Testlet 2

Question 1

MCQ-10875
In the current year, Drake, a disabled taxpayer, made the following home improvements:

-Pool installation, which qualified as a medical expense and increased the value of the home by 25,000 $100,000
-Widening doorways to accommodate Drake’s wheelchair (the improvement did not increase the value of his home) 10,000

For regular income tax purposes and without regard to the adjusted gross income percentage threshold limitation, what maximum amount would be allowable as a medical expense deduction in the current year?

Answer 1

$85,000

Drake may only deduct $75,000, the difference between the cost of improvement ($100,000) and the increase in market value ($25,000) of the home. In addition, the full cost of home-related capital
expenditures to enable a physically handicapped individual to live independently and productively qualifies as a medical expense. The widening of hallways qualifies as this type of expense and, therefore, the entire $10,000 is
deductible.

Question 2

MCQ-10882
To which of the following transactions does the common law Statute of Frauds not apply?

Answer 2

Contracts that can be performed within one year.

Question 3

MCQ-02167
Perfection of a security interest permits the secured party to protect its interest by:

Answer 3

Establishing priority over the claims of most subsequent secured creditors

Question 4

MCQ-14750
Which of the following statements is not correct?

Answer 4

A complex trust is not allowed to accumulate current income

Question 5

MCQ-10876
Which of the following should be used in computing the basis of a partner’s interest acquired from another partner?

Answer 5

Cash paid by transferee to transferor: Yes; Transferee’s share of partnership liabilities: Yes

Question 6

MCQ-10907
The at-risk limitation provisions of the Internal Revenue Code may limit:
I. A partner’s deduction for his or her distributive share of partnership losses.
II. A partnership’s net operating loss carryover.

Answer 6

I only

Question 7

MCQ-10904
A heavy equipment dealer would like to trade some business assets in a nontaxable exchange. Which of the following
exchanges would qualify as nontaxable?

Answer 7

A corporate office building for a vacant lot.

Question 8

MCQ-10901
A corporation that has been an S corporation from its inception may:

Answer 8

Have passive investment income in excess of 25% of gross receipts
for 3 consecutive years and nonpassive income: Yes; Be owned by a
bankruptcy estate: Yes

Question 9

MCQ-10896
Which of the following forms of business generally provides all owners with limited liability while avoiding federal taxation of income at the entity level?

Answer 9

Subchapter S corporation

Question 10

MCQ-10887
In Year 1, Smith, a divorced person, provided over one half the support for his widowed mother, Ruth, and his son, Clay, both of whom are U.S. citizens. During Year 1, Ruth did not live with Smith. She received $9,000 in Social Security benefits. Clay, a 25-year-old full-time graduate student, and his wife lived with Smith. Clay had no income but filed a joint return for Year 1, owing an additional $500 in taxes on his wife’s income. How many people meet the definition of either qualifying child or qualifying relative for Smith?

Answer 10

1

Question 11

MCQ-10872
Stone and Frazier decided to terminate the Woodwest Partnership as of December 31. On that date, Woodwest’s balance sheet was as follows:
Cash 2,000
Equipment (adjusted basis) 2,000
Capital - Stone 3,000
Capital - Frazier 1,000

The fair market value of the equipment was $3,000. Frazier’s outside basis in the partnership was $1,200. Upon liquidation, Frazier received $1,500 in cash. What gain should Frazier recognize?

Answer 11

$300

1,500 (amount realized) - 1,200 (Basis in partnership interest) = 300

Question 12

MCQ-10895
The following information pertains to Dahl Corp.:
Accumulated earnings and profits at January 1, Year 1 120,000
Earnings and profits for the year ended December 31, Year 1 160,000
Cash distributions to individual stockholders during Year 1 360,000

What is the total amount of distributions taxable as dividend income to Dahl’s stockholders in Year 1?

Answer 12

280,000

120,000 + 160,000 = 280,000

Question 13

MCQ-10897
Bartlet owns a manufacturing business and participates in the business. Which of the following conditions would cause the business to be considered a nonpassive activity for Bartlet?

Answer 13

Bartlet participates in the business for more than 500 hours during a year.

Question 14

MCQ-10877
The answer to each of the following questions would be irrelevant in determining whether a tuition payment made on behalf of another individual is excludible for gift tax purposes, except:

Answer 14

Was the tuition payment made directly to the educational organization?

Question 15

MCQ-10879
Sands purchased 100 shares of Eastern Corp. stock for $18,000 on April 1 of the prior year. On February 1 of the current year, Sands sold 50 shares of Eastern for $7,000. Fifteen days later, Sands purchased 25 shares of Eastern for $3,750. What is the amount of Sand’s recognized gain or loss?

Answer 15

1,000

Question 16

MCQ-10908
Heather, Erika, and Shelby are members in HES LLC. Heather works 40 hours per week and Erika and Shelby work 20 hours per week. Heather contributed $30,000 to the LLC and Erika and Shelby contributed $60,000 each. Erika and Shelby have each originated 45% of the LLC’s business and Heather has originated the other 10%. Absent an agreement to the contrary among the owners, who controls the management of the HES LLC?

Answer 16

Heather, Erika, and Shelby in proportion to their ownership interests.

Question 17

MCQ-10906
Which of the following is not true with regard to personal holding companies (PHCs)?

Answer 17

Personal holding companies, as specifically defined by the Code, are corporations that meet certain “closelyheld” ownership criteria and have over 50% of their adjusted gross income consisting of net rent (less than 50% of ordinary gross income), taxable interest, most royalties, and dividends from an unrelated domestic
corporation.

Question 18

MCQ-08038
Which of the following individuals is not a tax preparer as defined in the Internal Revenue Code?

Answer 18

A person who, while in the employ of a CPA, enters the tax information of a client into a computer program.

Question 19

MCQ-10892
How are C corporation’s net capital losses used?

Answer 19

Carried back three years and forward five years

Question 20

MCQ-10885
Which of the following must take place for a corporation to be voluntarily dissolved?

Answer 20

Passage by the board of directors of a resolution to dissolve

Question 21

MCQ-15642
Rich is a cash-basis, self-employed air-conditioning repairman with current year gross business receipts of $20,000. Rich’s cash disbursements were as follows:

Air-conditioning parts 2,500
Yellow Pages listing 2,000
Estimated federal income taxes on self-employment income 1,000
Business long-distance telephone calls 400
Charitable contributions 200

What amount should Rich report as net self-employment income?

Answer 21

15,100

20,000 - 2,500 - 2,000 - 400 = 15,100

Question 22

MCQ-10888
Terri sends a note to Jim offering to sell Jim her car. However, Terri conditions the sale on Jim accepting the offer by July 11. Terri may revoke the offer:

Answer 22

Before Jim mails a note of acceptance.

Question 23

MCQ-15047
Which of the following credits can result in a refund even if the individual had no income tax liability?

Answer 23

Earned Income Credit.

Question 24

MCQ-10880
Potter Corp. and Sly Corp. file consolidated tax returns. In January Year 1, Potter sold land, with a basis of $60,000 and a fair value of $75,000, to Sly for $100,000. Sly sold the land in December Year 2 for $125,000. In its Year 2 and Year 1 tax returns, what amount of gain should be reported for these transactions in the consolidated return?

Answer 24

Year 2: 65,000; Year 1: 0

Question 25

MCQ-08052
John Harper’s individual income tax return was audited by the IRS. The IRS revenue agent determined John owed additional taxes on his previously filed return. John disagrees with the agent’s additional assessment and the matter was not agreed upon at the IRS administrative appeals conference. John has decided to initiate resolution of the disputed tax in the Federal Court System

Answer 25

The U.S. Tax Court is the only forum in which the taxpayer may have a claim heard without first paying the disputed tax liability in full.

Question 26

MCQ-10873
If a security becomes worthless in the current taxable year, it is treated as sold or exchanged on:

Answer 26

The last day of the current taxable year

Question 27

MCQ-10893
Upon her grandfather’s death, Jordan inherited 10 shares of Universal Corp. stock that had a fair market value of $5,000. Her grandfather acquired the shares in 1995 for $2,500. Four months after her grandfather’s death, Jordan sold all her shares of Universal for $7,500. What was Jordan’s recognized gain in the year of sale?

Answer 27

$2,500 long-term capital gain.

7,500 - 5,000 = 2,500

Question 28

MCQ-04456
For regular tax purposes, with regard to the itemized deduction for qualified residence interest, home equity indebtedness incurred during the year:

Answer 28

Must be incurred to acquire, construct, or substantially improve the residence and is subject to the overall
mortgage interest limitation

Question 29

MCQ-10891
Simpson, Ogden Corp.’s agent, needs a written agency agreement to:

Answer 29

Purchase an interest in undeveloped land for Ogden

Question 30

MCQ-10902
Which one of the following statements is correct with regard to an individual taxpayer who has elected to amortize the
premium on a bond that yields taxable interest?

Answer 30

The bond’s basis is reduced by the amortization

Question 31

MCQ-12143
Cassidy, an individual taxpayer, reported the following items of income and expense for the current year:
Salary 50,000
Alimony paid to a former spouse (divorce finalized in 2017) 10,000
Inheritance from a grandparent 25,000
Proceeds of a lawsuit for physical injuries 50,000

What is the amount of Cassidy’s adjusted gross income for the current year?

Answer 31

40,000

50,000 - 10,000 = 40,000

Question 32

MCQ-10905
A homestead exemption ordinarily could exempt a debtor’s equity in certain property from post-judgment collection by a creditor. To which of the following creditors will this exemption apply?

Answer 32

Valid home mortgage lien: No; Valid IRS Tax lien: No

Question 33

MCQ-10889
An S corporation may deduct:

Answer 33

Compensation of officers

Question 34

MCQ-10886
Under Treasury Circular 230, in which of the following situations is a CPA prohibited from giving written advice concerning one or more federal tax issues?

Answer 34

The CPA takes into account the possibility that a tax return will not be audited

Question 35

MCQ-10878
In a common law action against an accountant, lack of privity is a viable defense if the plaintiff:

Answer 35

Is the client’s creditor who sues the accountant for negligence.

Question 36

MCQ-10884
Jaxson Corp. has 200,000 shares of voting common stock issued and outstanding. King Corp. has decided to acquire 90 percent of Jaxson’s voting common stock solely in exchange for 50 percent of its voting common stock and retain Jaxson as a subsidiary after the transaction. Which of the following statements is true?

Answer 36

The transaction will qualify as a tax-free reorganization.

Question 37

MCQ-10874
While reviewing a new client’s prior-year tax returns, a CPA became aware that the client did not properly file all required federal income tax returns. Under Treasury Circular 230, what should the CPA do in this situation?

Answer 37

Advise the client of the consequences of the noncompliance.

Question 38

MCQ-10900
In Year 1, Brun Corp. properly accrued $10,000 for an income item on the basis of a reasonable estimate. In Year 2, Brun determined that the exact amount was $12,000. Which of the following statements is correct?

Answer 38

The $2,000 difference is includible in Brun’s Year 2 income tax return.