Testlet 1 Flashcards

1
Q

MCQ-10870
In computing the ordinary income of a partnership, a deduction is allowed for:

A

Guaranteed payments to partners.

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2
Q

MCQ-10853
Under the uniform capitalization rules applicable to property acquired for resale, which of the following costs should be
capitalized with respect to inventory if no exceptions are met?

A

Marketing Costs: No; Off-Site Storage Costs: Yes

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3
Q

MCQ-10847
Carlos asked Rick and Peter to guarantee Carlos’ debt to Gord Motors. Both Rick and Peter agree to act as sureties. The contract that all parties signed provides that Rick’s maximum liability is $30,000, and Peter’s is $20,000. Carlos owes Gord Motors $20,000 and is in default. Rick pays Gord Motors the entire amount. In the absence of an agreement to the contrary, Rick can recover from Peter:

A

$8,000

As a general rule each surety is liable to the creditor for the entire amount of the debt. However, with respect to co-sureties, each co-surety can seek contribution from the other co-surety (or co-sureties) to the extent any co-surety pays more than his/her/its pro rata share of the debt. In this case Rick’s pro rata share of the debt is
$30,000/($30,000 + $20,000) = 3/5. 3/5 x $20,000 = $12,000. Peter’s pro rata share is $20,000/($30,000 + $20,000) = 2/5. 2/5 x $20,000 = $8,000. Peter owes Rick $8,000 in contribution.

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4
Q

MCQ-10856
The Jacksons, who file a joint return, actively participate in a solely-owned rental real estate activity that produces a $30,000 loss during the current year. Their adjusted gross income was $120,000 before considering the rental activity. How much of the rental loss, if any, are the Jacksons entitled to deduct?

A

$15,000

Generally, passive losses are only deductible against other passive income, and there is no passive income in the facts of this question. However, the “mom and pop” exception will apply because the Jacksons actively participate in the activity. This exception allows up to $25,000 of passive losses to be deducted against other
nonpassive income. There is a phase-out over an adjusted gross income (AGI) range of $100,000 to $150,000. The Jacksons’ AGI is $120,000, and that is 40% into the phase-out range. Therefore, 40% of the $25,000 exception amount is phased out, and the deduction is $15,000 [$25,000 – ($25,000 × 40%)].

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5
Q

MCQ-10858
Taylor owns 1,000 shares of Media Corporation common stock with a basis of $22,000 and a fair market value of $33,000. Media paid a nontaxable 10% common stock dividend. What is the basis for each share of Media common stock owned by Taylor after receipt of the dividend?

A

$20

22,000 / 1,100 (which is 1000 x 1.1) = 20

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6
Q

MCQ-10843
A couple filed a joint return in prior tax years. During the current tax year, one spouse died. The couple has no dependent children. What is the filing status available to the surviving spouse for the first subsequent tax year?

A

Single

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7
Q

MCQ-10868
For an individual business owner, which of the following would typically be classified as a capital asset for federal income tax purposes?

A

Marketable securities.

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8
Q

MCQ-10841
Lobster, Inc. purchased the following assets during Year 1:
Computers 35,000
Computer desks 22,000
Office furniture 4,000
Delivery trucks 25,000
Building 425,000

What should be reported as the cost basis for a MACRS seven-year property?

A

$26,000

This would include the computer desks costing $22,000 and the office furniture costing $4,000, for a total of $26,000.

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9
Q

MCQ-10867
Jans, an individual, owns 80% and 100% of the total value and voting power of A and B Corps., respectively, which in turn own the following (both value and voting power):

C Corp 80% A Corp
D Corp 100% B Corp

All companies are C corporations, except B Corp., which had elected S status since inception. Which of the following statements is correct with respect to the companies’ ability to file a consolidated return?

A

A and C may file as a group, but B and D may not file as a group.

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10
Q

MCQ-10857
A taxpayer is trading a building used solely for business purposes for another building to be used in his business. The building originally cost $35,000 and he has taken $12,000 in depreciation. The old building is currently worth $20,000 and the new building the taxpayer wants in exchange is worth $20,000. No other cash or property is exchanged in the transaction. What is the taxpayer’s basis in the new building received?

A

$23,000

20,000 - 23,000 = (3,000) loss
Basis 20,000 + 3,000 = 23,000

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11
Q

MCQ-10871
How is the depreciation deduction of nonresidential real property determined for tax purposes using MACRS?

A

Straight-line method over 39 years.

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12
Q

MCQ-10834
Bass Corp., a calendar year C corporation, made qualifying Year 2 estimated tax deposits based on its actual Year 1 tax liability. On March 15, Year 3, Bass filed a timely automatic extension request for its Year 2 corporate income tax return. Estimated tax deposits and the extension payment totaled $7,600. This amount was 95% of the total tax shown on Bass’ final Year 2 corporate income tax return. Bass paid $400 additional tax on the final Year 2 corporate income tax return filed before the extended due date. For the Year 2 calendar year, Bass was subject to pay:

I. Interest on the $400 tax payment made in Year 3.
II. A tax delinquency penalty.

A

I only

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13
Q

MCQ-10865
Nolan designed Timber Partnership’s new building. Nolan received an interest in the partnership for the services. Nolan’s normal billing for these services would be $80,000 and the fair market value of the partnership interest Nolan received is $120,000. What amount of income should Nolan report?

A

$120,000

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14
Q

MCQ-10860
In preparing a client’s current-year individual income tax return, a tax practitioner discovers an error in the prior year’s return. Under the rules of practice, the tax practitioner:

A

Must advise the client of the error.

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15
Q

MCQ-10855
Lind and Post organized Ace Corp., which issued voting common stock with a fair market value of $120,000. They each transferred property in exchange for stock as follows:

Lind Building 40,000 (adjust basis) 82,000 (FMV) 60%
Post Land 5,000 (adjust basis) 48,000 (FMV) 40%

The building was subject to a $10,000 mortgage that was assumed by Ace. What was Lind’s basis in Ace stock?

A

$30,000

Lind computes his basis as the basis of property and cash (none here) contributed, less the amount of any debt he is relieved of. Here he contributes property with an adjusted basis of $40,000, but the $10,000 debt he is relieved of must be subtracted, resulting in a net basis of $30,000. This can also be thought of as giving Lind a
basis equivalent to the amount of equity he had in the contributed building.

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16
Q

MCQ-10850
The statute of limitations for an alleged breach of contract:

A

Generally commences on the date of the breach.

17
Q

MCQ-10837
A corporation was completely liquidated and dissolved during the year. The filing fees, professional fees, and other expenditures incurred in connection with the liquidation and dissolution are:

A

Deductible in full by the dissolved corporation.

18
Q

MCQ-10917
Parent company X and subsidiary company Y file a calendar year consolidated federal income tax return. Company X reported a $120,000 tax loss, which included a $10,000 dividend from Y. Company Y reported $140,000 of taxable income, which included $30,000 of dividends received from less than 20% owned stock investments. Neither company took into account any applicable dividends-received deduction. What is the group’s consolidated tax loss for the year?

A

($5,000)

Because X and Y are a consolidated entity, X should not include the $10,000 dividend from Y in its income. This brings X’s loss to $130,000 [($120,000) – $10,000 = ($130,000)]. The consolidated taxable income for the year, prior to consideration of the dividends-received deduction, is then X’s $130,000 loss netted with Y’s $140,000 income, for preliminary taxable income of $10,000. The dividends-received deduction on the $30,000 dividend received by Y is 50% or $15,000. This amount is subtracted from the $10,000 consolidated taxable income which results in a $5,000 loss. Note that the income limitation on the dividends-received deduction does not apply because the full dividends-received deduction results in a loss.

19
Q

MCQ-10844
David Dickens sold a piece of land on an installment sale basis to Chuck Quarters on October 1, Year 1. David’s basis in the land was $150,000 and Chuck purchased it for $1,500,000; payable in three annual installments of $500,000 on Dec. 31, Year 1, Year 2 and Year 3. How much gain should David report in his Year 1 tax return?

A

$450,000

1,500,000 - 150,000 = 1,350,000
1,350,000 / 1,500,000 = 90%
500,000 x 90% = 450,000

20
Q

MCQ-14768
Bob and Nancy are married and file a joint return for tax year 2022. They are both under age 50 and employed with wages of $50,000 each. Their total AGI is $250,000. Bob is an active participant in a qualified plan, but Nancy is not. What is the maximum traditional IRA deduction they can take for the current year?

A

$0

Because Bob is a participant in another qualified retirement plan and the couple’s AGI is over the phase-out range, they are both phased out completely and no IRA deduction is available.

21
Q

MCQ-10846
For the current year, Maple Corp.’s book income, before federal income tax, was $100,000. Included in this $100,000 were the following:

Provision for state income tax 1,000
Interest earned on U.S. Treasury Bonds 6,000
Interest expense on bank loan to purchase U.S. Treasury Bonds 2,000

A

$100,000

22
Q

MCQ-08041
Which of the following is correct about the powers of a State Board of Accountancy?

A

A State Board of Accountancy has the power to suspend or revoke a CPA’s license

23
Q

MCQ-10842
Libby, a citizen and resident of Country A, owns 100 shares of United Bank, a U.S. corporation. United pays a dividend of $100 per share. Which of the following statements is correct?

A

Libby will receive a check in the amount of $7,000 in payment of the dividend.

24
Q

MCQ-10864
Grill deals in the repair and sale of new and used clocks. West brought a clock to Grill to be repaired. One of Grill’s clerks mistakenly sold West’s clock to Hone, another customer. Under the Sales Article of the UCC, will West win a suit against Hone for the return of the clock?

A

No, because Grill is a merchant to whom goods had been entrusted.

25
Q

MCQ-02100
Which one of the following statements concerning workers’ compensation laws is generally correct?

A

Employers are strictly liable without regard to whether or not they are at fault

26
Q

MCQ-08039
Which of the following is an unreasonable position as defined by the Internal Revenue Code?

A

There is substantial authority for the position, and it does involve a tax shelter. It does not appear that there is a more likely than not chance that the position will be sustained on its merits.

27
Q

MCQ-10852
Under Section 444 of the Internal Revenue Code, certain partnerships can elect to use a tax year different from their
required tax year. One of the conditions for eligibility to make a Section 444 election is that the partnership must:

A

Choose a tax year where the deferral period is not longer than three months

28
Q

MCQ-10854
John Q. Dillinger is the outgoing Commissioner of the Internal Revenue Service. In his final public meeting with IRS employees, he addressed changes that he would like to see made in the IRS audit and appeals process. Which of the following statements that he made at this meeting is correct?

A

Following an audit, if agreement is reached with the taxpayer, the taxpayer signs Form 870

29
Q

MCQ-15046
Which of the following disqualifies an individual from the earned income credit?

A

The taxpayer has a filing status of married filing separately.

30
Q

MCQ-10859
The filing of an involuntary bankruptcy petition under the Federal Bankruptcy Code:

A

Stops the enforcement of judgment liens against property in the bankruptcy estate

31
Q

MCQ-10848
After a corporation’s status as an S corporation is revoked or terminated, how many years is the corporation required to
wait before making a new S election, in the absence of IRS consent to an earlier election?

A

5

32
Q

MCQ-15688
A husband and wife agree to split monetary gifts to their relatives. The husband gives his daughter $21,500, and the wife gives her niece $18,000. Assume the annual gift tax exclusion is $16,000. What amount is the taxable gift for the husband and wife if gift-splitting is elected?

A

$0

33
Q

MCQ-10840
Which, if any, of the following could result in penalties against an income tax return preparer?

I. Knowing or reckless disclosure or use of tax information obtained in preparing a return.
II. A willful attempt to understate any client’s tax liability on a return or claim for refund.

A

Both I and II

34
Q

MCQ-10849
A calendar-year individual is eligible to contribute to a deductible IRA. The taxpayer obtained a six-month extension to file until October 15 but did not file the return until November 1. What is the latest date that an IRA contribution can be made in order to qualify as a deduction on the prior year’s return?

A

April 15

35
Q

MCQ-10836
Absent an election to close the books, the allocation of nonseparately stated income or loss for an S corporation
shareholder that changed his ownership interest during the year is computed based on which of the following ownership percentages?

A

Ownership percentage computed on a per-share per-day basis.

36
Q

MCQ-10866
Which of the following statements is(are) correct regarding the common law elements that must be proven to support a finding of constructive fraud against a CPA?

I. The plaintiff has justifiably relied on the CPA’s misrepresentation.
II. The CPA has acted in a grossly negligent manner.

A

Both I and II

37
Q

MCQ-10861
Jones incorporated a sole proprietorship by exchanging all the proprietorship’s assets for the stock of Nu Co., a new corporation. To qualify for tax-free incorporation, Jones must be in control of Nu immediately after the exchange. What percentage of Nu’s stock must Jones own to qualify as “control” for this purpose?

A

80%

38
Q

MCQ-10869
A general partnership must:

A

Have two or more partners.