Testlet 1

Question 1

MCQ-10038
In general, which of the following debts will be discharged under the voluntary liquidation provisions of the Bankruptcy Code?

I. A debt arising before the filing of the bankruptcy petition due to the debtor’s negligence.
II. Income taxes due from filing a fraudulent return 7 years prior to filing the bankruptcy petition

Answer 1

I only

Bankruptcy discharges most of pre-petition debts. Nondischargeable debts include certain taxes, debts incurred by fraud, unscheduled debts, debts arising from crimes, fines and penalties, alimony/child support debts,
and student loans.

Question 2

MCQ-15647
Martin Corporation, a calendar year corporation, purchased and placed into service evenly in the current year $3,630,000 of computer equipment. Martin elected to take the maximum allowable Section 179 expense. What is Martin Corporation’s Section 179 expense deduction assuming the rules in effect for 2022?

Answer 2

$150,000

For 2022, the maximum amount that can be expensed under Section 179 is $1,080,000, but that amount is reduced, dollar for dollar, for the amount the total qualified property placed into service in the year exceeds $2,700,000. In this case, the total amount of equipment placed into service is $3,630,000, and the excess purchases over the $2,700,000 threshold amount is $930,000. The maximum Section 179 expense allowed of $1,080,000 is reduced by the $930,000 excess over the threshold. The reduced Section 179 allowed is $150,000 ($1,080,000 – $930,000)

Question 3

MCQ-15657
Robin, a C corporation, had revenues of $200,000 and operating expenses of $75,000. Robin also received a $20,000 dividend from a domestic corporation and is entitled to a $10,000 dividend-received deduction. Robin donated $15,000 to a qualified charitable organization in the current year. What is Robin’s charitable contributions deduction?

Answer 3

$14,500

Revenues $200,000
Dividends Received 20,000
Less: Operating expenses (75,000)
Total Income 145,000
X 10%
Answer $14,500

Question 4

MCQ-03268
Nia Johnson invested in a certificate of deposit (CD) at the local bank. The total interest to be earned on the CD amounted to $1,000. However, Nia withdrew the money early and only earned $800. The bank reported $1,000 of interest and a $200 early withdrawal penalty to Nia for tax reporting. How will Nia report the interest earned and the early withdrawal penalty?

Answer 4

$1,000 as interest income and a $200 adjustment to AGI for the early withdrawal penalty

Question 5

MCQ-10537
Albert and Carol Dutton finalized their divorce in January 2017. In accordance with the divorce decree, Albert transferred title in their home to Carol during the year. The home, which had a fair market value of $450,000, was subject to a mortgage of $300,000 that had more than 25 years remaining on the amortization schedule. Monthly mortgage payments amount to $2,200. Under the terms of the settlement, Albert is obligated to make the mortgage payments on the home for the full remaining 25-year term of the indebtedness, regardless of how long Carol lives. Albert made 12 mortgage payments during the current year. What amount is taxable as alimony on Carols’ current year tax return?

Answer 5

$0

Carol will include $0 as alimony from the mortgage payments made by Albert during the year on her current year income tax return. Payments that are required to be paid, even if the recipient dies, are not considered to be payments for support (alimony), and are considered to be amounts owed to the payee as part of the divorce
settlement (i.e., property settlements). Note that for divorce or separation agreements executed through December 31, 2018, the alimony is taxable as income to the recipient and deductible as an adjustment by the payor. For divorce or separation agreements executed after December 31, 2018, the alimony received is not taxable and the alimony paid is not deductible.

Question 6

MCQ-09971
Dylan died on March 2, Year 1. Ann, his wife, and Lena, their daughter, survive. Ann filed a joint return in Year 1. Lena, age 19 in Year 4, is a college student and continues to live at home with her mother. She works part-time, earning wages of $2,000 for the year. What is Ann’s filing status for Year 4?

Answer 6

Head of Household

Question 7

MCQ-03170
In which of the following cases will federal law prohibit a state from imposing an income tax on net income?

Answer 7

Orders are taken within the state and accepted at corporate headquarters outside of the state and shipped from a location outside of the state.

Question 8

MCQ-10591
Circular 230:

Answer 8

Prohibits a practitioner from endorsing or negotiating refund checks issued to the client.

Question 9

MCQ-10548
On June 1, Year 3, Baxter Corp. adopted a plan of complete liquidation. On December 1, Year 3, Baxter distributed to its stockholders installment notes receivable that Baxter had acquired in connection with the sale of land in Year 2. The following information pertains to these notes:
Baxter’s basis $85,000
Fair market value 150,000
Face amount 180,000

How much gain must Baxter recognize in Year 3 as a result of this distribution?

Answer 9

$65,000

Distributions in complete liquidation of the corporation are subject to two levels of taxation. First, the corporation must recognize gain or loss as if it sold the assets for the fair market value. The gain on the sale would be the fair market value of $150,000 less $85,000 basis for a gain of $65,000. Second, the shareholders would report gain
or loss determined by the difference between the fair market value of the assets received and the shareholders’ adjusted basis of the stock.

Question 10

MCQ-10593
Under Circular 230, for tax returns:

Answer 10

A practitioner must return all client records at the request of the client.

Question 11

MCQ-10504
Sand orally promised Frost a $10,000 bonus, in addition to a monthly salary, if Frost would work two years for Sand. If Frost works for the two years, will the Statute of Frauds be a defense if Sand refuses to pay Frost the bonus?

Answer 11

No, because Frost fully performed.

Although under the Statute of Frauds most contracts that by their terms are impossible to perform within one year must be evidenced by a writing signed by the party sought to be held liable and containing the material terms of the contract, there is an exception if one party has fully performed his/her part of the contract. In such a case, the contract can be enforced despite the lack of a sufficient writing if the aggrieved party can convince the court that the oral term was indeed part of the contract. Here, Frost had fully performed by working for the two-year period and so he has a chance to enforce the bonus provision despite the absence of a sufficient writing.

Question 12

MCQ-10590
Which of the following professional bodies has the authority to revoke a CPA’s license to practice public accounting?

Answer 12

State board of accountancy.

Question 13

MCQ-10041
Marcus incurred $750 of expenses for business meals in his position as an employee of Alexander Corporation. Marcus’ expenses were not reimbursed. This expenditure is:

Answer 13

Not deductible.

Question 14

MCQ-09996
Emerald Corporation, a calendar year corporation, began business in Year 1. Emerald made a valid S corporation election on December 8, Year 3, with the unanimous consent of its shareholders. The eligibility requirements for S status continued to be met throughout Year 4. On what date did Emerald’s S status become effective?

Answer 14

January 1, Year 4

In order to be effective for the current taxable year, the S corporation election must be made by the 15th day of the third month of the taxable year. If the election is made after that date, the election becomes effective on the first day of the next taxable year, January 1, Year 4, in this case.

Question 15

MCQ-10043
Which of the following requirements is NOT necessary in order to have a security interest attach?

Answer 15

There must be a proper filing

Question 16

MCQ-10506
Which of the following statements is correct regarding modification of a sales contract under the Uniform Commercial Code?

Answer 16

The modification must satisfy the Statute of Frauds if the contract as modified is within its provisions.

Question 17

MCQ-09978
Grant had adjusted gross income of $55,000. During the year his personal use summer home was completely destroyed by a fire. The home was located in a presidentially declared disaster area. Pertinent data with respect to the home
follows:

Cost basis: $135,000
Value before casualty $140,000
Value after casualty $123,000

Grant was insured for his actual loss and he received the insurance settlement. What is Grant’s allowable casualty loss deduction?

Answer 17

$0

The entire loss was covered by insurance.

Question 18

MCQ-15698
With respect to the penalties for failure to file information returns of tax preparers, which of the following provisions is correct for any person who employed a tax return preparer during the return period?

Answer 18

The penalty for failure to file information returns does not apply to the extent that the failure is due to reasonable cause and not due to willful neglect.

Question 19

MCQ-10596
Decker sold equipment for $200,000. The equipment was purchased for $160,000 and had accumulated depreciation of
$60,000. What amount is reported as ordinary income under Code Sec. 1245?

Answer 19

$60,000

Ordinary income is recognized on gain of accumulated depreciation.

Question 20

MCQ-10596
Decker sold equipment for $200,000. The equipment was purchased for $160,000 and had accumulated depreciation of $60,000. What amount is reported as ordinary income under Code Sec. 1245?

Answer 20

$60,000

Under Sec. 1245, ordinary income is recognized on the gain to the extent of the accumulated depreciation. Any gain in excess of the original cost is a Sec. 1231 gain, which is taxed as a capital gain if not subject to the Sec. 1231 five-year look-back rule

Question 21

MCQ-10562
Riley purchased Series EE U.S. Savings Bonds in 1998. Redemption proceeds will be used for payment of the college tuition for Riley’s dependent child. One of the conditions that must be met for the tax exemption of accumulated interest on these bonds is that the

Answer 21

Purchaser of the bonds must be the sole owner of the bonds (or the joint owner with his or her spouse).

Question 22

MCQ-09995
On January 2, Year 1, Miller and White contributed $8,000 and $12,000 in cash, respectively, and formed the Jumbo General Partnership. The partnership agreement allocated profits and losses 40% to Miller and 60% to White. During the year, Jumbo purchased property from an unrelated seller for $8,000 cash and a $50,000 mortgage note that was the general liability of the partnership. Jumbo’s liability:

Answer 22

Increases Miller’s partnership basis by $20,000.

40% of $50,000 mortgage

Question 23

MCQ-10520
On June 1 of the current year, Monte Scott received a 10% interest in the capital of Eve’s World, a partnership, for services rendered. Eve’s net assets at June 1 had a basis of $105,000 and a fair market value of $150,000. What income must Monte Scott include on his current year tax return for the partnership interest transferred to him by the other partners?

Answer 23

$15,000 ordinary income.

Total FMV of capital accounts $150,000
% received by Monte Scott 10%

Question 24

MCQ-10620
Which of the following promises is supported by legally sufficient consideration and will be enforceable?

Answer 24

A promise to pay a minor $500 to paint a garage

Question 25

MCQ-10042
Ben Willis paid self-employment taxes of $3,000 as a result of earnings from his consulting business. The “employer”
portion of these taxes are:

Answer 25

A deduction to arrive at adjusted gross income.

Question 26

MCQ-03339
On February 1 of Year 0, John received a nonqualified stock option to purchase 100 shares of his employer’s stock for $10 per share. At the time John received the option, it was selling for $5 per share on an established exchange. On September 1 of Year 1, John exercised the options when the stock was selling for $19 per share. On December 1 of Year 2, John sold all of the shares for $30 per share. What is the amount and character of income that John must report in Year 0?

Answer 26

$500, ordinary

100 shares x $5/option

Question 27

MCQ-10009
Shontelle and Teodoro are equal partners in the S&T Partnership. On January 1 of the current year, each partner’sadjusted basis in S&T was $50,000 (including each partner’s $15,000 share of partnership liabilities). During the current year, S&T sustained an operating loss of $25,000 and earned $5,000 of interest and dividend income from investments. The partnership’s liabilities were reduced to $20,000 as of December 31. Assuming the liabilities are shared equally by the partners, the basis of each partner’s interest in S&T on January 1 of the next year is:

Answer 27

$35,000

Spell BASE (Beginning, Additions, Sub, End)

B: 35,000 15,000 50,000
A: 2,500 2,500
S: (12,500) (12,500)
S: (5,000) (5,000)
E: 25,000 10,000 35,000

Question 28

MCQ-10560
For income to be taxable on a tax return, it must be:

Answer 28

Both realized and recognized.

Question 29

MCQ-10595
Wynn, a single individual age 60, sold his personal residence for $450,000. Wynn had owned the residence, which had a basis of $250,000, for six years. Within eight months of the sale, Wynn purchased a new residence for $400,000. What is
Wynn’s recognized gain from the sale of his personal residence?

Answer 29

$0

Wynn’s realized gain on the sale of the home is $200,000 [$450,000 - $250,000]. Wynn has owned and used the residence as his primary residence for the last six years. [Note that the purchase of the new home is of no consequence to the recognizable gain on the sale of the old home.] As the realized gain is less than the maximum
excludable gain of $250,000 and Wynn has owned and used the property for more than two out of the last five years, Wynn has zero recognized gain on the sale of his residence.

Question 30

MCQ-08025
The U.S. Tax Court is:

Answer 30

A specialized trial court that hears only Federal tax cases. The trials are by judge and not by a jury.

Question 31

MCQ-08026
Bob files an extension of his Year 1 income tax return on March 23, Year 2. His withholding for Year 1 is $3,200. He estimates that he will owe an additional $1,000 and includes a check for $1,000 with the extension. Bob files his Year 1 income tax return on May 18, Year 2. The total tax indicated on the return is $5,100. What amount of the tax is subject to the Failure-to-Pay Penalty?

Answer 31

$900

The total tax on the return is $5,100. Bob paid in $4,200 by the original due date of the return ($3,200 withholding plus $1,000 paid in with the extension). The additional $900 ($5,100 − $4,200) is subject to the Failureto-Pay Penalty because it was paid after the original due date of the return. The exception does not apply because the
amount paid in by the original due date was less than 90% of the total tax. ($4,200 / $5,100 = 82%).

Question 32

MCQ-03089
Which of the following statements is correct concerning the similarities between a limited partnership and a corporation?

Answer 32

Each is created under a statute and must file a copy of its certificate with the proper state authorities.

Question 33

MCQ-10594
Starr, a self-employed individual, purchased a piece of equipment for use in Starr’s business. The costs associated with the acquisition of the equipment were:

Purchase price 55,000
Delivery charges 725
Installation fees 300
Sales tax 3,400

What is the depreciable basis of the equipment?

Answer 33

$59,425

Purchase price 55,000
Delivery charges 725
Installation fees 300
Sales tax 3,400
Total depreciable basis 59,425

Question 34

MCQ-15687
Jonah, an unmarried individual, gave the following outright gifts during the year:
Donee Amount Use by Donee
Jordan $9,000 Purchase of a new car
Krista $20,500 College tuition
Emma $23,000 Medical expenses
Northside Hospital $18,000 Emma’s medical expenses
Central University $20,000 Krista’s college tuition

Jonah’s taxable gifts for the year should total:

Answer 34

$11,500

Jordan $0 [100% excluded: under $16,000 annually]
Krista 4,500 [Only $16,000 excluded]
Emma 7,000 [Only $16,000 excluded]
Northside Hospital $0 [100% excluded: direct to medical inst.]
Central University $0 [100% excluded: direct to educational inst.]
Taxable gifts $11,500

Question 35

MCQ-10567
Which of the following statements is FALSE?

Answer 35

If an individual files a tax return with a zero tax liability in the prior year, the individual must pay in at least 90 percent of the current year’s tax to avoid underpayment penalties, as the ability to use the 100 percent of prior year tax is lost

Question 36

MCQ-10592
Simon, a C corporation, had a deficit in accumulated earnings and profits of $50,000 at the beginning of the year and had current earnings and profits of $10,000. At year end, Simon paid a dividend of $15,000 to its sole shareholder. What amount of the dividend is reported as income?

Answer 36

$10,000

Dividends are a distribution of property by a corporation out of its earnings and profits (E&P). Dividends come from current E&P and then from accumulated E&P. If current E&P is positive and accumulated E&P is negative, distributions are dividends only to the extent of current E&P. Any excess distribution above E&P reduces the
shareholders basis in the stock, if any. If the shareholder has no basis, then the excess distribution is reported as a capital gain.

Question 37

MCQ-10011
Tim and Rick cannot come to an agreement as to the exact amount Rick owes Tim. They decide to and do form a new agreement that, on fulfillment, will discharge the prior obligation. Rick fulfills the new terms. This is called:

Answer 37

An accord and satisfaction.

Question 38

MCQ-10011
Tim and Rick cannot come to an agreement as to the exact amount Rick owes Tim. They decide to and do form a new agreement that, on fulfillment, will discharge the prior obligation. Rick fulfills the new terms. This is called:

Answer 38

An accord and satisfaction.

Question 39

MCQ-10510
Which of the following statements is correct with respect to the reorganization provisions of the Bankruptcy Code?

Answer 39

The commencement of a proceeding may be voluntary or involuntary