Question 1

IRC Section 267 has a special rule for sales to a related party that are unpaid at the end of the year. In which of the following cases does the rule apply? A. When a cash-basis seller sells to a cash-basis buyer B. When an accrual-basis seller sells to an accrual-basis buyer C. When a cash-basis seller sells to an accrual-basis buyer D. When an accrual-basis seller sells to a cash-basis buyer

Accepted Answer

C. When a cash-basis seller sells to an accrual-basis buyer The rule applies when the seller is on the cash basis and the buyer is on the accrual basis. The buyer may not deduct the expense until the seller has reported the income.

Question 2

Which of the following credits may be offset against the gross estate tax to determine the net estate tax of a U.S. citizen? A. Unified credit B. Credit for gift taxes paid on gift made after 1976 A. Both A and B B. Neither A norB C. Only B D. Only A

Accepted Answer

D. Only A Estate and gift taxation has been combined into a unified system. The unified credit 统一抵税额 is a specific credit allowed against the estate tax and will encompass prior gifts as well. As a result, option B (credit for gift taxes paid on gift made after 1976) is already included in option A, the unified credit.

Question 3

You are a partner in HiJack Partnership. The adjusted basis of your partnership interest at the end of the current year is zero. Your share of potential ordinary income from partnership depreciable property is $5,000. The partnership has no other unrealized receivables or substantially appreciated inventory items. You sell your interest in the partnership for $11,000 in cash. Which of the following statements is accurate? 1. You report the entire amount as a capital gain since your adjusted basis in the partnership is zero. 2. You report $5,000 as ordinary income from the sale of the partnership's depreciable property. 3. You report the remaining $6,000 gain as capital gain. A. Two (2) and 3 are correct, but 1 is incorrect. B. All of the statements are incorrect. C. All of the statements are correct. D. One (1) is correct, but 2 and 3 are incorrect.

Accepted Answer

A. Two (2) and 3 are correct, but 1 is incorrect. The $5,000 is reported under the ordinary income rules for depreciation recapture. The additional payment of $6,000 is a capital gain and reportable in the current year.

Question 4

You are a partner in HiJack Partnership. The adjusted basis of your partnership interest at the end of the current year is zero. Your share of potential ordinary income from partnership depreciable property is $5,000. The partnership has no other unrealized receivables or substantially appreciated inventory items. You sell your interest in the partnership for $11,000 in cash. Which of the following statements is accurate? 1. You report the entire amount as a capital gain since your adjusted basis in the partnership is zero. 2. You report $5,000 as ordinary income from the sale of the partnership's depreciable property. 3. You report the remaining $6,000 gain as capital gain. A. Two (2) and 3 are correct, but 1 is incorrect. B. All of the statements are incorrect. C. All of the statements are correct. D. One (1) is correct, but 2 and 3 are incorrect.

Accepted Answer

A. Two (2) and 3 are correct, but 1 is incorrect. The $5,000 is reported under the ordinary income rules for depreciation recapture. The additional payment of $6,000 is a capital gain and reportable in the current year.

Question 5

Danielson invested $2 million in DEC, a qualified small business corporation. Six years later, Danielson sold all of the DEC stock for $16 million and purchased an office building with the proceeds. Danielson had not previously excluded any gain on the sale of small business stock. What is Danielson's taxable gain after the exclusion? A. $0 B. $6 million C. $7 million D. $9 million

Accepted Answer

C. $7 million IRC Section 1202 permits a taxpayer, other than a corporation, to exclude in general 50% of the gain realized on the sale of a qualified small business corporation if the taxpayer holds the stock for more than five years prior to sale. The amount of gain which may be excluded in this manner is limited, on a “per issuer” basis, to the greater of $10 million or 10 times the taxpayer's basis in the stock. In this example, 50% of the gain is $7 million ($16,000,000 − $2,000,000 × 0.50). Compare that number to: 10 times the taxpayer's basis, which would be $20 million ($2,000,000 × 10)= $10 million The gain excluded is limited to the greater of either (1) or (2) above—in this case, $20 million. However, since the gain exclusion is calculated at $7 million, the limitation is not met and $7 million is excluded.

Question 6

Which of the following minerals do not have a percentage depletion rate of 15% for mining in the United States? A. Gold B. Silver C. Copper D. Clay

Accepted Answer

D. Clay Clay mining deposits can be written off using a percentage depletion rate of either 5% or 7.5%, depending on the end use of the clay. Gold, silver, copper, and iron ore mining use the 15% depletion rate for the cost recovery of the capital investment in the mining properties.

Question 7

For an individual business owner, which of the following would typically be classified as a capital asset for federal income tax purposes? A. Accounts receivable B. Marketable securities C. Machinery and equipment used in a business D. Inventory

Accepted Answer

B. Marketable securities Capital assets are investment property and personal-use property. Capital assets do not include the following: Property held for resale (inventory) Real or depreciable property used in a trade or business Accounts or notes receivable acquired in normal business operations

Question 8

Which of the following items qualifies for treatment under IRC Section 1231 (Property Used in the Trade or Business and Involuntary Conversions)? A. Copyright used in the business, held for 10 years B. Building used in the business, held for 6 months C. Machinery used in the business, held for 11 months D. Computer used in the business, held for 4 years

Accepted Answer

D. Computer used in the business, held for 4 years IRC Section 1231 transactions include sales or exchanges of real property or depreciable personal property. This property must be used in a trade or business and held longer than one year. Generally, property held for the production of rents or royalties is considered to be used in a trade or business. These assets qualify for treatment under IRC Section 1231. Generally, a net Section 1231 loss is ordinary loss and a net Section 1231 gain (except for depreciation recapture) is long-term capital gain. A sample of items that are not capital assets include but are not limited to the following: Property held mainly for sale to customers or property that will physically become part of merchandise for sale to customers Accounts or notes receivable acquired in the ordinary course of a trade or business for services rendered A copyright; a literary, musical, or artistic composition if personal efforts created the property or if the property was acquired in a way that entitled the taxpayer to the basis of the previous owner whose personal efforts created it (for example, if the property was received as a gift) In this case, a copyright is not a capital asset and the building and machinery are capital assets used in a business but were held for less than one year. Hence, the best answer choice is the computer used in a business for four years.

Question 9

Platt owns land that is operated as a parking lot. A shed was erected on the lot for the related transac­tions with customers. With regard to capital assets and Section 1231 assets, how should these assets be classified? A. Land: Capital; Shed: Capital B. Land: Section 1231; Shed: Capital C. Land: Capital; Shed: Section 1231 D. Land: Section 1231; Shed: Section 1231

Accepted Answer

D. Land: Section 1231; Shed: Section 1231 IRC Section 1221 defines a capital asset by exclusion. If an item is listed there, then it is not a capital asset. All property used in a taxpayer’s trade or business is excluded from being a capital asset. IRC Section 1231 defines “property used in the trade or business” to mean property used in the trade or business, of a character which is subject to the allowance for depreciation and real property used in the trade or business. Both the land and the shed are used in the business and cannot be capital assets, but must qualify

Question 10

Summer, a single individual, had a net operating loss of $20,000 three years ago. A Section 1244 stock loss made up 3/4ths of that loss. Summer had no taxable income from that year until the current year. In the current year, Summer has gross income of $80,000 and sustains another loss of $50,000 on Section 1244 stock. Assuming that Summer can carry the entire $20,000 net operating loss to the current year, what is the amount and character of the Section 1244 loss that Summer can deduct for the current year? A. $35,000 ordinary loss B. $35,000 capital loss C. $50,000 ordinary loss D. $50,000 capital loss

Accepted Answer

C. $50,000 ordinary loss The total loss for the current year equals $70,000, which is the $20,000 loss carryover plus the current-year loss of $50,000. However, Section 1244 has a limit of $50,000 per year. Therefore, of the total loss of $70,000, $50,000 will be allowed Section 1244 status and will be treated as an ordinary loss.

Question 11

A sole proprietor of a farm implement store sold a truck for $15,000 that had been used to make service calls. The truck cost $30,000 three years ago, and $21,360 depreciation was taken. What is the appropriate classification of the $6,360 gain for tax purposes? A. Ordinary gain ``` B. Section 1231 (property used in the trade or business and involuntary conversions) gain ``` C. Long-term capital gain D. Short-term capital gain

Accepted Answer

A. Ordinary gain IRC Section 1231 property is defined as an asset used in a trade or business subject to depreciation and capital gain treatment would be available. But IRC Section 1231 is modified by IRC Section 1245, which states that personal (versus real) property’s depreciation taken must be recaptured as ordinary income first. If a gain still remains after the depreciation recapture, then capital gain treatment is applied. In this example, total depreciation taken of $21,360 is greater than the total gain of $6,360. Therefore, all of the $6,360 gain is ordinary.

Question 12

A taxpayer lived in an apartment building and had a 2-year lease that began 16 months ago. The taxpayer's landlord wanted to sell the building and offered the taxpayer $10,000 to vacate the apartment immediately. The taxpayer's lease on the apartment was a capital asset but had no tax basis. If the taxpayer accepted the landlord's offer, the gain or loss would be which of the following? A. An ordinary gain B. A short-term capital loss C. A long-term capital gain D. A short-term capital gain

Accepted Answer

C. A long-term capital gain Since a leasehold is not listed, it will be a capital asset. The difference between long-term and short-term capital gain is defined as one year or less for short term. The taxpayer held the lease for 16 months; therefore, it is long term. Capital assets are defined by exclusion; that is, the Internal Revenue Code (IRC) lists items that are not capital assets. All else would then be capital. The items listed as not capital items are as follows: Property held for resale (inventory) Depreciable property or real property used in a trade or business Accounts or notes receivable acquired in normal business operations A copyright or a literary, artistic, or musical composition in the hands of the creator or anyone who assumes the creator's basis (property received through gift) U.S. government publications received from the government other than by purchase at the price that it is offered for sale to the public Certain commodities derivative instruments held by a commodities derivatives dealer Any hedging transaction that is clearly identified as such before the close of the day on which it is acquired, originated, or entered into Supplies of a type regularly used or consumed by the taxpayer in the ordinary course of a trade or business of the taxpayer

Question 13

A taxpayer purchased 5 acres of land for $200,000 and placed in service other tangible business assets that cost $15,000. Disregarding business income limitations and assuming that the annual Section 179 (election to expense certain depreciable business assets) limit is $500,000 for 2016, what maximum amount of cost recovery can the taxpayer claim this year? A. $215,000 B. $200,000 C. $15,000 D. $25,000

Accepted Answer

C. $15,000 Land is not depreciable and does not qualify for Section 179 automatic expensing. The only assets in this problem that qualify for Section 179 are the other tangible business assets that cost $15,000. Because the $15,000 is less than the overall limit of $500,000, all $15,000 of the other tangible business assets are allowed as Section 179 expenses.

Question 14

Which of the following is deductible from a decedent’s gross estate? A. Expenses of administering and settling the estate B. State inheritance or estate tax A. I only B. II only C. Both I and II D. Neither I nor II

Accepted Answer

C. Both I and II IRC Section 2053 details the deductions allowed against a decedent’s gross estate. Administrative expenses and state estate taxes are specifically allowed.

Question 15

An individual reports the following capital transactions in the current year: Short-term capital gain $ 1,000 Short-term capital loss 11,000 Long-term capital gain 10,000 Long-term capital loss 6,000 What amount is deducted in arriving at adjusted gross income? A. $10,000 B. $6,000 C. $3,000 D. $0

Accepted Answer

C. $3,000 If capital losses exceed capital gains, for an individual, the amount of the capital loss that can be claimed to lower income is limited to $3,000. Any amount not used carries forward indefinitely. All short-term capital gains and losses are netted together and then all long-term capital gains and losses are netted together. Then the short term is netted with the long term. In this example, the short-term items net to a short-term capital loss of $10,000. The long-term capital items net to a long-term capital gain of $4,000. The $4,000 long-term capital gain is eliminated by the $10,000 short-term capital loss resulting in a net $6,000 short-term capital loss. The taxpayer may use $3,000 of the short-term loss to reduce taxable income. The balance unused, $3,000, is a carryover to the next year.

Question 16

Rock Crab, Inc., purchases the following assets during the year: ``` Computer $ 3,000 Computer desk 1,000 Office furniture 4,000 Delivery van 25,000 What should be reported as the cost basis for MACRS 5-year property? ``` A. $3,000 B. $25,000 C. $28,000 D. $33,000

Accepted Answer

C. $28,000 (3+25) There are six recovery periods for personal property: 3, 5, 7, 10, 15, and 20 years. The 5- and 7-year properties are the most common: ``` The 5-year class includes automobiles, general-purpose light trucks, computers, and office machinery (typewriters, calculators, copiers, etc.). The 7-year class includes heavy, special-purpose trucks, and office furniture and fixtures (desks, filing cabinets, etc.). Thus, the computer at $3,000 plus the delivery van at $25,000 would total $28,000 and be reported as MACRS 5-year property. ```

Question 17

Kate Lemon purchased a diamond pin for $6,000 in Year 1. In Year 10, when the value was $11,000, she gave it to her daughter, Ann. No gift tax was paid. If Ann sells the pin for $12,000, Ann's recognized gain is: A. $1,000. B. $5,000. C. $6,000. D. $0.

Accepted Answer

C. $6,000. The basis of property acquired by gift is the donor's basis if the property is sold at a gain: $12,000 sale - $6,000 basis (cost to Kate) = $6,000 taxable gain for Ann

Question 18

Prime Corporation’s building was destroyed by a tornado. The fair market value of the building at the time of the tornado was $400,000 and its adjusted basis was $350,000. The insurance proceeds totaled $500,000 as follows: $400,000 for the building $100,000 for lost profits during rebuilding Prime does not defer any gain under the involuntary conversion provisions of IRC Section 1033. What amount of the insurance proceeds is taxable to Prime? A. $0 B. $50,000 C. $100,000 D. $150,000

Accepted Answer

D. $150,000 Insurance proceeds that are not fully reinvested into replacement property will be subject to taxation. In this case, zero was reinvested into property. The building is treated as a sale of property. Proceeds received of $400,000 minus adjusted basis of $350,000 leaves a $50,000 gain. The additional $100,000 of insurance proceeds was to replace lost business during the rebuilding phase. By the nature of being a replacement of earnings, the full $100,000 is taxable. The gain of $50,000 plus the lost earnings of $100,000 totals $150,000.

Question 19

Jan, an unmarried individual, gave the following outright gifts in 2016: Donee Amount Use by Donee Jones $20,000 Down payment on house Craig 20,000 College tuition Kande 5,000 Vacation trip Jan’s 2016 exclusions for gift tax purposes total: A. $39,000. B. $33,000. C. $20,000. D. $14,000.

Accepted Answer

B. $33,000. A taxpayer is allowed an annual exclusion of $14,000 per donee during the tax year. If a gift of tuition payments had been made directly to the college versus to Craig, then the entire amount of tuition payments would be excluded. Therefore, an exclusion of $14,000 each is available for the gifts to Jones and Craig, and the entire $5,000 to Kande is excluded. The total of the exclusions is $33,000 (($14,000 × 2) + $5,000).

Question 20

A taxpayer purchased and placed in service during the year a $761,000 piece of equipment. The equipment is 7-year property. The first-year depreciation for 7-year property is 14.29%. There is an allowable Section 179 limit of $500,000. What amount is the maximum allowable depreciation without using bonus depreciation? A. $25,000 B. $37,297 C. $500,000 D. $537,297

Accepted Answer

D. $537,297 A taxpayer who elects to expense under Section 179 must reduce the depreciable basis of the Section 179 property by the amount of the Section 179 expense deduction. The maximum allowable depreciation is calculated (rounded) as follows: Basis of property $761,000 Less: Section 179 expense (500,000) Adjusted basis $261,000 1st-year MACRS rate × 14.29% 1st-year depreciation $ 37,297 Section 179 expense 500,000 Maximum allowable depreciation $537,297

Question 21

Cobb created a $500,000 trust that provided his mother with an income interest for her life and the remainder interest to go to his sister at the death of his mother. Cobb expressly retained the power to revoke both the income interest and the remainder interest at any time. The income interest at the trust's creation: A. is a gift of present interest. B. is a gift of a future interest. C. is not a completed gift. D. is a complete gift to the mother but not to the sister.

Accepted Answer

C. is not a completed gift. The income interest would not be a completed gift at the trust's creation because the grantor retained the power to revoke the trust. To be a completed gift, the grantor must relinquish all dominion and control over the transferred property. Generally, if any right is retained to revoke or change the disposition of the property the gift is not complete. A transfer in trust can be a complete gift if it is irrevocable and the grantor does not retain any powers over the trust. A gift that is not complete is not subject to gift tax.

Question 22

On January 1, Fast, Inc., entered into a covenant not to compete with Swift, Inc., for a period of 5 years, with an option by Swift to extend it to 7 years. What is the amortization period of the covenant for tax purposes? A. 5 years B. 7 years C. 15 years D. 17 years

Accepted Answer

C. 15 years A covenant not to compete that is acquired with the purchase of a business is considered to be a Section 197 intangible eligible for 15-year amortization.

Question 23

Rita Ryan died leaving a will naming her children, John and Dale, as the sole beneficiaries. In her will, Rita designated John as the executor of her estate and excused John from posting a bond as executor. At the time of Rita’s death, she owned a parcel of land with her sister, Ann, as joint tenants with right of survivor­ship. In general, John as executor, must: A. post a bond despite the provision to the contrary in Rita’s will. B. serve without compensation because John is also a named beneficiary in the will. C. file a final account of the administration of the estate. D. relinquish the duties because of the conflict of interest as executor and beneficiary.

Accepted Answer

C. file a final account of the administration of the estate. A beneficiary may also serve as an executor for the estate. There are many responsibilities of an executor, one of which is filing a final account of the administration of the estate. The other answer choices may be possibilities but are not necessarily required.

Question 24

Mark Olds sold a delivery truck (business use) at a loss. The truck had been held for three years. The loss on the sale of the delivery truck is classified as a: A. capital loss. B. Section 1231 loss. C. Section 1245 loss. D. Section 1250 loss.

Accepted Answer

B. Section 1231 loss. Depreciable property used in a business is a Section 1231 asset. Section 1245 only applies to the sale of personal property at a gain. Section 1250 applies to the sale of real property at a gain.

Question 25

Grayson Nolan purchased a duplex and lives in one part and uses the other part as a retail store. Grayson purchased bedroom furniture for $4,000 for the residential part and office furniture for $5,000 for the retail store. What is the total amount of capital assets? A. $0 B. $4,000 C. $5,000 D. $9,000

Accepted Answer

B. $4,000 Only the personal use property is a capital asset. Business use property is not a capital asset. IRC Section 1221

Question 26

On December 1, Year 4, Jim Miller placed in service office furniture (7-year life), which cost $28,000. Jim did not elect Section 179 expensing or bonus depreciation. The office furniture was the only asset purchased during the year. What amount can Jim claim as depreciation under MACRS for Year 4? A. $1,000 B. $2,000 C. $4,000 D. $7,000

Accepted Answer

A. $1,000 First-year depreciation under MACRS is based on double declining balance. A 7-year life would yield depreciation of 2/7 the first year. Because the purchase was made in December, the mid-quarter convention is used and 1-1/2 months of depreciation is recorded. Depreciation is $1,000 ($28,000 × 2/7 × 1.5/12).

Question 27

On March 1 of the previous year, a parent sold stock with a cost of $8,000 to their child, for $6,000, its fair market value. On September 30 of the current year, the child sold the same stock for $7,000 to Hancock, who is unrelated to the parent and child. What is the proper treatment for these transactions? A. Parent has a $2,000 recognized loss and child has $1,000 recognized gain. B. Parent has $2,000 recognized loss and child has $0 recognized gain. C. Parent has $0 recognized loss and child has $1,000 recognized gain. D. Parent has $0 recognized loss and child has $0 recognized gain.

Accepted Answer

D. Parent has $0 recognized loss and child has $0 recognized gain. Losses on sale transactions between related parties are not recognized. When the related party, who purchased the asset, sells to an outsider, then the gain is reduced by the loss previously unrecognized but not in excess of the gain. In other words, the related taxpayer may not be able to take all of the previous loss unrecognized. In this problem, the parent cannot recognize the loss of $2,000 ($6,000 sales price − $8,000 basis) on the sale of the stock to the child. But when the child sells the stock to an unrelated party, Hancock, the child’s gain of $1,000 ($7,000 sales price − $6,000 basis) is reduced by the previous unrecognized loss of $2,000 down to zero, but NOT less than zero. The unused loss of $1,000 from the parent ($2,000 unrecognized loss − $1,000 loss used by the child) is lost forever. The correct answer is that the parent recognizes zero loss and the child has zero recognized gain.

Question 28

If a security becomes worthless in the current taxable year, it is treated as sold or exchanged on the: A. last day of the preceding taxable year. B. last day of the current taxable year. C. date it is deemed worthless. D. first day of the current taxable year.

Accepted Answer

B. last day of the current taxable year. The gain or loss on a sale or trade of property is found by comparing the amount realized with the adjusted basis of the property. If the amount realized from a sale or trade is more than the adjusted basis of the property that the taxpayer transfers, the difference is a gain, or If the adjusted basis of the property that the taxpayer transfers is more than the amount realized, the difference is a loss. Stocks, stock rights, and bonds (other than those held for sale by a securities dealer) that became worthless during the tax year are treated as though they were sold on the last day of the tax year. This affects whether the taxpayer's capital loss is long term or short term.

Question 29

Smith made a gift of property to Thompson. Smith's basis in the property was $1,200. The fair market value at the time of the gift was $1,400. Thompson sold the property for $2,500. What was the amount of Thompson's gain on the disposition? A. $0 B. $1,100 C. $1,300 D. $2,500

Accepted Answer

C. $1,300 The basis in property acquired by gift is determined by reference to the basis in the hands of the transferor. Generally the basis is the same as the basis of the transferor (special rules apply if that basis is greater than the fair market value at the time of the gift). In this case, the fair market value at the time of the gift ($1,400) is greater than Smith's basis ($1,200) so Thompson's basis is $1,200. ``` Thompson's gain on the disposition is computed as follows: Sales price $2,500 Less basis 1,200 Gain $1,300 IRC Section 1015(a) ```

Question 30

John Evert exchanged land held as an investment for other land to be held as an investment. Relevant data is: Property given by John Basis $60,000 Value $90,000 Mortgage on land $10,000 Property received by John Value $65,000 Cash $15,000 What is John's recognized gain or loss on the exchange? A. $15,000 B. $25,000 C. $30,000 D. $55,000

Accepted Answer

B. $25,000 Value received $65,000 Mortgage relief 10,000 Cash received 15,000 Amount realized 90,000 Less: Basis given 60,000 Realized gain $30,000 The realized gain is recognized to the extent of the boot (mortgage relief and cash received) $25,000.

Question 31

Farr made a gift of stock to her child, Pat. At the date of gift, Farr's stock basis was $10,000 and the stock's fair market value was $15,000. No gift taxes were paid. What is Pat's basis in the stock for computing gain? A. $0 B. $5,000 C. $10,000 D. $15,000

Accepted Answer

C. $10,000 Basis in property received as a gift is generally the same as the basis in the property in the hands of the donor. If gift taxes are paid, they are added to the basis. Special rules apply in the case of property with a fair market value less than the donor's basis. Farr gave Pat property with a basis of $10,000 and a fair market value of $15,000. Since there was no gift tax paid and the fair market value exceeds the basis, Pat has a basis of $10,000 in the property. IRC Section 1015

Question 32

A taxpayer sold for $200,000 equipment that had an adjusted basis of $180,000. Through the date of the sale, the taxpayer had deducted $30,000 of depreciation. Of this amount, $17,000 was in excess of straight-line depreciation. What amount of gain would be recaptured under Section 1245 (“Gain from Dispositions of Certain Depreciable Property”)? A. $13,000 B. $17,000 C. $20,000 D. $30,000

Accepted Answer

C. $20,000 Because the taxpayer sold equipment for $200,000 that had an adjusted basis of $180,000, the taxpayer has a gain of $20,000. The taxpayer had taken $30,000 in depreciation on the equipment. IRC Section 1245 requires that a gain on the sale of equipment will be treated as ordinary income to the extent of all depreciation. Although a maximum of $30,000 could have been recaptured, the total gain in the sale was $20,000, limiting the depreciation recapture to $20,000.

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