REG 3 Flashcards
Mary purchased an annuity that pays her $500 per month for the rest of her life. She paid $70,000 for the annuity. Based on IRS annuity tables, Mary’s life expectancy is 16 years. How much of the 200th $500 monthly payment will Mary include in her gross income?
A. $135.42
B. $0
C. $500
D. $364.58
Choice “C” is correct. Based on IRS tables, Mary is expected to receive 192 (16 years × 12 months) annuity payments. Mary will recover her investment over the life expectancy stated in the IRS tables, or the first 192 annuity payments. After the 192nd payment, all of the annuity payment is taxable.
Hook Corp., a calendar year C corporation, reported the following Year 2 financial information:
Net income per books $ 210,000
Federal income taxes per books 114,000
Tax depreciation in excess of book depreciation 66,000
Charitable contributions per books 46,000
What is Hook’s taxable income?
A. $212,000
B. $229,500
C. $273,600
D. $390,000
Choice “C” is correct. Hook’s taxable income is $273,600. Federal income taxes are nondeductible, so they are added back to net income per books to determine taxable income. The tax depreciation in excess of book depreciation is subtracted from net income per books. The deduction for charitable contributions is subject to a 10 percent of adjusted taxable income limitation. Adjusted taxable income is taxable income before charitable contributions deduction, dividends-received deduction, and capital loss carryback.
Net income per books $ 210,000
+ Federal income taxes per books 114,000
+ Charitable contributions per books 46,000
− Tax depreciation in excess of book (66,000)
Taxable income before charitable contributions 304,000
× 10% = 30,400 charitable contributions limit
− Charitable contributions (limited) (30,400)
Taxable income $ 273,600
Charles and Marcia are married cash-basis taxpayers. In Year 8, 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 Year 8 joint income tax return?
A. $1,900
B. $1,100
C. $500
D. $2,900
Choice “A” is correct. The $500 interest on federal income tax refund, the $600 interest on state income tax refund, and the $800 interest on federal government obligations are taxable, for a total of $1,900. The $1,000 interest on state government obligations is normally not taxable. Recall that to determine whether or not a state tax refund is taxable for federal tax purposes, we must know if the taxpayer took the standard deduction in the prior year or itemized deductions. This is not the case for interest on a tax refund. Interest on a federal or state income tax refund is included in taxable income.
Prime Corp. is an accrual basis, calendar year C corporation. Its current year reported book income before federal income taxes was $300,000, which included $17,000 corporate bond interest income. A $20,000 expense for term life insurance premiums on corporate officers was incurred. Prime was the policy owner and beneficiary. What was Prime’s current year taxable income as reconciled on Prime’s Schedule M-1, Reconciliation of Income (Loss) per Books With Income per Return, of Form 1120, U.S. Corporation Income Tax Return?
A. $280,000
B. $283,000
C. $300,000
D. $320,000
Choice “D” is correct. To arrive at taxable income, term life insurance premiums are added back to book income because they are not deductible for taxable income purposes ($20,000 + $300,000 = $320,000).
In which type of business entity is the entire ownership interest most freely transferable?
A. Limited partnership.
B. Limited liability company.
C. Corporation.
D. General partnership.
Choice “C” is correct. Among the business entities listed, entire ownership interests are most freely transferable in a corporation. Unless transferability is restricted by contract (restricted shares or voting trusts or voting agreements), there are no restrictions on the sale of corporate stock (the common stock represents the stockholders’ ownership interest). The right to transfer ownership interests freely is one of the advantages of the corporate form of business.
Kane Corp. is a calendar year domestic personal holding company. Which deduction(s) must Kane make from Year 1 taxable income to determine undistributed personal holding company income prior to the dividend-paid deduction?
Federal Net long-term
income taxes capital gain
less related
federal income taxes
A. No Yes
B. Yes Yes
C. No No
D. Yes No
Choice “B” is correct. A personal holding company deducts federal income taxes in computing undistributed personal holding company income. A personal holding company deducts net long-term capital gain less related federal income taxes in computing undistributed personal holding company income.
Berry, Drake, and Flanigan are partners in a general partnership. The partners made capital contributions as follows: Berry, $150,000; Drake, $100,000; and Flanigan, $50,000. Drake made a loan of $50,000 to the partnership. The partnership agreement specifies that Flanigan will receive a 50% share of profits, and Drake and Berry each will receive a 25% share of profits. Under the Revised Uniform Partnership Act and in the absence of any partnership agreement to the contrary, which of the following statements is correct regarding the sharing of losses?
A. The partners will share equally in any partnership losses.
B. The partners will share in losses on a pro rata basis according to the capital contributions and loans made to the partnership.
C. The partners will share in losses on a pro rata basis according to the capital contributions.
D. The partners will share in losses according to the allocation of profits specified in the partnership agreement.
Choice “D” is correct. Under the Revised Uniform Partnership Act, unless agreed otherwise, partners share losses in the same manner that they share profits.
A 33-year-old taxpayer withdrew $30,000 from a deductible traditional IRA. The taxpayer has a 33% effective tax rate and a 35% marginal tax rate. What is the total tax liability associated with the withdrawal?
A. $10,000
B. $13,000
C. $10,500
D. $13,500
Choice “D” is correct. The taxpayer is under the age of 59 ½, and the facts do not indicate that an exception applies; therefore, the taxpayer is subject to the 10% penalty on the IRA distribution in addition to the regular income tax. The regular income tax that applies is the marginal rate (the rate for the next dollar of taxable income). The effective tax rate is simply the total tax divided by the total taxable income. In this case, the taxpayer would have to pay the regular tax on the distribution at the 35% marginal rate PLUS the 10% penalty on early distribution without an exception. The calculation to arrive at the total tax associated with the withdrawal follows:
Regular Income Tax 30,000
× 35%
10,500
Penalty Tax 30,000
× 10%
3,000
Total Tax 13,500
An individual taxpayer’s tax return included the following:
Regular tax before tax credits $ 5,000
Current year estimated tax payments $ 6,000
Amount paid with current year extension $ 1,000
Federal income tax withheld $ 1,000
What amount, if any, is the taxpayer’s overpayment?
A. $2,000
B. $3,000
C. $0
D. $1,000
Choice “B” is correct. The total tax payments applied against the $5,000 current year regular tax liability is $8,000, which includes $6,000 current year estimated tax payments, $1,000 current year withholding, and $1,000 paid with current year extension. Overpayment = $5,000 current year tax liability − $8,000 tax payments = $3,000.
For Year 2, Quest Corp., an accrual basis calendar year C corporation, had an $8,000 unexpired charitable contribution carryover from Year 1. Quest’s Year 2 taxable income before the deduction for charitable contributions was $200,000. On December 12, Year 2, Quest’s board of directors authorized a $15,000 cash contribution to a qualified charity, which was made on January 6, Year 3. What is the maximum allowable deduction that Quest may take as a charitable contribution on its Year 2 income tax return?
A. $8,000
B. $20,000
C. $15,000
D. $23,000
Choice “B” is correct. C corporations are allowed a maximum charitable contribution deduction of 10 percent of taxable income before the following deductions:
Any charitable contribution;
The dividends-received deduction;
Any net operating loss carryback; and
Any net capital loss carryback.
Accrued charitable contributions not paid by the end of the year are deductible in the year of accrual if (i) the board of directors authorizes the contribution during the tax year and (ii) the accrual basis corporation pays the accrued amount by the 15th day of the fourth month (generally 3½ months) following the end of the tax year.
Any amount in excess of the “10 percent limitation” may be carried forward for five years.
In this question, the corporation has: (i) an $8,000 unexpired charitable contribution carryover from the previous year; (ii) -0- charitable contributions paid during the current year; and (iii) a $15,000 contribution which the board of directors authorized by the end of the year and which the corporation paid by the 15th day of the fourth month following the end of the tax year. The deduction before application of the “10 percent limit” is $23,000: $8,000 + 0 + $15,000. However, the taxable income before the five deductions listed above is $200,000. So, the deduction is limited to $20,000: the lesser of (i) the $23,000 amount before application of the “10 percent limit” or (ii) $20,000, which is 10 percent of the $200,000 taxable income before the five deductions listed above.
What type of conduct generally will make a contract voidable?
A. Fraud in the execution.
B. Fraud in the inducement.
C. Physical coercion.
D. Contracting with a person under guardianship.
Choice “B” is correct. If a person is defrauded into entering into a contract because its terms or the surrounding circumstances are not as represented (that is, fraud in the inducement), the contract is merely voidable.
Which of the following statements is correct regarding a limited liability company’s operating agreement?
A. It must be in writing.
B. It is designed to forestall and resolve disputes among the owners.
C. It is necessary for a limited liability company to exist.
D. It must be filed with a central state agency.
Choice “B” is correct. An operating agreement is an optional agreement among members of a limited liability company (LLC) setting out the details of how the LLC will be run.
Under the Bankruptcy Code, which of the following is a ground for denying a discharge in a Chapter 7 Liquidation case?
Prior discharge Failure to keep
within eight years books and records
A. Yes No
B. No Yes
C. Yes Yes
D. No No
Choice “C” is correct. In a Chapter 7 Liquidation case, the court can deny a discharge if creditors allege and prove that the debtor did any of a number of acts. One such act is that the debtor obtained a prior discharge within eight years. Similarly, failure to keep books and records is a ground for discharge. This is the only choice indicating both prior discharge within eight years and failure to keep records.
Which of the following actions requires an agent for a corporation to have a written agency agreement?
A. Hiring an independent general contractor to renovate the principal’s office building.
B. Purchasing an interest in undeveloped land for the principal.
C. Retaining an attorney to collect a business debt owed the principal.
D. Purchasing office supplies for the principal’s business.
Choice “B” is correct. Generally, agency power may be granted orally, even if the agent enters into contracts that must be in writing to be enforceable. However, most states require an agency agreement to be in writing if the agent is to purchase or convey interests in land.
Under the Secured Transactions Article of the UCC, which of the following statements is correct regarding a security interest that has not attached?
A. It is effective against third parties with unsecured claims.
B. It is effective against the debtor, but not against third parties.
C. It is not effective against either the debtor or third parties.
D. It is effective against both the debtor and third parties.
Choice “C” is correct. A security interest is not effective against anyone before it attaches to the collateral. Thus, all of the other answer choices are incorrect.
A parent corporation owned more than 90% of each class of the outstanding stock issued by a subsidiary corporation and decided to merge that subsidiary into itself. Under the Revised Model Business Corporation Act, which of the following actions must be taken?
A. The parent corporation’s stockholders must approve the merger.
B. The subsidiary corporation’s board of directors must pass a merger resolution.
C. The subsidiary corporation’s dissenting stockholders must be given an appraisal remedy.
D. The parent corporation’s dissenting stockholders must be given an appraisal remedy.
Choice “C” is correct. In a short form merger (one between a parent and a subsidiary 90% of which is owned by the parent), the subsidiary’s shareholders have a right to dissent and take advantage of the appraisal remedy.
A cash-basis individual taxpayer owns 55% of Stone, a C corporation. Stone uses the accrual method of accounting and owes the taxpayer $4,500 for rent incurred during Year 1. In Year 2, one-half of this expense was paid and reported as income by the taxpayer. What amount of this expense may Stone deduct for Year 2?
A. $0
B. $4,500
C. $2,475
D. $2,250
Choice “D” is correct. Expenses owed by an accrual-basis corporation to a cash-basis shareholder who owns at least 50 percent of the corporation’s stock are not deductible by the corporation until the expense is actually paid in cash to the shareholder. Thus, because half of the $4,500 ($2,250) accrued rent was paid to the shareholder in Year 2, Stone may deduct $2,250 in Year 2.
If a buyer accepts an offer containing an immaterial unilateral mistake, the resulting contract will be:
A. Void at the election of the buyer.
B. Valid as to both parties.
C. Void as a matter of law.
D. Voidable at the election of the seller.
Choice “B” is correct. An immaterial unilateral mistake is not a defense to a contract. A material unilateral mistake can be a defense if the nonmistaken party either knew or should have known of the mistake.
Which of the following offers of proof are inadmissible under the parol evidence rule when a written contract is intended as the complete agreement of the parties:
I. Proof of the existence of a subsequent oral modification of the contract.
II. Proof of the existence of a prior oral agreement that contradicts the written contract.
A. II only.
B. I only.
C. Both I and II.
D. Neither I nor II.
Choice “A” is correct. The parol evidence rule prohibits evidence of prior oral or written agreements that seek to contradict the terms of a fully integrated contract (i.e., one intended as the complete agreement). Thus, II is prohibited. However, the parol evidence rule does not prohibit introduction of subsequent agreements; thus, I is not prohibited.
Vale is a 50 percent partner in Ball Partnership. Vale’s tax basis in Ball on January 2, Year 1, was $60,000. Ball did not have unrealized receivables, appreciated inventory, or properties that had been contributed by its partners. On December 31, Year 1, Ball made a $10,000 nonliquidating cash distribution to each partner. The Ball Partnership income tax return reported the following items for Year 1:
Tax-exempt interest income $80,000
Dividend income 12,000
What total amount of gross income from Ball should be included in Vale’s Year 1 adjusted gross income?
A. $16,000
B. $46,000
C. $36,000
D. $6,000
Choice “D” is correct. Vale includes only his share of dividend income from the partnership ($12,000 × 50% = $6,000) in adjusted gross income.
Under Chapter 11 of the federal Bankruptcy Code, which of the following actions is necessary before the court may confirm a reorganization plan?
A. Acceptance of the plan by all classes of claimants.
B. Provision for full payment of administration expenses.
C. Preparation of a contingent plan of liquidation.
D. Appointment of a trustee.
Choice “B” is correct. A reorganization plan under Chapter 11 will not be approved unless the plan provides for the full payment of administration expenses (and for full payment to certain other classes of creditors, too).
Easy Corp. is a real estate developer and regularly engages real estate brokers to act on its behalf in acquiring parcels of land. The brokers are authorized to enter into such contracts, but are instructed to do so in their own names without disclosing Easy’s identity or relationship to the transaction. If a broker enters into a contract with a seller on Easy’s behalf:
A. The broker will not be personally bound by the contract because the broker has express authority to act.
B. Easy will be bound by the contract because of the broker’s apparent authority.
C. The broker will have the same actual authority as if Easy’s identity had been disclosed.
D. Easy will not be liable for any negligent acts committed by the broker while acting on Easy’s behalf.
Choice “C” is correct. Actual authority arises from the communications between the principal and the agent. Whether the agent discloses the principal to the third party with whom the agent contracts has no effect on the communications between the principal and the agent.
As a general partner in Greenland Associates, an individual’s share of partnership income for the current tax year is $25,000 ordinary business income and a $10,000 guaranteed payment. The individual also received $5,000 in cash distributions from the partnership. What income should the individual report from the interest in Greenland?
A. $25,000
B. $5,000
C. $35,000
D. $40,000
Choice “C” is correct. A partner must include in income their share of partnership income (even if not received) on their tax return in the taxable year within which the taxable year of the partnership ends. This income includes guaranteed payments.
Withdrawals/distributions are not a taxable event, yet will decrease the partner’s basis.
During the year, 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 the following year. In addition, in the current year, Scott paid a physician $2,800 for the medical expenses of his wife, who died in the prior year. Disregarding the adjusted gross income percentage threshold, what amount could Scott claim in his current year income tax return for medical expenses?
A. $0
B. $2,800
C. $4,000
D. $6,800
Choice “D” is correct. $6,800. Scott could claim $6,800 on his current year tax return for medical expenses. Medical expenses charged to a credit card is expensed in the year the charge is made. It does not matter when the amount charged is actually paid. Expenses paid for the medical care of a decedent by the decedent’s spouse are included as medical expenses in the year paid, whether they are paid before or after the decedent’s death.
Which of the following events will release a noncompensated surety from liability?
A. Modification by the principal debtor and creditor of their contract that materially increases the surety’s risk of loss.
B. Filing of an involuntary petition in bankruptcy against the principal debtor.
C. Release of the principal debtor’s obligation by the creditor but with the reservation of the creditor’s rights against the surety.
D. Insanity of the principal debtor at the time the contract was entered into with the creditor.
Choice “A” is correct. Any variation on an uncompensated surety’s risk releases the surety.
A taxpayer reported the following in a tax year:
Salary $122,000
Capital gain dividends 3,700
Partnership short-term capital loss (6,300)
The taxpayer acquired the partnership interest during the year in exchange for a capital contribution of $2,750, and there were no additional items affecting the taxpayer’s basis in the partnership. What is the taxpayer’s adjusted gross income for the year?
A $122,700
B. $119,400
C. $122,950
D. $122,000
Choice “C” is correct. The taxpayer’s adjusted gross income (AGI) for the year is $122,950. The short-term capital loss (STCL) from the partnership can only be flowed through for deduction on the partner’s individual income tax return to the extent of the partner’s tax basis in the partnership interest. In this case, the partner’s basis is the amount of his capital contribution of $2,750, so only $2,750 of the STCL is flowed through for deduction on his individual tax return. The remaining $3,550 loss ($6,300 − $2,750) is suspended until the partner’s basis is reinstated in future years.
Individual taxpayers are allowed to deduct up to $3,000 of net capital losses each year, after netting all the capital gains and losses for the year together. The $2,750 STCL from the partnership is offset against the LTCG dividends of $3,700, so the taxpayer has a net LTCG for the year of $950.
Salary $122,000
Capital gain dividends (LTCG) $3,700
STCL from partnership (2,750)
Net LTCG 950
AGI 122,950
Choice “A” is incorrect. AGI of $122,700 includes a $3,000 deduction for the STCL from the partnership ($122,000 + $3,700 − $3,000). The STCL flowed through from the partnership is limited to the taxpayer’s basis in the partnership of $2,750. Even if the STCL flowed through from the partnership was more than $3,000, the $3,000 capital loss deduction is for net capital losses, after netting all capital gains and losses together.
Unemployment tax payable under the Federal Unemployment Tax Act (FUTA), is:
A. Payable by all employers.
B. Deducted from employee wages.
C. Paid to the Social Security Administration.
D. A tax-deductible employer’s expense.
Choice “D” is correct. An employer’s payment under the Federal Unemployment Tax Act (FUTA) is a tax-deductible employer expense.
The spouse of a married taxpayer died on January 15, Year 1. The taxpayer’s qualifying child moved to live with grandparents in their home on August 30, Year 2. If the taxpayer did not remarry before the end of Year 2, then which filing status should the taxpayer choose for Year 2?
A. Married filing jointly
B. Head of household
C. Surviving spouse
D. Married filing separately
Choice “B” is correct. The taxpayer should choose the head of household filing status for Year 2. The taxpayer qualifies for this filing status because the taxpayer is unmarried and maintained his or her home as the principal residence for the qualifying child for more than half of the taxable year. The taxpayer does not meet the requirements for a qualifying widow(er) as a result of the qualifying child moving to live with grandparents in their home on August 30, Year 2. To file as a qualifying widow(er), the surviving spouse must pay over half the cost of maintaining a household where a dependent child lives for the whole taxable year.
Price owns 2,000 shares of Universal Corp.’s $10 cumulative preferred stock. During its first year of operations, cash dividends of $5 per share were declared on the preferred stock but were never paid. In the second year, dividends on the preferred stock were neither declared nor paid. If Universal is dissolved, which of the following statements is correct?
A. Universal will be liable to Price as an unsecured creditor for $10,000.
B. Price will have priority over the claims of Universal’s bond owners.
C. Price will have priority over the claims of Universal’s unsecured judgment creditors.
D. Universal will be liable to Price as a secured creditor for $20,000.
Choice “A” is correct. After a dividend is declared but not paid on cumulative preferred stock, the unpaid dividend ranks with other “unsecured” debts.
Which of the following statements is not true under Chapter 15 of the United States Bankruptcy Code?
A. U.S. courts have an affirmative duty to cooperate with foreign courts.
B. A foreign representative may operate the debtor’s business in the U.S.
C. Discrimination against foreign interests is never allowed.
D. A foreign representative may participate in other U.S. bankruptcy cases pending against the represented debtor.
Choice “C” is correct. This statement is not true. Although discrimination against foreign interests generally is prohibited, discrimination is allowed with regard to certain foreign government tax liens. All of the other statements are true.
Which of the following statements regarding the self-employment tax is true?
A. All self-employment income is subject to both Medicare and Social Security tax.
B. Self-employment income is subject to both federal income tax and self-employment tax.
C. One half of self-employment tax is deductible as an itemized deduction.
D. Income and expenses from self-employment is reported on Schedule D (Form 1040).
Choice “B” is correct. Self-employment income is subject to federal income tax and self-employment tax. The self-employment tax is made up of Social Security (12.4%) and Medicare (2.9%), for a total of 15.3%.
An S corporation has income of $72,000 after the following deductions:
IRC Section 179 election to expense depreciable property $ 15,000
Charitable contributions $11,000
Salary to owner who worked as CEO of the corporation $84,000
What is the amount of non-separately stated income shown on the S corporation’s income tax return?
A. $156,000
B. $98,000
C. $87,000
D. $83,000
Choice “B” is correct. The S corporation’s non-separately stated income is $98,000. The Section 179 expense and charitable contributions are separately stated items. The shareholder-employee salary expense is a deduction in calculating the S corporation’s ordinary business income (non-separately stated income).
Total S corporation taxable income $ 72,000
Add back separately stated items:
Section 179 expense 15,000
Charitable contributions 11,000
S corporation non-separately stated income $ 98,000
Patti is a director of Smackey, Inc. As a corporate director, Patti is:
A. An agent.
B. A fiduciary.
C. A principal.
D. A trustee.
Choice “B” is correct. Each director owes the corporation fiduciary duties and must act in the best interest of the corporation.
Under the “Ultramares” rule, to which of the following parties will an accountant be liable for negligence?
Parties in privity Foreseen parties
A. Yes Yes
B. No No
C. Yes No
D. No Yes
Choice “C” is correct. Ultramares limits the accountant’s liability for negligence to: (i) parties in privity and (ii) intended third party beneficiaries; parties who are merely “foreseen” cannot recover.
An employee who has had Social Security tax withheld in an amount greater than the maximum for a particular year may claim:
A. Such excess 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.
Choice “C” is correct. An employee who has had 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.
Dale’s distributive share of income from the calendar year partnership of Dale & Eck was $50,000 in Year 1. On December 15, Year 1, Dale, who is a cash-basis taxpayer, received a $27,000 distribution of the partnership’s Year 1 income, with the $23,000 balance paid to Dale in May Year 2. In addition, Dale received a $10,000 interest-free loan from the partnership in Year 1. This $10,000 is to be offset against Dale’s share of Year 2 partnership income. What total amount of partnership income is taxable to Dale in Year 1?
A. $27,000
B. $60,000
C. $50,000
D. $37,000
Choice “C” is correct. The total amount of partnership income taxable to Dale in Year 1 is $50,000, which is his distributive share of partnership income.
A partner must include his allocated share of partnership income, even if not received in cash, in his tax return for his taxable year (usually calendar year) within which the taxable year of the partnership ends.
Jensen reported the following items during the current year:
Fair rent value of a condominium owned by Jensen’s employer 1,400
Cash found in a desk purchased for $30 at a flea market 400
Inheritance 11,000
The employer allowed Jensen to use the condominium for free in recognition of outstanding achievement. Based on this information, what is Jensen’s gross income for the year?
A. $12,400
B. $1,800
C. $1,770
D. $1,400
Choice “B” is correct. Gross income includes employee achievement awards not in the form of tangible personal property. Tangible personal property does not include lodging. Gross income also includes treasure troves to the extent of its value in United States currency.
