Tax Quiz 3

Question 1

Steve began his professional corporation single practitioner CPA firm 38 years ago. He worked profitably as a sole practitioner for the full 38 years until retiring December 31 of last year at his full retirement age. On January 1 of this year, he sold his practice for $400,000 to be received in 4 equal, annual payments of $100,000, beginning on the date of sale and continuing each January 1 for the next 3 years. Is Steve eligible for Social Security retirement benefits during this year and why?
A)
Yes, he is eligible because he retired at his full retirement age and is fully insured.
B)
No, even though he retired at his full retirement age, the proceeds from the sale of his practice will delay his receiving Social Security retirement benefits.
C)
Yes, he is entitled to benefits, but they will be reduced because of the payments from the sale of his practice.
D)
No, he is not considered retired for Social Security purposes until the installment payments are complete.

Answer 1

A

Question 2

Cathy sold 100 shares of GlassCo stock for $5,200. She paid $4,000 for the stock 2 years ago. Commissions of $80 on the sale and $50 on the purchase were paid. What is the amount realized and the gain recognized, respectively, on this sale?

        Amount realized	    Gain recognized A)
              $1,200	             $1,070  B)
              $5,200	             $1,200  C)
              $5,070	             $1,070  D)
              $5,120	             $1,070

Answer 2

D

The amount realized is the sales price less the commissions paid on the sale ($5,200 − $80 = $5,120). Her basis in the stock is the purchase price of the stock plus commissions paid at purchase ($4,000 + $50 = $4,050). Therefore, the amount realized is reduced by Cathy’s basis in arriving at the taxable gain of $1,070 ($5,120 − $4,050).

Question 3

Bob and Heather form a partnership. Bob contributes $30,000 in cash and $20,000 in stock certificates. Heather contributes $10,000 in cash and a tract of commercial real estate worth $40,000. Heather's basis in the real estate is $15,000. Bob and Heather are equal partners. Immediately after forming the partnership, Heather sells her interest in the partnership for $50,000. How much of a gain must Heather recognize for tax purposes on the sale of her partnership interest?
A)
$75,000.
 B)
$50,000.
 C)
$25,000.
 D)
$15,000.

Answer 3

C

Heather’s total basis in the partnership is equal to her basis in the property she contributed. Since she invested $10,000 in cash and real estate for which her basis was $15,000, her total basis in the partnership is $25,000. The sale of her partnership interest results in a gain of $25,000.

Question 4

In Year 1, Woody loaned his friend, Wesley, $3,500 to help Wesley pay his creditors. Wesley was to repay the loan by the end of Year 2. Instead of paying his creditors, Wesley laid the entire loan down on one roll of the dice at the local casino and lost. In Year 3, after filing for bankruptcy, Wesley could repay Woody only $250. What is Woody’s realized loss in Year 3 as a taxpayer with a single filing status?
A)
$3,000 ordinary loss in Year 3.
B)
$3,500 short-term capital loss in Year 3.
C)
$3,000 short-term capital loss in Year 3 and $250 short-term capital loss in Year 4.
D)
$3,250 short-term capital loss in Year 3.

Answer 4

D

This loan is considered a nonbusiness bad debt. Nonbusiness bad debts are considered short-term capital losses in the year in which they become completely worthless. Woody will realize a short-term loss of $3,250 in Year 3 ($3,500 loan − $250 actually paid). Assuming Woody had no gains during the year, he will be able to recognize a $3,000 short-term capital loss in Year 3 and will carry over the remaining capital loss of $250 to the next year.

Question 5

A client has an income tax liability of $20,000 before payments and credits. He made estimated payments of $6,000 and had $13,000 of taxes withheld from his paycheck. He also is eligible for a nonrefundable credit of $3,000 this year. Which of the following statements regarding this client’s income tax situation for the current year is CORRECT?
A)
The client will receive a refund of $2,000 after filing his federal income tax return.
B)
The client will owe $4,000 of additional tax when he files his federal income tax return.
C)
The client will owe $1,000 of additional tax when he files his federal income tax return.
D)
The client will file a federal income tax return, will owe no tax, and will not receive a refund.

Answer 5

A

The client will receive a refund this year of $2,000 because he is eligible for a nonrefundable credit. Nonrefundable credits are limited to a taxpayer’s tax liability.

Calculation:

Tax liability before credits and payments	$20,000 
Less nonrefundable tax credit	   (3,000)
Total remaining tax liability	$17,000 
Less estimated payments	(6,000)
Less amount withheld	 (13,000)

Refund owed to taxpayer $2,000

Question 6

Scott received an incentive stock option (ISO) from his employer. The option allows Scott to purchase 100 shares of company stock at $50 per share. Scott exercised the option 5 years later when the fair market value (FMV) of the stock was $125 per share. He held the stock for 3 more years and sold it on the secondary market for $175 per share. In the year of exercise, Scott had reportable amounts for regular tax purposes and for alternative minimum tax (AMT) purposes, respectively, of:
A)
$0 and $0.
 B)
$0 and $7,500.
 C)
$7,500 and $5,000.
 D)
$12,500 and $5,000.

Answer 6

B

Question 7

Rusty is the sole proprietor of a shoe factory. During the current year, he sold a packing machine for $2,000 that he had purchased several years ago for $10,000. The packing machine had an adjusted basis of $1,000 after depreciation. He also sold a delivery truck for $2,000 purchased several years ago which had a basis of $500 after depreciation and an original purchase price of $2,500. What is Rusty’s net gain or loss on the property and how will it be treated for tax purposes?
A)
$2,500 gain, treated as Section 1245 depreciation recapture (ordinary income).
B)
$1,000 gain, treated as a long-term capital gain.
C)
$2,500 gain, treated as a Section 1231 long-term capital gain.
D)
$1,000 gain, treated as ordinary income.

Answer 7

A

The properties in question qualify under Section 1231, which provides special treatment for certain properties used in a trade or business (i.e., machinery and vehicles) if they are held for longer than 1 year. The properties are also subject to Section 1245 depreciation recapture. The total gain is $1,000 on the sale of the machine and $1,500 on the sale of the vehicle. The entire $2,500 is treated as ordinary income for tax purposes because of Section 1245 depreciation recapture rules.

Question 8

On February 2 of the current year, a taxpayer exchanged a bank building, having an adjusted tax basis of $600,000 and subject to a mortgage of $275,000 for another bank building with a fair market value of $800,000 and subject to a mortgage of $275,000. Transfers were made subject to outstanding mortgages. What amount of gain should the taxpayer recognize in the current year?
A)
$275,000.
 B)
$75,000.
 C)
$0.
 D)
$200,000.

Answer 8

C

Question 9

Jason, who is in the 35% marginal income tax bracket, wants to sell an office building which was fully depreciated at the date of sale (the basis in the land is $50,000). His brother, Sam, referred him to Sam’s own CFP® professional to make certain Jason knows the tax effects of the sale. Jason tells the CFP® professional his adjusted basis in the building is zero and of the $150,000 in depreciation taken, $50,000 was attributed to accelerated depreciation. Jason’s sale price was $500,000 and he is allowing the buyer to pay him using an installment sale. The buyer, Taylor, will make 20% down payment and finance the purchase with annual installments over the next 10 years, with the first payment due on March 1 of next year. Jason engages the CFP® professional to advise him on the transaction. What should the CFP® professional do next regarding the sale transaction, assuming Jason becomes a financial planning client?
A)
The CFP® professional should advise Jason on the tax ramifications based on Jason’s verbal recitation of the facts.
B)
Jason would have to also bring in Taylor to see the CFP® professional because he would have to help both sides in the transaction.
C)
Because Sam is the CFP® professional’s client, the CFP® professional cannot help Jason.
D)
The CFP® professional should ask for the documents supporting the numbers Jason has provided.

Answer 9

D

Question 10

James has gross income of $40,000 this year. He pays $3,000 per year in property taxes on his home. He also pays property taxes of $12,000 on an apartment building that he owns. Assuming no other adjustments to gross income, how much is James’ adjusted gross income (AGI) for the year?

A)
$37,000.
 B)
$31,000.
 C)
$28,000.
 D)
$40,000.

Answer 10

C

Most individual tax payments are deductible only as itemized deductions from AGI. If the taxpayer does not have enough deductions to itemize, there is no tax benefit from the interest payment. There are two cases in which the taxpayer may deduct taxes from gross income in arriving at the adjusted gross income:

when the taxes are incurred in carrying on a trade or business.
when the taxes are incurred in connection with property held for the production of rents or royalties. Taxes paid on the apartment building can be deducted from James’s gross income to arrive at his AGI.
Therefore, James’ AGI is $28,000 ($40,000 − $12,000).

Question 11

You are a CFP® professional and have a new client who has brought you financial information for the past 5 years. Upon review of the information you notice a discrepancy between the investment assets and the investment income reported. Your client informs you that the income from a rental property has been assigned to his adult daughter and is reported on her income tax return because she pays a lower tax rate while also providing the daughter the desired cash. The client prepares his own returns using income tax preparation software. What actions should you recommend to the client?

A)
Both the client and the daughter must file amended income tax returns and the client must report the rental income instead of his daughter.
B)
The assignment of income should be formalized by a written document prepared by an attorney.
C)
All the client needs to do is report the assigned income on a gift tax return because it is actually a gift from father to daughter and it will then be accounted for correctly.
D)
This is a routine assignment of income transaction and requires no further action on the taxpayer’s part..

Answer 11

A

Question 12

William gave his son, Simon, a house on August 1 of this year. No gift tax was paid. The fair market value (FMV) of the house on January 1, August 1, and December 31 of the current year were as follows: $130,000, $140,000, and $150,000. William had purchased the property in 2001 for $60,000 and had used it as rental property the entire time he held it. He had taken cumulative straight-line depreciation of $10,000 through July 31 of the current year. What is Simon’s initial tax basis?

A)
Simon’s initial tax basis is zero because he did not pay for the house.
B)
Simon’s initial tax basis is the same as William’s cost, less depreciation, regardless of what Simon does with the property.
C)
Simon’s initial tax basis is the FMV on the date of the gift.
D)
Simon’s initial tax basis is the same as William’s cost.

Answer 12

B

Question 13

Mike exchanged an old machine in a like-kind exchange: adjusted basis of old machine, $5,000; fair market value (FMV) of new machine, $10,000; FMV of boot received, $0; FMV of boot given, $6,000. What gain must be recognized by Mike, and what is his adjusted tax basis in the new asset, respectively?
Recognized gain Adjusted tax basis
A)
$0 $10,000
B)
$5,000 $11,000
C)
$0 $11,000
D)
$0 $5,000

Answer 13

C

when no boot is received your recognized gain will equal $0

To solve for adjusted tax basis:

original basis
\+ boot given
\+ gain recognized
- boot received
- loss recognized

Question 14

Craig gives his son Scott stock with a basis of $80,000 and a fair market value of $70,000. No gift tax is paid. Scott subsequently sells the stock for $78,000. What is Scott's recognized gain or loss?
A)
$78,000 gain.
 B)
No gain or loss.
 C)
$8,000 gain.
 D)
$2,000 loss.

Answer 14

B

Question 15

Martin is in a year-end planning meeting with his clients, Sue and Robert. Robert mentions that since they last met, the couple has been providing support for Sue’s grandfather, David. Further questioning by Martin reveals that David disappeared late last year after his wife’s death and had been homeless when the couple located him and brought him home. David has had little known income this past year and has only been living with Sue and Robert for the last 7 months. They did not mention him at previous meetings because they were not certain he would stay. What steps should Martin take after receiving this information?

1. Because David is only Sue’s grandfather and did not live with the couple the entire year, Martin should inform the couple David cannot be considered a dependent for income tax purposes.
2. Martin should acquire information on the amounts Sue and Robert have paid out for David’s support.
3. Martin should advise the couple that if the support tests are met, David may be considered a dependent this year.
4. Martin needs to obtain actual information on any income David may have had during the year and used for his support.

Answer 15

2, 3, and 4

1 is incorrect because the grandfather does not have to live with them to be claimed as a dependent

Question 16

Jenny incurred investment acquisition expenses of $10,000 this year. The investment income she received, as a result, was $40,000, of which $5,000 was tax-free interest income on bonds. How much of her investment expenses will be deductible for this year?

A)
$8,750.
 B)
$10,000.
 C)
The amount cannot be determined from the information given.
 D)
$7,500.

Answer 16

A

Business expenses generated by a source that creates tax-exempt income are not deductible. Because 12.5% ($5,000 ÷ $40,000) of her income was tax-exempt, the same proportion of her expenses is not tax deductible. In other words, because 87.5% of her income was taxable, 87.5% of her expenses were tax deductible ($8,750).

Question 17

Margo files her tax return 39 days after the due date. Along with the return, she remits a check for $6,000 (the balance of the tax owed). Disregarding any interest element, her combined failure-to-file and failure-to-pay penalties are:
A)
$600.
 B)
$440.
 C)
$400.
 D)
$660.

Answer 17

A

Question 18

When reviewing the documents provided by your client, Randy, you, a CFP® professional, note that Randy implemented the plan to acquire new stores and expand his business, in accordance with his stated financial goals. Randy, a calendar-year, cash-basis taxpayer, owns and operates furniture rental outlets in Georgia. He wants to expand to other states. He spent $20,000 investigating furniture stores in Alabama and $12,000 investigating stores in Florida. He acquired the Alabama stores but not the stores in Florida. Randy is understandably concerned about the expenses he incurred investigating the stores in both states. He asks you to review his expenditures and tell him regarding the income tax implications. When reporting the above expenses on his income tax return you tell Randy he should:
A)
expense $32,000.
 B)
expense $12,000 and capitalize $20,000.
 C)
capitalize $32,000.
 D)
capitalize $20,000 and not deduct $12,000.

Answer 18

A

Randy is already in the business; therefore, expenses are currently deductible and do not need to be capitalized. Deductible expenses include travel, engineering and architectural surveys, marketing reports, and legal and accounting services. (Domain 7: Monitoring the Recommendations)

Question 19

Grace brought you a document she has executed stating that she is assigning the income from the ABC Mutual Fund shares that she owns to her son, Paul. Paul is facing some economic challenges and Grace believes the income from the mutual funds shares will help him. As Grace’s planner, what do you tell her about this income assignment?
A)
The assignment of income will be valid if the mutual fund manager also signs the document of assignment.
B)
Grace’s document assigning the mutual fund income to Paul makes the income taxable to Paul and not Grace.
C)
Grace can successfully assign the income to Paul because he is a family member. This option is unavailable to unrelated parties.
D)
Grace can assign the income to Paul but it is still taxable to Grace and not Paul because Grace still owns the mutual fund shares; she would be making a gift to Paul of the income.

Answer 19

D

Question 20

Meredith is a physician in Louisiana. She has owned her office building for the past 15 years. The building currently has a FMV of $400,000. Meredith has an adjusted basis in the building of $100,000. She gives the other physician $200,000 in cash in addition to her building. She decides to move her medical practice to Texas and finds a physician there who wishes to move to Louisiana. They agree to trade ownership of their respective office buildings. The value of the office building in Texas is $600,000. How much gain must Meredith recognize for income tax purposes in the year the exchange takes place?
A)
$200,000.
 B)
$400,000.
 C)
$500,000.
 D)
$0.

Answer 20

D

In a Section 1031 like-kind exchange, when the boot given up is cash and not other, not-like-kind property, there is no recognized gain on the transaction. When properties are traded and the newly acquired property is used for the same purpose as the old property, the Tax Code does not require the taxpayer to recognize any gain received in the exchange.

Question 21

William is age 30, single and is covered by a qualified retirement plan. He provided the following information for his 2017 income tax return:

Salary $30,000
Contribution to a Roth individual retirement account $3,000
Total itemized deductions $6,500
Number of personal exemptions claimed 1
What is William’s taxable income for 2017?

A)
$22,450.
 B)
19,950.
 C)
$19,450.
 D)
$15,450.

Answer 21

C

Question 22

The following assets were used in John’s business:

Asset Holding Period Gain/Loss
Equipment 4 years $2,100
Truck 6 months ($1,200)
Common stock (capital assets) 3 years $2,000

The equipment had an adjusted basis of zero and was purchased for $8,000. The truck was purchased for $3,000 and sold for $1,800. The stock was purchased for $3,000 and sold for $5,000. In the current year (the year of the sale), John should report what amount of net capital gain and net ordinary income?

A)
$800 long-term capital gain and $900 ordinary gain.
B)
$2,000 long-term capital gain and $900 ordinary gain.
C)
$4,100 long-term capital gain and $1,200 ordinary loss.
D)
$2,100 long-term capital gain.

Answer 22

B

The equipment is fully depreciated, so the entire gain of $2,100 will be taxed as ordinary income because of Section 1245 depreciation recapture. The truck was held short term (not more than 1 year), and as a result, the entire $1,200 loss is treated as an ordinary, not capital, loss. The sale of the common stock is treated as a long-term capital gain.

Question 23

Jack and Jill are in business together as partners. Their partnership agreement provides that Jack is to receive 60% of all profits and losses and Jill is to receive 40% of all profits and losses. If the partnership’s total charitable contributions for the year are $10,000, how much of the charitable contribution can Jill report as a deduction on her personal income tax return?

A)
$5,000.
 B)
$0.
 C)
$6,000.
 D)
$4,000.

Answer 23

D

Unless the partnership specifically describes how an item is to be distributed among the partners, it is presumed to be distributed in the same proportion as profits and losses. Because Jill is entitled to 40% of the profits and losses, she is also entitled to 40% of the charitable contributions, which equals $4,000.

Question 24

Bob is a cash-basis, calendar year, sole proprietor. It is now December of the current year, and Bob has come to you for a strategy that would help reduce his income tax liability for the current year. You are a CFP® professional and have not seen Bob during the year. You are uncertain of his true tax position as this tax planning was not in the original letter of engagement. Which of the following actions should you perform in Bob’s best interest?
A)
You request a new letter of engagement and updated financial information for Bob personally as well as for the business before making recommendations.
B)
You decide to offer basic recommendations that will help no matter what his tax status is currently.
C)
You recommend Bob buy an interest in a RELP to shelter some of his income.
D)
Because this advice was not in the original scope of work, you cannot help Bob.

Answer 24

A

Question 25

Jenny is a real estate agent and investor in Georgia. She owns an office building that has a FMV of $200,000, which she is trying to sell. She has an adjusted basis in the building of $100,000. Her brother, a doctor, owns an office building in California and agrees to trade buildings with her. The value of the office building in California is $300,000. If the exchange takes place this year, how much of a gain must Jenny recognize this year because of the exchange?

A)
$200,000.
 B)
$100,000.
 C)
$300,000.
 D)
$0.

Answer 25

A

When properties are traded and the use for the newly acquired property is the same as for the old property, the Code does not require the taxpayer to recognize any gain received in the exchange. However, the property that is traded cannot be treated this way if it is property held primarily for sale. Dealers in real estate who hold properties that are primarily for sale, such as the case with Jenny, must recognize any gain or loss of an exchange. The gain in this case is the value of the building received less Jenny’s basis in her building. ($300,000 − $100,000 = $200,000 gain)

Question 26

Which of the following charitable contributions is NOT deductible on Mary’s 2017 income tax return?

A)
A pledge on December 31, 2017 to pay the United Way $50 before April 15, 2018.
B)
All of these.
C)
A contribution charged to her credit card on December 10, 2017, even though she did not pay the bill until January 2018.
D)
A contribution charged to her credit card October 10, 2017, which she did not pay until the end of 2017.

Answer 26

A

One requirement for a charitable contribution deduction is that the gift must be paid in cash or property before the end of the tax year. Contributions made by credit cards are deductible the year in which the credit card is actually charged, regardless of when the taxpayer pays the credit card bill.

Question 27

Anna is a 4% shareholder and an employee of Powers Enterprises, an S corporation. Which of the following items is deductible by Powers on its tax return?

1. A reasonable salary paid to Anna.
2. Group health insurance.
3. Entertainment expense reimbursements paid to Anna.
4. Premiums for up to $50,000 of group term life insurance benefits.

Answer 27

none of these

Powers is an S corporation which is a pass-through entity. None of the listed expenses are deductible by the corporation as Powers Enterprises furnishes K-1s to the shareholders who then report items of revenue and expense on their personal income tax returns. It should be noted that partners, proprietors, and greater than 2% S corporation owners are not considered employees and are ineligible for the employer paid group term life insurance of $50,000.

Question 28

Which of the following statements regarding the American Opportunity Tax Credit are CORRECT?

1. A student must be enrolled no less than half time to be eligible.
2. The credit is only available for expenses paid on behalf of a taxpayer, spouse, or dependent.
3. A student may claim both an American Opportunity Tax Credit and the Lifetime Learning Credit in the same tax year.

Answer 28

1 and 2

The American Opportunity Tax Credit (formerly the Hope Scholarship Credit) was created to help all students further their education after completing high school. This credit may be claimed for 2017 for the first 4 years of postsecondary education. Statement 3 is incorrect because only one of the available credits may be claimed per student per year.

Question 29

Baxter owns a small business. This year he made the following purchases:

1. Several new computers for his office
2. Land on which he will be building a warehouse
3. A sports utility vehicle (SUV) to go to client work sites (the SUV is fitted for the specialty tools he needs)
4. A small office building he will rent to others.

Which of his purchases is(are) neither depreciable nor amortizable for federal income tax purposes?

Answer 29

2 only

Land can never be depreciated for income tax purposes. A computer used in a business is eligible for a depreciation deduction. Rental real estate (the office building) is used for the production of income and is therefore eligible for a depreciation deduction. A sports utility vehicle, used in a trade or business, is also eligible for a depreciation deduction.

Question 30

Meg gave her friend Jan property that had a FMV of $10,000 on the date of the gift. Meg’s basis in the property was $7,500. Three years later, Jan sold the property for $12,000. When determining a gain on the sale of property by Jan, what is the general rule regarding the Jan’s basis in the property?
A)
The donee’s basis is always equal to the donor’s basis.
B)
The donee’s basis is the greater of the donor’s basis or the FMV of the gift at the time the donee receives it.
C)
The donee’s basis equals the donor’s basis, subject to adjustment for gift taxes paid on the appreciation in value of the gift.
D)
The donee’s basis is the same as the last preceding owner who acquired the property by gift.

Answer 30

C

The general rule is that when a person has property given to him as a gift, the recipient’s basis is the same as the donor’s or the last preceding owner who did not acquire the property by gift. The recipient, however, is entitled to adjust the basis for any gift taxes he or the donor is required to pay on the net appreciation in the value of the gift. Different rules apply for losses on donee sales.

Question 31

During the current year, Bill sustained a serious injury in the course of his employment. As a result of this injury, Bill received the following payments:

Workers’ compensation $3,000
Reimbursement from his employer’s accident and
health plan from medical expenses paid by Bill $2,400
Compensatory damages for physical injuries $6,000
Punitive damages for physical injuries $5,000
What amount should be included in Bill’s gross income this year?

A)
$5,000.
 B)
$16,400.
 C)
$0.
 D)
$3,000.

Answer 31

A

The question relates to inclusion in gross income. All punitive damages are included in income. Workers’ compensation is intended to make a person whole and is excluded. Compensatory damages for physical injuries are also excluded. Reimbursements from an employee medical plan are not generally included either.

Question 32

Ten years ago, Christine purchased 100 shares of Romig Corporation stock for $28,000. In the current tax year, she sells 30 of these shares purchased for $8,000. Twenty-nine days earlier, she had purchased 30 shares for $7,500. What is Christine’s recognized gain or loss on the sale of the stock, and her basis in the 30 shares purchased 29 days earlier?

          Recognized loss	Basis in new stock
A)
                         $400	$7,500
 B)
                            $0	$8,250
 C)
                            $0	$7,900
 D)
                            $0	$7,500

Answer 32

C

Amount realized	$8,000 
Adjusted basis (30 × $280)	(8,400)
Realized loss	($400)
Recognized loss	$0 
Because the transaction is a wash sale, the realized loss of $400 cannot be deducted. As a result, this postponed loss is added to the adjusted basis of the shares purchased 29 days earlier to determine the basis of the new shares. Therefore, the adjusted basis for these shares is $7,900 ($7,500 + $400). The wash sale rules apply to a loss sustained upon a sale or other disposition of a stock or security. The loss is not allowed if, within a period beginning 30 days before the date of the sale and ending 30 days after that date, the taxpayer has acquired or has entered into a contract or option to acquire substantially identical stock or securities. (Domain 3: Analyzing and Evaluating the Client's Current Financial Status)

Question 33

Which of the following conditions must a taxpayer meet to obtain innocent spouse relief?
A)
Innocent spouse relief must be elected by both the taxpayer and the taxpayer’s spouse.
B)
The spouse must have had no reason to know the extent of the understatement.
C)
The understatement of tax must be attributable to a grossly erroneous item of the other spouse.
D)
The taxpayer must have filed a separate return.

Answer 33

B

Question 34

Savannah owns a 10-year period certain annuity that currently pays her $300 per month. She dies after receiving 5 years of payments. Her beneficiary is Jim. Which of the following statements regarding this situation is CORRECT?
A)
Jim must pay income tax on the full amount of all remaining payments he receives from the annuity.
B)
Because the remaining annuity payments represent income in respect of a decedent (IRD), the annuity payments retain the same character to Jim as they did to Savannah for the remaining life of the annuity contract.
C)
Jim will receive all remaining payments under the annuity on a tax-free basis.
D)
Savannah’s exclusion ratio prior to death was 33.3%.

Answer 34

B

Question 35

Vicki, age 70, retired from Austin Industries several years ago. In the current year, Vicki purchased an annuity for $26,000 to provide her with an additional source of retirement income. Under the contract, Vicki will receive $300 each month for the rest of her life. According to actuarial estimates, Vicki will live to receive 100 payments and will receive a 3% return on her original investment. Which of the following statements regarding payments received under the annuity is CORRECT?

1. If Vicki collects $3,000 in the current year, the $3,000 is treated as a recovery of capital and, thus, is not taxable.
2. If Vicki dies after collecting a total of 50 payments, she has an economic loss that is not deductible.
3. If Vicki lives to collect more than 100 payments, she must amend her prior years’ tax returns to increase her taxable portion of each payment received in the past.
4. If Vicki lives to collect more than 100 payments, all amounts received after the 100th payment must be included in her gross income.

Answer 35

4 only

Question 36

Which of the following are implications of the AMT, as it applies to real estate transactions?

1. Depreciation and long-term capital loss deductions are reduced.
2. Net operating losses are adjusted and deductions are limited.
3. Some itemized deductions are eliminated and some passive activity losses are added back.
4. The installment sales method is not allowed in AMT calculations.

Answer 36

all are implication of AMT as it applies to real estate transactions

Question 37

What is the primary tax benefit of an S corporation?
A)
The Internal Revenue Code has special tax rates that apply to S corporations, which are lower than the rates that apply to other corporations.
B)
The S corporation is closely-held and the owners receive a great deal of compensation that is deductible as a business expense.
C)
Under the Internal Revenue Code, an S corporation is not taxed as a regular corporation. The corporate net income is taxed directly to the shareholders.
D)
Under the Internal Revenue Code, an S corporation is not taxed at the same rate as a regular corporation. The S corporation must pay taxes, but may use the rates for an individual taxpayer.

Answer 37

C

Question 38

Kurt, who is single and worked as a manager for Review Corp., loaned $4,000 to Review Corp. 2 years ago. Kurt did not own any of Review's stock, and the loan was not a condition of Kurt's employment by Review. This year, Review Corp. declared bankruptcy, and Kurt's note receivable from Review became worthless. What loss can Kurt claim on his income tax return for this year, assuming no other capital gains or losses?
A)
$3,000 short-term capital loss.
 B)
$4,000 short-term capital loss.
 C)
$4,000 business bad debt.
 D)
$2,000 long-term capital loss.

Answer 38

A

This is a nonbusiness bad debt (personal bad debt). Regardless of the holding period, it is treated as a short-term capital loss, and the $3,000 limit offset against ordinary income limit applies. Kurt has a carryover short-term capital loss: $4,000 − $3,000 = $1,000. If the loan had been a condition of Kurt’s employment, it would have been classified as a business bad debt and would have been an ordinary loss in the year the debt went bad.

Question 39

Which of the following statements from a tax standpoint for cash-basis taxpayers is(are) CORRECT?

1. Cash-basis taxpayers may defer reporting of some of the income for a service contract entered into in November of year 1, paid for in year 1, and requiring services from December of year 1 through May of year 3.
2. Cash-basis taxpayers can elect to defer recognition of income for advance payments for goods if the method of accounting for the sale is the same for tax and financial reporting.
3. Cash-basis taxpayers can claim a deduction for depreciation on fixed assets in the same manner as an accrual-basis taxpayer.
4. Income is defined as the change in the taxpayer’s net worth in terms of market value plus the value of assets consumed during the period.

Answer 39

3 only

Question 40

How can passive activity losses be deductible from other taxable income?
A)
Passive losses can offset passive gains, and a phased-out $25,000 deduction ($12,500 for MFS) for rental real estate applies.
B)
Passive activity losses are deductible against portfolio gains.
C)
Passive losses can only be carried forward against future passive gains.
D)
Passive losses can only be offset by passive gains.

Answer 40

A

Generally, passive activity losses can only be used to offset passive activity income. An exception for the deduction of passive losses is for rental real estate. A phased-out deduction of $25,000 ($12,500 for MFS) of rental real estate losses is allowed against a taxpayer’s other non-passive income. If AGI is greater than $100,000 ($50,000 for MFS), however, there is a reduction of 50 cents for each dollar over $100,000 ($50,000 for MFS), which then terminates at $150,000 ($75,000 for MFS) of AGI.