at a loss.

41) Interest is not imputed on a gift loan between two individuals totaling $14,000 except when the borrowed funds are used to purchase income-producing property.

42) Interest is not imputed on a gift loan between two individuals totaling $100,000 except when the borrowed funds are used to purchase income-producing property.

43) In general, a change in accounting method must be approved by the IRS.

44) Vector Corporation has been using an incorrect method in accounting for supplies expense. It can change to the correct method without filing 3115.

45) A corporation is starting to produce glasses with smart phone capabilities. Generally, a business producing this type of product will want to elect the LIFO inventory method.

46) A new business is established. It is not a seasonal business. All of the following are acceptable accounting tax years with the exception of
A) an S corporation year ending October 31.
B) a C corporation (not a personal service corporation) tax year ending on February 15.
C) a C corporation (not a personal service corporation) tax year ending on April 30.
D) a partnership tax year ending on October 31 with three equal partners whose tax years end on September 30, October 31, and November 30.

47) When preparing a tax return for a short period, the taxpayer should annualize the income if the short period return
A) is the last return for a decedent who died on June 15.
B) is the first return for a corporation created on June 1.
C) is the last return for a partnership, which was terminated on October 12.
D) is a return for June 1 to December 31, for a corporation changing from a fiscal year to a calendar year.

48) Emma, a single taxpayer, obtains permission to change from a calendar year to a fiscal year ending June 30, 2014. During the six months ending June 30, 2014, she earns $40,000 and has $8,000 of itemized deductions. What is the amount of her annualized income?
A) $30,025
B) $64,000
C) $60,050
D) $64,300

49) All of the following statements are true except:
A) once adopted, an accounting period normally cannot be changed without approval by the IRS.
B) taxpayers who change from one accounting period to another must annualize their income for the resulting short period.
C) taxpayers filing an initial tax return are required to annualize the year’s income and prorate exemptions and credits.
D) an existing partnership can change its tax year without prior approval if the partners with a majority interest have the same tax year to which the partnership changes.

50) Which of the following partnerships can elect the cash basis method of accounting?
A) a CPA firm with average revenues of $20 million
B) a chocolate manufacturer with average revenues of $3 million
C) a cleaning service partnership generating average revenues of $5.5 million whose partners are Joe, Larry and Smith Inc.
D) None of the above.

51) Under the cash method of accounting, all of the following are true with the exception of:
A) Fixed assets are always expensed as the taxpayer pays for the assets.
B) Gross income includes the value of property received.
C) To some extent, a taxpayer may control the year in which an expense is deductible by choosing when to make the payment.
D) Income is reported in the tax year in which payments are actually or constructively received.

52) For purposes of the accrual method of accounting, the economic performance test is met when
A) the property or services are actually provided.
B) the amount of the item can be reasonably estimated.
C) all events have occurred that establish the fact of a liability.
D) all events have occurred that fix the taxpayer’s right to receive income.

53) Under UNICAP, all of the following overhead costs are included in inventory except
A) factory utilities, rent, insurance and depreciation.
B) officers’ salaries and factory administration.
C) research and experimentation.
D) factory payroll, purchasing and warehouse costs.

54) Which of the following statements regarding UNICAP is incorrect?
A) The UNICAP rules result in more costs being included in inventory for tax purposes than for financial accounting.
B) Taxpayers with gross receipts averaging more than $10,000,000 or more for the prior three years must apply the UNICAP provisions.
C) Interest must be included in inventory if the property produced is real property or long-lived property.
D) UNICAP requires that advertising and selling costs be allocated between inventory and cost of sales.

55) In 2014, Richard’s Department Store changes its inventory method from FIFO to LIFO. Richard’s uses the simplified LIFO method. Richard’s year-end inventory under FIFO is as follows: 2013 – $300,000; 2014 – $350,000. The 2013 price index is 110% and the 2014 index is 120%. The 2014 layer is
A) $19,097.
B) $20,833.
C) $22,727.
D) $50,000.

56) Inventory may be valued on the tax return at the lower of cost or market unless
A) replacement cost is higher than historical cost.
B) the taxpayer determines inventory cost using the LIFO method.
C) the taxpayer determines inventory cost using the FIFO method.
D) the cash method of accounting is used by the taxpayer.

57) When accounting for long-term contracts (other than those for services), all of the following accounting methods may be acceptable with the exception of
A) the cash method of accounting.
B) the completed contract method.
C) the percentage of completion method.
D) the modified percentage of completion method.

58) Under the percentage of completion method, gross income is reported
A) when the contract is completed.
B) using a percentage that is determined by dividing current year costs by the expected total revenue.
C) based on the portion of work that is incomplete.
D) based on the portion of work that has been completed.

59) This year, Hamilton, a local manufacturer of off-shore drilling platforms, entered into a contract to construct a drilling platform that will be placed in the North Atlantic Ocean. The total contract price is $5,000,000, and Hamilton estimates the total construction cost at $3,000,000. Actual costs incurred this year are $600,000. If Hamilton uses the percentage of completion method, the gross profit for this year is
A) $0.
B) $400,000.
C) $600,000.
D) $2,000,000.

60) Bergeron is a local manufacturer of off-shore drilling platforms. This year, Bergeron entered into a contract to construct a drilling platform, which will be placed in the North Atlantic Ocean. The total contract price is $5,000,000, and Bergeron estimates the total construction cost at $2,000,000. Actual costs incurred this year are $600,000. If Bergeron uses the completed contract method, the gross profit for this year is
A) $0.
B) $400,000.
C) $600,000.
D) $2,000,000.

61) In year 1 a contractor agrees to build a building for $2,500,000 by the end of year 2. The builder’s cost is estimated to be $1,800,000. The actual costs year 1 are $900,000 and year 2’s actual costs are $1,300,000. Under the completed contract method the gross profit for year 1 is
A) $0.
B) $300,000.
C) $350,000.
D) $700,000.

62) In year 1 a contractor agrees to build a building for $2,500,000 by the end of year 2. The builder’s cost is estimated to be $1,800,000. The actual costs year 1 are $900,000 and year 2’s actual costs are $1,300,000. Under the completed contract method the gross profit for year 2 is
A) $0.
B) $300,000.
C) $350,000.
D) $700,000.

63) In year 1 a contractor agrees to build a building for $2,500,000 by the end of year 2. The builder’s cost is estimated to be $1,800,000. The actual costs year 1 are $900,000 and year 2’s actual costs are $1,100,000. Under the percentage of completion method year 1’s gross profit is
A) $0.
B) $300,000.
C) $350,000.
D) $700,000.

64) In year 1 a contractor agrees to build a building for $2,500,000 by the end of year 2. The builder’s cost is estimated to be $1,800,000. The actual costs year 1 are $900,000 and year 2’s actual costs are $1,100,000. Under the percentage of completion method year 2’s gross profit is
A) $150,000.
B) $500,000.
C) $700,000.
D) $350,000.

65) The look-back interest adjustment involves the
A) calculation of interest on an installment sale.
B) calculation of gross profit on an installment sale collection.
C) calculation of additional tax due if actual cost rather than estimated cost had been used on the percentage of completion method.
D) calculation of interest on additional tax that would have been due if actual cost rather than estimated cost had been used on the percentage of completion method.

66) This year, a contractor agrees to build a building for $2,000,000, which will be completed by the end of next year. The builder’s cost is estimated to be $1,700,000. The actual costs this year are $800,000 and next year’s actual costs are $800,000. If the tax rate is 20% and the interest rate is 10%, the look back interest for the percentage of completion method is
A) $ 0.
B) $1,176.
C) $2,000.
D) $6,000.

67) An installment sale is best defined as
A) any disposition of property in which at least three payments are received.
B) any disposition of property in which the installment method is elected by the taxpayer.
C) any disposition of property where at least one payment is received after the close of the taxable year in which disposition occurs.
D) any disposition of publicly traded property or inventory where at least one payment is received after the close of the taxable year in which disposition occurs.

68) The installment method may be used for sales of all kinds of property with the exception of
A) real property.
B) personal property.
C) capital assets.
D) marketable securities.

69) The installment sale method can be used for all of the following transactions except
A) the sale of an antique by a collector.
B) the sale of shares of publicly-traded corporate stock.
C) the sale of farmland used in a farming business.
D) the sale of a boat held for personal use.

70) The installment sale method can be used for all of the following transactions except
A) the sale of an painting by an art collector.
B) the sale of a sole proprietor’s office building.
C) the sale of an individual’s personal car.
D) the sale of a yacht by a shipbuilder.

71) Freida is an accrual-basis taxpayer who owns a furniture store. The furniture store had the following sales of inventory:

Year of sale Installment sales Profit Collections in 2014
2012 $60,000 $30,000 $20,000
2013 100,000 50,000 30,000
2014 250,000 125,000 40,000

For tax purposes, Freida should report gross profit for 2014 of
A) $40,000.
B) $65,000.
C) $90,000.
D) $125,000.

72) Which of the following conditions are required for the use of the installment method?
A) The taxpayer must realize a gain on the sale of the property.
B) The taxpayer cannot be on the cash method.
C) The value of the obligations received is determinable at the date of sale.
D) All of the above are required.

73) Kyle sold land on the installment basis for $100,000. His basis in the land was $70,000. Kyle received a $40,000 down payment and a real estate installment sale contract calling for $60,000 in additional payments in future years. In addition, Kyle paid $6,000 in commissions on the sale. What is the gross profit to be recognized in the current year?
A) $0
B) $9,600
C) $12,000
D) $24,000

74) Kevin sold property with an adjusted basis of $58,000. The buyer assumed Kevin’s existing mortgage of $40,000 and agreed to pay an additional $60,000 consisting of a cash down payment of $40,000, and payments of $4,000, plus interest, per year for the next 5 years. Kevin paid selling expenses totaling $2,000. What is Kevin’s gross profit percentage?
A) 33 1/3%
B) 40%
C) 60%
D) 66 2/3%

75) This year, John purchased property from William by assuming an existing mortgage of $40,000 and agreed to pay an additional $60,000, plus interest, in the 3 years following the year of sale (i.e. $20,000 annual payments for three years, plus interest). William had an adjusted basis of $44,000 in the building. What are the sales price and the contract price in this transaction?

A)
Sales Price Contract Price
$40,000 $60,000

B)
Sales Price Contract Price
$100,000 $40,000

C)
Sales Price Contract Price
$100,000 $60,000

D)
Sales Price Contract Price
$100,000 $100,000

76) On July 25 of this year, Raj sold land with a cost of $15,000 for $40,000. Raj collected $20,000 this year and is scheduled to receive $5,000 each year for four years starting next year plus an acceptable rate of interest. Raj’s gain recognized this year is
A) $7,500.
B) $12,500.
C) $20,000.
D) $25,000.

77) On June 11, of last year, Derrick sold land with a cost of $15,000 for $45,000. Derrick collected $20,000 last year and is scheduled to receive $5,000 each year for five years starting this year plus an acceptable rate of interest. Derrick receives the $5,000 installment required this year. Derrick’s recognized gain this year is
A) $0.
B) $1,667.
C) $3,333.
D) $5,000.

78) Sela sold a machine for $140,000. The machine originally cost $90,000 and $10,000 of MACRS depreciation had been allowable. The buyer assumed an existing loan of $40,000, paid $20,000 cash down and agreed to pay $10,000 per year for eight years plus interest. Selling expenses are $10,000. The total gross profit for installment sale recognition purposes is
A) $30,000.
B) $40,000.
C) $50,000.
D) $60,000.

79) Malea sold a machine for $140,000. The machine originally cost $90,000 and $10,000 of MACRS depreciation had been allowable. The buyer assumed an existing loan of $40,000, paid $20,000 cash down and agreed to pay $10,000 per year for eight years plus interest. Selling expenses are $10,000. The contract price is
A) $40,000.
B) $80,000.
C) $100,000.
D) $130,000.

80) On June 11, two years ago, Gia sold land with a cost of $15,000 for $45,000. Gia collected $20,000 initially and is scheduled to receive $5,000 each year for five years starting last year plus an acceptable rate of interest. This year, Gia decided to sell one installment note to a bank that agreed to pay $4,100. As a result of the sale of the note, Gia must report
A) $0.
B) $1,667 gain.
C) $2,433 gain.
D) ($900) loss.

81) On May 18, of last year, Carter sells unlisted stock with a cost of $24,000 for $60,000. Carter collects $20,000 initially and is scheduled to receive $10,000 each year for four years starting this year plus an acceptable rate of interest. After receiving the first $10,000 scheduled installment payment, Carter is unable to collect any further payments. After incurring legal fees of $1,000, Carter recovers a portion of the stock valued at $26,000. As a result of the repossession, Carter must report
A) ordinary income of $9,000.
B) capital gain of $9,000.
C) ordinary income of $13,000.
D) capital gain of $13,000.

82) On May 18, of last year, Yuji sold unlisted stock with a cost of $12,000 for $30,000. Yuji collected $10,000 initially and is scheduled to receive $5,000 each year for four years starting this year plus an acceptable rate of interest. After receiving the first scheduled $5,000 payment, Yuji was unable to collect any further payments. After incurring legal fees of $500, Yuji recovered a portion of the stock valued at $13,000. Yuji’s basis in the recovered stock is
A) $6,500.
B) $7,000.
C) $12,500.
D) $13,000.

83) Andrew sold land to Becca, Andrew’s daughter. The fair market value of the land was $300,000 (basis $250,000). Becca agreed to pay Andrew $300,000 over 8 years. Becca immediately sold the land to Olga for $300,000 cash. The gain of $50,000 must be recognized
A) by Becca in installments.
B) by Becca when Becca sells to Olga.
C) by Andrew when Andrew sells to Becca.
D) by Andrew when Becca sells to Olga.

84) On September 2, of this year, Keshawn sold land to Rex, his nephew, for $400,000. Keshawn’s basis in the land was $100,000. Rex agreed to pay his uncle $40,000 this year, and $60,000 each year for the next six years plus interest. One month later, Rex sold the land to Theo, an unrelated party, for $450,000. Based on this information, Keshawn must report
A) $0. Rex reports gain of $300,000.
B) gain of $225,000 this year.
C) gain of $225,000 this year plus interest in following six years.
D) gain of $30,000 this year, and gain in each of the following six years of $45,000 plus interest.

85) All of the following are considered related for purposes of Section 453(e) installment sales except
A) parents.
B) children.
C) sister.
D) controlled corporation.

86) All of the following transactions are exempt from rules regarding imputed interest with the exception of
A) taxpayer purchases newly issued bond for $700 (face value of $1,000).
B) taxpayer sells land for $135,000 with payment due in 5 years and no stated interest.
C) taxpayer sells his home gym equipment for $2,800 with payment due in one year and no stated interest.
D) taxpayer purchases a sailboat costing $2,500 for week-end boating trips; the full price payable in five months and no stated interest.

87) Jennifer made interest-free gift loans to each of her four children as follows:
(1) John borrowed $9,500 to purchase an automobile. His net investment income is $1,500.
(2) Rick borrowed $50,000 to purchase a trailer. His net investment income is $900.
(3) Bert borrowed $25,000 to purchase stock. His net investment income is $1,200.
(4) Elizabeth borrowed $110,000 to purchase a home. Her net investment income is $800.

Assuming a 5% interest rate, on which loans must interest be imputed?
A) loan to John and Bert
B) loan to Bert and Elizabeth
C) loan to Rick, Bert, and Elizabeth
D) All of the loans are subject to the imputed interest rules.

88) Imputation of interest could be required on all of the following loans with the exception of
A) a loan between a partnership and a 55% partner.
B) a loan between a mother and son.
C) a loan between an employer and employee.
D) a loan between two best friends.

89) Prior Corp. plans to change its method of accounting for supplies. Both the old and new methods are acceptable. Which of the following statements is correct regarding the change?
A) The taxpayer will need to amend prior returns to reflect the new method.
B) The taxpayer will report the full amount of change in the current tax return.
C) The taxpayer will report the net adjustment over four years.
D) The taxpayer will report the net adjustment and pay the tax when it files the Form 3115.

90) Which of the following businesses is most likely to benefit from an election to account for its inventory under LIFO?
A) a company producing the newest version of a tablet with ultra-long battery life. It believes it has a one-year lead over the competition.
B) a company producing products with copper as a key component. Copper prices fluctuate widely.
C) a company producing parts for the auto industry. Costs in this field tend to steadily climb.
D) None of the above.

91) Lloyd Corporation, a calendar year accrual basis taxpayer, pays its insurance premium each year on June 1, the anniversary of the policy. The premium paid this year is $9,600 while last year’s was $9,000. How much of is Lloyd’s deduction for insurance this year?

92) In 2013 Anika Co. adopted the simplified dollar-value LIFO method. Inventory under FIFO in 2013 and 2014 is $400,000 and $600,000, respectively. The Consumer Price Index for 2013 is 115 and the Consumer Price Index in 2014 is 125 percent. How much is Anika’s inventory at the end of year 2014 under simplified LIFO?

93) In 2014, Modern Construction Company entered into a contract to construct a building for $5,000,000. The estimated cost to complete the building is $4,000,000 and the project will be completed in 2015. Modern incurred actual construction costs of $1,600,000 and $1,800,000 in 2014 and 2015, respectively. How much gross profit is recognized using the percentage-of-completion method in 2014 and 2015?

94) Tonya sold publicly-traded stock with an adjusted basis of $76,000 for $90,000. Tonya received a down payment of $15,000 with the balance due in equal payments over the next four years. What is the amount of gross profit to be recognized in the year of sale?

95) Natalie sold a machine for $140,000. The machine originally cost $95,000 and $15,000 of MACRS depreciation had been allowable. The buyer assumed an existing loan of $40,000, paid $30,000 cash down and agreed to pay $10,000 per year for seven years plus interest. Selling expenses are $10,000. What is the amount of gain to be reported in the year of sale?

96) Marissa sold stock of a non-publicly traded corporation with an adjusted basis of $36,000 for $48,000. Marissa received a down payment of $12,000 with the balance due in equal payments over the next two years.
a. What is the amount of gross profit to be recognized in the year of sale?
b. Assume that the buyer defaulted on the final payment. Marissa sued and was able to repossess the stock. The fair market value of the stock on the date of repossession is $36,000; legal fees were $1,500. What is the gain or loss on the repossession?

97) Nick sells land with a $7,000 adjusted basis for $10,000. Nick receives a $2,000 down payment with the balance of $8,000 due the following year. Nick is unable to collect the remaining $8,000 and, after incurring legal fees of $500, he repossesses the land when it has a fair market value of $9,000.
a. What is the amount of gain that Nick must report in the first year?
b. What is the amount of gain that Nick must report in the second year?
c. What is the basis in the repossessed stock?

98) Emily made the following interest free loans to her children:
(1) $10,000 to Erin for a down payment on a new home. Her net investment income for the year is $1,300.
(2) $50,000 to Sasha to purchase stock. Her net investment income for the year is $800.
(3) $60,000 to Tim to purchase a new boat. His net investment income for the year is $2,800.

The applicable federal interest rate on similar loans is 5%. What is the amount of interest income that Emily must report from these transactions?

99) Winnie made a $70,000 interest-free loan to her son, Tod, who used the money to retire a mortgage on his personal residence. Tod’s only source of income was salary of $35,000 and $990 interest income on a savings account. The relevant Federal interest rate was 5% and the loan was outstanding all year long.

What amount must Winnie include as interest income as a result of this transaction?

100) Which entities may elect a fiscal year? Discuss how certain tax entities may circumvent the requirement of using a calendar year.

101) Generally, economic performance must occur before an expense may be deducted. In some cases, this requirement of economic performance may be waived. Discuss the conditions under which economic performance may be waived and an earlier deduction may be allowed.

102) What is the significance of the Thor Power Tool Co. case?

103) Xerxes Manufacturing, in its first year of operations, produces solar panels which are sold through large building supply and home improvement stores. Xerxes’ year-end results include the following:

Office rent and utilities $15,000
Salaries of office staff 100,000
Salaries of factory workers 500,000
Direct materials used in production of solar panels 400,000
Factory rent 30,000
Factory utilities 10,000

You are preparing Xerxes’ first year tax return. Xerxes has elected a calendar year as its tax accounting period and the accrual method. What additional information would you need to prepare the tax return?

104) Doug is going to sell land for $100,000. The terms of the sale include $20,000 down and $20,000 plus interest for the next 4 years. He wishes to recognize income using the installment method. Both his brother and his son wish to buy the land from him. What are the tax considerations?

105) Discuss the purpose of the imputed interest rules.

106) Arnie is negotiating the sale of land to Phil. Arnie’s basis in the land is $3,000,000, and it currently has a fair market value of $5,000,000. Phil wants to pay the purchase price over three years. Arnie suggests that Phil pays $2,000,000 at closing, then pay $1,200,000 each of the next three years. Arnie would not require that Phil pay any interest under these terms. Discuss the tax issues that Arnie should consider.

107) Jared wants his daughter, Jacqueline, to learn about the stock market. He loans Jacqueline $30,000, but does not require Jacqueline to pay interest. Jared tells Jacqueline that she can repay him from the proceeds of future stock sales. Discuss the tax issues that Jared should consider.

Chapter 12 Property Transactions: Nontaxable Exchanges

1) Realized gain or loss must be recognized unless a specific Code section provides for nonrecognition treatment.

2) In a like-kind exchange, both the property transferred and the property received must be held by the taxpayer either for productive use in a trade or business or for investment.

3) The exchange of a personal-use automobile for stock in an automobile manufacturer held as an investment qualifies for like-kind treatment.

4) If an exchange qualifies as a like-kind exchange, nonrecognition of gain or loss is elective.

5) Real property exchanged for personal property qualifies as a like-kind exchange.

6) An investor exchanges an office building located in Niagara Falls, NY for an office building located in Niagara Falls, Ontario. The exchange does not qualify as like-kind.

7) An exchange of inventory for inventory of a like kind qualifies as a like-kind exchange.

8) The exchange of a partnership interest for an interest in another partnership qualifies as a like-kind exchange.

9) A sale of property and subsequent purchase of like-kind property may be treated as a like-kind exchange if the two transactions are interdependent.

10) For purposes of nontaxable exchanges, cash and non-like-kind property constitute boot.

11) The receipt of boot as part of a nontaxable exchange causes a realized loss to be recognized.

12) Where non-like-kind property other than cash is received as boot, the amount of the boot is the property’s fair market value.

13) If each party in a like-kind exchange assumes a liability of the other party, only the net liability given or received is boot.

14) The basis of non-like-kind property received is the basis in the hands of the transferor at the date of the exchange.

15) If related taxpayers exchange property qualifying for a like-kind exchange, the properties must be retained for three years after the exchange to prevent recognition of gain resulting from the original exchange on a subsequent disposition of the property.

16) The holding period of like-kind property received in a nontaxable exchange begins on the day of the exchange.

17) The holding period for boot property received begins on the day after the date of the exchange.

18) The involuntary conversion provisions which allow deferral of gain are mandatory.

19) If a gain is realized on the involuntary conversion of property, the gain may be deferred if qualifying replacement property is acquired within a specified time period at a cost equal to or greater than the amount realized on the involuntary conversion.

20) All or part of gain realized on an involuntary conversion is deferred but not permanently excluded if qualifying replacement property is acquired within the requisite period of time.

21) In an involuntary conversion, the basis of replacement property is its cost reduced by the gain deferred.

22) A taxpayer may elect to defer recognition of a loss resulting from an involuntary conversion.

23) If the threat of condemnation exists and the taxpayer has reasonable grounds to believe that the property will be condemned, the taxpayer may elect to defer gain even if the taxpayer sells the property to a party other than the governmental unit that is threatening to condemn the property.

24) When the cost of replacement property is less than the amount realized on an involuntary conversion, gain will be recognized. The recognized gain will be equal to the amount realized over the cost of the replacement property, but not more than the total realized gain.

25) If property is involuntarily converted into similar property, the basis and holding period of the converted property carry over to the basis and holding period of the replacement property.

26) If the taxpayer elects to defer the gain on an involuntary conversion, the holding period of the replacement property begins on the date of purchase.

27) Replacing a building with land qualifies as replacement property under the involuntary conversion rules relevant to a casualty.

28) If real property used in a trade or business or held for investment is condemned, it must be replaced with property having a similar functional use.

29) Vector Inc.’s office building burns down on October 31, 2014. Vector, a calendar year taxpayer, finally settles with the insurance company on February 3, 2015. In order to defer the gain realized on the building, Vector must acquire another office building by February 3, 2017.

30) When an involuntary conversion is due to the condemnation of real property held for productive use in a trade or business or for investment, the replacement period will end three years after the close of the first tax year in which any part of the gain is realized.

31) A loss on the sale of a taxpayer’s personal residence is deductible if the taxpayer owned and lived in the home for two of five years.

32) In order for the gain on the sale of a personal residence to be excluded under Section 121, a replacement residence must be purchased within two years.

33) In the case of married taxpayers, an individual may claim the Sec. 121 exclusion even if the individual’s spouse used the exclusion within the past two years.

34) The taxpayer must be occupying the residence at the time of the sale in order for Sec. 121 to apply.

35) If a taxpayer owns more than one home, she can designate the home that will be considered her principal residence for purposes of the Sec. 121 exclusion.

36) If a principal residence is sold before satisfying the ownership and use tests, part of the gain may be excluded if the sale is due to a change in employment, health, or unforeseen circumstances.

37) Ron and Fay live in Buffalo. They also own a condominium in Orlando (purchased in 2009) which they rent to vacationers. Ron and Fay will be retiring. They plan to live in the Orlando property for two and a half years. When they sell it, they will be able to exclude the full gain which is expected to be about $200,000.

38) All of the following qualify as a like-kind exchange except
A) an apartment building held for investment for farmland used in a trade or business.
B) a printer used in trade or business for a computer used in trade or business.
C) improved real estate held for investment for unimproved real estate held for investment.
D) an airplane used in trade or business for a general purpose truck used in trade or business.

39) Which of the following statements with respect to a like-kind exchange is false?
A) Property of one class must be exchanged for property of the same class.
B) An exchange of inventory does not qualify as a like-kind exchange.
C) Personal property must be exchanged for personal property.
D) Sale of property and subsequent purchase of like-kind property will always qualify as a like-kind exchange.

40) A owns a ranch in Wyoming, which B offers to purchase. A is not willing to sell the ranch but is willing to exchange the ranch for an apartment complex in Louisiana. The complex is available for sale. B purchases the apartment complex in Louisiana from C and transfers it to A in exchange for A’s ranch. The ranch and the complex each have a $1,000,000 fair market value. Which of the following is true?
A) The transaction qualifies as a like-kind exchange for B but not for A.
B) The transaction qualifies as a like-kind exchange for both B and A.
C) The transaction qualifies as a like-kind exchange for A but not for B.
D) The transaction does not qualify as a like-kind exchange for either B or A.

41) Landry exchanged land with an adjusted basis of $50,000 for another parcel of land worth $35,000 plus $10,000 of cash. Landry held the original land for investment purposes and will do the same with the new parcel. Due to the exchange, Landry will recognize
A) $10,000 gain.
B) $5,000 gain.
C) $5,000 loss.
D) $0.

42) Dean exchanges business equipment with a $120,000 adjusted basis for $40,000 cash and business equipment with a $140,000 FMV. What is the amount of gain which Dean recognizes on the exchange?
A) $0
B) $20,000
C) $40,000
D) $60,000

43) Daniella exchanges business equipment with a $100,000 adjusted basis for $10,000 cash and business equipment with a $96,000 FMV. What is the amount of gain recognized on the exchange?
A) $0
B) $4,000
C) $6,000
D) $10,000

44) Gena exchanges land held as an investment with a $60,000 basis for other land with a $80,000 FMV and a motorcycle with a $10,000 FMV. The acquired land is to be held for investment and the motorcycle is for personal use. What is the amount of recognized gain?
A) $0
B) $10,000
C) $20,000
D) $30,000

45) Pamela owns land for investment purposes. The land is worth $300,000 (basis of $260,000 to Pamela). Pamela exchanges the land, plus $20,000 cash, for a warehouse to be used in her business. The FMV of the warehouse is $400,000, but the warehouse is subject to a mortgage of $80,000, which is assumed by Pamela. Pamela must recognize a gain of
A) $ 0.
B) $ 40,000.
C) $ 120,000.
D) $ 140,000.

46) Bob owns a warehouse that is used in business while Rebecca owns land. Bob exchanges the warehouse for the land, which will be held for investment. The FMV of the warehouse is $440,000 (basis $240,000), but the warehouse is subject to a mortgage of $80,000, which is assumed by Rebecca. Bob receives $40,000 cash and the land, which has a FMV of $320,000. Bob realizes a gain (loss) on the exchange of
A) $80,000.
B) $120,000.
C) $190,000.
D) $200,000.

47) Emily owns land for investment purposes that has a FMV of $300,000 (basis of $260,000). She exchanges the land, plus $40,000 cash, for a warehouse to be used in her business. The warehouse is worth $420,000, but is subject to a mortgage of $80,000 which Emily will assume. The gain realized by Emily on the exchange is
A) $40,000.
B) $80,000.
C) $120,000.
D) $160,000.

48) Glen owns a building that is used in business. The building is worth $200,000, but is subject to a mortgage of $40,000. Glen’s basis in the building is $120,000. Glen exchanges the building for investment land worth $150,000 plus $10,000 cash. In addition, the other party assumes the mortgage which will be held for investment. Glen must recognize a gain of
A) $0.
B) $10,000.
C) $50,000.
D) $80,000.

49) Kai owns an apartment building held for investment purposes. The apartment building is worth $500,000, although it is subject to a mortgage of $100,000. Kai’s basis in the apartment building is $380,000. Kai exchanges the apartment building for an office building. The office building has an FMV of $350,000. Kai receives $50,000 cash in addition to receiving the office building, and the other party assumes the apartment building mortgage. What is Kai’s recognized gain on this exchange?
A) $0
B) $50,000
C) $120,000
D) $150,000

50) In a nontaxable exchange, Henri traded in a truck having an adjusted basis of $8,500 and a FMV of $10,000, for a new truck having a FMV of $15,000. In addition, Henri paid cash of $5,000. What is Henri’s basis in the new truck?
A) $5,000
B) $8,500
C) $13,500
D) $15,000

51) Bobbie exchanges business equipment (adjusted basis $160,000) for other business equipment that has a FMV of $140,000. Bobbie also receives $30,000 cash. Bobbie’s basis in the new equipment is
A) $130,000.
B) $140,000.
C) $160,000.
D) $170,000.

52) Jason owns a warehouse that is used in business. The FMV of the warehouse is $200,000 (basis $120,000), and the warehouse is subject to a mortgage of $40,000. Jason exchanges the warehouse for land valued at $150,000. The other party also pays him $10,000 cash and assumes the mortgage on the warehouse. Jason’s basis in the land received will be
A) $120,000.
B) $150,000.
C) $180,000.
D) $200,000.

53) Laurie owns land held for investment. The land’s FMV is $150,000. Laurie’s basis in the land is $130,000. Laurie exchanges the land, plus $20,000 of cash, for a warehouse owned by Trey. The warehouse is worth $210,000, but is subject to a mortgage of $40,000 which Laurie will assume. Trey’s basis in the warehouse is $120,000. Laurie’s basis in the warehouse received will be
A) $150,000.
B) $170,000.
C) $190,000.
D) $210,000.

54) Rosa exchanges business equipment with a $60,000 adjusted basis for a like-kind piece of equipment with a $100,000 FMV and $20,000 of marketable securities. What is Rosa’s basis for the new equipment?
A) $60,000
B) $80,000
C) $100,000
D) $120,000

55) If there is a like-kind exchange of property between related parties, how long do they have to wait to dispose of the property received in order to avoid having to recognize any gain on the exchange?
A) 6 months
B) 1 year
C) 2 years
D) no waiting period

56) Rolf exchanges an office building worth $150,000 for investment land worth $175,000. He also provided stock worth $25,000. Rolf’s adjusted basis in the building and stock is $130,000 and $11,000, respectively. How much gain will Rolf recognize on the exchange?
A) $0
B) $14,000
C) $20,000
D) $34,000

57) Yael exchanges an office building worth $150,000 for investment land worth $175,000. He also provided
stock worth $25,000. Yael’s adjusted basis in the building and stock is $180,000 and $11,000, respectively. How much gain or loss will Yael recognize on the exchange?
A) $0
B) ($30,000)
C) ($16,000)
D) $14,000

58) Which of the following statements is not true with regard to like-kind exchanges?
A) Nonrecognition of gains and losses is mandatory if the exchange is a like-kind exchange.
B) The holding period of like-kind property received includes the holding period of the property exchanged.
C) A loss is always recognized if the taxpayer transfers non-like-kind personal use property (e.g. a personal use car) in an otherwise like-kind exchange.
D) The basis of property received in an exchange is equal to the basis of the property exchanged less the boot received plus the gain recognized and less any loss recognized.

59) All of the following are true except:
A) A nonsimultaneous exchange may never qualify as a like-kind exchange.
B) Nonrecognition of gains and losses is mandatory if the exchange is a like-kind exchange.
C) A loss may be recognized on non-like-kind property (boot) if the taxpayer transfers the boot in an otherwise like-kind exchange.
D) The holding period of like-kind property received includes the holding period of the property exchanged.

60) Cassie owns a Rembrandt painting she acquired on June 1, 2008 as an investment. She exchanges the painting on September 5, 2014, for a Picasso sculpture and marketable securities to be held as an investment. On what date does the sculpture’s holding period begin?
A) June 1, 2008
B) June 2, 2008
C) September 5, 2014
D) September 6, 2014

61) Juan’s business delivery truck is destroyed in an accident. He paid $40,000 for the truck, and $30,000 of depreciation has been deducted during its period of use. The insurance company pays Juan $32,000 due to the accident. What is the minimum amount that Juan must spend on a new truck to avoid any gain recognition?
A) $40,000
B) $32,000
C) $10,000
D) $22,000

62) Stephanie’s building, which was used in her business, was destroyed in a fire. Stephanie’s adjusted basis in the building was $175,000, and its FMV was $210,000. Stephanie filed an insurance claim and was reimbursed $200,000. In that same year, Stephanie invested $180,000 of the insurance proceeds in another business building. If the proper election is made, Stephanie will recognize gain of
A) $ 0.
B) $15,000.
C) $20,000.
D) $25,000.

63) Stephanie’s building, which was used in her business, was destroyed in a fire. Stephanie’s adjusted basis in the building was $175,000, and its FMV was $210,000. Stephanie filed an insurance claim and was reimbursed $200,000. In that same year, Stephanie invested $180,000 of the insurance proceeds in another business building. Assuming the proper election is made to defer gain, Stephanie’s basis in the new building will be
A) $175,000.
B) $180,000.
C) $200,000.
D) $210,000.

64) Ron’s building, which was used in his business, was destroyed in a fire. Ron’s adjusted basis in the building was $210,000, and its FMV was $330,000. Ron filed an insurance claim and was reimbursed $300,000. In that same year, Ron invested $240,000 of the insurance proceeds in another business building. Ron will recognize gain of
A) $0.
B) $30,000.
C) $60,000.
D) $90,000.

65) Ron’s building, which was used in his business, was destroyed in a fire. Ron’s adjusted basis in the building was $210,000, and its FMV was $330,000. Ron filed an insurance claim and was reimbursed $300,000. In that same year, Ron invested $240,000 of the insurance proceeds in another business building. Ron’s basis in the new building is
A) $180,000.
B) $210,000.
C) $240,000.
D) $330,000.

66) Which of the following statements is false regarding involuntary conversions?
A) A taxpayer must replace the destroyed property within the same tax year in which the gain is realized.
B) A taxpayer cannot elect to defer recognition of a loss resulting from an involuntary conversion.
C) If deferral of gain is elected, the holding period of the converted property carries over to the replacement property.
D) Gain may be deferred if the property is involuntarily converted into property that is similar or related in service or use to the converted property.

67) The building used in Tim’s business was condemned by the city of Lafayette. Tim received a condemnation award of $125,000. He paid $1,200 in lawyer’s fees and $800 for an appraisal of the property. Tim’s adjusted basis in the building was $60,000. Tim reinvests in similar property costing $110,000, and Tim makes the proper election regarding the property. What is the amount of Tim’s realized (not recognized) gain on the condemnation?
A) $ 0
B) $50,000
C) $63,000
D) $65,000

68) The building used in Terry’s business was condemned by the city of St. Louis. Terry received a condemnation award of $125,000. He paid $1,200 in lawyer’s fees and $800 for an appraisal of the property. Terry’s adjusted basis in the building was $60,000. Terry reinvests in similar property costing $110,000, and Terry makes the proper election regarding the property. What is the amount of Terry’s recognized gain on the condemnation?
A) $15,000
B) $13,000
C) $50,000
D) $63,000

69) Ed owns a racehorse with a $600,000 basis used for breeding purposes. The racehorse is killed in a tornado, and Ed collects $1,000,000 from the insurance company. He purchases another horse for $550,000. What is the amount of gain recognized on the transaction?
A) $0
B) $50,000
C) $350,000
D) $400,000

70) The building used in Manuel’s business was condemned by the city of Mobile. Manuel received a condemnation award of $220,000. He paid $800 in lawyer’s fees and $600 for an appraisal of the property. Manuel’s adjusted basis in the building was $120,000. Manuel reinvests in similar property costing $200,000, and Manuel makes the proper election regarding the property. Manuel’s basis in the new building is
A) $102,400.
B) $121,400.
C) $120,000.
D) $200,000.

71) Which of the following statements regarding involuntary conversions is incorrect?
A) With some exceptions, the replacement property must be similar or related in service or use to the property converted.
B) The functional-use test is more restrictive than the like-kind test.
C) The taxpayer-use test applies to the involuntary conversion of rental property owned by an investor.
D) Real property used in a trade or business that is condemned must be replaced with property which has the same functional use as the converted property.

72) Each of the following is true of deferral of gain attributable to the involuntary conversion of personal property with the exception of
A) gain deferral is elective, except for direct conversions.
B) the replacement property may be acquired by gift, inheritance, or purchase.
C) qualifying replacement property must be acquired within a specified time period.
D) replacement property must be similar or related in service or use to the converted property.

73) Alex owns an office building which the state condemns on January 15, 2014. Alex receives the condemnation award on April 1, 2014. In order to qualify for nonrecognition of gain on this involuntary conversion, what is the last date for Alex to acquire qualified replacement property?
A) January 15, 2016
B) January 15, 2017
C) December 31, 2016
D) December 31, 2017

74) According to Sec. 121, individuals who sell or exchange their personal residence may exclude part or all of the gain if the house was owned and occupied as a principal residence for
A) at least five years immediately before the sale date.
B) at least one year of the three-year period before the sale date.
C) at least two years of the five-year period before the sale date.
D) at least five years of the ten-year period before the sale date.

75) Mitchell and Debbie, both 55 years old and married, sell their personal residence to Sophie. Sophie pays $225,000 and assumes their $70,000 mortgage. To make the sale they pay $4,000 in commissions and $1,000 in legal costs. They have owned and lived in the house for seven years and their tax basis is $125,000. What is the amount of gain recognized on the sale?
A) $0
B) $100,000
C) $165,000
D) $170,000

76) Bob and Elizabeth, both 55 years old and married, sell their personal residence to Wolfgang. Wolfgang pays $660,000 and assumes their $90,000 mortgage. To make the sale they pay $20,000 in commissions and $10,000 in legal costs. They have owned and lived in the house for seven years and their tax basis is $200,000. What is the amount of gain recognized on the sale?
A) $0
B) $20,000
C) $50,000
D) $520,000

77) Frank, a single person age 52, sold his home this year. He had lived in the house for 10 years.
He signed a contract on March 4 to sell his home and closed the sale on May 3.

Sales price $202,000
Selling expenses 12,000
Replaced and paid for a broken window on March 2 200
Basis of old home before repairs and improvements 150,000

Based on these facts, what is the amount of his recognized gain?
A) $0
B) $39,800
C) $40,000
D) $52,000

78) Pierce, a single person age 60, sold his home this year. He had lived in the house for 10 years. He signed a contract on March 4 to sell his home.

Sales price $600,000
Selling expenses 15,000
Replaced and paid for a broken window on March 2 800
Basis of old home before repairs and improvements 310,000

Based on these facts, what is the amount of his recognized gain?
A) $0
B) $25,000
C) $40,000
D) $275,000

79) On May 1 of this year, Ingrid sold her personal residence for $250,000. Commissions on the sale were $20,000. Ingrid also incurred $10,000 of costs for painting and repairs, which were all completed and paid for two weeks prior to the sale of her home. Ingrid’s basis in her old home was $180,000. Ingrid’s realized gain upon the sale of her first home is
A) $ 0.
B) $40,000.
C) $50,000.
D) $70,000.

80) William and Kate married in 2014 and purchased a new home together. Each had owned and lived in separate residences for the past 5 years. William’s adjusted basis in his old residence was $200,000; Kate’s adjusted basis in her old residence was $120,000. In late 2014, William sells his residence for $500,000 while Kate sells her residence for $190,000. What is the total gain to be excluded from these transactions in 2014?
A) $0
B) $250,000
C) $320,000
D) $370,000

81) All of the following statements are true with regard to personal residences except:
A) Temporarily renting property that was formerly the taxpayer’s principal residence does not automatically preclude the use of Sec. 121.
B) To qualify for favorable tax treatment under Sec. 121, the residence must be either the taxpayer’s principal residence or a secondary residence.
C) In the case of married taxpayers, an individual may claim the exclusion even if the individual’s spouse used the exclusion within the past two years.
D) Houseboats, house trailers, and condominium apartments may qualify as a principal residence.

82) Generally, a full exclusion of gain under Sec. 121 upon the sale of a personal residence applies to only one sale or exchange every
A) six months.
B) year.
C) two years.
D) five years.

83) Jenna, who is single, sold her principal residence on December 1, 2013, and excluded the $150,000 gain because she met the ownership and usage requirements under Sec. 121. Jenna purchased another residence in Pensacola on January 1, 2014 that she occupied until July 1, 2014 when she receives a new job offer from an employer in Miami. She sells the Pensacola residence on October 1, 2014 and realizes a gain of $40,000. Jenna may exclude what amount of the gain from the sale on October 1, 2014?
A) $0
B) $10,000
C) $20,000
D) $40,000

84) Which of the following statements is false with regard to the ownership and use tests under Sec. 121?
A) The taxpayer must be occupying the residence at the time of the sale in order for Sec. 121 to apply.
B) If a principal residence is sold before satisfying the ownership and use tests, part of the gain may be excluded if the sale is due to a change in employment, health, or unforeseen circumstances.
C) For purposes of the two-year ownership rule, a taxpayer’s period of ownership includes the period during which the taxpayer’s deceased spouse owned the residence.
D) When a taxpayer receives a residence from a spouse or an ex-spouse incident to a divorce, the taxpayer’s period of owning the property includes the time the residence was owned by the spouse or ex-spouse.

85) Under what circumstances can a taxpayer obtain a partial exclusion if a home is sold before the use and ownership tests are satisfied?
A) change in employment that meets the requirement for a moving expense deduction
B) increased traffic due to widening of a road
C) birth of one child
D) divorce

86) Which of the following is not an unforeseen circumstance for purposes of obtaining a partial exclusion of a gain on the sale of a home?
A) loss of employment by the qualified individual if the individual is eligible for unemployment compensation
B) natural or man-made disaster resulting in a casualty to the residence
C) birth of one child
D) divorce or legal separation

87) Sometimes taxpayers should structure a transaction to avoid the application of like-kind provisions. Which of the following conditions is likely to cause a taxpayer to avoid like-kind treatment?
A) Expected higher tax rates in the future.
B) Less accelerated depreciation provisions expected in the future.
C) A decline in the value of the asset being disposed of.
D) None of the above.

88) Which of the following statements in not correct regarding the compliance requirements of an involuntary conversion?
A) The taxpayer elects the deferral by not reporting the gain as income for the first year in which the gain is realized although all relevant information regarding the vent will be reported.
B) A taxpayer who recognized the full gain and paid the taxes can later file a refund claim to elect the deferral if qualified property is acquired before the expiration of the replacement period.
C) A taxpayer elects to defer the full gain in the year the gain is realized (year one), and no gain is reported on that year’s tax return. Qualified replacement property is acquired in the following year (year two), but the full insurance proceeds are not spent so some gain must be recognized. The partial gain recognition will be reported on the tax return for year two.
D) A taxpayer properly elected to defer the full realized gain in year one and provides appropriate information on the replacement property. The taxpayer cannot later revoke the election and designate a different property as the replacement property.

89) Indicate with a “yes” or a “no” which of the following are like-kind exchanges.
a. Computer used in trade or business for office furniture used in trade or business.
b. Apartment building held as an investment for an office building used in trade or business.
c. Land used in trade or business for equipment used in trade or business.
d. Printer used in trade or business for printer used for personal purposes.
e. Exchange of improved real estate held for investment for unimproved real estate held for investment.

90) Indicate with a “yes” or a “no” which of the following are like-kind exchanges (assume all assets are held for business or investment purposes).
a. Exchange of common stock held as an investment for land held as an investment.
b. Exchange of farmland for an apartment building.
c. Exchange of office furniture used in trade or business for computer used in a trade or business
d. Exchange of unimproved real estate for improved real estate.
e. Exchange of automobile used in trade or business for office building used in trade or business

91) Amelia exchanges an office building with a $350,000 adjusted basis for an airplane with a $560,000 fair market value to be used in business.
a. What is the amount of gain or loss realized by Amelia?
b. What is the amount of gain or loss recognized by Amelia?

92) Cheryl owns 200 shares of Cornerstone Corporation common stock which has an adjusted basis of $60,000 and a fair market value of $75,000. John owns 200 shares of Cable Corporation with a $75,000 fair market value.
a. If Cheryl and John exchange their stock, what is the amount of Cheryl’s realized gain?
b. If Cheryl and John exchange their stock, what is the amount of Cheryl’s recognized gain?

93) Kevin exchanges an office building used in his business for another office building worth $200,000 plus $30,000 cash. The FMV of Kevin’s old building is $280,000 (basis $150,000) and it is subject to a mortgage of $50,000. The mortgage is assumed by the other party.
a. What is the amount of gain realized by Kevin?
b. What is the amount of gain recognized by Kevin?
c. What is the basis of the new building to Kevin?

94) Summer exchanges an office building used in her business for another office building. Summer’s office building has a FMV of $250,000 (basis of $180,000). The FMV of the new building is $300,000, and it is subject to a mortgage of $60,000, which is assumed by Summer. Summer also pays the other party $40,000 cash.
a. What is the amount of gain realized by Summer?
b. What is the amount of gain recognized by Summer?
c. What is the basis of the new building to Summer?

95) Trent, who is in the business of racing horses, exchanges a racehorse with a basis of $80,000 for $40,000 cash and a trotter (another racehorse) with a $150,000 fair market value.
a. What is the amount of gain realized by Trent?
b. What is the amount of gain recognized by Trent?
c. What is the adjusted basis of the trotter?

96) Patricia exchanges office equipment with an adjusted basis of $20,000 for $5,000 cash and office equipment with a fair market value of $12,000.
a. What is the gain or loss realized?
b. What is the gain or loss recognized?
c. What is the adjusted basis of the new office equipment?

97) Eric exchanges a printing press with an adjusted basis of $64,000 for a smaller model with a $100,000 fair market value. In addition, he receives $20,000 of marketable securities.
a. What is the amount of gain realized by Eric?
b. What is the amount of gain recognized by Eric?
c. What is Eric’s basis in the new printing press?
d. What is Eric’s basis in the marketable securities?

98) Olivia exchanges land with a $50,000 basis plus marketable securities with a $20,000 basis for a larger parcel of land worth $110,000 in a transaction that otherwise qualifies as a like-kind exchange. The FMV of the land and marketable securities exchanged by Olivia is $75,000 and $35,000 respectively.
a. What is the amount of gain realized and recognized by Olivia on each asset?
b. What is the amount of Olivia’s basis in the new land?

99) Whitney exchanges timberland held as an investment for undeveloped land with a $300,000 FMV. Whitney’s basis for the timberland is $150,000. She also transfers her tractor with a $15,000 basis and a $10,000 FMV as part of the exchange.
a. What is the amount, if any, of gain or loss recognized on the transaction?
b. What is the basis of the undeveloped land?

100) Marinda exchanges an office building worth $800,000 (basis is $820,000) for a warehouse worth $850,000. A part of the exchange she also transfers $50,000 worth of securities which she purchased for $40,000.
a. What are Marinda’s realized and recognized gains (losses) on the two assets exchanged?
b. What is Marinda’s basis in the warehouse acquired?

101) Luke’s offshore drilling rig with a $700,000 adjusted basis is destroyed by a hurricane. He collects $620,000 from the insurance company and purchases a new drilling rig for $600,000.
a. What are the tax consequences of these transactions?
b. What is the basis of the new rig?

102) An office building owned by Abby and used in her business was destroyed in a fire. Abby’s adjusted basis in the building was $145,000 and its FMV was $180,000. Abby filed an insurance claim and she was reimbursed $160,000. In that same year, Abby invested $150,000 of the insurance proceeds in another business building.
a. Assume Abby made the proper election with regard to the involuntary conversion. What is the amount of gain to be recognized by Abby?
b. What is Abby’s basis in the new building?

103) Mick owns a racehorse with a $500,000 basis used for breeding purposes. The racehorse is killed in an accident and Mick receives $750,000 from the insurance company. Mick purchases another racehorse for $400,000.
a. What is the amount of Mick’s realized gain?
b. What is the amount of Mick’s recognized gain?

104) Theresa owns a yacht that is held for personal use and has a $100,000 basis. The yacht is destroyed by a storm and Theresa collects $120,000 from the insurance company. She purchases a new $150,000 yacht for personal use and elects to defer any gain on the transaction. What is the basis of the new yacht?

105) Kareem’s office building is destroyed by fire on April 11, 2014. Settlement is reached with the insurance company on November 1, 2014 when he receives a check for $900,000. The property had recently been appraised for $920,000. Kareem’s adjusted basis in the building was $800,000.
a. What is Kareem’s realized gain or loss?
b. Assume Kareem wishes to defer the maximum amount of gain. Indicate:
(1) the minimum amount that must be spent on a new property.
(2) any restrictions on the new property in order for it to qualify.
(3) the deadline for placing the new property in service.
c. Assume that instead of a fire, the state forces Kareem to sell the property. Indicate how your responses to part b would differ.

106) Nicki is single and 46 years old. She sells her principal residence (adjusted basis $200,000) that she purchased ten years ago for $435,000.
a. What is the amount of Nicki’s recognized gain on the sale?
b. Assume instead that Nicki sells the residence for $485,000. What is the amount of Nicki’s recognized gain on the sale?
c. Assume instead that Nicki has been married to Mike for the entire time they have owned and lived in the home. If they sell the home for $485,000, what is the amount of their recognized gain on the sale?

107) In 1997, Paige paid $200,000 to purchase a new residence. She paid a realtor $5,000 to help locate the house and paid legal fees of $3,000 to make certain that the seller had legal title to the property. Under the provisions of tax law in effect at the time of the purchase, she deferred a gain of $30,000 from the sale of a former residence in 1996. In 1999, she added a new porch to the house at a cost of $15,000 and installed central air conditioning at a cost of $12,000. Since purchasing the house, she has paid $2,000 in repairs. What is the adjusted basis of the home?

108) James and Ellen Connors, who are both 50 years old and married, sell their personal residence on July 25, 2014 for $950,000. They have lived in the home for 20 years. The basis of the home is $350,000. They purchased a new home for $1,000,000 in August 2014. After living in that home for 219 days, the Connors were forced to sell their new home in 2015 for $1,300,000 and move to another climate due to Ellen’s severe health problems.
a. What is the amount of gain recognized on the home sale in 2014?
b. What is the amount of the gain recognized on the home sale in 2015?

109) Amber receives a residence ($750,000 FMV, $500,000 adjusted basis) owned for eight years by Jonathan, her former spouse, as part of a divorce settlement. Amber and Jonathan had lived in the home for the four years before the divorce. Seven months after the transfer of the residence, Amber sells it for $790,000. What is the amount of Amber’s recognized gain on the sale of the home?

110) The Smiths owned and used their principal residence, with an adjusted basis of $250,000, for ten years. The house is destroyed by a tornado and the Smiths receive insurance proceeds of $800,000. Six months later, they purchase another residence for $850,000.
a. What is the amount of gain the Smiths must recognize?
b. What is the basis of the new residence?

111) Discuss the basis rules of property received in a nontaxable like-kind exchange.

112) Discuss the rules regarding the holding period for like-kind property received in a nontaxable exchange.

113) May a taxpayer elect under Sec. 1033 to defer recognition of loss resulting from an involuntary conversion?

114) Ike and Tina married and moved into their new home (purchase price $800,000) 18 months ago. They are thinking of selling the home which is now worth $1,300,000. They plan to reinvest in a smaller home costing approximately $600,000. What should they consider before selling their home?

115) Discuss why a taxpayer would want to avoid like-kind exchange provisions.

Chapter 13 Property Transactions: Section 1231 and Recapture

1) Mark owns an unincorporated business and has $20,000 of Section 1231 gains and $22,000 of Section 1231 losses. He must report a capital loss of $2,000 on his tax return.

2) A net Sec. 1231 gain is treated as ordinary income to the extent of any nonrecaptured net Sec. 1231 losses for the preceding five years.

3) In 2014, Thomas, who has a marginal tax rate of 15%, sells land that is Sec. 1231 property at a gain of $4,000. If he has no other 1231 transactions or capital asset transactions and has no nonrecaptured 1231 gain, Thomas will pay no tax on the $4,000 gain.

4) Sec. 1231 property must satisfy a holding period of more than one year.

5) Depreciable property used in a trade or business for one year or less is considered Sec. 1231 property.

6) Any gain or loss resulting from the sale or disposition of depreciable property used in trade or business and held one year or less is considered ordinary.

7) The sale of inventory results in ordinary gain or loss.

8) Gains and losses from involuntary conversions of property used in a trade or business generally are classified as capital gains and losses.

9) Gains and losses resulting from condemnations of Sec. 1231 property and capital assets held more than one year are classified as ordinary gains and losses.

10) If the recognized losses resulting from involuntary conversions arising from casualty or theft exceed the recognized gains from such events (i.e. a net loss from the casualty), all of the involuntary conversions are treated as ordinary gains and losses.

11) If realized gain from disposition of business equipment exceeds total depreciation or cost recovery, a portion of the gain will receive Sec. 1231 treatment if the equipment’s holding period is more than one year.

12) The purpose of Sec. 1245 is to eliminate the advantage taxpayers would have if they were able to reduce ordinary income by depreciation deductions and also receive favorable Sec. 1231 treatment when the asset was sold.

13) Sec. 1245 applies to gains on the sale of depreciable personal property, but it generally does not apply to depreciable real property.

14) If a taxpayer has gains on Sec. 1231 assets, Secs. 1245 and 1250 must be applied first to determine any amounts recaptured as ordinary income, and any excess gain may then be netted with Sec. 1231 losses for possible long-term capital gain treatment.

15) Sec. 1245 ordinary income recapture can apply to buildings placed in service prior to 1987.

16) Sec. 1245 can increase the amount of gain recognized on an asset.

17) Section 1250 could convert a portion of Sec. 1231 gain into ordinary income if the real property was placed in service prior to 1987 and accelerated depreciation was used.

18) For noncorporate taxpayers, depreciation recapture is not required on real property placed in service after 1986.

19) When corporate and noncorporate taxpayers sell real property placed in service after 1986, all depreciation taken will be taxed at a maximum rate of 25%.

20) Unrecaptured 1250 gain is the amount of long-term capital gain which would be taxed as ordinary income if Sec. 1250 provided for the recapture of all depreciation and not just additional depreciation.

21) The amount recaptured as ordinary income under either Sec. 1245 or Sec. 1250 can never exceed the realized gain.

22) Section 1250 does not apply to assets sold or exchanged at a loss.

23) In addition to the normal recapture rules of Sec. 1250, corporations which sell depreciable real estate are subject to additional recapture rules of Sec. 291.

24) The additional recapture under Sec. 291 is 25% of the difference between the amount that would have been recaptured if the property was Sec. 1245 property and the actual recapture under Sec. 1250.

25) Frisco Inc., a C corporation, placed a building in service in 2002 and deducted straight-line depreciation under the MACRS system in the normal manner. It sold the building this year for a substantial gain. Because straight-line depreciation was used, Frisco will not need to recognize any ordinary gain.

26) Gifts of appreciated depreciable property may trigger recapture of depreciation or cost-recovery deductions to the donor.

27) When a donee disposes of appreciated gift property, the recapture amount for the donee is computed by including the recapture amount attributable to the donor.

28) When appreciated property is transferred at death, the recapture potential carries over to the person who receives the property from the decedent.

29) If no gain is recognized in a nontaxable like-kind exchange involving Sec. 1245 or Sec. 1250 property, the recapture potential carries over to the replacement property.

30) When gain is recognized on an involuntary conversion, gain is subject to recapture under Sec. 1245 or Sec.1250.

31) Installment sales of depreciable property which result in recaptured income under Secs. 1245 or 1250 require that the recaptured income be recognized in the year of sale.

32) Costs of tangible personal business property which are expensed under Sec. 179 are subject to recapture if the property is converted to nonbusiness use before the end of the MACRS recovery period.

33) Gain recognized on the sale or exchange of property between related parties is capital if the property is subject to depreciation in the hands of the transferee.

34) Why did Congress establish favorable treatment for 1231 assets?
A) to encourage the mobility of capital
B) to allow a larger deduction for losses
C) to help business owners replace assets which had declined in value
D) All of the above

35) Jeremy has $18,000 of Section 1231 gains and $23,000 of Section 1231 losses. The gains and losses are characterized as

A)
Capital Gain Capital Loss Ordinary Income Ordinary Loss
$18,000 $23,000

B)
Capital Gain Capital Loss Ordinary Income Ordinary Loss
$18,000 $23,000

C)
Capital Gain Capital Loss Ordinary Income Ordinary Loss
$18,000 $23,000

D)
Capital Gain Capital Loss Ordinary Income Ordinary Loss
$18,000 $3,000 $20,000

36) Pierce has a $16,000 Section 1231 loss, a $12,000 Section 1231 gain, and a salary of $50,000. What is the treatment of these items in Pierce’s AGI?
A) Pierce has a LTCG of $12,000 and a net ordinary income of $34,000.
B) The 1231 gains and losses are treated as ordinary gains and losses making Pierce’s AGI for the year $46,000.
C) Pierce has a $3,000 LTCL which is deductible for AGI making AGI $47,000. He also has a $1,000 LTCL carryover.
D) Pierce has net LTCG of $9,000 and $37,000 of net ordinary income.

37) Daniel recognizes $35,000 of Sec. 1231 gains and $25,000 of Sec. 1231 losses during the current year. The only other Sec. 1231 item was a $4,000 loss three years ago. This year, Daniel must report
A)
NLTCG Ordinary Income
$10,000 $ 0

B)
NLTCG Ordinary Income
$ 6,000 $ 4,000

C)
NLTCG Ordinary Income
$ 4,000 $ 6,000

D)
NLTCG Ordinary Income
$ 4,000 $10,000

38) During the current year, Danika recognizes a $30,000 Section 1231 gain and a $22,000 Section 1231 loss. Prior to this, Danika’s only Section 1231 item was a $15,000 loss two years ago. Danika must report a(n)
A) $8,000 net LTCG.
B) $8,000 ordinary income.
C) $15,000 ordinary income.
D) $8,000 ordinary income and $7,000 net LTCG.

39) During the current year, George recognizes a $30,000 Section 1231 gain on sale of land and a $18,000 Section 1231 loss on the sale of land. Prior to this, George’s only Section 1231 item was a $14,000 loss six years ago. George must report a
A) $12,000 net LTCG.
B) $12,000 ordinary income.
C) $14,000 ordinary income.
D) $10,000 ordinary income and $2,000 net LTCG.

40) During the current year, Kayla recognizes a $40,000 Section 1231 gain on sale of land and a $22,000 Section 1231 loss on the sale of land. Prior to this, Kayla’s only Section 1231 item was a $10,000 loss six years ago. Kayla is in the 28% marginal tax bracket. The amount of tax resulting from these transactions is
A) $2,700.
B) $3,600.
C) $4,000.
D) $5,040.

41) Blair, whose tax rate is 28%, sells one tract of land at a gain of $29,000 and another tract of land at a gain of $11,000. Both tracts of land are Sec. 1231 property. She has never had any other Sec. 1231 transactions. How are the gains taxed?
A) ordinary income of $40,000 taxed at 28%
B) a net capital gain of $40,000 which is not taxed
C) a net capital gain of $40,000 taxed at 15%
D) ordinary income of $40,000 taxed at 25%

42) For a business, Sec. 1231 property does not include
A) timber, coal, or domestic iron ore.
B) inventory purchased 24 months ago.
C) an office building purchased five years ago.
D) land used in the business that was purchased two years ago.

43) Which of the following assets is 1231 property?
A) a machine used in the company’s manufacturing operations
B) an investment in corporate stock
C) land held for investment
D) items held for resale by a retailer

44) Section 1231 property will generally have all the following characteristics except
A) real or depreciable property.
B) used in trade or business.
C) held for sale to customers.
D) held for more than one year.

45) A corporation owns many acres of timber, which it acquired three years ago, and which has a $120,000 basis. The timber was cut last year for use in the corporation’s business. The FMV of the timber on the first day of last year was $270,000. The corporation made the appropriate election to treat the cutting as a sale or exchange. The timber is sold for $300,000 this year. The tax result this year is
A) recognition of capital gain of $30,000.
B) recognition of Sec. 1231 gain of $30,000.
C) recognition of ordinary income of $30,000.
D) no income recognized since all recognition occurs in the year of the cutting of the timber.

46) A corporation owns many acres of timber, which it acquired three years ago, and which has a $150,000 basis for depletion. The timber is cut during the current year for use in the corporation’s business. The FMV of the timber on the first day of the current year is $280,000. If the corporation makes the appropriate election, the tax result is
A) recognition of a Sec. 1231 gain of $130,000.
B) no recognition of gain or loss since the timber is used in the business.
C) recognition of a gain at the time of sale if the timber is later sold with the gain equal to the sales price less the basis in the timber.
D) recognition of a gain if the timber is later sold with the gain equal to the sales price less $280,000 (FMV on the first day of the year of the cutting).

47) In order to be considered Sec. 1231 property, all of the following livestock must be held for 12 months or more from date of acquisition except
A) goats.
B) hogs.
C) sheep.
D) cattle.

48) For livestock to be considered Section 1231 property,
A) the livestock must be held for draft, breeding or dairy purposes, but not for sport.
B) cattle and horses must be held for at least 12 months from the date of acquisition.
C) cattle and horses must be held for at least 24 months from the date of acquisition.
D) livestock other than cattle and horses must be held for at least 24 months from the date of acquisition.

49) If Section 1231 applies to the sale or exchange of an unharvested crop sold with land, the costs of producing the crop are
A) capitalized.
B) deducted as an expense of operations when incurred and also deducted from the sales price at the time of the sale.
C) deducted when incurred if the land is sold but capitalized if the land is exchanged.
D) deducted as an expense of operations when incurred.

50) Dinah owned land with a FMV of $130,000 (adjusted basis $120,000) which is investment property (a capital asset). Dinah owned a second tract of land, a 1231 asset, with a FMV of $46,000 (adjusted basis $50,000). Both tracts were acquired in 2001 and condemned by the state this year. The state paid an amount equal to FMV. If there are no other transactions involving capital assets or 1231 assets, Dinah must report on her current year return
A) $6,000 net ordinary income.
B) $6,000 net section 1231 gain treated as a net capital gain.
C) a LTCG of $10,000 and a 1231 loss of $4,000.
D) a LTCG of $10,000 and a nondeductible loss of $4,000.

51) Emma owns a small building ($120,000 basis and $123,000 FMV) and equipment ($35,000 basis and $22,000 FMV). Both assets were acquired three years ago, are used in Emma’s business, and are depreciated using straight-line depreciation. Both are destroyed by fire. Insurance proceeds were equal to their FMVs. Only one other transfer of an asset occurs during the year, and a $3,000 LTCL is recognized. After considering all transactions, the tax result to Emma is a
A) $13,000 NLTCL.
B) $13,000 ordinary loss.
C) $3,000 LTCG; $3,000 LTCL; and $13,000 ordinary loss.
D) $10,000 net ordinary loss and a $3,000 NLTCL.

52) Cassie owns equipment ($45,000 basis and $30,000 FMV) and a building ($152,000 basis and $158,000 FMV), which are used in Cassie’s business. Cassie has used straight-line depreciation for both assets, which were acquired two years ago. Both the equipment and the building are destroyed in a fire, and Cassie collects insurance proceeds equal to the assets’ FMV. The tax result to Cassie for this transaction is a
A) $15,000 Sec. 1231 loss and a $6,000 ordinary gain.
B) $15,000 ordinary loss and a $6,000 ordinary gain.
C) $15,000 ordinary loss and a $6,000 Sec. 1231 gain.
D) $15,000 Sec. 1231 loss and a $6,000 Sec. 1231 gain.

53) Harry owns equipment ($50,000 basis and $38,000 FMV) and a building ($140,000 basis and $156,000 FMV), which are used in his business. Harry uses straight-line depreciation for both assets, which were acquired several years ago. Both the equipment and the building are destroyed in a fire, and Harry collects insurance proceeds equal to the assets’ FMV. The tax result to Harry for this transaction is
A) the involuntary conversions are treated as ordinary gains and losses.
B) the involuntary conversions are treated as Sec. 1231 gains and losses.
C) the loss on involuntary conversion is treated as a Sec. 1231 loss while the gain is treated as an ordinary gain.
D) the loss on involuntary conversion is treated as an ordinary loss while the gain is treated as a Sec. 1231 gain.

54) Terry has sold equipment used in her business. She acquired the equipment three years ago for $50,000 and has recognized $30,000 of depreciation across the years in use. In order to recognize any Sec. 1231 gain, she must sell the equipment for more than
A) $0.
B) $20,000.
C) $30,000.
D) $50,000.

55) During the current year, Hugo sells equipment for $150,000. The equipment cost $175,000 when placed in service two years ago, and $55,000 of depreciation deductions were allowed. The results of the sale are
A) LTCG of $30,000.
B) Sec. 1231 gain of $30,000.
C) Sec. 1245 ordinary income $30,000.
D) Sec. 1250 ordinary income of $30,000.

56) During the current year, a corporation sells equipment for $300,000. The equipment cost $270,000 when purchased and placed in service two years ago and $60,000 of depreciation deductions were allowed. The results of the sale are
A) ordinary income of $90,000.
B) Sec. 1231 gain of $90,000.
C) ordinary income of $60,000 and LTCG of $30,000.
D) ordinary income of $60,000 and Sec. 1231 gain of $30,000.

57) Section 1245 recapture applies to all the following except
A) depreciable personal property.
B) assets sold or exchanged at a loss.
C) total depreciation or amortization allowed or allowable.
D) amortizable intangible personal property.

58) All of the following statements are true regarding Sec. 1245 are true except
A) Sec. 1245 does not apply to any buildings placed in service after 1986.
B) Sec. 1245 applies to assets sold or exchanged at a gain or at a loss.
C) Sec. 1245 property includes nonresidential real estate that qualified as recovery property under the ACRS rules unless the taxpayer elected to use the straight-line method of cost recovery.
D) Sec. 1245 ordinary applies to total depreciation or amortization allowed or allowable but not more than the realized gain.

59) An unincorporated business sold two warehouses during the current year. The straight-line depreciation method was used for the first building and the accelerated method (ACRS) was used for the second building. Information about those buildings is presented below.

Building No. 1 Building No. 2
Date acquired 1986 1986
Cost $800,000 $900,000
Accum. Depreciation
Straight-line 800,000
ACRS depreciation 900,000
Selling Price 80,000 400,000

How much gain from these sales should be reported as section 1231 gain and ordinary income due to depreciation recapture by the owner of the business?

A)
Section 1231 Gain Ordinary Income
$480,000 $0

B)
Section 1231 Gain Ordinary Income
$ 80,000 $400,000

C)
Section 1231 Gain Ordinary Income
$ 0 $480,000

D)
Section 1231 Gain Ordinary Income
$400,000 $ 80,000

60) A building used in a business for more than a year is sold. Sec. 1250 will not cause depreciation recapture if
A) the building is fully depreciated.
B) the building was placed in service after 1986.
C) straight-line depreciation was used.
D) all of the above.

61) With respect to residential rental property
A) 80% or more of the gross rental income from the building or structure must be rental income from dwelling units in order for it to be classified as residential rental property.
B) hotels are not included in this category if less than half of the units are used on a transient basis.
C) 80% or more of the net rental income from the building or structure must be rental income from dwelling units in order for it to be classified as residential rental property.
D) gain is not subject to the depreciation recapture provisions if the property is held more than one year.

62) Marta purchased residential rental property for $600,000 on January 1, 1985. Total ACRS deductions for 1985 through the date of sale amounted to $600,000. If the straight-line method of depreciation had been used, depreciation would have been $600,000. The property is sold for $750,000 on January 1 of the current year. The amount and character of the gain is
A) $750,000 Sec. 1231 gain.
B) $150,000 Sec. 1231 gain and $600,000 ordinary income.
C) $750,000 ordinary gain due to Sec 1245.
D) $750,000 ordinary gain due to Sec. 1250.

63) Emily, whose tax rate is 28%, owns an office building which she purchased for $900,000 on March 18 of last year. The building is sold for $950,000 on February 20 of this year when the adjusted basis of the building was $876,000. The tax results to Emily are
A) $74,000 1231 gain taxed at 15%.
B) $74,000 ordinary income taxed at 28%.
C) $24,000 1250 unrecaptured gain taxed at 25% and $50,000 1231 gain taxed at 15%.
D) $24,000 1231 gain taxed at 15% and $50,000 ordinary income taxed at 28%.

64) In 1980, Mr. Lyle purchased a factory building to use in business for $480,000. When Mr. Lyle sells
the building for $580,000, he has taken depreciation of $470,000. Straight-line depreciation would have been $400,000. Mr. Lyle must report
A) $570,000 of ordinary gain.
B) $570,000 of Sec. 1231 gain.
C) $70,000 of ordinary income and $500,000 of Sec. 1231 gain.
D) $470,000 of ordinary gain and $100,000 of Sec. 1231 gain.

65) Ross purchased a building in 1985, which he uses in his manufacturing business. Ross uses the ACRS statutory rates to determine the cost-recovery deduction for the building. Ross’s original cost for the building is $500,000 and cost-recovery deductions allowed are $500,000. If the building is sold for $340,000, the tax results to Ross are
A) $340,000 LTCG.
B) $340,000 Sec. 1231 gain.
C) $340,000 Sec. 1245 ordinary income.
D) $340,000 Sec. 1250 ordinary income.

66) Eric purchased a building in 2003 that he uses in his business. Eric uses the straight-line method for the building. Eric’s original cost for the building is $420,000 and cost-recovery deductions are $120,000. Eric is in the top tax bracket and has never sold any other business assets. If the building is sold for $560,000, the tax results are
A) $260,000 Sec. 1231 gain, all taxable at 20%.
B) $260,000 unrecaptured Sec. 1250 gain, all taxable at 25%.
C) $260,000 Sec. 1231 gain, of which $120,000 is unrecaptured Sec. 1250 gain taxable at 25% and the $140,000 balance is taxable at 20%.
D) $120,000 Sec. 1245 ordinary income, $140,000 Sec. 1231 gain taxable at 20%.

67) With regard to noncorporate taxpayers, all of the following statements are true regarding Sec. 1250 recapture except
A) Sec. 1250 affects the character of the gain, not the amount of the gain.
B) Sec. 1250 applies to assets sold or exchanged at either a gain or a loss.
C) Sec. 1250 ordinary income does not exist if the straight-line method of depreciation is used.
D) Sec. 1250 ordinary income is never more than the additional depreciation allowed.

68) In 1980, Artima Corporation purchased an office building for $400,000 for use in its business. The
building is sold during the current year for $550,000. Total depreciation allowed for the building was $350,000; straight-line would have been $320,000. As result of the sale, how much section 1231 gain will Artima Corporation report?
A) $350,000
B) $406,000
C) $320,000
D) $500,000

69) A corporation sold a warehouse during the current year. The straight-line depreciation method was used. Information about the building is presented below:

Date acquired 1984
Cost $800,000
Accumulated Depreciation – Straight-line 620,000
Selling Price 890,000

How much gain should the corporation report as section 1231 gain?
A) $124,000
B) $620,000
C) $586,000
D) $710,000

70) Octet Corporation placed a small storage building in service in 1999. Octet’s original cost for the building is $800,000 and the cost recovery deductions are $300,000. This year the building is sold for $1,100,000. The amount and character of the gain are
A) Ordinary gain of $60,000 and Sec. 1231 gain of $540,000.
B) Ordinary gain of $300,000 and Sec. 1231 gain of $300,000.
C) Ordinary gain of $600,000.
D) Sec. 1231 gain of $600,000.

71) Maura makes a gift of a van to a local food bank run by a charity. Maura had used the van in her trade or business. The van has a FMV of $6,500; a cost of $31,000; and $27,000 depreciation claimed. What is the amount of Maura’s charitable contribution deduction?
A) $6,500
B) $31,000
C) $4,000
D) $2,500

72) A taxpayer purchased a factory building in 1985 for $800,000. After claiming ACRS-accelerated depreciation of $800,000, she sells the asset for $1,000,000 during the current year. No payment is received during the current year, and the $1,000,000 balance to be paid with interest at the interest rate in four annual payments beginning one year from date of sale. The installment sales method is adopted. How much ordinary income is recognized in the current year?
A) $ 0
B) $200,000
C) $800,000
D) $1,000,000

73) Douglas bought office furniture two years and four months ago for $25,000 to use in his business and elected to expense all of it under Sec. 179. Depreciation of $3,500 would have been taken under the MACRS rules. If Douglas converts the furniture to nonbusiness use today, Douglas must
A) amend the prior two years tax returns.
B) include $3,500 in gross income in year of conversion.
C) include $21,500 in gross income in year of conversion.
D) include $25,000 in gross income in year of conversion.

74) Clarise bought a building three years ago for $180,000 to use in her business. The straight-line method of depreciation was used and $15,000 of depreciation deductions were allowed. During the current year, Clarise sells the building to her wholly-owned corporation for $235,000. The tax results to Clarise are
A) $70,000 ordinary income.
B) $70,000 of Sec. 1231 gain.
C) $55,000 ordinary income and $15,000 Sec. 1231 gain.
D) $15,000 of ordinary income and $55,000 Sec. 1231 gain.

75) All of the following are considered related parties for purposes of Sec. 1239 recapture with the exception of
A) an individual and a partnership where the individual has a one-fourth interest in the partnership.
B) an individual and a corporation where the individual owns more than 50% of the value of the outstanding stock of the corporation.
C) an individual and a corporation where the individual’s spouse owns more than 50% of the value of the outstanding stock of the corporation.
D) an individual and a partnership where the individual owns more than 50% of the capital of the partnership.

76) Cobra Inc. sold stock for a $25,000 loss five years ago. It has been carrying over the capital loss for five years, and the loss will expire at the end of this year because Cobra has not had any capital gains. Earlier this year Cobra sold a parcel of land held four years for business use and will recognize a $30,000 gain. Cobra is thinking about selling some machinery used in its business for the past three years. During this time technology has dramatically changed so Cobra will recognize a $32,000 loss on the sale of the machinery. Cobra is trying to decide whether to sell the machinery at year-end or early next year. Cobra is profitable and has a consistent marginal tax rate of 35%. When should Cobra sell the equipment?
A) current year
B) early next year
C) current year, but arrange an installment sale to spread the loss recognition over the two years
D) either the current year or next year

77) Lucy, a noncorporate taxpayer, experienced the following Section 1231 gains and losses during the years 2009 through 2014. Her first disposition of a Sec. 1231 asset occurred in 2009. Assuming Lucy had no capital gains and losses during that time period, what is the tax treatment in each of the years listed?

Section 1231 Gains Section 1231 Losses
2009 $10,000 $ 8,000
2010 $18,000 $23,000
2011 $ 9,000 $13,000
2012 $22,000 $16,000
2013 $25,000 $17,000
2014 $11,000 $18,000

78) Jillian, whose tax rate is 39.6%, had the following sales of Section 1231 property this year:

Sale of land at a gain of $15,000
Sale of land at a gain of $12,000
Sale of land at a loss of $8,000

a. What is the amount of her resulting tax liability?
b. Assume instead that Jillian has a 15% marginal tax rate. What is the amount of her resulting tax liability?
c. Assume instead that Jillian has a 28% marginal tax rate. What is the amount of her resulting tax liability?

79) Hilton, a single taxpayer in the 28% marginal tax bracket, has $16,000 of nonrecaptured net Sec. 1231 losses, at the beginning of a year in which he had the following transactions:

-Sale of Asset A at a $10,000 1231 gain, all of which is unrecaptured Sec. 1250 gain
-Sale of Asset B at a $13,000 1231 gain

How are the items reported this year and at which rate(s) are the amounts taxed?

80) Indicate whether each of the following assets are capital assets, Sec. 1231 assets, or ordinary income property (property which, if sold, results in ordinary income). Assume that all of the property is held for more than one year.
a. XYZ Corporation owns land used as an employee parking lot. How is the parking lot classified for tax purposes?
b. Montana Corporation owns land held as an investment. How is the land classified for tax purposes?
c. John, a self-employed electrician, owns an automobile he uses strictly for personal use. How is the automobile classified for tax purposes?
d. Jan, a self-employed contractor, owns a truck she uses exclusively in her trade or business. How is the truck classified for tax purposes?
e. Leslie owns an office building where her accounting practice is located. What is the classification of the building?
f. Yvonne owns a computer for use in her job as a sales representative. She does not use the computer for personal purposes. How is the computer classified for tax purposes?

81) Sarah owned land with a FMV of $150,000 (adjusted basis $135,000) which is investment property (a capital asset). Sarah owned a second tract of land, a 1231 asset, with a FMV of $38,000 (adjusted basis $55,000). Both tracts were acquired in 2000 and condemned by the state this year. The state paid an amount equal to FMV. If there are no other transactions involving capital assets or 1231 assets, what is the amount that Sarah must report on her current year return?

82) Elaine owns equipment ($23,000 basis and $15,000 FMV) and a building ($136,000 basis and $148,000 FMV), which are used in her business. Elaine uses straight-line depreciation for both assets, which were acquired several years ago. Both the equipment and the building are destroyed in a fire, and Elaine collects insurance proceeds equal to the assets’ FMV.
a. What is the tax treatment of these two transactions?
b. Assume that Elaine is only able to collect $3,000 from the insurance company for the equipment loss. What is the tax treatment of the two transactions (assume the basis and insurance reimbursement remain the same for the building).

83) The following gains and losses pertain to Jimmy’s business assets that qualify as Sec. 1231 property. Jimmy does not have any nonrecaptured net Sec. 1231 losses from previous years, and the portion of gain recaptured as ordinary income due to the depreciation recapture provisions has been eliminated.

Gain due to insurance reimbursement for hurricane damage $24,000
Loss due to condemnation $21,000
Gain due to the sale of Sec. 1231 property $18,000

Describe the specific tax treatment of each of these transactions.

84) The following gains and losses pertain to Arnold’s business assets that qualify as Sec. 1231 property. Arnold does not have any nonrecaptured net Sec. 1231 losses from previous years, and the portion of gain recaptured as ordinary income due to the depreciation recapture provisions has been eliminated.

Loss from hurricane damage $25,000
Loss due to condemnation $20,000
Gain due to the sale of Sec. 1231 property $16,000

Describe the specific tax treatment of each of these transactions.

85) The following are gains and losses recognized in 2014 on Ann’s business assets that were held for more than one year. The assets qualify as Sec. 1231 property.

Gain due to insurance reimbursement for casualty $20,000
Gain due to a condemnation 30,000
Loss due to the sale of Sec. 1231 property 17,000

A summary of Ann’s net Sec. 1231 gains and losses for the previous five-year period is as follows:

Cumulative Nonrecaptured
Year Sec. 1231 Gain Sec. 1231 Loss Net 1231 Losses
2009 $5,000 $0
2010 $3,000 $3,000
2011 $17,000 $20,000
2012 $12,000 $8,000
2013 $10,000 $18,000

Describe the specific tax treatment of each of the current year transactions.

86) Network Corporation purchased $200,000 of five-year equipment on March 24, 2012. They elected to expense $60,000 of the cost under Sec. 179 in effect that year. After depreciating the equipment $28,000 in 2012 and $22,400 in 2013, the equipment was sold for $190,000.
a. What is the amount of the realized gain (or loss) on the sale?
b. How is the gain or loss taxed?

87) On June 1, 2011, Buffalo Corporation purchased and placed in service 7-year MACRS tangible property costing $100,000. On November 10, 2014, Buffalo sold the property for $102,000 after having taken MACRS $47,525 in depreciation deductions. What is the amount and character of Buffalo’s gain?

88) An unincorporated business sold two warehouses during the current year. The straight-line depreciation method was used for Building No. 1 and the accelerated method (ACRS) was used for Building No. 2. Information about those buildings is presented below.

Building No. 1 Building No. 2
Date acquired 1984 1984
Cost $510,000 $650,000
Accum. Depreciation
Straight-line 510,000
ACRS depreciation 650,000
Selling Price 750,000 825,000

How much gain from these sales should be reported as section 1231 gain and ordinary income due to depreciation recapture?

89) Jed sells an office building during the current year for $800,000. The building was purchased in 1980 for $350,000. Jed had depreciated the building under an accelerated method, but it is now fully depreciated. Jed has never had any other Sec. 1231 transactions.
a. What is the recognized gain or loss on the sale of the building and the character of the gain?
b. How will the gain be taxed?

90) Pam owns a building used in her trade or business that was placed into service in 2002. The building cost $450,000 and depreciation to date amounts to $200,000. Pam sells the building for $380,000. It is the only asset she sells this year, and she has no nonrecaptured Sec. 1231 losses. What is the amount of recognized gain and the nature of the gain? How will the gain be taxed?

91) Julie sells her manufacturing plant and land originally purchased in 1980. Accelerated depreciation had been taken on the building, but the building is now fully depreciated. Julie is in the 39.6% marginal tax bracket. Other information is as follows:

Property Original cost Total depreciation Adjusted basis Selling price
Plant $2,800,000 $2,800,000 $0 $3,000,000
Land $ 500,000 $500,000 $800,000

She has not sold any other assets this year. A review of her file indicates that the only asset dispositions in the past five years was a truck sold for a $10,000 loss last year. What are the tax consequences of the sale (type of gain; rates at which taxed)?

92) Connors Corporation sold a warehouse during the current year for $980,000. The building had been acquired in 1980 at a cost of $830,000. The building is fully depreciated.

What is the amount and nature of the gain or loss on the sale of the warehouse?

93) WAM Corporation sold a warehouse during the current year for $830,000. The building had been acquired in 1989 at a cost of $730,000 and had total straight-line depreciation of $510,000.

What is the amount and nature of the gain or loss on the sale of the warehouse?

94) Describe the tax treatment for a noncorporate taxpayer in the 39.6% marginal tax bracket who sells each of the first two assets for $500,000 and each of the second two assets for $750,000. Each asset was purchased in 2010 and is used in a trade or business. There are no other gains and losses and no nonrecaptured Section 1231 losses.

Original Basis Adjusted Basis
Land $350,000 $350,000
Equipment $600,000 $450,000
Equipment $600,000 $500,000
Building $550,000 $450,000

95) Jacqueline dies while owning a building with a $1,000,000 FMV. The building is classified as Sec. 1245 property acquired in 1985 for $850,000. Cost-recovery deductions of $850,000 have been claimed. Pam inherits the property.
a. What is the amount of Pam’s basis in the property?
b. What is the amount of cost-recovery deductions that Pam must recover if she immediately sells the building?

96) Melissa acquired oil and gas properties for $600,000. During 2013 she elected to expense the $180,000 of IDC. Total depletion allowed was $50,000. During the current year, Melissa sells the property for $700,000.
a. What is the amount of and nature of her gain using the facts above?
b. What is the amount of and nature of her gain assuming that she sold the property for $850,000?

97) Pete sells equipment for $15,000 to Marcel, his son. The equipment cost $20,000 and has accumulated depreciation of $12,000. Marcel will use the equipment in his business.
a. What is the amount and character of Pete’s gain on the sale?
b. How does your answer change if the sales price is $22,000?

98) What is the purpose of Sec. 1245 and what is its significance?

99) Jesse installed solar panels in front of his office building in 2013. The panels are not attached to the building. After using the solar panels for 13 months, Jesse decided to replace them with a newer model to obtain a greater savings on electricity costs. Jesse sold the old solar panels for an amount greater than his original purchase price. What tax issues should be considered with purchase, use and sale of the original solar panels?

100) Brian purchased some equipment in 2014 which he intends to use in his trade or business. He approaches you to assist him in planning for the ultimate disposal of the asset—whether it be by sale, charitable contribution to the local university, gift to his sister for use in her business, or some other means. Discuss the tax considerations.

Chapter 14 Special Tax Computation Methods, Tax Credits, and Payment of Tax

1) The alternative minimum tax applies to individuals, corporations, estates, and trusts.

2) The alternative minimum tax applies to individuals only if it exceeds the taxpayer’s regular income tax liability.

3) For purposes of the AMT, the standard deduction, but not the personal and dependency exemptions, is allowed.

4) An example of an AMT tax preference is the excess of MACRS depreciation on equipment over depreciation computed by using the the 150% declining balance method.

5) All tax-exempt bond interest income is classified as an AMT preference.

6) Casualty and theft losses in excess of 10% of AGI are deductible for AMT purposes.

7) Medical expenses in excess of 10% of AGI are deductible when computing AMT.

8) For purposes of the AMT, only the foreign tax credit and refundable personal credits are allowed to reduce the tentative minimum tax.

9) A taxpayer who paid AMT in prior years, but is not subject to the AMT in the current year, may be entitled to an AMT credit against his regular tax liability in the current year.

10) If an individual is classified as an employee, the employer is required to withhold the employee’s share of the FICA tax and to provide a matching amount.

11) Self-employed individuals are subject to the self-employment tax if their net earnings are more than the personal exemption amount.

12) One-half of the self-employment tax imposed is allowed as a for AGI deduction.

13) If an individual is an employee and also has self-employment income, the maximum tax base for computing self-employment tax is reduced by the wages that are subject to the FICA tax.

14) A self-employed individual has earnings from his business of $300,000. For the earnings in excess of the $117,000, he will only have to pay the 2.9% Medicare tax.

15) When a husband and wife file a joint return and both have self-employment income, the self-employment tax must be computed separately.

16) Nonrefundable credits may offset tax liability but may not result in additional payments to the taxpayer.

17) The child and dependent care credit provides relief for working taxpayers who pay for care for younger children or an incapacitated dependent or spouse.

18) For purposes of the child and dependent care credit, qualifying employment-related expenses cannot include payments to a relative.

19) For purposes of the limitation on qualifying expenses for the child and dependent care credit, a spouse who is either a full-time student or is incapacitated is deemed to have earned income of $250 per month, or $500 per month if there are two or more qualifying individuals in the household.

20) The adoption credit based on qualified adoption expenses is generally allowed in the year the adoption is finalized.

21) Taxpayers with income below phase-out amounts are allowed a child credit of $1,000 for each qualifying child under age 17.

22) Qualified tuition and related expenses eligible for the American Opportunity Tax Credit are limited to those incurred the first two years of postsecondary education.

23) Brad and Shelly’s daughter is starting her freshman year of college. Brad and Shelly will be able to claim the American Opportunity Tax Credit for a percentage of the cost of tuition and room and board.

24) To claim the Lifetime Learning Credit, a student must take at least one-half of a full-time course load during the year.

25) The qualified retirement savings contributions credit is based on a maximum contribution of $2,000.

26) In lieu of a foreign tax credit, a taxpayer may elect to take a deduction for foreign taxes paid or accrued.

27) The foreign tax credit is equal to the smaller of foreign taxes paid or accrued in the tax year or the portion of the U.S. income tax liability attributable to the income earned in all foreign countries.

28) The general business credits are refundable credits.

29) A credit for rehabilitation expenditures is available to a business for the purchase price of a building originally placed in service before 1936.

30) The nonrefundable disabled access credit is available to eligible small businesses for expenditures incurred to make existing business facilities accessible to disabled individuals.

31) Research expenses eligible for the research credit include costs that are incident to the development or improvement of a product or component.

32) A taxpayer’s tentative minimum tax exceeds his net income tax so he will be paying the alternative minimum tax this year. The taxpayer has a sole proprietorship through which he has earned general business credits. The taxpayer can reduce his AMT to the extent of his general business credits.

33) The earned income credit is refundable only if a tax has been withheld.

34) The earned income credit is available only to taxpayers with qualifying children.

35) The health insurance premium assistance credit is designed to help lower and middle income taxpayers who purchase their own health insurance insurance directly from an insurance company or through a state or federal exchange.

36) If an employee has more than one employer during the year, all employers must withhold federal income taxes but only one employer must withhold FICA tax.

37) If estimated tax payments equal or exceed 100% of the actual tax liability for the prior year, there is generally (assuming AGI less than or equal to $150,000) no penalty for underpayment of estimated taxes.

38) Bob’s income can vary widely from year-to-year because much of his compensation comes from sales commissions and bonuses. It generally is in the $200,000 to $300,000 range. To minimize the risk of underpayment penalties for estimated tax he should pay in, through payroll withholding and estimated tax payments, 100% of the prior year tax liability.

39) Nonrefundable personal tax credits are allowed against the taxpayer’s tax liability before other credits are claimed.

40) Jake and Christina are married and file a joint return for 2014 with taxable income of $100,000 and tax preferences and adjustments of $20,000 for AMT purposes. Their regular tax liability is $16,713. What is the amount of their total tax liability?
A) $6,859
B) $9,854
C) $16,713
D) $26,567

41) In computing the alternative minimum taxable income, no deduction is allowed for
A) alimony.
B) moving expenses.
C) personal exemptions.
D) individual retirement account contributions.

42) Harley’s tentative minimum tax is computed by multiplying the AMT tax rates by her
A) taxable income.
B) alternative minimum tax base.
C) alternative minimum taxable income.
D) tentative alternative taxable income.

43) In 2014 Charlton and Cindy have alternative minimum taxable income of $130,000 and file a joint return. For purposes of computing the alternative minimum tax, their exemption is
A) $0.
B) $7,900.
C) $52,800.
D) $82,100.

44) Reva and Josh Lewis had alternative minimum taxable income of $350,000 in 2014 and file a joint return. For purposes of computing the alternative minimum tax, their exemption is
A) $33,725.
B) $52,800.
C) $48,375.
D) $82,100.

45) In computing AMTI, tax preference items are
A) excluded.
B) added only.
C) subtracted only.
D) either added or subtracted.

46) In computing AMTI, adjustments are
A) limited.
B) added only.
C) subtracted only.
D) either added or subtracted.

47) All of the following are allowable deductions under the alternative minimum tax except
A) charitable contributions.
B) gambling losses.
C) qualified housing interest.
D) personal property taxes.

48) Suzanne, a single taxpayer, has the following tax information for the current year.
• Charitable contribution of real property with a FMV of $25,000 (adjusted basis $20,000) for which a $25,000 deduction was taken.
• Research and experimental expenses of $40,000 deducted in full for regular tax.

Suzanne’s total tax preferences and adjustments equals
A) $5,000.
B) $36,000.
C) $41,000.
D) $45,000.

49) Rex has the following AMT adjustments:
-Depreciation of real property acquired in 1996 using MACRS is $22,000 while depreciation for AMT purposes is $15,000.
-R&E expenditures amounting to $60,000 are expensed.

The net adjustment is
A) $7,000.
B) $54,000.
C) $61,000.
D) $67,000.

50) Lavonne has a regular tax liability of $13,356 on taxable income of $70,000. She also has tax preferences of $25,000 and positive adjustments attributable to limitations on itemized deductions of $15,000. Lavonne is single and takes a $3,950 personal exemption for herself only. Lavonne’s alternative minimum tax for 2014 is
A) $0.
B) $2,543.
C) $16,271.
D) none of the above.

51) Self-employment taxes include components for
A) Medicare hospital insurance and SUTA.
B) Social Security and FUTA.
C) FICA and FUTA.
D) Social Security and Medicare hospital insurance.

52) A wage cap does not exist for which of the following self-employment taxes?
A) Social Security tax
B) FICA
C) FUTA
D) Medicare hospital insurance

53) If an individual is liable for self-employment tax, a portion of the self-employment tax is
A) a for AGI deduction.
B) from AGI as an itemized deduction.
C) a Schedule C business expense.
D) nondeductible.

54) John has $55,000 net earnings from a sole proprietorship. John is also employed by a major corporation and is paid $25,000. John’s self-employment tax (rounded) for 2014 is
A) $3,886.
B) $4,208.
C) $7,771.
D) $8,415.

55) Joe has $130,000 net earnings from a sole proprietorship. Joe’s self-employment tax (rounded) for 2014 is
A) $17,990.
B) $18,368.
C) $19,890.
D) None of the above.

56) Hong earns $127,300 in her job as a physician’s assistant. She also has her own business selling cosmetics. This business generated $10,000 of earnings. What is Hong’s self-employment tax for 2014?
A) $268
B) $290
C) $1,412
D) $1,530

57) Ava has net earnings from self-employment of $125,000. She also earned salary of $170,000 from a job held earlier in the year. How much Additional Medicare Tax will be owed on the self-employment income?
A) $0
B) $769
C) $855
D) $3,625

58) All of the following statements regarding self-employment income/tax are true except:
A) The self-employment tax is imposed on net earnings from self-employment over $400.
B) Self-employment tax is computed separately for married individuals filing joint returns.
C) Independent contractors are subject to self-employment tax on the amount of net earnings from the self-employment activity.
D) Employees who have a business in addition to their regular employment are not subject to the self-employment tax since FICA is withheld on their wages.

59) All of the following are self-employment income except
A) net income of a sole proprietorship.
B) dividends received by a corporate shareholder.
C) fees received for serving as a director of a corporation.
D) distributive share of partnership income from a partnership operating a business.

60) Nonrefundable tax credits
A) only offset a taxpayer’s tax liability.
B) may only be used if the taxpayer is receiving a refund.
C) can be carried back two years and carried forward 15 years if they exceed tax liability in the current year.
D) allow the excess over the taxpayer’s tax liability to be paid to the taxpayer.

61) Refundable tax credits
A) only offset a taxpayer’s tax liability.
B) may only be used if the taxpayer is receiving a refund.
C) have all expired but may be reinstated with new tax legislation.
D) allow the excess over the taxpayer’s tax liability to be paid to the taxpayer.

62) Which statement is correct?
A) Tax credits reduce tax liability on a dollar-for-dollar basis.
B) Tax deductions reduce tax liability on a dollar-for-dollar basis.
C) The benefit of a tax credit depends on the taxpayer’s marginal tax rate.
D) Tax deductions are less valuable for high-income taxpayers than for low-income taxpayers.

63) Max and Alexandra are married and incur $5,500 of qualifying expenses to care for their two children, ages 2 and 5. Max’s earned income is $35,000 and Alexandra’s earnings from a part-time job are $5,000. What is the amount of the qualifying expenses for purposes of computing the child and dependent care credit?
A) $3,000
B) $5,000
C) $5,500
D) $6,000

64) Marvin and Pamela are married, file a joint return, and have two children, ages 9 and 11. Their combined AGI is $65,000. Marvin’s earned income is $40,000; Pamela’s is $25,000. They incur $6,500 of child-care expenses to enable them to be employed during the current year. Their child and dependent care credit is
A) $1,200.
B) $1,300.
C) $1,800.
D) $6,000.

65) Bud and Stella are married, file a joint return, and have one child, age 3. Their combined AGI is $35,000. Bud and Stella incur $3,500 of child-care expenses during the current year. The child and dependent care credit is
A) $600.
B) $700.
C) $750.
D) $875.

66) Mark and Stacy are married, file a joint return, and have one child, age 3. Their combined AGI is $55,000. Mark and Stacy incur $3,500 of child-care expenses during the current year. Mark’s employer reimburses him $1,500 under a qualified dependent care assistance plan. The child and dependent care credit is
A) $300.
B) $600.
C) $700.
D) $1,200.

67) Evan and Barbara incurred qualified adoption expenses in 2013 of $6,000, and then incurred $7,500 more in 2014 when the adoption of their child became final. Their 2013 AGI was $110,000 and their 2014 AGI was $100,000. The allowable adoption credit is
A) $13,190 in 2014.
B) $13,500 in 2014.
C) $6,000 in 2013 and $7,190 in 2014.
D) $6,000 in 2013 and $7,500 in 2014.

68) Lee and Whitney incurred qualified adoption expenses in 2013 of $2,000, and then incurred $7,000 more in 2014 when the adoption of their child became final. Their 2013 AGI was $120,000 and their 2014 AGI was $140,000. The allowable adoption credit is
A) $ 7,000 in 2014.
B) $ 9,000 in 2014.
C) $13,190 in 2014.
D) $2,000 in 2013 and $7,000 in 2014.

69) Marguerite and Josephus have two children, ages 13 and 10. Their modified AGI is $120,500.What is their child tax credit?
A) $900
B) $1,000
C) $2,000
D) None of the above.

70) The maximum amount of the American Opportunity Tax Credit for each qualified student is
A) $1,500.
B) $2,000.
C) $2,500.
D) $3,000.

71) Jeffery and Cassie, who are married with modified AGI of $90,000, are sending their son to his first year of college. Their total tuition and related payments during 2014 amounted to $5,500. They have not taken advantage of any other type of tax benefit related to educational expenses. Their American Opportunity Tax Credit for 2014 is
A) $1,500.
B) $2,000.
C) $2,500.
D) $5,000.

72) Timothy and Alice, who are married with modified AGI of $90,000, are sending their daughter to her first year of college. Their total tuition and related payments during the year amounted to $13,000. In addition, their daughter received a $10,000 scholarship to cover tuition. They have not taken advantage of any other type of tax benefit related to educational expenses. Their American Opportunity Tax Credit is
A) $2,000.
B) $2,250.
C) $2,500.
D) $3,000.

73) Joe, who is single with modified AGI of $84,000, is sending his son to his first year of college. The total tuition and related payments during the year amounted to $18,000. Joe has not taken advantage of any other type of tax benefit related to educational expenses. His American Opportunity Tax Credit is
A) $ 0.
B) $1,000.
C) $1,500.
D) $2,500.

74) In the fall of 2014, James went back to school to earn a master of accountancy degree. He incurred $7,000 of qualified educational expenses and his modified AGI for the year was $40,000. His Lifetime Learning Credit is
A) $1,000.
B) $1,400.
C) $1,800.
D) $2,500.

75) All of the following statements are true regarding the Lifetime Learning Credit except which one?
A) In order to qualify for the Lifetime Learning Credit, a student must be enrolled 1/2 time.
B) Qualifying expenses include those for tuition and related fees but not for room and board.
C) The Lifetime Learning credit may be claimed for any degree or nondegree course at a college or university that helps an individual acquire or improve their job skills.
D) The Lifetime Learning credit and the American Opportunity Tax credit may not be taken in the same tax year with respect to the same student’s tuition and related fees.

76) Which of the following is not a qualifying property for the residential energy efficient property (REEP) credit?
A) geothermal heat pumps
B) residential wind property
C) metal or asphalt roofs with special coatings
D) solar hot water heaters

77) Kerry is single and has AGI of $25,000 in 2014. During the year he contributes $5,000 to his Roth IRA. What is the amount of qualified retirement savings contributions credit to which he is entitled?
A) $200
B) $400
C) $800
D) $1,000

78) A corporation has $100,000 of U.S. source taxable income and $300,000 of foreign source taxable income from countries X and Y for a total worldwide taxable income of $400,000. Countries X and Y levy a total of $60,000 in foreign taxes upon the foreign source taxable income. U.S. taxes before credits are $140,000. The foreign tax credit limitation is
A) $35,000.
B) $60,000.
C) $80,000.
D) $105,000.

79) Carlotta, Inc. has $50,000 foreign-source income and $150,000 worldwide income. Its U.S. tax on its worldwide income is $42,000 and it paid foreign taxes of $16,000. What is the corporation’s foreign tax credit?
A) $2,000
B) $14,000
C) $16,000
D) $42,000

80) Carlotta, Inc. has $50,000 foreign-source income and $150,000 worldwide income. Its U.S. tax on its worldwide income is $42,000 and it paid foreign taxes of $12,000. What is the corporation’s foreign tax credit?
A) $4,000
B) $12,000
C) $14,000
D) $42,000

81) Current year foreign taxes paid exceed the ceiling based on U.S. tax attributable to foreign source income. These excess foreign tax credits
A) are lost.
B) can be carried forward ten years only.
C) can be carried back one year and then carried forward ten years.
D) can be carried back one year and then carried forward twenty years.

82) The general business credit includes all of the following with the exception of
A) research credit.
B) disabled access credit.
C) foreign tax credit.
D) credit for rehabilitation expenditure.

83) Octo Corp. purchases a building for use in its business at a cost of $100,000. The building was built in 1930 and needs substantantial work so it can be used. Octo spends $150,000 on qualifying renovations. Octo will earn a rehabilitation credit of
A) $15,000.
B) $25,000.
C) $5,000.
D) $30,000.

84) Runway Corporation has $2 million of gross receipts in the preceding year. For purposes of the disabled access credit, what is the maximum number of full-time employees the corporation can have in the preceding year?
A) 10
B) 15
C) 20
D) 30

85) Kors Corporation has 30 employees and $5 million of gross receipts. Kors spends $15,000 for qualified structural improvements for access for the disabled. The disabled access credit is
A) $5,000.
B) $5,125.
C) $0.
D) $7,500.

86) Which of the following expenditures will qualify as a research expenditure for purposes of the research credit?
A) An ice cream producer develops a new type of packaging that will keep ice cream frozen while driving home from the grocery store.
B) An ice cream producer develops a new design on the package that will be more pleasing to the culture of a new market it is entering.
C) An ice cream producer develops a new marketing campaign to introduce its brand to a new region of the country it is entering.
D) All of the above qualify as research expenditures for the research credit.

87) ChocoHealth Inc. is developing new chocolate products providing abundant health benefits at low calorie counts. For the past three years, it spent an average of $500,000 per year on research. ChocoHealth has spent $900,000 on research. The company has elected the simplified credit. For the current year, it will earn a research credit of
A) $54,000.
B) $126,000.
C) $80,000.
D) $91,000.

88) The general business credit may not exceed the net income tax minus the greater of the tentative minimum tax or
A) 20% of the net regular tax liability above $20,000.
B) 25% of the net regular tax liability above $20,000.
C) 20% of the net regular tax liability above $25,000.
D) 25% of the net regular tax liability above $25,000.

89) Dwayne has general business credits totaling $30,000 before limitation. His regular tax liability is $83,000 and his tentative minimum tax is $79,000. What amount of general business credit can Dwayne take this year?
A) $4,000
B) $14,500
C) $25,000
D) $30,000

90) Layla earned $20,000 of general business credits from her sole proprietorship. Her regular tax liability is $45,000, and her tentative minimum tax is $49,000. During the current year Layla will apply general business credits of
A) $0.
B) $4,000.
C) $20,000.
D) $45,000.

91) Individuals without children are eligible for the earned income credit if they meet all the following conditions except
A) file married filing separately.
B) at tax year end are at least age 25 but not more than age 64.
C) for the tax year are not a dependent of another taxpayer.
D) the United States is their principal place of residence for more than one-half of the tax year.

92) A taxpayer will be ineligible for the earned income credit if he or she has disqualified investment income of more than $3,350 in 2014. Disqualified income includes all the following except
A) net capital gains.
B) tax-exempt interest.
C) net rental income.
D) self-employment income.

93) Which one of the following is a refundable credit?
A) earned income credit
B) child and dependent care credit
C) lifetime learning credit
D) credit for the elderly and disabled

94) In 2014 Rita is divorced with one child. She has AGI of $19,500 resulting in a federal income tax liability of $250 and an earned income credit of $3,038. She has had $550 of federal income taxes withheld from her pay. Rita will receive a federal income refund of
A) $550.
B) $300.
C) $3,038.
D) $3,338.

95) Which of the following statements is incorrect regarding qualifying criteria for the health insurance premium tax credit?
A) The insurance policy must be purchased directly from an insurance company.
B) Household income must be below designated levels.
C) The taxpayer cannot have access to affordable essential coverage through an employer.
D) The individual may not be eligible as a dependent of another taxpayer.

96) An individual with AGI equal to or less than $150,000 in the prior year may generally avoid penalties for underpayment of estimated tax in each of the following cases with the exception of
A) estimated tax is less than $1,500.
B) 90% of the tax due for the current year is paid.
C) 90% of the tax due for the current year is paid when computed on an annualized basis.
D) 100% of the actual tax liability for the prior year is paid.

97) With respect to estimated tax payments for a taxpayer with AGI of $150,000 or lower in the prior year, all of the following are generally true with the exception of
A) no penalty is imposed if the estimated tax is less than $1,000.
B) no penalty is imposed if the individual has no tax liability for the prior year.
C) no underpayment penalty is imposed if the estimated payments total at least 90% of the tax due for the current year.
D) no underpayment penalty is imposed if the estimated payments total at least 90% of the actual tax liability for the prior year.

98) If a taxpayer’s AGI is greater than $150,000, no penalty will be imposed if the taxpayer pays estimated tax payments in 2014 equal to what percentage of 2013’s income tax liability?
A) 100%
B) 90%
C) 110%
D) 120%

99) Annie has taxable income of $100,000, a regular tax liability of $21,176, a positive AMT adjustment due to limitations on itemized deductions of $20,000, and tax preferences of $25,000 in 2014. Annie is single and takes a $3,950 personal exemption for herself only. What is Annie’s AMT for 2014?

100) George and Meredith who are married, have a regular tax liability of $22,963, taxable income of $125,000, tax preferences of $25,000, and positive adjustments attributable to limitations on itemized deductions of $18,700 this year. They claim $11,850 of personal and dependency exemptions for themselves and their 20-year old dependent daughter. What is George and Meredith’s alternative minimum tax for 2014?

101) Sonya started a self-employed consulting business in the last part of the year and earned $40,000. She had been employed as manager in a consulting firm prior to starting her own business and had earned $125,000.
(a) What is Sonya’s self employment tax for 2014?
(b) What is Sonya’s deduction for AGI for the SE tax?

102) Lara started a self-employed consulting business in the last part of the year and earned $60,000 of self- employment income. She had been employed as manager in a consulting firm prior to starting her own business and had earned $175,000.
(a) What is Lara’s Additional Medicare Tax for 2014, if any?
(b) What is Lara’s deduction for AGI for the Additional Medicare Tax?

103) Sam and Megan are married with two dependent children. Both Sam and Megan work, earning $50,000 and $55,000, respectively. Their AGI totals $110,000. They incur $6,500 of qualifying child care expenses of which $2,500 is reimbursed by Megan’s dependent care program at work.

What is the amount of their child and dependent care credit?

104) Nick and Nicole are both 68 years old and file a joint return. They have AGI of $15,000 and receive nontaxable Social Security payments of $4,200 during the current year. What is the amount of the tax credit for the elderly?

105) Tyler and Molly, who are married filing jointly with $210,000 of AGI in 2014, incurred the following expenses in their efforts to adopt a child:

2013: Attorney’s fees $4,500
2014: Attorney’s fees $4,500
Court costs $1,000
Adoption fees $5,500

The adoption was finalized in 2014. What is the amount of the allowable adoption credit in 2014?

106) Tom and Anita are married, file a joint return with an AGI of $165,000, and have one dependent child, Tim, who is a first-time freshman in college. The following expenses are incurred and paid in 2014:

Tuition, fees and textbooks $11,000
Room and Board $5,000

What is the maximum education credit allowed to Tom and Anita?

108) Bonjour Corp. is a U.S.-based corporation with operations in France. The operations in France generated $200,000 of taxable income whereas worldwide operations generated total taxable income of $2,000,000. Its U.S. tax liability before credits is $680,000. Determine the allowable foreign tax credit assuming taxes paid to France as follows:
a. $40,000.
b. $80,000.

109) During the year, Jim incurs $50,000 of rehabilitation expenditures in connection with a certified historic structure used in his business. The adjusted basis of the structure was $40,000 at the time the rehabilitation began.
a. What is the amount, if any, of his rehabilitation credit for the year?
b. What is the depreciable basis of the rehabilitation expenditures?

110) Hawaii, Inc., began a child care facility for its employees during the year. The corporation incurred the following expenses:

Rent of facility $30,000
Leasehold improvements 50,000
Equipment, toys, etc. 15,000
Salaries of child care employees 25,000
Other operating expenses of facility 18,000
Subtotal $138,000
Qualified child care referral fees 10,000
Total expenses $148,000

What is the amount of Hawaii’s credit for employer-provided child care?

111) Ivan has generated the following taxes and credits this year:

Regular tax $38,000
Tentative minimum tax 28,000
Dependent care credit 1,200
American Opportunity credit 800
Research credit 20,000
Rehabilitation credit 15,000

How much general business credit will he apply to the current year tax liability?

112) Beth and Jay project the following taxes for the current year:

Regular tax $50,000
AMT 10,000
Self employment tax 12,000

How much in estimated tax payments (including withholding from wages and quarterly estimated payments) should the taxpayers pay this year in order to avoid underpayment penalties under the following assumptions regarding the preceding tax year?

a. Preceding tax year—AGI of $140,000 and total taxes of $36,000.
b. Preceding tax year—AGI of $155,000 and total taxes of $50,000.

113) Discuss tax-planning options available for expenses incurred for child and dependent care.

114) Describe the differences between the American Opportunity Tax credit and the Lifetime Learning credit.

115) Assume you plan to volunteer at a Volunteer Income Tax Assistance (VITA) program for low income taxpayers and wish to prepare so you can help your clients achieve the maximum tax savings. Briefly discuss tax credits with which you should become familiar.

116) Discuss the tax planning techniques available to a U.S. citizen who is on a foreign job assignment.

117) Discuss when Form 6251, Alternative Minimum Tax, must be filed.

ACC 555 Week 11 Final Exam – Strayer University New

ACC/555 Week 11 Final Exam – Strayer New

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Chapters 7 Through 14

Prentice Hall’s Federal Taxation 2015 Comprehensive, 28e (Pope)
Chapter 7 Itemized Deductions

1) For individuals, all deductible expenses must be classified as deductions for AGI or deductions from AGI.

2) In 2014, medical expenses are deductible as a from AGI deduction to the extent that they exceed 7.5 percent of the taxpayer’s AGI.

3) Medical expenses paid on behalf of an individual who could be the taxpayer’s dependent except for the gross income or joint return tests are deductible as itemized deductions.

4) Medical expenses incurred on behalf of children of divorced parents are deductible by the parent who pays the expenses but only if that parent also is entitled to the dependency exemption.

5) The definition of medical care includes preventative measures such as routine physical examinations.

6) Due to stress on the job, taxpayer Charlie began to experience chest pains. In order to relax and relieve the pains, he and his spouse went on an ocean cruise. The cost of the cruise to alleviate this medical condition is tax deductible.

7) Expenditures for a weight reduction program are deductible if recommended by a physician to treat a specific medical condition such as hypertension caused by excess weight.

8) In order for a taxpayer to deduct a medical expense, the amount must be paid to a certified medical doctor (M.D.).

9) Jeffrey, a T.V. news anchor, is concerned about the wrinkles around his eyes. Because it is job-related, the cost of a face lift to eliminate these wrinkles is a deductible medical expense.

10) Expenditures for long-term care insurance premiums qualify as a medical expense deduction subject to an annual limit based upon the age of an individual.

11) Capital expenditures for medical care which permanently improve or better the taxpayer’s property are deductible to the extent the cost exceeds the increase in fair market value to the property attributable to the capital expenditure.

12) Expenditures incurred in removing structural barriers in the home of a physically handicapped individual are deductible only to the extent the cost exceeds the increase in fair market value to the property attributable to the capital expenditure.

13) If the principal reason for a taxpayer’s presence in an institution is the need and availability of medical care, the entire cost of lodging and meals is considered qualified medical expenditures.

14) A medical expense is generally deductible only in the year in which the expense is actually paid.

15) If a prepayment is a requirement for the receipt of the medical care, the payment is deductible in the year paid rather than the year in which the care is rendered.

16) If a medical expense reimbursement is received in a year after a deduction has been taken on a previous year’s return, the previous year’s return must be amended to eliminate the reimbursed expense.

17) Assessments or fees imposed for specific privileges or services are not deductible as taxes.

18) Foreign real property taxes and foreign income taxes are not deductible as itemized deductions.

19) A personal property tax based on the weight of the property is deductible.

20) Assessments made against real estate for the purpose of funding local improvements are not deductible in the year paid but rather should be added to the cost basis of the property.

21) Self-employed individuals may deduct the full self-employment taxes paid as a for AGI deduction.

22) Finance charges on personal credit cards are considered interest and are, therefore, deductible.

23) In general, the deductibility of interest depends on the purpose for which the indebtedness is incurred.

24) Interest expense incurred in the taxpayer’s trade or business is deductible as a for AGI deduction without limitation if the taxpayer materially participates in the business.

25) Investment interest expense which is disallowed because it exceeds the taxpayer’s net investment income may be carried over and treated as incurred in subsequent years.

26) Investment interest includes interest expense incurred to purchase tax-exempt securities.

27) Taxpayers may elect to include net capital gain as part of investment income.

28) Taxpayers may not deduct interest expense on most personal debt, including credit card debt, car loans, and other consumer debt.

29) Qualified residence interest consists of both acquisition indebtedness and home equity interest.

30) Acquisition indebtedness for a personal residence includes debt incurred to substantially improve the residence.

31) A taxpayer is allowed to deduct interest expense incurred on home equity indebtedness limited to the lesser of $100,000 or the home equity (FMV of the residence less the acquisition indebtedness).

32) While points paid to purchase a residence are deductible as interest in the period paid, points associated with the refinancing of a residence must be amortized and deducted over the life of the loan.

33) Christopher, a cash basis taxpayer, borrows $1,000 from ABC Bank by issuing a 3-month note on December 1, 2014. Christopher receives $940 but must repay $1,000 on the due date. The amount of interest expense deductible in 2014 is $20.

34) Charitable contributions made to individuals are deductible if the individuals can show extreme financial need.

35) For charitable contribution purposes, capital gain property includes property which, if sold, would produce a long-term capital gain.

36) A charitable contribution deduction is allowed for the FMV of services rendered to a qualified charitable organization.

37) A charitable contribution in excess of the deduction limit for one taxable year can be carried forward five years.

38) If a taxpayer makes a charitable contribution to a university and in return receives the right to purchase tickets to athletic events, the taxpayer may deduct only 80% of the payment.

39) An accrual-basis corporation can only deduct contributions made by year-end.

40) Corporate charitable deductions are limited to 10% of the corporation’s taxable income for the year.

41) Legal fees for drafting a will are generally deductible.

42) A taxpayer can deduct a reasonable amount for small out-of-pocket (i.e. cash) donations.

43) Van pays the following medical expenses this year:
• $1,500 for doctor bills for Van’s son who is claimed as a dependent by Van’s former spouse.
• $300 for Van’s eyeglasses.
• $900 for Van’s dental work.
• $3,800 for Van’s face lift. Van, a newscaster, is worried about the wrinkles around his eyes.

How much can Van include on his return as qualified medical expenses before limitation?
A) $1,200
B) $2,400
C) $2,700
D) $6,500

44) All of the following are deductible as medical expenses except
A) vitamins and health foods that improve a taxpayer’s general health.
B) payments for a vision exam and contact lenses.
C) payments to a hospital for laboratory fees and X-rays for diagnosis of a medical problem.
D) cosmetic surgery necessary to correct a deformity arising from a congenital abnormality.

45) All of the following payments for medical items are deductible with the exception of the payment for
A) insulin.
B) general appointment for teeth cleaning.
C) acupuncture for specific medical purposes.
D) nonprescription medicine for treatment of a specific medical condition.

46) In 2014 Sela traveled from her home in Flagstaff to San Francisco to seek medical care. Because she was unable to travel alone, her mother accompanied her. Total expenses included:

Hotel room en route ($150 × 2 rooms × 3 nights) $900
Mileage, 1,000 miles
Doctors bills in San Francisco 1,600

The total medical expenses deductible before the 10% limitation are
A) $1,600.
B) $2,135.
C) $2,500.
D) $2,460.

47) Leo spent $6,600 to construct an entrance ramp and to widen doorways in his personal residence to make the home accessible for his wife, who is disabled and confined to a wheelchair. The $6,600 expenditure increased the value of the residence by $2,000. How much of the $6,600 is a deductible medical expense (before considering limits based on AGI)?
A) $0
B) $2,000
C) $4,600
D) $6,600

48) Linda had a swimming pool constructed at her house. Her physician advised and prescribed to her that the pool would slow the effects of her degenerative disease. The pool was not suitable for recreational use. Prior to the construction of the pool, the fair market value of her house was $172,000. After the construction of the pool, the appraised fair market value of the house was $181,000. The cost of the pool was $13,000. What is the amount of Linda’s qualified medical expense (before considering limits based on AGI)?
A) $0
B) $4,000
C) $9,000
D) $13,000

49) Alan, who is a security officer, is shot while on the job. As a result, Alan suffers from a chronic leg injury and must use a wheelchair and undergo therapy to regain and retain strength. Alan’s physician recommends that he install a whirlpool bath in his home for therapy. During the year, Alan makes the following expenditures:

Wheelchair $ 1,200
Whirlpool bath 2,000
Maintenance of the whirlpool 250
Increased utility bills associated with whirlpool 450
Entrance ramp, various home modifications 7,200

A professional appraiser tells Alan that the whirlpool has increased the value of his home by $1,000. Alan’s deductible medical expenses (before considering limitations based on AGI) will be
A) $6,000.
B) $10,100.
C) $7,000.
D) $7,700.

50) Mitzi’s medical expenses include the following:

Medical premiums $10,850
Doctors fees 2,000
Hospital fees 3,350
Prescription drugs 600
Eyeglasses 350
General purpose vitamins 100

Mitzi’s AGI for the year is $33,000. She is single and age 49. None of the medical costs are reimbursed by insurance. After considering the AGI floor, Mitzi’s medical expense deduction is
A) $12,900.
B) $13,850.
C) $14,675.
D) $16,325.

51) Caleb’s medical expenses before reimbursement for the year include the following:

Medical premiums $11,000
Doctors, hospitals 3,500
Prescriptions 600

Caleb’s AGI for the year is $50,000. He is single and age 58. Caleb also receives a reimbursement for medical expenses of $1,000. Caleb’s deductible medical expenses that will be added to the other itemized deduction will be
A) $10,350.
B) $9,100.
C) $14,500.
D) $15,100.

52) A review of the 2014 tax file of Gregory, a single taxpayer who is age 40, provides the following information regarding Gregory’s 2014 tax status:

Adjusted gross income $40,000
Medical expenses (before percentage limit) 5,000
Itemized deductions other than medical 5,400
2014 potential standard deduction 6,200

In 2015, Gregory receives a reimbursement for last year’s medical expenses of $1,200. As a result, Gregory must
A) include $200 in gross income for 2015.
B) include $1,200 in gross income for 2015.
C) reduce 2015’s medical expenses by $1,200.
D) amend the 2014 return.

53) Mr. and Mrs. Thibodeaux, who are filing a joint return, have adjusted gross income of $75,000. During the tax year, they paid the following medical expenses for themselves and for Mrs. Thibodeaux’s mother, Mrs. Watson (age 63). Mrs. Watson provided over one-half of her own support.

Prescription drugs for Mr. Thibodeaux $3,600
General vitamins for Mrs. Thibodeaux $ 100
Doctor bill for Mr. Thibodeaux $1,800
Doctor bill for Mrs. Thibodeaux $4,000
Hospital bill for Mrs. Watson $2,200

Mr. and Mrs. Thibodeaux received no reimbursement for the above expenditures. What is the amount of their deductible itemized medical expenses?
A) $1,900
B) $2,000
C) $4,100
D) $9,400

54) Mr. and Mrs. Gere, who are filing a joint return, have adjusted gross income of $50,000. During the tax year, they paid the following medical expenses for themselves and for Mrs. Gere’s mother, Mrs. Williams. The Gere’s could claim Mrs. Williams as their dependent, but she has too much gross income.

Insulin for Mr. Gere $1,000
Health insurance premiums for Mrs. Gere $3,100
Hospital bill for Mrs. Williams $5,200
Doctor bill for Mrs. Gere $4,000

Mr. and Mrs. Gere received no reimbursement for the above expenditures. What is the amount of their deductible itemized medical expenses?
A) $5,200
B) $8,300
C) $4,300
D) $13,300

55) The following taxes are deductible as itemized deductions with the exception of
A) state income taxes.
B) federal income taxes.
C) foreign real property taxes.
D) local personal property taxes.

56) Matt paid the following taxes in 2014:

Real estate taxes on rental property he owns $4,000
Real estate taxes on his own residence 3,600
Federal income taxes 8,000
State income taxes 3,400
Local city income taxes 500
State sales taxes 700

What amount can Matt deduct as an itemized deduction on his tax return?
A) $7,500
B) $11,500
C) $15,500
D) $19,500

57) In 2014, Carlos filed his 2013 state income tax return and paid taxes of $800. Also in 2014, Carlos’s employer withheld state income tax of $750 from Carlos’s salary. In 2015, Carlos filed his 2014 state income tax return and paid an additional $600 of state income tax due for 2014. How much state income tax can Carlos deduct on his 2014 federal income tax return for state income tax?
A) $1,350
B) $1,400
C) $1,550
D) $2,150

58) Doug pays a county personal property tax on his automobile of $1,500. The $1,500 includes $800 based on the weight of the car and $700 based on the value of the car. How much of the tax can Doug deduct on his tax return?
A) $0
B) $700
C) $800
D) $1,500

59) During the year Jason and Kristi, cash basis taxpayers, paid the following taxes:

State gift tax $1,000
Property tax on home in the United States 4,100
State income tax (withholdings) 3,000
Estimated federal income tax 4,500
Estimated state income tax (paid by check) 800
Special assessment by city for sidewalks and street lighting
on their street 2,000

What amount can Kristi and Jason claim as an itemized deduction for taxes on their federal income tax return in the current year?
A) $7,900
B) $8,900
C) $10,900
D) $15,400

60) In February of the current year (assume a non-leap year), Ken and Kelsey received their property tax statement for last calendar-year taxes of $1,600, which they paid to the taxing authority on March 1 of the current year. They had purchased their home on May 1 last year. What amount of property tax on this statement may they claim as an itemized deduction this year?
A) $0
B) $1,069
C) $1,074
D) $1,600

61) On September 1, of the current year, James, a cash-basis taxpayer, sells his farm to Bill, also a cash-basis taxpayer, for $100,000. James’ basis in the farm is $65,000. The real property tax year is the calendar year. Real estate taxes on the property for the year are $3,650 and are payable in November of the current year. The sales agreement does not provide for apportionment of real estate taxes between the buyer and seller. Assume Bill pays all of the real estate taxes in the current year. The effects of this sales structure will be:

A)
Taxes allocated to James Taxes allocated to Bill Effect on James’ Gain
$0 $3,650 no effect on gain

B)
Taxes allocated to James Taxes allocated to Bill Effect on James’ Gain
$3,650 $0 decrease gain by $1,220

C)
Taxes allocated to James Taxes allocated to Bill Effect on James’ Gain
$2,430 $1,220 increase gain by $2,430

D)
Taxes allocated to James Taxes allocated to Bill Effect on James’ Gain
$1,220 $2,430 increase gain by $1,220

62) On September 1, of the current year, Samuel, a cash-basis taxpayer, sells his farm to Edward, also a cash-basis taxpayer for $100,000. Samuel’s basis in the farm is $65,000. The real property tax year is the calendar year. Real estate taxes on the property for the year are $3,650 and are payable on April 1 of the following year. The sales agreement does not provide for apportionment of real estate taxes between the buyer and seller. Assume Samuel pays all of the real estate taxes prior to the sale. The effects of this sales structure will be:

A)
Taxes allocated to Samuel Taxes allocated to Edward Effect on Samuel’s Gain
$1,220 $2,430 increase gain by $1,220

B)
Taxes allocated to Samuel Taxes allocated to Edward Effect on Samuel’s Gain
$2,430 $1,220 increase gain by $2,430

C)
Taxes allocated to Samuel Taxes allocated to Edward Effect on Samuel’s Gain
$2,430 $1,220 decrease gain by $1,220

D)
Taxes allocated to Samuel Taxes allocated to Edward Effect on Samuel’s Gain
$1,220 $2,430 decrease gain by $1,220

63) Peter is assessed $630 for street improvements in front of his house. Which of the following statements is correct?
A) Peter must deduct the assessment as a tax.
B) Peter must reduce the property basis by $630.
C) Peter must increase the property basis by $630.
D) Peter can elect to deduct the $630 currently or increase the basis in the property.

64) Hui pays self-employment tax on her sole proprietorship income, supplemental Medicare surtaxes on excess wages and self-employment income (the .09% tax) and supplemental Medicare taxes on investment income (the 3.8% tax). Which of the following statements is correct regarding the deductibility of these taxes?
A) All three of the taxes are deductible as itemized deductions.
B) One-half of the self-employment tax is deductible for AGI, and the .09% and 3.8% taxes are itemized deductions.
C) None of the taxes are allowed as a deduction.
D) One-half of the self-employment tax is deductible for AGI, but the .09% and 3.8% taxes are not allowed as deductions.

65) Which of the following is deductible as interest expense?
A) personal credit card interest
B) interest to purchase tax-exempt bonds
C) bank service charges on personal account
D) interest on a home equity loan to purchase a car

66) Riva borrows $10,000 that she intends to use for purchasing supplies for her business. She temporarily deposits the funds in her personal checking account. Prior to the deposit, the checking account held $40,000 of personal funds. Riva books a vacation for $6,000 and writes a check to the travel agency from her personal account. Later in the month, the business supplies bill arrives and Riva writes a check for $10,000 from the personal account. With respect to the interest expense on the $10,000 loan,
A) it will all be treated trade or business expense.
B) 60 percent will be treated as personal interest expense and 40 percent as trade or business expense.
C) it will all be treated as personal expense.
D) 20 percent will be treated trade or business expense.

67) When both borrowed and owned funds are mingled in the same account, for purposes of categorizing interest expense, a repayment of the debt is allocated first to
A) personal expenditures.
B) trade or business expenditures.
C) investment expenditures.
D) passive activity expenditures in real estate.

68) All of the following statements are true except
A) investment interest expense is deductible to the extent of a taxpayer’s net investment income.
B) short-term capital gains meet the definition of net investment income.
C) investment interest expense includes interest expense to purchase or carry tax-exempt securities.
D) net investment income is the taxpayer’s investment income in excess of investment expenses.

69) In the current year, Julia earns $9,000 in net investment income and incurs $14,000 of investment interest expense. What is the maximum amount of investment interest expense she is allowed to deduct this year?
A) $0
B) $3,000 deductible this year; $11,000 carried forward to next year
C) $9,000 deductible this year; $5,000 carried forward to next year
D) $14,000 deductible this year; nothing to be carried forward to next year

70) Ted pays $2,100 interest on his automobile loan, $120 interest on a loan to purchase a computer for personal use, $630 interest on credit cards, and $1,100 investment interest expense. Ted has net investment income of $850. Ted’s deductible interest is
A) $850.
B) $1,100.
C) $2,950.
D) $3,200.

71) Takesha paid $13,000 of investment interest expense in a year in which she earned $4,500 in dividends, $5,400 in interest income, and had a short-term capital gain of $1,000 and a long-term capital gain of $2,200. The capital gains resulted from the sale of stock held as an investment. She has no other investment-related expenses. What is her maximum deduction for investment interest expense, assuming Takesha does not make any elections?
A) $5,400
B) $6,400
C) $13,100
D) $13,000

72) Dana paid $13,000 of investment interest expense in a year in which she earned $4,500 in dividends, $5,400 in interest income, and had a short-term capital gain of $1,000 and a long-term capital gain of $2,200. The capital gains resulted from the sale of stock held as an investment. She has no other investment-related expenses. What is her maximum deduction for investment interest expense if Dana makes the proper elections to raise her ceiling as high as possible?
A) $5,400
B) $9,900
C) $13,100
D) $13,000

73) Faye earns $100,000 of AGI, including $90,000 of salary and $10,000 of interest income. Faye does itemize her deductions. The miscellaneous category of her itemized deductions consists of $1,500 of unreimbursed employee business expenses and a $900 fee paid for investment advice. Faye has paid $11,000 of interest expense on a loan used to purchase stocks. How much of the $11,000 interest expense can be deducted this year?
A) $11,000
B) $10,000
C) $9,100
D) $9,600

74) Teri pays the following interest expenses during the year:

Home mortgage interest on personal residence $8,500
Credit card interest on personal purchases 550
Interest on loans used to purchase investments (Net investment
income is $2,000) 2,400
Interest on loans used for a business conducted as a sole proprietorship 3,800
Interest on a credit card used exclusively in the business 470

What is the amount of interest expense that can be deducted as an itemized deduction?
A) $10,500
B) $10,900
C) $14,300
D) $14,700

75) On July 31 of the current year, Marjorie borrows $120,000 to purchase a new fishing boat. The loan is secured by her personal residence. On the date of the loan, the outstanding balance on the original debt incurred to purchase the residence is $300,000 and the FMV of the home is $450,000. What is the total amount of debt on which Marjorie can deduct interest in the current year?
A) $300,000
B) $400,000
C) $420,000
D) $450,000

76) Wayne and Maria purchase a home on April 1 of the current year. In order to obtain a thirty-year mortgage, they are required to pay $7,200 in points at closing. Charging points is a customary business practice in the area. In addition, they pay $4,400 of interest during the year. What is their current year deduction related to their home?
A) $4,400
B) $4,580
C) $7,200
D) $11,600

77) Claudia refinances her home mortgage on June 1 of the current year. She obtains a 30 year mortgage at 5%. As part of the refinancing, she pays points of $3,600 (a customary practice in her location). What amount, if any, of the points are deductible?
A) $0
B) $70
C) $120
D) $3,600

78) Leslie, who is single, finished graduate school this year and began repaying her student loan. The proceeds of the loan were used to pay her qualified higher education expenses. She has not received any type of educational assistance or scholarships. The amount of interest paid during the year amounted to $3,800. What is the amount and classification of her student loan interest education deduction if her modified AGI is $40,000?
A) $2,500 for AGI
B) $2,500 from AGI
C) $3,800 for AGI
D) $3,800 from AGI

79) Marcia, who is single, finished graduate school this year and began repaying her student loan. The proceeds of the loan were used to pay her qualified higher education expenses. She has not received any type of educational assistance or scholarships. The amount of interest paid during the year amounted to $3,000. What is the amount and classification of her student loan interest deduction if her AGI is $68,000?
A) $500 for AGI
B) $2,000 for AGI
C) $2,500 for AGI
D) $3,000 for AGI

80) Don’s records contain the following information:
1. Donated stock having a fair market value of $3,600 to a qualified charitable organization. He acquired the stock five months previously at a cost of $2,400.
2. Paid $700 to a church school as a requirement for the enrollment of his daughter.
3. Paid $200 for annual homeowner’s association dues.
4. Drove 400 miles in his personal auto at 14 cents per mile. The travel was directly related to volunteer services he performed for his church (actual costs were not available).

What is Don’s charitable contribution deduction?
A) $2,456
B) $3,156
C) $3,356
D) $3,656

81) Erin’s records reflect the following information:

1. Paid $200 dues to a fraternal organization (such as the Elks Club)
2. Donated stock having a fair market value of $3,500 to a qualified charitable organization. She purchased the stock 2 years earlier for $3,000.
3. Paid $1,600 cash to qualified public charitable organizations

Erin’s adjusted gross income for this year was $50,000. What is the amount of her charitable contribution deduction for the year?
A) $4,600
B) $4,800
C) $5,100
D) $5,300

82) Sacha purchased land in 2010 for $35,000 that she held as a capital asset. This year, she contributed the land to the Boy Scouts of America (a charitable organization) for use as a site for a summer camp. The market value of the land at the date of contribution is $40,000. Sacha’s adjusted gross income is $90,000. Assuming no special elections, Sacha’s maximum deductible contribution this year is
A) $13,000.
B) $27,000.
C) $35,000.
D) $40,000.

83) Doris donated a diamond brooch recently appraised at $25,000 to her local church. Doris had purchased it many years ago for $10,000. The church sold the brooch to provide funding for church programming. Doris’ AGI is $40,000. Doris will be able to take a charitable deduction of
A) $10,000.
B) $25,000.
C) $12,000.
D) $20,000.

84) Clayton contributes land to the American Red Cross for use as a future site for a new building. His AGI is $50,000. Clayton paid $20,000 for the land eight months ago but its market value at the date of contribution is $25,000. With no special elections, Clayton’s deductible contribution this year is
A) $7,000.
B) $18,000.
C) $20,000.
D) $25,000.

85) Carl purchased a machine for use in his trade or business two years ago for $30,000. During the current year, Carl donates the machine to the local community college. At the time of the contribution, the machine’s adjusted basis is $10,000 and its FMV is $15,000. Carl’s AGI for the year is $48,000. What is the amount of his charitable contribution deduction?
A) $10,000
B) $14,000
C) $15,000
D) $25,000

86) During the current year, Jane spends approximately 90 hours of her time in developing computer software for a church. As a programmer and data analyst, Jane normally bills her clients at $130 per hour for her time. Jane also drives her car a total of 800 miles in performing her voluntary work. Jane’s deductible contribution is
A) $0.
B) $112.
C) $11,700.
D) $11,812.

87) Carol contributes a painting to a local museum for display. Her AGI is $60,000. Carol paid $22,000 for the painting in 2006, but its market value at the date of the contribution is $25,000. With no special elections, Carol’s deductible contribution this year is
A) $ 7,000.
B) $18,000.
C) $22,000.
D) $25,000.

88) Hugh contributes a painting to a local museum for display. His AGI is $35,000. Hugh paid $16,000 for the painting in 2000, but its market value at the date of the contribution is $22,000. If Hugh makes the election to maximize the current year deduction, his deductible contribution for this year will be
A) $10,500.
B) $16,000.
C) $17,500.
D) $22,000.

89) Patrick’s records for the current year contain the following information. He donated stock having a fair market value of $5,000 to a qualified charitable organization. Patrick acquired the stock two years ago at a cost of $3,000. He paid $1,000 for membership in an athletic scholarship program maintained by the university. The only benefit of the membership is that Patrick is entitled to purchase a season ticket to the university’s home football games. He also donated $7,500 cash to a qualified charitable organization. Patrick’s adjusted gross income for the year is $100,000. What is the amount of his charitable contribution deduction?
A) $11,300
B) $11,500
C) $13,300
D) $13,500

90) Grace has AGI of $60,000 in 2013 and 2014. She makes cash contributions to public charities of $34,000 in 2013 and $31,000 in 2014. Grace’s charitable contribution carryover to 2015 is
A) $0.
B) $1,000.
C) $4,000.
D) $5,000.

91) Daniel had adjusted gross income of $60,000, which consisted of $55,000 in wages and $5,000 in dividend income from taxable domestic corporations. His expenses include:

Investment counseling fee $800
Attorney fee for preparing a will 200
Union dues 350
Tax return preparation fee 450

What is the net amount deductible by Daniel for the above items?
A) $400
B) $600
C) $1,000
D) $1,600

92) Wang, a licensed architect employed by Skye Architects, incurred the following unreimbursed expenses this year:

Subscription to architectural journals $800
Dues to Professional Architecture Society 400
Tax return preparation 600
Investment advice 500

Wang’s AGI is $75,000. What is his net deduction for miscellaneous itemized deductions?
A) $0
B) $1,900
C) $800
D) $1,500

93) Tasneem, a single taxpayer has paid the following amounts in 2014:

State income taxes $10,000
Property taxes on home 4,000
Mortgage interest on home 12,000
Charitable contributions 14,000

Tasneem’s AGI is $360,000. What is her net itemized deduction allowed?
A) $40,000
B) $38,352
C) $36,826
D) None of the above.

94) Christa has made a $25,000 pledge to the American Red Cross (a public charity). Christa expects AGI of $200,000 this year. Which of the following assets should she donate?
A) $25,000 of cash
B) stock purchased three years ago for $18,000 with a current FMV of $25,000
C) stock purchased six months ago for $28,000 with a current FMV of $25,000
D) Christa should be indifferent among the three choices.

95) Which of the following is not required substantiation for a noncash charitable contribution?
A) name and address of charitable organization
B) method used to determine the donated property’s fair market value
C) date and location of property donated
D) use of donation by charitable organization

96) During the current year, Deborah Baronne, a single individual, paid the following amounts:

Federal income tax $10,000
State income tax $4,000
Real estate taxes on land in France $1,500
Real estate taxes on land in U.S. $1,700
State sales taxes $2,000
State occupational license fee $ 600

How much can Deborah deduct in taxes as itemized deductions?

97) Phoebe’s AGI for the current year is $120,000. Included in this AGI is $100,000 salary and $20,000 of interest income. In earning the investment income, Phoebe paid investment interest expense of $30,000. She also incurred the following expenditures subject to the 2% of AGI limitation:

Investment expenses:
Subscriptions to investment journals $ 500
Investment counseling 1,500
Safe-deposit box rental for stock certificates 100
Noninvestment expenses:
Unreimbursed employee business expenses $1,800
Tax return preparation fees (non-business-related) 500

What is Phoebe’s investment interest expense deduction for the year?

98) On December 1, 2014, Delilah borrows $2,000 from her credit union to use in her business. Under the terms of the contract, Delilah actually receives $1,940 but is required to repay $2,000 in three months.
a. What amount may Delilah deduct as interest expense in 2014 and in 2015 if she is a cash basis taxpayer?
b. What amount may Delilah deduct as interest expense in 2014 and in 2015 if she is an accrual basis taxpayer?

99) During 2014 Richard and Denisa, who are married and have two dependent children, have the following income and losses:

Total salaries $150,000
Bank account interest 25,000
Short-term capital gains 4,000
Short-term capital losses ( 1,500)

They also incurred the following expenses:
Qualified medical expenses $ 8,000
State income taxes paid 12,000
Property taxes on home 2,300
Qualified residence interest 9,000
Investment interest expense 7,500
Cash charitable contributions 15,000
Tax return preparation fees 3,600
Unreimbursed employee business expenses 4,000

Compute Richard and Denisa’s taxable income for the year. (Show all calculations in good form.)

100) Hope is a marketing manager at a local company. Information about her 2014 income and expenses is as follows:

Income received
Salary $150,000
Taxes withheld from salary:
Federal income tax $30,000
State income tax 8,000
Social Security tax 7,254
Medicare tax 2,175

Interest income from bank 6,000
Dividend income from U.S. stocks 4,000
Short-term capital gain 2,000
Long-term capital gain 3,000
State income tax refund from last year 500
Expenses paid:
Unreimbursed dental and eyecare costs $1,800
Property taxes on her home 3,900
Fees paid to town for garbage pick-up 400
Stock donated to American Red Cross; FMV $5,000; purchased three years ago for $3,100
Dues paid to American Marketing Association 600
Subscription to professional marketing journals 300
Fee for preparation of 2013 tax return and IRS audit assistance 2,000
Investment advisor fee 1,000
Home mortgage interest 10,000
Interest on borrowing to purchase investment assets 11,000
Interest on car loan 1,100

Compute Hope’s taxable income for the year in good form. Show all supporting computations. Hope is single, and she elects to itemize her deductions each year. Assume she does not make any elections regarding the investment interest expense. Also assume that her tax profile was similar in the preceding year.

101) Explain under what circumstances meals and lodging en route to a medical facility may be deductible.

102) Explain when the cost of living in an institution other than a hospital may be deductible.

103) Discuss the timing of the allowable medical expense deduction.

104) Patrick and Belinda have a twelve year old son, Aidan, who is autistic. Patrick and Belinda pay tuition of $20,000 annually for Aidan to attend a school for autistic children. What tax issues should be considered? What additional information would you need?

105) Discuss what circumstances must be met for personal property taxes to be deductible.

106) Explain why interest expense on investments is limited to net investment income.

107) When are points paid on a loan deductible as interest expense?

108) Sharif is planning to buy a new car for personal use and will need to take out a loan. His sources of the financing include (1) a loan from the car dealership charging 6% interest, (2) a loan from his brokerage firm secured against his stock portfolio charging 6.2% and (3) a home equity bank loan secured against his home charging 7%. Sharif has AGI of $150,000 and does itemize his deductions. He is in the 28% tax bracket. Discuss how income taxes can influence his decision regarding the source of financing.

109) May an individual deduct a charitable contribution for services rendered to a charitable organization?

110) What is the result if a taxpayer makes a contribution to a college or university and in return receives the right to purchase tickets to athletic events?

111) What is the treatment of charitable contributions in excess of the applicable limits for the current year?

112) Explain how tax planning may allow a deduction of qualified medical expenses.

113) Explain what types of tax planning are available for taxpayers making charitable contributions.

114) Jill is considering making a donation to her church. She wants to give $50,000 for the new church building. She has some stock with a FMV of $50,000 and an adjusted basis of $10,000 that she has held for 3 years. She is planning to sell the stock and donate the $50,000 proceeds to the church. What should she consider before taking that action?

Chapter 8 Losses and Bad Debts

1) In order to be recognized and deducted on a tax return, a loss must first be realized.

2) The amount of loss realized on the sale of property is computed by subtracting adjusted basis from amount realized.

3) A loss incurred on the sale or exchange of property is deductible only if the property is used in a trade or business or held for investment.

4) The sale of inventory at a loss results in an ordinary loss.

5) Losses incurred in the sale or exchange of personal-use property are deductible as capital losses.

6) A loss on business or investment property which is abandoned is deductible as an ordinary loss to the extent of the property’s adjusted basis on the date of abandonment.

7) The total worthlessness of a security generally results in an ordinary loss.

8) A capital loss may arise from the sale or exchange of a capital asset.

9) The destruction of a capital asset by a casualty gives rise to a capital rather than ordinary loss.

10) One of the requirements which must be met for stock to be considered Section 1244 stock is that the stock must be owned by an individual or a partnership.

11) One of the requirements which must be met for stock to be considered Section 1244 stock is that the corporation cannot have more than $10 million of total capital and paid in surplus as of the stock issuance.

12) When applying the limitations of the passive activity rules, a taxpayer’s AGI is classified into active income, portfolio income and passive income. For this purpose, portfolio income includes dividends, interest, annuities, and royalties.

13) Losses from passive activities that cannot be deducted currently are carried over for up to 5 subsequent years.

14) Individual taxpayers can offset portfolio income with passive losses.

15) If a taxpayer disposes of an interest in a passive activity, unused carryover losses are available to the purchaser of the interest.

16) A taxpayer may deduct suspended losses of a passive activity when the taxpayer completely terminates his or her ownership of the activity.

17) Once an activity has been classified as passive, it is considered passive with regard to that taxpayer until it is sold.

18) A passive activity includes any rental activity or any trade or business in which the taxpayer does not materially participate.

19) Two separate business operations conducted at the same location may be treated as separate activities under the passive activity rules.

20) Partnerships and S corporations must identify their business and rental activities by applying the passive activity rules at the partnership or S corporation level and then must report the results of their operations by activity to the partners or shareholders.

21) Material participation by a taxpayer in a passive activity is satisfied if the individual participates in the activity for more than 500 hours during the year.

22) For purposes of the application of the passive loss limitations, a closely held C corporation is a C corporation where more than 50 percent of the stock is owned by five or fewer individuals at any time during the last half of the taxable year.

23) A closely held C Corporation’s passive losses may offset its active income.

24) Individuals who actively participate in the management of rental real property may deduct up to $25,000 in losses, subject to AGI limitations.

25) For purposes of applying the passive loss limitations for rental real estate, active participation requires a greater time commitment by the taxpayer than does material participation.

26) Taxpayers are allowed to recognize net passive losses from all activities up to a ceiling of $25,000.

27) A taxpayer may deduct a loss resulting from the theft of business and investment property but not a theft of personal-use property.

28) When business property involved in a casualty is totally destroyed, the amount of the loss is limited to the lesser of the taxpayer’s adjusted basis in the property or the reduction in FMV.

29) In the case of casualty losses of personal-use property, the losses sustained in each separate casualty are reduced by both $100 and 10 percent of the taxpayer’s AGI for the year.

30) A theft loss is deducted in the year in which the theft is discovered.

31) When personal-use property is covered by insurance, no deduction is available for a casualty loss of the property unless the taxpayer timely files an insurance claim for the loss.

32) When the taxpayer anticipates a full recovery on a casualty loss of personal-use property but receives less than full recovery in a subsequent year, the unrecovered portion may be deducted.

33) If a taxpayer suffers a loss attributable to a disaster in an area subsequently declared a disaster area, the casualty loss may be deducted in the year preceding the year in which the loss actually occurs.

34) For a bad debt to be deductible, the taxpayer must have a basis in the debt.

35) A bona fide debtor-creditor relationship can never exist in the case of related parties.

36) A taxpayer guarantees another person’s obligation and is forced to pay the debt under the terms of the guarantee. The original debtor does not repay the taxpayer. The taxpayer/guarantor may deduct the loss.

37) Lisa loans her friend, Grace, $10,000 to finance a new business. If Grace defaults on the loan, Lisa may take a deduction for a business bad debt in the year of total worthlessness.

38) A business bad debt gives rise to an ordinary deduction while a nonbusiness bad debt is treated as a short-term capital loss.

39) No deduction is allowed for a partially worthless nonbusiness debt.

40) A net operating loss (NOL) occurs when taxable income for any year is negative because itemized deductions and total exemptions exceed business income.

41) A net operating loss can be carried back three years or carried forward five years.

42) All of the following losses are deductible except
A) decline in value of securities.
B) total worthlessness of securities.
C) sale or exchange of business property.
D) destruction of personal use property by fire, storm, or casualty.

43) The amount realized by Matt on the sale of property to Caitlin includes all of the following with the exception of
A) cash received by Matt.
B) mortgage on the property that is assumed by Caitlin.
C) mortgage on the property paid off by Matt prior to the sale.
D) the FMV of any other property received by Matt in the transaction.

44) In 2000, Michael purchased land for $100,000. Over the years, economic conditions deteriorated, and the value of the land declined to $60,000. Michael sells the property in this year, when it is subject to a $30,000 nonrecourse mortgage. The buyer pays Michael $34,000 cash and takes the property subject to the mortgage. Michael incurs $5,000 in real estate commissions. Michael’s gain or loss on the sale is
A) $4,000 gain.
B) $1,000 loss.
C) $36,000 loss.
D) $41,000 loss.

45) Lucia owns 100 shares of Cronco Inc. which she purchased on December 1 of last year for $10,000. The stock is not Sec. 1244 stock. On July 1 of the current year, Lucia receives notice from the bankruptcy court that Conco Inc. has been liquidated, and there are no assets remaining for shareholders. As a result, Lucia will have
A) a short-term capital loss of $10,000.
B) a long-term capital loss of $10,000.
C) an ordinary loss of $10,000.
D) no loss allowed.

46) Jamie sells investment real estate for $80,000, resulting in a $15,000 loss. Jamie’s loss is
A) an ordinary loss.
B) a capital loss.
C) a Sec. 1231 loss.
D) a Sec. 1244 loss.

47) Juan has a casualty loss of $32,500 on investment property after receiving an insurance settlement. This is Juan’s only casualty transaction this year. Juan’s loss is
A) an ordinary loss.
B) a capital loss.
C) a Sec. 1231 loss.
D) a Sec. 1244 loss.

48) All of the following are true of losses from the sale or worthlessness of small business corporation (Section 1244) stock with the exception of
A) the stock must be owned by an individual or a partnership.
B) the stock must have been issued by a domestic corporation.
C) the stock must have been issued for cash or property other than stock or securities.
D) a single taxpayer may deduct, as ordinary losses, up to a maximum of $100,000 per tax year with the remainder treated as capital losses.

49) Stacy, who is married and sole shareholder of ABC Corporation, sold all of her stock in the corporation for $100,000. Stacy had organized the corporation in 2009 by contributing $225,000 and receiving all of the capital stock of the corporation. ABC Corporation is a domestic corporation engaged in the manufacturing of ski boots. The stock in ABC Corporation qualified as Sec. 1244 stock. The sale results in a(n)
A) ordinary loss of $125,000.
B) long-term capital loss of $125,000.
C) long-term capital loss of $100,000 and ordinary loss of $25,000.
D) ordinary loss of $100,000 and long-term capital loss of $25,000.

50) Amy, a single individual and sole shareholder of Brown Corporation, sold all of the Brown stock for $30,000. The stock basis was $150,000. Amy had owned the stock for 3 years. Brown Corporation meets the Section 1244 requirements. Amy has
A) a $50,000 ordinary loss and $70,000 LTCL.
B) a $50,000 STCL and a $70,000 LTCL.
C) a $100,000 ordinary loss and a $20,000 LTCL.
D) a $100,000 LTCL and a $20,000 ordinary loss.

51) Sarah had a $30,000 loss on Section 1244 stock, a $15,000 loss on sale of a personal use automobile and a $8,000 loss on stock that is not classified as Section 1244. Without regard to net capital loss limitations, Sarah should recognize
A) a ordinary loss of $38,000.
B) a capital loss of $53,000.
C) an ordinary loss of $30,000 and a capital loss of $8,000.
D) an ordinary loss of $30,000 and a capital loss of $23,000.

52) During the year, Mark reports $90,000 of active business income from his law practice. He also owns two passive activities. From Activity A, he earns $20,000 of income, and from Activity B, he incurs a $30,000 loss. As a result, Mark
A) reports AGI of $80,000.
B) reports AGI of $90,000 with a $10,000 passive loss carryover.
C) reports AGI of $90,000 with a $30,000 passive loss carryover.
D) reports AGI of $110,000 with a $30,000 passive loss carryover.

53) Joy reports the following income and loss:

Salary $ 120,000
Income from activity A 60,000
Loss from activity B ( 35,000)
Loss from activity C ( 55,000)

Activities A, B, and C are all passive activities.

Based on this information, Joy has
A) adjusted gross income of $90,000.
B) salary of $120,000 and deductible net losses of $30,000.
C) salary of $120,000 and net passive losses of $30,000 that will be carried over.
D) salary of $120,000, passive income of $60,000, and passive loss carryovers of $90,000.

54) Jana reports the following income and loss:

Salary $ 120,000
Income from activity A 60,000
Loss from activity B ( 30,000)
Loss from activity C ( 70,000)

Activities A, B, and C are all passive activities.
Based on this information, Joy has the following suspended losses:

A)
Activity B Activity C
$30,000 $70,000

B)
Activity B Activity C
$0 $0

C)
Activity B Activity C
$18,000 $42,000

D)
Activity B Activity C
$12,000 $28,000

55) Jeff owned one passive activity. Jeff sold the activity and realized a $2,000 gain on the sale. Prior to the sale, he realized a current year loss from the activity of $6,000. In addition, he has suspended losses from prior years of $7,000. What is the net impact on Jeff’s AGI this year due to the passive activity?
A) increase of $2,000
B) no net change
C) decrease of $4,000
D) decrease of $11,000

56) Nancy reports the following income and loss in the current year.

Salary $ 60,000
Income from activity A 18,000
Loss from activity B ( 9,000)
Loss from activity C ( 13,000)

All three activities are passive activities with respect to Nancy. Nancy also has $21,000 of suspended losses attributable to activity C carried over from prior years. During the year, Nancy sells activity C and realizes a $15,000 taxable gain. What is Nancy’s AGI as a result of these transactions?
A) $50,000
B) $55,000
C) $64,000
D) $71,000

57) Lewis died during the current year. Lewis owned passive activity property with a FMV of $61,000 and a basis of $48,000. Suspended losses of $15,000 were attributable to the property. How much of the suspended loss is deductible on Lewis’s final income tax return?
A) $0
B) $2,000
C) $13,000
D) $15,000

58) Mara owns an activity with suspended passive losses from prior years of $13,000. In the current year, Mara becomes a material participant in the activity. This year the activity generates $6,000 of income. The net effect of this activity on Mara’s current year AGI is a(n)
A) increase of $6,000.
B) decrease of $13,000.
C) 0.
D) decrease of $7,000.

59) Charlie owns activity B which was considered a passive activity and generated a $17,000 suspended loss. Charlie increases his involvement with activity B so that this year activity B is not considered passive for Charlie. During this year, activity B produces a $9,000 loss. In addition, Charlie acquires an investment in activity X, a passive activity, this year. Charlie’s share of activity X’s income is $13,000. Charlie’s salary this year is $70,000. As a result, this year Charlie must
A) offset B’s loss carryover against X’s current income and carry over $9,000 loss from activity B to next year.
B) offset B’s carryover loss and current loss against X’s income first and then offset any remaining loss against salary.
C) offset B’s $9,000 loss against X’s $13,000 income and offset B’s loss carryover against the remaining $4,000 of X’s income.
D) offset B’s current $9,000 loss against his salary and offset B’s loss carryover against X’s income and carry over $4,000 of loss to next year.

60) Jorge owns activity X which produced a $20,000 passive loss last year. Jorge’s only income last year was wages of $30,000. Jorge is a material participant in activity X this year when it produces a $14,000 loss. This year, Jorge’s wages are $40,000. This year, Jorge also has passive activity income from activity Y of $16,000. What is the total passive activity loss carryover to next year?
A) $0
B) $3,000
C) $4,000
D) $18,000

61) Which of the following is not generally classified as a passive activity?
A) an activity in which the taxpayer does not materially participate
B) a limited partnership interest
C) rental real estate
D) a business in which the taxpayer owns an interest and works 1,000 hours a year

62) An individual is considered to materially participate in an activity if any of the following tests are met with the exception of
A) the individual participates in the activity for more than 500 hours during the year.
B) the individual participates in the activity for 75 hours during the year, and that participation is more than any other individual’s participation for the year.
C) the individual has materially participated in the activity in any five years during the immediate preceding 10 taxable years.
D) the individual’s participation in the activity for the year constitutes substantially all of the participation in the activity by all individuals.

63) Tom and Shawn own all of the outstanding stock of Brady Corporation (a retail store operated as a C corporation). This year, Brady generates taxable income of $20,000 from active business operations, and also reports investment interest of $22,000 and losses of $28,000 from a passive activity. As a result, Brady Corporation reports
A) net income of $42,000.
B) interest income of $22,000 and a passive loss carryover of $8,000.
C) business income of $20,000 and a passive loss carryover of $6,000.
D) business income of $20,000, interest income of $22,000, and a passive loss carryover of $28,000.

64) A taxpayer’s rental activities will be considered a trade or business, rather than a passive activity, if
A) the taxpayer performs more than 750 hours of work during the year managing the rental properties
B) the taxpayer performs more than 500 hours of work during the year managing the rental properties.
C) more than half of the taxpayers personal services performed in all business activities during the year are spent managing the rental properties.
D) conditions A and C, but not B, are satisfied.

65) Justin has AGI of $110,000 before considering his $30,000 loss from rental property, which he actively manages. How much of the rental loss can Justin deduct this year?
A) $10,000
B) $20,000
C) $25,000
D) $30,000

66) Joseph has AGI of $170,000 before considering the $20,000 rental loss for property which he actively manages. How much of the rental loss can he deduct?
A) $0
B) $10,000
C) $20,000
D) $25,000

67) Shaunda has AGI of $90,000 and owns rental property generating a $27,000 loss. She actively manages the property. Her deductible loss is
A) $0.
B) $13,500.
C) $25,000.
D) $27,000.

68) Brandon, a single taxpayer, had a loss of $48,000 from a rental real estate activity in which he actively participated. He also had $27,000 of income from another rental real estate activity in which he actively participated. He acquired both investments in 2014. If Brandon has no other passive income or losses and has adjusted gross income of $84,000 before considering passive activities, how much loss from rental activities can he use to offset his nonpassive income?
A) $21,000
B) $24,000
C) $25,000
D) $45,000

69) Which of the following is most likely not considered a casualty?
A) fire loss
B) water damage caused by a busted water heater
C) death of a pine tree due to a two-day infestation of pine beetles
D) water damage to the walls and ceiling of a taxpayer’s personal residence as the result of gradual deterioration of the roof

70) Nicole has a weekend home on Pecan Island that she purchased in 2005 for $250,000. Recently, the home was appraised at $260,000. After the appraisal, a hurricane hit Pecan Island, severely damaging Nicole’s home. An appraisal placed the value of the home at $140,000 after the hurricane. Because of its prohibitive cost, Nicole had no hurricane insurance. Before any reductions or limitations, Nicole’s casualty loss amount is
A) $0.
B) $10,000.
C) $120,000.
D) $140,000.

71) A fire totally destroyed office equipment and furniture which Monica uses in her business. The equipment had an adjusted basis of $15,000 and a FMV of $10,000 before the fire. The furniture’s adjusted basis was $5,000 and its FMV was $2,000 before the fire. Monica’s AGI for the year is $60,000. Monica does not have insurance on the destroyed assets. How much is Monica’s deductible casualty loss?
A) $5,900
B) $12,000
C) $13,900
D) $20,000

72) Lena owns a restaurant which was damaged by a tornado. The following assets were partially destroyed:

Basis Reduction in FMV Insurance Payment
Building $150,000 $200,000 $100,000
Equipment $30,000 $20,000 $10,000

Lena has AGI of $50,000. What is the amount of Lena’s deductible casualty loss?
A) $54,900
B) $60,000
C) $70,000
D) $180,000

73) Leonard owns a hotel which was damaged by a hurricane. The hotel had an adjusted basis of $1,000,000 before the hurricane. A recent appraisal determined that the hotel’s FMV was $1,500,000 before the hurricane and $700,000 afterwards. Leonard received insurance proceeds of $500,000. His AGI is $60,000. What is the amount of his deductible casualty loss?
A) $293,900
B) $300,000
C) $793,900
D) $800,000

74) Jarrett owns a mountain chalet that he purchased in 2008 for $175,000. This year, the home appraised at $300,000. Shortly after the appraisal, a blizzard hit the area in spring of the current year, destroying trees and severely damaging several homes, including Jarrett’s chalet. Its value was reduced to $135,000. Jarrett does not have insurance. Jarrett’s AGI is $200,000. Jarrett’s deductible loss after limitations is
A) $135,000.
B) $144,900.
C) $164,900.
D) $165,000.

75) Hope sustained a $3,600 casualty loss due to a severe storm. She also incurred a $800 loss from a theft in the same year. Both the casualty and theft involved personal-use property. Hope’s AGI for the year is $25,000 and she does not have insurance coverage. Hope’s deductible casualty loss is
A) $1,700.
B) $1,800.
C) $4,200.
D) $4,300.

76) In the current year, Marcus reports the following casualty gains and losses on personal-use property. Assets X and Y are destroyed in the first casualty while Z is destroyed in a second casualty.

Asset Reduction
in FMV Adjusted Basis Insurance Holding Period
X $8,000 $2,000 $7,000 2 years
Y 3,000 5,000 2,000 10 months
Z 2,500 1,300 1,000 8 months

As a result of these losses and insurance recoveries, Marcus must report
A) a net gain of $3,700.
B) a long-term gain of $4,900 on asset X; a short-term capital loss of $900 on asset Y; and a short-term capital loss of $200 on asset Z.
C) a long-term capital gain of $5,000 on asset X; a short-term capital loss of $900 on asset Y; and a short-term capital loss of $200 on asset Z.
D) a long-term capital gain of $5,000 on asset X; a short-term capital loss of $900 on asset Y; and a short-term capital loss of $300 on asset Z.

77) Wesley completely demolished his personal automobile in a car accident. Damage to the auto was estimated at $35,000. Wesley had purchased the car a few years ago for $60,000. He received an insurance reimbursement of $28,000. His adjusted gross income this year was $55,000 and he incurred no other losses during the year. What amount can he deduct as a casualty loss on his income tax return after limitations?
A) $1,400
B) $1,500
C) $6,900
D) $7,000

78) A flood damaged an auto owned by Mr. and Mrs. South on June 15 of this year. The car was only used for personal purposes.

Fair market value before the flood $18,500
Fair market value after the flood 2,000
Cost basis 20,000
Insurance proceeds 13,000
Adjusted gross income for this year 25,000
Business use of auto 0

Based on these facts, what is the amount of the South’s casualty loss deduction after limitations for this year?
A) $900
B) $1,000
C) $4,400
D) $4,500

79) In February 2014, Amelia’s home, which originally cost $150,000, is damaged by a windstorm. Amelia had refinanced the home shortly before the storm, and it was appraised at $200,000. After the storm, the home appraised at $120,000. Amelia has received no insurance reimbursement by December 31, but expects to recover 90 percent of the loss. In the subsequent year, the insurance company pays Amelia $50,000. Amelia’s AGI is $85,000 in 2014, and her 2015 AGI is $80,000. Amelia suffers no other casualty losses in either year. Amelia may deduct
A) $7,900 in 2014.
B) $22,000 in 2015.
C) $13,900 in 2015.
D) $14,000 in 2015.

80) This summer, Rick’s home (which has a basis of $80,000) is damaged by a tornado. An appraisal by a realtor placed the FMV of the home at $120,000 before the tornado and at $85,000 after the tornado. Rick estimates that the insurance company will reimburse him for 60% of the loss. Next year, the insurance company pays Rick $20,000. Rick’s current year’s AGI is $50,000 and his next year’s AGI is $55,000. Rick suffers no other casualty losses in either year. After limitations, Rick may deduct a casualty loss this year of
A) $ 8,900.
B) $ 9,900.
C) $15,000.
D) $35,000.

81) Juanita, who is single, is in an automobile accident in 2014 and her car sustains $6,200 in damages. Because both drivers received tickets in the accident, Juanita does not expect to recover any of the loss from her insurance company. Juanita’s 2014 AGI is $31,000, and she deducts a $3,000 loss on her 2014 tax return. Her other itemized deductions in 2014 exceed $12,000. In 2015, Juanita’s insurance company reimburses her $2,800. Juanita’s 2015 AGI is $28,000. As a result, Juanita must
A) amend 2014 to show a $200 loss.
B) do nothing and simply keep the $2,800.
C) do nothing to the 2014 return but report $2,800 of income on her 2015 return.
D) amend the 2014 return to show $0 loss and file her 2015 return to show a $200 loss.

82) Constance, who is single, is in an automobile accident in 2014, and her car sustains $6,200 in damages. Because both drivers received tickets in the accident, Constance does not expect to recover any of the loss from her insurance company. Constance’s 2014 AGI is $31,000. Her casualty loss is $3,000; she has other itemized deductions of $1,200. In 2015, Constance’s insurance company reimburses her $2,800. Constance’s 2015 AGI is $28,000. As a result, Constance must
A) amend the 2015 return to show the $200 loss.
B) do nothing and simply keep the $2,800.
C) amend the 2014 return to show $0 loss and file her 2015 return to show $200 loss.
D) do nothing to the 2014 return but report $2,800 of income on her 2015 return.

83) Last year, Abby loaned Pat $10,000 as a gesture of their friendship. Although Pat had signed a note payable that contained interest payments and a maturity date, the loan had not been repaid this year when Pat died insolvent. For this year, assuming that the loan was bona fide, Abby should account for nonpayment of the loan as a(n)
A) itemized deduction.
B) ordinary loss.
C) long-term capital loss.
D) short-term capital loss.

84) In October 2014, Jonathon Remodeling Co., an accrual-method taxpayer, remodels and renovates an office building for Dale and bills him $30,000. Dale signs a note for the debt. Dale keeps delaying payment and files bankruptcy in 2015. Creditors are informed that no assets are available for payment. Jonathon Remodeling Co. will report
A) $0 income in both years.
B) $30,000 income in 2014 and a bad debt deduction of $30,000 in 2015.
C) $30,000 income in 2014 and a STCL of $30,000 in 2015 limited to $3,000 after netting.
D) $30,000 income in 2014 and then must amend last year’s return to show $0 income when advised of the bankruptcy.

85) Martha, an accrual-method taxpayer, has an accounting practice. In 2013, she performs tax analyses for Arnold and sends him an invoice for $10,000. In 2014, Martha sells her practice and all accounts to David. Arnold’s debt becomes worthless that year after David has purchased the practice. The result is
A) Martha deducts a nonbusiness bad debt in 2014.
B) Martha deducts a business bad debt in 2014.
C) David deducts a business bad debt in 2014.
D) David deducts a nonbusiness bad debt in 2014.

86) Vera has a key supplier for her business who was facing cash flow problems which would impair Vera’s ability to get shipments of key components for her production. Vera made a $10,000 loan to the supplier. Unfortunately the supplier filed for bankruptcy and has gone out of business without repaying Vera. Vera will be able to recognize a loss of
A) $10,000.
B) $3,000.
C) $7,000.
D) 0.

87) In 2013 Grace loaned her friend Paula $12,000 to invest in various stocks. Paula signed a note to repay the principal with interest. Unfortunately the market for that industry sector plunged, and Paula incurred large losses. In 2014 Paula declared personal bankruptcy and Grace was unable to collect any of her loan. Grace had no other gains or losses last year or this year. The result is
A) Grace deducts a business bad debt of $12,000 in 2014.
B) Grace deducts a $12,000 nonbusiness bad debt as a short-term capital loss in 2014.
C) Grace deducts a $3,000 nonbusiness bad debt as a short-term capital loss in 2014 and carries $9,000 over to subsequent years.
D) Grace deducts a business bad debt of $3,000 in 2014 and carries $9,000 over to subsequent years.

88) Which of the following expenses or losses could create a net operating loss for an individual taxpayer?
A) large losses on sales of investment assets
B) an operating loss from a sole proprietorship
C) large charitable contributions
D) all of the above

89) An individual taxpayer has negative taxable income for the year. In calculating the net operating loss created, which of the following expenses or losses will be added back to the negative taxable income?
A) capital losses
B) personal and dependency exemptions
C) nonbusiness deductions in excess of nonbusiness income
D) all of the above

90) A taxpayer incurs a net operating loss in the current year. With respect to the application of the NOL,
A) the taxpayer will carry back the NOL three years first, then carry forward any balance for five years.
B) the taxpayer must carry forward the loss and has up to 20 years to use it.
C) the taxpayer can carry forward the loss indefinitely until there is sufficient taxable income to use it up.
D) the taxpayer will first carry back the NOL for two years, then carryforward the balance for a period of 20 years, or the taxpayer can elect to only carry forward the loss for the 20-year allowable period.

91) Kendal reports the following income and loss:

Salary $120,000
Income from activity A 36,000
Loss from activity B ( 30,000)
Loss from activity C ( 60,000)

Activities A, B, and C are all passive activities, but none are rental properties. What is the amount of the suspended loss attributable to each activity?

92) During the year, Patricia realized $10,000 of taxable income from activity A, $4,000 loss from activity B, and $6,000 of taxable income from activity C. All three activities are passive activities with regard to Patricia, but are not rental properties. In addition, $32,000 of passive losses from activity C is carried over from prior years. During the current year, Patricia sells activity C for an $18,000 taxable gain. Patricia’s salary for the year is $100,000. What is the amount of Patricia’s deduction against salary income?

93) Hersh realized the following income and loss this year:

Net taxable income from chocolate shop $50,000
Interest income 10,000
Loss from passive activity (not a rental property) (58,000)

a. Assume Hersh is an individual taxpayer and the chocolate shop is his sole proprietorship. Determine Hersh’s AGI and any carryovers.
b. Assume the taxpayer is Hersh Inc., a C corporation, owned 100% by the Hersh family. Determine Hersh Inc.’s taxable income and any carryovers.

94) Adam owns interests in partnerships A and B, both of which are Publicly Traded Partnerships. During the current year, Adam’s share of the income from A is $12,000. Adam’s share of B’s loss is $3,500. B also generates portfolio income of which Adam’s share is $2,000. What are the tax consequences of these income and loss items?

95) Parveen is married and files a joint return. He reports the following items of income and loss for the year:

Salary $ 135,000
Activity A (passive) 13,000
Activity B (nonbusiness rental real estate) ( 45,000)

If Parveen actively participates in the management of Activity B, what is his AGI for the year and what is the passive loss carryover to next year?

96) Aretha has AGI of less than $100,000 and a 25% marginal tax rate. During the year, she reports a $36,000 loss from Activity A and a $24,000 loss from Activity B. Additionally, Activity A generates $8,000 of tax credits. Both activities A and B are passive real estate rental activities in which Anita actively participates and owns over 10% of each activity.
a. How much loss can be recognized from each activity?
b. What is the amount of Aretha’s suspended loss from each activity?
c. How much of the tax credits can be applied this year?

97) Wes owned a business which was destroyed by fire in May 2014. Details of his losses follow:

Adj. FMV FMV Insurance
Asset Basis Before After Reimbursement
A $1,000 $2,000 $ 0 $2,000
B 15,000 10,000 3,000 2,000
C 2,400 5,000 2,500 1,000

His AGI without consideration of the casualty is $45,000.

What is Wes’s net casualty loss deduction for 2013?

98) Determine the net deductible casualty loss on the Schedule A for Alan Michael when his adjusted gross income was $40,000 in 2014 and the following occurred:

Adj. FMV FMV Insurance
Asset Basis Before After Reimbursement
A $1,200 $2,000 $ 500 $ 100
B 14,000 12,000 5,000 1,100
C 600 3,000 2,775 125

A and B were destroyed in the same casualty in March. C was destroyed in a separate casualty in July.

All casualty losses were nonbusiness personal use property losses and none occurred in a federally declared disaster area.

What is the amount of the net deductible casualty loss?

99) Frank loaned Emma $5,000 in 2012 with the agreement that the loan would be repaid in three years. In 2013, Emma filed for bankruptcy and based on available information from the bankruptcy court, it was estimated that Frank could expect to receive $.65 on the dollar. In 2014, final settlement was made and Frank received $600.
a. Assuming the loan is a business bad debt, what is the amount of and the nature of Frank’s deduction in 2013?
b. Assuming the loan is a business bad debt, what is the amount of and the nature of Frank’s deduction in 2014?
c. Assuming instead that the loan is a nonbusiness bad debt, what is the amount of and the nature of Frank’s deduction in 2013 and 2014?

100) Becky, a single individual, reports the following taxable items in 2014:

Gross income from business $ 93,000
Minus: Business expenses ( 105,000)
($ 12,000)
Interest income 1,500
AGI ($ 10,500)

Itemized deductions:
Interest expense $ 3,100
State Income Taxes 1,900
Casualty 3,000
Total itemized deductions ( 8,000)
Minus: Personal exemption ( 3,950)
Taxable income ($22,450)

What is Barbara’s NOL for the year?

101) Harley, a single individual, provided you with the following information for this year:

Income:
Salary from part-time employment $ 16,000
Interest income from savings 1,000
Net long-term capital gain from investment property 3,000

Deductions:
Net business loss
(sales of $100,000 less expenses of $130,000) ($30,000)
Personal exemption ( 3,950)
Standard deduction ( 6,200)
Net-operating loss carryover from last year ( 3,000)

What is the amount of Harley’s net operating loss for this year?

102) Businesses can recognize a loss on abandoned property. What types of factors would indicate that property had been abandoned?

103) What must an individual taxpayer prove to receive a worthless security deduction?

104) Erin, a single taxpayer, has 1,000 shares of 1244 stock she purchased directly from AAA Corporation for $120,000 five years ago. The stock has a FMV of $30,000, and Erin is thinking of selling the stock. She has no other capital gains or losses for the year. Discuss the tax consequences and planning opportunities relating to selling the stock.

105) Why was Section 1244 enacted by Congress? Specifically, consider and discuss some of the individual qualifying requirements of Sec. 1244.

106) Why did Congress enact restrictions and limitations on losses from passive activities?

107) What is required for an individual to be considered as actively participating in a real estate activity for purposes of utilizing the $25,000 ceiling on rental real estate losses?

108) What is or are the standards that must be present to warrant a casualty loss deduction?

109) A taxpayer suffers a casualty loss on personal-use property for which he has insurance coverage. However, to avoid a premium adjustment, the taxpayer fails to make a timely claim. In this situation is the full deduction for the casualty, after the normal floors, available to the taxpayer? Why or why not?

110) If a loan has been made to a related party, what are some considerations for determining whether the loan is a bona fide debt or is, in fact, merely a gift?

111) Distinguish between the accrual-method taxpayer and the cash-method taxpayer with regard to basis in a receivable.

112) What are some factors which indicate that a debt may be worthless?

113) If an NOL is incurred, when would a taxpayer elect to forgo the carryback period and only carry the loss deduction forward?

114) How is a claim for refund of taxes filed by an individual who carries an NOL deduction back to a prior year?

Chapter 9 Employee Expenses and Deferred Compensation

1) Deferred compensation refers to methods of compensating employees based upon their current service where the benefits are deferred until future periods.

2) If an individual is self-employed, business-related expenses are deductions for AGI.

3) Unreimbursed employee business expenses are deductions for AGI.

4) An employer-employee relationship exists where the employer has the right to control and direct the individual providing services with regard to the end result and the means by which the result is accomplished.

5) A nondeductible floor of 2% of AGI is imposed on unreimbursed employee business expenses, investment expenses, and many other miscellaneous itemized deductions such as tax preparation fees.

6) Gambling losses are miscellaneous itemized deductions subject to the 2% of AGI floor.

7) Personal travel expenses are deductible as miscellaneous itemized deductions subject to the 2% of AGI floor.

8) The deduction for unreimbursed transportation expenses for employees is subject to the 2% of AGI floor.

9) If an individual is not “away from home,” expenses related to local transportation are never deductible.

10) Jason, who lives in New Jersey, owns several apartment buildings in Baltimore. His travel expenses to Baltimore to inspect his property are tax deductible.

11) According to the IRS, a person’s tax home is the location of the family residence regardless of the location of the taxpayer’s principal place of employment.

12) In determining whether travel expenses are deductible, a general rule is that if a person is reassigned for an indefinite period, the individual’s tax home shifts to the new location and travel expenses are not deductible.

13) Travel expenses related to temporary work assignments of one year or less are deductible.

14) If the purpose of a trip is primarily personal and only secondarily related to business, the transportation costs to and from the destination are deductible.

15) Incremental expenses of an additional night’s lodging and additional day’s meals that are incurred to obtain “excursion” air fare rates with respect to employees whose business travel extends over Saturday night are not deductible business expenses.

16) Travel expenses for a taxpayer’s spouse are deductible if the spouse is an employee, the travel is for a bona fide purpose, and the expenses are otherwise deductible.

17) Travel expenses related to foreign conventions are disallowed unless the meeting is directly related to the taxpayer’s business or is employment related and it is reasonable for the meeting to be held outside of North America.

18) Commuting to and from a job location is a deductible expense.

19) Transportation expenses incurred to travel from one job to another are deductible if a taxpayer has more than one job.

20) Taxpayers may use the standard mileage rate method when five vehicles are used simultaneously for business.

21) If the standard mileage rate is used in the first year, the actual expense method may not be used in future years.

22) A taxpayer goes out of town to a business convention. The 50% reduction applies to the cost of food, entertainment and transportation expenses.

23) Self-employed individuals receive a for AGI deduction for 50% of entertainment expenses paid or incurred in the trade or business.

24) If an employee incurs business-related entertainment expenses that are fully reimbursed, it is the employer who is subject to the 50% limitation.

25) A tax adviser takes a client to a major league hockey game following the conclusion of a meeting involving the signing of a major planning engagement. As it is not “directly related,” the entertainment cannot be deductible.

26) “Associated with” entertainment expenditures generally must occur on the same day that business is discussed.

27) Dues paid to social or athletic clubs are deductible if they meet a primary-use test, requiring that more than 50% of the use of the facility be for business purposes.

28) Generally, 50% of the cost of business gifts is deductible up to $25 per donee per year.

29) A gift from an employee to his or her superior does not qualify as a business gift.

30) An accountant takes her client to a hockey game following a business meeting. Because it is a playoff game, and the tickets were purchased that day, a premium was paid. The deduction for the tickets is limited to 50% of the face value.

31) If an employee incurs travel expenditures and is fully reimbursed by the employer, neither the reimbursement nor the deduction is reported on the employee’s tax return if reporting is pursuant to an accountable plan.

32) Kim currently lives in Buffalo and works in Rochester, a 60-mile commute each way. Kim accepts a new job in a town outside of Rochester, and the new commute is 75-miles each way. Kim decides the commute for the new job is too long, and she moves to Rochester. Kim is eligible to deduct her moving expenses.

33) Deductible moving expenses include the cost of moving household goods and personal effects as well as temporary living expenses.

34) When a public school system requires advanced education for a teacher to continue employment, the teacher’s expenses are a deductible education expense.

35) Educational expenses incurred by a CPA for courses necessary to meet continuing education requirements are fully deductible.

36) Educational expenses incurred by a bookkeeper for courses necessary to sit for the CPA exam are fully deductible.

37) In-home office expenses are deductible if the office is used exclusively on a regular basis as the principal place of business for any trade or business of the taxpayer.

38) In addition to the general requirements for in-home office expenses, employees must also prove that the exclusive use of the office is for the convenience of the employer.

39) In-home office expenses for an office used by the taxpayer for administrative or management activities of the taxpayer’s trade or business are never deductible.

40) In-home office expenses which are not deductible in the year in which the costs were incurred due to limitations may be carried forward to subsequent years.

41) An employer receives an immediate tax deduction for pension and profit-sharing contributions made on behalf of employees.

42) In a defined contribution pension plan, fixed amounts are contributed based upon a specific formula and retirement benefits are based on the value of a participant’s account at the time of retirement.

43) A qualified pension plan requires that employer-provided benefits must be 100 percent vested after five years of service.

44) Under a qualified pension plan, the employer’s deduction is usually deferred until the employee recognizes income.

45) Nonqualified deferred compensation plans can discriminate in favor of highly compensated executives.

46) Corporations issuing incentive stock options receive a tax deduction for compensation expense.

47) Employees receiving nonqualified stock options recognize ordinary income at the grant date or exercise date if there is a readily ascertainable fair market value.

48) A sole proprietor establishes a Keogh plan. The highest effective percentage of earned income she can contribute is 25 percent.

49) SIMPLE retirement plans allow a higher level of employer contributions than do SEP IRAs.

50) The maximum tax deductible contribution to a traditional IRA in 2014 is $5,500 ($6,500 for a taxpayer age 50 or over).

51) The maximum tax deductible contribution to a Roth IRA in 2014 is $5,500 ($6,500 for a taxpayer age 50 or over).

52) A contributor may make a deductible contribution to a Coverdell Education Savings Account for a qualified designated beneficiary of up to $2,000.

53) All taxpayers are allowed to contribute funds to Health Savings Accounts to supplement their health insurance.

54) In which of the following situations is the individual is an independent contractor rather than an employee?
A) a nurse who is directly supervised by doctors in an office
B) a computer programmer who is instructed as to what projects to undertake, programming language and format, and hours of work
C) a nurse who travels to several different patients. She sets her own hours and is responsible for the delivery of nursing care and end result
D) a teacher whose hours, classroom responsibilities, content and methods of instruction are established by the school

55) Which of the following statements regarding independent contractors and employees is true (ignore temporary provisions)?
A) Independent contractors pay Social Security and Medicare tax of 15.3%.
B) Employees must pay unemployment taxes.
C) Independent contractors and employees pay the same Social Security and Medicare tax rates.
D) Independent contractors deduct their business expenses “from AGI.”

56) West’s adjusted gross income was $90,000. During the current year he incurred and paid the following:

Publications (unreimbursed and related to employment) $2,000
Tax return preparation fee 1,000
Dues to professional organizations 1,500
Fees for will preparation (no tax advice) 800
Life insurance premiums 1,400

Assuming he can itemize deductions, how much should West claim as miscellaneous itemized deductions (after limitations have been applied)?
A) $2,700
B) $4,500
C) $3,500
D) $5,300

57) Allison, who is single, incurred $4,000 for unreimbursed employee expenses, $10,000 for mortgage interest and real estate taxes on her home, and $500 for investment counseling fees. Allison’s AGI is $80,000. Allison’s allowable deductions from AGI are (after limitations have been applied)
A) $10,500.
B) $12,900.
C) $14,000.
D) $14,500.

58) All of the following are allowed a “For AGI” deduction except:
A) Cora owns her own CPA firm and travels from Lafayette, LA. to Washington, D.C. to attend a tax conference.
B) Jennifer, who lives in Houston, is the owner or several apartment buildings in Salt Lake City and travels there to inspect and manage her investments.
C) Alan is self-employed and is away from home overnight on job-related business.
D) Alison is an employee who is required to travel to company facilities throughout the U.S. in the conduct of her management responsibilities. She is not reimbursed by her employer.

59) Ron is a university professor who accepts a visiting position at another university for six months and
obtains a leave of absence from his current employer. Ron rents an apartment near the university and purchases his food. These living expenses incurred by Ron while visiting the university will be
A) deductible for AGI.
B) deductible from AGI, without application of a floor.
C) deductible from AGI, subject to the 2% of AGI floor.
D) nondeductible.

60) Gwen traveled to New York City on a business trip for her employer. Gwen spent 4 days in business meetings and conferences and then spent 2 days sightseeing in the area. Gwen’s plane fare for the trip was $250. Meals cost $160 per day. Hotels and other incidental expenses amounted to $250 per day. Gwen was not reimbursed by her employer for any expenses. Her AGI for the year is $50,000 and she itemizes but has no other miscellaneous itemized deductions. Gwen may deduct (after limitations)
A) $570.
B) $890.
C) $1,890.
D) $1,570.

61) Norman traveled to San Francisco for four days on vacation, and while there spent another two days conducting business for his employer. Norman’s plane fare for the trip was $500; meals cost $150 per day; hotels cost $300 per day; and a rental car cost $150 per day that was used for all six days. Norman was not reimbursed by his employer for any expenses. Norman’s AGI for the year is $40,000 and he did not have any other miscellaneous itemized deductions. Norman may deduct (after limitations)
A) $250.
B) $800.
C) $1,050.
D) $1,200.

62) Gayle, a doctor with significant investments in the stock market, traveled on a cruise ship to Bermuda. Investment specialists provided daily seminars which Gayle attended. The cost of the cruise for four days is $2,500. Gayle can deduct (before application of any floors)
A) $0.
B) $1,250.
C) $2,000.
D) $2,500.

63) Chelsea, who is self-employed, drove her automobile a total of 20,000 business miles in 2014. This represents about 75% of the auto’s use. She has receipts as follows:

Parking (business only) $500
Tolls (business only) 200
Repairs $1,000

Chelsea has an AGI for the year of $50,000. Chelsea uses the standard mileage rate method. After application of any relevant floors or other limitations, she can deduct
A) $10,900.
B) $11,900.
C) $11,750.
D) $12,900.

64) Brittany, who is an employee, drove her automobile a total of 20,000 business miles in 2014. This represents about 75% of the auto’s use. She has receipts as follows:

Parking (business only) $500
Tolls (business only) 200
Repairs $1,000

Brittany’s AGI for the year of $50,000, and her employer does not provide any reimbursement. She uses the standard mileage rate method. After application of any relevant floors or other limitations, Brittany can deduct
A) $10,900.
B) $11,900.
C) $10,750.
D) $12,900.

65) Rajiv, a self-employed consultant, drove his auto 20,000 miles this year, 15,000 to meetings with clients and 5,000 for commuting and personal use. The cost of operating the auto for the year was as follows:

Gasoline and repairs $7,000
Insurance 1,000
Depreciation 4,000

Rajiv’s AGI is $100,000 before considering the auto costs. Rajiv has used the actual cost method in the past. What is Rajiv’s deduction for the use of the auto after application of all relevant limitations?
A) $8,325
B) $9,000
C) $6,325
D) $7,000

66) Jordan, an employee, drove his auto 20,000 miles this year, 15,000 to meetings with clients and 5,000 for commuting and personal use. The cost of operating the auto for the year was as follows:

Gasoline and repairs $7,000
Insurance 1,000
Depreciation 4,000

Jordan submitted appropriate reports to his employer, and the employer paid a reimbursement of $ .50 per mile. Jordan has used the actual cost method in the past. Jordan’s AGI is $50,000. What is Jordan’s deduction for the use of the auto after application of all relevant limitations?
A) $1,500
B) $500
C) $1,000
D) $8,000

67) Sarah incurred employee business expenses of $5,000 consisting of $3,000 business meals and $2,000 customer entertainment. She provided an adequate accounting to her employer’s accountable plan and received reimbursement for one-half of the total expenses. How much of the meals and entertainment will be deductible by Sarah without consideration of the 2% of AGI limit?
A) $0
B) $1,250
C) $2,500
D) $5,000

68) Austin incurs $3,600 for business meals while traveling for his employer, Tex, Inc. Austin is reimbursed in full by Tex pursuant to an accountable plan. What amounts can Austin and Tex deduct?

A)
Austin Tex
$0 $1,800

B)
Austin Tex
$0 $3,600

C)
Austin Tex
$1,800 $1,800

D)
Austin Tex
$3,600 $0

69) Joe is a self-employed tax attorney who frequently entertains his clients at his country club. Joe’s club expenses include the following:

Annual dues $ 5,400
Initiation fees 1,200
Charges for personal meals with his family 3,100
Meal and entertainment charges related to business use 4,000

Assuming the business meals and entertainment qualify as deductible entertainment expenses, Joe may deduct
A) $2,000.
B) $4,700.
C) $5,300.
D) $4,000.

70) Shane, an employee, makes the following gifts, none of which are reimbursed:

Shane’s manager $30
Shane’s personal assistant 40
4 customers ($27 each) 108

What amount of the gifts is deductible before application of the 2% of AGI floor for miscellaneous itemized deductions?
A) $125
B) $150
C) $75
D) $178

71) Steven is a representative for a textbook publishing company. Steven attends a convention which will also be attended by many potential customers. During the week of the convention, Steven incurs the following costs in entertaining potential customers.

Meal costs $ 1,500
Entertainment of customers 3,500

Having recently been to a company seminar on the new tax laws, Steven makes sure that business is discussed at the various dinners, and that the entertainment is on the same day as the meetings with customers. Steven is reimbursed $2,000 by his employer under an accountable plan. Steven’s AGI for the year is $50,000, and while he itemizes deductions, he has no other miscellaneous itemized deductions. What is the amount and character of Steven’s deduction after any limitations?
A) $500 from AGI
B) $500 for AGI
C) $2,000 from AGI
D) $2,000 for AGI

72) Matt is a sales representative for a local company. He entertains customers as part of his job. During the current year he spends $3,000 on business entertainment. The company provides him an expense allowance of $2,000 under a nonaccountable plan. How will Matt treat the $2,000 partial reimbursement and the $3,000 entertainment expense?
A) He will deduct the $1,000 net expense as a miscellaneous itemized deduction, subject to the 2% of AGI floor.
B) He will deduct $500 of the net expense as a miscellaneous itemized deduction, subject to the 2% of AGI floor.
C) He will recognize $2,000 of income and deduct $3,000 as a miscellaneous itemized deduction, subject to the 2% of AGI floor.
D) He will recognize $2,000 of income and deduct $1,500 as a miscellaneous itemized deduction, subject to the 2% of AGI floor.

73) Donald takes a new job and moves to a new residence. The distances are as follows:

Old residence to new job 70 miles
Old residence to old job 8 miles

By how many miles does the move exceed the minimum distance requirement for the moving expense deduction?
A) 12 miles
B) 20 miles
C) 62 miles
D) none of the above

74) In which of the following situations is the taxpayer not allowed a deduction for moving expenses?
A) Pam moves from Phoenix to Los Angeles to take a new job. She works at the Los Angeles job for 45 weeks before starting a new job in Las Vegas.
B) Paul moves from Boston to Miami to start a new business selling t-shirts. The business is not successful and Paul returns to Boston after 52 weeks.
C) Phyllis opens a coffee bar after moving from Seattle to San Francisco. She still owns the coffee bar and lives in San Francisco 90 weeks after her move.
D) Marva moves from Dallas to Washington D.C. in her job as an IRS agent. She is still working at the IRS Washington office after one year.

75) Bill obtained a new job in Boston. He incurred the following moving expenses:

Transportation of household goods and personal effects $2,600
Cost of transporting Bill’s family 2,000
House-hunting trip 1,700
Payments to lessor to cancel a lease 500

Assuming Bill is entitled to deduct moving expenses, what is the amount of the deduction?
A) $2,600
B) $4,600
C) $6,300
D) $6,800

76) Ron obtained a new job and moved from Houston to Washington. He incurred the following moving expenses:

Transportation of household goods $3,200
House-hunting trips 1,500
Temporary living expenses (20 days) 3,400
Commissions on new lease 500
Costs of settling old lease 250
Mileage for personal automobile 1,400 miles

Assuming Ron is eligible to deduct his moving expenses, what is the amount of the deduction?
A) $3,529
B) $6,600
C) $9,179
D) $3,984

77) Edward incurs the following moving expenses:

Direct moving expenses $4,000
Indirect moving expense 6,000

The employer reimburses Edward for the full $10,000. What is the amount to be reported as income by Edward?
A) $0
B) $4,000
C) $6,000
D) $10,000

78) All of the following may deduct education expenses except:
A) Richard is a self-employed dentist who incurs expenses to attend a convention on new techniques in oral surgery.
B) Paige is an accountant who incurs expenses to take a CPA exam review course.
C) Hope is a business executive who incurs expenses to pursue an MBA degree.
D) Marvin is a high school teacher who incurs expenses for education courses to meet new course requirements to maintain his job.

79) The following individuals maintained offices in their home:
(1) Dr. Austin is a self-employed surgeon who performs surgery at four hospitals. He uses his home for administrative duties as he does not have an office in any of the hospitals.
(2) June, who is a self-employed plumber, earns her living in her customer’s homes. She maintains an office at home where she bills clients and does other paperwork related to her plumbing business.
(3) Cassie, who is an employee of Montgomery Electrical, is provided an office at the work but does significant administrative work at home. Her employer does not require her to do extra work but she feels it is necessary.

Who is entitled to a home office deduction?
A) Dr Austin
B) Dr. Austin and June
C) Cassie and June
D) All of the taxpayers are entitled to a deduction.

80) Alex is a self-employed dentist who operates a qualifying office in his home. Alex has $180,000 gross income from his practice and $160,000 of expenses directly related to the business, i.e., non-home office expenses. Alex’s allocable home office expenses for mortgage interest expenses and property taxes are $14,000 and other home office expenses are $9,000. What is Alex’s total allowable home office deduction?
A) $9,000
B) $14,000
C) $20,000
D) $23,000

81) Charles is a self-employed CPA who maintains a qualifying office in his home. Charles has $110,000 gross income from his practice and incurs $88,000 in salaries, supplies, computer services, etc. Charles’s mortgage interest and real estate taxes allocable to the office total $10,000. Other expenses total $14,000 and consist of depreciation, utilities, insurance, and maintenance. What is Charles’ total home office expense deduction?
A) $10,000
B) $14,000
C) $22,000
D) $24,000

82) In a contributory defined contribution pension plan, all of the following are true with the exception of
A) a separate account is established for each participant.
B) both the employee and employer can make contributions to the plan.
C) amounts are contributed to the plan based upon a specific formula.
D) retirement benefits are a fixed amount based on the level of compensation earned by the employee during the working years.

83) Characteristics of profit-sharing plans include all of the following with the exception of:
A) A predetermined formula is used to allocate employer contributions to individual employees and to establish benefit payments.
B) Forfeitures of benefits under the plan may be reallocated to the remaining participants.
C) The company must make contributions to the plan if it has profits during the year.
D) Annual employer contributions are not required, but substantial, recurring contributions must be made to satisfy the requirement that the plan be permanent.

84) Ross works for Houston Corporation, which has a contributory defined contribution pension plan. The employer’s monthly contribution to the plan is 8 percent of each participating employee’s monthly salary, while the employee contributes only 6 percent. Ross’s monthly salary is $3,000. Which of the following statements best describes the benefits of the plan?
A) Houston receives a deduction for its contributions to the plan when Ross receives a distribution from the plan.
B) While Ross is taxed on the employer’s contributions to the plan, his own contributions are not taxed until he receives a distribution from the plan.
C) Ross may deduct his own contributions to the pension plan, and Ross reports income from the plan each year until he receives distributions from the plan.
D) The earnings on amounts contributed to the plan are not taxed to Ross until he retires or receives a distribution from the plan.

85) Sam retired last year and will receive annuity payments for life from his employer’s qualified
retirement plan of $30,000 per year starting this year. During his years of employment, Sam contributed $130,000 to the plan on an after-tax basis. Based on IRS tables, his life expectancy is 260 months. All of the contributions were on a pre-tax basis. This year, Sam will include what amount in income?
A) 0
B) $6,000
C) $24,000
D) $30,000

86) Hunter retired last year and will receive annuity payments for life from his employer’s qualified retirement plan of $30,000 per year starting this year. During his years of employment, Hunter contributed $130,000 to the plan. Based on IRS tables, his life expectancy is 260 months. All of the contributions were on a pre-tax basis. This year, Hunter will include what amount in income?
A) $0
B) $6,000
C) $24,000
D) $30,000

87) Which of the following statements is incorrect regarding unfunded deferred compensation plans?
A) The employee is not taxed on the compensation amount when it is deposited in an escrow account.
B) An accrual-basis employer can deduct the compensation amount when it is accrued in the year service.
C) An employee is taxed when the amount is actually paid or made available.
D) A 20% excise tax will apply if the employee can voluntarily elect to receive payment early.

88) Tobey receives 1,000 shares of YouDog! stock as part of his compensation package. Tobey’s employment contract with YouDog!, Inc. states that if he leaves before completion of three years of employment, he will forfeit the stock. The stock currently has a fair market value of $12 per share. Which of the following statements regarding Tobey’s choices is not true?
A) Tobey does not have to recognize any income from receiving the stock until his rights to the stock are fully vested.
B) Tobey must report $12,000 as income due to the receipt of the stock in the current year.
C) Tobey may elect to report the $12,000 FMV of the stock as ordinary income in the current year.
D) If Tobey elects to report $12,000 as income in the current year and the stock price falls to $5 per share when his rights to the stock are vested, Tobey is not allowed to deduct a loss.

89) All of the following characteristics are true of an incentive stock option with the exception of
A) the option price must be equal to or greater than the stock’s FMV on the option’s grant date.
B) the employee cannot own more than ten percent of the voting power of the employer corporation’s stock immediately prior to the option’s grant date.
C) the option must be granted within ten years from the date the plan is adopted and the employee must exercise the stock option within ten years from the grant date.
D) there is no limit to the value of the options that become exercisable to an employee in a single year.

90) Wilson Corporation granted an incentive stock option to Reva on January 1, two years ago. The option price was $300, and the FMV of the Wilson stock was also $300 on the grant date. The option allowed Reva to purchase 150 shares of Wilson stock. Reva exercised the option on August 1, this year, when the stock’s FMV was $400. Unless otherwise stated, assume Reva is a qualifying employee. The results of the above transactions to Reva will be
A) no income to Reva on the grant date or exercise date but there is an alternative minimum tax adjustment item to Reva of $15,000.
B) no income tax or alternative minimum tax effect for Reva.
C) ordinary income to Reva on the exercise date of $15,000.
D) capital gain to Reva on the exercise date of $15,000.

91) Mirasol Corporation granted an incentive stock option to employee Josephine two years ago. The option price was $150 and the FMV of the Mirasol stock was also $150 on the grant date. The option allowed Josephine to purchase 160 shares of Mirasol stock. Josephine exercised the option this year when the stock’s FMV was $250. Unless otherwise stated, assume Josephine is a qualifying employee. The results of the above transactions to Mirasol Corporation will be
A) no compensation deduction.
B) a compensation deduction of $16,000 on the grant date.
C) a tax preference item of $16,000 on the exercise date.
D) a compensation deduction of $16,000 on the exercise date.

92) Martin Corporation granted an incentive stock option to employee Caroline on January 1, 2011. The option price was $150, and the FMV of the Martin stock was also $150 on the grant date. The option allowed Caroline to purchase 160 shares of Martin stock. Caroline exercised the option on August 1, 2013 when the stock’s FMV was $250. Unless otherwise stated, assume Caroline is a qualifying employee. If Caroline sells the stock on September 5, 2014 for $350 per share, she must recognize (ignore alternative minimum tax)
A) 0. No gain or loss is recognized at exercise or sale with incentive stock options.
B) long-term capital gain of $16,000 in 2014.
C) ordinary income of $16,000 on the exercise date and a long-term capital gain of $16,000 in 2014.
D) long-term capital gain of $32,000 in 2014.

93) Jackson Corporation granted an incentive stock option to employee Caroline on January 1, two years ago. The option price was $150, and the FMV of the Jackson stock was also $150 on the grant date. The option allowed Caroline to purchase 160 shares of Jackson stock. Caroline exercised the option on August 1, 2013, when the stock’s FMV was $250. Unless otherwise stated, assume Caroline is a qualifying employee. If Caroline sells the stock on July 5, 2014 for $400 per share, she must recognize
A) long-term capital gain of $40,000 in the year of sale.
B) long-term capital gain of $24,000 in the year of sale.
C) ordinary income of $16,000 on the exercise date and a long-term capital gain of $24,000 in the year of sale.
D) ordinary income of $16,000 and a short-term capital gain of $24,000 in the year of sale.

94) Martin Corporation granted a nonqualified stock option to employee Caroline on January 1, 2011. The option price was $150, and the FMV of the Martin stock was also $150 on the grant date. The option allowed Caroline to purchase 1,000 shares of Martin stock. The option itself does not have a readily ascertainable FMV. Caroline exercised the option on August 1, 2014 when the stock’s FMV was $250. If Caroline sells the stock on September 5, 2015 for $300 per share, she must recognize

A)
2014 2015
$100,000 ordinary income $50,000 LTCG

B)
2014 2015
0 $150,000 LTCG

C)
2014 2015
$100,000 ordinary income $50,000 ordinary income

D)
2014 2015
0 $150,000 ordinary income

95) Martin Corporation granted a nonqualified stock option to employee Caroline on January 1, 2011. The option price was $150, and the FMV of the Martin stock was also $150 on the grant date. The option allowed Caroline to purchase 1,000 shares of Martin stock. The option itself does not have a readily ascertainable FMV. Caroline exercised the option on August 1, 2014 when the stock’s FMV was $250. Caroline sells the stock on September 5, 2015 for $300 per share. Martin Corporation will be allowed a deduction of
A) $150,000 in 2011.
B) $100,000 in 2014.
C) $50,000 in 2015.
D) $100,000 in 2014 and $50,000 in 2015.

96) A partnership plans to set up a retirement plan to benefit the partners and the employees. All of the following retirement plans are appropriate except
A) an H.R. 10 (Keogh) plan.
B) a SEP IRA.
C) a SIMPLE plan.
D) a Solo 401(k).

97) Frank is a self-employed CPA whose 2014 net earnings from his trade or business (before the H.R. 10 plan contribution but after the deduction for one-half of self-employment taxes) is $240,000. What is the maximum contribution that Frank can make on his behalf to his H.R. 10 (Keogh) plan in 2014?
A) $65,000
B) $48,000
C) $52,000
D) $60,000

98) Tessa is a self-employed CPA whose 2014 net earnings from her business (before the H.R. 10
plan contribution but after the deduction for one-half of self-employment taxes) is $400,000. What is the maximum contribution that Tessa can make on her behalf to her H.R. 10 (Keogh) plan in 2014?
A) $100,000
B) $80,000
C) $65,000
D) $52,000

99) Which of the following is true about H.R.10 (Keogh) plans?
A) The plan must be established before the end of the tax year, and contributions must be made before the due date of the tax return, plus extensions.
B) The plan must be established and contributions must be made before the end of the tax year.
C) The plan must be established and contributions must be made before April 1.
D) The plan must be established and contributions must be made before the due date of the tax return, plus extensions.

100) Which of the following statements is incorrect regarding the SEP IRA?
A) Both employers and employees can contribute to the plan.
B) Contributions made by the due date of the tax return can be treated as made on the last day of the related tax year.
C) Employer contributions must be nondiscriminatory.
D) The maximum contribution for 2014 is $52,000.

101) Which statement is correct regarding SIMPLE retirement plans?
A) SIMPLE plans are not subject to nondiscrimination rules.
B) This plan can only be adopted by employers with 50 or fewer employees.
C) Only the employer can contribute to the plan.
D) Employer contributions must vest within three years.

102) Tyne is a 48-year-old an unmarried taxpayer who is not an active participant in an employer-sponsored qualified retirement plan. Before IRA contributions, her AGI is $63,000 in 2014. What is the maximum amount she may contribute to a tax deductible IRA?
A) $ 0
B) $4,400
C) $5,500
D) $6,500

103) Hannah is a 52-year-old an unmarried taxpayer who is not an active participant in an employer-sponsored qualified retirement plan. Before IRA contributions, her AGI is $63,000 in 2014. What is the maximum amount she may contribute to a tax deductible IRA?
A) $4,400
B) $5,200
C) $5,500
D) $6,500

104) H (age 50) and W (age 48) are married but only W is employed. She is not covered by a retirement plan at work. She earns $75,000 during the year and they have combined AGI of $78,000 before any IRA contribution. In 2014, the maximum amount together they may contribute to tax deductible IRAs is
A) $5,500.
B) $6,500.
C) $11,000.
D) $12,000.

105) Tyler (age 50) and Connie (age 48) are a married couple. Tyler is covered under a qualified retirement plan at his job and earned $175,000 in 2014. Connie is employed as a lab technician and earned $30,000 but is not covered under a qualified retirement plan. They file a joint return; have interest and dividend income of $30,000. What is their maximum for AGI deduction for contributions to a traditional IRA?
A) $0
B) $5,500
C) $6,500
D) $12,000

106) Tucker (age 52) and Elizabeth (age 48) are a married couple. Tucker is covered under a qualified retirement plan at his job and earned $90,000 in 2014. Elizabeth is employed as a lab technician and earned $30,000 but is not covered under a qualified retirement plan. They file a joint return; have interest and dividend income of $25,000. What is the maximum amount of tax deductible contributions may be made to a traditional IRA?
A) $0
B) $11,000
C) $5,500
D) $12,000

107) During 2014, Marcia, who is single and is covered under a pension plan at work, contributes $5,500 into a Roth IRA. If her AGI is $64,000, which of the following is true?
A) All of the contribution is deductible.
B) None of the contribution is deductible.
C) She must withdraw all of the contribution immediately since she is covered under a plan at work.
D) Only 60% of the contribution is deductible since her AGI exceeds $60,000 by $4,000 and her maximum contribution is phased out by 40%.

108) Feng, a single 40 year old lawyer, is covered by a qualified retirement at work. His salary is $109,000, and his total AGI is $123,000. The maximum contribution he can make to a Roth IRA in 2014 is
A) 0.
B) $3,300.
C) $2,200.
D) $5,500.

109) Which of the following is true about future qualified distributions from a Roth IRA by a person who will be 65 years old at the time the distributions begin? Assume the individual opened the account before age 60.
A) The entire amount of the distributions will be tax-free.
B) Only the accumulated earnings will be tax-free.
C) Only the previous contributions will be tax-free.
D) The entire amount of the distribution will be taxable.

110) All of the following are true with regard to a Roth IRA except
A) contributions to Roth IRAs are subject to special modified AGI limitations that are higher than those for traditional IRAs.
B) contributions to Roth IRAs are never tax deductible.
C) contributions to Roth IRAs must cease after the owner has reached age 70 1/2.
D) contributions to existing Roth IRAs must be made by the due date of the return.

111) Which of the following statements regarding Coverdell Education Savings Accounts is incorrect, disregarding any AGI limits?
A) Distributions cannot be used for elementary and secondary education expenses.
B) Distributions to the beneficiary are not taxable as long as they are used for tuition, fees, room and board.
C) Contributions can be made until the beneficiary reaches 18.
D) Contributors can make nondeductible contributions of up to $2,000 for each beneficiary.

112) Which of the following statements regarding Health Savings Accounts is incorrect?
A) Taxpayers are allowed to deduct contributions to a health savings account for AGI.
B) All taxpayers are eligible to establish a health savings account.
C) Distributions from a health savings account are excluded from gross income if used to pay qualified medical expenses.
D) Health savings account contributions are limited to the lesser of 100% of annual deductible under high deductible health plan or $3,300 for taxpayers without family coverage.

113) Which of the following conditions would generally not favor the rollover of an untaxed retirement fund (e.g. traditional IRA or 401(k) plan) to a Roth account?
A) expected higher tax rates at retirement
B) significant after-tax funds available to pay taxes
C) an advanced age of the taxpayer
D) All of the above create favorable conditions for a rollover to a Roth.

114) Richard traveled from New Orleans to New York for both business and vacation. He spent 4 days conducting business and some days vacationing. He incurred the following expenses:

Airfare $460
Lodging-per day 175
Meals-per day 100
Business Entertainment 800

What is his miscellaneous itemized deduction (before the floor), assuming Richard is an employee and is not reimbursed, under the following two circumstances?

a. He spends three days on vacation, in addition to the business days.
b. He spends six days on vacation, in addition to the business days.

115) David acquired an automobile for $30,000 for use in his unincorporated business in 2011 and used the standard mileage rate method in 2012 and 2013. He switches to the actual expense method for 2014. The automobile was used 25,000 miles in 2012 and 20,000 miles in 2013. What is the amount of the adjusted basis of the automobile for purposes of computing depreciation in 2014?

116) Sarah purchased a new car at the beginning of the year. She makes an adequate accounting to her employer and receives a $2,400 (12,000 miles × 20 cents per mile) reimbursement in 2014 for employment-related business miles. She incurs the following expenses related to both business and personal use:

Gas and oil $6,000
Repairs and maintenance 2,500
Depreciation 3,000
Insurance 1,800
Total $13,300

She also spent $200 on parking and tolls that were related to business. During the year she drove a total 20,000 miles.

What are the possible amounts of Sarah’s deductible transportation expenses?

117) Rita, a single employee with AGI of $100,000 before consideration of the items below, incurred the following expenses during the year, all of which were unreimbursed unless otherwise indicated:

Transportation expenses for business trip $3,000
Registration fees for business conference 700
Business-related meals and entertainment 700
Country club dues (used 60% for business) 4,000
Local meals eaten alone during regular business hours after visiting client 400
Qualified moving expenses 1,000
Tax return preparation fees 900
Safe deposit box rental for stock certificates 50

In addition, Rita paid $300 for dues to her professional business association. The company reimbursed her after she submitted the appropriate documentation. What is Rita’s net miscellaneous itemized deduction for the year after application of all relevant limitations?

118) Ellie, a CPA, incurred the following deductible education expenses to maintain or improve her skills:

Travel and transportation $1,700
Tuition 6,000
Books 800
Ellie’s AGI for the year is $60,000.

a. If Ellie is self-employed, what are the amount of and the nature of the deduction for these expenses?
b. If, instead, Ellie is an employee who is not reimbursed by his employer, what are the amount of and the nature of the deduction for these expenses (after limitations)?

119) Dighi, an artist, uses a room in his home (250 square feet) as a studio exclusively to paint. The studio meets the requirements for a home office deduction. (Painting is considered his trade or business.) The following information appears in Dighi’s records:

Revenue from sale of paintings $4,000
Expenses attributable to business of painting such as supplies 1,800
Expenses related to home office:
Property taxes on portion of home where he paints 900
Utilities, insurance, etc 700
Depreciation of portion of home 800

(a) What is the amount of Dighi’s home office deduction if he is self-employed?
(b) If some amount is not allowed under the tax law, how is the disallowed amount treated?
(c) Assume all of Dighi’s records of expenses relating to the room were destroyed in a major paint spill. How much of a home office deduction, if any, will he be allowed?

120) Ruby Corporation grants stock options to Iris on February 1, 2013. The options do not have a readily ascertainable value. The option price is $100, and the FMV of the Ruby stock is also $100 on the grant date. The option allows Iris to purchase 200 shares of Ruby stock. Iris exercises the option on August 1, 2014, when the stock’s FMV is $150. Iris sells the stock on December 5, 2015 for $400. Determine the amount and character (i.e. ordinary, LTCG or STCG) of income recognized by Iris and the deduction allowed Ruby Corporation in 2013, 2014 and 2015 under the following assumptions:

a. The stock option is an incentive stock option.
b. The stock option is a nonqualified stock option.

121) Tia is a 52-year-old an unmarried taxpayer who is an active participant in an employer-sponsored qualified retirement plan. Before IRA contributions, her AGI is $64,000 in 2014.
a. What is the maximum amount she can contribute and the maximum deduction she can receive for a contribution to a traditional IRA?
b. What is the maximum amount she can contribute and the maximum deduction she can receive for a contribution to a Roth IRA?
Answer:

122) Raul and Jenna are married and are both working. They are both over age 50. Jenna participates in her employer’s Sec. 401(k) plan and makes the maximum contribution and enjoys a company matching contribution. Raul’s employer does not maintain a retirement plan so he would like to save as much as possible in a tax-advantaged manner for retirement. They expect to report $185,000 of AGI for 2014.
a. What is the maximum amount that Raul can contribute to a traditional IRA and how much can he deduct?
b. What is the maximum amount that Raul can contribute to a Roth IRA and how much can he deduct?
c. How could Raul contribute to both the traditional IRA and Roth IRA to maximize current and future tax savings?

123) Jack takes a $7,000 distribution from his Health Savings Account. $2,000 is used to pay for X-rays and dental surgery. The other $5,000 to make a down payment on a new car. What are the tax consequences to Jack?

124) What factors are considered in determining whether an expense is a deductible travel expense?

125) What two conditions are necessary for moving expenses to be deductible?

126) Explain when educational expenses are deductible for an employee.

127) When are home-office expenses deductible?

128) Gina is an instructor at State University in Birmingham. Her university has asked her if she would be interested in taking a temporary assignment at their Montgomery campus. In addition to her salary, the University would pay her living expenses while in Montgomery. What should Gina consider with regard to taxes in deciding whether or not to accept the offer?

129) Fiona is about to graduate college with a management degree. She has been offered a job as a sales representative for a pharmaceutical company. The job will require significant travel and entertainment expenses for which she will be given a salary supplement. What tax issues should Fiona consider in her decision?

130) Chuck, who is self-employed, is scheduled to fly from Minneapolis to London on a business trip. His flight schedule included a connection through New York City. When Chuck arrived in New York City, he learned that his flight to London had been cancelled due to a volcanic eruption in Iceland. All air travel to Europe was delayed for five days because of significant amounts of ash in the air, causing Chuck to incur costs for hotel and meals in New York City. Since Chuck had never been to New York City before, he spent the time sightseeing. What tax issues are present?

131) Josiah is a human resources manager of a large software company. He is considering asking for a leave of absence to pursue an MBA degree. Josiah will pay for his MBA tuition of $45,000 a year without any employer assistance. Josiah will incur a large debt if he pursues an MBA. Upon completing his MBA, he would want to consider various job opportunities. Discuss the tax issues affecting Josiah’s decision?

132) Daniel has accepted a new job and is reviewing the retirement plan information. He has a choice of participating in the company’s conventional Sec. 401(k) plan or a Roth 401(k) plan. Explain the difference between the two plans in terms of employee contributions and retirement distributions from the plan.

133) Discuss the tax treatment of a nonqualified stock option plan.

134) Johanna is single and self-employed as a technology consultant. She wants to set money aside for her retirement. What tax and financial issues should she consider?

135) Why did Congress establish Health Savings Accounts (HSAs)? How do HSAs operate?

Chapter 10 Depreciation, Cost Recovery, Amortization, and Depletion

1) On its tax return, a corporation will use the same depreciation, amortization and depletion methods used in its financial statements issued to shareholders.

2) Depreciable property includes business, investment, and personal-use assets.

3) In order for an asset to be depreciated in the year of purchase, it must be placed in service before year’s end.

4) The basis of an asset must be reduced by the depreciation allowable.

5) Land, buildings, equipment, and stock are examples of tangible property.

6) If personal-use property is converted to trade or business use, the basis for depreciation is the lesser of adjusted basis or FMV on the date of conversion.

7) Under the MACRS rules, salvage value is not considered in the computation of the cost-recovery or depreciation amount.

8) Under the MACRS system, depreciation rates for real property must always use the mid-month convention in the year of acquisition.

9) Under MACRS, tangible personal property used in trade or business purchased and placed into service on March 1, 2014 should be depreciated for 10 months in 2014. Assume the business uses a calendar tax year.

10) MACRS recovery property includes tangible personal and real property that is used in a trade or business.

11) Under the MACRS system, automobiles and computers are classified as seven-year property.

12) In computing MACRS depreciation in the year of disposition of personal property used in a trade or business, the half-year convention must be applied to the amounts in the tables if the half-year convention was used in the year the asset was placed into service.

13) Intangible assets are subject to MACRS depreciation.

14) Section 179 allows taxpayers to immediately expense up to $25,000 (for 2014), subject to limitations, of the cost of real and personal property placed into service in a trade or business.

15) The Section 179 expensing election is available on an annual basis for property purchased during the year.

16) Personal property used in a rental activity held for investment qualifies for the Section 179 expensing election.

17) Sec. 179 tax benefits are recaptured if at any time an asset is converted to personal use.

18) Any Section 179 deduction that is not allowed currently due to the taxable income limitation may be carried over and deducted in future years.

19) Under the MACRS system, if the aggregate basis of all personal property placed in service during the last three months of the year exceeds 40% of the cost of all personal property placed in service during the tax year, the mid-quarter convention is required.

20) The mid-quarter convention applies to personal and real property.

21) Under the MACRS system, the same convention that applies in the year of acquisition (e.g., half-year, mid-quarter, or mid-month) also applies in the year of disposition.

22) Residential rental property is defined as property from which more than 80% of the gross rental income is rental income from dwelling units.

23) The MACRS system requires that residential real property and nonresidential rental property be depreciated using the straight-line method.

24) Capital improvements to real property must be depreciated over the remaining life of the property on which the improvements were made.

25) Expenditures that enlarge a building, any elevator or escalator, any structural component that benefits a common area or the internal structural framework are not considered qualified leasehold improvement property.

26) The straight-line method may be elected for depreciating tangible personal property placed in service after 1986.

27) The election to use ADS is made on a year-by-year, property-class by property-class basis for real and personal property.

28) If the business use of listed property is 50% or less of the total usage, the alternative depreciation system must be used.

29) If the business use of listed property decreases to 50% or less of the total usage, the property is subject to depreciation recapture.

30) Once the business use of listed property falls to 50% or below, the alternative depreciation system must be used for the current year and all subsequent years, even if the business use percentage increases to more than 50% in a subsequent year.

31) If a new luxury automobile is used 100% for business and placed in service in 2014, the maximum MACRS depreciation on the vehicle for 2014 is $3,160.

32) A large SUV is place in service in 2014. MACRS depreciation on an SUV weighing over 6,000 pounds is limited to $3,160 for the first year placed in service.

33) When a taxpayer leases an automobile for 100% business purposes, the entire lease payment is deductible.

34) If a company acquires goodwill in connection with the acquisition of a business, the goodwill is amortizable over a 60-month period.

35) Amounts paid in connection with the acquisition of a business which represent a covenant not to compete are amortizable over the covenant’s remaining life.

36) Unless an election is made to expense or defer and amortize research and experimental expenditures, these costs must be capitalized.

37) Most taxpayers elect to expense R&E expenditures because of the immediate tax benefit.

38) Off-the-shelf computer software that is purchased for use in the taxpayer’s trade or business is amortized over 36 months, or it can be immediately expensed under a Sec. 179 election.

39) Taxpayers are entitled to a depletion deduction if they have an economic interest in the natural resource property.

40) A taxpayer owns an economic interest in an oil and gas property. She is allowed to deduct the smaller of cost depletion or percentage depletion.

41) Intangible drilling and development costs (IDCs) may be deducted as an expense or may be capitalized.

42) Joan bought a business machine for $15,000 on January 1, 2013, and later sold the machine for $12,800 when the total allowable depreciation is $8,500. The depreciation actually taken on the tax returns totaled $8,000. Joan must recognize a gain (or loss) of
A) no gain or loss.
B) ($3,200).
C) $6,800.
D) $6,300.

43) In April 2014, Emma acquired a machine for $60,000 for use in her business. The machine is classified as 7-year property. Emma does not expense the asset under Sec. 179. Emma’s depreciation on the machine this year is
A) $30,000.
B) $60,000.
C) $6,428.
D) $8,574.

44) In May 2014, Cassie acquired a machine for $30,000 to use in her business. The machine is classified as 5-year property. Cassie does not expense the property under Sec. 179. Cassie’s depreciation on the machine this year is
A) $3,000.
B) $6,000.
C) $12,000.
D) $15,000.

45) On January 3, 2011, John acquired and placed into service business tools costing $10,000. The tools have a 3-year class life. No other assets were purchased during that year. The depreciation in 2014 for those tools is (Sec. 179 and bonus depreciation were not applied)
A) $0.
B) $741.
C) $1,920.
D) $3,333.

46) When depreciating 5-year property, the final year of depreciation will be year
A) 3.
B) 4.
C) 5.
D) 6.

47) Prithi acquired and placed in service $190,000 of equipment on August 1, 2014 for use in her sole proprietorship. The equipment is 5-year recovery property. No other acquisitions are made during the year. Prithi elects to expense the maximum amount under Sec. 179. Prithi’s total deductions for the year (including Sec. 179 and depreciation) are
A) $38,000.
B) $25,000.
C) $63,000.
D) $58,000.

48) Fred purchases and places in service in 2014 personal property costing $221,000. What is the maximum Sec. 179 deduction that Fred can deduct, ignoring any taxable income limitation?
A) $25,000
B) $21,000
C) $4,000
D) $200,000

49) Cate purchases and places in service property costing $150,000 in 2014. She wants to elect the maximum Sec. 179 deduction allowed. Her business income is $20,000. What is the amount of her allowable Sec. 179 deduction and carryover, if any?

A)
179 deduction Carryover
$25,000 0

B)
179 deduction Carryover
$150,000 0

C)
179 deduction Carryover
$20,000 $130,000

D)
179 deduction Carryover
$20,000 $5,000

50) Ilene owns an unincorporated manufacturing business. In 2014, she purchases and places in service $206,000 of qualifying five-year equipment for use in her business. Her taxable income from the business before any Sec. 179 deduction is $17,000. Elaine takes the maximum allowable deduction under section 179. Which of the following statements is true regarding the Sec. 179 election?
A) Ilene can deduct $25,000 as a section 179 deduction in 2014, with no carryover to next year.
B) Ilene can deduct $19,000 as a section 179 deduction in 2014.
C) IIene can deduct $17,000 as a section 179 deduction in 2014; $2,000 may be carried over to next year.
D) Ilene can deduct $17,000 as a section 179 deduction in 2014 ,with no carryover to next year.

51) Terra Corporation, a calendar-year taxpayer, purchases and places into service machinery with a 7-year life that cost $125,000. The mid-quarter convention does not apply. Terra elects to depreciate the maximum under Sec. 179. Terra’s taxable income for the year before the Sec. 179 deduction is $700,000. What is Terra’s total depreciation deduction related to this property?
A) $17,863
B) $42,863
C) $25,000
D) $39,290

52) Tessa owns an unincorporated manufacturing business. In 2014, she purchases and places in service $207,000 of qualifying five-year equipment for use in her business. Her taxable income from the business before any Sec. 179 deduction is $15,000. Tessa elects to expense the maximum under Sec. 179. What is Tessa’s maximum total cost recovery deduction for 2014?
A) $53,400
B) $52,800
C) $15,000
D) $41,400

53) Which of the following statements regarding Sec. 179 is true?
A) If a taxpayer places in service property costing more than the Sec. 179 ceiling on the amount of property placed in service, the excess can be carried over to subsequent years.
B) Amounts of the Sec. 179 election in excess of the taxable income limitation are carried forward.
C) Sec. 179 carryforwards expire after five years.
D) All of the above statements are true.

54) In November 2014, Kendall purchases a computer for $4,000. She does not use Sec. 179 expensing. She only uses the most accelerated depreciation method possible. The computer is the only personal property which she places in service during the year. What is her total depreciation deduction for 2014?
A) $200
B) $572
C) $800
D) $1,000

55) On October 2, 2014, Dave acquired and placed into service 5-year business equipment costing $70,000. No other acquisitions were made during the year. Dave does not use Sec. 179 expensing. The depreciation for this year is using the most accelerated method possible is
A) $0.
B) $3,500.
C) $7,000.
D) $10,003.

56) On November 3, this year, Kerry acquired and placed into service 7-year business equipment costing $80,000. In addition, on May 5th of this year, Kerry had also placed in business use 5-year recovery property costing $15,000. Kerry did not elect Sec. 179 immediate expensing. No other assets were purchased during the year. The depreciation for this year is
A) $3,606.
B) $6,606.
C) $13,576.
D) $14,432.

57) Paul bought a computer for $15,000 for business use on March 18, 2012. This was his only purchase for that year. Paul used the most accelerated depreciation method available, but did not elect Sec. 179. Bonus depreciation was not available. Paul sells the machine in 2014. The depreciation on the computer for 2014 is
A) $0.
B) $1,440.
C) $1,500.
D) $2,880.

58) On April 12, 2013, Suzanne bought a computer for $20,000 for business use. This was the only purchase for that year. Suzanne used the most accelerated depreciation method available but did not elect Sec. 179. Bonus depreciation was not available. Suzanne sells the machine in 2014. The depreciation on the computer for 2014 is
A) $2,000.
B) $3,200.
C) $4,000.
D) $6,400.

59) Harrison acquires $65,000 of 5-year property in June 2012 that is required to be depreciated using the mid-quarter convention (because of other purchases that year). He did not elect Sec. 179 immediate expensing. Bonus depreciation was not available. If Harrison sells the property on August 23, 2014, what is the amount of depreciation claimed in 2014?
A) $6,500.00
B) $7,312.50
C) $11,700.00
D) $9,289.00

60) For real property placed in service after 1986, depreciation under the MACRS system is calculated using the
A) straight-line method and a half-year convention in the year of acquisition and in the year of disposition.
B) straight-line method and a mid-month convention in the year of acquisition and in the year of disposition.
C) 200% DB method and a mid-month convention in the year of acquisition and in the year of disposition.
D) 200% DB method and a half-year convention in the year of acquisition and in the year of disposition.

61) On August 11, 2014, Nancy acquired and placed into service residential rental property, which cost $430,000; the cost of the land has been excluded. Nancy annually elects the maximum allowed Sec. 179 deduction. The total depreciation for the year is (rounded)
A) $5,865.
B) $4,141.
C) $5,117.
D) $15,636.

62) Lincoln purchases nonresidential real property costing $300,000 and places it in service in March 2013. What is Lincoln’s 2014 depreciation on the property?
A) $6,099
B) $7,692
C) $8,637
D) $10,908

63) Atiqa took out of service and sold a residential rental property on October 31 of this year. She had originally acquired the property ten years ago. The building (excluding the value of the land) cost $1,000,000. How much is her current year depreciation deduction?
A) $30,300
B) $36,360
C) $18,182
D) $28,785

64) All of the following are true with regard to the alternative depreciation system except
A) the principal type of property for which ADS is required is any tangible property which is used predominantly outside of the United States.
B) the ADS election is available to real property on a property by property basis.
C) the ADS election is available to personal property on a property by property basis.
D) once the ADS election is made for specified property, it is irrevocable.

65) If the business usage of listed property is less than or equal to 50% of its total usage, depreciation is calculated using the
A) regular MACRS tables.
B) alternative depreciation system.
C) it may not be depreciated.
D) regular MACRS tables and a mid-month convention.

66) Eric is a self-employed consultant. In May of the current year, Eric acquired a computer system (5-year property) for $6,000 and used the computer 80% for business and 20% for personal purposes. Eric does not take any Sec. 179 deduction. The maximum depreciation deduction for is
A) $600.
B) $800.
C) $960.
D) $1,200.

67) Eric is a self-employed consultant. In May of the current year, Eric acquired a computer system (5-year property) for $7,000 and used the computer 30% for business. Eric does not use Sec. 179. The maximum depreciation deduction for is
A) $210.
B) $420.
C) $700.
D) $2,100.

68) In the current year George, a college professor, acquired a computer system (5-year property) for $1,000 and used the computer 80% for teaching and research-related activities and the remaining 20% for personal use. Because George’s employer provides him with a computer in his office at the university, the employer does not require him to have a computer at home. No election was made regarding Sec. 179. The maximum depreciation deduction is
A) $0.
B) $200.
C) $160.
D) $800.

69) In April of 2013, Brandon acquired five-year listed property (not an automobile) for $30,000 and used it 70% for business. No election was made regarding Sec. 179 and bonus depreciation was not available. In 2014, his business use of the property dropped to 40%. Which of the following statements is true?
A) The change does not affect Brandon’s previous depreciation.
B) Brandon must recapture $2,100 as ordinary income.
C) Brandon must recapture $4,200 as ordinary income.
D) Brandon must amend the previous tax return and recompute depreciation.

70) In July of 2014, Pat acquired a new automobile for $28,000 and used the automobile 80% for business. No election is made regarding Sec. 179. Assuming her business use remains at 80%, Pat can take a maximum depreciation deduction in 2014 of
A) $2,528.
B) $3,160.
C) $5,600.
D) $4,480.

71) On January l Grace leases and places into service an automobile with a FMV of $39,000. The business use of the automobile is 60%. The “inclusion amount” for the initial year of the lease from the IRS tables is $20. The annual lease payments are $8,000. What are the tax consequences of this lease?
A) deduction for lease payments of $4,782
B) deduction for lease payments of $4,800
C) deduction for lease payments of $6,000
D) deduction for lease payment of $8,982

72) On January 1, 2014, Charlie Corporation acquires all of the net assets of Rocky Corporation for $2,000,000. The following intangible assets are included in the purchase agreement:

Assets Acquisition Cost
Goodwill and going concern value $105,000
Licenses $ 45,000
Patents $ 60,000
Covenant not to compete for five years $120,000

What is the total amount of amortization allowed in 2014?
A) $15,000
B) $22,000
C) $31,000
D) $38,000

73) In accounting for research and experimental expenditures, all of the following alternatives are available with the exception of
A) expense R&E costs in the year paid or incurred.
B) expense R&E costs in the year in which a product or process becomes marketable.
C) defer and amortize R&E costs as a ratable deduction over a period of 60 months or more.
D) capitalize and write off R&E costs only when the research project is abandoned or is worthless.

74) Costs that qualify as research and experimental expenditures include all of the following except
A) depreciation of laboratory equipment.
B) management studies.
C) costs incurred in developing product improvements.
D) costs of obtaining a patent such as attorney fees.

75) This year Bauer Corporation incurs the following costs in development of new products:

Laboratory supplies $ 55,000
Laboratory equipment purchased
(5-year recovery property) 50,000
Salaries (lab personnel) 90,000
Utilities 20,000
Total $215,000

No benefits are realized from the research expenditures until next year. If Bauer Corporation elects to expense the research expenditures, the deduction is
A) $10,000 this year and $175,000 next year.
B) $175,000 next year.
C) $175,000 this year.
D) $215,000 this year.

76) Galaxy Corporation purchases specialty software from a software development firm for use in its business as of January 1 of the current year at a cost of $90,000. No hardware was acquired. How much of the cost can Galaxy deduct this year?
A) $18,000
B) $15,000
C) $30,000
D) $90,000

77) In calculating depletion of natural resources each period,
A) cost depletion must be used.
B) percentage depletion must be used.
C) the greater of cost depletion or percentage depletion must be used.
D) the smaller of cost depletion or percentage depletion must be used.

78) J.R. acquires an oil and gas property interest for $300,000. J.R. expects to recover 50,000 barrels of oil. Intangible drilling and development costs are $80,000 and are charged to expense. Other expenses are $20,000. During the year, 13,000 barrels of oil are sold for $170,000. J.R.’s depletion deduction is
A) $25,500.
B) $35,000.
C) $70,000.
D) $78,000.

79) Everest Corp. acquires a machine (seven-year property) on January 10, 2014 at a cost of $212,000. Everest makes the election to expense the maximum amount under Sec. 179.
a. Assume that the taxable income from trade or business is $500,000.
(1) What is the amount of the Section 179 expensing deduction for the current year?
(2) What is the amount of the Section 179 carryover to the next tax year?
(3) What is the amount of depreciation allowed?
b. Assume instead that the taxable income from trade or business is $10,000.
(1) What is the amount of the Section 179 expensing deduction for the current year?
(2) What is the amount of the Section 179 carryover to the next tax year?
(3) What is the amount of depreciation allowed this year?

80) In August 2014, Tianshu acquires and places into service 7-year business equipment (tangible personal property qualifying under Sec. 179) for $70,000. This is the only asset that she purchased during the year; her taxable income from her trade or business is $23,000. She decides to limit her 179 election to the maximum amount currently deductible in her business for the current year. What is her maximum cost recovery (Sec. 179 and depreciation) deduction for 2014?

82) Mehmet, a calendar-year taxpayer, acquires 5-year tangible personal property in 2014 and does not use Sec. 179. Mehmet places the property in service on the following schedule:

Date placed in service Acquisition Cost
January 15 $50,000
May 25 $100,000
November 8 $200,000

What is the total depreciation for 2012?

83) Greta, a calendar-year taxpayer, acquires 5-year tangible personal property in 2014 and places the property in service on the following schedule:

Date placed in service Acquisition Cost
January 15 $ 7,000
May 25 $10,000
November 8 $33,000

Greta elects to expense the maximum under Section 179, and selects the property placed into service on November 8. Her business ‘s taxable income before section 179 is $190,000. What is the total cost recovery deduction (depreciation and Sec. 179) for 2014?

84) During the year 2014, a calendar year taxpayer, Marvelous Munchies, a chain of specialty food shops, purchased equipment as follows:

Date Asset Cost
March 3 Refrigerators 600,000
October 9 Equipment 1,200,000

Assume the property is all 5-year property. What is the maximum depreciation that may be deducted for the assets this year, 2014, assuming the alternative depreciation system is not chosen?

85) On May 1, 2008, Empire Properties Corp., a calendar year taxpayer, purchased an apartment building for $1,000,000, of which $400,000 was allocable to the land. The corporation sold the property this year on September 23, 2013.
a. What was the corporation’s depreciation for the building, using statutory percentages under MACRS for 2008?
b. What was the corporation’s depreciation for the building, using statutory percentages under MACRS for 2013?

86) On May 1, 2012, Empire Properties Corp., a calendar year taxpayer, purchased an office building for $1,000,000, of which $400,000 was allocable to the land. The corporation sold the property this year on September 23, 2014.
a. What was the corporation’s depreciation for the building, using statutory percentages under MACRS for 2012?
b. What was the corporation’s depreciation for the building, using statutory percentages under MACRS
for 2014?

87) In January of 2014, Brett purchased a Porsche for $100,000 to be used in his business. Brett drove the car 83 percent of the time for business. What is the maximum amount that Brett may deduct in 2014?

88) Stellar Corporation purchased all of the assets of Bellavia Company as of January 1 this year for $1 million. Included in the assets acquired are the following intangible assets:

Asset Useful Life Cost
Patent 10 year $120,000
Covenant not to complete 3 years 30,000
Goodwill Indefinite 300,000

What is Stellar’s maximum amortization deduction for the year?

89) Jack purchases land which he plans on developing as a golf course. The land costs $20,000,000 and the cost of clearing the land, earthmoving, constructing hazards, bunkers and greens, and installing irrigation systems will cost an additional $6,000,000. What tax issues should Jack consider?

90) Bert, a self-employed attorney, is considering either purchasing or leasing a $50,000 automobile for use in his business. What are the issues he should consider in making his decision?

91) Why would a taxpayer elect to capitalize and amortize intangible drilling costs (IDCs) rather than expense such costs?

92) Discuss the options available regarding treatment of an amount paid in excess of the FMV of an acquired company’s net assets in a business combination.

93) Why would a taxpayer elect to use the alternative depreciation system rather than the MACRS rules?

Chapter 11 Accounting Periods and Methods

1) A taxpayer’s tax year must coincide with the year used to keep the taxpayer’s books and records.

2) A fiscal year is a 12-month period that ends on the last day of any month other than December.

3) A partnership must generally use the same tax year of the partners who own the majority of partnership income and capital.

4) If the majority of the partners do not have the same tax year, the partnership must use the tax year of its principal partners.

5) All C corporations can elect a tax year other than a calendar year.

Explanation: Personal service corporations are generally required to use a calendar year.

6) An improper election to use a fiscal year automatically places the taxpayer on the calendar year.

7) If Jett Corporation receives a charter in 2012 but does not begin operations and file its first tax return until 2014, Jett may elect a fiscal year on the 2014 return.

8) Partnerships, S corporations, and personal service corporations may elect a taxable year which results in a tax deferral of four months or less.

9) An S corporation elects a September 30 taxable year. The S corporation, as a pass-through entity does not need to make tax payments to the IRS.

10) Except in a few specific circumstances, once adopted, an accounting period may be changed without IRS approval.

11) A newly married person may change tax years to conform to that of his or her spouse so that a joint return may be filed.

12) Generally, an income tax return covers an accounting period of 12 months.

13) A subsidiary corporation filing a consolidated return with its parent corporation must change its accounting period to conform with its parent’s tax year.

14) Misha, a single taxpayer, died on July 31, 2014. Her final income tax return (ignoring extensions) is due November 15, 2014.

15) Taxpayers who change from one accounting period to another must annualize their income for the resulting short period.

16) Generally, if inventories are an income-producing factor to the business, the accrual method must be used for sales and cost of goods sold.

17) Alvin, a practicing attorney who also owns an office supplies store, may use the cash basis for his legal practice and the accrual basis for his office supplies store.

18) A taxpayer must use the same accounting method on the personal tax return that the taxpayer uses in the taxpayer’s trade or business.

19) C corporations and partnerships with a corporate partner may use the cash method of accounting if average annual gross receipts for the three preceding tax years do not exceed $10 million.

20) Under the cash method of accounting, income is reported for the tax year in which payments are actually or constructively received.

21) Under the cash method of accounting, all expenses are deductible when paid.

22) Points paid on a mortgage to buy a personal residence are deductible in the year paid.

23) Under the cash method of accounting, payment by credit card entitles the taxpayer to deduct the expenditure at the time the charge is made.

24) If a cash basis taxpayer gives a note in payment of an expense, the deduction may not be taken until the note is paid.

25) The all-events test requires that the accrual-basis taxpayer report income when all events have occurred that fix the taxpayer’s right to the income and when the amount can be determined with reasonable accuracy.

26) Under the accrual method of accounting, the two tests to determine when income must be reported and expenses deducted are the all-events test and the economic performance test.

27) One criterion which will permit a deduction for an expenditure by the accrual-basis taxpayer prior to economic performance is that either the amount is not material or the earlier accrual of the item results in a better matching of income and expense.

28) A taxpayer who uses the cash method in computing gross income from his or her business must use the cash method in computing expenses of such business.

29) A business which provides a warranty on goods sold will deduct a reserve for warranty expense consistent with the reporting on its financial statements.

30) A taxpayer may use a combination of accounting methods as long as income is clearly reflected.

31) A taxpayer who uses the LIFO method of inventory valuation may use the lower of cost or market method.

32) The uniform capitalization rules (UNICAP) require the capitalization of some overhead costs that are expensed for financial accounting purposes.

33) Many taxpayers use the LIFO method of inventory valuation because during inflationary periods, LIFO normally results in the lowest inventory value and hence the lowest taxable income.

34) A taxpayer may use the FIFO or average cost methods for financial statement purposes, while using the LIFO method for tax purposes.

35) For tax purposes, the lower of cost or market method must ordinarily be applied to each separate inventory item.

36) For tax purposes, “market” for purposes of applying the lower of cost or market method means the price at which the taxpayer can sell the inventory item.

37) Contracts for services including accounting, legal and architectural services do not qualify for long-term contract treatment.

38) A taxpayer must use the same accounting method, either percentage of completion or completed contract method, for all long-term contracts in the same trade or business.

39) The installment method is not applicable to sales of inventory and marketable securities.

40) The installment sale method may be used on the sale of property at a loss.

41) Interest is not imputed on a gift loan between two individuals totaling $14,000 except when the borrowed funds are used to purchase income-producing property.

42) Interest is not imputed on a gift loan between two individuals totaling $100,000 except when the borrowed funds are used to purchase income-producing property.

43) In general, a change in accounting method must be approved by the IRS.

44) Vector Corporation has been using an incorrect method in accounting for supplies expense. It can change to the correct method without filing 3115.

45) A corporation is starting to produce glasses with smart phone capabilities. Generally, a business producing this type of product will want to elect the LIFO inventory method.

46) A new business is established. It is not a seasonal business. All of the following are acceptable accounting tax years with the exception of
A) an S corporation year ending October 31.
B) a C corporation (not a personal service corporation) tax year ending on February 15.
C) a C corporation (not a personal service corporation) tax year ending on April 30.
D) a partnership tax year ending on October 31 with three equal partners whose tax years end on September 30, October 31, and November 30.

47) When preparing a tax return for a short period, the taxpayer should annualize the income if the short period return
A) is the last return for a decedent who died on June 15.
B) is the first return for a corporation created on June 1.
C) is the last return for a partnership, which was terminated on October 12.
D) is a return for June 1 to December 31, for a corporation changing from a fiscal year to a calendar year.

48) Emma, a single taxpayer, obtains permission to change from a calendar year to a fiscal year ending June 30, 2014. During the six months ending June 30, 2014, she earns $40,000 and has $8,000 of itemized deductions. What is the amount of her annualized income?
A) $30,025
B) $64,000
C) $60,050
D) $64,300

49) All of the following statements are true except:
A) once adopted, an accounting period normally cannot be changed without approval by the IRS.
B) taxpayers who change from one accounting period to another must annualize their income for the resulting short period.
C) taxpayers filing an initial tax return are required to annualize the year’s income and prorate exemptions and credits.
D) an existing partnership can change its tax year without prior approval if the partners with a majority interest have the same tax year to which the partnership changes.

50) Which of the following partnerships can elect the cash basis method of accounting?
A) a CPA firm with average revenues of $20 million
B) a chocolate manufacturer with average revenues of $3 million
C) a cleaning service partnership generating average revenues of $5.5 million whose partners are Joe, Larry and Smith Inc.
D) None of the above.

51) Under the cash method of accounting, all of the following are true with the exception of:
A) Fixed assets are always expensed as the taxpayer pays for the assets.
B) Gross income includes the value of property received.
C) To some extent, a taxpayer may control the year in which an expense is deductible by choosing when to make the payment.
D) Income is reported in the tax year in which payments are actually or constructively received.

52) For purposes of the accrual method of accounting, the economic performance test is met when
A) the property or services are actually provided.
B) the amount of the item can be reasonably estimated.
C) all events have occurred that establish the fact of a liability.
D) all events have occurred that fix the taxpayer’s right to receive income.

53) Under UNICAP, all of the following overhead costs are included in inventory except
A) factory utilities, rent, insurance and depreciation.
B) officers’ salaries and factory administration.
C) research and experimentation.
D) factory payroll, purchasing and warehouse costs.

54) Which of the following statements regarding UNICAP is incorrect?
A) The UNICAP rules result in more costs being included in inventory for tax purposes than for financial accounting.
B) Taxpayers with gross receipts averaging more than $10,000,000 or more for the prior three years must apply the UNICAP provisions.
C) Interest must be included in inventory if the property produced is real property or long-lived property.
D) UNICAP requires that advertising and selling costs be allocated between inventory and cost of sales.

55) In 2014, Richard’s Department Store changes its inventory method from FIFO to LIFO. Richard’s uses the simplified LIFO method. Richard’s year-end inventory under FIFO is as follows: 2013 – $300,000; 2014 – $350,000. The 2013 price index is 110% and the 2014 index is 120%. The 2014 layer is
A) $19,097.
B) $20,833.
C) $22,727.
D) $50,000.

56) Inventory may be valued on the tax return at the lower of cost or market unless
A) replacement cost is higher than historical cost.
B) the taxpayer determines inventory cost using the LIFO method.
C) the taxpayer determines inventory cost using the FIFO method.
D) the cash method of accounting is used by the taxpayer.

57) When accounting for long-term contracts (other than those for services), all of the following accounting methods may be acceptable with the exception of
A) the cash method of accounting.
B) the completed contract method.
C) the percentage of completion method.
D) the modified percentage of completion method.

58) Under the percentage of completion method, gross income is reported
A) when the contract is completed.
B) using a percentage that is determined by dividing current year costs by the expected total revenue.
C) based on the portion of work that is incomplete.
D) based on the portion of work that has been completed.

59) This year, Hamilton, a local manufacturer of off-shore drilling platforms, entered into a contract to construct a drilling platform that will be placed in the North Atlantic Ocean. The total contract price is $5,000,000, and Hamilton estimates the total construction cost at $3,000,000. Actual costs incurred this year are $600,000. If Hamilton uses the percentage of completion method, the gross profit for this year is
A) $0.
B) $400,000.
C) $600,000.
D) $2,000,000.

60) Bergeron is a local manufacturer of off-shore drilling platforms. This year, Bergeron entered into a contract to construct a drilling platform, which will be placed in the North Atlantic Ocean. The total contract price is $5,000,000, and Bergeron estimates the total construction cost at $2,000,000. Actual costs incurred this year are $600,000. If Bergeron uses the completed contract method, the gross profit for this year is
A) $0.
B) $400,000.
C) $600,000.
D) $2,000,000.

61) In year 1 a contractor agrees to build a building for $2,500,000 by the end of year 2. The builder’s cost is estimated to be $1,800,000. The actual costs year 1 are $900,000 and year 2’s actual costs are $1,300,000. Under the completed contract method the gross profit for year 1 is
A) $0.
B) $300,000.
C) $350,000.
D) $700,000.

62) In year 1 a contractor agrees to build a building for $2,500,000 by the end of year 2. The builder’s cost is estimated to be $1,800,000. The actual costs year 1 are $900,000 and year 2’s actual costs are $1,300,000. Under the completed contract method the gross profit for year 2 is
A) $0.
B) $300,000.
C) $350,000.
D) $700,000.

63) In year 1 a contractor agrees to build a building for $2,500,000 by the end of year 2. The builder’s cost is estimated to be $1,800,000. The actual costs year 1 are $900,000 and year 2’s actual costs are $1,100,000. Under the percentage of completion method year 1’s gross profit is
A) $0.
B) $300,000.
C) $350,000.
D) $700,000.

64) In year 1 a contractor agrees to build a building for $2,500,000 by the end of year 2. The builder’s cost is estimated to be $1,800,000. The actual costs year 1 are $900,000 and year 2’s actual costs are $1,100,000. Under the percentage of completion method year 2’s gross profit is
A) $150,000.
B) $500,000.
C) $700,000.
D) $350,000.

65) The look-back interest adjustment involves the
A) calculation of interest on an installment sale.
B) calculation of gross profit on an installment sale collection.
C) calculation of additional tax due if actual cost rather than estimated cost had been used on the percentage of completion method.
D) calculation of interest on additional tax that would have been due if actual cost rather than estimated cost had been used on the percentage of completion method.

66) This year, a contractor agrees to build a building for $2,000,000, which will be completed by the end of next year. The builder’s cost is estimated to be $1,700,000. The actual costs this year are $800,000 and next year’s actual costs are $800,000. If the tax rate is 20% and the interest rate is 10%, the look back interest for the percentage of completion method is
A) $ 0.
B) $1,176.
C) $2,000.
D) $6,000.

67) An installment sale is best defined as
A) any disposition of property in which at least three payments are received.
B) any disposition of property in which the installment method is elected by the taxpayer.
C) any disposition of property where at least one payment is received after the close of the taxable year in which disposition occurs.
D) any disposition of publicly traded property or inventory where at least one payment is received after the close of the taxable year in which disposition occurs.

68) The installment method may be used for sales of all kinds of property with the exception of
A) real property.
B) personal property.
C) capital assets.
D) marketable securities.

69) The installment sale method can be used for all of the following transactions except
A) the sale of an antique by a collector.
B) the sale of shares of publicly-traded corporate stock.
C) the sale of farmland used in a farming business.
D) the sale of a boat held for personal use.

70) The installment sale method can be used for all of the following transactions except
A) the sale of an painting by an art collector.
B) the sale of a sole proprietor’s office building.
C) the sale of an individual’s personal car.
D) the sale of a yacht by a shipbuilder.

71) Freida is an accrual-basis taxpayer who owns a furniture store. The furniture store had the following sales of inventory:

Year of sale Installment sales Profit Collections in 2014
2012 $60,000 $30,000 $20,000
2013 100,000 50,000 30,000
2014 250,000 125,000 40,000

For tax purposes, Freida should report gross profit for 2014 of
A) $40,000.
B) $65,000.
C) $90,000.
D) $125,000.

72) Which of the following conditions are required for the use of the installment method?
A) The taxpayer must realize a gain on the sale of the property.
B) The taxpayer cannot be on the cash method.
C) The value of the obligations received is determinable at the date of sale.
D) All of the above are required.

73) Kyle sold land on the installment basis for $100,000. His basis in the land was $70,000. Kyle received a $40,000 down payment and a real estate installment sale contract calling for $60,000 in additional payments in future years. In addition, Kyle paid $6,000 in commissions on the sale. What is the gross profit to be recognized in the current year?
A) $0
B) $9,600
C) $12,000
D) $24,000

74) Kevin sold property with an adjusted basis of $58,000. The buyer assumed Kevin’s existing mortgage of $40,000 and agreed to pay an additional $60,000 consisting of a cash down payment of $40,000, and payments of $4,000, plus interest, per year for the next 5 years. Kevin paid selling expenses totaling $2,000. What is Kevin’s gross profit percentage?
A) 33 1/3%
B) 40%
C) 60%
D) 66 2/3%

75) This year, John purchased property from William by assuming an existing mortgage of $40,000 and agreed to pay an additional $60,000, plus interest, in the 3 years following the year of sale (i.e. $20,000 annual payments for three years, plus interest). William had an adjusted basis of $44,000 in the building. What are the sales price and the contract price in this transaction?

A)
Sales Price Contract Price
$40,000 $60,000

B)
Sales Price Contract Price
$100,000 $40,000

C)
Sales Price Contract Price
$100,000 $60,000

D)
Sales Price Contract Price
$100,000 $100,000

76) On July 25 of this year, Raj sold land with a cost of $15,000 for $40,000. Raj collected $20,000 this year and is scheduled to receive $5,000 each year for four years starting next year plus an acceptable rate of interest. Raj’s gain recognized this year is
A) $7,500.
B) $12,500.
C) $20,000.
D) $25,000.

77) On June 11, of last year, Derrick sold land with a cost of $15,000 for $45,000. Derrick collected $20,000 last year and is scheduled to receive $5,000 each year for five years starting this year plus an acceptable rate of interest. Derrick receives the $5,000 installment required this year. Derrick’s recognized gain this year is
A) $0.
B) $1,667.
C) $3,333.
D) $5,000.

78) Sela sold a machine for $140,000. The machine originally cost $90,000 and $10,000 of MACRS depreciation had been allowable. The buyer assumed an existing loan of $40,000, paid $20,000 cash down and agreed to pay $10,000 per year for eight years plus interest. Selling expenses are $10,000. The total gross profit for installment sale recognition purposes is
A) $30,000.
B) $40,000.
C) $50,000.
D) $60,000.

79) Malea sold a machine for $140,000. The machine originally cost $90,000 and $10,000 of MACRS depreciation had been allowable. The buyer assumed an existing loan of $40,000, paid $20,000 cash down and agreed to pay $10,000 per year for eight years plus interest. Selling expenses are $10,000. The contract price is
A) $40,000.
B) $80,000.
C) $100,000.
D) $130,000.

80) On June 11, two years ago, Gia sold land with a cost of $15,000 for $45,000. Gia collected $20,000 initially and is scheduled to receive $5,000 each year for five years starting last year plus an acceptable rate of interest. This year, Gia decided to sell one installment note to a bank that agreed to pay $4,100. As a result of the sale of the note, Gia must report
A) $0.
B) $1,667 gain.
C) $2,433 gain.
D) ($900) loss.

81) On May 18, of last year, Carter sells unlisted stock with a cost of $24,000 for $60,000. Carter collects $20,000 initially and is scheduled to receive $10,000 each year for four years starting this year plus an acceptable rate of interest. After receiving the first $10,000 scheduled installment payment, Carter is unable to collect any further payments. After incurring legal fees of $1,000, Carter recovers a portion of the stock valued at $26,000. As a result of the repossession, Carter must report
A) ordinary income of $9,000.
B) capital gain of $9,000.
C) ordinary income of $13,000.
D) capital gain of $13,000.

82) On May 18, of last year, Yuji sold unlisted stock with a cost of $12,000 for $30,000. Yuji collected $10,000 initially and is scheduled to receive $5,000 each year for four years starting this year plus an acceptable rate of interest. After receiving the first scheduled $5,000 payment, Yuji was unable to collect any further payments. After incurring legal fees of $500, Yuji recovered a portion of the stock valued at $13,000. Yuji’s basis in the recovered stock is
A) $6,500.
B) $7,000.
C) $12,500.
D) $13,000.

83) Andrew sold land to Becca, Andrew’s daughter. The fair market value of the land was $300,000 (basis $250,000). Becca agreed to pay Andrew $300,000 over 8 years. Becca immediately sold the land to Olga for $300,000 cash. The gain of $50,000 must be recognized
A) by Becca in installments.
B) by Becca when Becca sells to Olga.
C) by Andrew when Andrew sells to Becca.
D) by Andrew when Becca sells to Olga.

84) On September 2, of this year, Keshawn sold land to Rex, his nephew, for $400,000. Keshawn’s basis in the land was $100,000. Rex agreed to pay his uncle $40,000 this year, and $60,000 each year for the next six years plus interest. One month later, Rex sold the land to Theo, an unrelated party, for $450,000. Based on this information, Keshawn must report
A) $0. Rex reports gain of $300,000.
B) gain of $225,000 this year.
C) gain of $225,000 this year plus interest in following six years.
D) gain of $30,000 this year, and gain in each of the following six years of $45,000 plus interest.

85) All of the following are considered related for purposes of Section 453(e) installment sales except
A) parents.
B) children.
C) sister.
D) controlled corporation.

86) All of the following transactions are exempt from rules regarding imputed interest with the exception of
A) taxpayer purchases newly issued bond for $700 (face value of $1,000).
B) taxpayer sells land for $135,000 with payment due in 5 years and no stated interest.
C) taxpayer sells his home gym equipment for $2,800 with payment due in one year and no stated interest.
D) taxpayer purchases a sailboat costing $2,500 for week-end boating trips; the full price payable in five months and no stated interest.

87) Jennifer made interest-free gift loans to each of her four children as follows:
(1) John borrowed $9,500 to purchase an automobile. His net investment income is $1,500.
(2) Rick borrowed $50,000 to purchase a trailer. His net investment income is $900.
(3) Bert borrowed $25,000 to purchase stock. His net investment income is $1,200.
(4) Elizabeth borrowed $110,000 to purchase a home. Her net investment income is $800.

Assuming a 5% interest rate, on which loans must interest be imputed?
A) loan to John and Bert
B) loan to Bert and Elizabeth
C) loan to Rick, Bert, and Elizabeth
D) All of the loans are subject to the imputed interest rules.

88) Imputation of interest could be required on all of the following loans with the exception of
A) a loan between a partnership and a 55% partner.
B) a loan between a mother and son.
C) a loan between an employer and employee.
D) a loan between two best friends.

89) Prior Corp. plans to change its method of accounting for supplies. Both the old and new methods are acceptable. Which of the following statements is correct regarding the change?
A) The taxpayer will need to amend prior returns to reflect the new method.
B) The taxpayer will report the full amount of change in the current tax return.
C) The taxpayer will report the net adjustment over four years.
D) The taxpayer will report the net adjustment and pay the tax when it files the Form 3115.

90) Which of the following businesses is most likely to benefit from an election to account for its inventory under LIFO?
A) a company producing the newest version of a tablet with ultra-long battery life. It believes it has a one-year lead over the competition.
B) a company producing products with copper as a key component. Copper prices fluctuate widely.
C) a company producing parts for the auto industry. Costs in this field tend to steadily climb.
D) None of the above.

91) Lloyd Corporation, a calendar year accrual basis taxpayer, pays its insurance premium each year on June 1, the anniversary of the policy. The premium paid this year is $9,600 while last year’s was $9,000. How much of is Lloyd’s deduction for insurance this year?

92) In 2013 Anika Co. adopted the simplified dollar-value LIFO method. Inventory under FIFO in 2013 and 2014 is $400,000 and $600,000, respectively. The Consumer Price Index for 2013 is 115 and the Consumer Price Index in 2014 is 125 percent. How much is Anika’s inventory at the end of year 2014 under simplified LIFO?

93) In 2014, Modern Construction Company entered into a contract to construct a building for $5,000,000. The estimated cost to complete the building is $4,000,000 and the project will be completed in 2015. Modern incurred actual construction costs of $1,600,000 and $1,800,000 in 2014 and 2015, respectively. How much gross profit is recognized using the percentage-of-completion method in 2014 and 2015?

94) Tonya sold publicly-traded stock with an adjusted basis of $76,000 for $90,000. Tonya received a down payment of $15,000 with the balance due in equal payments over the next four years. What is the amount of gross profit to be recognized in the year of sale?

95) Natalie sold a machine for $140,000. The machine originally cost $95,000 and $15,000 of MACRS depreciation had been allowable. The buyer assumed an existing loan of $40,000, paid $30,000 cash down and agreed to pay $10,000 per year for seven years plus interest. Selling expenses are $10,000. What is the amount of gain to be reported in the year of sale?

96) Marissa sold stock of a non-publicly traded corporation with an adjusted basis of $36,000 for $48,000. Marissa received a down payment of $12,000 with the balance due in equal payments over the next two years.
a. What is the amount of gross profit to be recognized in the year of sale?
b. Assume that the buyer defaulted on the final payment. Marissa sued and was able to repossess the stock. The fair market value of the stock on the date of repossession is $36,000; legal fees were $1,500. What is the gain or loss on the repossession?

97) Nick sells land with a $7,000 adjusted basis for $10,000. Nick receives a $2,000 down payment with the balance of $8,000 due the following year. Nick is unable to collect the remaining $8,000 and, after incurring legal fees of $500, he repossesses the land when it has a fair market value of $9,000.
a. What is the amount of gain that Nick must report in the first year?
b. What is the amount of gain that Nick must report in the second year?
c. What is the basis in the repossessed stock?

98) Emily made the following interest free loans to her children:
(1) $10,000 to Erin for a down payment on a new home. Her net investment income for the year is $1,300.
(2) $50,000 to Sasha to purchase stock. Her net investment income for the year is $800.
(3) $60,000 to Tim to purchase a new boat. His net investment income for the year is $2,800.

The applicable federal interest rate on similar loans is 5%. What is the amount of interest income that Emily must report from these transactions?

99) Winnie made a $70,000 interest-free loan to her son, Tod, who used the money to retire a mortgage on his personal residence. Tod’s only source of income was salary of $35,000 and $990 interest income on a savings account. The relevant Federal interest rate was 5% and the loan was outstanding all year long.

What amount must Winnie include as interest income as a result of this transaction?

100) Which entities may elect a fiscal year? Discuss how certain tax entities may circumvent the requirement of using a calendar year.

101) Generally, economic performance must occur before an expense may be deducted. In some cases, this requirement of economic performance may be waived. Discuss the conditions under which economic performance may be waived and an earlier deduction may be allowed.

102) What is the significance of the Thor Power Tool Co. case?

103) Xerxes Manufacturing, in its first year of operations, produces solar panels which are sold through large building supply and home improvement stores. Xerxes’ year-end results include the following:

Office rent and utilities $15,000
Salaries of office staff 100,000
Salaries of factory workers 500,000
Direct materials used in production of solar panels 400,000
Factory rent 30,000
Factory utilities 10,000

You are preparing Xerxes’ first year tax return. Xerxes has elected a calendar year as its tax accounting period and the accrual method. What additional information would you need to prepare the tax return?

104) Doug is going to sell land for $100,000. The terms of the sale include $20,000 down and $20,000 plus interest for the next 4 years. He wishes to recognize income using the installment method. Both his brother and his son wish to buy the land from him. What are the tax considerations?

105) Discuss the purpose of the imputed interest rules.

106) Arnie is negotiating the sale of land to Phil. Arnie’s basis in the land is $3,000,000, and it currently has a fair market value of $5,000,000. Phil wants to pay the purchase price over three years. Arnie suggests that Phil pays $2,000,000 at closing, then pay $1,200,000 each of the next three years. Arnie would not require that Phil pay any interest under these terms. Discuss the tax issues that Arnie should consider.

107) Jared wants his daughter, Jacqueline, to learn about the stock market. He loans Jacqueline $30,000, but does not require Jacqueline to pay interest. Jared tells Jacqueline that she can repay him from the proceeds of future stock sales. Discuss the tax issues that Jared should consider.

Chapter 12 Property Transactions: Nontaxable Exchanges

1) Realized gain or loss must be recognized unless a specific Code section provides for nonrecognition treatment.

2) In a like-kind exchange, both the property transferred and the property received must be held by the taxpayer either for productive use in a trade or business or for investment.

3) The exchange of a personal-use automobile for stock in an automobile manufacturer held as an investment qualifies for like-kind treatment.

4) If an exchange qualifies as a like-kind exchange, nonrecognition of gain or loss is elective.

5) Real property exchanged for personal property qualifies as a like-kind exchange.

6) An investor exchanges an office building located in Niagara Falls, NY for an office building located in Niagara Falls, Ontario. The exchange does not qualify as like-kind.

7) An exchange of inventory for inventory of a like kind qualifies as a like-kind exchange.

8) The exchange of a partnership interest for an interest in another partnership qualifies as a like-kind exchange.

9) A sale of property and subsequent purchase of like-kind property may be treated as a like-kind exchange if the two transactions are interdependent.

10) For purposes of nontaxable exchanges, cash and non-like-kind property constitute boot.

11) The receipt of boot as part of a nontaxable exchange causes a realized loss to be recognized.

12) Where non-like-kind property other than cash is received as boot, the amount of the boot is the property’s fair market value.

13) If each party in a like-kind exchange assumes a liability of the other party, only the net liability given or received is boot.

14) The basis of non-like-kind property received is the basis in the hands of the transferor at the date of the exchange.

15) If related taxpayers exchange property qualifying for a like-kind exchange, the properties must be retained for three years after the exchange to prevent recognition of gain resulting from the original exchange on a subsequent disposition of the property.

16) The holding period of like-kind property received in a nontaxable exchange begins on the day of the exchange.

17) The holding period for boot property received begins on the day after the date of the exchange.

18) The involuntary conversion provisions which allow deferral of gain are mandatory.

19) If a gain is realized on the involuntary conversion of property, the gain may be deferred if qualifying replacement property is acquired within a specified time period at a cost equal to or greater than the amount realized on the involuntary conversion.

20) All or part of gain realized on an involuntary conversion is deferred but not permanently excluded if qualifying replacement property is acquired within the requisite period of time.

21) In an involuntary conversion, the basis of replacement property is its cost reduced by the gain deferred.

22) A taxpayer may elect to defer recognition of a loss resulting from an involuntary conversion.

23) If the threat of condemnation exists and the taxpayer has reasonable grounds to believe that the property will be condemned, the taxpayer may elect to defer gain even if the taxpayer sells the property to a party other than the governmental unit that is threatening to condemn the property.

24) When the cost of replacement property is less than the amount realized on an involuntary conversion, gain will be recognized. The recognized gain will be equal to the amount realized over the cost of the replacement property, but not more than the total realized gain.

25) If property is involuntarily converted into similar property, the basis and holding period of the converted property carry over to the basis and holding period of the replacement property.

26) If the taxpayer elects to defer the gain on an involuntary conversion, the holding period of the replacement property begins on the date of purchase.

27) Replacing a building with land qualifies as replacement property under the involuntary conversion rules relevant to a casualty.

28) If real property used in a trade or business or held for investment is condemned, it must be replaced with property having a similar functional use.

29) Vector Inc.’s office building burns down on October 31, 2014. Vector, a calendar year taxpayer, finally settles with the insurance company on February 3, 2015. In order to defer the gain realized on the building, Vector must acquire another office building by February 3, 2017.

30) When an involuntary conversion is due to the condemnation of real property held for productive use in a trade or business or for investment, the replacement period will end three years after the close of the first tax year in which any part of the gain is realized.

31) A loss on the sale of a taxpayer’s personal residence is deductible if the taxpayer owned and lived in the home for two of five years.

32) In order for the gain on the sale of a personal residence to be excluded under Section 121, a replacement residence must be purchased within two years.

33) In the case of married taxpayers, an individual may claim the Sec. 121 exclusion even if the individual’s spouse used the exclusion within the past two years.

34) The taxpayer must be occupying the residence at the time of the sale in order for Sec. 121 to apply.

35) If a taxpayer owns more than one home, she can designate the home that will be considered her principal residence for purposes of the Sec. 121 exclusion.

36) If a principal residence is sold before satisfying the ownership and use tests, part of the gain may be excluded if the sale is due to a change in employment, health, or unforeseen circumstances.

37) Ron and Fay live in Buffalo. They also own a condominium in Orlando (purchased in 2009) which they rent to vacationers. Ron and Fay will be retiring. They plan to live in the Orlando property for two and a half years. When they sell it, they will be able to exclude the full gain which is expected to be about $200,000.

38) All of the following qualify as a like-kind exchange except
A) an apartment building held for investment for farmland used in a trade or business.
B) a printer used in trade or business for a computer used in trade or business.
C) improved real estate held for investment for unimproved real estate held for investment.
D) an airplane used in trade or business for a general purpose truck used in trade or business.

39) Which of the following statements with respect to a like-kind exchange is false?
A) Property of one class must be exchanged for property of the same class.
B) An exchange of inventory does not qualify as a like-kind exchange.
C) Personal property must be exchanged for personal property.
D) Sale of property and subsequent purchase of like-kind property will always qualify as a like-kind exchange.

40) A owns a ranch in Wyoming, which B offers to purchase. A is not willing to sell the ranch but is willing to exchange the ranch for an apartment complex in Louisiana. The complex is available for sale. B purchases the apartment complex in Louisiana from C and transfers it to A in exchange for A’s ranch. The ranch and the complex each have a $1,000,000 fair market value. Which of the following is true?
A) The transaction qualifies as a like-kind exchange for B but not for A.
B) The transaction qualifies as a like-kind exchange for both B and A.
C) The transaction qualifies as a like-kind exchange for A but not for B.
D) The transaction does not qualify as a like-kind exchange for either B or A.

41) Landry exchanged land with an adjusted basis of $50,000 for another parcel of land worth $35,000 plus $10,000 of cash. Landry held the original land for investment purposes and will do the same with the new parcel. Due to the exchange, Landry will recognize
A) $10,000 gain.
B) $5,000 gain.
C) $5,000 loss.
D) $0.

42) Dean exchanges business equipment with a $120,000 adjusted basis for $40,000 cash and business equipment with a $140,000 FMV. What is the amount of gain which Dean recognizes on the exchange?
A) $0
B) $20,000
C) $40,000
D) $60,000

43) Daniella exchanges business equipment with a $100,000 adjusted basis for $10,000 cash and business equipment with a $96,000 FMV. What is the amount of gain recognized on the exchange?
A) $0
B) $4,000
C) $6,000
D) $10,000

44) Gena exchanges land held as an investment with a $60,000 basis for other land with a $80,000 FMV and a motorcycle with a $10,000 FMV. The acquired land is to be held for investment and the motorcycle is for personal use. What is the amount of recognized gain?
A) $0
B) $10,000
C) $20,000
D) $30,000

45) Pamela owns land for investment purposes. The land is worth $300,000 (basis of $260,000 to Pamela). Pamela exchanges the land, plus $20,000 cash, for a warehouse to be used in her business. The FMV of the warehouse is $400,000, but the warehouse is subject to a mortgage of $80,000, which is assumed by Pamela. Pamela must recognize a gain of
A) $ 0.
B) $ 40,000.
C) $ 120,000.
D) $ 140,000.

46) Bob owns a warehouse that is used in business while Rebecca owns land. Bob exchanges the warehouse for the land, which will be held for investment. The FMV of the warehouse is $440,000 (basis $240,000), but the warehouse is subject to a mortgage of $80,000, which is assumed by Rebecca. Bob receives $40,000 cash and the land, which has a FMV of $320,000. Bob realizes a gain (loss) on the exchange of
A) $80,000.
B) $120,000.
C) $190,000.
D) $200,000.

47) Emily owns land for investment purposes that has a FMV of $300,000 (basis of $260,000). She exchanges the land, plus $40,000 cash, for a warehouse to be used in her business. The warehouse is worth $420,000, but is subject to a mortgage of $80,000 which Emily will assume. The gain realized by Emily on the exchange is
A) $40,000.
B) $80,000.
C) $120,000.
D) $160,000.

48) Glen owns a building that is used in business. The building is worth $200,000, but is subject to a mortgage of $40,000. Glen’s basis in the building is $120,000. Glen exchanges the building for investment land worth $150,000 plus $10,000 cash. In addition, the other party assumes the mortgage which will be held for investment. Glen must recognize a gain of
A) $0.
B) $10,000.
C) $50,000.
D) $80,000.

49) Kai owns an apartment building held for investment purposes. The apartment building is worth $500,000, although it is subject to a mortgage of $100,000. Kai’s basis in the apartment building is $380,000. Kai exchanges the apartment building for an office building. The office building has an FMV of $350,000. Kai receives $50,000 cash in addition to receiving the office building, and the other party assumes the apartment building mortgage. What is Kai’s recognized gain on this exchange?
A) $0
B) $50,000
C) $120,000
D) $150,000

50) In a nontaxable exchange, Henri traded in a truck having an adjusted basis of $8,500 and a FMV of $10,000, for a new truck having a FMV of $15,000. In addition, Henri paid cash of $5,000. What is Henri’s basis in the new truck?
A) $5,000
B) $8,500
C) $13,500
D) $15,000

51) Bobbie exchanges business equipment (adjusted basis $160,000) for other business equipment that has a FMV of $140,000. Bobbie also receives $30,000 cash. Bobbie’s basis in the new equipment is
A) $130,000.
B) $140,000.
C) $160,000.
D) $170,000.

52) Jason owns a warehouse that is used in business. The FMV of the warehouse is $200,000 (basis $120,000), and the warehouse is subject to a mortgage of $40,000. Jason exchanges the warehouse for land valued at $150,000. The other party also pays him $10,000 cash and assumes the mortgage on the warehouse. Jason’s basis in the land received will be
A) $120,000.
B) $150,000.
C) $180,000.
D) $200,000.

53) Laurie owns land held for investment. The land’s FMV is $150,000. Laurie’s basis in the land is $130,000. Laurie exchanges the land, plus $20,000 of cash, for a warehouse owned by Trey. The warehouse is worth $210,000, but is subject to a mortgage of $40,000 which Laurie will assume. Trey’s basis in the warehouse is $120,000. Laurie’s basis in the warehouse received will be
A) $150,000.
B) $170,000.
C) $190,000.
D) $210,000.

54) Rosa exchanges business equipment with a $60,000 adjusted basis for a like-kind piece of equipment with a $100,000 FMV and $20,000 of marketable securities. What is Rosa’s basis for the new equipment?
A) $60,000
B) $80,000
C) $100,000
D) $120,000

55) If there is a like-kind exchange of property between related parties, how long do they have to wait to dispose of the property received in order to avoid having to recognize any gain on the exchange?
A) 6 months
B) 1 year
C) 2 years
D) no waiting period

56) Rolf exchanges an office building worth $150,000 for investment land worth $175,000. He also provided stock worth $25,000. Rolf’s adjusted basis in the building and stock is $130,000 and $11,000, respectively. How much gain will Rolf recognize on the exchange?
A) $0
B) $14,000
C) $20,000
D) $34,000

57) Yael exchanges an office building worth $150,000 for investment land worth $175,000. He also provided
stock worth $25,000. Yael’s adjusted basis in the building and stock is $180,000 and $11,000, respectively. How much gain or loss will Yael recognize on the exchange?
A) $0
B) ($30,000)
C) ($16,000)
D) $14,000

58) Which of the following statements is not true with regard to like-kind exchanges?
A) Nonrecognition of gains and losses is mandatory if the exchange is a like-kind exchange.
B) The holding period of like-kind property received includes the holding period of the property exchanged.
C) A loss is always recognized if the taxpayer transfers non-like-kind personal use property (e.g. a personal use car) in an otherwise like-kind exchange.
D) The basis of property received in an exchange is equal to the basis of the property exchanged less the boot received plus the gain recognized and less any loss recognized.

59) All of the following are true except:
A) A nonsimultaneous exchange may never qualify as a like-kind exchange.
B) Nonrecognition of gains and losses is mandatory if the exchange is a like-kind exchange.
C) A loss may be recognized on non-like-kind property (boot) if the taxpayer transfers the boot in an otherwise like-kind exchange.
D) The holding period of like-kind property received includes the holding period of the property exchanged.

60) Cassie owns a Rembrandt painting she acquired on June 1, 2008 as an investment. She exchanges the painting on September 5, 2014, for a Picasso sculpture and marketable securities to be held as an investment. On what date does the sculpture’s holding period begin?
A) June 1, 2008
B) June 2, 2008
C) September 5, 2014
D) September 6, 2014

61) Juan’s business delivery truck is destroyed in an accident. He paid $40,000 for the truck, and $30,000 of depreciation has been deducted during its period of use. The insurance company pays Juan $32,000 due to the accident. What is the minimum amount that Juan must spend on a new truck to avoid any gain recognition?
A) $40,000
B) $32,000
C) $10,000
D) $22,000

62) Stephanie’s building, which was used in her business, was destroyed in a fire. Stephanie’s adjusted basis in the building was $175,000, and its FMV was $210,000. Stephanie filed an insurance claim and was reimbursed $200,000. In that same year, Stephanie invested $180,000 of the insurance proceeds in another business building. If the proper election is made, Stephanie will recognize gain of
A) $ 0.
B) $15,000.
C) $20,000.
D) $25,000.

63) Stephanie’s building, which was used in her business, was destroyed in a fire. Stephanie’s adjusted basis in the building was $175,000, and its FMV was $210,000. Stephanie filed an insurance claim and was reimbursed $200,000. In that same year, Stephanie invested $180,000 of the insurance proceeds in another business building. Assuming the proper election is made to defer gain, Stephanie’s basis in the new building will be
A) $175,000.
B) $180,000.
C) $200,000.
D) $210,000.

64) Ron’s building, which was used in his business, was destroyed in a fire. Ron’s adjusted basis in the building was $210,000, and its FMV was $330,000. Ron filed an insurance claim and was reimbursed $300,000. In that same year, Ron invested $240,000 of the insurance proceeds in another business building. Ron will recognize gain of
A) $0.
B) $30,000.
C) $60,000.
D) $90,000.

65) Ron’s building, which was used in his business, was destroyed in a fire. Ron’s adjusted basis in the building was $210,000, and its FMV was $330,000. Ron filed an insurance claim and was reimbursed $300,000. In that same year, Ron invested $240,000 of the insurance proceeds in another business building. Ron’s basis in the new building is
A) $180,000.
B) $210,000.
C) $240,000.
D) $330,000.

66) Which of the following statements is false regarding involuntary conversions?
A) A taxpayer must replace the destroyed property within the same tax year in which the gain is realized.
B) A taxpayer cannot elect to defer recognition of a loss resulting from an involuntary conversion.
C) If deferral of gain is elected, the holding period of the converted property carries over to the replacement property.
D) Gain may be deferred if the property is involuntarily converted into property that is similar or related in service or use to the converted property.

67) The building used in Tim’s business was condemned by the city of Lafayette. Tim received a condemnation award of $125,000. He paid $1,200 in lawyer’s fees and $800 for an appraisal of the property. Tim’s adjusted basis in the building was $60,000. Tim reinvests in similar property costing $110,000, and Tim makes the proper election regarding the property. What is the amount of Tim’s realized (not recognized) gain on the condemnation?
A) $ 0
B) $50,000
C) $63,000
D) $65,000

68) The building used in Terry’s business was condemned by the city of St. Louis. Terry received a condemnation award of $125,000. He paid $1,200 in lawyer’s fees and $800 for an appraisal of the property. Terry’s adjusted basis in the building was $60,000. Terry reinvests in similar property costing $110,000, and Terry makes the proper election regarding the property. What is the amount of Terry’s recognized gain on the condemnation?
A) $15,000
B) $13,000
C) $50,000
D) $63,000

69) Ed owns a racehorse with a $600,000 basis used for breeding purposes. The racehorse is killed in a tornado, and Ed collects $1,000,000 from the insurance company. He purchases another horse for $550,000. What is the amount of gain recognized on the transaction?
A) $0
B) $50,000
C) $350,000
D) $400,000

70) The building used in Manuel’s business was condemned by the city of Mobile. Manuel received a condemnation award of $220,000. He paid $800 in lawyer’s fees and $600 for an appraisal of the property. Manuel’s adjusted basis in the building was $120,000. Manuel reinvests in similar property costing $200,000, and Manuel makes the proper election regarding the property. Manuel’s basis in the new building is
A) $102,400.
B) $121,400.
C) $120,000.
D) $200,000.

71) Which of the following statements regarding involuntary conversions is incorrect?
A) With some exceptions, the replacement property must be similar or related in service or use to the property converted.
B) The functional-use test is more restrictive than the like-kind test.
C) The taxpayer-use test applies to the involuntary conversion of rental property owned by an investor.
D) Real property used in a trade or business that is condemned must be replaced with property which has the same functional use as the converted property.

72) Each of the following is true of deferral of gain attributable to the involuntary conversion of personal property with the exception of
A) gain deferral is elective, except for direct conversions.
B) the replacement property may be acquired by gift, inheritance, or purchase.
C) qualifying replacement property must be acquired within a specified time period.
D) replacement property must be similar or related in service or use to the converted property.

73) Alex owns an office building which the state condemns on January 15, 2014. Alex receives the condemnation award on April 1, 2014. In order to qualify for nonrecognition of gain on this involuntary conversion, what is the last date for Alex to acquire qualified replacement property?
A) January 15, 2016
B) January 15, 2017
C) December 31, 2016
D) December 31, 2017

74) According to Sec. 121, individuals who sell or exchange their personal residence may exclude part or all of the gain if the house was owned and occupied as a principal residence for
A) at least five years immediately before the sale date.
B) at least one year of the three-year period before the sale date.
C) at least two years of the five-year period before the sale date.
D) at least five years of the ten-year period before the sale date.

75) Mitchell and Debbie, both 55 years old and married, sell their personal residence to Sophie. Sophie pays $225,000 and assumes their $70,000 mortgage. To make the sale they pay $4,000 in commissions and $1,000 in legal costs. They have owned and lived in the house for seven years and their tax basis is $125,000. What is the amount of gain recognized on the sale?
A) $0
B) $100,000
C) $165,000
D) $170,000

76) Bob and Elizabeth, both 55 years old and married, sell their personal residence to Wolfgang. Wolfgang pays $660,000 and assumes their $90,000 mortgage. To make the sale they pay $20,000 in commissions and $10,000 in legal costs. They have owned and lived in the house for seven years and their tax basis is $200,000. What is the amount of gain recognized on the sale?
A) $0
B) $20,000
C) $50,000
D) $520,000

77) Frank, a single person age 52, sold his home this year. He had lived in the house for 10 years.
He signed a contract on March 4 to sell his home and closed the sale on May 3.

Sales price $202,000
Selling expenses 12,000
Replaced and paid for a broken window on March 2 200
Basis of old home before repairs and improvements 150,000

Based on these facts, what is the amount of his recognized gain?
A) $0
B) $39,800
C) $40,000
D) $52,000

78) Pierce, a single person age 60, sold his home this year. He had lived in the house for 10 years. He signed a contract on March 4 to sell his home.

Sales price $600,000
Selling expenses 15,000
Replaced and paid for a broken window on March 2 800
Basis of old home before repairs and improvements 310,000

Based on these facts, what is the amount of his recognized gain?
A) $0
B) $25,000
C) $40,000
D) $275,000

79) On May 1 of this year, Ingrid sold her personal residence for $250,000. Commissions on the sale were $20,000. Ingrid also incurred $10,000 of costs for painting and repairs, which were all completed and paid for two weeks prior to the sale of her home. Ingrid’s basis in her old home was $180,000. Ingrid’s realized gain upon the sale of her first home is
A) $ 0.
B) $40,000.
C) $50,000.
D) $70,000.

80) William and Kate married in 2014 and purchased a new home together. Each had owned and lived in separate residences for the past 5 years. William’s adjusted basis in his old residence was $200,000; Kate’s adjusted basis in her old residence was $120,000. In late 2014, William sells his residence for $500,000 while Kate sells her residence for $190,000. What is the total gain to be excluded from these transactions in 2014?
A) $0
B) $250,000
C) $320,000
D) $370,000

81) All of the following statements are true with regard to personal residences except:
A) Temporarily renting property that was formerly the taxpayer’s principal residence does not automatically preclude the use of Sec. 121.
B) To qualify for favorable tax treatment under Sec. 121, the residence must be either the taxpayer’s principal residence or a secondary residence.
C) In the case of married taxpayers, an individual may claim the exclusion even if the individual’s spouse used the exclusion within the past two years.
D) Houseboats, house trailers, and condominium apartments may qualify as a principal residence.

82) Generally, a full exclusion of gain under Sec. 121 upon the sale of a personal residence applies to only one sale or exchange every
A) six months.
B) year.
C) two years.
D) five years.

83) Jenna, who is single, sold her principal residence on December 1, 2013, and excluded the $150,000 gain because she met the ownership and usage requirements under Sec. 121. Jenna purchased another residence in Pensacola on January 1, 2014 that she occupied until July 1, 2014 when she receives a new job offer from an employer in Miami. She sells the Pensacola residence on October 1, 2014 and realizes a gain of $40,000. Jenna may exclude what amount of the gain from the sale on October 1, 2014?
A) $0
B) $10,000
C) $20,000
D) $40,000

84) Which of the following statements is false with regard to the ownership and use tests under Sec. 121?
A) The taxpayer must be occupying the residence at the time of the sale in order for Sec. 121 to apply.
B) If a principal residence is sold before satisfying the ownership and use tests, part of the gain may be excluded if the sale is due to a change in employment, health, or unforeseen circumstances.
C) For purposes of the two-year ownership rule, a taxpayer’s period of ownership includes the period during which the taxpayer’s deceased spouse owned the residence.
D) When a taxpayer receives a residence from a spouse or an ex-spouse incident to a divorce, the taxpayer’s period of owning the property includes the time the residence was owned by the spouse or ex-spouse.

85) Under what circumstances can a taxpayer obtain a partial exclusion if a home is sold before the use and ownership tests are satisfied?
A) change in employment that meets the requirement for a moving expense deduction
B) increased traffic due to widening of a road
C) birth of one child
D) divorce

86) Which of the following is not an unforeseen circumstance for purposes of obtaining a partial exclusion of a gain on the sale of a home?
A) loss of employment by the qualified individual if the individual is eligible for unemployment compensation
B) natural or man-made disaster resulting in a casualty to the residence
C) birth of one child
D) divorce or legal separation

87) Sometimes taxpayers should structure a transaction to avoid the application of like-kind provisions. Which of the following conditions is likely to cause a taxpayer to avoid like-kind treatment?
A) Expected higher tax rates in the future.
B) Less accelerated depreciation provisions expected in the future.
C) A decline in the value of the asset being disposed of.
D) None of the above.

88) Which of the following statements in not correct regarding the compliance requirements of an involuntary conversion?
A) The taxpayer elects the deferral by not reporting the gain as income for the first year in which the gain is realized although all relevant information regarding the vent will be reported.
B) A taxpayer who recognized the full gain and paid the taxes can later file a refund claim to elect the deferral if qualified property is acquired before the expiration of the replacement period.
C) A taxpayer elects to defer the full gain in the year the gain is realized (year one), and no gain is reported on that year’s tax return. Qualified replacement property is acquired in the following year (year two), but the full insurance proceeds are not spent so some gain must be recognized. The partial gain recognition will be reported on the tax return for year two.
D) A taxpayer properly elected to defer the full realized gain in year one and provides appropriate information on the replacement property. The taxpayer cannot later revoke the election and designate a different property as the replacement property.

89) Indicate with a “yes” or a “no” which of the following are like-kind exchanges.
a. Computer used in trade or business for office furniture used in trade or business.
b. Apartment building held as an investment for an office building used in trade or business.
c. Land used in trade or business for equipment used in trade or business.
d. Printer used in trade or business for printer used for personal purposes.
e. Exchange of improved real estate held for investment for unimproved real estate held for investment.

90) Indicate with a “yes” or a “no” which of the following are like-kind exchanges (assume all assets are held for business or investment purposes).
a. Exchange of common stock held as an investment for land held as an investment.
b. Exchange of farmland for an apartment building.
c. Exchange of office furniture used in trade or business for computer used in a trade or business
d. Exchange of unimproved real estate for improved real estate.
e. Exchange of automobile used in trade or business for office building used in trade or business

91) Amelia exchanges an office building with a $350,000 adjusted basis for an airplane with a $560,000 fair market value to be used in business.
a. What is the amount of gain or loss realized by Amelia?
b. What is the amount of gain or loss recognized by Amelia?

92) Cheryl owns 200 shares of Cornerstone Corporation common stock which has an adjusted basis of $60,000 and a fair market value of $75,000. John owns 200 shares of Cable Corporation with a $75,000 fair market value.
a. If Cheryl and John exchange their stock, what is the amount of Cheryl’s realized gain?
b. If Cheryl and John exchange their stock, what is the amount of Cheryl’s recognized gain?

93) Kevin exchanges an office building used in his business for another office building worth $200,000 plus $30,000 cash. The FMV of Kevin’s old building is $280,000 (basis $150,000) and it is subject to a mortgage of $50,000. The mortgage is assumed by the other party.
a. What is the amount of gain realized by Kevin?
b. What is the amount of gain recognized by Kevin?
c. What is the basis of the new building to Kevin?

94) Summer exchanges an office building used in her business for another office building. Summer’s office building has a FMV of $250,000 (basis of $180,000). The FMV of the new building is $300,000, and it is subject to a mortgage of $60,000, which is assumed by Summer. Summer also pays the other party $40,000 cash.
a. What is the amount of gain realized by Summer?
b. What is the amount of gain recognized by Summer?
c. What is the basis of the new building to Summer?

95) Trent, who is in the business of racing horses, exchanges a racehorse with a basis of $80,000 for $40,000 cash and a trotter (another racehorse) with a $150,000 fair market value.
a. What is the amount of gain realized by Trent?
b. What is the amount of gain recognized by Trent?
c. What is the adjusted basis of the trotter?

96) Patricia exchanges office equipment with an adjusted basis of $20,000 for $5,000 cash and office equipment with a fair market value of $12,000.
a. What is the gain or loss realized?
b. What is the gain or loss recognized?
c. What is the adjusted basis of the new office equipment?

97) Eric exchanges a printing press with an adjusted basis of $64,000 for a smaller model with a $100,000 fair market value. In addition, he receives $20,000 of marketable securities.
a. What is the amount of gain realized by Eric?
b. What is the amount of gain recognized by Eric?
c. What is Eric’s basis in the new printing press?
d. What is Eric’s basis in the marketable securities?

98) Olivia exchanges land with a $50,000 basis plus marketable securities with a $20,000 basis for a larger parcel of land worth $110,000 in a transaction that otherwise qualifies as a like-kind exchange. The FMV of the land and marketable securities exchanged by Olivia is $75,000 and $35,000 respectively.
a. What is the amount of gain realized and recognized by Olivia on each asset?
b. What is the amount of Olivia’s basis in the new land?

99) Whitney exchanges timberland held as an investment for undeveloped land with a $300,000 FMV. Whitney’s basis for the timberland is $150,000. She also transfers her tractor with a $15,000 basis and a $10,000 FMV as part of the exchange.
a. What is the amount, if any, of gain or loss recognized on the transaction?
b. What is the basis of the undeveloped land?

100) Marinda exchanges an office building worth $800,000 (basis is $820,000) for a warehouse worth $850,000. A part of the exchange she also transfers $50,000 worth of securities which she purchased for $40,000.
a. What are Marinda’s realized and recognized gains (losses) on the two assets exchanged?
b. What is Marinda’s basis in the warehouse acquired?

101) Luke’s offshore drilling rig with a $700,000 adjusted basis is destroyed by a hurricane. He collects $620,000 from the insurance company and purchases a new drilling rig for $600,000.
a. What are the tax consequences of these transactions?
b. What is the basis of the new rig?

102) An office building owned by Abby and used in her business was destroyed in a fire. Abby’s adjusted basis in the building was $145,000 and its FMV was $180,000. Abby filed an insurance claim and she was reimbursed $160,000. In that same year, Abby invested $150,000 of the insurance proceeds in another business building.
a. Assume Abby made the proper election with regard to the involuntary conversion. What is the amount of gain to be recognized by Abby?
b. What is Abby’s basis in the new building?

103) Mick owns a racehorse with a $500,000 basis used for breeding purposes. The racehorse is killed in an accident and Mick receives $750,000 from the insurance company. Mick purchases another racehorse for $400,000.
a. What is the amount of Mick’s realized gain?
b. What is the amount of Mick’s recognized gain?

104) Theresa owns a yacht that is held for personal use and has a $100,000 basis. The yacht is destroyed by a storm and Theresa collects $120,000 from the insurance company. She purchases a new $150,000 yacht for personal use and elects to defer any gain on the transaction. What is the basis of the new yacht?

105) Kareem’s office building is destroyed by fire on April 11, 2014. Settlement is reached with the insurance company on November 1, 2014 when he receives a check for $900,000. The property had recently been appraised for $920,000. Kareem’s adjusted basis in the building was $800,000.
a. What is Kareem’s realized gain or loss?
b. Assume Kareem wishes to defer the maximum amount of gain. Indicate:
(1) the minimum amount that must be spent on a new property.
(2) any restrictions on the new property in order for it to qualify.
(3) the deadline for placing the new property in service.
c. Assume that instead of a fire, the state forces Kareem to sell the property. Indicate how your responses to part b would differ.

106) Nicki is single and 46 years old. She sells her principal residence (adjusted basis $200,000) that she purchased ten years ago for $435,000.
a. What is the amount of Nicki’s recognized gain on the sale?
b. Assume instead that Nicki sells the residence for $485,000. What is the amount of Nicki’s recognized gain on the sale?
c. Assume instead that Nicki has been married to Mike for the entire time they have owned and lived in the home. If they sell the home for $485,000, what is the amount of their recognized gain on the sale?

107) In 1997, Paige paid $200,000 to purchase a new residence. She paid a realtor $5,000 to help locate the house and paid legal fees of $3,000 to make certain that the seller had legal title to the property. Under the provisions of tax law in effect at the time of the purchase, she deferred a gain of $30,000 from the sale of a former residence in 1996. In 1999, she added a new porch to the house at a cost of $15,000 and installed central air conditioning at a cost of $12,000. Since purchasing the house, she has paid $2,000 in repairs. What is the adjusted basis of the home?

108) James and Ellen Connors, who are both 50 years old and married, sell their personal residence on July 25, 2014 for $950,000. They have lived in the home for 20 years. The basis of the home is $350,000. They purchased a new home for $1,000,000 in August 2014. After living in that home for 219 days, the Connors were forced to sell their new home in 2015 for $1,300,000 and move to another climate due to Ellen’s severe health problems.
a. What is the amount of gain recognized on the home sale in 2014?
b. What is the amount of the gain recognized on the home sale in 2015?

109) Amber receives a residence ($750,000 FMV, $500,000 adjusted basis) owned for eight years by Jonathan, her former spouse, as part of a divorce settlement. Amber and Jonathan had lived in the home for the four years before the divorce. Seven months after the transfer of the residence, Amber sells it for $790,000. What is the amount of Amber’s recognized gain on the sale of the home?

110) The Smiths owned and used their principal residence, with an adjusted basis of $250,000, for ten years. The house is destroyed by a tornado and the Smiths receive insurance proceeds of $800,000. Six months later, they purchase another residence for $850,000.
a. What is the amount of gain the Smiths must recognize?
b. What is the basis of the new residence?

111) Discuss the basis rules of property received in a nontaxable like-kind exchange.

112) Discuss the rules regarding the holding period for like-kind property received in a nontaxable exchange.

113) May a taxpayer elect under Sec. 1033 to defer recognition of loss resulting from an involuntary conversion?

114) Ike and Tina married and moved into their new home (purchase price $800,000) 18 months ago. They are thinking of selling the home which is now worth $1,300,000. They plan to reinvest in a smaller home costing approximately $600,000. What should they consider before selling their home?

115) Discuss why a taxpayer would want to avoid like-kind exchange provisions.

Chapter 13 Property Transactions: Section 1231 and Recapture

1) Mark owns an unincorporated business and has $20,000 of Section 1231 gains and $22,000 of Section 1231 losses. He must report a capital loss of $2,000 on his tax return.

2) A net Sec. 1231 gain is treated as ordinary income to the extent of any nonrecaptured net Sec. 1231 losses for the preceding five years.

3) In 2014, Thomas, who has a marginal tax rate of 15%, sells land that is Sec. 1231 property at a gain of $4,000. If he has no other 1231 transactions or capital asset transactions and has no nonrecaptured 1231 gain, Thomas will pay no tax on the $4,000 gain.

4) Sec. 1231 property must satisfy a holding period of more than one year.

5) Depreciable property used in a trade or business for one year or less is considered Sec. 1231 property.

6) Any gain or loss resulting from the sale or disposition of depreciable property used in trade or business and held one year or less is considered ordinary.

7) The sale of inventory results in ordinary gain or loss.

8) Gains and losses from involuntary conversions of property used in a trade or business generally are classified as capital gains and losses.

9) Gains and losses resulting from condemnations of Sec. 1231 property and capital assets held more than one year are classified as ordinary gains and losses.

10) If the recognized losses resulting from involuntary conversions arising from casualty or theft exceed the recognized gains from such events (i.e. a net loss from the casualty), all of the involuntary conversions are treated as ordinary gains and losses.

11) If realized gain from disposition of business equipment exceeds total depreciation or cost recovery, a portion of the gain will receive Sec. 1231 treatment if the equipment’s holding period is more than one year.

12) The purpose of Sec. 1245 is to eliminate the advantage taxpayers would have if they were able to reduce ordinary income by depreciation deductions and also receive favorable Sec. 1231 treatment when the asset was sold.

13) Sec. 1245 applies to gains on the sale of depreciable personal property, but it generally does not apply to depreciable real property.

14) If a taxpayer has gains on Sec. 1231 assets, Secs. 1245 and 1250 must be applied first to determine any amounts recaptured as ordinary income, and any excess gain may then be netted with Sec. 1231 losses for possible long-term capital gain treatment.

15) Sec. 1245 ordinary income recapture can apply to buildings placed in service prior to 1987.

16) Sec. 1245 can increase the amount of gain recognized on an asset.

17) Section 1250 could convert a portion of Sec. 1231 gain into ordinary income if the real property was placed in service prior to 1987 and accelerated depreciation was used.

18) For noncorporate taxpayers, depreciation recapture is not required on real property placed in service after 1986.

19) When corporate and noncorporate taxpayers sell real property placed in service after 1986, all depreciation taken will be taxed at a maximum rate of 25%.

20) Unrecaptured 1250 gain is the amount of long-term capital gain which would be taxed as ordinary income if Sec. 1250 provided for the recapture of all depreciation and not just additional depreciation.

21) The amount recaptured as ordinary income under either Sec. 1245 or Sec. 1250 can never exceed the realized gain.

22) Section 1250 does not apply to assets sold or exchanged at a loss.

23) In addition to the normal recapture rules of Sec. 1250, corporations which sell depreciable real estate are subject to additional recapture rules of Sec. 291.

24) The additional recapture under Sec. 291 is 25% of the difference between the amount that would have been recaptured if the property was Sec. 1245 property and the actual recapture under Sec. 1250.

25) Frisco Inc., a C corporation, placed a building in service in 2002 and deducted straight-line depreciation under the MACRS system in the normal manner. It sold the building this year for a substantial gain. Because straight-line depreciation was used, Frisco will not need to recognize any ordinary gain.

26) Gifts of appreciated depreciable property may trigger recapture of depreciation or cost-recovery deductions to the donor.

27) When a donee disposes of appreciated gift property, the recapture amount for the donee is computed by including the recapture amount attributable to the donor.

28) When appreciated property is transferred at death, the recapture potential carries over to the person who receives the property from the decedent.

29) If no gain is recognized in a nontaxable like-kind exchange involving Sec. 1245 or Sec. 1250 property, the recapture potential carries over to the replacement property.

30) When gain is recognized on an involuntary conversion, gain is subject to recapture under Sec. 1245 or Sec.1250.

31) Installment sales of depreciable property which result in recaptured income under Secs. 1245 or 1250 require that the recaptured income be recognized in the year of sale.

32) Costs of tangible personal business property which are expensed under Sec. 179 are subject to recapture if the property is converted to nonbusiness use before the end of the MACRS recovery period.

33) Gain recognized on the sale or exchange of property between related parties is capital if the property is subject to depreciation in the hands of the transferee.

34) Why did Congress establish favorable treatment for 1231 assets?
A) to encourage the mobility of capital
B) to allow a larger deduction for losses
C) to help business owners replace assets which had declined in value
D) All of the above

35) Jeremy has $18,000 of Section 1231 gains and $23,000 of Section 1231 losses. The gains and losses are characterized as

A)
Capital Gain Capital Loss Ordinary Income Ordinary Loss
$18,000 $23,000

B)
Capital Gain Capital Loss Ordinary Income Ordinary Loss
$18,000 $23,000

C)
Capital Gain Capital Loss Ordinary Income Ordinary Loss
$18,000 $23,000

D)
Capital Gain Capital Loss Ordinary Income Ordinary Loss
$18,000 $3,000 $20,000

36) Pierce has a $16,000 Section 1231 loss, a $12,000 Section 1231 gain, and a salary of $50,000. What is the treatment of these items in Pierce’s AGI?
A) Pierce has a LTCG of $12,000 and a net ordinary income of $34,000.
B) The 1231 gains and losses are treated as ordinary gains and losses making Pierce’s AGI for the year $46,000.
C) Pierce has a $3,000 LTCL which is deductible for AGI making AGI $47,000. He also has a $1,000 LTCL carryover.
D) Pierce has net LTCG of $9,000 and $37,000 of net ordinary income.

37) Daniel recognizes $35,000 of Sec. 1231 gains and $25,000 of Sec. 1231 losses during the current year. The only other Sec. 1231 item was a $4,000 loss three years ago. This year, Daniel must report
A)
NLTCG Ordinary Income
$10,000 $ 0

B)
NLTCG Ordinary Income
$ 6,000 $ 4,000

C)
NLTCG Ordinary Income
$ 4,000 $ 6,000

D)
NLTCG Ordinary Income
$ 4,000 $10,000

38) During the current year, Danika recognizes a $30,000 Section 1231 gain and a $22,000 Section 1231 loss. Prior to this, Danika’s only Section 1231 item was a $15,000 loss two years ago. Danika must report a(n)
A) $8,000 net LTCG.
B) $8,000 ordinary income.
C) $15,000 ordinary income.
D) $8,000 ordinary income and $7,000 net LTCG.

39) During the current year, George recognizes a $30,000 Section 1231 gain on sale of land and a $18,000 Section 1231 loss on the sale of land. Prior to this, George’s only Section 1231 item was a $14,000 loss six years ago. George must report a
A) $12,000 net LTCG.
B) $12,000 ordinary income.
C) $14,000 ordinary income.
D) $10,000 ordinary income and $2,000 net LTCG.

40) During the current year, Kayla recognizes a $40,000 Section 1231 gain on sale of land and a $22,000 Section 1231 loss on the sale of land. Prior to this, Kayla’s only Section 1231 item was a $10,000 loss six years ago. Kayla is in the 28% marginal tax bracket. The amount of tax resulting from these transactions is
A) $2,700.
B) $3,600.
C) $4,000.
D) $5,040.

41) Blair, whose tax rate is 28%, sells one tract of land at a gain of $29,000 and another tract of land at a gain of $11,000. Both tracts of land are Sec. 1231 property. She has never had any other Sec. 1231 transactions. How are the gains taxed?
A) ordinary income of $40,000 taxed at 28%
B) a net capital gain of $40,000 which is not taxed
C) a net capital gain of $40,000 taxed at 15%
D) ordinary income of $40,000 taxed at 25%

42) For a business, Sec. 1231 property does not include
A) timber, coal, or domestic iron ore.
B) inventory purchased 24 months ago.
C) an office building purchased five years ago.
D) land used in the business that was purchased two years ago.

43) Which of the following assets is 1231 property?
A) a machine used in the company’s manufacturing operations
B) an investment in corporate stock
C) land held for investment
D) items held for resale by a retailer

44) Section 1231 property will generally have all the following characteristics except
A) real or depreciable property.
B) used in trade or business.
C) held for sale to customers.
D) held for more than one year.

45) A corporation owns many acres of timber, which it acquired three years ago, and which has a $120,000 basis. The timber was cut last year for use in the corporation’s business. The FMV of the timber on the first day of last year was $270,000. The corporation made the appropriate election to treat the cutting as a sale or exchange. The timber is sold for $300,000 this year. The tax result this year is
A) recognition of capital gain of $30,000.
B) recognition of Sec. 1231 gain of $30,000.
C) recognition of ordinary income of $30,000.
D) no income recognized since all recognition occurs in the year of the cutting of the timber.

46) A corporation owns many acres of timber, which it acquired three years ago, and which has a $150,000 basis for depletion. The timber is cut during the current year for use in the corporation’s business. The FMV of the timber on the first day of the current year is $280,000. If the corporation makes the appropriate election, the tax result is
A) recognition of a Sec. 1231 gain of $130,000.
B) no recognition of gain or loss since the timber is used in the business.
C) recognition of a gain at the time of sale if the timber is later sold with the gain equal to the sales price less the basis in the timber.
D) recognition of a gain if the timber is later sold with the gain equal to the sales price less $280,000 (FMV on the first day of the year of the cutting).

47) In order to be considered Sec. 1231 property, all of the following livestock must be held for 12 months or more from date of acquisition except
A) goats.
B) hogs.
C) sheep.
D) cattle.

48) For livestock to be considered Section 1231 property,
A) the livestock must be held for draft, breeding or dairy purposes, but not for sport.
B) cattle and horses must be held for at least 12 months from the date of acquisition.
C) cattle and horses must be held for at least 24 months from the date of acquisition.
D) livestock other than cattle and horses must be held for at least 24 months from the date of acquisition.

49) If Section 1231 applies to the sale or exchange of an unharvested crop sold with land, the costs of producing the crop are
A) capitalized.
B) deducted as an expense of operations when incurred and also deducted from the sales price at the time of the sale.
C) deducted when incurred if the land is sold but capitalized if the land is exchanged.
D) deducted as an expense of operations when incurred.

50) Dinah owned land with a FMV of $130,000 (adjusted basis $120,000) which is investment property (a capital asset). Dinah owned a second tract of land, a 1231 asset, with a FMV of $46,000 (adjusted basis $50,000). Both tracts were acquired in 2001 and condemned by the state this year. The state paid an amount equal to FMV. If there are no other transactions involving capital assets or 1231 assets, Dinah must report on her current year return
A) $6,000 net ordinary income.
B) $6,000 net section 1231 gain treated as a net capital gain.
C) a LTCG of $10,000 and a 1231 loss of $4,000.
D) a LTCG of $10,000 and a nondeductible loss of $4,000.

51) Emma owns a small building ($120,000 basis and $123,000 FMV) and equipment ($35,000 basis and $22,000 FMV). Both assets were acquired three years ago, are used in Emma’s business, and are depreciated using straight-line depreciation. Both are destroyed by fire. Insurance proceeds were equal to their FMVs. Only one other transfer of an asset occurs during the year, and a $3,000 LTCL is recognized. After considering all transactions, the tax result to Emma is a
A) $13,000 NLTCL.
B) $13,000 ordinary loss.
C) $3,000 LTCG; $3,000 LTCL; and $13,000 ordinary loss.
D) $10,000 net ordinary loss and a $3,000 NLTCL.

52) Cassie owns equipment ($45,000 basis and $30,000 FMV) and a building ($152,000 basis and $158,000 FMV), which are used in Cassie’s business. Cassie has used straight-line depreciation for both assets, which were acquired two years ago. Both the equipment and the building are destroyed in a fire, and Cassie collects insurance proceeds equal to the assets’ FMV. The tax result to Cassie for this transaction is a
A) $15,000 Sec. 1231 loss and a $6,000 ordinary gain.
B) $15,000 ordinary loss and a $6,000 ordinary gain.
C) $15,000 ordinary loss and a $6,000 Sec. 1231 gain.
D) $15,000 Sec. 1231 loss and a $6,000 Sec. 1231 gain.

53) Harry owns equipment ($50,000 basis and $38,000 FMV) and a building ($140,000 basis and $156,000 FMV), which are used in his business. Harry uses straight-line depreciation for both assets, which were acquired several years ago. Both the equipment and the building are destroyed in a fire, and Harry collects insurance proceeds equal to the assets’ FMV. The tax result to Harry for this transaction is
A) the involuntary conversions are treated as ordinary gains and losses.
B) the involuntary conversions are treated as Sec. 1231 gains and losses.
C) the loss on involuntary conversion is treated as a Sec. 1231 loss while the gain is treated as an ordinary gain.
D) the loss on involuntary conversion is treated as an ordinary loss while the gain is treated as a Sec. 1231 gain.

54) Terry has sold equipment used in her business. She acquired the equipment three years ago for $50,000 and has recognized $30,000 of depreciation across the years in use. In order to recognize any Sec. 1231 gain, she must sell the equipment for more than
A) $0.
B) $20,000.
C) $30,000.
D) $50,000.

55) During the current year, Hugo sells equipment for $150,000. The equipment cost $175,000 when placed in service two years ago, and $55,000 of depreciation deductions were allowed. The results of the sale are
A) LTCG of $30,000.
B) Sec. 1231 gain of $30,000.
C) Sec. 1245 ordinary income $30,000.
D) Sec. 1250 ordinary income of $30,000.

56) During the current year, a corporation sells equipment for $300,000. The equipment cost $270,000 when purchased and placed in service two years ago and $60,000 of depreciation deductions were allowed. The results of the sale are
A) ordinary income of $90,000.
B) Sec. 1231 gain of $90,000.
C) ordinary income of $60,000 and LTCG of $30,000.
D) ordinary income of $60,000 and Sec. 1231 gain of $30,000.

57) Section 1245 recapture applies to all the following except
A) depreciable personal property.
B) assets sold or exchanged at a loss.
C) total depreciation or amortization allowed or allowable.
D) amortizable intangible personal property.

58) All of the following statements are true regarding Sec. 1245 are true except
A) Sec. 1245 does not apply to any buildings placed in service after 1986.
B) Sec. 1245 applies to assets sold or exchanged at a gain or at a loss.
C) Sec. 1245 property includes nonresidential real estate that qualified as recovery property under the ACRS rules unless the taxpayer elected to use the straight-line method of cost recovery.
D) Sec. 1245 ordinary applies to total depreciation or amortization allowed or allowable but not more than the realized gain.

59) An unincorporated business sold two warehouses during the current year. The straight-line depreciation method was used for the first building and the accelerated method (ACRS) was used for the second building. Information about those buildings is presented below.

Building No. 1 Building No. 2
Date acquired 1986 1986
Cost $800,000 $900,000
Accum. Depreciation
Straight-line 800,000
ACRS depreciation 900,000
Selling Price 80,000 400,000

How much gain from these sales should be reported as section 1231 gain and ordinary income due to depreciation recapture by the owner of the business?

A)
Section 1231 Gain Ordinary Income
$480,000 $0

B)
Section 1231 Gain Ordinary Income
$ 80,000 $400,000

C)
Section 1231 Gain Ordinary Income
$ 0 $480,000

D)
Section 1231 Gain Ordinary Income
$400,000 $ 80,000

60) A building used in a business for more than a year is sold. Sec. 1250 will not cause depreciation recapture if
A) the building is fully depreciated.
B) the building was placed in service after 1986.
C) straight-line depreciation was used.
D) all of the above.

61) With respect to residential rental property
A) 80% or more of the gross rental income from the building or structure must be rental income from dwelling units in order for it to be classified as residential rental property.
B) hotels are not included in this category if less than half of the units are used on a transient basis.
C) 80% or more of the net rental income from the building or structure must be rental income from dwelling units in order for it to be classified as residential rental property.
D) gain is not subject to the depreciation recapture provisions if the property is held more than one year.

62) Marta purchased residential rental property for $600,000 on January 1, 1985. Total ACRS deductions for 1985 through the date of sale amounted to $600,000. If the straight-line method of depreciation had been used, depreciation would have been $600,000. The property is sold for $750,000 on January 1 of the current year. The amount and character of the gain is
A) $750,000 Sec. 1231 gain.
B) $150,000 Sec. 1231 gain and $600,000 ordinary income.
C) $750,000 ordinary gain due to Sec 1245.
D) $750,000 ordinary gain due to Sec. 1250.

63) Emily, whose tax rate is 28%, owns an office building which she purchased for $900,000 on March 18 of last year. The building is sold for $950,000 on February 20 of this year when the adjusted basis of the building was $876,000. The tax results to Emily are
A) $74,000 1231 gain taxed at 15%.
B) $74,000 ordinary income taxed at 28%.
C) $24,000 1250 unrecaptured gain taxed at 25% and $50,000 1231 gain taxed at 15%.
D) $24,000 1231 gain taxed at 15% and $50,000 ordinary income taxed at 28%.

64) In 1980, Mr. Lyle purchased a factory building to use in business for $480,000. When Mr. Lyle sells
the building for $580,000, he has taken depreciation of $470,000. Straight-line depreciation would have been $400,000. Mr. Lyle must report
A) $570,000 of ordinary gain.
B) $570,000 of Sec. 1231 gain.
C) $70,000 of ordinary income and $500,000 of Sec. 1231 gain.
D) $470,000 of ordinary gain and $100,000 of Sec. 1231 gain.

65) Ross purchased a building in 1985, which he uses in his manufacturing business. Ross uses the ACRS statutory rates to determine the cost-recovery deduction for the building. Ross’s original cost for the building is $500,000 and cost-recovery deductions allowed are $500,000. If the building is sold for $340,000, the tax results to Ross are
A) $340,000 LTCG.
B) $340,000 Sec. 1231 gain.
C) $340,000 Sec. 1245 ordinary income.
D) $340,000 Sec. 1250 ordinary income.

66) Eric purchased a building in 2003 that he uses in his business. Eric uses the straight-line method for the building. Eric’s original cost for the building is $420,000 and cost-recovery deductions are $120,000. Eric is in the top tax bracket and has never sold any other business assets. If the building is sold for $560,000, the tax results are
A) $260,000 Sec. 1231 gain, all taxable at 20%.
B) $260,000 unrecaptured Sec. 1250 gain, all taxable at 25%.
C) $260,000 Sec. 1231 gain, of which $120,000 is unrecaptured Sec. 1250 gain taxable at 25% and the $140,000 balance is taxable at 20%.
D) $120,000 Sec. 1245 ordinary income, $140,000 Sec. 1231 gain taxable at 20%.

67) With regard to noncorporate taxpayers, all of the following statements are true regarding Sec. 1250 recapture except
A) Sec. 1250 affects the character of the gain, not the amount of the gain.
B) Sec. 1250 applies to assets sold or exchanged at either a gain or a loss.
C) Sec. 1250 ordinary income does not exist if the straight-line method of depreciation is used.
D) Sec. 1250 ordinary income is never more than the additional depreciation allowed.

68) In 1980, Artima Corporation purchased an office building for $400,000 for use in its business. The
building is sold during the current year for $550,000. Total depreciation allowed for the building was $350,000; straight-line would have been $320,000. As result of the sale, how much section 1231 gain will Artima Corporation report?
A) $350,000
B) $406,000
C) $320,000
D) $500,000

69) A corporation sold a warehouse during the current year. The straight-line depreciation method was used. Information about the building is presented below:

Date acquired 1984
Cost $800,000
Accumulated Depreciation – Straight-line 620,000
Selling Price 890,000

How much gain should the corporation report as section 1231 gain?
A) $124,000
B) $620,000
C) $586,000
D) $710,000

70) Octet Corporation placed a small storage building in service in 1999. Octet’s original cost for the building is $800,000 and the cost recovery deductions are $300,000. This year the building is sold for $1,100,000. The amount and character of the gain are
A) Ordinary gain of $60,000 and Sec. 1231 gain of $540,000.
B) Ordinary gain of $300,000 and Sec. 1231 gain of $300,000.
C) Ordinary gain of $600,000.
D) Sec. 1231 gain of $600,000.

71) Maura makes a gift of a van to a local food bank run by a charity. Maura had used the van in her trade or business. The van has a FMV of $6,500; a cost of $31,000; and $27,000 depreciation claimed. What is the amount of Maura’s charitable contribution deduction?
A) $6,500
B) $31,000
C) $4,000
D) $2,500

72) A taxpayer purchased a factory building in 1985 for $800,000. After claiming ACRS-accelerated depreciation of $800,000, she sells the asset for $1,000,000 during the current year. No payment is received during the current year, and the $1,000,000 balance to be paid with interest at the interest rate in four annual payments beginning one year from date of sale. The installment sales method is adopted. How much ordinary income is recognized in the current year?
A) $ 0
B) $200,000
C) $800,000
D) $1,000,000

73) Douglas bought office furniture two years and four months ago for $25,000 to use in his business and elected to expense all of it under Sec. 179. Depreciation of $3,500 would have been taken under the MACRS rules. If Douglas converts the furniture to nonbusiness use today, Douglas must
A) amend the prior two years tax returns.
B) include $3,500 in gross income in year of conversion.
C) include $21,500 in gross income in year of conversion.
D) include $25,000 in gross income in year of conversion.

74) Clarise bought a building three years ago for $180,000 to use in her business. The straight-line method of depreciation was used and $15,000 of depreciation deductions were allowed. During the current year, Clarise sells the building to her wholly-owned corporation for $235,000. The tax results to Clarise are
A) $70,000 ordinary income.
B) $70,000 of Sec. 1231 gain.
C) $55,000 ordinary income and $15,000 Sec. 1231 gain.
D) $15,000 of ordinary income and $55,000 Sec. 1231 gain.

75) All of the following are considered related parties for purposes of Sec. 1239 recapture with the exception of
A) an individual and a partnership where the individual has a one-fourth interest in the partnership.
B) an individual and a corporation where the individual owns more than 50% of the value of the outstanding stock of the corporation.
C) an individual and a corporation where the individual’s spouse owns more than 50% of the value of the outstanding stock of the corporation.
D) an individual and a partnership where the individual owns more than 50% of the capital of the partnership.

76) Cobra Inc. sold stock for a $25,000 loss five years ago. It has been carrying over the capital loss for five years, and the loss will expire at the end of this year because Cobra has not had any capital gains. Earlier this year Cobra sold a parcel of land held four years for business use and will recognize a $30,000 gain. Cobra is thinking about selling some machinery used in its business for the past three years. During this time technology has dramatically changed so Cobra will recognize a $32,000 loss on the sale of the machinery. Cobra is trying to decide whether to sell the machinery at year-end or early next year. Cobra is profitable and has a consistent marginal tax rate of 35%. When should Cobra sell the equipment?
A) current year
B) early next year
C) current year, but arrange an installment sale to spread the loss recognition over the two years
D) either the current year or next year

77) Lucy, a noncorporate taxpayer, experienced the following Section 1231 gains and losses during the years 2009 through 2014. Her first disposition of a Sec. 1231 asset occurred in 2009. Assuming Lucy had no capital gains and losses during that time period, what is the tax treatment in each of the years listed?

Section 1231 Gains Section 1231 Losses
2009 $10,000 $ 8,000
2010 $18,000 $23,000
2011 $ 9,000 $13,000
2012 $22,000 $16,000
2013 $25,000 $17,000
2014 $11,000 $18,000

78) Jillian, whose tax rate is 39.6%, had the following sales of Section 1231 property this year:

Sale of land at a gain of $15,000
Sale of land at a gain of $12,000
Sale of land at a loss of $8,000

a. What is the amount of her resulting tax liability?
b. Assume instead that Jillian has a 15% marginal tax rate. What is the amount of her resulting tax liability?
c. Assume instead that Jillian has a 28% marginal tax rate. What is the amount of her resulting tax liability?

79) Hilton, a single taxpayer in the 28% marginal tax bracket, has $16,000 of nonrecaptured net Sec. 1231 losses, at the beginning of a year in which he had the following transactions:

-Sale of Asset A at a $10,000 1231 gain, all of which is unrecaptured Sec. 1250 gain
-Sale of Asset B at a $13,000 1231 gain

How are the items reported this year and at which rate(s) are the amounts taxed?

80) Indicate whether each of the following assets are capital assets, Sec. 1231 assets, or ordinary income property (property which, if sold, results in ordinary income). Assume that all of the property is held for more than one year.
a. XYZ Corporation owns land used as an employee parking lot. How is the parking lot classified for tax purposes?
b. Montana Corporation owns land held as an investment. How is the land classified for tax purposes?
c. John, a self-employed electrician, owns an automobile he uses strictly for personal use. How is the automobile classified for tax purposes?
d. Jan, a self-employed contractor, owns a truck she uses exclusively in her trade or business. How is the truck classified for tax purposes?
e. Leslie owns an office building where her accounting practice is located. What is the classification of the building?
f. Yvonne owns a computer for use in her job as a sales representative. She does not use the computer for personal purposes. How is the computer classified for tax purposes?

81) Sarah owned land with a FMV of $150,000 (adjusted basis $135,000) which is investment property (a capital asset). Sarah owned a second tract of land, a 1231 asset, with a FMV of $38,000 (adjusted basis $55,000). Both tracts were acquired in 2000 and condemned by the state this year. The state paid an amount equal to FMV. If there are no other transactions involving capital assets or 1231 assets, what is the amount that Sarah must report on her current year return?

82) Elaine owns equipment ($23,000 basis and $15,000 FMV) and a building ($136,000 basis and $148,000 FMV), which are used in her business. Elaine uses straight-line depreciation for both assets, which were acquired several years ago. Both the equipment and the building are destroyed in a fire, and Elaine collects insurance proceeds equal to the assets’ FMV.
a. What is the tax treatment of these two transactions?
b. Assume that Elaine is only able to collect $3,000 from the insurance company for the equipment loss. What is the tax treatment of the two transactions (assume the basis and insurance reimbursement remain the same for the building).

83) The following gains and losses pertain to Jimmy’s business assets that qualify as Sec. 1231 property. Jimmy does not have any nonrecaptured net Sec. 1231 losses from previous years, and the portion of gain recaptured as ordinary income due to the depreciation recapture provisions has been eliminated.

Gain due to insurance reimbursement for hurricane damage $24,000
Loss due to condemnation $21,000
Gain due to the sale of Sec. 1231 property $18,000

Describe the specific tax treatment of each of these transactions.

84) The following gains and losses pertain to Arnold’s business assets that qualify as Sec. 1231 property. Arnold does not have any nonrecaptured net Sec. 1231 losses from previous years, and the portion of gain recaptured as ordinary income due to the depreciation recapture provisions has been eliminated.

Loss from hurricane damage $25,000
Loss due to condemnation $20,000
Gain due to the sale of Sec. 1231 property $16,000

Describe the specific tax treatment of each of these transactions.

85) The following are gains and losses recognized in 2014 on Ann’s business assets that were held for more than one year. The assets qualify as Sec. 1231 property.

Gain due to insurance reimbursement for casualty $20,000
Gain due to a condemnation 30,000
Loss due to the sale of Sec. 1231 property 17,000

A summary of Ann’s net Sec. 1231 gains and losses for the previous five-year period is as follows:

Cumulative Nonrecaptured
Year Sec. 1231 Gain Sec. 1231 Loss Net 1231 Losses
2009 $5,000 $0
2010 $3,000 $3,000
2011 $17,000 $20,000
2012 $12,000 $8,000
2013 $10,000 $18,000

Describe the specific tax treatment of each of the current year transactions.

86) Network Corporation purchased $200,000 of five-year equipment on March 24, 2012. They elected to expense $60,000 of the cost under Sec. 179 in effect that year. After depreciating the equipment $28,000 in 2012 and $22,400 in 2013, the equipment was sold for $190,000.
a. What is the amount of the realized gain (or loss) on the sale?
b. How is the gain or loss taxed?

87) On June 1, 2011, Buffalo Corporation purchased and placed in service 7-year MACRS tangible property costing $100,000. On November 10, 2014, Buffalo sold the property for $102,000 after having taken MACRS $47,525 in depreciation deductions. What is the amount and character of Buffalo’s gain?

88) An unincorporated business sold two warehouses during the current year. The straight-line depreciation method was used for Building No. 1 and the accelerated method (ACRS) was used for Building No. 2. Information about those buildings is presented below.

Building No. 1 Building No. 2
Date acquired 1984 1984
Cost $510,000 $650,000
Accum. Depreciation
Straight-line 510,000
ACRS depreciation 650,000
Selling Price 750,000 825,000

How much gain from these sales should be reported as section 1231 gain and ordinary income due to depreciation recapture?

89) Jed sells an office building during the current year for $800,000. The building was purchased in 1980 for $350,000. Jed had depreciated the building under an accelerated method, but it is now fully depreciated. Jed has never had any other Sec. 1231 transactions.
a. What is the recognized gain or loss on the sale of the building and the character of the gain?
b. How will the gain be taxed?

90) Pam owns a building used in her trade or business that was placed into service in 2002. The building cost $450,000 and depreciation to date amounts to $200,000. Pam sells the building for $380,000. It is the only asset she sells this year, and she has no nonrecaptured Sec. 1231 losses. What is the amount of recognized gain and the nature of the gain? How will the gain be taxed?

91) Julie sells her manufacturing plant and land originally purchased in 1980. Accelerated depreciation had been taken on the building, but the building is now fully depreciated. Julie is in the 39.6% marginal tax bracket. Other information is as follows:

Property Original cost Total depreciation Adjusted basis Selling price
Plant $2,800,000 $2,800,000 $0 $3,000,000
Land $ 500,000 $500,000 $800,000

She has not sold any other assets this year. A review of her file indicates that the only asset dispositions in the past five years was a truck sold for a $10,000 loss last year. What are the tax consequences of the sale (type of gain; rates at which taxed)?

92) Connors Corporation sold a warehouse during the current year for $980,000. The building had been acquired in 1980 at a cost of $830,000. The building is fully depreciated.

What is the amount and nature of the gain or loss on the sale of the warehouse?

93) WAM Corporation sold a warehouse during the current year for $830,000. The building had been acquired in 1989 at a cost of $730,000 and had total straight-line depreciation of $510,000.

What is the amount and nature of the gain or loss on the sale of the warehouse?

94) Describe the tax treatment for a noncorporate taxpayer in the 39.6% marginal tax bracket who sells each of the first two assets for $500,000 and each of the second two assets for $750,000. Each asset was purchased in 2010 and is used in a trade or business. There are no other gains and losses and no nonrecaptured Section 1231 losses.

Original Basis Adjusted Basis
Land $350,000 $350,000
Equipment $600,000 $450,000
Equipment $600,000 $500,000
Building $550,000 $450,000

95) Jacqueline dies while owning a building with a $1,000,000 FMV. The building is classified as Sec. 1245 property acquired in 1985 for $850,000. Cost-recovery deductions of $850,000 have been claimed. Pam inherits the property.
a. What is the amount of Pam’s basis in the property?
b. What is the amount of cost-recovery deductions that Pam must recover if she immediately sells the building?

96) Melissa acquired oil and gas properties for $600,000. During 2013 she elected to expense the $180,000 of IDC. Total depletion allowed was $50,000. During the current year, Melissa sells the property for $700,000.
a. What is the amount of and nature of her gain using the facts above?
b. What is the amount of and nature of her gain assuming that she sold the property for $850,000?

97) Pete sells equipment for $15,000 to Marcel, his son. The equipment cost $20,000 and has accumulated depreciation of $12,000. Marcel will use the equipment in his business.
a. What is the amount and character of Pete’s gain on the sale?
b. How does your answer change if the sales price is $22,000?

98) What is the purpose of Sec. 1245 and what is its significance?

99) Jesse installed solar panels in front of his office building in 2013. The panels are not attached to the building. After using the solar panels for 13 months, Jesse decided to replace them with a newer model to obtain a greater savings on electricity costs. Jesse sold the old solar panels for an amount greater than his original purchase price. What tax issues should be considered with purchase, use and sale of the original solar panels?

100) Brian purchased some equipment in 2014 which he intends to use in his trade or business. He approaches you to assist him in planning for the ultimate disposal of the asset—whether it be by sale, charitable contribution to the local university, gift to his sister for use in her business, or some other means. Discuss the tax considerations.

Chapter 14 Special Tax Computation Methods, Tax Credits, and Payment of Tax

1) The alternative minimum tax applies to individuals, corporations, estates, and trusts.

2) The alternative minimum tax applies to individuals only if it exceeds the taxpayer’s regular income tax liability.

3) For purposes of the AMT, the standard deduction, but not the personal and dependency exemptions, is allowed.

4) An example of an AMT tax preference is the excess of MACRS depreciation on equipment over depreciation computed by using the the 150% declining balance method.

5) All tax-exempt bond interest income is classified as an AMT preference.

6) Casualty and theft losses in excess of 10% of AGI are deductible for AMT purposes.

7) Medical expenses in excess of 10% of AGI are deductible when computing AMT.

8) For purposes of the AMT, only the foreign tax credit and refundable personal credits are allowed to reduce the tentative minimum tax.

9) A taxpayer who paid AMT in prior years, but is not subject to the AMT in the current year, may be entitled to an AMT credit against his regular tax liability in the current year.

10) If an individual is classified as an employee, the employer is required to withhold the employee’s share of the FICA tax and to provide a matching amount.

11) Self-employed individuals are subject to the self-employment tax if their net earnings are more than the personal exemption amount.

12) One-half of the self-employment tax imposed is allowed as a for AGI deduction.

13) If an individual is an employee and also has self-employment income, the maximum tax base for computing self-employment tax is reduced by the wages that are subject to the FICA tax.

14) A self-employed individual has earnings from his business of $300,000. For the earnings in excess of the $117,000, he will only have to pay the 2.9% Medicare tax.

15) When a husband and wife file a joint return and both have self-employment income, the self-employment tax must be computed separately.

16) Nonrefundable credits may offset tax liability but may not result in additional payments to the taxpayer.

17) The child and dependent care credit provides relief for working taxpayers who pay for care for younger children or an incapacitated dependent or spouse.

18) For purposes of the child and dependent care credit, qualifying employment-related expenses cannot include payments to a relative.

19) For purposes of the limitation on qualifying expenses for the child and dependent care credit, a spouse who is either a full-time student or is incapacitated is deemed to have earned income of $250 per month, or $500 per month if there are two or more qualifying individuals in the household.

20) The adoption credit based on qualified adoption expenses is generally allowed in the year the adoption is finalized.

21) Taxpayers with income below phase-out amounts are allowed a child credit of $1,000 for each qualifying child under age 17.

22) Qualified tuition and related expenses eligible for the American Opportunity Tax Credit are limited to those incurred the first two years of postsecondary education.

23) Brad and Shelly’s daughter is starting her freshman year of college. Brad and Shelly will be able to claim the American Opportunity Tax Credit for a percentage of the cost of tuition and room and board.

24) To claim the Lifetime Learning Credit, a student must take at least one-half of a full-time course load during the year.

25) The qualified retirement savings contributions credit is based on a maximum contribution of $2,000.

26) In lieu of a foreign tax credit, a taxpayer may elect to take a deduction for foreign taxes paid or accrued.

27) The foreign tax credit is equal to the smaller of foreign taxes paid or accrued in the tax year or the portion of the U.S. income tax liability attributable to the income earned in all foreign countries.

28) The general business credits are refundable credits.

29) A credit for rehabilitation expenditures is available to a business for the purchase price of a building originally placed in service before 1936.

30) The nonrefundable disabled access credit is available to eligible small businesses for expenditures incurred to make existing business facilities accessible to disabled individuals.

31) Research expenses eligible for the research credit include costs that are incident to the development or improvement of a product or component.

32) A taxpayer’s tentative minimum tax exceeds his net income tax so he will be paying the alternative minimum tax this year. The taxpayer has a sole proprietorship through which he has earned general business credits. The taxpayer can reduce his AMT to the extent of his general business credits.

33) The earned income credit is refundable only if a tax has been withheld.

34) The earned income credit is available only to taxpayers with qualifying children.

35) The health insurance premium assistance credit is designed to help lower and middle income taxpayers who purchase their own health insurance insurance directly from an insurance company or through a state or federal exchange.

36) If an employee has more than one employer during the year, all employers must withhold federal income taxes but only one employer must withhold FICA tax.

37) If estimated tax payments equal or exceed 100% of the actual tax liability for the prior year, there is generally (assuming AGI less than or equal to $150,000) no penalty for underpayment of estimated taxes.

38) Bob’s income can vary widely from year-to-year because much of his compensation comes from sales commissions and bonuses. It generally is in the $200,000 to $300,000 range. To minimize the risk of underpayment penalties for estimated tax he should pay in, through payroll withholding and estimated tax payments, 100% of the prior year tax liability.

39) Nonrefundable personal tax credits are allowed against the taxpayer’s tax liability before other credits are claimed.

40) Jake and Christina are married and file a joint return for 2014 with taxable income of $100,000 and tax preferences and adjustments of $20,000 for AMT purposes. Their regular tax liability is $16,713. What is the amount of their total tax liability?
A) $6,859
B) $9,854
C) $16,713
D) $26,567

41) In computing the alternative minimum taxable income, no deduction is allowed for
A) alimony.
B) moving expenses.
C) personal exemptions.
D) individual retirement account contributions.

42) Harley’s tentative minimum tax is computed by multiplying the AMT tax rates by her
A) taxable income.
B) alternative minimum tax base.
C) alternative minimum taxable income.
D) tentative alternative taxable income.

43) In 2014 Charlton and Cindy have alternative minimum taxable income of $130,000 and file a joint return. For purposes of computing the alternative minimum tax, their exemption is
A) $0.
B) $7,900.
C) $52,800.
D) $82,100.

44) Reva and Josh Lewis had alternative minimum taxable income of $350,000 in 2014 and file a joint return. For purposes of computing the alternative minimum tax, their exemption is
A) $33,725.
B) $52,800.
C) $48,375.
D) $82,100.

45) In computing AMTI, tax preference items are
A) excluded.
B) added only.
C) subtracted only.
D) either added or subtracted.

46) In computing AMTI, adjustments are
A) limited.
B) added only.
C) subtracted only.
D) either added or subtracted.

47) All of the following are allowable deductions under the alternative minimum tax except
A) charitable contributions.
B) gambling losses.
C) qualified housing interest.
D) personal property taxes.

48) Suzanne, a single taxpayer, has the following tax information for the current year.
• Charitable contribution of real property with a FMV of $25,000 (adjusted basis $20,000) for which a $25,000 deduction was taken.
• Research and experimental expenses of $40,000 deducted in full for regular tax.

Suzanne’s total tax preferences and adjustments equals
A) $5,000.
B) $36,000.
C) $41,000.
D) $45,000.

49) Rex has the following AMT adjustments:
-Depreciation of real property acquired in 1996 using MACRS is $22,000 while depreciation for AMT purposes is $15,000.
-R&E expenditures amounting to $60,000 are expensed.

The net adjustment is
A) $7,000.
B) $54,000.
C) $61,000.
D) $67,000.

50) Lavonne has a regular tax liability of $13,356 on taxable income of $70,000. She also has tax preferences of $25,000 and positive adjustments attributable to limitations on itemized deductions of $15,000. Lavonne is single and takes a $3,950 personal exemption for herself only. Lavonne’s alternative minimum tax for 2014 is
A) $0.
B) $2,543.
C) $16,271.
D) none of the above.

51) Self-employment taxes include components for
A) Medicare hospital insurance and SUTA.
B) Social Security and FUTA.
C) FICA and FUTA.
D) Social Security and Medicare hospital insurance.

52) A wage cap does not exist for which of the following self-employment taxes?
A) Social Security tax
B) FICA
C) FUTA
D) Medicare hospital insurance

53) If an individual is liable for self-employment tax, a portion of the self-employment tax is
A) a for AGI deduction.
B) from AGI as an itemized deduction.
C) a Schedule C business expense.
D) nondeductible.

54) John has $55,000 net earnings from a sole proprietorship. John is also employed by a major corporation and is paid $25,000. John’s self-employment tax (rounded) for 2014 is
A) $3,886.
B) $4,208.
C) $7,771.
D) $8,415.

55) Joe has $130,000 net earnings from a sole proprietorship. Joe’s self-employment tax (rounded) for 2014 is
A) $17,990.
B) $18,368.
C) $19,890.
D) None of the above.

56) Hong earns $127,300 in her job as a physician’s assistant. She also has her own business selling cosmetics. This business generated $10,000 of earnings. What is Hong’s self-employment tax for 2014?
A) $268
B) $290
C) $1,412
D) $1,530

57) Ava has net earnings from self-employment of $125,000. She also earned salary of $170,000 from a job held earlier in the year. How much Additional Medicare Tax will be owed on the self-employment income?
A) $0
B) $769
C) $855
D) $3,625

58) All of the following statements regarding self-employment income/tax are true except:
A) The self-employment tax is imposed on net earnings from self-employment over $400.
B) Self-employment tax is computed separately for married individuals filing joint returns.
C) Independent contractors are subject to self-employment tax on the amount of net earnings from the self-employment activity.
D) Employees who have a business in addition to their regular employment are not subject to the self-employment tax since FICA is withheld on their wages.

59) All of the following are self-employment income except
A) net income of a sole proprietorship.
B) dividends received by a corporate shareholder.
C) fees received for serving as a director of a corporation.
D) distributive share of partnership income from a partnership operating a business.

60) Nonrefundable tax credits
A) only offset a taxpayer’s tax liability.
B) may only be used if the taxpayer is receiving a refund.
C) can be carried back two years and carried forward 15 years if they exceed tax liability in the current year.
D) allow the excess over the taxpayer’s tax liability to be paid to the taxpayer.

61) Refundable tax credits
A) only offset a taxpayer’s tax liability.
B) may only be used if the taxpayer is receiving a refund.
C) have all expired but may be reinstated with new tax legislation.
D) allow the excess over the taxpayer’s tax liability to be paid to the taxpayer.

62) Which statement is correct?
A) Tax credits reduce tax liability on a dollar-for-dollar basis.
B) Tax deductions reduce tax liability on a dollar-for-dollar basis.
C) The benefit of a tax credit depends on the taxpayer’s marginal tax rate.
D) Tax deductions are less valuable for high-income taxpayers than for low-income taxpayers.

63) Max and Alexandra are married and incur $5,500 of qualifying expenses to care for their two children, ages 2 and 5. Max’s earned income is $35,000 and Alexandra’s earnings from a part-time job are $5,000. What is the amount of the qualifying expenses for purposes of computing the child and dependent care credit?
A) $3,000
B) $5,000
C) $5,500
D) $6,000

64) Marvin and Pamela are married, file a joint return, and have two children, ages 9 and 11. Their combined AGI is $65,000. Marvin’s earned income is $40,000; Pamela’s is $25,000. They incur $6,500 of child-care expenses to enable them to be employed during the current year. Their child and dependent care credit is
A) $1,200.
B) $1,300.
C) $1,800.
D) $6,000.

65) Bud and Stella are married, file a joint return, and have one child, age 3. Their combined AGI is $35,000. Bud and Stella incur $3,500 of child-care expenses during the current year. The child and dependent care credit is
A) $600.
B) $700.
C) $750.
D) $875.

66) Mark and Stacy are married, file a joint return, and have one child, age 3. Their combined AGI is $55,000. Mark and Stacy incur $3,500 of child-care expenses during the current year. Mark’s employer reimburses him $1,500 under a qualified dependent care assistance plan. The child and dependent care credit is
A) $300.
B) $600.
C) $700.
D) $1,200.

67) Evan and Barbara incurred qualified adoption expenses in 2013 of $6,000, and then incurred $7,500 more in 2014 when the adoption of their child became final. Their 2013 AGI was $110,000 and their 2014 AGI was $100,000. The allowable adoption credit is
A) $13,190 in 2014.
B) $13,500 in 2014.
C) $6,000 in 2013 and $7,190 in 2014.
D) $6,000 in 2013 and $7,500 in 2014.

68) Lee and Whitney incurred qualified adoption expenses in 2013 of $2,000, and then incurred $7,000 more in 2014 when the adoption of their child became final. Their 2013 AGI was $120,000 and their 2014 AGI was $140,000. The allowable adoption credit is
A) $ 7,000 in 2014.
B) $ 9,000 in 2014.
C) $13,190 in 2014.
D) $2,000 in 2013 and $7,000 in 2014.

69) Marguerite and Josephus have two children, ages 13 and 10. Their modified AGI is $120,500.What is their child tax credit?
A) $900
B) $1,000
C) $2,000
D) None of the above.

70) The maximum amount of the American Opportunity Tax Credit for each qualified student is
A) $1,500.
B) $2,000.
C) $2,500.
D) $3,000.

71) Jeffery and Cassie, who are married with modified AGI of $90,000, are sending their son to his first year of college. Their total tuition and related payments during 2014 amounted to $5,500. They have not taken advantage of any other type of tax benefit related to educational expenses. Their American Opportunity Tax Credit for 2014 is
A) $1,500.
B) $2,000.
C) $2,500.
D) $5,000.

72) Timothy and Alice, who are married with modified AGI of $90,000, are sending their daughter to her first year of college. Their total tuition and related payments during the year amounted to $13,000. In addition, their daughter received a $10,000 scholarship to cover tuition. They have not taken advantage of any other type of tax benefit related to educational expenses. Their American Opportunity Tax Credit is
A) $2,000.
B) $2,250.
C) $2,500.
D) $3,000.

73) Joe, who is single with modified AGI of $84,000, is sending his son to his first year of college. The total tuition and related payments during the year amounted to $18,000. Joe has not taken advantage of any other type of tax benefit related to educational expenses. His American Opportunity Tax Credit is
A) $ 0.
B) $1,000.
C) $1,500.
D) $2,500.

74) In the fall of 2014, James went back to school to earn a master of accountancy degree. He incurred $7,000 of qualified educational expenses and his modified AGI for the year was $40,000. His Lifetime Learning Credit is
A) $1,000.
B) $1,400.
C) $1,800.
D) $2,500.

75) All of the following statements are true regarding the Lifetime Learning Credit except which one?
A) In order to qualify for the Lifetime Learning Credit, a student must be enrolled 1/2 time.
B) Qualifying expenses include those for tuition and related fees but not for room and board.
C) The Lifetime Learning credit may be claimed for any degree or nondegree course at a college or university that helps an individual acquire or improve their job skills.
D) The Lifetime Learning credit and the American Opportunity Tax credit may not be taken in the same tax year with respect to the same student’s tuition and related fees.

76) Which of the following is not a qualifying property for the residential energy efficient property (REEP) credit?
A) geothermal heat pumps
B) residential wind property
C) metal or asphalt roofs with special coatings
D) solar hot water heaters

77) Kerry is single and has AGI of $25,000 in 2014. During the year he contributes $5,000 to his Roth IRA. What is the amount of qualified retirement savings contributions credit to which he is entitled?
A) $200
B) $400
C) $800
D) $1,000

78) A corporation has $100,000 of U.S. source taxable income and $300,000 of foreign source taxable income from countries X and Y for a total worldwide taxable income of $400,000. Countries X and Y levy a total of $60,000 in foreign taxes upon the foreign source taxable income. U.S. taxes before credits are $140,000. The foreign tax credit limitation is
A) $35,000.
B) $60,000.
C) $80,000.
D) $105,000.

79) Carlotta, Inc. has $50,000 foreign-source income and $150,000 worldwide income. Its U.S. tax on its worldwide income is $42,000 and it paid foreign taxes of $16,000. What is the corporation’s foreign tax credit?
A) $2,000
B) $14,000
C) $16,000
D) $42,000

80) Carlotta, Inc. has $50,000 foreign-source income and $150,000 worldwide income. Its U.S. tax on its worldwide income is $42,000 and it paid foreign taxes of $12,000. What is the corporation’s foreign tax credit?
A) $4,000
B) $12,000
C) $14,000
D) $42,000

81) Current year foreign taxes paid exceed the ceiling based on U.S. tax attributable to foreign source income. These excess foreign tax credits
A) are lost.
B) can be carried forward ten years only.
C) can be carried back one year and then carried forward ten years.
D) can be carried back one year and then carried forward twenty years.

82) The general business credit includes all of the following with the exception of
A) research credit.
B) disabled access credit.
C) foreign tax credit.
D) credit for rehabilitation expenditure.

83) Octo Corp. purchases a building for use in its business at a cost of $100,000. The building was built in 1930 and needs substantantial work so it can be used. Octo spends $150,000 on qualifying renovations. Octo will earn a rehabilitation credit of
A) $15,000.
B) $25,000.
C) $5,000.
D) $30,000.

84) Runway Corporation has $2 million of gross receipts in the preceding year. For purposes of the disabled access credit, what is the maximum number of full-time employees the corporation can have in the preceding year?
A) 10
B) 15
C) 20
D) 30

85) Kors Corporation has 30 employees and $5 million of gross receipts. Kors spends $15,000 for qualified structural improvements for access for the disabled. The disabled access credit is
A) $5,000.
B) $5,125.
C) $0.
D) $7,500.

86) Which of the following expenditures will qualify as a research expenditure for purposes of the research credit?
A) An ice cream producer develops a new type of packaging that will keep ice cream frozen while driving home from the grocery store.
B) An ice cream producer develops a new design on the package that will be more pleasing to the culture of a new market it is entering.
C) An ice cream producer develops a new marketing campaign to introduce its brand to a new region of the country it is entering.
D) All of the above qualify as research expenditures for the research credit.

87) ChocoHealth Inc. is developing new chocolate products providing abundant health benefits at low calorie counts. For the past three years, it spent an average of $500,000 per year on research. ChocoHealth has spent $900,000 on research. The company has elected the simplified credit. For the current year, it will earn a research credit of
A) $54,000.
B) $126,000.
C) $80,000.
D) $91,000.

88) The general business credit may not exceed the net income tax minus the greater of the tentative minimum tax or
A) 20% of the net regular tax liability above $20,000.
B) 25% of the net regular tax liability above $20,000.
C) 20% of the net regular tax liability above $25,000.
D) 25% of the net regular tax liability above $25,000.

89) Dwayne has general business credits totaling $30,000 before limitation. His regular tax liability is $83,000 and his tentative minimum tax is $79,000. What amount of general business credit can Dwayne take this year?
A) $4,000
B) $14,500
C) $25,000
D) $30,000

90) Layla earned $20,000 of general business credits from her sole proprietorship. Her regular tax liability is $45,000, and her tentative minimum tax is $49,000. During the current year Layla will apply general business credits of
A) $0.
B) $4,000.
C) $20,000.
D) $45,000.

91) Individuals without children are eligible for the earned income credit if they meet all the following conditions except
A) file married filing separately.
B) at tax year end are at least age 25 but not more than age 64.
C) for the tax year are not a dependent of another taxpayer.
D) the United States is their principal place of residence for more than one-half of the tax year.

92) A taxpayer will be ineligible for the earned income credit if he or she has disqualified investment income of more than $3,350 in 2014. Disqualified income includes all the following except
A) net capital gains.
B) tax-exempt interest.
C) net rental income.
D) self-employment income.

93) Which one of the following is a refundable credit?
A) earned income credit
B) child and dependent care credit
C) lifetime learning credit
D) credit for the elderly and disabled

94) In 2014 Rita is divorced with one child. She has AGI of $19,500 resulting in a federal income tax liability of $250 and an earned income credit of $3,038. She has had $550 of federal income taxes withheld from her pay. Rita will receive a federal income refund of
A) $550.
B) $300.
C) $3,038.
D) $3,338.

95) Which of the following statements is incorrect regarding qualifying criteria for the health insurance premium tax credit?
A) The insurance policy must be purchased directly from an insurance company.
B) Household income must be below designated levels.
C) The taxpayer cannot have access to affordable essential coverage through an employer.
D) The individual may not be eligible as a dependent of another taxpayer.

96) An individual with AGI equal to or less than $150,000 in the prior year may generally avoid penalties for underpayment of estimated tax in each of the following cases with the exception of
A) estimated tax is less than $1,500.
B) 90% of the tax due for the current year is paid.
C) 90% of the tax due for the current year is paid when computed on an annualized basis.
D) 100% of the actual tax liability for the prior year is paid.

97) With respect to estimated tax payments for a taxpayer with AGI of $150,000 or lower in the prior year, all of the following are generally true with the exception of
A) no penalty is imposed if the estimated tax is less than $1,000.
B) no penalty is imposed if the individual has no tax liability for the prior year.
C) no underpayment penalty is imposed if the estimated payments total at least 90% of the tax due for the current year.
D) no underpayment penalty is imposed if the estimated payments total at least 90% of the actual tax liability for the prior year.

98) If a taxpayer’s AGI is greater than $150,000, no penalty will be imposed if the taxpayer pays estimated tax payments in 2014 equal to what percentage of 2013’s income tax liability?
A) 100%
B) 90%
C) 110%
D) 120%

99) Annie has taxable income of $100,000, a regular tax liability of $21,176, a positive AMT adjustment due to limitations on itemized deductions of $20,000, and tax preferences of $25,000 in 2014. Annie is single and takes a $3,950 personal exemption for herself only. What is Annie’s AMT for 2014?

100) George and Meredith who are married, have a regular tax liability of $22,963, taxable income of $125,000, tax preferences of $25,000, and positive adjustments attributable to limitations on itemized deductions of $18,700 this year. They claim $11,850 of personal and dependency exemptions for themselves and their 20-year old dependent daughter. What is George and Meredith’s alternative minimum tax for 2014?

101) Sonya started a self-employed consulting business in the last part of the year and earned $40,000. She had been employed as manager in a consulting firm prior to starting her own business and had earned $125,000.
(a) What is Sonya’s self employment tax for 2014?
(b) What is Sonya’s deduction for AGI for the SE tax?

102) Lara started a self-employed consulting business in the last part of the year and earned $60,000 of self- employment income. She had been employed as manager in a consulting firm prior to starting her own business and had earned $175,000.
(a) What is Lara’s Additional Medicare Tax for 2014, if any?
(b) What is Lara’s deduction for AGI for the Additional Medicare Tax?

103) Sam and Megan are married with two dependent children. Both Sam and Megan work, earning $50,000 and $55,000, respectively. Their AGI totals $110,000. They incur $6,500 of qualifying child care expenses of which $2,500 is reimbursed by Megan’s dependent care program at work.

What is the amount of their child and dependent care credit?

104) Nick and Nicole are both 68 years old and file a joint return. They have AGI of $15,000 and receive nontaxable Social Security payments of $4,200 during the current year. What is the amount of the tax credit for the elderly?

105) Tyler and Molly, who are married filing jointly with $210,000 of AGI in 2014, incurred the following expenses in their efforts to adopt a child:

2013: Attorney’s fees $4,500
2014: Attorney’s fees $4,500
Court costs $1,000
Adoption fees $5,500

The adoption was finalized in 2014. What is the amount of the allowable adoption credit in 2014?

106) Tom and Anita are married, file a joint return with an AGI of $165,000, and have one dependent child, Tim, who is a first-time freshman in college. The following expenses are incurred and paid in 2014:

Tuition, fees and textbooks $11,000
Room and Board $5,000

What is the maximum education credit allowed to Tom and Anita?

108) Bonjour Corp. is a U.S.-based corporation with operations in France. The operations in France generated $200,000 of taxable income whereas worldwide operations generated total taxable income of $2,000,000. Its U.S. tax liability before credits is $680,000. Determine the allowable foreign tax credit assuming taxes paid to France as follows:
a. $40,000.
b. $80,000.

109) During the year, Jim incurs $50,000 of rehabilitation expenditures in connection with a certified historic structure used in his business. The adjusted basis of the structure was $40,000 at the time the rehabilitation began.
a. What is the amount, if any, of his rehabilitation credit for the year?
b. What is the depreciable basis of the rehabilitation expenditures?

110) Hawaii, Inc., began a child care facility for its employees during the year. The corporation incurred the following expenses:

Rent of facility $30,000
Leasehold improvements 50,000
Equipment, toys, etc. 15,000
Salaries of child care employees 25,000
Other operating expenses of facility 18,000
Subtotal $138,000
Qualified child care referral fees 10,000
Total expenses $148,000

What is the amount of Hawaii’s credit for employer-provided child care?

111) Ivan has generated the following taxes and credits this year:

Regular tax $38,000
Tentative minimum tax 28,000
Dependent care credit 1,200
American Opportunity credit 800
Research credit 20,000
Rehabilitation credit 15,000

How much general business credit will he apply to the current year tax liability?

112) Beth and Jay project the following taxes for the current year:

Regular tax $50,000
AMT 10,000
Self employment tax 12,000

How much in estimated tax payments (including withholding from wages and quarterly estimated payments) should the taxpayers pay this year in order to avoid underpayment penalties under the following assumptions regarding the preceding tax year?

a. Preceding tax year—AGI of $140,000 and total taxes of $36,000.
b. Preceding tax year—AGI of $155,000 and total taxes of $50,000.

113) Discuss tax-planning options available for expenses incurred for child and dependent care.

114) Describe the differences between the American Opportunity Tax credit and the Lifetime Learning credit.

115) Assume you plan to volunteer at a Volunteer Income Tax Assistance (VITA) program for low income taxpayers and wish to prepare so you can help your clients achieve the maximum tax savings. Briefly discuss tax credits with which you should become familiar.

116) Discuss the tax planning techniques available to a U.S. citizen who is on a foreign job assignment.

117) Discuss when Form 6251, Alternative Minimum Tax, must be filed.

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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.
Answer: FALSE

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.
Answer: FALSE

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
A) $6,250.
B) $8,750.
C) $16,250.
D) $18,750.

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?
A) $5,600
B) $7,000
C) $21,000
D) $22,400

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
A) $3,520.
B) $4,000.
C) $4,480.
D) $11,520.

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
A) $206,000.
B) $214,000.
C) $234,000.
D) $279,000.

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
A) $13,000.
B) $15,000.
C) $25,000.
D) $41,000.

50) Shaquille buys new cars for five of his friends. Each car cost $70,000. What is the amount of Shaquille’s taxable gifts?
A) $0
B) $280,000
C) $336,000
D) $350,000

51) In 2014, an estate is not taxable unless the sum of the taxable estate and taxable gifts made after 1976 exceeds
A) $1,000,000.
B) $3,500,000.
C) $5,000,000.
D) $5,340,000.

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
A) $210,000.
B) $5,550,000.
C) $6,150,000.
D) $6,500,000.

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?
A) $2,100,000
B) $2,500,000
C) $2,600,000
D) $3,400,000

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?
A) $9,139
B) $8,951
C) $8,698
D) $9,945
Answer: A

56) Jillian, a single individual, earns $230,000 in 2014 through her job as an accounting manager. What is her FICA tax?
A) $10,859
B) $17,595
C) $10,589
D) $8,951

57) Martha is self-employed in 2014. Her business profits are $140,000. What is her self-employment tax?
A) $21,420
B) $18,568
C) $18,159
D) None of the above.

58) Which of the following is not one of Adam Smith’s canons of taxation?
A) equity
B) convenience
C) certainty
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?
A) Corporation
B) Partnership
C) Individual
D) All of the above are taxpayers.

64) All of the following are classified as flow-through entities for tax purposes except
A) partnerships.
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
A) $0.
B) $100,000.
C) $200,000.
D) $300,000.

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?
A) $0
B) $250,000
C) $500,000
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).
D) 25%.

85) What are the correct monthly rates for calculating failure to file and failure to pay penalties?

A)
Failure to file Failure to pay
5.0% 5.0%

B)
Failure to file Failure to pay
0.5% 0.5%

C)
Failure to file Failure to pay
5.0% 0.5%

D)
Failure to file Failure to pay
0.5% 5.0%

86) Which is not a component of tax practice?
A) providing clients tax refund advance loans
B) tax research
C) tax planning and consulting
D) compliance

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:

Salaries $110,000
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:

Salary $55,000
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:

Salary $80,000
Interest on local government bonds
(qualifies as a tax exclusion) 4,000
Allowable itemized deductions 13,000

What is taxable income?
A) $57,050
B) $63,050
C) $63,000
D) $67,050

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
A) $12,400.
B) $13,600.
C) $14,800.
D) $15,500.

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
A) $12,400.
B) $13,600.
C) $13,950.
D) $7,750.

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
A) $44,850.
B) $46,050.
C) $51,050.
D) $43,800.

50) On June 1, 2014, Ellen turned 65. Ellen has been a widow for five years and has no dependents. Her standard deduction is
A) $3,950.
B) $6,200.
C) $7,750.
D) $12,400.

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?
A) $14,850
B) $18,850
C) $8,650
D) $22,800

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?
A) $1,000
B) $2,000
C) $2,350
D) $6,200

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?
A) $1,000
B) $6,200
C) $8,000
D) $8,350

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?
A) $850
B) $1,000
C) $1,200
D) $6,100

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?
A) $1,000
B) $4,900
C) $5,250
D) $6,120

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?
A) 2
B) 3
C) 4
D) 5

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?
A) 1
B) 2
C) 3
D) 4

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?
A) 1
B) 2
C) 3
D) 4

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?
A) 2
B) 3
C) 4
D) 5

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?
A) 2
B) 3
C) 4
D) 5

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?
A) 0
B) 1
C) 2
D) 3

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?
A) 0
B) 1
C) 2
D) 3

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?
A) $10,000
B) $10,001
C) $14,000
D) $14,001

66) Which of the following is not considered support for the dependent support test?
A) food
B) clothing
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?
A) $5,000
B) $7,500
C) $10,000
D) $10,700

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
A) 14.
B) 17.
C) 19.
D) 24.

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?
A) $0
B) $1,000
C) $2,000
D) $3,000

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?
A) $0
B) $500
C) $1,500
D) $2,000

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?
A) $0
B) $1,000
C) $2,000
D) $3,000

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?
A) $0
B) $1,000
C) $2,000
D) $3,000

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?
A) $1,200
B) $1,500
C) $1,800
D) $2,000

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
A) single.
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?
A) uncle
B) brother
C) father
D) nephew

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
A) single.
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
A) 17
B) 18
C) 20
D) 23

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
A) $0.
B) $150.
C) $500.
D) $3,900.

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
A) $0.
B) $1,000.
C) $350.
D) $4,900.

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
A) $0.
B) $4,000.
C) $4,500.
D) $3,650.

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
A) $380.
B) $200.
C) $560.
D) $300.

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
A) $265.
B) $308.
C) $445.
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
A) $300.
B) $150.
C) $280.
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?
A) $16,500
B) $22,500
C) $26,150
D) $42,900

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
A) 0%.
B) 20%.
C) 10%.
D) 15%.

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
A) $7,900.
B) $15,800.
C) $12,324.
D) $3,476.

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
A) $12,200.
B) $22,500.
C) $19,900.
D) $21,300.

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
A) $0.
B) $1,350.
C) $1,800.
D) $5,800.

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
A) $15,000.
B) $20,000.
C) $39,600.
D) $23,800.

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.

Salaries $180,000
Interest income 12,000
Deductible IRA contributions 11,000
Itemized deductions 22,600

Withholding 32,000

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:

Salary $6,500
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.

Required:
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
A) $50,000.
B) $50,100.
C) $51,100.
D) $51,600.

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
A) $92,000.
B) $93,000.
C) $94,500.
D) $97,000.

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?
A) $480
B) $360
C) $720
D) $1,200

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?
A) $66,000
B) $67,000
C) $68,000
D) $65,000

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?
A) $480
B) $360
C) $720
D) $1,200

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
A) $200.
B) $1,000.
C) $1,680.
D) $5,000.

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?
A) $7,000
B) $12,000
C) $17,000
D) $24,000

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
A) $0.
B) $2,400.
C) $3,000.
D) $6,000.

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?
A) $2,250
B) $2,500
C) $3,000
D) $5,000

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
A) $0.
B) $1,400.
C) $1,600.
D) $3,000.

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
A) $400.
B) $1,300.
C) $1,800.
D) $2,200.

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?
A) $14,400
B) $12,000
C) $2,400
D) $22,400

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?
A) $0
B) $1,000
C) $3,000
D) $6,000

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?
A) $3,424
B) $4,024
C) $4,054
D) $4,016

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?
A) $5,619
B) $5,519
C) $5,454
D) $6,506

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?
A) $0
B) $200
C) $400
D) $1,000

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?
A) $0
B) $50
C) $5,000
D) $50,000

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
A) $6.00.
B) $6.57.
C) $6.60.
D) $7.26.

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
A) $100,000.
B) $155,000.
C) $170,000.
D) $270,000.

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?
A) $200,000
B) $250,000
C) $400,000
D) $450,000

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?

A)
Rosa’s Income
From Stock Transfer Rosa’s Income
From Stock Sale
$0 $20,000 capital gain

B)
Rosa’s Income
From Stock Transfer Rosa’s Income
From Stock Sale
$0 $7,000 capital gain

C)
Rosa’s Income
From Stock Transfer Rosa’s Income
From Stock Sale
$13,000 $7,000 capital gain

D)
Rosa’s Income
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?
A) $25,000
B) $35,000
C) $40,000
D) $75,000

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?
A) $25,000
B) $35,000
C) $40,000
D) $75,000

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?
A) $0
B) $2,000
C) $4,000
D) $6,000

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
A) $0.
B) $2,000.
C) $2,800.
D) $4,000.

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
A) $0.
B) $1,680.
C) $3,120.
D) $4,800.

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?
A) $2,600
B) $3,000
C) $9,000
D) $12,000

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?
A) $0
B) $200
C) $400
D) $600

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:

Salary $55,000
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)?
A) $57,500
B) $59,500
C) $62,500
D) $64,500

97) Lily had the following income and losses during the current year:

Salary $75,000
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)?
A) $135,000
B) $143,000
C) $165,000
D) $173,000

98) Lori had the following income and losses during the current year:

Wages $22,000
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)?
A) $72,000
B) $79,000
C) $82,000
D) $84,000

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
A) $0.
B) $2,500.
C) $4,000.
D) $8,000.

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?
A) $0
B) $4,500
C) $10,000
D) $20,000

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?
A) $5,000
B) $8,500
C) $7,050
D) $10,000

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?
A) $0
B) $150,000
C) $250,000
D) $400,000

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?
A) $0
B) $600
C) $900
D) $1,500

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?
A) $0
B) $1,000
C) $2,000
D) $6,000

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
A) $0.
B) $6,000.
C) $18,000.
D) $24,000.

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—
a. $50,000.
b. $100,000.

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.

Required:
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?
A) $30,000
B) $34,000
C) $39,500
D) $49,500

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?
A) $0
B) $55,000
C) $145,000
D) $300,000

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?
A) $0
B) $40,000
C) $60,000
D) $100,000

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.
B) $80,000.
C) $320,000.
D) $400,000.

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?
A) $0
B) $500
C) $100
D) $2,700

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
A) $0.
B) $30,000.
C) $32,000.
D) $2,000.

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
A) $0.
B) $600.
C) $800.
D) $1,400.

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
A) $5,000.
B) $15,000.
C) $18,500.
D) $23,500.

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
A) $7,000.
B) $7,500.
C) $14,500.
D) $22,500.

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
A) $0.
B) $150,000.
C) $225,000.
D) $250,000.

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
A) $0.
B) $200,000.
C) $500,000.
D) $530,000.

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?
A) $0
B) $80,000
C) $95,000
D) $175,000

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?
A) $30,000
B) $40,000
C) $105,000
D) $145,000

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?
A) $3,000
B) $10,000
C) $12,000
D) $16,000

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
A) $0.
B) $6,000.
C) $12,000.
D) $18,000.

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?
A) $0
B) $1,400
C) $36,000
D) $3,000

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?
A) $0
B) $9,800
C) $56,000
D) $7,000

63) Joe Black, a police officer, was injured in the line of duty. He received the following during the current year:

Salary $50,000
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?
A) $57,000
B) $66,000
C) $71,000
D) $84,000

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?
A) $0
B) $840
C) $1,440
D) $1,600

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-ter