Incorrect Questions 2

Question 1

Which of the following statements is (are) correct regarding debtors’ rights?
I. State exemption statutes prevent all of a debtor’s personal property from being sold to pay a federal tax lien.

II. Federal Social Security benefits received by a debtor are exempt from garnishment by creditors.

A.  I only.
B.  II only.
C.  Both I and II.
D.  Neither I nor II.

Answer 1

B. II only.

Exemption statutes never apply to all personal property. They may exempt selected items, such as a computer, clothes, bibles, trade equipment, and furniture. A creditor cannot seize any and every asset to satisfy a debt. Social Security benefits are exempt from garnishment.

Question 2

Dart Inc., a closely held corporation, was petitioned involuntarily into bankruptcy under the liquidation provisions of Chapter 7 of the Federal Bankruptcy Code. Dart contested the petition.
Dart has not been paying its business debts as they became due, has defaulted on its mortgage loan payments, and owes back taxes to the IRS. The total cash value of Dart’s bankruptcy estate after the sale of all assets and payment of administration expenses is $100,000.

Dart has the following creditors:

• Fracon Bank is owed $75,000 principal and accrued interest on a mortgage loan secured by Dart’s real property. The property was valued at and sold, in bankruptcy, for $70,000.
• The IRS has a $12,000 recorded judgment for unpaid corporate income tax.
• JOG Office Supplies has an unsecured claim of $3,000 that was timely filed.
• Nanstar Electric Co. has an unsecured claim of $1,200 that was not timely filed.
• Decoy Publications has a claim of $14,000, of which $2,000 is secured by Dart’s inventory that was valued and sold, in bankruptcy, for $2,000. The claim was timely filed.

Which of the following statements would correctly describe the result of Dart’s opposing the petition?

A.  Dart will win because the petition should have been filed under Chapter 11.
B.  Dart will win because there are not more than 12 creditors.
C.  Dart will lose because it is not paying its debts as they become due.
D.  Dart will lose because of its debt to the IRS.

Answer 2

C. Dart will lose because it is not paying its debts as they become due.

A challenge will fail if debts are not paid as they become due. It will also fail if a receiver was appointed to take control of the debtor’s property within 120 days prior to the filing of the involuntary petition.

Question 3

Which of the following conditions, if any, must a debtor meet to file a voluntary bankruptcy petition under Chapter 7 of the Federal Bankruptcy Code?
Insolvency Three or more creditors
Yes Yes
Yes No
No Yes
No No

Answer 3

Insolvency No

Three or more creditors No

Question 4

To file for bankruptcy under Chapter 7 of the Federal Bankruptcy Code, an individual must
A. Have debts of any amount.
B. Be insolvent.
C. Be indebted to more than three creditors.
D. Have debts in excess of $5,000.

Answer 4

A. Have debts of any amount.

Debts must exist in some amount. Otherwise, there is nothing from which a person needs protection. However, there is no minimum amount of debt. So long as the filing is not a “substantial abuse of the process,” as when a millionaire tries to declare bankruptcy based on minor credit card debts, the filing is valid.

Question 5

Which of the following statements is correct concerning the voluntary filing of a petition in bankruptcy?
A. If the debtor has 12 or more creditors, the unsecured claims must total at least $5,000.
B. The debtor must be insolvent.
C. If the debtor has fewer than 12 creditors, the unsecured claims must total at least $5,000.
D. The petition may be filed jointly by spouses.

Answer 5

D. The petition may be filed jointly by spouses.

Question 6

The filing of an involuntary bankruptcy petition under the Federal Bankruptcy Code
A. Terminates liens on exempt property.
B. Terminates all security interests in property in the bankruptcy estate.
C. Stops the debtor from incurring new debts.
D. Stops the enforcement of judgment liens against property in the bankruptcy estate.

Answer 6

D. Stops the enforcement of judgment liens against property in the bankruptcy estate.

Question 7

On August 1, 2004, Hall files a voluntary petition under Chapter 7 of the Federal Bankruptcy Code.
Hall’s assets are sufficient to pay general creditors 40% of their claims.

The following transactions occurred before the filing:

• On May 15, 2004, Hall gave a mortgage on Hall’s home to National Bank to secure payment of a loan National had given Hall two years earlier. When the loan was made, Hall’s twin was a National employee.
• On June 1, 2004, Hall purchased a boat from Olsen for $10,000 cash.
• On July 1, 2004, Hall paid off an outstanding credit card balance of $500. The original debt had been $2,500.

The credit card payment was

A.  Preferential, because the payment was made within 90 days of the filing of the petition.
B.  Preferential, because the payment was on account of an antecedent debt.
C.  Not preferential, because the payment was for a consumer debt of less than $5,000 ($5,475 after August 2007).
D.  Not preferential, because the payment was less than 40% of the original debt.

Answer 7

C. Not preferential, because the payment was for a consumer debt of less than $5,000 ($5,475 after August 2007).

This looks like a preferential payment, but is not, because it falls within an exception to the general rule. Consumer debts of up to $5,475 may be made without showing a preference, as can alimony and child support payments.
If the payment were $5,475 or more, then the 90-day rule would make the payment preferential, because the credit card balance was an antecedent debt, or one that existed when the bankruptcy was filed.

Question 8

On August 1, 2004, Hall files a voluntary petition under Chapter 7 of the Federal Bankruptcy Code.
Hall’s assets are sufficient to pay general creditors 40% of their claims.

The following transactions occurred before the filing:

• On May 15, 2004, Hall gave a mortgage on Hall’s home to National Bank to secure payment of a loan National had given Hall two years earlier. When the loan was made, Hall’s twin was a National employee.
• On June 1, 2004, Hall purchased a boat from Olsen for $10,000 cash.
• On July 1, 2004, Hall paid off an outstanding credit card balance of $500. The original debt had been $2,500.

The National mortgage was

A.  Preferential, because National would be considered an insider.
B.  Preferential, because the mortgage was given to secure an antecedent debt.
C.  Not preferential, because Hall is presumed insolvent when the mortgage was given.
D.  Not preferential, because the mortgage was a security interest.

Answer 8

B. Preferential, because the mortgage was given to secure an antecedent debt.

A debtor who declares bankruptcy may not give one creditor better treatment than others. Any payment or security interest made to a particular creditor within 90 days of declaring bankruptcy is a preferential payment if the payment is made on an antecedent debt.
An antecedent debt is one that existed at the time bankruptcy was declared.

Question 9

On February 28, 2005, Master, Inc. has total assets with a fair market value of $1.2mn and total liabilities of $990,000.
On January 15, 2005, Master made a monthly installment-note payment to Acme Distributors Corp., a creditor holding a properly perfected security interest in equipment, having a fair market value greater than the balance due on the note. On March 15, 2005, Master voluntarily files a petition in bankruptcy under the liquidation provisions of Chapter 7 of the Federal Bankruptcy Code. One year later, the equipment is sold for less than the balance due on the note to Acme.

Master’s payment to Acme could

A.  Be set aside as a preferential transfer, because the fair market value of the collateral was greater than the installment-note balance.
B.  Be set aside as a preferential transfer, unless Acme showed that Master was solvent on January 15, 2005.
C.  Not be set aside as a preferential transfer, because Acme was oversecured.
D.  Not be set aside as a preferential transfer if Acme showed that Master was solvent on March 15, 2005.

Answer 9

C. Not be set aside as a preferential transfer, because Acme was oversecured.

A payment is not preferential if it is not more than the creditor would have received in a bankruptcy proceeding. Since Acme has a perfected security interest, its rights are unaffected by the bankruptcy proceeding, and it retains the right to receive repayment of its debt without having the payments set aside.

Question 10

Under the liquidation provisions of Chapter 7 of the federal Bankruptcy Code, certain property acquired by the debtor after the filing of the petition becomes part of the bankruptcy estate.
An example of such property is

A.  Municipal-bond interest received by the debtor within 180 days of the filing of the petition.
B.  Alimony received by the debtor within one year of the filing of the petition.
C.  Social Security payments received by the debtor within 180 days of the filing of the petition.
D.  Gifts received by the debtor within one year of the filing of the petition.

Answer 10

A. Municipal-bond interest received by the debtor within 180 days of the filing of the petition.

A debtor’s estate in bankruptcy consists of all tangible and intangible property of the debtor held at the commencement of the bankruptcy proceedings. In addition, the estate consists of any after-acquired income from such property.
Therefore, interest from municipal bonds (held as part of the estate) also becomes part of the estate. Any gifts received within 180 days of the filing the petition also become part of the estate. All other payments received after the filing of the petition are not considered income from the existing debtor’s (bankruptcy) estate.

Question 11

Dart Inc., a closely held corporation, is petitioned involuntarily into bankruptcy under the liquidation provisions of Chapter 7 of the Federal Bankruptcy Code. Dart contests the petition.
Dart has not been paying its business debts as they become due, has defaulted on its mortgage-loan payments, and owes back-taxes to the IRS. The total cash value of Dart’s bankruptcy estate after the sale of all assets and payment of administration expenses is $100,000.

Dart has the following creditors:

Fracon Bank is owed $75,000 principal and accrued interest on a mortgage loan secured by Dart’s real property. The property was valued at and sold, in bankruptcy, for $70,000.

• The IRS has a $12,000 recorded judgment for unpaid corporate income tax.
• JOG Office Supplies has an unsecured claim of $3,000 that was filed in timely fashion.
• Nanstar Electric Co. has an unsecured claim of $1,200 that was not timely filed.
• Decoy Publications has a claim of $14,000, of which $2,000 is secured by Dart’s inventory that was valued and sold, in bankruptcy, for $2,000. The claim was filed in timely fashion.

Which of the following events will follow the filing of the Chapter 7 involuntary petition?

  A trustee will be appointed  	  A stay against creditor-collection proceedings will go into effect  
	 Yes 	 Yes 
	 Yes 	 No 
	 No 	 Yes 
	 No 	 No

Answer 11

A trustee will be appointed Yes
A stay against creditor-collection proceedings will go into effect Yes

A trustee will be appointed and charged with liquidating assets in the best interests of the creditors. A stay against creditor collection is automatically issued upon filing of the involuntary petition, and will prohibit all creditors from commencing other legal actions to receive payments for debts owed.

Question 12

Which of the following types of claims would be paid first in the distribution of a bankruptcy estate under the liquidation provisions of Chapter 7 of the Federal Bankruptcy Code, if the petition were filed July 15, 2008?
A. A secured debt properly perfected on March 20, 20x8.
B. Inventory purchased and delivered August 1, 20x8.
C. Employee wages due April 30, 20x8.
D. Federal tax lien filed June 30, 20x8.

Answer 12

A. A secured debt properly perfected on March 20, 20x8.

The perfected secured creditors will take first.

Question 13

Dart Inc., a closely held corporation, is petitioned involuntarily into bankruptcy under the liquidation provisions of Chapter 7 of the Federal Bankruptcy Code. Dart contests the petition.
Dart has not been paying its business debts as they become due, has defaulted on its mortgage-loan payments, and owes back-taxes to the IRS. The total cash value of Dart’s bankruptcy estate after the sale of all assets and payment of administration expenses is $100,000.

Dart has the following creditors:

• Fracon Bank is owed $75,000 principal and accrued interest on a mortgage loan secured by Dart’s real property. The property was valued at and sold, in bankruptcy, for $70,000.
• The IRS has a $12,000 recorded judgment for unpaid corporate income tax.
• JOG Office Supplies has an unsecured claim of $3,000 that was filed in timely fashion.
• Nanstar Electric Co. has an unsecured claim of $1,200 that was not filed in a timely fashion.
• Decoy Publications has a claim of $14,000, of which $2,000 is secured by Dart’s inventory that was valued and sold, in bankruptcy, for $2,000. The claim was filed in a timely fashion.

Assume that the bankruptcy estate was distributed.

What total dollar amount would Fracon Bank receive on its secured and unsecured claims?

A.  $70,000
B.  $72,000
C.  $74,000
D.  $75,000

Answer 13

C. $74,000

Of the $100,000, the first $70,000 will go to Fracon Bank, as that money was generated by the sale of the house in which they had a security interest. This leaves Fracon with an additional $5,000 in general debt. The next $2,000 will similarly go to Decoy as money raised from the sale of their security interest. This leaves $28,000. The next $12,000 will go to the IRS to satisfy their recorded judgment, leaving $16,000. All taxes are paid before general creditors are paid. The final $16,000 is divided pro rata among remaining creditors, since there is not enough to pay all of them in full. However, all general creditors who have filed a claim in a timely fashion must be fully repaid before those who have not filed in a timely fashion are paid anything. So, we have $20,000 of total general creditors’ claims, and $16,000 to pay them. Each will take 80% of their unsecured claims. Fracon will take 80% of $5,000, or $4,000. This will be added to the $70,000 already received, to get the total of $74,000.

Question 14

On February 28, 2005, Master, Inc. has total assets with a fair market value of $1.2mn and total liabilities of $990,000.
On January 15, 2005, Master made a monthly installment-note payment to Acme Distributors Corp., a creditor holding a properly perfected security interest in equipment having a fair market value greater than the balance due on the note.
On March 15, 2005, Master voluntarily files a petition in bankruptcy under the liquidation provisions of Chapter 7 of the Federal Bankruptcy Code. One year later, the equipment was sold to Acme for less than the balance due on the note .

Which of the following statements correctly describes Acme’s distribution from Master’s bankruptcy estate?

A.  Acme will receive the total amount it is owed, even if the proceeds from the sale of the collateral were less than the balance owed by Master.
B.  Acme will have the same priority as unsecured general creditors, to the extent that the proceeds from the sale of its collateral are insufficient to satisfy the amount owed by Master.
C.  The total proceeds from the sale of the collateral will be paid to Acme, even if they are less than the balance owed by Master, provided there is sufficient cash to pay all administrative costs associated with the bankruptcy.
D.  Acme will receive only the proceeds from the sale of the collateral in full satisfaction of the debt owed by Master.

Answer 14

B. Acme will have the same priority as unsecured general creditors, to the extent that the proceeds from the sale of its collateral are insufficient to satisfy the amount owed by Master.

If this sale does not generate enough to cover the entire debt, then Acme becomes a general creditor for that portion of the debt. A perfected secured creditor only has a special priority right to the security interest, or collateral. When the collateral has been disposed of, it must wait in line for further payments with everyone else.

Question 15

In a voluntary bankruptcy proceeding under Chapter 7 of the Federal Bankruptcy Code, which of the following claims, filed within 90 days of the filing for bankruptcy, will be paid first?
A. Unsecured federal taxes.
B. Utility bills up to $1,000.
C. Voluntary contributions to employee benefit plans.
D. Employee vacation and sick pay up to $2,000 per employee.

Answer 15

D. Employee vacation and sick pay up to $2,000 per employee.

Question 16

Under Chapter 7 of the Federal Bankruptcy Code, what affect does a bankruptcy discharge have on a judgment creditor when there is no bankruptcy estate?
A. The judgment creditor’s claim is non-dischargeable.
A judgment creditor’s debt is dischargeable and therefore is not on the statutory list of non-dischargeable debts.
B. The judgment creditor retains a statutory lien against the debtor.
C. The debtor is relieved of any personal liability to the judgment creditor.
D. The debtor is required to pay a liquidated amount to vacate the judgment.

Answer 16

C. The debtor is relieved of any personal liability to the judgment creditor.

Unless the debtor has been denied a discharge decree owing either to an act of the debtor (such as fraud, intentional concealment of assets, and the like), or where, by statute, the debt is not discharged (such as in the case of unpaid taxes), the discharge decree releases the debtor from personal liability for debts owed to his or her creditors.

A judgment creditor’s debt is dischargeable and therefore is not on the statutory list of non-dischargeable debts.

Question 17

Which of the following claims will not be discharged in bankruptcy?
A. A claim that arises from alimony or maintenance.
B. A claim that arises out of the debtor’s breach of a contract.
C. A claim brought by a secured creditor that remains unsatisfied after the sale of the collateral.
D. A claim brought by a judgment creditor whose judgment resulted from the debtor’s negligent operation of a motor vehicle.

Answer 17

A. A claim that arises from alimony or maintenance.

Many items are not discharged in a bankruptcy proceeding. Among them are government fines, taxes, some student loans, alimony, child support, and maintenance debts.

Question 18

Which of the following claims will not be discharged in bankruptcy?
A. A claim that arises from alimony or maintenance.
B. A claim that arises out of the debtor’s breach of a contract.
C. A claim brought by a secured creditor that remains unsatisfied after the sale of the collateral.
D. A claim brought by a judgment creditor whose judgment resulted from the debtor’s negligent operation of a motor vehicle.

Answer 18

A. A claim that arises from alimony or maintenance.

Many items are not discharged in a bankruptcy proceeding. Among them are government fines, taxes, some student loans, alimony, child support, and maintenance debts.

Question 19

Which of the following acts by a debtor could result in a bankruptcy court revoking the debtor’s discharge?
I. Failure to list one creditor.

II. Failure to answer correctly material questions on the bankruptcy petition.

A.  I only.
B.  II only.
C.  Both I and II.
D.  Neither I nor II.

Answer 19

B. II only.

A discharge is usually final. It will be revoked only if later evidence suggests that the debtor acted fraudulently or intentionally misled the bankruptcy court. Failure to list one creditor is probably not a fraudulent action, particularly if there are many creditors. Failing to answer important questions honestly and accurately may well indicate fraud.

Question 20

Which of the following claims will not be discharged in bankruptcy?
A. A claim that arises from alimony or maintenance.
B. A claim that arises out of the debtor’s breach of a contract.
C. A claim brought by a secured creditor that remains unsatisfied after the sale of the collateral.
D. A claim brought by a judgment creditor whose judgment resulted from the debtor’s negligent operation of a motor vehicle.

Answer 20

A. A claim that arises from alimony or maintenance.

Question 21

Under the Federal Age Discrimination in Employment Act, which of the following practices would be prohibited?
Compulsory retirement of employees over the age of 65. Termination of employees between the ages of 65 and 70 for cause.
Yes Yes
Yes No
No Yes
No No

Answer 21

Compulsory retirement of employees over the age of 65. Yes
Termination of employees between the ages of 65 and 70 for cause. No

The Act prevents the WRONGFUL discharge of older workers. It is wrongful to fire someone or force his/her retirement simply because (s)he is older, just as it is wrongful to fire someone because of his/her race or religion. The Act, however, does not prohibit firing workers for legitimate reasons, such as incompetence. It does not guarantee perpetual employment for the elderly.

Question 22

Under the Federal Age Discrimination in Employment Act, which of the following practices is prohibited?
A. Termination of employees between the ages of 65 and 70 for cause.
B. Mandatory retirement of any employee.
C. Unintentional age discrimination.
D. Termination of employees as part of a rational business decision.

Answer 22

C. Unintentional age discrimination.

Question 23

Nelson Corporation is a big firm that wishes to be a good corporate citizen and certainly wants to obey the law. Nelson consults with an outside law firm that counsels Nelson regarding its ADA responsibilities. Which of the following is Nelson likely to be told it must be ready to do to accommodate disabled employees?
A. Provide adaptive hardware.
B. Hire readers or interpreters.
C. Provide part-time or modified work schedules.
D. A, B, and C.

Answer 23

D. A, B, and C.

Question 24

Rocky has an unusual number of conditions that make him a difficult employee. Which of the following conditions are protected from discrimination by the ADA?
	A.  Muscular dystrophy.
	B.  Transvestitism.
	C.  Kleptomania.
	D.  All of the above.

Answer 24

A. Muscular dystrophy.

An examination of the statute indicates that, of those conditions listed in this question, only muscular dystrophy is a protected condition.

Question 25

The National Football League has a rule that bars players from entering the league, unless they have been out of high school for at least three years. Maurice, a running back from Big State University who is tired of going to class and wants to start earning as a professional sportsman, challenges the rule. Which of the following is true?
A. Maurice has a strong claim under the ADEA.
B. Maurice’s ADEA claim will probably fail because the ADEA does not protect against reverse age discrimination.
C. Maurice’s ADEA claim will probably fail, because the ADEA does not apply to organizations such as the NFL.
D. B and C.

Answer 25

B. Maurice’s ADEA claim will probably fail because the ADEA does not protect against reverse age discrimination.

Because the ADEA protects older people and not youngsters from discrimination, this is the best answer.

Question 26

Mary’s supervisor tells her one day that she has the “sleekest ass” in the company. This highly offends Mary, and she sues her employer for hostile-environment sexual harassment. Which of the following is true?
A. Mary has a strong case.
B. Mary will probably lose, because she has not established an intimidating, hostile, or offensive working environment.
C. If Mary’s supervisor had been female, no sexual-harassment claim would be possible.
D. None of the above.

Answer 26

B. Mary will probably lose, because she has not established an intimidating, hostile, or offensive working environment.

It would be rare that a single comment, no matter how thoughtless, rude, or sexist, could produce an actionable “hostile environment.”

Question 27

Sholanke works for a large telemarketer. After completing the company training course and working for three months, during which time he exceeds his quota of telephone attempts and telephone contacts, he is fired and replaced by another black male. His supervisor explains that he has been terminated because he speaks English with a Nigerian accent. Which of the following is true?
A. Sholanke has a strong claim for racial discrimination.
B. Sholanke has a strong claim for gender discrimination.
C. Sholanke has a strong claim for national-origin discrimination.
D. All of the above.

Answer 27

C. Sholanke has a strong claim for national-origin discrimination.

National-origin discrimination claims are often based on discrimination owing to employees’ accents. Because Sholanke exceeds quotas, he cannot have been fired for cause. The supervisor admits the discrimination against Sholanke.

Question 28

Brock is terminated for (a) smoking pot in front of employees; (b) lack of attention to job duties; (c) an open affair with his secretary; and (d) low office morale. He wishes to sue his employer. Which of the following is true?
A. Brock will probably lose.
B. Brock would have a plausible case if he could prove that his race was also a motivating factor in his termination.
C. A and B.
D. None of the above.

Answer 28

C. A and B.

Question 29

While on vacation, Massey is severely injured in a motorcycle accident. Which of the following is true?
A. Because he was not injured on the job, Massey is ineligible for disability benefits under the Social Security system.
B. In order to be eligible for benefits, Massey must be prevented from working for a year or more.
C. Massey is under 65, so he is ineligible for benefits.
D. A and C.

Answer 29

B. In order to be eligible for benefits, Massey must be prevented from working for a year or more.

The disability must be sufficiently serious to prevent the applicant from working for at least a year, so this answer is accurate.

Question 30

Tally is not a “fully insured” worker under the Social Security rules, but she is a “currently insured” worker. To which benefits is she entitled?
A. Disability benefits.
B. Lump-sum death benefits.
C. Survivor benefits for herself and her family.
D. A and B only.

Answer 30

D. A and B only.

Question 31

Social security benefits may include all of the following, except
	A.  Payments to divorced spouses.
	B.  Payments to disabled children.
	C.  Medicare payments.
	D.  Medicaid payments.

Answer 31

D. Medicaid payments.

Question 32

Under the Federal Insurance Contributions Act (FICA), which of the following acts will cause an employer to be liable for penalties?
Failure to supply taxpayer identification numbers. Failure to make timely FICA deposits.
Yes Yes
Yes No
No Yes
No No

Answer 32

Failure to supply taxpayer identification numbers. Yes
Failure to make timely FICA deposits. Yes

Employers must both supply taxpayer ID numbers and regularly make required deposits to comply with the Act, which provides retirement and disability insurance.

Question 33

Syl Corp. does not withhold FICA taxes from its employees’ compensation. Syl voluntarily pays the entire FICA tax for its share and the amounts that it could have withheld from the employees.
The employees’ share of FICA taxes paid by Syl to the IRS is

A.  Deductible by Syl as additional compensation that may be included in the employees' taxable income.
B.  Not deductible by Syl, because it does not meet the deductibility requirement as an ordinary and necessary business expense.
C.  A non-taxable gift to each employee, provided that the amount is less than $1,000 annually to each employee.
D.  Subject to prescribed penalties imposed on Syl for its failure to withhold required payroll taxes.

Answer 33

A. Deductible by Syl as additional compensation that may be included in the employees’ taxable income.

The IRS does not let workers escape tax liability that easily. Employees are required under FICA to contribute around 7.5% of their earnings. If this amount is paid for them, it is a very real increase in their “pay,” and is therefore treated as income. Syl, then, may deduct these amounts as paid income.

Question 34

Tower drives a truck for Musgrove Produce, Inc. The truck is owned by Musgrove. Tower is paid on the basis of a formula that takes into consideration the length of the trip, cargo, and fuel consumed.
Tower is responsible for repairing or replacing all flat tires. Musgrove is responsible for all other truck maintenance. Tower drives only for Musgrove.
If Tower is a common-law employee and not an independent contractor, which of the following statements is correct?

A.  All Social Security retirement benefits are fully includible in the determination of Tower's federal taxable income if certain gross-income limitations are exceeded.
B.  Musgrove remains primarily liable for Tower's share of FICA taxes if it fails to withhold and pay the taxes on Tower's wages.
C.  Musgrove would not have to withhold FICA taxes if Tower elected to make FICA contributions as a self-employed person.
D.  Bonuses or vacation pay that are paid to Tower by Musgrove are not subject to FICA taxes, because they are not regarded as regular compensation.

Answer 34

B. Musgrove remains primarily liable for Tower’s share of FICA taxes if it fails to withhold and pay the taxes on Tower’s wages.

Ignore all of the information about the relationship, because the question tells us the important thing: Tower is an employee. An employer must either deduct FICA taxes or pay them for ALL employees.
So long as a person is not classified as an independent contractor, these taxes are due one way or the other.

Question 35

Dangle is a CPA working for Milstead Co. Dangle pays most of Milstead’s bills and is deeply concerned that Milstead does not seem to have enough money to pay all its bills and meet its federal payroll tax obligations. Dangle is a patriotic person and would never want to defraud the federal government. He always pays his own personal income taxes. However, in order to pay Milstead’s federal payroll tax obligations, Dangle would have to either (a) not pay Milstead’s employees or (b) not pay Milstead’s suppliers, either of which would functionally put the company out of business. Therefore, Dangle fails to pay the federal payroll taxes, instead. This does not save Milstead, which eventually files for bankruptcy. The IRS comes after Dangle as a “responsible person.” Which of the following is true?
A. Dangle is not a “responsible person.”
B. Dangle is a “responsible person,” but is not liable, because he did not “willfully” fail to pay the payroll taxes.
C. A and B.
D. None of the above.

Answer 35

D. None of the above.

Question 36

Which of the following types of income is subject to taxation under the provisions of the Federal Insurance Contributions Act (FICA)?
A. Interest earned on municipal bonds.
B. Capital gains of $3,000.
C. A vehicle received as a productivity award.
D. Dividends of $2,500.

Answer 36

C. A vehicle received as a productivity award.

Social security is set up to help retirees with their loss of earned income. Generally, to be subject to FICA taxes, the income must be earned in the course of employment. This does not mean that only traditional wages are taxed. A car earned as a bonus is still very much a benefit realized in the course of employment, and so the value of the car will be the basis for FICA taxes.

Question 37

Assume that the maximum wage base for FICA is $100,000. Jill earns $50,000 while working for MaximumEd Corporation. Jill also has her own business on the side, making $100,000 net. Upon what amount must Jill pay taxes under the Self-Employment Contributions Act?
	A.  $150,000.
	B.  $100,000.
	C.  $50,000.
	D.  None of the above.

Answer 37

C. $50,000.

The maximum wage base for FICA is reduced by the amount Jill paid through other means. She and MaximumEd both paid their share on the $50,000 that she made working for MaximumEd. Therefore, Jill should have to pay taxes under SECA on only $50,000, so this is the correct answer.

Question 38

Randolph has a bad year with his business, a sole proprietorship, which he runs out of his home. However, his rich aunt, who worries about him, gives Randolph $250,000 in July. Which of the following is true?
A. Randolph must pay tax under SECA on the $250,000.
B. Randolph need not pay tax under SECA on the $250,000 because it is not “income.”
C. Neither A nor B.
D. All of the above.

Answer 38

B. Randolph need not pay tax under SECA on the $250,000 because it is not “income.”

Gifts are “passive” income and not covered by SECA.

Question 39

Taxes payable under the Federal Unemployment Tax Act (FUTA) are
A. Partially deductible by the covered employee for federal income-tax purposes.
B. Calculated as a fixed percentage of all compensation paid to an employee.
C. Payable by all employers, regardless of the total amount of compensation paid to individual employees.
D. Deductible by the employer as a business expense for federal income-tax purposes.

Answer 39

D. Deductible by the employer as a business expense for federal income-tax purposes.

An employer pays for all obligations under FUTA and the employees do not contribute out of their paychecks. These taxes are fully deductible by the employer when the employer calculates federal income taxes.

Question 40

For the entire year of 2005, Ral Supermarket, Inc. conducts its business operations without any permanent or full-time employees.
Ral employs temporary and part-time workers during each of the 52 weeks in the year.
Under the provisions of the Federal Unemployment Tax Act (FUTA), which of the following statements is correct regarding Ral’s obligation to file a federal unemployment tax return for 2005?

A.  Ral must file a 2005 FUTA return only if aggregate wages exceed $100,000 during 2005.
B.  Ral must file a 2005 FUTA return because it had at least one employee during at least 20 weeks of 2005.
C.  Ral is obligated to file a 2005 FUTA return only if at least one worker earned $50 or more in any calendar quarter of 2005.
D.  Ral does not have to file a 2005 FUTA return, because it had no permanent or full-time employees in 2005.

Answer 40

B. Ral must file a 2005 FUTA return because it had at least one employee during at least 20 weeks of 2005.

A return must be filed under FUTA if there are ANY employees during a substantial portion of the year.
If a full OR part-time employee is around for over 20 weeks in a given year, a return must be filed.

Question 41

An employer having an experience unemployment tax rate of 3.2% in a state having a standard unemployment tax rate of 5.4% may take a credit against a 6.2% federal unemployment tax rate of
	A.  3.0%
	B.  3.2%
	C.  5.4%
	D.  6.2%

Answer 41

C. 5.4%

The key is that the overall payments made by the employer should not exceed the overall federal unemployment tax rate of 6.2%. Therefore, all 5.4% of the state’s standard unemployment tax rate may be credited against the federal percentage.

Question 42

Which of the following statements is correct under the Federal Fair Labor Standards Act?
A. Some workers may be included within the minimum-wage provisions, but exempt from the overtime provisions.
B. Some workers may be included within the overtime provisions, but exempt from the minimum-wage provisions.
C. All workers are required to be included within both the minimum-wage provisions and the overtime provisions.
D. Possible exemptions from the minimum-wage provisions and the overtime provisions must be determined by the union contract in effect at the time.

Answer 42

A. Some workers may be included within the minimum-wage provisions, but exempt from the overtime provisions.

Question 43

Under the Fair Labor Standards Act, which of the following pay bases may be used to pay covered, non-exempt employees who earn, on average, the minimum hourly wage?
  Hourly  	  Weekly  	  Monthly  
	 Yes 	 Yes 	 Yes 
	 Yes 	 Yes 	 No 
	 Yes 	 No 	 Yes 
	 No 	 Yes 	 Yes

Answer 43

Hourly Yes
Weekly Yes
Monthly Yes

The FLSA does not prohibit any of these pay periods. It ensures that a worker’s total compensation is not below a certain level, but wages may be paid on an hourly, weekly, or monthly basis.

Question 44

Which of the following statements correctly describes the funding of non-contributory pension plans?
A. All of the funds are provided by the employees.
B. All of the funds are provided by the employer.
C. The employer and employee each provide 50% of the funds.
D. The employer provides 90% of the funds, and each employee

Answer 44

B. All of the funds are provided by the employer.

If an employee puts wages or other compensation into a pension plan, it is called a “contribution.” Non-contributory plans are funded entirely by the employer, and not at all by the employees. Such plans are increasingly rare.

Question 45

Dan is concerned about the cost of continuing health insurance, especially because he is currently unemployed. Which of the following is true?
A. The Consolidated Omnibus Budget Reconciliation Act (COBRA) requires the employer to continue to pay for all of the insurance premiums.
B. Because the former employee no longer works for the employer, the employer is required to pay only half of the extended coverage premium.
C. Dan will have to pay all the premiums himself.
D. None of the above.

Answer 45

C. Dan will have to pay all the premiums himself.

COBRA strikes a balance between the former employee’s need for coverage and the former employer’s desire not to be saddled with the expense.

Question 46

Which of the following is true regarding ERISA’s vesting policy?
A. The money that employees contribute to a pension plan must fully vest within two years.
B. The money that employers contribute to a pension plan must fully vest within ten years.
C. A and B.
D. None of the above.

Answer 46

D. None of the above.

Question 47

Which of the following are not features of ERISA?
A. ERISA regulates defined-contribution plans and defined-benefit plans.
B. ERISA provides for partial vesting.
C. ERISA set up the PBGC.
D. ERISA applies to government pension plans.

Answer 47

D. ERISA applies to government pension plans.

This answer is correct, because coverage of government pension plans is not a feature or ERISA.

Question 48

Which of the following are features of ERISA?
A. It broadly pre-empts state regulation of pension funds.
B. It applies to pension benefit plans, but not employee welfare plans.
C. It permits discrimination against lower-level employees who make less money and, therefore, have less need for pension protection.
D. All of the above.

Answer 48

A. It broadly pre-empts state regulation of pension funds.

Question 49

Which of the following is an accurate characterization of the Family Medical Leave Act (FMLA)?
A. Its purpose is to balance the needs of an employee’s workplace with the needs of the employee’s family.
B. It entitles an employee to 12 weeks of paid leave without losing their job.
C. It entitles an employee to 24 weeks of unpaid leave without losing their job.
D. All of the above.

Answer 49

A. Its purpose is to balance the needs of an employee’s workplace with the needs of the employee’s family.

The FMLA is a social program, following the Scandinavian model, for balancing these competing interests.

Question 50

Tan has just become HR director of a regional manufacturer with 127 employees at its plant site in Kansas City. He does some research on FMLA. What is he likely to discover?
A. His company is too small to have obligations under the FMLA.
B. Employees must request FMLA leave in order to be entitled to it.
C. It is his responsibility as HR director to offer FMLA benefits to eligible employees.
D. B and C.

Answer 50

B. Employees must request FMLA leave in order to be entitled to it.

The FMLA puts the onus on employees to request FMLA leave, rather than upon the employer to offer it.

Question 51

Decker sold equipment for $200,000. The equipment was purchased for $160,000 and had accumulated depreciation of $60,000. What amount is reported as ordinary income under Code Sec. 1245?
	A.  $0
	B.  $ 40,000
	C.  $ 60,000
	D.  $100,000

Answer 51

C. $ 60,000

The gain recognized from the sale is:
Amount realized $200,000
Adjusted basis ($160,000 - $60,000) 100,000
Recognized gain $100,000

Personalty is subject to the Section 1245 depreciation recapture rules which indicate that gain will be taxed as ordinary income up to the amount of depreciation claimed on the property. Since there was $60,000 of depreciation on the equipment, $60,000 of the gain is taxed as ordinary income and the remaining $40,000 is taxed as Section 1231 gain.

Question 52

Lobster, Inc. incurs the following losses on disposition of business assets during the year:
Loss on the abandonment of office equipment $25,000
Loss on the sale of a building (straight-line depreciation taken in prior years of $200,000) 250,000
Loss on the sale of delivery trucks 15,000
What is the amount and character of the losses to be reported on Lobster’s tax return?

A.  $40,000 Section 1231 loss only.
B.  $40,000 Section 1231 loss, $50,000 long-term capital loss.
C.  $40,000 Section 1231 loss, $250,000 long-term capital loss.
D.  $290,000 Section 1231 loss.

Answer 52

D. $290,000 Section 1231 loss.

All of the assets sold are assets that have been used in a business and are therefore Section 1231 losses. Thus, all of the losses are Section 1231 losses and total $290,000.

Question 53

On August 22, 2015 Martha purchases a computer to use in her childcare business. She sells the computer on December 28, 2015 for $2,000 when the machine has an adjusted tax basis of $1,700. What is the amount and character of the gain on the sale?
	A.  $300 short-term capital gain.
	B.  $300 long-term capital gain.
	C.  $300 ordinary income.
	D.  $300 Section 1231 gain.

Answer 53

C. $300 ordinary income.

Tangible assets that are used in a trade or business and owned for one year or less are ordinary assets. Since the computer was owned for slightly more than four months, the gain is classified as ordinary income.

Question 54

Kaitlin owns a computer that she uses for business, investment, and personal use, as follows:
Personal use. 25%
Investment use. 30%
Business use. 45%
Will Kaitlin’s use qualify her to use accelerated or straight-line depreciation, and what percentage of the asset’s basis qualifies to be depreciated?

A.  Straight-line, 45%.
B.  Accelerated, 45%.
C.  Straight-line, 75%.
D.  Accelerated, 75%.

Answer 54

C. Straight-line, 75%.

A computer qualifies as listed property, and MACRS accelerated depreciation can be claimed for listed property only if the business use of the asset exceeds 50% of the total use. Since Kaitlin’s business use is 45%, she does not meet the 50% test and must use straight-line (ADS) depreciation. However, she can depreciate both the business and investment use of the asset, so 75% of the asset’s basis qualifies to be depreciated.

Question 55

Under modified accelerated cost recovery system (MACRS) depreciation for property placed in service after 1986,
A. Used tangible depreciable property is excluded from the computation.
B. Salvage value is ignored for the purposes of computing the MACRS deduction.
C. No type of straight-line depreciation is allowable.
D. The recovery period for depreciable realty is 27.5 years.

Answer 55

B. Salvage value is ignored for the purposes of computing the MACRS deduction.

Under MACRS, the property’s depreciable basis as determined by Code Section 162 is used to compute the depreciation deductions, except that salvage values are considered to be zero. Hence, the salvage value is ignored for computing the MACRS depreciation deduction and, therefore, this response is correct.

Question 56

A taxpayer purchased five acres of land for $200,000 and placed in service other tangible business assets that cost $450,000. Disregarding business income limitations and assuming that the annual Section 179 (Election to Expense Certain Depreciable Business Assets) limit is $500,000, what maximum amount of cost recovery can the taxpayer claim this year?
	A.  $650,000
	B.  $500,000
	C.  $450,000
	D.  $200,000

Answer 56

C. $450,000

Land is not depreciable. Section 179 can be elected to expense the $450,000 of business assets since it does not exceed the maximum Section 179 limit of $500,000 as given in the problem.

Question 57

Browne, a self-employed taxpayer, has 2015 business net income of $15,000 prior to any expense deduction for equipment purchases. In 2015, Browne purchases and places into service, for business use, office machinery costing $20,000. This is Browne’s only 2015 capital expenditure.
Browne’s business establishment is not in an economically distressed area. Browne makes a proper and timely expense election to deduct the maximum amount (assumed to be $25,000 ignoring bonus depreciation). Browne is not a member of any pass-through entity.

What is Browne’s deduction under the election?

A.  $4,000
B.  $10,000
    C.  $15,000	
D.  $20,000

Answer 57

C. $15,000

Property purchased for use in active trade or business is considered Code-Section 1245 property. Code-Section 1245 property is eligible for the Code-Section 179 election. Under this election, taxpayers may expense a statutory amount of the cost of property used by the taxpayers in active trade or business.

The statutory amount is $25,000 for 2015. Since Browne purchases the equipment for use in business, the property is eligible for the Code-Section 179 deduction. Browne’s income could limit the amount of the deduction, because the statutory amount, $25,000, is more than Browne’s business income of $15,000. Hence, Browne may elect under Code Section 179 to deduct $15,000. The remaining $5,000 of the cost of $20,000 can be carried over to future years.

Question 58

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

Answer 58

C. 15 years.

The statutory amortization period for a covenant not to compete that is related to a business acquisition is 15 years.

Question 59

On August 1, 2015, Graham purchases and places into service an office building costing $264,000, including $30,000 for the land. What was Graham's MACRS deduction for the office building in 2015?
	A.  $9,600
	B.  $6,000
	C.  $3,600
	D.  $2,250

Answer 59

D. $2,250

Under MACRS, the office building is considered non-residential real property. Land cannot be depreciated. Its class life is 39 years. MACRS requires that the straight-line method be used to compute the depreciation of 39-year class life property. Therefore, the office building would be depreciated at a rate of $6,000 per year ([$264,000 building cost, less $30,000 cost of land]/39 years).

However, the mid-month convention applies to 39-year class life property. Therefore, for August 2015 (the first month of service), Graham could deduct $250 (= $6,000/12 months x one-half of a month). For the period of September 2015 to December 2015 (the remainder of the tax year), Graham could deduct $2,000 (= $6,000 x 4/12 months). Hence, Graham’s MACRS deduction for the office building in 2015 would be $2,250, the sum of the two periods.

Question 60

Hogan exchanged a business-use machine having an original cost of $100,000 and accumulated depreciation of $30,000 for business-use equipment owned by Baker having a fair market value of $80,000 plus $1,000 cash. Baker assumed a $2,000 outstanding debt on the machine. What taxable gain should Hogan recognize?
	A.  $0
	B.  $3,000
	C.  $10,000
	D.  $11,000

Answer 60

B. $3,000

This is a qualified like-kind exchange because a machine was exchanged for equipment and Hogan's use for each is for business purposes.
Amount Realized:		
Equipment received	$80,000	
Cash	1,000	
Debt relief	2,000	
Total		$ 83,000
Adjusted Basis:		
Cost	$100,000	
Depreciation	(30,000)	
(70,000)
Realized Gain		$13,000
Debt relief and the cash received are both considered to be boot received, which is a total of $3,000. The recognized gain is the lower of the realized gain, $13,000, or boot received, $3,000.

Question 61

In 2015, Joan Reed exchanges commercial real estate that she owns for other commercial real estate, plus $50,000 cash. The following additional information pertains to this transaction:
Property given up by Reed.
Fair market value. $500,000
Adjusted basis. $300,000
Property received by Reed.
Fair market value. $450,000
What amount of gain should be recognized in Reed’s 2015 income-tax return?

A.  $200,000
B.  $100,000
C.  $50,000
D.  $0

Answer 61

C. $50,000

When a taxpayer exchanges property for “like-kind” property, no gain or loss is generally recognized. However, if boot is received, gain is recognized to the extent of boot received in the exchange. The exchanges of real estate for “like-kind” real estate qualify for non-recognition under the “like-kind” exchange rules.

Reed gave up real estate with an adjusted basis of $300,000. Reed received real estate with a fair market value of $450,000 and $50,000 in cash. Hence, Reed realized a gain of $200,000.

However, this gain is only recognized to the extent of the boot that Reed received, $50,000.

Question 62

Aviary Corp., a sole proprietorship, sold a building for $600,000. Aviary received a down payment of $120,000 as well as annual principal payments of $120,000 for each of the subsequent four years. Aviary purchased the building for $500,000 and claimed depreciation of $80,000. What amount of gain should Aviary report in the year of sale using the installment method?

A.  $180,000
B.  $120,000
C.  $54,000
D.  $36,000

Answer 62

D. $36,000

Aviary’s basis in the building is $420,000 ($500,000 cost - $80,000 depreciation). Aviary’s gain on the sale of the building is $180,000 ($600,000 amount realized - $420,000 basis). On the installment basis, the $180,000 gain is reported pro-rata as payments are received. In the year of sale, 20% ($120,000/$600,000) of the total payments of $600,000 are received. Thus, 20% of the gain is recognized, or $36,000 ($180,000 x 20%).

Question 63

Sands purchased 100 shares of Eastern Corp. stock for $18,000 on April 1 of the prior year. On February 1 of the current year, Sands sold 50 shares of Eastern for $7,000. Fifteen days later, Sands purchased 25 shares of Eastern for $3,750. What is the amount of Sand’s recognized gain or loss?

A.  $0
B.  $500 loss.
C.  $1,000 loss.
D.  $2,000 loss.

Answer 63

C. $1,000 loss.

Sand’s basis per share is $180 ($18,000/100 shares). Sand’s realized loss on the 50 shares sold is $2,000 ($7,000 amount realized - $9,000 basis ($180 x 50 shares). This loss is not recognized under the wash sale rule if the same stock is repurchased within 30 days. Since only 25 shares were repurchased during the 30 day period, 50% (25 shares/50 shares) of the loss is not recognized. Therefore, $1,000 of the realized loss is recognized.

Question 64

In year 1, a taxpayer sold real property for $200,000, receiving $100,000 at closing and $100,000 plus accrued interest at the prime rate in the next year. The buyer also assumed a $50,000 mortgage on the property. The taxpayer's adjusted basis was $75,000, and the taxpayer incurred $10,000 of selling expenses. If this transaction qualifies for installment sale treatment, what is the gross profit on the sale?
	A.  $115,000
	B.  $125,000
	C.  $165,000
	D.  $175,000

Answer 64

C. $165,000

The gross profit on the sale is the amount realized less the property’s adjusted basis. The amount realized is $200,000 + $50,000 debt relief - $10,000 selling expenses, or $240,000. The $240,000 is reduced by the basis of $75,000 to produce the gross profit of $165,000.

Question 65

Conner purchases 300 shares of Zinco stock for $30,000 in 2001.
On May 23, 2014, Conner sells all the stock to his daughter, Alice, for $20,000, its then fair market value. Conner realizes no other gain or loss during 2014. On July 26, 2015, Alice sells the 300 shares of Zinco for $25,000.
What is Alice’s recognized gain or loss on her sale?

A.  $0
B.  $5,000 long-term gain.
C.  $5,000 short-term loss.
D.  $5,000 long-term loss.

Answer 65

A. $0

A taxpayer acquiring property through purchase or exchange from a person who sustained a loss on the transaction that was disallowed owing to related taxpayer rules realizes a gain on the sale or other disposition of the property only to the extent that the gain exceeds the amount of the disallowed loss. Alice acquired the Zinco stock from her father, who sustained a disallowed loss of $10,000 ($20,000 selling price, less $30,000 purchase price). Hence, Alice would have to realize a gain of more than $10,000 for her to recognize a gain, since she now has a right of offset of $10,000.
Alice purchased the stock from her father for $20,000 and sold the stock for $25,000 - realizing a gain of $5,000. Since Alice’s realized gain is less than her father’s right of offset, Alice does not recognize any gain on the sale of the stock.

Question 66

Smith, an individual calendar-year taxpayer, purchased 100 shares of Core Co. common stock for $15,000 on December 15, 2014, and an additional 100 shares for $13,000 on December 30, 2014. On January 3, 2015, Smith sold the shares purchased on December 15, 2014, for $13,000.
What amount of loss from the sale of Core’s stock is deductible on Smith’s 2014 and 2015 income tax returns?

  2014  	  2015  
	 $0 	 $0 
	 $0 	 $2,000 
	 $1,000 	 $1,000 
	 $2,000 	 $0

Answer 66

2014 2015
$0 $0

Under wash-sale rules, taxpayers may not recognize losses attributable to the sale of stock or securities if substantially identical stock or securities are purchased 30 days before or after the sale giving rise to the loss. Wash-sale rules do not prevent the recognition of gains from these sales.
Smith sold 100 shares of Core Co. common stock on January 3, 2015 for $13,000. As the stock was purchased for $15,000, Smith sustained a loss of $2,000 on the transaction. However, Smith may not recognize this loss because Smith purchased an additional 100 shares for $13,000 on December 30, 2014, which was within 30 days before or after the January 3, 2015 sale. Thus, Smith may not recognize a loss in either 2014 or 2015.

Question 67

Micro Corp., a calendar year, accrual basis corporation, purchased a 5-year, 8%, $100,000 taxable corporate bond for $108,530, on July 1, 2015, the date the bond was issued.
The bond paid interest semiannually. Micro elected to amortize the bond premium. For Micro’s 2015 tax return, the bond premium amortization for 2015 should be
I. Computed under the constant yield to maturity method.

II. Treated as an offset to the interest income on the bond.

A.  I only.
B.  II only.
C.  Both I and II.
D.  Neither I nor II.

Answer 67

C. Both I and II.

Taxpayers may elect to amortize taxable bonds purchased at a premium. Non-taxable bonds purchased at a premium generally are required to be amortized. The amortized bond premium is based on the constant yield to maturity. The amount amortized usually reduces the taxpayer’s basis in the bonds and, for taxable bonds, results in an offsetting deduction for interest received from the bond.

Question 68

Which of the following statements is correct with regard to an individual taxpayer who has elected in 2015 to amortize the premium on a bond that yields taxable interest?
A. The amortization is treated as an itemized deduction.
B. The amortization is not treated as a reduction of taxable income.
C. The bond’s basis is reduced by the amortization.
D. The bond’s basis is increased by the amortization.

Answer 68

C. The bond’s basis is reduced by the amortization.

Question 69

Charles and Marcia are married cash-basis taxpayers. In 2015, they had interest income as follows:

• $500 interest on federal income tax refund.
• $600 interest on state income tax refund.
• $800 interest on federal government obligations.
• $1,000 interest on state government obligations.

What amount of interest income is taxable on Charles and Marcia’s 2015 joint income tax return?

A.  $500
B.  $1,100
C.  $1,900
    D.  $2,900

Answer 69

C. $1,900

Refunds and recoveries attributable to a prior tax year are excluded from income to the extent that the amount does not reduce the amount of tax imposed for the earlier year. However, interest received on these refunds and recoveries is taxable interest income.
Thus, Charles and Marcia should include the interest received on the state and federal income tax refunds as interest income on their income tax return. In addition, Charles and Marcia should include the interest received on federal government obligations as taxable interest income on their income tax return because interest on these obligations is taxable.

However, interest on state government obligations is tax-exempt income and, as a result, Charles and Marcia should not include interest income from these obligations on their income tax return.

Question 70

In 2014, Stewart Corp. properly accrued $5,000 for an income item on the basis of a reasonable estimate. In 2015, after filing its 2014 federal income tax return, Stewart determined that the exact amount was $6,000.
Which of the following statements is correct?

A.  No further inclusion of income is required as the difference is less than 25% of the original amount reported and the estimate had been made in good faith.
B.  The $1,000 difference is includible in Stewart's income tax return.
C.  Stewart is required to notify the IRS within 30 days of the determination of the exact amount of the item.
D.  Stewart is required to file an amended return to report the additional $1,000 of income.

Answer 70

B. The $1,000 difference is includible in Stewart’s income tax return.

Under the accrual method of accounting, income is reported once all events to establish a taxpayer’s right to receive the income have occurred and the amount can be determined with reasonable accuracy.
If an amount of income has been accrued on the basis of a reasonable estimate with the exact amount to be determined at a later date, any difference between the estimate and exact amount is to be included in income or deducted in the year when the exact amount can be determined.

Question 71

In 2015, Clark filed Form 1040EZ for the 2014 taxable year. In 2015, Clark received a state income tax refund of $900 plus interest of $10, for overpayment of 2014 state income tax.
What amount of the state tax refund and interest is taxable in Clark’s 2015 federal income tax return?

A.  $0
B.  $10
C.  $900
D.  $910

Answer 71

B. $10

Federal and state income tax refunds are excluded from a taxpayer’s taxable income to the extent that the refund did not reduce the amount of tax for the earlier year. However, any interest earned on these refunds is considered taxable income.
Thus, Clark’s state income tax refund is excluded from taxable income. However, the $10 in interest income from the refund is taxable income and, therefore, included on Clark’s 2015 federal income tax return.

Question 72

Perle, a dentist, billed Wood $600 for dental services. Wood paid Perle $200 cash and built a bookcase for Perle’s office in full settlement of the bill. Wood sells comparable bookcases for $350.
What amount should Perle include in taxable income as a result of this transaction?

A.  $0
B.  $200
C.  $550
D.  $600

Answer 72

C. $550

The amount of income realized by a taxpayer from a sale or disposition of property equals the sum of the amount of cash received and the fair market value of any property received.
Despite billing Wood $600 for the dental services, Perle only received $200 of cash and $350 of property from the transaction. Thus, $550 of taxable income, the sum of the cash received and the fair market value of any property received should be included on Perle’s income tax return.

Question 73

Lyle Corp. is a distributor of pharmaceuticals and sells only to retail drug stores. Lyle received unsolicited samples of non-prescription drugs from a manufacturer.
Lyle donated these drugs to a qualified exempt organization and deducted their fair market value as a charitable contribution.
What should be included as gross income in Lyle’s return for receipt of these samples?

A.  Fair market value.
B.  Net discounted wholesale price.
C.  $25 nominal value assigned to gifts.
D.  $0

Answer 73

A. Fair market value.

A corporation may deduct the fair market value of the contributed property but must add the same amount to its gross income for the receipt of the gift.
Since Lyle Corp. deducted the fair market value of the donated drugs as a charitable contribution, it must add the same amount to its gross income.

Question 74

Randolph is a single individual who always claims the standard deduction. Randolph received the following in the current year:
Wages $22,000
Unemployment compensation 6,000
Pension distribution (100% taxable) 4,000
A state tax refund from the previous year 425
What is Randolph’s gross income?

A.  $22,000
B.  $28,425
C.  $32,000
D.  $32,425

Answer 74

C. $32,000

All of the items received are included in gross income except for the state income tax refund. Since Randolph always uses the standard deduction, no tax benefit is received when the state income taxes are paid. Therefore, the refund is not taxable.

Question 75

John and Mary were divorced in 2014. The divorce decree provides that John pay alimony of $10,000 per year, to be reduced by 20% on their child’s 18th birthday. During 2015, John paid $7,000 directly to Mary and $3,000 to Spring College for Mary’s tuition.
What amount of these payments should be reported as income in Mary’s 2015 income tax return?

A.  $5,600
B.  $8,000
C.  $8,600
D.  $10,000

Answer 75

B. $8,000

Alimony received by a taxpayer is included in that taxpayer’s gross income and alimony paid by a taxpayer is deductible from that taxpayer’s gross income. To be considered alimony, the payments must be made under a divorce or separation agreement. Payments to third parties (such as tuition, rent and mortgage) by the spouse paying alimony for the spouse receiving alimony receive the same treatment as cash payments.
John and Mary have a divorce decree stipulating $10,000 per year payments from John to Mary, but the amount decreases to $8,000 when their child reaches the age of 18 years. Due to this decrease, $2,000 of the $10,000 payment would be considered child support and, as a result, would not be reported by Mary as income. The remaining $8,000 would be considered alimony and, therefore, reported as income by Mary.

Question 76

Porter was unemployed for part of the year in 2015. Porter received $35,000 in wages, $4,000 from a state unemployment compensation plan, and $2,000 from his former employer's company-paid supplemental unemployment benefit plan. What is the amount of Porter's gross income in 2015?
	A.  $35,000
	B.  $37,000
	C.  $39,000
	D.  $41,000

Answer 76

D. $41,000

Wages are included in gross income for the year in which they are received. Unemployment compensation is also included in gross income since it replaces income that would have been received if working. Therefore, the total amount included in gross income is $41,000.

Question 77

Fuller was the owner and beneficiary of a $200,000 life insurance policy on a parent. Fuller sold the policy to Decker, for $25,000. Decker paid a total of $40,000 in premiums.
Upon the death of the parent, what amount must Decker include in gross income?

A.  $0
B.  $135,000
C.  $160,000
D.  $200,000

Answer 77

B. $135,000

Decker’s cost basis is the $25,000 he paid for the policy plus the $40,000 he paid in premiums. $200,000 less $65,000 = $135,000.

Question 78

Blake, a single individual age 67, had a 2015 adjusted gross income of $60,000 exclusive of social security benefits. Blake received social security benefits of $8,400 and interest of $1,000 on tax-exempt obligations during 2015. What amount of social security benefits is excludable from Blake's 2015 taxable income?
	A.  $0
	B.  $1,260
	C.  $4,200
	D.  $8,400

Answer 78

B. $1,260

PI = AGI + tax-exempt interest + 50% (SSB)
PI = $60,000 + $1,000 + 50% (8,400) = $65,200.

Since PI ($65,200) exceeds Base Amount 2 ($34,000), then the taxable amount of SSB is the lesser of:

.85 x SSB ($8,400) = $7,140, or
.85 x [PI - BA2; $65,200 - $34,000) = $26,520, plus the lesser of
amount included based on the 50% formula (50% x $8,400) = $4,200, or
$4,500 (unless married filing joint, then $6,000), which provides $26,520 + $4,200 = $30,720 for part b of the formula.
Thus, the amount included in income is the lower of $7,140 or $30,720, so the amount excluded is $1,260 ($8,400 - $7,140).

Question 79

In 2015, Joan accepted and received a $10,000 award for outstanding civic achievement. Joan was selected without any action on her part, and no future services are expected of her as a condition of receiving the award. What amount should Joan include in her 2015 adjusted gross income in connection with this award?
	A.  $0
	B.  $ 4,000
	C.  $ 5,000
	D.  $10,000

Answer 79

D. $10,000

Joan meets all of the requirements to exclude the gift from income, except that she accepted the award and received payment. Therefore, the FMV of the award, $10,000, is included in her income.

Question 80

Unless the Internal Revenue Service consents to a change of method, the accrual method of tax reporting is mandatory for a sole proprietor when there are
Accounts receivable for services rendered Year-end merchandise inventories
Yes Yes
Yes No
No No
No Yes

Answer 80

Accounts receivable for services rendered No Year-end merchandise inventories Yes

Unless the IRS consents to a change of method, taxpayers are to use the accrual method of accounting for purchases and sales if inventories are used.
Accounts receivable for services rendered does not trigger the required use of the accrual method.

Question 81

Which of the following costs are subject to the Uniform Capitalization Rules of Code Sec. 263A for manufactured tangible personal property?
	A.  Off-site storage.
	B.  Advertising.
	C.  Research.
	D.  Marketing.

Answer 81

A. Off-site storage.

Off-site storage costs must be capitalized as part of the inventory cost for tax purposes.

Question 82

In calculating the tax of a corporation for a short period, which of the following processes is correct?
A. Divide current-year income by prior-year income, then multiply the result by prior-year tax.
B. Compute tax on short-period income, then multiply the result by 12 divided by the number of months in the short period.
C. Determine the average taxable income for the past three years, then multiply the result by the number of months in the short period divided by 12.
D. Annualize income and calculate the tax on annualized income, then multiply the computed tax by the number of months in the short period divided by 12.

Answer 82

D. Annualize income and calculate the tax on annualized income, then multiply the computed tax by the number of months in the short period divided by 12.

If a corporation filed a short-year return for 3 month, the income for that period is first multiplied by 4 (12 months/3 months) to annualize the income for 12 months. The corporate tax liability is then computed on this amount for the full 12 months. That amount is the multiplied by 3/12 to prorate for the short tax year.

Question 83

Which of the following taxpayers may use the cash basis as its method of accounting for tax purposes?
A. Partnership that is designated as a tax shelter.
B. Retail store with $2 million in gross receipts.
Retail store is incorrect. Since a retail store has inventory gross receipts it would need to not exceed $1 million for the cash method to be permitted.
C. An international accounting firm organized as a partnership.
D. Office cleaning corporation with average annual income of $8 million.

Answer 83

C. An international accounting firm organized as a partnership.

Partnerships can use the cash method regardless of the amount of gross receipts as long as none of the partners are C corporations.

Question 84

The Uniform Capitalization Rules of Code Sec. 263A apply to retailers whose average gross receipts for the preceding three years exceed what amount?
	A.  $ 1,000,000
	B.  $ 2,500,000
	C.  $ 5,000,000
	D.  $10,000,000

Answer 84

D. $10,000,000

The Uniform Capitalization Rules do not apply to small personal property dealers. Small personal property dealers are defined as those with $10 million or less in gross receipts during the preceding three years.

Question 85

John Budd is the sole stockholder of Ral Corp., an accrual basis taxpayer engaged in wholesaling operations. Ral’s retained earnings at January 1, 2015 amounted to $1,000,000. For the year ended December 31, 2015, Ral’s book income, before federal income tax, was $300,000.
Included in the computation of this $300,000 were the following:
Dividends received on 500 shares of stock of a taxable domestic corporation that had 1,000,000 shares of stock outstanding (Ral had no portfolio indebtedness) $ 1,000
Loss on sale of investment in stock of unaffiliated corporation (this stock had been held for two years; Ral had no other capital gains or losses) (5,000)
Keyman insurance premiums paid on Budd’s life (Ral is the beneficiary of this policy) 3,000
Group term insurance premiums paid on $10,000 life insurance policies for each of Ral’s four employees (the employees’ spouses are the beneficiaries) 4,000
Amortization of cost of acquiring a perpetual dealer’s franchise (Ral paid $48,000 for this franchise on July 1, 2015, and is amortizing it over a 48-month period) 6,000
Contribution to a recognized, qualified charity (this contribution was authorized by Ral’s board of directors in December 2015, to be paid on January 31, 2016) 75,000

On December 1, 2015, Ral received advance rental of $27,000 from a tenant for a three-year lease commencing January 1, 2016 to cover rents for the years 2016, 2017, and 2018. In conformity with GAAP, Ral did not include any part of this rental in its income statement for the year ended December 31, 2015.
What amount should Ral include in its 2015 taxable income for rent revenue?
A. $0
B. $750
C. $9,000
D. $27,000

Answer 85

D. $27,000

For accrual based taxpayers, items generally are included in gross income for the year in which the income is earned. However, for tax purposes, income is earned when

1) all the events have occurred to attach the taxpayer’s right to receive the income and
2) the amount of income can be determined with reasonable accuracy. Cash based taxpayers report income when it is actually received or constructively received (i.e., in the taxpayer’s control). Since all the events have occurred to attach Ral Corp.’s right to receive the income and the amount of income can be determined with reasonable accuracy, the corporation must report $27,000 in rental revenue for 2015. It is irrelevant that the rental revenue covers the following years.

Question 86

The selection of an accounting method for tax purposes by a newly incorporated C corporation
A. Is made on the initial tax return by using the chosen method.
B. Is made by filing a request for a private letter ruling from the IRS.
C. Must first be approved by the company’s board of directors.
D. Must be disclosed in the company’s organizing documents.

Answer 86

A. Is made on the initial tax return by using the chosen method.

Accounting methods for a new corporation are made on the initial tax return.

Question 87

Ace Rentals Inc., an accrual-basis taxpayer, reported rent receivable of $35,000 and $25,000 in its 2015 and 2014 balance sheets, respectively. During 2015, Ace received $50,000 in rent payments and $5,000 in nonrefundable rent deposits.
In Ace’s 2015 corporate income tax return, what amount should Ace include as rent revenue?

A.  $50,000
B.  $55,000
C.  $60,000
D.  $65,000

Answer 87

D. $65,000

Ace Corp. would report rent revenue of $65,000. Of this amount, $55,000 (the sum of $50,000 in rental payments and $5,000 in nonrefundable rent deposits) would be cash receipts. Ace Corp. is an accrual based taxpayer. Therefore, for tax purposes, income is earned when 1) all the events have occurred to attach the taxpayer’s right to receive the income and 2) the amount of income can be determined with reasonable accuracy. With respect to rent receivable, the income must have been earned to record it as a receivable.
Hence, in calculating rent revenue, the $10,000 increase in rent receivable from 2014 to 2015 would have to be added to the corporation’s cash receipts.

Question 88

Which of the following taxpayers may use the cash method of accounting?
A. A tax shelter
B. A qualified personal service corporation
C. A C corporation with annual gross receipts of $50,000,000
D. A manufacturer

Answer 88

B. A qualified personal service corporation

Taxable income shall not be computed under the cash receipts and disbursements method of accounting by:
Corporations, unless a qualified personal service corporation with gross receipts of not more than $5,000,000.
Partnership which has a C corporation as a partner, or
A tax shelter

Question 89

Which of the following costs is not included in inventory under the Uniform Capitalization rules for goods manufactured by the taxpayer?
	A.  Research
	B.  Warehousing costs
	C.  Quality control
	D.  Taxes excluding income taxes

Answer 89

A. Research

Taxpayers subject to the uniform capitalization rules must capitalize all direct costs and certain indirect costs properly allocable to real property and tangible personal property produced by the taxpayer, except for research and experimental expenditures.

Question 90

Dart, a C corporation, distributes software over the Internet and has had average revenues in excess of $20 million dollars per year for the past three years. To purchase software, customers key-in their credit card number to a secure web site and receive a password that allows the customer to immediately download the software. As a result, Dart doesn’t record accounts receivable or inventory on its books. Which of the following statements is correct?
A. Dart may use either the cash or accrual method of accounting as long as Dart elects a calendar year end.
B. Dart may utilize any method of accounting Dart chooses as long as Dart consistently applies the method it chooses.
C. Dart must use the accrual method of accounting.
D. Dart may utilize the cash basis method of accounting until it incurs an additional $10 million to develop additional software.

Answer 90

C. Dart must use the accrual method of accounting.

C corporations cannot use the cash method of accounting unless their average annual gross receipts for the previous three years do not exceed $5,000,000. Once the $5,000,000 test is failed the accrual method must be used for all future tax years. Since Dart has had revenues of more than $20 million for the last three years it must use the accrual method of accounting.

Question 91

Easel Co. has elected to reimburse employees for business expenses under a nonaccountable plan. Easel does not require employees to provide proof of expenses and allows employees to keep any amount not spent. Under the plan, Mel, an Easel employee for a full year, gets $400 per month for business automobile expenses. At the end of the year Mel informs Easel that the only business expense incurred was for business mileage of 12,000 at a rate of 30 cents per mile, the IRS standard mileage rate at the time. Mel encloses a check for $1,200 to refund the overpayment to Easel. What amounts should be reported in Mel's gross income for the year?
	A.  $0
	B.  $1,200
	C.  $3,600
	D.  $4,800

Answer 91

D. $4,800

Since this is not an accountable plan, all reimbursements are included in the employee’s income ($400 x 12 months = $4,800) and all employee deductions will be 2% miscellaneous itemized deductions.

Question 92

Johnson worked for ABC Co. and earned a salary of $100,000. Johnson also received, as a fringe benefit, group term-life insurance at twice Johnson's salary. The annual IRS-established uniform cost of insurance is $2.76 per $1,000. What amount must Johnson include in gross income?
	A.  $100,000
	B.  $100,276
	C.  $100,414
	D.  $100,552

Answer 92

C. $100,414

The first $50,000 of group-term life insurance provided by an employer is a tax-free fringe benefit. Johnson receives $200,000 of group-term life insurance, so $150,000 of this coverage is taxable. There are 150 units of $1,000 each of excess coverage, included in income at $2.76 for each unit. The income from the insurance coverage is $414 ($2.76 × $150). When the $414 is included with the $100,000 salary, gross income is $100,414.

Question 93

John invested $2,000 a year into his retirement plan from his before tax earnings (that is, he received a deduction for these contributions and was not taxed on the income). His employer contributed $3,000 a year to John's retirement fund. After 30 years of contributions, John retires and receives a distribution, which is not tax-free, of $350,000, the balance in his retirement fund. John must include what amount in gross income?
	A.  $0
	B.  $200,000
	C.  $260,000
	D.  $350,000

Answer 93

D. $350,000

John does not have any basis in his retirement account. He did not receive basis for his contributions because they were made from earnings that were not taxed. He did not receive basis for his employer’s contributions since they were made from employer funds. Therefore, the entire $350,000 distribution is included in John’s gross income.

Question 94

Mr. Kitten purchased an annuity contract for $50,000 from the XYZ Company on March 31, 2015. He is to receive $1,000 per month starting April 1, 2015 and continuing for life. He has a life expectancy of 10 years as of March 31, 2015. Mr. Kitten's reportable annuity income for 2015 is:
	A.  $3,750
	B.  $5,250
	C.  $9,000
	D.  $12,500

Answer 94

B. $5,250

Mr. Kitten’s expected return is 120 months × $1,000, or $120,000. His basis in the annuity is $50,000, so his exclusion ratio is 41.67% ($50,000/$120,000). He received nine payments totaling $9,000 in 2015, and $3,750 is excluded from income. Therefore, $5,250 is included in income ($9,000 − $3,750).

Question 95

A calendar-year individual is eligible to contribute to a deductible IRA. The taxpayer obtained a six-month extension to file until October 15 but did not file the return until November 1. What is the latest date that an IRA contribution can be made in order to qualify as a deduction on the prior year's return?
	A.  October 15
	B.  April 15
	C.  August 15
	D.  November 1

Answer 95

B. April 15

IRA contributions must be made by the original due date of the return (April 15) even if the return is extended.

Question 96

Tom owns a fast-food restaurant which he reports as a sole proprietorship for tax purposes. Which of the following expenses is allowed as a deduction on Tom’s Schedule C for the current year?
A. Wages of $20 per week to his 14 year-old daughter who cleans the restaurant on Saturdays.
B. Speeding ticket of $75 that he incurred while picking up supplies to bring to the restaurant.
C. A bribe of $200 to the city inspector charged with inspecting whether restaurants have met all city health requirements.
D. State income taxes paid during the year of $1,650.

Answer 96

A. Wages of $20 per week to his 14 year-old daughter who cleans the restaurant on Saturdays.

It is an ordinary and necessary expense to have the restaurant cleaned and the $20 is reasonable.

Question 97

Sam has been engaged in an illegal business this year related to electronically stealing funds from individuals’ bank accounts. Which of the following items is not deductible on his business tax return for the year?
A. Salaries for two individuals that helped him operate the business.
B. Rent expense for an office used to operate the illegal business.
C. Interest expense on a loan used to purchase equipment for the business.
D. The salaries, rent expense, and interest expense are all deductible.

Answer 97

D. The salaries, rent expense, and interest expense are all deductible.

The ordinary, necessary, and reasonable expenses of operating illegal businesses (other than illegal drug activity) are permitted (as long as the expense itself is not against public policy). All of these expenses are deductible against the revenue earned from the activities, so this response is incorrect.

Question 98

John Budd is the sole stockholder of Ral Corp., an accrual basis taxpayer engaged in wholesaling operations. Ral’s retained earnings at January 1, 2015 amounted to $1,000,000.
For the year ended December 31, 2015, Ral’s book income, before federal income tax, was $300,000. Included in the computation of this $300,000 were the following:
Dividends received on 500 shares of stock of a taxable domestic corporation that had 1,000,000 shares of stock outstanding (Ral had no portfolio indebtedness) $ 1,000
Loss on sale of investment in stock of unaffiliated corporation (this stock had been held for two years; Ral had no other capital gains or losses) (5,000)
Keyman insurance premiums paid on Budd’s life (Ral is the beneficiary of this policy) 3,000
Group term insurance premiums paid on $10,000 life insurance policies for each of Ral’s four employees (the employees’ spouses are the beneficiaries) 4,000
Amortization of cost of acquiring a perpetual dealer’s franchise (Ral paid $48,000 for this franchise on July 1, 2015, and is amortizing it over a 48-month period) 6,000
Contribution to a recognized, qualified charity (this contribution was authorized by Ral’s board of directors in December 2015, to be paid on January 31, 2016) 75,000

On December 1, 2015, Ral received advance rental of $27,000 from a tenant for a three-year lease commencing January 1, 2015 to cover rents for the years 2016, 2017, and 2018. In conformity with GAAP, Ral did not include any part of this rental in its income statement for the year ended December 31, 2015.
What amount should Ral deduct for keyman and group life insurance premiums in computing taxable income for 2015?
A. $0
B. $3,000
C. $4,000
D. $7,000

Answer 98

C. $4,000

A taxpayer may not deduct life insurance premiums in which the taxpayer is directly or indirectly the beneficiary. Hence, Ral Corp. may not deduct the $3,000 in keyman insurance premiums that it paid on Budd’s life because the corporation is the beneficiary. However, a taxpayer may deduct the group term life insurance premiums if the insured employee or his/her beneficiaries would get the insurance proceeds. Thus, Ral Corp. may deduct the $4,000 in group term insurance premiums paid on the $10,000 life insurance policies for each of Ral Corp.’s four employees.

Question 99

Mock operates a retail business selling illegal narcotic substances. Which of the following item(s) may Mock deduct in calculating business income?
I. Cost of merchandise

II. Business expenses other than the cost of merchandise

A.  I only
B.  II only
C.  Both I and II
D.  Neither I nor II

Answer 99

A. I only

No deduction or credit shall be allowed for any amount paid or incurred during the taxable year in carrying on any trade or business if such trade or business (or the activities which comprise such trade or business) consists of trafficking in controlled substances (within the meaning of schedule I and II of the Controlled Substances Act) which is prohibited by Federal law or the law of any State in which such trade or business is conducted. However, a deduction is allowed for the cost of merchandise purchased.

Question 100

Cole earned $3,000 in wages, incurred $1,000 in unreimbursed employee business expenses, paid $400 as interest on a student loan, and contributed $100 to a charity. What is Cole's adjusted gross income?
	A.  $3,000
	B.  $2,600
	C.  $2,500
	D.  $1,600

Answer 100

B. $2,600

The unreimbursed employee business expenses and charitable contribution are itemized deductions, so these do not affect the computation of adjusted gross income. AGI equals the $3,000 of wages less student loan interest of $400, or $2,600.

Question 101

Davidson was transferred from Chicago to Atlanta. In connection with the transfer, Davidson incurred the following moving expenses:
Moving the household goods $2,000
Temporary living expenses in Atlanta 400
Lodging on the way to Atlanta 100
Meals 40
What amount may Davidson deduct if the employer reimbursed Davidson $2,000 (not included in form W-2) for moving expenses?

A.  $100
B.  $120
C.  $500
D.  $520

Answer 101

A. $100

Qualified moving expenses are limited to the expenses for moving the household goods ($2,000) and lodging ($100). Meals are not deductible during a move and temporary living expenses are never deductible. The $2,100 of qualified expenses is reduced by the $2,000 reimbursement from the employer.

Question 102

Alex and Myra Burg, married and filing joint income tax returns, derive their entire income from the operation of their retail candy shop. Their 2015 adjusted gross income was $50,000. The Burgs itemized their deductions on Schedule A for 2015.

The following unreimbursed cash expenditures were among those made by the Burgs during 2015:

Repair and maintenance of motorized wheelchair for physically handicapped dependent child
$ 300
Tuition, meals and lodging at special school for physically handicapped dependent child in the institution primarily for the availability of medical care, with meals and lodging furnished as necessary incidents to that care State income tax
1,200
Self-employment tax
7,650
Four tickets to a theater party sponsored by a qualified charitable organization; not considered a business expense; similar tickets would cost $25 each at the box office
160
Repair of glass vase accidentally broken in home by dog; vase cost $500 in 2011; fair value $600 before accident and $200 after accident
90
Fee for breaking lease on prior apartment residence located 20 miles from new residence
500
Security deposit placed on apartment at new location
900
What amount should the Burgs deduct for moving expenses in their itemized deductions on Schedule A for 2015?

A.  $0
B.  $500
C.  $900
D.  $1,400

Answer 102

A. $0

If an employee or a self-employed individual moves his/her residence due to a change of his/her principal place of work, reasonable expenses resulting from moving household goods and personal effects from the old residence to the new residence and from traveling from the old residence to the new residence may be deducted. To qualify for the deduction, the new job site must be at least 50 miles further away from the old residence than was the old principal job.

If the taxpayer was unemployed before the move, the job site must be at least 50 miles away from his/her old residence. In addition, the taxpayer must be employed full-time in the area of the new principal place of work for at least 39 weeks during the 12 month period following the move, or if self-employed, for at least 78 weeks in the 24 month period following the move with at least 39 of the 78 weeks in the 12 month period following the move.

Neither the $500 fee for breaking the lease on the prior apartment residence nor the $900 for the security deposit placed on the apartment at the new location may be deducted as moving expenses. They are not qualified expenses nor was the move work related or more than 50 miles.

Also note that the question asks to determine the moving expenses that are deducted on Schedule A. Moving expenses are deducted on Form 1040 - they are not itemized deductions.

Question 103

The 2015 deduction by an individual taxpayer for interest on investment indebtedness is
A. Limited to the investment interest paid in 2015.
B. Limited to the taxpayer’s 2015 interest income.
C. Limited to the taxpayer’s 2015 net investment income.
D. Not limited.

Answer 103

C. Limited to the taxpayer’s 2015 net investment income.

A noncorporate taxpayer’s deduction for interest on investment indebtedness is limited to the taxpayer’s net investment income. Interest on investment indebtedness is interest paid or accrued that is allocable to property held for investment.

Question 104

Which of the following statements is correct regarding the deductibility of an individual’s medical expenses?
A. A medical expense paid by credit card is deductible in the year the credit card bill is paid.
B. A medical expense deduction is allowed for payments made in the current year for medical services received in earlier years.
C. Medical expenses, net of insurance reimbursements, are disregarded in the alternative minimum tax calculation.
D. A medical expense deduction is NOT allowed for Medicare insurance premiums.

Answer 104

B. A medical expense deduction is allowed for payments made in the current year for medical services received in earlier years.

Medical expenses paid by an individual are deductible in the year paid.

Question 105

An individual taxpayer earned $10,000 in investment income, $8,000 in noninterest investment expenses, and $5,000 in investment interest expense. How much is the taxpayer allowed to deduct on the current-year's tax return for investment interest expenses?
	A.  $0
	B.  $2,000
	C.  $3,000
	D.  $5,000

Answer 105

B. $2,000

Investment interest expense is deductible to the extent of net investment income. Net investment income is defined as investment income ($10,000) less noninterest investment expenses ($8,000), or $2,000. So, $2,000 of the $5,000 of investment interest expense is deductible as an itemized deduction. The remaining $3,000 is carried over, indefinitely, and deducted in a year that has sufficient net investment income.

Question 106

Carroll, an unmarried taxpayer with an adjusted gross income of $100,000, incurred and paid the following unreimbursed medical expenses for the year:
Doctor bills resulting from a serious fall $ 5,000
Cosmetic surgery that was necessary to correct a congenital deformity 15,000
Carroll had no medical insurance and is 60 years old. For regular income tax purposes, what was Carroll’s maximum allowable medical expense deduction, after the applicable threshold limitation, for the year?

A.  $0
B.  $10,000
C.  $15,000
D.  $20,000

Answer 106

B. $10,000

Total allowable medical expenses is $20,000. Only medical expenses in excess of 10% of AGI are allowable as a deduction. Carrol’s AGI is $100,000 x .010 = $10,000. Total expenses of $20,000 - $10,000 = $10,000 deductible expenses.

Question 107

During 2015, Scott charged $4,000 on his credit card for his dependent son’s medical expenses. Payment to the credit card company had not been made by the time Scott filed his income tax return in 2015.
However, in 2015, Scott paid a physician $2,800 for the medical expenses of his wife, who died in 2015.
Disregarding the adjusted gross income percentage threshold, what amount could Scott claim in his 2015 income tax return for medical expenses?

A.  $0
B.  $2,800
C.  $4,000
D.  $6,800

Answer 107

D. $6,800

Taxpayers may deduct the qualified medical expenses incurred for both their treatment and the treatment of spouses and dependents. These medical expenses only may be claimed in the year the expenses were paid. If the medical expenses were paid with borrowed funds, as credit cards are considered, the deduction still is taken the year the medical expenses were paid, not in the year the borrowed funds were repaid.
Scott may deduct his son’s $4,000 of medical expenses in 2015 because his son was his dependent and the medical expenses were paid with borrowed funds in 2015. Scott also may deduct the $2,800 of medical expenses for his wife in 2015 because he paid the expenses in cash during 2015.

Therefore, Scott may claim $6,800 in his 2015 income tax return for medical expenses.

Question 108

Hall, a divorced person and custodian of her 12-year old child, filed her 2015 federal income tax return as head of a household. She submitted the following information to the CPA who prepared her 2015 return:
The divorce agreement, executed in 2013, provides for Hall to receive $3,000 per month, of which $600 is designated as child support. After the child reaches 18, the monthly payments are to be reduced to $2,400 and are to be continued until remarriage or death. However, for the year 2015, Hall received a total of only $5,000 from her former husband. Hall paid an attorney $2,000 in 2015 in a suit to collect the alimony owed.
In June 2015, Hall’s mother gifted her 100 shares of a listed stock. The donor’s basis for this stock, which she bought in 1995, was $4,000, and market value on the date of the gift was $3,000. Hall sold his stock in July 2015 for $3,500. The donor paid no gift tax.
During 2015, Hall spent a total of $1,000 for state lottery tickets. Her lottery winnings in 2015 totaled $200.
Hall earned a salary of $25,000 in 2015. Hall was not covered by any type of retirement plan, but contributed $2,000 to an IRA in 2015.
In 2015, Hall sold an antique that she bought in 1995 to display in her home. Hall paid $800 for the antique and sold it for $1,400, using the proceeds to pay a court-ordered judgment.
Hall paid the following expenses in 2015 pertaining to the home that she owns: realty taxes, $3,400; mortgage interest, $7,000; casualty insurance, $490; assessment by city for construction of a sewer system, $910; interest of $1,000 on a personal, unsecured bank loan, the proceeds of which were used for home improvements. Hall does not rent out any portion of the home.
The $910 sewer system assessment imposed by the city in 2015 is

A.  Allowed with the realty taxes as an itemized deduction for taxes.
B.  Allowed as an itemized deduction subject to the 2% of adjusted gross income floor.
C.  Deductible in arriving at adjusted gross income.
D.  Not deductible in 2015.

Answer 108

D. Not deductible in 2015.

Assessments for public improvements, that tend to increase the value of the taxpayer’s property (whether or not the value actually increases), generally, are not deductible. However, assessments may be deducted to the extent that the taxpayer can prove the assessment is allocable to maintenance.
Since Hall cannot prove that any of the assessment for the sewer system is allocable to maintenance, the assessment is not deductible.

Question 109

Alex and Myra Burg, married and filing joint income tax returns, derive their entire income from the operation of their retail candy shop.
Their 2015 adjusted gross income was $50,000. The Burgs itemized their deductions on Schedule A for 2015.

The following unreimbursed cash expenditures were among those made by the Burgs during 2015:

Repair and maintenance of motorized wheelchair for physically handicapped dependent child
$ 300
Tuition, meals and lodging at special school for physically handicapped dependent child in the institution primarily for the availability of medical care, with meals and lodging furnished as necessary incidents to that care
4,000
State income tax
1,200
Self-employment tax
7,650
Four tickets to a theater party sponsored by a qualified charitable organization; not considered a business expense; similar tickets would cost $25 each at the box office
160
Repair of glass vase accidentally broken in home by dog; vase cost $500 in 2010; fair value $600 before accident and $200 after accident
90
Fee for breaking lease on prior apartment residence located 20 miles from new residence
500
Security deposit placed on apartment at new location
900
What amount should the Burgs deduct for gifts to charity in their itemized deductions on Schedule A?

A.  $160
B.  $100
C.  $60
D.  $0

Answer 109

C. $60

When individual taxpayers make charitable contributions in connection with admission to an entertainment event, the individual taxpayer only may deduct the difference between amount paid for admission and the fair value of admission.

Question 110

Jimet, an unmarried taxpayer, qualified to itemize deductions. Jimet’s adjusted gross income was $30,000 and he made a $2,000 cash donation directly to a needy family. Jimet also donated stock, valued at $3,000, to his church. Jimet had purchased the stock four months earlier for $1,500.
What was the maximum amount of the charitable contribution allowable as an itemized deduction on Jimet’s income tax return?

A.  $0
B.  $1,500
C.  $2,000
D.  $5,000

Answer 110

B. $1,500

$1,500 is correct. The $2,000 cash donated to a needy family is not deductible because the needy family is not a qualified charitable organization. The stock was purchased for $1,500 and not held for one year to be capital gain property, therefore the deduction for the stock is the fair market value of the stock ($3,000) less the short-term capital gain ($1,500) if the stock had been sold ($3,000 − basis of $1,500) = $1,500.

Question 111

Hall, a divorced person and custodian of her 12-year old child, filed her 2015 federal income tax return as head of a household.
She submitted the following information to the CPA who prepared her 2015 return:

The divorce agreement, executed in 2013, provides for Hall to receive $3,000 per month, of which $600 is designated as child support. After the child reaches 18, the monthly payments are to be reduced to $2,400 and are to be continued until remarriage or death. However, for the year 2015, Hall received a total of only $5,000 from her former husband. Hall paid an attorney $2,000 in 2015 in a suit to collect the alimony owed.
In June 2015, Hall’s mother gifted her 100 shares of a listed stock. The donor’s basis for this stock, which she bought in 1995, was $4,000, and market value on the date of the gift was $3,000. Hall sold his stock in July 2015 for $3,500. The donor paid no gift tax.
During 2015, Hall spent a total of $1,000 for state lottery tickets. Her lottery winnings in 2015 totaled $200.
Hall earned a salary of $25,000 in 2015. Hall was not covered by any type of retirement plan, but contributed $2,000 to an IRA in 2015.
In 2015, Hall sold an antique that she bought in 2007 to display in her home. Hall paid $800 for the antique and sold it for $1,400, using the proceeds to pay a court-ordered judgment.
Hall paid the following expenses in 2015 pertaining to the home that she owns: realty taxes, $3,400; mortgage interest, $7,000; casualty insurance, $490; assessment by city for construction of a sewer system, $910; interest of $1,000 on a personal, unsecured bank loan, the proceeds of which were used for home improvements. Hall does not rent out any portion of the home.
The casualty insurance premium of $490 is

A.  Allowed as an itemized deduction subject to the $100 floor and the 10% of adjusted gross income floor.
B.  Allowed as an itemized deduction subject to the 2% of gross income floor.
C.  Deductible in arriving at adjusted gross income.
D.  Not deductible in 2015.

Answer 111

D. Not deductible in 2015.

Question 112

Hall, a divorced person and custodian of her 12-year old child, filed her 2015 federal income tax return as head of a household. She submitted the following information to the CPA who prepared her 2015 return:

The divorce agreement, executed in 2013, provides for Hall to receive $3,000 per month, of which $600 is designated as child support. After the child reaches 18, the monthly payments are to be reduced to $2,400 and are to be continued until remarriage or death. However, for the year 2015, Hall received a total of only $5,000 from her former husband. Hall paid an attorney $2,000 in 2015 in a suit to collect the alimony owed.

In June 2015, Hall’s mother gifted her 100 shares of a listed stock. The donor’s basis for this stock, which she bought in 1995, was $4,000, and market value on the date of the gift was $3,000. Hall sold her stock in July 2015 for $3,500. The donor paid no gift tax.

During 2015, Hall spent a total of $1,000 for state lottery tickets. Her lottery winnings in 2015 totaled $200.

Hall earned a salary of $25,000 in 2015. Hall was not covered by any type of retirement plan, but contributed $2,000 to an IRA in 2015.

In 2015, Hall sold an antique that she bought in 2007 to display in her home. Hall paid $800 for the antique and sold it for $1,400, using the proceeds to pay a court-ordered judgment.

Hall paid the following expenses in 2015 pertaining to the home that she owns: realty taxes, $3,400; mortgage interest, $7,000; casualty insurance, $490; assessment by city for construction of a sewer system, $910; interest of $1,000 on a personal, unsecured bank loan, the proceeds of which were used for home improvements. Hall does not rent out any portion of the home.

Hall’s lottery transactions should be reported as follows:

Schedule A - Itemized Deductions
Other miscellaneous deductions

  Other income on page 1  	  Subject to 2% AGI floor  	  Not subject to 2% AGI floor  
	 $0 	          $0 	        $0 
	 $200 	 $0 	    $200 
	 $200 	 $200 	 $0 
	 $200 	 $0 	         $0

Answer 112

$200 $0 $200
Individual taxpayers must report gambling winnings as other income on their income tax returns. The taxpayer’s gambling losses may be deducted, but only to the extent of the taxpayer’s gambling winnings and only as an itemized deduction not subject to the 2 percent adjusted gross income floor.

Question 113

Nichol Corp. gave gifts to 15 individuals who were customers of the business. The gifts were not in the nature of advertising. The market values of the gifts were as follows:
5 gifts @ $15 each
9 gifts @ $30 each
1 gift @ $100
What amount is deductible as business gifts?

A.  $0
B.  $75
C.  $325
D.  $445

Answer 113

C. $325

The deduction for business gifts is limited to $25 per individual/customer who receives a gift. The total deduction is computed as follows:
5 x $15 =	$ 75
9 x $25 =	$225
1 x $25 =	$ 25
Total	$325

Question 114

During the 2015 holiday season, Palo Corp. gave business gifts to 17 customers. These gifts, which were not of an advertising nature, had the following fair market values:
4 at $ 10
4 at $ 25
4 at $ 50
5 at $100
How much of these gifts was deductible as a business expense for 2015?

A.  $840
B.  $365
C.  $140
D.  $0

Answer 114

B. $365

The deduction for business gifts is limited to $25 per donee per year. The deduction is computed as follows:
4 at $ 10			$ 40
4 at $ 25			100
4 at $ 50	limited to $25		100
5 at $ 100	limited to $25		125
Total		$365

Question 115

Baker, a sole proprietor CPA, has several clients that do business in Spain. While on a four-week vacation in Spain, Baker took a five-day seminar on Spanish business practices that cost $700. Baker’s round-trip airfare to Spain was $600. While in Spain, Baker spent an average of $100 per day on accommodations, local travel, and other incidental expenses, for total expenses of $2,800.
What amount of educational expense can Baker deduct on Form 1040 Schedule C, “Profit or Loss From Business”?

A.  $ 700
B.  $1,200
C.  $1,800
D.  $4,100

Answer 115

B. $1,200
When traveling outside the U.S. primarily for vacation (4 weeks total versus 1 week seminar), the cost of the trip is a nondeductible personal expense. Baker can deduct the registration fees for the business seminar and deduct the out of pocket expenses for the time that was directly related to the business seminar (1 week). 5 days x $100 per day plus $700 registration = $1200 of deductible education expense.

Question 116

Banks Corp., a calendar year corporation, reimburses employees for properly substantiated qualifying business meal expenses.
The employees are present at the meals, which are neither lavish nor extravagant, and the reimbursement is not treated as wages subject to withholdings.
For 2015, what percentage of the meal expense may Banks deduct?

A.  0%
B.  50%
C.  80%
D.  100%

Answer 116

B. 50%

Question 117

For the year ended December 31, 2015, Sanchez had a net operating loss of $100,000. Taxable income for the earlier years, computed without reference to the net operating loss, was as follows:
Taxable income
2011 $90,000
2012 $80,000
2013 $50,000
2014 $40,000
If Sanchez makes no special election to waive the net operating loss carryback, what amount of net operating loss will be available to Sanchez for 2016?

A.  $ 0
B.  $ 10,000
C.  $ 60,000
D.  $ 100,000

Answer 117

B. $ 10,000

The $100,000 NOL would first be carried back to 2013 and offset $50,000 of income. It would then be carried to 2014 and offset $40,000 of income. This would leave $10,000 of NOL ($100,000 - $50,000 - $40,000) to carryforward to 2016.

Question 118

Jason Budd, CPA, reports on the cash basis. In April 2014, Budd billed a client $3,500 for the following professional services:
Personal estate planning $2,000
Personal tax return preparation 1,000
Compilation of business financial statements 500
No part of the $3,500 was ever paid. In April 2015, the client declared bankruptcy, and the $3,500 obligation became totally uncollectible. What loss can Budd deduct on his tax return for this bad debt?

A.  $0
B.  $ 500
C.  $ 1,500
D.  $3,500

Answer 118

A. $0

Since Budd reports on the cash basis he did not recognize income when the client was billed. Therefore, he has no basis in the receivable to deduct when it becomes uncollectible.

Question 119

An individual’s losses on transactions entered into for personal purposes are deductible only if
A. The losses qualify as casualty or theft losses.
B. The losses can be characterized as hobby losses.
C. The losses do not exceed $3,000 ($6,000 on a joint return).
D. No part of the transactions was entered into for profit.

Answer 119

A. The losses qualify as casualty or theft losses.

An individual’s losses on transactions entered into for personal purposes are only deductible if the losses qualify as casualty or theft losses. If the losses originated due to a trade or business, individuals also may deduct losses originating from transactions entered into for profit.

Question 120

Cobb, an unmarried individual, had an adjusted gross income of $200,000 in 2015 before any IRA deduction, taxable social security benefits, or passive activity losses.
Cobb incurred a loss of $30,000 in 2015 from rental real estate in which he actively participated.
What amount of loss attributable to this rental real estate can be used in 2015 as an offset against income from nonpassive sources?

A.  $0
B.  $12,500
C.  $25,000
D.  $30,000

Answer 120

A. $0

Passive activity losses normally only may be used to offset passive activity income.
Therefore, Cobb may not use any of his loss attributable to the rental real estate to offset against income from nonpassive sources.

Question 121

Lane, a single taxpayer, received $160,000 in salary, $15,000 in income from an S Corporation in which Lane does not materially participate, and a $35,000 passive loss from a real estate rental activity in which Lane materially participated. Lane's modified adjusted gross income was $165,000. What amount of the real estate rental activity loss was deductible?
	A.  $0
	B.  $15,000
	C.  $25,000
	D.  $35,000

Answer 121

B. $15,000

Lane has $160,000 in active income, $15,000 of passive income, and $35,000 of passive losses. Note that the exception that allows deduction for up to $25,000 of rental real estate losses does not apply since Lane’s modified AGI exceeds $150,000. The passive losses can only be deducted to the extent of passive income, so $15,000 is correct.

Question 122

A review of Bearing’s year 2 records disclosed the following tax information:
Wages $ 18,000
Taxable interest and qualifying dividends 4,000
Schedule C trucking business net income 32,000
Rental (loss) from residential property (35,000)
Limited partnership (loss) (5,000)
Bearing actively participated in the rental property and was a limited partner in the partnership. Bearing had sufficient amounts at risk for the rental property and the partnership. What is Bearing’s year 2 adjusted gross income?

A.  $14,000
B.  $19,000
C.  $29,000
D.  $54,000

Answer 122

C. $29,000

Wages, interest, dividends, and Schedule C income are all taxable for a total of $54,000. $25,000 of the rental loss is allowed since Bearing actively participates in the rental real estate activity and his modified AGI does not exceed $100,000. However, the $5,000 passive loss from the partnership cannot reduce other income. Therefore, AGI is $29,000.

Question 123

Which of the following statements regarding an individual’s suspended passive activity losses is correct?
A. $3,000 of suspended losses can be utilized each year against portfolio income.
B. Suspended losses can be carried forward, but not back, until utilized.
C. Suspended losses must be carried back three years and forward seven years.
D. A maximum of 50% of the suspended losses can be used each year when an election is made to forgo the carry-back period.

Answer 123

B. Suspended losses can be carried forward, but not back, until utilized.

Suspended passive losses can be carried forward indefinitely, but they cannot be carried back.

Question 124

In 2015, Smith, a divorced person, provided over one half the support for his widowed mother, Ruth, and his son, Clay, both of whom are U.S. citizens.
During 2015, Ruth did not live with Smith. She received $9,000 in social security benefits.
Clay, a full-time graduate student, and his wife lived with Smith. Clay had no income but filed a joint return for 2015, owing an additional $500 in taxes on his wife’s income.
How many exemptions was Smith entitled to claim on his 2015 tax return?

A.  4
B.  3
C.  2
D.  1

Answer 124

C. 2

For a taxpayer to claim an individual as an exemption on his tax return, the individual must be a dependent of the taxpayer.

Exempt income such as social security is not included in the individual’s income for testing whether or not an individual’s income exceeds the exemption amount.

Question 125

Sara Hance, who is single and lives alone in Idaho, has no income of her own and is supported in full by the following persons:
Amount of Support Percent of Total
Alma (unrelated friend) $2,400 48
Ben (Sara’s brother) 2,150 43
Carl (Sara’s son) 450 9
Total $5,000 100
Under a multiple support agreement, Sara’s dependency exemption can be claimed by:

A.  No one
B.  Alma
C.  Ben
D.  Carl

Answer 125

C. Ben

Ben has provided over 10% of Sara’s support and all of the qualifying relative tests are met (gross income, joint return, citizen) except for the support test, but it is met through the multiple support agreement. The individuals as a group have provided over 50% of Sara’s support.

Question 126

Jim and Kay Ross contributed to the support of their two children, Dale and Kim, and Jim’s widowed parent, Grant. For 2015, Dale, a 19-year old full-time college student who lives at home when not at college, earned $4,500 as a baby-sitter.
Kim, a 23-year old bank teller, earned $12,000. Kim provided more than 50% of her support during 2015. Grant received $5,000 in dividend income and $4,000 in nontaxable social security benefits.

Grant, Dale, and Kim are U.S. citizens and Grant and Dale were over one-half supported by Jim and Kay.

How many exemptions can Jim and Kay claim on their 2015 joint income tax return?

A.  Two
B.  Three
C.  Four
D.  Five

Answer 126

B. Three

For a taxpayer to claim an individual as an exemption on his tax return, the individual must be a qualifying child or qualifying relative. Kim is not a qualifying child or a qualifying relative because she provides over 50% of her own support. Therefore, no one can claim her as a dependent.
Dale is a qualifying child and can therefore be claimed as a dependent. He meets the relationship, age, residence (lives at home for more than half the year; time at college counts as home), joint return, and citizen test.

Grant does not qualify as a qualifying relative because he fails the gross income test. His gross income exceeds the personal exemption amount for 2015 of $4,000.

Hence, Jim and Kay may take an exemption for Dale and, including themselves, take a total of three personal exemptions.

Question 127

In which of the following situations may taxpayers file as married filing jointly?
A. Taxpayers who were married but lived apart during the year.
B. Taxpayers who were married but lived under a legal separation agreement at the end of the year.
C. Taxpayers who were divorced during the year.
D. Taxpayers who were legally separated but lived together for the entire year.

Answer 127

A. Taxpayers who were married but lived apart during the year.

Whether taxpayers live together does not impact filing status. Marital status is determined on the last day of the tax year. Since the taxpayers were married as of the end of the tax year they may file married filing joint (note that they could also file married filing separately).

Question 128

For head of household filing status, which of the following costs are considered in determining whether the taxpayer has contributed more than one-half the cost of maintaining the household?
Food consumed in the home Value of services rendered in the home by the taxpayer
Yes Yes
No No
Yes No
No Yes

Answer 128

Food consumed in the home Yes
Value of services rendered in the home by the taxpayer No

For head of household filing status, the following costs are considered in determining whether the taxpayer has contributed more than one-half the cost of maintaining the household: rent; mortgage interest; taxes; insurance on the home; repairs; utilities; and food eaten in the home. The following costs may not be considered: clothing; education; medical treatment; vacations; life insurance; transportation; rental value of home owned by taxpayer; and the value of services provided by the taxpayer or a member of the taxpayer’s household.
This response correctly indicates that the food consumed may be considered in determining whether the taxpayer has contributed more than one-half the cost of maintaining the household and that value of services provided by the taxpayer may not be considered.

Question 129

On their joint tax return, Sam and Joann had adjusted gross income (AGI) of $150,000 and claimed the following itemized deductions:
Interest of $15,000 on a $100,000 home equity loan to purchase a motor home
Real estate tax and state income taxes of $18,000
Unreimbursed medical expenses of $15,000 (prior to AGI limitation)
Miscellaneous itemized deductions of $5,000 (prior to AGI limitation).
Both Sam and Joann are less than 65 years old. Based on these deductions, what would be the amount of AMT add-back adjustment in computing alternative minimum taxable income?

A.  $21,750
B.  $23,750
C.  $35,000
D.  $38,750

Answer 129

C. $35,000

The following amounts are added back to taxable income to compute AMT income:
Interest because proceeds were not used for principal residence $15,000
Taxes 18,000
Medical expenses (no adjustment since 10% of AGI threshold applies for regular tax also) -0-
2% miscellaneous itemized deductions (deducted $5,000 - (2% x $150,000) for regular tax) 2,000
Total add-back $35,000

Question 130

An employee who has social security tax withheld in an amount greater than the maximum for a particular year, may claim
A. Such expenses as either a credit or an itemized deduction, at the election of the employee, if that excess resulted from correct withholding by two or more employers.
B. Reimbursement of such excess from his employers, if that excess resulted from correct withholding by two or more employers.
C. The excess as a credit against income tax, if that excess resulted from correct withholding by two or more employers.
D. The excess as a credit against income tax, if that excess was withheld by one employer.

Answer 130

C. The excess as a credit against income tax, if that excess resulted from correct withholding by two or more employers.

An employee who has social security tax withheld in an amount greater than the maximum for a particular year, may claim the excess as a credit against income tax, if that excess resulted from correct withholding by two or more employers. An employee who had excess social security tax withheld from one employer should be reimbursed by the employer.

Question 131

In 2015, Don Mills, a single taxpayer, had $70,000 in taxable income before personal exemptions. Mills had no tax preferences. His itemized deductions were as follows:
State and local income taxes
$5,000
Home mortgage interest on loan to acquire residence
6,000
Miscellaneous deductions that exceed 2% of adjusted gross income
2,000
What amount did Mills report as alternative minimum taxable income before the AMT exemption?

A.  $72,000
B.  $75,000
C.  $77,000
D.  $83,000

Answer 131

C. $77,000

The alternative minimum tax ensures that all taxpayers share the tax burden fairly by preventing taxpayers with substantial income from avoiding significant tax liability. The alternative minimum tax equals the excess (if any) of the tentative minimum tax over the regular tax. In computing a taxpayer’s alternative minimum taxable income, several adjustments and preferences are made to a taxpayer’s taxable income before personal exemptions. Adjustments are a substitution of an amount used in computing alternative minimum tax for an amount used computing regular tax. Preferences involve the addition of the difference between alternative minimum tax and regular tax treatments. Included in the preferences are those stipulating that state and local income taxes and miscellaneous itemized deductions are not deductible for alternative minimum tax purposes. Home mortgage interest on loan to acquire residence is deductible under both the regular tax and the alternative minimum tax.
Thus, Mills must add back his state and local income taxes of $5,000 and miscellaneous deductions that exceed 2% of adjusted gross income of $2,000 to his $70,000 of taxable income before personal exemptions, putting his alternative minimum taxable income at $77,000.

Question 132

The alternative minimum tax (AMT) is computed as the
A. Excess of the regular tax over the tentative AMT.
B. Excess of the tentative AMT over the regular tax.
C. The tentative AMT plus the regular tax.
D. Lesser of the tentative AMT or the regular tax.

Answer 132

B. Excess of the tentative AMT over the regular tax.

The alternative minimum tax (AMT) ensures that all taxpayers share the tax burden fairly by preventing taxpayers with substantial income from avoiding significant tax liability. The AMT equals the excess of the tentative AMT tax over the regular tax.

Question 133

Baum, an unmarried optometrist and sole proprietor of Optics, buys and maintains a supply of eyeglasses and frames to sell in the ordinary course of business. In 2015, Optics had $350,000 in gross business receipts and its year-end inventory was not subject to the uniform capitalization rules. Baum’s 2015 adjusted gross income was $90,000 and Baum qualified to itemize deductions.
During 2015, Baum recorded the following information:

Business expenses:
Optics cost of goods sold $35,000
Optics rent expense $28,000
Liability insurance premium on Optics $ 5,250
Other expenditures:
Baum’s self-employment tax $29,750
Baum’s self-employment health insurance $ 8,750
Insurance premium on personal residence
In 2015, Baum’s home was totally destroyed by fire. The furniture had an adjusted basis of $14,000 and a fair market value of $11,000. During 2015, Baum collected $3,000 in insurance reimbursement and had no casualty gains during the year. $ 2,625
Qualified 2015 mortgage interest on a loan to acquire a personal residence $52,500
Annual interest on a $70,000, 5-year home equity loan. The loan was secured by Baum’s home, obtained January 2, 2015. The fair market value of the home exceeded the mortgage and the home equity loan by a substantial amount. The proceeds were used to purchase a car for personal use. $ 3,500
Points prepaid on January 2, 2015 to acquire the home equity loan $ 1,400
Real estate taxes on personal residence $ 2,200
Estimated payments of 2015 federal income taxes $13,500
Local property taxes on the car value, used exclusively for personal use $ 300
What amount should Baum report as 2015 net earnings from self-employment?

A.  $243,250
B.  $252,000
C.  $273,000
D.  $281,750

Answer 133

D. $281,750

Baum’s self-employment tax of $29,750 is not a deduction on Schedule C but a deduction in arriving at AGI.

Question 134

In 2015, to qualify for the child care credit on a joint return, at least one spouse must

  Have an adjusted gross
income of $15,000 or less  	  Be gainfully employed/looking
for work or a student when 
related expenses are incurred  
	 Yes 	 Yes 
	 No 	 No 
	 Yes 	 No 
	 No 	 Yes

Answer 134

Have an adjusted gross
income of $15,000 or less  	  No
Be gainfully employed/looking
for work or a student when 
related expenses are incurred        Yes

Individual taxpayers with adjusted gross income of $15,000 or less may claim a child care credit for 35 percent of employment related expenses. The credit is reduced by one percent of the expenses for each $2,000 of adjusted gross income over $15,000, but is not reduced to less than 20 percent of the expenses.
This response correctly indicates at least one spouse does not need to earn $15,000 or less to claim the credit. Earning more than $15,000 does not make a taxpayer ineligible for the credit, it reduces the amount of the credit by decreasing the percentage of the expenses that may be claimed.

This response also correctly indicates that at least one spouse must be gainfully employed or looking for work to claim the credit.

Question 135

Which of the following statements is false with regard to the child and dependent care credit?
A. The caregiver cannot be a dependent relative or child of the taxpayer.
B. The credit percentage begins at 35% and phases out once AGI exceeds a certain threshold. As income increases the credit percentage is eventually reduced to zero.
C. The maximum amount of expense eligible for the credit is $3,000 ($6,000 if more than one individual qualifies for care).
D. A qualifying child or dependent under the age of 13 who lives with the taxpayer more than one-half of the tax year is a qualifying individual for purposes of claiming the credit.

Answer 135

B. The credit percentage begins at 35% and phases out once AGI exceeds a certain threshold. As income increases the credit percentage is eventually reduced to zero.

The credit percentage begins at 35% if AGI is less than $15,000, and is reduced by 1% for each $2,000 increment (or part) in AGI above $15,000. The minimum dependent care credit is 20%. Therefore, this statement is false.

Question 136

Which of the following statements concerning tax credits is true?
A. The foreign tax credit is available for business entities, such as corporations, but not for individuals.
B. Unused general business credits are carried back two years and forward 20 years.
C. For the rehabilitation credit, expenditures to rehabilitate property placed in service before 1936 are eligible for a 20% credit.
D. The work opportunity tax credit is calculated on the amount of wages paid per eligible employee during the first year of employment. The maximum credit is $2,400 per eligible employee.

Answer 136

D. The work opportunity tax credit is calculated on the amount of wages paid per eligible employee during the first year of employment. The maximum credit is $2,400 per eligible employee.

The work opportunity tax credit is 40% of the first $6,000 of wages per employee, so the maximum credit is $2,400.

Question 137

The following information pertains to Wald Corp.’s operations:
Worldwide taxable income $300,000
U.S. source taxable income 180,000
U.S. income tax before foreign tax credit 96,000
Foreign source taxable income 120,000
Foreign income taxes paid on foreign source taxable income 39,000
What amount of foreign tax credit may Wald claim?

A.  $28,800
B.  $36,600
C.  $38,400
D.  $39,000

Answer 137

C. $38,400

The foreign tax credit is the lower of:

1) foreign tax paid ($39,000), or
2) U.S. tax x foreign taxable income / worldwide taxable income

$96,000 x $120,000 / $300,000 = $38,400

Question 138

Foreign income taxes paid by a corporation

    A.  May be claimed either as a deduction or as a credit, at the option of the corporation.
B.  May be claimed only as a deduction.
C.  May be claimed only as a credit.
D.  Do not qualify either as a deduction or as a credit.

Answer 138

A. May be claimed either as a deduction or as a credit, at the option of the corporation.

Question 139

Ames and Roth form Homerun, a C corporation. Ames contributes several autographed baseballs to Homerun. Ames purchased the baseballs for $500, and they have a total fair market value of $1,000. Roth contributes several autographed baseball bats to Homerun. Roth purchased the bats for $5,000, and they have a fair market value of $7,000. What is Homerun’s basis in the contributed bats and balls?

A.  $0
B.  $5,500
C.  $6,000
D.  $8,000

Answer 139

B. $5,500

When property is contributed to a corporation in exchange for stock, the corporation takes the same basis in the property that the shareholder had, increased by any gain recognized by the shareholder. Ames had a cost basis in the balls of $500 and Roth had a basis of $5,000 in the bats, so the total basis for Homerun is $5,500.

Question 140

In 2015, Stone, a cash basis taxpayer, incorporated her CPA practice. No liabilities were transferred. The following assets were transferred to the corporation:
Cash (checking account) $ 500
Computer equipment Adjusted basis 30,000
Fair market value 34,000
Cost 40,000
Immediately after the transfer, Stone owned 100% of the corporation’s stock. The corporation’s total basis for the transferred assets is

A.  $30,000
B.  $30,500
C.  $34,500
D.  $40,500

Answer 140

B. $30,500

When a shareholder transfers property to a corporation, the corporation takes the shareholders basis in the property.
Stone’s basis of the property transferred into the corporation was $30,500, the adjusted basis of the computer equipment ($30,000) plus the cash ($500).

Hence, the corporation’s basis in the property also would be $30,500.

Question 141

Adams, Beck, and Carr organized Flexo Corp. with authorized voting common stock of $100,000. Adams received 10% of the capital stock in payment for the organizational services that he rendered for the benefit of the newly formed corporation. Adams did not contribute property to Flexo and was under no obligation to be paid by Beck or Carr. 
Beck and Carr transferred property in exchange for stock as follows:
Adjusted basis
Fair market value
Percentage of Flexo stock acquired
Beck
5,000
20,000
20%
Carr
60,000
70,000
70%
What amount of gain did Carr recognize from this transaction?

A.  $40,000
B.  $15,000
C.  $10,000
D.  $0

Answer 141

D. $0

The transaction would qualify as a tax-free event for Carr because it would be considered to be a Section 351 transfer. Under Section 351, no gain or loss is recognized if the property is transferred solely for the exchange of stock of the corporation, if immediately after the transfer the transferring taxpayer or taxpayers have control over the corporation. Control is defined as owning at least 80 percent of corporation’s voting stock and at least 80 percent of the corporation’s other classes of stock.
Since Beck and Carr together own 90 percent of the corporation immediately after the transfer, the transaction would be a tax-free event for both taxpayers.

Question 142

In April, A and B formed X Corp. A contributed $50,000 cash, and B contributed land worth $70,000 (with an adjusted basis of $40,000). B also received $20,000 cash from the corporation. A and B each receives 50% of the corporation’s stock. What is the tax basis of the land to X Corp.?

A.  $40,000
B.  $50,000
C.  $60,000
D.  $70,000

Answer 142

C. $60,000

X Corp’s basis in the land is B’s basis in the land ($40,000) plus any gain recognized by B. B’s recognized gain is the lower of 1) the realized gain, or 2) the boot received. The realized gain is $30,000 ($70,000 - $40,000). The boot received is the cash of $20,000. Thus, the gain recognized is $20,000. X Corp’s basis in the land is $60,000 ($40,000 + $20,000).

B’s amount realized is computed as follows: The corporation received cash of $50,000 and land of $70,000 for a total of $120,000. But it also gave $20,000 cash back to B as part of the formation. This is subtracted from above - - so the net value of what the corporation received is $100,000. $100,000 x 50% = $50,000, so that is the value of the stock received by B. His amount realized is $50,000 + cash received of $20,000 = $70,000.

Question 143

Axis Corp. is an accrual basis calendar year corporation.
On December 13, 2015, the Board of Directors declared a two percent of profits bonus to all employees for services rendered during 2015 and notified them in writing. None of the employees own stock in Axis.
The amount represents reasonable compensation for services rendered and was paid on March 13, 2016. Axis’ bonus expense may

A.  Not be deducted on Axis' 2015 tax return because the per share employee amount cannot be determined with reasonable accuracy at the time of the declaration of the bonus.
B.  Be deducted on Axis' 2015 tax return.
C.  Be deducted on Axis' 2016 tax return.
D.  Not be deducted on Axis' tax return because payment is a disguised dividend.

Answer 143

B. Be deducted on Axis’ 2015 tax return.

The liability to pay the deferred compensation becomes fixed when:

1) all events have occurred to establish the liability to pay the compensation;
2) economic performance has occurred with respect to the liability; and
3) the amount can be determined with reasonable accuracy. In addition, accrual based taxpayers must pay the deferred compensation within the first 2 1/2 months of a tax year to deduct the compensation in the preceding year.

Question 144

Soma Corp. had $600,000 in compensation expense for book purposes in 2014
Included in this amount was a $50,000 accrual for 2014 nonshareholder bonuses. Soma paid the actual 2014 bonus of $60,000 on March 1, 2015.
In its 2014 tax return, what amount should Soma deduct as compensation expense?

A.  $600,000
B.  $610,000
C.  $550,000
D.  $540,000

Answer 144

B. $610,000

In addition, accrual based taxpayers must pay the deferred compensation within the first 2 1/2 months of a tax year to deduct the compensation in the preceding year.

Question 145

Would the following expense items be reported on Schedule M-1 of the corporation income tax return showing the reconciliation of income per books with income per return?
Interest incurred on loan to carry U.S. obligations Provision for state corporation income tax
Yes Yes
No No
Yes No
No Yes

Answer 145

Interest incurred on loan to carry U.S. obligations No

Provision for state corporation income tax No

Question 146

For the year ended December 31, 2015, Kelly Corp. had net income per books of $300,000 before the provision for Federal income taxes. Included in the net income were the following items:
Dividend income from an unaffiliated domestic taxable corporation (taxable income limitation does not apply and there is no portfolio indebtedness) $50,000
Bad debt expense (represents the increase in the allowance for doubtful accounts) 80,000
Assuming no bad debt was written off, what is Kelly’s taxable income for the year ended December 31, 2015?

A.  $250,000
B.  $330,000
C.  $345,000
D.  $380,000

Answer 146

C. $345,000

Since Kelly Corp. is not affiliated with the corporation paying the dividends, it owns less than 20 percent of the corporation paying the dividends and, as a result, may take a 70 percent (or $35,000) dividend received deduction. Bad debts are deductible with no percentage limitation. However, Kelly Corp. cannot take a deduction for its bad debt expense because no bad debt was actually incurred. Instead, the expense represents an increase in allowances for doubtful accounts. The corporation’s bad debt expense must be added back to net income.

Hence, Kelly Corp.’s taxable income is $345,000 - net income of $300,000 minus dividend received deduction of $35,000 and plus the bad debts expense of $80,000.

Question 147

On January 2 of this year, BIG, an accrual basis, calendar-year C corporation, purchased all of the assets of a sole proprietorship, including $300,000 of goodwill. Current-year federal income tax expense of $110,100 and $7,500 for goodwill amortization (based upon 40 year amortization period) were deducted to arrive at Big's book income of $239,200. What is Big's current-year taxable income (as reconciled on Schedule M-1)?
	A.  $239,200
	B.  $329,300
	C.  $336,800
	D.  $349,300

Answer 147

C. $336,800

The purpose of Schedule M-1 of Form 1120, U.S. Corporation Income Tax Return is to reconcile book income (loss) with income per the return. Federal income tax is not deductible for tax purposes so it must be added back to book income, giving $349,300 ($239,200 + $110,100). The goodwill is amortized over 15 years for tax purposes, or $20,000 per year ($300,000/15 years). Thus, the book goodwill amortization is added back and the tax good will is deducted. This results in taxable income of $336,800 ($349,300 + $7,500 - $20,000).

Question 148

Widget Corporation was formed in Year 1. Gross receipts for its first four years of operations are as follows

Year 1	$6,000,000
Year 2	$7,000,000
Year 3	$5,000,000
Year 4	$4,000,000
For each year, is Widget Corporation exempt from the AMT under the small corporation exemption?

A.  Year 1, Yes; Year 2, Yes; Year 3, Yes; Year 4, Yes
B.  Year 1, NO; Year 2, Yes; Year 3, Yes; Year 4, Yes
C.  Year 1, Yes; Year 2, NO; Year 3, Yes; Year 4, Yes
D.  Year 1, Yes; Year 2, NO; Year 3, NO; Year 4, NO

Answer 148

D. Year 1, Yes; Year 2, NO; Year 3, NO; Year 4, NO

In the first year of a corporation’s existence it is automatically exempt from the AMT (Yes). Widget’s first testing window to determine if it is subject to the AMT in Year 2 is just Year 1 gross receipts of $6,000,000. Since this exceeds the $5,000,000 threshold for the first three-year testing window (or portion thereof), Widget is NOT exempt from the AMT in Year 2. Once the small corporation exemption test is failed, then the corporation is NOT exempt for all future tax years, so the answer is NO for Years 3 and 4 also.

Question 149

Tan Corporation calculated the following taxes for the year:
Regular tax liability $210,000
Tentative minimum tax 240,000
Personal Holding Company Tax 65,000
What is Tan’s total tax liability for the year?

A.  $210,000
B.  $240,000
C.  $275,000
D.  $305,000

Answer 149

D. $305,000

A corporation must pay the alternative minimum tax (AMT) to the extent that the tentative minimum tax liability exceeds the regular tax liability. Therefore, Tan must pay an AMT of $30,000 ($240,000 − $210,000) in addition to the regular tax liability of $210,000. The personal holding company tax is an excise tax that penalizes companies who have excess investment income. The $65,000 PHC tax is in addition to the regular tax.
The total tax liability is $305,000 ($210,000 + $30,000 + $65,000).

Question 150

Rona Corp.’s 2015 alternative minimum taxable income was $200,000.
The exempt portion of Rona’s 2015 alternative minimum taxable income was
A. $0
B. $12,500
C. $27,500
D. $52,500

Answer 150

C. $27,500

When computing alternative minimum taxable income, corporations may take an exemption of $40,000 minus 25 percent of alternative minimum taxable income exceeding $150,000.
Thus, this exemption is equal to zero when alternative minimum taxable income is equal to or exceeds $310,000.

Rona Corp.’s exempt portion of its 2015 alternative minimum taxable income was $27,500 = $40,000 − [25 percent * ($200,000 − $150,000)].

Question 151

The accumulated earnings tax can be imposed
A. Regardless of the number of stockholders of a corporation.
B. On personal holding companies.
C. On companies that make distributions in excess of accumulated earnings.
D. On both partnerships and corporations.

Answer 151

A. Regardless of the number of stockholders of a corporation.

The accumulated earnings tax is a tax imposed on corporations that accumulate earnings beyond reasonable amount. This tax was imposed to prevent corporations from accumulating earnings and profits with the purpose of avoiding income tax on its shareholders.
Any corporation accumulating earnings beyond the point of reasonable needs of the business is considered to have accumulated the earnings for the tax benefit of its shareholders, unless a preponderance of the evidence indicates otherwise. Only the shareholders of closely-held corporations would tend to have the power to retain corporate earnings for their benefit. As a result, the accumulated earnings tax tends to be applied more often to closely-held corporations.

However, the number of shareholders in a corporation is not a determining factor in imposing the tax. Hence, the accumulated earnings tax may be applied regardless of the number of shareholders in a corporation.

Question 152

Kari Corp., a manufacturing company, was organized on January 2, 2015. Its 2015 federal taxable income was $400,000 and its federal income tax was $100,000.
What is the maximum amount of accumulated taxable income that may be subject to the accumulated earnings tax for 2015 if Kari takes only the minimum accumulated earnings credit?

A.  $300,000
B.  $150,000
C.  $50,000
D.  $0

Answer 152

C. $50,000
The accumulated earnings tax is a penalty tax imposed on corporations that accumulates earnings and profits for the purpose of avoiding income tax for its shareholders. The accumulated earnings tax is equivalent to 20 percent of the corporation’s accumulated taxable income.
Accumulated taxable income is composed of taxable income adjusted downward for federal income and excess profits taxes, charitable deduction in excess of the ceiling, net capital gains and losses, and taxes of foreign countries and U.S. possessions and upward for certain corporate deductions, net operating loss deduction and capital loss carryback or carryover.

When calculating the accumulated earnings tax, corporations are given a credit, the accumulated earnings credit, of $250,000 ($150,000 for certain service corporations) plus dividends paid within the first 2 1/2 months of the corporation’s tax year less accumulated earnings and profits at the end of the preceding tax year.

Hence, the maximum amount of accumulated taxable income that may be subject to the accumulated earnings tax for 2015 if Kari Corp. takes only the minimum accumulated earnings credit is $50,000. This amount is composed of $400,000 in taxable income less both a downward adjustment of $100,000 for federal income taxes and the $250,000 accumulated earnings credit.

Question 153

Kane Corp. is a calendar year domestic personal holding company. Which deduction(s) must Kane make from 2015 taxable income to determine undistributed personal holding company income prior to the dividend-paid deduction?
Federal income taxes Net long-term capital gain less related federal income taxes
Yes Yes
Yes No
No Yes
No No

Answer 153

Federal income taxes Yes
Net long-term capital gain less related federal income taxes Yes

Personal holding companies are required to pay taxes on their undistributed personal holding company income. Personal holding company income and undistributed personal holding company income differ. Undistributed personal holding company income is computed by adjusting taxable income, then subtracting the dividends paid deduction. Deductions are made from taxable income for federal and foreign taxes; charitable contributions (based on a higher percentage limitation than the 10 percent of income limitation imposed on corporations); and excess capital gains (i.e., any excess net long-term capital gain over net short-term capital loss for the tax year).
Corporate deductions for dividends received and any net operating loss deduction must be added back, and business expenses and depreciation exceeding rental income may have to be added back. Hence, both the federal income taxes and the net long-term capital gain should be deducted from taxable income by Kane in determining undistributed personal holding company income prior to the dividend-paid deduction.

Question 154

The minimum total voting power that a parent corporation must have in a subsidiary's stock in order to be eligible for the filing of a consolidated return is
	A.  20%
	B.  50%
	C.  51%
	D.  80%

Answer 154

D. 80%

To be permitted to file a consolidated return, the parent and its subsidiaries must be members of an affiliated group. Corporations qualify as members of an affiliated group by having a common parent that directly owns at least 80 percent of the total voting stock and at least 80 percent of the total value of the stock in at least one other includible corporation. In addition, a minimum of one of the other includible corporations must own at least 80 percent in each of the remaining includible corporations.

Question 155

Jans, an individual, owns 80% and 100% of the total value and voting power of A and B Corps., which in turn own the following (both value and voting power):
Ownership
Property A Corp B Corp
C Corp 80% -
D Corp - 100%
All companies are C corporations except B Corp., which had elected S status since inception. Which of the following statements is correct with respect to the companies’ ability to file a consolidated return?

A.  A, C, and D may file as a group.
B.  A and C may not file as a group, and B and D may not file as a group.
C.  A and C may file as a group, and B and D may file as a group.
D.  A and C may file as a group, but B and D may not file as a group.

Answer 155

D. A and C may file as a group, but B and D may not file as a group.

A and C are an affiliated group because A owns at least 80% of C and A is the parent company. B and D may not file a consolidated return because S corporations are not eligible to be in an affiliated group.

Question 156

A corporation was completely liquidated and dissolved during 2015. The filing fees, professional fees, and other expenditures incurred in connection with the liquidation and dissolution are
A. Deductible in full by the dissolved corporation.
B. Deductible by the shareholders and not by the corporation.
C. Treated as capital losses by the corporation.
D. Not deductible either by the corporation or shareholders.

Answer 156

A. Deductible in full by the dissolved corporation.

Filing, professional fees (accounting and legal) and other expenditures incurred in connection with liquidations and dissolutions are fully deductible for the dissolving corporation.

Question 157

S Corporation was a wholly-owned subsidiary of P Corporation. Both corporations were domestic C corporations. P received a liquidating distribution of property (worth $250 and a basis of $135) from S in cancellation of the stock. What amount of gain will P recognize if P had a basis of $100 in the S stock before the receipt of the property?
	A.  $ 0
	B.  $ 35
	C.  $150
	D.  $250

Answer 157

A. $ 0

If stock of a subsidiary is liquidated by its parent company, any realized gain on the transaction is, in general, not recognized. The realized gain to parent is $150 ($250 property received - $100 basis). The recognized gain is zero.

Question 158

ABC has 200 shares of voting common stock outstanding. XYZ has decided to acquire 90 percent of the ABC stock solely in exchange for 50 percent of its voting stock. ABC will become XYZ’s subsidiary after the transaction. Which of the following statements is true?
A. XYZ must acquire 100 percent of ABC for the transaction to qualify as a reorganization.
B. The transaction is a reorganization.
C. XYZ must issue at least 60 percent of its stock for the transaction to qualify as a reorganization.
D. ABC must surrender assets to XYZ to qualify as a reorganization.

Answer 158

B. The transaction is a reorganization.

The 80% control test is met since 90% of ABC’s voting stock is being acquired. XYZ is using its voting stock as required for B reorganizations.

Question 159

In a Type B reorganization:
A. The stock of the target corporation is acquired solely for the voting stock of either the acquiring corporation or its parent.
B. The acquiring corporation must have control of the target corporation immediately after the acquisition.
C. Both of the above are correct.
D. None of the above is correct.

Answer 159

C. Both of the above are correct.

A Type B reorganization must be stock for stock, and only voting stock of the acquiring firm, or its parent, is permitted. Acquiring must also control target after the acquisition.

Question 160

Pursuant to a plan of corporate reorganization adopted in July 2015, Gow exchanged 500 shares of Lad Corp. common stock that he had bought in January 2015 at a cost of $5,000 for 100 shares of Rook Corp. common stock having a fair market value of $6,000.
Gow’s recognized gain on this exchange was

A.  $1,000 long-term capital gain.
B.  $1,000 short-term capital gain.
C.  $1,000 ordinary income.
D.  $0.

Answer 160

D. $0.

If taxpayer receives stocks or securities under a plan of reorganization from a corporation included in the reorganization, the taxpayer does not recognize a gain or loss from the transaction. However, if the taxpayer receives boot, the transaction is taxable up to the amount of the boot.
Since Gow received the Rook Corp. stock solely in exchange for his Lad Corp. stock under a plan of reorganization and did not receive any boot, the transaction would be tax-free for Gow.

Question 161

Corporations A and B combine in a qualifying reorganization, and form Corporation C, the only surviving corporation.
This reorganization is tax-free to the

  Shareholders  	  Corporation  
	 Yes 	 Yes 
	 Yes 	 No 
	 No 	 No 
	 No 	 Yes

Answer 161

Shareholders Yes Corporation Yes

Corporate reorganizations generally are tax-free for both shareholders and the corporation.
In this case, the reorganization would be viewed as a Type A: Merger or Consolidation, which qualifies for tax-free treatment for both shareholders and the corporation.

This response correctly indicates that the transaction would be tax-free for both shareholders and the corporation and, therefore, it is correct.

Question 162

P corporation acquired the assets of its wholly-owned subsidiary, S corporation, under a plan that qualified as a tax-free complete liquidation of S. Which of the following of S's unused carryovers may be transferred to P?
	A.  Excess charitable contributions.
	B.  Net operating loss.
	C.  Both of the above are transferred.
	D.  None of the above are transferred.

Answer 162

C. Both of the above are transferred.

Tax attributes of the subsidiary transfer to the parent after a tax-free liquidation of the subsidiary into the parent.

Question 163

Clock Corporation owns 80%, 90%, and 100%, respectively, of its three subsidiaries, Lamp, Chair, and Table. The corporations have elected to file a consolidated tax return for U.S. federal income tax. The corporations have nexus as follows:
Nexus
Clock States M and N
Lamp States M and N
Chair State N
Table States M and N
If a consolidated state income tax return is filed in State M, which corporations will be included in the return?

A.  Clock
B.  Clock and Table.
C.  Clock, Lamp, and Table.
D.  Clock, Lamp, Chair, and Table.

Answer 163

C. Clock, Lamp, and Table.

Only affiliated corporations that have Nexus with State M will be included in the state consolidated income tax return for State M.

Question 164

Callaway Company manufactures its products in State F and sells them in States F and G. Callaway’s sales are as follows for the current year:
Sales shipped from State F to customers in State F $10,000
Sales shipped from State F to customers in State G 40,000
Assume that Callaway has nexus in both states F and G. What is Callaway’s State F sales factor for the current year?

A.  0%
B.  20%
C.  50%
D.  100%

Answer 164

B. 20%

$10,000/($10,000 + $40,000) = 20%.

Question 165

Woods Corporation’s federal taxable income for the current year is $250,000 which includes the following:
$15,000 of deducted state income taxes

$25,000 of interest income on United States Treasury Bonds

Woods also had $10,000 of interest from state and local bonds that it owns. Federal depreciation in excess of that allowed for state purposes was $7,000. Woods operates exclusively in State F, which does not tax income earned on federal obligations, taxes all municipal bond interest, and disallows a deduction for state income taxes. What is Wood’s state taxable income?

A.  $257,000.
B.  $243,000.
C.  $307,000.
D.  $250,000.

Answer 165

A. $257,000.

The starting point for computing state taxable income is $250,000. Adjustments are:
State income taxes	+ $15,000
Municipal interest income	+ $10,000
Excess federal depreciation	+ $ 7,000
U.S. Treasury interest income	-$25,000
State taxable income	$257,000

Question 166

Which of the following statements is incorrect?
A. Foreign currency exchange gains and losses resulting from the normal course of business operations are ordinary.
B. Foreign currency exchange gains and losses resulting from investment transactions are capital.
C. Foreign currency exchange gains and losses resulting from personal transactions are capital.
D. Foreign currency exchange gains and losses resulting from the normal course of business operations are capital.

Answer 166

D. Foreign currency exchange gains and losses resulting from the normal course of business operations are capital.

They are actually ordinary.

Question 167

Mr. Travel is a U.S. citizen who has been a resident of Spain for five years. In 2015, he has the following income from Spanish sources:
Salary Interest Income
Gross amount $90,000 $20,000
Spanish income tax (20%) (18,000) (4,000)
Net cash received (80%) $72,000 $16,000
The interest income was from a Spanish money market account. Mr. Travel also was provided housing from his employer that had a fair market value of $30,000 (not subject to Spanish tax). Total U.S.-source earned income for Mr. Travel was $60,000. How much of the foreign taxes paid is eligible to be used in the foreign tax credit computation?

A.  - $0 -
B.  $ 4,000
C.  $18,000
D.  $22,000

Answer 167

B. $ 4,000

Since the $90,000 earned income was excludable from U.S. income the $18,000 in Spanish taxes is not eligible for the foreign tax credit. The $4,000 related to the interest income is eligible.

Question 168

Mr. Travel is a U.S. citizen who has been a resident of Spain for five years. In 2015, he has the following income from Spanish sources:
Salary Interest Income
Gross amount $90,000 $20,000
Spanish income tax (20%) (18,000) (4,000)
Net cash received (80%) $72,000 $16,000
The interest income was from a Spanish money market account. Mr. Travel also was provided housing from his employer that had a fair market value of $40,000 (not subject to Spanish tax). Total U.S.-source earned income for Mr. Travel was $60,000. What is Mr. Travel’s minimum includible United States gross income from these transactions? The housing exclusion is $14,112 and foreign earned income exclusion is $100,800 in 2015.

A.  $ 60,000.
B.  $105,888.
C.  $110,000.
D.  $200,000.

Answer 168

B. $105,888.

The $90,000 of salary is completely excluded. Foreign-earned income from personal services is limited to $100,800 in 2015.The housing is excludable to the extent it exceeds 16% × $100,800, or $16,128. This excess is $23,872 ($40,000 − $16,128). However, the housing exclusion may never exceed $14,112 in 2015, so the includible housing income is $25,888 ($40,000 − $14,112). The interest income is fully includible as is the U.S. source earned income of $60,000. Therefore, includible income is $25,888 + $20,000 + $60,000, or $105,888.