Sample Exam 1

Question 1

Smith and Jones formed a partnership. Smith contributed a building with an original cost of $80,000, a fair market value of $100,000, and an adjusted basis of $40,000. Jones contributed $100,000 cash. Each partner is a material participant in partnership business. How much can Smith currently deduct if his share of the partnership’s first-year operating loss is $45,000?

A) $5,000

B) $20,000

C) $40,000

D) $45,000

Answer 1

The answer is (C). The distributive share of a partnership’s operating loss that is deductible by an individual partner is limited to the adjusted basis of his or her partnership interest. Hence Smith’s adjusted basis in his partnership interest is $40,000, determined by his adjusted basis for the property he has contributed.

Question 2

Which of the following statements concerning the taxation of capital gains and losses of individual taxpayers is correct?

A) The maximum tax rate on long-term capital gains is generally 15 percent under current law.

B) Up to $3,000 of net capital losses ($1,500 if married filing separately) may be used to offset ordinary income in any given year.

C) Collectibles gain is taxed at regular ordinary income tax rates.

D) The portion of long-term gain attributable to unrecaptured depreciation is not taxable when real estate is sold.

Answer 2

The answer is (B). (A) is incorrect because the maximum rate is generally 20 percent. (C) is incorrect because collectibles gain is subject to a 28 percent maximum rate. (D) is incorrect because such unrecaptured depreciation is subject to a 25 percent maximum rate.

Question 3

Michael and Mary, a married couple filing jointly, sell their home this year for $650,000. Their basis in the home, including cost and improvements, is $200,000. Mary purchased the home in her name many years ago and the couple has lived together there since that time. What amount of gain must Michael and Mary recognize from the sale?

A) $0

B) $200,000

C) $450,000

D) $650,000

Answer 3

The answer is (A). The couple is eligible for the full $500,000 exclusion under the rules for married couples. Their realized gain is $450,000 ($650,000 – $200,000). Therefore no gain is taxable.

Question 4

Which of the following statements concerning the conventions used for calculating depreciation in the year an asset is placed in service is correct?

A) Assets in the 5-year property class are subject to a midmonth convention.

B) The convention for the year the property is placed in service does not apply in the year in which the property is disposed of.

C) A midquarter convention applies if more than 40 percent of all property placed in service by a taxpayer during the year and otherwise qualifying for the half-year convention is placed in service during the last 3 months of the taxable year.

D) Real estate is subject to a half-year convention.

Answer 4

The answer is (C). (A) is incorrect because 5-year property is subject to a half-year convention. (B) is incorrect because the convention does apply in the year in which the property is disposed of. (D) is incorrect because real estate is generally subject to a midmonth convention.

Chapter 10

Question 5

Johnson makes a $500,000 building available five nights a week at no charge to the local Boy Scout Council. Which of the following statements correctly describes how the use of Johnson’s property will be treated for purposes of the charitable contribution deduction?

A) Johnson has a charitable deduction equal to the fair market value of the property.

B) Johnson has no deduction for the rent-free occupancy.

C) Johnson has a charitable deduction equal to the value of the rent-free occupancy but limited to 30 percent of his adjusted gross income.

D) Johnson has a charitable deduction equal to the value of the rent-free occupancy but limited to 50 percent of his adjusted gross income.

Answer 5

The answer is (B). Allowing a charitable, religious, educational, or similar organization to use property on a rent-free basis does not give rise to a charitable deduction.

Question 6

Five years ago John purchased a portfolio of public-purpose municipal bonds for $85,000. During the current year he received $8,000 interest on these bonds. At the end of the current year he sold these bonds for $95,000. How much taxable income must John report for the current year as a consequence of owning and disposing of these bonds?

A) $0

B) $4,800

C) $10,000

D) $18,000

Answer 6

The answer is (C). Any gain from the sale of tax-exempt securities is subject to federal income taxation. Since the bonds are public-purpose bonds, the interest is tax exempt.

Question 7

Which of the following statements concerning elements of personal income taxation is correct?

A) The personal exemption amount is a fixed amount not indexed for inflation.

B) The kiddie tax applies to the earned income of children under a specified age.

C) Single taxpayers receive the highest standard deduction amount.

D) The range of taxable income over which specific tax brackets will be applied depends on the filing status of the particular taxpayer(s).

Answer 7

The answer is (D). (A) is incorrect because the the TCJA eliminated personal and dependent exemptions for the years 2018-2025. (B) is incorrect because the kiddie tax is applicable to the net unearned income of children under a specified age. (C) is incorrect because married taxpayers filing jointly receive the highest standard deduction amount.

Question 8

Which of the following is an ordinary and necessary deductible business expense for Bob, a life insurance agent?

A) the tuition fee for the two CLU courses he is taking toward his CLU designation

B) the entire amount of his home telephone bill, since he often sets up appointments from home

C) premiums for his homeowners’ insurance

D) the cost of commuting to his office

Answer 8

The answer is (A). The tuition for CLU courses is paid for the purpose of maintaining or improving skills necessary to the agent’s current employment. (B) is incorrect because his primary office is not at home, and the basic cost of his first line is nondeductible. (C) is incorrect because personal insurance premiums are generally nondeductible. (D) is incorrect because commuting expenses are nondeductible.

Question 9

Which of the following statements concerning a taxpayer who wishes to contest a statutory notice of deficiency assessed against him is correct?

A) He may petition for a jury trial in the U.S. Court of Federal Claims without prepaying the deficiency.

B) He may petition the U.S. Tax Court to hear his case without prepaying the deficiency but is not entitled to a jury trial.

C) He may file a petition to have his case heard before a jury in the U.S. District Court without prepaying the deficiency.

D) He may petition for a jury trial in the U.S. Tax Court without prepaying the deficiency.

Answer 9

The answer is (B). The Tax Court is the only court that will hear a tax case without prior payment of the assessed deficiency. (A) is incorrect because there are no jury trials in the Court of Federal Claims. (C) is incorrect because prepayment of the assessed deficiency is required in the District Court. (D) is incorrect because the Tax Court does not have jury trials.

Question 10

An employer maintains a group term life insurance plan for its employees. A nonkey employee, aged 60, is provided with $100,000 worth of coverage. Using the Uniform Premium Table I, the cost of $1,000 of protection per month in his age bracket is $.66. If the employee contributes $200 annually toward the cost of the coverage, what amount will be included in the employee’s gross income?

A) $0

B) $196

C) $396

D) $792

Answer 10

The answer is (B). Premiums for the first $50,000 of coverage are tax free to the employee. The Table I cost for the excess coverage ($50,000) is taxable to the extent that it exceeds the employee’s contribution. Here, this Table I cost is $396 per year (.66 × 12 × 50). Therefore $196 is taxable to the employee ($396 – $200).

Question 11

Faith Forrester has the following selected information concerning her interest expenses and investment income for this year:

Interest income from corporate bonds = $5,000

Dividend income not eligible for the lower maximum tax rates on qualifying dividends = $10,000

Interest paid to acquire common stock portfolio = $18,000

Interest income from public-purpose municipal bonds = $4,000

Interest paid to acquire the municipal bonds = $2,000

Qualified residence interest paid on principal residence = $10,000

Based on the above information, the total amount of all of Faith’s interest deductions for this year is

A) $15,000

B) $25,000

C) $28,000

D) $29,000

Answer 11

The answer is (B). Faith can deduct investment interest up to the limit of her net investment income. However, municipal bond interest income or the interest paid to acquire municipal bonds does not qualify as investment income or interest. Thus the only investment interest that qualifies is the $18,000 paid to acquire the common stocks. Since Faith has only $15,000 of net investment income, she is limited to a $15,000 investment interest deduction. The $10,000 mortgage interest on the home is fully deductible. Faith has total interest deductions this year of $25,000.

Question 12

The Magic Missile Corporation has two shareholders. Past earnings and profits totaled $100,000. This year the corporation had earnings and profits of $200,000 and distributed $175,000 to each shareholder. How much of the distribution is taxable as a dividend to each shareholder?

A) $0

B) $100,000

C) $150,000

D) $175,000

Answer 12

The answer is (C). The distribution to each shareholder is taxed as a dividend to the extent of the pro rata earnings and profits of the corporation, both accumulated and current. The combined earnings and profits in this case totaled $300,000. Therefore $150,000 of the distribution to each of the two shareholders is a dividend.

Question 13

Sally Snow is the beneficiary of her husband’s $120,000 life insurance policy. Sally’s husband died in September 2000. She elected to receive $7,800 annually under a life income option. Her life expectancy was 20 years when the life income option was chosen. How much of each annual annuity payment is included in her gross income?

A) $1,800

B) $3,800

C) $6,000

D) $7,800

Answer 13

The answer is (A). Under the settlement option chosen, Sally receives $7,800 annually; $6,000 represents the death benefit that is nontaxable to her. The remaining portion, $1,800, represents payment of interest, which is taxable as ordinary income.

Question 14

Which of the following statements concerning the deductibility of bad debts is correct?

A) If a father guarantees his daughter’s bank loan and she defaults, the father is entitled to a business bad-debt deduction.

B) Under certain circumstances a bad-debt deduction may be available even if a legal debt does not exist.

C) No deduction for partial worthlessness of a debt is allowed.

D) A nonbusiness bad debt can be deductible only as a short-term capital loss.

Answer 14

The answer is (D). (A) is incorrect because in a family situation the guarantor of a loan is not acting in the course of his or her trade or business. (B) is incorrect because a legal (enforceable) debt is a prerequisite to the deduction. (C) is incorrect because a taxpayer may take a deduction for partial worthlessness if the debt is a business bad debt and the circumstances warrant it.

Question 15

In order to be treated as a qualifying child of the taxpayer for dependency exemption purposes, an individual must generally meet which of the following tests?

A) The individual’s gross income for the year must be less than the amount of the personal exemption.

B) The individual must have the same principal place of abode as the taxpayer for more than half of the taxable year.

C) The individual must be under the age of 17.

D) The taxpayer must provide 100 percent of the individual’s support for the year.

Answer 15

The answer is (B). (A) is incorrect because the gross income test applies for purposes of determining whether an individual is a qualifying relative, not a qualifying child. (C) is incorrect because a qualifying child must generally be below the age of 19, not 17. (Different rules apply for full-time students and individuals with disabilities.) (D) is incorrect because the support test for a qualifying child requires only that the individual not provide more than half of his or her own support.

Question 16

Which of the following educational expenses would be deductible as a business expense by an individual taxpayer?

A) A practicing attorney pays for medical school because she wants to run for the office of city coroner.

B) A filing clerk pays for a night course in computer-based filing because his supervisor suggested he learn the more modern system since the office will be converting to it soon.

C) A carpenter pays for courses leading to a master’s degree in literature to further broaden his horizons.

D) A salesman pays for courses in an MBA program to be qualified to apply for a job as vice president of finance

Answer 16

The answer is (B). Educational expenses are deductible as business expenses if the education is to improve skills in the taxpayer’s current job or is required by the taxpayer’s employer. However, education leading to a career change does not give rise to a business expense deduction, even though a different tax deduction or credit might be available for the expense.

Question 17

Which of the following statements concerning the rules for taxation of capital gains for individual taxpayers is correct?

A) The current required holding period for long-term capital gains is more than 24 months.

B) Gain from the sale of collectibles is taxed at a maximum rate of 20 percent.

C) There must generally be a sale or exchange of a capital asset in order for the capital gain or loss rules to apply.

D) Short-term capital gains are taxed at a maximum rate of 28 percent.

Answer 17

The answer is (C). In the case of capital assets, realization of gain or loss generally occurs through a sale or taxable exchange of the asset.

Question 18

This year Joe Carlton gave rental real estate worth $50,000 to his daughter Susan as a wedding present. Joe’s adjusted basis in the property was $10,000. After Susan received the property, it generated $5,000 in income this year. Which of the following amounts will Susan have to include as income this year?

A) $0

B) $5,000

C) $10,000

D) $55,000

Answer 18

The answer is (B). Only the $5,000 of income generated by the gifted property is includible in Susan’s gross income.

Question 19

How many personal exemptions is a blind, unmarried taxpayer, aged 65 or older, who is not subject to the exemption phaseout rules, entitled to?

A) The taxpayer is not entitled to any personal exemptions.

B) The taxpayer is entitled to one personal exemption.

C) The taxpayer is entitled to two personal exemptions.

D) The taxpayer is entitled to three personal exemptions.

Answer 19

The answer is (A). Older or blind taxpayers receive an additional amount in the determination of their standard deduction. However, they do not receive additional personal exemptions under TCJA as of 2018.

Question 20

20. An executive bought 100 shares of his employer’s stock for $2,000 on July 1 of this year. These shares are nontransferable and he must return them if he leaves the corporation. However, for each year he remains, 20 shares do not have to be returned. If the fair market value is $40 per share on July 1 of next year, the executive will have ordinary income next year of

A) $400

B) $800

C) $2,000

D) $4,000

Answer 20

The answer is (A). The executive has a basis of $20 per share ($2,000 ÷ 100). Their value when the restriction lapses is $40 per share. Therefore the executive has income of $20 per share ($40 – $20), for a total of $400 ($20 × 20 shares).

Question 21

For the current year an individual taxpayer age 70 will have the following income and medical expenses: Adjusted gross income = $100,000 Medical expense insurance = $3,000 Unreimbursed hospital and doctor bills = $2,000 Unreimbursed prescription drug expenses = $1,000 The individual taxpayer will have a medical expense deduction for the current year of

A) $0

B) $1,000

C) $3,000

D) $6,000

Answer 21

The answer is (A). The total medical expenses ($6,000) are less than the applicable floor of adjusted gross income ($7,500 for taxpayers, or 7.5% of AGI in 2017 and 2018 and reverting back to 10% in 2019).

Question 22

A C corporation in the manufacturing business having $50,000 of taxable income for the year will pay federal income taxes in the amount of

A) $10,500

B) $12,500

C) $17,000

D) $19,500

Answer 22

The answer is (A). Under the TCJA in 2018, the tax rate for C Corporations is 21 percent, or $10,500 in this case.

Question 23

Robert and Susan were just divorced. In accordance with the decree, he is paying her $1,000 per month as alimony and $600 per month for support of their twins, aged 5. How much of each monthly payment of $1,600 is allowed as a deduction from Robert’s gross income?

A) $0

B) $600

C) $1,000

D) $1,600

Answer 23

The answer is (A). Alimony is no longer deductible according to the TCJA for the tax years 2019-2025.

Question 24

An independent sales representative purchased a business car 3 years ago for $12,000. This year he exchanged the old business car now worth $6,000 with an adjusted basis of $5,000 plus $5,000 cash for a new business car with a selling price of $11,000. As a result of this exchange the sales representative recognized

A) no gain or loss

B) a $1,000 gain

C) a $6,000 loss

D) a $5,000 gain

Answer 24

The answer is (A). The taxpayer has realized no taxable gain on the exchange, so there is no recognized gain. The exchange would appear to qualify as a like-kind exchange even if gain were realized. Also, the taxpayer paid cash boot in the exchange, but did not receive boot that would cause the recognition of gain.

Question 25

In which of the following courts may a taxpayer petition for redetermination of an assessed income tax deficiency and receive a jury trial? A) U.S. District Court B) Court of Appeals for the Federal Circuit C) U.S. Court of Federal Claims D) U.S. Tax Court

Answer 25

The answer is (A). The U.S. District Court is the only court in which a taxpayer can have a jury trial in a civil tax case.

Question 26

Which of the following types of income would increase the exposure of an individual taxpayer to the 3.8 percent tax on net investment income? A) interest income from an asset held in a trade or business B) undistributed dividend income held by a qualified charitable remainder annuity trust or unitrust C) capital gains from an asset not held in a trade or business D) tax-exempt income

Answer 26

The answer is (C). Capital gains from an asset not held in a trade or business is specifically included within the meaning of net investment income. The income described in (A), (B), and (D) is exempted from the meaning of net investment income.

Question 27

An individual taxpayer received an inheritance of $20,000 in cash, which he donated to a public charity. His adjusted gross income for the year is $30,000. The maximum charitable deduction that the taxpayer will be allowed for the current year is A) $3,000 B) $9,000 C) $18,000 D) $20,000

Answer 27

The answer is (C). The current deduction is limited to 60% of adjusted gross income, or $18,000 in this case for cash donations.

Question 28

In determining his individual income tax, each partner reports his distributive share of the partnership income. Subject to certain restrictions, a partner's distributive share is generally determined by A) the current value of the capital account of each partner B) the partnership agreement C) the amount of salary payments made to a partner for services rendered D) reference to the basis of each individual partner's interest

Answer 28

The answer is (B). Salary, capital accounts, and basis are not necessarily related to the partner’s distributive share, which is determined under the partnership agreement.

Question 29

This year an individual taxpayer (other than a married individual filing a separate return) has $30,000 of investment interest expense and $1,000 of net investment income. The maximum amount of investment interest expense this taxpayer may deduct this year is A) $0 B) $1,000 C) $10,000 D) $30,000

Answer 29

The answer is (B). The deduction is limited to the taxpayer’s net investment income for the year, or $1,000.

Question 30

Which of the following statements correctly describes the option available to an annuitant if, in a given year, the annual payment from a variable annuity is $400 less than the annuitant's annual excludible amount? A) The annuitant may use the $400 difference to offset other taxable income for the year in which the above annuity payment was received. B) The annuitant may use the $400 difference to reduce his investment in the contract in the year following the one in which the above annuity payment was received. C) The annuitant may recalculate his exclusion ratio for tax purposes for the year in which the above annuity payment was received. D) The annuitant may recalculate his excludible amount beginning with payments to be received in the year following the one in which the above annuity payment was received.

Answer 30

The answer is (D). In the case of a variable annuity, the annuitant may recalculate the exclusion ratio with respect to future payments if he or she receives a payment that is less than the currently excludible amount.

Question 31

A woman purchased a $100,000 whole life insurance policy on her life and designated her husband as beneficiary. Several years later the woman surrendered the policy for its cash value of $50,000. At the time of surrender, the woman had paid gross premiums of $45,000 and had received policy dividends of $10,000. What were the income tax consequences to the woman upon receipt of the cash surrender value? A) She received the entire $50,000 tax free. B) She received $45,000 tax free and $5,000 as ordinary income. C) She received $35,000 tax free and $15,000 as ordinary income. D) She received $15,000 tax free and $35,000 as ordinary income.

Answer 31

The answer is (C). The woman’s basis in the policy is $35,000 ($45,000 premiums – $10,000 dividends received). Therefore the taxable amount is $15,000 ($50,000 received – $35,000 basis).

Question 32

Which of the following statements concerning the exclusion of gain on the sale of a principal residence is correct? A) The taxpayer must have occupied the residence for an aggregate of 4 out of the previous 5 years to be eligible for the exclusion. B) The maximum exclusion for married couples filing jointly is $1 million. C) There is no requirement that the taxpayer purchase a replacement residence to be eligible for the exclusion. D) The maximum exclusion for single taxpayers is $500,000.

Answer 32

The answer is (C). (A) is incorrect because the occupancy requirement is 2 out of 5 years. (B) is incorrect because the maximum exclusion is $500,000. (D) is incorrect because the maximum exclusion for single taxpayers is $250,000.

Question 33

A corporation purchased a $50,000 whole life insurance policy on a man who was a key employee. Several years later the man terminated employment and his wife purchased the policy from the corporation with her own funds for $10,000. The wife designated herself as beneficiary and started paying the premiums. If the man were to die after his wife had paid net premiums amounting to $5,000, what would be the income tax consequences to the wife upon receipt of the policy death proceeds? A) She would receive the entire $50,000 tax free. B) She would receive $15,000 tax free and $35,000 as ordinary income. C) She would receive $10,000 tax free and $40,000 as ordinary income. D) She would receive the entire $50,000 as ordinary income.

Answer 33

The answer is (B). This is a transfer-for-value situation. The wife paid $10,000 for the policy and $5,000 in subsequent premiums, a total basis of $15,000. She must pay tax on the proceeds in excess of $15,000.

Question 34

The alternative minimum tax (AMT) is imposed on alternative minimum taxable income (AMTI) in excess of any applicable exemption amount. What is the lowest possible tax rate to be applied to the tentative minimum taxable income of an individual taxpayer? A) 15 percent B) 20 percent C) 26 percent D) 28 percent

Answer 34

The answer is (C). The individual AMT rate is 26 percent on the first $191,500 of ATMI. The excess over this amount is taxed at 28 percent.

Question 35

Ben and John formed a corporation. John transferred $60,000 in cash to the corporation. Ben transferred property with a basis of $30,000 and a fair market value of $80,000. The corporation paid him $20,000 in cash. They each received back 50 percent of the stock of the corporation. How much gain will Ben recognize? A) $20,000 B) $30,000 C) $60,000 D) $80,000

Answer 35

The answer is (A). When property is transferred in a tax-free incorporation, there is no recognition of gain or loss to the transferor if only stock is received in exchange. However, gain will be recognized to Ben to the extent of money or other property received ($20,000).

Question 36

Which of the following statements concerning the deductibility of business expenses is (are) correct? I. Entertainment expenses are fully deductible if recorded by the taxpayer when incurred. II. Fines for the violation of a state law are deductible if they are incurred in the ordinary course of business. A) I only B) II only C) Both I and II D) Neither I nor II

Answer 36

The answer is (D). I is incorrect because entertainment expenses are not deductible. II is incorrect because fines for violation of law are not deductible, even if they are incurred in the ordinary course of business.

Question 37

Which of the following statements concerning dividends from a corporation to its shareholders is (are) correct? I. Cash dividends are generally taxed at a maximum capital gains rate of 20 percent under current law. II. Dividends of property other than money are considered capital transactions for income tax purposes A) I only B) II only C) Both I and II D) Neither I nor II

Answer 37

The answer is (A). II is incorrect because a distribution of any type of property in the form of a dividend can be taxed as a dividend and not as a capital transaction.

Question 38

Under which of the following circumstances will a corporation's payment of premiums on a life insurance policy be taxable to an insured employee? I. The corporation purchases group term life insurance of $10,000 payable to the insured employeeÍs personal beneficiary under a nondiscriminatory plan. II. The insured employee is the owner of an individual policy and the proceeds are payable to the employee's personal beneficiary. A) I only B) II only C) Both I and II D) Neither I nor II

Answer 38

The answer is (B). The insured employee is taxed on the coverage because the employee is the owner of the policy. I is incorrect because the insurance premiums would not be taxable. These premiums will qualify for the exclusion under IRC Sec. 79.

Question 39

Which of the following statements concerning the tax implications of a divorce is (are) correct? I. Excess alimony payments are fully taxable to the recipient. II. Cash payments for child support provided in the divorce decree are tax deductible. A) I only B) II only C) Both I and II D) Neither I nor II

Answer 39

The answer is (D). I is incorrect because the recipient of excess alimony payments receives a deduction for such payments in the third post-separation year (in 2018) After 2018 alimony will not be deductible. II is incorrect because child support payments are not deductible.

Question 40

Which of the following statements correctly describe(s) a function of the federal income tax system? I. It can be used to reduce inflationary trends. II. It can be used to encourage economic activity at the taxpayer level. A) I only B) II only C) Both I and II D) Neither I nor II

Answer 40

The answer is (C). Both I and II are correct.

Question 41

Which of the following statements concerning S corporations is (are) correct? I. An S corporation may have only two classes of stock-preferred and common. II. The electing corporation must be a domestic corporation with no more than 50 shareholders. A) I only B) II only C) Both I and II D) Neither I nor II

Answer 41

The answer is (D). I is incorrect because an S corporation may not have preferred stock. II is incorrect because an S corporation may have up to 100 shareholders.

Question 42

Which of the following statements concerning sources of tax law is (are) correct? I. The IRS is bound to follow a decision of the Tax Court in subsequent cases involving the same issue. II. A two-thirds majority of both houses of Congress is needed to override the President's veto of a tax bill. A) I only B) II only C) Both I and II D) Neither I nor II

Answer 42

The answer is (B). I is incorrect because the IRS is not bound to follow Tax Court decisions.

Question 43

Which of the following statements concerning the small corporation exemption under the alternative minimum tax is (are) correct? I. To qualify for the exemption, the corporation must have no more than five shareholders. II. To qualify for the exemption, a new corporation must have average annual gross receipts of $5 million or less for its first 3 taxable years. A) I only B) II only C) Both I and II D) Neither I nor II

Answer 43

The answer is (D). I and II are incorrect because the AMT tax has been repealed for C corporations in 2018 due to the TCJA law.

Question 44

Which of the following items would be considered constructively received in the current year by a cash-basis taxpayer? I. interest earned from reinvestment of insurance policy dividends that are left with the insurance company II. income from work performed that has been billed but will not be received until next year A) I only B) II only C) Both I and II D) Neither I nor II

Answer 44

The answer is (A). II is incorrect because a cash-basis taxpayer reports income when received, not when he or she has completed the work and submitted a bill for services.

Question 45

Which of the following statements concerning the itemized deduction for medical expenses is (are) correct? I. Any expenses for cosmetic surgery will qualify for the medical expense deduction. II. Physicians' fees are deductible at 50 percent of the cost. A) I only B) II only C) Both I and II D) Neither I nor II

Answer 45

The answer is (D). I is incorrect because expenses for cosmetic surgery are subject to strict rules regarding deductibility under current law. II is incorrect because allowable medical expenses, including physicians’ fees, are fully deductible as itemized deductions, but only to the extent that they exceed the applicable percent of the taxpayer’s adjusted gross income.

Question 46

Which of the following statements concerning capital cost recovery (depreciation) for assets placed in service this year is (are) correct? I. When the tax law specifies a particular type of depreciation method such as 150 percent declining balance, the taxpayer is precluded from using the straight-line method for that class of property. II. Automobiles are depreciated over a 3-year recovery period. A) I only B) II only C) Both I and II D) Neither I nor II

Answer 46

The answer is (D). I is incorrect because the law permits taxpayers the option to elect straight-line depreciation for any asset class placed in service during the year. II is incorrect because automobiles currently placed in service are depreciated over a 5-year recovery period.

Question 47

Which of the following statements concerning taxation of an annuity purchased this year is (are) correct? I. A portion of annuity payments received will be tax free as a return of capital for as long as the annuitant lives, regardless of how long. II. A gift of an annuity contract can result in a taxable event for the donor at the time of the gift. A) I only B) II only C) Both I and II D) Neither I nor II

Answer 47

The answer is (B). I is incorrect because the tax-free amount recoverable for an annuity purchased this year is limited to the individual’s investment in the contract. Once the investment in the contract is fully recovered, the full amount of each annuity payment is taxable.

Question 48

Which of the following statements concerning the retirement of a general partner in a service partnership is (are) correct? I. Payments attributed to inventory and unrealized receivables will be treated as ordinary income to the retiring partner. II. Payment for goodwill will be treated as capital gain to the retiring partner if the partnership agreement provides for payments for goodwill. A) I only B) II only C) Both I and II D) Neither I nor II

Answer 48

The answer is (C). Both I and II are correct.

Question 49

Which of the following statements concerning the income tax treatment of disability income insurance benefits is (are) correct? I. Benefits received from policies paid for by an employer are generally included in the employee's gross income. II. Benefits from policies owned and paid for by the insured are taxable income to him or her when received. A) I only B) II only C) Both I and II D) Neither I nor II

Answer 49

The answer is (A). II is incorrect because benefits on disability policies personally owned and paid for by the insured are not taxable.

Question 50

Which of the following legal expenses of an individual taxpayer is (are) deductible in full for a single tax year as a nonbusiness expense? I. Legal expenses paid or incurred in connection with being represented at a tax audit II. Legal expenses paid or incurred in defending or perfecting title to real property A) I only B) II only C) Both I and II D) Neither I nor II

Answer 50

The answer is (A). II is incorrect because legal expenses paid to defend or perfect title to property are generally not deductible in full for a single tax year. Those legal expenses may be capitalized and will be recovered when the property is depreciated or sold.

Question 51

At the time of occurrence, which of the following events will require recognition of $1,000 of gross income by the taxpayer? I. The taxpayer receives $1,000 in cash from his mother for his birthday. II. A creditor cancels the taxpayer's debt of $1,000. A) I only B) II only C) Both I and II D) Neither I nor II

Answer 51

The answer is (B). I is incorrect because the $1,000 in this situation is a gift, and gifts are not includible in the gross income of the recipient.

Question 52

Which of the following statements concerning the income taxation of corporations is (are) correct? I. Any corporation can fully deduct the dividends it receives each year from other corporations. II. A corporation can only use capital losses to offset capital gains. A) I only B) II only C) Both I and II D) Neither I nor II

Answer 52

The answer is (B). I is incorrect because the dividends-received deduction, if available, is generally less than 100 percent.

Question 53

Which of the following statements concerning the doctrine of constructive receipt is (are) correct? I. The taxpayer has constructively received income when it is credited to his account without restrictions. II. It is inapplicable to individual taxpayers who report income on a cash basis. A) I only B) II only C) Both I and II D) Neither I nor II

Answer 53

The answer is (A). II is incorrect because the doctrine of constructive receipt applies specifically to cash-basis taxpayers.

Question 54

A shareholder sells a portion of his stock in a corporation that he purchased at various prices and times. In this situation, which of the following statements concerning the method he may use to determine the basis of these shares is (are) correct? I. If he can adequately identify the shares sold, he can use the basis of those specific shares. II. If he is unable to identify the shares sold, he must use a first-in, first-out (FIFO) method to determine the basis. A) I only B) II only C) Both I and II D) Neither I nor II

Answer 54

The answer is (C). Both I and II are correct.

Question 55

A corporation pays the premiums on a life insurance policy on the life of its president. In which of the following situations may the corporation deduct the premiums as an expense? I. The corporation is the absolute owner and beneficiary of the policy. II. The president is the absolute owner of all rights under the policy and the corporation makes the premium payments pursuant to the president's compensation package. A) I only B) II only C) Both I and II D) Neither I nor II

Answer 55

The answer is (B). I is incorrect because a corporation cannot deduct premiums paid on a policy if the corporation is a beneficiary

Question 56

Which of the following statements concerning the tax credit for qualified adoption expenses is (are) correct? I. The allowable amount of the credit is phased out for taxpayers whose adjusted gross income exceeds a specified amount. II. In the case of a foreign adoption, the credit is not allowable until the year in which the adoption becomes final. A) I only B) II only C) Both I and II D) Neither I nor II

Answer 56

The answer is (C). Both I and II are correct.

Question 57

Which of the following statements concerning the income tax treatment of qualified longterm care insurance contracts is (are) correct? I. Premiums paid for such contracts are deductible as medical expenses subject to annual limitations based on the covered individual's age. II. Premiums paid for such contracts are not eligible for the above-the-line deduction for health insurance premiums of self-employed taxpayers. A) I only B) II only C) Both I and II D) Neither I nor II

Answer 57

The answer is (A). II is incorrect because premiums for qualified long-term care insurance contracts are eligible for the above-the-line deduction.

Question 58

A newly-formed corporation will have gross income in the current year of $100,000. Which of the following would be fully deductible by the corporation for the current taxable year? I. All of the organizational expenses incurred in forming the corportation II. The payment of common stock dividends out of current earnings and profits. A) I only B) II only C) Both I and II D) Neither I nor II

Answer 58

The answer is (D). I is incorrect because organizational expenses in excess of the deductible limit permitted under section 195 of the Internal Revenue Code must be amortized over a 180-month period. II is incorrect because dividends paid are not deductible regardless of the amount of the corporation’s earnings and profits.

Question 59

An individual taxpayer irrevocably assigns a level premium whole life insurance policy on his life to a qualified public charity. Which of the following statements concerning the charitable contribution deduction treatment of this policy gift is (are) correct? I. The taxpayer will receive a charitable deduction in the current year equal to the lesser of the premiums paid or the value of the policy. II. The taxpayer will receive a charitable deduction in the year of his death equal to the net policy proceeds. A) I only B) II only C) Both I and II D) Neither I nor II

Answer 59

The answer is (A). II is incorrect because there is no income tax charitable deduction for policy proceeds. The deduction is taken in the year of contribution and is not based upon the death proceeds.

Question 60

Which of the following transactions between a corporation and its shareholders could result in a taxable distribution to the shareholders? I. The corporation sells property to the shareholders at a price equivalent to the fair market value. II. The corporation cancels debts that several shareholders owed to it. A) I only B) II only C) Both I and II D) Neither I nor II

Answer 60

The answer is (B). I is incorrect because a sale of property at fair market value by a corporation to its shareholders is not treated as a dividend or other taxable distribution made with respect to stock ownership.

Question 61

A U.S. Supreme Court interpretation of tax law is the law of the land until which of the following happen(s)? I. Congress enacts a new statute, tantamount to overturning a Court decision. II. The Court overrides its own prior decision. A) I only B) II only C) Both I and II D) Neither I nor II

Answer 61

The answer is (C). Both I and II are correct.

Question 62

Which of the following statements concerning the personal-holding-company tax is (are) correct? I. One requirement to be treated as a personal holding company is that more than 50 percent of the value of the company's stock must be held by five or fewer individuals. II. The personal-holding-company tax can be avoided by the payment of dividends by the company. A) I only B) II only C) Both I and II D) Neither I nor II

Answer 62

The answer is (C). Both I and II are correct.

Question 63

Which of the following is (are) included in the gross income of an individual taxpayer? I. damages other than punitive damages received on account of a physical personal injury suffered by the taxpayer II. property received by the taxpayer as an inheritance A) I only B) II only C) Both I and II D) Neither I nor II

Answer 63

The answer is (D). I is incorrect because damages (other than punitive damages) received on account of a physical personal injury are generally not taxable. II is incorrect because property received by inheritance is generally not taxable.

Question 64

Which of the following statements concerning the limitations on passive activity losses is (are) correct? I. The limitations are generally designed to limit tax benefits with respect to activities in which the taxpayer does not materially participate. II. Excess passive losses disallowed under the limitations are allowed in the year the taxpayer disposes of his or her entire interest in the passive activity in a taxable disposition. A) I only B) II only C) Both I and II D) Neither I nor II

Answer 64

The answer is (C). Both I and II are correct.

Question 65

To substantiate entertainment deductions for business purposes, a record must be kept of which of the following? I. the business relationship to the taxpayer of the person entertained II. the date and place of the entertainment A) I only B) II only C) Both I and II D) Neither I nor II

Answer 65

The answer is (D). Neither I nor II are correct because under the new tax regulations, TCJA, business entertainment expenses are not allowed as a deduction.

Question 66

A shareholder must meet which of the following requirements to avoid having the family attribution rules applied to an IRC Sec. 302 complete redemption? I. The shareholder must receive the proceeds in cash at the time the stock is redeemed by the corporation. II. The shareholder must repay all debts owed to the corporation at the time the stock is redeemed by the corporation. A) I only B) II only C) Both I and II D) Neither I nor II

Answer 66

The answer is (D). I is incorrect because it is immaterial under the attribution rules whether the shareholder receives cash at the time of the redemption. II is incorrect because there is no requirement that the shareholder repay debts to the corporation in order to avoid family attribution.

Question 67

Which of the following statements concerning stock redemptions under IRC Sec. 303 is (are) correct? I. The value of the stock used to qualify for a Sec. 303 redemption must generally exceed 35 percent of the decedent's adjusted gross estate. II. The proceeds of a stock redemption under Sec. 303 will be treated as a dividend for income tax purposes. A) I only B) II only C) Both I and II D) Neither I nor II

Answer 67

The answer is (A). II is incorrect because proceeds of a Sec. 303 redemption are treated as made in exchange for a capital asset and are therefore eligible for capital gains treatment.

Question 68

All the following requirements must be met for a corporation to obtain a deduction for payment of its president's salary EXCEPT A) The expense must be ordinary and necessary. B) The expense must generally be paid or incurred during the corporation's taxable year. C) The expense must be incurred in carrying on a trade or business. D) The expense must be directly attributable to the president's employment within the United States or its territories.

Answer 68

The answer is (D). There is no requirement that salaries be earned within the United States or its territories.

Question 69

All the following statements concerning the tax credit for children are correct EXCEPT A) The amount of the credit is currently $2,000 per child. B) The credit is phased out for upper-income taxpayers. C) The taxpayer must be entitled to claim a dependency exemption for the child with respect to whom the credit is claimed. D) The credit is available with respect to children under the age of 21.

Answer 69

The answer is (D). The credit is available with respect to children under age 17.

Question 70

An individual may typically deduct all the following expenses from adjusted gross income EXCEPT A) state and local income taxes B) the attorney's fee for drafting a simple will C) state and local personal property taxes D) interest expense for a mortgage loan on his or her principal residence

Answer 70

The answer is (B). While attorneys’ fees are deductible as they relate to business, profit making, or tax matters, the drafting of a simple will is a personal expenditure that is nondeductible.

Question 71

All the following statements concerning the accumulated-earnings tax are correct EXCEPT A) It applies to accumulated earnings and profits retained by a corporation that are in excess of a specified amount and for which there is no reasonable business purpose. B) Its purpose is to prevent corporations from being used as devices to avoid personal income tax through the accumulation of corporate earnings. C) Retention of earnings to purchase key person insurance is generally considered a reasonable need of the business. D) Accumulations of $350,000 or less will automatically be considered as held for the reasonable needs of the business.

Answer 71

The answer is (D). The accumulated-earnings tax credit (or exemption) is $250,000 ($150,000 for professional service corporations).

Question 72

Which of the following statements concerning personal and dependency exemptions is correct? A) A person who is the dependent of another taxpayer may not claim a personal exemption on his or her own return. B) Married taxpayers filing jointly are allowed a personal exemption for each spouse. C) Personal and dependent exemptions have been eliminated under TCJA as of 2018 D) In order to be claimed as a dependent under the dependency exemption rules, the dependent person must generally not file a joint return with his or her spouse.

Answer 72

The answer is (C)

Question 73

All the following transfers by sale of a life insurance policy are excluded from the transferfor-value rules EXCEPT A) sale of the policy to the insured B) sale of the policy to a partner of the insured C) sale of the policy to a corporation in which the insured is a shareholder D) sale of the policy to a shareholder in a corporation in which the insured is also a shareholder

Answer 73

The answer is (D). This sale of a policy to another shareholder is not an exception to the transfer-for-value rules.

Question 74

All the following statements concerning benefits paid from dependent care assistance programs are correct EXCEPT A) The annual dollar limit on excludible benefits for married taxpayers filing jointly is $10,000. B) The amount excludible from gross income cannot exceed the earned income of the taxpayer for the year. C) To fully qualify for the income tax exclusion, the plan must meet certain nondiscrimination requirements. D) A payment to the employee's child under age 19 may not be excluded from the employee's gross income.

Answer 74

The answer is (A). The dollar limit is $6,000. It is $3,000 for one qualifying individual dependent and $6,000 for two or more individuals.

Question 75

All the following kinds of property used in a trade or business or held for the production of income are depreciable or amortizable for tax purposes EXCEPT A) welding equipment B) rental apartment buildings C) automobiles D) land

Answer 75

The answer is (D). Land may not be depreciated for tax purposes.

Question 76

All the following statements concerning the tax consequences of forming a partnership are correct EXCEPT A) As a general rule no gain or loss is recognized on the transfer of property or money to a partnership in exchange for a partnership interest. B) A partnership's basis in contributed property is the property's fair market value at the time of the transfer. C) The contributing partner's basis with respect to contributed property subject to indebtedness is reduced to the extent the indebtedness is taken over by the other partners. D) When a partner receives a partnership interest in exchange for services, the value of the interest may be taxable to the partner as compensation.

Answer 76

The answer is (B). A partnership generally retains the same basis in contributed property as the property had in the hands of the contributing partner.

Question 77

All the following statements concerning like-kind exchanges of property are correct EXCEPT A) A business may exchange real estate for a truck without recognition of gain or loss. B) Recognition of gain or loss in a like-kind exchange is postponed to a future taxable sale or exchange. C) In a like-kind exchange, gain is recognized to the extent of boot received in the exchange. D) A typical nontaxable exchange is one where a taxpayer trades in his or her old business truck plus cash for a new business truck.

Answer 77

The answer is (A). Real estate and trucks are not like-kind property under IRC Sec. 1031.

Question 78

All the following statements concerning the deductibility of casualty losses are correct EXCEPT A) To be deductible, a casualty loss must arise from an identifiable event. B) For personal losses of individuals the amount deductible cannot be greater than the adjusted basis of the property. C) Individuals are generally allowed a deduction for mislaid property. D) A deduction for nonbusiness casualty losses covered by insurance is allowable only if a timely claim had been filed with the insurer.

Answer 78

The answer is (C). Mislaid property generally does not give rise to a deductible loss.

Question 79

All the following statements concerning the alternative minimum tax (AMT) are correct EXCEPT A) Interest on nongovernmental-purpose municipal bonds issued last year is considered a preference item for AMT purposes. B) Each individual taxpayer has an exemption amount for AMT purposes that is unaffected by the amount of the taxpayer's AMTI. C) The foreign tax credit may be used to offset the AMT. D) C corporations are not liable for AMT per the TCJA tax rules beginning in 2018.

Answer 79

The answer is (B). The amount of an individual taxpayer’s exemption is reduced when a taxpayer’s AMTI reaches a specified dollar amount.

Question 80

To determine adjusted gross income, all the following are potentially deductible, in whole or in part, from gross income EXCEPT A) business expenses of self-employed taxpayers B) charitable contributions of individuals C) losses from the sale or exchange of property D) alimony payments

Answer 80

The answer is (B). Charitable contributions are deductible, with certain limitations, from adjusted gross income (not gross income) in determining taxable income. The other expenses listed are deductible from gross income in determining adjusted gross income. Note that alimony deductibility expires as of the end of 2018.

Question 81

Mrs. Morris sells all or some of her shares in the QT Corporation at a price in excess of her basis. The corporation has only one class of voting common stock. All the following qualify as capital transactions for Mrs. Morris EXCEPT A) Mrs. Morris sells 25 percent of her shares to Mr. Smith, a stranger, in order to raise capital. B) The QT Corporation redeems 200 of Mrs. Morris's 500 shares, and the remaining 500 outstanding shares are owned by her brother. C) The corporation redeems all Mrs. Morris' shares in the corporation and none of the remaining shareholders is related to her. D) The corporation redeems the shares that belong to Mrs. Morris, her son is the sole remaining stockholder, and she will be a director of QT.

Answer 81

The answer is (D). Although the corporation redeems all of Mrs. Morris’s shares, she is constructively deemed to own the shares belonging to her son and will therefore be denied capital transaction tax treatment on the redemption. She cannot claim a waiver of the family attribution rules because of her status as a director of QT Corporation.

Question 82

All the following statements concerning the recovery periods and methods for determining cost recovery deductions for property placed in service this year are correct EXCEPT A) There are prescribed recovery periods for all types of depreciable assets. B) The applicable recovery periods for qualified recovery property range from 3 years to 39 years, depending on the type of property acquired. C) The 5-year property class consists of tangible personal property, such as automobiles. D) The depreciation method applicable to all property is the double-declining-balance method.

Answer 82

The answer is (D). Only property in the 3-year, 5-year, 7-year, and 10-year classes can use the double-declining-balance method. Classes of 15 years and 20 years use 150 percent declining balance. Both residential and nonresidential real estate use the straight-line method.

Question 83

All the following statements concerning the income tax treatment of benefits received by an employee under an employer-financed nondiscriminatory accident and health plan are correct EXCEPT A) Medical expense reimbursement benefits paid directly by the employer to the employee are excludible from the employee's gross income. B) Benefits received in excess of the amount of expenses actually incurred for medical treatment are excludible from the employee's gross income. C) Medical expense reimbursement benefits paid through an insurance company are excludible from the employee's gross income. D) Benefits received for permanent disfigurement in an amount computed without regard to the period the employee is away from work are excludible from the employee's gross income.

Answer 83

The answer is (B). Benefits received in excess of medical expenses incurred will be includible in gross income.

Question 84

All the following statements concerning the income tax status of a family partnership are correct EXCEPT A) The IRS may ignore the partnership agreement and reallocate income for tax purposes to properly reflect the economic reality of the partnership arrangement. B) A family partnership is generally structured to shift income within the family so that the total income taxes of family members are less than if the business were a sole proprietorship. C) If a family member is to be considered a partner in a family partnership in which capital is a material income-producing factor, the family member must have acquired his capital interest through a bona fide transaction. D) Without contributing services to the partnership, a family member can be treated as a partner in a family partnership whose income consists primarily of fees or commissions.

Answer 84

The answer is (D). A family member in a partnership which is in the business of performing services must contribute services to the partnership to be treated as a partner for tax purposes.

Question 85

Individual taxpayers can deduct all the following types of losses EXCEPT A) losses incurred in a trade or business B) losses incurred in a transaction entered into for profit C) personal losses that arise from a fire, storm, shipwreck, or other casualty, or from a theft D) personal losses that arise from the gradual wearing out of property held for personal use

Answer 85

The answer is (D). The wearing out of property held for personal use does not give rise to a tax deduction.

Question 86

All the following statements concerning the deductibility of various expenses in connection with a taxpayer's trade or business are correct EXCEPT A) Living expenses at a temporary residence while away from home for 6 months are generally deductible. B) Deductions for bribes paid to public officials are disallowed. C) The expenses of commuting are deductible if the taxpayer lives more than 50 miles away from his place of business. D) A bonus paid to an employee is subject to the same test of reasonableness applicable to other salary payments in determining its deductibility.

Answer 86

The answer is (C). Commuting expenses are nondeductible regardless of the distance involved.

Question 87

An individual sold his interest in a partnership to another individual. All the following statements concerning the income taxation of the sale proceeds to the individual are correct EXCEPT A) That portion of the proceeds which represents his share of the potential gain on partnership inventory is taxable to him as ordinary income. B) That portion of the proceeds which represents specified goodwill is taxable to him as a capital gain. C) That portion of the proceeds which represents his share of depreciable partnership property with a fair market value in excess of basis is received by him on a tax-free basis. D) That portion of the proceeds which represents his share of unrealized receivables is taxable to him as ordinary income.

Answer 87

The answer is (C). Proceeds received for the fair market value of property in excess of its basis are taxable.

Question 88

All of the following statements concerning the Hope Scholarship and American Opportunity Tax Credit for higher education expenses are correct EXCEPT A) To claim the credit, the student on whose behalf the expenses are paid must be at least a half-time student. B) The credit cannot be claimed with respect to the same expenses for which the taxpayer elects to claim the Lifetime Learning Tax Credit. C) The credit is phased out for taxpayers with modified adjusted gross income above specified levels. D) A credit of up to $5,000 per year may be claimed with respect to the expenses of each eligible student.

Answer 88

The answer is (D). The maximum credit is subject to annual indexing adjustments for inflation, but is considerably less than $5,000. Currently a maximum credit of $2,500 for the American Opportunity Tax Credit is available with up to 40% of it being refundable.

Question 89

All the following are considered to be nondeductible personal, living, or family expenses EXCEPT A) rent, water, and utility payments made by the taxpayer on his residence B) life insurance premiums paid by the taxpayer on the life of his mother C) interest on a $250,000 first mortgage secured by the taxpayer's residence D) fire and casualty insurance premiums for the taxpayer's residence

Answer 89

The answer is (C). Interest on a first mortgage of up to $750,000 of new mortgage debt beginning in 2018, and up to $1 million of principal secured by the taxpayer’s residence on debt incurred prior to 2018, will generally qualify as deductible qualified residence interest.

Question 90

All the following statements concerning the calculation of an individual taxpayer's alternative minimum taxable income (AMTI) are correct EXCEPT A) State and local taxes deducted in determining the regular income tax are added back to taxable income in calculating AMTI. B) Charitable contributions deducted in determining the regular income tax are added back to taxable income in calculating AMTI. C) Personal and dependency exemptions are added back to taxable income in calculating AMTI. D) The standard deduction is added back to taxable income in calculating AMTI if the taxpayer uses the standard deduction.

Answer 90

The answer is (B). Charitable contributions are deductible in computing AMTI.

Question 91

All the following taxes may generally be deducted by an individual taxpayer who itemizes his deductions EXCEPT A) state income taxes B) local real property taxes C) federal income taxes D) local personal property taxes

Answer 91

The answer is (C). Federal income taxes are not deductible.

Question 92

All the following statements concerning the attribution rules for determining constructive ownership of stock are correct EXCEPT A) Shares of stock owned by a father are considered as being owned by his daughter's husband. B) Shares of stock owned by an estate are considered as being owned proportionately by its beneficiaries having a direct present interest in the estate. C) Shares of stock owned by a trust are considered as being owned by its beneficiaries in proportion to their actuarial interests in the trust. D) Shares of stock owned by a partnership are considered as being owned proportionately by the partners.

Answer 92

The answer is (A). The attribution rules apply from parent to child and between spouses, but not from a parent to the spouse of a child because the family attribution rules cannot be applied twice in succession.

Question 93

All the following statements concerning IRS revenue rulings are correct EXCEPT A) They are issued when the IRS wishes to resolve unclear points of law. B) They have the force and effect of law and must be followed by the courts. C) They are issued if a stated set of facts involving a problem common to many taxpayers is recognized. D) They are binding on IRS revenue agents in their handling of issues in current taxpayer cases.

Answer 93

The answer is (B). The courts are not bound to follow revenue rulings, which represent only the position of the IRS on a given issue.

Question 94

Julie is a partner in a partnership. All the following statements concerning adjustments to Julie's interest in the partnership are correct EXCEPT A) Basis is decreased by Julie's share of the partnership's liability to her to the extent that she loaned money to the partnership as an outsider. B) Basis is decreased by distributions made to Julie. C) Basis is decreased by Julie's share of any partnership losses. D) Basis is increased by Julie's share of increased partnership liabilities.

Answer 94

The answer is (A). Any liability to the partner by the partnership will increase, not decrease, basis.

Question 95

All the following statements concerning the tax aspects of withdrawals from universal life policies are correct EXCEPT A) Withdrawals will be taxable only if the policy is a modified endowment contract (MEC). B) Withdrawals associated with a reduction in the policy's death benefit may be subject to last-in, first-out (LIFO) tax treatment. C) Special rules apply to withdrawals occurring during the first 15 policy years. D) Withdrawals during the first 5 policy years may have a higher taxable portion than withdrawals made during years 6 through 15.

Answer 95

The answer is (A). Withdrawals from such policies may be taxable even if the policy is not a MEC.

Question 96

All the following statements concerning the private rulings issued by the IRS are correct EXCEPT A) They are published and made available to the public. B) They are issued at the request of an individual taxpayer. C) They are binding upon the IRS only for the particular case in point. D) They can be used as precedents by taxpayers in general.

Answer 96

The answer is (D). Private rulings cannot be used as legal precedents.

Question 97

All the following statements concerning the time for filing tax returns are correct EXCEPT A) Individual tax returns are generally due on or before April 15 of the year following a given tax year. B) An automatic extension can be obtained by individuals by filing Form 4868 on or before the due date. C) Some corporations may have a tax year that operates on a 12-month period beginning on a day other than January 1. D) A C Corporation’s return is generally due on the fifteenth day of the third month following the close of its tax year.

Answer 97

The answer is (D). A C Corporation’s return is generally due on the fifteenth day of the fourth month following the close of its tax year, not the third month.

Question 98

All the following statements concerning the use of life insurance in the context of a divorce settlement are correct EXCEPT A) An existing cash value policy transferred by one spouse to the other results in taxable income to the recipient spouse. B) If one spouse owns a policy and the other spouse pays the premiums after the divorce, the premium payments are generally treated as alimony. C) If one spouse owns the policy, pays the premiums, and names the other spouse as beneficiary, the premiums are not deductible. D) Death benefits paid under policies used in divorce settlements will generally be free of income tax.

Answer 98

The answer is (A). Such a transfer will not result in a taxable event.

Question 99

All the following are basic requirements for the allowance of a depreciation deduction EXCEPT A) the taxpayer generally must have an ownership interest in the asset B) the asset's useful life must be limited C) the asset must be used only in the taxpayer's trade or business D) the taxpayer must have a tax basis in the asset

Answer 99

The answer is (C). Assets held for the production of income as well as assets used in a trade or business may qualify for depreciation deductions.

Question 100

All the following statements concerning the alternative minimum tax (AMT) are correct EXCEPT A) Medical expenses in excess of 10 percent of adjusted gross income are deductible in computing alternative minimum taxable income. B) The AMT is still imposed on C Corporations under the TCJA. C) The adoption credit is allowable in computing AMT liability. D) The AMT is imposed only if it exceeds the individual taxpayer's regular income tax

Answer 100

The answer is (B). The AMT is no longer imposed on C Corporations as a result of the TCJA