REG 9 Flashcards
During 2015, Matt Johnson was assessed a deficiency on his 2013 federal income tax return. As a result of this assessment he was required to pay $970, determined as follows: Additional tax $600 Late filing penalty 50 Negligence penalty 200 Interest 120 What portion of the $970 would qualify as itemized deductions for 2015? $0 $ 30 $250 $370
None of the items listed relating to the tax deficiency for 2013 are deductible. The interest on the tax deficiency is considered personal interest and is not deductible. The additional federal income tax, the late filing penalty, and the negligence penalty are also not deductible.
Which one of the following statements concerning the American Opportunity Credit (modified Hope scholarship credit) is correct?
A taxpayer may claim the American Opportunity credit in addition to the lifetime learning credit for one dependent.
The credit is available for the first four years of a postsecondary education program.
The credit is available on a per taxpayer basis.
Expenses incurred for room, board, and books qualify for the credit.
The American Opportunity credit provides for a maximum credit of $2,500 per year (100% of the first $2,000, plus 25% of the next $2,000 of tuition expenses) for the first four years of postsecondary education. The credit is available on a per student basis and covers tuition for the taxpayer, spouse, and dependents. To be eligible, the student must be enrolled on at least a half-time basis for one academic period during the year. The American Opportunity credit is available for an individual only if the lifetime learning credit is not claimed for that individual during the same tax year.
Which expense, both incurred and paid during the current year, can be claimed as an itemized deduction subject to the 2% of adjusted gross income floor?
Employee’s unreimbursed business auto expense.
One-half of the self-employment tax.
Employee’s unreimbursed moving expense.
Self-employed health insurance.
An employee’s unreimbursed business expenses are included in the category of miscellaneous itemized deductions subject to the 2% of adjusted gross income floor.
Aqua, Inc., a Florida corporation, entered into a contract for $30,000 with Sing, Inc., to perform plumbing services in a complex owned by Sing in Virginia. After the work was satisfactorily completed, Sing discovered that Aqua violated Virginia’s licensing law by failing to obtain a plumbing license. Virginia’s licensing statute was regulatory in nature, serving to protect the public against unskilled and dishonest plumbers. Upon Sing’s request, independent appraisals of Aqua’s work were performed, which indicated that the complex was benefited to the extent of $25,000. Sing refuses to pay Aqua. If Aqua brings suit it may recover
$30,000.
$25,000.
Nothing.
An amount sufficient to cover its out-of-pocket costs.
This answer is correct because if a contract violates a regulatory licensing statute, it will be unenforceable by either party. The main function of a regulatory licensing statute is to protect the public against unskilled or dishonest persons. Another type of licensing statute is a revenue-seeking statute. The purpose of these types of statutes generally is to gain revenue for the governmental unit issuing the license. A contract that violates a revenue-seeking statute is enforceable. In this case, the facts stipulate that a regulatory licensing statute is violated. Consequently, Aqua may not enforce the agreement.
Bud Ace, a self-employed carpenter, reports his income on the cash basis. During the current year he completed a job for a customer and sent him a bill for $3,000. The customer was not satisfied with the work and indicated that he would only pay $1,500. Ace agreed to reduce the bill to $2,000 but before payment was made the customer died. Ace could not collect from the customer’s estate and should treat this loss as
An ordinary business deduction of $3,000.
An ordinary business deduction of $2,000.
A short-term capital loss of $1,500.
A nondeductible loss as no income was reported.
Accounts receivable for services rendered by a cash-basis taxpayer have no basis for tax purposes. Since a cash-basis taxpayer does not include accounts receivable in income until payment is received, failure to collect accounts receivable results in a nondeductible loss.
Hall, a divorced person and custodian of her 12-year-old child, filed her 2014 federal income tax return as head of a household. Hall earned a salary of $75,000 in 2014. Hall was not covered by any type of retirement plan, but contributed $5,500 to an IRA in 2014. Hall’s $5,500 contribution to an IRA should be treated as
A deduction from income in arriving at adjusted gross income.
A deduction from adjusted gross income subject to the 2% of adjusted gross income floor.
A deduction from adjusted gross income not subject to the 2% of adjusted gross income floor.
Nondeductible, with the interest income on the $5,500 to be deferred until withdrawal.
Since Hall was not a participant in a qualified pension plan, there is no phase-out of the $5,500 maximum IRA deduction. Therefore, Hall’s maximum contribution and deduction to an IRA would be limited to the lesser of (1) $5,500, or (2) 100% of her compensation. Since Hall earned a salary of $75,000, Hall’s maximum deduction for contributions to an IRA is $5,500. If IRA contributions are deductible, they are always deductible from gross income in arriving at adjusted gross income.
For the current year, Atkinson, Inc. had gross business income of $160,000 and dividend income of $100,000 from unaffiliated domestic corporations that are 20%-owned. Business deductions for the current year amounted to $170,000. What is Atkinson’s dividends-received deduction for the current year? $0 $72,000 $80,000 $90,000
72'000 This answer is correct. The DRD (normally 80% of dividends from unaffiliated corporations 20%-owned) may be limited to 80% of TI before the DRD, except when the full 80% DRD creates or increases a net operating loss. Gross business income $ 160,000 Dividend income 100,000 $ 260,000 Less business deductions (170,000) Taxable income before DRD $90,000 DRD ($90,000 × 80%) (72,000) Taxable income $18,000 Since the full deduction (80% × $100,000 = $80,000) would not create a NOL, the limitation applies.
Frey Corp. has 1,000 shares of issued and outstanding common stock. Frey’s articles of incorporation permit a stockholder who owns 5% or more of the outstanding stock or who has owned the stock for longer than six months to inspect Frey’s books and records. Ace, who has owned 25 shares of Frey stock for four months, wants to inspect the books and records. Under the Revised Model Business Corporation Act, which of the following statements is correct regarding Ace’s right to inspect the books and records?
Ace must wait two months before being allowed to inspect the books and records.
Ace must purchase an additional 25 shares of Frey stock before being allowed to inspect the books and records.
Ace may, after giving five days’ written notice, inspect the books and records to determine the value of Frey stock.
Ace may, after giving five days’ written notice, inspect the books and records to provide a list of Frey stockholders to Ace’s broker.
Under the Revised Model Business Corporation Act a stockholder has the right to inspect the books and records with 5 days’ notice.
How may income taxes paid by an individual to a foreign country be treated?
As an itemized deduction subject to the 2% floor.
As a credit against federal income taxes due.
As an adjustment to gross income.
As a nondeductible
Foreign income taxes paid by an individual may be deducted as an itemized deduction (not subject to the 2% floor), or may be subtracted as a credit against federal income taxes due.
Barkley owns a vacation cabin that was rented to unrelated parties for 10 days during the year for $2,500. The cabin was used personally by Barkley for three months and left vacant for the rest of the year. Expenses for the cabin were as follows. Real estate taxes $1,000 Maintenance and utilities $2,000 How much rental income (loss) is included in Barkley’s adjusted gross income? $0 $ 500 $ (500) $(1,500)
- The treatment of rental income and expenses for a dwelling unit that is also used for personal purposes depends on whether the taxpayer uses it as a home. A dwelling unit is used as a home if personal use exceeds the greater of 14 days, or 10% of the number of days rented. If a dwelling unit is used as a home and it is rented for less than 15 days during the tax year, rental income is excluded from gross income and expenses are not deductible as rental expenses. Here, since the cabin was used as a home and was rented for only 10 days, the rental income is excluded from Barkley’s gross income, and the real estate taxes and maintenance and utilities are not deductible as rental expenses. Of course the real estate taxes will be deductible as an itemized deduction from AGI if Barkley itemizes deductions.
Bishop Corporation reported taxable income of $700,000 on its federal income tax return for calendar year 2014. Selected information for 2014 is available from Bishop’s records as follows:
Provision for federal income tax per books $238,000
Depreciation claimed on the tax return 130,000
Depreciation recorded in the books 75,000
Life insurance proceeds on death of corporate officer 100,000
Bishop reported net income per books for 2014 of
$897,000
$637,000
$617,000
$517,000
This answer is correct. The provision for federal income tax is not deductible in computing taxable income but would be deducted in computing book income. The life insurance proceeds are tax-exempt, but are included in book income. The calculation of net income per books is as follows:
Taxable income $700,000
Less provision for federal income tax (238,000)
Add life insurance proceeds 100,000
Add depreciation on tax return 130,000
Less depreciation per books (75,000)
Net income per books $617,000
Axel Corp. was incorporated and began business in 2012. In computing its alternative minimum tax for 2013, it determined that it had adjusted current earnings (ACE) of $500,000 and alternative minimum taxable income (prior to the ACE adjustment) of $450,000. For 2014, it had adjusted current earnings of $200,000 and alternative minimum taxable income (prior to the ACE adjustment) of $300,000. What is the amount of Axel Corp.’s adjustment for adjusted current earnings that will be used in calculating its alternative minimum tax for 2014? $( 37,500) $( 50,000) $( 75,000) $(100,000)
The requirement is to determine the adjustment for adjusted current earnings (ACE) that will be used in the computation of Axel Corp.’s alternative minimum tax for 2014. The ACE adjustment is equal to 75% of the difference between ACE and pre-ACE alternative minimum taxable income (AMTI). The ACE adjustment can be positive or negative, but a negative ACE adjustment is limited in amount to prior years’ net positive ACE adjustments. For 2013, Axel had a positive ACE adjustment of ($500,000 − $450,000) × 75% = $37,500. For 2014, Axel’s ACE is less than its pre-ACE AMTI, leading to a tentative negative ACE adjustment of ($200,000 − $300,000) × 75% = ($75,000). However, this negative ACE adjustment is allowed only to the extent of $37,500, the amount of Axel’s net positive adjustment for prior years.
Viking Corp. manufactures action figures for children. During 2014, Viking purchased $2,300,000 of used production machinery to be used in its business. For 2014, Viking’s taxable income before any Sec. 179 expense deduction was $140,000. What is the maximum amount of Sec. 179 expense election Viking will be allowed to deduct for 2014 and the maximum amount of Sec. 179 expense election that can carry over to 2015?
Expense of $140,000 and carryover of $60,000.
Expense of $140,000 and carryover of $360,000.
Expense of $200,000 and carryover of $300,000.
Expense of $500,000 and carryover of $0.
Sec. 179 permits a taxpayer to treat up to $500,000 of the cost of qualifying depreciable personal property as an expense rather than as a capital expenditure. However, the $500,000 maximum is reduced dollar-for-dollar by the cost of qualifying property placed in service during the taxable year that exceeds $2 million. Here, the maximum amount that can be expensed is $500,000 − ($2,300,000 − $2,000,000) = $200,000 for 2014. However, this amount is further limited as a deduction for 2014 to Viking’s taxable income of $140,000 before the Sec. 179 expense deduction. The remainder ($200,000 − $140,000 = $60,000) that is not currently deductible because of the taxable income limitation can be carried over and will be deductible subject to the taxable income limitation in 2015.
On July 1, 2015, in connection with a recapitalization of Yorktown Corporation, Robert Moore exchanged 1,000 shares of stock which cost him $95,000 for 1,000 shares of new stock worth $108,000 and bonds in the principal amount of $10,000 with a fair market value of $10,500. What is the amount of Moore’s recognized gain during 2015? $0 $10,500 $23,000 $23,500
Since a recapitalization is a reorganization, a realized gain is recognized only to the extent that consideration other than stock or securities is received, including the FMV of an excess of the principal amount of securities received over the principal amount of securities surrendered. Since no securities were surrendered, the excess principal amount of securities received is $10,000, and Moore’s realized gain of $23,500 [($108,000 + $10,500) — $95,000] is recognized to the extent of the $10,500 FMV of the excess principal amount of securities received.
An employee who has had social security tax withheld in an amount greater than the maximum for a particular year, may claim
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.
Reimbursement of such excess from his employers, if that excess resulted from correct withholding by two or more employers.
The excess as a credit against income tax, if that excess resulted from correct withholding by two or more employers.
The excess as a credit against income tax, if that excess was withheld by one employer.
If an individual works for more than one employer, and combined wages exceed the maximum used for FICA purposes, too much FICA tax will be withheld. In such case, since the excess results from correct withholding by two or more employers, the excess should be claimed as a credit against income tax.
Which of the following statements is correct regarding a limited liability company’s operating agreement?
It must be filed with a central state agency.
It must be in writing.
It is designed to forestall and resolve disputes among the owners.
It is necessary for a limited liability company to exist.
One of the main purposes of an operational agreement for any business entity is to anticipate and diffuse problems before they occur.
For the year ended December 31, 2014, Elmer Shaw earned $3,000 interest at Prestige Savings Bank, on a time savings account scheduled to mature in 2017. In March 2015, before filing his 2014 income tax return, Shaw incurred an interest forfeiture penalty of $1,500 for premature withdrawal of the funds from his account. Shaw should treat this $1,500 forfeiture penalty as a
Penalty not deductible for tax purposes.
Deduction from gross income in arriving at 2015 adjusted gross income.
Deduction from 2015 adjusted gross income, deductible only if Shaw itemizes his deductions for 2015.
Reduction of interest earned in 2014, so that only $1,500 of such interest is taxable on Shaw’s 2014 return.
An interest forfeiture penalty for making a premature withdrawal from a time savings account should be deducted from gross income in arriving at adjusted gross income in the year in which the penalty is incurred.
Parker, whose spouse died during the preceding year, has not remarried. Parker maintains a home for her dependent child. What is Parker’s most advantageous filing status?
Single.
Head of household.
Married filing separately.
Qualifying widow(er) with dependent child.
Parker should file as a “Qualifying widow(er) with dependent child” since it will enable her to use the joint return standard deduction and joint return tax rate schedule. This filing status is available for the two taxable years following the year of a spouse’s death if (1) the surviving spouse was eligible to file a joint return in the year of the spouse’s death, (2) does not remarry before the end of the current tax year, and (3) the surviving spouse pays over 50% of the cost of maintaining a household that is the principal home for the entire year of the surviving spouse’s dependent child.
A 33-year-old taxpayer withdrew $30,000 (pretax) from a 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? $10,000 $10,500 $13,000 $13,500
If an individual never made a nondeductible contribution to a traditional IRA, then any distributions from the IRA are fully taxable as ordinary income. Also, if the individual is under age 59 1/2, the distribution is generally subject to the 10% penalty tax for early distributions. Here, the $30,000 distribution would be taxed at the taxpayer’s marginal rate of 35% resulting in a tax of $10,500. Additionally, there will be a penalty tax of 10% × $30,000 = $3,000, because of having received the distribution before age 59 1/2, resulting in a total tax liability of $13,500
Boone Corporation, which is not exempt from the alternative minimum tax, reported adjusted current earnings (ACE) of $500,000 for 2014. Its alternative minimum taxable income (before the alternative minimum tax NOL deduction and ACE adjustment) was $200,000. Boone Corporation’s alternative minimum taxable income (after exemption) for 2014 was $237,500 $372,500 $425,000 $500,000
Boone’s pre-ACE AMTI of $200,000 would be increased by an ACE adjustment of [($500,000 − $200,000) × 75%] = $225,000, resulting in an alternative minimum taxable income of $425,000. No AMT exemption would be available because Boone’s $40,000 exemption would be reduced (to zero) by 25% of AMTI in excess of $150,000.
Nelson Harris had adjusted gross income in 2014 of $60,000. During the year his personal summer home was completely destroyed by a hurricane. Pertinent data with respect to the home follows: Cost basis $39,000 Value before casualty 45,000 Value after casualty 3,000 Harris was partially insured for his loss and in 2014 he received a $15,000 insurance settlement. What is Harris’ allowable casualty loss deduction for 2014? $17,900 $18,000 $26,900 $27,000
This answer is correct. The deduction for a nonbusiness casualty loss is computed as the lesser of (1) the adjusted basis of property, or (2) the decline in FMV; reduced by any insurance recovery, a $100 floor, and 10% of the taxpayer’s AGI.
Lesser of:
1) Adjusted basis $39,000 or
2) Decline in FMV ($45,000 − $3,000) = $42,000 $39,000
Decreased by:
Insurance recovery (15,000)
$100 floor (100)
10% of $60,000 (6,000)
Casualty loss deduction $17,900
Roger Burrows, age 19, is a full-time student at Marshall College and a candidate for a bachelor’s degree. During the current year he received the following payments:
State scholarship covering tuition for 10 months $ 3,600
Loan from college financial aid office 5,500
Cash support from parents 8,000
Cash dividends on qualified investments 700
Cash prize awarded in contest 5,000
$22,800
What is Burrows’ gross income for the current year?
$ 700
$ 5,700
$13,700
$17,300
Roger Burrows’ gross income is $5,700, consisting of $700 of dividends and the $5,000 prize. Scholarships awarded for tuition to candidates for a degree are excluded from gross income unless provided as compensation for services. Loans and cash support from parents are also excluded from gross income.
Which of the following items should be included on the Schedule M-1, Reconciliation of Income (Loss) per Books with Income per Return, of Form 1120, US Corporation Income Tax Return to reconcile book income to taxable income?
Cash distributions to shareholders.
Premiums paid on key-person life insurance policy.
Corporate bond interest.
Ending balance of retained earnings.
The requirement is to determine which item should be included on Schedule M-1 of Form 1120 to reconcile a corporation’s book income to taxable income. Generally, Schedule M-1 includes items whose treatment for computing book income differs from their treatment in computing taxable income. This answer is correct since the premiums paid on a key-person life insurance policy would be deducted per books, but would not be deductible for tax purposes because it is an expense of producing tax-exempt income (i.e., the life insurance proceeds if the person dies). The amount of premium would be added back to book income in order to arrive at taxable income on Schedule M-1.
In 2014, Joe Buron, a single taxpayer, had $80,000 in taxable income before personal exemptions. Buron had no tax preferences, and his itemized deductions were as follows:
Real property taxes $4,000
Home mortgage interest on loan to purchase residence 6,000
Miscellaneous deductions in excess of 2% of adjusted gross income 2,000
What amount must Buron report as alternative minimum taxable income before the AMT exemption for 2014?
$84,000
$86,000
$88,000
$92,000
Certain itemized deductions are not deductible in computing an individual’s AMTI. Specifically, no AMT deduction is allowed for state, local, and foreign income taxes, real and personal property taxes, and miscellaneous itemized deductions subject to the 2% of AGI floor. Here, Buron’s $4,000 of real property taxes and $2,000 of miscellaneous itemized deductions must be added back to his $80,000 of regular taxable income before personal exemption to arrive at Buron’s AMTI before AMT exemption of ($80,000 + $4,000 + $2,000) = $86,000.
Parr is the vice president of research of Lynx, Inc. When hired, Parr signed an employment contract prohibiting Parr from competing with Lynx during and after employment. While employed, Parr acquired knowledge of many of Lynx’s trade secrets. If Parr wishes to compete with Lynx and Lynx refuses to give Parr permission, which of the following statements is correct?
Parr has the right to compete with Lynx upon resigning from Lynx.
Parr has the right to compete with Lynx only if fired from Lynx.
In determining whether Parr may compete with Lynx, the court should not consider Parr’s ability to obtain other employment.
In determining whether Parr may compete with Lynx, the court should consider, among other factors, whether the agreement is necessary to protect Lynx’s legitimate business interests.
This answer is correct because for a covenant not to compete to be enforceable, the agreement must be necessary to protect Lynx’s legitimate interests. In deciding the issue, the court will balance Parr’s ability to obtain other employment against Lynx’s right to protect its business.
Lark Corp. and its wholly owned subsidiary, Day Corp., both operated on a calendar year. In January 2015 Day adopted a plan of complete liquidation. Two months later, Day paid all of its liabilities and distributed its remaining assets to Lark. These assets consisted of the following:
Cash $50,000
Land (at cost) 10,000
Fair market value of the land was $30,000. Upon distribution of Day’s assets to Lark, all of Day’s capital stock was cancelled. Lark’s basis for the Day stock was $7,000. Lark’s recognized gain in 2015 on receipt of Day’s assets in liquidation was $0 $50,000 $53,000 $73,000
No gain or loss will be recognized by a parent corporation (Lark Corp.) on the receipt of property in complete liquidation of an 80% or more owned subsidiary (Day Corp.).
On June 30, 2015, Ral Corporation had retained earnings of $100,000. On that date, it sold a plot of land to a noncorporate stockholder for $50,000. Ral had paid $40,000 for the land in 2010, and it had a fair market value of $80,000 when the stockholder bought it. The amount of dividend income taxable to the stockholder in 2015 is $0 $10,000 $20,000 $30,000
If a corporation sells property to a shareholder for less than fair market value, the shareholder is considered to have received a constructive dividend to the extent of the difference between the fair market value of the property and the price paid. Thus, the shareholder’s dividend income is $30,000 ($80,000 FMV — $50,000 purchase price).
Mr. and Mrs. Donald Curry’s real property tax year is on a calendar-year basis, with payments due annually on August 1. The realty taxes on their home amounted to $1,200 in 2014, but the Currys did not pay any portion of that amount since they sold the house on April 1, 2014, four months before payment was due. However, realty taxes were prorated on the closing statement. Assuming that they owned no other real property during the year, how much can the Currys deduct on Schedule A of Form 1040 for real estate taxes in 2014? $0 $296 $800 $1,200
This answer is correct. When real estate is sold, the real estate tax deduction is apportioned between the seller and the buyer according to the number of days in the real property tax year that each holds the property. Since Curry sold his home on April 1, 2012, the deduction allocated to Curry would be
90/365 × $1,200 = $296
In 2015, Dr. Ernest Griffiths, a cash-basis taxpayer, incorporated his medical practice. No liabilities were transferred. The following assets were transferred to the corporation:
Cash $20,000
Equipment:
Adjusted basis $140,000
Fair market value $180,000
Immediately after the transfer, Griffiths owned 100% of the corporation’s stock. The corporation’s total basis for the transferred assets is
$140,000
$160,000
$180,000
$200,000
The cash and equipment were transferred by Griffiths in a nontaxable, Sec. 351 transfer to a controlled corporation. The corporation’s basis for the assets would be the same as Griffiths’ basis, increased by any gain recognized by Griffiths. Since Griffiths did not receive any boot, no gain was recognized by him. Thus, the corporation’s total basis for the assets transferred is $160,000 ($20,000 + $140,000).
Barton Corporation and Clagg Corporation have decided to combine their separate companies pursuant to the provisions of their state corporation laws. After much discussion and negotiation, they decided that a consolidation was the appropriate procedure to be followed. Which of the following is an incorrect statement with respect to the contemplated statutory consolidation?
A statutory consolidation pursuant to state law is recognized by the Internal Revenue Code as a type of tax-free reorganization.
The larger of the two corporations will emerge as the surviving corporation.
Creditors of Barton and Clagg will have their claims protected despite the consolidation.
The shareholders of both Barton and Clagg must approve the plan of consolidation.
The larger of the two corporations will emerge as the surviving corporation. This answer is correct because the statement is false. A consolidation is the unifying of two or more corporations into one new corporation, extinguishing both existing corporations.
Sec. 1244 stock permits shareholders to deduct an ordinary loss on sale or worthlessness of stock. Which of the following is correct with respect to qualifying for Sec. 1244 ordinary loss treatment?
The shareholder must be the original holder of stock, and an individual or corporation.
The stock can be common or preferred, voting or nonvoting.
The amount of ordinary loss is limited to $100,000 ($200,000 on joint return); any excess is treated as a capital loss.
The corporation during the 3-year period before the year of loss received more than 50% of its total gross receipts from royalties, rents, dividends, interest, annuities, and gains from sales or exchanges of stock or securities.
In order to deduct an ordinary loss on sale or worthlessness of stock under Sec. 1244, (1) the shareholder must be the original holder of stock, and an individual or partnership; (2) the stock can be common or preferred, voting or nonvoting; (3) the amount of ordinary loss is limited to $50,000 ($100,000 on joint return); (4) the corporation during the 5-year period before the year of loss received less than 50% of its total gross receipts from royalties, rents, dividends, interest, annuities, and gains from sales or exchanges of stock or securities; and (5) the corporation’s aggregate amount of money and adjusted basis of other property received for stock as a contribution to capital and paid-in surplus does not exceed $1,000,000.
