Practice Exam 9.5.23 Flashcards
Which of the following statements is true with respect to tax-exempt organizations?
A. A partnership may qualify as an organization exempt from federal income tax if it is organized and operated exclusively for one or more of the purposes found in Sec. 501(c)(3).
B. A foundation may qualify for exemption from federal income tax if it is organized for the prevention of cruelty to animals.
C. An individual can qualify as an organization exempt from federal income tax.
D. In order to qualify as an exempt organization, the organization must be a corporation.
B. A foundation may qualify for exemption from federal income tax if it is organized for the prevention of cruelty to animals.
Exempt status generally depends on the nature and purpose of an organization. Among the types of organizations that may qualify as exempt are corporations, trusts, foundations, funds, community funds, etc. A more complete list can be found in Sec. 501(c) along with the permitted stated purposes and requirements.
A tax return preparer may disclose or use tax return information without the taxpayer’s consent to
A. Facilitate a supplier’s or lender’s credit evaluation of the taxpayer.
B. Solicit additional nontax business.
C. Accommodate the request of a financial institution that needs to determine the amount of taxpayer’s debt to it to be forgiven.
D. Be evaluated by a quality or peer review organization.
D. Be evaluated by a quality or peer review organization.
An income tax return preparer who discloses information furnished in connection with preparation of any return or uses the information for any purpose other than to prepare or assist in preparation of the return is subject to a penalty. However, disclosure for evaluation by an official quality or peer review organization is not absolutely prohibited.
A man’s wife dies of an illness in April of the current tax year. The surviving spouse is also ill and does not work, but he lives off his IRA account and retirement from a former employer, and provides over half of the cost of maintaining his own home. He has not remarried and lived in the home the entire year. Which filing status below is the surviving spouse eligible to use and provides the lowest tax rate?
A. Single.
B. Married filing jointly.
C. Head of household.
D. Married filing separately.
B. Married filing jointly.
An individual whose spouse dies during the current tax year may file under married filing jointly, which has the lowest tax rate, even if the individual has not remarried by the end of the tax year.
At the close of the prior year, an individual taxpayer transferred assets into an irrevocable trust, retaining the right to the income from the trust for life. During the year, the assets earned ordinary dividends and interest income. The tax liability on the income earned will be paid
A. By the trust on the interest income only, and by the individual taxpayer for the dividend income.
B. Entirely by the trust.
C. By the trust on the dividend income only, and by the individual taxpayer for the interest income.
D. Entirely by the individual taxpayer.
D. Entirely by the individual taxpayer.
Generally, the only way a grantor can avoid taxation on the income from the trust is to give up control and benefits of the assets assigned to the trust and give up the right to revoke or amend the trust. The taxpayer retains the right to income from the trust for life, so the taxpayer must pay taxes on the income earned by the trust.
In 2023, 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 2023, Ruth did not live with Smith. She received $10,250 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 2023, owing an additional $500 in taxes on his wife’s income. How many dependents was Smith entitled to claim on his 2023 tax return?
A. 0
B. 1
C. 2
D. 3
B. 1
Only Smith’s mother may be claimed as a dependent. Smith provided over one-half of her support, and they do not need to live together. The Social Security benefits are not taxable (provisional income not in excess over base amount of $25,000) and therefore not included in gross income. However, a taxpayer loses the claim as a dependent for a married dependent filing a joint return, but not if only to claim a refund. Despite providing over one-half of their support, the taxpayer cannot claim his son or his daughter-in-law as dependents.
In February 2023, Paul and Jean, a married couple, cashed a qualified Series EE savings bond they bought in November 2010. They received proceeds of $7,132, representing principal of $5,000 and interest of $2,132. In 2023, they helped pay their daughter’s college tuition. The qualified education expenses they paid in 2023 totaled $4,000. They are not claiming an education credit for the expenses, and they do not have an education IRA. How much interest income can Paul and Jean exclude?
A. $1,000
B. $4,000
C. $1,196
D. $2,132
C. $1,196
If the gross proceeds are greater than the educational expenses, the amount of interest that is excludable is determined by taking the applicable fraction of interest. The applicable fraction is determined by dividing the total qualified educational expenses by the gross proceeds of the bond redemption ($4,000 ÷ $7,132). This percentage is then multiplied by the amount of interest to obtain the exclusion amount ($2,132 × .561). Therefore, Paul and Jean can exclude $1,196 of interest from income.
Of the organizations listed below, which organization could not receive approval for tax-exempt status under Internal Revenue Code Sec. 501(c)(3)?
A. A local boys club.
B. A partnership for scientific research.
C. A college alumni association.
D. A local chapter of the Salvation Army.
B. A partnership for scientific research.
Organizations formed and operated exclusively for religious, charitable, scientific, educational, literary, or similar purposes are a broad class of exempt organizations. A partnership cannot qualify as an exempt organization, and no part of the net earnings may accrue to the benefit of any private shareholder or individual.
Which of the following is treated as income from a passive activity with respect to loss limitations of Sec. 469?
A. Interest on bank accounts.
B. Annuity income from an insurance contract.
C. Rental income from an office building in which the owner earns 80% of her gross income and materially participates for 700 hours of service during the year.
D. An individual’s fees for managing a passive activity.
C. Rental income from an office building in which the owner earns 80% of her gross income and materially participates for 700 hours of service during the year.
In general, a passive activity is any activity that involves the conduct of a trade or business or the production of income and in which the taxpayer does not materially participate [Sec. 469(c)(1)]. Losses from rental real estate are no longer subject to the passive activity rules if the taxpayer meets two requirements: (1) More than 50% of the individual’s personal services are performed in real property trades or businesses in which they materially participate during the year and (2) the individual performs more than 750 hours of service in the real property trades or businesses in which the individual materially participates.
In order to show that a tax preparer’s application of tax law was in line with the intent of the tax law, the preparer should cite which of the following types of authoritative sources to make the most convincing case?
A. IRS publication.
B. Committee report.
C. Technical advice memorandum of another, similar case.
D. Delegation order.
B. Committee report.
Committee reports are useful tools in determining Congressional intent behind certain tax laws and helping examiners apply the law properly. The committee reports are very high authority.
All of the following payments made to employees would be currently deductible as business expenses except
A. Reasonable salary paid to a corporate officer owning a controlling interest for services she rendered.
B. Wages paid to employees for constructing a new building to be used in the business.
C. Vacation pay paid to an employee when the employee chooses not to take a vacation.
D. Lump-sum payment made to the beneficiary of a deceased employee that is reasonable in relation to the employee’s past services, i.e., payment equivalent to compensation.
B. Wages paid to employees for constructing a new building to be used in the business.
Normally, Sec. 162(a)(1) allows a deduction for a reasonable allowance for salaries or other compensation for personal services actually rendered. However, Sec. 263A requires all direct costs and a proper share of indirect costs allocable to property produced by the taxpayer to be capitalized. Wages paid to employees for constructing a new building would be direct costs allocable to that building. Those costs are capitalized and depreciated as part of the cost of the building rather than currently deductible.
A CPA is permitted to disclose confidential client information without the consent of the client to
A. III only.
B. II only.
C. II and III only.
D. I and III only.
A. III only.
The Confidential Client Information Rule states that a member may not disclose any confidential client information except with the specific consent of the client. But this rule should not be understood to preclude a CPA from responding to an inquiry made by (1) an investigative body of a state CPA society, (2) the trial board of the AICPA, or (3) an AICPA or state peer review body, or in response to a validly issued and enforceable subpoena.
Jefferson’s investment income consisted of $2,000 in interest from a U.S. Treasury bond and $1,000 interest from a municipal bond. Jefferson also paid $4,000 in investment interest expense. Assuming that Jefferson itemizes, what amount can Jefferson deduct for investment interest expense?
A. $4,000
B. $1,000
C. $3,000
D. $2,000
D. $2,000
Investment interest expense is only deductible to the extent of net investment income. Taxable investment income does not include tax-exempt municipal bond interest. Because the $2,000 U.S. Treasury bond interest income is the only taxable investment income, only $2,000 of the investment interest expense may be deducted in the current year.
Wilson, CPA, uses a commercial tax software package to prepare clients’ individual income tax returns. Upon reviewing a client’s computer-generated Year 1 itemized deductions, Wilson discovers that the schedule’s deductible investment interest expense is less than the amount paid by the taxpayer and the amount that Wilson entered into the computer. After analyzing the entire tax return, Wilson determines that the computer-generated investment interest expense deduction is correct. Why is the computer-generated investment interest expense deduction correct?
A. Neither I nor II.
B. I only.
C. Both I and II.
D. II only.
B. I only.
The IRC allows the deduction of a limited amount of investment interest as an itemized deduction. The limit is to the extent of net investment income.
The Enduro Hunting Club, organized for nonprofitable purposes, took in the following receipts for the year:
Enduro will lose exempt status because
A. Dues represent less than 50% of total annual receipts.
B. Jerky sales account for 35% of total annual receipts.
C. Assessments for land preservation are not qualified receipts for exempt status.
D. Membership fees are not qualified receipts for exempt status.
B. Jerky sales account for 35% of total annual receipts.
Social clubs organized for pleasure, recreation, and other nonprofitable purposes, substantially all of the activities of which are for such purposes, are an exempt class. However, exempt status is lost if 35% or more of receipts are from sources other than membership fees, dues, and assessments. Enduro’s receipts for the year totaled $100,000, and 35% of those were from the sale of products to the public, causing loss of exempt status.
Phil and Joan Crawley made the following payments during 2023:
The Crawleys had net investment income of $3,000 for the year. What is the maximum amount that the Crawleys can deduct as interest expense in calculating itemized deductions for 2023?
A. $7,100
B. $6,600
C. $3,600
D. $7,600
B. $6,600
The interest on U.S. savings bonds is taxable, and interest is deductible on the loan to purchase them. Investment interest expense is deductible only to the extent of net investment income. The interest on the credit card is personal interest, none of which is deductible. The home mortgage interest is deductible assuming it is qualified residence interest. The points on a conventional mortgage loan are deductible even though the points represent prepaid interest. The Crawleys’ maximum interest deduction is
A tax return preparer is not required to
A. Notify the taxpayer regarding an omission in a filed tax return.
B. Advise the taxpayer of noncompliance under the Internal Revenue Code.
C. Notify the taxpayer when an error is discovered.
D. Discuss the tax return with a third party after oral consent by the client-taxpayer.
D. Discuss the tax return with a third party after oral consent by the client-taxpayer.
A tax return preparer should obtain the taxpayer’s written, formal consent authorizing disclosure for a specific purpose.
Which of the following statements about business meals is true?
A. The IRS denies deductions for any meal expense for which substantiating evidence is not provided.
B. No deduction is allowed for meals that are lavish or extravagant.
C. Meals while traveling for business are not deductible.
D. The meal is deductible whether or not the taxpayer or their employee is present at the meal.
B. No deduction is allowed for meals that are lavish or extravagant.
Business meals include food and beverages provided to a customer. Meal expenses are not deductible if neither the taxpayer nor an employee of the taxpayer is present at the meal. No deduction is allowed for meals (or any portion thereof) that are lavish or extravagant under the circumstances. The IRS denies deductions for any meal expense over $75 for which the claimant did not provide substantiating evidence. Meals while traveling for business are 50% deductible.
A tax advisor with what responsibility should take reasonable steps to ensure that the firm’s procedures for all members, associates, and employees are consistent with the best practices?
A. Overseeing either a firm’s practice of (1) providing advice concerning federal tax issues or (2) preparing or assisting in the preparation of submissions to the IRS.
B. Overseeing a firm’s practice of preparing or assisting in the preparation of submissions to the IRS.
C. Overseeing a firm’s practice of providing advice concerning federal tax issues.
D. Neither overseeing a firm’s practice of providing advice concerning federal tax issues nor preparing or assisting in the preparation of submissions to the IRS.
A. Overseeing either a firm’s practice of (1) providing advice concerning federal tax issues or (2) preparing or assisting in the preparation of submissions to the IRS.
Tax advisors with responsibility for overseeing a firm’s practice of (1) providing advice concerning federal tax issues or of (2) preparing or assisting in the preparation of submissions to the Internal Revenue Service should take reasonable steps to ensure that the firm’s procedures for all members, associates, and employees are consistent with the best practices.
All of the following expenses incurred in the course of operating a business are deductible business expenses except
A. Advertising in a convention program of a political party. The proceeds from the publication of the program are for the local use of the political party.
B. Public service advertising that keeps the name of the business before the public.
C. Advertising sponsorship at public school sporting events.
D. Advertising in a concert program the local church is sponsoring.
A. Advertising in a convention program of a political party. The proceeds from the publication of the program are for the local use of the political party.
Section 276 provides that advertising in a publication of a political party is not deductible as a business expense. The proceeds from the convention program are for the use of a political party. Therefore, the expenses incurred to advertise in that program are not deductible.
Robbie, a cash-basis single taxpayer, reported $50,000 of adjusted gross income last year and claimed itemized deductions of $15,000, consisting of $10,000 of state income taxes and $5,000 of investment interest, paid last year. Robbie’s itemized deduction amount, which exceeded the standard deduction available to single taxpayers for last year by $1,150, was fully deductible, and it was not subject to any limitations or phase-outs. In the current year, Robbie received a $1,500 state tax refund relating to the prior year. What is the proper treatment of the state tax refund?
A. Include $1,500 in income in the current year.
B. Amend the prior year’s return and reduce the claimed itemized deductions for that year.
C. Include $1,150 in income in the current year.
D. Include none of the refund in income in the current year.
C. Include $1,150 in income in the current year.
Gross income includes items received for which the taxpayer received a tax benefit in a prior year, but amounts recovered during the tax year that did not provide a tax benefit in the prior year are excluded. Since Robbie’s itemized deduction amount for the previous year exceeded the standard deduction available to him by $1,150, Robbie only received a tax benefit for that amount and therefore must only include $1,150 of the tax refund in income for the current year.
Jerry and Ann Jones are married and keep up a home for their two preschool children, ages 2 and 4. They claim their children as dependents and file a joint return using Form 1040. Their adjusted gross income (AGI) is $89,000. Jerry earned $44,000, and Ann earned $45,000. During the year, they pay work-related expenses of $3,000 for child care for their son, Daniel, at a neighbor’s home and $3,200 for child care for their daughter, Amy, at Pine Street Nursery School. How much of their child-care payments are eligible for the Child and Dependent Care Credit on their return?
A. $6,000
B. $3,000
C. $6,200
D. $0
A. $6,000
The IRC allows a child-care credit for a portion of qualifying child or dependent care expenses paid for the purpose of allowing the taxpayer to be gainfully employed. The payments cannot be to someone that you or your spouse can claim as a dependent. The maximum amount of employment-related expenses to which the credit may be applied is $3,000, if one qualifying person is involved, or $6,000, if two or more are involved, less excludable employer dependent-care assistance program payments.
By what date must a tax return preparer furnish a copy of the original return to a taxpayer?
A. By the seventh work day after the preparer signs the completed return.
B. By the date the taxpayer pays for the preparation of the return.
C. By the date the tax return is due to be filed with the IRS.
D. By the date the tax return is presented for the signature of the taxpayer.
D. By the date the tax return is presented for the signature of the taxpayer.
The person who is a tax return preparer of any return of tax under Title 26 shall furnish a completed copy of the original return or claim for refund to the taxpayer not later than the time the original return or claim for refund is presented for the signature of the taxpayer. The preparer may, if (s)he wishes, request a receipt or other evidence from the taxpayer sufficient to show satisfaction of the requirement.
The Enduro Hunting Club, an exempt organization, made the following disbursements of its net earnings during the current year:
Enduro will lose exempt status for
A. $6,000 disbursement to Geronimo.
B. $3,000 disbursement to Hoot.
C. $5,000 disbursement to Island Park.
D. $10,000 disbursement to Fountain of Youth.
A. $6,000 disbursement to Geronimo.
Social clubs organized for pleasure, recreation, and other nonprofitable purposes, substantially all of the activities of which are for such purposes, are an exempt class. However, no part of net earnings may inure to the benefit of any private shareholder. Geronimo is the only private shareholder Enduro made a distribution to.
Mr. Todd, who is 43 years old, has lived apart from his wife since May 2023. For 2023, his two children, whom he can claim as dependents, lived with him the entire year, and he paid the entire cost of maintaining the household. Assuming that Mr. Todd cannot qualify to file a joint return for 2023, he must, nevertheless, file a return if his gross income is at least
A. $27,700
B. $1,850
C. $20,800
D. $13,850
C. $20,800
Generally, a taxpayer must file a tax return if the taxpayer’s gross income equals or exceeds his or her standard deduction [Sec. 6012(a)]. Standard deductions in 2023 are $27,700 for married filing jointly, $20,800 for heads of household, and $13,850 for single individuals (Publication 501). A taxpayer who has two children and files as a head of household must file a return if his or her gross income equals or exceeds $20,800.