South-Western Federal Taxation 2014 Individual Income Taxes, 37th Edition

1. The r at i f i cat i on of t he Si xt eent h Amendment t o t he U. S.
Const i t ut i on
was necessar y t o val i dat e t he Feder al i ncome t ax on cor por at i ons.

a. Tr ue
*b. Fal se

2. Bef or e t he Si xt eent h Amendment t o t he Const i t ut i on was r at i f i ed,
t her e was no val i d Feder al i ncome t ax on i ndi vi dual s.

a. Tr ue
*b. Fal se

3. The f i r st i ncome t ax on i ndi vi dual s ( af t er t he r at i f i cat i on of t he
Si xt eent h Amendment t o t he Const i t ut i on) l evi ed t ax r at es f r oma l ow of
2%t o a hi gh of 6%.

*a. Tr ue
b. Fal se

4. The Feder al i ncome t ax on i ndi vi dual s gener at es mor e r evenue t han
t he Feder al i ncome t ax on cor por at i ons.

*a. Tr ue
b. Fal se

5. The pay- as- you- go f eat ur e of t he Feder al i ncome t ax on i ndi vi dual s
conf or ms t o AdamSmi t h s canon of cer t ai nt y.

a. Tr ue
*b. Fal se

6. Because t he l aw i s compl i cat ed, most i ndi vi dual t axpayer s ar e not
abl e t o compl et e t hei r Feder al i ncome t ax r et ur ns wi t hout out si de
assi st ance.

*a. Tr ue
b. Fal se

7. The FI CA t ax ( Medi car e component ) on wages i s progressive si nce t he
t ax due i ncr eases as wages i ncr ease.

a. Tr ue
*b. Fal se

8. The Feder al est at e and gi f t t axes ar e exampl es of progressive t axes.

*a. Tr ue
b. Fal se

9. The Feder al exci se t ax on ci gar et t es i s an exampl e of a proportional
t ax.

*a. Tr ue
b. Fal se

10. Cur r ent l y, t he Feder al i ncome t ax i s l ess progressive t han i t ever
has been i n t he past .

a. Tr ue
*b. Fal se

11. Mona i nher i t s her mot her s per sonal r esi dence, whi ch she conver t s
t o a f ur ni shed r ent house. These changes shoul d af f ect t he amount of ad
valorem pr oper t y t axes l evi ed on t he pr oper t i es.

*a. Tr ue
b. Fal se

12. A fixture wi l l be subj ect t o t he ad valorem t ax on personalty
r at her t han t he ad valorem t ax on realty.

a. Tr ue
*b. Fal se

13. Even i f pr oper t y t ax r at es ar e not changed, t he amount of ad
valorem t axes i mposed on r eal t y may not r emai n t he same.

*a. Tr ue
b. Fal se

14. The ad valorem t ax on per sonal use per sonal t y i s mor e of t en avoi ded
by t axpayer s t han t he ad valorem t ax on busi ness use per sonal t y.

*a. Tr ue
b. Fal se

15. A Feder al exci se t ax i s no l onger i mposed on admi ssi on t o t heat er s.

*a. Tr ue
b. Fal se

16. Ther e i s a Feder al exci se t ax on hot el occupancy.

a. Tr ue
*b. Fal se

17. The Feder al gas- guzzl er t ax appl i es onl y t o aut omobi l es
manuf act ur ed over seas and i mpor t ed i nt o t he U. S.

a. Tr ue
*b. Fal se

18. Li ke t he Feder al count er par t , t he amount of t he st at e exci se t axes
on gasol i ne var i es f r omst at e t o st at e.

a. Tr ue
*b. Fal se

19. Not al l of t he st at es t hat i mpose a gener al sal es t ax al so have a
use t ax.

a. Tr ue
*b. Fal se

20. Sal es made by mai l or der ar e not exempt f r omt he appl i cat i on of a
gener al sal es ( or use) t ax.

*a. Tr ue
b. Fal se

21. Two per sons who l i ve i n t he same st at e but i n di f f er ent count i es
may not be subj ect t o t he same gener al sal es t ax r at e.

*a. Tr ue
b. Fal se

22. St at es i mpose ei t her a st at e i ncome t ax or a gener al sal es t ax, but
not bot h t ypes of t axes.

a. Tr ue
*b. Fal se

23. A saf e and easy way f or a t axpayer t o avoi d l ocal and st at e sal es
t axes i s t o make t he pur chase i n a st at e t hat l evi es no such t axes.

a. Tr ue
*b. Fal se

24. On t r ansf er s by deat h, t he Feder al gover nment r el i es on an est at e
t ax, whi l e st at es i mpose an est at e t ax, an i nher i t ance t ax, bot h t axes,
or nei t her t ax.

*a. Tr ue
b. Fal se

25. An i nher i t ance t ax i s a t ax on a decedent s r i ght t o pass pr oper t y
at deat h.

a. Tr ue
*b. Fal se

26. One of t he maj or r easons f or t he enact ment of t he Feder al est at e
t ax was t o pr event l ar ge amount s of weal t h f r ombei ng accumul at ed
wi t hi n t he f ami l y uni t .

*a. Tr ue
b. Fal se

27. Under Cl i nt s wi l l , al l of hi s pr oper t y passes t o ei t her t he
Lut her an Chur ch or t o hi s wi f e. No Feder al est at e t ax wi l l be due on
Cl i nt s deat h i n 2013.

*a. Tr ue
b. Fal se

28. Under t he usual st at e i nher i t ance t ax, t wo hei r s, a cousi n and a
son of t he deceased, woul d not be t axed at t he same r at e.

*a. Tr ue
b. Fal se

29. The annual excl usi on, cur r ent l y $14, 000, i s avai l abl e f or gi f t and
est at e t ax pur poses.

a. Tr ue
*b. Fal se

30. I n 2012, J os, a wi dower , sel l s l and ( f ai r mar ket val ue of $100, 000)
t o hi s daught er , Li nda, f or $50, 000. J os has made a t axabl e gi f t of
$50, 000.

a. Tr ue
*b. Fal se

31. J ul i us, a mar r i ed t axpayer , makes gi f t s t o each of hi s si x chi l dr en.
A maxi mumof t wel ve annual excl usi ons coul d be al l owed as t o t hese
gi f t s.

*a. Tr ue
b. Fal se

32. One of t he mot i vat i ons f or maki ng a gi f t i s t o save on i ncome t axes.

*a. Tr ue
b. Fal se

33. The f or mul a f or t he Feder al i ncome t ax on cor por at i ons i s t he same
as t hat appl i cabl e t o i ndi vi dual s.

a. Tr ue
*b. Fal se

34. A st at e i ncome t ax can be i mposed on nonresident t axpayer s who ear n
i ncome wi t hi n t he st at e or on an i t i ner ant basi s.

*a. Tr ue
b. Fal se

35. For st at e i ncome t ax pur poses, a maj or i t y of st at es al l ow a
deduct i on f or Feder al i ncome t axes.

a. Tr ue
*b. Fal se

36. Some st at es use t hei r st at e i ncome t ax r et ur n as a means of
col l ect i ng unpai d sal es and use t axes.

*a. Tr ue
b. Fal se

37. No st at e has of f er ed an i ncome t ax amnest y pr ogr ammor e t han once.

a. Tr ue
*b. Fal se

38. For Feder al i ncome t ax pur poses, t her e never has been a gener al
amnest y per i od.

*a. Tr ue
b. Fal se

39. Under st at e amnest y pr ogr ams, al l del i nquent and unpai d i ncome
t axes ar e f or gi ven.

a. Tr ue
*b. Fal se

40. When a st at e decoupl es f r oma Feder al t ax pr ovi si on, i t means t hat
t hi s pr ovi si on wi l l not appl y f or st at e i ncome t ax pur poses.

*a. Tr ue
b. Fal se

41. The pr i nci pal obj ect i ve of t he FUTA t ax i s t o pr ovi de some measur e
of r et i r ement secur i t y.

a. Tr ue
*b. Fal se

42. Cur r ent l y, t he t ax base f or t he Soci al Secur i t y component of t he
FI CA i s not l i mi t ed t o a dol l ar amount .

a. Tr ue
*b. Fal se

43. A par ent empl oys hi s t wi n daught er s, age 17, i n hi s sol e
pr opr i et or shi p. The daught er s ar e not subj ect t o FI CA cover age.

*a. Tr ue
b. Fal se

44. Unl i ke FI CA, FUTA r equi r es t hat empl oyer s compl y wi t h st at e as wel l
as Feder al r ul es.

*a. Tr ue
b. Fal se

45. A maj or advant age of a f l at t ax t ype of i ncome t ax i s i t s
si mpl i ci t y.

*a. Tr ue
b. Fal se

46. The val ue added t ax ( VAT) has not had wi de accept ance i n t he
i nt er nat i onal communi t y.

a. Tr ue
*b. Fal se

47. I f mor e I RS audi t s ar e pr oduci ng a gr eat er number of no change
r esul t s, t hi s i ndi cat es i ncr eased compl i ance on t he par t of t axpayer s.

a. Tr ue
*b. Fal se

48. The amount of a t axpayer s i t emi zed deduct i ons will i ncr ease t he
chance of bei ng audi t ed by t he I RS.

*a. Tr ue
b. Fal se

49. I n an of f i ce audi t , t he audi t by t he I RS t akes pl ace at t he of f i ce
of t he t axpayer .

a. Tr ue
*b. Fal se

50. The I RS agent audi t i ng t he r et ur n will i ssue an RAR even i f t he
t axpayer owes no addi t i onal t axes.

*a. Tr ue
b. Fal se

51. I f a speci al agent becomes i nvol ved i n t he audi t of a r et ur n,
t hi s i ndi cat es t hat t he I RS suspect s t hat f r aud i s i nvol ved.

*a. Tr ue
b. Fal se

52. I f a t axpayer f i l es ear l y ( i . e. , bef or e t he due dat e of t he r et ur n) ,
t he st at ut e of l i mi t at i ons on assessment s begi ns on t he dat e t he r et ur n
i s f i l ed.

a. Tr ue
*b. Fal se

53. For omi ssi ons f r omgr oss i ncome i n excess of 25%of t hat r epor t ed,
t her e i s no st at ut e of l i mi t at i ons on addi t i onal i ncome t ax assessment s
by t he I RS.

a. Tr ue
*b. Fal se

54. I f an i ncome t ax r et ur n i s not f i l ed by a t axpayer , t her e i s no
st at ut e of l i mi t at i ons on assessment s of t ax by t he I RS.

*a. Tr ue
b. Fal se

55. I f f r aud i s i nvol ved, t her e i s no t i me l i mi t on t he assessment of a
def i ci ency by t he I RS.

*a. Tr ue
b. Fal se

56. The I RS i s r equi r ed t o r edet er mi ne t he i nt er est r at e on
under payment s and over payment s once a year .

a. Tr ue
*b. Fal se

57. A cal endar year t axpayer f i l es hi s 2012 Feder al i ncome t ax r et ur n
on Mar ch 5, 2013. The r et ur n r ef l ect s an over payment of $6, 000, and t he
t axpayer r equest s a r ef und of t hi s amount . The r ef und i s pai d on May 17,
2013. The r ef und need not i ncl ude i nt er est .

*a. Tr ue
b. Fal se

58. For i ndi vi dual t axpayer s, t he i nt er est r at e f or i ncome t ax r ef unds
( over payment s) is t he same as t hat appl i cabl e t o assessment s
( under payment s) .

*a. Tr ue
b. Fal se

59. Dur i ng any mont h i n whi ch bot h t he f ai l ur e t o f i l e penal t y and t he
f ai l ur e t o pay penal t y appl y, t he f ai l ur e t o f i l e penal t y i s increased
by t he amount of t he f ai l ur e t o pay penal t y.

a. Tr ue
*b. Fal se

60. When i nt er est i s char ged on a def i ci ency, any par t of a mont h
count s as a f ul l mont h.

a. Tr ue
*b. Fal se

61. For t he negl i gence penal t y t o appl y, t he under payment must be
caused by i nt ent i onal di sr egar d of r ul es and r egul at i ons wi t hout i nt ent
t o def r aud.

*a. Tr ue
b. Fal se

62. Upon audi t by t he I RS, Fai t h i s assessed a def i ci ency of $40, 000 of
whi ch $25, 000 i s at t r i but abl e t o negl i gence. The 20%negl i gence penal t y
wi l l appl y t o $25, 000.

*a. Tr ue
b. Fal se

63. I f t he t ax def i ci ency i s at t r i but abl e t o f r aud, t he negl i gence
penal t y wi l l not be i mposed.

*a. Tr ue
b. Fal se

64. The civil f r aud penal t y can ent ai l l ar ge f i nes and possi bl e
i ncar cer at i on.

a. Tr ue
*b. Fal se

65. Even t hough a cl i ent r ef uses t o cor r ect an er r or on a past r et ur n,
i t may be possi bl e f or a pr act i t i oner t o cont i nue t o pr epar e r et ur ns
f or t he cl i ent .

*a. Tr ue
b. Fal se

66. I n pr epar i ng an i ncome t ax r et ur n, t he use of a cl i ent s est i mat es
i s not per mi t t ed.

a. Tr ue
*b. Fal se

67. I n pr epar i ng a t ax r et ur n, al l quest i ons on t he r et ur n must be
answer ed.

a. Tr ue
*b. Fal se

68. A CPA f i r mi n Cal i f or ni a sends many of i t s l ess compl ex t ax r et ur ns
t o be pr epar ed by a gr oup of account ant s i n I ndi a. I f cer t ai n
pr ocedur es ar e f ol l owed, t hi s out sour ci ng of t ax r et ur n pr epar at i on i s
pr oper .

*a. Tr ue
b. Fal se

69. The obj ect i ve of pay-as-you-go ( paygo) i s t o achi eve r evenue
neut r al i t y.

*a. Tr ue
b. Fal se

70. When Congr ess enact s a t ax cut t hat i s phased i n over a per i od of
year s, r evenue neut r al i t y i s achi eved.

a. Tr ue
*b. Fal se

71. A t ax cut enact ed by Congr ess t hat cont ai ns a sunset provision wi l l
make t he t ax cut t empor ar y.

*a. Tr ue
b. Fal se

72. The t ax l aw pr ovi des var i ous t ax cr edi t s, deduct i ons, and
excl usi ons t hat ar e desi gned t o encour age t axpayer s t o obt ai n
addi t i onal educat i on. These pr ovi si ons can be j ust i f i ed on bot h
economi c and equi t y gr ounds.

a. Tr ue
*b. Fal se

73. Var i ous t ax pr ovi si ons encour age t he cr eat i on of cer t ai n t ypes of
r et i r ement pl ans. Such pr ovi si ons can be j ust i f i ed on bot h economi c and
soci al gr ounds.

*a. Tr ue
b. Fal se

74. To l essen, or el i mi nat e, t he ef f ect of mul t i pl e t axat i on, a
t axpayer who i s subj ect t o bot h f or ei gn and U. S. i ncome t axes on t he
same i ncome i s al l owed ei t her a deduct i on or a cr edi t f or t he f or ei gn
t ax pai d.

*a. Tr ue
b. Fal se

75. To mi t i gat e t he ef f ect of t he annual account i ng per i od concept , t he
t ax l aw per mi t s t he car r yf or war d t o ot her year s of t he excess
char i t abl e cont r i but i ons of a par t i cul ar year .

*a. Tr ue
b. Fal se

76. J ason s busi ness war ehouse i s dest r oyed by f i r e. As t he i nsur ance
pr oceeds exceed t he basi s of t he pr oper t y, a gai n r esul t s. I f J ason
shor t l y r ei nvest s t he pr oceeds i n a new war ehouse, no gai n i s
r ecogni zed due t o t he appl i cat i on of t he wher ewi t hal t o pay concept .

*a. Tr ue
b. Fal se

77. As i t i s consi st ent wi t h t he wher ewi t hal t o pay concept , t he t ax
l aw r equi r es a sel l er t o r ecogni ze gai n i n t he year t he i nst al l ment
sal e occur s.

a. Tr ue
*b. Fal se

78. St eal t h t axes have t he ef f ect of gener at i ng addi t i onal t axes f r om
al l t axpayer s.

a. Tr ue
*b. Fal se

79. A pr ovi si on i n t he l aw t hat compel s accr ual basi s t axpayer s t o pay
a t ax on pr epai d i ncome i n t he year r ecei ved and not when ear ned i s
consi st ent wi t h gener al l y accept ed account i ng pr i nci pl es.

a. Tr ue
*b. Fal se

80. As a mat t er of admi ni st r at i ve conveni ence, t he I RS woul d pr ef er t o
have Congr ess decr ease ( r at her t han i ncr ease) t he amount of t he
st andar d deduct i on al l owed t o i ndi vi dual t axpayer s.

a. Tr ue
*b. Fal se

81. I n cases of doubt , cour t s have hel d t hat t ax r el i ef pr ovi si ons
shoul d be br oadl y const r ued i n f avor of t axpayer s.

a. Tr ue
*b. Fal se

82. On occasi on, Congr ess has t o enact l egi sl at i on t hat cl ar i f i es t he
t ax l aw i n or der t o change a r esul t r eached by t he U. S. Supr eme Cour t .

*a. Tr ue
b. Fal se

83. Whi ch, i f any, of t he f ol l owi ng st at ement s best descr i bes t he
hi st or y of t he Feder al i ncome t ax?

a. I t di d not exi st dur i ng t he Ci vi l War .
*b. The Feder al i ncome t ax on cor por at i ons was hel d by t he U. S.
Supr eme Cour t t o be al l owabl e under t he U. S. Const i t ut i on.
c. The Feder al i ncome t ax on i ndi vi dual s was hel d by t he U. S.
Supr eme Cour t t o be al l owabl e under t he U. S. Const i t ut i on.
d. Bot h t he Feder al i ncome t ax on i ndi vi dual s and on cor por at i ons
was hel d by t he U. S. Supr eme Cour t t o be cont r ar y t o t he U. S.
Const i t ut i on.
e. None of t he above.

84. Whi ch, i f any, i s not one of AdamSmi t h s canons of t axat i on?

a. Economy.
b. Cer t ai nt y.
c. Conveni ence.
*d. Si mpl i ci t y.
e. Equal i t y.

85. Whi ch, i f any, of t he f ol l owi ng t axes ar e proportional ( r at her t han
progressive) ?

*a. St at e gener al sal es t ax.
b. Feder al cor por at e i ncome t ax.
c. Feder al est at e t ax.
d. Feder al gi f t t ax.
e. Al l of t he above.

86. Whi ch, i f any, of t he f ol l owi ng t r ansact i ons wi l l increase a t axi ng
j ur i sdi ct i on s r evenue f r omt he ad valorem t ax i mposed on r eal est at e?

a. A r esi dent di es and l eaves hi s f ar mt o hi s chur ch.
b. A l ar ge pr oper t y owner i ssues a conser vat i on easement as t o
some of her l and.
*c. A t ax hol i day i ssued 10 year s ago has expi r ed.
d. A bankr upt mot el i s acqui r ed by t he Red Cr oss and i s t o be
used t o pr ovi de housi ng f or homel ess per sons.

87. Which, if any, of the following transactions will decrease a taxing
jurisdictions ad valorem tax revenue imposed on real estate?

*a. A t ax hol i day i s gr ant ed t o an out - of - st at e busi ness t hat i s
sear chi ng f or a new f act or y si t e.
b. An abandoned chur ch i s conver t ed t o a r est aur ant .
c. A publ i c school i s r azed and t ur ned i nt o a ci t y par k.
d. A l ocal uni ver si t y sel l s a dor mi t or y t hat wi l l be conver t ed
f or use as an apar t ment bui l di ng.

88. Whi ch, i f any, of t he f ol l owi ng i s a t ypi cal char act er i st i c of an
ad valorem t ax on per sonal t y?

a. Taxpayer compl i ance i s gr eat er f or per sonal use pr oper t y t han
f or busi ness use pr oper t y.
*b. The t ax on aut omobi l es somet i mes consi der s t he age of t he
vehi cl e.
c. Most st at es i mpose a t ax on i nt angi bl es.
d. The t ax on i nt angi bl es gener at es consi der abl e r evenue si nce i t
i s di f f i cul t f or t axpayer s t o avoi d.

89. Feder al exci se t axes t hat ar e no longer imposed i ncl ude:

a. Tax on ai r t r avel .
b. Tax on wager i ng.
c. Tax on t he manuf act ur e of spor t i ng equi pment .
d. Tax on al cohol .
*e. None of t he above.

90. Taxes not imposed by t he Feder al gover nment i ncl ude:

a. Tobacco exci se t ax.
b. Cust oms dut i es ( t ar i f f s on i mpor t s) .
*c. Tax on r ent car s.
d. Gas guzzl er t ax.

91. Taxes l evi ed by both st at es and t he Feder al gover nment i ncl ude:

a. Gener al sal es t ax.
b. Cust omdut i es.
c. Hot el occupancy t ax.
d. Fr anchi se t ax.

92. Taxes l evi ed by all st at es i ncl ude:

*a. Tobacco exci se t ax.
b. I ndi vi dual i ncome t ax.
c. I nher i t ance t ax.
d. Gener al sal es t ax.

93. A use t ax i s i mposed by:

a. The Feder al gover nment and al l st at es.
b. The Feder al gover nment and a maj or i t y of t he st at es.
c. Al l st at es and not t he Feder al gover nment .
*d. Most of t he st at es and not t he Feder al gover nment .

94. Bur t and Li sa ar e mar r i ed and l i ve i n a common l aw st at e. Bur t
want s t o make gi f t s t o t hei r f our chi l dr en i n 2013. What i s t he maxi mum
amount of t he annual excl usi on t hey wi l l be al l owed f or t hese gi f t s?

a. $14, 000.
b. $28, 000.
c. $56, 000.
*d. $112, 000.

95. Pr oper t y can be t r ansf er r ed wi t hi n t he f ami l y gr oup by gi f t or at
deat h. One mot i vat i on f or pr ef er r i ng t he gi f t appr oach i s:

a. To t ake advant age of t he hi gher uni f i ed t r ansf er t ax cr edi t
avai l abl e under t he gi f t t ax.
b. To avoi d a f ut ur e decl i ne i n val ue of t he pr oper t y t r ansf er r ed.
*c. To t ake advant age of t he per donee annual excl usi on.
d. To shi f t i ncome t o hi gher br acket donees.

96. I ndi cat e whi ch, i f any, st at ement i s incorrect. St at e i ncome t axes:

a. Can pi ggyback t o t he Feder al ver si on.
*b. Cannot appl y t o vi si t i ng nonr esi dent s.
c. Can decoupl e f r omt he Feder al ver si on.
d. Can pr ovi de occasi onal amnest y pr ogr ams.

97. St at e i ncome t axes generally can be char act er i zed by:

*a. The same dat e f or f i l i ng as t he Feder al i ncome t ax.
b. No pr ovi si on f or wi t hhol di ng pr ocedur es.
c. Al l owance of a deduct i on f or Feder al i ncome t axes pai d.
d. Appl yi ng onl y t o i ndi vi dual s and not appl yi ng t o cor por at i ons.

98. A char act er i st i c of FI CA i s t hat :

a. I t does not appl y when one spouse wor ks f or t he ot her spouse.
b. I t i s i mposed onl y on t he empl oyer .
c. I t pr ovi des a modest sour ce of i ncome i n t he event of l oss of
empl oyment .
d. I t i s admi ni st er ed by bot h st at e and Feder al gover nment s.

99. A char act er i st i c of FUTA i s t hat :

a. I t i s i mposed on bot h empl oyer and empl oyee.
b. I t i s i mposed sol el y on t he empl oyee.
*c. Compl i ance r equi r es f ol l owi ng gui del i nes i ssued by bot h st at e
and Feder al r egul at or y aut hor i t i es.
d. I t i s appl i cabl e t o spouses of empl oyees but not t o any
chi l dr en under age 18.

100. The U. S. ( ei t her Feder al , st at e, or l ocal ) does not i mpose:

a. Fr anchi se t axes.
b. Sever ance t axes.
c. Occupat i onal f ees.
d. Cust omdut i es.
*e. Expor t dut i es.

101. The pr oposed flat tax:

a. Woul d el i mi nat e t he i ncome t ax.
*b. Woul d si mpl i f y t he i ncome t ax.
c. Woul d t ax t he i ncr ement i n val ue as goods move t hr ough t he
pr oduct i on and manuf act ur i ng st ages t o t he mar ket pl ace.
d. I s a t ax on consumpt i on.

102. A VAT ( val ue added t ax) :

*a. I s r egr essi ve i n i t s ef f ect .
b. Has not pr oved popul ar out si de of t he U. S.
c. I s not a t ax on consumpt i on.
d. I s used excl usi vel y by t hi r d wor l d ( l ess devel oped) count r i es.

103. Char act er i st i cs of t he Fai r Tax ( i . e. , nat i onal sal es t ax)
i ncl ude whi ch, i f any, of t he f ol l owi ng:

a. Abol i t i on of t he Feder al i ndi vi dual ( but not t he cor por at e)
i ncome t ax.
b. Abol i t i on of al l Feder al i ncome t axes but r et ent i on of payr ol l
t axes ( i ncl udi ng t he sel f - empl oyment t ax) .
c. Abol i t i on of al l Feder al i ncome t axes and payr ol l t axes but
r et ent i on of t he Feder al est at e and gi f t t axes.
*d. Abol i t i on of al l Feder al i ncome and payr ol l t axes as wel l as
t he Feder al est at e and gi f t t axes.

104. I n t er ms of pr obabi l i t y, whi ch of t he f ol l owi ng t axpayer s woul d be
least likely t o be audi t ed by t he I RS?

a. Taxpayer owns and oper at es a check- cashi ng ser vi ce.
*b. Taxpayer i s an empl oyed el ect r i ci an.
c. Taxpayer j ust r ecei ved a $3 mi l l i on per sonal i nj ur y awar d as a
r esul t of a l awsui t .
d. Taxpayer j ust won a $1 mi l l i on sl ot machi ne j ackpot at a Las
Vegas casi no.
e. Taxpayer has been audi t ed sever al t i mes bef or e.

105. Whi ch of t he f ol l owi ng is a char act er i st i c of t he audi t pr ocess?

a. Most t axpayer audi t s i nvol ve speci al agent s.
b. Sel f - empl oyed t axpayer s ar e l ess l i kel y t o be sel ect ed f or
audi t t han empl oyed t axpayer s.
*c. Less i mpor t ant i ssues ar e handl ed by means of a
cor r espondence audi t .
d. I f a t axpayer di sagr ees wi t h t he I RS audi t or s f i ndi ng, t he
onl y r esor t i s t o t he cour t s.

106. Davi d f i l es hi s t ax r et ur n 45 days af t er t he due dat e. Al ong wi t h
t he r et ur n, Davi d r emi t s a check f or $40, 000 whi ch i s t he bal ance of
t he t ax owed. Di sr egar di ng t he i nt er est el ement , Davi d s t ot al f ai l ur e
t o f i l e and t o pay penal t i es ar e:

a. $400.
b. $3, 600.
*c. $4, 000.
d. $4, 400.

107. A char act er i st i c of t he f r aud penal t i es i s:

a. When negl i gence and ci vi l f r aud appl y t o a def i ci ency, t he
negl i gence penal t y pr edomi nat es.
*b. Cr i mi nal f r aud can r esul t i n a f i ne and a pr i son sent ence.
c. The cr i mi nal f r aud penal t y i s 75%of t he def i ci ency
at t r i but abl e t o t he f r aud.
d. The I RS has t he same bur den of pr oof i n t he case of cr i mi nal
f r aud t han wi t h ci vi l f r aud.

108. Regar di ng pr oper et hi cal gui del i nes, whi ch ( i f any) of t he
f ol l owi ng i s cor r ect ?

*a. The use of cl i ent est i mat es i n pr epar i ng a r et ur n may be
accept abl e.
b. Under no ci r cumst ances shoul d a quest i on on a t ax r et ur n be
l ef t unanswer ed.
c. I f a cl i ent has made a mi st ake i n a pr i or year s r et ur n and
r ef uses t o cor r ect i t , you shoul d wi t hdr aw f r omt he engagement .
d. I f t he exact amount of a deduct i on i s not cer t ai n ( e. g. ,
ar ound mi d- $600s) , i t should be r ecor ded as an odd amount ( i . e. ,
$649) so as t o i ncr ease t he appear ance of gr eat er cer t ai nt y.

109. Bot h economi c and soci al consi der at i ons can be used t o j ust i f y:

a. Favor abl e t ax t r eat ment f or acci dent and heal t h pl ans pr ovi ded
f or empl oyees and f i nanced by empl oyer s.
b. Di sal l owance of any deduct i on f or expendi t ur es deemed t o be
cont r ar y t o publ i c pol i cy ( e. g. , f i nes, penal t i es, i l l egal
ki ckbacks, br i bes t o gover nment of f i ci al s) .
*c. Var i ous t ax cr edi t s, deduct i ons, and excl usi ons t hat ar e
desi gned t o encour age t axpayer s t o obt ai n addi t i onal educat i on.
d. Al l owance of a deduct i on f or st at e and l ocal i ncome t axes pai d.

110. Soci al consi der at i ons can be used t o j ust i f y:

*a. Al l owance of a cr edi t f or chi l d car e expenses.
b. Al l owi ng excess capi t al l osses t o be car r i ed over t o ot her
year s.
c. Al l owi ng accel er at ed amor t i zat i on f or t he cost of i nst al l i ng
pol l ut i on cont r ol f aci l i t i es.
d. Al l owi ng a Feder al i ncome t ax deduct i on f or st at e and l ocal
sal es t axes.

111. Al l owi ng a domest i c pr oduct i on act i vi t i es deduct i on f or cer t ai n
manuf act ur i ng i ncome can be j ust i f i ed:

a. As mi t i gat i ng t he ef f ect of t he annual account i ng per i od
concept .
b. As pr omot i ng admi ni st r at i ve f easi bi l i t y.
*c. By economi c consi der at i ons.
d. Based on t he wher ewi t hal t o pay concept .

112. Pr ovi si ons i n t he t ax l aw t hat pr omot e ener gy conser vat i on and
mor e use of al t er nat i ve ( non- f ossi l ) f uel s can be j ust i f i ed by:

a. Pol i t i cal consi der at i ons.
*b. Economi c and soci al consi der at i ons.
c. Pr omot i ng admi ni st r at i ve f easi bi l i t y.
d. Encour agement of smal l busi ness.

113. Whi ch, i f any, of t he f ol l owi ng pr ovi si ons cannot be j ust i f i ed as
mi t i gat i ng t he ef f ect of t he annual account i ng per i od concept ?

*a. Nonr ecogni t i on of gai n al l owed f or i nvol unt ar y conver si ons.
b. Net oper at i ng l oss car r yback and car r yover pr ovi si ons.
c. Car r y over of excess char i t abl e cont r i but i ons.
d. Use of t he i nst al l ment met hod t o r ecogni ze gai n.
e. Car r y over of excess capi t al l osses.

114. Whi ch, i f any, of t he f ol l owi ng pr ovi si ons of t he t ax l aw cannot
be j ust i f i ed as pr omot i ng admi ni st r at i ve f easi bi l i t y ( si mpl i f yi ng t he
t ask of t he I RS) ?

a. Penal t i es ar e i mposed f or f ai l ur e t o f i l e a r et ur n or pay a
t ax on t i me.
b. Pr epai d i ncome i s t axed i n t he year r ecei ved and not i n t he
year ear ned.
c. Annual adj ust ment s f or i ndexat i on i ncr eases t he amount of t he
st andar d deduct i on al l owed.
d. Casual t y l osses must exceed 10%of AGI t o be deduct i bl e.
*e. A deduct i on i s al l owed f or char i t abl e cont r i but i ons.

115. A l andl or d l eases pr oper t y upon whi ch t he t enant makes
i mpr ovement s. The i mpr ovement s ar e si gni f i cant and ar e not made i n l i eu
of r ent . At t he end of t he l ease, t he val ue of t he i mpr ovement s ar e not
i ncome t o t he l andl or d. Thi s r ul e i s an exampl e of :

a. A cl ear r ef l ect i on of i ncome r esul t .
b. The t ax benef i t r ul e.
c. The ar m s l engt h concept .
*d. The wher ewi t hal t o pay concept .

116. Match the statements that relate to each other. Note: Some choices
may be used more than once or not at all.J ock t axDecoupl i ngDI FTax f r aud
suspect edRevenue neut r al i t yRARWher ewi t hal t o pay concept Mi t i gat i on of
t he annual account i ng per i od concept Tax on t r ansf er s at deat h
( i nher i t ance t ype) Exci se t ax on t obaccoUse t axI ncome t ax amnest yI mpor t
t axes ( cust oms dut i es) Pay- as- you- go ( paygo) Expor t t axesSt at e i ncome
t ax appl i ed t o vi si t i ng nonr esi dent Undoi ng t he pi ggyback r esul t No
cor r ect mat ch pr ovi ded I RS speci al agent I deal budget goal as t o new
t ax l egi sl at i on No change i s one possi bl e r esul t Def er r al of gai ns
f r omi nvol unt ar y conver si ons Car r yback and car r yf or war d of net
oper at i ng l osses I mposed by some st at es but not t he Feder al
gover nment I mposed by al l st at es and t he Feder al gover nment Ever y
st at e t hat has a gener al sal es t ax has one I mposed by some st at es but
not t he Feder al gover nment I mposed onl y by t he Feder al gover nment
I deal budget goal as t o new t ax l egi sl at i on No cor r ect mat ch pr ovi ded

[ a] 1. J ock t ax
[ b] 2. Decoupl i ng
[ c] 3. DI F
[ d] 4. Tax f r aud suspect ed
[ e] 5. Revenue neut r al i t y
[ f ] 6. RAR
[ g] 7. Wher ewi t hal t o pay concept
[ h] 8. Mi t i gat i on of t he annual account i ng per i od concept
[ i ] 9. Tax on t r ansf er s at deat h ( i nher i t ance t ype)
[ j ] 10. Exci se t ax on t obacco
[ k] 11. Use t ax
[ l ] 12. I ncome t ax amnest y
[ m] 13. I mpor t t axes ( cust oms dut i es)
[ n] 14. Pay- as- you- go ( paygo)
[ o] 15. Expor t t axes

a. St at e i ncome t ax appl i ed t o vi si t i ng nonr esi dent
b. Undoi ng t he pi ggyback r esul t
c. No cor r ect mat ch pr ovi ded
d. I RS speci al agent
e. I deal budget goal as t o new t ax l egi sl at i on
f . No change i s one possi bl e r esul t
g. Def er r al of gai ns f r omi nvol unt ar y conver si ons
h. Car r yback and car r yf or war d of net oper at i ng l osses
i . I mposed by some st at es but not t he Feder al gover nment
j . I mposed by al l st at es and t he Feder al gover nment
k. Ever y st at e t hat has a gener al sal es t ax has one
l . I mposed by some st at es but not t he Feder al gover nment
m. I mposed onl y by t he Feder al gover nment
n. I deal budget goal as t o new t ax l egi sl at i on
o. No cor r ect mat ch pr ovi ded

117. Match the statements that relate to each other. Note: Some choices
may be used more than once.Of f i ce audi t Fi el d audi t Fai l ur e t o f i l e
penal t yFai l ur e t o pay penal t yNegl i gence penal t yCr i mi nal f r aud
penal t yFr aud and st at ut e of l i mi t at i onsEar l y f i l i ng and st at ut e of
l i mi t at i ons ( def i ci ency si t uat i ons) Lat e f i l i ng and st at ut e l i mi t at i ons
( def i ci ency si t uat i ons) No r et ur n and st at ut e l i mi t at i onsMor e t han 25%
gr oss i ncome omi ssi on and st at ut e of l i mi t at i onsI nt er est due on
r ef undConduct ed at I RS of f i ce Conduct ed at t axpayer s of f i ce 5%per
mont h ( 25%l i mi t ) 0. 5%per mont h ( 25%l i mi t ) 20%of under payment No
cor r ect mat ch pr ovi ded No st at ut e of l i mi t at i ons ( per i od r emai ns open)
3 year s f r omdue dat e of r et ur n 3 year s f r omdat e r et ur n i s f i l ed No
st at ut e of l i mi t at i ons ( per i od r emai ns open) 6 year s 45- day gr ace
per i od al l owed t o I RS 75%of under payment

[ a] 1. Of f i ce audi t
[ b] 2. Fi el d audi t
[ c] 3. Fai l ur e t o f i l e penal t y
[ d] 4. Fai l ur e t o pay penal t y
[ e] 5. Negl i gence penal t y
[ f ] 6. Cr i mi nal f r aud penal t y
[ g] 7. Fr aud and st at ut e of l i mi t at i ons
[ h] 8. Ear l y f i l i ng and st at ut e of l i mi t at i ons ( def i ci ency
si t uat i ons)
[ i ] 9. Lat e f i l i ng and st at ut e l i mi t at i ons ( def i ci ency
si t uat i ons)
[ j ] 10. No r et ur n and st at ut e l i mi t at i ons
[ k] 11. Mor e t han 25%gr oss i ncome omi ssi on and st at ut e of
l i mi t at i ons
[ l ] 12. I nt er est due on r ef und

a. Conduct ed at I RS of f i ce
b. Conduct ed at t axpayer s of f i ce
c. 5%per mont h ( 25%l i mi t )
d. 0. 5%per mont h ( 25%l i mi t )
e. 20%of under payment
f . No cor r ect mat ch pr ovi ded
g. No st at ut e of l i mi t at i ons ( per i od r emai ns open)
h. 3 year s f r omdue dat e of r et ur n
i . 3 year s f r omdat e r et ur n i s f i l ed
j . No st at ut e of l i mi t at i ons ( per i od r emai ns open)
k. 6 year s
l . 45- day gr ace per i od al l owed t o I RS
m. 75%of under payment

118. Using the choices provided below, show the justification for each
provision of the tax law listed. A t ax cr edi t f or amount s spent t o
f ur ni sh car e f or chi l dr en whi l e t he par ent i s at wor k. Addi t i onal
depr eci at i on deduct i on al l owed f or t he year t he asset i s acqui r ed. Tax
br acket s ar e i ncr eased f or i nf l at i on. A smal l busi ness cor por at i on can
el ect t o avoi d t he cor por at e i ncome t ax. A deduct i on f or cont r i but i ons
by an empl oyee t o cer t ai n r et i r ement pl ans. A deduct i on f or qual i f i ed
t ui t i on pai d t o obt ai n hi gher educat i on. A deduct i on f or cer t ai n
expenses ( i nt er est and t axes) i nci dent t o home owner shi p. A Feder al
deduct i on f or st at e and l ocal i ncome t axes pai d. A deduct i on f or cer t ai n
i ncome f r ommanuf act ur i ng act i vi t i es. A br i be t o t he l ocal sher i f f ,
al t hough busi ness r el at ed, i s not deduct i bl e. Cont r i but i ons t o
char i t abl e or gani zat i ons ar e deduct i bl e. A Feder al deduct i on f or st at e
and l ocal sal es t axes pai d. Tax cr edi t s avai l abl e f or t he pur chase of a
vehi cl e t hat uses al t er nat i ve ( non- f ossi l ) f uel s. Tax cr edi t s f or home
i mpr ovement s t hat conser ve ener gy. Mor e r api d expensi ng f or t ax pur poses
of t he cost s of i nst al l i ng pol l ut i on cont r ol devi ces. Soci al
consi der at i ons Economi c consi der at i ons Equi t y consi der at i ons Economi c
consi der at i ons Economi c consi der at i ons Economi c consi der at i ons Economi c
consi der at i ons Equi t y consi der at i ons Economi c consi der at i ons Soci al
consi der at i ons Soci al consi der at i ons Equi t y consi der at i ons Economi c
consi der at i ons Economi c consi der at i ons Economi c consi der at i ons

[ a] 1. A t ax cr edi t f or amount s spent t o f ur ni sh car e f or
chi l dr en whi l e t he par ent i s at wor k.
[ b] 2. Addi t i onal depr eci at i on deduct i on al l owed f or t he year
t he asset i s acqui r ed.
[ c] 3. Tax br acket s ar e i ncr eased f or i nf l at i on.
[ d] 4. A smal l busi ness cor por at i on can el ect t o avoi d t he
cor por at e i ncome t ax.
[ e] 5. A deduct i on f or cont r i but i ons by an empl oyee t o cer t ai n
r et i r ement pl ans.
[ f ] 6. A deduct i on f or qual i f i ed t ui t i on pai d t o obt ai n hi gher
educat i on.
[ g] 7. A deduct i on f or cer t ai n expenses ( i nt er est and t axes)
i nci dent t o home owner shi p.
[ h] 8. A Feder al deduct i on f or st at e and l ocal i ncome t axes
pai d.
[ i ] 9. A deduct i on f or cer t ai n i ncome f r ommanuf act ur i ng
act i vi t i es.
[ j ] 10. A br i be t o t he l ocal sher i f f , al t hough busi ness
r el at ed, i s not deduct i bl e.
[ k] 11. Cont r i but i ons t o char i t abl e or gani zat i ons ar e
deduct i bl e.
[ l ] 12. A Feder al deduct i on f or st at e and l ocal sal es t axes
pai d.
[ m] 13. Tax cr edi t s avai l abl e f or t he pur chase of a vehi cl e
t hat uses al t er nat i ve ( non- f ossi l ) f uel s.
[ n] 14. Tax cr edi t s f or home i mpr ovement s t hat conser ve ener gy.
[ o] 15. Mor e r api d expensi ng f or t ax pur poses of t he cost s of
i nst al l i ng pol l ut i on cont r ol devi ces.

a. Soci al consi der at i ons
b. Economi c consi der at i ons
c. Equi t y consi der at i ons
d. Economi c consi der at i ons
e. Economi c consi der at i ons
f . Economi c consi der at i ons
g. Economi c consi der at i ons
h. Equi t y consi der at i ons
i . Economi c consi der at i ons
j . Soci al consi der at i ons
k. Soci al consi der at i ons
l . Equi t y consi der at i ons
m. Economi c consi der at i ons
n. Economi c consi der at i ons
o. Economi c consi der at i ons

119. Tayl or , a wi dow, makes cash gi f t s t o her f i ve mar r i ed chi l dr en
( i ncl udi ng t hei r spouses) and t o her seven gr andchi l dr en. What i s t he
maxi mumamount Tayl or can gi ve f or cal endar year 2013 wi t hout usi ng her
uni f i ed t r ansf er t ax cr edi t ?

Cor r ect Answer :
$221, 000. $14, 000 ( annual excl usi on) 17 donees = $238, 000.

120. For t he t ax year 2013, Noah r epor t ed gr oss i ncome of $300, 000 on
hi s t i mel y f i l ed Feder al i ncome t ax r et ur n.

a. Pr esumi ng t he gener al r ul e appl i es, when
does t he st at ut e of l i mi t at i ons on
assessment s nor mal l y expi r e?

b. Suppose Noah i nadver t ent l y omi t t ed gr oss
i ncome of $76, 000. When does t he st at ut e of
l i mi t at i ons on assessment s expi r e?

c. Suppose t he omi ssi on was del i ber at e and not
i nadver t ent . When does t he st at ut e of
l i mi t at i ons on assessment s expi r e?

Cor r ect Answer :
a. Three years from April 15, 2014.

b. If more than 25% of gross income is omitted, a
six-year statute applies (i.e., 6 years from
April 15, 2014). Here, it does as $76,000 is
more than $75,000 (25% $300,000).

c. If fraud is involved, the statute never
expires.

121. Wi t hout obt ai ni ng an ext ensi on, Pamf i l es her i ncome t ax r et ur n 55
days af t er t he due dat e. Wi t h her r et ur n, she pays an addi t i onal t ax of
$60, 000. Di sr egar di ng any i nt er est el ement , what i s Pam s penal t y f or
f ai l ur e t o pay and t o f i l e?

Cor r ect Answer :
$6, 000. Di sr egar di ng t he i nt er est el ement , Pam s t ot al penal t i es ar e as
f ol l ows:

Failure to pay penalty (0.5%
$60,000 2 months)
$ 600
Plus: Failure to file
penalty (5% $60,000
2 months)
$6,000
Less failure to pay
penalty for same
period
(6
00)
5,400
Total penalties $6,000

122. On hi s 2013 i ncome t ax r et ur n, Andr ew omi t t ed i ncome and
over st at ed deduct i ons t o t he ext ent t hat hi s i ncome t ax was under st at ed
by $500, 000. Di sr egar di ng any i nt er est el ement , what i s Andr ew s
penal t y i f t he under st at ement was due t o:

a. Negl i gence.

b. Ci vi l f r aud.

c. Cr i mi nal f r aud.

Cor r ect Answer :
a. $100,000 (20% $500,000).

b. $375,000 (75% $500,000).

c. Various fines and/or prison sentence.

123. Sever al year s ago, Logan pur chased ext r a gr azi ng l and f or hi s
r anch at a cost of $240, 000. I n 2013, t he l and i s condemned by t he
st at e f or devel opment as a hi ghway mai nt enance depot . Under t he
condemnat i on awar d, Logan r ecei ves $600, 000 f or t he l and. Wi t hi n t he
same year , he r epl aces t he pr oper t y wi t h ot her gr azi ng l and. What i s
Logan s t ax si t uat i on i f t he r epl acement l and cost :

a. $210, 000?

b. $360, 000?

c. $630, 000?

d. Why?

Cor r ect Answer :
a. The full realized gain of $360,000 [$600,000
(condemnation proceeds) $240,000 (cost of
land)] must be recognized, as only $210,000
was reinvested. The condemnation proceeds of
$600,000 exceed the amount reinvested by more
than $360,000.

b. As only $360,000 was reinvested in replacement
property, $240,000 ($600,000 $360,000) of
the gain must be recognized.

c. As the full $600,000 was reinvested, no
realized gain need be recognized.

d. If some of the gain is not reinvested,
consistent with the wherewithal to pay concept
there exists the ability to pay the tax.

124. Pai ge i s t he sol e shar ehol der of Ci t r on Cor por at i on. Dur i ng t he
year , Pai ge l eases a bui l di ng t o Ci t r on f or a mont hl y r ent al of $80, 000.
I f t he f ai r r ent al val ue of t he bui l di ng i s $60, 000, what ar e t he
i ncome t ax consequences t o t he par t i es i nvol ved?

Cor r ect Answer :
The r ent char ged by Pai ge i s not ar ms l engt h; as such, Ci t r on
Cor por at i on s r ent deduct i on i s $60, 000 ( not $80, 000) . The $20, 000
di f f er ence i s a nondeduct i bl e di vi dend di st r i but i on. For Pai ge, t he
change mer el y r equi r es r ecl assi f i cat i on. I nst ead of $80, 000 of r ent
i ncome, she has $60, 000 of r ent i ncome and $20, 000 of di vi dend i ncome.

125. I n 1985, Roy l eased r eal est at e t o Dr ab Cor por at i on f or 20 year s.
Dr ab Cor por at i on made si gni f i cant capi t al i mpr ovement s t o t he pr oper t y.
I n 2005, Roy deci des not t o r enew t he l ease and vacat es t he pr oper t y.
At t hat t i me, t he val ue of t he i mpr ovement s i s $800, 000. Roy sel l s t he
r eal est at e i n 2013 f or $1, 200, 000 of whi ch $900, 000 i s at t r i but abl e t o
t he i mpr ovement s. How and when i s Roy t axed on t he i mpr ovement s made by
Dr ab Cor por at i on?

Cor r ect Answer :
Roy i s not subj ect t o t axat i on on t he i mpr ovement s unt i l he di sposes of
t he pr oper t y ( i . e. , 2013) . Af t er a cont r over si al Supr eme Cour t deci si on
year s ago, Congr ess cl ar i f i ed t he t ax l aw t o make i t mor e consi st ent
wi t h t he wher ewi t hal t o pay concept .

126. The Feder al i ncome t ax i s based on a pay- as- you- go syst emand has
become a mass t ax. Expl ai n t hi s st at ement .

Cor r ect Answer :
The pay- as- you- go syst emi s pr esent i n t he wage and ot her wi t hhol di ng
pr ocedur es. I n t he case of sel f - empl oyed per sons, i t i s mani f est ed i n
t he r equi r ed quar t er l y payment s f or est i mat ed t axes. The i ncome t ax
became a mass t ax dur i ng Wor l d War I I when i t s cover age was ext ended t o
74%of t he popul at i on ( f r oml ess t han 6%i n 1939) .

127. I n t er ms of AdamSmi t h s canons of t axat i on, how does t he Feder al
i ncome t ax f ar e as f ar as economy i s concer ned?

Cor r ect Answer :
Economy is present only if the collection procedure of the IRS is
considered. Economy is not present, however, if the focus is on taxpayer
compliance effort and costs.

128. Due t o t he popul at i on change, t he Goose Cr eek School Di st r i ct has
deci ded t o cl ose one of i t s hi gh school s. Si nce i t has no f ur t her need
of t he pr oper t y, t he school i s l i st ed f or sal e. The t wo bi ds i t
r ecei ves ar e as f ol l ows:

Uni t ed Met hodi st
Chur ch
$1, 700, 0
00
Pl anet Mot or s 1, 600, 00
0

The Uni t ed Met hodi st Chur ch woul d use t he pr oper t y t o est abl i sh a
sect ar i an mi ddl e school . Pl anet , a wel l - known car deal er shi p, woul d
r evamp t he pr oper t y and oper at e i t as a br anch l ocat i on.

I f you wer e a member of t he School Di st r i ct boar d, what f act or s woul d
you consi der i n eval uat i ng t he t wo bi ds?

Cor r ect Answer :
Al t hough t he bi d f r omt he Uni t ed Met hodi st Chur ch i s hi gher , sever al
ot her f act or s need t o be consi der ed. Does, f or exampl e, Goose Cr eek
School di st r i ct exempt pr oper t y owned by chur ches f r omi t s ad valorem
t axes? I f so, l osi ng t hi s pr oper t y f r omt he t ax base coul d pr ove ver y
cost l y over t he l ong r un. Al so, i t i s pr obabl e t hat i ncome- pr oduci ng
pr oper t y ( such as a car deal er shi p) woul d be t axed at a hi gher r at e
t han t hat owned by a nonpr of i t or gani zat i on ( a school oper at ed by a
chur ch) . Thi s assumes, of cour se, t hat t he school woul d be t axed at al l .
The aut o deal er shi p al so woul d gener at e sal es t ax.

129. Mor gan i nher i t s her f at her s per sonal r esi dence i ncl udi ng al l of
t he f ur ni shi ngs. She pl ans t o add a swi mmi ng pool and sauna t o t he
pr oper t y and r ent i t as a f ur ni shed house. What ar e some of t he ad
valorem pr oper t y t ax pr obl ems Mor gan can ant i ci pat e?

Cor r ect Answer :
The r eal est at e t axes pr obabl y wi l l i ncr ease f or sever al r easons. The
capi t al i mpr ovement s and t he conver si on f r omr esi dent i al t o r ent al wi l l
t r i gger t he i ncr ease. Fur t her mor e, t he f ur ni shi ngs may gener at e an ad
valorem t ax on per sonal t y. ( Dependi ng on appl i cabl e l aw, f ur ni t ur e
mi ght not be subj ect t o t ax unl ess used f or busi ness pur posessuch as
i n t hi s case. )

130. I n 2011, Debor ah became 65 year s ol d. I n 2012 she added a swi mmi ng
pool , and i n 2013 she conver t ed t he r esi dence t o r ent al pr oper t y and
moved i nt o an assi st ed l i vi ng f aci l i t y. Si nce 2010, Debor ah s ad
val or empr oper t y t axes have decr eased once and i ncr eased t wi ce. Expl ai n.

Cor r ect Answer :
The decrease probably came in 2011 when Deborah reached age 65. The
increases probably occurred in 2012 when she added the pool and in 2013
when the residence was converted to rental property.

131. A l ack of compl i ance i n t he payment of use t axes can be r esol ved
by sever al means. I n t hi s r egar d, comment on t he f ol l owi ng:

a. Regi st r at i on of aut omobi l es.

b. Repor t i ng of I nt er net pur chases on st at e
i ncome t ax r et ur ns.

Cor r ect Answer :
a. As reflected in Example 5 in the text, re-
registration of a car purchased out-of-state
is the occasion for the owners home state to
collect the use tax.

b. Completing the state income tax return reminds
(or forces) the taxpayer to pay use tax on
out-of-state-purchases.

132. What ar e t he pr os and cons of t he f ol l owi ng st at e and l ocal t ax
pr ovi si ons?

a. An ad valorem pr oper t y t ax hol i day made
avai l abl e t o a manuf act ur i ng pl ant t hat i s
r el ocat i ng.

b. Hot el occupancy t ax and a r ent al car
sur char ge.

c. A back- t o- school sal es t ax hol i day.

Cor r ect Answer :
a. Such a holiday is designed to attract new
industry to the area. This means more jobs and
growth in consumption. On the other hand, if
the tax holiday is too generous, this places a
strain on available public revenue. The result
could be that schools and capital maintenance
(roads, public services) will suffer.

b. The hotel occupancy tax and car rental
surcharges are popular because they mainly
impact visitors. Also, they can generate
considerable revenue to finance major capital
improvements. If these taxes become excessive,
however, they could discourage major events
(such as conventions).

c. Such holidays are very popular with both
merchants and consumers and serve the social
need of defraying some of the costs of sending
children to school. Once established, however,
they are difficult to get rid of. Thus, they
become an annual drain on sales tax revenue.

133. What i s a sever ance t ax? How pr oduct i ve can i t be i n t er ms of
gener at i ng r evenue?

Cor r ect Answer :
A sever ance t ax i s one i mposed when nat ur al r esour ces ( e. g. , oi l , gas,
i r on or e, coal ) ar e ext r act ed. I t i s based on t he not i on t hat t he st at e
has an i nt er est i n such r esour ces. For some st at es, t he r evenue f r om
sever ance t axes can be si gni f i cant . Al aska, f or exampl e, r el i es heavi l y
on i t s sever ance t axes and has been abl e t o avoi d bot h a st at e i ncome
t ax and a gener al sal es t ax.

134. What i s t he di f f er ence bet ween an i nher i t ance t ax and an est at e
t ax? Who i mposes t hese t axes?

Cor r ect Answer :
An inheritance tax is a tax on the right to receive property from a
decedent. An estate tax is imposed on the right to pass property at death.
The Federal government imposes estate taxes, while states impose
inheritance taxes. Some states impose both, while others impose neither.

135. Logan di es wi t h an est at e wor t h $20 mi l l i on. Under hi s wi l l , $10
mi l l i on passes t o hi s wi f e whi l e $10 mi l l i on goes t o hi s chur ch. What
i s Logan s Feder al est at e t ax r esul t ?

Cor r ect Answer :
None. After a marital deduction of $10 million and a charitable deduction
of $10 million, Logans taxable estate is $0.

136. Wi t h r egar d t o st at e i ncome t axes, expl ai n what i s meant by t he
j ock t ax?

Cor r ect Answer :
Although states have a right to levy an income tax on all nonresidents who
earn income within the state, they usually do so only on highly paid
visitors. Such persons are often athletes, hence the designation of jock
tax.

137. Vi r t ual l y al l st at e i ncome t ax r et ur ns cont ai n checkof f boxes f or
donat i ons t o var i ous causes. On what gr ounds has t hi s pr ocedur e been
cr i t i ci zed?

Cor r ect Answer :
In many cases the procedure is overused (i.e., a multiplicity of boxes).
This overuse adds complexity to the return. Also, in most cases the
donation is being drawn from any income tax refund that might be due. Thus,
taxpayers may not fully appreciate that they are paying for such checkoffs.

138. St at e and l ocal gover nment s ar e somet i mes f or ced t o f i nd ways t o
gener at e addi t i onal r evenue. Comment on t he pr os and cons of t he
f ol l owi ng pr ocedur es:

a. Decoupl e what woul d be par t of t he pi ggyback
f or mat of t he st at e i ncome t ax.

b. Tax amnest y pr ovi si ons.

c. I nt er net shami ng.

Cor r ect Answer :
a. The decoupling process is easily accomplished
as to new Federal tax changes that have never
taken effect at the state level. Taxpayers are
not apt to miss what they never have enjoyed.

b. Tax amnesty provisions generate considerable
revenue. It also unmasks many taxpayers who
have not previously paid taxes. Now that the
taxing jurisdiction is aware of their
existence, they will tend to pay taxes in the
future.

c. By use of a public Web site, the taxing
authority posts the names of those taxpayers
that are delinquent as to various taxes (e.g.,
sales, income). This public humiliation (or
threat of) very often results in compliance.

139. Br i ana l i ves i n one st at e and wor ks i n t he adj oi ni ng st at e. Bot h
st at es t ax t he i ncome she ear ns f r om her j ob. Does Br i ana have any
r el i ef f r omt hi s appar ent doubl e t axat i on of t he same i ncome?

Cor r ect Answer :
Most states allow their residents some form of tax credit for the income
taxes paid to other states. In Brianas case, the credit would be allowed
by the state where she lives for the taxes paid to the state where she
works.

140. I n l at e J une 2013, Ar t i s audi t ed by t he st at e and a l ar ge
def i ci ency i s assessed. I n November of t he same year , hi s Feder al
i ncome t ax r et ur n i s audi t ed by t he I RS. What has pr obabl y happened?

Cor r ect Answer :
The IRS has been notified by the state concerning the results of the June
audit.

141. Two mont hs af t er t he bur gl ar y of hi s per sonal r esi dence, Er i c i s
audi t ed by t he I RS. Among t he i t ems t aken i n t he bur gl ar y was a shoe
box cont ai ni ng appr oxi mat el y $50, 000 i n cash. Er i c i s t he owner and
oper at or of a cash- and- car r y l i quor st or e. Er i c wonder s why he was
audi t ed. Can you hel p expl ai n?

Cor r ect Answer :
Al t hough Er i c s audi t by t he I RS coul d be t he r esul t of sheer chance,
t hi s appear s unl i kel y. Pr ess cover age of t he bur gl ar y, par t i cul ar l y i f
t he i t ems st ol en wer e enumer at ed, coul d have put t he I RS on not i ce. Why
woul d anyone keep such a l ar ge amount of cash at hi s per sonal r esi dence?
Al so, Er i c i s i n a busi ness wher e t ax evasi on i s easi l y accompl i shed.

142. Ri ck, t he sol e pr opr i et or of an adul t ent er t ai nment cl ub, i s
audi t ed by t he I RS. On t he t hi r d day of t he f i el d audi t , t he r egul ar
I RS agent i s accompani ed by a speci al agent . Shoul d Ri ck be concer ned
by t hi s new devel opment ? Expl ai n.

Cor r ect Answer :
Yes, he should. Special agents rarely appear during an audit unless the
regular agent suspects that fraud may be involved. Considering the type of
business Rick conducts, the heavy use of cash probably exists. With cash
involved, tax evasion is easier to carry out.

143. Tr acy has j ust been audi t ed and t he I RS agent has i ssued an RAR
t hat assesses a l ar ge def i ci ency. Si nce Tr acy di sagr ees wi t h t he r esul t ,
her next st ep i s t o go t o cour t . Do you agr ee?

Cor r ect Answer :
Tracy might save herself time and expense by going to the Appeals Division
of the IRS. Here, the IRS has the authority to negotiate a settlement based
on the hazards of litigation (i.e., the probabilities of winning or
losing). If a settlement is reached, resort to the courts is avoided.

144. Can a t axpayer st ar t t he 3- year st at ut e of l i mi t at i ons on
addi t i onal assessment s by t he I RS by f i l i ng hi s i ncome t ax r et ur n ear l y
( i . e. , bef or e t he due dat e) ? Can t he per i od be shor t ened by f i l i ng
l at e ( i . e. , af t er t he due dat e) ?

Cor r ect Answer :
The answer i s no i n bot h cases. When f i l i ng ear l y, t he st at ut e st ar t s
t o r un on t he due dat e of t he r et ur n. When f i l i ng l at e however , t he
f i l i ng dat e cont r ol s.

145. Br ayden f i l es hi s Feder al i ncome t ax r et ur n by Apr i l 15, but does
not pay t he t ax. Al t hough he expect s t o pay i nt er est on t he l ar ge
amount of t ax he st i l l owes, he f eel s t hat t he t i mel y f i l i ng has
avoi ded any penal t i es. I s Br ayden s assumpt i on cor r ect ?

Cor r ect Answer :
Although Brayden has avoided the failure to file penalty, the failure to
pay penalty will apply. It is 0.5% per month up to a maximum of 25% of the
tax due as shown on the return.

146. Mel i nda has been r ef er r ed t o you by one of your cl i ent s. I n t he
past , she has pr epar ed her own i ncome t ax r et ur ns, but she has become
over whel med by t he i ncr eased compl exi t y of t he t ax l aw. Consequent l y,
Mel i nda want s you t o pr epar e her r et ur n f or cal endar year 2013. I n
r evi ewi ng her 2012 r et ur n, you not e t hat she has cl ai med as a deduct i on
t he ent i r e cost of a busi ness bui l di ng t hat shoul d have been
capi t al i zed and depr eci at ed. What cour se of act i on shoul d you f ol l ow?

Cor r ect Answer :
You shoul d r ecommend t o Mel i nda t hat an amended r et ur n be f i l ed f or
2012 cor r ect i ng t he er r or . I f she r ef uses, you shoul d assess t he
gr avi t y of t he er r or and how i t i mpact s on your abi l i t y t o f i l e an
accur at e r et ur n f or 2013. I f you cannot do so, t hen you must decl i ne
t he engagement .

147. Your cl i ent , Conni e, won $12, 000 i n a f oot bal l of f i ce pool . She
sees no r eason t o i ncl ude i t i n her i ncome f or sever al r easons. Fi r st ,
t he amount won wi l l not be r epor t ed t o t he I RS. Second, as an aver age
i ncome empl oyee, she i s unl i kel y t o be audi t ed by t he I RS. Thi r d, she
f eel s t hat she has pr obabl y l ost t hi s much i n ot her past of f i ce
pool s. How do you r espond?

Cor r ect Answer :
As a pr act i t i oner , you cannot pl ay t he audi t l ot t er y. You must pr esume
she wi l l be audi t ed i r r espect i ve of t he pr obabi l i t i es. Al t hough t he
use of est i mat es i s al l owed, Conni e s assumpt i ons as t o her l osses ar e
not r eal i st i c. Even i f t hey wer e r el i abl e, gambl i ng l osses cannot be
of f set agai nst gambl i ng wi nni ngs but must be separ at el y deduct ed. Thus,
t he $12, 000 must be r epor t ed as i ncome or you cannot pr epar e Conni e s
r et ur n.

148. Under what condi t i ons i s i t per mi ssi bl e, f r om an et hi cal
st andpoi nt , f or a CPA f i r m t o out sour ce t ax r et ur n pr epar at i on t o a
t hi r d par t y?

Cor r ect Answer :
First, the clients confidentiality must be preserved. Second, the CPA
firm must verify the accuracy of the work. Third, the clients must be
advised as to the practice.

149. I n t er ms of r evenue neut r al i t y, comment on a t ax cut enact ed by
Congr ess t hat :

a. cont ai ns r evenue of f set s.

b. i ncl udes a sunset pr ovi si on.

Cor r ect Answer :
a. Ideally, to achieve revenue neutrality all
tax cuts should be accompanied by revenue
offsets.

b. A sunset provision does not account for the
immediate revenue losses generated by a tax
cut. It merely provides that such losses
will not continue beyond a specified date
when the tax cut expires and the former tax
law is reinstated.

150. The t ax l aw cont ai ns var i ous t ax cr edi t s, deduct i ons, and
excl usi ons t hat ar e desi gned t o encour age t axpayer s t o obt ai n
addi t i onal educat i on. On what gr ounds can t hese pr ovi si ons be j ust i f i ed?

Cor r ect Answer :
Social and economic considerations. As to the latter, a better educated
workforce carries a positive economic impact.

151. The t ax l aw cont ai ns var i ous pr ovi si ons t hat encour age home
owner shi p.

a. On what basi s can t hi s obj ect i ve be
j ust i f i ed?

b. Ar e t her e any negat i ve consi der at i ons?
Expl ai n.

Cor r ect Answer :
a. Home ownership can be justified on economic
and social grounds.

b. Granting tax advantages to persons who are
purchasing their homes places the taxpayers
who rent at a disadvantage. The result is
inequality in treatment.

152. The t ax l aw al l ows an i ncome t ax deduct i on ( or a cr edi t ) f or
f or ei gn i ncome t axes. Expl ai n why.

Cor r ect Answer :
The deduct i on ( or a cr edi t ) f or f or ei gn i ncome t axes can be j ust i f i ed
on t he gr ounds t hat i t mi t i gat es t he doubl e t ax i mposed on t he same
i ncome.

153. The t ax l aw al l ows, under cer t ai n condi t i ons, def er r al of gai n
r ecogni t i on f or i nvol unt ar y conver si ons.

a. What i s t he j ust i f i cat i on f or t hi s r el i ef
measur e?

b. What happens i f t he pr oceeds ar e not
ent i r el y r ei nvest ed?

Cor r ect Answer :
a. By recognizing that the taxpayers relative
economic situation has not changed and that he
or she lacks the wherewithal to pay a tax, any
recognition of realized gain is deferred.

b. If the proceeds from an involuntary conversion
are not fully reinvested in property that is
similar or related in service or use,
recognized gain results. Such recognized gain
cannot exceed realized gain and will be
limited to the amount of the proceeds not
reinvested. Recognition is based on the notion
that the taxpayer now has the wherewithal to
pay the tax that results.

154. How do t he net oper at i ng l oss pr ovi si ons i n t he t ax l aw mi t i gat e
t he ef f ect of t he annual account i ng concept ?

Cor r ect Answer :
Without the allowance of carryback and/or carryover provisions that apply
the excess losses to profitable years, the losses would disappear. As shown
by Example 25, this result places a business with profit and loss
fluctuations on a more level playing field with one that maintains a stable
income pattern.

155. I n connect i on wi t h f aci l i t at i ng t he f unct i on of t he I RS i n t he
admi ni st r at i on of t he t ax l aws, comment on t he ut i l i t y of t he f ol l owi ng:

a. An i ncr ease i n t he amount of t he st andar d
deduct i on.

b. Dol l ar and per cent age l i mi t at i ons on t he
deduct i on of per sonal casual t y l osses.

c. Avai l abi l i t y of i nt er est and penal t i es f or
t axpayer noncompl i ance.

Cor r ect Answer :
a. An increase in the amount of the standard
deduction reduces the number of taxpayers
who choose to itemize their personal
deductions. This, in turn, cuts down on the
deductions the IRS has to check.

b. Limitations placed on casualty and theft
losses curtail the number of taxpayers who
can claim the deduction.

c. The imposition of extra penalties, in
addition to the tax owed, definitely deters
taxpayer noncompliance.

156. Congr ess r eact s t o j udi ci al deci si ons t hat i nt er pr et t he t ax l aw
i n di f f er ent ways. When i t appr oves of a deci si on, Congr ess may act t o
amend t he Code t o i ncor por at e t he hol di ng. When i t di sappr oves,
Congr ess may amend t he Code t o nul l i f y i t s ef f ect . Gi ve an exampl e of
each one of t hese congr essi onal r eact i ons.

Cor r ect Answer :
Congr ess appr oved of t he j udi ci al concl usi on t hat most st ock di vi dends
shoul d be nont axabl e and amended t he Code t o t hi s ef f ect . However , i t
di sagr eed as t o when l easehol d i mpr ovement s shoul d be t axed t o a l essor .
Consi st ent wi t h t he wher ewi t hal t o pay concept , t he i mpr ovement s ar e t o
be t axed on t he t er mi nat i on of t he l ease. Thus, Congr ess over t ur ned a
j udi ci al hol di ng t hat woul d have t axed such i mpr ovement s i n t he year
t hey ar e made by t he l essee.

157. Rul es of t ax l aw do not i ncl ude Revenue Rul i ngs and Revenue
Pr ocedur es.

a. Tr ue
*b. Fal se

158. A t ax pr of essi onal need not wor r y about t he r el at i ve wei ght of
aut hor i t y wi t hi n t he var i ous t ax l aw sour ces.

a. Tr ue
*b. Fal se

159. I n r ecent year s, Congr ess has been r el at i vel y successf ul i n
si mpl i f yi ng t he Internal Revenue Code.

a. Tr ue
*b. Fal se

160. A t axpayer shoul d al ways mi ni mi ze hi s or her t ax l i abi l i t y.

a. Tr ue
*b. Fal se

161. The f i r st codi f i cat i on of t he t ax l aw occur r ed i n 1954.

a. Tr ue
*b. Fal se

162. The Code sect i on ci t at i on i s i ncor r ect : 212( 1) .

a. Tr ue
*b. Fal se

163. Subchapt er D r ef er s t o t he Cor por at e Di st r i but i ons and
Adj ust ment s sect i on of t he Internal Revenue Code.

a. Tr ue
*b. Fal se

164. Regul at i ons ar e gener al l y i ssued i mmedi at el y af t er a st at ut e i s
enact ed.

a. Tr ue
*b. Fal se

165. Tempor ar y Regul at i ons ar e onl y publ i shed i n t he Internal Revenue
Bulletin.

a. Tr ue
*b. Fal se

166. Revenue Rul i ngs i ssued by t he Nat i onal Of f i ce of t he I RS car r y t he
same l egal f or ce and ef f ect as Regul at i ons.

a. Tr ue
*b. Fal se

167. A Revenue Rul i ng i s a j udi ci al sour ce of Feder al t ax l aw.

a. Tr ue
*b. Fal se

168. The f ol l owi ng ci t at i on can be a cor r ect ci t at i on: Rev. Rul . 95- 271,
I . R. B. No. 54, 18.

a. Tr ue
*b. Fal se

169. Revenue Pr ocedur es deal wi t h t he i nt er nal management pr act i ces and
pr ocedur es of t he I RS.

*a. Tr ue
b. Fal se

170. Post - 1984 l et t er r ul i ngs may be subst ant i al aut hor i t y f or pur poses
of t he accur acy- r el at ed penal t y i n 6662.

*a. Tr ue
b. Fal se

171. A l et t er r ul i ng appl i es onl y t o t he t axpayer who asks f or and
obt ai ns a l et t er r ul i ng.

*a. Tr ue
b. Fal se

172. The I RS i s not r equi r ed t o make a l et t er r ul i ng publ i c.

a. Tr ue
*b. Fal se

173. Det er mi nat i on l et t er s usual l y i nvol ve f i nal i zed t r ansact i ons.

*a. Tr ue
b. Fal se

174. Techni cal Advi ce Memor anda deal wi t h compl et ed t r ansact i ons.

*a. Tr ue
b. Fal se

175. Techni cal Advi ce Memor anda may not be ci t ed as pr ecedent s by
t axpayer s.

*a. Tr ue
b. Fal se

176. A t axpayer must pay any t ax def i ci ency assessed by t he I RS and sue
f or a r ef und t o br i ng sui t i n t he U. S. Cour t of Feder al Cl ai ms. Onl y
i n t he Tax Cour t can j ur i sdi ct i on be obt ai ned wi t hout f i r st payi ng t he
assessed t ax def i ci ency.

*a. Tr ue
b. Fal se

177. I n a U. S. Di st r i ct Cour t , a j ur y can deci de bot h quest i ons of f act
and quest i ons of l aw.

a. Tr ue
*b. Fal se

178. Thr ee j udges wi l l nor mal l y hear each U. S. Tax Cour t case.

a. Tr ue
*b. Fal se

179. A t axpayer can obt ai n a j ur y t r i al i n t he U. S. Tax Cour t .

a. Tr ue
*b. Fal se

180. A t axpayer must pay any t ax def i ci ency assessed by t he I RS and sue
f or a r ef und t o br i ng sui t i n t he U. S. Di st r i ct Cour t .

*a. Tr ue
b. Fal se

181. Ar i zona i s i n t he j ur i sdi ct i on of t he Ei ght h Ci r cui t Cour t of
Appeal s.

a. Tr ue
*b. Fal se

182. Texas i s i n t he j ur i sdi ct i on of t he Second Ci r cui t Cour t of
Appeal s.

a. Tr ue
*b. Fal se

183. The Golsen r ul e has been over t ur ned by t he U. S. Supr eme Cour t .

a. Tr ue
*b. Fal se

184. The gr ant i ng of a Wr i t of Cer t i or ar i i ndi cat es t hat at l east f our
member s of t he Supr eme Cour t bel i eve t hat an i ssue i s of suf f i ci ent
i mpor t ance t o be hear d by t he f ul l cour t .

*a. Tr ue
b. Fal se

185. The pet i t i oner r ef er s t o t he par t y agai nst whoma sui t i s
br ought .

a. Tr ue
*b. Fal se

186. The t er mpet i t i oner i s a synonymf or def endant .

a. Tr ue
*b. Fal se

187. The U. S. Tax Cour t meet s most of t en i n Washi ngt on, D. C.

a. Tr ue
*b. Fal se

188. Ther e ar e 11 geogr aphi c U. S. Ci r cui t Cour t of Appeal s.

*a. Tr ue
b. Fal se

189. The f ol l owi ng ci t at i on i s cor r ect : Larry G. Mitchell, 131 T. C. 215
( 2008) .

*a. Tr ue
b. Fal se

190. The I RS i ssues an acqui escence or nonacqui escence onl y f or r egul ar
Tax Cour t deci si ons.

a. Tr ue
*b. Fal se

191. Ther e i s a di r ect conf l i ct bet ween a Code sect i on adopt ed i n 2008
and a t r eat y wi t h Fr ance ( si gned i n 2012) . The Code sect i on cont r ol s.

a. Tr ue
*b. Fal se

192. The Index to Federal Tax Articles ( publ i shed by War r en, Gor ham,
and Lamont ) i s avai l abl e i n pr i nt and el ect r oni c f or mat s.

a. Tr ue
*b. Fal se

193. A U. S. Di st r i ct Cour t i s t he l owest t r i al cour t .

*a. Tr ue
b. Fal se

194. The r esear ch pr ocess shoul d begi n wi t h a t ax ser vi ce.

a. Tr ue
*b. Fal se

195. El ect r oni c dat abases ar e most f r equent l y sear ched by t he keywor d
appr oach.

*a. Tr ue
b. Fal se

196. The t est f or whet her a chi l d qual i f i es f or dependency st at us i s
f i r st conduct ed under t he qual i f i ed chi l d r equi r ement .

*a. Tr ue
b. Fal se

197. A Bl uebook opi ni on i s subst ant i al aut hor i t y f or pur poses of t he
accur acy r el at ed penal t y.

*a. Tr ue
b. Fal se

198. The pr i mar y pur pose of ef f ect i ve t ax pl anni ng i s t o r educe or
def er t he t ax i n t he cur r ent t ax year .

a. Tr ue
*b. Fal se

199. Def er r i ng i ncome t o a subsequent year i s consi der ed t o be t ax
avoi dance.

*a. Tr ue
b. Fal se

200. Tax pl anni ng usual l y i nvol ves a compl et ed t r ansact i on.

a. Tr ue
*b. Fal se

201. The Regul at i on sect i on of t he CPA exami s 60%Taxat i on and 40%Law
& Pr of essi onal Responsi bi l i t i es.

*a. Tr ue
b. Fal se

202. The I nt er nal Revenue Code was f i r st codi f i ed i n what year ?

a. 1913.
b. 1923.
*c. 1939.
d. 1954.
e. 1986.

203. Tax bi l l s ar e handl ed by whi ch commi t t ee i n t he U. S. House of
Repr esent at i ves?

a. Taxat i on Commi t t ee.
*b. Ways and Means Commi t t ee.
c. Fi nance Commi t t ee.
d. Budget Commi t t ee.

204. Feder al t ax l egi sl at i on gener al l y or i gi nat es i n what body?

a. I nt er nal Revenue Ser vi ce.
b. Senat e Fi nance Commi t t ee.
*c. House Ways and Means Commi t t ee.
d. Senat e Fl oor .

205. Subt i t l e A of t he I nt er nal Revenue Code cover s whi ch of t he
f ol l owi ng t axes?

*a. I ncome t axes.
b. Est at e and gi f t t axes.
c. Exci se t axes.
d. Empl oyment t axes.

206. I n 212( 1) , t he number ( 1) st ands f or t he:

a. Sect i on number .
b. Subsect i on number .
*c. Par agr aph desi gnat i on.
d. Subpar agr aph desi gnat i on.

207. Whi ch of t hese i s not a cor r ect ci t at i on t o t he I nt er nal Revenue
Code?

a. Sect i on 211.
b. Sect i on 1222( 1) .
c. Sect i on 2( a) ( 1) ( A) .
d. Sect i on 280B.
*e. Al l of above ar e cor r ect ci t es.

208. Whi ch of t he f ol l owi ng i s not an admi ni st r at i ve sour ce of t ax l aw?

a. Fi el d Ser vi ce Advi ce.
b. Revenue Pr ocedur e.
c. Techni cal Advi ce Memor anda.
d. Gener al Counsel Memor andum.
*e. Al l of t he above ar e admi ni st r at i ve sour ces.

209. Whi ch of t he f ol l owi ng sour ces has t he highest t ax val i di t y?

a. Revenue Rul i ng.
b. Revenue Pr ocedur e.
c. Regul at i ons.
*d. Internal Revenue Code sect i on.

210. Whi ch of t he f ol l owi ng t ypes of Regul at i ons has t he highest t ax
val i di t y?

a. Tempor ar y.
*b. Legi sl at i ve.
c. I nt er pr et i ve.
d. Pr ocedur al .

211. Whi ch st at ement i s not t r ue wi t h r espect t o a Regul at i on t hat
i nt er pr et s t he t ax l aw?

*a. I ssued by t he U. S. Congr ess.
b. I ssued by t he U. S. Tr easur y Depar t ment .
c. Desi gned t o pr ovi de an i nt er pr et at i on of t he t ax l aw.
d. Car r i es mor e l egal f or ce t han a Revenue Rul i ng.
e. Al l of t he above st at ement s ar e t r ue.

212. I n addr essi ng t he i mpor t ance of a Regul at i on, an I RS agent must :

*a. Gi ve equal wei ght t o t he Code and t he Regul at i ons.
b. Gi ve mor e wei ght t o t he Code r at her t han t o a Regul at i on.
c. Gi ve mor e wei ght t o t he Regul at i on r at her t han t o t he Code.
d. Gi ve l ess wei ght t o t he Code r at her t han t o a Regul at i on.

213. Whi ch i t emmay not be ci t ed as a pr ecedent ?

a. Regul at i ons.
b. Tempor ar y Regul at i ons.
*c. Techni cal Advi ce Memor anda.
d. U. S. Di st r i ct Cour t deci si on.

214. What st at ement i s not t r ue wi t h r espect t o Tempor ar y Regul at i ons?

*a. May not be ci t ed as pr ecedent .
b. I ssued as Pr oposed Regul at i ons.
c. Aut omat i cal l y expi r e wi t hi n t hr ee year s af t er t he dat e of
i ssuance.
d. Found i n t he Federal Register.

215. What admi ni st r at i ve r el ease deal s wi t h a pr oposed t r ansact i on
r at her t han a compl et ed t r ansact i on?

*a. Let t er Rul i ng.
b. Techni cal Advi ce Memor andum.
c. Det er mi nat i on Let t er .
d. Fi el d Ser vi ce Advi ce.

216. Whi ch of t he f ol l owi ng i ndi cat es t hat a deci si on has pr ecedent i al
val ue f or f ut ur e cases?

*a. Stare decisis.
b. Golsen doct r i ne.
c. En banc.
d. Reenact ment doct r i ne.

217. A t axpayer who l oses i n a U. S. Di st r i ct Cour t may appeal di r ect l y
t o t he:

a. U. S. Supr eme Cour t .
b. U. S. Tax Cour t .
c. U. S. Cour t of Feder al Cl ai ms.
*d. U. S. Ci r cui t Cour t of Appeal s.

218. I f a t axpayer deci des not t o pay a t ax def i ci ency, he or she must
go t o whi ch cour t ?

a. Appr opr i at e U. S. Ci r cui t Cour t of Appeal s.
b. U. S. Di st r i ct Cour t .
*c. U. S. Tax Cour t .
d. U. S. Cour t of Feder al Cl ai ms.

219. A j ur y t r i al i s avai l abl e i n t he f ol l owi ng t r i al cour t :

a. U. S. Tax Cour t .
b. U. S. Cour t of Feder al Cl ai ms.
*c. U. S. Di st r i ct Cour t .
d. U. S. Ci r cui t Cour t of Appeal s.

220. A t axpayer may not appeal a case f r omwhi ch cour t :

a. U. S. Di st r i ct Cour t .
b. U. S. Ci r cui t Cour t of Appeal s.
*d. Smal l Case Di vi si on of t he U. S. Tax Cour t .

221. The I RS wi l l not acqui esce t o t he f ol l owi ng t ax deci si ons:

a. U. S. Di st r i ct Cour t .
b. U. S. Tax Cour t .
*d. Smal l Case Di vi si on of t he U. S. Tax Cour t .

222. Whi ch publ i sher of f er s t he Standard Federal Tax Reporter?

a. Resear ch I nst i t ut e of Amer i ca.
*b. Commer ce Cl ear i ng House.
c. Pr ent i ce- Hal l .
d. Lexi sNexi s.

223. Whi ch i s pr esent l y not a maj or t ax ser vi ce?

a. Standard Federal Tax Reporter.
*b. Federal Taxes.
c. United States Tax Reporter.
d. Tax Management Portfolios.
e. Al l of t he above ar e maj or t ax ser vi ces.

224. Whi ch publ i sher of f er s t he United States Tax Reporter?

*a. Resear ch I nst i t ut e of Amer i ca.
b. Commer ce Cl ear i ng House.
c. Lexi sNexi s.
d. Tax Anal yst s.

225. When sear chi ng on an onl i ne t ax ser vi ce, whi ch appr oach i s mor e
f r equent l y used?

a. Code sect i on appr oach.
*b. Keywor d appr oach.
c. Tabl e of cont ent s appr oach.
d. I ndex.
e. Al l ar e about t he same.

226. A r esear cher can f i nd t ax i nf or mat i on on home page si t es of :

a. Gover nment al bodi es.
b. Tax academi cs.
c. Publ i sher s.
d. CPA f i r ms.
*e. Al l of t he above.

227. Tax r esear ch i nvol ves whi ch of t he f ol l owi ng pr ocedur es:

a. I dent i f yi ng and r ef i ni ng t he pr obl em.
b. Locat i ng t he appr opr i at e t ax l aw sour ces.
c. Assessi ng t he val i di t y of t he t ax l aw sour ces.
d. Fol l ow- up.

228. Whi ch t ax- r el at ed websi t e pr obabl y gi ves t he best pol i cy-
or i ent at i on r esul t s?

a. t axal manac. or g.
b. i r s. gov.
c. t axsi t es. com.
*d. t axanal yst . com.
e. ust axcour t . gov.

229. Whi ch cour t deci si on woul d pr obabl y car r y mor e wei ght ?

a. Regul ar U. S. Tax Cour t deci si on.
*b. Revi ewed U. S. Tax Cour t deci si on.
c. U. S. Di st r i ct Cour t deci si on.
d. Memor andumTax Cour t deci si on.
e. U. S. Cour t of Feder al Cl ai ms.

230. Whi ch Regul at i ons have t he f or ce and ef f ect of l aw?

a. Pr ocedur al Regul at i ons.
b. Fi nal i zed Regul at i ons.
*c. Legi sl at i ve Regul at i ons.
d. I nt er pr et i ve Regul at i ons.

231. Whi ch i t ems t el l t axpayer s t he I RS s r eact i on t o cer t ai n cour t
deci si ons?

a. Not i ces.
b. Revenue Pr ocedur es.
c. Revenue Rul i ngs.
*d. Act i ons on Deci si ons.
e. Legi sl at i ve Regul at i ons.

232. Whi ch cour t deci si on car r i es mor e wei ght ?

a. Feder al Di st r i ct Cour t .
*b. Second Ci r cui t Cour t of Appeal s.
c. Memor andumU. S. Tax Cour t deci si on.
d. Smal l Cases Di vi si on of U. S. Tax Cour t .
e. U. S. Cour t of Feder al Cl ai ms.

233. Whi ch company does not publ i sh ci t at or s f or t ax pur poses?

*a. J ohn Wi l ey & Sons.
b. Commer ce Cl ear i ng House.
c. Resear ch I nst i t ut e of Amer i ca.
d. West l aw.
e. Shepar d s.

234. Whi ch i s not a pr i mar y sour ce of t ax l aw?

a. Not i ce 89- 99, 1989- 2 C. B. 422.
b. Estate of Harry Holmes v. Comm., 326 U. S. 480 ( 1946) .
c. Rev. Rul . 79- 353, 1979- 2 C. B. 325.
d. Pr op. Reg. 1. 752- 4T( f ) .
*e. Al l of t he above ar e pr i mar y sour ces.

235. Whi ch st at ement i s incorrect wi t h r espect t o t axat i on on t he CPA
exam?

a. The CPA examnow has onl y f our par t s.
*b. Ther e ar e no l onger case st udi es on t he exam.
c. A candi dat e may not go back af t er exi t i ng a t est l et .
d. Si mul at i ons i ncl ude a f our - f unct i on pop- up cal cul at or .
e. None of t he above ar e i ncor r ect .

236. How can Congr essi onal commi t t ee r epor t s be used by a t ax
r esear cher ?

Cor r ect Answer :
Congr essi onal commi t t ee r epor t s of t en expl ai n t he pr ovi si ons of
pr oposed l egi sl at i on and ar e a val uabl e sour ce of ascer t ai ni ng t he
i nt ent of Congr ess. The i nt ent of Congr ess i s t he key t o i nt er pr et i ng
new l egi sl at i on by t axpayer s, especi al l y bef or e Regul at i ons ar e
publ i shed.

237. What ar e Tr easur y Depar t ment Regul at i ons?

Cor r ect Answer :
Regul at i ons ar e i ssued by t he U. S. Tr easur y Depar t ment under aut hor i t y
gr ant ed by Congr ess. I nt er pr et i ve by nat ur e, t hey pr ovi de t axpayer s
wi t h consi der abl e gui dance on t he meani ng and appl i cat i on of t he Code.
Regul at i ons may be i ssued i n proposed, temporary, or final f or m.
Regul at i ons car r y consi der abl e aut hor i t y as t he of f i ci al i nt er pr et at i on
of t ax st at ut es. They ar e an i mpor t ant f act or t o consi der i n compl yi ng
wi t h t he t ax l aw. Cour t s gener al l y i gnor e Pr oposed Regul at i ons.

238. Compar e Revenue Rul i ngs wi t h Revenue Pr ocedur es.

Cor r ect Answer :
Revenue Rul i ngs ar e of f i ci al pr onouncement s of t he Nat i onal Of f i ce of
t he I RS. They t ypi cal l y pr ovi de one or mor e exampl es of how t he I RS
woul d appl y a l aw t o speci f i c f act si t uat i ons. Li ke Regul at i ons,
Revenue Rul i ngs ar e desi gned t o pr ovi de i nt er pr et at i on of t he t ax l aw.
However , t hey do not car r y t he same l egal f or ce and ef f ect as
Regul at i ons and usual l y deal wi t h mor e r est r i ct ed pr obl ems. Regul at i ons
ar e appr oved by t he Secr et ar y of t he Tr easur y, wher eas Revenue Rul i ngs
gener al l y ar e not .

Revenue Procedures are issued in the same manner as Revenue Rulings, but
deal with the internal management practices and procedures of the IRS.
Familiarity with these procedures can increase taxpayer compliance and help
the IRS administer the tax laws more efficiently. A taxpayers failure to
follow a Revenue Procedure can result in unnecessary delay or, in a
discretionary situation, can cause the IRS to decline to act on behalf of
the taxpayer.

239. What i s a Techni cal Advi ce Memor andum?

Cor r ect Answer :
The Nat i onal Of f i ce of t he I RS r el eases Techni cal Advi ce Memor anda
( TAMs) weekl y. TAMs r esembl e l et t er r ul i ngs i n t hat t hey gi ve t he I RS s
det er mi nat i on of an i ssue. However , t hey di f f er i n sever al r espect s.
Let t er r ul i ngs deal wi t h pr oposed t r ansact i ons and ar e i ssued t o
t axpayer s at t hei r r equest . I n cont r ast , TAMs deal wi t h compl et ed
t r ansact i ons. Fur t her mor e, TAMs ar i se f r omquest i ons r ai sed by I RS
per sonnel dur i ng audi t s and ar e i ssued by t he Nat i onal Of f i ce of t he
I RS t o i t s f i el d per sonnel . TAMs ar e of t en r equest ed f or quest i ons
r el at i ng t o exempt or gani zat i ons and empl oyee pl ans. TAMs ar e not
of f i ci al l y publ i shed and may not be ci t ed or used as pr ecedent .

240. Di scuss t he advant ages and di sadvant ages of t he Smal l Cases
Di vi si on of t he U. S. Tax Cour t .

Cor r ect Answer :
Ther e i s no appeal f r omt he Smal l Cases Di vi si on. The j ur i sdi ct i on of
t he Smal l Cases Di vi si on i s l i mi t ed t o cases i nvol vi ng amount s of
$50, 000 or l ess. The pr oceedi ngs of t he Smal l Cases Di vi si on ar e
i nf or mal ( e. g. , no necessi t y f or t he t axpayer t o be r epr esent ed by a
l awyer or ot her t ax advi ser ) . Speci al t r i al j udges r at her t han Tax
Cour t j udges pr esi de over t hese pr oceedi ngs. The deci si ons of t he
Smal l Cases Di vi si on ar e not pr ecedent s f or any ot her cour t deci si on
and ar e not r evi ewabl e by any hi gher cour t . Pr oceedi ngs can be mor e
t i mel y and l ess expensi ve i n t he Smal l Cases Di vi si on. Some of t hese
cases can now be f ound on t he U. S. Tax Cour t I nt er net Websi t e.

241. Di st i ngui sh bet ween t he j ur i sdi ct i on of t he U. S. Tax Cour t and a
U. S. Di st r i ct Cour t .

Cor r ect Answer :
The U. S. Tax Cour t hear s onl y t ax cases and i s t he most popul ar t ax
f or um. The U. S. Di st r i ct Cour t hear s a wi de var i et y of nont ax cases,
i ncl udi ng dr ug cr i mes and ot her Feder al vi ol at i ons, as wel l as t ax
cases. Some Tax Cour t j ust i ces have been appoi nt ed f r omI RS or Tr easur y
Depar t ment posi t i ons. For t hese r easons, some peopl e suggest t hat t he
U. S. Tax Cour t has mor e exper t i se i n t ax mat t er s.

242. How do t r eat i es f i t wi t hi n t ax sour ces?

Cor r ect Answer :
The U. S si gns cer t ai n t ax t r eat i es ( somet i mes cal l ed t ax convent i ons)
wi t h f or ei gn count r i es t o r ender mut ual assi st ance i n t ax enf or cement
and t o avoi d doubl e t axat i on. Tax l egi sl at i on enact ed i n 1988 pr ovi ded
t hat nei t her a t ax l aw nor a t ax t r eat y t akes gener al pr ecedence. Thus,
when t her e i s a di r ect conf l i ct wi t h t he Code and a t r eat y, t he most
r ecent i t emwi l l t ake pr ecedence. A t axpayer must di scl ose on t he t ax
r et ur n any posi t i on wher e a t r eat y over r i des a t ax l aw. Ther e i s a
$1, 000 penal t y per f ai l ur e t o di scl ose f or i ndi vi dual s and a $10, 000
per f ai l ur e penal t y f or cor por at i ons.

243. Under t he Feder al i ncome t ax f or mul a f or i ndi vi dual s, a choi ce
must be made bet ween cl ai mi ng deduct i ons for AGI and i t emi zed
deduct i ons.

a. Tr ue
*b. Fal se

244. Under t he Feder al i ncome t ax f or mul a f or i ndi vi dual s, t he
det er mi nat i on of adj ust ed gr oss i ncome ( AGI ) pr ecedes t hat of t axabl e
i ncome ( TI ) .

*a. Tr ue
b. Fal se

245. Under t he i ncome t ax f or mul a, a t axpayer must choose bet ween
deduct i ons for AGI and t he st andar d deduct i on.

a. Tr ue
*b. Fal se

246. Af t er El l i e moves out of t he apar t ment she had r ent ed as her
per sonal r esi dence, she r ecover s her damage deposi t of $1, 000. The
$1, 000 i s not i ncome t o El l i e.

*a. Tr ue
b. Fal se

247. An above t he l i ne deduct i on r ef er s t o a deduct i on for AGI .

*a. Tr ue
b. Fal se

248. Because t hey appear on page 1 of For m1040, i t emi zed deduct i ons
ar e al so r ef er r ed t o as page 1 deduct i ons.

a. Tr ue
*b. Fal se

249. A decr ease i n a t axpayer s AGI coul d i ncr ease t he amount of
medi cal expenses t hat can be deduct ed.

*a. Tr ue
b. Fal se

250. An i ncr ease i n a t axpayer s AGI coul d decr ease t he amount of
char i t abl e cont r i but i on t hat can be cl ai med.

a. Tr ue
*b. Fal se

251. Adj ust ed gr oss i ncome ( AGI ) appear s at t he bot t omof page 1 and at
t he t op of page 2 of For m1040.

*a. Tr ue
b. Fal se

252. Al l excl usi ons f r omgr oss i ncome ar e r epor t ed on For m1040.

a. Tr ue
*b. Fal se

253. The f i l i ng st at us of a t axpayer ( e. g. , si ngl e, head of househol d)
must be i dent i f i ed bef or e t he appl i cabl e st andar d deduct i on i s
det er mi ned.

*a. Tr ue
b. Fal se

254. Lee, a ci t i zen of Kor ea, i s a r esi dent of t he U. S. Any r ent i ncome
Lee r ecei ves f r oml and he owns i n Kor ea is not subj ect t o t he U. S.
i ncome t ax.

a. Tr ue
*b. Fal se

255. The addi t i onal st andar d deduct i on f or age and bl i ndness i s gr eat er
f or mar r i ed t axpayer s t han f or si ngl e t axpayer s.

a. Tr ue
*b. Fal se

256. The basic and additional st andar d deduct i ons bot h are subj ect t o
an annual adj ust ment f or i nf l at i on.

*a. Tr ue
b. Fal se

257. Many t axpayer s who pr evi ousl y i t emi zed wi l l st ar t cl ai mi ng t he
st andar d deduct i on when t hey pur chase a home.

a. Tr ue
*b. Fal se

258. Once t hey r each age 65, many t axpayer s wi l l swi t ch f r omi t emi zi ng
t hei r deduct i ons from AGI and st ar t cl ai mi ng t he st andar d deduct i on.

*a. Tr ue
b. Fal se

259. Cl aude s deduct i ons from AGI exceed t he st andar d deduct i on al l owed
f or 2013. Under t hese ci r cumst ances, Cl aude cannot cl ai mt he st andar d
deduct i on.

a. Tr ue
*b. Fal se

260. As opposed t o i t emi zi ng deduct i ons from AGI , t he maj or i t y of
i ndi vi dual t axpayer s choose t he st andar d deduct i on.

*a. Tr ue
b. Fal se

261. Howar d, age 82, di es on J anuar y 2, 2013. On Howar d s f i nal i ncome
t ax r et ur n, t he f ul l amount of t he basi c and addi t i onal st andar d
deduct i ons wi l l be al l owed even t hough Howar d l i ved f or onl y 2 days
dur i ng t he year .

*a. Tr ue
b. Fal se

262. I n 2013, Ed i s 66 and si ngl e. I f he has i t emi zed deduct i ons of
$7, 300, he shoul d not cl ai mt he st andar d deduct i on al t er nat i ve.

a. Tr ue
*b. Fal se

263. J ason and Peg ar e mar r i ed and f i l e a j oi nt r et ur n. Bot h ar e over
65 year s of age and J ason i s bl i nd. Thei r st andar d deduct i on f or 2013
i s $15, 800 ( $12, 200 + $1, 200 + $1, 200 + $1, 200) .

*a. Tr ue
b. Fal se

264. Der ek, age 46, i s a sur vi vi ng spouse. I f he has i t emi zed
deduct i ons of $12, 500 f or 2013, Der ek should not cl ai mt he st andar d
deduct i on.

*a. Tr ue
b. Fal se

265. Buddy and Hazel ar e ages 72 and 71 and f i l e a j oi nt r et ur n. I f
t hey have i t emi zed deduct i ons of $14, 300 f or 2013, t hey should not
cl ai mt he st andar d deduct i on.

a. Tr ue
*b. Fal se

266. Cl ar a, age 68, cl ai ms head of househol d f i l i ng st at us. I f she has
i t emi zed deduct i ons of $10, 100 f or 2013, she should not cl ai mt he
st andar d deduct i on.

a. Tr ue
*b. Fal se

267. Moni que i s a r esi dent of t he U. S. and a ci t i zen of Fr ance. I f she
f i l es a U. S. i ncome t ax r et ur n, Moni que cannot cl ai mt he st andar d
deduct i on.

a. Tr ue
*b. Fal se

268. Dan and Donna ar e husband and wi f e and f i l e separ at e r et ur ns f or
t he year . I f Dan i t emi zes hi s deduct i ons from AGI , Donna cannot cl ai m
t he st andar d deduct i on.

*a. Tr ue
b. Fal se

269. Benj ami n, age 16, i s cl ai med as a dependent by hi s par ent s. Dur i ng
2013, he ear ned $700 at a car wash. Benj ami n s st andar d deduct i on i s
$1, 350 ( $1, 000 + $350) .

a. Tr ue
*b. Fal se

270. Debby, age 18, i s cl ai med as a dependent by her mot her . Dur i ng
2013, she ear ned $1, 100 i n i nt er est i ncome on a savi ngs account .
Debby s st andar d deduct i on i s $1, 450 ( $1, 100 + $350) .

a. Tr ue
*b. Fal se

271. Kat r i na, age 16, i s cl ai med as a dependent by her par ent s. Dur i ng
2013, she ear ned $5, 600 as a checker at a gr ocer y st or e. Her st andar d
deduct i on i s $5, 950 ( $5, 600 ear ned i ncome + $350) .

*a. Tr ue
b. Fal se

272. A dependent cannot cl ai ma per sonal exempt i on on hi s or her own
r et ur n.

*a. Tr ue
b. Fal se

273. When separ at e i ncome t ax r et ur ns ar e f i l ed by mar r i ed t axpayer s,
one spouse cannot cl ai mt he ot her spouse as an exempt i on.

a. Tr ue
*b. Fal se

274. But ch and Mi ner va ar e di vor ced i n December of 2013. Si nce t hey
wer e mar r i ed f or mor e t han one- hal f of t he year , t hey ar e consi der ed as
mar r i ed f or 2013.

a. Tr ue
*b. Fal se

275. For t he year a spouse di es, t he sur vi vi ng spouse i s consi der ed
mar r i ed f or t he ent i r e year f or i ncome t ax pur poses.

*a. Tr ue
b. Fal se

276. I n det er mi ni ng whet her t he gr oss i ncome t est i s met f or dependency
exempt i on pur poses, onl y t he t axabl e por t i on of a schol ar shi p i s
consi der ed.

*a. Tr ue
b. Fal se

277. Al ber t buys hi s mot her a TV. For pur poses of meet i ng t he suppor t
t est , Al ber t cannot i ncl ude t he cost of t he TV.

a. Tr ue
*b. Fal se

278. I f an i ndi vi dual does not spend f unds t hat have been r ecei ved f r om
anot her sour ce ( e. g. , i nt er est on muni ci pal bonds) , t he unexpended
amount s ar e not consi der ed f or pur poses of t he suppor t t est .

*a. Tr ue
b. Fal se

279. Usi ng bor r owed f unds f r oma mor t gage on her home, Leah pr ovi des
52%of her own suppor t , whi l e her sons f ur ni shed t he r est . Leah can be
cl ai med as a dependent under a mul t i pl e suppor t agr eement .

a. Tr ue
*b. Fal se

280. Roy and Li nda wer e di vor ced i n 2012. The di vor ce decr ee awar ds
cust ody of t hei r chi l dr en t o Li nda but i s si l ent as t o who i s ent i t l ed
t o cl ai mt hemas dependent s. I f Roy f ur ni shed mor e t han hal f of t hei r
suppor t , he can cl ai mt hemas dependent s i n 2013.

a. Tr ue
*b. Fal se

281. I n 2013, Hal f ur ni shes mor e t han hal f of t he suppor t of hi s ex-
wi f e and her f at her , bot h of whoml i ve wi t h hi m. The di vor ce occur r ed
i n 2012. Hal may cl ai mt he f at her - i n- l aw and t he ex- wi f e as dependent s.

*a. Tr ue
b. Fal se

282. Af t er her di vor ce, Hope cont i nues t o suppor t her ex- husband s
si st er , Ci ndy, who does not l i ve wi t h her . Hope can cl ai mCi ndy as a
dependent .

*a. Tr ue
b. Fal se

283. Dar r en, age 20 and not di sabl ed, ear ns $4, 000 dur i ng 2013.
Dar r en s par ent s cannot cl ai mhi mas a dependent unl ess he i s a f ul l -
t i me st udent .

*a. Tr ue
b. Fal se

284. Lucas, age 17 and si ngl e, ear ns $6, 000 dur i ng 2013. Lucas s
par ent s cannot cl ai mhi mas a dependent i f he does not l i ve wi t h t hem.

*a. Tr ue
b. Fal se

285. Sar ah f ur ni shes mor e t han 50%of t he suppor t of her son and
daught er - i n- l aw who l i ve wi t h her . I f t he son and daught er - i n- l aw f i l e
a j oi nt r et ur n, Sar ah cannot cl ai mt hemas dependent s.

a. Tr ue
*b. Fal se

286. Ki m, a r esi dent of Or egon, suppor t s hi s par ent s who ar e r esi dent s
of Canada but ci t i zens of Kor ea. Ki mcan cl ai mhi s par ent s as
dependent s.

*a. Tr ue
b. Fal se

287. St eal t h t axes ar e di r ect ed at l ower i ncome t axpayer s.

a. Tr ue
*b. Fal se

288. I n det er mi ni ng t he f i l i ng r equi r ement based on gr oss i ncome
r ecei ved, bot h addi t i onal st andar d deduct i ons ( i . e. , age and bl i ndness)
ar e t aken i nt o account .

a. Tr ue
*b. Fal se

289. For dependent s who have i ncome, speci al f i l i ng r equi r ement s appl y.

*a. Tr ue
b. Fal se

290. A t axpayer who i t emi zes must use For m1040, and cannot use For m
1040EZ or For m1040A.

*a. Tr ue
b. Fal se

291. An i ndi vi dual t axpayer uses a f i scal year Mar ch 1- Febr uar y 28. The
due dat e of t hi s t axpayer s Feder al i ncome t ax r et ur n i s May 15 of each
t ax year .

a. Tr ue
*b. Fal se

292. Mar r i ed t axpayer s who f i l e a j oi nt r et ur n cannot l at er ( i . e. ,
af t er t he f i l i ng due dat e) swi t ch t o separ at e r et ur ns f or t hat year .

*a. Tr ue
b. Fal se

293. Mar r i ed t axpayer s who f i l e separ at el y cannot l at er ( i . e. , af t er
t he due dat e f or f i l i ng) change t o a j oi nt r et ur n.

a. Tr ue
*b. Fal se

294. Sur vi vi ng spouse f i l i ng st at us begi ns i n t he year i n whi ch t he
deceased spouse di ed.

a. Tr ue
*b. Fal se

295. I n J anuar y 2013, J ake s wi f e di es and he does not r emar r y. For t ax
year 2013, J ake may not be abl e t o use t he f i l i ng st at us avai l abl e t o
mar r i ed per sons f i l i ng j oi nt r et ur ns.

*a. Tr ue
b. Fal se

296. For t ax pur poses, mar r i ed per sons f i l i ng separ at e r et ur ns ar e
t r eat ed t he same as si ngl e t axpayer s.

a. Tr ue
*b. Fal se

297. Kat el yn i s di vor ced and mai nt ai ns a househol d i n whi ch she and her
daught er , Cr i ssa, l i ve. Cr i ssa, age 22, ear ns $11, 000 dur i ng 2013 as a
model . Kat el yn does not qual i f y f or head of househol d f i l i ng st at us.

*a. Tr ue
b. Fal se

298. Ed i s di vor ced and mai nt ai ns a home i n whi ch he and a dependent
f r i end l i ve. Ed does not qual i f y f or head of househol d f i l i ng st at us.

*a. Tr ue
b. Fal se

299. I n t er ms of i ncome t ax consequences, abandoned spouses are t r eat ed
t he same way as mar r i ed per sons f i l i ng separ at e r et ur ns.

a. Tr ue
*b. Fal se

300. Si nce an abandoned spouse i s t r eat ed as si ngl e and has one or mor e
dependent chi l dr en, he or she qual i f i es f or t he st andar d deduct i on
avai l abl e t o head of househol d.

*a. Tr ue
b. Fal se

301. Cur r ent l y, t he t op i ncome t ax r at e i n ef f ect i s not t he hi ghest i t
has ever been.

*a. Tr ue
b. Fal se

302. I n t er ms of t i mi ng as t o any one year , t he Tax Tabl es ar e
avai l abl e bef or e t he Tax Rat e Schedul es.

a. Tr ue
*b. Fal se

303. The ki ddi e t ax does not appl y t o a chi l d whose ear ned i ncome i s
mor e t han one- hal f of hi s or her suppor t .

*a. Tr ue
b. Fal se

304. Once a chi l d r eaches age 19, t he ki ddi e t ax no l onger appl i es.

a. Tr ue
*b. Fal se

305. When t he ki ddi e t ax appl i es and t he par ent s ar e di vor ced, t he
appl i cabl e par ent ( f or det er mi ni ng t he par ent al t ax) i s t he one wi t h
t he gr eat er t axabl e i ncome.

a. Tr ue
*b. Fal se

306. When t he ki ddi e t ax appl i es, t he chi l d need not f i l e an i ncome t ax
r et ur n because t he chi l d s i ncome wi l l be r epor t ed on t he par ent s
r et ur n.

a. Tr ue
*b. Fal se

307. A chi l d who has unear ned i ncome of $2, 000 or l ess cannot be
subj ect t o t he ki ddi e t ax.

*a. Tr ue
b. Fal se

308. A chi l d who i s mar r i ed cannot be subj ect t o t he ki ddi e t ax.

a. Tr ue
*b. Fal se

309. I n 2013, Fr ank sol d hi s per sonal use aut omobi l e f or a l oss of
$9, 000. He al so sol d a per sonal coi n col l ect i on f or a gai n of $10, 000.
As a r esul t of t hese sal es, $10, 000 i s subj ect t o i ncome t ax.

*a. Tr ue
b. Fal se

310. Gai n on t he sal e of col l ect i bl es hel d f or mor e t han 12 mont hs
al ways i s subj ect t o a t ax r at e of 28%.

a. Tr ue
*b. Fal se

311. For 2013, St uar t has a shor t - t er mcapi t al l oss, a col l ect i bl e
l ong- t er mcapi t al gai n, and a l ong- t er mcapi t al gai n f r oml and hel d as
i nvest ment . The shor t - t er ml oss i s f i r st appl i ed t o t he col l ect i bl e
capi t al gai n.

*a. Tr ue
b. Fal se

312. I n t er ms of t he t ax f or mul a appl i cabl e t o i ndi vi dual t axpayer s,
whi ch, i f any, of t he f ol l owi ng st at ement s i s correct?

*a. I n ar r i vi ng at t axabl e i ncome, a t axpayer must choose bet ween
t he st andar d deduct i on and deduct i ons from AGI .
b. I n ar r i vi ng at AGI , per sonal and dependency exempt i ons must be
subt r act ed f r omgr oss i ncome.
c. I n ar r i vi ng at t axabl e i ncome, a t axpayer must choose bet ween
t he st andar d deduct i on and cl ai mi ng per sonal and dependency
exempt i ons.
d. The f or mul a does not appl y i f a t axpayer el ect s t o cl ai mt he
st andar d deduct i on.

313. I n t er ms of t he t ax f or mul a appl i cabl e t o i ndi vi dual t axpayer s,
whi ch, i f any, of t he f ol l owi ng st at ement s i s cor r ect ?

a. I n ar r i vi ng at AGI , a t axpayer must el ect bet ween cl ai mi ng
deduct i ons for AGI and deduct i ons from AGI .
b. I n ar r i vi ng at t axabl e i ncome, a t axpayer must el ect bet ween
cl ai mi ng deduct i ons for AGI and deduct i ons from AGI .
c. I f a t axpayer has deduct i ons for AGI , t he st andar d deduct i on
i s not avai l abl e.
d. I n ar r i vi ng at t axabl e i ncome, a t axpayer must el ect bet ween
deduct i ons for AGI and t he st andar d deduct i on.

314. Regar di ng t he t ax f or mul a and i t s r el at i onshi p t o For m1040, whi ch,
i f any, of t he f ol l owi ng st at ement s i s correct?

a. Most excl usi ons f r omgr oss i ncome ar e r epor t ed on page 2 of
For m1040.
b. An above t he l i ne deduct i on r ef er s t o a deduct i on from AGI .
*c. A page 1 deduct i on r ef er s t o a deduct i on for AGI .
d. The t axabl e i ncome ( TI ) amount appear s bot h at t he bot t omof
page 1 and at t he t op of page 2 of For m1040.

315. Whi ch of t he f ol l owi ng i t ems, i f any, i s deduct i bl e?

a. Par ki ng expenses i ncur r ed i n connect i on wi t h j ur y dut y
t axpayer i s a dent i st .
*b. Subst ant i at ed gambl i ng l osses ( not i n excess of gambl i ng
wi nni ngs) f r omst at e l ot t er y.
c. Cont r i but i ons t o mayor s r eel ect i on campai gn.
d. Speedi ng t i cket i ncur r ed whi l e on busi ness.
e. Pr emi ums pai d on per sonal l i f e i nsur ance pol i cy.

316. Whi ch, i f any, of t he f ol l owi ng i s a deduct i on for AGI ?

*a. Cont r i but i ons t o a t r adi t i onal I ndi vi dual Ret i r ement Account .
b. Chi l d suppor t payment s.
c. Funer al expenses.
d. Loss on t he sal e of a per sonal r esi dence.
e. Medi cal expenses.

317. Whi ch, i f any, of t he f ol l owi ng i s a deduct i on for AGI ?

a. St at e and l ocal sal es t axes.
b. I nt er est on home mor t gage.
c. Char i t abl e cont r i but i ons.
*d. Unr ei mbur sed movi ng expenses of an empl oyee.

318. Whi ch, i f any, of t he st at ement s r egar di ng t he st andar d deduct i on
i s cor r ect ?

*a. Some t axpayer s may qual i f y f or t wo t ypes of st andar d
deduct i ons.
b. Not avai l abl e t o t axpayer s who choose t o deduct t hei r per sonal
and dependency exempt i ons.
c. Not avai l abl e t o t axpayer s who choose t o cl ai mt hei r deduct i on
for AGI .
d. The basi c st andar d deduct i on i s i ndexed f or i nf l at i on but t he
addi t i onal st andar d deduct i on i s not .

319. Whi ch, i f any, of t he f ol l owi ng st at ement s r el at i ng t o t he
st andar d deduct i on i s correct?

a. I f a t axpayer di es dur i ng t he year , hi s ( or her ) st andar d
deduct i on must be pr or at ed.
*b. I f a t axpayer i s cl ai med as a dependent of anot her , hi s ( or
her ) addi t i onal st andar d deduct i on i s al l owed i n f ul l ( i . e. , no
adj ust ment i s necessar y) .
c. I f spouses f i l e separ at e r et ur ns, bot h spouses must cl ai mt he
st andar d deduct i on ( r at her t han i t emi ze t hei r deduct i ons from
AGI ) .
d. I f a t axpayer i s cl ai med as a dependent of anot her , no basi c
st andar d deduct i on i s al l owed.

320. Dur i ng 2013, Mar vi n had t he f ol l owi ng t r ansact i ons:

Salary $50,000
Bank loan (proceeds used to buy
personal auto)
10,000
Alimony paid 12,000
Child support paid 6,000
Gift from aunt 20,000

Marvins AGI is:

a. $32, 000.
*b. $38, 000.
c. $44, 000.
d. $56, 000.
e. $64, 000.

321. Dur i ng 2013, Est her had t he f ol l owi ng t r ansact i ons:

Salary $70,000
Interest income on Xerox bonds 2,000
Inheritance from uncle 40,000
Contribution to traditional IRA 5,500
Capital losses 2,500

Esthers AGI is:

a. $62, 000.
*b. $64, 000.
c. $67, 000.
d. $102, 000.
e. $104, 000.

322. Dur i ng 2013, Sar ah had t he f ol l owi ng t r ansact i ons:

Salary $ 80,00
0
Interest income on City of Baltimore
bonds
1,000
Damages for personal injury (car
accident)
100,000
Punitive damages (same car accident) 200,000
Cash dividends from Chevron
Corporation stock
7,000

Sarahs AGI is:

a. $185, 000.
b. $187, 000.
c. $285, 000.
*d. $287, 000.
e. $387, 000.

323. I n 2013, Ci ndy had t he f ol l owi ng t r ansact i ons:

Salary $90,000
Short-term capital gain from a stock
investment
4,000
Moving expense to change jobs (11,000)
Received repayment of $20,000 loan
she made to her sister in 2009
(includes no interest)
20,000
State income taxes (5,000)

Cindys AGI is:

a. $114, 000.
b. $103, 000.
c. $98, 000.
d. $94, 000.
*e. $83, 000.

324. Syl vi a, age 17, i s cl ai med by her par ent s as a dependent . Dur i ng
2013, she had i nt er est i ncome f r oma bank savi ngs account of $2, 000 and
i ncome f r oma par t - t i me j ob of $4, 200. Syl vi a s t axabl e i ncome i s:

a. $4, 200 $4, 550 = $0.
b. $6, 200 $5, 700 = $500.
*c. $6, 200 $4, 550 = $1, 650.
d. $6, 200 $1, 000 = $5, 200.

325. Tony, age 15, i s cl ai med as a dependent by hi s gr andmot her . Dur i ng
2013, Tony had i nt er est i ncome f r omBoei ng Cor por at i on bonds of $1, 000
and ear ni ngs f r oma par t - t i me j ob of $700. Tony s t axabl e i ncome i s:

a. $1, 700.
b. $1, 700 $700 $1, 000 = $0.
*c. $1, 700 $1, 050 = $650.
d. $1, 700 $1, 000 = $700.

326. Mer l e i s a wi dow, age 80 and bl i nd, who i s cl ai med as a dependent
by her son. Dur i ng 2013, she r ecei ved $4, 800 i n Soci al Secur i t y
benef i t s, $2, 350 i n bank i nt er est , and $1, 800 i n cash di vi dends f r om
st ocks. Mer l e s t axabl e i ncome i s:

*a. $4, 150 $1, 000 $3, 000 = $150.
b. $4, 150 $3, 000 = $1, 150.
c. $4, 150 $1, 000 $1, 500 = $1, 650.
d. $8, 950 $1, 000 $3, 000 = $4, 950.

327. Wi l ma, age 70 and si ngl e, i s cl ai med as a dependent on her
daught er s t ax r et ur n. Dur i ng 2013, she had i nt er est i ncome of $2, 500
and $800 of ear ned i ncome f r ombaby si t t i ng. Wi l ma s t axabl e i ncome i s:

a. $700.
b. $850.
c. $1, 800.
d. $2, 250.

328. Kyl e and Li za ar e mar r i ed and under 65 year s of age. Dur i ng 2013,
t hey f ur ni sh mor e t han hal f of t he suppor t of t hei r 19- year ol d
daught er , May, who l i ves wi t h t hem. She gr aduat ed f r omhi gh school i n
May 2012. May ear ns $15, 000 f r oma par t - t i me j ob, most of whi ch she
set s asi de f or f ut ur e col l ege expenses. Kyl e and Li za al so pr ovi de mor e
t han hal f of t he suppor t of Kyl e s cousi n who l i ves wi t h t hem. Li za s
f at her , who di ed on J anuar y 3, 2013, at age 90, has f or many year s
qual i f i ed as t hei r dependent . How many per sonal and dependency
exempt i ons shoul d Kyl e and Li za cl ai m?

a. Two.
b. Thr ee.
*c. Four .
d. Fi ve.

329. Evan and Ei l een Car t er ar e husband and wi f e and f i l e a j oi nt
r et ur n f or 2013. Bot h ar e under 65 year s of age. They pr ovi de mor e t han
hal f of t he suppor t of t hei r daught er , Pamel a ( age 25) , who i s a f ul l -
t i me medi cal st udent . Pamel a r ecei ves a $5, 000 schol ar shi p cover i ng her
t ui t i on at col l ege. They f ur ni sh al l of t he suppor t of Bel i nda ( Evan s
gr andmot her ) , who i s age 80 and l i ves i n a nur si ng home. They al so
suppor t Peggy ( age 66) , who i s a f r i end of t he f ami l y and l i ves wi t h
t hem. How many dependency exempt i ons may t he Car t er s cl ai m?

a. Two.
*b. Thr ee.
c. Four .
d. Fi ve.

330. I n whi ch, i f any, of t he f ol l owi ng si t uat i ons may t he i ndi vi dual
not be cl ai med as a dependent of t he t axpayer ?

a. A f or mer spouse who l i ves wi t h t he t axpayer ( di vor ce t ook
pl ace l ast year ) .
b. A st epmot her who does not l i ve wi t h t he t axpayer .
c. A mar r i ed daught er who l i ves wi t h t he t axpayer .
d. A hal f br ot her who does not l i ve wi t h t he t axpayer and i s a
ci t i zen and r esi dent of Canada.
*e. A cousi n who does not l i ve wi t h t he t axpayer .

331. Dur i ng 2013, Li sa ( age 66) f ur ni shed mor e t han 50%of t he suppor t
of t he f ol l owi ng per sons:

Lisas current husband who has no income and is
not claimed by someone else as a dependent.
Lisas stepson (age 19) who lives with her and
earns $6,000 as a dance instructor. He dropped
out of school a year ago.
Lisas ex-husband who does not live with her.
The divorce occurred two years ago.
Lisas former brother-in-law who does not live
with her.

Presuming all other dependency tests are met, on a separate return how many
personal and dependency exemptions may Lisa claim?

a. Two.
*b. Thr ee.
c. Four .
d. Fi ve.

332. A qual i f yi ng chi l d cannot i ncl ude:

a. A nonr esi dent al i en.
b. A mar r i ed son who f i l es a j oi nt r et ur n.
c. A daught er who i s away at col l ege.
d. A br ot her who i s 28 year s of age and di sabl ed.
*e. A gr andmot her .

333. El l en, age 12, l i ves i n t he same househol d wi t h her f at her ,
gr andf at her , and uncl e. The cost of mai nt ai ni ng t he househol d i s
pr ovi ded by her gr andf at her ( 40%) and her uncl e ( 60%) . Di sr egar di ng
t i e- br eaker r ul es, El l en i s a qual i f yi ng chi l d as t o:

a. Onl y her f at her .
b. Onl y her gr andf at her and uncl e.
c. Onl y her uncl e.
*d. Al l par t i es i nvol ved ( i . e. , f at her , gr andf at her , and uncl e) .

334. Mi l l i e, age 80, i s suppor t ed dur i ng t he cur r ent year as f ol l ows:

Percent of
Support
Weston (a son) 20%
Faith (a daughter) 35%
Jake (a cousin) 25%
Brayden (unrelated close
family friend)
20%

During the year, Millie lives in an assisted living facility. Under a
multiple support agreement, indicate which parties can qualify to claim
Millie as a dependent.

*a. West on and Fai t h.
b. Fai t h.
c. West on, Fai t h, J ake, and Br ayden.
d. Fai t h, J ake, and Br ayden.

335. The Hut t er s f i l ed a j oi nt r et ur n f or 2013. They pr ovi de mor e t han
50%of t he suppor t of Car l a, Mel vi n, and Aar on. Car l a ( age 18) i s a
cousi n and ear ns $2, 800 f r oma par t - t i me j ob. Mel vi n ( age 25) i s t hei r
son and i s a f ul l - t i me l aw st udent . He r ecei ved f r omt he uni ver si t y a
$3, 800 schol ar shi p f or t ui t i on. Aar on i s a br ot her who i s a ci t i zen of
I sr ael but r esi des i n Fr ance. Car l a and Mel vi n l i ve wi t h t he Hut t er s.
How many per sonal and dependency exempt i ons can t he Hut t er s cl ai mon
t hei r Feder al i ncome t ax r et ur n?

a. Two.
b. Thr ee.
*c. Four .
d. Fi ve.

336. Whi ch of t he f ol l owi ng char act er i st i cs cor r ect l y descr i bes t he
pr ocedur e f or t he phaseout of exempt i ons?

a. The t hr eshol d amount s ar e di f f er ent and depend on f i l i ng
st at us ( e. g. , j oi nt r et ur n, si ngl e) .
b. The t hr eshol d amount s ar e i ndexed f or i nf l at i on each year .
c. The phaseout pr ocedur e i s known as a st eal t h t ax.
d. For t he phaseout pr ocedur e t o be appl i ed, a t axpayer s AGI
must exceed t he t hr eshol d amount .

337. Regar di ng t he r ul es appl i cabl e t o f i l i ng of i ncome t ax r et ur ns,
whi ch, i f any, of t he f ol l owi ng i s an incorrect st at ement :

a. Mar r i ed per sons who f i l e j oi nt r et ur ns cannot l at er ( af t er t he
due dat e of t he r et ur n) subst i t ut e separ at e r et ur ns.
b. Mar r i ed per sons who f i l e separ at e r et ur ns can l at er ( af t er t he
due dat e of t he r et ur n) subst i t ut e a j oi nt r et ur n.
*c. The usual t est as t o when a t axpayer must f i l e a r et ur n i s
based on t he t ot al of t he f ol l owi ng: per sonal exempt i on + basi c
st andar d deduct i on + bot h addi t i onal st andar d deduct i ons.
d. Speci al f i l i ng r equi r ement r ul es exi st f or t axpayer s who ar e
cl ai med as dependent s of anot her .

338. Kyl e, whose wi f e di ed i n December 2010, f i l ed a j oi nt t ax r et ur n
f or 2010. He di d not r emar r y, but has cont i nued t o mai nt ai n hi s home i n
whi ch hi s t wo dependent chi l dr en l i ve. What i s Kyl e s f i l i ng st at us as
t o 2013?

*a. Head of househol d.
b. Sur vi vi ng spouse.
c. Si ngl e.
d. Mar r i ed f i l i ng separ at el y.

339. Emi l y, whose husband di ed i n December 2012, mai nt ai ns a househol d
i n whi ch her dependent mot her l i ves. Whi ch ( i f any) of t he f ol l owi ng i s
her f i l i ng st at us f or t he t ax year 2013? ( Not e: Emi l y i s t he execut or
of her husband s est at e. )

a. Si ngl e.
b. Mar r i ed, f i l i ng separ at el y.
c. Sur vi vi ng spouse.
*d. Head of househol d.
e. Mar r i ed, f i l i ng j oi nt l y.

340. Whi ch of t he f ol l owi ng t axpayer s may f i l e as a head of househol d
i n 2013?

Ron pr ovi des al l t he suppor t f or hi s mot her , Bet t y, who l i ves by
her sel f i n an apar t ment i n For t Lauder dal e. Ron pays t he r ent and ot her
expenses f or t he apar t ment and pr oper l y cl ai ms hi s mot her as a
dependent .

Tammy pr ovi des over one- hal f t he suppor t f or her 18- year ol d br ot her ,
Dan. Dan ear ned $4, 200 i n 2013 wor ki ng at a f ast f ood r est aur ant and i s
savi ng hi s money t o at t end col l ege i n 2014. Dan l i ves i n Tammy s home.

J oe s wi f e l ef t hi ml at e i n December of 2012. No l egal act i on was t aken
and J oe has not hear d f r omher i n 2013. J oe suppor t ed hi s 6- year - ol d
son, who l i ved wi t h hi mt hr oughout 2013.

a. Ron onl y.
b. Tammy onl y.
c. J oe onl y.
d. Ron and J oe onl y.
*e. Ron, Tammy, and J oe.

341. Nel da i s mar r i ed t o Chad, who abandoned her i n ear l y J une of 2013.
She has not seen or communi cat ed wi t h hi msi nce t hen. She mai nt ai ns a
househol d i n whi ch she and her t wo dependent chi l dr en l i ve. Whi ch of
t he f ol l owi ng st at ement s about Nel da s f i l i ng st at us i n 2013 i s cor r ect ?

a. Nel da can use t he r at es f or si ngl e t axpayer s.
b. Nel da can f i l e a j oi nt r et ur n wi t h Chad.
c. Nel da can f i l e as a sur vi vi ng spouse.
*d. Nel da can f i l e as a head of househol d.
e. None of t he above st at ement s i s appr opr i at e.

342. Ar nol d i s mar r i ed t o Sybi l , who abandoned hi mi n 2012. He has not
seen or communi cat ed wi t h her si nce Apr i l of t hat year . He mai nt ai ns a
househol d i n whi ch t hei r son, Evans, l i ves. Evans i s age 25 and ear ns
over $6, 000 each year . For t ax year 2013, Ar nol d s f i l i ng st at us i s:

a. Mar r i ed, f i l i ng j oi nt l y.
b. Head of househol d.
*c. Mar r i ed, f i l i ng separ at el y.
d. Sur vi vi ng spouse.
e. Si ngl e.

343. Regar di ng t he Tax Tabl es appl i cabl e t o t he Feder al i ncome t ax,
whi ch of t he f ol l owi ng st at ement s i s correct?

*a. For any one year , t he Tax Tabl es ar e i ssued by t he I RS af t er
t he Tax Rat e Schedul es.
b. The Tax Tabl es wi l l al ways yi el d t he same amount of t ax as t he
Tax Rat e Schedul es.
c. Taxpayer s can el ect as t o whet her t he use t he Tax Tabl es or
t he Tax Rat e Schedul es.
d. The Tax Tabl es can be used by an est at e but not by a t r ust .
e. No cor r ect answer gi ven.

344. I n whi ch, i f any, of t he f ol l owi ng si t uat i ons wi l l t he ki ddi e t ax
not appl y?

a. The chi l d i s mar r i ed but does not f i l e a j oi nt r et ur n.
*b. The chi l d has unear ned i ncome of $2, 000 or l ess.
c. The chi l d has unear ned i ncome t hat exceeds mor e t han hal f of
hi s ( or her ) suppor t .
d. The chi l d i s under age 24 and a f ul l - t i me st udent .

345. Whi ch, i f any, of t he f ol l owi ng i s a cor r ect st at ement r el at i ng t o
t he ki ddi e t ax?

a. I f t he par ent s ar e di vor ced, t he i ncome of t he noncust odi al
par ent i s used t o det er mi ne t he al l ocabl e par ent al t ax.
b. The component s f or t he appl i cat i on of t he ki ddi e t ax ar e not
subj ect t o adj ust ment f or i nf l at i on.
c. I f t he ki ddi e t ax appl i es, t he par ent s must i ncl ude t he i ncome
of t he chi l d on t hei r own i ncome t ax r et ur n.
*d. The ki ddi e t ax does not appl y i f bot h par ent s of t he chi l d
ar e deceased.

346. Dur i ng t he year , Ki msol d t he f ol l owi ng asset s: busi ness aut o f or
a $1, 000 l oss, st ock i nvest ment f or a $1, 000 l oss, and pl easur e yacht
f or a $1, 000 l oss. Pr esumi ng adequat e i ncome, how much of t hese l osses
may Ki mcl ai m?

a. $0.
b. $1, 000.
*c. $2, 000.
d. $3, 000.

347. Per r y i s i n t he 33%t ax br acket . Dur i ng 2013, he had t he f ol l owi ng
capi t al asset t r ansact i ons:

Gain from the sale of a stamp
collection (held for 10 years)
$30,000
Gain from the sale of an investment
in land (held for 4 years)
10,000
Gain from the sale of stock
investment (held for 8 months)
4,000

Perrys tax consequences from these gains are as follows:

a. ( 15% $30, 000) + ( 33% $4, 000) .
*b. ( 15% $10, 000) + ( 28% $30, 000) + ( 33% $4, 000) .
c. ( 0% $10, 000) + ( 28% $30, 000) + ( 33% $4, 000) .
d. ( 15% $40, 000) + ( 33% $4, 000) .

348. Ki r by i s i n t he 15%t ax br acket and had t he f ol l owi ng capi t al
asset t r ansact i ons dur i ng 2013:

Long-term gain from the sale of a
coin collection
$11,000
Long-term gain from the sale of a
land investment
10,000
Short-term gain from the sale of a
stock investment
2,000

Kirbys tax consequences from these gains are as follows:

a. ( 5% $10, 000) + ( 15% $13, 000) .
b. ( 15% $13, 000) + ( 28% $11, 000) .
*c. ( 0% $10, 000) + ( 15% $13, 000) .
d. ( 15% $23, 000) .

349. For t he cur r ent year , Davi d has sal ar y i ncome of $80, 000 and t he
f ol l owi ng pr oper t y t r ansact i ons:

Stock investment sales
Long-term capital gain $ 9,000
Short-term capital loss (12,000)
Loss on sale of camper (purchased 4
years ago and used for family
vacations)
(2,000)

What is Davids AGI for the current year?

a. $76, 000.
*b. $77, 000.
c. $78, 000.
d. $89, 000.

350. Dur i ng 2013, Tr evor has t he f ol l owi ng capi t al t r ansact i ons:

LTCG $ 6,00
0
Long-term collectible gain 2,000
STCG 4,000
STCL 10,000

After the netting process, the following results:

a. Long- t er mcol l ect i bl e gai n of $2, 000.
b. LTCG of $6, 000, Long- t er mcol l ect i bl e gai n of $2, 000, and a
STCL of $6, 000.
c. LTCG of $6, 000, Long- t er mcol l ect i bl e gai n of $2, 000, and a
STCL car r yover t o 2014 of $3, 000.
*d. LTCG of $2, 000.

351. Regarding dependency exemptions, classify each statement in one of
the four categories:A son l i ves wi t h t axpayer and ear ns $3, 000. A
daught er who does not l i ve wi t h t axpayer . A gr anddaught er , who l i ves
wi t h t axpayer , i s 19 year s ol d, ear ns $5, 000, and i s not a f ul l - t i me
st udent . An uncl e who l i ves wi t h t axpayer . A nephew who l i ves wi t h
t axpayer . A ni ece who l i ves wi t h t axpayer , i s 20 year s ol d, ear ns $5, 000,
and i s a f ul l - t i me st udent . A hal f br ot her who l i ves wi t h t axpayer . A
cousi n who does not l i ve wi t h t axpayer . A st epdaught er who does not l i ve
wi t h t axpayer . A daught er - i n- l aw who l i ves wi t h t axpayer . A f ami l y f r i end
who i s suppor t ed by and l i ves wi t h t he t axpayer . An ex- husband ( di vor ce
occur r ed l ast year ) who l i ves wi t h t axpayer . Coul d be either a
qual i f yi ng chi l d or a qual i f yi ng r el at i ve. Coul d be a qual i f yi ng
r el at i ve. Coul d be neither a qual i f yi ng chi l d nor a qual i f yi ng r el at i ve.
Coul d be a qual i f yi ng r el at i ve. Coul d be either a qual i f yi ng chi l d or a
qual i f yi ng r el at i ve. Coul d be a qual i f yi ng chi l d. Coul d be either a
qual i f yi ng chi l d or a qual i f yi ng r el at i ve. Coul d be neither a
qual i f yi ng chi l d nor a qual i f yi ng r el at i ve. Coul d be a qual i f yi ng
r el at i ve. Coul d be a qual i f yi ng r el at i ve. Coul d be a qual i f yi ng
r el at i ve. Coul d be a qual i f yi ng r el at i ve.

[ a] 1. A son l i ves wi t h t axpayer and ear ns $3, 000.
[ b] 2. A daught er who does not l i ve wi t h t axpayer .
[ c] 3. A gr anddaught er , who l i ves wi t h t axpayer , i s 19 year s
ol d, ear ns $5, 000, and i s not a f ul l - t i me st udent .
[ d] 4. An uncl e who l i ves wi t h t axpayer .
[ e] 5. A nephew who l i ves wi t h t axpayer .
[ f ] 6. A ni ece who l i ves wi t h t axpayer , i s 20 year s ol d, ear ns
$5, 000, and i s a f ul l - t i me st udent .
[ g] 7. A hal f br ot her who l i ves wi t h t axpayer .
[ h] 8. A cousi n who does not l i ve wi t h t axpayer .
[ i ] 9. A st epdaught er who does not l i ve wi t h t axpayer .
[ j ] 10. A daught er - i n- l aw who l i ves wi t h t axpayer .
[ k] 11. A f ami l y f r i end who i s suppor t ed by and l i ves wi t h t he
t axpayer .
[ l ] 12. An ex- husband ( di vor ce occur r ed l ast year ) who l i ves
wi t h t axpayer .

a. Coul d be either a qual i f yi ng chi l d or a qual i f yi ng r el at i ve.
b. Coul d be a qual i f yi ng r el at i ve.
c. Coul d be neither a qual i f yi ng chi l d nor a qual i f yi ng
r el at i ve.
d. Coul d be a qual i f yi ng r el at i ve.
e. Coul d be either a qual i f yi ng chi l d or a qual i f yi ng r el at i ve.
f . Coul d be a qual i f yi ng chi l d.
g. Coul d be either a qual i f yi ng chi l d or a qual i f yi ng r el at i ve.
h. Coul d be neither a qual i f yi ng chi l d nor a qual i f yi ng
r el at i ve.
i . Coul d be a qual i f yi ng r el at i ve.
j . Coul d be a qual i f yi ng r el at i ve.
k. Coul d be a qual i f yi ng r el at i ve.
l . Coul d be a qual i f yi ng r el at i ve.

352. Match the statements that relate to each other. Note: Choice L may
be used more than once.Sur vi vi ng spouseSchol ar shi p f unds f or
t ui t i onAdditional st andar d deduct i onSchol ar shi p f unds f or r oomand
boar dAbandoned spouseBasi c st andar d deduct i onResi dent of Canada or
Mexi coAge of a qual i f yi ng chi l d$1, 000Ki ddi e t ax appl i esKi ddi e t ax does
not appl yMul t i pl e suppor t agr eement Unmar r i ed t axpayer who can use t he
same t ax r at es as mar r i ed per sons f i l i ng j oi nt l y. Not consi der ed i n
appl yi ng t he gr oss i ncome t est ( f or dependency exempt i on pur poses) . Not
avai l abl e t o 65- year ol d t axpayer who i t emi zes. Consi der ed i n appl yi ng
gr oss i ncome t est ( f or dependency exempt i on pur poses) . Qual i f i es f or
head of househol d f i l i ng st at us. Not avai l abl e t o 65- year ol d t axpayer
who i t emi zes. Except i on f or U. S. ci t i zenshi p or r esi dency t est ( f or
dependency exempt i on pur poses) . Consi der ed f or dependency exempt i on
pur poses. Lar gest basi c st andar d deduct i on avai l abl e t o a dependent who
has no ear ned i ncome. A chi l d ( age 16) who i s a dependent and has onl y
unear ned i ncome of $4, 500. A chi l d ( age 15) who i s a dependent and has
onl y ear ned i ncome. Except i on t o t he suppor t t est ( f or dependency
exempt i on pur poses) . No cor r ect mat ch pr ovi ded.

[ a] 1. Sur vi vi ng spouse
[ b] 2. Schol ar shi p f unds f or t ui t i on
[ c] 3. Additional st andar d deduct i on
[ d] 4. Schol ar shi p f unds f or r oomand boar d
[ e] 5. Abandoned spouse
[ f ] 6. Basi c st andar d deduct i on
[ g] 7. Resi dent of Canada or Mexi co
[ h] 8. Age of a qual i f yi ng chi l d
[ i ] 9. $1, 000
[ j ] 10. Ki ddi e t ax appl i es
[ k] 11. Ki ddi e t ax does not appl y
[ l ] 12. Mul t i pl e suppor t agr eement

a. Unmar r i ed t axpayer who can use t he same t ax r at es as
mar r i ed per sons f i l i ng j oi nt l y.
b. Not consi der ed i n appl yi ng t he gr oss i ncome t est ( f or
dependency exempt i on pur poses) .
c. Not avai l abl e t o 65- year ol d t axpayer who i t emi zes.
d. Consi der ed i n appl yi ng gr oss i ncome t est ( f or dependency
exempt i on pur poses) .
e. Qual i f i es f or head of househol d f i l i ng st at us.
f . Not avai l abl e t o 65- year ol d t axpayer who i t emi zes.
g. Except i on f or U. S. ci t i zenshi p or r esi dency t est ( f or
dependency exempt i on pur poses) .
h. Consi der ed f or dependency exempt i on pur poses.
i . Lar gest basi c st andar d deduct i on avai l abl e t o a dependent
who has no ear ned i ncome.
j . A chi l d ( age 16) who i s a dependent and has onl y unear ned
i ncome of $4, 500.
k. A chi l d ( age 15) who i s a dependent and has onl y ear ned
i ncome.
l . Except i on t o t he suppor t t est ( f or dependency exempt i on
pur poses) .
m. No cor r ect mat ch pr ovi ded.

353. Match the statements that relate to each other. Note: Choice L may
be used more than once.Mul t i pl e suppor t agr eement Ki ddi e t ax may be
i mposedNonr esi dent al i enTax Rat e Schedul eGai n on col l ect i bl es ( hel d
mor e t han one year ) Aver age i ncome t ax r at eMar gi nal i ncome t ax
r at eAddi t i onal st andar d deduct i onRel at i onshi p t est ( f or dependency
exempt i on pur poses) Long- t er mcapi t al gai nsGl obal syst emof
t axat i onTer r i t or i al syst emof t axat i onNo one qual i f i ed t axpayer meet s
t he suppor t t est . A dependent chi l d ( age 18) who has onl y unear ned
i ncome. Not el i gi bl e f or t he st andar d deduct i on. Hi ghest appl i cabl e
r at e i s 35%. Maxi mumr at e i s 28%. Equal t o t ax l i abi l i t y di vi ded by
t axabl e i ncome. The hi ghest i ncome t ax r at e appl i cabl e t o a t axpayer .
Avai l abl e t o a 70- year - ol d f at her cl ai med as a dependent by hi s son.
Taxpayer s ex- husband does not qual i f y. Appl i cabl e r at e coul d be as l ow
as 0%. No cor r ect mat ch pr ovi ded. I ncome f r omf or ei gn sour ces i s not
subj ect t o t ax.

[ a] 1. Mul t i pl e suppor t agr eement
[ b] 2. Ki ddi e t ax may be i mposed
[ c] 3. Nonr esi dent al i en
[ d] 4. Tax Rat e Schedul e
[ e] 5. Gai n on col l ect i bl es ( hel d mor e t han one year )
[ f ] 6. Aver age i ncome t ax r at e
[ g] 7. Mar gi nal i ncome t ax r at e
[ h] 8. Addi t i onal st andar d deduct i on
[ i ] 9. Rel at i onshi p t est ( f or dependency exempt i on pur poses)
[ j ] 10. Long- t er mcapi t al gai ns
[ k] 11. Gl obal syst emof t axat i on
[ l ] 12. Ter r i t or i al syst emof t axat i on

a. No one qual i f i ed t axpayer meet s t he suppor t t est .
b. A dependent chi l d ( age 18) who has onl y unear ned i ncome.
c. Not el i gi bl e f or t he st andar d deduct i on.
d. Hi ghest appl i cabl e r at e i s 35%.
e. Maxi mumr at e i s 28%.
f . Equal t o t ax l i abi l i t y di vi ded by t axabl e i ncome.
g. The hi ghest i ncome t ax r at e appl i cabl e t o a t axpayer .
h. Avai l abl e t o a 70- year - ol d f at her cl ai med as a dependent by
hi s son.
i . Taxpayer s ex- husband does not qual i f y.
j . Appl i cabl e r at e coul d be as l ow as 0%.
k. No cor r ect mat ch pr ovi ded.
l . I ncome f r omf or ei gn sour ces i s not subj ect t o t ax.

354. Emi l y had t he f ol l owi ng t r ansact i ons dur i ng 2013:

Sal ar y $90, 000
I nt er est i ncome on bonds
I ssued by Ci t y of
Nashvi l l e
$4, 000
I ssued by Chevr on
Cor por at i on
5, 00
0
9, 000
Al i mony r ecei ved 5, 000
Chi l d suppor t r ecei ved 20, 000
Ci t y and st at e i ncome t axes
pai d
( 5, 000)
Bank l oan obt ai ned t o pay f or
car pur chase
15, 000

What i s Emi l y s AGI f or 2013?

Cor r ect Answer :
$100, 000. $90, 000 ( sal ar y) + $5, 000 ( i nt er est on Chevr on Cor por at i on
bonds) + $5, 000 ( al i mony r ecei ved) . I nt er est on t he Ci t y of Nashvi l l e
bonds i s an excl usi on f r omgr oss i ncome. The bank l oan has no t ax
ef f ect , as Emi l y i s obl i gat ed t o r epay t he amount bor r owed. Ci t y and
st at e i ncome t axes ar e deduct i ons from AGI .

355. Edgar had t he f ol l owi ng t r ansact i ons f or 2013:

Sal ar y $ 80, 000
Al i mony pai d ( 4, 000)
Recover y f r omcar
acci dent

Per sonal i nj ur y
damages
$40, 000
Puni t i ve damages 70, 000 110, 000
Gi f t f r ompar ent s 20, 000
Pr oper t y sal es
Loss on sal e of boat
( used f or pl easur e and
owned 4 year s)
( $ 4, 000)
Gai n on sal e of ADM
st ock ( hel d f or 10 mont hs
as an i nvest ment )
4, 000 ( 0)

What i s Edgar s AGI f or 2013?

Cor r ect Answer :
$150, 000. $80, 000 ( sal ar y) $4, 000 ( al i mony pai d) + $70, 000 ( puni t i ve
damage awar d) + $4, 000 ( shor t - t er mcapi t al gai n on t he sal e of st ock
i nvest ment ) . The per sonal i nj ur y r ecover y and t he gi f t f r omEdgar s
par ent s ar e excl usi ons f r omgr oss i ncome. The l oss f r omt he sal e of t he
boat i s per sonal and, t her ef or e, nondeduct i bl e. The shor t - t er mcapi t al
gai n on t he sal e of t he ADM st ock i s t axed i n f ul l as or di nar y i ncome.

356. Tayl or had t he f ol l owi ng t r ansact i ons f or 2013:

Sal ar y $ 85, 000

Movi ng expenses i ncur r ed t o
change j obs
( 12, 000)
I nher i t ance r ecei ved f r om
deceased uncl e
300, 000
Li f e i nsur ance pr oceeds f r om
pol i cy on uncl e s l i f e ( Tayl or
was
named t he benef i ci ar y)
200, 000
Cash pr i ze f r omchur ch r af f l e 3, 000
Payment of chur ch pl edge ( 4, 500)

What i s Tayl or s AGI f or 2013?

Cor r ect Answer :
$76, 000. $85, 000 ( sal ar y) + $3, 000 ( r af f l e pr i ze) $12, 000 ( movi ng
expenses) . The i nher i t ance and l i f e i nsur ance pr oceeds ar e excl usi ons
f r omgr oss i ncome. The payment by Tayl or of her chur ch pl edge i s a
deduct i on from AGI . Thus, i t does not ent er i nt o t he det er mi nat i on of
AGI .

357. Tomi s si ngl e and f or 2013 has AGI of $50, 000. He i s age 70 and
has no dependent s. For 2013, he has i t emi zed deduct i ons from AGI of
$7, 000. Det er mi ne Tom s t axabl e i ncome f or 2013.

Cor r ect Answer :
$38, 500. Tom s st andar d deduct i on i s $6, 100 ( basi c) + $1, 500
( addi t i onal ) f or a t ot al of $7, 600. Consequent l y, he shoul d sel ect t he
st andar d deduct i on opt i on si nce i t exceeds hi s i t emi zed deduct i ons of
$7, 000. Thus, hi s t axabl e i ncome i s det er mi ned as f ol l ows: $50, 000
( AGI ) $7, 600 ( st andar d deduct i on) $3, 900 ( per sonal exempt i on) =
$38, 500.

358. War r en, age 17, i s cl ai med as a dependent by hi s f at her . I n 2013,
War r en has di vi dend i ncome of $1, 500 and ear ns $400 f r oma par t - t i me
j ob.

a. What i s War r en s t axabl e i ncome f or 2013?

b. Suppose War r en ear ned $1, 200 ( not $400) f r om
t he par t - t i me j ob. What i s War r en s t axabl e
i ncome f or 2013?

Cor r ect Answer :
a. $900. Warrens standard deduction is the
greater of $400 (earned income) + $350 or
$1,000. Thus, $1,500 + $400 $1,000 = $900
taxable income.

b. $1,150. Warrens standard deduction now
becomes $1,550 ($1,200 + $350). Thus, $1,500 +
$1,200 $1,550 = $1,150 taxable income.

359. Meg, age 23, i s a f ul l - t i me l aw st udent and i s cl ai med by her
par ent s as a dependent . Dur i ng 2013, she r ecei ved $1, 400 i nt er est
i ncome f r oma bank savi ngs account and $5, 900 f r oma par t - t i me j ob.
What i s Meg s t axabl e i ncome f or 2013?

Cor r ect Answer :
$1, 200. Meg s st andar d deduct i on i s t he gr eat er of $5, 900 ( ear ned
i ncome) + $350 or $1, 000. But t he $6, 250 i s l i mi t ed t o $6, 100 ( t he
st andar d deduct i on al l owed a si ngl e per son) . Thus, $1, 400 + $5, 900
$6, 100 = $1, 200 t axabl e i ncome.

360. Hel oi se, age 74 and a wi dow, i s cl ai med as a dependent by her
daught er . For 2013, she had i ncome as f ol l ows: $2, 500 i nt er est on
muni ci pal bonds; $3, 200 Soci al Secur i t y benef i t s; $3, 000 i ncome f r oma
par t - t i me j ob; and $2, 800 di vi dends on st ock i nvest ment s. What i s
Hel oi se s t axabl e i ncome f or 2013?

Cor r ect Answer :
$950. $3, 000 ( i ncome f r omj ob) + $2, 800 ( di vi dends) $3, 350 ( basi c
st andar d deduct i on i s $3, 000 + $350) $1, 500 ( addi t i onal st andar d
deduct i on f or age) = $950. The Soci al Secur i t y benef i t s of $3, 200 and
t he i nt er est on muni ci pal bonds of $2, 500 ar e not t axabl e.

361. Pedr o i s mar r i ed t o Consuel a, who l i ves wi t h hi m. Bot h ar e U. S.
ci t i zens and r esi dent s of Nebr aska. Pedr o f ur ni shes al l of t he suppor t
of hi s par ent s, who ar e ci t i zens and r esi dent s of Mexi co. He al so
f ur ni shes al l of t he suppor t of Consuel a s par ent s, who ar e ci t i zens
and r esi dent s of El Sal vador . Consuel a has no gr oss i ncome f or t he year .
I f Pedr o f i l es as a mar r i ed per son f i l i ng separ at el y, how many per sonal
and dependency exempt i ons can he cl ai mon hi s r et ur n?

Cor r ect Answer :
Four . A per sonal exempt i on f or Pedr o and Consuel a and dependency
exempt i ons f or Pedr o s par ent s. Consuel a can be cl ai med because she has
no i ncome. Pr esumabl y she i s not bei ng cl ai med as a dependent by
anot her . Al t hough Pedr o s par ent s ar e nei t her U. S. ci t i zens nor
r esi dent s, t hey ar e r esi dent s of Mexi co. Consuel a s par ent s meet
nei t her t he ci t i zenshi p nor r esi dency t est s.

362. Homer ( age 68) and hi s wi f e J ean ( age 70) f i l e a j oi nt r et ur n.
They f ur ni sh al l of t he suppor t of Lut her ( Homer s 90- year ol d f at her ) ,
who l i ves wi t h t hem. For 2013, t hey r ecei ved $6, 000 of i nt er est i ncome
on ci t y of Chi cago bonds and i nt er est i ncome on cor por at e bonds of
$48, 000. Comput e Homer and J ean s t axabl e i ncome f or 2013.

Cor r ect Answer :
$21, 700. Thei r gr oss i ncome i s $48, 000 si nce t he $6, 000 i nt er est on
muni ci pal bonds i s an excl usi on. They ar e ent i t l ed t o a basi c st andar d
deduct i on of $12, 200 and addi t i onal st andar d deduct i ons of $1, 200 each
f or bei ng age 65 or ol der . They can cl ai ma dependency exempt i on of
$3, 900 f or Lut her and t wo per sonal exempt i ons f or t hemsel ves. Thus,
$48, 000 $12, 200 $2, 400 ( 2 $1, 200) $11, 700 ( 3 $3, 900) = $21, 700.

363. El l en, age 39 and si ngl e, f ur ni shes mor e t han 50%of t he suppor t
of her par ent s, who do not l i ve wi t h her . El l en pr act i ces as a sel f -
empl oyed i nt er i or decor at or and has gr oss i ncome i n 2013 of $120, 000.
Her deduct i ons ar e as f ol l ows: $30, 000 busi ness and $8, 100 i t emi zed.

a. What i s El l en s t axabl e i ncome f or 2013?

b. Can El l en qual i f y f or head of househol d
f i l i ng st at us? Expl ai n.

Cor r ect Answer :
a. $69,350. $120,000 (gross income) - $30,000
(business deductions for AGI) = $90,000
(AGI) $8,950 (standard deduction)
$3,900 (personal exemption) $7,800
(dependency exemptions for parents) =
$69,350 taxable income. The answer presumes
that the parents meet the other dependency
exemption tests (e.g., gross income) besides
support.

b. Ellen can qualify for head of household
filing status if she furnishes more than
half of the cost of maintaining her
parents household. Also, at least one of
Ellens parents must qualify as her
dependent (see part a. above).

364. Ashl ey ear ns a sal ar y of $55, 000, has capi t al gai ns of $3, 000, and
i nt er est i ncome of $5, 000 i n 2013. Her husband di ed i n 2012. Ashl ey has
a dependent son, Tyr one, who i s age 8. Her i t emi zed deduct i ons ar e
$9, 000.

a. Cal cul at e Ashl ey s t axabl e i ncome f or 2013.

b. What i s her f i l i ng st at us?

Cor r ect Answer :
a. Salary $55,000
Capital gains 3,000
Interest 5,00
0
AGI $63,000
Less: Standard deduction (12,200)
Less: Personal exemption and
dependency deduction ($3,900 2)
(7,800)
Taxable income $43,000

b. Ashley satisfies the requirements for a
surviving spouse.

365. Dur i ng t he year , I r v had t he f ol l owi ng t r ansact i ons:

Long- t er ml oss on t he sal e of
busi ness use equi pment
$7, 000
Long- t er ml oss on t he sal e of
per sonal use camper
6, 000
Long- t er mgai n on t he sal e of
per sonal use boat
3, 000
Shor t - t er ml oss on t he sal e of st ock
i nvest ment
4, 000
Long- t er ml oss on t he sal e of l and
i nvest ment
5, 000

How ar e t hese t r ansact i ons handl ed f or i ncome t ax pur poses?

Cor r ect Answer :
Or di nar y l oss of $7, 000 on t he busi ness equi pment . The $6, 000 l oss on
t he camper i s per sonal and not deduct i bl e. However , t he $3, 000 gai n on
t he boat i s t axabl e and i s appl i ed agai nst t he l ong- t er mcapi t al l oss
on t he l and, r educi ng i t t o $2, 000. The $4, 000 shor t - t er mcapi t al l oss
on t he st ock of f set s or di nar y i ncome up t o $3, 000. The unused r emai ni ng
$1, 000 shor t - t er mcapi t al l oss and t he $2, 000 l ong- t er mcapi t al l oss
f r omt he l and sal e ar e car r i ed over t o f ut ur e year s.

366. Dur i ng 2013, Addi son has t he f ol l owi ng gai ns and l osses:

LTCG $10, 000
LTCL 3, 000
STCG 2, 000
STCL 7, 000

a. How much i s Addi son s t ax l i abi l i t y i f she
i s i n t he 15%t ax br acket ?

b. I f her t ax br acket i s 33%( not 15%) ?

Cor r ect Answer :
a. $0. After the initial netting process, there
is a LTCG of $7,000, and a STCL of $5,000.
The $5,000 of STCL is applied to the LTCG of
$7,000. The final result is a net LTCG of
$2,000 taxed at 0% for a tax liability of
$0.

b. $300. See part a. for the netting process.
Now the $2,000 is taxed at 15% for a tax
liability of $300.

367. Dur i ng 2013, J ackson had t he f ol l owi ng capi t al gai ns and l osses:

Gai n f r omt he sal e of coi n
col l ect i on ( hel d t hr ee year s)
$12, 000
Gai n f r omt he sal e of l and hel d as
an i nvest ment f or si x year s
9, 000
Gai n f r omt he sal e of st ock hel d as
an i nvest ment ( hel d f or 10 mont hs)
3, 000

a. How much i s J ackson s t ax l i abi l i t y i f he i s
i n t he 15%t ax br acket ?

b. I f hi s t ax br acket i s 33%( not 15%) ?

Cor r ect Answer :
a. $2,250. Gain of $12,000 on the sale of the
coin collection is taxed at 15% (lesser of
28% or 15%). The same is true for the short-
term gain of $3,000. The gain of $9,000 on
the sale of the land is taxed at 0%. Thus,
(15% $15,000) + (0% $9,000) = $2,250.

b. $5,700. (33% $3,000) + (28% $12,000) +
(15% $9,000) = $5,700.

368. Dur i ng 2013, Madi son had sal ar y i ncome of $80, 000 and t he
f ol l owi ng capi t al t r ansact i ons:

LTCG $13, 000
LTCL 15, 000
STCG 13, 000
STCL 6, 000

How ar e t hese t r ansact i ons handl ed f or i ncome t ax pur poses?

Cor r ect Answer :
Combi ni ng t he l ong- t er mt r ansact i ons yi el ds a net LTCL of $2, 000
( $13, 000 $15, 000) , whi l e t he shor t - t er mpr ocess r esul t s i n a net STCG
of $7, 000 ( $13, 000 $6, 000) . A f ur t her combi nat i on l eaves a net STCG
of $5, 000 ( $7, 000 $2, 000) whi ch i s t axed as or di nar y i ncome. Onl y net
LTCG r esul t s i n pr ef er ent i al t ax t r eat ment .

369. Mr . Lee i s a ci t i zen and r esi dent of Hong Kong, whi l e Mr . Ander son
i s a ci t i zen and r esi dent of t he U. S. I n t he t axat i on of i ncome, Hong
Kong uses a t er r i t or i al appr oach, whi l e t he U. S. f ol l ows t he gl obal
syst em. I n t er ms of ef f ect , expl ai n what t hi s means t o Mr . Lee and Mr .
Ander son.

Cor r ect Answer :
Mr . Lee i s t axed onl y on t he i ncome he r ecei ves f r omHong Kong, whi l e
Mr . Ander son i s t axed on hi s gl obal i ncome. Under t he U. S. appr oach, a
ci t i zen or r esi dent i s t axed on a wor l dwi de basi s. Si nce t he U. S.
syst emcoul d l ead t o t he same i ncome bei ng t axed t wi ce, var i ous r el i ef
pr ovi si ons ar e necessi t at ed ( e. g. , f or ei gn t ax cr edi t ) .

370. The Deweys ar e expect i ng t o save on t hei r t axes f or 2013. Not onl y
have bot h i ncur r ed l ar ge medi cal expenses, but bot h r eached age 65.
Dur i ng t he year , t hey al so r ecogni zed a $30, 000 l oss on some l and t hey
sol d whi ch was pur chased as an i nvest ment sever al year s ago. Ar e t he
Deweys under a mi st aken under st andi ng r egar di ng t hei r t ax posi t i on?
Expl ai n.

Cor r ect Answer :
The Deweys ar e expect i ng t o qual i f y f or t wo addi t i onal st andar d
deduct i ons and ant i ci pat i ng a deduct i on f or medi cal expenses. The t wo
obj ect i ves cannot coexi st . Cl ai mi ng a medi cal deduct i on r equi r es t hat
t hey i t emi ze. Taxpayer s who i t emi ze, however , cannot cl ai many t ype of
st andar d deduct i on. Regar di ng t he capi t al l oss, and pr esumi ng no
capi t al gai ns, onl y $3, 000 can be deduct ed agai nst t hei r ot her i ncome.
The bal ance of $27, 000 must be car r i ed over t o f ut ur e year s.

371. Deduct i ons for AGI ar e of t en r ef er r ed t o as above- t he- l i ne or
page 1 deduct i ons. Expl ai n.

Cor r ect Answer :
Above t he l i ne means bef or e t he bot t oml i ne of page 1 of For m1040,
whi ch i s AGI . These deduct i ons appear on page 1 of For m1040.

372. Adj ust ed gr oss i ncome ( AGI ) set s t he ceiling or t he floor f or
cer t ai n deduct i ons. Expl ai n and i l l ust r at e what t hi s st at ement means.

Cor r ect Answer :
By a cei l i ng what i s meant i s t hat t he deduct i on cannot exceed a
per cent age of AGI . Thus, t he char i t abl e cont r i but i on deduct i on cannot
exceed 50%of a t axpayer s AGI . By a f l oor what i s meant i s t hat a
deduct i on i s al l owed onl y i f i t exceeds a per cent age of AGI . Thus, t he
deduct i on f or medi cal expenses i s l i mi t ed t o t he excess of t hese
expenses over 10%( or 7. 5%) of AGI .

373. Dur i ng t he cur r ent year , Dor i s r ecei ved a l ar ge gi f t f r omher
par ent s and a si zeabl e i nher i t ance f r oman uncl e. She al so pai d
pr emi ums on an i nsur ance pol i cy on her l i f e. Dor i s i s conf used because
she cannot f i nd any pl ace on For m1040 t o r epor t t hese i t ems. Expl ai n.

Cor r ect Answer :
Gi f t s and i nher i t ances ar e excl usi ons f r omgr oss i ncome. Li ke most
excl usi ons, t hey ar e not r epor t ed on For m1040. Pr emi ums on a per sonal
l i f e i nsur ance pol i cy ar e nondeduct i bl e. Nondeduct i bl e i t ems, such as
t hese pr emi ums, ar e not r epor t ed on For m1040

374. Mel i s not qui t e sur e whet her an expendi t ur e he made i s a
deduct i on for AGI or a deduct i on from AGI . Si nce he pl ans t o choose
t he st andar d deduct i on opt i on f or t he year , does t he di st i nct i on
mat t er ? Expl ai n.

Cor r ect Answer :
I t makes a gr eat deal of di f f er ence i f t he expendi t ur e i s a deduct i on
for AGI . I f i t i s, Mel wi l l benef i t t axwi se. I t makes no di f f er ence,
however , i f i t i s a deduct i on from. The st andar d deduct i on i s i n l i eu
of i t emi zed deduct i ons.

375. When f i l i ng t hei r Feder al i ncome t ax r et ur ns, t he Youngs al ways
cl ai med t he st andar d deduct i on. Af t er t hey pur chased a home, however ,
t hey st ar t ed t o i t emi ze t hei r deduct i ons from AGI .

a. Expl ai n t he r eason f or t he change.

b. Suppose t hey pur chased t he home i n November
2012, but di d not st ar t i t emi zi ng unt i l t ax
year 2013. Why t he del ay as t o i t emi zi ng?

Cor r ect Answer :
a. The interest on the home mortgage and the
property taxes gave the Youngs itemized
deductions in excess of the applicable
standard deduction.

b. The home mortgage interest and property
taxes for two months (i.e., November and
December) may not have been enough to place
the Youngs in a position to exceed the
applicable standard deduction for 2012. In
2013, however, a full 12 months worth of
home mortgage interest and property taxes in
involved.

376. The Dar ger s have i t emi zed deduct i ons t hat exceed t he st andar d
deduct i on. However , when t hey f i l e t hei r j oi nt r et ur n, t hey choose t he
st andar d deduct i on opt i on.

a. I s t hi s pr oper pr ocedur e?

b. Asi de f r oma possi bl e mi sunder st andi ng as t o
t he t ax l aw, what mi ght be t he r eason f or
t he Dar ger s choi ce?

Cor r ect Answer :
a. Yes. The choice between itemizing and
claiming the standard deduction is elective
and up to the taxpayer.

b. The excess of the itemized deductions over
the standard deduction may be marginal, and
the Dargers are willing to forgo the effort
of itemizing for a small tax savings. Also,
they may not maintain the records (i.e.,
substantiation) that some itemized
deductions require.

377. Under what ci r cumst ances, i f any, may an ex- spouse be cl ai med as a
dependent ?

Cor r ect Answer :
As an ex- spouse does not meet t he r el at i onshi p t est , he or she must be
a member of t he t axpayer s househol d. The associ at i on cannot be i n
vi ol at i on of l ocal l aw and t he year i nvol ved cannot be t he year of t he
di vor ce.

378. I n r esol vi ng qual i f i ed chi l d st at us f or dependency exempt i on
pur poses, why ar e t i ebr eaker r ul es necessar y? Can t hese r ul es be wai ved?

Cor r ect Answer :
A per son bei ng cl ai med as a dependent may sat i sf y qual i f i ed chi l d
st at us as t o mor e t han one t axpayer . See Exampl e 16 i n t he t ext . The
t i ebr eaker r ul es can be wai ved.

379. I n sat i sf yi ng t he suppor t t est and t he gr oss i ncome t est f or
cl ai mi ng a dependency exempt i on, a schol ar shi p r ecei ved by t he per son
bei ng cl ai med i s handl ed t he same way f or each t est . Do you agr ee or
di sagr ee wi t h t hi s st at ement ? Why?

Cor r ect Answer :
Di sagr ee. For pur poses of t he suppor t t est , al l of t he schol ar shi p i s
di sr egar ded. For pur poses of t he gr oss i ncome t est , onl y t he t axabl e
par t i s consi der ed ( i . e. , t he nont axabl e par t i s di sr egar ded) .

380. I n or der t o cl ai ma dependency exempt i on f or ot her t han a
qual i f yi ng chi l d, a t axpayer must meet t he suppor t t est . Gener al l y,
t hi s i s done by f ur ni shi ng mor e t han 50%of a dependent s suppor t . What
except i ons exi st , i f any, wher e t he suppor t f ur ni shed need not be mor e
t han 50%?

Cor r ect Answer :
One except i on i nvol ves t he mul t i pl e suppor t agr eement . Her e, f ami l y
member s col l ect i vel y f ur ni sh mor e t han 50%of t he suppor t , but no one
per son does so. For t hose qual i f i ed i ndi vi dual s who cont r i but e mor e
t han 10%, t he gr oup can desi gnat e whi ch per son may cl ai mt he dependency
exempt i on.

The second except i on i nvol ves t he di vor ced par ent s of chi l dr en. The
cust odi al par ent i s ent i t l ed t o t he dependency exempt i ons f or t he
chi l dr en. I f t hi s par ent agr ees not t o cl ai mt he exempt i on( s) , t hen t he
noncust odi al par ent may do so.

381. I n appl yi ng t he gr oss i ncome t est i n t he case of dependent s t hat
ar e mar r i ed, coul d t he appl i cat i on of communi t y pr oper t y l aws have any
ef f ect ? Expl ai n.

Cor r ect Answer :
Most of t en, t he appl i cat i on of communi t y pr oper t y l aws wi l l i mpact on
t he dependency st at us of t he spouse of a qual i f yi ng chi l d. Suppose, f or
exampl e, Roger mai nt ai ns a househol d t hat i ncl udes hi s 18- year - ol d
daught er , Al i ce, and her husband, Cr ai g. Assume f ur t her t hat Al i ce
ear ns $8, 000 f r oma par t - t i me j ob whi l e Cr ai g has no i ncome. I n a
common l aw st at e, Cr ai g meet s t he gr oss i ncome t est ( i . e. , $0) whi l e
Al i ce s gr oss i ncome, as a qual i f yi ng chi l d, i s i mmat er i al . I n a
communi t y pr oper t y st at e, however , Cr ai g now vi ol at es t he gr oss i ncome
t est wi t h $4, 000 ( 50% $8, 000) of i ncome, whi l e Al i ce r emai ns i mmune.

382. I n meet i ng t he cr i t er i a of a qual i f yi ng chi l d f or dependency
exempt i on pur poses, when i f ever , mi ght t he chi l d s i ncome become
r el evant ?

Cor r ect Answer :
The amount of i ncome ear ned by t he qual i f yi ng chi l d nor mal l y i s of no
consequence. I f , however , such i ncome i s used t o make t he chi l d sel f -
suppor t i ng, t hen he or she can no l onger be a qual i f yi ng chi l d. Such
chi l d al so woul d not be a qual i f yi ng r el at i ve due t o t he gr oss i ncome
and suppor t t est s.

383. Lena i s 66 year s of age, si ngl e, and bl i nd and i s not cl ai med as a
dependent . How much gr oss i ncome must she have bef or e she i s r equi r ed
t o f i l e a Feder al i ncome t ax r et ur n f or 2013?

Cor r ect Answer :
$11, 500. $6, 100 ( basi c st andar d deduct i on) + $1, 500 ( addi t i onal
st andar d deduct i on f or age) + $3, 900 ( per sonal exempt i on) . Not e t hat no
addi t i onal st andar d deduct i on i s al l owed f or bl i ndness.

384. When can a t axpayer not use For m1040EZ? For m1040A?

Cor r ect Answer :
For m1040EZ cannot be used when t he t axpayer cl ai ms any dependent s; i s
age 65 or ol der ( or bl i nd) ; or , has t axabl e i ncome of $100, 000 or mor e.
For m1040A cannot be used i f t he t axpayer i t emi zes deduct i ons from AGI .

385. Cont r ast t he t ax consequences r esul t i ng f r omt he f ol l owi ng f i l i ng
st at us si t uat i ons:

a. Mar r i ed f i l i ng j oi nt l y ver sus mar r i ed f i l i ng
separ at el y.

b. Mar r i ed f i l i ng separ at el y ver sus si ngl e
f i l i ng separ at el y.

c. Mar r i ed f i l i ng separ at el y ver sus abandoned
spouse st at us.

Cor r ect Answer :
a. Married persons filing jointly have a number
of tax elections available to them that cannot
be chosen if they file separate returns. For
example, the credit for child and dependent
care expenses and the earned income credit are
not available unless married persons file
joint returns.

b. Married persons filing separately often will
not fare as well as the couple that remains
single. For one advantage, each single person
has full flexibility in choosing between the
standard deduction and itemizing and is not
bound by what the companion does. A second
advantage is the ability of each to apply a
full $3,000 of excess capital losses against
ordinary income. For married persons filing
separate returns, the ordinary income offset
is restricted to $1,500 each.

c. Because abandoned spouse status means that the
taxpayer is treated as being single, the same
advantages mentioned in part a. above exist
when compared to married persons filing
separate returns. Even more advantageous is
that abandoned spouse status permits the use
of head of household filing status. Head of
household tax rates are lower than those
applicable to single persons (and married
persons filing separate returns). Also, the
standard deduction amount for head of
household filing status is larger than that
available to single persons (and married
persons filing separate returns).

386. J ayden and Chl oe Har per ar e husband and wi f e and use t he cal endar
year f or t ax pur poses.

a. I f t he Har per s f i l e a j oi nt r et ur n f or 2013,
can t hey l at er swi t ch t o separ at e r et ur ns
f or 2013?

b. I f t he Har per s f i l e separ at e r et ur ns f or
2013, can t hey l at er swi t ch t o a j oi nt
r et ur n f or 2013?

Cor r ect Answer :
a. Unless the Harpers do so on or before the
regular filing date (i.e., April 15, 2014),
they cannot switch to separate returns.

b. Yes, they can unless the statute of
limitations has run (usually three years from
the filing date).

387. When mar r i ed per sons f i l e a j oi nt r et ur n, j oi nt and sever al
l i abi l i t y r esul t s. What does t hi s mean?

Cor r ect Answer :
J oi nt and sever al l i abi l i t y means t hat ei t her spouse i s f ul l y l i abl e
f or any i ncome t ax due f or t he year . Thus, i f mor e t ax i s due, t he I RS
can pur sue either spouse f or t he def i ci ency.

388. Regar di ng head of househol d f i l i ng st at us, comment on t he
f ol l owi ng:

a. A t axpayer qual i f i es even t hough he
mai nt ai ns a househol d whi ch he and t he
dependent do not shar e.

b. A t axpayer does not qual i f y even t hough t he
per son shar i ng t he househol d is a dependent .

c. The usual event ual f i l i ng st at us of a
sur vi vi ng spouse.

Cor r ect Answer :
a. If the household is that of a dependent
parent, it need not be taxpayers household.

b. If the household does not include a dependent
that meets the relationship test, head of
household filing status is unavailable. An
example would be a taxpayer who maintains a
household for a cousin who lives with her.
Even if the cousin is a dependent under the
member of the household test, taxpayer does
not qualify for head of household filing
status. A cousin does not satisfy the
relationship test.

c. Once the two-year surviving spouse period
terminates, the taxpayer usually will qualify
for head of household filing status.

389. The maj or advant age of bei ng cl assi f i ed as an abandoned spouse i s
t hat t he t axpayer i s t r eat ed f or t ax pur poses as bei ng si ngl e and not
mar r i ed. Thi s means t hat an abandoned spouse can use t he mor e f avor abl e
t ax r at es avai l abl e t o si ngl e per sons t han t hose avai l abl e t o mar r i ed
per sons f i l i ng separ at el y. Comment on t he accur acy of t hi s concl usi on.

Cor r ect Answer :
The concl usi on i s i ncor r ect . The cl assi f i cat i on of abandoned spouse
al l ows t he t axpayer t o t he use of t he r at es f or head of househol d
f i l i ng st at us whi ch ar e mor e f avor abl e t han mar r i ed f i l i ng separ at el y.

390. For t he past f ew year s, Cor ey s f i l i ng st at us has been as
f ol l ows: 2009 ( mar r i ed/ j oi nt ) ; 2010 ( mar r i ed/ separ at e) ; 2011
( sur vi vi ng spouse) ; 2012 ( sur vi vi ng spouse) ; and 2013 ( head of
househol d) . Expl ai n what pr obabl y has happened.

Cor r ect Answer :
One pr obabl e expl anat i on i s t hat Cor ey s wi f e di ed i n 2010 and t he
execut or of her est at e r ef used t o agr ee t o f i l i ng a j oi nt r et ur n. As
sur vi vi ng spouse st at us does not cont i nue beyond t wo year s, Cor ey i s
r el egat ed t o head of househol d st at us i n 2013.

391. DeWayne i s a U. S. ci t i zen and r esi dent . He spends much of each
year i n t he Uni t ed Ki ngdomon busi ness. He i s mar r i ed t o Pet ul a, a U. K.
ci t i zen and r esi dent of London. DeWayne has hear d t hat i t i s possi bl e
t hat he can f i l e a j oi nt i ncome t ax r et ur n f or U. S. pur poses. I f t hi s
i s so, what ar e t he const r ai nt s he shoul d consi der i n maki ng any such
deci si on?

Cor r ect Answer :
The el ect i on t o f i l e a j oi nt r et ur n has t he ef f ect of t r eat i ng Pet ul a
as a U. S. r esi dent . Unf or t unat el y, t hi s pl aces Pet ul a on t he U. S.
gl obal appr oach t o t axat i on. I f Pet ul a has consi der abl e i ncome of her
own, t he el ect i on makes t hi s i ncome subj ect t o U. S. t axat i on whi ch may
be di sadvant ageous.

392. For 2013, Tomhas t axabl e i ncome of $48, 005. When he uses t he Tax
Tabl es, Tomf i nds t hat hi s t ax l i abi l i t y i s hi gher t han under t he Tax
Rat e Schedul es.

a. Why t he di f f er ence?

b. Can Tomuse t he Tax Rat e Schedul es?

Cor r ect Answer :
a. Even though the Tax Tables are based on the
Tax Rate Schedules, minor differences in the
tax liabilities will result. The variance is
due to the fact that the tax for any table
bracket amount is determined by using the
midpoint amount. In Toms case, the tax on
the $48,000 $48,050 bracket is the tax on
$48,025. Because Toms taxable income (i.e.,
$48,005) is below $48,025, his tax will be
higher.

b. No. Except in special situations, taxpayers
must use the Tax Tables.

393. Li st at l east t hr ee except i ons t o t he appl i cat i on of t he ki ddi e
t ax.

Cor r ect Answer :
Unear ned i ncome of $2, 000 or l ess.
Age 19 ( or age 24 i f a f ul l - t i me st udent ) or ol der .
Bot h par ent s deceased.
Ear ned i ncome i n excess of 50%of suppor t .
Mar r i ed and f i l i ng a j oi nt r et ur n wi t h spouse.

394. The Mar t i ns have a t eenage son who has become an accompl i shed
bagpi per . Wi t h pr oper pr omot i on and schedul i ng, t he son has good i ncome
pot ent i al by char gi ng f or hi s ser vi ces at speci al event s ( par t i cul ar l y
f uner al s) . However , t he Mar t i ns ar e f ear f ul t hat t he i ncome coul d
gener at e a ki ddi e t ax and cause t hemt he l oss of a dependency exempt i on
deduct i on. Ar e t he Mar t i ns concer ns j ust i f i ed? Expl ai n.

Cor r ect Answer :
The i ncome r ecei ved by t he son woul d be ear ned i ncome. Ther ef or e, t he
ki ddi e t ax i s not a pr obl emsi nce i t appl i es onl y t o unear ned i ncome.
As l ong as t he son i s under age 19 ( or a f ul l - t i me st udent under age
24) , he i s a dependent as a qual i f yi ng chi l d. Under t hese r ul es, t he
amount of t he son s i ncome does not mat t er ( unl ess he becomes sel f -
suppor t i ng) . I f t he son i s age 19 ( or ol der ) and not a st udent , any
dependency exempt i on must sat i sf y t he qual i f yi ng r el at i ve r ul es. Her e,
not meet i ng t he gr oss i ncome t est woul d cause t he dependency exempt i on
t o be l ost .

395. I n ear l y 2013, Ben sol d a yacht , hel d f or 9 mont hs and f or
pl easur e, f or a $5, 000 gai n. Concer ned about of f set t i ng t he gai n bef or e
year - end, Ben i s consi der i ng sel l i ng one of t he f ol l owi ngeach of whi ch
woul d yi el d a $5, 000 l oss:

Houseboat used f or r ecr eat i on.

Tr uck used i n busi ness.

St ock i nvest ment hel d f or 13 mont hs.

Eval uat e each choi ce.

Cor r ect Answer :
The sal e of t he houseboat pr oduces no benef i t si nce l osses on per sonal
use pr oper t y ar e not deduct i bl e. The sal e of t he t r uck yi el ds an
or di nar y l oss of $5, 000. The or di nar y l oss r esul t of f set s t he or di nar y
i ncome caused by a shor t - t er mcapi t al gai n. The best choi ce, however ,
i s t he st ock i nvest ment . A net l ong- t er mcapi t al l oss can neut r al i ze a
net shor t - t er mcapi t al gai n and pr event or di nar y i ncome f r om
mat er i al i zi ng. By i t sel f , a net l ong- t er mcapi t al l oss can onl y be
of f set agai nst r egul ar i ncome t o t he ext ent of $3, 000. Al so, i t mi ght
obvi at e l ong- t er mcapi t al gai ns whi ch ar e t axed at pr ef er ent i al t ax
r at es.

396. Af t er payi ng down t he mor t gage on t hei r per sonal r esi dence, t he
Hi l l s have f ound t hat t hei r i t emi zed deduct i ons f or each year ar e
al ways sl i ght l y l ess t han t he st andar d deduct i on opt i on.

a. Expl ai n what has happened.

b. What r emedy do you suggest ?

Cor r ect Answer :
a. Paying down the mortgage reduced the interest
expense deduction. With less interest expense,
the Hills deductions from AGI no longer
exceed the standard deduction amount.

b. The Hills should begin concentrating their
other itemized deductions (e.g., charitable
contributions) by paying for multiple years in
the same year. Being on a cash basis, the
timing of the deduction is based on the year
of payment. In alternate years, moreover, the
standard deduction is claimed.

397. Maude s par ent s l i ve i n anot her st at e and she cannot cl ai mt hemas
her dependent s. I f Maude pays t hei r medi cal expenses, can she der i ve
any t ax benef i t f r omdoi ng so? Expl ai n.

Cor r ect Answer :
I f Maude coul d ot her wi se cl ai mher par ent s as dependent s except f or not
sat i sf yi ng ei t her t he gr oss i ncome or t he j oi nt r et ur n t est s, she can
cl ai many medi cal expenses pai d on t hei r behal f .

398. The r eal i zat i on r equi r ement gi ves an i ncent i ve t o own asset s t hat
have i ncr eased i n val ue and t o sel l asset s whose val ue has decr eased.

a. Tr ue
*b. Fal se

399. A sol e pr opr i et or shi p pur chased an asset f or $1, 000 i n 2013 and
i t s val ue was $1, 500 at t he end of 2013. I n 2014, t he sol e
pr opr i et or shi p sol d t he asset f or $1, 400. The sol e pr opr i et or shi p
r eal i zed a t axabl e gai n of $400 i n 2014 but an economi c l oss of $100 i n
2014.

*a. Tr ue
b. Fal se

400. J udy i s a cash basi s at t or ney. I n 2013, she per f or med ser vi ces i n
connect i on wi t h t he f or mat i on of a cor por at i on and r ecei ved st ock wi t h
a val ue of $4, 000 f or her ser vi ces. By t he end of t he year , t he val ue
of t he st ock had decr eased t o $2, 000. She cont i nued t o hol d t he st ock.
J udy must r ecogni ze $4, 000 of gr oss i ncome f r omt he st ock f or 2013.

*a. Tr ue
b. Fal se

401. Bar ney pai nt ed hi s house whi ch saved hi m$3, 000. Accor di ng t o t he
r eal i zat i on r equi r ement , Bar ney must r ecogni ze $3, 000 of i ncome.

a. Tr ue
*b. Fal se

402. Ni chol as owned st ock t hat decr eased i n val ue by $20, 000 dur i ng t he
year , but he di d not sel l t he st ock. He ear ned $45, 000 sal ar y, but
r ecei ved onl y $34, 000 because $11, 000 i n t axes wer e wi t hhel d. Ni chol as
saved $10, 000 of hi s sal ar y and used t he r emai nder f or per sonal l i vi ng
expenses. Ni chol as s economi c i ncome f or t he year exceeded hi s gr oss
i ncome f or t ax pur poses.

a. Tr ue
*b. Fal se

403. The f act t hat t he account i ng met hod t he t axpayer uses t o measur e
i ncome i s consi st ent wi t h GAAP does not assur e t hat t he met hod wi l l be
accept abl e f or t ax pur poses.

*a. Tr ue
b. Fal se

404. The f i nanci al account i ng pr i nci pl e of conser vat i smi s not wel l -
sui t ed t o t he t ask of measur i ng t axabl e i ncome.

*a. Tr ue
b. Fal se

405. A cash basi s t axpayer pur chased a cer t i f i cat e of deposi t f or
$1, 000 on J ul y 1, 2013 t hat wi l l pay $1, 100 upon i t s mat ur i t y on J une
30, 2015. The t axpayer must r ecogni ze a por t i on of t he i ncome i n 2013.

*a. Tr ue
b. Fal se

406. Ral ph pur chased hi s f i r st Ser i es EE bond dur i ng t he year . He pai d
$709 f or a 10- year bond wi t h a $1, 000 mat ur i t y val ue. The yi el d t o
mat ur i t y on t he bonds was 3. 5%. Ral ph is not r equi r ed t o r ecogni ze t he
$291 ( $1, 000 $709) or i gi nal i ssue di scount unt i l t he bond mat ur es.
However , Ral ph can el ect t o amor t i ze t he di scount over t he t en- year
per i od.

*a. Tr ue
b. Fal se

407. At t he begi nni ng of 2013, Mar y pur chased a 3- year cer t i f i cat e of
deposi t ( CD) f or $8, 760. The mat ur i t y val ue of t he cer t i f i cat e was
$10, 000 and i t was t o yi el d 4. 5%. She al so pur chased a Ser i es EE bond
f or $6, 400 wi t h a mat ur i t y val ue i n 10 year s of $10, 000. Mar y must
r ecogni ze $1, 240 of i ncome f r omt he cer t i f i cat e of deposi t i n 2013, and
$3, 600 f r omt he Ser i es EE bonds i n 2022.

a. Tr ue
*b. Fal se

408. I n 2005, Ter r y pur chased l and f or $150, 000. I n 2013, Ter r y
r ecei ved $10, 000 f r oma l ocal cabl e t el evi si on company i n exchange f or
Ter r y al l owi ng t he company t o r un an under gr ound cabl e acr oss Ter r y s
pr oper t y. Ter r y i s not r equi r ed t o r ecogni ze i ncome f r omr ecei vi ng t he
$10, 000 because i t was a r et ur n of hi s capi t al i nvest ed i n t he l and.

*a. Tr ue
b. Fal se

409. I n December 2013, Mar y col l ect ed t he December 2013 and J anuar y
2014 r ent f r oma t enant . Mar y i s a cash basi s t axpayer . The amount
col l ect ed i n December 2013 f or t he 2014 r ent shoul d be i ncl uded i n her
2014 gr oss i ncome.

a. Tr ue
*b. Fal se

410. On December 1, 2013, Dani el , an accr ual basi s t axpayer , col l ect s
$12, 000 r ent f or December 2013 and $12, 000 f or J anuar y 2014. Dani el
must i ncl ude t he $24, 000 i n 2013 gr oss i ncome.

*a. Tr ue
b. Fal se

411. On J anuar y 1, 2013, an accr ual basi s t axpayer ent er ed i nt o a
cont r act t o pr ovi de t er mi t e i nspect i on ser vi ce each mont h f or 36 mont hs.
The amount r ecei ved f or t he cont r act was $2, 400. The t axpayer shoul d
r epor t $1, 600 of i ncome i n 2014.

*a. Tr ue
b. Fal se

412. An advance payment r ecei ved i n J une 2013 by an accr ual basi s and
cal endar year t axpayer f or ser vi ces t o be pr ovi ded over a 36- mont h
per i od can be spr ead over f our t ax year s.

a. Tr ue
*b. Fal se

413. An accr ual basi s t axpayer who owns and oper at es a pr of essi onal
basket bal l t eami s al l owed t o al l ocat e i ncome f r omseason t i cket sal es
on t he basi s of t he number of games pl ayed dur i ng t he year .

*a. Tr ue
b. Fal se

414. I n 2013, J uan, a cash basi s t axpayer , was of f er ed $3 mi l l i on f or
si gni ng a pr of essi onal basebal l cont r act . He count er of f er ed t hat he
woul d r ecei ve $900, 000 per year f or 4 year s begi nni ng i n 2014. The
t eamaccept ed t he count er of f er . J uan const r uct i vel y r ecei ved $3
mi l l i on i n 2013.

a. Tr ue
*b. Fal se

415. The const r uct i ve r ecei pt doct r i ne r equi r es t hat i ncome must be
r ecogni zed when i t i s made avai l abl e t o t he cash basi s t axpayer ,
al t hough i t has not been act ual l y r ecei ved. The const r uct i ve r ecei pt
doct r i ne does not appl y t o accr ual basi s t axpayer s.

*a. Tr ue
b. Fal se

416. Fr ed i s a f ul l - t i me t eacher . He has wr i t t en a book and r ecei ves
r oyal t i es f r omi t . Fr ed s mot her , Mabel , i s age 65 and l i ves on her
Soci al Secur i t y benef i t s and gi f t s f r omher son, Fr ed. Thi s year Fr ed
di r ect ed t he publ i sher t o make t he r oyal t y check payabl e t o Mabel
because she needs t he money f or suppor t . Fr ed must i ncl ude t he amount
of t he r oyal t y check i n hi s gr oss i ncome.

*a. Tr ue
b. Fal se

417. J essi ca i s a cash basi s t axpayer . When J essi ca f ai l ed t o r epay a
l oan, t he bank gar ni shed her sal ar y. Each week $60 was wi t hhel d f r om
J essi ca s sal ar y and pai d t o t he bank. J essi ca i s r equi r ed t o i ncl ude
t he $60 each week i n her gr oss i ncome even t hough i t i s t he cr edi t or
t hat benef i t s f r omt he i ncome.

*a. Tr ue
b. Fal se

418. ABC Cor por at i on decl ar ed a di vi dend f or t axpayer s of r ecor d as of
December 24, 2013. The di vi dend checks wer e mai l ed on December 31,
2013. Ed, a cash basi s shar ehol der , r ecei ved t he di vi dend check on
J anuar y 2, 2014. Ed cannot del ay r epor t i ng t he i ncome f r omt he di vi dend
unt i l 2014.

a. Tr ue
*b. Fal se

419. Tom, a cash basi s t axpayer , pur chased a bond on Mar ch 31 f or
$10, 000, pl us $100 accr ued i nt er est . I n December , Tomcol l ect ed $500
i nt er est f r omt he bond. Tom s i nt er est i ncome f r omt he bond f or t he
year i s $500.

a. Tr ue
*b. Fal se

420. When st ock i s sol d af t er t he dat e of decl ar at i on but bef or e t he
r ecor d dat e, t he buyer must r ecogni ze as i ncome t he di vi dend decl ar ed.

*a. Tr ue
b. Fal se

421. Li nda del i ver s pi zzas f or a pi zza shop. On Wednesday, December 31,
2013, Li nda made sever al del i ver i es and col l ect ed $400 f r omcust omer s.
However , Li nda f or got t o t ur n i n t he pr oceeds f or t he day t o her
empl oyer unt i l t he f ol l owi ng Fr i day, J anuar y 2, 2014. The pi zza shop
owner r ecogni zes t he i ncome of $400 when he r ecei ves i t f r omLi nda i n
2014.

a. Tr ue
*b. Fal se

422. J ake i s t he sol e shar ehol der of an S cor por at i on t hat ear ned
$60, 000 i n 2013. The cor por at i on was shor t on cash and t her ef or e
di st r i but ed onl y $15, 000 t o J ake i n 2013. J ake i s r equi r ed t o
r ecogni ze $60, 000 of i ncome f r omt he S cor por at i on i n 2013.

*a. Tr ue
b. Fal se

423. The B & WPar t ner shi p ear ned t axabl e i ncome of $140, 000 f or t he
year . Br yan i s ent i t l ed t o 50%of t he pr of i t s, but Br yan wi t hdr ew onl y
$60, 000 dur i ng t he year . Br yan s gr oss i ncome f r omt he par t ner shi p f or
t he year i s $60, 000.

a. Tr ue
*b. Fal se

424. When a busi ness i s oper at ed as an S cor por at i on, a di sadvant age i s
t hat t he shar ehol der must pay t he t ax on hi s or her shar e of t he S
cor por at i on s i ncome even t hough t he S cor por at i on di d not di st r i but e
t he i ncome t o t he shar ehol der .

*a. Tr ue
b. Fal se

425. Mar k i s a cash basi s t axpayer . He i s a par t ner i n t he M&M
par t ner shi p, and hi s shar e of t he par t ner shi p s pr of i t s f or 2013 i s
$90, 000. Onl y $40, 000 was di st r i but ed t o hi mi n J anuar y 2013, and t hi s
was hi s shar e of t he 2012 par t ner shi p pr of i t s. None of t he 2013
pr of i t s wer e di st r i but ed al t hough Mar k s shar e of t he 2013 pr of i t s was
$90, 000. Mar k s gr oss i ncome f r omt he par t ner shi p f or 2013 i s $40, 000.

a. Tr ue
*b. Fal se

426. Rhonda has a 30%i nt er est i n t he capi t al and pr of i t s of t he ABC
Par t ner shi p. I n t he f i r st year of t he par t ner shi p, 2013, i t ear ned
$150, 000. However , t he par t ner s agr eed t hat not hi ng woul d be
di st r i but ed unt i l af t er t he end of Mar ch 2014, bef or e Rhonda f i l ed her
2013 t ax r et ur n. The di st r i but i ons wer e t o be del ayed because i t was
uncl ear as t o whet her busi ness condi t i ons woul d r emai n good i n
2014. Thi ngs wer e goi ng wel l i n 2014 and t her ef or e t he par t ner shi p
di st r i but ed $30, 000 t o Rhonda at t he end of Mar ch, as a por t i on of her
shar e of t he par t ner shi p s 2013 ear ni ngs. The par t ner shi p s i ncome f or
2014 was $60, 000. As a r esul t , Rhonda must r ecogni ze $30, 000 of gr oss
i ncome i n 2013 and $18, 000 i n 2014.

a. Tr ue
*b. Fal se

427. Apr i l , a cal endar year t axpayer , i s a 40%par t ner i n Pal e
Par t ner shi p, whose f i scal year ends on Sept ember 30t h. For t he f i scal
year endi ng Sept ember 30, 2013, t he par t ner shi p had $400, 000 net i ncome
and f or f i scal year endi ng Sept ember 30, 2014, t he par t ner shi p had
$300, 000 net i ncome. Apr i l wi t hdr ew $100, 000 i n December of each
year . Apr i l s gr oss i ncome f r omt he par t ner shi p f or 2013 i s $160, 000
( $400, 000 40%) .

*a. Tr ue
b. Fal se

428. Al vi n i s t he sol e shar ehol der of an S cor por at i on t hat ear ned
$200, 000 i n 2013 and di st r i but ed $75, 000 t o Al vi n. Al vi n must r ecogni ze
$75, 000 as i ncome f r omt he S cor por at i on i n 2013.

a. Tr ue
*b. Fal se

429. Samant ha and her son, Br ent , ar e cash basi s t axpayer s. Samant ha
gave Br ent a cor por at e bond wi t h a f ace amount and f ai r mar ket val ue of
$10, 000. On t he dat e of t he gi f t , Mar ch 31, 2013, t he accr ued i nt er est
on t he bond was $100. On December 31, 2013, Br ent col l ect ed $400
i nt er est on t he bond. Br ent must i ncl ude i n gr oss i ncome t he $300
i nt er est ear ned af t er t he dat e of t he gi f t .

*a. Tr ue
b. Fal se

430. I n al l communi t y pr oper t y st at es, t he i ncome f r ompr oper t y t hat
was i nher i t ed by a spouse af t er t he mar r i age i s t r eat ed as al l ear ned
by t he spouse who i nher i t ed t he pr oper t y.

a. Tr ue
*b. Fal se

431. Ted ear ned $150, 000 dur i ng t he cur r ent year . He pai d Al i ce, hi s
f or mer wi f e, $75, 000 i n al i mony. Under t hese f act s, t he t ax i s pai d by
t he per son who benef i t s f r omt he i ncome r at her t han t he per son who
ear ned t he i ncome.

*a. Tr ue
b. Fal se

432. Geor ge and Er i n ar e di vor ced, and Geor ge i s r equi r ed t o pay Er i n
$20, 000 of al i mony each year . Geor ge ear ns $75, 000 a year . Er i n i s
r equi r ed t o i ncl ude t he al i mony payment s i n gr oss i ncome al t hough
Geor ge ear ned t he i ncome.

*a. Tr ue
b. Fal se

433. Af t er t he di vor ce, J ef f was r equi r ed t o pay $18, 000 per year t o
hi s f or mer spouse, Dar l ene, who had cust ody of t hei r chi l d. J ef f s
payment s wi l l be r educed t o $12, 000 per year i n t he event t he chi l d
di es or r eaches age 21. Dur i ng t he year , J ef f pai d t he $18, 000 r equi r ed
under t he di vor ce agr eement . Dar l ene must i ncl ude t he $12, 000 i n gr oss
i ncome.

*a. Tr ue
b. Fal se

434. Paul a t r ansf er s st ock t o her f or mer spouse, Fr ed. The t r ansf er i s
pur suant t o a di vor ce agr eement . Paul a s cost of t he st ock was $75, 000
and i t s f ai r mar ket val ue on t he dat e of t he t r ansf er i s $95, 000. Fr ed
l at er sel l s t he st ock f or $100, 000. Fr ed s r ecogni zed gai n f r omt he
sal e of t he st ock i s $5, 000.

a. Tr ue
*b. Fal se

435. J acob and Emi l y wer e co- owner s of a per sonal r esi dence. As par t of
t hei r di vor ce agr eement , Emi l y pai d J acob cash f or hi s i nt er est i n t he
per sonal r esi dence. Thi s cash payment r esul t s i n a t axabl e gai n t o
J acob i f he r ecei ves mor e cash t han hi s shar e of t he cost of t he
r esi dence.

a. Tr ue
*b. Fal se

436. Al i mony r ecapt ur e may occur i f t her e i s a subst ant i al decr ease i n
t he amount of t he al i mony payment s i n t he second year .

*a. Tr ue
b. Fal se

437. I f t he al i mony r ecapt ur e r ul es appl y, t he r eci pi ent of t he al i mony
decr eases hi s or her AGI by a por t i on of t he amount i ncl uded i n gr oss
i ncome as al i mony i n a pr i or year or year s.

*a. Tr ue
b. Fal se

438. Fat her made an i nt er est - f r ee l oan of $25, 000 t o Son who used t he
money t o buy an SUV. Son had $1, 600 i nt er est i ncome f r oma cer t i f i cat e
of deposi t f or t he year . Fat her i s not r equi r ed t o i mput e i nt er est
i ncome.

a. Tr ue
*b. Fal se

439. I n t he case of a bel ow- mar ket gi f t l oan f or whi ch t her e i s no
except i on t o t he i mput ed i nt er est r ul es, t he l ender i s deemed t o have
r ecei ved i nt er est i ncome even t hough no i nt er est i s char ged and
col l ect ed.

*a. Tr ue
b. Fal se

440. I n t he case of a gi f t l oan of l ess t han $100, 000, t he i mput ed
i nt er est r ul es apply i f t he donee has net i nvest ment i ncome of over
$1, 000.

*a. Tr ue
b. Fal se

441. Susan pur chased an annui t y f or $200, 000. She i s t o r ecei ve $18, 000
each year and her l i f e expect ancy i s 13 year s. I f Susan col l ect s under
t he annui t y f or 14 year s, t he ent i r e $18, 000 r ecei ved i n t he 14t h year
must be i ncl uded i n her gr oss i ncome.

*a. Tr ue
b. Fal se

442. Ter r i pur chased an annui t y f or $100, 000. She was t o r ecei ve
$10, 000 per year and her l i f e expect ancy was 20 year s. She di ed af t er
r ecei vi ng 8 payment s. Ter r i s f i nal r et ur n shoul d r ef l ect a l oss of
$20, 000 ( $100, 000 $80, 000) .

a. Tr ue
*b. Fal se

443. I f a l ot t er y pr i ze wi nner t r ansf er s t he pr i ze t o a qual i f i ed
gover nment uni t or nonpr of i t or gani zat i on, t hen t he pr i ze i s excl uded
f r omt he wi nner s gr oss i ncome i f t he amount of t he pr i ze does not
exceed 30%of t he wi nner s AGI .

a. Tr ue
*b. Fal se

444. I f t he empl oyer pr ovi des al l empl oyees wi t h gr oup t er ml i f e
i nsur ance equal t o t wi ce t he empl oyee s annual sal ar y, an empl oyee wi t h
a sal ar y of $50, 000 has no gr oss i ncome f r omt he l i f e i nsur ance
pr ot ect i on pr ovi ded by t he empl oyer .

a. Tr ue
*b. Fal se

445. I n t he case of a per son wi t h ot her i ncome of $300, 000, 15%of hi s
or her Soci al Secur i t y benef i t s r ecei ved ar e excl uded f r omgr oss i ncome.

*a. Tr ue
b. Fal se

446. Nor ma s i ncome f or 2013 i s $27, 000 f r ompar t - t i me wor k and $9, 000
of Soci al Secur i t y benef i t s. Nor ma i s not mar r i ed. A por t i on of her
Soci al Secur i t y benef i t s must be i ncl uded i n her gr oss i ncome.

*a. Tr ue
b. Fal se

447. Loi s, who i s si ngl e, r ecei ved $9, 000 of Soci al Secur i t y benef i t s.
She al so r ecei ved $25, 000 f r omdi vi dends, i nt er est , and her empl oyer s
pensi on pl an. I f Loi s sel l s a capi t al asset t hat pr oduces a $1, 000
r ecogni zed l oss, Loi s s t axabl e i ncome wi l l decr ease by mor e t han
$1, 000.

*a. Tr ue
b. Fal se

448. On a par t i cul ar Sat ur day, Tomhad pl anned t o pai nt a r oomi n hi s
house, but hi s empl oyer gave hi mt he oppor t uni t y t o wor k t hat day. I f
Tomwor ks, he must hi r e a pai nt er f or $120. For Tomt o have a posi t i ve
cash f l ow f r omwor ki ng and hi r i ng t he pai nt er :

*a. Tommust ear n mor e t han $160 i f he i s i n t he 25%mar gi nal t ax
br acket .
b. Tommust ear n at l east $160 i f he i s i n t he 33%mar gi nal t ax
br acket .
c. Tommust ear n at l east $150 i f he i s i n t he 25%mar gi nal t ax
br acket .
d. Tommust ear n at l east $135 i f he i s i n t he 15%mar gi nal t ax
br acket .

449. The t ax concept and economi c concept of i ncome ar e i n agr eement on
whi ch of t he f ol l owi ng:

a. The f ai r r ent al val ue of an owner - occupi ed home shoul d be
i ncl uded i n i ncome.
b. The i ncr ease i n val ue of asset s hel d f or t he ent i r e year
shoul d be i ncl uded i n i ncome f or t he year .
*c. Rent i ncome f or 2014 col l ect ed i n 2013 i s i ncome f or 2013.
d. Al l of t he above.

450. The Bl ue Ut i l i t i es Company pai d Sue $2, 000 f or t he r i ght t o l ay an
under gr ound el ect r i c cabl e acr oss her pr oper t y anyt i me i n t he f ut ur e.

a. Sue must r ecogni ze $2, 000 gr oss i ncome i n t he cur r ent year i f
t he company di d not i nst al l t he cabl e dur i ng t he year .
*b. Sue i s not r equi r ed t o r ecogni ze gr oss i ncome f r omt he
r ecei pt of t he f unds, but she must r educe her cost basi s i n t he
l and by $2, 000.
c. Sue must r ecogni ze $2, 000 gr oss i ncome i n t he cur r ent year
r egar dl ess of whet her t he company i nst al l ed t he cabl e dur i ng t he
year .
d. Sue must r ecogni ze $2, 000 gr oss i ncome i n t he cur r ent year ,
and when t he cabl e i s i nst al l ed, she must r educe her cost basi s
i n t he l and by $2, 000.

451. For pur poses of det er mi ni ng gr oss i ncome, whi ch of t he f ol l owi ng
i s t r ue?

a. A mechani c compl et ed r epai r s on an aut omobi l e dur i ng t he year
and col l ect s money f r omt he cust omer . The cust omer was not
sat i sf i ed wi t h t he r epai r s and sued t he mechani c f or a r ef und.
The mechani c can def er r ecogni t i on of t he i ncome unt i l t he sui t
has been set t l ed.
*b. A t axpayer who f i nds a wal l et f ul l of money i s r equi r ed t o
r ecogni ze i ncome even t hough someone may event ual l y ask f or t he
r et ur n of t he money.
c. Embezzl ement pr oceeds ar e not i ncl uded i n t he embezzl er s
gr oss i ncome because t he embezzl er has an obl i gat i on t o r epay t he
owner .
d. Al l of t he above ar e f al se.
e. Al l of t he above ar e t r ue.

452. Det r oi t Cor por at i on sued Chi cago Cor por at i on f or i nt ent i onal
damage t o Det r oi t s goodwi l l . Det r oi t had cr eat ed i t s goodwi l l t hr ough
pr ovi di ng hi gh- qual i t y ser vi ces t o i t s cust omer s. Thus, no basi s f or
t he goodwi l l appear ed on Det r oi t s bal ance sheet . The sui t was set t l ed
and Det r oi t r ecei ved $1, 500, 000 f or t he damages t o i t s goodwi l l .

a. The $1, 500, 000 i s not t axabl e because i t r epr esent s a r ecover y
of capi t al .
*b. The $1, 500, 000 i s t axabl e because Det r oi t has no basi s i n t he
goodwi l l .
c. The $1, 500, 000 i s not t axabl e because Det r oi t di d not hi ng t o
ear n t he money.
d. The $1, 500, 000 i s not t axabl e because Det r oi t set t l ed t he case.

453. The annual i ncr ease i n t he cash sur r ender val ue of a l i f e
i nsur ance pol i cy:

a. I s t axed when t he i ndi vi dual di es and t he hei r s col l ect t he
i nsur ance pr oceeds.
b. Must be i ncl uded i n gr oss i ncome each year under t he or i gi nal
i ssue di scount r ul es.
c. Reduces t he deduct i on f or l i f e i nsur ance expense.
*d. I s not i ncl uded i n gr oss i ncome each year because of t he
subst ant i al r est r i ct i ons on gai ni ng access t o t he pol i cy s val ue.

454. Tur ner , a successf ul execut i ve, i s negot i at i ng a compensat i on pl an
wi t h hi s pot ent i al empl oyer . The empl oyer has of f er ed t o pay Tur ner a
$600, 000 annual sal ar y, payabl e at t he r at e of $50, 000 per mont h.
Tur ner count er of f er s t o r ecei ve a mont hl y sal ar y of $40, 000 ( $480, 000
annual l y) and a $180, 000 bonus i n 5 year s when Tur ner wi l l be age 65.

a. I f t he empl oyer accept s Tur ner s count er of f er , Tur ner wi l l
r ecogni ze $660, 000 at t he t i me t he of f er i s accept ed.
b. I f t he empl oyer accept s Tur ner s count er of f er , Tur ner wi l l
r ecogni ze as gr oss i ncome $55, 000 per mont h [ ( $480, 000 +
$180, 000) / 12] .
*c. I f t he empl oyer accept s Tur ner s count er of f er , Tur ner wi l l
r ecogni ze $40, 000 i ncome each mont h f or t he year and $180, 000 i n
year 5.
d. I f t he empl oyer accept s Tur ner s count er of f er , Tur ner must
r ecogni ze i mput ed i nt er est i ncome on t he $180, 000 t o be r ecei ved
i n 5 year s.

455. Mar oon Cor por at i on expect s t he empl oyees i ncome t ax r at es t o
i ncr ease next year . The empl oyees use t he cash met hod. The company
pr esent l y pays on t he l ast day of each mont h. The company i s
consi der i ng changi ng i t s pol i cy so t hat t he December sal ar i es wi l l be
pai d on t he f i r st day of t he f ol l owi ng year . What woul d be t he ef f ect
on an empl oyee of t he pr oposed change i n company pol i cy f or payi ng i t s
sal ar i es begi nni ng f or December 2013.

a. The empl oyee woul d be r equi r ed t o r ecogni ze t he i ncome i n
December 2013 because i t i s const r uct i vel y r ecei ved at t he end of
t he mont h.
b. The empl oyee woul d be r equi r ed t o r ecogni ze t he i ncome i n
December 2013 because t he empl oyee has a cl ai mof r i ght t o t he
i ncome when i t i s ear ned.
*c. The empl oyee wi l l not be r equi r ed t o r ecogni ze t he i ncome
unt i l i t i s r ecei ved, i n 2014.
d. The empl oyee can el ect t o ei t her i ncl ude t he pay i n 2013 or
2014.

456. The annual i ncr ease i n t he cash sur r ender val ue of a l i f e
i nsur ance pol i cy:

a. I s t axed accor di ng t o t he or i gi nal i ssue di scount r ul es.
*b. I s not i ncl uded i n gr oss i ncome because t he pol i cy must be
sur r ender ed t o r ecei ve t he cash sur r ender val ue.
c. Reduces t he deduct i on f or l i f e i nsur ance expense.
d. I s exempt because i t i s l i f e i nsur ance pr oceeds.

457. Under t he or i gi nal i ssue di scount ( OI D) r ul es as appl i ed t o a
t hr ee- year cer t i f i cat e of deposi t :

a. Al l of t he i ncome must be r ecogni zed i n t he year of mat ur i t y
by a cash basi s t axpayer .
b. The OI D wi l l be i ncl uded i n gr oss i ncome f or t he year of
pur chase.
c. The i nt er est i ncome wi l l be t he same each year .
*d. The i nt er est i ncome wi l l be gr eat er i n t he t hi r d year t han i n
t he f i r st year .
e. None of t he above i s cor r ect .

458. Fr eddy pur chased a cer t i f i cat e of deposi t f or $20, 000 on J ul y 1,
2013. The cer t i f i cat e s mat ur i t y val ue i n t wo year s ( J une 30, 2015) i s
$21, 218, yi el di ng 3%bef or e- t ax i nt er est .

a. Fr eddy must r ecogni ze $1, 218 gr oss i ncome i n 2013.
b. Fr eddy must r ecogni ze $1, 218 gr oss i ncome i n 2015.
c. Fr eddy must r ecogni ze $600 ( . 03 $20, 000) gr oss i ncome i n 2015.
*d. Fr eddy must r ecogni ze $300 ( . 03 $20, 000 . 5) gr oss i ncome
i n 2013.

459. J er r y pur chased a U. S. Ser i es EE savi ngs bond f or $744. The bond
has a mat ur i t y val ue i n 10 year s of $1, 000 and yi el ds 3%i nt er est . Thi s
i s t he f i r st Ser i es EE bond t hat J er r y has ever owned.

*a. J er r y can def er t he i nt er est i ncome unt i l t he bond mat ur es i n
10 year s.
b. J er r y must r epor t ( $1, 000 $744) / 10 = $25. 60 i nt er est i ncome
each year he owns t he bond.
c. The i nt er est on t he bonds i s exempt f r omFeder al i ncome t ax.
d. J er r y can r epor t al l of t he $256 as a capi t al gai n i n t he year
i t mat ur es.

460. Of f i ce Pal ace, I nc. , l eased an al l - i n- one pr i nt er t o a new
cust omer , Ashl ey, on December 27, 2013. The pr i nt er was t o r ent f or
$600 per mont h f or a per i od of 36 mont hs begi nni ng J anuar y 1, 2014.
Ashl ey was r equi r ed t o pay t he f i r st and l ast mont h s r ent at t he t i me
t he l ease was si gned. Ashl ey was al so r equi r ed t o pay a $1, 500 damage
deposi t . Of f i ce Pal ace must r ecogni ze as i ncome f or t he l ease:

a. $0 i n 2013, i f Of f i ce Pal ace i s an accr ual basi s t axpayer .
b. $7, 800 i n 2014, i f Of f i ce Pal ace i s a cash basi s t axpayer .
c. $2, 700 i n 2013, i f Of f i ce Pal ace i s a cash basi s t axpayer .
*d. $1, 200 i n 2013, i f Of f i ce Pal ace i s an accr ual basi s t axpayer .

461. The Mar oon & Or ange Gym, I nc. , uses t he accr ual met hod of
account i ng. The cor por at i on sel l s member shi ps t hat ent i t l e t he member
t o use t he f aci l i t i es at any t i me. A one- year member shi p cost s $480
( $480/ 12 = $40 per mont h) ; a t wo- year member shi p cost s $720 ( $720/ 24 =
$30 per mont h) . Cash payment i s r equi r ed at t he begi nni ng of t he
member shi p per i od. On J ul y 1, 2013, t he company sol d a one- year
member shi p and a t wo- year member shi p. The company shoul d r epor t as
gr oss i ncome f r omt he t wo cont r act s:

a. $420 i n 2013.
b. $960 i n 2013.
c. $180 i n 2015.
*d. $780 i n 2014.

462. Or ange Cabl e TV Company, an accr ual basi s t axpayer , al l ows i t s
cust omer s t o pay by t he year i n advance ( $500 per year ) , or t wo year s
i n advance ( $950) . I n Sept ember 2012, t he company col l ect ed t he
f ol l owi ng amount s appl i cabl e t o f ut ur e ser vi ces:

October 2012-September 2014 services
(two-year contracts)
$144,000
October 2012-September 2013 services
(one-year contracts)
128,000
Total $272,000

As a result of the above, Orange Cable should report as gross income:

a. $272, 000 i n 2012.
b. $128, 000 i n 2012.
c. $168, 000 i n 2013.
*d. $222, 000 i n 2013.

463. Wi t h r espect t o t he pr epai d i ncome f r omser vi ces, whi ch of t he
f ol l owi ng i s t r ue?

a. The t r eat ment of pr epai d i ncome i s t he same f or t ax and
f i nanci al account i ng.
b. A cash basi s t axpayer can spr ead t he i ncome over t he per i od
ser vi ces ar e t o be pr ovi ded i f al l of t he ser vi ces wi l l be
compl et ed by t he end of t he t ax year f ol l owi ng t he year of
r ecei pt .
*c. An accr ual basi s t axpayer can spr ead t he i ncome over t he
per i od ser vi ces ar e t o be pr ovi ded i f al l of t he ser vi ces wi l l be
compl et ed by t he end of t he t ax year f ol l owi ng t he year of
r ecei pt .
d. An accr ual basi s t axpayer can spr ead t he i ncome over t he
per i od ser vi ces ar e t o be pr ovi ded on a cont r act f or t hr ee year s
or l ess.

464. Wi t h r espect t o i ncome f r omser vi ces, whi ch of t he f ol l owi ng i s
t r ue?

a. The i ncome i s al ways amor t i zed over t he per i od t he ser vi ces
wi l l be r ender ed by an accr ual basi s t axpayer .
b. A cash basi s t axpayer can spr ead t he i ncome f r oma 24- mont h
ser vi ce cont r act over t he cont r act per i od.
*c. I f an accr ual basi s t axpayer sel l s a 36- mont h ser vi ce
cont r act on J ul y 1, 2013 f or $3, 600, t he t axpayer s 2013 gr oss
i ncome f r omt he cont r act i s $600.
d. I f an accr ual basi s t axpayer sel l s a 24- mont h ser vi ce cont r act
on J ul y 1, 2013, one- hal f ( 12/ 24) t he i ncome i s r ecogni zed i n
2014.

465. The Gr een Company, an accr ual basi s t axpayer , pr ovi des busi ness-
consul t i ng ser vi ces. Cl i ent s gener al l y pay a r et ai ner at t he begi nni ng
of a 12- mont h per i od. Thi s ent i t l es t he cl i ent t o no mor e t han 40 hour s
of ser vi ces. Once t he cl i ent has r ecei ved 40 hour s of ser vi ces, Gr een
char ges $500 per hour . Gr een Company al l ocat es t he r et ai ner t o i ncome
based on t he number of hour s wor ked on t he cont r act . At t he end of t he
t ax year , t he company had $50, 000 of unear ned r evenues f r omt hese
cont r act s. The company al so had $10, 000 i n unear ned r ent i ncome
r ecei ved f r omexcess of f i ce space l eased t o ot her compani es. Based on
t he above, Gr een must i ncl ude i n gr oss i ncome f or t he cur r ent year :

a. $60, 000.
b. $50, 000.
*c. $10, 000.
d. $0.

466. Teal company i s an accr ual basi s t axpayer . On December 1, 2013, a
cust omer pai d f or an i t emt hat was on hand, but t he cust omer want ed t he
i t emdel i ver ed i n ear l y J anuar y 2014. Teal del i ver ed t he i t emon
J anuar y 4, 2014. Teal i ncl uded t he sal e i n i t s 2013 i ncome f or
f i nanci al account i ng pur poses.

*a. Teal must r ecogni ze t he i ncome i n 2013.
b. Teal must r ecogni ze t he i ncome i n t he year t i t l e t o t he goods
passed t o t he cust omer , as det er mi ned under t he st at e l aws i n
whi ch t he st or e i s l ocat ed.
c. Teal can el ect t o r ecogni ze t he i ncome i n ei t her 2013 or 2014.
d. Teal must r ecogni ze t he i ncome i n 2014.

467. On J anuar y 5, 2013, Ti mpur chased a bond payi ng i nt er est at 6%f or
$30, 000. On Mar ch 31, 2013, he gave t he bond t o J ane. The bond pays
$1, 800 i nt er est on December 31. Ti mand J ane ar e cash basi s t axpayer s.
When J ane col l ect s t he i nt er est i n December 2013:

a. Ti mmust i ncl ude al l of t he i nt er est i n hi s gr oss i ncome.
b. J ane must r epor t $1, 800 gr oss i ncome f or 2013.
*c. J ane r epor t s $1, 350 of i nt er est i ncome i n 2013, and Ti m
r epor t s $450 of i nt er est i ncome i n 2013.
d. J ane r epor t s $450 of i nt er est i ncome i n 2013, and Ti mr epor t s
$1, 350 of i nt er est i ncome i n 2013.

468. Mi ke cont r act ed wi t h Kr amCompany, Mi ke s cont r ol l ed cor por at i on.
Mi ke was a medi cal doct or and t he cont r act pr ovi ded t hat he woul d wor k
excl usi vel y f or t he cor por at i on. No ot her doct or wor ked f or t he
cor por at i on. The cor por at i on cont r act ed t o per f or man oper at i on f or
Rosa f or $8, 000. The cor por at i on pai d Mi ke $6, 500 t o per f or mt he
oper at i on under t he t er ms of hi s empl oyment cont r act .

*a. Mi ke s gr oss i ncome i s $6, 500.
b. Mi ke must r ecogni ze t he $8, 000 gr oss i ncome because he
pr ovi ded t he ser vi ce.
c. Mi ke must r ecogni ze $8, 000 gr oss i ncome si nce t he pat i ent
obvi ousl y want ed hi mt o per f or mt he oper at i on.
d. The Kr amCompany cor por at i on s gr oss i ncome i s $1, 500.

469. As a gener al r ul e:
I. Income from property is taxed to the
person who owns the property.
II. Income from services is taxed to the
person who earns the income.
III. The assignee of income from property must
pay tax on the income.
IV. The person who receives the benefit of
the income must pay the tax on the
income.

*a. Onl y I and I I ar e t r ue.
b. Onl y I I I and I V ar e t r ue.
c. I , I I , and I I I ar e t r ue, but I V i s f al se.
d. I , I I , I I I , and I V ar e t r ue.
e. None of t he above i s t r ue.

470. On November 1, 2013, Bob, a cash basi s t axpayer , gave Dave common
st ock. On Oct ober 30, 2013, t he cor por at i on had decl ar ed t he di vi dend
payabl e t o shar ehol der s of r ecor d as of November 22, 2013. The di vi dend
was pai d on December 15, 2013. The cor por at i on has pai d t he $1, 200
di vi dend once each year f or t he past t en year s, dur i ng whi ch Bob owned
t he st ock. When Dave col l ect ed t he di vi dend on December 15, 2013:

a. Bob must i ncl ude $1, 000 ( 10/ 12 x $1, 200) of t he di vi dend i n
hi s gr oss i ncome.
*b. Bob must i ncl ude al l of t he di vi dend i n hi s gr oss i ncome.
c. Dave must i ncl ude al l of t he di vi dend i n hi s gr oss i ncome.
d. Dave shoul d t r eat t he $1, 200 as a r ecover y of capi t al .

471. Dani el pur chased a bond on J ul y 1, 2013, at par of $10, 000 pl us
accr ued i nt er est of $300. On December 31, 2013, Dani el col l ect ed t he
$600 i nt er est f or t he year . On J anuar y 1, 2014, Dani el sol d t he bond
f or $10, 200.

*a. Dani el must r ecogni ze $300 i nt er est i ncome f or 2013 and a
$200 gai n on t he sal e of t he bond i n 2014.
b. Dani el must r ecogni ze $600 i nt er est i ncome f or 2013 and a $200
gai n on t he sal e of t he bond i n 2014.
c. Dani el must r ecogni ze $600 i nt er est i ncome f or 2013 and a $100
l oss on t he sal e of t he bond i n 2014.
d. Dani el must r ecogni ze $300 i nt er est i ncome f or 2013 and a $100
l oss on t he sal e of t he bond i n 2014.

472. Ther esa, a cash basi s t axpayer , pur chased a bond on J ul y 1, 2009,
f or $10, 000, pl us $400 of accr ued i nt er est . The bond pai d $800 of
i nt er est each December 31. On Mar ch 31, 2013, she sol d t he bond f or
$9, 800, whi ch i ncl uded $200 of accr ued i nt er est .

*a. Ther esa has $200 i nt er est i ncome and a $400 l oss f r omt he
bond i n 2013.
b. Ther esa has $200 i nt er est i ncome and a $200 gai n f r omt he bond
i n 2013.
c. Ther esa has a $100 l oss f r omt he sal e of t he bond and no
i nt er est i ncome.
d. Ther esa s l oss on t he sal e of t he bond i s $600.

473. Dar r yl , a cash basi s t axpayer , gave 1, 000 shar es of Copper Company
common st ock t o hi s daught er on Sept ember 29, 2013. Copper Company i s a
publ i cl y hel d company t hat has decl ar ed a $2. 00 per shar e di vi dend on
Sept ember 30t h ever y year f or t he l ast 20 year s. J ust as Dar r yl had
expect ed, Copper Company decl ar ed a $2. 00 per shar e di vi dend on
Sept ember 30t h, payabl e on Oct ober 15t h, t o st ockhol der s of r ecor d as
of Oct ober 10t h. The daught er r ecei ved t he $2, 000 di vi dend on Oct ober
18, 2013.

*a. The daught er must r ecogni ze t he i ncome because she owned t he
st ock when t he di vi dend was decl ar ed and she r ecei ved t he $2, 000.
b. Dar r yl must r ecogni ze t he i ncome of $2, 000 because t he pur pose
of t he gi f t was t o avoi d t axes.
c. Dar r yl must r ecogni ze $1, 500 of t he di vi dend because he owned
t he st ock f or t hr ee- f our t hs of t he year .
d. Dar r yl must r ecogni ze t he $2, 000 di vi dend as hi s i ncome
because he const r uct i vel y r ecei ved t he di vi dend.

474. Wayne owns a 30%i nt er est i n t he capi t al and pr of i t s of Emer al d
Company ( a cal endar year par t ner shi p) . For t ax year 2013, t he
par t ner shi p ear ned r evenue of $900, 000 and had oper at i ng expenses of
$660, 000. Dur i ng t he year , Wayne wi t hdr ew f r omt he par t ner shi p a t ot al
of $90, 000. He al so i nvest ed an addi t i onal $30, 000 i n t he par t ner shi p.
For 2013, Wayne s gr oss i ncome f r omt he par t ner shi p i s:

*a. $72, 000.
b. $90, 000.
c. $132, 000.
d. $162, 000.

475. Har r y and Wanda wer e mar r i ed i n Texas, a communi t y pr oper t y st at e,
but moved t o Vi r gi ni a, a common l aw st at e. The cal cul at i on of t hei r
i ncome on a j oi nt r et ur n:

a. Wi l l i ncr ease as a r esul t of changi ng t hei r st at e of r esi dence.
b. Wi l l decr ease as a r esul t of changi ng t hei r st at e of r esi dence.
*c. Wi l l not change as a r esul t of changi ng t hei r st at e of
r esi dence.
d. Wi l l not be per mi t t ed.

476. J i mand Nor a, r esi dent s of a communi t y pr oper t y st at e, wer e
mar r i ed i n ear l y 2011. Lat e i n 2011 t hey separ at ed, and i n 2013 t hey
wer e di vor ced. Each ear ned a sal ar y, and t hey r ecei ved i ncome f r om
communi t y owned i nvest ment s i n al l r el evant year s. They f i l ed separ at e
r et ur ns i n 2011 and 2012.

*a. I n 2012, Nor a must r epor t onl y her sal ar y and one- hal f of t he
i ncome f r omcommuni t y pr oper t y on her separ at e r et ur n.
b. I n 2012, Nor a must r epor t on her separ at e r et ur n one- hal f of
t he J i mand Nor a sal ar y and one- hal f of t he communi t y pr oper t y
i ncome.
c. I n 2013, Nor a must r epor t on her separ at e r et ur n one- hal f of
t he J i mand Nor a sal ar y f or t he per i od t hey wer e mar r i ed as wel l
as one- hal f of t he communi t y pr oper t y i ncome and her i ncome
ear ned af t er t he di vor ce.
d. I n 2013, Nor a must r epor t onl y her sal ar y on her separ at e
r et ur n.

477. Under t he al i mony r ul es:

a. To det er mi ne whet her a cash payment i s al i mony, one must
consul t t he st at e l aws t hat def i ne al i mony.
b. A per son who r ecei ves a pr oper t y di vi si on has exper i enced an
i ncr ease i n weal t h and t hus shoul d be subj ect t o t ax.
*c. The i ncome i s i ncl uded i n t he gr oss i ncome of t he r eci pi ent
of t he payment s.
d. A per son who ear ns $90, 000 and pays $20, 000 i n al i mony i s
t axed on $90, 000 because t he $20, 000 al i mony i s i ncome assi gned
t o t he f or mer spouse.

478. Tr avi s and Andr ea wer e di vor ced. Thei r onl y mar i t al pr oper t y
consi st ed of a per sonal r esi dence ( f ai r mar ket val ue of $400, 000, cost
of $200, 000) , and publ i cl y- t r aded st ocks ( f ai r mar ket val ue of $800, 000,
cost basi s of $500, 000) . Under t he t er ms of t he di vor ce agr eement ,
Andr ea r ecei ved t he per sonal r esi dence and Tr avi s r ecei ved t he st ocks.
I n addi t i on, Andr ea was t o r ecei ve $50, 000 f or ei ght year s.
I. If the $50,000 annual payments are to be
made to Andrea or her estate (if she dies
before the end of the eight years), the
payments will qualify as alimony.
II. Andrea has a taxable gain from an
exchange of her one-half interest in the
stocks for Travis one-half interest in
the house and cash.
III. If Travis sells the stocks for $900,000,
he must recognize a $400,000 gain.

*a. Onl y I I I i s t r ue.
b. Onl y I and I I I ar e t r ue.
c. Onl y I and I I ar e t r ue.
d. I , I I , and I I I ar e t r ue.
e. None of t he above ar e t r ue.

479. Whi ch of t he f ol l owi ng i s not a r equi r ement f or an al i mony
deduct i on?

a. The payment s must be i n cash.
b. The payment s must cease upon t he deat h of t he payee.
*c. The payment s must ext end over at l east t hr ee year s.
d. The payor and payee must not l i ve i n t he same househol d at t he
t i me of t he payment s.
e. Al l of t he above ar e r equi r ement s f or an al i mony deduct i on.

480. Ti mand J anet wer e di vor ced. Thei r onl y mar i t al pr oper t y was a
per sonal r esi dence wi t h a val ue of $120, 000 and cost of $50, 000. Under
t he t er ms of t he di vor ce agr eement , J anet woul d r ecei ve t he house and
J anet woul d pay Ti m$15, 000 each year f or 5 year s, or unt i l Ti m s deat h,
whi chever shoul d occur f i r st . Ti mand J anet l i ved apar t when t he
payment s wer e made t o Ti m. The di vor ce agr eement di d not cont ai n t he
wor d al i mony.

a. Ti mmust r ecogni ze a $35, 000 [ $60, 000 1/ 2( $50, 000) ] gai n on
t he sal e of hi s i nt er est i n t he house.
b. Ti mdoes not r ecogni ze any i ncome f r omt he above t r ansact i ons.
c. J anet i s not al l owed any al i mony deduct i ons.
*d. J anet i s al l owed t o deduct $15, 000 each year f or al i mony pai d.

481. Thel ma and Mi t ch wer e di vor ced. The coupl e had a j oi nt br oker age
account t hat i ncl uded st ocks wi t h a basi s of $600, 000 and a f ai r mar ket
val ue of $1, 000, 000. Under t he t er ms of t he di vor ce agr eement , Mi t ch
woul d r ecei ve t he st ocks and Mi t ch woul d pay Thel ma $100, 000 each year
f or 6 year s, or unt i l Thel ma s deat h, whi chever shoul d occur f i r st .
Thel ma and Mi t ch l i ved apar t when t he payment s wer e made by Mi t ch.
Mi t ch pai d t he $600, 000 t o Thel ma over t he si x- year per i od. The di vor ce
agr eement di d not cont ai n t he wor d al i mony. Then, Mi t ch sol d t he
st ocks f or $1, 300, 000. Mi t ch s r ecogni zed gai n f r omt he sal e i s:

a. $0.
b. $1, 000, 000 ( $1, 300, 000 $300, 000) .
*c. $700, 000 ( $1, 300, 000 $600, 000) .
d. $300, 000 ( $1, 300, 000 $1, 000, 000) .

482. The al i mony r ecapt ur e r ul es ar e i nt ended t o:

a. Assi st f or mer spouses i n col l ect i ng al i mony when t he ot her
spouse moves t o anot her st at e.
*b. Pr event t ax deduct i ons f or pr oper t y di vi si ons.
c. Reduce t he net cash out f l ow f or t he payor .
d. Di st i ngui sh chi l d suppor t payment s f r omal i mony.

483. The al i mony r ul es:

a. Ar e based on t he pr i nci pl e t hat t he per son who ear ns t he
i ncome shoul d pay t he t ax.
b. Per mi t t ax deduct i ons f or pr oper t y di vi si ons.
c. Look t o st at e l aw t o det er mi ne t he def i ni t i on of al i mony.
*d. Di st i ngui sh chi l d suppor t payment s f r omal i mony.

484. Under t he t er ms of a di vor ce agr eement , Ki mwas t o pay her husband
Tom$7, 000 per mont h i n al i mony. Ki m s payment s wi l l be r educed t o
$3, 000 per mont h when t hei r 9 year - ol d son becomes 21. The husband has
cust ody of t hei r son. For a t wel ve- mont h per i od, Ki mcan deduct f r om
gr oss i ncome ( and Tommust i ncl ude i n gr oss i ncome) :

a. $60, 000.
b. $48, 000.
*c. $36, 000.
d. $0.

485. Under t he t er ms of a di vor ce agr eement , Lanny was t o pay hi s wi f e
J oyce $2, 000 per mont h i n al i mony and $500 per mont h i n chi l d suppor t .
For a t wel ve- mont h per i od, Lanny can deduct f r omgr oss i ncome ( and
J oyce must i ncl ude i n gr oss i ncome) :

a. $0.
b. $6, 000.
*c. $24, 000.
d. $30, 000.

486. Under t he t er ms of a di vor ce agr eement , Ron i s t o pay hi s f or mer
wi f e J i l l $10, 000 per mont h. The payment s ar e t o be r educed t o $7, 000
per mont h when t hei r 15 year - ol d chi l d r eaches age 18. Dur i ng t he
cur r ent year , Ron pai d $120, 000 under t he agr eement . Assumi ng al l of
t he ot her condi t i ons f or al i mony ar e sat i sf i ed, Ron can deduct f r om
gr oss i ncome ( and J i l l must i ncl ude i n gr oss i ncome) as al i mony:

a. $120, 000.
*b. $84, 000.
c. $36, 000.
d. $0.

487. The pur pose of t he t ax r ul es t hat appl y t o bel ow- mar ket l oans
bet ween f ami l y member s i s t o:

a. Di scour age l oans bet ween r el at ed par t i es.
*b. Pr event shi f t i ng of i ncome among f ami l y member s.
c. Pr event gi f t s f r ombei ng di sgui sed as bad debt expenses.
d. Pr event gi f t t ax avoi dance.

488. On J anuar y 1, Fat her ( Dave) l oaned Daught er ( Debr a) $100, 000 t o
pur chase a new car and t o pay of f col l ege l oans. Ther e wer e no ot her
l oans out st andi ng bet ween Dave and Debr a. The r el evant Feder al r at e on
i nt er est was 6 per cent . The l oan was out st andi ng f or t he ent i r e year .

*a. I f Debr a has $15, 000 of i nvest ment i ncome, Dave must
r ecogni ze $6, 090 of i mput ed i nt er est i ncome.
b. Dave must r ecogni ze $6, 090 of i mput ed i nt er est i ncome
r egar dl ess of t he amount of Debr a s i nvest ment i ncome.
c. Debr a must r ecogni ze $6, 090 of i mput ed i nt er est i ncome.
d. Debr a must r ecogni ze $6, 090 of i mput ed i nt er est i ncome i f Dave
has at l east $6, 090 of i nvest ment i ncome.

489. The ef f ect s of a bel ow- mar ket l oan f or $100, 000 made by a
cor por at i on t o i t s chi ef execut i ve of f i cer as an ent i cement t o get hi m
t o r emai n wi t h t he company ar e:

a. The cor por at i on has i mput ed i nt er est i ncome and t he empl oyee
i s deemed t o have r ecei ved a gi f t .
b. The cor por at i on has i mput ed i nt er est i ncome and di vi dends pai d.
c. The empl oyee has no i ncome unl ess t he f unds ar e i nvest ed and
pr oduce i nvest ment i ncome f or t he year .
*d. The empl oyee has i mput ed compensat i on i ncome and t he
cor por at i on has i mput ed i nt er est i ncome.

490. Sar ah, a maj or i t y shar ehol der i n Teal , I nc. , made a $200, 000
i nt er est - f r ee l oan t o t he cor por at i on. Sar ah i s not an empl oyee of t he
cor por at i on.

a. Sar ah must r ecogni ze i mput ed i nt er est expense and t he
cor por at i on must r ecogni ze i mput ed i nt er est i ncome.
*b. Sar ah must r ecogni ze i mput ed i nt er est i ncome and t he
cor por at i on must r ecogni ze i mput ed i nt er est expense.
c. Sar ah must r ecogni ze i mput ed di vi dend i ncome and t he
cor por at i on may r ecogni ze i mput ed i nt er est expense.
d. Nei t her Sar ah s nor t he cor por at i on s gr oss i ncome i s af f ect ed
by t he l oans because no i nt er est was char ged.

491. Shar on made a $60, 000 i nt er est - f r ee l oan t o her son, Todd, who
used t he money t o st ar t a new busi ness. Todd s onl y sour ces of i ncome
wer e $25, 000 f r omt he busi ness and $490 of i nt er est on hi s checki ng
account . The r el evant Feder al i nt er est r at e was 5%. Based on t he above
i nf or mat i on:

a. Todd s busi ness net pr of i t wi l l be r educed by $3, 000 ( . 05
$60, 000) of i nt er est expense.
b. Shar on must r ecogni ze $3, 000 ( . 05 $60, 000) of i mput ed
i nt er est i ncome on t he bel ow- mar ket l oan.
c. Todd s gr oss i ncome must be i ncr eased by t he $3, 000 ( . 05
$60, 000) i mput ed i nt er est i ncome on t he bel ow mar ket l oan.
*d. Shar on does not r ecogni ze any i mput ed i nt er est i ncome and
Todd does not r ecogni ze any i mput ed i nt er est expense.

492. J ay, a si ngl e t axpayer , r et i r ed f r omhi s j ob as a publ i c school
t eacher i n 2013. He i s t o r ecei ve a r et i r ement annui t y of $1, 200 each
mont h and hi s l i f e expect ancy i s 180 mont hs. He cont r i but ed $36, 000 t o
t he pensi on pl an dur i ng hi s 35- year car eer ; so hi s adj ust ed basi s i s
$36, 000. J ay col l ect ed 192 payment s bef or e he di ed. What i s t he
cor r ect met hod f or r epor t i ng t he pensi on i ncome?

a. Si nce J ay i s no l onger wor ki ng, none of t he pensi on payment s
must be i ncl uded i n hi s gr oss i ncome.
b. The f i r st $36, 000 r ecei ved i s a nont axabl e r ecover y of capi t al ,
and al l subsequent annui t y payment s ar e t axabl e.
c. The f i r st $180, 000 he r ecei ves i s t axabl e and t he l ast $36, 000
i s a nont axabl e r ecover y of capi t al .
*d. Al l of t he l ast 12 payment s he r ecei ved ( $14, 400) ar e t axabl e.

493. I n 2013, Todd pur chased an annui t y f or $150, 000. The annui t y i s t o
pay hi m$2, 500 per mont h f or t he r est of hi s l i f e. Hi s l i f e expect ancy
i s 100 mont hs. Whi ch of t he f ol l owi ng i s cor r ect ?

a. Todd i s not r equi r ed t o r ecogni ze any i ncome unt i l he has
col l ect ed 60 payment s ( 60 $2, 500 = $150, 000) .
b. I f Todd col l ect s 30 payment s and t hen di es i n 2015, Todd s
est at e shoul d amend hi s t ax r et ur ns f or 2013 and 2014 and
el i mi nat e al l of t he r epor t ed i ncome f r omt he annui t y f or t hose
year s.
*c. For each $2, 500 payment r ecei ved i n t he f i r st year , Todd must
i ncl ude $1, 000 i n gr oss i ncome.
d. For each $2, 500 payment r ecei ved i n t he f i r st year , Todd must
i ncl ude $1, 500 i n gr oss i ncome.

494. Set h, a cal endar year t axpayer , pur chased an annui t y f or $50, 000
i n 2011. The annui t y was t o pay hi m$3, 000 on t he f i r st day of each
year , begi nni ng i n 2011, f or t he r emai nder of hi s l i f e. Set h s l i f e
expect ancy at t he t i me he pur chased t he annui t y was 20 year s. I n 2013,
Set h devel oped a deadl y di sease, and doct or s est i mat ed t hat he woul d
l i ve f or no mor e t han 24 mont hs.

*a. I f Set h di es i n 2014, a l oss can be cl ai med on hi s f i nal
r et ur n f or hi s unr ecover ed cost of t he annui t y.
b. I f Set h di es i n 2014, hi s r et ur ns f or t he t wo pr evi ous year s
can be amended t o al l ocat e t he ent i r e cost of t he annui t y t o t he
year s i n whi ch he r ecei ved payment s and r epor t ed gr oss i ncome.
c. I f Set h i s st i l l al i ve at t he end of 2013, he i s not r equi r ed
t o r ecogni ze any gr oss i ncome because of hi s t er mi nal i l l ness.
d. I f Set h i s st i l l al i ve i n 2033, hi s r ecover y of capi t al f or
t hat year i s $500.

495. Bet t y pur chased an annui t y f or $24, 000 i n 2013. Under t he cont r act ,
Bet t y wi l l r ecei ve $300 each mont h f or t he r est of her l i f e. Accor di ng
t o t he act uar i al est i mat es, Bet t y wi l l l i ve t o r ecei ve 96 payment s and
wi l l r ecei ve a 3%r et ur n on her or i gi nal i nvest ment .

a. I f Bet t y col l ect s $3, 000 i n 2013, her gr oss i ncome i s $630
( . 03 $21, 000) .
b. Bet t y has no gr oss i ncome unt i l she has col l ect ed $24, 000.
*c. I f Bet t y l i ves t o col l ect mor e t han 96 payment s, al l of t he
amount s col l ect ed af t er t he 96t h payment must be i ncl uded i n
t axabl e i ncome.
d. I f Bet t y l i ves t o col l ect onl y 60 payment s bef or e her deat h,
she wi l l r epor t a $6, 000 l oss f r omt he annui t y [ $24, 000 ( 60
$300) = $6, 000] on her f i nal r et ur n.

496. Gor don, an empl oyee, i s pr ovi ded gr oup t er ml i f e i nsur ance
cover age equal t o t wi ce hi s annual sal ar y of $125, 000 per
year . Accor di ng t o t he I RS Uni f or mPr emi umTabl e ( based on Gor don s
age) , t he amount i s $12 per year f or $1, 000 of pr ot ect i on. The cost of
an i ndi vi dual pol i cy woul d be $15 per year f or $1, 000 of pr ot ect i on.
Si nce Gor don pai d not hi ng t owar ds t he cost of t he $250, 000 pr ot ect i on,
Gor don must i ncl ude i n hi s 2012 gr oss i ncome whi ch of t he f ol l owi ng
amount s?

a. $1, 350.
*b. $2, 400.
c. $3, 000.
d. $3, 750.

497. Gr een, I nc. , pr ovi des gr oup t er ml i f e i nsur ance f or al l of i t s
empl oyees. The cover age equal s t wi ce t he empl oyee s annual sal ar y. Sam,
a vi ce- pr esi dent , wor ked al l year f or Gr een, I nc. , and r ecei ved
$200, 000 of cover age f or t he year at a cost t o Gr een of $1, 500. The
Uni f or mPr emi ums ( based on Sam s age) ar e $. 25 per mont h f or $1, 000 of
pr ot ect i on. How much must Sami ncl ude i n gr oss i ncome t hi s year ?

a. $0.
b. $375.
*c. $450.
d. $600.

498. Tur ner , I nc. , pr ovi des gr oup t er ml i f e i nsur ance t o t he of f i cer s
of t he cor por at i on onl y. J anet , a vi ce- pr esi dent , r ecei ved $400, 000 of
cover age f or t he year at a cost t o Tur ner , I nc. of $5, 600. The Uni f or m
Pr emi ums ( based on J anet s age) ar e $15 a year f or $1, 000 pr ot ect i on.
How much of t hi s must J anet i ncl ude i n gr oss i ncome t hi s year ?

a. $0.
b. $2, 700.
c. $5, 600.
*d. $6, 000.

499. The amount of Soci al Secur i t y benef i t s r ecei ved by an i ndi vi dual
t hat he or she must i ncl ude i n gr oss i ncome:

a. I s comput ed i n t he same manner as an annui t y [ excl usi on =
( cost / expect ed r et ur n) amount r ecei ved] .
b. May not exceed t he por t i on cont r i but ed by t he empl oyer .
c. May not exceed 50%of t he Soci al Secur i t y benef i t s r ecei ved.
*d. May be zer o or as much as 85%of t he Soci al Secur i t y benef i t s
r ecei ved, dependi ng upon t he t axpayer s Soci al Secur i t y benef i t s
and ot her i ncome.

500. The t axabl e por t i on of Soci al Secur i t y benef i t s may be af f ect ed by:

a. The t axpayer s i t emi zed deduct i ons.
*b. The i ndi vi dual s t ax- exempt i nt er est i ncome.
c. The number of quar t er s t he i ndi vi dual wor ked.
d. The i ndi vi dual s st andar d deduct i on.

501. Debbi e i s age 67 and unmar r i ed and her onl y sour ces of i ncome ar e
$200, 000 i n t axabl e i nt er est and $20, 000 of Soci al Secur i t y benef i t s.
Debbi e s adj ust ed gr oss i ncome f or t he year i s:

a. $220, 000.
*b. $217, 000.
c. $203, 000.
d. $200, 000.

502. Our t ax l aws encour age t axpayer s t o ____ asset s t hat have
appr eci at ed i n val ue and ____ asset s t hat have decl i ned i n val ue.

a. sel l , keep.
b. sel l , sel l .
*c. keep, sel l .
d. keep, keep.

503. Mar gar et owns l and t hat appr eci at es at t he r at e of 10%each year .
Ral ph owns a zer o coupon ( i . e. , al l of t he i nt er est i s pai d at mat ur i t y
but i s t axed annual l y) cor por at e bond wi t h a yi el d t o mat ur i t y of 10%.
At t he end of 10 year s, t he bond wi l l mat ur e and t he l and wi l l be sol d.
At t he end of t he 10 year s,

a. Mar gar et and Ral ph wi l l have accumul at ed t he same af t er - t ax
amount s.
b. Ral ph wi l l have accumul at ed a gr eat er af t er - t ax amount because
t he i nt er est on t he bond i s t ax- exempt .
c. Mar gar et wi l l have accumul at ed t he gr eat er af t er - t ax amount
because t he gai n on t he l and i s t ax- exempt .
d. Mar gar et wi l l have accumul at ed t he gr eat er af t er - t ax amount
but onl y i f her mar gi nal t ax r at e never exceeds 27%.
*e. Mar gar et wi l l accumul at e t he gr eat er af t er - t ax amount because
she ear ns a r et ur n on t he def er r ed t axes.

504. Ted was shoppi ng f or a new aut omobi l e. He f ound one t hat met hi s
needs and agr eed t o pur chase i t f or $23, 000. He had shopped ar ound and
concl uded t hat he coul d not get a bet t er pr i ce f r omanot her
deal er . Af t er he had pai d f or t he aut omobi l e, t he deal er cal l ed t o
not i f y Ted t hat he was ent i t l ed t o a manuf act ur er s r ebat e of
$1, 500. The next week he r ecei ved a $1, 500 check f r omt he manuf act ur er .
How much shoul d Ted i ncl ude i n gr oss i ncome?

Cor r ect Answer :
Per haps i n Ted s mi nd he i s $1, 500 r i cher as a r esul t of t he r ebat e,
si nce he was wi l l i ng t o pay $23, 000 f or t he aut omobi l e wi t hout any
knowl edge of t he f act t hat he was ent i t l ed t o t he r ebat e. However ,
f r omt he poi nt of vi ew of measur i ng gr oss i ncome, one coul d r eason t hat
he pur chased an aut omobi l e f or a net cost of $21, 500 ( $23, 000
$1, 500) . The f act t hat t he net cost i s l ess t han t he amount Ted was
wi l l i ng t o pay shoul d not af f ect t he det er mi nat i on of gr oss i ncome.

505. Det er mi ne t he pr oper t ax year f or gr oss i ncome i ncl usi on i n each
of t he f ol l owi ng cases.
a. An aut omobi l e deal er has sever al new car s
i n i nvent or y, but of t en does not have t he
r i ght combi nat i on of body st yl e, col or , and
accessor i es. I n some cases t he deal er makes
an of f er t o sel l a car at a cer t ai n pr i ce,
accept s a deposi t , and t hen or der s t he car
f r omt he manuf act ur er . When t he car i s
r ecei ved f r omt he manuf act ur er , t he sal e i s
cl osed, and t he deal er r ecei ves t he bal ance
of t he sal es pr i ce. At t he end of t he
cur r ent year , t he deal er has deposi t s
t ot al i ng $8, 200 f or car s t hat have not been
r ecei ved f r omt he manuf act ur er . When i s t he
$8, 200 subj ect t o t ax?

b. Pur pl e Cor por at i on, an ext er mi nat i ng
company, i s a cal endar year t axpayer . I t
cont r act s t o pr ovi de ser vi ce t o homeowner s
once a mont h under a one- , t wo- , or t hr ee-
year cont r act . On Apr i l 1 of t he cur r ent
year , t he company sol d a cust omer a one-
year cont r act f or $120. How much of t he
$120 i s t axabl e i n t he cur r ent year i f t he
company i s an accr ual basi s t axpayer . I f
t he $120 i s payment on a t wo- year cont r act ,
how much i s t axed i n t he year t he cont r act
i s sol d and i n t he f ol l owi ng year ? I f t he
$120 i s payment on a t hr ee- year cont r act ,
how much i s t axed i n t he year t he cont r act
i s sol d and i n t he f ol l owi ng year ?

c. Pi nk, I nc. , an accr ual basi s t axpayer , owns
an amusement par k whose f i scal year ends
Sept ember 30. To i ncr ease busi ness dur i ng
t he f al l and wi nt er mont hs, Pi nk sol d
passes t hat woul d al l ow t he hol der t o r i de
f r ee dur i ng t he mont hs of Oct ober t hr ough
Mar ch. Dur i ng t he mont h of Sept ember ,
$6, 000 was col l ect ed f r omt he sal e of
passes f or t he upcomi ng f al l and wi nt er .
When wi l l t he $6, 000 be t axabl e t o Pi nk?

d. The t axpayer i s i n t he of f i ce equi pment
r ent al busi ness and uses t he accr ual basi s
of account i ng. I n December he col l ect ed
$5, 000 i n r ent s f or t he f ol l owi ng J anuar y.
When i s t he $5, 000 t axabl e?

Cor r ect Answer :
a. Reg. 1.451-5 specifies that accrual basis
taxpayers may defer the recognition of income
from advance payments for the future sale of
inventories that are not on hand the last day
of the year and the amount collected is less
than the sellers cost of the goods. The
$8,200 would not be includible in the gross
income of the dealer for the current year and
would be includible in gross income at the
time the sale is consummated upon delivery of
the car.

b. Revenue Procedure 2004-34 permits the accrual
basis taxpayer to amortize the prepaid income
for the first year under the contract.
However, the balance of the unearned income
must be recognized in the tax year following
the year of receipt. In the case of a contract
sold on April 1 that was for services over the
twelve-month period beginning on that date,
the taxpayer would recognize 9/12 of the
income in the year of sale, and the remaining
balance (3/12) in the following year. In the
case of a contract sold on April 1 that was
for services over the 24-month period
beginning on that date, the taxpayer would
recognize 9/24 of the income in the year of
sale and the remaining balance (15/24) in the
following year. In the case of a contract sold
on April 1 that was for services over the 36-
month period beginning on that date, the
taxpayer would recognize 9/36 of the income in
the year of sale and the remaining balance
(27/36) in the following year.

c. Revenue Procedure 2004-34 would permit
deferral of $6,000 from income until the
following tax year since all services will be
performed by the end of the tax year following
the year of receipt.

d. Prepaid rent is taxable in the year of receipt
to both the accrual and cash basis taxpayers.
Revenue Procedure 2004-34 is not applicable to
prepaid rent income.

506. On J anuar y 1, 2013, Faye gave Todd, her son, a 36- mont h
cer t i f i cat e of deposi t she pur chased December 31, 2011, f or $8, 638.
Faye gave Todd 1, 000 shar es of ABC, I nc. , on December 2, 2013. The
cer t i f i cat e had a mat ur i t y val ue of $10, 000 and t he yi el d t o mat ur i t y
was 5%. On November 30, 2013, ABC, I nc. , had decl ar ed a di vi dend of
$1. 00 payabl e t o st ockhol der s of r ecor d on December 5t h. How much
i nt er est and di vi dends shoul d Todd i ncl ude i n hi s gr oss i ncome f or 2013?

Cor r ect Answer :
Todd must r epor t $454 of i nt er est i ncome and no di vi dends. The
cer t i f i cat e of deposi t i s an or i gi nal i ssue di scount i nst r ument .
Ther ef or e, Faye shoul d have r epor t ed $432 ( . 05 $8, 638) of i nt er est
i ncome i n 2012, and t hus t he adj ust ed basi s of t he CD i s $9, 070 ( $8, 638
+ $432) . Todd must r epor t i nt er est i ncome f or 2013 cal cul at ed as
f ol l ows: $454 ( . 05 $9, 070) . The di vi dends had been decl ar ed bef or e
Todd r ecei ved t he st ock. Accor di ng t o t he I RS i n t hi s case, t he i ncome
bel ongs t o Faye si nce she was t he owner of t he st ock when t he di vi dend
was decl ar ed and she assi gned t o Todd t he r i ght t o r ecei ve i t .

507. J os, a cash met hod t axpayer , i s a par t ner i n J &T Account i ng
Ser vi ces, a cal endar year par t ner shi p. Under t he par t ner shi p agr eement ,
J os i s t o r ecei ve 20%of t he par t ner shi p s pr of i t s or l osses. Each
par t ner i s al l owed t o wi t hdr aw $10, 000 each mont h f or hi s or her l i vi ng
expenses. J os wi t hdr ew $120, 000 dur i ng t he year as hi s mont hl y dr aw i n
2013. However , i n December t he par t ner shi p was shor t on cash and J os
was r equi r ed t o i nvest an addi t i onal $10, 000 i n t he par t ner shi p. I n
Mar ch 2013, J os r ecei ved $40, 000 as hi s shar e of di st r i but ed 2012
pr of i t s. The par t ner shi p ear ni ngs bef or e par t ner s wi t hdr awal s f or 2013
t ot al ed $1 mi l l i on. Comput e J os s gr oss i ncome f r omt he par t ner shi p
f or 2013.

Cor r ect Answer :
J os s gr oss i ncome f r omt he par t ner shi p i s hi s shar e of t he
par t ner shi p pr of i t s of $200, 000 ( . 20 $1 mi l l i on) . The amount of t he
di st r i but i ons he r ecei ves ( a r ecover y of capi t al nor mal l y) gener al l y
does not af f ect t he amount he i ncl udes i n hi s gr oss i ncome. A
wi t hdr awal of pr of i t s i s anal ogous t o wi t hdr awi ng cash f r oma bank
account cr eat ed wi t h af t er - t ax ear ni ngs. Hi s i nvest ment i s a $10, 000
cont r i but i on t o capi t al .

508. Ted and Al i ce wer e i n t he pr ocess of negot i at i ng a di vor ce
agr eement . They own bonds wi t h a basi s of $800, 000 and a f ai r mar ket
val ue of $800, 000. They al so own common st ock wi t h a basi s of $600, 000
and a f ai r mar ket val ue of $800, 000. Al i ce i s t r yi ng t o deci de whet her
t o bar gai n t o r ecei ve t he bonds or t he st ock. She has no pl ans f or
sel l i ng t he bonds or st ock, whi chever she r ecei ves.

a. Whi ch woul d you advi se Al i ce t o r ecei ve?

b. Fr omTed s per spect i ve, ar e t he asset s of equal val ue?

Cor r ect Answer :
a. The si gni f i cant di f f er ence bet ween t he asset s f r om a t ax
per spect i ve i s t hat t he per son who r ecei ves t he st ock wi l l have a
$600, 000 basi s when t he val ue i s $800, 000. Ther ef or e, a t axabl e gai n
wi l l be r ecogni zed i f t he asset s ar e sol d f or mor e t han $600, 000. The
bonds do not have t hi s t axabl e gai n possi bi l i t y. Al i ce cannot be
absol ut el y cer t ai n t hat t he pr oper t y wi l l never be sol d; t her ef or e, she
shoul d accept t he bonds.

b. The bonds and stock are not of equal value because the
stock has the lower tax basis thus creating a potential tax liability upon
their sale.

509. Mar gar et made a $90, 000 i nt er est - f r ee l oan t o her son, Adam, who
used t he money t o r et i r e a mor t gage on hi s per sonal r esi dence and t o
buy a cer t i f i cat e of deposi t . Adam s onl y i ncome f or t he year i s hi s
sal ar y of $35, 000 and $1, 400 i nt er est i ncome on t he cer t i f i cat e of
deposi t . The r el evant Feder al i nt er est r at e i s 8%compounded
semi annual l y. The l oan i s out st andi ng f or t he ent i r e year .

a. Based on t he above i nf or mat i on, what i s t he
ef f ect of t he l oan on Mar gar et s gr oss
i ncome f or t he year ?

b. The f act s ar e t he same as above, except you
di scover ed t hat Mar gar et had made an
addi t i onal l oan of $15, 000 t o Adami n t he
pr evi ous year . Adamused t he f unds t o pay
hi s chi l d s pr i vat e school t ui t i on. What ar e
t he ef f ect s of t he l oans on Mar gar et s gr oss
i ncome?

Cor r ect Answer :
a. Margarets interest income from the loan is
$1,400, which is equal to Adams net
investment income for the year. Thus,
Margarets imputed interest income for the
year is $1,400, which is the lesser of the
imputed interest at the Federal rate of $7,344
[($90,000 8% 1/2) + ($93,600 8% 1/2)]
or Adams net investment income of $1,400.

b. Margarets loans to Adam exceed $100,000
($90,000 + $15,000). Therefore, Margaret must
recognize interest income equal to the Federal
rate times the outstanding loans.

(.08 $105,000 1/2) = $4,200; (.08 $109,200 1/2) =
$4,368

Total = $8,568

510. Ar nol d was empl oyed dur i ng t he f i r st si x mont hs of t he year and
ear ned a $90, 000 sal ar y. Dur i ng t he next 6 mont hs, he col l ect ed $7, 200
of unempl oyment compensat i on, bor r owed $6, 000 ( usi ng hi s per sonal
r esi dence as col l at er al ) , and wi t hdr ew $1, 000 f r omhi s savi ngs account
( i ncl udi ng $60 i nt er est ) . When he l ef t hi s f or mer empl oyer , he
wi t hdr ew hi s r et i r ement benef i t s ( a qual i f i ed annui t y) i n a l ump- sumof
$50, 000. He made no cont r i but i ons t o t he pl an. Ar nol d s par ent s
l oaned hi m$10, 000 ( i nt er est - f r ee) on J ul y 1 of t he cur r ent year , when
t he Feder al r at e was 3%. Ar nol d di d not r epay t he l oan dur i ng t he year
and used t he money f or l i vi ng expenses. Cal cul at e Ar nol d s adj ust ed
gr oss i ncome f or t he year .

Cor r ect Answer :
Salary $ 90,000
Unemployment compensation 7,200
Interest income 60
Retirement benefit 50,0
00
Adjusted gross income $147,260

The interest-free loan does not result in gross income to Arnold because of
the $10,000 exception.

511. How does t he t axat i on of Soci al Secur i t y benef i t s di f f er f r omt he
t axat i on of an annui t y pur chased by t he t axpayer ?

Cor r ect Answer :
I n case of Soci al Secur i t y benef i t s, t he t axpayer pays i nt o t he f und
out of hi s or her bef or e t ax ear ni ngs, and t he empl oyer mat ches t he
empl oyee s cont r i but i on. The amount of Soci al Secur i t y benef i t s t hat
ar e i ncl uded i n gr oss i ncome ( 50%or 85%) i s dependent upon t he
per son, s ot her i ncome combi ned wi t h t he Soci al Secur i t y benef i t . The
empl oyee s cont r i but i on t o t he Soci al Secur i t y f und does not di r ect l y
ent er i nt o t he cal cul at i on of t he t axabl e por t i on.

I n t he case of an annui t y pur chased by t he i ndi vi dual , t he t axabl e
por t i on i s comput ed by subt r act i ng f r omt he amount r ecei ved t he act ual
amount pai d by t he i ndi vi dual . The t axabl e por t i on i s spr ead over t he
i ndi vi dual s l i f e expect ancy, and a l oss i s r ecogni zed i f t he empl oyee
di es bef or e t he end of hi s or her l i f e expect ancy.

512. Sar ah, a wi dow, i s r et i r ed and r ecei ves $20, 000 i nt er est i ncome
and di vi dends and $10, 000 i n Soci al Secur i t y benef i t s. Sar ah i s
consi der i ng sel l i ng a st ock at a $8, 000 gai n. What wi l l be t he i ncr ease
i n Sar ah s gr oss i ncome as a r esul t of t he sal e of t he st ock?

Cor r ect Answer :
None of Sar ah s Soci al Secur i t y benef i t s wi l l be t axabl e i f she does
not sel l t he st ock {50%[ $20, 000 + 50%( $10, 000) $25, 000] = $0}.

The $8, 000 gai n wi l l cause Sar ah s t axabl e Soci al Secur i t y benef i t s t o
i ncr ease by $4, 000, whi ch i s t he l esser of t he f ol l owi ng:

50%($10,000) $5,000
50%[$28,000 + 50%($10,000)
$25,000]
$4,000

Therefore, the $8,000 gain will cause Sarahs gross income to increase by
$12,000 ($8,000 + $4,000).

513. Roy i s consi der i ng pur chasi ng l and f or $10, 000. He expect s t he
l and t o appr eci at e i n val ue 8%each year ( compounded) and he wi l l sel l
i t at t he end of 10 year s. He al so i s consi der i ng pur chasi ng a bond f or
$10, 000. The bond does not pay any annual i nt er est , but wi l l pay
$21, 589 at mat ur i t y i n 10 year s. The bef or e- t ax r at e of r et ur n on t he
bond i s 8%. Roy i s i n t he 40%( combi ned Feder al and St at e) mar gi nal t ax
br acket . Roy has ot her i nvest ment s t hat ear n a 8%bef or e- t ax r at e of
r et ur n. Gi ven t hat t he compound i nt er est f act or at 8%i s 2. 1589, and at
4. 8%t he f act or i s 1. 5981, whi ch al t er nat i ve shoul d Roy choose?

Cor r ect Answer :
Roy shoul d sel ect t he i nvest ment i n t he l and. The i nvest ment i n t he
bond ear ns a 4. 8%af t er - t ax r at e of r et ur n. The t ax on t he or i gi nal
i ssue di scount must be pai d each year ; t her ef or e, owni ng t he bond i s
equi val ent t o owni ng an i nvest ment t hat appr eci at es at an af t er - t ax
r at e of 4. 8%. At t he end of 10 year s, Roy wi l l have accumul at ed $15, 981
( 1. 5981 $10, 000) . Wi t h t he l and, Roy s i nvest ment wi l l appr eci at e t o
$21, 589 ( 2. 1589 $10, 000) whi ch exceeds t he $15, 981 amount accumul at ed
wi t h t he bond.

514. I n J anuar y 2013, Tammy pur chased a bond due i n 24 mont hs. The cost
of t he bond i s $857 and i t s mat ur i t y val ue i s $1, 000. No i nt er est i s
pai d each year , but t he compound i nt er est r at e on t he bond i s 8%. Tammy
al so pur chased a Ser i es EE Uni t ed St at es Gover nment bond f or $558, wi t h
a mat ur i t y val ue i n 10 year s of $1, 000. Thi s i s t he onl y Ser i es EE bond
she has ever owned. The Ser i es EE bond i s sol d t o yi el d 6%i nt er est .
Tammy i s 13 year s ol d and has no ot her sour ce of i ncome. She i s cl ai med
as a dependent by her par ent s. Comput e Tammy s gr oss i ncome f r omt he
bond and Ser i es EE bond f or 2013.

Cor r ect Answer :
Tammy s onl y r ecogni zed i ncome i s f r omt he or i gi nal i ssue di scount of
$69 ( $857 8%) on t he bond. The Ser i es EE bonds ar e exempt f r omt he
or i gi nal i ssue di scount r ul es. However , Tammy coul d el ect t o i ncl ude
t he or i gi nal i ssue di scount on t he Ser i es EE bond each year , and i t
appear s t hat t he el ect i on shoul d be made. Because Tammy has no ot her
sour ces of i ncome, t he ef f ect i ve t ax r at e on t he accr ued Ser i es EE bond
i nt er est i s zer o because of t he avai l abl e st andar d deduct i on of $900.
The i nt er est r epor t ed wi l l i ncr ease Tammy s basi s i n t he Ser i es EE bond
and, t her ef or e, she wi l l not have t o r ecogni ze any i ncome at mat ur i t y.
The i nt er est on t he Ser i es EE bond f or 2013, i f t he el ect i on i s made,
i s $33 ( $558 6%) .

515. I n some f or ei gn count r i es, t he t ax l aw speci f i cal l y desi gnat es t he
t ypes of i ncome i t ems t hat ar e i ncl udi bl e i n gr oss i ncome. How does
t hi s appr oach compar e wi t h t he U. S. I nt er nal Revenue Code ( 61) ? What
i s a maj or advant age t o t he appr oach used i n t he U. S. t ax l aw?

Cor r ect Answer :
The I nt er nal Revenue Code def i nes gr oss i ncome as al l i ncome unl ess
speci f i cal l y excl uded. The advant age of t he U. S. syst emi s t hat an al l -
i ncl usi ve l i st of t ypes of i ncome does not have t o be devel oped.

516. Mel i ssa i s a compul si ve coupon cl i pper . She of t en br ags about t he
t i me she pur chased a car t f ul l of gr ocer i es f or $5. 00, when t he cost
wi t hout coupons woul d have been $50. Di scuss whet her Mel i ssa r eal i zes
gr oss i ncome f r omher coupon cl i ppi ng.

Cor r ect Answer :
Under t he al l - i ncl usi ve concept of gr oss i ncome, one coul d r eason t hat
Mel i ssa r eal i zes i ncome f r omher coupon col l ect i ng act i vi t i es. She
cl ear l y i ncr eases her weal t h, as she acqui r es f ood at 1/ 10t h of t he
amount pai d by t hose who do not spend t hei r t i me and ef f or t savi ng
coupons. I n some cases, t he coupons may have been obt ai ned when ot her
goods wer e pur chased. One coul d r eason t hat t he pr i ce pai d i ncl uded a
cost of t he coupon; t hus, t he pr i ce pai d woul d be al l ocat ed bet ween t he
goods r ecei ved and t he cost of t he coupon. Then, when t he coupon was
ut i l i zed, t he di f f er ence bet ween Mel i ssa s cost and t he r edempt i on
val ue woul d be i ncome.

However , i t seems unl i kel y t hat t he I RS woul d at t empt t o t ax t he
ear ni ngs f r omcoupon cl i ppi ng because of t he t i me and ef f or t r equi r ed
t o col l ect smal l amount s of t axes.

517. Kat her i ne i s 60 year s ol d and i s bar gai ni ng wi t h her empl oyer over
def er r ed compensat i on. I n exchange f or r educi ng her cur r ent year s
sal ar y by $50, 000, she can r ecei ve a l ump- sumamount i n 5 year s, when
she wi l l r et i r e. I f she r ecei ves t he $50, 000 i n t he cur r ent year , she
wi l l i nvest i n cer t i f i cat es of deposi t t hat yi el d 5%. Kat her i ne i s i n
t he 28%mar gi nal t ax br acket i n al l r el evant year s. What i s t he
mi ni mumamount Kat her i ne shoul d accept as a def er r ed pay opt i on? [ Hi nt :
t he compound i nt er est f act or i s 1. 1934. ]

Cor r ect Answer :
$59,669

The $50,000 salary will be $36,000 [(1 .28)($50,000)] after-tax. When
this is invested in a CD that yields 3.6% [(1 .28)(.05)] after-tax for
five years, the compounded amount will be $42,962 ($36,000
1.1934). If a lump-sum is received in five years, it will be subject to
tax. Therefore, Katherine should receive at least $59,669 [$42,962/(1
.28)].

518. Di ck and J ane ar e di vor ced i n 2012. At t he t i me of t he di vor ce,
Di ck had a l awsui t pendi ng. He had f i l ed sui t agai nst a f or mer empl oyer
f or over t i me pay. As par t of a di vor ce agr eement , Di ck agr eed t o pay
J ane one- hal f of t he pr oceeds f r omt he l awsui t . I n 2013, Di ck col l ect ed
$250, 000 f r omt he f or mer empl oyer and pai d J ane $125, 000. What ar e t he
t ax consequences f or Di ck r ecei vi ng t he $250, 000 and t hen payi ng J ane
t he $125, 000?

Cor r ect Answer :
The $250, 000 payment i s addi t i onal gr oss i ncome t o Di ck. I n or der f or
Di ck t o avoi d t ax on t he $125, 000 he t r ansf er r ed t o J ane, t he payment
must qual i f y as al i mony. Thi s means t he payment must be made onl y i f
she i s al i ve at t he t i me Di ck r ecei ves t he awar d. Mor eover , even i f t he
payment qual i f i es as al i mony, t he l ar ge payment r ecei ved i n 2013 wi l l
pr obabl y r esul t i n some al i mony r ecapt ur e.

519. Rachel owns r ent al pr oper t i es. When Rachel r ent s t o a new t enant ,
she usual l y r equi r es t he t enant t o pay an amount i n addi t i on t o t he
f i r st mont h s r ent . The addi t i onal amount ser ves as secur i t y f or
damages t o t he pr oper t y and t he t enant s f ai l ur e t o pay f ut ur e r ent s.
How shoul d t he payment s be char act er i zed ( e. g. , on l ease document s) t o
mi ni mi ze Rachel s cur r ent t ax l i abi l i t y?

Cor r ect Answer :
The payment s shoul d be char act er i zed as damage deposi t s. Thi s wi l l
ensur e t hat t he I RS wi l l not t ax t he payment s as pr epai d i ncome. A
payment t o secur e f ut ur e r ent s woul d pr obabl y be t r eat ed as pr epai d
r ent i ncome.

520. Rachel , who i s i n t he 35%mar gi nal t ax br acket , i s consi der i ng
pur chasi ng an annui t y t hat wi l l pay her $10, 000 per year f or t he
r emai nder of her l i f e. Her l i f e expect ancy i s 15 year s. The cost of t he
annui t y i s $97, 120, and t he cost i s cal cul at ed t o yi el d her an expect ed
6%r et ur n on her i nvest ment . As an al t er nat i ve, Rachel coul d pl ace t he
$97, 120 i n a savi ngs account yi el di ng 6%and she coul d wi t hdr aw $10, 000
each year f or 15 year s ( r educi ng t he val ue of t he account t o zer o at
t he end of 15 year s) . How mi ght t he t ax l aws appl i cabl e t o annui t i es
af f ect Rachel s deci si on?

Cor r ect Answer :
The t ax l aws f avor t he pur chase of t he annui t y. Thi s r esul t s because
t he annui t y r ul es al l ow t he t axpayer t o r ecover hi s or her i nvest ment
mor e qui ckl y t han under t he savi ngs account pl an. Each al t er nat i ve
yi el ds t he same t axabl e i ncome over t he 15 year s. However , Rachel s
t axes ar e def er r ed wi t h t he annui t y cont r act . Under t he annui t y r ul es,
Rachel woul d t r eat as a r ecover y of capi t al $6, 475 ( $97, 120/ 15) each
year . Wi t h t he savi ngs account , Rachel has l ess r ecover y of capi t al i n
t he ear l y year s t han i n t he l at er year s. For exampl e, i n t he f i r st year
Rachel ear ns i nt er est on t he savi ngs account of $5, 827 ( $97, 120 . 06)
and has a r ecover y of capi t al of $4, 173 ( $10, 000 $5, 827) . Thus, t he
pr esent val ue of t he t axes ar e gr eat er wi t h t he savi ngs account .

521. I n t he case of a zer o i nt er est bel ow- mar ket l oan by a cor por at i on
t o a shar ehol der - empl oyee, what di f f er ence does i t make t o t he
cor por at i on and t he shar ehol der whet her t he l oan i s char act er i zed as a
cor por at i on s l oan t o i t s shar ehol der or a cor por at i on s l oan t o i t s
empl oyee?

Cor r ect Answer :
I mput ed i nt er est on t he l oan t o an empl oyee woul d cr eat e compensat i on
expense equal t o t he amount of i mput ed i nt er est t hat i s not char ged t he
empl oyee. The compensat i on expense woul d be deduct i bl e by t he
cor por at i on. On t he ot her hand, t he i mput ed i nt er est on t he shar ehol der
l oan cr eat es a nondeduct i bl e di vi dend pai d by t he cor por at i on. Fr om
t he shar ehol der - empl oyee s per spect i ve, di vi dend t r eat ment mi ght be
pr ef er abl e because t he di vi dends ar e not subj ect t o 1. 45%Medi car e t ax
and ar e el i gi bl e f or t he benef i ci al t ax r at e f or qual i f i ed di vi dends.

522. Under t he f or mul a f or t axi ng Soci al Secur i t y benef i t s, l ow i ncome
t axpayer s ar e not r equi r ed t o i ncl ude any of t he Soci al Secur i t y
benef i t s i n gr oss i ncome. But as i ncome i ncr eases, 50%of t he Soci al
Secur i t y benef i t s may be i ncl uded i n gr oss i ncome. Fur t her i ncr eases i n
i ncome wi l l cause as much as 85%of t he Soci al Secur i t y benef i t s bei ng
subj ect t o t ax. Does t hi s mean t hat t he t axat i on of Soci al Secur i t y
benef i t s i s mor e or l ess pr ogr essi ve t han t he t axat i on of ot her t ypes
of i ncome?

Cor r ect Answer :
The f or mul a f or t he t axat i on of Soci al Secur i t y benef i t s i s mor e
pr ogr essi ve t han t he t axat i on of ot her sour ces of i ncome. Under a
pr ogr essi ve syst em, as i ncome i ncr eases t he t ax as a per cent of i ncome
i ncr eases. Thi s i s accompl i shed by i ncr easi ng t he mar gi nal t ax r at e as
i ncome i ncr eases. Wi t h t he Soci al Secur i t y t axi ng f or mul a, as i ncome
i ncr eases, and t he t axpayer i s subj ect ed t o hi gher mar gi nal r at es, t he
amount of t axabl e i ncome i ncr eases as mor e of t he Soci al Secur i t y
benef i t s ar e subj ect t o t ax.

523. For a per son who i s i n t he 35%mar gi nal t ax br acket , $1, 000 of
t ax- exempt i ncome i s equi val ent t o $1, 350 of i ncome t hat i s subj ect t o
t ax.

a. Tr ue
*b. Fal se

524. J ohn t ol d hi s nephew, St eve, i f you mai nt ai n my house when I
cannot , I wi l l l eave t he house t o you when I di e. St eve mai nt ai ned t he
house and when J ohn di ed St eve i nher i t ed t he house. The val ue of t he
r esi dence can be excl uded f r omSt eve s gr oss i ncome as an i nher i t ance.

a. Tr ue
*b. Fal se

525. Br ooke wor ks par t - t i me as a wai t r ess i n a r est aur ant . For gr oups
of 7 or mor e cust omer s, t he cust omer i s char ged 15%of t he bi l l f or
Br ooke s ser vi ces. For par t i es of l ess t han 7, t he t i ps ar e
vol unt ar y. Br ooke r ecei ved $11, 000 f r omt he gr oups of 7 or mor e and
$7, 000 i n vol unt ar y t i ps f r omal l ot her cust omer s. Usi ng t he cust omar y
15%r at e, her vol unt ar y t i ps woul d have been onl y $6, 000. Br ooke must
i ncl ude $18, 000 ( $11, 000 + $7, 000) i n gr oss i ncome.

*a. Tr ue
b. Fal se

526. Mel was t he benef i ci ar y of a $45, 000 gr oup t er ml i f e i nsur ance
pol i cy on hi s wi f e. Hi s wi f e s empl oyer pai d al l of t he pr emi ums on
t he pol i cy. Mel used t he l i f e i nsur ance pr oceeds t o pur chase a Uni t ed
St at es Gover nment bond, whi ch pai d hi m$2, 500 i nt er est dur i ng t he
cur r ent year . Mel s Feder al gr oss i ncome f r omt he above i s $2, 500.

*a. Tr ue
b. Fal se

527. Zack was t he benef i ci ar y of a l i f e i nsur ance pol i cy on hi s wi f e.
Zack had pai d $20, 000 i n pr emi ums on t he pol i cy. He col l ect ed $50, 000
on t he pol i cy when hi s wi f e di ed f r oma t er mi nal i l l ness. Because i t
t ook sever al mont hs t o pr ocess t he cl ai m, t he i nsur ance company pai d
Zack $53, 000, t he f ace amount of t he pol i cy pl us $3, 000 i nt er est . Zack
must i ncl ude $23, 000 i n hi s gr oss i ncome.

a. Tr ue
*b. Fal se

528. Ed di ed whi l e empl oyed by Vi ol et Company. Hi s wi f e col l ect ed
$40, 000 on a gr oup t er ml i f e i nsur ance pol i cy t hat Vi ol et pr ovi ded i t s
empl oyees, and $6, 000 of accr ued sal ar y Ed had ear ned pr i or t o hi s
deat h. Al l of t he pr emi ums on t he gr oup t er ml i f e i nsur ance pol i cy
wer e excl uded f r omt he Ed s gr oss i ncome. Ed s wi f e i s r equi r ed t o
r ecogni ze as gr oss i ncome onl y t he $6, 000 she r ecei ved f or t he accr ued
sal ar y.

*a. Tr ue
b. Fal se

529. Gar y cashed i n an i nsur ance pol i cy on hi s l i f e. He needed t he
f unds t o pay f or hi s t er mi nal l y i l l wi f e s medi cal expenses. He had
pai d $12, 000 i n pr emi ums and he col l ect ed $30, 000 f r omt he i nsur ance
company. Gar y i s not r equi r ed t o i ncl ude t he gai n of $18, 000 ( $30, 000
$12, 000) i n gr oss i ncome.

a. Tr ue
*b. Fal se

530. When Bet t y was di agnosed as havi ng a t er mi nal i l l ness, she sol d
her l i f e i nsur ance pol i cy t o I nsur ance Pur chase, I nc. , a company t hat
i s l i censed t o i nvest i n t hese t ypes of cont r act s. Bet t y sol d t he
pol i cy f or $32, 000 and I nsur ance Pur chase, I nc. , became t he benef i ci ar y.
She had pai d t ot al pr emi ums of $19, 000. Bet t y di ed 8 mont hs af t er t he
sal e. I nsur ance Pur chase, I nc. , col l ect ed $50, 000 on t he pol i cy. The
company had pai d addi t i onal pr emi ums of $4, 000 on t he pol i cy. Bet t y i s
not r equi r ed t o r ecogni ze a $13, 000 gai n f r omt he sal e of her l i f e
i nsur ance pol i cy and I nsur ance Pur chase, I nc. , i s r equi r ed t o
r ecogni ze a $14, 000 gai n f r omt he i nsur ance pol i cy.

*a. Tr ue
b. Fal se

531. Agnes r ecei ves a $5, 000 schol ar shi p whi ch cover s her t ui t i on at
Par ochi al Hi gh School . She may not excl ude t he $5, 000 because t he
excl usi on appl i es onl y t o schol ar shi ps t o at t end col l ege.

a. Tr ue
*b. Fal se

532. I f a schol ar shi p does not sat i sf y t he r equi r ement s f or a gi f t , t he
schol ar shi p must be i ncl uded i n gr oss i ncome.

a. Tr ue
*b. Fal se

533. Ashl ey r ecei ved a schol ar shi p t o be used as f ol l ows: t ui t i on
$6, 000; r oomand boar d $9, 000; and books and l abor at or y suppl i es
$2, 000. Ashl ey i s r equi r ed t o i ncl ude onl y $9, 000 i n her gr oss i ncome.

*a. Tr ue
b. Fal se

534. I n December 2013, Emi l y, a cash basi s t axpayer , r ecei ved a $2, 500
cash schol ar shi p f or t he Spr i ng semest er of 2014. However , she di d not
use t he f unds t o pay t he t ui t i on unt i l J anuar y 2014. Emi l y can excl ude
t he $2, 500 f r omher gr oss i ncome i n 2013.

*a. Tr ue
b. Fal se

535. Bet t y r ecei ved a gr aduat e t eachi ng assi st ant shi p t hat was awar ded
on t he basi s of academi c achi evement . The payment s must be i ncl uded i n
her gr oss i ncome.

*a. Tr ue
b. Fal se

536. I n 2013, Ther esa was i n an aut omobi l e acci dent and suf f er ed
physi cal i nj ur i es. The acci dent was caused by Ramon s negl i gence. I n
2014, Ther esa col l ect ed f r omhi s i nsur ance company. She r ecei ved
$15, 000 f or l oss of i ncome, $10, 000 f or pai n and suf f er i ng, $50, 000 f or
puni t i ve damages, and $6, 000 f or medi cal expenses whi ch she had
deduct ed on her 2013 t ax r et ur n ( t he amount i n excess of 10%of
adj ust ed gr oss i ncome) . As a r esul t of t he above, Ther esa s 2014 gr oss
i ncome i s i ncr eased by $56, 000.

*a. Tr ue
b. Fal se

537. Wor ker s compensat i on benef i t s ar e i ncl uded i n gr oss i ncome i f t he
empl oyer al so pays t he empl oyee whi l e t he empl oyee i s r ecover i ng f r om
hi s or her i nj ur y.

a. Tr ue
*b. Fal se

538. Samwas unempl oyed f or t he f i r st t wo mont hs of 2013. Dur i ng t hat
t i me, he r ecei ved $4, 000 of st at e unempl oyment benef i t s. He wor ked f or
t he next si x mont hs and ear ned $14, 000. I n Sept ember , he was i nj ur ed
on t he j ob and col l ect ed $5, 000 of wor ker s compensat i on benef i t s.
Sam s Feder al gr oss i ncome f r omt he above i s $18, 000 ( $4, 000 + $14, 000) .

*a. Tr ue
b. Fal se

539. Sar ah s empl oyer pays t he hospi t al i zat i on i nsur ance pr emi ums f or a
pol i cy t hat cover s al l empl oyees and r et i r ed f or mer empl oyees. Af t er
Sar ah r et i r es, t he hospi t al i nsur ance pr emi ums pai d f or her by her
empl oyer can be excl uded f r omher gr oss i ncome.

*a. Tr ue
b. Fal se

540. Meg s empl oyer car r i es i nsur ance on i t s empl oyees t hat wi l l pay an
empl oyee hi s or her r egul ar sal ar y whi l e t he empl oyee i s away f r omwor k
due t o i l l ness. The pr emi ums f or Meg s cover age wer e $1, 800. Meg was
absent f r omwor k f or t wo mont hs as a r esul t of a ki dney i nf ect i on.
Meg s empl oyer s i nsur ance company pai d Meg s r egul ar sal ar y of $8, 000
whi l e she was away f r omwor k. Meg al so col l ect ed $2, 000 on a wage
cont i nuat i on pol i cy she had pur chased. Meg must i ncl ude $11, 800 i n her
gr oss i ncome.

a. Tr ue
*b. Fal se

541. Mel ody wor ks f or a company wi t h onl y 22 empl oyees. Her empl oyer
cont r i but ed $2, 000 t o her heal t h savi ngs account ( HSA) , and t he account
ear ned $100 i n i nt er est dur i ng t he year . Mel ody wi t hdr ew onl y $1, 200
t o pay medi cal expenses dur i ng t he year . Mel ody i s not r equi r ed t o
r ecogni ze any gr oss i ncome f r omt he HSA f or t he year .

*a. Tr ue
b. Fal se

542. I f an empl oyer pays f or t he empl oyee s l ong- t er mcar e i nsur ance
pr emi ums, t he empl oyee can excl ude f r omgr oss i ncome t he pr emi ums but
al l of t he benef i t s col l ect ed must be i ncl uded i n gr oss i ncome.

a. Tr ue
*b. Fal se

543. Empl oyees of a CPA f i r ml ocat ed i n Vi r gi ni a may excl ude f r omgr oss
i ncome t he meal s and l odgi ng pr ovi ded by t he empl oyer whi l e t hey wer e
on an audi t i n Texas.

a. Tr ue
*b. Fal se

544. Car l a i s a deput y sher i f f . Her empl oyer r equi r es t hat she l i ve i n
t he count y wher e she i s empl oyed. Housi ng i s ver y expensi ve; so t he
count y agr eed t o pay her $4, 800 per year t o cover t he hi gher cost of
housi ng. Car l a must i ncl ude t he housi ng suppl ement i n her gr oss i ncome.

*a. Tr ue
b. Fal se

545. Roger i s i n t he 35%mar gi nal t ax br acket . Roger s empl oyer has
cr eat ed a f l exi bl e spendi ng account f or medi cal and dent al expenses
t hat ar e not cover ed by t he company s heal t h i nsur ance pl an. Roger had
hi s sal ar y r educed by $1, 200 dur i ng t he year f or cont r i but i ons t o t he
f l exi bl e spendi ng pl an. However , Roger i ncur r ed onl y $1, 100 i n act ual
expenses f or whi ch he was r ei mbur sed. Under t he pl an, he must f or f ei t
t he $100 unused amount . Hi s af t er - t ax cost of over f undi ng t he pl an i s
$65.

*a. Tr ue
b. Fal se

546. Mauve Company per mi t s empl oyees t o occasi onal l y use t he copyi ng
machi ne f or per sonal pur poses. The copyi ng machi ne i s l ocat ed i n t he
of f i ce wher e t he hi gher pai d execut i ves wor k, so t hey occasi onal l y use
t he machi ne. However , t he machi ne i s not conveni ent f or use by t he
l ower pai d war ehouse empl oyees and, t hus, t hey never use t he copi er .
The use of t he copy machi ne may not be excl uded f r omgr oss i ncome
because t he benef i t i s di scr i mi nat or y.

a. Tr ue
*b. Fal se

547. Fr esh Baker y of t en has unsol d donut s at t he end of t he day. The
baker y al l ows empl oyees t o t ake t he l ef t over s home. The empl oyees ar e
not r equi r ed t o r ecogni ze gr oss i ncome because t he baker y does not
i ncur any addi t i onal cost .

a. Tr ue
*b. Fal se

548. Ni col e s empl oyer pays her $150 per mont h t owar ds t he cost of
par ki ng near a r ai l way st at i on wher e Ni col e cat ches t he t r ai n t o wor k.
The empl oyer al so pays t he cost of t he r ai l pass, $75 per mont h. Ni col e
can excl ude bot h of t hese payment s f r omher gr oss i ncome.

*a. Tr ue
b. Fal se

549. A U. S. ci t i zen who wor ks i n Fr ance f r omFebr uar y 1, 2013 unt i l
J anuar y 31, 2014 i s el i gi bl e f or t he f or ei gn ear ned i ncome excl usi on i n
2013 and 2014.

*a. Tr ue
b. Fal se

550. Gener al l y, a U. S. ci t i zen i s r equi r ed t o i ncl ude i n gr oss i ncome
t he sal ar y and wages ear ned whi l e wor ki ng i n a f or ei gn count r y even i f
t he f or ei gn count r y t axes t he i ncome.

a. Tr ue
*b. Fal se

551. Cal vi n mi scal cul at ed hi s i ncome i n 2011 and over pai d hi s st at e
i ncome t ax by $10, 000. I n 2013, he amended hi s 2011 st at e i ncome t ax
r et ur n and r ecei ved a $10, 000 r ef und and $900 i nt er est . Cal vi n i t emi zed
hi s deduct i ons i n 2011, deduct i ng $12, 000 i n st at e i ncome t ax and
$30, 000 t ot al i t emi zed deduct i ons. As a r esul t of t he amended r et ur n
i n 2013, Cal vi n must r ecogni ze $10, 900 of gr oss i ncome.

*a. Tr ue
b. Fal se

552. A cash basi s t axpayer t ook an i t emi zed deduct i on of $5, 500 f or
st at e i ncome t ax pai d i n 2013. Hi s t ot al i t emi zed deduct i ons i n 2013
wer e $18, 000. I n 2014, he r ecei ved a $900 r ef und of hi s 2013 st at e
i ncome t ax. The t axpayer must i ncl ude t he $900 r ef und i n hi s 2014
Feder al gr oss i ncome i n accor dance wi t h t he t ax benef i t r ul e.

*a. Tr ue
b. Fal se

553. The t axpayer i ncor r ect l y t ook a $5, 000 deduct i on ( e. g. ,
i ncor r ect l y cal cul at ed depr eci at i on) i n 2013 and as a r esul t hi s
t axabl e i ncome was r educed by $5, 000. The t axpayer di scover ed hi s
er r or i n 2014. The t axpayer must add $5, 000 t o hi s 2014 gr oss i ncome
i n accor dance wi t h t he t ax benef i t r ul e t o cor r ect f or t he 2013 er r or .

a. Tr ue
*b. Fal se

554. Mot her par t i ci pat ed i n a qual i f i ed st at e t ui t i on pr ogr amf or t he
benef i t of her son. She cont r i but ed $15, 000. When t he son ent er ed
col l ege, t he bal ance i n t he f und sat i sf i ed t he t ui t i on char ge of
$20, 000. When t he f unds wer e wi t hdr awn t o pay t he col l ege t ui t i on f or
her son, nei t her Mot her nor son must i ncl ude $5, 000 ( $20, 000 $15, 000)
i n gr oss i ncome.

*a. Tr ue
b. Fal se

555. The ear ni ngs f r oma qual i f i ed st at e t ui t i on pr ogr amaccount ar e
def er r ed f r omt axat i on unt i l t hey ar e used f or qual i f i ed hi gher
educat i on expenses. At t hat t i me, t he amount t aken f r omt he f und must
be i ncl uded i n t he gr oss i ncome of t he per son who cont r i but ed t o t he
account .

a. Tr ue
*b. Fal se

556. Benny l oaned $100, 000 t o hi s cont r ol l ed cor por at i on. When i t
became appar ent t he cor por at i on woul d not be abl e t o r epay t he l oan i n
t he near f ut ur e, Benny cancel ed t he debt . The cor por at i on shoul d t r eat
t he cancel l at i on as a nont axabl e cont r i but i on t o capi t al .

*a. Tr ue
b. Fal se

557. Zor k Cor por at i on was ver y pr of i t abl e and had accumul at ed excess
cash. The company deci ded t o r epur chase some of i t s bonds t hat had
been i ssued f or $1, 000, 000. Because of an i ncr ease i n mar ket i nt er est
r at es, Zor k was abl e t o r et i r e t he bonds f or $900, 000. The company i s
not r equi r ed t o r ecogni ze $100, 000 of i ncome f r omt he di schar ge of i t s
i ndebt edness but must r educe t he basi s i n i t s asset s.

a. Tr ue
*b. Fal se

558. Amber Machi ner y Company pur chased a bui l di ng f r omTed f or $250, 000
cash and a mor t gage of $750, 000. One year af t er t he t r ansact i on, t he
mor t gage had been r educed t o $725, 000 by pr i nci pal payment s by Amber ,
but i t was appar ent t hat Amber woul d not be abl e t o cont i nue t o make
t he mont hl y payment s on t he mor t gage. Ted r educed t he amount owed by
Amber t o $600, 000. Thi s r educed t he mont hl y payment s t o a l evel t hat
Amber coul d pay. Amber must r ecogni ze $125, 000 i ncome f r omt he
r educt i on i n t he debt by Ted.

a. Tr ue
*b. Fal se

559. The t axpayer s mar gi nal t ax br acket i s 25%. Whi ch woul d t he
t axpayer pr ef er ?

a. $1. 00 t axabl e i ncome r at her t han $1. 25 t ax- exempt i ncome.
b. $1. 00 t axabl e i ncome r at her t han $. 75 t ax- exempt i ncome.
c. $1. 25 t axabl e i ncome r at her t han $1. 00 t ax- exempt i ncome.
*d. $1. 40 t axabl e i ncome r at her t han $1. 00 t ax- exempt i ncome.

560. Cash r ecei ved by an i ndi vi dual :

a. I s not i ncl uded i n gr oss i ncome i f i t was not ear ned.
b. I s not t axabl e unl ess t he payor i s l egal l y obl i gat ed t o make
t he payment .
c. Must al ways be i ncl uded i n gr oss i ncome.
*d. May be i ncl uded i n gr oss i ncome al t hough t he payor is not
l egal l y obl i gat ed t o make t he payment .

561. Shar on had some i nsi der i nf or mat i on about a cor por at e
t akeover . She uni nt ent i onal l y i nf or med a f r i end, who i mmedi at el y
bought t he st ock i n t he t ar get cor por at i on. The t akeover occur r ed and
t he f r i end made a subst ant i al pr of i t f r ombuyi ng and sel l i ng t he
st ock. The f r i end t ol d Shar on about hi s st ock deal i ngs, and gave her a
pear l neckl ace because she made i t al l possi bl e. The neckl ace was
wor t h $10, 000, but she al r eady owned mor e j ewel r y t han she desi r ed.

a. The neckl ace i s a nont axabl e gi f t r ecei ved by Shar on because
t he f r i end was not l egal l y r equi r ed t o make t he gi f t .
b. The val ue of t he neckl ace i s not i ncl uded i n Shar on s gr oss
i ncome unl ess she sel l s i t .
c. The val ue of t he neckl ace i s not i ncl uded i n Shar on s gr oss
i ncome because passi ng t he i nf or mat i on was an i l l egal act and t he
SEC can conf i scat e t he neckl ace.
*d. The val ue of t he neckl ace must be i ncl uded i n Shar on s gr oss
i ncome f or t he t ax year i t was r ecei ved by her .

562. Car i n, a wi dow, el ect ed t o r ecei ve t he pr oceeds of a $150, 000 l i f e
i nsur ance pol i cy on t he l i f e of her deceased husband i n 10 i nst al l ment s
of $17, 500 each. Her husband had pai d pr emi ums of $60, 000 on t he
pol i cy. I n t he f i r st year , Car i n col l ect ed $17, 500 f r omt he i nsur ance
company. She must i ncl ude i n gr oss i ncome:

a. $0.
*b. $2, 500.
c. $10, 000.
d. $25, 000.

563. I r i s col l ect ed $150, 000 on her deceased husband s l i f e i nsur ance
pol i cy. The pol i cy was pur chased by t he husband s empl oyer under a
gr oup pol i cy. I r i s s husband had i ncl uded $5, 000 i n gr oss i ncome f r om
t he gr oup t er ml i f e i nsur ance pr emi ums dur i ng t he year s he wor ked f or
t he empl oyer . She el ect ed t o col l ect t he pol i cy i n 10 equal annual
payment s of $18, 000 each.

a. None of t he payment s must be i ncl uded i n I r i s s gr oss i ncome.
b. The amount she r ecei ves i n t he f i r st year i s a nont axabl e
r et ur n of capi t al .
c. For each $18, 000 payment t hat I r i s r ecei ves, she can excl ude
$500 ( $5, 000/ $180, 000 $18, 000) f r omgr oss i ncome.
*d. For each $18, 000 payment t hat I r i s r ecei ves, she can excl ude
$15, 000 ( $150, 000/ $180, 000 $18, 000) f r omgr oss i ncome.

564. Tur quoi se Company pur chased a l i f e i nsur ance pol i cy on t he
company s chi ef execut i ve of f i cer , J oe. Af t er t he company had pai d
$400, 000 i n pr emi ums, J oe di ed and t he company col l ect ed t he $1. 5
mi l l i on f ace amount of t he pol i cy. The company al so pur chased gr oup
t er ml i f e i nsur ance on al l i t s empl oyees. J oe had i ncl uded $16, 000 i n
gr oss i ncome f or t he gr oup t er ml i f e i nsur ance pr emi ums. J oe s wi dow,
Rebecca, r ecei ved t he $100, 000 pr oceeds f r omt he gr oup t er ml i f e
i nsur ance pol i cy.

a. Rebecca can excl ude t he l i f e i nsur ance pr oceeds of $100, 000,
but Tur quoi se Company must i ncl ude $1, 100, 000 ( $1, 500, 000
$400, 000) i n gr oss i ncome.
*b. Tur quoi se Company and Rebecca can excl ude t he l i f e i nsur ance
pr oceeds of $1, 500, 000 and $100, 000, r espect i vel y, f r omgr oss
i ncome.
c. Tur quoi se Company can excl ude $1, 100, 000 ( $1, 500, 000
$400, 000) f r omgr oss i ncome, but Rebecca must i ncl ude $84, 000 i n
gr oss i ncome.
d. Tur quoi se Company must i ncl ude $1, 100, 000 ( $1, 500, 000
$400, 000) i n gr oss i ncome and Rebecca must i ncl ude $100, 000 i n
gr oss i ncome.

565. Swan Fi nance Company, an accr ual met hod t axpayer , r equi r es al l of
i t s cust omer s t o car r y cr edi t l i f e i nsur ance. I f a cust omer di es, t he
company r ecei ves f r omt he i nsur ance company t he bal ance due on t he
cust omer s l oan. Al i , a cust omer , di ed owi ng Swan $1, 500. The bal ance
due i ncl uded $200 accr ued i nt er est t hat Swan has i ncl uded i n i ncome.
When Swan col l ect s $1, 500 f r omt he i nsur ance company, Swan:

a. Must r ecogni ze $1, 500 i ncome f r omt he l i f e i nsur ance pr oceeds.
b. Must r ecogni ze $1, 300 i ncome f r omt he l i f e i nsur ance pr oceeds.
c. Does not r ecogni ze i ncome because l i f e i nsur ance pr oceeds ar e
t ax- exempt .
*d. Does not r ecogni ze i ncome f r omt he l i f e i nsur ance because t he
ent i r e amount i s a r ecover y of capi t al .

566. Ben was di agnosed wi t h a t er mi nal i l l ness. Hi s physi ci an est i mat ed
t hat Ben woul d l i ve no mor e t han 18 mont hs. Af t er he r ecei ved t he
doct or s di agnosi s, Ben cashed i n hi s l i f e i nsur ance pol i cy and used
t he pr oceeds t o t ake a t r i p t o see r el at i ves and f r i ends bef or e he
di ed. Ben had pai d $12, 000 i n pr emi ums on t he pol i cy, and he col l ect ed
$50, 000, t he cash sur r ender val ue of t he pol i cy. Henr y enj oys excel l ent
heal t h, but he cashed i n hi s l i f e i nsur ance pol i cy t o pur chase a new
home. He had pai d pr emi ums of $12, 000 and col l ect ed $50, 000 f r omt he
i nsur ance company.

a. Nei t her Ben nor Henr y i s r equi r ed t o r ecogni ze gr oss i ncome.
b. Bot h Ben and Henr y must r ecogni ze $38, 000 ( $50, 000 $12, 000)
of gr oss i ncome.
*c. Henr y must r ecogni ze $38, 000 ( $50, 000 $12, 000) of gr oss
i ncome, but Ben does not r ecogni ze any gr oss i ncome.
d. Ben must r ecogni ze $38, 000 ( $50, 000 $12, 000) of gr oss i ncome,
but Henr y does not r ecogni ze any gr oss i ncome.

567. Al ber t had a t er mi nal i l l ness whi ch r equi r ed al most const ant
nur si ng car e f or t he r emai ni ng t wo year s of hi s est i mat ed l i f e,
accor di ng t o hi s doct or . Al ber t had a l i f e i nsur ance pol i cy wi t h a f ace
amount of $100, 000. Al ber t had pai d $25, 000 of pr emi ums on t he pol i cy.
The i nsur ance company has of f er ed t o pay hi m$80, 000 t o cancel t he
pol i cy, al t hough i t s cash sur r ender val ue was onl y $55, 000. Al ber t
accept ed t he $80, 000. Al ber t used $15, 000 t o pay hi s medi cal expenses.
Al ber t made a mi r acul ous r ecover y and l i ved anot her 20 year s. As a
r esul t of cashi ng i n t he pol i cy:

a. Al ber t must r ecogni ze $55, 000 of gr oss i ncome, but he has
$15, 000 of deduct i bl e medi cal expenses.
b. Al ber t must r ecogni ze $65, 000 ( $80, 000 $15, 000) of gr oss
i ncome.
c. Al ber t must r ecogni ze $40, 000 ( $80, 000 $25, 000 $15, 000) of
gr oss i ncome.
*d. Al ber t i s not r equi r ed t o r ecogni ze any gr oss i ncome because
of hi s t er mi nal i l l ness.

568. A schol ar shi p r eci pi ent at St at e Uni ver si t y may excl ude f r omgr oss
i ncome t he schol ar shi p pr oceeds used t o pay f or :

a. Onl y t ui t i on.
*b. Tui t i on, books, and suppl i es.
c. Tui t i on, books, suppl i es, meal s, and l odgi ng.
d. Meal s and l odgi ng.

569. Ron, age 19, i s a f ul l - t i me gr aduat e st udent at Ci t y Uni ver si t y.
Dur i ng 2013, he r ecei ved t he f ol l owi ng payment s:

Cash award for being the outstanding
resident adviser
$ 1,500
Resident adviser housing 2,500
State scholarship for ten months
(tuition and books)
6,000
State scholarship (meals allowance) 2,400
Loan from college financial aid
office
3,000
Cash support from parents 2,00
0
$17,400

Ron served as a resident advisor in a dormitory and, therefore, the
university waived the $2,500 charge for the room he occupied. What is
Rons adjusted gross income for 2013?

a. $1, 500.
*b. $3, 900.
c. $9, 000.
d. $15, 400.

570. Bar ney i s a f ul l - t i me gr aduat e st udent at St at e Uni ver si t y. He
ser ves as a t eachi ng assi st ant f or whi ch he i s pai d $700 per mont h f or
9 mont hs and hi s $5, 000 t ui t i on i s wai ved. The uni ver si t y wai ves
t ui t i on f or al l of i t s empl oyees. I n addi t i on, he r ecei ves a $1, 500
r esear ch gr ant t o pur sue hi s own r esear ch and st udi es. Bar ney s gr oss
i ncome f r omt he above i s:

a. $0.
*b. $6, 300.
c. $11, 300.
d. $12, 800.

571. J ena i s a f ul l - t i me under gr aduat e st udent at St at e Uni ver si t y and
i s cl ai med by her par ent s as a dependent . Her onl y sour ce of i ncome i s
a $10, 000 at hl et i c schol ar shi p ( $1, 000 f or books, $5, 500 t ui t i on, $500
st udent act i vi t y f ee, and $3, 000 r oomand boar d) . J ena s gr oss i ncome
f or t he year i s:

a. $10, 000.
b. $4, 000.
*c. $3, 000.
d. $500.

572. As an execut i ve of Cher r y, I nc. , Ol l i e r ecei ves a f r i nge benef i t
i n t he f or mof annual t ui t i on schol ar shi ps of $10, 000 t o each of hi s
t hr ee chi l dr en. The schol ar shi ps ar e pai d by t he company di r ect l y t o
each chi l d s educat i onal i nst i t ut i on and ar e payabl e onl y i f t he
st udent mai nt ai ns a B aver age.

a. The t ui t i on payment s of $30, 000 may be excl uded f r omOl l i e s
gr oss i ncome as a schol ar shi p.
b. The t ui t i on payment s of $10, 000 each must be i ncl uded i n t he
chi l d s gr oss i ncome.
c. The t ui t i on payment s of $30, 000 may be excl uded f r omOl l i e s
gr oss i ncome because t he payment s ar e f or t he academi c
achi evement s of t he chi l dr en.
*d. The t ui t i on payment s of $30, 000 must be i ncl uded i n Ol l i e s
gr oss i ncome.

573. The t axpayer i s a Ph. D. st udent i n account i ng at Ci t y Uni ver si t y.
The st udent i s pai d $1, 500 per mont h f or t eachi ng t wo cl asses. The
t ot al amount r ecei ved f or t he year i s $13, 500.

a. The $13, 500 i s excl udi bl e i f t he money i s used t o pay f or
t ui t i on and books.
*b. The $13, 500 i s t axabl e compensat i on.
c. The $13, 500 i s consi der ed a schol ar shi p and, t her ef or e, i s
excl uded.
d. The $13, 500 i s excl uded because t he t ot al amount r ecei ved f or
t he year i s l ess t han her st andar d deduct i on and per sonal
exempt i on.

574. I n 2013, Khal i d was i n an aut omobi l e acci dent and suf f er ed
physi cal i nj ur i es. The acci dent was caused by Rashad s negl i gence.
Khal i d t hr eat ened t o f i l e a l awsui t agai nst Amber Tr ucki ng Company,
Rashad s empl oyer , cl ai mi ng $50, 000 f or pai n and suf f er i ng, $90, 000 f or
l oss of i ncome, and $70, 000 i n puni t i ve damages. Amber s i nsur ance
company wi l l not pay puni t i ve damages; t her ef or e, Amber has of f er ed t o
set t l e t he case f or $100, 000 f or pai n and suf f er i ng, $90, 000 f or l oss
of i ncome, and not hi ng f or puni t i ve damages. Khal i d i s i n t he 35%
mar gi nal t ax br acket . What i s t he af t er - t ax di f f er ence t o Khal i d
bet ween Khal i d s or i gi nal cl ai mand Amber s of f er ?

a. Amber s of f er i s $20, 000 l ess. ( $50, 000 + $90, 000 + $70, 000
$100, 000 $90, 000) .
b. Amber s of f er i s $7, 000 l ess. [ ( $50, 000 + $90, 000 + $70, 000
$100, 000 $90, 000) . 35) ] .
*c. Amber s of f er i s $4, 500 mor e. {$190, 000 ( $50, 000 + $90, 000)
+ [ $70, 000 ( 1 . 35) ] }.
d. Amber s of f er i s $22, 000 mor e. [ ( $190, 000 $210, 000) +
( $120, 000 . 35) ] .

575. Chr i st i e sued her f or mer empl oyer f or a back i nj ur y she suf f er ed
on t he j ob i n 2013. As a r esul t of t he i nj ur y, she was par t i al l y
di sabl ed. I n 2014, she r ecei ved $240, 000 f or her l oss of f ut ur e i ncome,
$160, 000 i n puni t i ve damages because of t he empl oyer s f l agr ant
di sr egar d f or t he empl oyee s saf et y, and $15, 000 f or medi cal
expenses. The medi cal expenses wer e deduct ed on her 2013 r et ur n,
r educi ng her t axabl e i ncome by $12, 000. Chr i st i e s 2014 gr oss i ncome
f r omt he above i s:

a. $415, 000.
b. $412, 000.
c. $255, 000.
d. $175, 000.
*e. $172, 000.

576. Ear l y i n t he year , Mar i on was i n an aut omobi l e acci dent dur i ng t he
cour se of hi s empl oyment . As a r esul t of t he physi cal i nj ur i es he
sust ai ned, he r ecei ved t he f ol l owi ng payment s dur i ng t he year :

Reimbursement of medical expenses
Marion paid by a medical insurance
policy he purchased
$10,000
Damage settlement to replace his lost
salary
15,000

What is the amount that Marion must include in gross income for the current
year?

a. $25, 000.
b. $15, 000.
c. $12, 500.
d. $10, 000.
*e. $0.

577. Ther esa sued her f or mer empl oyer f or age, r ace, and gender
di scr i mi nat i on. She cl ai med $200, 000 i n damages f or l oss of i ncome,
$300, 000 f or emot i onal har m, and $500, 000 i n puni t i ve damages. She
set t l ed t he cl ai mf or $700, 000. As a r esul t of t he set t l ement , Ther esa
must i ncl ude i n gr oss i ncome:

*a. $700, 000.
b. $500, 000.
c. $490, 000 [ ( $700, 000/ $1, 000, 000) $700, 000] .
d. $0.

578. J ack r ecei ved a cour t awar d i n a ci vi l l i bel and sl ander sui t
agai nst National Gossip. He r ecei ved $120, 000 f or damages t o hi s
pr of essi onal r eput at i on, $100, 000 f or damages t o hi s per sonal
r eput at i on, and $50, 000 i n puni t i ve damages. J ack must i ncl ude i n hi s
gr oss i ncome as a damage awar d:

a. $0.
b. $100, 000.
c. $120, 000.
*d. $270, 000.

579. Ol af was i nj ur ed i n an aut omobi l e acci dent and r ecei ved $25, 000
f or hi s physi cal i nj ur y, $50, 000 f or hi s l oss of i ncome, and $10, 000
puni t i ve damages. As a r esul t of t he awar d, t he amount Ol af must
i ncl ude i n gr oss i ncome i s:

*a. $10, 000.
b. $50, 000.
c. $60, 000.
d. $85, 000.

580. The excl usi on f or heal t h i nsur ance pr emi ums pai d by t he empl oyer
appl i es t o:

a. Onl y cur r ent empl oyees and t hei r spouses.
b. Onl y cur r ent empl oyees and t hei r spouses and dependent s.
c. Onl y cur r ent empl oyees and t hei r di sabl ed spouses.
*d. Pr esent empl oyees, r et i r ed f or mer empl oyees, and t hei r
spouses and dependent s.

581. J ul i e was suf f er i ng f r oma vi r al i nf ect i on t hat caused her t o mi ss
wor k f or 90 days. Dur i ng t he f i r st 30 days of her absence, she r ecei ved
her r egul ar sal ar y of $8, 000 f r omher empl oyer . For t he next 60 days,
she r ecei ved $12, 000 under an acci dent and heal t h i nsur ance pol i cy
pur chased by her empl oyer . The pr emi ums on t he heal t h i nsur ance pol i cy
wer e excl uded f r omher gr oss i ncome. Dur i ng t he l ast 30 days, J ul i e
r ecei ved $6, 000 on an i ncome r epl acement pol i cy she had pur chased. Of
t he $26, 000 she r ecei ved, J ul i e must i ncl ude i n gr oss i ncome:

a. $0.
b. $6, 000.
c. $8, 000.
d. $14, 000.
*e. $20, 000.

582. Mat i l da wor ks f or a company wi t h 1, 000 empl oyees. The company has
a hospi t al i zat i on i nsur ance pl an t hat cover s al l empl oyees. However ,
t he empl oyee must pay t he f i r st $3, 000 of hi s or her medi cal expenses
each year . Each year , t he empl oyer cont r i but es $1, 500 t o each
empl oyee s heal t h savi ngs account ( HSA) . Mat i l da s empl oyer made t he
cont r i but i ons i n 2012 and 2013, and t he account ear ned $100 i nt er est i n
2013. At t he end of 2013, Mat i l da wi t hdr ew $3, 100 f r omt he account t o
pay t he deduct i bl e por t i on of her medi cal expenses f or t he year and
ot her medi cal expenses not cover ed by t he hospi t al i zat i on i nsur ance
pol i cy. As a r esul t , Mat i l da must i ncl ude i n her 2013 gr oss i ncome:

*a. $0.
b. $100.
c. $1, 600.
d. $3, 100.

583. Al l empl oyees of Uni t ed Company ar e cover ed by a gr oup
hospi t al i zat i on i nsur ance pl an, but t he empl oyees must pay t he pr emi ums
( $8, 000 f or each empl oyee) . None of t he empl oyees has suf f i ci ent
medi cal expenses t o deduct t he pr emi ums. I nst ead of gi vi ng r ai ses next
year , Uni t ed i s consi der i ng payi ng t he empl oyee s hospi t al i zat i on
i nsur ance pr emi ums. I f t he change i s made, t he empl oyee s af t er - t ax
and i nsur ance pay wi l l :

a. Decr ease by t he same amount f or al l empl oyees.
b. I ncr ease mor e f or t he l ower pai d empl oyees ( 10%and 15%
mar gi nal t ax br acket ) .
*c. I ncr ease mor e f or t he hi gher i ncome ( 35% mar gi nal t ax br acket )
empl oyees.
d. I ncr ease by t he same amount f or al l empl oyees.

584. The pl ant uni on i s negot i at i ng wi t h t he Eagl e Company, whi ch i s on
t he ver ge of bankr upt cy. Eagl e has of f er ed t o pay f or t he empl oyees
hospi t al i zat i on i nsur ance i n exchange f or a wage r educt i on. The
empl oyees each cur r ent l y pay pr emi ums of $4, 000 a year f or t hei r
i nsur ance.

a. I f an empl oyee s wages ar e r educed by $5, 000 and t he empl oyee
i s i n t he 28%mar gi nal t ax br acket , t he empl oyee woul d benef i t
f r omt he of f er .
b. I f an empl oyee s wages ar e r educed by $4, 000 and t he empl oyee
c. I f an empl oyee s wages ar e r educed by $6, 000 and t he empl oyee
*d. a. , b. , and c.

585. J ames, a cash basi s t axpayer , r ecei ved t he f ol l owi ng compensat i on
and f r i nge benef i t s i n 2013:

Salary $66,000
Disability income protection premiums 3,000
Long-term care insurance premiums 4,000

His actual salary was $72,000. He received only $66,000 because his
salary was garnished and the employer paid $6,000 on Jamess credit card
debt he owed. The wage continuation insurance is available to all
employees and pays the employee three-fourths of the regular salary if the
employee is sick or disabled. The long-term care insurance is available to
all employees and pays $150 per day towards a nursing home or similar
facility. What is Jamess gross income from the above?

a. $66, 000.
*b. $72, 000.
c. $73, 000.
d. $75, 000.

586. The Fi r st Chance Casi no has gambl i ng f aci l i t i es, a bar , a
r est aur ant , and a hot el . Al l empl oyees ar e al l owed t o obt ai n f ood f r om
t he r est aur ant at no char ge dur i ng wor ki ng hour s. I n t he case of t he
empl oyees who oper at e t he gambl i ng f aci l i t i es, bar , and r est aur ant , 60%
of al l of Casi no s empl oyees, t he meal s ar e pr ovi ded f or t he
conveni ence of t he Casi no. However , t he hot el wor ker s, demanded equal
t r eat ment and t her ef or e wer e al so al l owed t o eat i n t he r est aur ant at
no char ge whi l e t hey ar e at wor k. Whi ch of t he f ol l owi ng i s cor r ect ?

a. Al l t he empl oyees ar e r equi r ed t o i ncl ude t he val ue of t he
meal s i n t hei r gr oss i ncome.
b. Onl y t he r est aur ant empl oyees may excl ude t he val ue of t hei r
meal s f r omgr oss i ncome.
c. Onl y t he empl oyees who wor k i n gambl i ng, t he bar , and t he
r est aur ant may excl ude t he meal s f r omgr oss i ncome.
*d. Al l of t he empl oyees may excl ude t he val ue of t he meal s f r om
gr oss i ncome.

587. An empl oyee can excl ude f r omgr oss i ncome t he val ue of meal s
pr ovi ded by hi s or her empl oyer whenever :

a. The meal i s not ext r avagant .
*b. The meal s ar e pr ovi ded on t he empl oyer s pr emi ses f or t he
empl oyer s conveni ence.
c. Ther e ar e no pl aces t o eat near t he wor k l ocat i on.
d. The meal s ar e pr ovi ded f or t he conveni ence of t he empl oyee.

588. Ri dge i s t he manager of a mot el . As a condi t i on of hi s empl oyment ,
Ri dge i s r equi r ed t o l i ve i n a r oomon t he pr emi ses so t hat he woul d be
t her e i n case of emer genci es. Ri dge consi der ed t hi s a f r i nge benef i t ,
si nce he woul d ot her wi se be r equi r ed t o pay $800 per mont h r ent . The
r oomt hat Ri dge occupi ed nor mal l y r ent ed f or $70 per ni ght , or $2, 100
per mont h. On t he aver age, 90%of t he mot el r ooms wer e occupi ed. As a
r esul t of t hi s r ent - f r ee use of a r oom, Ri dge i s r equi r ed t o i ncl ude i n
gr oss i ncome.

*a. $0.
b. $800 per mont h.
c. $2, 100 per mont h.
d. $1, 890 ( $2, 100 . 90) .

589. Adamr epai r s power l i nes f or t he Egr et Ut i l i t i es Company. He i s
gener al l y wor ki ng on a power l i ne dur i ng t he l unch hour . He must eat
when and wher e he can and st i l l get hi s wor k done. He usual l y pur chases
somet hi ng at a conveni ence st or e and eat s i n hi s t r uck. Egr et
r ei mbur ses Adamf or t he cost of hi s meal s.

*a. Adammust i ncl ude t he r ei mbur sement i n hi s gr oss i ncome.
b. Adamcan excl ude t he r ei mbur sement f r omhi s gr oss i ncome si nce
t he meal s ar e pr ovi ded f or t he conveni ence of t he empl oyer .
c. Adamcan excl ude t he r ei mbur sement f r omhi s gr oss i ncome
because he eat s t he meal s on t he empl oyer s busi ness pr emi ses
( t he t r uck) .
d. Adammay excl ude f r omhi s gr oss i ncome t he di f f er ence bet ween
what he pai d f or t he meal s and what i t woul d have cost hi mt o eat
at home.

590. Tommy, a seni or at St at e Col l ege, r ecei ves f r ee r oomand boar d as
f ul l compensat i on f or wor ki ng as a r esi dent advi sor at t he uni ver si t y
dor mi t or y. The r egul ar housi ng cont r act i s $2, 000 a year i n t ot al ,
$1, 200 f or l odgi ng and $800 f or meal s i n t he dor mi t or y. Tommy had t he
opt i on of r ecei vi ng t he meal s or $800 i n cash. Tommy accept ed t he meal s.
What must Tommy i ncl ude i n gr oss i ncome f r omwor ki ng as a r esi dent
advi sor ?

a. Al l i t ems can be excl uded f r omgr oss i ncome as a schol ar shi p.
*b. The meal s must be i ncl uded i n gr oss i ncome.
c. The meal s may be excl uded because he di d not r ecei ve cash.
d. The l odgi ng must be i ncl uded i n gr oss i ncome because i t was
compensat i on f or ser vi ces.

591. Under t he Swan Company s caf et er i a pl an, al l f ul l - t i me empl oyees
ar e al l owed t o sel ect any combi nat i on of t he benef i t s bel ow, but t he
t ot al r ecei ved by t he empl oyee cannot exceed $8, 000 a year .

I. Group medical and hospitalization
insurance for the employee, $3,600 a year.
II. Group medical and hospitalization
insurance for the employees spouse and
children, $1,200 a year.
III. Child-care payments, actual cost but not
more than $4,800 a year.
IV. Cash required to bring the total of
benefits and cash to $8,000.

Which of the following statements is true?

a. Sam, a f ul l - t i me empl oyee, sel ect s choi ces I I and I I I and
$2, 000 cash. Hi s gr oss i ncome must i ncl ude t he $2, 000.
b. Paul , a f ul l - t i me empl oyee, el ect s t o r ecei ve $8, 000 cash
because hi s wi f e s empl oyer pr ovi ded t hese same i nsur ance
benef i t s f or hi m. Paul i s not r equi r ed t o i ncl ude t he $8, 000 i n
gr oss i ncome.
c. Sue, a f ul l - t i me empl oyee, el ect s t o r ecei ve choi ces I , I I and
$3, 200 f or I I I . Sue i s r equi r ed t o i ncl ude $3, 200 i n gr oss i ncome.
*d. Al l of t he above.

592. Heat her i s a f ul l - t i me empl oyee of t he Dr ake Company and
par t i ci pat es i n t he company s f l exi bl e spendi ng pl an t hat i s avai l abl e
t o al l empl oyees. Whi ch of t he f ol l owi ng i s cor r ect ?

a. Heat her r educed her sal ar y by $1, 200, act ual l y spent $1, 500,
and r ecei ved onl y $1, 200 as r ei mbur sement f or her medi cal
expenses. Heat her s gr oss i ncome wi l l be r educed by $1, 500.
*b. Heat her r educed her sal ar y by $1, 200, and r ecei ved onl y $900
as r ei mbur sement f or her act ual medi cal expenses. She i s not
r ef unded t he $300 r emai ni ng bal ance, but her gr oss i ncome i s
r educed by $1, 200.
c. Heat her r educed her sal ar y by $1, 200, and r ecei ved onl y $800
as r ei mbur sement f or her medi cal expenses. She i s not r ef unded
t he $400. Her gr oss i ncome i s r educed by $800.
d. Heat her r educed her sal ar y by $1, 200, and r ecei ved onl y $900
as r ei mbur sement f or her medi cal expenses. She f or f ei t s t he $300.
Her gr oss i ncome i s r educed by $300.

593. Empl oyees of t he Val l ey Count r y Cl ub ar e al l owed t o use t he gol f
cour se wi t hout char ge bef or e and af t er wor ki ng hour s on Mondays, when
t he number of pl ayer s on t he cour se i s at i t s l owest . Tom, an empl oyee
of t he count r y cl ub pl ayed 40 r ounds of gol f dur i ng t he year at no
char ge when t he nonempl oyee char ge was $20 per r ound.

a. Tommust i ncl ude $800 i n gr oss i ncome.
b. Tomi s not r equi r ed t o i ncl ude anyt hi ng i n gr oss i ncome
because i t i s a de mi ni mi s f r i nge benef i t .
c. Tomi s not r equi r ed t o i ncl ude t he $800 i n gr oss i ncome
because t he use of t he cour se was a gi f t .
*d. Tomi s not r equi r ed t o i ncl ude anyt hi ng i n gr oss i ncome
because t hi s i s a no- addi t i onal - cost ser vi ce f r i nge benef i t .

594. The Royal Mot or Company manuf act ur es aut omobi l es. Empl oyees of t he
company can buy a new aut omobi l e f or Royal s cost pl us 2%. The
aut omobi l es ar e sol d t o deal er s at cost pl us 20%. Gener al l y, empl oyees
of Local Deal er , I nc. , ar e al l owed t o buy a new aut omobi l e f r omt he
company at t he deal er s cost . Of f i cer s of Local Deal er ar e al l owed t o
use a company vehi cl e ( f or per sonal use) at no cost .

*a. The empl oyees who buy aut omobi l es at a di scount ar e not
r equi r ed t o r ecogni ze i ncome f r omt he pur chase.
b. None of t he empl oyees who t ake advant age of t he f r i nge
benef i t s descr i bed above ar e r equi r ed t o r ecogni ze i ncome.
c. Empl oyees of Royal ar e r equi r ed t o r ecogni ze as gr oss i ncome
18%( 20% 2%) of t he cost of t he aut omobi l e pur chased.
d. Al l empl oyees must r ecogni ze gr oss i ncome f r omt hei r per sonal
use of t he company vehi cl es.

595. Peggy i s an execut i ve f or t he Tan Fur ni t ur e Manuf act ur i ng Company.
Peggy pur chased f ur ni t ur e f r omt he company f or $9, 500, t he pr i ce Tan
or di nar i l y woul d char ge a whol esal er f or t he same i t ems. The r et ai l
pr i ce of t he f ur ni t ur e was $12, 500, and Tan s cost was $9, 000. The
company al so pai d f or Peggy s par ki ng space i n a gar age near t he of f i ce.
The par ki ng f ee was $600 f or t he year . Al l empl oyees ar e al l owed t o buy
f ur ni t ur e at a di scount ed pr i ce compar abl e t o t hat char ged t o Peggy.
However , t he company does not pay ot her empl oyees par ki ng f ees.
Peggy s gr oss i ncome f r omt he above i s:

*a. $0.
b. $600.
c. $3, 500.
d. $4, 100.

596. The empl oyees of Mauve Account i ng Ser vi ces ar e per mi t t ed t o use
t he copy machi ne f or per sonal pur poses, pr ovi ded t he pr i vi l ege i s not
abused. Ed i s t he pr esi dent of a ci vi c or gani zat i on and uses t he
copi er t o make sever al copi es of t he or gani zat i on s agenda f or i t s
meet i ngs. The copi es made dur i ng t he year woul d have cost $150 at a
l ocal of f i ce suppl y.

a. Ed must i ncl ude $150 i n hi s gr oss i ncome.
b. Ed may excl ude t he cost of t he copi es as a no- addi t i onal cost
f r i nge benef i t .
c. Ed may excl ude t he cost of t he copi es onl y i f t he or gani zat i on
i s a cl i ent of Mauve.
*d. Ed may excl ude t he cost of t he copi es as a de minimis f r i nge
benef i t .

597. The Per f ect i on Tax Ser vi ce gi ves empl oyees $12. 50 as supper
money when t hey ar e r equi r ed t o wor k over t i me, appr oxi mat el y 25 days
each year . The supper money r ecei ved:

a. Must be i ncl uded i n t he empl oyee s gr oss i ncome.
b. Must be i ncl uded i n t he empl oyee s gr oss i ncome i f t he
empl oyee does not spend i t f or supper .
c. May be excl uded f r omt he empl oyee s gr oss i ncome as a no-
addi t i onal cost f r i nge benef i t .
*d. May be excl uded f r omt he empl oyee s gr oss i ncome as a de
minimis f r i nge benef i t .

598. The de minimis f r i nge benef i t :

a. Excl usi on appl i es onl y t o pr oper t y r ecei ved by t he empl oyee.
*b. Can be pr ovi ded on a di scr i mi nat or y basi s.
c. Excl usi on i s l i mi t ed t o $250 per year .
d. Excl usi on appl i es t o empl oyee di scount s.

599. Eval uat e t he f ol l owi ng st at ement s:

I. De minimis fringe benefits are those that
are so immaterial that accounting for them
is impractical.
II. De minimis fringe benefits are subject to
strict anti-discrimination requirements.
III. Generally, a fringe benefit of less than
$50 is considered de minimis and can be
excluded from gross income.

*a. Onl y I i s t r ue.
b. Onl y I I I i s t r ue.
c. Onl y I and I I I ar e t r ue.
d. I , I I , and I I I ar e t r ue.

600. Kr i st en s empl oyer owns i t s bui l di ng and pr ovi des par ki ng space
f or i t s empl oyees. The val ue of t he f r ee par ki ng i s $150 per
mont h. Kar en s empl oyer does not have par ki ng f aci l i t i es, but
r ei mbur ses i t s empl oyee f or t he cost of par ki ng i n a near by gar age, up
t o $150 per mont h.

a. Kr i st en and Kar en must r ecogni ze gr oss i ncome f r omt he par ki ng
ser vi ces.
b. Kr i st en can excl ude t he empl oyer pr ovi ded par ki ng f r omgr oss
i ncome, but Kar en must i ncl ude her r ei mbur sement i n gr oss i ncome.
c. Kr i st en must i ncl ude t he val ue of t he empl oyer pr ovi ded
par ki ng f r omher gr oss i ncome, but Kar en can excl ude her
r ei mbur sement f r omgr oss i ncome.
*d. Nei t her Kr i st en nor Kar en i s r equi r ed t o i ncl ude t he cost of
par ki ng i n gr oss i ncome.

601. A company has a medi cal r ei mbur sement pl an f or of f i cer s t hat
cover s al l cost s t hat t he i nsur er wi l l not pay. However , f or al l
empl oyees who ar e not of f i cer s, t he medi cal r ei mbur sement pl an appl i es
onl y af t er t he empl oyee has pai d $1, 000 f r omhi s or her own f unds. An
of f i cer i ncur r ed $1, 500 i n medi cal expenses and was r ei mbur sed f or t hat
amount . An hour l y wor ker al so i ncur r ed $1, 500 i n medi cal expense and
was r ei mbur sed $500.

a. Bot h empl oyees must i ncl ude al l benef i t s r ecei ved i n gr oss
i ncome.
b. The of f i cer must i ncl ude $500 i n gr oss i ncome.
*c. The of f i cer must i ncl ude $1, 500 i n gr oss i ncome.
d. The hour l y empl oyee must i ncl ude $1, 000 i n gr oss i ncome.

602. A U. S. ci t i zen wor ked i n a f or ei gn count r y f or t he per i od J ul y 1,
2012 t hr ough August 1, 2013. Her sal ar y was $10, 000 per mont h. Al so, i n
2012 she r ecei ved $5, 000 i n di vi dends f r omf or ei gn cor por at i ons ( not
qual i f i ed di vi dends) . No di vi dends wer e r ecei ved i n 2013. Whi ch of t he
f ol l owi ng i s cor r ect ?

a. The t axpayer cannot excl ude any of t he i ncome because she was
not pr esent i n t he f or ei gn count r y mor e t han 330 days i n ei t her
2012 or 2013.
b. The t axpayer can excl ude a por t i on of t he sal ar y f r omU. S.
gr oss i ncome i n 2012 and 2013, and al l of t he di vi dend i ncome.
c. The t axpayer can excl ude f r omU. S. gr oss i ncome $60, 000 sal ar y
i n 2012, but i n 2013 t he t axpayer wi l l exceed t he t wel ve mont h
l i mi t at i on and, t her ef or e, al l of t he 2013 compensat i on must be
i ncl uded i n gr oss i ncome. Al l of t he di vi dends must be i ncl uded
i n 2012 gr oss i ncome.
*d. The t axpayer must i ncl ude t he di vi dend i ncome of $5, 000 i n
2012 gr oss i ncome, but t he t axpayer can excl ude a por t i on of t he
compensat i on i ncome f r omU. S. gr oss i ncome i n 2012 and 2013.

603. Loui se wor ks i n a f or ei gn br anch of her empl oyer s busi ness. She
ear ned $5, 000 per mont h t hr oughout t he r el evant per i od.

*a. I f Loui se wor ked i n t he f or ei gn br anch f r omMay 1, 2012 unt i l
Oct ober 31, 2013, she may excl ude $40, 000 f r omgr oss i ncome i n
2012 and excl ude $50, 000 i n 2013.
b. I f Loui se wor ked i n t he f or ei gn br anch f r omMay 1, 2012 unt i l
Oct ober 31, 2013, she cannot excl ude anyt hi ng f r omgr oss i ncome
because she was not pr esent i n t he count r y f or 330 days i n ei t her
year .
c. I f Loui se began wor k i n t he f or ei gn count r y on May 1, 2012,
she must wor k t hr ough November 30, 2013 i n or der t o excl ude
$55, 000 f r omgr oss i ncome i n 2013 but none i n 2012.
d. Loui se wi l l not be al l owed t o excl ude any f or ei gn ear ned
i ncome because she made l ess t han $97, 600.

604. I n t he case of i nt er est i ncome f r omst at e and Feder al bonds:

a. I nt er est on Uni t ed St at es gover nment bonds r ecei ved by a st at e
r esi dent can be subj ect t o t hat st at e s i ncome t ax.
*b. I nt er est on Uni t ed St at es gover nment bonds i s subj ect t o
Feder al i ncome t ax.
c. I nt er est on bonds i ssued by St at e A r ecei ved by a r esi dent of
St at e B cannot be subj ect t o i ncome t ax i n St at e B.
d. Al l of t he above ar e cor r ect .
e. None of t he above ar e cor r ect .

605. Heat her s i nt er est and gai ns on i nvest ment s f or 2013 wer e as
f ol l ows:

Interest on Bland County school
bonds
$600
Interest on U.S. government bonds 700
Interest on a Federal income tax
refund
200
Gain on the sale of Bland County
school bonds
500

Heathers gross income from the above is:

a. $2, 000.
b. $1, 800.
*c. $1, 400.
d. $1, 300.

606. Emi l y i s i n t he 35%mar gi nal t ax br acket . She can pur chase a Yor k
Count y school bond yi el di ng 3. 5%i nt er est and t he i nt er est i s not
subj ect t o a 5%st at e t ax. But she i s i nt er est ed i n ear ni ng a hi gher
r et ur n f or compar abl e r i sk.

a. I f she buys a cor por at e bond t hat pays 6%i nt er est , her af t er -
t ax r at e of r et ur n wi l l be l ess t han i f she pur chased t he Yor k
Count y school bond.
*b. I f she buys a U. S. gover nment bond payi ng 5%, her af t er - t ax
r at e of r et ur n wi l l be l ess t han i f she pur chased t he Yor k Count y
school bond.
c. I f she buys a common st ock payi ng a 4%di vi dend, her af t er - t ax
r at e of r et ur n wi l l be hi gher t han i f she pur chased t he Yor k
Count y school bond.
d. Al l of t he above ar e cor r ect .
e. None of t he above ar e cor r ect .

607. Doug and Pat t i e r ecei ved t he f ol l owi ng i nt er est i ncome i n t he
cur r ent year :

Savings account at Greenbacks Bank $4,000
United States Treasury bonds 250
Interest on State of Virginia bonds 200
Interest on Federal tax refund 150
Interest on state income tax refund 75

Greenbacks Bank also gave Doug and Pattie a cellular phone (worth $100) for
opening the savings account. What amount of interest income should they
report on their joint income tax return?

a. $4, 775.
b. $4, 675.
*c. $4, 575.
d. $4, 300.

608. Geor ge, an unmar r i ed cash basi s t axpayer , r ecei ved t he f ol l owi ng
amount s dur i ng 2013:

Interest on savings accounts $2,000
Interest on a State tax refund 600
Interest on City of Salem school bonds 350
Interest portion of proceeds of a 5% bank
certificate of deposit purchased on
July 1, 2012, and matured on June
30, 2013
250
Dividends on USG common stock 300

What amount should George report as gross income from dividends and
interest for 2013?

a. $2, 300.
b. $2, 550.
*c. $3, 150.
d. $3, 500.

609. St uar t owns 300 shar es of Tur quoi se Cor por at i on st ock and 2, 000
shar es of Bl ue Cor por at i on st ock. Dur i ng t he year , St uar t r ecei ved 150
shar es of Tur quoi se as a r esul t of a 1 f or 2 st ock spl i t . The val ue of
t he shar es r ecei ved was $4, 800. St uar t al so r ecei ved 100 shar es of Bl ue
Cor por at i on st ock as a r esul t of a 5%st ock di vi dend. St uar t di d not
have t he opt i on of r ecei vi ng cash f r omBl ue. The addi t i onal shar es he
r ecei ved had a val ue of $7, 200. St uar t s gr oss i ncome f r omt he r ecei pt
of t he addi t i onal Tur quoi se and Bl ue shar es i s:

*a. $0.
b. $4, 800.
c. $7, 200.
d. $12, 000.

610. Assumi ng a t axpayer qual i f i es f or t he excl usi on t r eat ment , t he
i nt er est i ncome on educat i onal savi ngs bonds:

a. I s gr oss i ncome t o t he per son who pur chased t he bond i n t he
year t he i nt er est i s ear ned.
b. I s gr oss i ncome t o t he st udent i n t he year t he i nt er est i s
ear ned.
c. I s i ncl uded i n t he st udent s gr oss i ncome i n t he year t he
savi ngs bonds ar e sol d or r edeemed t o pay educat i onal expenses.
*d. I s not i ncl uded i n anyone s gr oss i ncome i f t he pr oceeds ar e
used t o pay col l ege t ui t i on.

611. The excl usi on of i nt er est on educat i onal savi ngs bonds:

a. Appl i es onl y t o savi ngs bonds owned by t he chi l d.
*b. Appl i es t o par ent s who pur chase bonds f or whi ch t he pr oceeds
ar e used f or t hei r chi l d s educat i on.
c. Means t hat t he chi l d must i ncl ude t he i nt er est i n i ncome i f
t he bond i s owned by t he par ent .
d. Does appl y even i f used t o pay f or r oomand boar d.

612. Mar t ha par t i ci pat ed i n a qual i f i ed t ui t i on pr ogr amf or t he benef i t
of her son. She i nvest ed $6, 000 i n t he f und. Four year s l at er her son
wi t hdr ew $8, 000, t he ent i r e bal ance i n t he pr ogr am, t o pay hi s col l ege
t ui t i on.

*a. Mar t ha i s not r equi r ed t o i ncl ude t he $2, 000 ( $8, 000 $6, 000)
i n her gr oss i ncome when t he f unds ar e used t o pay t he t ui t i on.
b. Mar t ha s son must i ncl ude t he $2, 000 ( $8, 000 $6, 000) i n hi s
gr oss i ncome when t he f unds ar e used t o pay t he t ui t i on.
c. Mar t ha must i ncl ude $8, 000 i n her gr oss i ncome.
d. Mar t ha s son must i ncl ude $8, 000 i n hi s gr oss i ncome.

613. I n December 2013, Todd, a cash basi s t axpayer , pai d $1, 200 of f i r e
i nsur ance pr emi ums f or t he cal endar year 2014 on a bui l di ng he hel d f or
r ent al i ncome. Todd deduct ed t he $1, 200 of i nsur ance pr emi ums on hi s
2013 t ax r et ur n. He had $150, 000 of t axabl e i ncome t hat year . On J une
30, 2014, he sol d t he bui l di ng and, as a r esul t , r ecei ved a $500 r ef und
on hi s f i r e i nsur ance pr emi ums. As a r esul t of t he above:

a. Todd shoul d amend hi s 2013 r et ur n and cl ai m$500 l ess
i nsur ance expense.
*b. Todd shoul d i ncl ude t he $500 i n 2014 gr oss i ncome i n
accor dance wi t h t he t ax benef i t r ul e.
c. Todd shoul d add t he $500 t o hi s sal es pr oceeds f r omt he
bui l di ng.
d. Todd shoul d i ncl ude t he $500 i n 2014 gr oss i ncome i n
accor dance wi t h t he cl ai mof r i ght doct r i ne.

614. Tonya i s a cash basi s t axpayer . I n 2013, she pai d st at e i ncome
t axes of $8, 000. I n ear l y 2014, she f i l ed her 2013 st at e i ncome t ax
r et ur n and r ecei ved a $900 r ef und.

a. I f Tonya i t emi zed her deduct i ons i n 2013 on her Feder al i ncome
t ax r et ur n, she shoul d amend her 2013 r et ur n and r educe her
i t emi zed deduct i ons by $900.
b. I f Tonya i t emi zed her deduct i ons i n 2013 on her Feder al i ncome
t ax r et ur n and her i t emi zed deduct i ons exceeded t he st andar d
deduct i on by at l east $900, t he r ef und wi l l not af f ect her 2014
t ax r et ur n.
c. I f Tonya i t emi zed her deduct i ons i n 2013 on her Feder al i ncome
t ax r et ur n, she must amend her 2013 Feder al i ncome t ax r et ur n and
use t he st andar d deduct i on.
*d. I f Tonya i t emi zed her deduct i ons i n 2013 on her Feder al
i ncome t ax r et ur n and her i t emi zed deduct i ons exceeded t he
st andar d deduct i on by mor e t han $900, she must r ecogni ze $900
i ncome i n 2014 under t he t ax benef i t r ul e.

615. Har ol d bought l and f r omJ ewel f or $150, 000. Har ol d pai d $50, 000
cash and gave J ewel an 8%not e f or $100, 000. The not e was t o be pai d
over a f i ve- year per i od. When t he bal ance on t he not e was $80, 000,
J ewel began havi ng f i nanci al di f f i cul t i es. To accel er at e her cash
i nf l ows, J ewel agr eed t o accept $60, 000 cash f r omHar ol d i n f i nal
payment of t he not e pr i nci pal .

a. Har ol d must r ecogni ze $20, 000 ( $80, 000 $60, 000) of gr oss
i ncome.
*b. Har ol d i s not r equi r ed t o r ecogni ze gr oss i ncome, but must
r educe hi s cost basi s i n t he l and t o $130, 000.
c. Har ol d i s not r equi r ed t o r ecogni ze gr oss i ncome, si nce he
pai d t he debt bef or e i t was due.
d. J ewel must r ecogni ze gr oss i ncome of $20, 000 ( $80, 000
$60, 000) f r omdi schar ge of t he debt .

616. Hazel , a sol vent i ndi vi dual but a r ecover i ng al cohol i c, embezzl ed
$6, 000 f r omher empl oyer . I n t he same year t hat she embezzl ed t he f unds,
her empl oyer di scover ed t he t hef t . Her empl oyer di d not f i r e her and
t ol d her she di d not have t o r epay t he $6, 000 i f she woul d at t end
Al cohol i cs Anonymous. Hazel met t he condi t i ons and her empl oyer
cancel ed t he debt .

a. Hazel di d not r eal i ze any i ncome because her empl oyer made a
gi f t t o her .
*b. Hazel must i ncl ude $6, 000 i n gr oss i ncome f r omdi schar ge of
i ndebt edness.
c. Hazel must i ncl ude $6, 000 i n gr oss i ncome under t he t ax
benef i t r ul e.
d. Hazel may excl ude t he $6, 000 f r omgr oss i ncome because t he
debt never exi st ed.

617. Gol d Company was exper i enci ng f i nanci al di f f i cul t i es, but was not
bankr upt or i nsol vent . The Nat i onal Bank, whi ch hel d a mor t gage on
ot her r eal est at e owned by Gol d, r educed t he pr i nci pal f r om$110, 000 t o
$85, 000. The bank had made t he l oan t o Gol d when i t pur chased t he r eal
est at e f r omSi l ver , I nc. Pi nk, I nc. , t he hol der of a mor t gage on Gol d s
bui l di ng, agr eed t o accept $40, 000 i n f ul l payment of t he $55, 000 due.
Pi nk had sol d t he bui l di ng t o Gol d f or $150, 000 t hat was t o be pai d i n
i nst al l ment s over 8 year s. As a r esul t of t he above, Gol d must :

a. I ncl ude $40, 000 i n gr oss i ncome.
b. Reduce t he basi s i n i t s asset s by $40, 000.
*c. I ncl ude $25, 000 i n gr oss i ncome and r educe i t s basi s i n i t s
asset s by $15, 000.
d. I ncl ude $15, 000 i n gr oss i ncome and r educe i t s basi s i n t he
bui l di ng by $25, 000.

618. On J anuar y 1, 2003, Car di nal Cor por at i on i ssued 5%25- year bonds
at par and used t he $12, 000, 000 pr oceeds t o f i nance t he const r uct i on of
a new pl ant . On J anuar y 1, 2013, t he company acqui r ed t he bonds on t he
open mar ket f or $11, 500, 000. Assumi ng t hat Car di nal Cor por at i on i s
nei t her bankr upt nor i nsol vent , t he acqui si t i on and r et i r ement of t he
bonds r esul t s i n whi ch of t he f ol l owi ng:

*a. The company must r ecogni ze a $500, 000 gai n.
b. The company can make an el ect i on t o r ecogni ze a $500, 000 gai n
or r educe t he company s basi s i n t he pl ant by $500, 000.
c. The company must r ecogni ze a $500, 000 gai n and i ncr ease t he
company s basi s i n t he pl ant by $500, 000.
d. The company can amor t i ze t he $500, 000 gai n, r ecogni zi ng i ncome
over t he r emai ni ng l i f e of t he bonds.

619. Denny was nei t her bankr upt nor i nsol vent but was shor t of cash and
coul d not make t he mor t gage payment s on hi s per sonal r esi dence i n
2013. The bank t hat hel d t he mor t gage agr eed t o r educe t he pr i nci pal
on t he debt f r om$100, 000 t o $80, 000 so t hat Denny s mont hl y mor t gage
payment s coul d be r educed t o a manageabl e amount . Denny al so had a
vacat i on home wi t h a mor t gage whose payment s wer e beyond hi s means. The
mor t gage hol der on t he vacat i on home agr eed t o r educe t he mor t gage f r om
$60, 000 t o $50, 000. The val ue of t he per sonal r esi dence was $80, 000 and
t he val ue of t he vacat i on home was $45, 000 at t he dat es of t he debt
r educt i on.

a. Denny i s not r equi r ed t o r ecogni ze any i ncome as a r esul t of
t he r educt i on i n t he pr i nci pal of t he mor t gages.
*b. Denny i s r equi r ed t o r ecogni ze $10, 000 i ncome f r omt he
r educt i on i n t he mor t gage on t he vacat i on home, but has no gr oss
i ncome f r omt he r educt i on i n t he mor t gage pr i nci pal on hi s
per sonal r esi dence.
c. Denny i s r equi r ed t o r ecogni ze $5, 000 i ncome f r omt he
r educt i on i n t he mor t gage on t he vacat i on home, but not hi ng f or
t he r educt i on i n t he mor t gage on hi s per sonal r esi dence.
d. Denny i s r equi r ed t o r ecogni ze $10, 000 i ncome f r omt he
r educt i on i n t he mor t gage on t he vacat i on home and $20, 000 i ncome
f or t he r educt i on i n t he mor t gage on hi s per sonal r esi dence.

620. Fl or a Company owed $95, 000, a debt i ncur r ed t o pur chase l and t hat
ser ves as secur i t y f or t he debt .

a. I f Fl or a had bor r owed t he f unds f r oma bank, t he bank accept s
$85, 000 i n f ul l payment of t he debt , and Fl or a i s sol vent af t er
t he t r ansf er , Fl or a does not r ecogni ze i ncome, but t he company
must r educe t he cost of t he l and by $10, 000.
b. I f Fl or a had bor r owed t he f unds f r oma bank, and t he bank
accept s $85, 000 i n f ul l payment of t he debt , when t he val ue of
t he pr oper t y i s $80, 000, Fl or a can deduct a l oss.
c. I f Fl or a t r ansf er s t o t he bank ot her pr oper t y, wi t h a basi s of
$90, 000 and a f ai r mar ket val ue of $95, 000, i n f ul l payment of
t he debt , Fl or a can r ecogni ze a $5, 000 l oss.
*d. I f t he $95, 000 i s owed t o t he per son who sol d t he pr oper t y t o
Fl or a, and t he cr edi t or accept s $85, 000 i n f ul l payment f or t he
debt , Fl or a does not r ecogni ze gai n but must r educe i t s basi s i n
t he l and.

621. Sandy i s mar r i ed, f i l es a j oi nt r et ur n, and expect s t o be i n t he
28%mar gi nal t ax br acket f or t he f or eseeabl e f ut ur e. Al l of hi s i ncome
i s f r omsal ar y and al l of i t i s used t o mai nt ai n t he househol d. He has
a pai d- up l i f e i nsur ance pol i cy wi t h a cash sur r ender val ue of $100, 000.
He pai d $60, 000 of pr emi ums on t he pol i cy. Hi s gai n f r omcashi ng i n t he
l i f e i nsur ance pol i cy woul d be or di nar y i ncome. I f he r et ai ns t he
pol i cy, t he i nsur ance company wi l l pay hi m$3, 000 ( 3%) i nt er est each
year . Sandy t hi nks he can ear n a hi gher r et ur n i f he cashes i n t he
pol i cy and i nvest s t he pr oceeds.

a. What bef or e- t ax r at e of r et ur n woul d Sandy
be r equi r ed t o ear n on t he pr oceeds f r om
cashi ng i n t he pol i cy t o equal t he r et ur n
ear ned wi t h t he i nsur ance company?

b. Assume Sandy est i mat es he can ear n a 6%
bef or e- t ax r at e of r et ur n on t he pr oceeds
f r omcashi ng i n t he pol i cy. Assume he can
ear n a 6%r et ur n f or t he r emai nder of hi s
l i f e and t hat he wi l l r ei nvest al l ear ni ngs
at t he same 6%bef or e- t ax r at e of r et ur n. I f
Sandy expect s t o l i ve 10 mor e year s, whi ch
al t er nat i ve wi l l yi el d t he gr eat er amount t o
hi s benef i ci ar i es upon Sandy s deat h?
( Gi ven: The f ut ur e val ue of an annui t y i n 10
year s assumi ng a 4. 32%af t er - t ax r et ur n i s
12. 19. The f ut ur e val ue of an annui t y i n 10
year s assumi ng a 2. 16%r et ur n i s 11. 03) .

Cor r ect Answer :
a. If Sandy cashes in the policy, he must
recognize a $40,000 gain and pay taxes of
$11,200 [.28($100,000 $60,000) =
$11,200]. Therefore, he will have only
$88,800 to invest ($100,000 $11,200 =
$88,800). To earn $3,000, the same as he
receives from the insurance company, Sandy
must earn a .03378 return on the after-tax
proceeds ($88,800 .03378 = $3,000).

b. The life insurance proceeds will be exempt
from income tax. Therefore, if Sandy retains
the policy, the beneficiaries receive
$100,000 plus the compound amount of (1
.28)($3,000) = $2,160 interest earned each
year. The interest will be reinvested at 6%
before tax, or (1. .28)(.06) = 4.32%
after-tax interest. Given the compound
interest factor of 12.19, the annual income
will accumulate to 12.19 $2,160 = $26,330.
The after-tax policy proceeds are $100,000.

Therefore, if Sandy retains the policy, his
beneficiaries would expect to receive
$126,330 ($100,000 + $26,330). If Sandy
cashed in the policy, his beneficiaries will
receive the after-tax amount of the policy,
as computed in a., above, of $88,800, plus
the compound amount of the earnings on the
$88,800, at a 4.32% after-tax return. The
annual after-tax earnings on $88,800 is
$3,836 (.0432 $88,800). This will
accumulate to $3,836 12.19 = $46,761 in 10
years. Therefore, his beneficiaries would
receive $135,561 ($88,800 +
$46,761). Cashing in the policy is the
better alternative.

622. Bever l y di ed dur i ng t he cur r ent year . At t he t i me of her deat h,
her accr ued sal ar y and commi ssi ons t ot al ed $3, 000 and wer e pai d t o her
husband. The empl oyer al so pai d t he husband $35, 000 whi ch r epr esent ed
an amount equal t o Bever l y s sal ar y f or t he year pr i or t o her deat h.
The empl oyer had a pol i cy of maki ng t he sal ar y payment s t o hel p out
t he f ami l y i n t he t i me of i t s gr eat est need. Bever l y s spouse
col l ect ed her i nt er est i n t he empl oyer s qual i f i ed pr of i t shar i ng pl an
amount i ng t o $30, 000. As benef i ci ar y of hi s wi f e s l i f e i nsur ance
pol i cy, Bever l y s spouse el ect ed t o col l ect t he pr oceeds i n
i nst al l ment s. I n t he year of deat h, he col l ect ed $8, 000 whi ch i ncl uded
$1, 500 i nt er est i ncome. Whi ch of t hese i t ems ar e subj ect t o i ncome t ax
f or Bever l y s spouse?

Cor r ect Answer :
Salary and commissions $ 3,000
Profit sharing plan 30,000
Interest income 1,50
0
Included in gross income $34,500

All nonforfeitable rights to funds are includible in income (salary,
commissions). This includes the accrued salary of $3,000. The collection
of Beverlys interest in the profit sharing plan of $30,000 is subject to
taxation. The $35,000 payment by the employer was pursuant to a policy of
charity to families of deceased employees, and there is authority for
excluding this item as a gift. The IRS will probably challenge the
exclusion of the $35,000. The IRS would argue that a policy of making the
payment to all families of deceased employees makes the payment appear to
be in the nature of compensation for prior services. Life insurance
proceeds are tax-exempt. However, all interest paid on life insurance
proceeds is includible in gross income

623. Bar bar a was i nj ur ed i n an aut omobi l e acci dent . She has t hr eat ened
t o f i l e a sui t agai nst t he ot her par t y i nvol ved i n t he acci dent and has
pr oposed t he f ol l owi ng set t l ement :

Damages f or 25%l oss of t he use of
her r i ght ar m
$200, 000
Medi cal expenses 30, 000
Loss of wages 10, 000
Puni t i ve damages 100, 000
$340, 000

The def endant s i nsur ance company i s r el uct ant t o pay puni t i ve damages.
Al so, t he company di sput es t he amount of her l oss of wages amount .
I nst ead, t he company of f er s t o pay her $300, 000 f or damages t o her ar m
and $30, 000 medi cal expenses. Assumi ng Bar bar a i s i n t he 35%mar gi nal
t ax br acket , wi l l her af t er - t ax pr oceeds f r omaccept i ng t he of f er be
equal t o what she consi der s t o be her act ual damages ( l i st ed above) ?

Cor r ect Answer :
Bar bar a s cl ai mf or puni t i ve damages of $100, 000 i s t he onl y t axabl e
amount . Ther ef or e, her af t er - t ax pr oceeds f r omr ecei vi ng t he $340, 000
woul d be $305, 000 [ $340, 000 . 35( $100, 000) ] . None of t he of f er f r om
t he i nsur ance company ( $340, 000) woul d be t axabl e and t her ef or e her
af t er - t ax pr oceeds f r omt he set t l ement woul d be $340, 000. Thus, bot h
t he i nsur ance company and Bar bar a woul d benef i t f r omher accept i ng t he
i nsur ance company s of f er .

624. Geor ge i s empl oyed by t he Qual i t y Appl i ance Company. Al l t he f ul l
t i me empl oyees ar e al l owed t o pur chase appl i ances at t he company s cost
pl us 10%. The empl oyee al so i s gi ven, at no cost , a 1- year ser vi ce
cont r act on al l t he goods pur chased f r omt he company. Geor ge pur chased
a r ef r i ger at or f or $500. The company s nor mal sel l i ng pr i ce f or t he
r ef r i ger at or i s $800. Geor ge al so r ecei ved a ser vi ce cont r act , at no
char ge, t hat had a val ue of $150. Dur i ng t he year , Geor ge was r equi r ed
t o have hi s r ef r i ger at or ser vi ced once. The cost of t he cal l woul d have
been $75 i f he had not had t he ser vi ce cont r act . I s Geor ge r equi r ed t o
r ecogni ze any i ncome f r omt he pur chase of t he r ef r i ger at or , t he r ecei pt
of t he ser vi ce cont r act , and t he ser vi ce cal l ?

Cor r ect Answer :
Geor ge wi l l pr obabl y be r equi r ed t o r ecogni ze $120 i ncome f r omt he
ser vi ce cont r act . The company can sel l t he ser vi ce cont r act t o an
empl oyee at a 20%di scount and t he empl oyee i s not r equi r ed t o
r ecogni ze i ncome. Geor ge r ecei ved a 100%di scount ; t her ef or e, $120 ( 80%
$150) must be i ncl uded i n hi s gr oss i ncome. However , Geor ge can
per haps make a convi nci ng ar gument t hat he i s mer el y r ecei vi ng a no-
addi t i onal - cost ser vi ce, and t hus woul d not be r equi r ed t o r ecogni ze
i ncome. Geor ge wi l l not be r equi r ed t o r ecogni ze i ncome f r omt he
bar gai n pur chase of t he r ef r i ger at or because he pai d mor e t han t he
empl oyer s cost .

625. Sonj a i s a Uni t ed St at es ci t i zen who has wor ked i n Spai n f or t he
past 10 mont hs. She r ecei ved $8, 000 a mont h as compensat i on. Her
empl oyer has of f er ed t o ext end Sonj a s cont r act t o wor k i n Spai n f or
anot her 6 mont hs at t he same r at e of pay. I f she r ej ect s t he of f er , she
can r et ur n t o t he Uni t ed St at es and r ecei ve a sal ar y of $10, 000 per
mont h. Whi l e wor ki ng i n Spai n, she i s subj ect t o t he Spai n i ncome t ax,
whi ch i s appr oxi mat el y 11%of her gr oss pay. The mar gi nal t ax r at e on
her i ncome t axed i n t he Uni t ed St at es i s 25%. Compar e Sonj a s af t er - t ax
i ncome assumi ng she r emai ns i n Spai n wi t h her af t er - t ax i ncome i f she
r et ur ns t o t he Uni t ed St at es.

Cor r ect Answer :
I f Sonj a r et ur ns t o t he Uni t ed St at es, she wi l l not be pr esent i n t he
f or ei gn count r y f or t he r equi si t e per i od ( at l east 330 days dur i ng any
12 consecut i ve mont hs) . Thus, she wi l l not be el i gi bl e f or t he f or ei gn
ear ned i ncome excl usi on. Her i ncome wi l l be subj ect t o t he 25%r at e i n
t he Uni t ed St at es. Al t hough she wi l l be gi ven cr edi t f or t he t axes pai d
i n Spai n, t he net ef f ect of not ext endi ng t he st ay i s t o i ncr ease her
t ax r at e f r om11%t o 25%on her i ncome f or t he 15- mont h per i od ( t he
or i gi nal 10 mont hs pl us t he addi t i onal 5 mont hs under consi der at i on) .
Thi s woul d cost her $16, 800 [ ( . 25 . 11) ( 15 $8, 000) ] . The hi gher
pay i n t he Uni t ed St at es woul d yi el d onl y addi t i onal af t er - t ax i ncome
of $9, 000 [ ( $10, 000 $8, 000) ( 1 . 25) ( 6 mont hs) ] . Si nce t he benef i t s
of t he f or ei gn i ncome excl usi on ar e gr eat er t han t he l oss of i ncome, i t
woul d be benef i ci al t o st ay i n Spai n, f r oman af t er - t ax i ncome poi nt of
vi ew.

626. J uan, was consi der i ng pur chasi ng an i nt er est i n a t ax- exempt bond
f und f or $100, 000, when he di scover ed t hat t he i nt er est must be
i ncl uded on hi s st at e i ncome t ax r et ur n. The i nt er est r at e i s 5%. Hi s
mar gi nal Feder al t ax r at e i s 35%, and hi s mar gi nal st at e i ncome t ax
r at e i s 10%. J uan i t emi zes hi s deduct i ons on hi s Feder al i ncome t ax
r et ur n. As an al t er nat i ve, J uan can pur chase a st at e bond ( a doubl e-
exempt bond) yi el di ng 4. 9%i nt er est t hat i s exempt f r ombot h Feder al
and st at e i ncome t ax. Whi ch i nvest ment woul d yi el d t he gr eat er af t er -
t ax r et ur n?

Cor r ect Answer :
J uan wi l l r ecei ve $5, 000 bef or e- t ax f r omt he bond f und. The st at e
i ncome t ax i s $500 [ ( . 10) ( $5, 000) ] . The st at e i ncome t ax wi l l be
deduct i bl e on t he Feder al r et ur n; t hus, t he st at e t axes wi l l r educe
J uan s af t er - t ax i ncome by onl y $325 [ ( 1 . 35) ( $500] . Ther ef or e, t he
annual af t er - t ax r et ur n i s $4, 675 ( $5, 000 $325) , or 4. 675%. The
doubl e- exempt bonds wi l l yi el d 4. 9%af t er t ax; t her ef or e, i t i s t he
pr ef er r ed i nvest ment , assumi ng equal r i sks.

627. Mar gar et i s t r yi ng t o deci de whet her t o pl ace f unds i n a qual i f i ed
t ui t i on pr ogr am. Her son wi l l be at t endi ng col l ege i n 4 year s. She i s
i n t he 35%mar gi nal t ax br acket and she bel i eves she can ear n an 7%
bef or e t ax r et ur n on al t er nat i ve i nvest ment s. Thus, $10, 000 wi l l
accumul at e t o $11, 948 ( af t er - t ax) i n 4 year s. Mar gar et expect s t ui t i on
t o i ncr ease at t he r at e of 5%each year t o $12, 155 i n 4 year s. Her son
wi l l be i n t he 15%mar gi nal t ax br acket i n al l r el evant year s. Gi ven
t hese assumpt i ons, shoul d Mar gar et par t i ci pat e i n t he qual i f i ed t ui t i on
pr ogr am?

Cor r ect Answer :
Mar gar et can accumul at e $11, 948 by i nvest i ng her f unds f or 4 year s, but
t hen she must pay t he act ual t ui t i on. Al t er nat i vel y, i f she i nvest s t he
$10, 000 i n a qual i f i ed t ui t i on pr ogr am, t he t ui t i on wi l l be pai d i n 4
year s, r egar dl ess of t he amount . The amount of t he t ui t i on l ess t he
$10, 000 wi l l not be subj ect t o t ax. Thus, t he af t er - t ax f ut ur e val ue of
t he qual i f i ed t ui t i on f und i s $12, 155 ( $12, 155 $0) , whi ch i s gr eat er
t han t he al t er nat i ve accumul at ed val ue. Ther ef or e, i t appear s t hat
Mar gar et shoul d par t i ci pat e.

628. Gul l Cor por at i on was under goi ng r eor gani zat i on under t he
bankr upt cy l aws. The shar ehol der s, who had made l oans of $300, 000 t o
t he cor por at i on, agr eed t o accept addi t i onal st ock wi t h a val ue of
$200, 000 i nst ead of r epayment on t he debt . The Ol d Li ne I nsur ance
Company, whi ch had a $400, 000 mor t gage on t he bui l di ng, agr eed t o
r educe t he pr i nci pal t o $250, 000. A t r ade cr edi t or wi t h a r ecei vabl e of
$150, 000 f r omt he company agr eed t o accept $70, 000 i n f ul l payment f or
t he debt i ncur r ed t o pur chase goods t hat wer e st i l l on hand. Fi nal l y,
t he company t r ansf er r ed some equi pment wi t h an adj ust ed basi s of
$90, 000 i n sat i sf act i on of a l i abi l i t y f or $120, 000. Comput e t he
cor por at i on s gr oss i ncome and ot her adj ust ment s necessar y as a r esul t
of t he above t r ansact i ons.

Cor r ect Answer :
Gul l i s not r equi r ed t o r ecogni ze i ncome f r omt he shar ehol der s
exchangi ng t he debt f or st ock ( a nont axabl e cont r i but i on t o
capi t al ) . The $80, 000 r educt i on i n debt ( $150, 000 $70, 000) t o t r ade
cr edi t or s can be used t o r educe t he basi s i n t he goods
pur chased. However , Gul l i s r equi r ed t o r ecogni ze $30, 000 gai n
( $120, 000 $90, 000) f r omt r ansf er r i ng t he equi pment i n sat i sf act i on of
t he debt . However , because Gul f i s i n bankr upt cy, t he $150, 000 i ncome
f r omdi schar ge of i ndebt edness on t he mor t gage hel d by Ol d Li ne, can be
used t o r educe t ax at t r i but es ( e. g. , net oper at i ng l oss car r yover ,
basi s i n asset s) .

629. Car men had wor ked f or Spar r ow Cor por at i on f or t hi r t y year s when
she di ed of a hear t at t ack at age 60. She was pr act i cal l y penni l ess at
t he t i me of her deat h, owed a $12, 000 hospi t al bi l l , and had a di sabl ed
spouse. The company was ver y concer ned about i t s publ i c i mage, and
r at her t han r un t he r i sk of embar r assment f r omone of i t s l ong- t er m
empl oyees dyi ng and l eavi ng her spouse wi t h i nsuf f i ci ent means, t he
Boar d of Di r ect or s agr eed t o pay Car men s hospi t al bi l l and t o gi ve her
spouse $6, 000 per year f or t he r est of hi s l i f e. Di scuss bot h si des of
t he quest i on whet her Car men ( or her est at e) and her spouse r eal i ze any
t axabl e i ncome f r omt he above.

Cor r ect Answer :
The ar gument t hat Car men and her spouse r eal i ze i ncome f r omt he
payment s i s as f ol l ows: t he empl oyer was compensat i ng f or t he
empl oyee s pr i or ser vi ces. The f act t hat t he empl oyer had no l egal
obl i gat i on t o make t he payment s i s not r el evant si nce t he empl oyer
r eal i zed a benef i t ( pr event i on of embar r assment ) .

The ar gument t hat Car men and her spouse do not r eal i ze i ncome i s
pr edi cat ed upon char act er i zi ng t he payment s as a gi f t . Condi t i ons whi ch
i ndi cat e t hat a gi f t was i nt ended i ncl ude t he f ol l owi ng: t he spouse s
di r e f i nanci al condi t i on; t he decedent had been f ul l y compensat ed f or
her past ser vi ces, and any benef i t s t he cor por at i on r ecei ved f r omt he
payment s wer e i ndi r ect because t her e was no obl i gat i on t o pay such
amount s.

The $12, 000 hospi t al payment i s t axabl e because t he gi f t i s l i kel y
t axabl e i ncome t o her est at e, as i ncome i n r espect of t he decedent ,
because t he gi f t excl usi on does not appl y t o payment s by t he empl oyer
t o t he empl oyee.

630. What ar e t he t ax pr obl ems associ at ed wi t h payment s r ecei ved by a
wi f e f r omher deceased husband s empl oyer ? ( Assume t he wi f e r ender s no
ser vi ces t o t he empl oyer . )

Cor r ect Answer :
An amount pai d i n r espect of compensat i on owed t o t he empl oyee at t he
t i me of hi s deat h i s t axabl e t o t he spouse, j ust as t he amount woul d
have been t axabl e t o t he decedent i f he had r ecei ved t he money pr i or t o
deat h. Addi t i onal noni nvest ed amount s pai d by t he empl oyer pr obabl y
shoul d be t ot al l y excl uded f r omt he spouse s i ncome as a gi f t . However ,
t he I RS gener al l y consi der s such payment s t o be compensat i on f or past
ser vi ces r at her t han gi f t s.

Payment s r ecei ved f r omt he empl oyer s qual i f i ed pensi on or pr of i t
shar i ng pl an ar e subj ect t o t axat i on. Al so, i f t he empl oyee cont r i but ed
t o t he pensi on and pr of i t shar i ng pl an, t he benef i ci ar y i s al l owed t o
t r eat t hi s amount as a nont axabl e r ecover y of capi t al .

631. Bob had a t er mi nal i l l ness and r eal i zed t hat he can t t ake i t
wi t h hi m. Ther ef or e, he cashed i n hi s i nsur ance pol i cy and r ecei ved
$120, 000. He had pai d $50, 000 i n pr emi ums on t he pol i cy. He used t he
money t o f ul f i l l hi s l i f el ong ambi t i ons of goi ng t o t he Super Bowl ,
dr i vi ng an expensi ve spor t s car , and vacat i oni ng i n Ber muda.

Was Bob s behavi or consi st ent wi t h t he Congr essi onal i nt ent i n
pr ovi di ng t he t ax exempt i on he was per mi t t ed t o use?

Cor r ect Answer :
No. Bob was per mi t t ed t o excl ude f r omhi s gr oss i ncome t he $70, 000 gai n
( $120, 000 $50, 000) he r eal i zed f r omcashi ng i n t he pol i cy. The
excl usi on was per mi t t ed because he was t er mi nal l y i l l . The r at i onal e
f or t he excl usi on i s t hat of t en t he per son wi t h t he t er mi nal i l l ness
wi l l have t he need f or f unds t o be used f or hi s or her medi cal car e.
Bob i s cl ear l y not usi ng t he f unds f or t hi s pur pose t o be ser ved by t he
l aw. Never t hel ess, t he l aw does not pr event Bob f r omobt ai ni ng t he
excl usi on.

632. Ben was hospi t al i zed f or back pr obl ems. Whi l e he was away f r omt he
j ob, he col l ect ed hi s r egul ar sal ar y f r oman empl oyer - sponsor ed i ncome
pr ot ect i on i nsur ance pol i cy. Ben s empl oyer - sponsor ed hospi t al i zat i on
i nsur ance pol i cy al so pai d f or 90%of hi s medi cal expenses. Ben al so
col l ect ed on an i ncome pr ot ect i on pol i cy t hat he pur chased. Whi ch of
t he above sour ces of i ncome ar e t axabl e? Expl ai n t he basi s f or
excl udi ng any i t emor i t ems.

Cor r ect Answer :
Onl y t he col l ect i ons on t he empl oyer - sponsor ed i ncome pr ot ect i on pol i cy
ar e subj ect t o t ax. The hospi t al i zat i on benef i t s r ecei ved f r omt he
empl oyer sponsor ed pl an ar e speci f i cal l y excl uded. Bot h t he pr emi ums
and t he payment s can be excl uded. The amount s Ben col l ect ed on a pol i cy
he pur chased ar e speci f i cal l y excl uded under t he r at i onal e t hat t he
payment s ar e a r ecover y of Ben s pr emi ums.

633. The CEO of Ci r t r oni cs I nc. , di scover ed t hat t he company s
compet i t or had adopt ed a caf et er i a pl an f or i t s empl oyees. The CEO i s
concer ned about r et ai ni ng hi s t al ent ed empl oyees and woul d l i ke you t o
pr ovi de a br i ef expl anat i on as t o why a caf et er i a pl an may be
at t r act i ve t o t he company s empl oyees.

Cor r ect Answer :
Caf et er i a pl ans ar e benef i ci al wher e empl oyees desi r e di f f er ent t ypes
of benef i t s. Thi s of t en occur s when empl oyees ar e mar r i ed and t hei r
spouses r ecei ve some benef i t s f r omt hei r empl oyer s. For exampl e, i f t he
husband i s cover ed by heal t h i nsur ance pr ovi ded by hi s empl oyer , t her e
i s no need f or t he wi f e s empl oyer t o pr ovi de cover age f or t he husband
al so. Mor eover , some empl oyees may need chi l d car e benef i t s whi l e t hose
wi t hout chi l dr en may pr ef er cash. The caf et er i a pl an pr ovi des much
gr eat er f l exi bi l i t y i n pl anni ng benef i t s.

634. What Feder al i ncome t ax benef i t s ar e pr ovi ded f or col l ege st udent s?

Cor r ect Answer :
The Feder al i ncome t ax syst empr ovi des di r ect benef i t s t o col l ege
st udent s and i ndi r ect benef i t s by pr ovi di ng t ax r el i ef f or t he par ent s
of t he st udent s. Col l ege st udent s can r ecei ve t ax- exempt schol ar shi ps.
The i nt er est on educat i onal savi ngs bonds, whi ch ar e of t en pur chased by
par ent s may be exempt wher e t he pr oceeds ar e used t o pay qual i f i ed
educat i onal expenses. The qual i f i ed t ui t i on pr ogr amenabl es par ent s t o
f und t he educat i onal expenses of t hei r chi l dr en wi t hout any i ncome
bei ng t axed t o t he par ent s or t o chi l dr en.

635. The t axpayer was i n t he 35%mar gi nal t ax br acket i n 2013 and
deduct ed $15, 000 i n st at e i ncome t axes as an i t emi zed deduct i on t hat
year . I n 2014, he f i l ed hi s 2013 st at e i ncome t ax r et ur n and r ecei ved
a $5, 000 r ef und of st at e i ncome t axes pai d i n 2013. Hi s mar gi nal t ax
r at e i n 2013 was 15%. What was t he t axpayer s Feder al t ax benef i t f r om
t he over payment of hi s 2013 st at e i ncome t ax?

Cor r ect Answer :
The t axpayer r eal i zed a benef i t because t he deduct i on i n 2013 yi el ded
benef i t s of $. 35 f or each dol l ar of deduct i ons, whi l e t he r ecover y of
t he pr i or deduct i on was t axed at onl y 15%. The t axpayer s benef i t was
$1, 000 [ ( . 35 . 15) ( $5, 000) ] .

636. Empl oyer s can pr ovi de numer ous benef i t s t o t hei r empl oyees and t he
empl oyees ar e per mi t t ed t o excl ude t he val ue of t hese benef i t s f r om
gr oss i ncome. What ar e t he ef f ect s of t he excl usi ons on:

a. The pr ogr essi veness of t he t ax syst em?

b. The compl exi t y of t he t ax syst em?

Cor r ect Answer :
a. The benefit of an exclusion varies directly
with the recipients marginal tax rate.
Thus, individuals with the highest marginal
tax rate enjoy the greatest benefit from the
exclusion and those taxpayers in the lowest
marginal tax rate enjoy the least benefit.
Also, generally, the exclusions are often
available with the better paying jobs. This
also causes the tax system to be less
progressive than if the exclusions were not
permitted.

b. Any exclusion creates complexities in the
system because tests must be established to
determine whether the benefit is eligible
(e.g., whether the benefit is provided on in
a discriminatory manner) for the special
treatment. Also, often limitations are often
created, which requires even more testing.

637. Sal l y and Ed each own pr oper t y wi t h a f ai r mar ket val ue l ess t han
t he amount of t he out st andi ng mor t gage on t he pr oper t y and al so l ess
t han t he or i gi nal cost basi s. They each wer e abl e t o convi nce t he
mor t gage hol der t o r educe t he pr i nci pal amount on t he mor t gage. Sal l y s
mor t gage i s on her per sonal r esi dence and Ed s mor t gage i s on r ent al
pr oper t y he owns.

a. Expl ai n whet her each of t hese i ndi vi dual s
has r eal i zed i ncome f r omt he r educt i on i n
t he debt .

b. Assume t hat under t he cur r ent syst emof
measur i ng i ncome, each of t hese t axpayer s
r eal i zed i ncome f r omt he r educt i ons i n t he
mor t gages. Shoul d ei t her of t hese t axpayer s
be per mi t t ed t o excl ude any of t he debt
r educt i on i ncome?

Cor r ect Answer :
a. Each taxpayers liabilities were reduced.
Therefore, their net worth has increased as
measured using the cost basis in the assets.
Each taxpayer also experienced a loss in the
value of their assets. However, the losses
were not realized (because each taxpayer
still owns the property). Thus, each
taxpayer had income from the reduction in
debt, but no recognized loss. Fortunately,
recent legislation permits the taxpayer
whose property is a personal residence to
exclude the amount of the debt reduction
from gross income. The taxpayer who owns the
rental home is not eligible for the debt
reduction exclusion.

b. Allowing the exclusion from income for the
homeowner but not for the investor can only
be justified on the basis of a value system
that says we should bend the otherwise
equitable rules to favor home ownership.

638. I f a t ax- exempt bond wi l l yi el d appr oxi mat el y . 65 ( 1 . 35) t i mes
t he yi el d on a t axabl e bond of equal r i sk, who benef i t s f r omt he t ax
exempt i on: t he Feder al gover nment , t he st at e and l ocal gover nment s who
i ssue t he bonds, or t he i nvest or s?

Cor r ect Answer :
The st at e and l ocal gover nment s benef i t f r omt he exempt i on because t hey
ar e r equi r ed t o pay l ess i nt er est . The exempt i on cost s t he Feder al
gover nment , and t hus t he exempt i on shi f t s r esour ces f r omt he Feder al t o
t he st at e and l ocal gover nment s. The i nvest or s do not der i ve any
benef i t f r omt he exempt i on, i n t hi s exampl e, because t he mar ket dr i ves
t he pr i ce of t he exempt bonds upwar d so t hat t he af t er - t ax yi el ds on
t he bonds ar e equal f or i nvest or s i n t he hi ghest mar gi nal t ax br acket
( 35%) .

639. Deduct i ons ar e al l owed unl ess a speci f i c pr ovi si on i n t he t ax l aw
pr ovi des ot her wi se.

a. Tr ue
*b. Fal se

640. Mi t ch i s i n t he 28%t ax br acket . He may r ecei ve a di f f er ent t ax
benef i t f or a $2, 000 expendi t ur e t hat i s cl assi f i ed as a deduct i on from
AGI t han he wi l l r ecei ve f or a $1, 000 expendi t ur e t hat i s cl assi f i ed as
a deduct i on for AGI .

*a. Tr ue
b. Fal se

641. Dependi ng on t he nat ur e of t he expendi t ur e, expenses i ncur r ed i n a
t r ade or busi ness may be deduct i bl e for or from AGI .

a. Tr ue
*b. Fal se

642. Onl y some empl oyment r el at ed expenses ar e cl assi f i ed as deduct i ons
for AGI .

*a. Tr ue
b. Fal se

643. Sect i on 212 expenses t hat ar e r el at ed t o r ent and r oyal t y i ncome
ar e deduct i ons for AGI .

*a. Tr ue
b. Fal se

644. Al i ce i ncur s qual i f i ed movi ng expenses of $12, 000. I f she i s
r ei mbur sed by her empl oyer , t he deduct i on i s cl assi f i ed as a deduct i on
for AGI . I f not r ei mbur sed, t he deduct i on i s cl assi f i ed as an i t emi zed
deduct i on.

a. Tr ue
*b. Fal se

645. Expenses i ncur r ed f or t he pr oduct i on or col l ect i on of i ncome
generally ar e deduct i ons from adj ust ed gr oss i ncome.

*a. Tr ue
b. Fal se

646. The Code does not speci f i cal l y def i ne what const i t ut es a t r ade or
busi ness.

*a. Tr ue
b. Fal se

647. An expense need not be r ecur r i ng i n or der t o be or di nar y.

*a. Tr ue
b. Fal se

648. Aar on, a shar ehol der - empl oyee of Pi geon, I nc. , r ecei ves a $300, 000
sal ar y. The I RS cl assi f i es $100, 000 of t hi s amount as unr easonabl e
compensat i on. The ef f ect of t hi s r ecl assi f i cat i on i s t o decr ease
Aar on s gr oss i ncome by $100, 000 and i ncr ease Pi geon s gr oss i ncome by
$100, 000.

a. Tr ue
*b. Fal se

649. The por t i on of a shar ehol der - empl oyee s sal ar y t hat i s cl assi f i ed
as unr easonabl e has no ef f ect on t he amount of a shar ehol der - empl oyee s
gr oss i ncome, but r esul t s i n an i ncr ease i n t he t axabl e i ncome of t he
cor por at i on.

*a. Tr ue
b. Fal se

650. Gener al l y, a cl osel y- hel d f ami l y cor por at i on i s not per mi t t ed t o
t ake a deduct i on f or a sal ar y pai d t o a f ami l y member i n cal cul at i ng
cor por at e t axabl e i ncome.

a. Tr ue
*b. Fal se

651. Onl y under l i mi t ed ci r cumst ances can a l oss on t he sal e of a
per sonal use asset be deduct ed.

a. Tr ue
*b. Fal se

652. The i ncome of a sol e pr opr i et or shi p ar e r epor t ed on Schedul e C
( Pr of i t or Loss f r omBusi ness) .

*a. Tr ue
b. Fal se

653. The cash met hod can be used even i f i nvent or y and cost of goods
sol d ar e an i ncome pr oduci ng f act or i n t he busi ness.

a. Tr ue
*b. Fal se

654. A t axpayer s not e or pr omi se t o pay sat i sf i es t he act ual l y pai d
r equi r ement f or t he cash basi s met hod of account i ng.

a. Tr ue
*b. Fal se

655. I sabel l a owns t wo busi ness ent i t i es. She may be abl e t o use t he
cash met hod f or one and t he accr ual met hod f or t he ot her .

*a. Tr ue
b. Fal se

656. Under t he one- year r ul e f or t he cur r ent per i od deduct i on of
pr epai d expenses of cash basi s t axpayer s, t he asset must expi r e or be
consumed by t he end of t he t ax year f ol l owi ng t he year of payment .

*a. Tr ue
b. Fal se

657. None of t he pr epai d r ent pai d on Sept ember 1 by a cal endar year
cash basi s t axpayer f or t he next 18 mont hs i s deduct i bl e i n t he cur r ent
per i od.

a. Tr ue
*b. Fal se

658. The per i od i n whi ch an accr ual basi s t axpayer can deduct an
expense i s det er mi ned by appl yi ng t he economi c per f or mance and al l
event s t est s.

*a. Tr ue
b. Fal se

659. The amount of t he addi t i on t o t he r eser ve f or bad debt s f or an
accr ual met hod t axpayer i s al l owed as a deduct i on f or t ax pur poses, but
i s not al l owed f or a cash met hod t axpayer .

a. Tr ue
*b. Fal se

660. Al l domest i c br i bes ( i . e. , t o a U. S. of f i ci al ) ar e di sal l owed as
deduct i ons.

*a. Tr ue
b. Fal se

661. Fi nes and penal t i es pai d f or vi ol at i ons of t he l aw ( e. g. , i l l egal
dumpi ng of hazar dous wast e) ar e deduct i bl e onl y i f t hey r el at e t o a
t r ade or busi ness.

a. Tr ue
*b. Fal se

662. Susan i s a sal es r epr esent at i ve f or a U. S. weapons manuf act ur er .
She makes a $100, 000 gr ease payment t o a U. S. gover nment of f i ci al
associ at ed wi t h a weapons pur chase by t he U. S. Ar my. She makes a
si mi l ar payment t o a Saudi Ar abi an gover nment of f i ci al associ at ed wi t h
a si mi l ar sal e. Nei t her of t hese payment s i s deduct i bl e by Susan s
empl oyer .

a. Tr ue
*b. Fal se

663. The cost of l egal advi ce associ at ed wi t h t he pr epar at i on of an
i ndi vi dual s Feder al i ncome t ax r et ur n i s not deduct i bl e because i t i s
a per sonal expense.

a. Tr ue
*b. Fal se

664. Two- t hi r ds of t r ebl e damage payment s under t he ant i t r ust l aw ar e
not deduct i bl e.

a. Tr ue
*b. Fal se

665. The l egal cost of havi ng a wi l l pr epar ed i s not deduct i bl e.

*a. Tr ue
b. Fal se

666. Legal expenses i ncur r ed i n connect i on wi t h r ent al pr oper t y ar e
deduct i ons from AGI .

a. Tr ue
*b. Fal se

667. Legal f ees i ncur r ed i n connect i on wi t h a cr i mi nal def ense ar e not
deduct i bl e even i f t he cr i me i s associ at ed wi t h a t r ade or busi ness.

a. Tr ue
*b. Fal se

668. I f a t axpayer oper at es an i l l egal busi ness, no deduct i ons ar e
per mi t t ed.

a. Tr ue
*b. Fal se

669. Or di nar y and necessar y busi ness expenses, ot her t han cost of goods
sol d, of an i l l egal dr ug t r af f i cki ng busi ness do not r educe t axabl e
i ncome.

*a. Tr ue
b. Fal se

670. J acques, who i s not a U. S. ci t i zen, makes a cont r i but i on t o t he
campai gn of a candi dat e f or gover nor . Cassi e, a U. S. ci t i zen, al so
makes a cont r i but i on t o t he same campai gn f und. I f cont r i but i ons by
nonci t i zens ar e i l l egal under st at e l aw, t he cont r i but i on by Cassi e i s
deduct i bl e, whi l e t hat by J acques i s not .

a. Tr ue
*b. Fal se

671. A basebal l t eamt hat pays a st ar pl ayer an annual sal ar y of $25
mi l l i on can deduct t he ent i r e $25 mi l l i on as sal ar y expense. I f t he
same amount i s pai d t o t he CEO of I BM, onl y $1 mi l l i on i s deduct i bl e.

*a. Tr ue
b. Fal se

672. For a t axpayer who i s engaged i n a t r ade or busi ness, t he cost of
i nvest i gat i ng a busi ness i n t he same f i el d i s deduct i bl e onl y i f t he
t axpayer acqui r es t he busi ness.

a. Tr ue
*b. Fal se

673. I nvest i gat i on of a busi ness unr el at ed t o one s pr esent busi ness
never r esul t s i n a cur r ent per i od deduct i on of t he ent i r e amount i f t he
amount of t he i nvest i gat i on expenses exceeds $5, 000.

*a. Tr ue
b. Fal se

674. I n det er mi ni ng whet her an act i vi t y shoul d be cl assi f i ed as a
busi ness or as a hobby, t he sat i sf act i on of t he pr esumpt i on ( i . e. ,
pr of i t i n at l east 3 out of 5 year s) ensur es t r eat ment as a busi ness.

a. Tr ue
*b. Fal se

675. I f a t axpayer can sat i sf y t he t hr ee- out - of - f i ve year pr esumpt i on
t est associ at ed wi t h hobby l osses, t hen expenses f r omt he act i vi t y can
be deduct ed i n excess of t he gr oss i ncome f r omt he act i vi t y.

a. Tr ue
*b. Fal se

676. I f an act i vi t y i nvol ves hor ses, a pr of i t i n at l east t wo of seven
consecut i ve year s meet s t he pr esumpt i ve r ul e of 183.

*a. Tr ue
b. Fal se

677. A hobby act i vi t y can r esul t i n al l of t he hobby i ncome bei ng
i ncl uded i n AGI and no deduct i ons bei ng al l owed.

*a. Tr ue
b. Fal se

678. I f an i t emsuch as pr oper t y t axes and home mor t gage i nt er est
exceed t he i ncome f r oma hobby, t he excess amount of t hi s i t emover t he
hobby i ncome can be deduct ed i f t he t axpayer i t emi zes deduct i ons.

*a. Tr ue
b. Fal se

679. Hobby act i vi t y expenses ar e deduct i bl e from AGI t o t he ext ent of
hobby i ncome. Such expenses not i n excess of hobby i ncome ar e not
subj ect t o t he 2%of AGI f l oor .

a. Tr ue
*b. Fal se

680. Mar t ha r ent s part of her per sonal r esi dence i n t he summer f or 3
weeks f or $3, 000. Anne r ent s all of her per sonal r esi dence f or one week
i n December f or $2, 500. Anne i s not r equi r ed t o i ncl ude t he $2, 500 i n
her gr oss i ncome wher eas Mar t ha i s r equi r ed t o i ncl ude t he $3, 000 i n
her gr oss i ncome.

*a. Tr ue
b. Fal se

681. I f a vacat i on home i s r ent ed f or l ess t han 15 days dur i ng a year ,
t he onl y expenses t hat can be deduct ed ar e mor t gage i nt er est , pr oper t y
t axes, and per sonal casual t y l osses.

*a. Tr ue
b. Fal se

682. I f a vacat i on home i s cl assi f i ed as pr i mar i l y r ent al use, a
deduct i on f or al l of t he r ent al expenses i s al l owed.

a. Tr ue
*b. Fal se

683. I f a vacat i on home i s cl assi f i ed as pr i mar i l y per sonal use ( i . e. ,
r ent ed f or f ewer t han 15 days) , none of t he r el at ed expenses can be
deduct ed.

a. Tr ue
*b. Fal se

684. The por t i on of pr oper t y t ax on a vacat i on home t hat i s
at t r i but abl e t o per sonal use i s an i t emi zed deduct i on.

*a. Tr ue
b. Fal se

685. I f a vacat i on home i s cl assi f i ed as pr i mar i l y per sonal use, par t
of t he mai nt enance and ut i l i t y expenses can be al l ocat ed and deduct ed
as a r ent al expense.

a. Tr ue
*b. Fal se

686. A vacat i on home at t he beach whi ch i s r ent ed f or 200 days and used
per sonal l y f or 16 days i s cl assi f i ed i n t he per sonal / r ent al use
cat egor y.

a. Tr ue
*b. Fal se

687. I f a vacat i on home i s a per sonal / r ent al r esi dence, no mai nt enance
and ut i l i t y expenses can be cl ai med as a deduct i on.

a. Tr ue
*b. Fal se

688. Beul ah s per sonal r esi dence has an adj ust ed basi s of $450, 000 and
a f ai r mar ket val ue of $390, 000. Beul ah conver t s t he pr oper t y t o r ent al
use on November 1, 2013. The vacat i on home r ul es t hat l i mi t t he amount
of t he deduct i on t o t he r ent al i ncome wi l l appl y and t he adj ust ed basi s
f or depr eci at i on i s $390, 000.

a. Tr ue
*b. Fal se

689. Wal t want s t o gi ve hi s daught er $1, 800 f or Chr i st mas. As an
al t er nat i ve, she suggest s t hat he pay t he pr oper t y t axes on her
r esi dence. I f Ral ph pays t he pr oper t y t axes, he can deduct t hem.

a. Tr ue
*b. Fal se

690. LD Par t ner shi p, a cash basi s t axpayer , pur chases l and and a
bui l di ng f or $200, 000 wi t h $150, 000 of t he cost bei ng al l ocat ed t o t he
bui l di ng. The gr oss r ecei pt s of t he par t ner shi p ar e l ess t han $100, 000.
LD must capi t al i ze t he $50, 000 pai d f or t he l and, but can deduct t he
$150, 000 pai d f or t he bui l di ng i n t he cur r ent t ax year .

a. Tr ue
*b. Fal se

691. Pur chased goodwi l l must be capi t al i zed, but can be amor t i zed over
a 60- mont h per i od.

a. Tr ue
*b. Fal se

692. Mar ge sel l s l and t o her adul t son, J ason, f or i t s $20, 000
appr ai sed val ue. Her adj ust ed basi s f or t he l and i s $25, 000. Mar ge s
r ecogni zed l oss i s $5, 000 and J ason s adj ust ed basi s f or t he l and i s
$25, 000 ( $20, 000 cost + $5, 000 r ecogni zed gai n of Mar ge) .

a. Tr ue
*b. Fal se

693. For pur poses of t he 267 l oss di sal l owance pr ovi si on, a
t axpayer s aunt i s a r el at ed par t y.

a. Tr ue
*b. Fal se

694. Sammy, a cal endar year cash basi s t axpayer who i s age 66, has t he
f ol l owi ng t r ansact i ons:

Salary from job $90,000
Alimony received
from ex-wife
10,000
Medical expenses 8,000

Based on this information, Sammy has:

a. AGI of $90, 000.
b. AGI of $95, 000.
c. AGI of $99, 500.
d. Deduct i on f or medi cal expenses of $0.

695. Tr ade and busi ness expenses shoul d be t r eat ed as:

a. A deduct i on from AGI subj ect t o t he 2%- of - AGI f l oor .
b. A deduct i on from AGI not subj ect t o t he 2%- of - AGI f l oor .
*c. Deduct i bl e for AGI .
d. An i t emi zed deduct i on i f not r ei mbur sed.

696. Al i s si ngl e, age 60, and has gr oss i ncome of $140, 000. Hi s
deduct i bl e expenses ar e as f ol l ows:

Alimony $20,000
Charitable contributions 4,000
Contribution to a traditional IRA 5,000
Expenses paid on rental property 7,500
Interest on home mortgage and property
taxes on personal residence
7,200
State income tax 2,200

What is Als AGI?

a. $94, 100.
b. $103, 500.
*c. $107, 500.
d. $127, 500.

697. Mar sha i s si ngl e, had gr oss i ncome of $50, 000, and i ncur r ed t he
f ol l owi ng expenses:

Charitable contribution $2,000
Taxes and interest on home 7,000
Legal fees incurred in a tax dispute 1,000
Medical expenses 3,000
Penalty on early withdrawal of savings 250

Her AGI is:

a. $39, 750.
*b. $49, 750.
c. $40, 000.
d. $39, 750.

698. Whi ch of t he f ol l owi ng can be cl ai med as a deduct i on for AGI ?

a. Per sonal casual t y l osses.
b. I nvest ment i nt er est expenses.
c. Medi cal expenses.
d. Pr oper t y t axes on per sonal use r eal est at e.

699. Whi ch of t he f ol l owi ng i s a deduct i on for AGI ( i t emi zed deduct i on) ?

*a. Cont r i but i on t o a t r adi t i onal I RA.
b. Roof r epai r s t o a per sonal use home.
c. Saf e deposi t box r ent al f ee i n whi ch st ock cer t i f i cat es ar e
st or ed.
d. Pr oper t y t ax on per sonal r esi dence.

700. Whi ch of t he f ol l owi ng i s cor r ect ?

a. A per sonal casual t y l oss i s cl assi f i ed as a deduct i on from AGI .
b. Real est at e t axes on a t axpayer s per sonal r esi dence ar e
cl assi f i ed as deduct i ons from AGI .
c. An expense associ at ed wi t h r ent al pr oper t y i s cl assi f i ed as a
deduct i on for AGI.
d. Onl y a. and b. ar e cor r ect .
*e. a. , b. , and c. , ar e cor r ect .

701. Whi ch of t he f ol l owi ng ar e deduct i ons for AGI ?

a. Mor t gage i nt er est on a per sonal r esi dence.
b. Pr oper t y t axes on a per sonal r esi dence.
*c. Mor t gage i nt er est on a bui l di ng used i n a busi ness.
d. Fi nes and penal t i es i ncur r ed i n a t r ade or busi ness.

702. Whi ch of t he f ol l owi ng i s incorrect?

a. Al i mony i s a deduct i on for AGI .
*b. The expenses associ at ed wi t h r oyal t y pr oper t y ar e a deduct i on
from AGI .
c. Cont r i but i ons t o a t r adi t i onal I RA ar e a deduct i on for AGI .
d. Pr oper t y t axes on t axpayer s per sonal r esi dence ar e a
deduct i on from AGI
e. Al l of t he above ar e cor r ect .

703. Whi ch of t he f ol l owi ng i s not a t r ade or busi ness expense?

a. I nt er est on busi ness i ndebt edness.
b. Pr oper t y t axes on busi ness pr oper t y.
*c. Par ki ng t i cket pai d on busi ness aut o.
d. Depr eci at i on on busi ness pr oper t y.
e. Al l of t he above ar e t r ade or busi ness expenses.

704. Whi ch of t he f ol l owi ng i s a r equi r ed t est f or t he deduct i on of a
busi ness expense?

a. Or di nar y.
b. Necessar y.
c. Reasonabl e.

705. Paul a i s t he sol e shar ehol der of Vi ol et , I nc. For 2013, she
r ecei ves f r omVi ol et a sal ar y of $300, 000 and di vi dends of $100, 000.
Vi ol et s t axabl e i ncome f or 2013 i s $500, 000. On audi t , t he I RS t r eat s
$100, 000 of Paul a s sal ar y as unr easonabl e. Whi ch of t he f ol l owi ng
st at ement s i s cor r ect ?

a. Paul a s gr oss i ncome wi l l i ncr ease by $100, 000 as a r esul t of
t he I RS adj ust ment .
b. Vi ol et s t axabl e i ncome wi l l not be af f ect ed by t he I RS
adj ust ment .
c. Paul a s gr oss i ncome wi l l decr ease by $100, 000 as a r esul t of
t he I RS adj ust ment .
d. Vi ol et s t axabl e i ncome wi l l decr ease by $100, 000 as a r esul t
of t he I RS adj ust ment .
*e. None of t he above i s cor r ect .

706. Dur i ng 2012, t he f i r st year of oper at i ons, Si l ver , I nc. , pays
sal ar i es of $175, 000. At t he end of t he year , empl oyees have ear ned
sal ar i es of $20, 000, whi ch ar e not pai d by Si l ver unt i l ear l y i n
2013. What i s t he amount of t he deduct i on f or sal ar y expense?

a. I f Si l ver uses t he cash met hod, $175, 000 i n 2012 and $0 i n
2013.
b. I f Si l ver uses t he cash met hod, $0 i n 2012 and $195, 000 i n
2013.
c. I f Si l ver uses t he accr ual met hod, $175, 000 i n 2012 and
$20, 000 i n 2013.
*d. I f Si l ver uses t he accr ual met hod, $195, 000 i n 2012 and $0 i n
2013.

707. Beni t a i ncur r ed a busi ness expense on December 10, 2013, whi ch she
char ged on her bank cr edi t car d. She pai d t he cr edi t car d st at ement
whi ch i ncl uded t he char ge on J anuar y 5, 2014. Whi ch of t he f ol l owi ng i s
cor r ect ?

a. I f Beni t a i s a cash met hod t axpayer , she cannot deduct t he
expense unt i l 2014.
*b. I f Beni t a i s an accr ual met hod t axpayer , she can deduct t he
expense i n 2013.
c. I f Beni t a uses t he accr ual met hod, she can choose t o deduct
t he expense i n ei t her 2013 or 2014.
d. Onl y b. and c. ar e cor r ect .
e. a. , b. , and c. ar e cor r ect .

708. Payment s by a cash basi s t axpayer of capi t al expendi t ur es:

a. Must be expensed at t he t i me of payment .
b. Must be expensed by t he end of t he f i r st year af t er t he asset
i s acqui r ed.
*c. Must be deduct ed over t he act ual or st at ut or y l i f e of t he
asset .
d. Can be deduct ed i n t he year t he t axpayer chooses.

709. Pet al , I nc. i s an accr ual basi s t axpayer . Pet al uses t he agi ng
appr oach t o cal cul at e t he r eser ve f or bad debt s. Dur i ng 2013, t he
f ol l owi ng occur associ at ed wi t h bad debt s.

Credit sales $400,000
Collections on credit sales 250,000
Amount added to the reserve 10,000
Beginning balance in the reserve 0
Identifiable bad debts during 2013 12,000

The amount of the deduction for bad debt expense for Petal for 2013 is:

a. $10, 000.
*b. $12, 000.
c. $22, 000.
d. $140, 000.

710. Whi ch of t he f ol l owi ng l egal expenses ar e deduct i bl e for AGI ?

a. I ncur r ed i n connect i on wi t h a t r ade or busi ness.
b. I ncur r ed i n connect i on wi t h r ent al or r oyal t y pr oper t y hel d
f or t he pr oduct i on of i ncome.
c. I ncur r ed f or t ax advi ce r el at i ve t o t he pr epar at i on of an
i ndi vi dual s i ncome t ax r et ur n.
*d. Onl y a. and b. qual i f y.
e. a. , b. , and c. qual i f y.

711. Rex, a cash basi s cal endar year t axpayer , r uns a bi ngo oper at i on
whi ch i s i l l egal under st at e l aw. Dur i ng 2013, a bi l l desi gnat ed H. R. 9
i s i nt r oduced i nt o t he st at e l egi sl at ur e whi ch, i f enact ed, woul d
l egi t i mi ze bi ngo games. I n 2013, Rex had t he f ol l owi ng expenses:

Operating expenses in conducting bingo
games
$247,000
Payoff money to state and local police 24,000
Newspaper ads supporting H.R. 9 3,000
Political contributions to legislators
who support H.R. 9
8,000

Of these expenditures, Rex may deduct:

*a. $247, 000.
b. $250, 000.
c. $258, 000.
d. $282, 000.

712. Andr ew, who oper at es a l aundr y busi ness, i ncur r ed t he f ol l owi ng
expenses dur i ng t he year .

Parking ticket of $250 for one of his
delivery vans that parked illegally.
Parking ticket of $75 when he parked
illegally while attending a rock concert in
Tulsa.
DUI ticket of $500 while returning from the
rock concert.
Attorneys fee of $600 associated with the
DUI ticket.

What amount can Andrew deduct for these expenses?

*a. $0.
b. $250.
c. $600.
d. $1, 425.

713. Whi ch of t he f ol l owi ng may be deduct i bl e?

a. Br i bes t hat r el at e t o a U. S. busi ness.
b. Fi nes pai d f or vi ol at i ons of t he l aw.
*c. I nt er est on a l oan used i n a hobby.

714. Ter r y and J i mar e bot h i nvol ved i n oper at i ng i l l egal busi nesses.
Ter r y oper at es a gambl i ng busi ness and J i moper at es a dr ug r unni ng
busi ness. Bot h busi nesses have gr oss r evenues of $500, 000. The
busi nesses i ncur t he f ol l owi ng expenses.

Terry Jim
Employee salaries $200,000 $200,000
Bribes to police 25,000 25,000
Rent and utilities 50,000 50,000
Cost of goods sold 0 125,000

Which of the following statements is correct?

a. Nei t her Ter r y nor J i mcan deduct any of t he above i t ems i n
cal cul at i ng t he busi ness pr of i t .
*b. Ter r y shoul d r epor t pr of i t f r omhi s busi ness of $250, 000.
c. J i mshoul d r epor t pr of i t f r omhi s busi ness of $500, 000.
d. J i mshoul d r epor t pr of i t f r omhi s busi ness of $250, 000.

715. Tomoper at es an i l l egal dr ug- r unni ng oper at i on and i ncur r ed t he
f ol l owi ng expenses:

Salaries $ 75,000
Illegal kickbacks 20,000
Bribes to border guards 25,000
Cost of goods sold 160,000
Rent 8,000
Interest 10,000
Insurance on furniture and fixtures 6,000
Utilities and telephone 20,000

Which of the above amounts reduces his taxable income?

a. $0.
*b. $160, 000.
c. $279, 000.
d. $324, 000.

716. For a pr esi dent of a publ i cl y hel d cor por at i on, whi ch of t he
f ol l owi ng ar e not subj ect t o t he $1 mi l l i on l i mi t on execut i ve
compensat i on?

a. Cont r i but i on t o medi cal i nsur ance pl an.
b. Cont r i but i on t o pensi on pl an.
c. Pr emi ums on gr oup t er ml i f e i nsur ance of $50, 000.
d. Onl y b. and c. ar e not subj ect t o t he l i mi t .
*e. a. , b. , and c. , ar e not subj ect t o t he l i mi t .

717. Tommy, an aut omobi l e mechani c empl oyed by an aut o deal er shi p, i s
consi der i ng openi ng a f ast f ood f r anchi se. I f Tommy deci des not t o
acqui r e t he f ast f ood f r anchi se, any i nvest i gat i on expenses ar e:

a. A deduct i on for AGI .
b. A deduct i on from AGI , subj ect t o t he 2 per cent f l oor .
c. A deduct i on from AGI , not subj ect t o t he 2 per cent f l oor .
d. Deduct i bl e up t o $5, 000 i n t he cur r ent year wi t h t he bal ance
bei ng amor t i zed over a 180- mont h per i od.
*e. Not deduct i bl e.

718. I r i s, a cal endar year cash basi s t axpayer , owns and oper at es
sever al TV r ent al out l et s i n Fl or i da, and want s t o expand t o ot her
st at es. Dur i ng 2013, she spends $14, 000 t o i nvest i gat e TV r ent al st or es
i n Sout h Car ol i na and $9, 000 t o i nvest i gat e TV r ent al st or es i n Geor gi a.
She acqui r es t he Sout h Car ol i na oper at i ons, but not t he out l et s i n
Geor gi a. As t o t hese expenses, I r i s shoul d:

a. Capi t al i ze $14, 000 and not deduct $9, 000.
*b. Expense $23, 000 f or 2013.
c. Expense $9, 000 f or 2013 and capi t al i ze $14, 000.
d. Capi t al i ze $23, 000.

719. Whi ch of t he f ol l owi ng st at ement s i s cor r ect i n connect i on wi t h
t he i nvest i gat i on of a busi ness?

a. I f t he t axpayer i s not al r eady engaged i n t he t r ade or
busi ness, t he expenses i ncur r ed ar e deduct i bl e i f t he pr oj ect i s
abandoned.
*b. I f t he busi ness i s acqui r ed, t he expenses may be deduct ed
i mmedi at el y by a t axpayer engaged i n a si mi l ar t r ade or busi ness
r egar dl ess of whet her t he busi ness bei ng i nvest i gat ed i s acqui r ed.
c. That busi ness must be r el at ed t o t he t axpayer s pr esent
busi ness f or any expense ever t o be deduct i bl e.
d. Regar dl ess of whet her t he t axpayer i s al r eady engaged i n t he
t r ade or busi ness, t he expenses must be capi t al i zed and amor t i zed.

720. Whi ch of t he f ol l owi ng i s not r el evant i n det er mi ni ng whet her an
act i vi t y i s pr of i t - seeki ng or a hobby?

a. Whet her t he act i vi t y i s enj oyed by t he t axpayer .
b. The exper t i se of t he t axpayer s or t hei r advi ser s.
c. The t i me and ef f or t expended.
d. The r el at i onshi p of pr of i t s ear ned and l osses i ncur r ed.
*e. Al l of t he above ar e r el evant f act or s.

721. For an act i vi t y cl assi f i ed as a hobby, t he expenses ar e
cat egor i zed as f ol l ows:

( 1) Amount s t hat af f ect adj ust ed basi s and woul d be deduct i bl e
under ot her Code sect i ons i f t he act i vi t y had been engaged i n f or
pr of i t ( e. g. , depr eci at i on, amor t i zat i on, and depl et i on) .

( 2) Amount s deduct i bl e under ot her Code sect i ons wi t hout r egar d
t o t he nat ur e of t he act i vi t y, such as pr oper t y t axes and home mor t gage
i nt er est .

( 3) Amount s deduct i bl e under ot her Code sect i ons i f t he act i vi t y
had been engaged i n f or pr of i t , but onl y i f t hose amount s do not af f ect
adj ust ed basi s ( e. g. , mai nt enance, ut i l i t i es, and suppl i es) .

I f t hese expenses exceed t he gr oss i ncome f r omt he act i vi t y and ar e
t hus l i mi t ed, t he sequence i n whi ch t hey ar e deduct i bl e i s:

a. ( 1) , ( 2) , ( 3) .
b. ( 1) , ( 3) , ( 2) .
*c. ( 2) , ( 3) , ( 1) .
d. ( 2) , ( 1) , ( 3) .
e. ( 3) , ( 2) , ( 1) .

722. Pr i scel l a pur sued a hobby of maki ng bedspr eads i n her spar e t i me.
Her AGI bef or e consi der i ng t he hobby i s $40, 000. Dur i ng t he year she
sol d t he bedspr eads f or $10, 000. She i ncur r ed expenses as f ol l ows:

Supplies $4,000
Interest on loan to get business started 500
Advertising 6,500

Assuming that the activity is deemed a hobby, how should she report these
items on her tax return?

a. I ncl ude $10, 000 i n i ncome and deduct $11, 000 for AGI .
b. I gnor e bot h i ncome and expenses si nce hobby l osses ar e
di sal l owed.
c. I ncl ude $10, 000 i n i ncome, deduct not hi ng for AGI , and cl ai m
$11, 000 of t he expenses as i t emi zed deduct i ons.
d. I ncl ude $10, 000 i n i ncome and deduct i nt er est of $500 for AGI .

723. Cor y i ncur r ed and pai d t he f ol l owi ng expenses:

Tax return preparation fee $ 600
Moving expenses 2,000
Investment expenses 500
Expenses associated with rental
property
1,500
Interest expense associated with loan
to finance tax-exempt bonds
400

Calculate the amount that Cory can deduct (before any percentage
limitations).

a. $5, 000.
*b. $4, 600.
c. $3, 000.
d. $1, 500.

724. Whi ch of t he f ol l owi ng i s not deduct i bl e?

a. Movi ng expenses i n excess of r ei mbur sement .
b. Tax r et ur n pr epar at i on f ees of an i ndi vi dual .
c. Expenses i ncur r ed associ at ed wi t h i nvest ment s i n st ocks and
bonds.
*d. Al l owabl e hobby expenses i n excess of hobby i ncome.

725. I f a r esi dence i s used pr i mar i l y f or per sonal use ( r ent ed f or
f ewer t han 15 days per year ) , whi ch of t he f ol l owi ng i s cor r ect ?

*a. No i ncome i s i ncl uded i n AGI .
b. No expenses ar e deduct i bl e.
c. Expenses must be al l ocat ed bet ween r ent al and per sonal use.

726. Robyn r ent s her beach house f or 60 days and uses i t f or per sonal
use f or 30 days dur i ng t he year . The r ent al i ncome i s $6, 000 and t he
expenses ar e as f ol l ows:

Mortgage interest $9,000
Real estate taxes 3,000
Utilities 2,000
Maintenance 1,000
Insurance 500
Depreciation (rental part) 4,000

Using the IRS approach, total expenses that Robyn can deduct on her tax
return associated with the beach house are:

a. $0.
b. $6, 000.
c. $8, 000.
*d. $12, 000.

727. I f a vacat i on home i s det er mi ned t o be a per sonal / r ent al use
r esi dence, whi ch of t he f ol l owi ng st at ement s i s cor r ect ?

a. Al l r ent al i ncome i s i ncl uded i n gr oss i ncome.
b. Al l r ent al r el at ed expenses t hat ar e deduct i bl e ar e cl assi f i ed
as deduct i ons from AGI .
c. Expenses must be al l ocat ed bet ween r ent al and per sonal use.
*d. Onl y a. and c. ar e cor r ect .

728. Bob and Apr i l own a house at t he beach. The house was r ent ed t o
unr el at ed par t i es f or 8 weeks dur i ng t he year . Apr i l and t he chi l dr en
used t he house 12 days f or t hei r vacat i on dur i ng t he year . Af t er
pr oper l y di vi di ng t he expenses bet ween r ent al and per sonal use, i t was
det er mi ned t hat a l oss was i ncur r ed as f ol l ows:

Gross rental income $4,000
Less: Mortgage interest and
property taxes
$3,500
Other allocated
expenses
2,00
0
(5,50
0)
Net rental loss ($1,500)

What is the correct treatment of the rental income and expenses on Bob and
Aprils joint income tax return for the current year assuming the IRS
approach is used if applicable?

*a. A $1, 500 l oss shoul d be r epor t ed.
b. Onl y t he mor t gage i nt er est and pr oper t y t axes shoul d be
deduct ed.
c. Si nce t he house was used mor e t han 10 days per sonal l y by Bob
and Apr i l , t he r ent al expenses ( ot her t han mor t gage i nt er est and
pr oper t y t axes) ar e l i mi t ed t o t he gr oss r ent al i ncome i n excess
of deduct i ons f or i nt er est and t axes al l ocat ed t o t he r ent al use.
d. Si nce t he house was used l ess t han 50%per sonal l y by Bob and
Apr i l , al l expenses al l ocat ed t o per sonal use may be deduct ed.
e. Bob and Apr i l shoul d i ncl ude none of t he i ncome or expenses
r el at ed t o t he beach house i n t hei r cur r ent year i ncome t ax
r et ur n.

729. Because Scot t i s t hr ee mont hs del i nquent on t he mor t gage payment s
f or hi s per sonal r esi dence, J eanet t e ( hi s si st er ) i s goi ng t o cover t he
ar r ear age. Based on past exper i ence, she does not expect t o be r epai d
by Scot t . Whi ch of t he f ol l owi ng st at ement s i s cor r ect ?

a. I f Scot t r ecei ves t he money f r omJ eanet t e and pays t he
mor t gage company, J eanet t e can deduct t he i nt er est par t .
b. I f J eanet t e pays t he mor t gage company di r ect l y, nei t her Scot t
nor J eanet t e can deduct t he i nt er est par t .
c. I f J eanet t e pays t he mor t gage company di r ect l y, she cannot
deduct t he i nt er est par t .
*d. Onl y b. and c. ar e cor r ect .

730. Mel ba i ncur r ed t he f ol l owi ng expenses f or her dependent daught er
dur i ng t he cur r ent year :

Payment of principal on daughters
automobile loan
$3,600
Payment of interest on above loan 2,900
Payment of daughters property taxes 1,800
Payment of principal on daughters
personal residence loan
2,800
Payment of interest on daughters
personal residence loan
7,000

How much may Melba deduct in computing her itemized deductions?

*a. $0.
b. $8, 800.
c. $11, 700.
d. $18, 100.

731. Vel ma and Bud di vor ced. Vel ma s at t or ney f ee of $5, 000 i s
al l ocat ed as f ol l ows:

General representation in obtaining the
divorce
$1,500
Services in obtaining custody of the
child
900
Services in settlement of martial
property
600
Determining the tax consequences of:
Dependency deduction for child 700
Property settlement 1,300

Of the $5,000 Velma pays to her attorney, the amount she may deduct as an
itemized deduction is:

a. $0.
b. $700.
*c. $2, 000.
d. $5, 000.

732. Whi ch of t he f ol l owi ng must be capi t al i zed by a busi ness?

a. Repl acement of a wi ndshi el d of a busi ness t r uck whi ch was
br oken i n an acci dent .
b. Repai r of a r oof of a bui l di ng used i n busi ness.
*c. Amount pai d f or a covenant not t o compet e.
d. Onl y b. and c. must be capi t al i zed.
e. a. , b. , and c. can be expensed r at her t han capi t al i zed.

733. On J anuar y 2, 2013, Fr an acqui r es a busi ness f r omChuck. Among t he
asset s pur chased ar e t he f ol l owi ng i nt angi bl es: pat ent wi t h a 7- year
r emai ni ng l i f e, a covenant not t o compet e f or 10 year s, and goodwi l l .

Of t he pur chase pr i ce, $140, 000 was pai d f or t he pat ent and $60, 000 f or
t he covenant . The amount of t he excess of t he pur chase pr i ce over t he
i dent i f i abl e asset s was $100, 000. What i s t he amount of t he
amor t i zat i on deduct i on f or 2013?

a. $10, 667.
b. $16, 000.
*c. $20, 000.
d. $32, 667.

734. I n J anuar y, Lance sol d st ock wi t h a cost basi s of $26, 000 t o hi s
br ot her , J ames, f or $24, 000, t he f ai r mar ket val ue of t he st ock on t he
dat e of sal e. Fi ve mont hs l at er , J ames sol d t he same st ock t hr ough hi s
br oker f or $27, 000. What i s t he t ax ef f ect of t hese t r ansact i ons?

a. Di sal l owed l oss t o J ames of $2, 000; gai n t o Lance of $1, 000.
b. Di sal l owed l oss t o Lance of $2, 000; gai n t o J ames of $3, 000.
c. Deduct i bl e l oss t o Lance of $2, 000; gai n t o J ames of $3, 000.
*d. Di sal l owed l oss t o Lance of $2, 000; gai n t o J ames of $1, 000.

735. Ni keya sel l s l and ( adj ust ed basi s of $120, 000) t o her adul t son,
Shamed, f or i t s appr ai sed val ue of $95, 000. Whi ch of t he f ol l owi ng

a. Ni keya s r ecogni zed l oss i s $25, 000 ( $95, 000 amount r eal i zed
$120, 000 adj ust ed basi s) .
b. Shamed s adj ust ed basi s f or t he l and i s $120, 000 ( $95, 000 cost
+ $25, 000 di sal l owed l oss f or Ni keya) .
*c. I f Shamed subsequent l y sel l s t he l and f or $112, 000, he has no
r ecogni zed gai n or l oss.

736. Whi ch of t he f ol l owi ng i s not a r el at ed par t y f or const r uct i ve
owner shi p pur poses under 267?

*a. The t axpayer s aunt .
b. The t axpayer s br ot her .
c. The t axpayer s gr andmot her .
d. A cor por at i on owned mor e t han 50%by t he t axpayer .

737. Aust i n, a si ngl e i ndi vi dual wi t h a sal ar y of $100, 000, i ncur r ed
and pai d t he f ol l owi ng expenses dur i ng t he year :

Medi cal expenses $ 5, 000
Al i mony 24, 000
Char i t abl e cont r i but i ons 2, 000
Casual t y l oss ( af t er $100
f l oor )
1, 000
Mor t gage i nt er est on per sonal
r esi dence
4, 500
Pr oper t y t axes on per sonal
r esi dence
4, 200
Movi ng expenses 2, 500
Cont r i but i on t o a t r adi t i onal
I RA
4, 000
Sal es t axes ( no st at e or
l ocal i ncome t ax i s i mposed)
1, 300

Cal cul at e Aust i n s deduct i ons for AGI .

Cor r ect Answer :
Onl y t he f ol l owi ng expenses ar e deduct i bl e for AGI :

Alimony $24,000


Contribution to IRA 4,000

Deductions for AGI $30,500

The other expenses, after applying any statutory
floors, are deductions from AGI.

738. Ar nol d and Bet h f i l e a j oi nt r et ur n. Use t he f ol l owi ng dat a t o
cal cul at e t hei r deduct i on for AGI .

Mor t gage i nt er est on per sonal r esi dence $ 6, 0
00
Pr oper t y t axes on per sonal r esi dence 2, 500
Al i mony payment s 12, 000
Movi ng expenses 7, 000
St at e i ncome t axes 5, 000
I nvest ment i nt er est ( $8, 000 of expenses
l i mi t ed t o net i nvest ment i ncome of
$7, 500)
7, 500
Unr ei mbur sed empl oyee expenses 2, 500
Sal es t axes 2, 600

Cor r ect Answer :
Ar nol d and Bet h s deduct i on for AGI i s $19, 000 and consi st s of t he
f ol l owi ng i t ems:

Alimony payments $12,000
0
Deduction for AGI $19,000

All of the other items are itemized deductions. Note that the taxpayer must
choose between the state income taxes and the sales taxes.

739. Robi n and J ef f own an uni ncor por at ed har dwar e st or e. They
det er mi ne t hei r sal ar i es at t he end of t he year by usi ng t he amount
r equi r ed t o r educe t he net i ncome of t he har dwar e st or e t o $0. Based on
t hi s pol i cy, Robi n and J ef f each r ecei ve a t ot al sal ar y of $125, 000.
Thi s i s pai d as f ol l ows: $8, 000 per mont h and $29, 000 on December 31.
Det er mi ne t he amount of t he sal ar y deduct i on.

Cor r ect Answer :
Si nce t he har dwar e st or e i s not i ncor por at ed, t he i ssue of t he
r easonabl eness of t he sal ar i es i s not r el evant . Robi n and J ef f wi l l
r epor t i ncome of $125, 000 each r egar dl ess of whet her i t i s l abel ed as
sal ar y or as a di st r i but i on of t he har dwar e st or e s net i ncome.
Ther ef or e, t her e i s not hi ng wr ong wi t h t he har dwar e st or e ( i . e. , a
par t ner shi p) t aki ng a $250, 000 sal ar y deduct i on.

740. Sandr a owns an i nsur ance agency. The f ol l owi ng sel ect ed dat a ar e
t aken f r omt he agency bal ance sheet and i ncome st at ement pr epar ed usi ng
t he accrual met hod.

Revenue $250, 000
Sal ar i es and commi ssi ons 100, 000
Rent 10, 000
I nsur ance 5, 000
Ut i l i t i es 6, 000
Account s r ecei vabl e, 1/ 1/ 2013 40, 000
Account s r ecei vabl e, 12/ 31/ 2013 38, 000
Account s payabl e, 1/ 1/ 2013 12, 000
Account s payabl e, 12/ 31/ 2013 11, 000

Cal cul at e Sandr a s net pr of i t usi ng t he cash met hod f or 2013.

Cor r ect Answer :
Sandr a s accr ual met hod net pr of i t i s cal cul at ed as f ol l ows:

Revenue $250,000
Less: Expenses
Salaries and
commissions
$100,000
Rent 10,000
Insurance 5,000
Utilities 6,0
00
(121,000)
Net profit $129,000

To convert to cash method net profit, the following adjustments must be
made.

Net profitaccrual method $129,000
Deduct: Decrease in accounts
payable ($11,000 $12,000)
(1,000)
Add: Decrease in accounts
receivable ($38,000 $40,000)
2,0
00
Net profitcash method $130,000

741. Al f r ed s Ent er pr i ses, an uni ncor por at ed ent i t y, pays empl oyee
sal ar i es of $100, 000 dur i ng t he year . At t he end of t he year , $12, 000
of addi t i onal sal ar i es have been ear ned but not pai d unt i l t he
begi nni ng of t he next year .

a. Det er mi ne t he amount of t he deduct i on f or
sal ar i es i f Al f r ed i s a cash met hod
t axpayer .

b. Det er mi ne t he amount of t he deduct i on f or
sal ar i es i f Al f r ed i s an accr ual met hod
t axpayer .

Cor r ect Answer :
a. The deduction for salaries is the amount
paid of $100,000.

b. The deduction for salaries is calculated as
follows:

Salaries $100,000
Accrued salaries 12,0
00

Salary deduction $112,000

742. Tayl or , a cash basi s ar chi t ect , r ent s t he bui l di ng i n whi ch hi s
of f i ce i s l ocat ed f or $5, 000 per mont h. He commenced hi s pr act i ce on
Febr uar y 1, 2013. I n or der t o guar ant ee no r ent i ncr eases dur i ng an 18-
mont h per i od, he si gned an 18- mont h l ease and pr epai d t he $90, 000 on
Febr uar y 1, 2013. How much can Tayl or deduct as r ent expense f or 2013?

Cor r ect Answer :
Tayl or i s a cash basi s t axpayer . Thus, he i s el i gi bl e t o use t he one-
year r ul e on pr epayment s. Si nce hi s pr epayment s of 18- mont hs r ent does
not ext end beyond t he end of 2014, he can deduct t he $90, 000 pai d i n
2013.

743. I n or der t o pr ot ect agai nst r ent i ncr eases on t he bui l di ng i n
whi ch she oper at es a dance st udi o, Mel l a si gns an 18- mont h l ease f or
$36, 000. The l ease commences on Oct ober 1, 2013. How much of t he
$36, 000 payment can she deduct i n 2013 and 2014?

a. I f Mel l a i s an accr ual basi s t axpayer ?

b. I f Mel l a i s a cash basi s t axpayer ?

Cor r ect Answer :
a. As an accrual basis taxpayer, Mella can
deduct the amount of the rent expenses
incurred in 2013 of $6,000 ($2,000 3
months) for 2013 and the $24,000 ($2,000 12
months) incurred in 2014.

b. Since Mella is a cash basis taxpayer, she can
deduct the entire $36,000 prepayment in 2013
if she can satisfy the one-year rule.
However, since the rental period of 18 months
extends beyond the end of 2014, she fails the
requirement for the one-year rule.
Consequently, she can deduct only $6,000 in
2013 and $24,000 in 2014.

744. Pet ul a s busi ness sel l s heat pumps whi ch have a one- year war r ant y.
Based on hi st or i cal dat a, t he war r ant y cost s amount t o 11%of sal es.
Dur i ng 2013, heat pump sal es ar e $400, 000. Act ual war r ant y expenses
pai d i n 2013 ar e $40, 000.

a. Det er mi ne t he amount of t he war r ant y
expense deduct i on f or 2013 i f Pet ul a s
busi ness uses t he accr ual met hod.

b. How woul d your answer change i f Pet ul a used
t he cash met hod f or ext ended war r ant i es and
t he pur chaser s pai d $25, 000 f or t he
war r ant i es whi ch cover ed t he second and
t hi r d year s of owner shi p?

Cor r ect Answer :
a. Even though Petulas business uses the
accrual method, reserves for estimated
warranty expenses are not permitted.
Therefore, the deduction for warranty
expenses is the amount paid of $40,000.

b. Petula would record gross income in 2013 of
$425,000 ($400,000 + $25,000). The deduction
for warranty expense would still be $40,000.

745. Bei ge, I nc. , an ai r l i ne manuf act ur er , i s conduct i ng negot i at i ons
f or t he sal e of mi l i t ar y ai r cr af t . One negot i at i on i s wi t h a U. S.
assi st ant secr et ar y of def ense. She can cl ose t he deal on t he pur chase
of 50 at t ack hel i copt er s i f she i s pai d $750, 000 under t he t abl e.
Anot her negot i at i on i s wi t h t he mi ni st er of def ense of a t hi r d wor l d
count r y. To compl et e t he sal e of 20 j et f i ght er s t o hi s gover nment , he
demands t hat he be pai d a $1 mi l l i on gr ease payment . Bei ge makes t he
payment s and cl oses t he deal s. How much of t hese payment s ar e
deduct i bl e by Bei ge, I nc. ?

Cor r ect Answer :
The $750, 000 payment t o t he U. S. assi st ant secr et ar y of def ense i s a
br i be and i s not deduct i bl e. I f t he gr ease payment of $1 mi l l i on t o t he
mi ni st er of def ense of t he t hi r d wor l d count r y does not vi ol at e t he
For ei gn Cor r upt Pr act i ces Act of 1977, t hen t he ent i r e $1 mi l l i on
payment i s deduct i bl e. However , i f t he gr ease payment does vi ol at e t he
Act , t hen none of i t i s deduct i bl e.

746. Al bi e oper at es an i l l egal dr ug- r unni ng busi ness and has t he
f ol l owi ng i t ems of i ncome and expense. What i s Al bi e s adj ust ed gr oss
i ncome f r omt hi s oper at i on?

I ncome $800, 000
Expense
s:

Rent 24, 000
Br i bes t o pol i ce 55, 000
Medi cal expense 5, 000
Legal f ees 25, 000
Depr eci at i on 30, 000
I l l egal ki ckbacks 30, 000
Cost of goods sol d 300, 000

Cor r ect Answer :
Al bi e i s al l owed t o r educe hi s AGI onl y by t he cost of goods sol d; t hus,
hi s AGI i s $500, 000 ( $800, 000 $300, 000) . Not e t hat t he cost of goods
sol d i s t r eat ed as a negat i ve i t emi n cal cul at i ng gr oss i ncome.

747. Ki t t y r uns a br ot hel ( i l l egal under st at e l aw) and has t he
f ol l owi ng i t ems of i ncome and expense. What i s t he amount t hat she must
i ncl ude i n t axabl e i ncome f r omher oper at i on?

I ncome $200, 000
Expense
s:

Rent 8, 000
Br i bes t o pol i ce 10, 000
Medi cal expense 5, 000
Legal f ees 20, 000
I l l egal ki ckbacks 15, 000

Cor r ect Answer :
Income $200,000
Expenses:
Rent $ 8,000
Utilities 2,000
Medical 5,000
Legal fees 20,000
Depreciation 14,000 (49,000)
$151,000

The bribes to police of $10,000 and illegal kickbacks of $15,000 are not
deductible.

748. J anet i s t he CEO f or Si l ver , I nc. , a cl osel y hel d
cor por at i on. Her t ot al compensat i on f or 2013 i s $5 mi l l i on. Of t hi s
amount , $2 mi l l i on i s a sal ar y and $3 mi l l i on i s a bonus. The bonus
was cal cul at ed as 5%of Si l ver s net i ncome bef or e t he bonus and bef or e
t axes ( $60 mi l l i on X 5%= $3 mi l l i on) . The bonus pr ovi si on has been i n
ef f ect si nce J anet became CEO f i ve year s ago and i s r el at ed t o Si l ver s
per f or mance. I t i s appr oved annual l y by t he ent i r e boar d of di r ect or s
( 1 of t he 5 di r ect or s i s an out si de di r ect or ) of Si l ver . How much of
J anet s compensat i on can Si l ver deduct f or 2013?

Cor r ect Answer :
Al l of t he $5 mi l l i on i s deduct i bl e by Si l ver . Si nce Si l ver i s a
cl osel y hel d, r at her t han a publ i cl y hel d cor por at i on, t he $1 mi l l i on
st at ut or y l i mi t on t he deduct i on of cer t ai n execut i ve compensat i on i s
not appl i cabl e.

749. Agnes oper at es a Chr i st mas Shop i n At l ant i c Ci t y, NJ . She makes a
weekend t r i p t o Ver o Beach, FL, f or t he pur pose of det er mi ni ng t he
f easi bi l i t y of openi ng anot her shop. Her t r avel expenses ar e $2, 000
( i ncl udes $500 f or meal s) . I n addi t i on, she pays $5, 000 t o a mar ket
r esear ch f i r mi n Ver o Beach t o pr epar e a f easi bi l i t y st udy. Det er mi ne
t he amount of t he expenses t hat Agnes can deduct i f :

a. She opens a new shop i n Ver o Beach.

b. She deci des not t o open a new shop i n Ver o
Beach.

Cor r ect Answer :
a. Because Agnes is already in the Christmas
Shop business, all of the investigation
expenses ($2,000 + $5,000 = $7,000) are
deductible regardless of whether or not she
opens a shop in Vero Beach. Note, however,
that as discussed in Chapter 9, only 50% of
the cost of the meals is deductible.

b. Same response as in a.

750. Whi l e she was a col l ege st udent , Angel l i ved by a bookst or e
l ocat ed near campus. She t hi nks a bookst or e l ocat ed on t he ot her si de
of campus woul d be successf ul . She i ncur s expenses of $42, 800 ( l egal
f ees, account i ng f ees, mar ket i ng sur vey, et c. ) i n expl or i ng i t s
busi ness pot ent i al . Her par ent s have agr eed t o l oan her t he money
r equi r ed t o st ar t t he busi ness. What amount of t hese i nvest i gat i on
cost s can Angel deduct i f :

a. She opens t he bookst or e on August 1,
2013.

b. She deci des not t o open t he bookst or e.

Cor r ect Answer :
a. If Angel opens the bookstore on August 1,
2013, she can deduct the following
investigation expenses in 2013.

Allowed expense deduction in
first year
$5,000
Amortization ($37,800/180
months 5 months)
1,050
Deductible investigation
expenses
$6,050

b. If Angel does not open the bookstore, she
cannot deduct any of the $42,800 of
expenses she incurred.

751. Cal cul at e t he net i ncome i ncl udi bl e i n t axabl e i ncome f or t he
f ol l owi ng hobby:

I ncome $23, 000
Mor t gage i nt er est and pr oper t y t axes
al l ocabl e t o hobby
12, 000
Suppl i es and f ees 7, 000
Tel ephone f or hobby 3, 000

Cor r ect Answer :
Income (includible in
gross income)
$23,000
Itemized
deductions
:

Mortgage interest and
property taxes
$12,000
Supplies and fees 7,000
Telephone 3,000
Depreciation (limited
to $23,000 $12,000
$7,000 $3,000)
1,0
00
(23,000)
$
0

Otherwise deductible expenses must be deducted first; only enough other
expenses are allowed to offset the remaining income. Deductions affecting
depreciable basis are taken last. The mortgage interest and property taxes
are deductible as itemized deductions and the other hobby-related expenses
are subject to the 2%-of-AGI floor. Once the taxpayers AGI is determined,
the effect of the 2%-of-AGI floor on itemized deductions can be calculated.

752. Dur i ng t he year , Ri t a r ent ed her vacat i on home f or t wel ve days f or
$2, 400 and she used i t per sonal l y f or t hr ee mont hs. The f ol l owi ng
expenses wer e i ncur r ed on t he home:

Pr oper t y t axes $ 2, 200
Mor t gage i nt er est 10, 800
Ut i l i t i es and mai nt enance 1, 900
I nsur ance 900

Cal cul at e her r ent al gai n or l oss and i t emi zed deduct i ons.

Cor r ect Answer :
Ri t a excl udes t he $2, 400 of r ent al i ncome f r omgr oss i ncome because t he
home i s cl assi f i ed as pr i mar i l y per sonal . She can deduct t he pr oper t y
t axes ( $2, 200) and mor t gage i nt er est ( $10, 800) as i t emi zed
deduct i ons. No ot her expenses ar e deduct i bl e.

753. Dur i ng t he year , J i mr ent ed hi s vacat i on home f or 200 days and
l i ved i n i t f or 19 days. Dur i ng t he r emai ni ng days, t he vacat i on home
was avai l abl e f or r ent al use. I s t he vacat i on home subj ect t o t he
l i mi t at i on on t he deduct i ons of a per sonal / r ent al vacat i on home?

Cor r ect Answer :
The vacat i on home i s not subj ect t o t he l i mi t at i ons on t he deduct i ons
of a per sonal / r ent al vacat i on home. I t does sat i sf y t he r ent al par t of
t he cl assi f i cat i on because i t i s r ent ed f or gr eat er t han 14
days. However , t he per sonal use of 19 days does not exceed t he gr eat er
of ( 1) 14 days or ( 2) 10%of t he r ent al days, si nce 10%of t he r ent al
days i s 20 ( 200 r ent al days 10%) days. Ther ef or e, t he appr opr i at e
cl assi f i cat i on i s pr i mar i l y r ent al use r at her t han per sonal / r ent al use.

754. Dur i ng t he year , Mar t i n r ent ed hi s vacat i on home f or t hr ee mont hs
and spent one mont h t her e. Gr oss r ent al i ncome f r omt he pr oper t y was
$5, 000. Mar t i n i ncur r ed t he f ol l owi ng expenses: mor t gage i nt er est ,
$3, 000; r eal est at e t axes, $1, 500; ut i l i t i es, $800; mai nt enance, $500;
and depr eci at i on, $4, 000. Comput e Mar t i n s al l owabl e deduct i ons f or t he
vacat i on home.

Cor r ect Answer :
Si nce t he vacat i on home i s r ent ed f or 15 or mor e days and i s used f or
per sonal pur poses f or mor e t han t he gr eat er of ( 1) 14 days or ( 2) 10%
of t he r ent al days, t he deduct i ons ar e scal ed down, usi ng t he courts
approach, as f ol l ows:

Gross income $5,000
Deduct: Taxes and interest (3/12
$4,500)
(1,125)
Remainder applicable to other rental
expenses
$3,875
Deduct: Allocable share of utilities
and maintenance [3/4 ($800 + $500)]
(97
5)
Balance applicable to depreciation $2,900
Deduct: Depreciation (3/4 $4,000 =
$3,000) but limited to above balance
(2,900)
Net income $
0

Thus, Martin may deduct $1,125 taxes and interest, $975 utilities and
maintenance, and $2,900 depreciation against the gross income of $5,000.
The personal portion of taxes and interest ($3,375) is deductible as an
itemized deduction. Example 29

Using the IRSs approach, though, the deductions are as follows:

Gross income $5,000
Deduct: Taxes and interest (3/4
$4,500)
(3,375)
Remainder applicable to other rental
expenses
$1,625
Deduct: Allocable share of utilities
and maintenance [3/4 ($800 + $500)]
(975)
Balance applicable to depreciation $ 650

Deduct: Depreciation (3/4 $4,000 =
$3,000) but limited to above balance
(650)
Net income $
0

Thus, Martin may deduct $3,375 taxes and interest, $975 utilities and
maintenance, and $650 depreciation against the gross income of $5,000. The
personal portion of taxes and interest ($1,125) is deductible as an
itemized deduction.

755. Br i dget t s son, Cl yde, i s $12, 000 i n ar r ear s on hi s r esi dent i al
mor t gage payment s. Of t he $12, 000, $7, 500 r epr esent s i nt er est and
$4, 500 r epr esent s pr i nci pal .

a. I f Br i dget t pays t he $12, 000 t o t he
l ender , how much can she deduct ? How much
can Cl yde deduct ?

b. I f Br i dget t pays t he $7, 500 of i nt er est
t o t he l ender and l oans or gi ves $4, 500
t o Cl yde, who pays t he $4, 500 of
pr i nci pal , how much can Br i dget t deduct ?
How much can Cl yde deduct ?

c. I f Br i dget t gi ves or l ends t he $12, 000 t o
Cl yde who pays t he l ender , how much can
he deduct ? How much can Br i dget t deduct ?

d. Advi se Br i dget t and Cl yde on how t he
payment shoul d be made.

Cor r ect Answer :
a. A deduction cannot be taken for paying
another taxpayers obligation. So if
Bridgett pays the lender, neither Bridgett
nor Clyde could deduct the $7,500 of
mortgage interest expense.

b. Bridgett cannot deduct the $7,500 payment
identified as interest since this represents
the payment of another taxpayers
obligation. Even though Clyde has identified
the $4,500 payment as relating to the
principal of the mortgage, he probably can
deduct the $4,500 as mortgage interest
expense since Bridgett is not allowed the
deduction. In any event, Bridgett is not
allowed a deduction.

c. Clyde could deduct the $7,500 of mortgage
interest expense, and Bridgett would receive
no deduction.

d. Bridgett should either loan or give the
funds to Clyde who then makes the mortgage
payments of $12,000 ($7,500 interest +
$4,500 principal).

756. Mat t i e and El mer ar e separ at ed and ar e i n t he pr ocess of obt ai ni ng
a di vor ce. They i ncur l egal f ees f or t hei r r espect i ve at t or neys wi t h
t he expenses bei ng i t emi zed as f ol l ows:

For Mat t i e El mer
Gener al cost s of t he di vor ce $3, 500 $3, 000
Det er mi nat i on of dependency
exempt i ons
1, 500 0
Pr oper t y set t l ement t ax
consequences
400 1, 500
$5, 400 $4, 500

Al t hough t her e i s no r equi r ement t hat he do so, El mer pays Mat t i e s
l awyer as a gest ur e of t he posi t i ve f eel i ngs he st i l l has f or her .

a. Det er mi ne t he deduct i ons f or Mat t i e and f or
El mer .

b. Cl assi f y t he deduct i ons as for AGI and from
AGI .

Cor r ect Answer :
a. Only the legal fees associated with the
divorce that relate solely to tax advice are
deductible. Therefore, Elmer may deduct the
following:

Property settlement tax consequences $1,500

If Mattie had paid her attorney, she
could have deducted the following:

Determination of dependency
exemptions
$1,500
Property settlement tax
consequences
400
$1,900

However, since Elmer paid Matties lawyer,
Mattie is ineligible to take the deduction.
Likewise, Elmer is ineligible to take the
deduction for this $1,900 since the
obligation was that of Mattie.

b. Any expenses that are deductible in this
situation are classified as itemized
deductions (i.e., from AGI).

757. Mar vi n spends t he f ol l owi ng amount s on a house he owns:

Repai r t o r oof $1, 100
Car pet i ng f or t he
l i vi ng r oom
1, 200
Pai nt i ng of t he
ext er i or
4, 000
Repl acement of
f r ont door
800

a. How much of t hese expenses can Mar vi n
deduct i f t he house i s hi s pr i nci pal
r esi dence?
b. How much of t hese expenses can Mar vi n
deduct i f he r ent s t he house t o a t enant ?
c. Cl assi f y any deduct i bl e expenses as
deduct i ons for AGI or as deduct i ons from
AGI .

Cor r ect Answer :
a. Since these expenditures are personal
expenditures, no deduction is allowed.
b. Since these expenditures are for rental
property, Marvin can deduct $7,100 ($1,100 +
$1,200 + $4,000 + $800).
c. The $7,100 deduction associated with the
rental property is classified as a deduction
for AGI.

758. Wal t er sel l s l and wi t h an adj ust ed basi s of $175, 000 and a f ai r
mar ket val ue of $160, 000 t o hi s mot her , Shi r l ey, f or $160, 000. Wal t er
r ei nvest s t he pr oceeds i n t he st ock mar ket . Shi r l ey hol ds t he l and f or
one year and a day and sel l s i t i n t he mar ket pl ace f or $169, 000.

a. Det er mi ne t he t ax consequences t o Wal t er .

b. Det er mi ne t he t ax consequences t o Shi r l ey.

Cor r ect Answer :
a. Amount realized $160,000
Adjusted basis (175,000)
Realized loss ($ 15,000)

Walters realized loss of $15,000 is
disallowed because Walter and Shirley are
related parties.

b. Amount realized $169,000
Realized gain $ 9,000
Walters disallowed loss
needed to reduce
Shirleys gain to zero
(9,000)
Recognized gain $
0

Shirley may use as much of Walters
disallowed loss as she needs to reduce her
realized gain (i.e., $9,000) to $0. Thus,
Shirleys recognized gain is $0 and the
$6,000 ($15,000 $9,000) of Walters
disallowed loss that is not used by Shirley
is permanently lost.

759. Sandr a sol d 500 shar es of Wr en Cor por at i on t o Bob, her br ot her ,
f or i t s f ai r mar ket val ue. She had pai d $26, 000 f or t he st ock.
Cal cul at e Sandr a s and Bob s gai n or l oss under t he f ol l owi ng
ci r cumst ances:

a. Sandr a sol d t he shar es t o Bob f or $20, 000.
One year l at er , Bob sol d t hemf or $18, 000.

b. Sandr a sol d t he shar es t o Bob f or $30, 000.

c. Sandr a sol d t he shar es t o Bob f or $20, 000.

Cor r ect Answer :
a. Sandra has no deductible loss. Bobs
recognized loss is $2,000.

b. Sandra has a recognized gain of $4,000. Bob
has a recognized loss of $3,000. Related party
transaction rules apply only to losses.

c. Sandra has no deductible loss. Bob has a
recognized gain of $2,000 ($28,000 $20,000
= $8,000 less Sandras disallowed loss of
$6,000).

760. The st ock of Eagl e, I nc. i s owned as f ol l ows:

Tom 23%
Tom s uncl e 22%
Tom s daught er 7%
Tom s si st er 15%
Tom s spouse 15%
Tom s nephew 8%
Tom s CPA, unr el at ed 10%

Tomsel l s l and and a bui l di ng t o Eagl e, I nc. f or $212, 000. Hi s adj ust ed
basi s f or t hese asset s i s $225, 000. Cal cul at e Tom s r eal i zed and
r ecogni zed l oss associ at ed wi t h t he sal e.

Cor r ect Answer :
Tom s r eal i zed l oss i s $13, 000.

Amount realized $212,000
Adjusted basis (225,000
)
Realized loss ($ 13,000
)

However, his recognized loss is $0 because the loss is disallowed as a
267 related party transaction.

A related party includes a corporation more than 50% (directly or
indirectly) owned by the taxpayer. Toms total ownership (i.e., both
direct and constructive) of Eagle, Inc. is 60%.

Tom 23%
Toms daughter 7%
Toms sister 15%
Toms spouse 15%
60%

Toms uncle, nephew, and the CPA are not related parties for 267
purposes.

761. Tr acy i nvest ed i n t he f ol l owi ng st ocks and bonds dur i ng 2013.

Bl ue, I nc. $25, 000
Ci t y of Fal con bonds 75, 000

To f i nance t he i nvest ment s, she bor r owed $100, 000 f r omSwan Bank.
I nt er est expense pai d on t he l oan dur i ng 2013 was $5, 000. Dur i ng 2013,
Tr acy r ecei ved $1, 250 of di vi dend i ncome f r omBl ue, I nc. and $3, 000 of
i nt er est i ncome on t he muni ci pal bonds.

a. Det er mi ne t he amount of Tr acy s gr oss
i ncome.

b. Det er mi ne t he maxi mumamount of Tr acy s
deduct i bl e i nt er est expense.

Cor r ect Answer :
a. Tracy must include the $1,250 of dividend
income in her gross income. The interest on
the municipal bonds of $3,000 is tax-exempt.

b. Tracy can deduct the interest paid of $1,250
($5,000 1/4) on the portion of the loan
that relates to the Blue, Inc. stock. The
interest paid of $3,750 on the portion of
the loan that relates to the municipal bonds
is disallowed because the interest income
from the bonds is tax-exempt.

762. Tr ade of busi ness expenses ar e cl assi f i ed as deduct i ons for AGI .
Sect i on 212 expenses, bar r i ng cer t ai n except i ons, ar e cl assi f i ed as
deduct i ons from AGI . What ar e t hese except i ons?

Cor r ect Answer :
The nor mal cl assi f i cat i on f or 212 expenses i s as a deduct i on from AGI .
However , expenses pai d i n connect i on wi t h t he det er mi nat i on, col l ect i on,
or r ef und of t axes r el at ed t o t he i ncome of sol e pr opr i et or shi ps, r ent s
and r oyal t i es, or f ar mi ng oper at i ons ar e cl assi f i ed as deduct i ons for
AGI . I n addi t i on, ot her r ent al and r oyal t y expenses ar e cl assi f i ed as
deduct i ons for AGI.

763. Ar e al l per sonal expenses di sal l owed as deduct i ons?

Cor r ect Answer :
No. Sel ect ed per sonal expenses can be deduct ed as i t emi zed deduct i ons.
The f ol l owi ng ar e exampl es of deduct i bl e per sonal expenses.

Cont r i but i ons t o qual i f i ed char i t abl e or gani zat i ons ( not t o
exceed a speci f i ed per cent age of AGI ) .

Medi cal expenses ( i n excess of 7. 5%of AGI ) .

Cer t ai n st at e and l ocal t axes ( e. g. , r eal est at e t axes and st at e
and l ocal i ncome or sal es t axes) .

Per sonal casual t y l osses ( i n excess of an aggr egat e f l oor of 10%
of AGI and a $100 f l oor per casual t y) .

Cer t ai n per sonal i nt er est ( e. g. , mor t gage i nt er est on per sonal
r esi dence) .

764. Under what ci r cumst ance can a br i be be deduct ed?

Cor r ect Answer :
Br i bes pai d t o a domest i c of f i ci al ar e di sal l owed i f t he br i be i s
i l l egal under t he l aws of t he Uni t ed St at es. However , a br i be pai d t o a
f or ei gn of f i ci al i s di sal l owed onl y i f i t i s unl awf ul under t he For ei gn
Cor r upt Pr act i ces Act of 1977.

765. Can a t r ade or busi ness expense be deduct i bl e i f i t i s necessar y
but not or di nar y?

Cor r ect Answer :
No. To be deduct i bl e as a t r ade or busi ness expense, t he expense must
be bot h or di nar y and necessar y.

766. Sal ar i es ar e consi der ed an or di nar y and necessar y expense of a
t r ade or busi ness i f t hey meet what ot her r equi r ement ? What ar e t he t ax
consequences i f t hi s r equi r ement i s not met ?

Cor r ect Answer :
Reasonabl eness i s an addi t i onal r equi r ement t hat appl i es t o sal ar i es.
Gener al l y, t he unr easonabl e expense i s di sal l owed as a deduct i on t o t he
cor por at i on and t axabl e as a di vi dend, r at her t han as sal ar y, t o t he
shar ehol der .

767. I f par t of a shar ehol der / empl oyee s sal ar y i s cl assi f i ed as
unr easonabl e, det er mi ne t he ef f ect on t he:

a. Shar ehol der / empl oyee s gr oss i ncome.

b. Cor por at i on s t axabl e i ncome.

Cor r ect Answer :
a. The reclassification of part of a
shareholder/employees salary as
unreasonable will have no effect on the
shareholder/employees gross income. That
is, the shareholder/employees salary income
will decrease by the same amount as his
dividend income increases. Note that if the
dividends are qualified dividends, they are
eligible for the same preferential tax rate
of 15%/0% applicable to long-term capital
gains.

b. Salaries are deductible in calculating
corporate taxable income, whereas dividends
are not. So, the taxable income of the
corporation will increase due to a reduced
salary deduction.

768. What l osses ar e deduct i bl e by an i ndi vi dual t axpayer ?

Cor r ect Answer :
Gener al l y deduct i bl e l osses of i ndi vi dual t axpayer s ar e l i mi t ed t o ( 1)
t hose i ncur r ed i n a t r ade or busi ness or ( 2) i n a t r ansact i on ent er ed
i nt o f or pr of i t . However , i ndi vi dual s ar e al so al l owed t o deduct l osses
t hat ar e t he r esul t of a casual t y ( subj ect t o cer t ai n st at ut or y
mat er i al i t y l i mi t at i ons) .

769. Br uce owns sever al sol e pr opr i et or shi ps. Must Br uce use t he same
account i ng met hod f or each of t hese busi nesses?

Cor r ect Answer :
No. I f a t axpayer owns mul t i pl e busi nesses, i t may be possi bl e t o use
t he cash met hod f or some and t he accr ual met hod f or ot her s.

770. Max opened hi s dent al pr act i ce ( a sol e pr opr i et or shi p) i n Mar ch
2013. At t he end of t he year , he has unpai d account s r ecei vabl e of
$62, 000 and no unpai d account s payabl e. Shoul d Max use t he accr ual
met hod or t he cash met hod f or hi s dent al pr act i ce?

Cor r ect Answer :
A ser vi ce pr ovi der gener al l y shoul d use t he cash met hod. Under t he cash
met hod, Max r ecor ds i ncome f r omhi s dent al pr act i ce onl y as he col l ect s
f r omhi s pat i ent s and/ or t hei r i nsur ance compani es. Max has i ncome f r om
t he uncol l ect ed account s r ecei vabl e onl y as he r ecei ves payment . Not e
t hat si nce hi s account s payabl e can onl y be deduct ed when pai d under
t he cash met hod, he shoul d cont i nue t o mi ni mi ze t he account s payabl e
bal ance at t he end of t he t ax year .

771. Di scuss t he appl i cat i on of t he one- year r ul e on pr epayment s by a
cash basi s t axpayer .

Cor r ect Answer :
The Regul at i ons set f or t h t he gener al r ul e t hat an expendi t ur e t hat
cr eat es an asset havi ng a usef ul l i f e t hat ext ends subst ant i al l y beyond
t he end of t he t ax year must be capi t al i zed. However , under t he one-
year r ul e on pr epayment s f or cash basi s t axpayer s, t he pr epayment can
be expensed i n t he cur r ent t ax year i f t he asset wi l l expi r e or be
consumed by t he end of t he t ax year f ol l owi ng t he year of payment .
Ot her wi se, t he t axpayer must capi t al i ze t he pr epayment and deduct i t
over t he benef i t per i od.

772. Br i ef l y di scuss t he t wo t est s t hat an accr ual basi s t axpayer must
appl y bef or e an expense can be deduct ed.

Cor r ect Answer :
The t wo t est s t hat an accr ual basi s t axpayer must appl y bef or e an
expense can be deduct ed ar e ( 1) t he al l event s t est and ( 2) t he
economi c per f or mance t est . The all events test pr ovi des t hat a
deduct i on cannot be cl ai med unt i l al l t he event s t hat cr eat e t he
t axpayer s l i abi l i t y have occur r ed and t hat t he amount of t he l i abi l i t y
can be det er mi ned wi t h r easonabl e accur acy. The economic performance
test pr ovi des t hat t he ser vi ce, pr oper t y, or use of pr oper t y gi vi ng
r i se t o t he l i abi l i t y must have been per f or med f or , pr ovi ded t o, or
used by t he t axpayer .

773. Gr aham, a CPA, has submi t t ed a pr oposal t o do t he annual audi t f or
a muni ci pal i t y. Owen, t he ci t y t r easur er , t el l s Gr ahamt hat f or a
$1, 000 f ee, he wi l l use hi s i nf l uence t o have t he audi t awar ded t o
Gr aham. What f act or s ar e r el evant i n det er mi ni ng i f Gr ahamcan deduct
t he $1, 000 payment assumi ng he pays t he f ee t o Owen?

Cor r ect Answer :
The payment f r omGr ahamt o Owen appear s t o be a br i be. To be di sal l owed,
t he br i be must be i l l egal under ei t her Feder al or st at e l aw and al so
must subj ect t he payer t o a cr i mi nal penal t y or t he l oss of l i cense or
pr i vi l ege t o engage i n a t r ade or busi ness. For a br i be t hat i s i l l egal
under st at e l aw, a deduct i on i s deni ed onl y i f t he st at e l aw i s
gener al l y enf or ced.

774. How can an i ndi vi dual s consul t at i on wi t h a l awyer be cl assi f i ed
as a deduct i on for AGI i n some cases and a deduct i on from AGI i n ot her
i nst ances?

Cor r ect Answer :
Legal expenses ar e deduct i bl e when t hey ar e di r ect l y r el at ed t o a t r ade
or busi ness ( for AGI ) ; an i ncome- pr oduci ng act i vi t y ( ei t her for AGI or
from AGI ) ; or t he det er mi nat i on, col l ect i on, or r ef und of a t ax ( ei t her
for AGI or from AGI ) . Or di nar y and necessar y l egal expenses i ncur r ed i n
conj unct i on wi t h a t r ade/ busi ness or i n conj unct i on wi t h r ent al / r oyal t y
pr oper t y ar e deduct i bl e for AGI . Al l ot her deduct i bl e l egal expenses
ar e deduct i ons from AGI .

775. I f a t axpayer oper at ed an i l l egal busi ness ( not dr ug t r af f i cki ng) ,
what expenses can be deduct ed and what expenses ar e di sal l owed?

Cor r ect Answer :
The usual expenses of oper at i ng a busi ness ar e deduct i bl e. However , t he
f ol l owi ng expenses ar e di sal l owed.

Fi nes.

Br i bes t o publ i c of f i ci al s.

I l l egal ki ckbacks.

Ot her i l l egal payment s.

776. Bobby oper at es a dr ug t r af f i cki ng busi ness. Because he has an
account i ng backgr ound, he keeps det ai l ed f i nanci al r ecor ds. What
expenses can Bobby deduct on hi s Feder al i ncome t ax r et ur n?

Cor r ect Answer :
Bobby cannot deduct any of t he expenses associ at ed wi t h oper at i ng hi s
i l l egal dr ug t r af f i cki ng busi ness. However , gr oss i ncome f or t ax
pur poses i s def i ned as sal es mi nus cost of goods sol d. So i n
cal cul at i ng t he net i ncome of t he busi ness f or t ax pur poses, cost of
goods sol d i s t r eat ed as a negat i ve i ncome i t emr at her t han as an
expense.

777. Abner cont r i but es $2, 000 t o t he campai gn of t he Tea Par t y
candi dat e f or gover nor , $1, 000 t o t he campai gn of t he Tea Par t y
candi dat e f or senat or , and $500 t o t he campai gn of t he Tea Par t y
candi dat e f or mayor . Can Abner deduct t hese pol i t i cal cont r i but i ons?

Cor r ect Answer :
No. Pol i t i cal cont r i but i ons cannot be deduct ed.

778. Ar e t her e any ci r cumst ances under whi ch l obbyi ng expendi t ur es ar e
deduct i bl e?

Cor r ect Answer :
Yes. Lobbyi ng expendi t ur es ar e deduct i bl e under t he f ol l owi ng t hr ee
ci r cumst ances.

I nf l uenci ng l ocal l egi sl at i on.

Act i vi t i es devot ed sol el y t o moni t or i ng l egi sl at i on.

De minimis pr ovi si on f or annual i n- house expendi t ur es ( l obbyi ng
expenses ot her t han t hose pai d t o pr of essi onal l obbyi st s) i f such
expendi t ur es do not exceed $2, 000.

779. I n appl yi ng t he $1 mi l l i on l i mi t on deduct i ng execut i ve
compensat i on, what cor por at i ons ar e subj ect t o t he deduct i on l i mi t ?
What execut i ves ar e cover ed?

Cor r ect Answer :
The $1 mi l l i on l i mi t on deduct i ng t he compensat i on of a cover ed
execut i ve appl i es t o cor por at i ons t hat have at l east one cl ass of st ock
r egi st er ed under t he Secur i t i es Exchange Act of 1934. Cover ed empl oyees
i ncl ude t he chi ef execut i ve of f i cer and t he f our ot her most hi ghl y
compensat ed of f i cer s.

780. Under what ci r cumst ances may a t axpayer deduct t he expenses of
i nvest i gat i ng a possi bl e busi ness acqui si t i on, i f ( 1) t he busi ness i s
not acqui r ed; and ( 2) t he busi ness i s acqui r ed?

Cor r ect Answer :
(1) The expenses of investigation may be
deducted if the taxpayer is in the same or
similar business to that being
investigated, even if the business is not
acquired. If the taxpayer is not in the
same or similar trade or business to the
one being investigated, the investigation
expenses are nondeductible if the business
is not acquired.

(2) The expenses of investigation must be
capitalized by a taxpayer not in a similar
business when the business is acquired.
Such expenses may be immediately expensed
(up to $5,000 if such expenses do not
exceed $50,000) and the balance amortized
over a 180-month minimum period. If the
taxpayer is in the same or similar trade
or business as that acquired,
investigation expenses are currently
deductible.

781. What ar e t he r el evant f act or s t o be consi der ed i n det er mi ni ng
whet her an act i vi t y i s pr of i t - seeki ng or a hobby?

Cor r ect Answer :
The ni ne r el evant f act or s det ai l ed i n Reg. 1. 183- 2( b) ar e as f ol l ows:

( 1) Whet her t he act i vi t y i s conduct ed i n a busi nessl i ke manner .

( 2) The exper t i se of t he t axpayer s or t hei r advi ser s.

( 3) he t i me and ef f or t expended.

( 4) The expect at i on t hat t he asset s of t he act i vi t y wi l l
appr eci at e i n val ue.

( 5) The pr evi ous success of t he t axpayer i n t he conduct of si mi l ar
act i vi t i es.

( 6) The hi st or y of i ncome and l osses f r omt he act i vi t y.

( 7) The r el at i onshi p of pr of i t s ear ned t o l osses i ncur r ed.

( 8) The f i nanci al st at us of t he t axpayer .

( 9) El ement s of per sonal pl easur e or r ecr eat i on i n t he act i vi t y.

782. I n di st i ngui shi ng whet her an act i vi t y i s a hobby or a t r ade or
busi ness, di scuss t he pr esumpt i ve r ul e.

Cor r ect Answer :
The Code pr ovi des a r ebut t abl e pr esumpt i on t hat an act i vi t y i s pr of i t -
seeki ng ( i . e. , a t r ade or busi ness) r at her t han a hobby i f t he act i vi t y
shows a pr of i t i n at l east t hr ee of any f i ve ( t wo out of seven f or
hor ses) pr i or consecut i ve year s. I f t hi s t est i s met , t he act i vi t y i s
pr esumed t o be a t r ade or busi ness. The bur den of pr oof t hus shi f t s t o
t he I RS t o show ot her wi se.

783. Assumi ng an act i vi t y i s deemed t o be a hobby, di scuss t he or der
and l i mi t s i n whi ch expenses must be deduct ed.

Cor r ect Answer :
Amount s deduct i bl e under ot her Code sect i ons wi t hout r egar d t o t he
nat ur e of t he act i vi t y ( e. g. , pr oper t y t axes and mor t gage i nt er est )
must be deduct ed f i r st .

Amount s deduct i bl e under ot her Code sect i ons had t he act i vi t y been
pr of i t - seeki ng whi ch do not af f ect adj ust ed basi s ar e deduct ed next .

Deduct i ons af f ect i ng adj ust ed basi s ( e. g. , depr eci at i on) ar e t aken next .
At any poi nt wher e t he expenses exceed i ncome, t he deduct i on i s l i mi t ed
t o t he r emai ni ng i ncome.

784. Descr i be t he ci r cumst ances under whi ch a t axpayer can r ecei ve r ent
i ncome f r oma per sonal r esi dence, but does not have t o r epor t i t as
gr oss i ncome.

Cor r ect Answer :
I f t he per sonal r esi dence i s r ent ed f or f ewer t han 15 days i n a year ,
t he r ent i ncome i s excl uded f r omgr oss i ncome. Onl y mor t gage i nt er est
and r eal est at e t axes can be deduct ed.

785. For a vacat i on home t o be cl assi f i ed i n t he pr i mar i l y r ent al use
cat egor y, what at t r i but es must be pr esent ?

Cor r ect Answer :
To be cl assi f i ed i n t he pr i mar i l y r ent al use cat egor y, t he f ol l owi ng
at t r i but es must be pr esent .

The r esi dence i s r ent ed f or 15 days or mor e dur i ng t he year .
The r esi dence i s not used f or per sonal pur poses f or mor e t han t he
gr eat er of :
14 days
10 per cent of t he t ot al days r ent ed.

786. For a vacat i on home t o be cl assi f i ed i n t he per sonal / r ent al use
cat egor y, what at t r i but es must be pr esent ?

Cor r ect Answer :
To be cl assi f i ed i n t he per sonal / r ent al use cat egor y, t he f ol l owi ng
at t r i but es must be pr esent .

The r esi dence i s r ent ed f or 15 days or mor e i n a year .

The r esi dence i s used f or per sonal pur poses f or mor e t han t he
gr eat er of ( 1) 14 days or ( 2) 10%of t he t ot al days r ent ed.

787. What i s t he appr opr i at e t ax t r eat ment f or expendi t ur es pai d by a
t axpayer f or anot her s benef i t ?

Cor r ect Answer :
To be deduct i bl e, an expense must be i ncur r ed f or t he t axpayer s
benef i t or ar i se f r omt he t axpayer s obl i gat i on. An i ndi vi dual cannot
cl ai ma t ax deduct i on f or t he payment of t he expenses of anot her
i ndi vi dual . One except i on t o t hi s r ul e i s t he payment of medi cal
expenses f or a dependent . Such medi cal expenses ar e deduct i bl e by t he
payor subj ect t o t he nor mal r ul es t hat gover n t he deduct i bi l i t y of
medi cal expenses.

788. Ar e t her e any except i ons t o t he r ul e t hat per sonal expendi t ur es
cannot be deduct ed?

Cor r ect Answer :
Gener al l y per sonal expendi t ur es cannot be deduct ed. However , t he Code
pr ovi des t hat f or a per sonal expendi t ur e t o be deduct i bl e t he t axpayer
must be abl e t o i dent i f y a par t i cul ar sect i on of t he Code t hat per mi t s
t he deduct i on ( e. g. , char i t abl e cont r i but i ons, medi cal expenses,
cer t ai n t axes, cer t ai n i nt er est ) .

789. Br i ef l y di scuss t he di sal l owance of deduct i ons f or capi t al
expendi t ur es.

Cor r ect Answer :
Any expendi t ur es t hat add t o t he val ue or pr ol ong t he l i f e of pr oper t y
or adapt t he pr oper t y t o a new or di f f er ent use ar e capi t al
expendi t ur es whi ch must be capi t al i zed and depr eci at ed or amor t i zed.

790. Why ar e t her e r est r i ct i ons on t he r ecogni t i on of gai ns and l osses
r esul t i ng f r omt r ansact i ons bet ween r el at ed par t i es?

Cor r ect Answer :
Shamt r ansact i ons can be st r uct ur ed bet ween r el at ed par t i es such t hat
no r eal economi c change occur s i n t he st at us of t he par t i es, but a t ax
savi ngs r esul t s. Thi s i s an abuse of t he t ax l aw whi ch has r esul t ed i n
r est r i ct i ons on t he r ecogni t i on of such t r ansact i ons.

791. I n a r el at ed par t y t r ansact i on wher e r eal i zed l oss i s di sal l owed,
when can t he di sal l owed l oss be used by t he buyer on t he subsequent
sal e of t he pr oper t y? I n t he case of a r el at ed par t y di sal l owed l oss
t r ansact i on, can t he r el at ed par t y sel l er s di sal l owed l oss be used by
a t axpayer ot her t han t he r el at ed par t y buyer ?

Cor r ect Answer :
The r el at ed par t y buyer i s per mi t t ed t o use as much of t he di sal l owed
l oss of t he sel l er as i s needed t o r educe any r eal i zed gai n on t he
subsequent sal e of t he pr oper t y. I f t he pr oper t y i n t he hands of t he
buyer appr eci at es t o at l east t he amount of t he sel l er s adj ust ed basi s
at t he dat e of t he or i gi nal sal e, al l of t he di sal l owed l oss can be
used by t he buyer on t he subsequent sal e. The r el at ed par t y sel l er s
di sal l owed l oss can be used onl y by t he r el at ed par t y buyer .

792. Ol i ve, I nc. , an accr ual met hod t axpayer , i s a cor por at i on t hat i s
equal l y owned by Maur i ce and Al ex, who ar e br ot her s. The cor por at i on
uses t he accr ual met hod of account i ng and t he shar ehol der s use t he cash
met hod. To pr ovi de Ol i ve wi t h f unds t o acqui r e addi t i onal wor ki ng
capi t al , t he shar ehol der s each l oan Ol i ve $100, 000 wi t h a 6%i nt er est
r at e. At t he end of t he t ax year , t her e i s unpai d accr ued i nt er est of
$3, 000 due t o each shar ehol der . Fr oma t i mi ng per spect i ve, when shoul d
Ol i ve deduct t hi s $6, 000 and when shoul d Maur i ce and Al ex i ncl ude t he
$3, 000 i n gr oss i ncome? Ol i ve pays t he $3, 000 t o each shar ehol der ear l y
next year .

Cor r ect Answer :
Maur i ce and Al ex ar e r el at ed par t i es wi t h Ol i ve. So Ol i ve ( accr ual
met hod) must cl ai mt he deduct i on of $6, 000 i n t he same t ax year t hat
t he cash met hod shar ehol der s i ncl ude t he $3, 000 each i n gr oss i ncome
( next year ) . Not e t hat t hi s mat chi ng pr ovi si on appl i es onl y i f t he
payor uses t he accr ual met hod and t he payee uses t he cash met hod.

793. Br i ef l y expl ai n why i nt er est on money bor r owed t o buy t ax- exempt
muni ci pal bonds i s di sal l owed as a deduct i on.

Cor r ect Answer :
Because t he i nt er est i ncome on muni ci pal bonds i s excl udi bl e f r omgr oss
i ncome, t he r el at ed expense shoul d not be deduct i bl e. Ot her wi se, a
t axpayer coul d bor r ow money, at say 10%, i nvest t he f unds i n t ax- exempt
secur i t i es, at say 8%, and r eal i ze a pr of i t i f t he i nt er est expense
wer e deduct i bl e. The ent i r e pr of i t woul d be der i ved f r omt he t ax
t r eat ment .

794. J ames i s i n t he busi ness of debt col l ect i on. He pur chased a
$20, 000 account r ecei vabl e f r omGr een Cor por at i on f or $15, 000. Dur i ng
t he year , J ames col l ect ed $17, 000 i n f i nal set t l ement of t he
account . J ames can t ake a $2, 000 bad debt deduct i on i n t he cur r ent
year .

a. Tr ue
*b. Fal se

795. I f a busi ness debt pr evi ousl y deduct ed as par t i al l y wor t hl ess
becomes t ot al l y wor t hl ess t hi s year , onl y t he amount not pr evi ousl y
deduct ed can be deduct ed t hi s year .

*a. Tr ue
b. Fal se

796. Last year , t axpayer had a $10, 000 nonbusi ness bad debt . Taxpayer
al so had an $8, 000 shor t - t er mcapi t al gai n and t axabl e i ncome of
$35, 000. I f t axpayer col l ect s t he ent i r e $10, 000 dur i ng t he cur r ent
year , $8, 000 needs t o be i ncl uded i n gr oss i ncome.

a. Tr ue
*b. Fal se

797. A cash basi s t axpayer must i ncl ude as i ncome t he pr oceeds f r omt he
sal e of an account r ecei vabl e t o a col l ect i on agency.

*a. Tr ue
b. Fal se

798. I f an account r ecei vabl e wr i t t en of f dur i ng a pr i or year i s
subsequent l y col l ect ed dur i ng t he cur r ent year , t he amount col l ect ed
must be i ncl uded i n t he gr oss i ncome of t he cur r ent year t o t he ext ent
i t cr eat ed a t ax benef i t i n t he pr i or year .

*a. Tr ue
b. Fal se

799. A nonbusi ness bad debt deduct i on can be t aken any year af t er t he
debt becomes t ot al l y wor t hl ess.

a. Tr ue
*b. Fal se

800. A busi ness bad debt i s a debt unr el at ed t o t he t axpayer s t r ade or
busi ness ei t her when i t was cr eat ed or when i t became wor t hl ess.

*a. Tr ue
b. Fal se

801. I n det er mi ni ng whet her a debt i s a busi ness or nonbusi ness bad
debt , t he debt or s use of t he bor r owed f unds i s i mpor t ant .

a. Tr ue
*b. Fal se

802. A cor por at i on whi ch makes a l oan t o a shar ehol der can have a
nonbusi ness bad debt deduct i on.

a. Tr ue
*b. Fal se

803. A nonbusi ness bad debt can of f set an unl i mi t ed amount of l ong- t er m
capi t al gai n.

*a. Tr ue
b. Fal se

804. The amount of par t i al wor t hl essness on a nonbusi ness bad debt i s
deduct ed i n t he year par t i al wor t hl essness i s det er mi ned.

a. Tr ue
*b. Fal se

805. A bona f i de debt cannot ar i se on a l oan bet ween f at her and son.

a. Tr ue
*b. Fal se

806. A bond hel d by an i nvest or t hat i s uncol l ect i bl e wi l l be t r eat ed
as a wor t hl ess secur i t y and hence, pr oduce a capi t al l oss.

*a. Tr ue
b. Fal se

807. A l oss f r oma wor t hl ess secur i t y i s al ways t r eat ed as a shor t - t er m
capi t al l oss.

a. Tr ue
*b. Fal se

808. A l oss i s not al l owed f or a secur i t y t hat decl i nes i n val ue.

*a. Tr ue
b. Fal se

809. Sever al year s ago, J ohn pur chased 2, 000 shar es of Red Cor por at i on
1244 st ock f r omMar k f or $40, 000. Last year , J ohn sol d one- hal f of
hi s Red Cor por at i on st ock t o Mi ke f or $12, 000. Dur i ng t he cur r ent year ,
J ohn sol d t he r emai ni ng Red Cor por at i on st ock f or $3, 000. J ohn has a
$17, 000 ( $3, 000 $20, 000) or di nar y l oss f or t he cur r ent year .

a. Tr ue
*b. Fal se

810. I f a t axpayer sel l s t hei r 1244 st ock at a l oss, al l of t he l oss
wi l l be or di nar y l oss.

a. Tr ue
*b. Fal se

811. Al , who i s si ngl e, has a gai n of $40, 000 on t he sal e of 1244
st ock ( smal l busi ness st ock) and a l oss of $80, 000 on t he sal e of
1244 st ock. As a r esul t , Al has a $40, 000 or di nar y l oss.

a. Tr ue
*b. Fal se

812. An i ndi vi dual may deduct a l oss on r ent al pr oper t y even i f i t does
not meet t he def i ni t i on of a casual t y l oss.

*a. Tr ue
b. Fal se

813. Ot her casual t y means casual t i es si mi l ar t o t hose associ at ed wi t h
f i r es, st or ms, or shi pwr ecks.

*a. Tr ue
b. Fal se

814. A f at her cannot cl ai ma l oss on hi s daught er s r ent al use pr oper t y.

*a. Tr ue
b. Fal se

815. A per sonal casual t y l oss deduct i on may be al l owed f or l osses
r esul t i ng f r omt er mi t es.

*a. Tr ue
b. Fal se

816. I f t he amount of t he i nsur ance r ecover y f or a t hef t of busi ness
pr oper t y i s gr eat er t han t he asset s f ai r mar ket val ue but l ess t han
i t s adj ust ed basi s, a gai n i s r ecogni zed.

a. Tr ue
*b. Fal se

817. A t hef t l oss i s t aken i n t he year of t he t hef t .

a. Tr ue
*b. Fal se

818. Last year , Amos had AGI of $50, 000. Amos al so had a di amond r i ng
st ol en whi ch cost $20, 000 and was wor t h $17, 000 at t he t i me of t he
t hef t . He i t emi zed deduct i ons on l ast year s t ax r et ur n. I n t he
cur r ent year , Amos r ecover ed $17, 000 f r omt he i nsur ance
company. Ther ef or e, he must i ncl ude $11, 900 i n gr oss i ncome on t he t ax
r et ur n f or t he cur r ent year .

*a. Tr ue
b. Fal se

819. I f i nvest ment pr oper t y i s st ol en, t he amount of t he l oss i s t he
adj ust ed basi s of t he pr oper t y at t he t i me of t he t hef t r educed by $100
and 10%of AGI .

a. Tr ue
*b. Fal se

820. The cost of r epai r s t o damaged pr oper t y i s not an accept abl e
measur e of t he l oss i n val ue of t he pr oper t y.

a. Tr ue
*b. Fal se

821. Taxpayer s home was dest r oyed by a st or mi n t he cur r ent year and
t he ar ea was decl ar ed a di sast er ar ea. I f t he t axpayer el ect s t o t r eat
t he l oss as havi ng occur r ed i n t he pr i or year , i t wi l l be subj ect t o
t he 10%- of - AGI r educt i on based on t he AGI of t he cur r ent year .

a. Tr ue
*b. Fal se

822. The amount of l oss f or par t i al dest r uct i on of busi ness pr oper t y i s
t he decl i ne i n f ai r mar ket val ue of t he busi ness pr oper t y.

a. Tr ue
*b. Fal se

823. I f per sonal casual t y gai ns exceed per sonal casual t y l osses ( af t er
deduct i ng t he $100 f l oor ) , t her e i s no i t emi zed deduct i on.

*a. Tr ue
b. Fal se

824. The amount of a l oss on i nsur ed per sonal use pr oper t y i s r educed
by t he i nsur ance cover age i f no cl ai mi s made agai nst t he i nsur er .

*a. Tr ue
b. Fal se

825. Losses on r ent al pr oper t y ar e cl assi f i ed as deduct i ons for AGI .

*a. Tr ue
b. Fal se

826. When a nonbusi ness casual t y l oss i s spr ead bet ween t wo t axabl e
year s, t he l oss i n t he second year i s r educed by 10%of adj ust ed gr oss
i ncome f or t he f i r st year .

a. Tr ue
*b. Fal se

827. A t hef t l oss of i nvest ment pr oper t y i s an i t emi zed deduct i on not
subj ect t o t he 2%- of - AGI f l oor .

*a. Tr ue
b. Fal se

828. Resear ch and exper i ment al expendi t ur es do not i ncl ude t he cost of
consumer sur veys.

*a. Tr ue
b. Fal se

829. The cost of depr eci abl e pr oper t y i s not a r esear ch and
exper i ment al expendi t ur e.

*a. Tr ue
b. Fal se

830. I f an el ect i on i s made t o def er deduct i on of r esear ch expendi t ur es,
t he amor t i zat i on per i od i s based on t he expect ed l i f e of t he r esear ch
pr oj ect i f l ess t han 60 mont hs.

a. Tr ue
*b. Fal se

831. For t ax year s begi nni ng i n 2013, t he domest i c pr oduct i on
act i vi t i es deduct i on ( DPAD) f or a sol e pr opr i et or i s cal cul at ed by
mul t i pl yi ng 9%t i mes adj ust ed gr oss i ncome.

a. Tr ue
*b. Fal se

832. I f qual i f i ed pr oduct i on act i vi t i es i ncome ( QPAI ) cannot be used i n
t he cal cul at i on of t he domest i c pr oduct i on act i vi t i es deduct i on i n 2013
because of t he t axabl e i ncome l i mi t at i on, t he pr oduct of t he amount not
al l owed mul t i pl i ed by 9%can be car r i ed over f or 5 year s.

a. Tr ue
*b. Fal se

833. The l i mi t f or t he domest i c pr oduct i on act i vi t i es deduct i on ( DPAD)
uses al l W- 2 wages pai d t o empl oyees by t he t axpayer dur i ng t he t ax
year .

a. Tr ue
*b. Fal se

834. A r ei mbur sed empl oyee busi ness expense cannot cr eat e an NOL f or an
i ndi vi dual .

*a. Tr ue
b. Fal se

835. A t axpayer can car r y any NOL i ncur r ed f or war d 20 year s.

*a. Tr ue
b. Fal se

836. A f ar mi ng NOL may be car r i ed back 2 year s.

*a. Tr ue
b. Fal se

837. The amount of a f ar mi ng l oss cannot exceed t he amount of t he
t axpayer s NOL f or t he t axabl e year .

*a. Tr ue
b. Fal se

838. Nonbusi ness i ncome f or net oper at i ng l oss pur poses i ncl udes
di vi dends r ecei ved.

*a. Tr ue
b. Fal se

839. A t hef t of i nvest ment pr oper t y can cr eat e or i ncr ease a net
oper at i ng l oss f or an i ndi vi dual .

*a. Tr ue
b. Fal se

840. An NOL car r yf or war d i s used i n det er mi ni ng t he cur r ent year s
char i t abl e cont r i but i on deduct i on.

*a. Tr ue
b. Fal se

841. The excess of nonbusi ness capi t al gai ns over nonbusi ness capi t al
l osses must be added t o t axabl e i ncome t o comput e t he net oper at i ng
l oss of an i ndi vi dual .

a. Tr ue
*b. Fal se

842. An i ndi vi dual t axpayer who does not i t emi ze deduct i ons uses t he
st andar d deduct i on t o comput e t he excess of nonbusi ness deduct i ons over
t he sumof nonbusi ness i ncome and net nonbusi ness capi t al gai ns f or
pur poses of comput i ng net oper at i ng l oss.

*a. Tr ue
b. Fal se

843. When a net oper at i ng l oss i s car r i ed back t o a non- l oss year , t he
net oper at i ng l oss can af f ect t he medi cal expense deduct i on of t he
car r yback year .

*a. Tr ue
b. Fal se

844. Peggy i s i n t he busi ness of f act or i ng account s r ecei vabl e. Last
year , she pur chased a $30, 000 account r ecei vabl e f or $25, 000. Thi s year ,
t he account was set t l ed f or $25, 000. How much l oss can Peggy deduct and
i n whi ch year ?

a. $5, 000 f or t he cur r ent year .
b. $5, 000 f or t he pr i or year and $5, 000 f or t he cur r ent year .
c. $5, 000 f or t he pr i or year .
d. $10, 000 f or t he cur r ent year .

845. J ed i s an el ect r i ci an. J ed and hi s wi f e ar e accr ual basi s
t axpayer s and f i l e a j oi nt r et ur n. J ed wi r ed a new house f or Al i son
and bi l l ed her $15, 000. Al i son pai d J ed $10, 000 and r ef used t o pay t he
r emai nder of t he bi l l , cl ai mi ng t he f ee t o be exor bi t ant . J ed t ook
Al i son t o Smal l Cl ai ms Cour t f or t he unpai d amount and was awar ded a
$2, 000 j udgement . J ed was abl e t o col l ect t he j udgement but not t he
r emai nder of t he bi l l f r omAl i son. What amount of l oss may J ed deduct
i n t he cur r ent year ?

a. $0.
b. $2, 000.
*c. $3, 000.
d. $5, 000.

846. On J une 2, 2012, Fr ed s TV Sal es sol d Mar k a l ar ge HD TV, on
account , f or $12, 000. Fr ed s TV Sal es uses t he accr ual met hod. I n
2013, when t he bal ance on t he account was $8, 000, Mar k f i l ed f or
bankr upt cy. Fr ed was not i f i ed t hat he coul d not expect t o r ecei ve any
of t he amount owed t o hi m. I n 2014, f i nal set t l ement was made and Fr ed
r ecei ved $1, 000. How much bad debt l oss can Fr ed deduct i n 2014?

*a. $0.
b. $7, 000.
c. $8, 000.
d. $12, 000.

847. Mar y i ncur r ed a $20, 000 nonbusi ness bad debt l ast year . She al so
had an $8, 000 l ong- t er mcapi t al gai n l ast year . Her t axabl e i ncome f or
l ast year was an NOL of $15, 000. Dur i ng t he cur r ent year , she
unexpect edl y col l ect ed $12, 000 on t he debt . How shoul d Mar y account
f or t he col l ect i on?

a. $0 i ncome.
*b. $8, 000 i ncome.
c. $11, 000 i ncome.
d. $12, 000 i ncome.

848. Last year , Lucy pur chased a $100, 000 account r ecei vabl e f or
$90, 000. Dur i ng t he cur r ent year , Lucy col l ect ed $97, 000 on t he account .
What ar e t he t ax consequences t o Lucy associ at ed wi t h t he col l ect i on of
t he account r ecei vabl e? No subsequent col l ect i ons ar e expect ed.

a. $0.
b. $2, 000 gai n.
c. $3, 000 l oss.
d. $13, 000 l oss.

849. Two year s ago, Gi na l oaned Tom$50, 000. Tomsi gned a not e t he
t er ms of whi ch cal l ed f or mont hl y payment s of $2, 000 pl us 6%i nt er est
on t he out st andi ng bal ance. Last year , when t he bal ance owi ng on t he
l oan was $18, 000, Tomdef aul t ed on t he not e. As of t he end of l ast
year , t her e appear ed t o be no r easonabl e pr ospect of Gi na r ecover i ng
t he $18, 000. As a consequence, Gi na cl ai med t he $18, 000 as a
nonbusi ness bad debt . Last year , Gi na had AGI of a negat i ve $6, 000
whi ch i ncl uded $5, 000 net l ong- t er mcapi t al gai ns and $4, 000 of
qual i f i ed di vi dends. Gi na di d not i t emi ze her deduct i ons. Dur i ng t he
cur r ent year , Tompai d Gi na $13, 000 i n f i nal set t l ement of t he
l oan. How shoul d Gi na account f or t he payment i n t he cur r ent year ?

a. Fi l e an amended t ax r et ur n f or l ast year .
b. Repor t no i ncome f or t he cur r ent year .
c. Repor t $8, 000 of i ncome f or t he cur r ent year .
d. Repor t $12, 000 of i ncome f or t he cur r ent year .

850. Fi ve year s ago, Toml oaned hi s son J ohn $20, 000 t o st ar t a
busi ness. A not e was execut ed wi t h an i nt er est r at e of 8%, whi ch i s t he
Feder al r at e. The not e r equi r ed mont hl y payment s of t he i nt er est wi t h
t he $20, 000 due at t he end of t en year s. J ohn al ways made t he i nt er est
payment s unt i l l ast year . Dur i ng t he cur r ent year , J ohn not i f i ed hi s
f at her t hat he was bankr upt and woul d not be abl e t o r epay t he $20, 000
or t he accr ued i nt er est of $1, 800. Tomi s an accr ual basi s t axpayer
whose onl y i ncome i s sal ar y and i nt er est i ncome. The pr oper t r eat ment
f or t he nonpayment of t he not e i s:

a. No deduct i on.
*b. $3, 000 deduct i on.
c. $20, 000 deduct i on.
d. $21, 800 deduct i on.

851. Thr ee year s ago, Shar on l oaned her si st er $30, 000 t o buy a car . A
not e was i ssued f or t he l oan wi t h t he pr ovi si on f or mont hl y payment s of
pr i nci pal and i nt er est . Last year , Shar on pur chased a car f r omt he same
deal er , Hank s Aut o. As par t i al payment f or t he car , t he deal er
accept ed t he not e f r omShar on s si st er . At t he t i me Shar on pur chased
t he car , t he not e had a bal ance of $18, 000. Dur i ng t he cur r ent year ,
Shar on s si st er di ed. Hank s Aut o was not i f i ed t hat no f ur t her payment s
on t he not e woul d be r ecei ved. At t he t i me of t he not i f i cat i on, t he
not e had a bal ance due of $15, 500. What i s t he amount of l oss, wi t h
r espect t o t he not e, t hat Hank s Aut o may cl ai mon t he cur r ent year t ax
r et ur n?

a. $0.
b. $3, 000.
*c. $15, 500.
d. $18, 000.

852. On Sept ember 3, 2012, Abl e, a si ngl e i ndi vi dual , pur chased 1244
st ock i n Red Cor por at i on f r omhi s f r i end Al f or $60, 000. On December 31,
2012, t he st ock was wor t h $85, 000. On August 15, 2013, Abl e was
not i f i ed t hat t he st ock was wor t hl ess. How shoul d Abl e r epor t t hi s i t em
on hi s 2013 t ax r et ur n?

a. $85, 000 capi t al l oss.
b. $85, 000 or di nar y l oss.
c. $50, 000 or di nar y l oss and $35, 000 capi t al l oss.
d. $60, 000 or di nar y l oss.

853. On Febr uar y 20, 2012, Bi l l pur chased st ock i n Pi nk Cor por at i on
( t he st ock i s not smal l busi ness st ock) f or $1, 000. On May 1, 2013, t he
st ock became wor t hl ess. Dur i ng 2013, Bi l l al so had an $8, 000 l oss on
1244 smal l busi ness st ock pur chased t wo year s ago, a $9, 000 l oss on a
nonbusi ness bad debt , and a $5, 000 l ong- t er mcapi t al gai n. How shoul d
Bi l l t r eat t hese i t ems on hi s 2013 t ax r et ur n?

a. $4, 000 l ong- t er mcapi t al l oss and $9, 000 shor t - t er mcapi t al
l oss.
b. $4, 000 l ong- t er mcapi t al l oss and $3, 000 shor t - t er mcapi t al
l oss.
*c. $8, 000 or di nar y l oss and $3, 000 shor t - t er mcapi t al l oss.
d. $8, 000 or di nar y l oss and $5, 000 shor t - t er mcapi t al l oss.
e. $8, 000 l ong- t er mcapi t al l oss and $6, 000 shor t - t er mcapi t al
l oss.

854. J ohn f i l es a r et ur n as a si ngl e t axpayer . I n 2013, he had t he
f ol l owi ng i t ems:

Salary of $40,000.
Loss of $65,000 on the sale of 1244 stock
acquired two years ago.
Interest income of $6,000.

Determine Johns AGI for 2013.

a. ( $5, 000) .
*b. $0.
c. $45, 000.
d. $51, 000.

855. Br uce, who i s si ngl e, had t he f ol l owi ng i t ems f or t he cur r ent year :

Salary of $80,000.
Gain of $20,000 on the sale of 1244 stock
acquired two years earlier.
Loss of $75,000 on the sale of 1244 stock
acquired three years earlier.
Worthless stock of $15,000. The stock was
acquired on February 1 of the prior year and
became worthless on January 15 of the current
year.

Determine Bruces AGI for the current year.

*a. $27, 000.
b. $38, 000.
c. $42, 000.
d. $47, 000.

856. On J ul y 20, 2011, Mat t ( who f i l es a j oi nt r et ur n) pur chased 3, 000
shar es of Or ange Cor por at i on st ock ( t he st ock i s 1244 smal l busi ness
st ock) f or $24, 000. On November 10, 2012, Mat t pur chased an addi t i onal
1, 000 shar es of Or ange Cor por at i on st ock f r oma f r i end f or
$150, 000. On Sept ember 15, 2013, Mat t sol d t he 4, 000 shar es of st ock
f or $120, 000. How shoul d Mat t t r eat t he sal e of t he st ock on hi s 2013
r et ur n?

a. $54, 000 or di nar y l oss.
b. $100, 000 or di nar y l oss; $46, 000 net capi t al gai n.
c. $100, 000 or di nar y l oss; $20, 000 STCL.
d. $130, 000 or di nar y l oss; $66, 000 LTCG.

857. Whi ch of t he f ol l owi ng event s woul d pr oduce a deduct i bl e l oss?

a. Er osi on of per sonal use l and due t o r ai n or wi nd.
b. Ter mi t e i nf est at i on of a per sonal r esi dence over a sever al
year per i od.
c. Damages t o per sonal aut omobi l e r esul t i ng f r oma t axpayer s
wi l l f ul negl i gence.
*d. A mi spl aced di amond r i ng.

858. I n 2013, Wal l y had t he f ol l owi ng i nsur ed per sonal casual t y l osses
( ar i si ng f r omone casual t y) . Wal l y al so had $42, 000 AGI f or t he year
bef or e consi der i ng t he casual t y.

Fair Market
Value
Insurance
Asset Adjusted
Basis
Before After Recovery
A $9,200 $8,000 $1,000 $2,000
B 3,000 4,000
0
4,000
C 3,700 1,700
0
9
00

Wallys casualty loss deduction is:

a. $1, 500.
b. $1, 600.
c. $4, 800.
d. $58, 000.

859. J i mhad a car acci dent i n 2013 i n whi ch hi s car was compl et el y
dest r oyed. At t he t i me of t he acci dent , t he car had a f ai r mar ket val ue
of $30, 000 and an adj ust ed basi s of $40, 000. J i mused t he car 100%of
t he t i me f or busi ness use. J i mr ecei ved an i nsur ance r ecover y of 70%of
t he val ue of t he car at t he t i me of t he acci dent . I f J i m s AGI f or t he
year i s $60, 000, det er mi ne hi s deduct i bl e l oss on t he car .

a. $900.
b. $2, 900.
c. $3, 000.
d. $9, 000.

860. Nor m s car , whi ch he uses 100%f or per sonal pur poses, was
compl et el y dest r oyed i n an acci dent i n 2013. The car s adj ust ed basi s
at t he t i me of t he acci dent was $13, 000. I t s f ai r mar ket val ue was
$10, 000. The car was cover ed by a $2, 000 deduct i bl e i nsur ance pol i cy.
Nor mdi d not f i l e a cl ai magai nst t he i nsur ance pol i cy because of a
f ear t hat r epor t i ng t he acci dent woul d r esul t i n a subst ant i al i ncr ease
i n hi s i nsur ance r at es. Hi s adj ust ed gr oss i ncome was $14, 000 ( bef or e
consi der i ng t he l oss) . What i s Nor m s deduct i bl e l oss?

a. $0.
b. $100.
*c. $500.
d. $9, 500.

861. I n 2013, Gr ant s per sonal r esi dence was compl et el y dest r oyed by
f i r e. Gr ant was i nsur ed f or 100%of hi s act ual l oss, and he r ecei ved
t he i nsur ance set t l ement . Gr ant had adj ust ed gr oss i ncome, bef or e
consi der i ng t he casual t y i t em, of $30, 000. Per t i nent dat a wi t h r espect
t o t he r esi dence f ol l ows:

Cost basis $280,000
Value before casualty 250,000
Value after casualty 0

What is Grants allowable casualty loss deduction?

*a. $0.
b. $6, 500.
c. $6, 900.
d. $10, 000.
e. $80, 000.

862. J ohn had adj ust ed gr oss i ncome of $60, 000. Dur i ng t he year hi s
per sonal use summer home was damaged by a f i r e. Per t i nent dat a wi t h
r espect t o t he home f ol l ows:

Cost basis $260,000
Value before the fire 400,000
Value after the fire 100,000
Insurance recovery 270,000

John had an accident with his personal use car. As a result of the accident,
John was cited with reckless driving and willful negligence. Pertinent data
with respect to the car follows:

Cost basis $80,000
Value before the accident 56,000
Value after the accident 20,000
Insurance recovery 18,000

What is Johns itemized casualty loss deduction?

*a. $0.
b. $2, 000.
c. $17, 000.
d. $18, 000.

863. I n 2013, Mar y had t he f ol l owi ng i t ems:

Salary $30,000
Personal use casualty gain 10,000
Personal use casualty loss (after
$100 floor)
17,000
Other itemized deductions 4,000

Assuming that Mary files as head of household (has one dependent child),
determine her taxable income for the current year.

*a. $13, 250.
b. $14, 100.
c. $14, 300.
d. $24, 300.

864. I n 2013, Mor l ey, a si ngl e t axpayer , had an AGI of $30, 000 bef or e
consi der i ng t he f ol l owi ng i t ems:

Loss from damage to rental property ($6,000)
Loss from theft of bonds (3,000)
Personal casualty gain 4,000
Personal casualty loss (after $100
floor)
(9,000)

Determine the amount of Morleys itemized deduction from the losses.

a. $0.
b. $2, 900.
c. $5, 120.
*d. $5, 600.

865. I n 2013, Theo, an empl oyee, had a sal ar y of $30, 000 and
exper i enced t he f ol l owi ng l osses:

Loss from damage to rental property ($10,000)
Unreimbursed loss from theft of
business computer
(5,000)
floor)
(9,000)

Determine the amount of Theos itemized deduction from these losses.

a. $0.
b. $2, 800.
c. $2, 900.
d. $4, 580.

866. Al i ci a was i nvol ved i n an aut omobi l e acci dent i n 2013. Her car was
used 60%f or busi ness and 40%f or per sonal use. The car had or i gi nal l y
cost $40, 000. At t he t i me of t he acci dent , t he car was wor t h $20, 000
and Al i ci a had t aken $8, 000 of depr eci at i on. The car was t ot al l y
dest r oyed and Al i ci a had l et her car i nsur ance expi r e. I f Al i ci a s AGI
i s $50, 000 ( bef or e consi der i ng t he l oss) , det er mi ne her i t emi zed
deduct i on f or t he casual t y l oss.

*a. $4, 500.
b. $6, 100.
c. $8, 000.
d. $24, 000.

867. Last year , Sar ah ( who f i l es as si ngl e) had si l ver war e wor t h
$10, 000 ( basi s $6, 000) st ol en f r omher home. Sar ah s i nsur ance company
t ol d her t hat her pol i cy di d not cover t he t hef t . Sar ah s ot her
i t emi zed deduct i ons l ast year wer e $2, 000. She had AGI of $30, 000 l ast
year . I n August of t he cur r ent year , Sar ah s i nsur ance company deci ded
t hat Sar ah s pol i cy di d cover t he t hef t of t he si l ver war e and t hey pai d
Sar ah $5, 000. Det er mi ne t he t ax t r eat ment of t he $5, 000 r ecei ved by
Sar ah dur i ng t he cur r ent year .

*a. None of t he $5, 000 shoul d be i ncl uded i n gr oss i ncome.
b. $2, 900 shoul d be i ncl uded i n gr oss i ncome.
c. $5, 000 shoul d be i ncl uded i n gr oss i ncome.
d. Last year s r et ur n shoul d be amended t o i ncl ude t he $5, 000.

868. Al ma i s i n t he busi ness of dai r y f ar mi ng. Dur i ng t he year , one of
her bar ns was compl et el y dest r oyed by f i r e. The adj ust ed basi s of t he
bar n was $90, 000. The f ai r mar ket val ue of t he bar n bef or e t he f i r e was
$75, 000. The bar n was i nsur ed f or 95%of i t s f ai r mar ket val ue, and
Al ma r ecover ed t hi s amount under t he i nsur ance pol i cy. Al ma has
adj ust ed gr oss i ncome f or t he year of $40, 000 ( bef or e consi der i ng t he
casual t y) . Det er mi ne t he amount of l oss she can deduct on her t ax
r et ur n f or t he cur r ent year .

a. $3, 750.
b. $14, 650.
c. $14, 750.
*d. $18, 750.

869. I n 2013, J uan s home was bur gl ar i zed. J uan had t he f ol l owi ng i t ems
st ol en:

Securities worth $25,000. Juan purchased the
securities four years ago for $20,000.
New tools which Juan had purchased two weeks
earlier for $8,000. Juan uses the tools in
making repairs at an apartment house that he
owns and manages.
An antique worth $15,000. Juan inherited the
antique (a family keepsake) when the property
was worth $11,000.

Juans homeowners policy had a $50,000 deductible clause for thefts. If
Juans salary for the year is $50,000, determine the amount of his
itemized deductions as a result of the theft.

a. $3, 100.
b. $6, 000.
c. $26, 100.
d. $26, 500.

870. Regar di ng r esear ch and exper i ment al expendi t ur es, whi ch of t he
f ol l owi ng ar e not qual i f i ed expendi t ur es?

*a. Cost s of or di nar y t est i ng of mat er i al s.
b. Cost s t o devel op a pl ant pr ocess.
c. Cost s of devel opi ng a f or mul a.
d. Depr eci at i on on a bui l di ng used f or r esear ch.
e. Al l of t he above ar e qual i f i ed expendi t ur es.

871. Bl ue Cor por at i on i ncur r ed t he f ol l owi ng expenses i n connect i on
wi t h t he devel opment of a new pr oduct :

Salaries $100,000
Utilities 18,000
Materials 25,000
Advertising 5,000
Market survey 3,000
Depreciation on machine 9,000

Blue expects to begin selling the product next year. If Blue elects to
amortize research and experimental expenditures over 60 months, determine
the amount of the deduction for research and experimental expenditures for
the current year.

*a. $0.
b. $118, 000.
c. $143, 000.
d. $152, 000.
e. $160, 000.

872. Last year , Gr een Cor por at i on i ncur r ed t he f ol l owi ng expendi t ur es
i n t he devel opment of a new pl ant pr ocess:

Salaries $250,000
Materials 90,000
Utilities 20,000
Quality control testing costs 40,000
Management study costs 5,000
Depreciation of equipment 15,000

During the current year, benefits from the project began being realized in
May. If Green Corporation elects a 60 month deferral and amortization
period, determine the amount of the deduction for the current year.

a. $48, 000.
*b. $50, 400.
c. $54, 667.
d. $57, 067.

873. I vor y, I nc. , has t axabl e i ncome of $600, 000 and qual i f i ed
pr oduct i on act i vi t i es i ncome ( QPAI ) of $700, 000 i n 2013. I vor y s
domest i c pr oduct i on act i vi t i es deduct i on i s:

a. $36, 000.
b. $42, 000.
*c. $54, 000.
d. $63, 000.

874. For t he year 2013, Amber Cor por at i on has t axabl e i ncome of
$880, 000, al t er nat i ve mi ni mumt axabl e i ncome of $600, 000, and qual i f i ed
pr oduct i on act i vi t i es i ncome ( QPAI ) of $640, 000. The t ot al W- 2 wages
pai d t o empl oyees engaged i n qual i f i ed domest i c pr oduct i on act i vi t i es
ar e $116, 000. Amber s DPAD f or 2013 i s:

*a. $54, 000.
b. $57, 600.
c. $58, 000.
d. $79, 200.

875. Cr eam, I nc. s t axabl e i ncome f or 2013 bef or e any deduct i on f or an
NOL car r yf or war d of $30, 000 i s $70, 000. Cr eam s qual i f i ed pr oduct i on
act i vi t i es i ncome ( QPAI ) i s $60, 000. What i s t he amount of Cr eam s
domest i c pr oduct i on act i vi t i es deduct i on ( DPAD) f or 2013?

a. $1, 200.
b. $1, 800.
c. $2, 400.
*d. $3, 600.

876. I n t he comput at i on of a net oper at i ng l oss, whi ch of t he f ol l owi ng
i t ems i s not added t o t he negat i ve t axabl e i ncome?

a. Losses i ncur r ed i n a t r ansact i on ent er ed i nt o f or pr of i t .
*b. Deduct i bl e al i mony payment s.
c. Per sonal t hef t l oss.
d. Losses f r omt hef t of secur i t i es.

877. I f a t axpayer has an NOL i n 2013 of $20, 000, of whi ch $8, 000 i s
at t r i but abl e t o a t hef t of r ent al use pr oper t y, t he t axpayer may:

a. Car r y al l of t he NOL of $20, 000 back 5 year s.
b. Car r y al l of t he NOL of $20, 000 back 3 year s.
*c. Car r y $8, 000 of t he NOL back 3 year s and t he r emai nder of t he
NOL of $12, 000 back 2 year s.

878. Wu, who i s si ngl e, has t he f ol l owi ng i t ems f or 2013:

Salary $25,000
Itemized deductions ($27,000
attributable to casualty loss)
(32,000)

What is Wus NOL for 2013?

*a. $0.
b. $1, 000.
c. $2, 000.
d. $25, 000.

879. Khal i d, who i s si ngl e, had t he f ol l owi ng i t ems f or 2013:

Salary $40,000
Interest income on U.S. Treasure
bonds
8,000
Loss on theft of securities (60,000)
Interest income on New York state
bonds
12,000

What is Khalids NOL for 2013?

a. $10, 000.
*b. $12, 000.
c. $15, 000.
d. $25, 100.

880. J ani ce, si ngl e, had t he f ol l owi ng i t ems f or t he year 2013:

Salary $30,000
Dividend income 8,000
Loss on 1244 small business stock
held for three years
(45,000)
Total itemized deductions (5,000)

Determine Janices net operating loss for the year 2013.

a. $0.
b. $5, 000.
c. $15, 000.
d. $20, 000.

881. Bi l l , age 40, i s mar r i ed wi t h t wo dependent s. Bi l l had t he
f ol l owi ng i t ems f or t he year 2013:

Bills business loss ($40,000)
Bills salary 50,000
Personal casualty gains 5,000
floor)
(23,000)
Other itemized deductions (15,000)

Based on the above information, what is the net operating loss for Bill and
his spouse for the year 2013?

a. $0.
b. $5, 000.
*c. $7, 000.
d. $12, 000.

882. J ack, age 30 and mar r i ed wi t h no dependent s, i s a sel f - empl oyed
i ndi vi dual . For 2013, hi s sel f - empl oyed busi ness sust ai ned a net l oss
f r omoper at i ons of $10, 000. The f ol l owi ng addi t i onal i nf or mat i on was
obt ai ned f r omhi s per sonal r ecor ds f or t he year :

Nonbusiness long-term capital gain $ 2,0
00
Itemized deductionsconsisting of
taxes and interest
(12,000
)

Based on the above information, what is Jacks net operating loss for the
current year if he and his spouse file a joint return?

a. $2, 000.
b. $8, 000.
*c. $10, 000.
d. $11, 000.
e. $16, 400.

883. St el l a, age 38, i s si ngl e wi t h no dependent s. The f ol l owi ng
i nf or mat i on was obt ai ned f r omher per sonal r ecor ds f or t he cur r ent year .

Salary $30,000
Alimony received 12,000
Individual retirement account
contribution
2,000
Home mortgage interest expense 4,000
Property taxes 2,000
Personal casualty loss (after the
$100 floor)
38,000
Stolen investment property 16,000
Unreimbursed employee business loss 3,000

Based on the above information, what is Stellas net operating loss for
the current year?

a. $0.
b. ( $9, 000) .
*c. ( $10, 360) .
d. ( $11, 200) .

884. Ral ph i s si ngl e and has t he f ol l owi ng i t ems f or t he cur r ent year :

Nonbusiness capital gains $ 9,000
Nonbusiness capital losses (3,000)
Itemized deductions (none of the
amount resulted from a casualty loss)
(10,000)

In calculating Ralphs net operating loss, and with respect to the above
amounts only, what amount must be added back to taxable income (loss)?

*a. $0.
b. $2, 000.
c. $3, 000.
d. $4, 000.

885. El i zabet h has t he f ol l owi ng i t ems f or t he cur r ent year :

Nonbusiness capital gains $ 5,000
Nonbusiness capital losses (3,000)
Itemized deductions (including a
$20,000 casualty loss)
(27,000)

In calculating Elizabeths net operating loss, and with respect to the
above amounts only, what amount must be added back to taxable income (loss)?

a. $0.
b. $1, 000.
*c. $2, 000.
d. $20, 000.

886. St eve and Hol l y have t he f ol l owi ng i t ems f or 2013:

Dividend income $8,000
Itemized deductions (none of the
amount resulted from a casualty loss)
(13,000)
Business capital gains 1,000
Business capital losses (5,000)

In calculating their net operating loss, and with respect to the above
amounts only, what amount must be added back to taxable income (loss)?

a. $0.
b. $1, 300.
*c. $2, 000.
d. $3, 000.

887. Tonya had t he f ol l owi ng i t ems f or l ast year :

Sal ar y $40, 000
Shor t - t er mcapi t al gai n 12, 000
Nonbusi ness bad debt ( 25, 000)
Long- t er mcapi t al gai n 8, 000

For t he cur r ent year , Tonya had t he f ol l owi ng i t ems:

Sal ar y $45, 000
Col l ect i on of l ast year s bad debt 25, 000

Det er mi ne Tonya s adj ust ed gr oss i ncome f or t he cur r ent year .

Cor r ect Answer :
Salary $45,000
Income under tax benefit rule 23,000
Long-term capital loss carryover (2,000
)
AGI $66,000

Income on collection of nonbusiness
bad debt (classified as STCL) to the
extent of tax benefit in the prior
year ($20,000 offset against capital
$23,000
gain and $3,000 offset against
ordinary income).

888. Mar i a, who i s si ngl e, had t he f ol l owi ng i t ems f or 2013:

Sal ar y $80, 000
Loss on sal e of 1244 smal l
busi ness st ock acqui r ed 3 year s ago
( 60, 000)
St ock acqui r ed 2 year s ago became
wor t hl ess dur i ng t he year
( 5, 000)
Long- t er mcapi t al gai n 25, 000
Casual t y l oss on pr oper t y hel d 6
mont hs
( 6, 000)
Casual t y gai n on pr oper t y hel d 4
year s
4, 000

Det er mi ne Mar i a s adj ust ed gr oss i ncome f or 2013.

Cor r ect Answer :
Salary $80,000
Ordinary loss from
1244 stock
(50,000)
Capital gains and
losses

Long-term capital gain
($25,000 + $4,000)
$29,000
Less: Long-term capital loss
[($60,000
$50,000) + $5,000]
(15,000)
Net long-term capital gain $14,000
Less: Short-term capital loss
($15,000 + $4,000*)
(19,000)
Net capital loss (limited to
$3,000)
(5,000) (3,000)
Adjusted gross
income
$27,000

*Casualty losses to the extent of casualty gains.

889. Mi ke, si ngl e, age 31, had t he f ol l owi ng i t ems f or 2013:

Sal ar y $50, 000
Casual t i esi ndependent event s
Asset A ( per sonal use pr oper t y
hel d f or t wo year s) gai n
3, 000
Secur i t i es ( st ol en) l oss ( 8, 000)
Di vi dends 2, 000
I nt er est expense on per sonal
r esi dence
10, 000

Comput e Mi ke s t axabl e i ncome f or 2013.

Cor r ect Answer :
Salary $50,000
Dividends 2,000
Casualty gain (long-term capital
gain)
$3,000
Nonbusiness bad debt (short-term
capital loss)
(6,000)
Net short-term capital
loss
(3,00
0)
Less: Interest expense on personal
residence
(10,000)
Miscellaneous itemized deduction:
casualty loss
(8,000)
Personal exemption (3,90
0)

890. J ose, si ngl e, had t he f ol l owi ng i t ems f or 2013:

Sal ar y $44, 000
1244 l oss on st ock acqui r ed
3 year s ago
( 70, 000)
1244 gai n on st ock acqui r ed
10 mont hs ago
26, 000
Wor t hl ess secur i t y pur chased
i n J une of l ast year
( 4, 000)
I nt er est i ncome 8, 000
Comput e J ose s adj ust ed gr oss
i ncome f or 2013.

Cor r ect Answer :
Salary $44,000
Ordinary loss from
1244 stock
(50,000)
Short-term capital
gain
$26,000
Short-term capital
loss
(7,000)
gain
$19,000
Long-term loss from
1244 stock

($70,000 $50,000) ($20,000)
Worthless security (4,00
0)
(24,000)
Net long-term capital loss ($ 5,000)
Limit (2,000)
Adjusted gross income $
0

891. J ul i e, who i s si ngl e, has t he f ol l owi ng i t ems f or 2013:

Sal ar y$100, 000.

A hur r i cane compl et el y dest r oyed J ul i e s
dupl ex dur i ng t he cur r ent year . J ul i e
l i ved i n one- hal f of t he dupl ex and r ent ed
out t he ot her hal f . J ul i e pai d $400, 000
f or t he dupl ex and has t aken $80, 000 of
cost r ecover y on t he r ent al por t i on of t he
dupl ex. The dupl ex was wor t h $420, 000 at
t he t i me of t he dest r uct i on. J ul i e s
i nsur ance pol i cy pai d her 90%of t he f ai r
mar ket val ue of t he dupl ex.

Househol d i t ems dest r oyed i n t he hur r i cane
had a basi s of $15, 000 and a f ai r mar ket
val ue of $8, 500. Ther e was no i nsur ance
r ecover y on t he househol d i t ems.

J ul i e pur chased a pai nt i ng t hr ee year s ago
f or $4, 000. At t he t i me of t he hur r i cane,
t he pai nt i ng was wor t h $10, 000. J ul i e
pur chased t he pai nt i ng as an i nvest ment
wi t h t he i nt ent t hat she woul d sel l i t
when i t s val ue exceeded $12, 000. Ther e was
no i nsur ance r ecover y on t he pai nt i ng.

J ul i e had an aut omobi l e acci dent i n t he
cur r ent year . J ul i e used t he car 100%f or
per sonal pur poses. The car cost $37, 000
and had a decl i ne i n FMV as a r esul t of
t he acci dent of $5, 000. The car was
i nsur ed, but t he pol i cy had a $2, 000
deduct i bl e cl ause. J ul i e chose not t o
f i l e a cl ai mf or t he damage.

J ul i e owned a comput er t hat she used 100%
f or busi ness. The comput er was al so
compl et el y dest r oyed i n t he hur r i cane. I t
had a basi s of $6, 000 and a FMV of $4, 000
at t he t i me i t was dest r oyed. J ul i e was
not r ei mbur sed by her empl oyer f or t he
l oss on t he comput er .

Home mor t gage i nt er est $10, 000.

Det er mi ne t he amount of J ul i e s t axabl e
i ncome f or 2013.

Cor r ect Answer :
Salary $100,000
Plus: Gain on rental
duplex

Recovery [($420,000 90%) 50%] $189,000

Cost (50% 400,000) $200,000

Less: cost recovery (80,000)


Casualty gain 69,000
AGI $169,000
Less: Itemized deductions

Casualty loss

Dwelling

Basis ($400,000
50%)
$200,000
Recovery (189,000)
Loss $ 11,000
Household items 8,50
0

Total loss $ 19,500
Less: $100 floor (1
00)
$ 19,400
Automobile
Loss $ 5,000
Recovery if claim
filed
(3,000)
Loss $ 2,000
Less: $100 floor (1
00)
1,900
Total loss $ 21,300
Less: 10% $169,000 (AGI) (16,900)
Deductible casualty loss $ 4,400
Home mortgage interest 10,000
Other miscellaneous itemized deduction
painting
4,000
Computer loss [$6,000 (2% $169,000)] 2,
620

Total itemized deductions (21,020)
Personal exemption (3,900
)


892. J uani t a, si ngl e and age 43, had t he f ol l owi ng i t ems f or 2013:

Sal ar y $60, 000
Casual t y l oss on busi ness pr oper t y ( 15, 000)
Casual t y l oss on r ent al pr oper t y ( 5, 000)
Loss on t hef t of secur i t i es ( 8, 000)
Per sonal casual t y gai ns 9, 000
Per sonal casual t y l oss ( af t er $100
f l oor )
( 13, 000)
Ot her i t emi zed deduct i ons ( 9, 000)

Comput e J uani t a s t axabl e i ncome f or 2013.

Cor r ect Answer :
Salary $60,000
Casualty loss on
business property
(15,000)
Casualty loss on
rental property
(5,000)
Personal casualty
gains
$9,000
Personal casualty
loss
(9,000) 0
AGI $46,000
Casualty loss
[($13,000 $9,000)
(10% $46,000)]
(0)
Theft of
securities
(8,000)
Other itemized
deductions
(9,000)
Personal exemption (3,900)

893. Whi l e Susan was on vacat i on dur i ng t he cur r ent year , someone br oke
i nt o her home and st ol e t he f ol l owi ng i t ems:

A comput er used 60%i n connect i on wi t h
Susan s empl oyment as an empl oyee and 40%
f or her per sonal use. The cost of t he
comput er was $8, 000. Depr eci at i on of
$3, 000 had been t aken on t he comput er and
i t had a f ai r mar ket val ue of $4, 000 at t he
t i me of t he t hef t .

A pai nt i ng, whi ch Susan pur chased as an
i nvest ment f or $10, 000, had a f ai r mar ket
val ue of $17, 000.

Si l ver war e pur chased f or $3, 000 had a f ai r
mar ket val ue of $5, 000.

Cash of $30, 000.

Susan s adj ust ed gr oss i ncome, bef or e consi der i ng any of t he above
i t ems, i s $60, 000.
Det er mi ne t he t ot al amount of Susan s i t emi zed deduct i ons r esul t i ng
f r omt he t hef t .

Cor r ect Answer :
Painting loss (investment property) $10,000
Casualty loss
Computer ($4,000 40%) $ 1,60
0

Silverware 3,000
Cash 30,00
0

Total $34,600
Less: $100 floor (100)
10% $60,000 (AGI)

(6,00
0)
28
Loss on nonreimbursed employee business expensecomputer

Lesser of:
(1) Cost ($8,000 60%) $4,800
Depreciation (3,000)

Adjusted basis $1,800
(2) Fair market value ($4,000
60%)
$2,400
Loss $1,800
Less: 2% $60,000 (AGI) (1,200)
Total itemized deductions $3

894. Neal , si ngl e and age 37, has t he f ol l owi ng i t ems f or 2013:

Sal ar y $50, 000
Casual t y l oss on busi ness
pr oper t y
( 8, 000)
Casual t y l oss on r ent al pr oper t y ( 5, 000)
Per sonal casual t y gai ns 3, 000
Per sonal casual t y l osses ( af t er
$100 f l oor )
( 12, 000)
I nt er est expense on per sonal
r esi dence
( 7, 000)

Det er mi ne Neal s t axabl e i ncome f or 2013.

Cor r ect Answer :
Salary $50,000
Casualty loss on
business property
(8,000)
Casualty loss on
rental property
(5,000)
Personal casualty
gains
$3,000
Personal casualty (3,000)
losses 0
AGI $37,000
Less: Itemized
deductions

Casualty loss
($12,000
$3,000)
$9,000
Less: 10%
$37,000 (AGI)
(3,700)
Casualty loss
deduction
$5,300
Interest
expense
7,000 (12,300)
Personal
exemption
(3,900)

895. Gar y, who i s an empl oyee of Red Cor por at i on, has t he f ol l owi ng
i t ems f or 2013:

Sal ar y $80, 000
Per sonal casual t y gai n 7, 000
Per sonal casual t y l oss f r omone
event ( bef or e t he $100 f l oor )
15, 000
Loss on r ent al pr oper t y 6, 000
Thef t of bear er bonds 18, 000
Unr ei mbur sed l oss f r omt hef t of a
comput er used 100%f or busi ness
4, 000

Det er mi ne Gar y s AGI and t ot al amount of i t emi zed deduct i ons f or 2013.

Cor r ect Answer :
Salary $80,000
Loss on rental property (6,000)
Personal casualty loss (7,000)
Adjusted gross income

$74,000
Personal casualty loss ($15,000
$7,000)
$ 8,000
10% $74,000
(AGI)
(7,400)
$ 500

Theft of bearer bonds 18,000
Theft of computer [$4,000 (.02
$74,000)]
2,52
0
Total itemized deductions $21,020

896. Susan has t he f ol l owi ng i t ems f or 2013:
Loss on r ent al pr oper t y caused by t er mi t es$150, 000. I nsur ance
cover ed 80%of t he l oss.

Loss on per sonal use aut omobi l e$10, 000. The i nsur ance pol i cy
does not cover t he f i r st $3, 000 of l oss. Susan deci ded not t o f i l e a
cl ai mf or t he l oss.

Loss on a pai nt i ng st ol en f r omSusan s house. Susan pur chased t he
pai nt i ng t hr ee year s ago as an i nvest ment . She pai d $40, 000 f or t he
pai nt i ng and i t was wor t h $35, 000 at t he t i me of t he t hef t . The
pai nt i ng was i nsur ed f or t he f ai r mar ket val ue.

Sal ar y$40, 000.

Det er mi ne Susan s AGI and t ot al amount of i t emi zed deduct i ons f or 2013.

Cor r ect Answer :
Salary $40,000
Loss on rental property [(80%
$150,000) $150,000]
(30,000)

Casualty loss (limited to $3,000 not
subject to insurance)
$3,000
10% $10,000 (AGI) (1,000)
Casualty loss deduction $1,900
Loss on stolen painting ($40,000
$35,000)
5,000

897. Roger , an i ndi vi dual , owns a pr opr i et or shi p cal l ed Gr een
Thi ng. For t he year 2013, Roger has t he f ol l owi ng i t ems:

Busi ness i ncome$200, 000.
Busi ness expense$150, 000.
Loss on a compl et el y dest r oyed busi ness machi ne. The machi ne had
an adj ust ed basi s of $25, 000 and a f ai r mar ket val ue of $20, 000.

Loss on a busi ness t r uck. The t r uck had an adj ust ed basi s of
$8, 000. The r epai r s t o f i x t he t r uck cost $10, 000.

Det er mi ne Roger s adj ust ed gr oss i ncome f or 2013.

Cor r ect Answer :
Business income $200,000
Business expense (150,000)
Loss on business machine (25,000)
Loss on business truck (8,0
00)
Adjusted gross income $ 17,000

898. I n 2012, Robi n Cor por at i on i ncur r ed t he f ol l owi ng expendi t ur es i n
connect i on wi t h t he devel opment of a new pr oduct :

Sal ar i es $100, 000
Suppl i es 40, 000
Mar ket sur vey 10, 000

I n 2013, Robi n i ncur r ed t he f ol l owi ng addi t i onal expendi t ur es i n
connect i on wi t h t he devel opment of t he pr oduct :

Sal ar i es $125, 000
Suppl i es 50, 000
Adver t i si ng 10, 000

I n Oct ober 2013, Robi n began r ecei vi ng benef i t s f r omt he pr oj ect . I f
Robi n el ect s t o expense r esear ch and exper i ment al expendi t ur es,
det er mi ne t he amount and year of t he deduct i on.

Cor r ect Answer :
Deduct i bi l i t y of r esear ch and exper i ment al expendi t ur es i s per mi t t ed i n
t he year of i ncur r ence.

2012
Salaries $100,000
Supplies 40,000
Depreciation 25,00
0
Deductible expenses $165,000

The market survey is not a research and experimental expenditure.

2013
Salaries $125,000
Supplies 50,000
Depreciation 30,0
00
Deductible expenses $205,000

The advertising is not a research and experimental expenditure

899. I n 2013, Tan Cor por at i on i ncur r ed t he f ol l owi ng expendi t ur es i n
connect i on wi t h t he devel opment of a new pr oduct :

Sal ar i es $ 60, 000
Suppl i es 20, 000
Depr eci at i on on r esear ch equi pment 10, 000
Test i ng f or qual i t y cont r ol 5, 000
Adver t i si ng 8, 000
Over head al l ocat ed t o r esear ch 2, 000

Tan began sel l i ng t he pr oduct i n November , 2013. I f Tan el ect s t o
amor t i ze r esear ch and exper i ment al expendi t ur es, det er mi ne Tan s
deduct i on f or 2013.

Cor r ect Answer :
Salaries $60,000
Supplies 20,000
Depreciation 10,000
Overhead allocated to research 2,00
0
Total qualifying research
expenditures
$92,000

[($92,000/60 months) 2 months] = $3,067

900. Gr een, I nc. , manuf act ur es and sel l s wi dget s. Dur i ng 2013, an
exami nat i on of t he company r ecor ds showed t he f ol l owi ng i t ems:

Domest i c pr oduct i on gr oss $3, 000, 00
r ecei pt s 0
Cost of goods sol d f or domest i c
pr oduct s
750, 000
Expenses di r ect l y r el at ed t o
domest i c pr oduct i on gr oss
r ecei pt s ( ot her t han wages)
300, 000
W- 2 wages pai d t o empl oyees
engaged i n qual i f i ed domest i c
pr oduct i on act i vi t i es
300, 000
Rat abl e por t i on of ot her
expenses
100, 000
Tot al W- 2 wages 325, 000
Taxabl e i ncome 1, 600, 000

Det er mi ne Gr een s domest i c pr oduct i on act i vi t i es deduct i on f or 2013.

Cor r ect Answer :
Domestic production gross receipts $3,000,00
0
Less: Cost of goods sold (750,000)
Direct expenses (300,000)
W-2 wages directly
related
(300,000)
Allocated expenses (100
,000)
Qualified production activities
income (QPAI)
$1,550,00
0

Domestic production activities
deduction

Lessor of: QPAI 9% ($1,550,000
9%)
Taxable income 9%
($1,600,000 9%)
$ 139
,500

Limited to 50% of related W-2 wages
(50% $300,000) [no limit]
$ 150
,000

901. Red Company i s a pr opr i et or shi p owned by Sal l y, a si ngl e
i ndi vi dual . Red manuf act ur es and sel l s wi dget s. Dur i ng 2013, an
exami nat i on of Red s r ecor ds shows t he f ol l owi ng i t ems:

Domest i c pr oduct i on gr oss
r ecei pt s
$2, 500, 00
0
Cost of goods sol d f or domest i c 600, 000
pr oduct s
Expenses di r ect l y r el at ed t o
domest i c pr oduct i on gr oss
r ecei pt s ( ot her t han wages)
280, 000
Rat abl e por t i on of ot her
expenses
100, 000
Ot her expenses not al l ocat ed t o
domest i c pr oduct i on
gr oss r ecei pt s
30, 000
W- 2 wages pai d t o empl oyees
engaged i n qual i f i ed domest i c
pr oduct i on act i vi t i es
270, 000
Tot al W- 2 wages 320, 000

Sal l y al so had t he f ol l owi ng
addi t i onal i t ems:

Di vi dends r ecei ved $ 20, 00
0

Det er mi ne Sal l y s domest i c pr oduct i on act i vi t i es deduct i on f or 2013.

Cor r ect Answer :
Gross receipts $2,500,000
Expenses directly
related
(280,000)
Other allocated
and nonallocated expenses ($100,000
+ $30,000)
(130,000)
Wages (320,000)
Dividends received 20,000
Interest received
10,000
Modified adjusted gross income $1,200,000

Domestic production gross receipts $2,500,000
Direct expenses (280,000)
Allocated
expenses
(100,000)
W-2 wages
directly related
(270,
000)
Qualified production activities
income (QPAI)
$1,250,000

Lesser of: QPAI 9% ($1,250,000)
= $112,500

Mod
ified AGI 9% ($1,200,000) =
$108,000

Not to exceed 50% $270,000 =
$135,000

Sallys QPAD = $108,000

902. Nor a, si ngl e, had t he f ol l owi ng i ncome and deduct i ons f or 2013:

Sal es $ 50, 00
0
Busi ness expenses ( 100, 000
)
Di vi dends 2, 000
Nonbusi ness capi t al gai ns 4, 000
1244 st ock l oss ( 18, 000)
I t emi zed deduct i ons ( 4, 000)
Busi ness capi t al l oss ( 2, 000)
Busi ness capi t al gai n 1, 000

Comput e Nor a s net oper at i ng l oss f or 2013.

Cor r ect Answer :
Sales $ 50,000
Business
expenses
(100,000)

Alimony received 30,000
Dividends 2,000
1244 stock
(ordinary loss)
(18,000)

Capital gains
($4,000 +
$1,000)
$5,000

Less: Capital
losses
(2,000)

Net capital
gains
3,000

Adjusted gross
income
($ 32,000)

Standard
deduction
(6,100)

(single)
Personal
exemption (1
$3,900)
(3,900)

Taxable income ($ 42,000)


Personal
exemption
3,900
Excess of
nonbusiness
capital losses
over nonbusiness
capital gains

0

Excess of
nonbusiness
deductions over
sum of
nonbusiness
income and net
nonbusiness
capital gains

Standard
deduction
$6,100

Interest (1,000)

Dividends (2,000)

Alimony received (30,000)

Nonbusiness
capital gains
(4,000) 0
Excess of business
capital losses over
the sum of business
capital gains and
the excess of
nonbusiness capital
gains
over nonbusiness
deductions {$2,000
[$1,000 +
($1,000 + $2,000 +
$30,000 + $4,000
$6,100)]}

0

Net operating ($ 38,100)
loss

903. J uan, mar r i ed and f i l i ng j oi nt l y, had t he f ol l owi ng i ncome and
deduct i ons f or 2013:

Sal es $600, 000
Busi ness expenses ( 650, 000)
Di vi dends 4, 000
Per sonal casual t y l oss ( af t er
deduct i ng t he $100 f l oor )
( 25, 000)
Taxes pai d on per sonal r esi dence ( 7, 000)
I nt er est pai d on per sonal
r esi dence
( 9, 000)
Al i mony pai d ( 18, 000)

J uan has t hr ee dependent chi l dr en. Cal cul at e t he net oper at i ng l oss f or
2013.

Cor r ect Answer :
Sales $600,000
Business expense (650,000)
Dividends 4,000
Alimony paid (18,000)
Adjusted gross
income
($ 61,000)
Casualty loss
[$25,000 (10%
$0)]
$25,000
Taxes on personal
residence
7,000
Interest on
personal residence
9,000

(41,000)
Personal and
dependency exemptions
(5 $3,900)
(19,500)
Taxable income ($121,500)

Personal and dependency
exemptions
19,500
Excess of nonbusiness
deductions over nonbusiness
income:
Itemized deductions
($41,000
$25,000)
$16,000
Alimony paid 18,000
Total nonbusiness
deductions
$34,000
Interest income (3,000)
Dividends (4,000) 27,0
00
Net operating loss ($ 75,000)

904. J ason, mar r i ed and f i l i ng j oi nt l y, had t he f ol l owi ng i ncome f or
2013:

Sal ar y $ 70, 00
0
Loss on t he sal e of 1244 st ock
hel d f or 5 year s
( 110, 000
)
Di vi dends 25, 000
I t emi zed deduct i ons ( no casual t y
l osses)
( 12, 000)

J ason has f our dependent chi l dr en. Cal cul at e t he net oper at i ng l oss f or
2013.

Cor r ect Answer :
Salary $ 70,000
Ordinary loss ( 1244 stock) (100,000)
Long-term capital loss
[($110,000 $100,000) =
$10,000] limited to
(3,000)
Dividends 25,000
AGI $ 2,000
Itemized deductions (12,000)
Personal exemptions (6
$3,900)
(23,400)

Excess of nonbusiness
deductions over nonbusiness
income

[$12,000 ($25,000 +
$10,000 $3,000)]
0
Personal exemptions (6
$3,900)
23,40
0
Net operating loss ($ 10,000)

905. Rut h, age 66, sust ai ns a net oper at i ng l oss ( NOL) of $15, 000 f or
2013. Because Rut h had no t axabl e i ncome i n 2011, t he l oss i s car r i ed
back t o 2012. For 2012, t he j oi nt i ncome t ax r et ur n of Rut h and her
husband was as f ol l ows:

Sal ar y $20, 000
Net shor t - t er mcapi t al l oss ( 2, 000
)
AGI $23, 000
I t emi zed deduct i ons
Char i t abl e cont r i but i ons $4, 000
Medi cal expenses [ $2, 000
( $23, 000 . 075) ]
275
I nt er est 5, 000
Taxes 2, 500 ( 11, 775)
Per sonal exempt i ons ( 2 $3, 800) ( 7, 600
)
Taxabl e i ncome $ 3, 625

Cal cul at e Rut h s r emai ni ng 2013 NOL
t o be car r i ed t o 2014.

Cor r ect Answer :
Salary $20,000
Net short-term capital loss (not
permitted)
(
0)
Itemized deductions
Charitable contributions $4,000
Medical expenses [$2,000
($25,000 .075)]
125
Interest 5,000
Taxes 2,500 (11,625)
Personal exemptions (
0)
Modified taxable income

$13,375
NOL for 2013 ($15,000)
Modified taxable income 13,375
NOL to carry forward ($ 1,625)

906. Mi l t , mar r i ed and f i l i ng j oi nt l y, had t he f ol l owi ng i t ems f or 2013:

Sal es $200, 000
Busi ness expenses 210, 000
Di vi dends 5, 000
Sal ar y 20, 000
Nonbusi ness l ong- t er mcapi t al
gai ns
5, 000
Nonbusi ness shor t - t er mcapi t al
l osses
7, 000
Busi ness shor t - t er mcapi t al
l osses
4, 000
Busi ness l ong- t er mcapi t al
gai ns
2, 000
I RA cont r i but i ons 5, 000
Medi cal expenses 8, 450
Pr oper t y t axes 7, 000
Casual t y l oss on per sonal
pr oper t y ( af t er t he $100 f l oor )
35, 000
Loss on st ol en bonds 5, 000
Unr ei mbur sed empl oyee busi ness
expenses
8, 000

Mi l t has t wo dependent chi l dr en. I f Mi l t and hi s wi f e f i l e a j oi nt
r et ur n, comput e t hei r net oper at i ng l oss f or 2013.

Cor r ect Answer :
Sales $200,000
Less: business expenses (210,000)
Net business loss (10,000)
Interest income 3,
000
Dividends 5,
000
Salary 20,0
00
Alimony received 8,
000
Long-term capital gains ($5,000 + $2,000) $ 7,000
Short-term capital losses ($7,000 + $4,000) (11,000)
Net short-term capital losses ($ 4,000)
Limit (3,000)
IRA contributions (5
,000)
Adjusted gross income (AGI) $ 18,00
0
Charitable contributions $ 9,000
Medical expenses [$8,450 ($18,000
.10)]
6,650
Property taxes 7,000
Casualty loss [$35,000 ($18,000
.10)]
33,200
Theft loss on stolen bonds 5,000
Nonreimbursed business expenses
[$8,000 ($18,000 .02)] 7,640 (68,490)
Personal and dependency exemption deduction (4
$3,900)
(15,600)
Personal exemptions and dependency
deductions
15,600
Nonbusiness capital losses in excess of
nonbusiness
capital gains ($7,000 $5,000)

2,000
Nonbusiness deductions in excess of
nonbusiness income

IRA $ 5,000
Itemized deductions $68,490
Less: Casualty
loss (33,200)

Bonds theft loss (5,000)
Employee business
expenses (7,640)
22,650
Total nonbusiness
deductions
$27,650
Nonbusiness income
Interest $3,000
Dividends 5,000
Alimony received 8,000 (16,000) 11,650
Business capital losses in excess of
business capital
gains ($4,000 $2,000) limited
to $1,000

1,000
Net operating loss (NOL) ($35,840)

907. I dent i f y t he f act or s t hat shoul d be consi der ed i n det er mi ni ng
whet her a t r ansact i on i s a busi ness bad debt or a nonbusi ness bad debt .

Cor r ect Answer :
Fact or s t o be consi der ed i n det er mi ni ng whet her a t r ansact i on i s a
busi ness bad debt or a nonbusi ness bad debt ar e as f ol l ows:

Was the debt related to the taxpayers
business when it was created?

Was the debt related to the taxpayers
business when it became worthless?

Was the lender engaged in the business of
lending money?

Was there a proximate relationship between
the creation of the debt and the lenders
business?

908. Di scuss t he t ax t r eat ment of non- r ei mbur sed l osses of an empl oyee
i n connect i on wi t h a t r ade or busi ness.

Cor r ect Answer :
The l oss i s deduct i bl e f r omadj ust ed gr oss i ncome as a mi scel l aneous
i t emi zed deduct i on subj ect t o t he 2 per cent - of - AGI l i mi t at i on.

909. A t axpayer who sust ai ns a casual t y l oss i n an ar ea desi gnat ed by
t he Pr esi dent of t he Uni t ed St at es as a di sast er ar ea may t ake t he l oss
i n t he year i n whi ch t he l oss occur r ed or el ect t o t ake t he l oss i n t he
pr evi ous year . I dent i f y f act or s t hat shoul d be consi der ed i n deci di ng
i n whi ch year t o t ake t he l oss.

Cor r ect Answer :
Fact or s t hat shoul d be consi der ed i ncl ude:

The marginal tax rates of the two different
years.

The adjusted gross incomes of the two
different years.

Other casualty losses in the two different
years.

The benefits of a faster refund (or reduction
of tax).

910. Di scuss t he t r eat ment , i ncl udi ng t he car r yback and car r yf or war d
per i ods, of casual t y l osses i ncur r ed wi t h per sonal use pr oper t y.

Cor r ect Answer :
These l osses ar e subj ect t o t he $100 per event f l oor and t he 10%of AGI
l i mi t at i ons. The l osses ar e i t emi zed deduct i ons. Casual t y l osses on
per sonal use pr oper t y can have a t hr ee- year car r yback. The car r yover
per i od i s 20 year s.

911. What ar e t he t hr ee met hods of handl i ng r esear ch and exper i ment al
expendi t ur es i ncur r ed i n a t r ade or busi ness? Under what ci r cumst ances
woul d you choose each?

Cor r ect Answer :
The f ol l owi ng met hods ar e per mi t t ed:

The expense method, where the expenditures
are written off immediately, is attractive
where the taxpayer is currently in a high tax
bracket and has sufficient other income to
offset the deductions.

Deferral and amortization of expenditures
over a period of not less than 60 months is
generally chosen when the total deduction is
not wanted immediately because future income
is expected to be available to offset the
deduction.

The capitalization method allows no deduction
until the project is abandoned or becomes
worthless. Usually taxpayers do not choose
this method, since the tax benefit is
deferred for an indefinite period.

912. Why was t he domest i c pr oduct i on act i vi t i es deduct i on ( DPAD)
enact ed by Congr ess?

Cor r ect Answer :
The Amer i can J obs Cr eat i on Act of 2004 pr ovi si on cr eat i ng DPADs was
enact ed t o r epl ace cer t ai n t ax pr ovi si ons t hat our wor l d t r adi ng
par t ner s r egar ded as al l owi ng unf ai r advant age t o U. S. expor t s. Not e,
however , i n no way i s t he DPAD l i mi t ed t o expor t s.

913. How i s qual i f i ed pr oduct i on act i vi t i es i ncome ( QPAI ) cal cul at ed?

Cor r ect Answer :
QPAI i s cal cul at ed as f ol l ows:

The excess of domest i c pr oduct i on gr oss r ecei pt s ( DPGR) over t he sumof :

Cost of goods sold allocated to such
receipts.

Other deductions, expenses, or losses
directly allocated to such receipts.

The ratable portion of deductions, expenses,
and losses not directly allocable to such
receipts or another class of income.

914. Sal l y i s an empl oyee of Bl ue Cor por at i on. Last year , she
pur chased a ver y expensi ve comput er wi t h her own f unds. She used t he
comput er 100%f or busi ness pur poses. Dur i ng t he cur r ent year , t he
comput er was compl et el y dest r oyed i n a f i r e. Bl ue Cor por at i on di d not
r ei mbur se her f or her l oss. Di scuss whet her Sal l y s l oss wi l l cr eat e
or i ncr ease Sal l y s net oper at i ng l oss.

Cor r ect Answer :
The l oss i s i ncur r ed i n connect i on wi t h Sal l y s t r ade or
busi ness. However , because Sal l y i s an empl oyee and t he l oss i s not
r ei mbur sed, i t i s an i t emi zed deduct i on whi ch i s a deduct i on from
adj ust ed gr oss i ncome. The l oss i s not i ncur r ed i n a t r ansact i on
ent er ed i nt o f or pr of i t nor i s t he l oss a casual t y l oss on per sonal use
pr oper t y. However , t he l oss i s connect ed wi t h Sal l y s t r ade or
busi ness and t her ef or e, even t hough i t i s an i t emi zed deduct i on and
subj ect t o t he 2%- of - AGI f l oor , i t can cr eat e an NOL.

915. Di scuss t he t r eat ment of al i mony pai d and deduct i bl e i ndi vi dual
r et i r ement account cont r i but i ons i n comput i ng an i ndi vi dual s net
oper at i ng l oss.

Cor r ect Answer :
Al i mony pai d and deduct i bl e i ndi vi dual r et i r ement account cont r i but i ons
ar e t r eat ed as nonbusi ness deduct i ons i n comput i ng a net oper at i ng
l oss. Hence, nei t her i t emcan cr eat e or i ncr ease a net oper at i ng l oss.

916. Di scuss t he comput at i on of NOL r emai ni ng t o be car r i ed f or war d
af t er t he NOL has been appl i ed i n a car r yback year .

Cor r ect Answer :
The NOL amount t o be car r i ed f or war d i s t he excess of t he NOL over t he
t axabl e i ncome of t he year t o whi ch t he NOL i s bei ng appl i ed. However ,
t he t axabl e i ncome of t he year t o whi ch t he NOL i s bei ng appl i ed must
be comput ed wi t h t he f ol l owi ng modi f i cat i ons:

No deduction is allowed for the excess of
capital losses over capital gains.

No deduction is allowed for the NOL that is
being carried back. However, deductions are
allowed for NOLs occurring before the loss
year.

Any deductions claimed that are based on or
limited by AGI must be determined after
making the preceding adjustments. However,
charitable contributions do not take into
account any NOL carryback.

No deduction is allowed for personal or
dependency exemptions.

917. Di scuss t he ef f ect of al i mony i n comput i ng a net oper at i ng l oss.

Cor r ect Answer :
Al i mony r ecei ved i s t r eat ed as nonbusi ness i ncome. Al i mony pai d i s
t r eat ed as a nonbusi ness deduct i on.

918. Pr oper t y whi ch i s cl assi f i ed as per sonal t y may be depr eci at ed.

*a. Tr ue
b. Fal se

919. The basi s of cost r ecover y pr oper t y must be r educed by at l east
t he cost r ecover y al l owabl e.

*a. Tr ue
b. Fal se

920. Ant i ques may be el i gi bl e f or cost r ecover y i f t hey ar e used i n a

a. Tr ue
*b. Fal se

921. The key dat e f or cal cul at i ng cost r ecover y i s t he dat e t he asset
i s pl aced i n ser vi ce.

*a. Tr ue
b. Fal se

922. Land i mpr ovement s ar e gener al l y not el i gi bl e f or cost r ecover y.

a. Tr ue
*b. Fal se

923. The cost r ecover y basi s f or pr oper t y conver t ed f r omper sonal use
t o busi ness use may be t he f ai r mar ket val ue of t he pr oper t y at t he
t i me of t he conver si on.

*a. Tr ue
b. Fal se

924. The maxi mumcost r ecover y met hod f or al l per sonal pr oper t y under
MACRS i s 150%decl i ni ng bal ance.

a. Tr ue
*b. Fal se

925. The cost r ecover y per i od f or 3- year cl ass pr oper t y i s 4 year s.

*a. Tr ue
b. Fal se

926. Al l per sonal pr oper t y pl aced i n ser vi ce i n 2013 and used i n a
t r ade or busi ness qual i f i es f or addi t i onal f i r st - year depr eci at i on.

a. Tr ue
*b. Fal se

927. I f mor e t han 40%of t he val ue of pr oper t y, ot her t han r eal
pr oper t y, i s pl aced i n ser vi ce dur i ng t he l ast quar t er , al l of t he
pr oper t y pl aced i n ser vi ce i n t he second quar t er wi l l be al l owed 7. 5
mont hs of cost r ecover y.

*a. Tr ue
b. Fal se

928. Under MACRS, i f t he mi d- quar t er convent i on i s appl i cabl e, al l
pr oper t y sol d i s t r eat ed as bei ng sol d at t he mi d- poi nt of t he quar t er
i n whi ch i t i s pl aced i n ser vi ce.

a. Tr ue
*b. Fal se

929. The f act or f or det er mi ni ng t he cost r ecover y f or el i gi bl e r eal
est at e under MACRS, i n t he year of di sposi t i on, i s t aken f r omt he mont h
of t he di sposi t i on.

a. Tr ue
*b. Fal se

930. Resi dent i al r ent al r eal est at e i ncl udes pr oper t y wher e 80%or mor e
of t he net r ent al r evenues ar e f r omnont r ansi ent dwel l i ng uni t s.

a. Tr ue
*b. Fal se

931. Mot el bui l di ngs have a cost r ecover y per i od of 27. 5 year s.

a. Tr ue
*b. Fal se

932. Taxpayer s may el ect t o use t he st r ai ght - l i ne met hod under MACRS
f or per sonal t y.

*a. Tr ue
b. Fal se

933. Under t he MACRS st r ai ght - l i ne el ect i on f or per sonal t y, onl y t he
hal f - year convent i on i s appl i cabl e.

a. Tr ue
*b. Fal se

934. The cost r ecover y met hod f or new f ar mequi pment pl aced i n ser vi ce
dur i ng 2013 i s 200%decl i ni ng bal ance.

a. Tr ue
*b. Fal se

935. I n a f ar mi ng busi ness, MACRS st r ai ght - l i ne cost r ecover y i s
r equi r ed f or al l f r ui t bear i ng t r ees.

*a. Tr ue
b. Fal se

936. I n a f ar mi ng busi ness, i f t he uni f or mcapi t al i zat i on r ul es ar e not
used, cost i s r ecover ed usi ng t he ADS st r ai ght - l i ne met hod.

*a. Tr ue
b. Fal se

937. When l essor owned l easehol d i mpr ovement s ar e abandoned because of
t he t er mi nat i on of t he l ease, a l oss can be t aken f or t he unr ecover ed
basi s.

*a. Tr ue
b. Fal se

938. The cost s of qual i f i ed l easehol d i mpr ovement s qual i f y f or
addi t i onal f i r st - year depr eci at i on.

*a. Tr ue
b. Fal se

939. For per sonal pr oper t y pl aced i n ser vi ce i n 2013, t he 179 maxi mum
deduct i on i s l i mi t ed t o $500, 000.

*a. Tr ue
b. Fal se

940. The 179 deduct i on can exceed $500, 000 i n 2013 i f t he t axpayer
had a 179 amount whi ch exceeded t he t axabl e i ncome l i mi t at i on i n t he
pr i or year .

a. Tr ue
*b. Fal se

941. Any 179 expense amount t hat i s car r i ed f or war d i s subj ect t o t he
busi ness i ncome l i mi t at i on i n t he car r yf or war d year .

*a. Tr ue
b. Fal se

942. Taxabl e i ncome f or pur poses of 179 l i mi t ed expensi ng i s comput ed
by i ncl udi ng t he MACRS deduct i on.

*a. Tr ue
b. Fal se

943. The basi s of an asset on whi ch $500, 000 has been expensed under
179 wi l l be r educed by $500, 000, even i f $500, 000 cannot be expensed i n
t he cur r ent year because of t he t axabl e i ncome l i mi t at i on.

*a. Tr ue
b. Fal se

944. Pr oper t y used f or t he pr oduct i on of i ncome i s not el i gi bl e f or
179 expensi ng.

*a. Tr ue
b. Fal se

945. The st at ut or y dol l ar cost r ecover y l i mi t s under 280F does appl y
t o al l aut omobi l es.

a. Tr ue
*b. Fal se

946. The 179 l i mi t f or a spor t s ut i l i t y vehi cl e wi t h a GVWof 7, 000
pounds wi l l not appl y i f t he spor t s ut i l i t y vehi cl e i s used as a t axi .

a. Tr ue
*b. Fal se

947. Once t he mor e- t han- 50%busi ness usage t est i s passed f or l i st ed
pr oper t y, i t does mat t er i f t he busi ness usage f or t he pr oper t y dr ops
t o 50%or l ess dur i ng t he r ecover y per i od.

*a. Tr ue
b. Fal se

948. I f a new car t hat i s used pr edomi nant l y i n busi ness i s pl aced i n
ser vi ce i n 2013, t he st at ut or y dol l ar cost r ecover y l i mi t under 280F
wi l l depend on whet her t he t axpayer t akes MACRS or st r ai ght - l i ne
depr eci at i on.

a. Tr ue
*b. Fal se

949. I f an aut omobi l e i s pl aced i n ser vi ce i n 2013, t he l i mi t at i on f or
cost r ecover y i n 2015 wi l l be based on t he cost r ecover y l i mi t s f or t he
year 2013.

*a. Tr ue
b. Fal se

950. The st at ut or y dol l ar cost r ecover y l i mi t s under 280F f or
passenger aut omobi l es ar e changed i f mi d- quar t er cost r ecover y i s used.

a. Tr ue
*b. Fal se

951. I f a used $35, 000 aut omobi l e used 100%f or busi ness i n t he f i r st
year ( 2013) f ai l s t he 50%busi ness usage t est i n t he second year , no
cost r ecover y wi l l be r ecapt ur ed.

*a. Tr ue
b. Fal se

952. The i ncl usi on amount f or a l eased aut omobi l e i s adj ust ed by a
busi ness usage per cent age.

*a. Tr ue
b. Fal se

953. Al l l i st ed pr oper t y i s subj ect t o t he subst ant i at i on r equi r ement s
of 274.

*a. Tr ue
b. Fal se

954. I f a t axpayer uses r egul ar MACRS f or al l pr oper t y, an al t er nat i ve
mi ni mumt ax adj ust ment i s made wi t h r espect t o t he depr eci at i on on al l
pr oper t y, r egar dl ess of t he cl ass l i f e.

a. Tr ue
*b. Fal se

955. MACRS depr eci at i on i s used t o comput e ear ni ngs and pr of i t s.

a. Tr ue
*b. Fal se

956. Under t he al t er nat i ve depr eci at i on syst em( ADS) , t he hal f - year
convent i on must be used f or per sonal t y.

a. Tr ue
*b. Fal se

957. A t axpayer may el ect t o use t he al t er nat i ve depr eci at i on syst em
( ADS) t o comput e depr eci at i on f or ear ni ngs and pr of i t s.

*a. Tr ue
b. Fal se

958. An el ect i on t o use st r ai ght - l i ne under ADS i s made on an asset - by-
asset basi s f or pr oper t y ot her t han el i gi bl e r eal est at e.

a. Tr ue
*b. Fal se

959. For r eal pr oper t y, t he ADS convent i on i s t he mi d- mont h convent i on.

*a. Tr ue
b. Fal se

960. The cost of a covenant not t o compl et e f or 10 year s i ncur r ed i n
connect i on wi t h t he acqui si t i on of a busi ness i s amor t i zed over 10
year s.

a. Tr ue
*b. Fal se

961. Goodwi l l associ at ed wi t h t he acqui si t i on of a busi ness cannot be
amor t i zed.

a. Tr ue
*b. Fal se

962. A pur chased t r ademar k i s a 197 i nt angi bl e.

*a. Tr ue
b. Fal se

963. I f st ar t up expenses t ot al $53, 000 i n 2013, $51, 000 i s amor t i zed
over 180 mont hs.

*a. Tr ue
b. Fal se

964. The amor t i zat i on per i od i n 2013 f or $58, 000 of st ar t up expenses i s
180 mont hs.

*a. Tr ue
b. Fal se

965. Cost depl et i on i s det er mi ned by mul t i pl yi ng t he depl et i on cost per
uni t by t he number of uni t s sol d.

*a. Tr ue
b. Fal se

966. Per cent age depl et i on enabl es t he t axpayer t o r ecover mor e t han t he
cost of an asset .

*a. Tr ue
b. Fal se

967. I nt angi bl e dr i l l i ng cost s must be capi t al i zed and wr i t t en of f
t hr ough depl et i on.

a. Tr ue
*b. Fal se

968. Gr ape Cor por at i on pur chased a machi ne i n December of t he cur r ent
year . Thi s was t he onl y asset pur chased dur i ng t he cur r ent year . The
machi ne was pl aced i n ser vi ce i n J anuar y of t he f ol l owi ng year . No
asset s wer e pur chased i n t he f ol l owi ng year . Gr ape Cor por at i on s cost
r ecover y woul d begi n:

a. I n t he cur r ent year usi ng a mi d- quar t er convent i on.
b. I n t he cur r ent year usi ng a hal f - year convent i on.
c. I n t he f ol l owi ng year usi ng a mi d- quar t er convent i on.
*d. I n t he f ol l owi ng year usi ng a hal f - year convent i on.

969. Whi ch of t he f ol l owi ng asset s woul d be subj ect t o cost r ecover y?

a. A pai nt i ng by Pi casso hangi ng on a doct or s of f i ce wal l .
b. An ant i que vase i n a doct or s wai t i ng r oom.
*c. Landscapi ng ar ound t he doct or s of f i ce.
d. a. , b. , and c.

970. On J une 1 of t he cur r ent year , Tab conver t ed a machi ne f r om
per sonal use t o r ent al pr oper t y. At t he t i me of t he conver si on, t he
machi ne was wor t h $90, 000. Fi ve year s ago Tab pur chased t he machi ne f or
$120, 000. The machi ne i s st i l l encumber ed by a $50, 000 mor t gage. What
i s t he basi s of t he machi ne f or cost r ecover y?

a. $70, 000.
*b. $90, 000.
c. $120, 000.
d. $140, 000.

971. Tar a pur chased a machi ne f or $40, 000 t o be used i n her busi ness.
The cost r ecover y al l owed and al l owabl e f or t he t hr ee year s t he machi ne
was used ar e as f ol l ows:

Cost Recovery
Allowed
Cost Recovery
Allowable
Year 1 $16,000 $ 8,000
Year 2 9,600 12,800
Year 3 5,760 7,680

If Tara sells the machine after three years for $15,000, how much gain
should she recognize?

a. $3, 480.
b. $6, 360.
c. $9, 240.
*d. $11, 480.

972. Hazel pur chased a new busi ness asset ( f i ve- year asset ) on
Sept ember 30, 2013, at a cost of $100, 000. On Oct ober 4, 2013, Hazel
pl aced t he asset i n ser vi ce. Thi s was t he onl y asset Hazel pl aced i n
ser vi ce i n 2013. The onl y el ect i on wi t h r espect t o t he asset was not
t o t ake 179. On August 20, 2014, Hazel sol d t he asset . Det er mi ne
t he cost r ecover y f or 2014 f or t he asset .

a. $9, 600.
*b. $11, 875.
c. $23, 750.
d. $38, 000.

973. Tan Company acqui r es a new machi ne ( t en- year pr oper t y) on J anuar y
15, 2013, at a cost of $200, 000. Tan al so acqui r es anot her new machi ne
( seven- year pr oper t y) on November 5, 2013, at a cost of $40, 000. No
el ect i on i s made t o use t he st r ai ght - l i ne met hod. The company does not
make t he 179 el ect i on. Tan el ect s t o not t ake addi t i onal f i r st - year
depr eci at i on. Det er mi ne t he t ot al deduct i ons i n cal cul at i ng t axabl e
i ncome r el at ed t o t he machi nes f or 2013.

a. $24, 000.
*b. $25, 716.
c. $102, 000.
d. $132, 858.

974. J ames pur chased a new busi ness asset ( t hr ee- year per sonal t y) on
J ul y 23, 2013, at a cost of $40, 000. J ames t akes addi t i onal f i r st - year
depr eci at i on Det er mi ne t he cost r ecover y deduct i on f or 2013.

a. $8, 333.
*b. $26, 666.
c. $33, 333.
d. $41, 665.

975. Al i ce pur chased of f i ce f ur ni t ur e on Sept ember 20, 2012, f or
$100, 000. On Oct ober 10, 2012, she pur chased busi ness comput er s f or
$80, 000. Al i ce pl aced al l of t he asset s i n ser vi ce on J anuar y 15, 2013.
Al i ce di d not el ect t o expense any of t he asset s under 179, nor di d
she el ect st r ai ght - l i ne cost r ecover y. She di d not t ake addi t i onal
f i r st - year depr eci at i on. Det er mi ne t he cost r ecover y deduct i on f or t he
busi ness asset s f or 2013.

a. $6, 426.
b. $14, 710.
c. $25, 722.
*d. $30, 290.

976. Bar r y pur chased a used busi ness asset ( seven- year pr oper t y) on
Sept ember 30, 2013, at a cost of $200, 000. Thi s i s t he onl y asset he
pur chased dur i ng t he year . Bar r y di d not el ect t o expense any of t he
asset under 179, nor di d he el ect st r ai ght - l i ne cost r ecover y. Bar r y
sol d t he asset on J ul y 17, 2014. Det er mi ne t he cost r ecover y deduct i on
f or 2014.

a. $19, 133.
*b. $24, 490.
c. $34, 438.
d. $55, 100.

977. Bonni e pur chased a new busi ness asset ( f i ve- year pr oper t y) on
Mar ch 10, 2013, at a cost of $30, 000. She al so pur chased a new busi ness
asset ( seven- year pr oper t y) on November 20, 2013, at a cost of $13, 000.
Bonni e di d not el ect t o expense ei t her of t he asset s under 179, nor
di d she el ect st r ai ght - l i ne cost r ecover y. Bonni e t akes addi t i onal
f i r st - year depr eci at i on. Det er mi ne t he cost r ecover y deduct i on f or
2013 f or t hese asset s.

a. $5, 858.
b. $7, 464.
c. $9, 586.
d. $19, 429.

978. Doug pur chased a new f act or y bui l di ng on J anuar y 15, 1988, f or
$400, 000. On Mar ch 1, 2013, t he bui l di ng was sol d. Det er mi ne t he cost
r ecover y deduct i on f or t he year of t he sal e assumi ng he di d not use t he
MACRS st r ai ght - l i ne met hod.

a. $0.
b. $1, 587.
*c. $2, 645.
d. $12, 696.

979. Cor a pur chased a hot el bui l di ng on May 17, 2013, f or $3, 000, 000.
Det er mi ne t he cost r ecover y deduct i on f or 2014.

a. $48, 150.
b. $59, 520.
c. $69, 000.
*d. $76, 920.

980. Car l os pur chased an apar t ment bui l di ng on November 16, 2013, f or
$3, 000, 000. Det er mi ne t he cost r ecover y f or 2013.

a. $9, 630.
b. $11, 910.
c. $13, 950.
d. $22, 740.

981. Di ane pur chased a f act or y bui l di ng on Apr i l 15, 1993, f or
$5, 000, 000. She sel l s t he f act or y bui l di ng on Febr uar y 2, 2013.
Det er mi ne t he cost r ecover y deduct i on f or t he year of t he sal e.

a. $16, 025.
*b. $19, 838.
c. $26, 458.
d. $158, 750.

982. Howar d s busi ness i s r ai si ng and har vest i ng peaches. On Mar ch 10,
2013, Howar d pur chased 10, 000 new peach t r ees at a cost of $60, 000.
Howar d does not el ect t o expense asset s under 179. I f el i gi bl e,
Howar d t akes addi t i onal f i r st - year depr eci at i on. Det er mi ne t he cost
r ecover y deduct i on f or 2013.

a. $0.
b. $3, 000.
*c. $31, 500.
d. $60, 000.

983. On May 15, 2013, Br ent pur chased new f ar mequi pment f or $200, 000.
Br ent used t he equi pment i n connect i on wi t h hi s f ar mi ng
busi ness. Br ent does not el ect t o expense asset s under 179. Br ent
does not t ake addi t i onal f i r st - year depr eci at i on. Det er mi ne t he cost

a. $12, 852.
*b. $21, 420.
c. $30, 000.
d. $36, 000.

984. On J une 1, 2013, Sampur chased used f ar mmachi ner y f or $150, 000.
Samused t he machi ner y i n connect i on wi t h hi s f ar mi ng busi ness. Sam
does not el ect t o expense asset s under 179. Samhas, however , made an
el ect i on t o not have t he uni f or mcapi t al i zat i on r ul es appl y t o t he
f ar mi ng busi ness. Samt akes addi t i onal f i r st - year depr eci at i on when
avai l abl e. Det er mi ne t he cost r ecover y deduct i on f or 2013.

a. $5, 000.
*b. $7, 500.
c. $10, 000.
d. $78, 750.

985. On May 30, 2013, J ane si gned a 20- year l ease on a f act or y bui l di ng
t o use f or her busi ness. The l ease begi ns on J une 1, 2013. I n August
2013, J ane pai d $300, 000 f or qual i f i ed l easehol d i mpr ovement s t o t he
bui l di ng. J ane t akes addi t i onal f i r st - year depr eci at i on. Det er mi ne
J ane s t ot al deduct i on wi t h r espect t o t he l easehol d i mpr ovement s f or
2013.

a. $2, 890.
b. $150, 000.
*c. $154, 995.
d. $300, 000.

986. On Febr uar y 20, 2013, Susan pai d $200, 000 f or a l easehol d
i mpr ovement t o an of f i ce bui l di ng t hat she i s goi ng t o l ease t o J ohn.
The l easehol d i mpr ovement i s not a qual i f i ed l easehol d i mpr ovement . The
l ease wi l l begi n on J une 1, 2013, and t er mi nat e on May 31, 2023. At t he
t er mi nat i on of t he l ease, t he i mpr ovement wi l l be wor t hl ess. Det er mi ne
Susan s deduct i bl e l oss as a r esul t of t he t er mi nat i on of t he l ease.

a. $0.
b. $123, 503.
c. $127, 990.
d. $128, 631.

987. Whi t e Company acqui r es a new machi ne ( seven- year pr oper t y) on
J anuar y 10, 2013, at a cost of $600, 000. Whi t e makes t he el ect i on t o
expense t he maxi mumamount under 179. No el ect i on i s made t o use t he
st r ai ght - l i ne met hod. Whi t e does t ake addi t i onal f i r st - year
depr eci at i on. Det er mi ne t he t ot al deduct i ons i n cal cul at i ng t axabl e
i ncome r el at ed t o t he machi ne f or 2013 assumi ng Whi t e has t axabl e
i ncome of $800, 000.

a. $71, 593.
b. $128, 610.
c. $385, 296.
d. $390, 868.

988. Augi e pur chased one new asset dur i ng t he year ( f i ve- year pr oper t y)
on November 10, 2013, at a cost of $650, 000. She made t he 179
el ect i on. The i ncome f r omt he busi ness bef or e t he cost r ecover y
deduct i on and t he 179 deduct i on was $600, 000. She t akes addi t i onal
f i r st - year depr eci at i on. Det er mi ne t he t ot al cost r ecover y deduct i on
wi t h r espect t o t he asset f or 2013.

a. $22, 500.
b. $154, 550.
c. $500, 000.
d. $600, 700.

989. I n 2012, Gai l had a 179 deduct i on car r yover of $30, 000. I n 2013,
she el ect ed 179 f or an asset acqui r ed at a cost of $115, 000. Gai l s
179 busi ness i ncome l i mi t at i on f or 2013 i s $140, 000. Det er mi ne Gai l s
179 deduct i on f or 2013.

a. $25, 000.
b. $115, 000.
c. $130, 000.
*d. $140, 000.

990. The onl y asset Bi l l pur chased dur i ng 2013 was a new seven- year
cl ass asset . The asset , whi ch was l i st ed pr oper t y, was acqui r ed on J une
17 at a cost of $50, 000. The asset was used 40%f or busi ness, 30%f or
t he pr oduct i on of i ncome, and t he r est of t he t i me f or per sonal use.
Bi l l al ways el ect s t o expense t he maxi mumamount under 179 whenever
i t i s appl i cabl e. The net i ncome f r omt he busi ness bef or e t he 179
deduct i on i s $100, 000. Det er mi ne Bi l l s maxi mumdeduct i on wi t h r espect
t o t he pr oper t y f or 2013.

a. $1, 428.
*b. $2, 499.
c. $26, 749.
d. $33, 375.

991. Mar y pur chased a new f i ve- year cl ass asset on Mar ch 7, 2013. The
asset was l i st ed pr oper t y ( not an aut omobi l e) . I t was used 60%f or
busi ness and t he r est of t he t i me f or per sonal use. The asset cost
$900, 000. Mar y made t he 179 el ect i on. The i ncome f r omt he busi ness
bef or e t he 179 deduct i on was $600, 000. Mar y does t ake addi t i onal
f i r st - year depr eci at i on. Det er mi ne t he t ot al deduct i ons wi t h r espect
t o t he asset f or 2013.

a. $72, 000.
b. $271, 600.
*c. $524, 000.
d. $600, 000.

992. Hans pur chased a new passenger aut omobi l e on August 17, 2013, f or
$30, 000. Dur i ng t he year t he car was used 40%f or busi ness and 60%f or
per sonal use. Det er mi ne hi s cost r ecover y deduct i on f or t he car f or
2013.

a. $500.
b. $1, 000.
c. $1, 224.
d. $1, 500.

993. On J une 1, 2013, I r ene pl aces i n ser vi ce a new aut omobi l e t hat
cost $21, 000. The car i s used 70% f or busi ness and 30% f or per sonal use.
( Assume t hi s per cent age i s mai nt ai ned f or t he l i f e of t he car . ) She
does not t ake addi t i onal f i r st - year depr eci at i on. Det er mi ne t he cost

a. $3, 160.
b. $3, 290.
*c. $3, 570.
d. $6, 720.

994. On J une 1, 2013, J ames pl aces i n ser vi ce a new aut omobi l e t hat
( Assume t hi s per cent age i s mai nt ai ned f or t he l i f e of t he car . ) J ames
does t ake addi t i onal f i r st - year depr eci at i on. Det er mi ne t he cost

a. $1, 776.
b. $1, 836.
*c. $6, 696.
d. $11, 160.

995. On May 2, 2013, Kar en pl aced i n ser vi ce a new spor t s ut i l i t y
vehi cl e t hat cost $60, 000 and has a gr oss vehi cl e wei ght of 6, 300
l bs. The vehi cl e i s used 60%f or busi ness and 40%f or per sonal
use. Det er mi ne t he cost r ecover y f or 2013. Kar en want s t o maxi mi ze her
deduct i ons.

a. $2, 200.
b. $3, 060.
c. $25, 000.
d. $27, 200.

996. On J ul y 17, 2013, Kevi n pl aces i n ser vi ce a used aut omobi l e t hat
I n 2014, he used t he aut omobi l e 40%f or busi ness and 60%f or per sonal
use. Det er mi ne t he cost r ecover y r ecapt ur e f or 2014.

a. $0.
*b. $528.
c. $2, 000.
d. $2, 500.

997. J anet pur chased a new car on J une 5, 2013, at a cost of $20, 000.
She used t he car 80%f or busi ness and 20%f or per sonal use i n 2013. She
used t he aut omobi l e 40%f or busi ness and 60%f or per sonal use i n
2014. J anet t akes addi t i onal f i r st - year depr eci at i on. Det er mi ne
J anet s cost r ecover y r ecapt ur e f or 2014.

a. $0.
b. $928.
c. $1, 008.
*d. $7, 328.

998. On J ul y 10, 2013, Ar i f f pl aces i n ser vi ce a new spor t s ut i l i t y
vehi cl e t hat cost $70, 000 and wei ghed 6, 300 pounds. The SUV i s used
100%f or busi ness. Det er mi ne Ar i f f s maxi mumdeduct i on f or 2013,
assumi ng Ar i f f s 179 busi ness i ncome i s $110, 000. Ar i f f does not
t ake addi t i onal f i r st - year depr eci at i on.

a. $2, 960.
b. $25, 000.
*c. $34, 000.
d. $70, 000.

999. On Mar ch 1, 2013, Lana l eases and pl aces i n ser vi ce a passenger
aut omobi l e. The l ease wi l l r un f or f i ve year s and t he payment s ar e $500
per mont h. Dur i ng 2013, she uses her car 60%f or busi ness and 40%f or
per sonal act i vi t i es. Assumi ng t he dol l ar amount f r omt he I RS t abl e i s
$20, det er mi ne Lana s i ncl usi on as a r esul t of t he l ease.

a. $0.
*b. $10.
c. $17.
d. $20.

1000. On J une 1, 2013, Nor ml eases a t axi and pl aces i t i n ser vi ce. The
l ease payment s ar e $1, 000 per mont h. Assumi ng t he dol l ar amount f r om
t he I RS t abl e i s $241, det er mi ne Nor m s i ncl usi on amount .

*a. $0.
b. $241.
c. $907.
d. $1, 687.

1001. Bhaskar pur chased a new f act or y bui l di ng on Sept ember 10, 2013,
f or $3, 700, 000. Fi ve hundr ed t housand of t he pur chase pr i ce was
al l ocat ed t o t he l and. He el ect ed t he al t er nat i ve depr eci at i on syst em
( ADS) . Det er mi ne t he cost r ecover y deduct i on f or 2014.

a. $23, 328.
*b. $80, 000.
c. $82, 048.
d. $92, 500.

1002. Pat pur chased a used f i ve- year cl ass asset on Mar ch 15, 2013, f or
$60, 000. He di d not el ect 179 expensi ng. Det er mi ne t he cost r ecover y
deduct i on f or 2013 f or ear ni ngs and pr of i t s pur poses.

a. $2, 000.
b. $3, 000.
*c. $6, 000.
d. $12, 000.

1003. Geor ge pur chases used seven- year cl ass pr oper t y at a cost of
$200, 000 on Apr i l 20, 2013. Det er mi ne Geor ge s cost r ecover y deduct i on
f or 2013 f or al t er nat i ve mi ni mumt ax pur poses, assumi ng Geor ge does not
el ect 179.

a. $2, 500.
b. $10, 000.
c. $14, 280.
d. $28, 580.

1004. Dur i ng t he past t wo year s, t hr ough ext ensi ve adver t i si ng and
i mpr oved cust omer r el at i ons, Or ange Cor por at i on est i mat ed t hat i t had
devel oped cust omer goodwi l l wor t h $500, 000. For t he cur r ent year ,
det er mi ne t he amount of goodwi l l Or ange Cor por at i on may amor t i ze.

a. $16, 667.
b. $26, 667.
c. $33, 333.
d. $100, 000.

1005. On J une 1, 2013, Red Cor por at i on pur chased an exi st i ng busi ness.
Wi t h r espect t o t he acqui r ed asset s of t he busi ness, Red al l ocat ed
$300, 000 of t he pur chase pr i ce t o a pat ent . The pat ent wi l l expi r e i n
20 year s. Det er mi ne t he t ot al amount t hat Red may amor t i ze f or 2013 f or
t he pat ent .

a. $0.
b. $1, 667.
*c. $11, 667.
d. $35, 000.

1006. Or ange Cor por at i on begi ns busi ness on Apr i l 2, 2013. The
cor por at i on has st ar t up expendi t ur es of $64, 000 whi ch i t i ncur r ed l ast
year . I f Or ange Cor por at i on el ect s 195, det er mi ne t he t ot al amount
t hat Or ange may deduct i n 2013.

a. $0.
*b. $3, 200.
c. $4, 267.
d. $7, 950.

1007. On J anuar y 15, 2013, Ver n pur chased t he r i ght s t o a mi ner al
i nt er est f or $3, 500, 000. At t hat t i me i t was est i mat ed t hat t he
r ecover abl e uni t s woul d be 500, 000. Dur i ng t he year , 40, 000 uni t s wer e
mi ned and 25, 000 uni t s wer e sol d f or $800, 000. Ver n i ncur r ed expenses
dur i ng 2013 of $500, 000. The per cent age depl et i on r at e i s 22%.
Det er mi ne Ver n s depl et i on deduct i on f or 2013.

a. $150, 000.
*b. $175, 000.
c. $176, 000.
d. $200, 000.
e. $250, 000.

1008. Tompur chased and pl aced i n ser vi ce used of f i ce f ur ni t ur e on
J anuar y 3, 2013, f or $40, 000. Tom s account ant depr eci at ed t he
f ur ni t ur e usi ng st r ai ght - l i ne depr eci at i on over 10 year s f or f i nanci al
r epor t i ng pur poses. The account ant al so used t he same depr eci at i on
amount s when f i l i ng Tom s i ncome t ax r et ur ns. On J anuar y 10, 2018, Tom
sol d t he f ur ni t ur e. Det er mi ne t he t ax basi s of t he f ur ni t ur e at t he
t i me of t he sal e.

Cor r ect Answer :
The cost of t he asset must be r educed by t he gr eat er of t he cost
r ecover y al l owed or al l owabl e i n cal cul at i ng t he t ax basi s.

Cost $40,000
2013 allowable ($40,000
.1429)
(5,716)
2014 allowable ($40,000
.2449)
(9,796)
2015 allowable ($40,000
.1749)
(6,996)
2016 allowable ($40,000
.1249)
(4,996)
2017 allowed ($40,000
.0893)
(3,572)
2018 allowable ($40,000
.0892 .50)
(1,784)
Tax basis $ 7,140

1009. J i macqui r es a new seven- year cl ass asset on Sept ember 20, 2013,
f or $80, 000. He pl aced t he asset i n ser vi ce on Oct ober 5, 2013. He
does not el ect t o expense any of t he asset under 179 or el ect
st r ai ght - l i ne, cost r ecover y. He t akes addi t i onal f i r st - year
depr eci at i on. He sel l s t he asset on August 25, 2014. Thi s i s t he onl y
asset he acqui r es i n 2013. Det er mi ne J i m s cost r ecover y i n 2013 and
2014.

Cor r ect Answer :
The mi d- quar t er convent i on appl i es.

2013
Additional first-year depreciation
($80,000 .50)
$40,000
MACRS cost recovery ($40,000 .0357) 1,42
8
Total for 2013

$41,428
2014
MACRS cost recovery [$40,000 .2755
(2.5/4)]
$ 6,888

1010. Rod pai d $1, 950, 000 f or a new war ehouse on Apr i l 14, 2013. He
sol d t he war ehouse on Sept ember 29, 2018. Det er mi ne t he cost r ecover y
deduct i on f or 2013 and 2018.

Cor r ect Answer :
2013: $1, 950, 000 . 01819 = $35, 471.

2018: $1, 950, 000 . 02564 8. 5/ 12 = $35, 415.

1011. On Mar ch 3, 2013, Sal l y pur chased and pl aced i n ser vi ce a
bui l di ng cost i ng $12, 000, 000. The bui l di ng has 10 f l oor s. The bot t om
t hr ee f l oor s ar e r ent ed out t o busi nesses. The t op seven f l oor s ar e
r esi dent i al apar t ment s. The gr oss r ent s f r omt he busi nesses ar e
$60, 000 and t he gr oss r ent s f r omt he apar t ment s ar e
$110, 000. Det er mi ne Sal l y s cost r ecover y f or t he bui l di ng i n 2013.

Cor r ect Answer :
The gr oss r ent s f r omt he apar t ment s ar e not 80%or mor e of t he t ot al
gr oss r ent s and hence, t he whol e bui l di ng cannot be t r eat ed as
r esi dent i al r ent al r eal est at e.

Residential [(70% $12,000,000)
.02879]
$241,836
Nonresidential [(30% $12,000,000)
.02033]
73,1
88
Total cost recovery $315,024

1012. Si d bought a new $1, 210, 000 seven- year cl ass asset on August 2,
2013. On December 2, 2013, he pur chased $860, 000 of used f i ve- year
cl ass asset s. Si d does t ake addi t i onal f i r st - year depr eci at i on i f
avai l abl e. I f Si d el ect s 179, what i s t he maxi mumwr i t e- of f f or t hese
pur chases f or 2013?

Cor r ect Answer :
179 expense [$500,000
($2,070,000 $2,000,000)]

$430,000
Taking 179 expense on 7-year
property:

7-year property
179 expense $ 430,000
Additional first-year
depreciation [($1,210,000
$430,000) .50]
390,000
MACRS cost recovery ($390,000
.1429)
55,731

5-year property
.20)
172,000
Total deduction $1,047,731

Taking 179 expense on 5-year
property:

7-year property
depreciation ($1,210,000 .50)
$ 605,000
.1429)

86,455
5-year property
179 expense 430,000
MACRS cost recovery [($860,000
$430,000) .20]
86,
000

Using 179 on the used 5-year asset produces the greater total deduction
in 2013.

1013. Pol l y pur chased a new hot el on J ul y 20, 2013, f or $6, 000, 000. On
J anuar y 20, 2020, t he bui l di ng was sol d. Det er mi ne t he cost r ecover y
deduct i on f or t he year of t he sal e.

Cor r ect Answer :
$6, 000, 000 . 02564 . 5/ 12 = $6, 410.

1014. Rust i n bought used 7- year cl ass pr oper t y on May 15, 2013, f or
$728, 000. Rust i n el ect s 179 and st r ai ght - l i ne cost r ecover y. Rust i n s
t axabl e i ncome woul d not cr eat e a l i mi t at i on f or pur poses of t he 179
deduct i on. Det er mi ne t he maxi mumwr i t e- of f Rust i n can t ake i n 2013.

Cor r ect Answer :
179 expense election $500,000
Cost recovery [($728,000
$500,000) .0714 (Table 8.3)]
16,27
9
Total deduction $516,279

1015. Audr a acqui r es t he f ol l owi ng new f i ve- year cl ass pr oper t y i n 2013:

Asset Acqui si t i on
Dat e
Cost
A J anuar y
10
$ 106, 000
B J ul y 5 70, 000
C Novembe
r 15
1, 950, 000
Tot al $2, 126, 000

Audr a el ect s 179 f or Asset C. Audr a s t axabl e i ncome f r omher
busi ness woul d not cr eat e a l i mi t at i on f or pur poses of t he 179
deduct i on. Audr a t akes addi t i onal f i r st - year depr eci at i on. Det er mi ne
her t ot al cost r ecover y deduct i on ( i ncl udi ng t he 179 deduct i on) f or
t he year .

Cor r ect Answer :
$1, 950, 000/ $2, 126, 000 = 91. 7%. Ther ef or e, Audr a must use t he mi d-
quar t er convent i on.

Asset A:
depreciation ($106,000 .50)
$ 53,000
.35)

18,550
Asset B:
depreciation ($70,000 .50)
35,000
.15)

5,250
Asset C:
179 expense [$500,000
($2,126,000 $2,000,000)]
374,000
depreciation [($1,950,000
$374,000) .50]
788,000
MACRS cost recovery ($788,000 39
.05) ,400

1016. On Apr i l 5, 2013, Or ange Cor por at i on pur chased, and pl aced i n
ser vi ce, seven- year cl ass asset s cost i ng $540, 000 and f i ve- year cl ass
asset s cost i ng $140, 000. Or ange el ect s t o expense t he maxi mumamount
under 179. Or ange does not t ake addi t i onal f i r st - year
depr eci at i on. Assume t axabl e i ncome i s not a l i mi t at i on. Det er mi ne
Or ange Cor por at i on s cost r ecover y wi t h r espect t o t he asset s f or 2013.

Cor r ect Answer :
179 limit $500,000

Seven-year assets
179 expense $500,000
Regular MACRS [($540,000
$500,000) .1429]
5,716
Five-year assets
Regular MACRS ($140,000 .20) 28,00
0

1017. Mar t i n i s a sol e pr opr i et or of a busi ness. On Mar ch 4, 2013,
Mar t i n pur chased and pl aced i n ser vi ce new seven- year cl ass asset s
cost i ng $560, 000. Mar t i n s busi ness has i ncome f or t he year , bef or e
any deduct i ons associ at ed wi t h t he pur chased asset s, of
$160, 000. Mar t i n al so has $30, 000 of i nt er est i ncome f or t he year
whi ch i s not r el at ed t o t he busi ness. Mar t i n want s hi s adj ust ed gr oss
i ncome f or t he year t o be as l ow as possi bl e. Wi t h t hi s obj ect i ve i n
mi nd, det er mi ne how Mar t i n shoul d r ecover t he cost of t he acqui r ed
asset s.

Cor r ect Answer :
El ect i ng 179:

179 expense

$500,000
Business income before MACRS
deductions
$160,000
depreciation
[($560,000 $500,000)
(30,000)
50%]
.1429)
(4,287)
Business income limitation

$125,713
179 limit

$125,713
Business income $
0
Adjusted gross income $ 30,000

Not electing 179:

Business income before MACRS
deductions
$160,000
depreciation ($560,000 50%)
(280,000)
.1429)
(40,012)
Business income ($160,012)

Adjusted gross income ($130,012)

Not electing 179 will produce the lowest adjusted gross income because
the 179 expense cannot create a business loss.

1018. On Febr uar y 21, 2013, J oe pur chased new f ar mequi pment f or
$600, 000. J oe has made an el ect i on t o not have t he uni f or m
capi t al i zat i on r ul es appl y t o hi s f ar mi ng busi ness. He does not t ake
addi t i onal f i r st - year depr eci at i on. I f J oe el ect s 179, what i s t he
maxi mumwr i t e- of f f or t hi s pur chase f or 2013?

Cor r ect Answer :
179 expense $500,000
ADS straight-line [($600,000
$500,000) .05]
5,0
00

1019. On Apr i l 15, 2013, Sampl aced i n ser vi ce a st or age f aci l i t y ( a
si ngl e- pur pose agr i cul t ur al st r uct ur e) cost i ng $80, 000. Samal so
pur chased and pl ant ed f r ui t t r ees cost i ng $40, 000. Samdoes not el ect
t o expense any of t he acqui si t i ons under 179. Samel ect ed not t o
t ake addi t i onal f i r st - year depr eci at i on. Det er mi ne Sam s cost r ecover y
f r omt hese t wo i t ems f or 2013.

Cor r ect Answer :
Storage facility ($80,000
.075) (Table 8.4)
$6,000
Trees ($40,000 .05) (Table
8.3)
2,000

1020. On August 20, 2012, May si gned a 10- year l ease on a bui l di ng f or
her busi ness. On November 28, 2013, May pai d $80, 000 f or a qual i f i ed
l easehol d i mpr ovement t o t he bui l di ng. She t akes addi t i onal f i r st - year
depr eci at i on, but does not el ect 179 expensi ng. What i s May s cost
r ecover y deduct i on f or t he i mpr ovement i n 2013?

Cor r ect Answer :
Additional first-year depreciation
($80,000 .50)
$40,000
MACRS cost recovery ($40,000 .0333) 1,33
2

1021. On J ul y 15, 2013, Mavi s pai d $275, 000 f or qual i f i ed l easehol d
i mpr ovement s on a commer ci al bui l di ng she was l easi ng. Det er mi ne t he
maxi mumt ot al cost r ecover y f r omt he i mpr ovement s i n 2013.

Cor r ect Answer :
179 expense $250,000
depreciation [($275,000
$250,000) 50%]
12,500
Regular MACRS ($12,500
.0333)
416
$262,916

1022. J oe pur chased a new f i ve- year cl ass asset on J une 1, 2013. The
asset i s l i st ed pr oper t y ( not an aut omobi l e) . I t was used 55%f or
busi ness and 45%f or t he pr oduct i on of i ncome. The asset cost
$1, 000, 000. J oe made t he 179 el ect i on. J oe s t axabl e i ncome woul d not
cr eat e a l i mi t at i on f or pur poses of t he 179 deduct i on. J oe does not
t ake addi t i onal f i r st - year depr eci at i on. Det er mi ne J oe s t ot al cost
r ecover y ( i ncl udi ng t he 179 deduct i on) f or t he year .

Cor r ect Answer :
Busi ness use: $550, 000 ( $1, 000, 000 55%)
179 expense $500,000
Regular MACRS [($550,000 $500,000)
.20]
10,000

Production of income use: $450,000
($1,000,000 45%)

Regular MACRS ($450,000 .20) 90,0
00

*Property used for the production of income is not eligible for 179
expensing.

1023. Nor a pur chased a new aut omobi l e on J ul y 20, 2013, f or $29, 000.
The car was used 60%f or busi ness and 40%f or per sonal use. I n 2014,
t he car was used 30%f or busi ness and 70%f or per sonal use. Nor a
el ect s not t o t ake addi t i onal f i r st - year depr eci at i on. Det er mi ne t he
cost r ecover y r ecapt ur e and t he cost r ecover y deduct i on f or 2014.

Cor r ect Answer :
Cost r ecover y i n 2013:
MACRS ($29,000 .20) = $5,800 (limited
to $3,160*); $3,160 60%
$1,896
Straight-line ($29,000 .10) = $2,900
(limited to $3,160*); $2,900 60%
(1,740)
Cost recovery recapture in 2014

$ 156
Cost recovery in 2014:
Straight-line ($29,000 .20) = $5,800
(limited to $5,100*); $5,100 .30
$1,530

*These depreciation limits are indexed annually.

1024. Nor mpur chases a new spor t s ut i l i t y vehi cl e ( SUV) on Oct ober 12,
2013, f or $50, 000. The SUV has a gr oss vehi cl e wei ght of 6, 200 l bs. I t
i s used 100%of t he t i me f or busi ness and i t i s t he onl y busi ness asset
acqui r ed by Nor mdur i ng 2013. Comput e t he maxi mumdeduct i on wi t h
r espect t o t he SUV f or 2013. Nor mdoes t ake addi t i onal f i r st - year
depr eci at i on.

Cor r ect Answer :
The SUV i s not cl assi f i ed as a passenger aut omobi l e because of i t s GVW
exceedi ng 6, 000 l bs. Ther ef or e, i t i s not subj ect t o t he cost r ecover y
l i mi t s of 280F.

Section 179 expense (limited to
$25,000)
$25,000
depreciation [($50,000
$25,000) .50]
12,500
.05)
625

1025. On J une 1, 2013, Gabr i el l a pur chased a comput er and per i pher al
equi pment ( f i ve- year pr oper t y) f or $25, 000. She used t he asset s 40%f or
busi ness, 50%f or t he pr oduct i on of i ncome, and 10%f or per sonal use.
These ar e t he onl y asset s Gabr i el l a pur chased dur i ng t he cur r ent year .
Det er mi ne her t ot al cost r ecover y deduct i on f or t he cur r ent year .

Cor r ect Answer :
A comput er and per i pher al equi pment ar e l i st ed pr oper t y. Si nce t he
mor e- t han- 50%busi ness use t est i s not sat i sf i ed, Gabr i el l a cannot
el ect 179 expensi ng, she must use st r ai ght - l i ne cost r ecover y, and i s
not el i gi bl e f or addi t i onal f i r st - year depr eci at i on. The 10%of
per sonal usage does not qual i f y f or cost r ecover y.

$25, 000 . 10 90%= $2, 250.

1026. I n 2013, Mar ci i s consi der i ng st ar t i ng a new busi ness. Mar ci had
t he f ol l owi ng cost s associ at ed wi t h t hi s vent ur e:

Adver t i si ng $ 5, 000
Tr avel 10, 000
Mar ket sur veys 8, 000
Pr of essi onal ser vi ces 30, 000
I nt er est expense 2, 000
Taxes 1, 000

Mar ci st ar t ed t he new busi ness on J anuar y 5, 2014. Det er mi ne t he
deduct i on f or Mar ci s st ar t up cost s f or 2013.

Cor r ect Answer :
Mar ci i s not al l owed t o deduct any st ar t up cost s i n 2013 because t he
busi ness was not st ar t ed unt i l 2014.

1027. Ri ck pur chased a ur ani umi nt er est f or $10, 000, 000 on J anuar y 3,
2013, when r ecover abl e r eser ves wer e est i mat ed at 200, 000 uni t s. A
t ot al of 10, 000 uni t s wer e ext r act ed i n 2013 and 7, 000 uni t s wer e sol d
i n 2013. Gr oss i ncome f r omt he pr oper t y was $2, 800, 000 and t axabl e
i ncome wi t hout t he al l owance f or depl et i on was $1, 000, 000. Det er mi ne
t he depl et i on deduct i on f or 2013.

Cor r ect Answer :
Cost depl et i on

Per cent age depl et i on

Lesser of :
22% $2, 800, 000 = $616, 000
50% $1, 000, 000 = $500, 000

Ther ef or e t he depl et i on deduct i on woul d be $500, 000.

1028. Di scuss t he di f f er ence bet ween t he hal f - year convent i on and t he
mi d- quar t er convent i on.

Cor r ect Answer :
The hal f - year convent i on assumes pr oper t y i s pl aced i n ser vi ce at mi d-
year and t hus pr ovi des f or a hal f - year s cost r ecover y f or t hat year .
The mi d- quar t er convent i on assumes pr oper t y pl aced i n ser vi ce dur i ng
t he year i s pl aced i n ser vi ce at t he mi ddl e of t he quar t er i n whi ch i t
i s act ual l y pl aced i n ser vi ce.

1029. Di scuss t he cr i t er i a used t o det er mi ne whet her a bui l di ng i s
r esi dent i al or nonr esi dent i al r eal t y. Al so expl ai n t he t ax consequences
r esul t i ng f r omt hi s det er mi nat i on i f t he pr oper t y i s pl aced i n ser vi ce
i n 2013.

Cor r ect Answer :
Resi dent i al r eal t y i s pr oper t y f or whi ch 80%or mor e of t he gr oss
r ent al r evenues ar e f r omnont r ansi ent dwel l i ng uni t s. Resi dent i al
r eal t y has a r ecover y per i od of 27. 5 year s. Nonr esi dent i al r eal t y has a
r ecover y per i od of 39 year s.

1030. Di scuss t he ef f ect on t he cost r ecover y met hod of a t axpayer
el ect i on i f t he uni f or mcapi t al i zat i on r ul es appl y t o a f ar mi ng
busi ness.

Cor r ect Answer :
The cost r ecover y met hod i s gener al l y MACRS usi ng t he 150%decl i ni ng-
bal ance met hod.

1031. Di scuss t he t ax consequences of l i st ed pr oper t y bei ng used f or
t he pr oduct i on of i ncome compar ed t o bei ng used i n a t r ade or busi ness.

Cor r ect Answer :
Sect i on 179 expensi ng cannot be t aken on pr oper t y used f or t he
pr oduct i on of i ncome. However , addi t i onal f i r st - year depr eci at i on can
be t aken.

1032. Di scuss t he benef i ci al t ax consequences of an SUV not bei ng
cl assi f i ed as a passenger aut omobi l e.

Cor r ect Answer :
I f an aut omobi l e i s not cl assi f i ed as a passenger aut omobi l e, i t i s not
subj ect t o t he st at ut or y dol l ar cost r ecover y l i mi t s under 280F. I n
addi t i on t o a l ar ger cost r ecover y deduct i on each year , i t al so r esul t s
i n t he t ot al r ecover y of t he cost over a si x- year per i od. Whi l e t he
aut omobi l e i s st i l l l i st ed pr oper t y, i f i t passes t he mor e- t han- 50%
busi ness use t est , MACRS cost r ecover y can be used as wel l as an
el ect i on under 179. However , t he 179 l i mi t f or SUVs i s $25, 000
r at her t han $500, 000 i n 2013. The aut omobi l e al so i s el i gi bl e f or
addi t i onal f i r st - year depr eci at i on.

1033. Di scuss t he r eason f or t he i ncl usi on amount wi t h r espect t o
l eased aut omobi l es.

Cor r ect Answer :
The pur pose of t he i ncl usi on amount i s t o pr event t axpayer s f r om
ci r cumvent i ng t he cost r ecover y dol l ar l i mi t at i ons by l easi ng, i nst ead
of pur chasi ng, an aut omobi l e.

1034. Di scuss t he r equi r ement s i n or der f or st ar t up expendi t ur es t o be
amor t i zed under 195.

Cor r ect Answer :
The expendi t ur es must meet t wo r equi r ement s.

The expenditures must be paid or incurred in
connection with:

Creating an active trade or business;

Investigating the creation or acquisition
of an active trade or business; or

Any activity engaged in for profit in
anticipation of such activity becoming an
active trade or business.

Such costs must be the kinds of costs that
would be currently deductible if paid or
incurred in connection with the operation of
an existing trade or business in the same
field as that entered into by the taxpayer.

1035. Di scuss t he t ax i mpl i cat i ons of a sel l er al l ocat i ng t he sel l i ng
pr i ce t o goodwi l l or a covenant not t o compet e.

Cor r ect Answer :
Goodwi l l i s a capi t al asset and any gai n or l oss r ecogni zed on t he sal e
of t he goodwi l l wi l l be capi t al gai n or l oss. A covenant not t o
compet e i s an or di nar y asset and any gai n or l oss wi l l be or di nar y gai n
or l oss.

1036. One i ndi ci a of i ndependent cont r act or ( r at her t han empl oyee)
st at us i s when t he i ndi vi dual per f or mi ng t he ser vi ces i s pai d based on
t i me spent ( r at her t han on t asks per f or med) .

a. Tr ue
*b. Fal se

1037. I n some cases i t may be appr opr i at e f or a t axpayer t o r epor t
wor k- r el at ed expenses by usi ng both For m2106 and Schedul e C.

*a. Tr ue
b. Fal se

1038. The I RS will i ssue advanced r ul i ngs as t o whet her a wor ker s
st at us i s t hat of an empl oyee or an i ndependent cont r act or .

*a. Tr ue
b. Fal se

1039. J ake per f or ms ser vi ces f or Maude. I f Maude pr ovi des t he hel per
and t ool s, t hi s i s i ndi cat i ve of i ndependent cont r act or ( r at her t han
empl oyee) st at us.

a. Tr ue
*b. Fal se

1040. A st at ut or y empl oyee i s not a common l aw empl oyee but i s subj ect
t o Soci al Secur i t y t ax.

*a. Tr ue
b. Fal se

1041. For t ax pur poses, a st at ut or y empl oyee i s t r eat ed t he same as a
common l aw empl oyee.

a. Tr ue
*b. Fal se

1042. I f an i ndi vi dual i s subj ect t o t he di r ect i on or cont r ol of
anot her onl y t o t he ext ent of t he end r esul t but not as t o t he means of
accompl i shment , an empl oyer - empl oyee r el at i onshi p does not exi st .

*a. Tr ue
b. Fal se

1043. The wor k- r el at ed expenses of an i ndependent cont r act or will be
subj ect t o t he 2%- of - AGI f l oor .

a. Tr ue
*b. Fal se

1044. Af t er she f i ni shes wor ki ng at her mai n j ob, Ann r et ur ns home, has
di nner , t hen dr i ves t o her second j ob. Ann may deduct t he mi l eage
bet ween her f i r st and second j ob.

*a. Tr ue
b. Fal se

1045. A t axpayer who mai nt ai ns an of f i ce i n t he home t o conduct hi s
onl y busi ness wi l l not have nondeduct i bl e commut i ng expense.

*a. Tr ue
b. Fal se

1046. Af t er t he aut omat i c mi l eage r at e has been set by t he I RS f or a
year , i t cannot l at er be changed by t he I RS.

a. Tr ue
*b. Fal se

1047. I n choosi ng bet ween t he act ual expense met hod and t he aut omat i c
mi l eage met hod, a t axpayer shoul d consi der t he cost of i nsur ance on t he
aut omobi l e.

*a. Tr ue
b. Fal se

1048. A t axpayer who uses t he aut omat i c mi l eage met hod t o comput e aut o
expenses can al so deduct t he busi ness por t i on of t ol l s and par ki ng.

*a. Tr ue
b. Fal se

1049. A deduct i on f or par ki ng and ot her t r af f i c vi ol at i ons i ncur r ed
dur i ng busi ness use of t he aut omobi l e i s al l owed under t he act ual cost
met hod but not t he aut omat i c mi l eage met hod.

a. Tr ue
*b. Fal se

1050. A t axpayer who uses t he aut omat i c mi l eage met hod f or t he busi ness
use of an aut omobi l e can change t o t he act ual cost met hod i n a l at er
year .

*a. Tr ue
b. Fal se

1051. Once t he act ual cost met hod i s used, a t axpayer cannot change t o
t he aut omat i c mi l eage met hod i n a l at er year .

a. Tr ue
*b. Fal se

1052. For t ax pur poses, t r avel i s a br oader cl assi f i cat i on t han
t r anspor t at i on.

*a. Tr ue
b. Fal se

1053. Amy l i ves and wor ks i n St . Loui s. I n t he mor ni ng she f l i es t o
Bost on, has a t hr ee- hour busi ness meet i ng, and r et ur ns t o St . Loui s
t hat eveni ng. For t ax pur poses, Amy was away f r omhome.

a. Tr ue
*b. Fal se

1054. J anet , who l i ves and wor ks i n Newar k, t r avel s t o At l ant a f or a
Thur sday- Fr i day busi ness conf er ence. She st ays over af t er t he
conf er ence and vi si t s r el at i ves and f r i ends on Sat ur day. Under cer t ai n
ci r cumst ances, t he meal s and l odgi ng expenses f or Sat ur day can be
consi der ed as busi ness r el at ed.

*a. Tr ue
b. Fal se

1055. Mar vi n l i ves wi t h hi s f ami l y i n Al abama. He has t wo j obs: one
i n Al abama and one i n Nor t h Car ol i na. Mar vi n s t ax home i s wher e he
l i ves ( Al abama) .

a. Tr ue
*b. Fal se

1056. A t axpayer who l i ves and wor ks i n Kansas Ci t y i s sent t o Chi cago
on an ei ght - day busi ness t r i p. Whi l e i n Chi cago, t axpayer uses t he
hot el val et ser vi ce t o have some l aundr y done. The val et char ge i s a
nondeduct i bl e per sonal t r avel expense.

a. Tr ue
*b. Fal se

1057. The t ax l aw speci f i cal l y pr ovi des t hat a t axpayer cannot be
t empor ar i l y away f r omhome f or any per i od of empl oyment t hat exceeds
one year .

*a. Tr ue
b. Fal se

1058. A t axpayer who l i ves and wor ks i n Tul sa t r avel s t o Buf f al o f or
f i ve days. I f t hr ee days ar e spent on busi ness and t wo days ar e spent
on vi si t i ng r el at i ves, onl y 60%of t he ai r f ar e i s deduct i bl e.

a. Tr ue
*b. Fal se

1059. Bob l i ves and wor ks i n Newar k, NJ . He t r avel s t o London f or a
t hr ee- day busi ness meet i ng, af t er whi ch he spends t hr ee days t our i ng
Scot l and. Al l of hi s ai r f ar e i s deduct i bl e.

*a. Tr ue
b. Fal se

1060. Ei l een l i ves and wor ks i n Mobi l e. She t r avel s t o Rome f or an
ei ght - day busi ness meet i ng, af t er whi ch she spends t wo days t our i ng
I t al y. Al l of Ei l een s ai r f ar e i s deduct i bl e.

*a. Tr ue
b. Fal se

1061. Li amj ust gr aduat ed f r omcol l ege. Because i t i s hi s f i r st j ob,
t he cost of movi ng hi s per sonal bel ongi ngs f r omhi s par ent s home t o
t he j ob si t e does not qual i f y f or t he movi ng expense deduct i on.

a. Tr ue
*b. Fal se

1062. Si ck of her 65 mi l e dai l y commut e, Edna pur chases a condo t hat i s
onl y f our mi l es f r omher j ob. Edna s movi ng expenses t o her new condo
ar e not al l owed and cannot be cl ai med by her as a deduct i on.

*a. Tr ue
b. Fal se

1063. I n November 2013, Kat i e i ncur s unr ei mbur sed movi ng expenses t o
accept a new j ob. Kat i e cannot deduct any of t hese expenses when she
t i mel y f i l es her 2013 i ncome t ax r et ur n si nce she has not yet sat i sf i ed
t he 39- week t i me t est .

a. Tr ue
*b. Fal se

1064. I n May 2013, af t er 11 mont hs on a new j ob, Ken i s f i r ed af t er he
assaul t s a cust omer . Ken must i ncl ude i n hi s gr oss i ncome f or 2013 any
deduct i on f or movi ng expenses he may have cl ai med on hi s 2012 t ax
r et ur n.

a. Tr ue
*b. Fal se

1065. A movi ng expense deduct i on i s al l owed even i f at t he t i me of t he
move t he t axpayer di d not have a j ob at t he new l ocat i on.

*a. Tr ue
b. Fal se

1066. Kel l y, an unempl oyed ar chi t ect , moves f r omBost on t o Phoeni x t o
accept a j ob as a chef at a r est aur ant . Kel l y s movi ng expenses ar e not
deduct i bl e because her new j ob i s i n a di f f er ent t r ade or busi ness.

a. Tr ue
*b. Fal se

1067. Al exi s ( a CPA) sol d her publ i c account i ng pr act i ce i n Des Moi nes
and accept ed a j ob wi t h t he Seat t l e of f i ce of a nat i onal account i ng
f i r m. Her movi ng expenses ar e not deduct i bl e because she has changed
empl oyment st at us ( i . e. , went f r omsel f - empl oyed t o empl oyee) .

a. Tr ue
*b. Fal se

1068. Qual i f i ed movi ng expenses i ncl ude t he cost of l odgi ng but not
meal s dur i ng t he move.

*a. Tr ue
b. Fal se

1069. Qual i f i ed movi ng expenses of an empl oyee t hat ar e not r ei mbur sed
ar e a deduct i on for AGI .

*a. Tr ue
b. Fal se

1070. At age 65, Cami l l a r et i r es f r om her j ob i n Bost on and moves t o
Fl or i da. As a r et i r ee, she i s not subj ect t o t he t i me t est i n deduct i ng
her movi ng expenses.

a. Tr ue
*b. Fal se

1071. Af t er compl et i ng an over seas assi gnment i n Osl o ( Nor way) , Dani el
r et i r es f r omPel i can Cor por at i on and moves t o a r et i r ement communi t y i n
Key West ( Fl or i da) . Dani el s movi ng expenses f r om Osl o t o Key West ar e
deduct i bl e as t hey ar e exempt f r omt he t i me t est .

*a. Tr ue
b. Fal se

1072. An educat i on expense deduct i on may be al l owed even i f t he
educat i on r esul t s i n a pr omot i on or pay r ai se f or t he empl oyee.

*a. Tr ue
b. Fal se

1073. Ll oyd, a pr act i ci ng CPA, pays t ui t i on t o at t end l aw
school . Si nce a l aw degr ee i nvol ves educat i on l eadi ng t o a new t r ade
or busi ness, t he t ui t i on i s not deduct i bl e.

a. Tr ue
*b. Fal se

1074. Under t he r i ght ci r cumst ances, a t axpayer s meal s and l odgi ng
expense can qual i f y as a deduct i bl e educat i on expense.

*a. Tr ue
b. Fal se

1075. Ther e i s no cut back adj ust ment f or meal s and ent er t ai nment as t o
empl oyees who ar e subj ect t o r egul at i on by t he U. S. Depar t ment of
Tr anspor t at i on.

a. Tr ue
*b. Fal se

1076. Mal l ar d Cor por at i on pays f or a t r i p t o Ar uba f or i t s t wo t op
sal esper sons. Thi s expense is subj ect t o t he cut back adj ust ment .

a. Tr ue
*b. Fal se

1077. Fl ami ngo Cor por at i on f ur ni shes meal s at cost t o i t s empl oyees by
means of a caf et er i a i t mai nt ai ns. The cost of oper at i ng t he caf et er i a
is not subj ect t o t he cut back adj ust ment .

*a. Tr ue
b. Fal se

1078. A t axpayer t akes si x cl i ent s t o an NBA pl ayof f game. I f al l of
t he t i cket s ( l i st pr i ce of $120 each) ar e pur chased on t he I nt er net f or
$1, 800 ( $300 each) , onl y $60 ( $120 50%cut back adj ust ment ) per t i cket
i s deduct i bl e.

*a. Tr ue
b. Fal se

1079. Et han, a bachel or wi t h no i mmedi at e f ami l y, uses t he Pi ne Shadows
Count r y Cl ub excl usi vel y f or hi s busi ness ent er t ai ni ng. Al l of Et han s
annual dues f or hi s cl ub member shi p ar e deduct i bl e.

a. Tr ue
*b. Fal se

1080. J ackson gi ves hi s super vi sor and her husband each a $30 box of
chocol at es at Chr i st mas. J ackson may cl ai monl y $25 as a deduct i on.

a. Tr ue
*b. Fal se

1081. On t hei r bi r t hdays, Li l y sends gi f t cer t i f i cat es ( each val ued at
$25) t o Caden ( a key cl i ent ) and t o each of Caden s t wo mi nor chi l dr en.
Li l y can deduct onl y $25 as t o t hese gi f t s.

*a. Tr ue
b. Fal se

1082. Ti cket s t o a t heat er per f or mance or spor t i ng event can be t r eat ed
as either busi ness ent er t ai nment or a busi ness gi f t i f t he t axpayer
does not accompany t he cl i ent t o t he event .

*a. Tr ue
b. Fal se

1083. I n t he case of an of f i ce i n t he home deduct i on, t he excl usi ve
busi ness use t est does not appl y when t he home i s used as a daycar e
cent er .

*a. Tr ue
b. Fal se

1084. I f a t axpayer does not own a home but r ent s an apar t ment , t he
of f i ce i n t he home deduct i on i s not avai l abl e.

a. Tr ue
*b. Fal se

1085. A t axpayer who cl ai ms t he st andar d deduct i on wi l l not be abl e t o
cl ai man of f i ce i n t he home deduct i on.

a. Tr ue
*b. Fal se

1086. The por t i on of t he of f i ce i n t he home deduct i on t hat exceeds t he
i ncome f r omt he busi ness can be car r i ed over t o f ut ur e year s.

*a. Tr ue
b. Fal se

1087. I f t he cost of uni f or ms i s deduct i bl e, t hei r mai nt enance cost
( e. g. , l aundr y, dr y cl eani ng, al t er at i ons) al so i s deduct i bl e.

*a. Tr ue
b. Fal se

1088. Ti r ed of r ent i ng, Dr . Smi t h buys t he academi c r obes she wi l l wear
at her col l ege s gr aduat i on pr ocessi on. The cost of t hi s at t i r e does
not qual i f y as a uni f or mexpense.

a. Tr ue
*b. Fal se

1089. Fr ank, a r ecent l y r et i r ed FBI agent , pays j ob sear ch expenses t o
obt ai n a posi t i on wi t h a ci t y pol i ce depar t ment . Fr ank s j ob sear ch
expenses do qual i f y as deduct i ons.

*a. Tr ue
b. Fal se

1090. Af t er gr aduat i ng f r omcol l ege wi t h a degr ee i n chemi st r y, Al ber t o
obt ai ns a j ob as a chemi st wi t h DuPont . Al ber t o s j ob sear ch expenses
qual i f y as deduct i ons.

a. Tr ue
*b. Fal se

1091. Qual i f yi ng j ob sear ch expenses are deduct i bl e even i f t he
t axpayer does not change j obs.

*a. Tr ue
b. Fal se

1092. Madi son i s an i nst r uct or of f i ne ar t s at a l ocal communi t y
col l ege. I f she spends $600 ( not r ei mbur sed) on ar t suppl i es f or her
cl asses, $250 of t hi s amount can be cl ai med as a deduct i on for AGI .

a. Tr ue
*b. Fal se

1093. Bot h t r adi t i onal and Rot h I RAs possess t he advant age of t ax- f r ee
accumul at i on of i ncome wi t hi n t he pl an.

*a. Tr ue
b. Fal se

1094. When cont r i but i ons ar e made t o a t r adi t i onal I RA, t hey ar e
deduct i bl e by t he par t i ci pant . Lat er di st r i but i ons f r omt he I RA upon
r et i r ement ar e f ul l y t axed.

*a. Tr ue
b. Fal se

1095. By i t sel f , cr edi t car d r ecei pt s wi l l not const i t ut e adequat e
subst ant i at i on f or t r avel expenses.

*a. Tr ue
b. Fal se

1096. The Feder al per di emr at es t hat can be used f or deemed
subst ant i at ed pur poses ar e t he same f or al l l ocat i ons i n t he count r y.

a. Tr ue
*b. Fal se

1097. For sel f - empl oyed t axpayer s, t r avel expenses ar e not subj ect t o
t he 2%- of - AGI f l oor .

*a. Tr ue
b. Fal se

1098. A t axpayer who cl ai ms t he st andar d deduct i on wi l l not avoi d t he
2%f l oor on unr ei mbur sed empl oyee expenses.

a. Tr ue
*b. Fal se

1099. Empl oyees who r ender an adequat e account i ng t o t he empl oyer and
ar e f ul l y r ei mbur sed wi l l shi f t t he 50%cut back adj ust ment t o t hei r
empl oyer .

*a. Tr ue
b. Fal se

1100. Ai den per f or ms ser vi ces f or Lucas. Whi ch, i f any, of t he
f ol l owi ng f act or s i ndi cat e t hat Ai den i s an empl oyee, r at her t han an
i ndependent cont r act or ?

a. Ai den pr ovi des hi s own suppor t ser vi ces ( e. g. , wor k
assi st ant s) .
b. Ai den obt ai ned hi s t r ai ni ng ( i . e. , j ob ski l l s) f r omhi s f at her .
*c. Ai den i s pai d based on hour s wor ked.
d. Ai den makes hi s ser vi ces avai l abl e t o ot her s.

1101. J or dan per f or ms ser vi ces f or Ryan. Whi ch, i f any, of t he
f ol l owi ng f act or s i ndi cat e t hat J or dan i s an i ndependent cont r act or ,
r at her t han an empl oyee?

a. Ryan set s t he wor k schedul e.
b. Ryan pr ovi des t he t ool s used.
c. J or dan f i l es a For m2106 wi t h hi s For m1040.
*d. J or dan i s pai d based on t asks per f or med.

1102. Whi ch, i f any, of t he f ol l owi ng f act or s is not a char act er i st i c
of i ndependent cont r act or st at us?

*a. Wor k- r el at ed expenses ar e r epor t ed on For m2106.
b. Recei pt of a For m1099 r epor t i ng payment s r ecei ved.
c. Wor kpl ace f r i nge benef i t s ar e not avai l abl e.
d. Ser vi ces ar e per f or med f or mor e t han one par t y.

1103. A wor ker may pr ef er t o be t r eat ed as an i ndependent cont r act or
( r at her t han an empl oyee) f or whi ch of t he f ol l owi ng r easons:

a. Avoi ds t he cut back adj ust ment as t o busi ness meal s.
b. Al l of t he sel f - empl oyment t ax i s deduct i bl e f or i ncome t ax
pur poses.
*c. Wor k- r el at ed expenses ar e not subj ect t o t he 2%- of - AGI f l oor .
d. A Schedul e C does not have t o be f i l ed.

1104. A wor ker may pr ef er t o be cl assi f i ed as an empl oyee ( r at her t han
an i ndependent cont r act or ) f or whi ch of t he f ol l owi ng r easons:

a. To cl ai munr ei mbur sed wor k- r el at ed expenses as a deduct i on for
AGI .
*b. To avoi d t he sel f - empl oyment t ax.
c. To avoi d t he cut back adj ust ment on unr ei mbur sed busi ness
ent er t ai nment expenses.
d. To avoi d t he 2%- of - AGI f l oor on unr ei mbur sed wor k- r el at ed
expenses.

1105. St at ut or y empl oyees:

a. Repor t t hei r expenses on For m2106.
b. I ncl ude common l aw empl oyees.
c. Ar e subj ect t o i ncome t ax wi t hhol di ngs.
*d. Cl ai mt hei r expenses as deduct i ons for AGI .

1106. Cor ey i s t he ci t y sal es manager f or RI BS, a nat i onal f ast f ood
f r anchi se. Ever y wor ki ng day, Cor ey dr i ves hi s car as f ol l ows:

Miles
Home to office 20
Office to RIBS No. 1 15
RIBS No. 1 to No. 2 18
RIBS No. 2 to No. 3 13
RIBS No. 3 to home 30

Coreys deductible mileage is:

a. 0 mi l es.
b. 50 mi l es.
c. 66 mi l es.
d. 76 mi l es.

1107. Amy wor ks as an audi t or f or a l ar ge maj or CPA f i r m. Dur i ng t he
mont hs of Sept ember t hr ough November of each year , she i s per manent l y
assi gned t o t he t eamaudi t i ng Gar net Cor por at i on. As a r esul t , ever y
day she dr i ves f r omher home t o Gar net and r et ur ns home af t er wor k.
Mi l eage i s as f ol l ows:

Miles
Home to office 10
Home to Garnet 30
Office to Garnet 35

For these three months, Amys deductible mileage for each workday is:

a. 0.
b. 30.
c. 35.
*d. 60.

1108. Aaron is a self-employed practical nurse who works out of his home.
He provides nursing care for disabled persons living in their residences.
During the day he drives his car as follows.

Miles
Aarons home to
patient Louise
12
Patient Louise to
patient Carl
4
Patient Carl to
patient Betty
6
Patient Betty to
Aarons home
10

Aarons deductible mileage for each workday is:

a. 10 mi l es.
b. 12 mi l es.
c. 20 mi l es.
d. 22 mi l es.
*e. 32 mi l es.

1109. When usi ng t he aut omat i c mi l eage met hod, whi ch, i f any, of t he
f ol l owi ng expenses also can be cl ai med?

a. Engi ne t une- up.
*b. Par ki ng.
c. I nt er est on aut omobi l e l oan.
d. MACRS depr eci at i on.

1110. I n whi ch, i f any, of t he f ol l owi ng si t uat i ons i s t he aut omat i c
mi l eage avai l abl e?

a. A l i mousi ne t o be r ent ed by t he owner f or speci al occasi ons
( e. g. , weddi ngs, hi gh school pr oms) .
b. The aut o bel ongs t o t axpayer s mot her .
c. One of seven car s used t o del i ver pi zzas.
d. MACRS st at ut or y per cent age met hod has been cl ai med on t he
aut omobi l e.

1111. Under t he act ual cost met hod, whi ch, i f any, of t he f ol l owi ng
expenses will not be al l owed?

a. Car r egi st r at i on f ees.
b. Aut o i nsur ance.
*c. I nt er est expense on a car l oan ( t axpayer i s an empl oyee) .
d. Dues t o aut o cl ubs.
e. Al l of t he above wi l l be al l owed.

1112. Dave i s t he r egi onal manager f or a nat i onal chai n of aut o- par t s
st or es and i s based i n Sal t Lake Ci t y. When t he company opens new
st or es i n Boi se, Dave i s gi ven t he t ask of super vi si ng t hei r i ni t i al
oper at i on. For t hr ee mont hs, he wor ks weekdays i n Boi se and r et ur ns
home on weekends. He spends $350 r et ur ni ng t o Sal t Lake Ci t y but woul d
have spent $410 had he st ayed i n Boi se f or t he weekend. As t o t he
weekend t r i ps, how much, i f any, qual i f i es as a deduct i on?

a. $0, si nce t he t r i ps ar e per sonal and not wor k r el at ed.
b. $0, si nce Dave s t ax home has changed f r omSal t Lake Ci t y t o
Boi se.
c. $60.
*d. $350.
e. $410.

1113. Al l owi ng f or t he cut back adj ust ment ( 50%r educt i on f or meal s and
ent er t ai nment ) , whi ch of t he f ol l owi ng t r i ps, i f any, wi l l qual i f y f or
t he t r avel expense deduct i on?

*a. Dr . J ones, a gener al dent i st , at t ends a t wo- day semi nar on
devel opi ng a dent al pr act i ce.
b. Dr . Br own, a sur geon, at t ends a t wo- day semi nar on f i nanci al
pl anni ng.
c. Paul , a r omance l anguage hi gh school t eacher , spends summer
br eak i n Fr ance, Por t ugal , and Spai n i mpr ovi ng hi s l anguage
ski l l s.
d. Myr na went on a t wo- week vacat i on i n Bost on. Whi l e t her e, she
vi si t ed her empl oyer s home of f i ce t o have l unch wi t h f or mer co-
wor ker s.

1114. Dur i ng t he year , J ohn went f r omMi l waukee t o Al aska on busi ness.
Pr ecedi ng a f i ve- day busi ness meet i ng, he spent f our days vacat i oni ng
at t he beach. Excl udi ng t he vacat i on cost s, hi s expenses f or t he t r i p
ar e:

Air fare $3,200
Lodging 900
Meals 800
Entertainment 600

Presuming no reimbursement, deductible expenses are:

a. $3, 200.
b. $3, 900.
*c. $4, 800.
d. $5, 500.

1115. Dur i ng t he year , Sophi e went f r omOmaha t o Li ma ( Per u) on
busi ness. She spent f our days on busi ness, t wo days on t r avel , and f our
days on vacat i on. Di sr egar di ng t he vacat i on cost s, Sophi e s
unr ei mbur sed expenses ar e:

Air fare $3,000
Lodging 800
Meals 600
Entertainment 400

Sophies deductible expenses are:

a. $4, 300.
*b. $3, 100.
c. $2, 800.
d. $2, 500.

1116. Dur i ng t he year , Wal t t r avel s f r omSeat t l e t o Tokyo ( J apan) on
busi ness. Hi s t i me was spent as f ol l ows: 2 days t r avel ( one day each
way) , 2 days busi ness, and 2 days per sonal . Hi s expenses f or t he t r i p
wer e as f ol l ows ( meal s and l odgi ng r ef l ect onl y t he busi ness por t i on) :

Air fare $3,000
Lodging 2,000
Meals and entertainment 1,000

Presuming no reimbursement, Walts deductible expenses are:

a. $3, 500.
b. $4, 500.
*c. $5, 500.
d. $6, 000.

1117. I n t er ms of meet i ng t he di st ance t est f or pur poses of deduct i ng
movi ng expenses, whi ch of t he f ol l owi ng st at ement s i s cor r ect ?

a. The t axpayer s new j ob l ocat i on must be at l east 50 mi l es away
f r omt he ol d j ob.
b. The t axpayer s new r esi dence must be at l east 50 mi l es away
f r omt he new j ob.
c. The t axpayer s new r esi dence must be at l east 50 mi l es away
f r omt he ol d r esi dence.
*d. The t axpayer s new j ob l ocat i on must be at l east 50 mi l es
f ar t her f r omt he ol d r esi dence t han t he ol d r esi dence was t o t he
ol d j ob.

1118. As t o meet i ng t he t i me t est f or pur poses of deduct i ng movi ng
expenses, whi ch of t he f ol l owi ng st at ement s i s cor r ect ?

*a. Wor k at t he new l ocat i on must i nvol ve a f ul l - t i me j obpar t -
t i me j ob wi l l not suf f i ce.
b. The t axpayer has t wo year s i n whi ch t o sat i sf y t he 39- weeks or
78- weeks r equi r ement .
c. The t i me t est i s wai ved f or per sons whose move f ol l ows
r et i r ement .
d. The movi ng expense deduct i on cannot be cl ai med i f t he t axpayer
has not yet met t he t i me t est .

1119. Due t o a mer ger , Al l i son t r ansf er s f r omMi ami t o Chi cago. Under a
new j ob descr i pt i on, she i s r ecl assi f i ed f r omempl oyee t o i ndependent
cont r act or st at us. Her movi ng expenses, whi ch ar e not r ei mbur sed, ar e
as f ol l ows:

Transportation $1,400
Meals 400
Lodging 500
Cost of moving household
goods
4,000
Penalty for breaking
lease on Miami apartment
3,000

Allisons deductible moving expense is:

a. $0.
*b. $5, 900.
c. $6, 100.
d. $8, 900.
e. $9, 300.

1120. Rachel i s si ngl e and has a col l ege degr ee i n f i nance. She i s
empl oyed as a l oan of f i cer at a bank; her year l y AGI appr oxi mat es
$50, 000. Dur i ng t he year , she enr ol l ed i n a weekend MBA pr ogr amand
i ncur r ed t he f ol l owi ng nonr ei mbur sed expenses: $4, 100 ( t ui t i on) , $300
( books) , $200 ( ot her school suppl i es) , and $200 ( t r anspor t at i on t o and
f r omcampus) . Di sr egar di ng t he 2%- of - AGI l i mi t at i on, as t o t he MBA
pr ogr am, Rachel has a:

a. Deduct i on for and deduct i on from AGI of $0.
*b. Deduct i on for AGI of $4, 000 and deduct i on from AGI of $800.
c. Deduct i on for AGI of $4, 000 and deduct i on from AGI of $700.
d. Deduct i on for AGI of $4, 100 and deduct i on from AGI of $700.

1121. The 222 deduct i on f or t ui t i on and r el at ed expenses i s avai l abl e:

a. Onl y i f t he t axpayer i t emi zes deduct i ons from AGI .
b. To deduct t hat por t i on of t he t ui t i on i n excess of t hat
al l owed under t he l i f et i me l ear ni ng cr edi t .
c. To cover t he t ui t i on of a son who does not qual i f y as
t axpayer s dependent .
d. Onl y i f j ob r el at ed.

1122. The 222 deduct i on f or t ui t i on and r el at ed expenses i s avai l abl e:

a. Regar dl ess of t he amount of a t axpayer s MAGI .
b. To cover r oomand boar d expenses t o at t end col l ege.
c. To a mar r i ed t axpayer f i l i ng a separ at e r et ur n.
*d. Even i f a t axpayer does cl ai mt he st andar d deduct i on.

1123. Whi ch, i f any, of t he f ol l owi ng i s subj ect t o a cut back
adj ust ment ?

*a. An ai r l i ne pi l ot f or an execut i ve j et r ent al company who pays
hi s own t r avel expenses.
b. Meal s pr ovi ded at cost t o empl oyees by a caf et er i a f unded by
t he empl oyer .
c. Four t h of J ul y company pi cni c f or empl oyees.
d. A t r i p t o Ber muda awar ded t o t he company s t op sal esper son.

1124. Rober t ent er t ai ns sever al of hi s key cl i ent s on J anuar y 1 of t he
cur r ent year . Expenses pai d by Rober t ar e as f ol l ows:

Cab fare $ 60
Cover charge at supper
club
200
Dinner at club 800
Tips to waiter 160

Presuming proper substantiation, Roberts deduction is:

a. $610.
*b. $640.
c. $740.
d. $1, 220.

1125. Tr acy, t he r egi onal sal es di r ect or f or a manuf act ur er of exer ci se
equi pment , pays $2, 500 t o r ent a skybox f or a vi si t i ng per f or mance of
t he Har l emGl obet r ot t er s. The skybox hol ds 10 seat s, and Tr acy i nvi t es
7 cl i ent s t o t he event . Nonl uxur y seat s r ange i n pr i ce f r om$80 t o $120.
The r ef r eshment s pr ovi ded dur i ng t he event cost $600. I f Tr acy meet s
al l of t he r equi r ement s f or deduct i bi l i t y ( i . e. , busi ness di scussi on,
subst ant i at i on) , she may deduct :

*a. $900.
b. $1, 100.
c. $1, 260.
d. $1, 500.
e. $1, 550.

1126. Ral ph made t he f ol l owi ng busi ness gi f t s dur i ng t he year .

To Robert (a key client) at Christmas $50
To Angel (Roberts 8-year old
daughter) on her birthday
20
To Art (Ralphs secretary) on his
birthday ($3 was for gift wrapping)
30
To Paige (Ralphs boss) at Christmas 40

Presuming proper substantiation, Ralphs deduction is:

a. $0.
*b. $53.
c. $73.
d. $78.
e. $98.

1127. Whi ch of t he f ol l owi ng expenses, i f any, qual i f y as deduct i bl e?

a. Cont r i but i ons t o a Cover del l Educat i on Savi ngs Account ( CESA) .
b. Cont r i but i ons t o a qual i f i ed t ui t i on pr ogr am( 529 pl an) .
c. J ob hunt i ng expense of FBI agent who appl i es f or t he j ob of
ci t y manager of Beaumont ( TX) .
*d. Cont r i but i on t o a t r adi t i onal I RA.

1128. Whi ch, i f any, of t he f ol l owi ng expenses is subj ect t o t he 2%- of -
AGI f l oor ?

a. Qual i f i ed t ui t i on expenses under 222.
b. Cont r i but i on t o t r adi t i onal I RA.
c. Cost of a CPA examr evi ew cour set axpayer j ust began
empl oyment wi t h an account i ng f i r m.
d. Of f i ce i n t he home deduct i on f or a sel f - empl oyed t axpayer .

1129. Whi ch, i f any, of t he f ol l owi ng expenses is subj ect t o t he 2%- of -
AGI f l oor ?

a. Gambl i ng l osses ( t o t he ext ent of gambl i ng gai ns) .
b. Movi ng expenses ( not r ei mbur sed by empl oyer ) .
*c. Teachi ng suppl i es ( i n excess of $250) pur chased by a f i f t h
gr ade t eacher .
d. Uni on dues of sel f - empl oyed machi ni st .

1130. Whi ch, i f any, of t he f ol l owi ng expenses are not subj ect t o t he
2%- of - AGI f l oor ?

a. Saf et y shoes pur chased by an empl oyed pl umber .
*b. Rei mbur sed empl oyee expenses. Taxpayer - empl oyee r ender s an
adequat e account i ng t o t he empl oyer .
c. Unr ei mbur sed empl oyee expenses.
d. Tax r et ur n pr epar at i on f ee pai d by a nonempl oyed r et i r ee.

1131. I n cont r ast i ng t he r epor t i ng pr ocedur es of empl oyees and sel f -
empl oyed per sons r egar di ng j ob- r el at ed t r ansact i ons, whi ch of t he
f ol l owi ng i t ems i nvol ve sel f - empl oyed?

*a. Schedul e C of For m1040.
b. For m2106.
c. For mW- 2.
d. Schedul e A of For m1040.

1132. One of t he t ax advant ages of bei ng sel f - empl oyed ( r at her t han
bei ng an empl oyee) i s:

a. The sel f - empl oyment t ax i s l ower t han t he Soci al Secur i t y t ax.
b. The cut back adj ust ment does not appl y.
c. The act ual cost met hod f or deduct i ng t he busi ness use of an
aut omobi l e can be sel ect ed.
*d. J ob- r el at ed expenses ar e deduct i ons for AGI .
e. A deduct i on f or an of f i ce i n t he home i s avai l abl e.

1133. Sue performs services for Lynn. Regarding this arrangement, use
the legend provided to classify each statement.The ser vi ces ar e
per f or med at Sue s pr emi ses. Sue does not wor k f or ot her par t i es. Lynn
det er mi nes when t he ser vi ces ar e t o be per f or med. Sue has unr ei mbur sed
expenses. Sue was t r ai ned by Lynn. Sue uses her own hel per s. Sue char ges
by t he hour f or her wor k. Sue f i l es a For m2106 wi t h her For m1040. Sue
f i l es a Schedul e SE wi t h her For m1040. Sue uses her own t ool s. I ndi cat es
i ndependent cont r act or st at us. I ndi cat es empl oyee st at us. I ndi cat es
empl oyee st at us. I ndi cat es i ndependent cont r act or st at us. I ndi cat es
empl oyee st at us. I ndi cat es i ndependent cont r act or st at us. I ndi cat es
empl oyee st at us. I ndi cat es empl oyee st at us. I ndi cat es i ndependent
cont r act or st at us. I ndi cat es i ndependent cont r act or st at us.

[ a] 1. The ser vi ces ar e per f or med at Sue s pr emi ses.
[ b] 2. Sue does not wor k f or ot her par t i es.
[ c] 3. Lynn det er mi nes when t he ser vi ces ar e t o be per f or med.
[ d] 4. Sue has unr ei mbur sed expenses.
[ e] 5. Sue was t r ai ned by Lynn.
[ f ] 6. Sue uses her own hel per s.
[ g] 7. Sue char ges by t he hour f or her wor k.
[ h] 8. Sue f i l es a For m2106 wi t h her For m1040.
[ i ] 9. Sue f i l es a Schedul e SE wi t h her For m1040.
[ j ] 10. Sue uses her own t ool s.

a. I ndi cat es i ndependent cont r act or st at us.
b. I ndi cat es empl oyee st at us.
c. I ndi cat es empl oyee st at us.
d. I ndi cat es i ndependent cont r act or st at us.
e. I ndi cat es empl oyee st at us.
f . I ndi cat es i ndependent cont r act or st at us.
g. I ndi cat es empl oyee st at us.
h. I ndi cat es empl oyee st at us.
i . I ndi cat es i ndependent cont r act or st at us.
j . I ndi cat es i ndependent cont r act or st at us.

1134. Match the statements that relate to each other. (Note: Choice L
may be used more than once.)Char act er i st i c of a t axpayer who has t he
st at us of an empl oyeeChar act er i st i c of a t axpayer who i s sel f -
empl oyedAct ual cost met hod of det er mi ni ng aut o expenseAut omat i c mi l eage
met hodDeduct i bl e movi ng expenseNondeduct i bl e movi ng expenseMi xed use
( bot h busi ness and pl easur e) f or ei gn t r avel Educat i on expense t hat is
not deduct i bl e t o mai nt ai n or i mpr ove exi st i ng ski l l sTax home has
changedDeduct i bl e j ob- hunt i ng expensesDeduct i on by an empl oyee of
unr ei mbur sed of f i ce- i n- t he- home expensesMi xed use ( bot h busi ness and
pl easur e) domest i c t r avel . Taxpayer has t ool s and hel per pr ovi ded f or
hi mPayment f or ser vi ces r ender ed based on t asks per f or med Can i ncl ude
act ual cost of par ki ng Excl udes use of MACRS depr eci at i on Lodgi ng whi l e
i n r out e Meal s whi l e i n r out e Tr anspor t at i on must be al l ocat ed i f
t axpayer spends t wo weeks on busi ness and one week si ght seei ng
Par al egal obt ai ns a l aw degr ee Out - of - t own j ob assi gnment l ast s f or
mor e t han one year Must i nvol ve t he same t r ade or busi ness Must be f or
t he conveni ence of t he empl oyer Cor r ect mat ch not pr ovi ded

[ a] 1. Char act er i st i c of a t axpayer who has t he st at us of an
empl oyee
[ b] 2. Char act er i st i c of a t axpayer who i s sel f - empl oyed
[ c] 3. Act ual cost met hod of det er mi ni ng aut o expense
[ d] 4. Aut omat i c mi l eage met hod
[ e] 5. Deduct i bl e movi ng expense
[ f ] 6. Nondeduct i bl e movi ng expense
[ g] 7. Mi xed use ( bot h busi ness and pl easur e) f or ei gn t r avel
[ h] 8. Educat i on expense t hat is not deduct i bl e t o mai nt ai n or
i mpr ove exi st i ng ski l l s
[ i ] 9. Tax home has changed
[ j ] 10. Deduct i bl e j ob- hunt i ng expenses
[ k] 11. Deduct i on by an empl oyee of unr ei mbur sed of f i ce- i n-
t he- home expenses
[ l ] 12. Mi xed use ( bot h busi ness and pl easur e) domest i c t r avel .

a. Taxpayer has t ool s and hel per pr ovi ded f or hi m
b. Payment f or ser vi ces r ender ed based on t asks per f or med
c. Can i ncl ude act ual cost of par ki ng
d. Excl udes use of MACRS depr eci at i on
e. Lodgi ng whi l e i n r out e
f . Meal s whi l e i n r out e
g. Tr anspor t at i on must be al l ocat ed i f t axpayer spends t wo
weeks on busi ness and one week si ght seei ng
h. Par al egal obt ai ns a l aw degr ee
i . Out - of - t own j ob assi gnment l ast s f or mor e t han one year
j . Must i nvol ve t he same t r ade or busi ness
k. Must be f or t he conveni ence of t he empl oyer
l . Cor r ect mat ch not pr ovi ded

1135. Match the statements that relate to each other. (Note: Choice L
may be used more than once.)Act ual cost met hod of det er mi ni ng car
expenseDi st ance t est ( f or movi ng expenses) not sat i sf i edTi me t est ( f or
movi ng expenses) wai vedRot h I RAsKeogh ( H. R. 10) pl ansCut back adj ust ment
appl i esCut back adj ust ment does not appl yDeemed subst ant i at i onJ ob
hunt i ng expensesQual i f i ed t ui t i on and r el at ed expenses ( under
222) Cl ub dues deduct i bl eCl ub dues not deduct i bl eCan i ncl ude cost of car
i nsur ance and aut omobi l e cl ub dues Taxpayer moves t o a new r esi dence 55
mi l es cl oser t o hi s pr esent j ob Expat r i at e ( U. S. per son who i s empl oyed
over seas) r et ur ns home t o r et i r e Di st r i but i on f r ompl an i s not t axabl e
Di st r i but i on f r ompl an i s t axabl e Cover char ge pai d t o ent er t ai n cl i ent
at a ni ght cl ub. Company pi cni c sponsor ed by empl oyer Use of Feder al
per di emal l owance t o subst ant i at e meal s whi l e i n t r avel st at us
Deduct i bl e even i f t axpayer does not t ake t he new j ob Does not have t o
be j ob r el at ed Cor r ect mat ch not pr ovi ded Count r y cl ub member shi p f ee

[ a] 1. Act ual cost met hod of det er mi ni ng car expense
[ b] 2. Di st ance t est ( f or movi ng expenses) not sat i sf i ed
[ c] 3. Ti me t est ( f or movi ng expenses) wai ved
[ d] 4. Rot h I RAs
[ e] 5. Keogh ( H. R. 10) pl ans
[ f ] 6. Cut back adj ust ment appl i es
[ g] 7. Cut back adj ust ment does not appl y
[ h] 8. Deemed subst ant i at i on
[ i ] 9. J ob hunt i ng expenses
[ j ] 10. Qual i f i ed t ui t i on and r el at ed expenses ( under 222)
[ k] 11. Cl ub dues deduct i bl e
[ l ] 12. Cl ub dues not deduct i bl e

a. Can i ncl ude cost of car i nsur ance and aut omobi l e cl ub dues
b. Taxpayer moves t o a new r esi dence 55 mi l es cl oser t o hi s
pr esent j ob
c. Expat r i at e ( U. S. per son who i s empl oyed over seas) r et ur ns
home t o r et i r e
d. Di st r i but i on f r ompl an i s not t axabl e
e. Di st r i but i on f r ompl an i s t axabl e
f . Cover char ge pai d t o ent er t ai n cl i ent at a ni ght cl ub.
g. Company pi cni c sponsor ed by empl oyer
h. Use of Feder al per di emal l owance t o subst ant i at e meal s
whi l e i n t r avel st at us
i . Deduct i bl e even i f t axpayer does not t ake t he new j ob
j . Does not have t o be j ob r el at ed
k. Cor r ect mat ch not pr ovi ded
l . Count r y cl ub member shi p f ee

1136. Mer edi t h hol ds t wo j obs and at t ends gr aduat e school on weekends.
The educat i on i mpr oves her ski l l s, but does not qual i f y her f or a new
t r ade of busi ness. Bef or e goi ng t o t he second j ob, she r et ur ns home f or
di nner . Rel evant mi l eage i s as f ol l ows?

Home t o f i r st j ob 9 mi l es
Fi r st j ob t o second j ob 13 mi l es
Home t o second j ob 15 mi l es
Home t o uni ver si t y 7 mi l es

How much of t he mi l eage qual i f i es f or deduct i on pur poses?

Cor r ect Answer :
27 mi l es. The mi l eage f r omt he f i r st j ob t o t he second j ob, 13 mi l es,
qual i f i es. Al so, r ound t r i p mi l eage t o t he uni ver si t y ( 14 mi l es) can be
cl ai med i f t he educat i on Mer edi t h i s obt ai ni ng i s deduct i bl e.

1137. Paul i s empl oyed as an audi t or by a CPA f i r m. On most days, he
commut es by aut o f r omhi s home t o t he of f i ce. Dur i ng one mont h, however ,
he has an ext ensi ve audi t assi gnment cl oser t o home. For t hi s
engagement , Paul dr i ves di r ect l y f r omhome t o t he cl i ent s pr emi ses and
back. Mi l eage i nf or mat i on i s summar i zed bel ow:

Home t o
of f i ce
12 mi l es
Of f i ce t o
audi t cl i ent
15 mi l es
Audi t cl i ent
t o home
10 mi l es

I f Paul spends 20 days on t he audi t , what i s hi s deduct i bl e mi l eage?

Cor r ect Answer :
400 mi l es [ 20 mi l es ( each day) 20 days] .

1138. Dur i ng 2013, Eva used her car as f ol l ows: 12, 000 mi l es ( busi ness) ,
1, 400 mi l es ( commut i ng) , and 4, 000 mi l es ( per sonal ) . I n addi t i on, she
spent $440 f or t ol l s ( busi ness) and $620 f or par ki ng ( busi ness) . I f Eva
uses t he aut omat i c mi l eage met hod, what i s t he amount of her deduct i on?

Cor r ect Answer :
$7, 840. ( 12, 000 mi l es $0. 565) + $440 + $620 = $7, 840.

1139. Rod uses hi s aut omobi l e f or bot h busi ness and per sonal use and
cl ai ms t he aut omat i c mi l eage r at e f or al l pur poses. Dur i ng 2013, hi s
mi l eage was as f ol l ows:

Mi l es
Dr i ven
Per sonal 4, 000
Busi ness 8, 000
Qual i f yi ng movi ng
expense
3, 500
Medi cal 1, 800
Char i t abl e 1, 500
Qual i f yi ng educat i on
( MBA pr ogr am)
800

How much can Rod cl ai mf or mi l eage?

Cor r ect Answer :
$6, 454 [ ( 8, 800 mi l es $0. 565, busi ness and educat i on) + ( 3, 500 mi l es
$0. 24, movi ng) + ( 1, 800 mi l es $0. 24, medi cal ) + ( 1, 500 mi l es $0. 14,
char i t abl e) ] .

1140. El si e l i ves and wor ks i n Det r oi t . She i s t he r egi onal sal es
manager f or a nat i onal f ast - f ood chai n. Due t o unusual devel opment s,
she i s compel l ed t o wor k si x st r ai ght weeks i n t he Cl evel and ar ea.
I nst ead of spendi ng t he weekend t her e, she f l i es home ever y Fr i day
ni ght and r et ur ns ear l y Monday mor ni ng. The cost of comi ng home f or t he
weekend appr oxi mat es $600. Had she st ayed i n Cl evel and, deduct i bl e
meal s and l odgi ng woul d have been $700. How much, i f any, may El si e
deduct as t o each weekend?

Cor r ect Answer :
$600 f or each weekend, t he l esser of t he $600 cost of r et ur ni ng home or
t he $700 cost of st ayi ng i n Cl evel and.

1141. Al f r edo, a sel f - empl oyed pat ent at t or ney, f l ew f r om hi s home i n
Chi cago t o Mi ami , had l unch al one at t he ai r por t , conduct ed busi ness i n
t he af t er noon, and r et ur ned t o Chi cago i n t he eveni ng. Hi s expenses
wer e as f ol l ows:

Ai r f ar e $900
Ai r por t par ki ng
( Chi cago)
60
Lunch 30
Taxi s ( Mi ami ) 42

What i s Al f r edo s deduct i bl e expense f or t he t r i p?

Cor r ect Answer :
$1,002 ($900 + $60 + $42). As Alfredo was not away from home, his lunch is
not deductible.

1142. Li l y went f r omher of f i ce i n Por t l and t o Li sbon on busi ness.
Whi l e t her e, she spent par t of t he t i me on vacat i on. How much of t he
ai r f ar e of $5, 000 can she deduct based on t he f ol l owi ng assumpt i ons:

a. Li l y was gone f i ve days ( i . e. , t hr ee
busi ness and t wo per sonal ) .

b. Li l y was gone f i ve weeks ( i . e. , f our
busi ness and one per sonal ) .

c. Li l y was gone f i ve weeks ( i . e. , t hr ee
busi ness and t wo per sonal ) .

Cor r ect Answer :
a. $5,000.

b. $5,000.

c. $3,000. (60% $5,000).

Transportation costs for mixed use (i.e., both business and personal) need
not be allocated as long as domestic trips are involved. Such allocation is
necessary, however, for foreign trips unless one of two exceptions applies.
One exception deals with trips lasting seven days or less and covers part a.
(but not part b. or part c.) above. The second exception, less than 25% of
the time was for personal use, applies to part b. but not to part c. Thus,
in part b. no allocation is necessary, while in part c. the air fare must
be allocated.

1143. Noah moved f r om Del awar e t o Ar i zona t o accept a bet t er j ob. He
i ncur r ed t he f ol l owi ng unr ei mbur sed movi ng expenses:

Tr anspor t at i on $3, 000
Lodgi ng 400
Meal s i n r out e 500
Penal t y f or br eaki ng
apar t ment l ease
1, 000
For f ei t ur e of at hl et i c
cl ub member shi p
500
Movi ng company cost 7, 000

What i s Noah s movi ng expense deduct i on?

Cor r ect Answer :
$10,400 ($3,000 + $400 + $7,000). Meals ($500), lease penalty ($1,000), and
membership forfeiture ($500) are not qualifying moving expenses.

1144. Af t er gr aduat i ng f r omcol l ege, Cl i nt obt ai ned empl oyment i n Omaha.
I n movi ng f r omhi s par ent s home i n Bal t i mor e t o Omaha, Cl i nt i ncur r ed
t he f ol l owi ng expenses:

Tr anspor t at i on $ 700
Meal s 380
Lodgi ng 400
Cost of movi ng househol d goods 3, 500

a. How much may Cl i nt deduct as movi ng expense?

b. Woul d any deduct i on be al l owed i f Cl i nt
cl ai med t he st andar d deduct i on f or t he year
of t he move? Expl ai n.

Cor r ect Answer :
a. $4,600 ($700 + $400 + $3,500). No deduction
is allowed for meals.

b. Yes. Moving expenses are deductions for AGI
and can be claimed regardless of whether a
taxpayer takes the standard deduction or
chooses to itemize.

1145. Ar nol d i s empl oyed as an assi st ant manager i n t he f ur ni t ur e
di vi si on of a nat i onal chai n of depar t ment st or es. He i s a r ecent
col l ege gr aduat e wi t h a degr ee i n mar ket i ng. Dur i ng 2013, he enr ol l s i n
t he eveni ng MBA pr ogr amof a l ocal uni ver si t y and i ncur s t he f ol l owi ng
expenses: t ui t i on, $4, 200; books and comput er suppl i es, $800;
t r anspor t at i on expense t o and f r omt he uni ver si t y, $450; and meal s
whi l e on campus, $400. Ar nol d i s si ngl e and hi s annual AGI i s $64, 000.
As t o t hese expenses, what ar e Ar nol d s:

a. Deduct i ons for AGI ?

b. Deduct i ons from AGI ?

Cor r ect Answer :
a. $4,000. Although the tuition was $4,200,
222 imposes a limitation of $4,000.

b. $1,450. $200 (excess tuition not allowed under
222) + $800 (books and computer supplies) +
$450 (transportation) = $1,450. No deduction
is allowed for meals, since Arnold is not in
travel status. Further adjustment will be
required due to the 2%-of-AGI limitation on
certain itemized deductions.

1146. Cat hy t akes f i ve key cl i ent s t o a ni ght cl ub and i ncur s t he
f ol l owi ng cost s: $320 l i mousi ne r ent al , $460 cover char ge, $920 dr i nks
and di nner , and $200 t i ps. Sever al days af t er t he f unct i on, Cat hy mai l s
each cl i ent a pen cost i ng $25. To t he cost must be added $4 f or
engr avi ng of t he cl i ent s name. Assumi ng adequat e subst ant i at i on and a
busi ness j ust i f i cat i on, what i s Cat hy s deduct i on?

Cor r ect Answer :
$1, 255. $320 + [ ( $460 + $920 + $200) 50%] = $1, 110. Al so al l owed ar e
t he gi f t s of $145 ( 5 $29) . The cost of engr avi ng ( $4) can be added t o
t he maxi mumamount of gi f t al l owed ( $25) .

1147. For t he cur r ent f oot bal l season, Ter n Cor por at i on pays $40, 000
f or a skybox ( cont ai ni ng 12 seat s) at Vet er ans St adi umf or ei ght home
games. Regul ar nonskybox seat s at each game r ange f r om$120 t o $150 a
seat . I n November , a Ter n empl oyee and t en cl i ent s use t he skybox t o
at t end a game. The event i s pr eceded by a bona f i de busi ness di scussi on,
and Ter n spent $1, 000 f or f ood and dr i nks dur i ng t he game. What i s
Ter n s deduct i on?

Cor r ect Answer :
$1, 400. ( 12 seat s $150) + $1, 000 = $2, 800 50%( cut back adj ust ment ) =
$1, 400. Even t hough onl y t en cl i ent s at t ended, al l avai l abl e set s ar e
consi der ed. The hi ghest cost of a r egul ar seat ( $150) i s used i n t he
comput at i on.

1148. Br i an makes gi f t s as f ol l ows:

Reci pi ent Cost of
Gi f t
Mr . Br own ( a cl i ent ) $27*
Mr s. Br own ( Mr . Br own s wi f e) 15
Ms. Smi t h ( Br i an s
r ecept i oni st )
30
Mr . J ones ( Br i an s boss) 40

* I ncl udes $2 f or engr avi ng

Pr esumi ng adequat e subst ant i at i on and no r ei mbur sement , how much may
Br i an deduct ?

Cor r ect Answer :
$52 ( $27 + $25) . The deduct i on f or Mr . Br own s gi f t can i ncl ude nomi nal
cost s f or gi f t - wr appi ng and engr avi ng. No deduct i on i s al l owed f or t he
gi f t t o Mr s. Br own unl ess she i s i n a separ at e busi ness. Ot her wi se, she
f al l s under t he $25 l i mi t appl i cabl e t o Mr . Br own. The deduct i on f or Ms.
Smi t h s gi f t i s l i mi t ed t o $25. No deduct i on i s al l owed f or Br i an s
gi f t t o hi s boss.

1149. Rocky has a f ul l - t i me j ob as an el ect r i cal engi neer f or t he ci t y
ut i l i t y. I n hi s spar e t i me, Rocky r epai r s TV set s i n t he basement of
hi s per sonal r esi dence. Most of hi s busi ness comes f r omf r i ends and
r ef er r al s f r omf or mer cust omer s, al t hough occasi onal l y he r uns an ad i n
t he l ocal subur bi a newspaper . Typi cal l y, t he set s ar e dr opped of f at
Rocky s house and l at er pi cked up by t he owner when not i f i ed t hat t he
r epai r s have been made.

The f l oor space of Rocky s r esi dence i s 2, 500 squar e f eet , and he
est i mat es t hat 20%of t hi s i s devot ed excl usi vel y t o t he r epai r
busi ness. Gr oss i ncome f r omt he busi ness i s $13, 000, whi l e expenses
( ot her t han home of f i ce) ar e $5, 000. Expenses r el at i ng t o t he r esi dence
ar e as f ol l ows:

Real pr oper t y t axes $4, 500
I nt er est on home mor t gage 8, 000
Oper at i ng expenses of
r esi dence
3, 000
Depr eci at i on ( based on 20%
busi ness use)
1, 000

What i s Rocky s net i ncome f r omt he r epai r busi ness?

Cor r ect Answer :
Business income $13,000
Less: Expenses (5,000
)
Net business income before
home office expenses
$ 8,000
Less: Real property taxes ($4,500
20%)
(900)
Mortgage interest ($8,000
20%)
(1,600)
Operating expenses ($3,000
20%)
(600)
Depreciation (1,000
)
Net income from business $ 3,900

1150. I n t he cur r ent year , Bo accept ed empl oyment wi t h a Kansas Ci t y
l aw f i r maf t er gr aduat i ng f r oml aw school . Her expenses f or t he year
ar e l i st ed bel ow:

Cost of bar r evi ew cour se $1, 500
Qual i f i ed movi ng expenses 2, 100
J ob hunt i ng expenses 1, 800
Subscr i pt i ons t o l egal
j our nal s
450
Member shi p dues i n bar
associ at i ons
620
St at e bar dues 300

Si nce Bo wor ked j ust par t of t he year , her sal ar y was onl y $32, 100. I n
t er ms of deduct i ons from AGI , how much does Bo have?

Cor r ect Answer :
$770. AGI i s $30, 000 [ $32, 100 ( sal ar y) $2, 100 ( movi ng expenses) ] .
Thus, t he 2%- of - AGI f l oor i s $600 ( $30, 000 2%) . Qual i f yi ng i t emi zed
deduct i ons ar e $1, 370 ( $450 + $620 + $300) . Thus, $1, 370 $600 = $770
i s t he al l owabl e i t emi zed deduct i on. No deduct i on i s al l owed f or t he
bar r evi ew cour se and t he j ob hunt i ng expenses. I n t hi s case, i t i s
appar ent t hat Bo shoul d cl ai mt he st andar d deduct i on and not i t emi ze.

1151. For t he cur r ent year , Wi l bur i s empl oyed as a deput y sher i f f of a
count y. He has AGI of $50, 000 and t he f ol l owi ng unr ei mbur sed empl oyee
expenses:

At t endance at a l aw enf or cement
conf er ence ( $800 f or t r avel and $220
f or meal s)
$1, 020
Uni f or ms ( does not i ncl ude $300 f or
l aundr y and dr y cl eani ng)
1, 000
Pr of essi onal dues and j our nal s 300
Cont r i but i on t o sher i f f s r eel ect i on
campai gn ( hi ghl y r ecommended by
Wi l bur s boss)
400

How much of t hese expenses ar e al l owed as deduct i ons from AGI ?

Cor r ect Answer :
$1, 510. $910 + $1, 300 + $300 = $2, 510 ( 2% $50, 000) = $1, 510. A
cut back adj ust ment of $110 ( $220 50%) i s r equi r ed f or t he meal s
obt ai ned dur i ng t he conf er ence. No deduct i on i s avai l abl e f or t he
campai gn cont r i but i on.

1152. I f a busi ness r et ai ns someone t o pr ovi de ser vi ces, t hat per son
may ei t her be an empl oyee or be sel f - empl oyed ( i . e. , i ndependent
cont r act or ) .

a. What ar e t he t ax advant ages to the business
of havi ng t he ser vi ce pr ovi der cl assi f i ed as
sel f - empl oyed?

b. What ar e t he advant ages and di sadvant ages to
the service provider of sel f - empl oyed
st at us?

Cor r ect Answer :
a. Self-employed persons do not have to be
included in various fringe benefits programs
(e.g., group-term life insurance, accident and
health plans) and retirement plans. Because
they are not covered by FICA and FUTA, these
payroll costs are avoided.

b. The advantages are that expenses qualify as
deductions for AGI. Consequently,
deductibility is not affected by the choice of
the standard deduction, and no reduction is
required for the 2%-of-AGI floor. In terms of
disadvantages, being self-employed can lead to
other state and local taxes (e.g., license
fees, franchise taxes, occupation taxes, gross
receipts levy). The most significant, however,
is the self-employment tax that materializes.

1153. I n t er ms of i ncome t ax t r eat ment , what i s t he di f f er ence bet ween
common l aw and st at ut or y empl oyees?

Cor r ect Answer :
Al t hough subj ect t o Soci al Secur i t y t ax, st at ut or y empl oyees ar e not
subj ect t o I ncome t ax wi t hhol di ng. St at ut or y empl oyees may cl ai mal l of
t hei r unr ei mbur sed expenses as deduct i ons for AGI . For common l aw
empl oyees, such expenses ar e deduct i ons from AGI .

1154. Myr a s cl assi f i cat i on of t hose who wor k f or her as i ndependent
cont r act or s i s bei ng quest i oned by t he I RS. I t i s t he posi t i on of t he
I RS t hat t hese wor ker s ar e r eal l y empl oyees. What t ype of f act or s can
Myr a ut i l i ze t o j ust i f y her cl assi f i cat i on?

Cor r ect Answer :
Myr a needs t o show t hat she has a reasonable basis f or not t r eat i ng her
wor ker s as empl oyees. I n t hi s r egar d, can she pr ove r el i ance on any of
t he f ol l owi ng?

J udi ci al pr ecedent , publ i shed r ul i ng, or t echni cal advi ce.

A past I RS audi t t hat r esul t ed i n no empl oyment t ax assessment .

A l ongst andi ng pr act i ce of i ndependent cont r act or st at us i n t he
same i ndust r y.

Has Myr a consi st ent l y t r eat ed t hese wor ker s as i ndependent
cont r act or s? Has she r epor t ed t hei r ear ni ngs by f i l i ng For m1099- MI SC?

1155. Tayl or per f or ms ser vi ces f or J onat han on a r egul ar basi s. Ther e
exi st s consi der abl e doubt as t o whet her Tayl or i s an empl oyee or an
i ndependent cont r act or .

a. What can J onat han do t o cl ar i f y t he mat t er ?

b. Suppose J onat han t r eat s Tayl or as an
i ndependent cont r act or but Tayl or t hi nks she
i s an empl oyee. What i s Tayl or s r ecour se,
i f any?

Cor r ect Answer :
a. Jonathan can obtain a ruling from the IRS by
filing Form SS8 (Determination of Worker
Status for Purposes of Federal Employment
Taxes and Income Tax Withholding).

b. Taylor should file a Form 8919 (Uncollected
Social Security and Medicare Tax on Wages)
with the IRS.

1156. J acob i s a l andscape ar chi t ect who wor ks out of hi s home. He
wonder s whet her or not he wi l l have nondeduct i bl e commut i ng expenses
when he dr i ves t o t he l ocat i ons of hi s cl i ent s. Pl ease comment .

Cor r ect Answer :
Jacob has no commuting expenses since his tax home is his residence. Thus,
his mileage to and from the premises of his clients should be fully
deductible.

1157. Under t he aut omat i c mi l eage met hod, one r at e does not cover ever y
t ype of expense. For 2013, what ar e t he r at es f or busi ness use,
educat i on, movi ng, char i t abl e, and medi cal ?

Cor r ect Answer :
$0.565 (business use); $0.565 (education); $0.24 (moving); $0.14
(charitable); and $0.24 (medical).

1158. Chr i st opher j ust pur chased an aut omobi l e f or $40, 000 whi ch he
pl ans t o cl ai m100%as bei ng f or busi ness use. I n or der t o t ake
advant age of MACRS and 179, he pl ans t o use t he act ual cost met hod
f or det er mi ni ng hi s deduct i on i n t he f i r st year . I n subsequent year s,
he wi l l swi t ch t o t he aut omat i c mi l eage met hod. Comment on
Chr i st opher s pr oposed appr oach.

Cor r ect Answer :
Fi r st , l i mi t at i ons ar e i mposed on how much depr eci at i on can be cl ai med
over each year of t he f i ve- year wr i t e- of f per i od. I n most cases, such
l i mi t at i ons si gni f i cant l y r educe t he depr eci at i on nor mal l y al l owed.
Second, t he use of MACRS and/ or 179 pr ecl udes l at er conver t i ng t o t he
aut omat i c mi l eage met hod. Last l y, how many aut omobi l es does Chr i st opher
own? I f j ust one, 100%busi ness use coul d be al most i mpossi bl e t o
j ust i f y si nce i t negat es any per sonal use.

1159. Once set f or a year , when mi ght t he I RS change t he r at e f or t he
aut omat i c mi l eage met hod?

Cor r ect Answer :
Changes i n t he past have been j ust i f i ed by si gni f i cant i ncr eases i n
f uel pr i ces. Such a change pl aces a pr emi umon keepi ng t r ack of mi l eage
on a mont hl y basi s.

1160. Tr avel st at us r equi r es t hat t he t axpayer be away f r omhome
over ni ght .

a. What does away f r omhome over ni ght mean?

b. What t ax advant ages r esul t f r ombei ng i n
t r avel st at us?

Cor r ect Answer :
a. Home for this purpose is the place of
taxpayers principal employment.
Overnight need not be a 24-hour period,
but it must be a time duration substantially
longer than an ordinary days work such as
to require rest or sleep.

b. If travel status exists, many otherwise
nondeductible expenses (e.g., meals,
lodging, transportation) become deductible.

1161. When i s a t axpayer s wor k assi gnment i n a new l ocal e t empor ar y?
Per manent ? What di f f er ence does i t make?

Cor r ect Answer :
Temporary indicates that the assignments termination is expected within a
reasonably short period of time. In no event can the period of absence
exceed one year. If the taxpayers assignment is indefinite, and not
temporary, his or her tax home changes and travel status ends.

1162. Ni ck Lee i s a l i nebacker f or t he Bal t i mor e Ravens ( a pr of essi onal
f oot bal l cl ub) . Dur i ng t he f oot bal l season he r ent s an apar t ment i n a
Bal t i mor e subur b. The r est of t he t i me he l i ves wi t h hi s f ami l y i n Ann
Ar bor ( MI ) and wor ks at a l ocal bank as a vi ce pr esi dent i n char ge of
publ i c r el at i ons. Can Ni ck deduct hi s expenses whi l e away f r om Ann
Ar bor ? Expl ai n.

Cor r ect Answer :
Probably not. Although his personal residence is in Ann Arbor, Nicks tax
home is likely to be the Baltimore area. Considering the salaries of
professional football players, Nicks income from the Ravens must heavily
outweigh that received from an Ann Arbor bank. Furthermore, his principal
activity and the time spent (e.g., conditioning, training, playing) is that
of a player and not a banker.

1163. How ar e combi ned busi ness/ pl easur e t r i ps t r eat ed f or t r avel
wi t hi n t he Uni t ed St at es as opposed t o f or ei gn t r avel ?

Cor r ect Answer :
The maj or di f f er ence i s t hat t r anspor t at i on char ges ar e f ul l y
deduct i bl e i f t he t r i p i s pr i mar i l y f or busi ness and wi t hi n t he Nor t h
Amer i can ar ea. I f t he f or ei gn t r i p i s pr i mar i l y busi ness,
t r anspor t at i on expenses must be al l ocat ed bet ween busi ness and per sonal
unl ess ( 1) t he t axpayer was away f r omhome f or seven days or l ess or ( 2)
i f l ess t han 25%of t he t i me was spent on per sonal pur sui t s.

1164. Concer ni ng t he deduct i on f or movi ng expenses, what ci r cumst ances,
i f any, wi l l excuse a t axpayer f r ommeet i ng t he t i me t est of 39 or 78
weeks?

Cor r ect Answer :
The t i me t est wi l l be di sr egar ded i f t he t axpayer di es, becomes
di sabl ed, or i s di schar ged ( ot her t han f or wi l l f ul mi sconduct ) or
t r ansf er r ed by t he new empl oyer . Under cer t ai n condi t i ons, expat r i at es
who r et i r e whi l e over seas ar e exempt f r omt he t i me t est .

1165. A t axpayer j ust changed j obs and i ncur r ed unr ei mbur sed movi ng
expenses.

a. What ar e hi s ( or her ) opt i ons i f an i ncome
t ax r et ur n has t o be f i l ed bef or e t he t i me
t est i s met ?

b. What happens i f t he movi ng expense deduct i on
has been cl ai med and t he t i me t est i s not
l at er sat i sf i ed?

Cor r ect Answer :
a. The taxpayer may claim the deduction right
away or wait until the time test is met and
file an amended return for the year of the
move.

b. If the moving expense is claimed and the time
test is not later met, a taxpayer has two
options. First, he can increase the income for
the following year by the amount of the
deduction claimed. Second, he can file an
amended return for the year of the move in
which the deduction is not claimed.

1166. Ni col e j ust r et i r ed as a par t ner i n a Phi l adel phi a l aw f i r m. She
moved t o San Fr anci sco wher e she t ook a j ob as an adj unct pr of essor at
a l ocal l aw school . Can Ni col e deduct her movi ng expenses? Expl ai n

Cor r ect Answer :
She can deduct her moving expenses if her status as an adjunct professor is
full-time employment. She cannot if her status is regarded as part-time
employment.

1167. I n t er ms of I RS at t i t ude, what do t he f ol l owi ng expenses have i n
common?

a. Cost of a CPA examr evi ew cour se.

b. Cost of a r evi ew cour se f or t he bar exam.

c. Cost of a l aw degr ee by a t axpayer who does
not i nt end t o pr act i ce l aw.

Cor r ect Answer :
a. It is the position of the IRS that the costs
associated with becoming a CPA are incurred
in order to acquire a basic skill and thus
are not deductible as education expenses.

b. The same reasoning as noted in part a. above
applies to review course taken to pass the
bar exam.

c. Regardless of a taxpayers career goals,
the IRS considers a law degree to be the
acquisition of a basic skill.

1168. Madi son and Chr i st opher ar e st af f account ant s at a maj or publ i c
account i ng f i r m. Bot h ar e pur sui ng a l aw degr ee i n a ni ght pr ogr am at
l ocal l aw school . Madi son cont ends t hat t he cost of t he pr ogr am i s a
deduct i on f or i ncome t ax pur poses, whi l e Chr i st opher mai nt ai ns t hat i t
i s not . Who i s cor r ect and why?

Cor r ect Answer :
Both are partly correct and incorrect. The IRS takes the position that
pursuing a law degree is not maintaining or improving existing skills but
results in acquiring a new job skill. Thus, a legal education is not job
related to accounting but constitutes a new trade or business. However,
222 allows a deduction for tuition (up to $4,000 or less) even if the
education is not job related. This provision allows some or all of the law
school tuition to be deductible but not other associated expenses (e.g.,
textbooks, transportation). In summary, some costs can be claimed and some
cannot.

1169. Logan, Caden, and Ol i vi a ar e t hr ee unr el at ed par t i es who cl ai m
t he st andar d deduct i on. Al l ar e mar r i ed and at t end Ci t r on Uni ver si t y
and each pays t ui t i on of $6, 100. Of t hi s payment , Logan can cl ai m a
deduct i on of $4, 000; Caden a deduct i on of $2, 000; and Ol i vi a no
deduct i on at al l . Expl ai n.

Cor r ect Answer :
The most apparent explanation is the limitation imposed on the 222
tuition deduction. Logans MAGI must be less than $130,000, while Cadens
MAGI is more than $130,000 but not more than $160,000. Lastly, Olivias
MAGI must be in excess of $160,000.

1170. Meg t eaches t he f i f t h gr ade at a l ocal school . Dur i ng t he year ,
she spends $1, 200 f or school suppl i es f or use i n her cl assr oom. On her
i ncome t ax r et ur n, some of t hi s expense i s not r epor t ed and t he bal ance
i s deduct ed i n t wo di f f er ent pl aces. Expl ai n what has pr obabl y
happened.

Cor r ect Answer :
Meg pr obabl y has been r ei mbur sed f or some of t hese expenses. I f she
r ender s an adequat e account i ng t o her empl oyer , t he r ei mbur sement i s
not r epor t ed i n her i ncome nor i s t he expense i nvol ved deduct ed. As t o
t he r emai ni ng expenses, she has cl ai med $250 as a deduct i on for AGI and
t he bal ance as a mi scel l aneous i t emi zed deduct i on.

1171. I n connect i on wi t h t he of f i ce i n t he home deduct i on, comment on
t he f ol l owi ng:

a. Mi xed use ( i . e. , busi ness and per sonal ) of
t he por t i on of t he home al l ocat ed t o
busi ness.

b. The di f f er ence bet ween direct and indirect
expenses f or deduct i on pur poses.

c. The cl assi f i cat i on of t he expense ( i . e. ,
dfor or dfrom AGI ) .

Cor r ect Answer :
a. In most cases, mixed use of the portion
allocated to business is not
allowed. Consequently, the office must be
exclusively used for business. An
exception is made, however, when the home is
used as a daycare center. Here, mixed use
is allowed.

b. Direct expenses (e.g., painting the office)
are deductible in full because they only
benefit the office area. Indirect expenses
(e.g., homeowners casualty insurance) must
be allocated since they relate to both the
business and personal portions of the home.

c. Like most job-related expenses, the
taxpayers status (i.e., employed, self-
employed) governs the classification of the
expense. Thus, an office in the home expense
to an employee is a deduction from AGI,
while that of a self-employed taxpayer is a
deduction for AGI.

1172. Fai t h j ust gr aduat ed f r omcol l ege and she needs advi ce on t he t ax
t r eat ment of t he cost s she i ncur s i n connect i on wi t h her f i r st j ob ( a
sal es per son f or a phar maceut i cal company) . Speci f i cal l y, she want s t o
know about t he f ol l owi ng i t ems:

a. J ob sear ch cost s.

b. Busi ness war dr obe cost .

c. Movi ng expenses.

d. Deduct i on f or of f i ce i n t he home.

Cor r ect Answer :
a. Not deductible since it involves Faiths
first job.

b. Not deductible since the clothes are
suitable for street wear.

c. As long as the time and distance
requirements are met, the moving expenses
are deductible.

d. Unless Faiths employer has an office
available for her in the locale where she
works, she can qualify for an office in the
home deduction. This result is consistent
with the convenience of the employer
requirement applicable in the case of
employees.

1173. Regar di ng t ax f avor ed r et i r ement pl ans f or empl oyees and sel f -
empl oyed per sons, comment on t he f ol l owi ng:

a. The excl usi on ver sus deduct i on appr oaches as
t o cont r i but i ons by par t i ci pant s.

b. Tax- f r ee accumul at i on of ear ni ngs.

c. The def er r al of i ncome t ax consequences.

d. Empl oyee ver sus sel f - empl oyed st at us.

Cor r ect Answer :
a. Contributions by employees to retirement
plans that are qualified provide a tax
benefit either in the form of an exclusion
from gross income or as a deduction for AGI.
The traditional IRA takes the deduction
approach. This is also the case of
contributions by a self-employed person to a
Keogh (H.R. 10) plan.

b. A characteristic of all tax-favored
retirement plans is that income accumulates
free of tax. This allows for a greater
accumulation to take place up to the point
of distribution.

c. Except in the Roth IRA, the main objective
of retirement plans is to defer taxation
until distributions are made.

d. Keogh (H.R. 10) plans are, in effect, the
self-employed version of employee retirement
plans.

1174. Ashl ey and Mat t hew ar e husband and wi f e and bot h ar e pr act i ci ng
CPAs. On a j oi nt r et ur n, Ashl ey get s t o deduct her pr of essi onal dues
but Mat t hew does not . Expl ai n.

Cor r ect Answer :
Most likely Ashley is self-employed, while Matthew is employed. Thus,
Ashleys expenses are deductions for AGI and Matthews are itemized
deduction subject to the 2% floor. If they do not itemize (or if they do
and cannot exceed the 2% floor), Matthew loses the deduction for his
professional dues.

1175. I sabel l a i s a dent al hygi eni st who wor ks f or f i ve di f f er ent
dent i st s. She spends one day a week ( i . e. , Monday t hr ough Fr i day) wi t h
each. Al l of t he dent i st s except Dr . St anki ( t he Wednesday assi gnment )
t r eat her as an empl oyee. Dr . St anki , however , cl assi f i es her as bei ng
sel f - empl oyed. Comment on t hi s di scr epancy i n t r eat ment .

Cor r ect Answer :
Unl ess I sabel l a s Wednesday dut i es ar e si gni f i cant l y di f f er ent t han t he
r est of t he week, Dr . St anki has pl aced hi msel f i n a vul ner abl e
posi t i on. I n t er ms of t he pr oper wor k cl assi f i cat i on of a ser vi ce
pr ovi der , one key consi der at i on i s how t hey ar e t r eat ed by ot her
compar abl e busi nesses. I n al l l i kel i hood, t her ef or e, Dr . St anki wi l l
have a t ough t i me convi nci ng t he I RS t hat I sabel l a i s an i ndependent
cont r act or when f our of hi s col l eagues consi der her t o be an empl oyee.
Mor e l i kel y, Dr . St anki desi r es t o save on payr ol l t axes and avoi d
cover i ng I sabel l a i n any f r i nge benef i t s of f er ed t o ot her empl oyees.

1176. Fel i ci a, a r ecent col l ege gr aduat e, i s empl oyed as an account ant
by an oi l company. She woul d l i ke t o cont i nue her educat i on and obt ai n
a l aw degr ee. Di scuss Fel i ci a s t ax st at us i f she at t ends a l ocal l aw
school on a:

a. Par t - t i me basi s.

b. Ful l - t i me basi s.

Cor r ect Answer :
a. Regarding the usual education expense
justification of maintaining and improving
on existing skills, Felicia will not
succeed. The IRS has successfully maintained
that obtaining a law degree leads to a new
trade or business. Reliance on 222,
however, is appropriate since the education
need not be job related. Unfortunately,
222 only covers tuition, is limited to
$4,000, and may be reduced (or eliminated)
by an AGI limitation.

b. If Felicia quits her job and returns to
college on a full-time basis, she no longer
is in a trade or business. A temporary break
in employment status (e.g., leave of
absence), however, will cure this problem if
properly structured. However, Felicia will
still encounter the new trade or business
provision.

1177. Di scuss t he 2%- of - AGI f l oor and t he 50%cut back l i mi t at i on i n
connect i on wi t h var i ous empl oyee expenses under t he f ol l owi ng
ar r angement s:

a. The empl oyee i s not r ei mbur sed by t he
empl oyer .

b. The empl oyee i s f ul l y r ei mbur sed under a
nonaccount abl e pl an.

c. The empl oyee i s par t i al l y r ei mbur sed under
an account abl e pl an.

d. The empl oyee i s f ul l y r ei mbur sed under an
account abl e pl an.

Cor r ect Answer :
a. Any cutback adjustment and the 2%-of-AGI floor
are imposed on the employee. The employee has
the burden of being able to substantiate the
expenses involved. Furthermore, no deduction
is available if the employee does not itemize
deductions from AGI.

b. The reimbursement must be reported as income.
Deductions are handled as in part a. above.

c. Unless the reimbursement identifies the
expenses covered, it must be allocated between
the items that are and are not subject to the
cutback adjustment.

d. A washout results. In effect the expenses are
treated as deductions for AGI and fully offset
the reimbursement. As far as the employee is
concerned, the expenses are not subject to the
cutback adjustment or the 2%-of-AGI floor.

1178. Ramon and I ngr i d wor k i n t he f i el d of publ i c r el at i ons and i ncur
si zabl e ent er t ai nment expenses. Ramon i s empl oyed by a consumer
pr oduct s company, whi l e I ngr i d i s a sel f - empl oyed consul t ant . Regar di ng
t he t ax t r eat ment of t he ent er t ai nment expenses, when woul d:

a. Ramon be bet t er of f t han I ngr i d?

b. I ngr i d be bet t er of f t han Ramon?

Cor r ect Answer :
a. If Ramon renders an adequate accounting to
his employer and is fully reimbursed. In
such a case, the employee reports no income
or deduction as to these expenses. The
cutback adjustment is suffered by the
employer.

b. If Ramon does not render an adequate
accounting to his employer, he will have to
recognize any reimbursement as income and
substantiate any deduction. Even worse, he
will be subject to the cutback adjustment
and the deduction will be a miscellaneous
itemized deduction upon which the 2%-of-AGI
limit is imposed. Although Ingrid also will
be subject to the cutback adjustment, she
has a deduction for AGI upon which the 2%
rule does not apply.

1179. Per sonal expendi t ur es t hat ar e deduct i bl e as i t emi zed deduct i ons
i ncl ude medi cal expenses, Feder al i ncome t axes, st at e i ncome t axes,
pr oper t y t axes on a per sonal r esi dence, mor t gage i nt er est , and
char i t abl e cont r i but i ons.

a. Tr ue
*b. Fal se

1180. The el ect i on t o i t emi ze i s appr opr i at e when t ot al i t emi zed
deduct i ons ar e l ess t han t he st andar d deduct i on based on t he t axpayer s
f i l i ng st at us.

a. Tr ue
*b. Fal se

1181. Adr i enne sust ai ned ser i ous f aci al i nj ur i es i n a mot or cycl e
acci dent . To r est or e her physi cal appear ance, Adr i enne had cosmet i c
sur ger y. She cannot deduct t he cost of t hi s pr ocedur e as a medi cal
expense.

a. Tr ue
*b. Fal se

1182. A physi ci an r ecommends a pr i vat e school f or El l en s dependent
chi l d. Because of t he physi ci an s r ecommendat i on, t he cost of t he
pr i vat e school wi l l qual i f y as a medi cal expense deduct i on ( subj ect t o
per cent age l i mi t at i ons) .

a. Tr ue
*b. Fal se

1183. Mi ndy pai d an appr ai ser t o det er mi ne how much a capi t al
i mpr ovement made f or medi cal r easons i ncr eased t he val ue of her
per sonal r esi dence. The appr ai sal f ee qual i f i es as a deduct i bl e medi cal
expense.

a. Tr ue
*b. Fal se

1184. Upon t he r ecommendat i on of a physi ci an, Ed has a swi mmi ng pool
i nst al l ed at hi s r esi dence because of a hear t condi t i on. I f he i s
al l owed t o deduct al l or par t of t he cost of t he pool , Ed s i ncr ease i n
ut i l i t y bi l l s due t o t he oper at i on of t he pool qual i f i es as a medi cal
expense.

*a. Tr ue
b. Fal se

1185. Mason, age 70, a physi cal l y handi capped i ndi vi dual , pays $10, 000
i n 2013 f or t he i nst al l at i on of wheel chai r r amps, suppor t bar s, and
r ai l i ngs i n hi s per sonal r esi dence. These i mpr ovement s i ncr ease t he
val ue of hi s per sonal r esi dence by $2, 000. Onl y $8, 000 of t he
expendi t ur e qual i f i es as a medi cal deduct i on ( subj ect t o t he AGI f l oor ) .

a. Tr ue
*b. Fal se

1186. Chad pays t he medi cal expenses of hi s son, J ames. J ames woul d
qual i f y as Chad s dependent except t hat he ear ns $7, 500 dur i ng t he year .
Chad may cl ai mJ ames medi cal expenses even i f he i s not a dependent .

*a. Tr ue
b. Fal se

1187. Bi l l pai d $2, 500 of medi cal expenses f or hi s daught er , Mar i e.
Mar i e i s mar r i ed t o J ohn and t hey f i l e a j oi nt r et ur n. Bi l l can i ncl ude
t he $2, 500 of expenses when cal cul at i ng hi s medi cal expense deduct i on.

*a. Tr ue
b. Fal se

1188. I n 2013, Dena t r avel ed 600 mi l es f or speci al i zed medi cal
t r eat ment t hat was not avai l abl e i n her homet own. She pai d $90 f or
meal s dur i ng t he t r i p, $145 f or a hot el r oomon Tuesday ni ght , and $15
i n par ki ng f ees. She di d not keep r ecor ds of ot her out - of - pocket cost s
f or t r anspor t at i on. Dena can i ncl ude $209 i n comput i ng her medi cal
expenses.

*a. Tr ue
b. Fal se

1189. Mar i a t r avel ed t o Rochest er , Mi nnesot a, wi t h her son, who was
oper at ed on at t he Mayo Cl i ni c. Her son st ayed at t he cl i ni c f or t he
dur at i on of hi s t r eat ment . She pai d ai r f ar e of $300 and $50 per ni ght
f or l odgi ng. The cost of Mar i a s ai r f ar e and l odgi ng cannot be i ncl uded
i n det er mi ni ng her medi cal expense deduct i on.

a. Tr ue
*b. Fal se

1190. I n 2013, Br andon, age 72, pai d $3, 000 f or l ong- t er mcar e
i nsur ance pr emi ums. He may i ncl ude t he $3, 000 i n comput i ng hi s medi cal
expense deduct i on f or t he year .

*a. Tr ue
b. Fal se

1191. J i m s empl oyer pays hal f of t he pr emi ums on a gr oup medi cal
i nsur ance pl an cover i ng al l empl oyees, and empl oyees pay t he ot her
hal f . J i mcan excl ude t he hal f of t he pr emi umpai d by hi s empl oyer
f r omhi s gr oss i ncome and may i ncl ude t he hal f he pays i n det er mi ni ng
hi s medi cal expense deduct i on.

*a. Tr ue
b. Fal se

1192. Mat t , a cal endar year t axpayer , pays $11, 000 i n medi cal expenses
i n 2013. He expect s $5, 000 of t hese expenses t o be r ei mbur sed by an
i nsur ance company i n 2014. I n det er mi ni ng hi s medi cal expense deduct i on
f or 2013, Mat t must r educe hi s 2013 medi cal expenses by t he amount of
t he r ei mbur sement he expect s i n 2014.

a. Tr ue
*b. Fal se

1193. I n 2014, Rhonda r ecei ved an i nsur ance r ei mbur sement f or medi cal
expenses i ncur r ed i n 2013. She i s not r equi r ed t o i ncl ude t he
r ei mbur sement i n gr oss i ncome i n 2014 i f she cl ai med t he st andar d
deduct i on i n 2013.

*a. Tr ue
b. Fal se

1194. Geor gi a cont r i but ed $2, 000 t o a qual i f yi ng Heal t h Savi ngs Account
i n 2013. The ent i r e amount qual i f i es as an expense deduct i bl e for AGI .

*a. Tr ue
b. Fal se

1195. Shi r l ey pays FI CA ( empl oyer s shar e) on t he wages she pays her
mai d t o cl ean and mai nt ai n Shi r l ey s per sonal r esi dence. The FI CA
payment i s not deduct i bl e as an i t emi zed deduct i on.

*a. Tr ue
b. Fal se

1196. Fees f or aut omobi l e i nspect i ons, aut omobi l e t i t l es and
r egi st r at i on, br i dge and hi ghway t ol l s, par ki ng met er deposi t s, and
post age ar e not deduct i bl e i f i ncur r ed f or per sonal r easons, but t hey
ar e deduct i bl e as deduct i ons for AGI i f i ncur r ed as a busi ness expense
by a sel f - empl oyed t axpayer .

*a. Tr ue
b. Fal se

1197. A t axpayer may not deduct t he cost of new cur bi ng ( r el at i ve t o a
per sonal r esi dence) , even i f t he const r uct i on i s r equi r ed by t he ci t y
and t he cur bi ng pr ovi des an i nci dent al benef i t t o t he publ i c wel f ar e.

*a. Tr ue
b. Fal se

1198. Ser gi o was r equi r ed by t he ci t y t o pay $2, 000 f or t he cost of new
cur bi ng i nst al l ed by t he ci t y i n f r ont of hi s per sonal r esi dence. The
new cur bi ng was i nst al l ed t hr oughout Ser gi o s nei ghbor hood as par t of a
st r eet upgr ade pr oj ect . Ser gi o may not deduct $2, 000 as a t ax, but he
may add t he $2, 000 t o t he basi s of hi s pr oper t y.

*a. Tr ue
b. Fal se

1199. Tr ent sel l s hi s per sonal r esi dence t o Chest er on J ul y 1, 2013. He
had pai d $7, 000 i n r eal pr oper t y t axes on Mar ch 1, 2013, t he due dat e
f or pr oper t y t axes f or 2013. Tr ent may not deduct t he por t i on of t he
t axes he pai d f or t he per i od t he pr oper t y was owned by Chest er .

*a. Tr ue
b. Fal se

1200. Her ber t i s t he sol e pr opr i et or of a f ur ni t ur e st or e. He can
deduct r eal pr oper t y t axes on hi s st or e bui l di ng but he cannot deduct
st at e i ncome t axes r el at ed t o hi s net i ncome f r omt he f ur ni t ur e st or e
as a busi ness deduct i on.

*a. Tr ue
b. Fal se

1201. Gr ace s sol e sour ce of i ncome i s f r oma r est aur ant t hat she owns
and oper at es as a pr opr i et or shi p. Any st at e i ncome t ax Gr ace pays on
t he busi ness net i ncome must be deduct ed as a busi ness expense r at her
t han as an i t emi zed deduct i on.

a. Tr ue
*b. Fal se

1202. I n Apr i l 2013, Ber t i e, a cal endar year cash basi s t axpayer , had
t o pay t he st at e of Mi chi gan addi t i onal i ncome t ax f or 2012. Even
t hough i t r el at es t o 2012, f or Feder al i ncome t ax pur poses t he payment
qual i f i es as a t ax deduct i on f or t ax year 2013.

*a. Tr ue
b. Fal se

1203. I n J anuar y 2014, Pam, a cal endar year cash basi s t axpayer , made
an est i mat ed st at e i ncome t ax payment f or 2013. The payment i s
deduct i bl e i n 2013.

a. Tr ue
*b. Fal se

1204. Phyl l i s, a cal endar year cash basi s t axpayer who i t emi zed
deduct i ons, over pai d her 2012 st at e i ncome t ax and i s ent i t l ed t o a
r ef und of $400. Phyl l i s chooses t o appl y t he $400 over payment t owar d
her st at e i ncome t axes f or 2013. She i s r equi r ed t o r ecogni ze t hat
amount as i ncome i n 2013.

*a. Tr ue
b. Fal se

1205. Tom, whose MAGI i s $40, 000, pai d $3, 500 of i nt er est on a
qual i f i ed st udent l oan i n 2013. Tomi s si ngl e. He may deduct t he $3, 500
i nt er est as an i t emi zed deduct i on.

a. Tr ue
*b. Fal se

1206. For pur poses of comput i ng t he deduct i on f or qual i f i ed r esi dence
i nt er est , a qual i f i ed r esi dence i ncl udes onl y t he t axpayer s pr i nci pal
r esi dence.

a. Tr ue
*b. Fal se

1207. For pur poses of comput i ng t he deduct i on f or qual i f i ed r esi dence
i nt er est , a qual i f i ed r esi dence i ncl udes t he t axpayer s pr i nci pal
r esi dence and t wo ot her r esi dences of t he t axpayer or spouse.

a. Tr ue
*b. Fal se

1208. I nt er est pai d or accr ued dur i ng t he t ax year on aggr egat e
acqui si t i on i ndebt edness of $2 mi l l i on or l ess ( $1 mi l l i on or l ess f or
mar r i ed per sons f i l i ng separ at e r et ur ns) i s deduct i bl e as qual i f i ed
r esi dence i nt er est .

a. Tr ue
*b. Fal se

1209. A t axpayer pays poi nt s t o obt ai n f i nanci ng t o pur chase a second
r esi dence. At t he el ect i on of t he t axpayer , t he poi nt s can be deduct ed
as i nt er est expense f or t he year pai d.

a. Tr ue
*b. Fal se

1210. Poi nt s pai d by t he owner of a per sonal r esi dence t o r ef i nance an
exi st i ng mor t gage must be capi t al i zed and amor t i zed over t he l i f e of
t he new mor t gage.

*a. Tr ue
b. Fal se

1211. J ack sol d a per sonal r esi dence t o St even and pai d poi nt s of
$3, 500 on t he l oan t o hel p St even f i nance t he pur chase. J ack can deduct
t he poi nt s as i nt er est .

a. Tr ue
*b. Fal se

1212. Let ha i ncur r ed a $1, 600 pr epayment penal t y t o a l endi ng
i nst i t ut i on because she pai d of f t he mor t gage on her home ear l y. The
$1, 600 i s deduct i bl e as i nt er est expense.

*a. Tr ue
b. Fal se

1213. Leona bor r ows $100, 000 f r omFi r st Nat i onal Bank and uses t he
pr oceeds t o pur chase Ci t y of Houst on bonds. The i nt er est Leona pays on
t hi s l oan i s deduct i bl e as i nvest ment i nt er est subj ect t o t he
i nvest ment i nt er est l i mi t s.

a. Tr ue
*b. Fal se

1214. J oe, a cash basi s t axpayer , t ook out a 12- mont h busi ness l oan on
December 1, 2013. He pr epai d al l $3, 600 of t he i nt er est on t he l oan on
December 1, 2013. J oe can deduct onl y $300 of t he pr epai d i nt er est i n
2013.

*a. Tr ue
b. Fal se

1215. Sadi e mai l ed a check f or $2, 200 t o a qual i f i ed char i t abl e
or gani zat i on on December 31, 2013. The $2, 200 cont r i but i on i s
deduct i bl e on Sadi e s 2013 t ax r et ur n.

*a. Tr ue
b. Fal se

1216. On December 31, 2013, Lynet t e used her cr edi t car d t o make a $500
cont r i but i on t o t he Uni t ed Way, a qual i f i ed char i t abl e
or gani zat i on. She wi l l pay her cr edi t car d bal ance i n J anuar y
2014. I f Lynet t e i t emi zes, she can deduct t he $500 i n 2013.

*a. Tr ue
b. Fal se

1217. J udy pai d $40 f or Gi r l Scout cooki es and $40 f or Boy Scout
popcor n. J udy may cl ai man $80 char i t abl e cont r i but i on deduct i on.

a. Tr ue
*b. Fal se

1218. For al l of t he cur r ent year , Randy ( a cal endar year t axpayer )
al l owed t he Sal vat i on Ar my t o use a bui l di ng he owns r ent - f r ee. The
bui l di ng nor mal l y r ent s f or $24, 000 a year . Randy wi l l be al l owed a
char i t abl e cont r i but i on deduct i on t hi s year of $24, 000.

a. Tr ue
*b. Fal se

1219. Al cont r i but ed a pai nt i ng t o t he Met r opol i t an Ar t Museumof St .
Loui s, Mi ssour i . The pai nt i ng, pur chased si x year s ago, was wor t h
$40, 000 when donat ed, and Al s basi s was $20, 000. I f t hi s pai nt i ng i s
i mmedi at el y sol d by t he museumand t he pr oceeds ar e pl aced i n t he
gener al f und, Al s char i t abl e cont r i but i on deduct i on i s $20, 000
( subj ect t o per cent age l i mi t at i ons) .

*a. Tr ue
b. Fal se

1220. Dur i ng t he year , Vi ct or spent $300 on bi ngo games sponsor ed by
hi s chur ch. I f al l pr of i t s went t o t he chur ch, Vi ct or has a char i t abl e
cont r i but i on deduct i on of $300.

a. Tr ue
*b. Fal se

1221. I n 2013, Al l i son dr ove 800 mi l es t o vol unt eer i n a pr oj ect
sponsor ed by a qual i f i ed char i t abl e or gani zat i on i n Ut ah. I n addi t i on,
she spent $250 f or meal s whi l e away f r omhome. I n t ot al , Al l i son may
t ake a char i t abl e cont r i but i on deduct i on of $112 ( 800 mi l es $. 14) .

a. Tr ue
*b. Fal se

1222. Dur i ng t he year , Eve ( a r esi dent of Bi l l i ngs, Mont ana) spends
t hr ee consecut i ve weeks i n Loui svi l l e, Kent ucky. One week i s spent
r epr esent i ng t he Bi l l i ngs Fi r st Chr i st i an Chur ch at t he nat i onal
convent i on, and t wo weeks ar e spent vacat i oni ng wi t h r el at i ves. One
t hi r d of Eve s t r avel expenses wi l l qual i f y as a char i t abl e deduct i on.

a. Tr ue
*b. Fal se

1223. I n or der t o di ssuade hi s past or f r omr esi gni ng and t aki ng a
posi t i on wi t h a l ar ger chur ch, Mi chael , an ar dent l eader of t he
congr egat i on, gi ves t he past or a new car . The cost of t he car i s
deduct i bl e by Mi chael as a char i t abl e cont r i but i on.

a. Tr ue
*b. Fal se

1224. Dan cont r i but ed st ock wor t h $16, 000 t o hi s col l ege al ma mat er , a
qual i f i ed char i t y. He acqui r ed t he st ock el even mont hs ago f or
$4, 000. He may deduct $16, 000 as a char i t abl e cont r i but i on deduct i on
( subj ect t o per cent age l i mi t at i ons) .

a. Tr ue
*b. Fal se

1225. Ronal do cont r i but ed st ock wor t h $12, 000 t o t he Chi l dr en s
Pr ot ect i ve Agency, a qual i f i ed char i t y. He acqui r ed t he st ock t went y
mont hs ago f or $6, 000. He may deduct $6, 000 as a char i t abl e
cont r i but i on deduct i on ( subj ect t o per cent age l i mi t at i ons) .

a. Tr ue
*b. Fal se

1226. Any capi t al asset donat ed t o a publ i c char i t y t hat woul d r esul t
i n l ong- t er mcapi t al gai n i f sol d, i s subj ect t o t he 30%- of - AGI cei l i ng
l i mi t at i on on char i t abl e cont r i but i ons f or i ndi vi dual s.

*a. Tr ue
b. Fal se

1227. J ohn gave $1, 000 t o a f ami l y whose house was dest r oyed by f i r e.
J ohn may cl ai ma char i t abl e deduct i on of $1, 000 on hi s t ax r et ur n f or
t he cur r ent year .

a. Tr ue
*b. Fal se

1228. I n t he year of her deat h, Mar i a made si gni f i cant char i t abl e
cont r i but i ons of capi t al gai n pr oper t y. I n f act , t he amount of t he
cont r i but i ons exceeds 30%of her AGI . Mar i a s execut or can el ect t o
deduct char i t abl e cont r i but i ons of up t o 50%of Mar i a s AGI on Mar i a s
f i nal i ncome t ax r et ur n.

*a. Tr ue
b. Fal se

1229. The r educed deduct i on el ect i on enabl es a t axpayer t o move f r om
t he 30%- of - AGI l i mi t at i on t o t he 50%- of - AGI l i mi t at i on.

*a. Tr ue
b. Fal se

1230. Excess char i t abl e cont r i but i ons t hat come under t he 30%- of - AGI
cei l i ng ar e al ways subj ect t o t he 30%- of - AGI cei l i ng i n t he car r yover
year .

*a. Tr ue
b. Fal se

1231. Cont r i but i ons t o publ i c char i t i es i n excess of 50%of AGI may be
car r i ed back 3 year s or f or war d f or up t o 5 year s.

a. Tr ue
*b. Fal se

1232. Empl oyee busi ness expenses f or t r avel qual i f y as i t emi zed
deduct i ons subj ect t o t he 2%f l oor i f t hey ar e not r ei mbur sed.

*a. Tr ue
b. Fal se

1233. Gambl i ng l osses may be deduct ed t o t he ext ent of t he t axpayer s
gambl i ng wi nni ngs. Such l osses ar e subj ect t o t he 2%f l oor f or
mi scel l aneous i t emi zed deduct i ons.

a. Tr ue
*b. Fal se

1234. The phaseout of cer t ai n i t emi zed deduct i ons has been r ei nst at ed
f or year s begi nni ng i n 2013.

*a. Tr ue
b. Fal se

1235. Edna had an acci dent whi l e compet i ng i n a r odeo. She sust ai ned
f aci al i nj ur i es t hat r equi r ed cosmet i c sur ger y. Whi l e havi ng t he
sur ger y done t o r est or e her appear ance, she had addi t i onal sur ger y done
t o r eshape her chi n, whi ch was not i nj ur ed i n t he acci dent . The
sur ger y t o r est or e her appear ance cost $9, 000 and t he sur ger y t o
r eshape her chi n cost $6, 000. How much of Edna s sur gi cal f ees wi l l
qual i f y as a deduct i bl e medi cal expense ( bef or e appl i cat i on of t he AGI
l i mi t at i on) ?

a. $0.
b. $6, 000.
*c. $9, 000.
d. $15, 000.

1236. Fr ed and Lucy ar e mar r i ed, ages 33 and 32, and t oget her have AGI
of $120, 000 i n 2013. They have f our dependent s and f i l e a j oi nt r et ur n.
They pay $5, 000 f or a hi gh deduct i bl e heal t h i nsur ance pol i cy and
cont r i but e $2, 600 t o a qual i f i ed Heal t h Savi ngs Account . Dur i ng t he
year , t hey pai d t he f ol l owi ng amount s f or medi cal car e: $9, 200 i n
doct or and dent i st bi l l s and hospi t al expenses, and $3, 000 f or
pr escr i bed medi ci ne and dr ugs. I n Oct ober 2013, t hey r ecei ved an
i nsur ance r ei mbur sement of $4, 400 f or t he hospi t al i zat i on. They expect
t o r ecei ve an addi t i onal r ei mbur sement of $1, 000 i n J anuar y 2014.
Det er mi ne t he maxi mumdeduct i on al l owabl e f or medi cal expenses i n 2013.

*a. $800.
b. $3, 400.
c. $9, 200.
d. $12, 800.

1237. Ri char d, age 50, i s empl oyed as an act uar y. For cal endar year
2013, he had AGI of $130, 000 and pai d t he f ol l owi ng medi cal expenses:

Medical insurance premiums $5,300
Doctor and dentist bills for
Derrick and Jane (Richards
parents)
7,900
Doctor and dentist bills for
Richard
5,100
Prescribed medicines for Richard 830
Nonprescribed insulin for Richard 960

Derrick and Jane would qualify as Richards dependents except that they
file a joint return. Richards medical insurance policy does not cover
them. Richard filed a claim for $4,800 of his own expenses with his
insurance company in November 2013 and received the reimbursement in
January 2014. What is Richards maximum allowable medical expense
deduction for 2013?

a. $0.
*b. $7, 090.
c. $13, 000.
d. $20, 090.

1238. Sandr a i s si ngl e and does a l ot of busi ness ent er t ai ni ng at
home. Because Ar t hur , Sandr a s 80- year ol d dependent gr andf at her who
l i ved wi t h Sandr a, needs medi cal and nur si ng car e, he moved t o Twi l i ght
Nur si ng Home. Dur i ng t he year , Sandr a made t he f ol l owi ng payment s on
behal f of Ar t hur :

Room at Twilight $4,500
Meals for Arthur at
Twilight
850
Doctor and nurse fees 700
Cable TV service for
Arthurs room
107
Total $6,157

Twilight has medical staff in residence. Disregarding the AGI floor, how
much, if any, of these expenses qualify for a medical deduction by Sandra?

a. $6, 157.
*b. $6, 050.
c. $5, 200.
d. $1, 550.

1239. Phi l l i p, age 66, devel oped hi p pr obl ems and was unabl e t o cl i mb
t he st ai r s t o r each hi s second- f l oor bedr oom. Hi s physi ci an advi sed hi m
t o add a f i r st - f l oor bedr oomt o hi s home. The cost of const r uct i ng t he
r oomwas $32, 000. The i ncr ease i n t he val ue of t he r esi dence as a
r esul t of t he r oomaddi t i on was det er mi ned t o be $17, 000. I n addi t i on,
Phi l l i p pai d t he cont r act or $5, 500 t o const r uct an ent r ance r amp t o hi s
home and $8, 500 t o wi den t he hal l ways t o accommodat e hi s wheel chai r .
Phi l l i p s AGI f or 2013 was $100, 000. How much of t hese expendi t ur es can
Phi l l i p deduct as a medi cal expense i n 2013?

a. $14, 000.
b. $15, 000.
*c. $21, 500.
d. $29, 000.

1240. Qui nn, who i s si ngl e and l i ves al one, i s physi cal l y handi capped
as a r esul t of a di vi ng acci dent . I n or der t o l i ve i ndependent l y, he
modi f i es hi s per sonal r esi dence at a cost of $30, 000. The modi f i cat i ons
i ncl uded wi deni ng hal l s and door ways f or a wheel chai r , i nst al l i ng
suppor t bar s i n t he bat hr oomand ki t chen, i nst al l i ng a st ai r way l i f t ,
and r ewi r i ng so he coul d r each el ect r i cal out l et s and appl i ances. Qui nn
pays $200 f or an appr ai sal t hat pl aces t he val ue of t he r esi dence at
$129, 000 bef or e t he i mpr ovement s and $140, 000 af t er . As a r esul t of t he
oper at i on of t he st ai r way l i f t , Qui nn exper i enced an i ncr ease of $680
i n hi s ut i l i t y bi l l s f or t he cur r ent year . Di sr egar di ng t he per cent age
of AGI l i mi t at i on, how much of t he above expendi t ur es qual i f y as
medi cal expense deduct i ons?

a. $11, 680.
*b. $30, 680.
c. $30, 880.
d. $34, 880.

1241. Br ad, who woul d ot her wi se qual i f y as Faye s dependent , had gr oss
i ncome of $9, 000 dur i ng t he year . Faye, who had AGI of $120, 000, pai d
t he f ol l owi ng medi cal expenses i n 2013:

Cataract operation for Brad $ 5,400
Brads prescribed contact
lenses
1,800
Fayes doctor and dentist
bills
12,600
Prescribed drugs for Faye 2,55
0
Total $22,350

Assuming Faye is age 45, she has a medical expense deduction of:

a. $3, 150.
b. $4, 950.
*c. $10, 350.
d. $13, 350.

1242. Tom, age 48, i s advi sed by hi s f ami l y physi ci an t hat he needs
back sur ger y t o cor r ect a pr obl emf r omhi s l ast back sur ger y. Si nce
Tomi s i n a wheel chai r , he needs hi s wi f e, J ean, t o accompany hi mon
hi s t r i p t o Rochest er , Mi nnesot a, f or i n- pat i ent t r eat ment at t he Mayo
Cl i ni c, whi ch speci al i zes i n t hi s t ype of sur ger y. Tomi ncur r ed t he
f ol l owi ng cost s i n 2013:

Round-trip airfare ($350
each)
$ 700
Jeans hotel in Rochester
for four nights ($95 per
night)
380
Jeans meals while in
Rochester
105
Toms medical treatment 3,500
Toms prescription medicine 600

Compute Toms medical expenses for the trip (subject to the 10% floor).

a. $4, 000.
*b. $5, 000.
c. $5, 180.
d. $5, 285.

1243. Your f r i end Scot t y i nf or ms you t hat he r ecei ved a t ax- f r ee
r ei mbur sement i n 2013 of some medi cal expenses he pai d i n 2012. Whi ch
of t he f ol l owi ng st at ement s best expl ai ns why Scot t y i s not r equi r ed t o
r epor t t he r ei mbur sement i n gr oss i ncome?

a. Scot t y i t emi zed deduct i ons i n 2012.
*b. Scot t y di d not i t emi ze deduct i ons i n 2012.
c. Scot t y i t emi zed deduct i ons i n 2013.
d. Scot t y di d not i t emi ze deduct i ons i n 2013.
e. Scot t y i t emi zed deduct i ons i n 2013 but not i n 2012.

1244. I n 2013, Bor i s pays a $3, 800 pr emi umf or hi gh- deduct i bl e medi cal
i nsur ance f or hi msel f and hi s f ami l y. I n addi t i on, he cont r i but es
$3, 400 t o a Heal t h Savi ngs Account . Whi ch of t he f ol l owi ng st at ement s
i s true?

*a. I f Bor i s i s sel f - empl oyed, he may deduct $7, 200 as a
deduct i on for AGI .
b. I f Bor i s i s sel f - empl oyed, he may deduct $3, 400 as a deduct i on
for AGI and may i ncl ude t he $3, 800 pr emi umwhen cal cul at i ng hi s
i t emi zed medi cal expense deduct i on.
c. I f Bor i s i s an empl oyee, he may deduct $7, 200 as a deduct i on
for AGI .
d. I f Bor i s i s an empl oyee, he may i ncl ude $7, 200 when
cal cul at i ng hi s i t emi zed medi cal expense deduct i on.

1245. Dur i ng 2013, Hugh, a sel f - empl oyed i ndi vi dual , pai d t he f ol l owi ng
amount s:

Real estate tax on Iowa residence $3,800
Real estate taxes on land in
Puerto Rico (held as an
investment)
1,100
Gift tax paid on gift to daughter 1,200
State sales taxes 1,750
State occupational license fee 300
Property tax on value of his
automobile (used 100% for
business)
475

What is the maximum amount Hugh can claim as taxes in itemizing deductions
from AGI?

a. $6, 600.
*b. $6, 650.
c. $7, 850.
d. $8, 625.

1246. Dur i ng 2013, Nancy pai d t he f ol l owi ng t axes:

Tax on residence (for the period from
March 1 through August 31, 2013)
$5,250
State motor vehicle tax (based on the
value of the personal use automobile)
430
State sales tax 3,500

Nancy sold her personal residence on June 30, 2013, under an agreement in
which the real estate taxes were not prorated between the buyer and the
seller. What amount qualifies as a deduction from AGI for 2013 for Nancy?

a. $9, 180.
b. $9, 130.
*c. $7, 382.
d. $5, 382.

1247. I n Lawr ence Count y, t he r eal pr oper t y t ax year i s t he cal endar
year . The r eal pr oper t y t ax becomes a per sonal l i abi l i t y of t he owner
of r eal pr oper t y on J anuar y 1 i n t he cur r ent r eal pr oper t y t ax year
( assume t hi s year i s not a l eap year ) . The t ax i s payabl e on J une 1. On
May 1, Reggi e sel l s hi s house t o Dana f or $350, 000. On J une 1, Dana
pays t he ent i r e r eal est at e t ax of $7, 950 f or t he year endi ng December
31. How much of t he pr oper t y t axes may Reggi e deduct ?

a. $0.
*b. $2, 614.
c. $2, 625.
d. $7, 950.

1248. Br ad, who uses t he cash met hod of account i ng, l i ves i n a st at e
t hat i mposes an i ncome t ax ( i ncl udi ng wi t hhol di ng f r omwages) . On Apr i l
14, 2013, he f i l es hi s st at e r et ur n f or 2012, payi ng an addi t i onal $600
i n st at e i ncome t axes. Dur i ng 2013, hi s wi t hhol di ngs f or st at e i ncome
t ax pur poses amount t o $3, 550. On Apr i l 13, 2014, he f i l es hi s st at e
r et ur n f or 2013 cl ai mi ng a r ef und of $800. Br ad r ecei ves t he r ef und on
J une 3, 2014. I f he i t emi zes deduct i ons, how much may Br ad cl ai mas a
deduct i on f or st at e i ncome t axes on hi s Feder al i ncome t ax r et ur n f or
cal endar year 2013 ( f i l ed i n Apr i l 2014) ?

a. $3, 350.
b. $3, 550.
*c. $4, 150.
d. $5, 150.

1249. Bar r y and Lar r y, who ar e br ot her s, ar e equal owner s i n Chi ckadee
Cor por at i on. On J ul y 1, 2013, each l oans t he cor por at i on $10, 000 at an
annual i nt er est r at e of 10%. Bot h shar ehol der s ar e on t he cash met hod
of account i ng, whi l e Chi ckadee Cor por at i on i s on t he accr ual met hod.
Al l par t i es use t he cal endar year f or t ax pur poses. On J une 30, 2014,
Chi ckadee r epays t he l oans of $20, 000 t oget her wi t h t he speci f i ed
i nt er est of $2, 000. How much of t he i nt er est can Chi ckadee Cor por at i on
deduct i n 2013?

*a. $0.
b. $500.
c. $1, 000.
d. $2, 000.

1250. Ri ck and Car ol Ryan, mar r i ed t axpayer s, t ook out a mor t gage of
$160, 000 when pur chasi ng t hei r home t en year s ago. I n Oct ober of t he
cur r ent year , when t he home had a f ai r mar ket val ue of $200, 000 and
t hey owed $125, 000 on t he mor t gage, t he Ryans t ook out a home equi t y
l oan f or $110, 000. They used t he f unds t o pur chase a sai l boat t o be
used f or r ecr eat i onal pur poses. The sai l boat does not qual i f y as a
r esi dence. What i s t he maxi mumamount of debt on whi ch t he Ryans can
deduct home equi t y i nt er est ?

*a. $75, 000.
b. $90, 000.
c. $110, 000.
d. $125, 000.

1251. J oseph and Sandr a, mar r i ed t axpayer s, t ook out a mor t gage on
t hei r home f or $350, 000 i n 1991. I n May of t hi s year , when t he home had
a f ai r mar ket val ue of $450, 000 and t hey owed $250, 000 on t he mor t gage,
t hey t ook out a home equi t y l oan f or $220, 000. They used t he f unds t o
pur chase a si ngl e engi ne ai r pl ane t o be used f or r ecr eat i onal t r avel
pur poses. What i s t he maxi mumamount of debt on whi ch t hey can deduct
home equi t y i nt er est ?

a. $50, 000.
*b. $100, 000.
c. $220, 000.
d. $230, 000.

1252. Pedr o s chi l d at t ends a school oper at ed by t he chur ch t he f ami l y
at t ends. Pedr o made a donat i on of $1, 000 t o t he chur ch i n l i eu of t he
nor mal r egi st r at i on f ee of $200. I n addi t i on, Pedr o pai d t he r egul ar
t ui t i on of $6, 000 t o t he school . Based on t hi s i nf or mat i on, what i s
Pedr o s char i t abl e cont r i but i on?

a. $0.
*b. $800.
c. $1, 000.
d. $6, 800.
e. $7, 000.

1253. I n 2013, J er r y pays $8, 000 t o become a char t er member of Mammot h
Uni ver si t y s At hl et i c Counci l . The member shi p ensur es t hat J er r y wi l l
r ecei ve choi ce seat i ng at al l of Mammot h s home basket bal l games. Al so
i n 2013, J er r y pays $2, 200 ( t he r egul ar r et ai l pr i ce) f or season
t i cket s f or hi msel f and hi s wi f e. For t hese i t ems, how much qual i f i es
as a char i t abl e cont r i but i on?

a. $6, 200.
*b. $6, 400.
c. $8, 000.
d. $10, 200.

1254. Emi l y, who l i ves i n I ndi ana, vol unt eer ed t o t r avel t o Loui si ana
i n Mar ch t o wor k on a home- bui l di ng pr oj ect f or Habi t at f or Humani t y ( a
qual i f i ed char i t abl e or gani zat i on) . She was i n Loui si ana f or t hr ee
weeks. She nor mal l y makes $500 per week as a car pent er s assi st ant and
pl ans t o deduct $1, 500 as a char i t abl e cont r i but i on. I n addi t i on, she
i ncur r ed t he f ol l owi ng cost s i n connect i on wi t h t he t r i p: $600 f or
t r anspor t at i on, $1, 200 f or l odgi ng, and $400 f or meal s. What i s Emi l y s
deduct i on associ at ed wi t h t hi s char i t abl e act i vi t y?

a. $600.
b. $1, 200.
c. $1, 800.
*d. $2, 200.
e. $3, 700.

1255. Hannah makes t he f ol l owi ng char i t abl e donat i ons i n t he cur r ent
year :

Basis Fair
Market
Value
Inventory held for resale
in Hannahs business
(a sole
proprietorship)

$8,000

$ 7,200
Stock in HBM, Inc., held
as an investment (acquired
four years ago)

16,000

40,000
Baseball card collection
held as an investment
(acquired six
years ago)

4,000

20,000

The HBM stock and the inventory were given to Hannahs church, and the
baseball card collection was given to the United Way. Both donees
promptly sold the property for the stated fair market value. Disregarding
percentage limitations, Hannahs current charitable contribution deduction
is:

a. $28, 000.
*b. $51, 200.
c. $52, 000.
d. $67, 200.

1256. Byr on owned st ock i n Bl ossomCor por at i on t hat he donat ed t o a
museum( a qual i f i ed char i t abl e or gani zat i on) on J une 8 t hi s year . What
i s t he amount of Byr on s deduct i on assumi ng t hat he had pur chased t he
st ock f or $10, 500 l ast year on August 7, and t he st ock had a f ai r
mar ket val ue of $13, 800 when he made t he donat i on?

a. $3, 300.
*b. $10, 500.
c. $12, 150.
d. $13, 800.

1257. Zeke made t he f ol l owi ng donat i ons t o qual i f i ed char i t abl e
or gani zat i ons dur i ng 2013:

Basis Fair Market
Value
Used clothing (all
acquired before 2012) of
taxpayer
and his family

$ 1,350

$ 375
Stock in ABC, Inc., held
as an investment for
fifteen months

12,000

10,875
Stock in MNO, Inc., held
as an investment for
eleven months

15,000

18,000
Real estate held as an
investment for two years
15,000 30,000

The used clothing was donated to the Salvation Army; the other items of
property were donated to Eastern State University. Both are qualified
charitable organizations. Disregarding percentage limitations, Zekes
charitable contribution deduction for 2013 is:

a. $43, 350.
*b. $56, 250.
c. $59, 250.
d. $60, 375.

1258. Kar en, a cal endar year t axpayer , made t he f ol l owi ng donat i ons t o
qual i f i ed char i t abl e or gani zat i ons i n 2013:

Basis Fair Market
Value
Cash donation to State
University
$30,000 $ 30,000
Unimproved land to the
City of Terre Haute,
Indiana
70,000 210,000

The land had been held as an investment and was acquired 4 years ago.
Shortly after receipt, the City of Terre Haute sold the land for $210,000.
Karens AGI is $450,000. The allowable charitable contribution deduction
is:

a. $84, 000 i f t he r educed deduct i on el ect i on i s not made.
b. $100, 000 i f t he r educed deduct i on el ect i on i s not made.
*c. $165, 000 i f t he r educed deduct i on el ect i on i s not made.
d. $170, 000 i f t he r educed deduct i on el ect i on i s made.

1259. Dur i ng 2013, Ral ph made t he f ol l owi ng cont r i but i ons t o t he
Uni ver si t y of Or egon ( a qual i f i ed char i t abl e or gani zat i on) :

Cash $63,000
Stock in Raptor, Inc. (a
publicly traded corporation)
94,500

Ralph acquired the stock in Raptor, Inc., as an investment fourteen months
ago at a cost of $42,000. Ralphs AGI for 2013 is $189,000. What is
Ralphs charitable contribution deduction for 2013?

a. $56, 700.
b. $63, 000.
*c. $94, 500.
d. $157, 500.

1260. Pat di ed t hi s year . Bef or e she di ed, Pat gave 5, 000 shar es of
st ock i n Coyot e Cor por at i on ( a publ i cl y t r aded cor por at i on) t o her
chur ch ( a qual i f i ed char i t abl e or gani zat i on) . The st ock was wor t h
$180, 000 and she had acqui r ed i t as an i nvest ment f our year s ago at a
cost of $150, 000. I n t he year of her deat h, Pat had AGI of $300, 000. I n
compl et i ng her f i nal i ncome t ax r et ur n, how much of t he char i t abl e
cont r i but i on shoul d Pat s execut or deduct ?

a. $90, 000.
*b. $150, 000.
c. $180, 000.
d. $210, 000.

1261. Whi ch of t he f ol l owi ng i t ems woul d be an i t emi zed deduct i on on
Schedul e A of For m1040 not subject to t he 2%- of - AGI f l oor ?

a. Pr of essi onal dues pai d by an account ant ( empl oyed by For d
Mot or Co. ) t o t he Nat i onal Associ at i on of Account ant s.
*b. Gambl i ng l osses t o t he ext ent of gambl i ng wi nni ngs.
c. J ob hunt i ng cost s.
d. Appr ai sal f ee pai d t o a val uat i on exper t t o det er mi ne t he f ai r
mar ket val ue of ar t wor k donat ed t o a qual i f i ed museum.

1262. Paul , a cal endar year mar r i ed t axpayer , f i l es a j oi nt r et ur n f or
2013. I nf or mat i on f or 2013 i ncl udes t he f ol l owi ng:

AGI $175,000
State income taxes 13,500
State sales tax 3,000
Gambling losses (gambling
gains were $12,000)
6,800

Pauls allowable itemized deductions for 2013 are:

a. $13, 500.
b. $32, 400.
*c. $39, 200.
d. $42, 200.

1263. Mar i l yn, age 38, i s empl oyed as an ar chi t ect . For cal endar year
2013, she had AGI of $204, 000 and pai d t he f ol l owi ng medi cal expenses:

Medi cal i nsur ance pr emi ums $ 7, 800
Doct or bi l l s f or Pet er and
Est her ( Mar i l yn s par ent s)
7, 300
Doct or and dent i st bi l l s f or
Mar i l yn
11, 100
Pr escr i pt i on medi ci nes f or
Mar i l yn
750
Nonpr escr i pt i on i nsul i n f or
Mar i l yn
950

Pet er and Est her woul d qual i f y as Mar i l yn s dependent s except t hat t hey
f i l e a j oi nt r et ur n. Mar i l yn s medi cal i nsur ance pol i cy does not cover
t hem. Mar i l yn f i l ed a cl ai mf or r ei mbur sement of $6, 000 of her own
expenses wi t h her i nsur ance company i n December 2013 and r ecei ved t he
r ei mbur sement i n J anuar y 2014. What i s Mar i l yn s maxi mumal l owabl e
medi cal expense deduct i on f or 2013?

Cor r ect Answer :
Mar i l yn s medi cal expense deduct i on i s $7, 500, det er mi ned as f ol l ows:

Medical insurance
premiums
$ 7,800
Doctor and dentist bills
for Peter and Esther
7,300
Doctor and dentist bills
for Marilyn
11,100
Prescription medicines
for Marilyn
750
Nonprescription insulin
for Marilyn
9
50
Total medical expenses $27,900
Less: 10% of $204,000
(AGI)
(20,400)
Deductible portion of
medical expenses
$ 7,500

Although Peter and Esther cannot be claimed as Marilyns dependents, they
could have been had they not filed a joint return. Therefore, they qualify
for the medical expense deduction. Insulin is an exception to the rule that
nonprescribed drugs do not qualify as medical expenses. The insurance
recovery was not received until 2014. Therefore, it has no effect on the
medical expense deduction for 2013.

1264. Aar on, age 45, had AGI of $40, 000 f or 2013. He was i nj ur ed i n a
ski i ng acci dent and pai d $3, 600 f or hospi t al expenses and $1, 400 f or
doct or bi l l s. Aar on al so i ncur r ed medi cal expenses of $1, 200 f or hi s
chi l d, who l i ves wi t h hi s f or mer wi f e and i s cl ai med as a dependent by
her . I n 2014, Aar on was r ei mbur sed $1, 300 by hi s i nsur ance company f or
t he medi cal expenses at t r i but abl e t o t he ski i ng acci dent .

a. Comput e Aar on s deduct i on f or medi cal
expenses i n 2013.

b. Assume t hat Aar on woul d have el ect ed t o
i t emi ze hi s deduct i ons even i f he had no
medi cal expenses i n 2013. How much, i f any,
of t he $1, 300 r ei mbur sement must be
i ncl uded i n gr oss i ncome i n 2014?

c. Assume t hat Aar on s ot her i t emi zed
deduct i ons i n 2013 wer e $7, 000 and t hat he
f i l ed as a head of househol d. How much of
t he $1, 300 r ei mbur sement must he i ncl ude i n
gr oss i ncome i n 2014?

Cor r ect Answer :
a. Aaron can claim medical expenses he paid for
his child, even though his former wife is the
custodial parent. His deduction for medical
expenses in 2013 is computed as follows:

Hospitalization $3,600
Bills for doctors services 1,400
Medical expenses for child 1,200
Total $6,200
Less: 10% of $40,000 AGI (4,000)
Medical expense deduction (assuming
Aaron itemizes his deductions)
$2,200

b. If the reimbursement for medical care had
occurred in 2013, the medical expense
deduction would have been only $900 [$6,200
(total medical expenses) $1,300
(reimbursement) $4,000 (floor)], and Aaron
would have paid more income tax. Since the
reimbursement was made in a subsequent year,
Aaron would include $1,300 in gross income for
2014. If Aaron had not itemized in 2013, he
would not include the $1,300 reimbursement in
2014 gross income because he would have
received no tax benefit in 2013.

c. Aarons deduction for medical expenses in
2013 would have been $2,200 (see computation
in a. above). He would include the
reimbursement in gross income to the extent of
his $250 tax benefit, as computed below:

Other itemized deductions $7,000
Medical expenses in excess of 10%
floor
2,200
Standard deduction for head of
household in 2013
(8,950)
Tax benefit from medical expense
deduction
$ 250

1265. Dur i ng 2013, Kat hy, who i s sel f - empl oyed, pai d $650 per mont h f or
an HSA cont r act t hat pr ovi des medi cal i nsur ance cover age wi t h a $3, 000
deduct i bl e. The pl an cover s Kat hy, her husband, and t hei r t hr ee
chi l dr en. Of t he $650 mont hl y f ee, $300 was f or t he hi gh- deduct i bl e
pol i cy, and $350 was deposi t ed i nt o an HSA. How much of t he amount pai d
f or t he hi gh- deduct i bl e pol i cy can Kat hy deduct as a deduct i on for AGI ?

Cor r ect Answer :
Because Kat hy i s sel f - empl oyed, she can deduct $3, 600 ( $300 per mont h
12 mont hs) of t he amount pai d f or t he hi gh- deduct i bl e pol i cy as a
deduct i on for AGI ( r ef er t o Exampl e 10) . I n addi t i on, she may deduct
t he $4, 200 ( $350 per mont h 12 mont hs) pai d t o t he HSA as a deduct i on
for AGI . Thus, Kat hy may deduct $7, 800 ( $3, 600 + $4, 200) for AGI .

1266. I n 2013, Shi r l ey sol d her per sonal r esi dence t o Mi ke f or $400, 000.
Bef or e t he sal e, Shi r l ey pai d t he r eal est at e t axes of $7, 030 f or t he
cal endar year . For i ncome t ax pur poses, t he deduct i on i s appor t i oned as
f ol l ows: $4, 000 t o Shi r l ey and $3, 030 t o Mi ke.

a. What i s Mi ke s basi s i n t he r esi dence?

b. What i s Shi r l ey s amount r eal i zed f r om t he sal e of t he
r esi dence?

c. What amount of r eal est at e t axes can Mi ke deduct ?

d. What amount of r eal est at e t axes can Shi r l ey deduct ?

Cor r ect Answer :
Gener al di scussi on. For Feder al i ncome t ax pur poses, r eal est at e t axes
must be appor t i oned bet ween t he buyer and t he sel l er . The t axes pai d by
t he sel l er t hat ar e appor t i oned t o t he buyer af f ect bot h t he basi s of
t he buyer s pr oper t y and t he amount r eal i zed by t he sel l er .

a. Mi ke s basi s i n t he r esi dence i s $396, 970 [ $400, 000
( pur chase pr i ce) $3, 030 ( pr oper t y t axes al l ocat ed t o Mi ke but pai d by
Shi r l ey) ] .

b. Shi r l ey s amount r eal i zed i s $396, 970 [ $400, 000 ( sal es pr i ce)
$3, 030 ( pr oper t y t axes al l ocat ed t o Mi ke but pai d by Shi r l ey) ] .

c. Mike can deduct the $3,030 apportioned to him, even
though the tax was paid by Shirley.
d. Shirley can deduct only the tax apportioned to her of
$4,000, even though she paid the entire amount of $7,030.

1267. Br i an, a sel f - empl oyed i ndi vi dual , pays st at e i ncome t ax payment s
of :

$900 on J anuar y 15, 2013 ( 4t h est i mat ed t ax payment f or 2012)
$1, 000 on Apr i l 15, 2013 ( 1st est i mat ed t ax payment i n 2013)
$1, 000 on J une 17, 2013 ( 2nd est i mat ed t ax payment i n 2013)
$1, 000 on Sept ember 16, 2013 ( 3r d est i mat ed t ax payment i n 2013)
$800 on J anuar y 15, 2014 ( 4t h est i mat ed t ax payment of 2013)

Br i an had a t ax over payment of $500 on hi s 2012 st at e i ncome t ax r et ur n
and appl i ed t hi s t o hi s 2013 st at e i ncome t axes. What i s t he amount of
Br i an s st at e i ncome t ax i t emi zed deduct i on f or hi s 2013 Feder al i ncome
t ax r et ur n?

Cor r ect Answer :
$4, 400 i s t he i t emi zed deduct i on. $900 + $1, 000 + $1, 000 + $1, 000 +
$500 ( over payment ) .

1268. I n Pi at t Count y, t he r eal pr oper t y t ax year i s t he cal endar
year . The r eal pr oper t y t ax becomes a per sonal l i abi l i t y of t he owner
of r eal pr oper t y on J anuar y 1 and i s payabl e on J ul y 1 i n t he r eal
pr oper t y t ax year . On J une 30 of t hi s year ( assume not a l eap year ) ,
Har r y sel l s hi s house t o J udy f or $110, 000 and on J ul y 1, J udy pays t he
ent i r e r eal est at e t ax of $4, 380 f or t he cur r ent year endi ng December
31.

a. How much of t he pr oper t y t axes may Har r y
deduct ?

b. How much of t he pr oper t y t axes may J udy
deduct ?

Cor r ect Answer :
Gener al di scussi on. Real pr oper t y t axes must be appor t i oned,
r egar dl ess of whet her t he buyer or sel l er pays t he t axes. I n maki ng
t he appor t i onment , t he dat e of sal e count s as a day t he pr oper t y i s
owned by t he buyer .

a. Rate of tax per day
($4,380/365)
$ 12
Days Harry owned property
(January 1 - June 29)
180
Taxes apportioned to Harry
($12 180)
$2,160

b. Rate of tax per day
($4,380/365)
$ 12
Days Judy owned property
(June 30 - December 31)
185
Taxes apportioned to Judy
($12 185)
$2,220

1269. I n 2006, Ross, who i s si ngl e, pur chased a per sonal r esi dence f or
$170, 000 and t ook out a mor t gage of $100, 000 on t he pr oper t y. I n May
of t he cur r ent year , when t he r esi dence had a f ai r mar ket val ue of
$220, 000 and Ross owed $70, 000 on t he mor t gage, he t ook out a home
equi t y l oan f or $110, 000. He used t he f unds t o pur chase a BMWf or
hi msel f and a Lexus SUV f or hi s wi f e. For bot h vehi cl es, 100%of t he
use i s f or per sonal act i vi t i es. What i s t he maxi mumamount on whi ch
Ross can deduct home equi t y i nt er est ?

Cor r ect Answer :
I nt er est i s deduct i bl e onl y on t he por t i on of a home equi t y l oan t hat
does not exceed t he lesser of :

The fair market value of the residence,
reduced by the acquisition indebtedness
($220,000 FMV $70,000 acquisition
indebtedness = $150,000).

$100,000 ($50,000 for married persons filing
separate returns).

Ross can deduct all of the interest on the first mortgage since it is
acquisition indebtedness. Of the $110,000 home equity loan, interest on
$100,000 is deductible as home equity interest.

1270. Geor gi a had AGI of $100, 000 i n 2013. She donat ed Her on
Cor por at i on st ock wi t h a basi s of $8, 500 t o a qual i f i ed char i t abl e
or gani zat i on on J ul y 5, 2013.

a. What i s t he amount of Geor gi a s deduct i on,
assumi ng t hat she pur chased t he st ock on
December 4, 2012, and t he st ock had a f ai r
mar ket val ue of $15, 000 when she made t he
donat i on?

b. Assume t he same f act s as i n a. , except t hat
Geor gi a pur chased t he st ock on J ul y 1,
2005.

c. Assume t he same f act s as i n a. , except t hat
t he st ock had a f ai r mar ket val ue of $6, 000
( r at her t han $15, 000) when Geor gi a donat ed
i t t o t he char i t y.

Cor r ect Answer :
Gener al di scussi on. The deduct i on f or a cont r i but i on of capi t al gai n
pr oper t y i s based on t he f ai r mar ket val ue, whi l e t he deduct i on f or a
cont r i but i on of or di nar y i ncome pr oper t y i s equal t o t he l esser of t he
adj ust ed basi s or t he f ai r mar ket val ue.

a. Because Georgia did not hold the stock for
the long-term holding period (December 4,
2012 - July 5, 2013), it is short-term
capital gain property that is subject to the
rules for ordinary income
property. Therefore, her deduction is
limited to $8,500.

b. Georgia held the stock for the long-term
holding period (July 1, 2005 - July 5,
2013); so it is capital gain
property. Therefore, her deduction is
equal to the fair market value of the stock,
$15,000.

c. The deduction for a contribution of loss
property (FMV is less than adjusted basis)
is limited to the fair market
value. Therefore, Georgias deduction is
$6,000.

1271. Li nda, who has AGI of $120, 000 i n 2013, cont r i but es st ock i n
Mauve Cor por at i on ( a publ i cl y t r aded cor por at i on) t o t he Sal vat i on Ar my,
a qual i f i ed char i t abl e or gani zat i on. The st ock i s wor t h $65, 000, and
Li nda acqui r ed i t as an i nvest ment f our year s ago at a cost of $50, 000.

a. What i s t he t ot al amount t hat Li nda can
deduct as a char i t abl e cont r i but i on,
assumi ng she car r i es over any di sal l owed
cont r i but i on f r om2013 t o f ut ur e year s?

b. What i s t he maxi mumamount t hat Li nda can
deduct as a char i t abl e cont r i but i on i n 2013?

c. What f act or s shoul d Li nda consi der i n
deci di ng how t o t r eat t he cont r i but i on f or
Feder al i ncome t ax pur poses?

d. Assume Li nda di es i n December 2013. What
advi ce woul d you gi ve t he execut or of her
est at e wi t h r egar d t o possi bl e el ect i ons
t hat can be made r el at i ve t o t he
cont r i but i on?

Cor r ect Answer :
Gener al di scussi on. The st ock i s appr eci at ed l ong- t er mcapi t al gai n
pr oper t y. The gener al r ul e l i mi t s t he deduct i on f or t he cont r i but i on of
such pr oper t y t o 30%of AGI . However , under t he r educed deduct i on
el ect i on, a t axpayer may choose t o f or go a deduct i on of t he
appr eci at i on on capi t al gai n pr oper t y. Thi s enabl es t he t axpayer t o
move f r omt he 30%l i mi t at i on t o a 50%l i mi t at i on.

a. Linda can deduct a total of $65,000, the
fair market value of the stock. The
deduction for 2013 is limited to $36,000
(30% of $120,000 AGI). The remaining $29,000
can be carried forward and deducted in the
future, subject to the same percentage
limitations.

b. If Linda makes the reduced deduction
election, she can deduct $50,000 in 2013,
but she will forgo a deduction for the
$15,000 appreciation ($65,000 FMV $50,000
adjusted basis).

c. Although the reduced deduction election
appears attractive, it should be considered
carefully. The election sacrifices a
deduction for the appreciation on capital
gain property that might eventually be
allowed. Linda should do a present value
analysis to compare the value of a deduction
of $50,000 in 2013 versus the value of a
$36,000 deduction in 2013 plus $29,000 of
deductions to be carried over to future
years.

d. If Linda dies in December 2013, her executor
should make the reduced deduction election,
which would yield a charitable contribution
deduction of $50,000. If the election is not
made, the deduction will be $36,000 (30% of
$120,000) and the $29,000 carryover will be
lost because the 2013 return will be the
final return for Linda.

1272. Geor ge i s si ngl e and age 56, has AGI of $255, 000, and i ncur s t he
f ol l owi ng expendi t ur es i n 2013.

Medi cal expenses ( bef or e 10%
f l oor )
$27, 000
St at e i ncome t ax 7, 500
St at e sal es t ax 4, 500
Real est at e t ax 8, 600
Char i t abl e cont r i but i on 6, 500

What i s t he amount of i t emi zed deduct i ons Geor ge may cl ai m?

Cor r ect Answer :
Geor ge i s subj ect t o t he over al l l i mi t at i on on cer t ai n i t emi zed
deduct i ons because hi s AGI exceeds t he $250, 000 t hr eshol d f or si ngl e
f i l er s. Hi s i t emi zed deduct i ons i n 2013 af t er appl i cat i on of t he
over al l l i mi t at i on ar e comput ed bel ow:

Itemized deductions
subject to overall
limitation:

Interest on home
mortgage
$15,500
Real estate tax 8,600
Charitable
contributions
6,50
0
Total $38,100
Reduction equals the
lesser of the
following:

[3% ($255,000 AGI
$250,000)]
$
150

80% of itemized
deductions subject to
limitation

($38,100 80%) 30,480
Amount of reduction
(150)
Deductible itemized
overall limitation
$37,950
Itemized deductions
not subject to overall
limitation:

Medical expenses
[$27,000 (10%
$255,000 AGI)]
1,50
0
Total itemized
deductions
$39,450

The state sales tax is not deductible because George deducts the (higher)
state income tax expense.

1273. For cal endar year 2013, J on and Bet t y Hansen ( ages 59 and 60)
f i l e a j oi nt r et ur n r ef l ect i ng AGI of $280, 000. They i ncur t he
f ol l owi ng expendi t ur es:

Medi cal expenses bef or e AGI
f l oor
$30, 000
Casual t y l oss ( not cover ed
by i nsur ance) bef or e
st at ut or y f l oor s
30, 000
I nt er est on cr edi t car ds 800
Pr oper t y t axes on home 13, 000
St at e i ncome t ax 15, 000
Tax r et ur n pr epar at i on f ees 1, 20
0

What i s t he amount of i t emi zed deduct i ons t he Hansens may cl ai m?

Cor r ect Answer :
For t he medi cal expenses, t he t axpayer s ar e al l owed $2, 000 [ $30, 000
( 10% $280, 000 AGI ) ] . The casual t y l oss must f i r st be r educed by $100
and t hen by $28, 000 ( 10% $280, 000 AGI ) . Thus, onl y $1, 900 [ $30, 000
$28, 100 ( $100 + $28, 000) ] can be deduct ed. Al so, not e t hat t he t ax
r et ur n pr epar at i on f ees ar e mi scel l aneous i t emi zed deduct i ons subj ect
t o t he 2%f l oor . The f l oor of $5, 600 ( 2% $280, 000 AGI ) r educes t he
$1, 200 t o $0.

The Hansens ar e not subj ect t o t he over al l l i mi t at i on on cer t ai n
i t emi zed deduct i ons because t hei r AGI does not exceed t he $300, 000
t hr eshol d f or j oi nt f i l er s.

The i t emi zed deduct i ons t ot al $58, 900 ( $10, 000 mor t gage i nt er est +
$13, 000 pr oper t y t ax + $17, 000 cont r i but i ons + $15, 000 st at e i ncome t ax
+ $2, 000 medi cal + $1, 900 casual t y) .

1274. Char l es, who i s si ngl e and age 61, had AGI of $400, 000 dur i ng
2013. He i ncur r ed t he f ol l owi ng expenses and l osses dur i ng t he year .

Medi cal expenses bef or e 10%-
of - AGI l i mi t at i on
$39, 500
St at e and l ocal i ncome t axes 5, 200
Real est at e t axes 4, 400
Home mor t gage i nt er est 5, 400
Casual t y l oss bef or e 10%
l i mi t at i on ( af t er $100 f l oor )
47, 000
Unr ei mbur sed empl oyee expenses
subj ect t o 2%- of - AGI
l i mi t at i on
8, 900
Gambl i ng l osses ( Char l es had
$7, 400 of gambl i ng i ncome)
9, 800

Comput e Char l es s t ot al i t emi zed deduct i ons f or t he year .

Cor r ect Answer :
Char l es s i t emi zed deduct i ons ar e comput ed bel ow:

(10% $400,000 AGI)]
$
0
State and local income taxes 5,200
Casualty loss [$47,000 (10% 7,000
$400,000 AGI)]
Unreimbursed employee expenses
[$8,900 (2% $400,000 AGI)]
900
Gambling losses ($9,800 loss
limited to $7,400 of gambling
income)
7,
400

Charless itemized deductions in 2013 after application of the overall
limitation are computed below:

Itemized deductions subject
to overall limitation:

State and local income
taxes
$ 5,200
Unreimbursed employee
expenses
9
00

Reduction equals the lesser
of the following:

[3% ($400,000 AGI
$250,000)]
$ 4
,500

80% of itemized deductions
subject to limitation

($20,700 80%) 16
,560

Amount of reduction (4,
500)
Deductible itemized
overall limitation
$16,200

Itemized deductions not
subject to overall
limitation:

Casualty loss 7,000
Gambling loss 7
,400

1275. Hel en pays nur si ng home expenses of $3, 000 per mont h f or her
mot her . The mont hl y char ge cover s t he f ol l owi ng i t ems: $1, 400 f or
medi cal car e, $900 f or l odgi ng, and $700 f or f ood. Under what
ci r cumst ances can Hel en i ncl ude t he $3, 000 per mont h payment when
comput i ng her medi cal expense deduct i on f or t he year ? I f Hel en i s not
al l owed t o i ncl ude t he ent i r e payment , how much can she i ncl ude?

Cor r ect Answer :
Hel en may i ncl ude t he ent i r e amount pai d t o t he nur si ng home ( $3, 000
per mont h) i f t he primary r eason f or bei ng i n t he nur si ng home i s t o
get medi cal car e. I f t he pr i mar y r eason f or bei ng i n t he nur si ng home
i s per sonal , Hel en may i ncl ude onl y t he $1, 400 cost of medi cal car e i n
cal cul at i ng her medi cal expense deduct i on.

1276. Manny, age 57, devel oped a sever e hear t condi t i on, and hi s
physi ci an advi sed hi mt o i nst al l an el evat or i n hi s home. The cost of
i nst al l i ng t he el evat or was $15, 000, and t he i ncr ease i n t he val ue of
t he r esi dence was det er mi ned t o be $5, 800. Manny s AGI f or t he year
was $52, 000.

a. How much of t he expendi t ur e can Manny deduct
as a medi cal expense?

b. Assume t he same f act s as i n par t a. , except
t hat Manny was par al yzed i n an aut omobi l e
acci dent and t he expendi t ur es wer e i ncur r ed
t o bui l d ent r ance and exi t r amps and wi den
t he hal l ways i n hi s home t o accommodat e hi s
wheel chai r . How much of t he expendi t ur e can
Manny deduct as a medi cal expense?

Cor r ect Answer :
a. A capital improvement that ordinarily would
not have a medical purpose qualifies as a
medical expense if it is directly related to
prescribed medical care and is deductible to
the extent that the expenditure exceeds the
increase in value of the related
property. The medical expense deduction is
$4,000 [($15,000 $5,800) ($52,000
10%)].

b. The full cost of certain home-related capital
expenditures incurred to enable a physically
handicapped individual to live independently
and productively qualifies as a medical
expense. Qualifying costs include expenditures
for constructing entrance and exit ramps to
the residence, widening hallways and doorways
to accommodate wheelchairs, installing support
bars and railings in bathrooms and other
rooms, and adjusting electrical outlets and
fixtures. These expenditures are subject to
the 10% floor only, and the increase in the
homes value is deemed to be zero. Mannys
deduction is $9,800 [$15,000 ($52,000
10%)].

1277. Samuel , a 36 year ol d i ndi vi dual who has been physi cal l y
handi capped f or a year , pai d $15, 000 f or t he i nst al l at i on of wheel chai r
r amps, suppor t bar s, r ai l i ngs, and wi deni ng door ways i n hi s per sonal
r esi dence. These i mpr ovement s i ncr eased t he val ue of hi s per sonal
r esi dence by $4, 000. How much of Samuel s expendi t ur es qual i f y as a
medi cal expense deduct i on ( subj ect t o t he 10%f l oor ) ? Expl ai n.

Cor r ect Answer :
The f ul l cost of cer t ai n home- r el at ed capi t al expendi t ur es i ncur r ed t o
enabl e a physi cal l y handi capped i ndi vi dual t o l i ve i ndependent l y and
pr oduct i vel y qual i f i es as a medi cal expense. Qual i f yi ng cost s i ncl ude
expendi t ur es f or const r uct i ng ent r ance and exi t r amps t o t he r esi dence,
wi deni ng hal l ways and door ways t o accommodat e wheel chai r s, i nst al l i ng
suppor t bar s and r ai l i ngs i n bat hr ooms and ot her r ooms, and adj ust i ng
el ect r i cal out l et s and f i xt ur es. These expendi t ur es ar e subj ect t o t he
10%f l oor onl y, and t he i ncr ease i n t he home s val ue i s deemed t o be
zer o. So even t hough t he i mpr ovement s i ncr eased t he val ue of Samuel s
per sonal r esi dence by $4, 000, t he ent i r e $15, 000 of t he expendi t ur e
qual i f i es as a medi cal expense deduct i on ( subj ect t o t he 10%f l oor ) .

1278. Paul and Pat t y Bl ack ( bot h ar e age 66) ar e mar r i ed and t oget her
have AGI of $140, 000 i n 2013. They have t wo dependent s and f i l e a j oi nt
r et ur n. Dur i ng t he year , t hey pai d $8, 000 f or medi cal i nsur ance,
$15, 000 i n doct or bi l l s and hospi t al expenses, and $1, 000 f or
pr escr i bed medi ci ne and dr ugs.

a. I n December 2013, t he Bl acks r ecei ved an
i nsur ance r ei mbur sement of $3, 500 f or
hospi t al i zat i on expenses. Det er mi ne t he
deduct i on al l owabl e f or medi cal expenses
pai d dur i ng t he year .

b. Assume i nst ead t hat t he Bl acks r ecei ved t he
$3, 500 i nsur ance r ei mbur sement i n Febr uar y
2014. Det er mi ne t he deduct i on al l owabl e f or
medi cal expenses i ncur r ed i n 2013.

c. Assume t hat t he Bl acks r ecei ved t he $3, 500
i nsur ance r ei mbur sement i n Febr uar y 2014.
Di scuss whet her t he r ei mbur sement wi l l be
i ncl uded i n t hei r gr oss i ncome f or 2014.

Cor r ect Answer :
Gener al di scussi on. Al l of t he f ol l owi ng expenses ar e deduct i bl e,
subj ect t o t he 7. 5%f l oor : $8, 000 f or medi cal i nsur ance, $15, 000 i n
doct or bi l l s and hospi t al expenses, and $1, 000 f or pr escr i bed medi ci ne
and dr ugs.

a. Assuming Paul and Patty received the insurance
reimbursement in December 2013, their medical
expense deduction would be $6,000, computed as
follows:

Medical insurance $ 8,000

Doctor bills and hospital
expenses
15,000
Prescribed medicine and
drugs
1,0
00
Total medical expenses
incurred
$24,000
Minus: December 2013
reimbursement
(3,500)
after reimbursement
$20,500
Minus: 7.5% $140,000 AGI (10,500)
Medical expense deduction $10,000

b. Assuming Paul and Patty received the insurance
reimbursement in February 2014, they could
ignore the reimbursement in computing their
2013 medical expense deduction. Their medical
expense deduction would be $13,500, computed
as follows:

Medical insurance $ 8,000
Doctor bills and hospital
expenses
15,000
Prescribed medicine and
drugs
1,0
00
incurred
$24,000
Minus: 7.5% $140,000 AGI (10,500)
Medical expense deduction $13,500

c. If Paul and Patty itemized in 2013, they would
report the reimbursement as gross income in
2014, to the extent they received a tax
benefit from itemizing in 2013. If they did
not itemize in 2013 (i.e., took the standard
deduction), they would not be required to
report the reimbursement as gross income in
2014.

1279. Har r y and Sal l y wer e di vor ced t hr ee year s ago. I n J ul y of t he
cur r ent year , t hei r son, J oe, br oke hi s ar mf al l i ng out of a t r ee. J oe
l i ves wi t h Sal l y and Sal l y cl ai ms hi mas a dependent on her t ax
r et ur n. Har r y pai d f or t he medi cal expenses r el at ed t o J oe s i nj ur y.
Can Har r y cl ai mt he medi cal expenses he pai d f or J oe on hi s t ax r et ur n?

Cor r ect Answer :
Har r y may be abl e t o i ncl ude t he payment s r el at ed t o J oe s i nj ur y wi t h
hi s own medi cal expenses. For di vor ced par ent s wi t h chi l dr en, t he
noncust odi al par ent may cl ai many medi cal expenses he or she pays even
t hough t he cust odi al par ent cl ai ms t he chi l dr en as dependent s. Thi s
r ul e appl i es i f t he dependency exempt i on coul d have been shi f t ed t o t he
noncust odi al par ent by t he cust odi al par ent s wai ver ( see Chapt er 3) .

1280. For t he past sever al year s, J eanne and her t wo si st er s have t aken
t ur ns cl ai mi ng a dependency exempt i on deduct i on f or t hei r mot her under
a mul t i pl e suppor t agr eement . Thi s year J eanne wi l l be ent i t l ed t o t he
exempt i on, and her mot her needs money f or sur ger y and new eyegl asses.
Shoul d J eanne pay f or t he medi cal expenses as her shar e of her mot her s
expenses? How woul d t hi s benef i t J eanne?

Cor r ect Answer :
Si nce J eanne i s cl ai mi ng her mot her as a dependent on her t ax r et ur n
t hi s year , she i s al l owed t o deduct any medi cal expenses she pays f or
her . J eanne can cl ai mt he medi cal expenses as par t of her por t i on of
her mot her s suppor t .

1281. Li nda i s pl anni ng t o buy Vi cki s home. They want t o keep t he
t r ansact i on si mpl e, so t he sal es agr eement wi l l not appor t i on t he
pr oper t y t axes t hat Vi cki has al r eady pai d on t he home. Comment on t he
t ax i mpl i cat i ons f or Li nda and Vi cki .

Cor r ect Answer :
Real est at e t axes ar e appor t i oned bet ween buyer and sel l er based upon
t he number of days t he pr oper t y i s owned by each. Li nda and Vi cki wi l l
each be abl e t o deduct t axes based on t he number of days t hey each own
t he home. When t he sel l er pays t he ent i r e r eal est at e t ax bi l l ,
adj ust ment s ar e made t o t he amount r eal i zed by t he sel l er and t he basi s
of t he home i n t he hands of t he buyer . Vi cki wi l l r educe t he amount
r eal i zed on t he sal e by t he amount of t axes appor t i oned t o Li nda, and
Li nda wi l l r educe her basi s i n t he home by t he same amount .

1282. Li nda bor r owed $60, 000 f r omher par ent s f or a down payment on a
condomi ni um. She pai d i nt er est of $5, 500 i n 2011, $0 i n 2012, and
$9, 000 i n 2013. The I RS di sal l owed t he deduct i on. Can you of f er any
expl anat i on f or t he di sal l owance?

Cor r ect Answer :
Because of t he i r r egul ar pat t er ns of Li nda s payment s, i t does not
appear t hat t hi s i s a bona f i de l oan. Thus, t he amount s pai d coul d not
be i nt er est . Addi t i onal l y, t he i nt er est woul d not r epr esent deduct i bl e
qual i f i ed r esi dence i nt er est unl ess t he l oan was secur ed by t he
condomi ni um.

1283. Di ane cont r i but ed a par cel of l and t o t he Uni t ed Way. I n addi t i on,
she cont r i but ed bi bl es and song books f r omher pr opr i et or shi p s book
st or e i nvent or y t o Fi r st Chur ch, a qual i f i ed char i t abl e or gani zat i on.
Shoul d Di ane s char i t abl e cont r i but i on deduct i on f or t hese
cont r i but i ons be det er mi ned by t he basi s or f ai r mar ket val ue of t he
cont r i but ed i t ems?

Cor r ect Answer :
The l and i s a capi t al asset . Di ane s deduct i on f or t he l and
cont r i but i on wi l l be det er mi ned by t he f ai r mar ket val ue i f she has
hel d t he l and f or t he l ong- t er mhol di ng per i od. Ot her wi se, i t wi l l be
det er mi ned by t he basi s ( i . e. , assumi ng t he FMV i s at l east equal t o
t he basi s) . I nvent or y i s or di nar y i ncome pr oper t y, so Di ane s deduct i on
wi l l be det er mi ned by her basi s i n t he bi bl es and song books.

1284. J oe, who i s i n t he 33%t ax br acket i n 2013, expect s t o r et i r e i n
2014 and be i n t he 25%t ax br acket . He pl ans t o donat e $50, 000 t o hi s
chur ch. Because he wi l l not have t he cash avai l abl e unt i l 2014, J oe
donat es l and ( l ong- t er mcapi t al gai n pr oper t y) wi t h a basi s of $10, 000
and f ai r mar ket val ue of $50, 000 t o t he chur ch i n December 2013. He
r eacqui r es t he l and f or $50, 000 i n Febr uar y 2014. Di scuss J oe s t ax
obj ect i ves and al l t ax i ssues r el at ed t o hi s act i ons.

Cor r ect Answer :
J oe i s at t empt i ng t o accel er at e hi s char i t abl e cont r i but i on deduct i on
i nt o 2013. Ther e ar e sever al pot ent i al advant ages t o accel er at i ng t he
deduct i on by donat i ng t he l and i n 2013.

His contribution will be deducted in a tax year
when his marginal tax rate is 33% rather than
25%.

He might avoid disallowance of part of the
deduction due to AGI percentage limitations
because his contribution base will be higher in
2013 than in 2014.

He can deduct the fair market value of the land
without recognizing the $40,000 appreciation as
income.

He can step up his basis in the land from
$10,000 to $50,000 when he reacquires it in
2014.

Joes plan will generate many favorable outcomes if he does not run afoul
of the IRS. While it does not appear that Joe has done anything that does
not comply with the tax law, the IRS might collapse the transaction; that
is, focus on the outcome and ignore the steps involved. The outcome is
that Joe has transferred $50,000 cash to his church. The IRS might
disallow the deduction for the land contribution in 2013 and treat the
transaction as a cash contribution in 2014. In this case, Joes basis
for the purchased land would be $10,000 and his deduction would be at the
lower 2014 marginal tax rate.

1285. Sher r i owns an i nt er est i n a busi ness t hat i s not a passi ve
act i vi t y and i n whi ch she has $20, 000 at r i sk. I f t he busi ness i ncur s
a l oss f r omoper at i ons dur i ng t he year and her shar e of t he l oss i s
$32, 000, t hi s l oss wi l l be f ul l y deduct i bl e.

a. Tr ue
*b. Fal se

1286. J ack owns a 10%i nt er est i n a par t ner shi p ( not r eal est at e) i n
whi ch hi s at - r i sk amount i s $42, 000 at t he begi nni ng of t he year .
Dur i ng t he year , t he par t ner shi p bor r ows $80, 000 on a nonr ecour se not e
and i ncur s a l oss of $60, 000 f r omoper at i ons. J ack s at - r i sk amount at
t he end of t he year i s $44, 000.

a. Tr ue
*b. Fal se

1287. I n t he cur r ent year , Don has a $55, 000 l oss f r oma busi ness he
owns. Hi s at - r i sk amount at t he end of t he year , pr i or t o consi der i ng
t he cur r ent year l oss, i s $36, 000. He wi l l be al l owed t o deduct t he
$55, 000 l oss t hi s year i f he i s a mat er i al par t i ci pant i n t he busi ness.

a. Tr ue
*b. Fal se

1288. J udy owns a 20%i nt er est i n a par t ner shi p ( not r eal est at e) i n
whi ch her at - r i sk amount was $35, 000 at t he begi nni ng of t he year . The
par t ner shi p bor r owed $50, 000 on a r ecour se not e and made a $40, 000
pr of i t dur i ng t he year . Her at - r i sk amount at t he end of t he year i s
$43, 000.

a. Tr ue
*b. Fal se

1289. Tonya owns an i nt er est i n an act i vi t y ( not r eal est at e) t hat
conver t ed r ecour se f i nanci ng t o nonr ecour se f i nanci ng. Recapt ur e of
pr evi ousl y al l owed l osses i s r equi r ed i f Tonya s at - r i sk amount i s
r educed bel ow zer o as a r esul t of t he debt r est r uct ur i ng.

*a. Tr ue
b. Fal se

1290. Kel l y, who ear ns a year l y sal ar y of $120, 000, sol d an act i vi t y
wi t h a suspended passi ve l oss of $44, 000. The act i vi t y was sol d at a
l oss and Kel l y has no ot her passi ve act i vi t i es. The suspended l oss i s
not deduct i bl e.

a. Tr ue
*b. Fal se

1291. Al l of a t axpayer s t ax cr edi t s r el at i ng t o a passi ve act i vi t y
can be ut i l i zed when t he act i vi t y i s sol d at a l oss.

a. Tr ue
*b. Fal se

1292. J ackson Company i ncur s a $50, 000 l oss on a passi ve act i vi t y
dur i ng t he year . The company has act i ve i ncome of $34, 000 and por t f ol i o
i ncome of $24, 000. I f J ackson i s a per sonal ser vi ce cor por at i on, i t may
deduct $34, 000 of t he passi ve l oss.

a. Tr ue
*b. Fal se

1293. Or i ol e Cor por at i on has act i ve i ncome of $45, 000 and a passi ve
l oss of $23, 000 i n t he cur r ent year . Under an except i on, Or i ol e can
deduct t he $23, 000 l oss i f i t i s a per sonal ser vi ce cor por at i on.

a. Tr ue
*b. Fal se

1294. Gr ay Company, a cl osel y hel d C cor por at i on, i ncur s a $50, 000 l oss
on a passi ve act i vi t y dur i ng t he year . The company has act i ve i ncome of
$34, 000 and por t f ol i o i ncome of $24, 000. I f Gr ay i s not a per sonal
ser vi ce cor por at i on, i t may deduct $34, 000 of t he passi ve l oss.

*a. Tr ue
b. Fal se

1295. Wol f Cor por at i on has act i ve i ncome of $55, 000 and a passi ve l oss
of $33, 000 i n t he cur r ent year . Wol f cannot deduct t he $33, 000 l oss i f
i t i s a cl osel y hel d C cor por at i on t hat i s not a per sonal ser vi ce
cor por at i on.

a. Tr ue
*b. Fal se

1296. Li nda owns i nvest ment s t hat pr oduce por t f ol i o i ncome and Act i vi t y
A t hat pr oduces l osses. Fr oma t ax per spect i ve, Li nda wi l l be bet t er
of f i f Act i vi t y A i s not passi ve.

*a. Tr ue
b. Fal se

1297. Nat han owns Act i vi t y A, whi ch pr oduces i ncome, and Act i vi t y B,
whi ch pr oduces passi ve l osses. Fr oma t ax pl anni ng per spect i ve, Nat han
wi l l be bet t er of f i f Act i vi t y A i s passi ve.

*a. Tr ue
b. Fal se

1298. A t axpayer i s consi der ed t o be a mat er i al par t i ci pant i f he or
she spends mor e t han 500 hour s i n t he act i vi t y.

*a. Tr ue
b. Fal se

1299. Di ck par t i ci pat es i n an act i vi t y f or 90 hour s dur i ng t he year . He
has no empl oyees and t her e ar e no ot her par t i ci pant s. Di ck i s a
mat er i al par t i ci pant .

*a. Tr ue
b. Fal se

1300. Mar y J ane par t i ci pat es f or 100 hour s dur i ng t he year i n an
act i vi t y she owns. She has no empl oyees and i s t he onl y par t i ci pant i n
t he act i vi t y. The act i vi t y i s a si gni f i cant par t i ci pat i on act i vi t y.

a. Tr ue
*b. Fal se

1301. A t axpayer i s consi der ed t o be a mat er i al par t i ci pant i n a
si gni f i cant par t i ci pat i on act i vi t y i f he or she spends at l east 400
hour s i n t he act i vi t y.

a. Tr ue
*b. Fal se

1302. Tompar t i ci pat es f or 300 hour s i n Act i vi t y A and 250 hour s i n
Act i vi t y B, bot h of whi ch ar e nonr ent al busi nesses. Bot h act i vi t i es ar e
act i ve.

*a. Tr ue
b. Fal se

1303. Tompar t i ci pat es f or 100 hour s i n Act i vi t y A and 450 hour s i n
Act i vi t y B, bot h of whi ch ar e nonr ent al busi nesses. Bot h act i vi t i es ar e
act i ve.

a. Tr ue
*b. Fal se

1304. Fr omJ anuar y t hr ough November , Ver n par t i ci pat ed f or 420 hour s as
a sal esman i n a par t ner shi p i n whi ch he owns a 50%i nt er est . The
par t ner shi p has f our f ul l - t i me empl oyees. Dur i ng December , Ver n spends
110 hour s cl eani ng t he st or e and pai nt i ng t he wal l s i n or der t o meet
t he mat er i al par t i ci pat i on st andar ds. Ver n qual i f i es as a mat er i al
par t i ci pant .

a. Tr ue
*b. Fal se

1305. J oyce owns an act i vi t y ( not r eal est at e) i n whi ch she
par t i ci pat es f or 100 hour s a year ; her husband par t i ci pat es f or 450
hour s. J oyce qual i f i es as a mat er i al par t i ci pant .

*a. Tr ue
b. Fal se

1306. When det er mi ni ng whet her an i ndi vi dual i s a mat er i al par t i ci pant ,
par t i ci pat i on by an owner s spouse gener al l y count s.

*a. Tr ue
b. Fal se

1307. I f an owner par t i ci pat es f or mor e t han 500 hour s i n a DVD r ent al
act i vi t y, any l oss f r omt hat act i vi t y i s t r eat ed as an act i ve l oss t hat
can of f set act i ve i ncome.

*a. Tr ue
b. Fal se

1308. Br uce owns a smal l apar t ment bui l di ng t hat pr oduces a $25, 000
l oss dur i ng t he year . Hi s AGI bef or e consi der i ng t he r ent al l oss i s
$85, 000. Br uce must be a mat er i al par t i ci pant wi t h r espect t o t he
r ent al act i vi t y i n or der t o deduct t he $25, 000 l oss under t he r eal
est at e r ent al except i on.

a. Tr ue
*b. Fal se

1309. Wayne owns a smal l apar t ment bui l di ng t hat pr oduces a $45, 000
l oss dur i ng t he year . Hi s AGI bef or e consi der i ng t he r ent al l oss i s
$85, 000. Because Wayne i s an act i ve par t i ci pant wi t h r espect t o t he
r ent al act i vi t y, he may deduct t he $45, 000 l oss.

a. Tr ue
*b. Fal se

1310. Ser vi ces per f or med by an empl oyee ar e t r eat ed as bei ng r el at ed t o
a r eal est at e t r ade or busi ness i f t he empl oyee per f or mi ng t he ser vi ces
has mor e t han a 5%owner shi p i nt er est i n t he empl oyer .

*a. Tr ue
b. Fal se

1311. I n t he cur r ent year , Kel l y had a $35, 000 l oss f r oma r eal est at e
r ent al act i vi t y i n whi ch she i s a 10%owner . I f she i s an act i ve
par t i ci pant and i f her modi f i ed AGI i s $100, 000, she can deduct $25, 000
of t he l oss.

*a. Tr ue
b. Fal se

1312. I ndi vi dual s can deduct f r omact i ve or por t f ol i o i ncome l osses of
up t o $25, 000 f r omr eal est at e r ent al act i vi t i es i n whi ch t hey act i vel y
par t i ci pat e.

*a. Tr ue
b. Fal se

1313. I ndi vi dual s wi t h modi f i ed AGI of $100, 000 can deduct agai nst
act i ve or por t f ol i o i ncome l osses of up t o $25, 000 f r omr eal est at e
r ent al act i vi t i es i n whi ch t hey act i vel y par t i ci pat e.

*a. Tr ue
b. Fal se

1314. Roger owns and act i vel y par t i ci pat es i n t he oper at i ons of an
apar t ment bui l di ng whi ch pr oduces a $40, 000 l oss dur i ng t he year . He
has AGI of $150, 000 f r oman act i ve busi ness. He may deduct $25, 000 of
t he l oss.

a. Tr ue
*b. Fal se

1315. Lucy owns and act i vel y par t i ci pat es i n t he oper at i ons of an
apar t ment compl ex t hat pr oduces a $50, 000 l oss dur i ng t he year . Her
modi f i ed AGI i s $125, 000 f r oman act i ve busi ness. Di sr egar di ng any at -
r i sk amount l i mi t at i on, she may deduct $25, 000 of t he l oss, and t he
r emai ni ng $25, 000 i s a suspended passi ve l oss.

a. Tr ue
*b. Fal se

1316. Ki mdi es owni ng a passi ve act i vi t y wi t h a basi s of $75, 000, a
f ai r mar ket val ue of $140, 000, and suspended l osses of $80, 000. Al l of
t he $80, 000 passi ve l oss can be deduct ed on Ki m s f i nal i ncome t ax
r et ur n.

a. Tr ue
*b. Fal se

1317. Chr i s r ecei ves a gi f t of a passi ve act i vi t y f r omhi s f at her whose
basi s was $60, 000. Suspended l osses r el at ed t o t he act i vi t y ar e $18, 000.
Chr i s wi l l be al l owed t o of f set t he $18, 000 suspended l osses agai nst
f ut ur e passi ve i ncome.

a. Tr ue
*b. Fal se

1318. Er i c makes an i nst al l ment sal e of a passi ve act i vi t y havi ng
suspended l osses of $40, 000. He col l ect s 25%of t he sal es pr i ce i n t he
cur r ent year , and wi l l col l ect 25%i n each of t he next t hr ee year s.
Er i c can deduct $10, 000 of t he passi ve l oss t hi s year .

*a. Tr ue
b. Fal se

1319. Gai l exchanges passi ve Act i vi t y A, whi ch has suspended l osses of
$15, 000, f or passi ve Act i vi t y B i n a nont axabl e exchange. The new owner
of passi ve Act i vi t y A can of f set t he $15, 000 suspended l osses agai nst
passi ve i ncome i n t he f ut ur e.

a. Tr ue
*b. Fal se

1320. Davi d ear ned i nvest ment i ncome of $20, 000, i ncur r ed i nvest ment
i nt er est expense of $12, 000, and ot her i nvest ment expenses of $9, 000
dur i ng t he cur r ent year . Davi d can deduct $12, 000 of i nvest ment
i nt er est f or t hi s year .

a. Tr ue
*b. Fal se

1321. I nvest ment i ncome can i ncl ude gr oss i ncome f r omi nt er est ,
di vi dends, annui t i es, and r oyal t i es not der i ved i n t he or di nar y cour se
of a t r ade or busi ness; i ncome f r oma passi ve act i vi t y; and i ncome f r om
a r eal est at e act i vi t y i n whi ch t he t axpayer act i vel y par t i ci pat es.

a. Tr ue
*b. Fal se

1322. Bob r eal i zed a l ong- t er mcapi t al gai n of $8, 000. I n cal cul at i ng
hi s net i nvest ment i ncome, Bob may el ect t o i ncl ude t he gai n i n
i nvest ment i ncome.

*a. Tr ue
b. Fal se

1323. Har r y ear ned i nvest ment i ncome of $18, 500, i ncur r ed i nvest ment
i nt er est expense of $15, 500, and ot her i nvest ment expenses of $9, 000
dur i ng t he cur r ent year . Har r y may deduct $9, 500 of i nvest ment i nt er est
expense t hi s year and car r y f or war d $6, 000 t o f ut ur e year s.

*a. Tr ue
b. Fal se

1324. I n 2013, Ar nol d i nvest s $80, 000 f or a 20%i nt er est i n a
par t ner shi p i n whi ch he i s a mat er i al par t i ci pant . The par t ner shi p
i ncur s a l oss wi t h $100, 000 bei ng Ar nol d s shar e. Whi ch of t he
f ol l owi ng st at ement s i s incorrect?

a. Si nce Ar nol d has onl y $80, 000 of capi t al at r i sk, he cannot
deduct any mor e t han t hi s amount agai nst hi s ot her i ncome.
b. Ar nol d s nondeduct i bl e l oss of $20, 000 can be car r i ed over and
used i n f ut ur e year s ( subj ect t o t he at - r i sk pr ovi si ons) .
c. I f Ar nol d has t axabl e i ncome of $40, 000 f r omt he par t ner shi p
i n 2014 and t her e ar e no ot her t r ansact i ons t hat af f ect hi s at -
r i sk amount , he can use al l of t he $20, 000 l oss car r i ed over f r om
2013.
*d. Ar nol d s $100, 000 l oss i s nondeduct i bl e i n 2013 and 2014
under t he passi ve l oss pr ovi si ons.
e. Al l of t he st at ement s ar e cor r ect .

1325. Last year , Ted i nvest ed $100, 000 f or a 50%i nt er est i n a
par t ner shi p i n whi ch he was a mat er i al par t i ci pant . The par t ner shi p
i ncur r ed a l oss, and Ted s shar e was $150, 000. Whi ch of t he f ol l owi ng
st at ement s i s incorrect?

a. Ted s nondeduct i bl e l oss of $50, 000 can be car r i ed over and
used i n t he f ut ur e ( subj ect t o t he at - r i sk pr ovi si ons) .
b. I f Ted has t axabl e i ncome of $50, 000 f r omt he par t ner shi p i n
t he cur r ent year and no ot her t r ansact i ons t hat af f ect hi s at -
r i sk amount , he can use al l of t he $50, 000 l oss car r i ed over .
c. Si nce Ted has onl y $100, 000 of capi t al at r i sk, he cannot
deduct mor e t han $100, 000 agai nst hi s ot her i ncome.
*d. None of t he above i s i ncor r ect .

1326. I n 2013, J oanne i nvest ed $90, 000 f or a 20%i nt er est i n a l i mi t ed
l i abi l i t y company ( LLC) i n whi ch she i s a mat er i al par t i ci pant . The
LLC r epor t ed l osses of $340, 000 i n 2013 and $180, 000 i n 2014. J oanne s
shar e of t he LLC s l osses was $68, 000 i n 2013 and $36, 000 i n 2014. How
much of t hese l osses can J oanne deduct ?

a. $68, 000 i n 2013; $36, 000 i n 2014.
*b. $68, 000 i n 2013; $22, 000 i n 2014.
c. $0 i n 2013; $0 i n 2014.
d. $68, 000 i n 2013; $0 i n 2014.

1327. I n 2013, Ki pp i nvest ed $65, 000 f or a 30%i nt er est i n a
par t ner shi p conduct i ng a passi ve act i vi t y. The par t ner shi p r epor t ed
l osses of $200, 000 i n 2013 and $100, 000 i n 2014, Ki pp s shar e bei ng
$60, 000 i n 2013 and $30, 000 i n 2014. How much of t he l osses f r omt he
par t ner shi p can Ki pp deduct assumi ng he owns no ot her i nvest ment s and
does not par t i ci pat e i n t he par t ner shi p s oper at i ons?

a. $0 i n 2013; $30, 000 i n 2014.
b. $60, 000 i n 2013; $30, 000 i n 2014.
c. $60, 000 i n 2013; $5, 000 i n 2014.
d. $60, 000 i n 2013; $0 i n 2014.

1328. J osh has i nvest ment s i n t wo passi ve act i vi t i es. Act i vi t y A
( acqui r ed t hr ee year s ago) pr oduces i ncome of $30, 000 t hi s year , whi l e
Act i vi t y B ( acqui r ed t wo year s ago) pr oduces a l oss of $50, 000. What
i s t he amount of J osh s suspended l oss f or t he year ?

a. $0.
b. $18, 000.
*c. $20, 000.
d. $50, 000.

1329. Car l , a physi ci an, ear ns $200, 000 f r omhi s medi cal pr act i ce i n
t he cur r ent year . He r ecei ves $45, 000 i n di vi dends and i nt er est dur i ng
t he year as wel l as $5, 000 of i ncome f r oma passi ve act i vi t y. I n
addi t i on, he i ncur s a l oss of $50, 000 f r oman i nvest ment i n a passi ve
act i vi t y. What i s Car l s AGI f or t he cur r ent year af t er consi der i ng t he
passi ve i nvest ment ?

a. $195, 000.
b. $200, 000.
c. $240, 000.
*d. $245, 000.

1330. Nel l sel l s a passi ve act i vi t y wi t h an adj ust ed basi s of $45, 000
f or $105, 000. Suspended l osses at t r i but abl e t o t hi s pr oper t y t ot al
$45, 000. The t ot al gai n and t he t axabl e gai n ar e:

a. $60, 000 t ot al gai n; $105, 000 t axabl e gai n.
b. $10, 000 t ot al gai n; $15, 000 t axabl e gai n.
c. $60, 000 t ot al gai n; $0 t axabl e gai n.
*d. $60, 000 t ot al gai n; $15, 000 t axabl e gai n.

1331. Mat t has t hr ee passi ve act i vi t i es and has at - r i sk amount s i n
excess of $100, 000 f or each. Dur i ng t he year , t he act i vi t i es pr oduced
t he f ol l owi ng i ncome ( l osses) .

Activity A ($60,000)
Activity B (40,000)
Activity C 75
,000
Net passive loss ($25,000)

Matts suspended losses are as follows:

a. $25, 000 i s al l ocat ed t o C; $0 t o A and B.
b. $12, 500 i s al l ocat ed t o A; $12, 500 t o B.
*c. $15, 000 i s al l ocat ed t o A; $10, 000 t o B.
d. $8, 333 i s al l ocat ed t o A, B, and C.

1332. Gr een Cor por at i on ear ns act i ve i ncome of $50, 000 and r ecei ves
$40, 000 i n di vi dends dur i ng t he year . I n addi t i on, Gr een i ncur s a l oss
of $70, 000 f r oman i nvest ment i n a passi ve act i vi t y acqui r ed sever al
year s ago. Consi der t he f ol l owi ng t wo st at ement s:

(1) Greens current deduction for passive
losses is $50,000 if it is a closely held C
corporation that is not a personal service
corporation.

(2) Greens current deduction for passive
losses is $0 if it is a personal service
corporation.

Which of the following answers is correct?

a. Onl y st at ement 1.
b. Onl y st at ement 2.
*c. Bot h st at ement s 1 and 2.
d. Nei t her st at ement 1 or 2.

1333. Whi t e Cor por at i on, a cl osel y hel d per sonal ser vi ce cor por at i on,
has $150, 000 of passi ve l osses, $120, 000 of act i ve busi ness i ncome, and
$30, 000 of por t f ol i o i ncome. How much of t he passi ve l oss can Whi t e
Cor por at i on deduct ?

*a. $0.
b. $30, 000.
c. $120, 000.
d. $150, 000.

1334. Char l es owns a busi ness wi t h t wo separ at e depar t ment s. Depar t ment
A pr oduces $100, 000 of i ncome and Depar t ment B i ncur s a $60, 000 l oss.
Char l es par t i ci pat es f or 550 hour s i n Depar t ment A and 100 hour s i n
Depar t ment B. He has f ul l - t i me empl oyees i n bot h depar t ment s.

a. I f Char l es el ect s t o t r eat bot h depar t ment s as a si ngl e
act i vi t y, he cannot of f set t he $60, 000 l oss agai nst t he $100, 000
i ncome.
b. Char l es may not t r eat Depar t ment A and Depar t ment B as
separ at e act i vi t i es because t hey ar e par t s of one busi ness.
c. I f Char l es el ect s t o t r eat t he t wo depar t ment s as separ at e
act i vi t i es, he can of f set t he $60, 000 l oss agai nst t he $100, 000
i ncome.
*d. I f Char l es el ect s t o t r eat bot h depar t ment s as a si ngl e
act i vi t y, he can of f set t he $60, 000 l oss agai nst t he $100, 000
i ncome.

1335. Tar a owns a shoe st or e and a bookst or e. Bot h busi nesses ar e
oper at ed i n a mal l . She al so owns a r est aur ant acr oss t he st r eet and a
j ewel r y st or e sever al bl ocks away.

*a. Al l f our busi nesses can be t r eat ed as a si ngl e act i vi t y i f
Tar a el ect s t o do so.
b. Onl y t he shoe st or e and bookst or e can be t r eat ed as a si ngl e
act i vi t y, t he r est aur ant must be t r eat ed as a separ at e act i vi t y,
and t he j ewel r y st or e must be t r eat ed as a separ at e act i vi t y.
c. The shoe st or e, bookst or e, and r est aur ant can be t r eat ed as a
si ngl e act i vi t y, and t he j ewel r y st or e must be t r eat ed as a
separ at e act i vi t y.
d. Al l f our busi nesses must be t r eat ed as separ at e act i vi t i es.

1336. Whi ch of t he f ol l owi ng f act or s shoul d be consi der ed i n
det er mi ni ng whet her an act i vi t y i s t r eat ed as an appr opr i at e economi c
uni t ?

a. The si mi l ar i t i es and di f f er ences i n t ypes of busi ness.
b. The ext ent of common cont r ol .
c. The ext ent of common owner shi p.
d. The geogr aphi c l ocat i on.

1337. Whi ch of t he f ol l owi ng i s not a f act or t hat shoul d be consi der ed
i n det er mi ni ng whet her an act i vi t y i s t r eat ed as an appr opr i at e
economi c uni t ?

a. The i nt er dependenci es bet ween t he act i vi t i es.
b. The ext ent of common cont r ol .
c. The ext ent of common owner shi p.
d. The geogr aphi cal l ocat i on.
*e. Al l of t he above ar e r el evant f act or s.

1338. Tess owns a bui l di ng i n whi ch she r ent s apar t ment s t o t enant s and
oper at es a r est aur ant . Whi ch of t he f ol l owi ng st at ement s i s incorrect?

a. I f 60%of Tess s gr oss i ncome i s f r omapar t ment r ent al s and
40%i s f r omt he r est aur ant , t he r ent al oper at i on and t he
r est aur ant busi ness must be t r eat ed as separ at e act i vi t i es.
b. I f 95%of Tess s gr oss i ncome i s f r omapar t ment r ent al s and 5%
i s f r omt he r est aur ant , she may t r eat t he r ent al oper at i on and
t he r est aur ant busi ness as a si ngl e act i vi t y t hat is a r ent al
act i vi t y.
c. I f 5%of Tess s gr oss i ncome i s f r omapar t ment r ent al s and 95%
i s f r omt he r est aur ant , she may t r eat t he r ent al oper at i on and
t he r est aur ant busi ness as a si ngl e act i vi t y t hat is not a r ent al
act i vi t y.
*d. I f 98%of Tess s gr oss i ncome i s f r omapar t ment r ent al s and
2%i s f r omt he r est aur ant , t he r ent al oper at i on and t he
r est aur ant busi ness must be t r eat ed as a si ngl e act i vi t y t hat is
not a r ent al act i vi t y.

1339. Ri ck, a comput er consul t ant , owns a separ at e busi ness ( not r eal
est at e) i n whi ch he par t i ci pat es. He has one empl oyee who wor ks par t -
t i me i n t he busi ness.

a. I f Ri ck par t i ci pat es f or 500 hour s and t he empl oyee
par t i ci pat es f or 620 hour s dur i ng t he year , Ri ck qual i f i es as a
*b. I f Ri ck par t i ci pat es f or 550 hour s and t he empl oyee
par t i ci pat es f or 2, 000 hour s dur i ng t he year , Ri ck qual i f i es as a
c. I f Ri ck par t i ci pat es f or 120 hour s and t he empl oyee
par t i ci pat es f or 120 hour s dur i ng t he year , Ri ck does not qual i f y
as a mat er i al par t i ci pant .
d. I f Ri ck par t i ci pat es f or 95 hour s and t he empl oyee
par t i ci pat es f or 5 hour s dur i ng t he year , Ri ck pr obabl y does not
qual i f y as a mat er i al par t i ci pant .

1340. Ned, a col l ege pr of essor , owns a separ at e busi ness ( not r eal
est at e) i n whi ch he par t i ci pat es i n t he cur r ent year . He has one
empl oyee who wor ks par t - t i me i n t he busi ness.

a. I f Ned par t i ci pat es f or 120 hour s and t he empl oyee
par t i ci pat es f or 120 hour s dur i ng t he year , Ned does not qual i f y
as a mat er i al par t i ci pant .
b. I f Ned par t i ci pat es f or 95 hour s and t he empl oyee par t i ci pat es
f or 5 hour s dur i ng t he year , Ned pr obabl y does not qual i f y as
c. I f Ned par t i ci pat es f or 500 hour s and t he empl oyee
par t i ci pat es f or 520 hour s dur i ng t he year , Ned qual i f i es as
*d. I f Ned par t i ci pat es f or 600 hour s and t he empl oyee
par t i ci pat es f or 2, 000 hour s dur i ng t he year , Ned qual i f i es as a

1341. Ahmad owns f our act i vi t i es. He par t i ci pat ed f or 120 hour s i n
Act i vi t y A, 150 hour s i n Act i vi t y B, 140 hour s i n Act i vi t y C, and 100
hour s i n Act i vi t y D. Whi ch of t he f ol l owi ng st at ement s i s correct?

a. Act i vi t i es A, B, C, and D ar e al l si gni f i cant par t i ci pat i on
act i vi t i es.
*b. Act i vi t i es A, B, and C ar e si gni f i cant par t i ci pat i on
act i vi t i es.
c. Ahmad i s a mat er i al par t i ci pant wi t h r espect t o Act i vi t i es A,
B, and C.
d. Ahmad i s a mat er i al par t i ci pant wi t h r espect t o Act i vi t i es A,
B, C, and D.

1342. Paul a owns f our separ at e act i vi t i es. She el ect s not t o gr oup t hem
t oget her as a si ngl e act i vi t y under t he appr opr i at e economi c uni t
st andar d. Paul a par t i ci pat es f or 130 hour s i n Act i vi t y A, 115 hour s i n
Act i vi t y B, 260 hour s i n Act i vi t y C, and 100 hour s i n Act i vi t y D. She
has one empl oyee, who wor ks 125 hour s i n Act i vi t y D. Whi ch of t he
f ol l owi ng st at ement s i s correct?

a. Act i vi t i es A, B, C, and D ar e al l si gni f i cant par t i ci pat i on
act i vi t i es.
b. Paul a i s a mat er i al par t i ci pant wi t h r espect t o Act i vi t i es A,
B, C, and D.
c. Paul a i s not a mat er i al par t i ci pant wi t h r espect t o Act i vi t i es
A, B, C, and D.
d. Losses f r omal l of t he act i vi t i es can be used t o of f set
Paul a s act i ve i ncome.

1343. Dena owns i nt er est s i n f i ve busi nesses and has f ul l - t i me
empl oyees i n each busi ness. She par t i ci pat es f or 100 hour s i n Act i vi t y
A, 120 hour s i n Act i vi t y B, 130 hour s i n Act i vi t y C, 140 hour s i n
Act i vi t y D, and 125 hour s i n Act i vi t y E.

a. Al l f i ve of Dena s act i vi t i es ar e si gni f i cant par t i ci pat i on
act i vi t i es.
b. Dena i s a mat er i al par t i ci pant wi t h r espect t o al l f i ve
act i vi t i es.
c. Dena i s not a mat er i al par t i ci pant i n any of t he act i vi t i es.
*d. Dena i s a mat er i al par t i ci pant wi t h r espect t o Act i vi t i es B,
C, D, and E.

1344. Mar i a, who owns a 50%i nt er est i n a r est aur ant , has been a
mat er i al par t i ci pant i n t he r est aur ant act i vi t y f or t he l ast 20 year s.
She r et i r ed f r omt he r est aur ant at t he end of l ast year and wi l l not
par t i ci pat e i n t he r est aur ant act i vi t y i n t he f ut ur e. However , she
cont i nues t o be a mat er i al par t i ci pant i n a r et ai l st or e i n whi ch she
i s a 50%par t ner . The r est aur ant oper at i ons pr oduce a l oss f or t he
cur r ent year , and Mar i a s shar e of t he l oss i s $80, 000. Her shar e of
t he i ncome f r omt he r et ai l st or e i s $150, 000. She does not own
i nt er est s i n any ot her act i vi t i es.

a. Mar i a cannot deduct t he $80, 000 l oss f r omt he r est aur ant
because she i s not a mat er i al par t i ci pant .
*b. Mar i a can of f set t he $80, 000 l oss agai nst t he $150, 000 of
i ncome f r omt he r et ai l st or e.
c. Mar i a wi l l not be abl e t o deduct any l osses f r omt he
r est aur ant unt i l she has been r et i r ed f or at l east t hr ee year s.
d. Assumi ng Mar i a cont i nues t o hol d t he i nt er est i n t he
r est aur ant , she wi l l al ways t r eat t he l osses as act i ve.

1345. Lei gh, who owns a 50%i nt er est i n a spor t i ng goods st or e, was a
mat er i al par t i ci pant i n t he act i vi t y f or t he l ast f i f t een year s. She
r et i r ed f r omt he spor t i ng goods st or e at t he end of l ast year and wi l l
not par t i ci pat e i n t he act i vi t y i n t he f ut ur e. However , she cont i nues
t o be a mat er i al par t i ci pant i n an of f i ce suppl y st or e i n whi ch she i s
a 50%par t ner . The oper at i ons of t he spor t i ng goods st or e r esul t ed i n a
l oss f or t he cur r ent year and Lei gh s shar e of t he l oss i s $40, 000.
Lei gh s shar e of t he i ncome f r omt he of f i ce suppl y st or e i s $75, 000.
She does not own i nt er est s i n any ot her act i vi t i es.

a. Lei gh cannot deduct t he $40, 000 l oss f r omt he spor t i ng goods
st or e because she i s not a mat er i al par t i ci pant .
*b. Lei gh can of f set t he $40, 000 l oss f r omt he spor t i ng goods
st or e agai nst t he $75, 000 of i ncome f r omt he of f i ce suppl y st or e.
c. Lei gh wi l l not be abl e t o deduct any l osses f r omt he spor t i ng
goods st or e unt i l f ut ur e year s.
d. Lei gh wi l l not be abl e t o deduct any l osses f r omt he spor t i ng
goods st or e unt i l she has been r et i r ed f or at l east f our year s.

1346. J ed spends 32 hour s a week, 50 weeks a year , oper at i ng a DVD
r ent al st or e t hat he owns. He al so owns a musi c st or e i n anot her ci t y
t hat i s oper at ed by a f ul l - t i me empl oyee. He el ect s not t o gr oup t hem
t oget her as a si ngl e act i vi t y under t he appr opr i at e economi c uni t
st andar d. J ed spends 40 hour s per year wor ki ng at t he musi c st or e.

a. Nei t her st or e i s a passi ve act i vi t y.
b. Bot h st or es ar e passi ve act i vi t i es.
c. Onl y t he DVD r ent al st or e i s a passi ve act i vi t y.
*d. Onl y t he musi c st or e i s a passi ve act i vi t y.

1347. J enny spends 32 hour s a week, 50 weeks a year , oper at i ng a DVD
r ent al st or e t hat she owns. She al so owns a musi c st or e i n anot her ci t y
t hat i s oper at ed by a f ul l - t i me empl oyee. J enny spends 140 hour s per
year wor ki ng at t he musi c st or e. She el ect s not t o gr oup t hemt oget her
as a si ngl e act i vi t y under t he appr opr i at e economi c uni t st andar d.

*a. Nei t her st or e i s a passi ve act i vi t y.
b. Bot h st or es ar e passi ve act i vi t i es.
c. Onl y t he DVD r ent al st or e i s a passi ve act i vi t y.
d. Onl y t he musi c st or e i s a passi ve act i vi t y.

1348. Skeet er i nvest s i n vacant l and f or t he pur pose of r eal i zi ng a
pr of i t on i t s appr eci at i on. He l eases t he l and dur i ng t he per i od he
hol ds i t . The unadj ust ed basi s of t he pr oper t y i s $75, 000 and i t s f ai r
mar ket val ue i s $105, 000. The l ease payment s ar e $1, 200 per year .

a. The l easi ng act i vi t y wi l l be t r eat ed as a r ent al act i vi t y and
wi l l be t r eat ed as a passi ve act i vi t y r egar dl ess of how many
hour s Skeet er par t i ci pat es.
b. The l easi ng act i vi t y wi l l be t r eat ed as a r ent al act i vi t y and
wi l l not be t r eat ed as a passi ve act i vi t y i f Skeet er qual i f i es as
a r eal est at e pr of essi onal .
*c. The l easi ng act i vi t y wi l l not be t r eat ed as a r ent al act i vi t y.
d. The l easi ng act i vi t y wi l l be t r eat ed as a r ent al act i vi t y and
wi l l not be t r eat ed as a passi ve act i vi t y i f Skeet er devot es mor e
t han 500 hour s t o t he act i vi t y.

1349. J osh has i nvest ment s i n t wo passi ve act i vi t i es. Act i vi t y A,
acqui r ed t hr ee year s ago, pr oduces i ncome i n t he cur r ent year of
$60, 000. Act i vi t y B, acqui r ed l ast year , pr oduces a l oss of $100, 000 i n
t he cur r ent year . At t he begi nni ng of t hi s year , J osh s at - r i sk amount s
i n Act i vi t i es A and B ar e $10, 000 and $100, 000, r espect i vel y. What i s
t he amount of J osh s suspended passi ve l oss wi t h r espect t o t hese
act i vi t i es at t he end of t he cur r ent year ?

a. $0.
b. $36, 000.
*c. $40, 000.
d. $100, 000.

1350. Sandr a acqui r ed a passi ve act i vi t y t hr ee year s ago. Unt i l l ast
year , t he act i vi t y was pr of i t abl e and her at - r i sk amount was $300, 000.
Last year , t he act i vi t y pr oduced a l oss of $100, 000, and i n t he cur r ent
year , t he l oss i s $50, 000. Assumi ng Sandr a has r ecei ved no passi ve
i ncome i n t he cur r ent or pr i or year s, her suspended passi ve l oss f r om
t he act i vi t y i s:

a. $90, 000 f r oml ast year and $50, 000 f r omt he cur r ent year .
*b. $100, 000 f r oml ast year and $50, 000 f r omt he cur r ent year .
c. $0 f r oml ast year and $0 f r omt he cur r ent year .
d. $50, 000 f r omt he cur r ent year .

1351. Ri t a ear ns a sal ar y of $150, 000, and i nvest s $40, 000 f or a 20%
i nt er est i n a passi ve act i vi t y. Oper at i ons of t he act i vi t y r esul t i n a
l oss of $250, 000, of whi ch Ri t a s shar e i s $50, 000. How i s her l oss
char act er i zed?

*a. $40, 000 i s suspended under t he passi ve l oss r ul es and $10, 000
i s suspended under t he at - r i sk r ul es.
b. $40, 000 i s suspended under t he at - r i sk r ul es and $10, 000 i s
suspended under t he passi ve l oss r ul es.
c. $50, 000 i s suspended under t he passi ve l oss r ul es.
d. $50, 000 i s suspended under t he at - r i sk r ul es.

1352. Ar t s at - r i sk amount i n a passi ve act i vi t y was $60, 000 at t he
begi nni ng of 2012. Hi s l oss f r omt he act i vi t y i n 2012 i s $80, 000, and
he had no passi ve act i vi t y i ncome dur i ng t he year . Ar t had $20, 000 of
passi ve i ncome f r omt he act i vi t y i n 2013. Under t he passi ve l oss r ul es,
Ar t s suspended l oss at t he end of 2013 i s:

a. $15, 000.
b. $20, 000.
c. $45, 000.
*d. $60, 000.

1353. Vi c s at - r i sk amount i n a passi ve act i vi t y i s $200, 000 at t he
begi nni ng of t he cur r ent year . Hi s cur r ent l oss f r omt he act i vi t y i s
$80, 000. Vi c had no passi ve act i vi t y i ncome dur i ng t he year . At t he end
of t he cur r ent year :

*a. Vi c has an at - r i sk amount i n t he act i vi t y of $120, 000 and a
suspended passi ve l oss of $80, 000.
b. Vi c has an at - r i sk amount i n t he act i vi t y of $200, 000 and a
suspended passi ve l oss of $80, 000.
c. Vi c has an at - r i sk amount i n t he act i vi t y of $120, 000 and no
suspended passi ve l oss.
d. Vi c has an at - r i sk amount i n t he act i vi t y of $200, 000 and no
suspended passi ve l oss.

1354. Wes s at - r i sk amount i n a passi ve act i vi t y i s $25, 000 at t he
begi nni ng of t he cur r ent year . Hi s cur r ent l oss f r omt he act i vi t y i s
$35, 000 and he has no passi ve act i vi t y i ncome. At t he end of t he
cur r ent year , whi ch of t he f ol l owi ng st at ement s i s incorrect?

a. Wes has a l oss of $25, 000 suspended under t he passi ve l oss
r ul es.
b. Wes has an at - r i sk amount i n t he act i vi t y of $0.
c. Wes has a l oss of $10, 000 suspended under t he at - r i sk r ul es.
*d. Wes has a l oss of $35, 000 suspended under t he passi ve l oss
r ul es.
e. None of t he above i s i ncor r ect .

1355. J on owns an apar t ment bui l di ng i n whi ch he i s a mat er i al
par t i ci pant and a comput er consul t i ng busi ness. Of t he 2, 000 hour s he
spends on t hese act i vi t i es dur i ng t he year , 55%of t he t i me i s spent
oper at i ng t he apar t ment bui l di ng and 45%of t he t i me i s spent i n t he
comput er consul t i ng busi ness.

a. The comput er consul t i ng busi ness i s a passi ve act i vi t y but t he
apar t ment bui l di ng i s not .
b. The apar t ment bui l di ng i s a passi ve act i vi t y but t he comput er
consul t i ng busi ness i s not .
c. Bot h t he apar t ment bui l di ng and t he comput er consul t i ng
busi ness ar e passi ve act i vi t i es.
*d. Nei t her t he apar t ment bui l di ng nor t he comput er consul t i ng
busi ness i s a passi ve act i vi t y.

1356. Consi der t he f ol l owi ng t hr ee st at ement s:

(1) Tad invests in vacant land for the purpose of
realizing a profit on its appreciation. He
leases the land during the period he holds
it. The unadjusted basis of the property is
$25,000 and its fair market value is $35,000.
The lease payments are $400 per year.

(2) A farmer owns land with an unadjusted basis
of $25,000 and a fair market value of
$35,000. He used it for farming purposes in
the two prior years. In the current year, he
leases the land to another farmer for $400.

(3) At City Hospital, each inpatient is provided
a private room while medical care is
provided.

In which of the three cases above could the rental activity automatically
be considered a passive activity?

a. Case 1 onl y.
b. Case 2 onl y.
c. Case 3 onl y.
d. Cases 1, 2, and 3.

1357. Pabl o, who i s si ngl e, has $95, 000 of sal ar y, $10, 000 of i ncome
f r oma l i mi t ed par t ner shi p, and a $27, 000 passi ve l oss f r oma r eal
est at e r ent al act i vi t y i n whi ch he act i vel y par t i ci pat es. Hi s modi f i ed
adj ust ed gr oss i ncome i s $95, 000. Of t he $27, 000 l oss, how much i s
deduct i bl e?

a. $0.
b. $10, 000.
c. $25, 000.
*d. $27, 000.

1358. J osi e, an unmar r i ed t axpayer , has $155, 000 i n sal ar y, $10, 000 i n
i ncome f r oma l i mi t ed par t ner shi p, and a $26, 000 passi ve l oss f r oma
r eal est at e r ent al act i vi t y i n whi ch she act i vel y par t i ci pat es. I f her
modi f i ed adj ust ed gr oss i ncome i s $155, 000, how much of t he $26, 000
l oss i s deduct i bl e?

a. $0.
*b. $10, 000.
c. $25, 000.
d. $26, 000.

1359. Kat e di es owni ng a passi ve act i vi t y wi t h an adj ust ed basi s of
$100, 000. I t s f ai r mar ket val ue at t hat dat e i s $130, 000. Suspended
l osses r el at i ng t o t he pr oper t y wer e $45, 000.

*a. The hei r s adj ust ed basi s i s $130, 000, and Kat e s f i nal
deduct i on i s $15, 000.
b. The hei r s adj ust ed basi s i s $130, 000, and Kat e s f i nal
c. The hei r s adj ust ed basi s i s $100, 000, and Kat e s f i nal
d. The hei r s adj ust ed basi s i s $175, 000, and Kat e has no f i nal
deduct i on.

1360. Car oyl made a gi f t t o Ti mof a passi ve act i vi t y ( adj ust ed basi s
of $50, 000, suspended l osses of $20, 000, and a f ai r mar ket val ue of
$80, 000) . No gi f t t ax r esul t ed f r omt he t r ansf er .

a. Ti m s adj ust ed basi s i s $80, 000, and Ti mcan deduct t he
$20, 000 of suspended l osses i n t he f ut ur e.
b. Ti m s adj ust ed basi s i s $80, 000.
c. Ti m s adj ust ed basi s i s $50, 000, and t he suspended l osses ar e
l ost .
d. Ti m s adj ust ed basi s i s $50, 000, and Ti mcan deduct t he
$20, 000 of suspended l osses i n t he f ut ur e.

1361. I dent i f y f r omt he l i st bel ow t he t ype of di sposi t i on of a passi ve
act i vi t y wher e t he t axpayer keeps t he suspended l osses of t he di sposed
act i vi t y and ut i l i zes t hemon a subsequent t axabl e di sposi t i on.

a. Di sposi t i on of a passi ve act i vi t y by gi f t .
*b. Nont axabl e exchange of a passi ve act i vi t y.
c. Di sposi t i on of a passi ve act i vi t y at deat h.
d. I nst al l ment sal e of a passi ve act i vi t y.

1362. Raul i s mar r i ed and f i l es a j oi nt t ax r et ur n. Hi s cur r ent
i nvest ment i nt er est expense of $95, 000 i s r el at ed t o a l oan used t o
pur chase a par cel of uni mpr oved l and. I ncome f r omi nvest ment s
[ di vi dends ( not qual i f i ed) and i nt er est ] t ot al $18, 000 and
mi scel l aneous i t emi zed deduct i ons ( af t er adj ust ment f or t he 2%- of - AGI
f l oor ) amount t o $2, 800. I n addi t i on t o t he $1, 400 of i nvest ment
expenses i ncl uded i n mi scel l aneous i t emi zed deduct i ons, Raul pai d
$3, 600 of r eal est at e t axes on t he uni mpr oved l and. He al so has a
$4, 500 net l ong- t er mcapi t al gai n f r omt he sal e of anot her par cel of
uni mpr oved l and. Raul s maximum i nvest ment i nt er est deduct i on f or t he
year i s:

a. $95, 000.
b. $18, 000.
*c. $17, 500.
d. $13, 000.

1363. J udy i ncur r ed $58, 500 of i nt er est expense t hi s year r el at ed t o
her i nvest ment s. Her i nvest ment i ncome i ncl udes $15, 000 of i nt er est ,
$9, 000 of qual i f i ed di vi dends, and a $22, 500 net capi t al gai n on t he
sal e of secur i t i es. The maximum amount of J udy s i nvest ment i nt er est
expense deduct i on f or t he year i s:

a. $15, 000.
b. $24, 000.
c. $37, 500.
*d. $46, 500.

1364. Match the term with the correct response. More than one response
may be correct.Si gni f i cant par t i ci pat i on act i vi t y. At - r i sk
amount . Mat er i al par t i ci pat i on. Ext r aor di nar y per sonal ser vi ces. Act i ve
par t i ci pat i on. One i n whi ch t he i ndi vi dual s par t i ci pat i on equal s mor e
t han 100 hour s dur i ng t he year . No cor r ect choi ce i s gi ven. Taxpayer
devot es t i me aggr egat i ng mor e t han 500 hour s i n al l si gni f i cant
par t i ci pat i on act i vi t i es dur i ng t he year . The use of pr oper t y i s
i nci dent al t o t he r ecei pt of ser vi ces. Par t i ci pat es i n maki ng
management deci si ons i n a si gni f i cant and bonaf i de sense. Taxpayer
devot es t i me i n t he act i vi t y whi ch const i t ut es subst ant i al l y al l of t he
par t i ci pat i on i n t he act i vi t y of al l i ndi vi dual s.

[ a] 1. Si gni f i cant par t i ci pat i on act i vi t y.
[ b] 2. At - r i sk amount .
[ c] 3. Mat er i al par t i ci pat i on.
[ d] 4. Ext r aor di nar y per sonal ser vi ces.
[ e] 5. Act i ve par t i ci pat i on.

a. One i n whi ch t he i ndi vi dual s par t i ci pat i on equal s mor e
t han 100 hour s dur i ng t he year .
b. No cor r ect choi ce i s gi ven.
c. Taxpayer devot es t i me aggr egat i ng mor e t han 500 hour s i n
al l si gni f i cant par t i ci pat i on act i vi t i es dur i ng t he year .
d. The use of pr oper t y i s i nci dent al t o t he r ecei pt of
ser vi ces.
e. Par t i ci pat es i n maki ng management deci si ons i n a
si gni f i cant and bonaf i de sense.
f . Taxpayer devot es t i me i n t he act i vi t y whi ch const i t ut es
subst ant i al l y al l of t he par t i ci pat i on i n t he act i vi t y of al l
i ndi vi dual s.

1365. Match the treatment for the following types of
transactions.Tr eat ment of a di sposi t i on of a passi ve act i vi t y by
gi f t . Tr eat ment of a di sposi t i on of a passi ve act i vi t y at
deat h. Tr eat ment of an i nst al l ment sal e of a passi ve act i vi t y. Tr eat ment
of a nont axabl e exchange of a passi ve act i vi t y. Tr eat ment of a sal e of a
passi ve act i vi t y wher e al l of t he r eal i zed gai n or l oss i s r ecogni zed
cur r ent l y. Tr eat ment of suspended cr edi t s when passi ve act i vi t y i s sol d
at a l oss. The suspended l osses ar e added t o t he basi s of t he pr oper t y.
Suspended l osses ar e al l owed t o t he t axpayer t o t he ext ent t hey exceed
t he amount , i f any, of t he st ep- up i n basi s al l owed. The l osses ar e
al l owed i n t he year s i n whi ch gai n i s r ecogni zed. The t axpayer keeps
t he suspended l osses. Any suspended l osses may be used i n t he cur r ent
year . No cor r ect choi ce i s gi ven. Suspended l osses ar e al l owed t o
of f set t he i ncome f r omt he act i vi t y, ot her passi ve act i vi t i es, or
act i ve i ncome.

[ a] 1. Tr eat ment of a di sposi t i on of a passi ve act i vi t y by
gi f t .
[ b] 2. Tr eat ment of a di sposi t i on of a passi ve act i vi t y at
deat h.
[ c] 3. Tr eat ment of an i nst al l ment sal e of a passi ve act i vi t y.
[ d] 4. Tr eat ment of a nont axabl e exchange of a passi ve
act i vi t y.
[ e] 5. Tr eat ment of a sal e of a passi ve act i vi t y wher e al l of
t he r eal i zed gai n or l oss i s r ecogni zed cur r ent l y.
[ f ] 6. Tr eat ment of suspended cr edi t s when passi ve act i vi t y i s
sol d at a l oss.

a. The suspended l osses ar e added t o t he basi s of t he pr oper t y.
b. Suspended l osses ar e al l owed t o t he t axpayer t o t he ext ent
t hey exceed t he amount , i f any, of t he st ep- up i n basi s al l owed.
c. The l osses ar e al l owed i n t he year s i n whi ch gai n i s
r ecogni zed.
d. The t axpayer keeps t he suspended l osses.
e. Any suspended l osses may be used i n t he cur r ent year .
f . No cor r ect choi ce i s gi ven.
g. Suspended l osses ar e al l owed t o of f set t he i ncome f r omt he
act i vi t y, ot her passi ve act i vi t i es, or act i ve i ncome.

1366. Sar ah pur chased f or $100, 000 a 10%i nt er est i n a busi ness vent ur e
t hat i s not subj ect t o t he passi ve act i vi t y r ul es. Dur i ng t he f i r st
year , her shar e of t he ent i t y s l oss was $120, 000. At t he begi nni ng of
t he second year , t he ent i t y obt ai ned $800, 000 of r ecour se f i nanci ng.
Dur i ng t he second year , Sar ah wi t hdr ew cash of $20, 000, and her shar e
of t he ent i t y s l oss was $25, 000. Cal cul at e t he amount of l oss t hat
Sar ah may cl ai mi n each of t he t wo year s and det er mi ne her at - r i sk
amount at t he end of each year .

Cor r ect Answer :
Initial at-risk
amount
$100,000
Subtract: Deductibl
e first year loss of
$120,000, limited to
at-risk amount of
(100,000)
$100,000
At-risk amount at the
end of first year

$
0
Suspended loss at the
end of first year
$ 20,000

beginning of the
second year
$
0
Add: Share of
recourse debt
80,000
Subtract: Withdrawa
l
(20,000)
Deductible $25,000
second year loss +
$20,000 loss
suspended from prior
year
(45,000)
end of second year
$ 15,000

Suspended loss at the
end of second year
$
0

1367. I n 2013, Emi l y i nvest s $120, 000 i n a l i mi t ed par t ner shi p t hat i s
not a passi ve act i vi t y. Dur i ng 2013, her shar e of t he par t ner shi p l oss
i s $90, 000. I n 2014, her shar e of t he par t ner shi p l oss i s $50, 000. How
much can Emi l y deduct i n 2013 and 2014?

Cor r ect Answer :
Al t hough t he passi ve l oss r ul es do not appl y, t he at - r i sk r ul es l i mi t
Emi l y s deduct i ons. She can deduct $90, 000 i n 2013 and her at - r i sk
amount wi l l be r educed t o $30, 000 ( $120, 000 $90, 000 deduct ed) . She
wi l l be l i mi t ed t o a $30, 000 deduct i on i n 2014 unl ess she i ncr eases her
amount at r i sk. For exampl e, i f Emi l y i nvest s an addi t i onal $20, 000 i n
2014, her at - r i sk amount woul d be $50, 000 ( $30, 000 bal ance + $20, 000
addi t i onal i nvest ment ) , and she woul d be abl e t o deduct t he ent i r e
$50, 000 l oss i n 2014.

1368. I n 2012, Kel l y ear ns a sal ar y of $200, 000 and i nvest s $40, 000 f or
a 20%i nt er est i n a par t ner shi p not subj ect t o t he passi ve l oss
r ul es. Thr ough t he use of $800, 000 of nonr ecour se f i nanci ng, t he
par t ner shi p acqui r es asset s wor t h $1 mi l l i on. The act i vi t y pr oduces a
l oss of $150, 000, of whi ch Kel l y s shar e i s $30, 000. I n 2013, Kel l y s
shar e of t he l oss f r omt he par t ner shi p i s $15, 000. How much of t he
l oss f r omt he par t ner shi p can Kel l y deduct ?

Cor r ect Answer :
Kel l y has $40, 000 at r i sk at t he end of 2012 and can deduct t he $30, 000
l oss i n t hat year . Thi s decr eases hi s at - r i sk amount t o
$10, 000. Consequent l y, at t he end of 2013, he can deduct onl y $10, 000
of t he $15, 000 l oss.

1369. Li ndsey, an at t or ney, ear ns $125, 000 f r omher l aw pr act i ce i n t he
cur r ent year . I n addi t i on, she r ecei ves $50, 000 i n di vi dends and
i nt er est dur i ng t he year . Fur t her , she i ncur s a l oss of $40, 000 f r oman
i nvest ment i n a passi ve act i vi t y. What i s Li ndsey s AGI f or t he year
af t er consi der i ng t he passi ve i nvest ment ?

Cor r ect Answer :
Li ndsey cannot deduct t he passi ve l oss agai nst act i ve or por t f ol i o
i ncome. Ther ef or e, her AGI af t er consi der i ng t he passi ve i nvest ment i s
$175, 000 ( $125, 000 act i ve i ncome + $50, 000 por t f ol i o i ncome) .

1370. Anne sel l s a r ent al house f or $100, 000 ( adj ust ed basi s of
$55, 000) . Dur i ng her owner shi p, $60, 000 of l osses have been suspended
under t he passi ve act i vi t y l oss r ul es. Det er mi ne t he t ax t r eat ment t o
Anne on t he di sposi t i on of t he pr oper t y.

Cor r ect Answer :
Because Anne di sposes of her ent i r e i nt er est i n t he passi ve act i vi t y,
she i s abl e t o f ul l y r ecogni ze t he suspended l osses. By ut i l i zat i on of
t he $60, 000 suspended l oss, a deduct i bl e l oss of $15, 000 r esul t s.

Net sales price $100,000
Less: Adjusted basis (55,00
0)
Total gain $ 45,000

Less: Suspended losses (60,00
0)
Deductible (nonpassive) loss ($ 15,000)

1371. Hugh has f our passi ve act i vi t i es whi ch gener at e t he f ol l owi ng
i ncome and l osses i n t he cur r ent year .

Act i vi t y Gai n
( Loss)
A ( $60, 000
)
B ( 20, 00
0)
C ( 10, 00
0)
D 10, 00
0
Tot al ( $80, 000
)

How much of t he $80, 000 net passi ve l oss can Hugh deduct t hi s year ?
Cal cul at e t he suspended l osses ( by act i vi t y) .

Cor r ect Answer :
None. The suspended l osses of $80, 000 ar e al l ocat ed as f ol l ows:

Activity Suspended Loss
A $60,000/$90,00
0 $80,000
$53,333
B $20,000/$90,00
0 $80,000
17,778
C $10,000/$90,00
0 $80,000
8,889
Total suspended loss $80,000

1372. Pat sel l s a passi ve act i vi t y f or $100, 000 t hat has an adj ust ed
basi s of $55, 000. Dur i ng t he year s of her owner shi p, $60, 000 of l osses
have been i ncur r ed t hat wer e suspended under t he passi ve act i vi t y l oss
r ul es. I n addi t i on, t he passi ve act i vi t y gener at ed t ax cr edi t s of
$10, 000 t hat wer e not ut i l i zed and suspended. Det er mi ne t he t ax
t r eat ment t o Pat on t he di sposi t i on of t he pr oper t y.

Cor r ect Answer :
Because Pat di sposes of her ent i r e i nt er est i n t he passi ve act i vi t y,
she i s abl e t o r ecogni ze f ul l y t he l osses t hat had been suspended
dur i ng t he year s of her owner shi p. Wi t h t he cur r ent ut i l i zat i on of t he
$60, 000 suspended l oss, a net deduct i bl e l oss of $15, 000 r esul t s, whi ch
i s t r eat ed as a l oss t hat i s not f r oma passi ve act i vi t y. However , t he
suspended cr edi t s ar e l ost and may not be used. The t ax cr edi t s ar e
al l owed on di sposi t i ons onl y when t her e i s suf f i ci ent t ax on t he
di sposi t i on ( i . e. , due t o a gai n) t o absor b t hem.

Net sales price $100,000
Less: Adjusted basis (55,0
00)
Total gain $ 45,000
Less: Suspended losses (60,0
00)
Deductible loss ($ 15,000)

1373. Pur pl e Cor por at i on, a per sonal ser vi ce cor por at i on, ear ns act i ve
i ncome of $600, 000. The cor por at i on r ecei ves $60, 000 i n di vi dends and
i ncur s a l oss of $100, 000 f r oman i nvest ment i n a passi ve act i vi t y
acqui r ed t hr ee year s ago. What i s Pur pl e s i ncome af t er consi der i ng
t he passi ve i nvest ment ?

Cor r ect Answer :
A per sonal ser vi ce cor por at i on cannot of f set passi ve l osses agai nst
act i ve or por t f ol i o i ncome. Pur pl e s i ncome i s $660, 000 ( $600, 000
act i ve i ncome + $60, 000 di vi dend i ncome) . The $100, 000 passi ve l oss i s
suspended.

1374. Or ange Cor por at i on, a cl osel y hel d ( nonper sonal ser vi ce) C
cor por at i on, ear ns act i ve i ncome of $300, 000 i n t he cur r ent year . The
cor por at i on al so r ecei ves $35, 000 i n di vi dends and i ncur s a l oss of
$50, 000 f r oman i nvest ment i n a passi ve act i vi t y. What i s Or ange s
i ncome f or t he year af t er consi der i ng t he passi ve i nvest ment ?

Cor r ect Answer :
A cl osel y hel d ( nonper sonal ser vi ce) C cor por at i on can of f set passi ve
l osses agai nst active, but not por t f ol i o i ncome. Ther ef or e, Or ange s
i ncome i s $285, 000 [ ( $300, 000 act i ve i ncome $50, 000 passi ve l oss) +
$35, 000 por t f ol i o i ncome] .

1375. Ll oyd, a l i f e i nsur ance sal esman, ear ns a $400, 000 sal ar y i n t he
cur r ent year . As he wor ks onl y 30 hour s per week i n t hi s j ob, he has
t i me t o par t i ci pat e i n sever al ot her busi nesses. He owns an i ce cr eam
par l or and a car r epai r shop i n Tampa. He al so owns an i ce cr eampar l or
and a car r epai r shop i n Por t l and and a car r epai r shop i n St . Loui s. A
pr el i mi nar y anal ysi s on December 1 of t he cur r ent year shows pr oj ect ed
i ncome and l osses f or t he var i ous busi nesses as f ol l ows:
I ncome
( Loss)
Tampa i ce cr eampar l or ( 95
hour s par t i ci pat i on)
$56, 000
Tampa car r epai r shop ( 140
hour s par t i ci pat i on)
( 89, 000)
Por t l and i ce cr eampar l or
( 90 hour s par t i ci pat i on)
34, 000
Por t l and car r epai r shop
( 41, 000)
St . Loui s car r epai r shop
( 15, 000)

Ll oyd has f ul l - t i me empl oyees at each of t he f i ve busi nesses l i st ed
above. Revi ew al l possi bl e gr oupi ngs f or Ll oyd s act i vi t i es. Whi ch
gr oupi ng met hod and ot her st r at egi es shoul d Ll oyd consi der t hat wi l l
pr ovi de t he gr eat est t ax advant age?

Cor r ect Answer :
The basi c i ssue r el at es t o how t he car r epai r shops and i ce cr eam
par l or s shoul d be gr ouped under t he passi ve act i vi t y r ul es so as t o
maxi mi ze t he t ax benef i t t o Ll oyd. The $400, 000 sal ar y i s act i ve i ncome.
I f t he par t i ci pat i on l evel s st ay t he same i n t he i ce cr eam par l or and
car r epai r shop busi nesses, al l pr of i t s and l osses wi l l be passi ve,
assumi ng each l ocat i on i s a separ at e act i vi t y. As a r esul t , a net
passi ve l oss of $55, 000 ( $89, 000 l oss + $41, 000 l oss + $15, 000 l oss
$56, 000 pr of i t $34, 000 pr of i t ) woul d be suspended and not be
avai l abl e t o of f set hi s sal ar y. To mi t i gat e t hi s r esul t , t hr ee opt i ons
shoul d be consi der ed.
Opt i on 1 i s based on t he si gni f i cant par t i ci pat i on act i vi t y r ul e. I f
al l of t he busi nesses ar e t r eat ed as separ at e act i vi t i es, Ll oyd woul d
not be consi der ed a mat er i al par t i ci pant , even under t he si gni f i cant
par t i ci pat i on act i vi t y r ul e. Under t he si gni f i cant par t i ci pat i on
act i vi t y r ul e, t he car r epai r shops woul d be consi der ed si gni f i cant
act i vi t i es, but t he i ce cr eam par l or s woul d not . But even wi t h t he car
r epai r shops, t he t ot al par t i ci pat i on i s not expect ed t o exceed t he
mor e- t han- 500 hour t hr eshol d ( 140 + 170 + 180 = 490) . I f Ll oyd coul d
par t i ci pat e 11 mor e hour s i n any of t he car r epai r shop busi nesses,
t hey woul d be t r eat ed as act i ve and t he net l oss f r om t he car r epai r
shops of $145, 000 ( $89, 000 + $41, 000 + $15, 000) coul d be of f set agai nst
hi s sal ar y. Fur t her , i f Ll oyd does not par t i ci pat e any mor e i n t he
ot her i ce cr eam par l or busi nesses, t hei r combi ned $90, 000 of i ncome
wi l l be r epor t ed as passi ve i ncome. Thi s char act er i zat i on as passi ve
coul d be hel pf ul i f Ll oyd wer e t o acqui r e addi t i onal busi nesses i n t he
f ut ur e t hat pr oduce passi ve l osses.
Under option 2, both the ice cream parlor and car repair shop businesses
could be combined as a single activity based on common ownership.
Because Lloyd has participated more than 500 hours in the five businesses,
the net loss of $55,000 would be considered active and could be used to
offset his salary.
Option 3 would combine the car repair shops as one activity based on
product while the ice cream parlors would be treated as a separate activity
based on product. As with option 1, if Lloyd could participate 11 more
hours in any of the car repair shop businesses, they would be treated as
active, and the net loss of $145,000 ($89,000 + $41,000 + $15,000) could be
offset against his salary. Also, he could treat the ice cream parlors as a
single business and the net income would be passive, which could be helpful
in the future if other passive ventures would be acquired.

1376. Vai l owns i nt er est s i n a beaut y sal on, a nat ur al f oods st or e, and
a t anni ng sal on. Sever al f ul l - t i me empl oyees wor k at each of t he
ent er pr i ses. As of t he end of November of t he cur r ent year , Vai l has
wor ked 180 hour s i n t he beaut y sal on, 220 hour s at t he nat ur al f oods
st or e, and 80 hour s at t he t anni ng sal on. These t hr ee vent ur es
col l ect i vel y wi l l pr oduce i ncome. Vai l al so owns one ot her passi ve
act i vi t y t hat i s pr oduci ng a l oss ( a l i mi t ed par t ner shi p i n whi ch she
has r epor t ed no par t i ci pat i on) . How shoul d Vai l pl an her act i vi t i es
f or t he r emai nder of t he year ?

Cor r ect Answer :
I f Vai l spends an addi t i onal 21 hour s i n t he t anni ng sal on act i vi t y,
she has par t i ci pat ed mor e t han 500 hour s i n al l of her si gni f i cant
par t i ci pat i on act i vi t i es. Consequent l y, she i s consi der ed a mat er i al
par t i ci pant i n t he vent ur es, and t he r esul t i ng act i ve i ncome i s not
avai l abl e t o absor b t he passi ve l oss gener at ed by t he l i mi t ed
par t ner shi p. Ther ef or e, Vai l shoul d avoi d devot i ng addi t i onal t i me t o
t he vent ur es. I nst ead, she shoul d pl an t o fail t he mat er i al
par t i ci pat i on st andar d t o keep t he i ncome cl assi f i ed as passi ve.

1377. Ken has a $40, 000 l oss f r oman i nvest ment i n a par t ner shi p i n
whi ch he does not mat er i al l y par t i ci pat e. He pai d $30, 000 f or hi s
i nt er est . How much of t he l oss i s di sal l owed by t he at - r i sk r ul es? How
much i s di sal l owed by t he passi ve l oss r ul es?

Cor r ect Answer :
The at - r i sk l i mi t s di sal l ow $10, 000 of t he deduct i on ( $40, 000 l oss
$30, 000 at r i sk) . Ken i s not a mat er i al par t i ci pant , so t he r emai ni ng
$30, 000 i s di sal l owed by t he passi ve l oss r ul es.

1378. Dur i ng t he cur r ent year , Ryan per f or ms per sonal ser vi ces as
f ol l ows: 700 hour s i n hi s management consul t i ng pr act i ce, 650 hour s i n
a r eal est at e devel opment busi ness, and 550 hour s i n an apar t ment
l easi ng oper at i on. He expect s t hat l osses wi l l be r eal i zed f r omt he
t wo r eal est at e vent ur es whi l e hi s consul t i ng pr act i ce wi l l show a
pr of i t . Ryan f i l es a j oi nt r et ur n wi t h hi s wi f e whose sal ar y i s
$125, 000. Di scuss t he char act er and t r eat ment of t he i ncome and l osses
gener at ed by t hese act i vi t i es.

Cor r ect Answer :
Ryan i s consi der ed a mat er i al par t i ci pant i n al l t hr ee vent ur es, so t he
i ncome and l oss f r omt hese oper at i ons wi l l be f ul l y r ef l ect ed on hi s
i ncome t ax r et ur n. The l osses f r omt he r eal est at e act i vi t i es wi l l not
be subj ect t o t he passi ve l oss r ul es because mor e t han 50%of hi s
per sonal ser vi ces wer e devot ed t o r eal pr oper t y t r ades or busi nesses i n
whi ch he i s a mat er i al par t i ci pant , and t hi s par t i ci pat i on exceeded 750
hour s. Thus, t he l osses f r omt hese act i vi t i es can of f set t he i ncome
f r omhi s management consul t i ng pr act i ce and hi s wi f e s sal ar y.

1379. I n t he cur r ent year , Luci l e, who has AGI of $70, 000 bef or e
consi der i ng r ent al act i vi t i es, i s act i ve i n t hr ee separ at e r eal est at e
r ent al act i vi t i es and i s i n t he 28%t ax br acket . She had $15, 000 of
l osses f r omAct i vi t y A, $25, 000 of l osses f r omAct i vi t y B, and i ncome
of $20, 000 f r omAct i vi t y C. She al so had $3, 100 of t ax cr edi t s f r om
Act i vi t y A. Cal cul at e her deduct i ons and cr edi t s cur r ent l y al l owed and
t he suspended l osses and cr edi t s.

Cor r ect Answer :
Luci l e can ut i l i ze $20, 000 of l osses and $1, 400 of cr edi t s under t he
r eal est at e r ent al act i vi t i es except i on as f ol l ows:

Income
(Loss):
Activity A ($15,000)
Activity B (25,000)
Activity C 20,000
Net loss ($20,000)
Utilized
loss
20,000
Suspended
loss
$
0
Utilized
credit
$ 1,400
Suspended
credit
$ 1,700

After deducting the $20,000 loss, Lucile has an available deduction
equivalent of $5,000 [$25,000 (maximum loss allowed) $20,000 (utilized
loss)]. Then the maximum amount of credits Lucile may claim is $1,400
[$5,000 deduction equivalent .28 (marginal tax bracket)] that is
allocated to Activity A.

1380. Last year , Wanda gave her daught er a passi ve act i vi t y ( adj ust ed
basi s of $80, 000; f ai r mar ket val ue of $160, 000) wi t h suspended l osses
of $20, 000. I n t he cur r ent year , her daught er r eal i zes i ncome of
$10, 000 f r omt he act i vi t y. What ar e t he t ax ef f ect s t o Wanda and her
daught er ?

Cor r ect Answer :
Wanda l oses t he suspended l osses of $20, 000 but t hey ar e added t o t he
basi s of t he gi f t ed pr oper t y. She may or may not have t o pay gi f t
t axes, dependi ng on t he val ue of ot her gi f t s she has gi ven dur i ng her
l i f et i me. Wanda s daught er can add t he suspended l osses t o t he basi s
i n t he pr oper t y but she cannot appl y t hemagai nst t he i ncome r ecei ved.

1381. Bar b bor r owed $100, 000 t o acqui r e a par cel of l and t o be hel d f or
i nvest ment pur poses and pai d i nt er est of $11, 000 on t he l oan. She has
AGI of $75, 000 f or t he year . Ot her i t ems r el at ed t o Bar b s i nvest ment s
i ncl ude t he f ol l owi ng:

I nvest ment i ncome $10, 00
0
Long- t er mcapi t al gai n
on sal e of st ock
7, 500
I nvest ment counsel
f ees
2, 000

Bar b i s unmar r i ed and el ect s t o i t emi ze her deduct i ons. She has no
mi scel l aneous i t emi zed deduct i ons ot her t han t he i nvest ment counsel
f ees.

a. Det er mi ne Bar b s cur r ent i nvest ment
i nt er est deduct i on, assumi ng she does not
make any speci al el ect i on r egar di ng t he
comput at i on of i nvest ment i ncome.

b. Di scuss t he t r eat ment of Bar b s i nvest ment
i nt er est t hat i s di sal l owed i n t he cur r ent
year .

c. What el ect i on coul d Bar b make t o i ncr ease
t he amount of her cur r ent i nvest ment
i nt er est deduct i on?

Cor r ect Answer :
a. Barbs investment interest deduction is
limited to net investment income, which is
computed as follows:

Income from
investments
$10,000
Less: Investment
expenses*

(500)
Net investment
income
$ 9,500

*Because Barb has no other miscellaneous
itemized deductions, the deductible investment
expenses are the smaller of (1) $2,000, the
amount of investment expenses included in the
total of miscellaneous itemized deductions
subject to the 2%-of-AGI floor, or (2) $500,
the amount of miscellaneous expenses
deductible after the 2%-of-AGI floor is
applied [$2,000 $1,500 (2% of $75,000
AGI)].

Barbs deduction for investment interest is
limited to $9,500, the amount of net
investment income. The balance of $1,500 is
disallowed in the current year.

Total investment
interest expense
$11,000
Less: Net investment
income
(9
,500)
Investment interest
disallowed in the
current year
$ 1,5
00

b. The $1,500 of investment interest disallowed
may be carried over and becomes investment
interest expense in the subsequent year
subject to the net investment income
limitation in that year.

c. Barb could increase her investment interest
deduction by electing to treat the LTCG as
investment income. This would increase her
investment income for purposes of
calculating her investment interest
deduction. She would be able to deduct the
full $11,000 of investment interest
expense. If she makes the election, the
amount so elected could not be taxed using
the beneficial capital gains tax rate.

1382. Descr i be t he t ypes of act i vi t i es and t axpayer s t hat ar e subj ect
t o t he at - r i sk r ul es.

Cor r ect Answer :
The at - r i sk pr ovi si ons l i mi t t he deduct i bi l i t y of l osses f r ombusi ness
and i ncome- pr oduci ng act i vi t i es. The pr ovi si ons appl y t o i ndi vi dual s
and cl osel y hel d cor por at i ons. I n t he case of an S cor por at i on or a
par t ner shi p, t he at - r i sk l i mi t s appl y at t he owner l evel .

1383. I dent i f y how t he passi ve l oss r ul es br oadl y cl assi f y var i ous
t ypes of i ncome and l osses. Pr ovi de exampl es of each cat egor y.

Cor r ect Answer :
The passi ve l oss r ul es r equi r e i ncome and l osses t o be cl assi f i ed i nt o
one of t hr ee cat egor i es: act i ve, passi ve, or por t f ol i o. Active income
i ncl udes sal ar y and wages, pr of i t f r oma t r ade or busi ness i n whi ch t he
t axpayer i s a mat er i al par t i ci pant , and gai n on t he sal e of asset s used
i n an act i ve t r ade or busi ness. Portfolio income i ncl udes i nt er est ,
di vi dends, annui t i es, and r oyal t i es not der i ved i n t he or di nar y cour se
of a t r ade or busi ness. The f i nal cat egor y, passive income or loss, i s
gener at ed by a passi ve act i vi t y. The f ol l owi ng act i vi t i es ar e t r eat ed
as passi ve: ( 1) any t r ade or busi ness or i ncome- pr oduci ng act i vi t y i n
whi ch t he t axpayer does not mat er i al l y par t i ci pat e, and ( 2) subj ect t o
except i ons, al l r ent al act i vi t i es, whet her t he t axpayer mat er i al l y
par t i ci pat es or not .

1384. Di scuss t he t r eat ment gi ven t o suspended passi ve act i vi t y l osses
and cr edi t s. What happens t o an act i vi t y s unused l osses and cr edi t s
when t he act i vi t y i s sol d?

Cor r ect Answer :
I n gener al , passi ve l osses ar e deduct i bl e t o t he ext ent of passi ve
i ncome f r omal l of t he t axpayer s cur r ent - year passi ve
act i vi t i es. Passi ve cr edi t s can be ut i l i zed onl y agai nst r egul ar t ax
at t r i but abl e t o passi ve i ncome. I f passi ve l osses or cr edi t s ar e not
used i n t he cur r ent year , t hey ar e car r i ed over i ndef i ni t el y f or
pot ent i al use i n t he succeedi ng year s t o of f set passi ve i ncome ( or
r egul ar t ax at t r i but abl e t o passi ve i ncome) i n t hose year s.

An act i vi t y s unused ( or suspended) passi ve l osses t hat exi st when a
t axpayer sel l s t he passi ve act i vi t y may be used t o r educe t he gai n f r om
t he sal e, or i ncr ease t he r ecogni zed l oss. Thus, t he suspended passi ve
l osses ar e f ul l y ut i l i zed i n t he year of di sposi t i on. I n cont r ast ,
passi ve cr edi t s ar e al l owed on di sposi t i ons onl y when t her e i s
suf f i ci ent t ax on passi ve i ncome t o absor b t hem.

1385. Li st t he t axpayer s t hat ar e subj ect t o t he passi ve l oss r ul es and
summar i ze t he gener al i mpact of t hese r ul es on t hese t axpayer s.

Cor r ect Answer :
The passi ve l oss r ul es appl y t o i ndi vi dual s, est at es, t r ust s, per sonal
ser vi ce cor por at i ons, and cl osel y hel d C cor por at i ons. Passi ve i ncome
or l oss f r omi nvest ment s hel d by S cor por at i ons or par t ner shi ps f l ows
t hr ough t o t he owner s and t he passi ve l oss r ul es appl y at t he owner
l evel .

For i ndi vi dual s, est at es, t r ust s, and per sonal ser vi ce cor por at i ons,
l osses or expenses gener at ed by passi ve act i vi t i es can be deduct ed onl y
t o t he ext ent of i ncome f r omal l of t he t axpayer s passi ve act i vi t i es.
The appl i cat i on of t he passi ve l oss r ul es t o cl osel y hel d ( nonper sonal
ser vi ce) C cor por at i ons i s sl i ght l y di f f er ent : t hese t axpayer s may use
passi ve l osses t o of f set act i ve i ncome, but not por t f ol i o i ncome. Any
unused passi ve l osses ar e suspended and car r i ed f or war d t o f ut ur e year s
t o of f set passi ve i ncome gener at ed i n t hose year s. Ot her wi se, suspended
l osses may be used when a t axpayer di sposes of hi s or her ent i r e
i nt er est i n an act i vi t y.

1386. What speci al passi ve l oss t r eat ment i s avai l abl e t o r eal est at e
act i vi t i es?

Cor r ect Answer :
The speci al passi ve l oss r ul es avai l abl e t o r eal est at e act i vi t i es
al l ow t he deduct i on of al l or par t of r eal est at e r ent al l osses agai nst
act i ve or por t f ol i o i ncome, even t hough t he act i vi t y ot her wi se i s
def i ned as a passi ve act i vi t y. The speci al r ul es ar e avai l abl e i n t wo
si t uat i ons:

Losses from real estate rental activities are
not treated as passive losses for certain
qualifying real estate professionals.

Qualifying individuals may deduct up to
$25,000 of losses from real estate rental
activities against active and portfolio
income. The potential annual $25,000
deduction is reduced by 50 percent of the
taxpayers AGI in excess of $100,000.

1387. When a t axpayer di sposes of a passi ve act i vi t y by gi f t , what
happens t o any unused passi ve l osses?

Cor r ect Answer :
I n a di sposi t i on of a t axpayer s i nt er est i n a passi ve act i vi t y by gi f t ,
t he suspended l osses ar e added t o t he basi s of t he pr oper t y.

1388. Descr i be t he gener al r ul es t hat l i mi t t he deduct i on of i nvest ment
i nt er est expense.

Cor r ect Answer :
The deduct i on of i nvest ment i nt er est expense i s l i mi t ed t o net
i nvest ment i ncome f or t he year . Any i nvest ment i nt er est expense not
deduct ed i n t he cur r ent year i s car r i ed over f or pot ent i al use i n
succeedi ng year s.

I nvest ment i nt er est expense i s i nt er est i ncur r ed on bor r owed f unds used
t o acqui r e or cont i nue t o hol d i nvest ment asset s. Net i nvest ment
i ncome i s i nvest ment i ncome ( e. g. , i nt er est , annui t i es, r oyal t i es)
r educed by i nvest ment expenses ( i . e. , deduct i bl e expenses di r ect l y
connect ed t o t he pr oduct i on of i nvest ment i ncome) .

1389. I dent i f y t he t ypes of i ncome t hat ar e cl assi f i ed as i nvest ment
i ncome. Di scuss t he f l exi bi l i t y t hat a t axpayer has wi t h r espect t o
cer t ai n t ypes of i ncome t hat may pot ent i al l y be consi der ed i nvest ment
i ncome.

Cor r ect Answer :
I nvest ment i ncome i s gr oss i ncome f r omi nt er est , di vi dends ( i n cer t ai n
cases) , annui t i es, and r oyal t i es not der i ved i n t he or di nar y cour se of
a t r ade or busi ness. Passi ve act i vi t y i ncome and i ncome f r oma r eal
est at e act i vi t y i n whi ch t he t axpayer act i vel y par t i ci pat es ar e not
i ncl uded as i nvest ment i ncome.

The t axpayer may el ect t o t r eat net capi t al gai n and qual i f i ed
di vi dends as i nvest ment i ncome. Net capi t al gai n i ncl udes gai n
at t r i but abl e t o t he di sposi t i ons of pr oper t y pr oduci ng i nvest ment
i ncome or hel d f or i nvest ment pur poses. Qual i f i ed di vi dends ar e
di vi dends t hat ar e t axed at t he same mar gi nal r at e t hat i s appl i cabl e
t o a net capi t al gai n. I f t he t axpayer el ect s t o t r eat net capi t al
gai n and qual i f i ed di vi dend i ncome as i nvest ment i ncome, t hey may not
be t axed usi ng t he pr ef er ent i al capi t al gai ns r at es.

1390. I n deci di ng t o enact t he al t er nat i ve mi ni mumt ax, Congr ess was
concer ned about t he i nequi t y t hat r esul t ed when t axpayer s wi t h
subst ant i al economi c i ncomes coul d avoi d payi ng r egul ar i ncome t ax.

*a. Tr ue
b. Fal se

1391. The AMT cal cul at ed usi ng t he i ndi r ect met hod wi l l pr oduce a
di f f er ent amount t han t he AMT cal cul at ed usi ng t he di r ect met hod.

a. Tr ue
*b. Fal se

1392. AMT adj ust ment s can be posi t i ve or negat i ve, wher eas AMT
pr ef er ences ar e al ways posi t i ve.

*a. Tr ue
b. Fal se

1393. Si nce most t ax pr ef er ences ar e mer el y t i mi ng di f f er ences, t hey
event ual l y wi l l r ever se and net t o zer o.

a. Tr ue
*b. Fal se

1394. Unl ess ci r cul at i on expendi t ur es ar e amor t i zed over a t hr ee- year
per i od f or r egul ar i ncome t ax pur poses, t her e wi l l be an AMT adj ust ment .

*a. Tr ue
b. Fal se

1395. A t axpayer who expenses ci r cul at i on expendi t ur es i n t he year
i ncur r ed f or r egul ar i ncome t ax pur poses wi l l have a posi t i ve AMT
adj ust ment i n t he f ol l owi ng year .

a. Tr ue
*b. Fal se

1396. Assumi ng no phaseout , t he AMT exempt i on amount f or a mar r i ed
t axpayer f i l i ng separ at el y f or 2013 i s mor e t han t he AMT exempt i on
amount f or C cor por at i ons.

*a. Tr ue
b. Fal se

1397. I f t he AMT base i s gr eat er t han $175, 000, t he AMT r at e f or an
i ndi vi dual t axpayer i s t he same as t he AMT r at e f or a C cor por at i on.

a. Tr ue
*b. Fal se

1398. The net capi t al gai n i ncl uded i n an i ndi vi dual t axpayer s AMT
base i s el i gi bl e f or t he benef i ci al al t er nat i ve t ax r at e on net capi t al
gai n. Thi s f avor abl e al t er nat i ve r at e appl i es bot h i n cal cul at i ng t he
r egul ar i ncome t ax and t he AMT.

*a. Tr ue
b. Fal se

1399. Busi ness t ax cr edi t s r educe t he AMT and t he r egul ar i ncome t ax i n
t he same way.

a. Tr ue
*b. Fal se

1400. Pr i or t o t he ef f ect of t ax cr edi t s, Cl ar ence s r egul ar i ncome t ax
l i abi l i t y i s $200, 000 and hi s t ent at i ve AMT i s $180, 000. Cl ar ence has
nonr ef undabl e busi ness t ax cr edi t s of $35, 000. Hi s t ax l i abi l i t y i s
$165, 000.

a. Tr ue
*b. Fal se

1401. I f Abby s al t er nat i ve mi ni mumt axabl e i ncome exceeds her r egul ar
t axabl e i ncome, she wi l l have an al t er nat i ve mi ni mumt ax.

a. Tr ue
*b. Fal se

1402. Madge s t ent at i ve AMT i s $112, 000. Her r egul ar i ncome t ax
l i abi l i t y i s $99, 000. Madge s AMT i s $13, 000.

*a. Tr ue
b. Fal se

1403. The phaseout of t he AMT exempt i on amount f or a t axpayer f i l i ng as
a head of househol d bot h begi ns and ends at a hi gher i ncome l evel t han
i t does f or a si ngl e t axpayer .

a. Tr ue
*b. Fal se

1404. Negat i ve AMT adj ust ment s f or t he cur r ent year caused by t i mi ng
di f f er ences ar e of f set by t he posi t i ve AMT adj ust ment s f or pr i or t ax
year s al so caused by t i mi ng di f f er ences.

*a. Tr ue
b. Fal se

1405. Paul i ncur r ed ci r cul at i on expendi t ur es of $180, 000 i n 2013 and
deduct ed t hat amount f or r egul ar i ncome t ax pur poses. Paul has a
$60, 000 negat i ve AMT adj ust ment f or 2014, 2015, and f or 2016.

a. Tr ue
*b. Fal se

1406. Keosha acqui r es 10- year per sonal pr oper t y t o use i n her busi ness
i n 2013 and t akes t he maxi mumcost r ecover y deduct i on f or r egul ar
i ncome t ax pur poses. As a r esul t of t hi s, Keosha wi l l have a posi t i ve
AMT adj ust ment i n 2013.

*a. Tr ue
b. Fal se

1407. J oel pl aced r eal pr oper t y i n ser vi ce i n 2013 t hat cost $900, 000
and used MACRS f or r egul ar i ncome t ax pur poses. He i s r equi r ed t o make
a posi t i ve adj ust ment f or AMT pur poses i n 2013 f or t he excess of
depr eci at i on cal cul at ed f or r egul ar i ncome t ax pur poses over t he
depr eci at i on cal cul at ed f or AMT pur poses.

a. Tr ue
*b. Fal se

1408. Af t er per sonal pr oper t y i s f ul l y depr eci at ed f or bot h r egul ar
i ncome t ax pur poses and AMT pur poses, t he posi t i ve and negat i ve
adj ust ment s t hat have been made f or AMT pur poses wi l l net t o zer o.

*a. Tr ue
b. Fal se

1409. The r equi r ed adj ust ment f or AMT pur poses f or pol l ut i on cont r ol
f aci l i t i es pl aced i n ser vi ce i n 2013 i s equal t o t he di f f er ence bet ween
t he amor t i zat i on deduct i on al l owed f or r egul ar i ncome t ax pur poses and
t he depr eci at i on deduct i on comput ed under ADS.

a. Tr ue
*b. Fal se

1410. The AMT adj ust ment f or mi ni ng expl or at i on and devel opment cost s
can be avoi ded i f t he t axpayer el ect s t o wr i t e of f t he expendi t ur es i n
t he year i ncur r ed f or r egul ar i ncome t ax pur poses, r at her t han wr i t i ng
of f t he expendi t ur es over a 10- year per i od f or r egul ar i ncome t ax
pur poses.

a. Tr ue
*b. Fal se

1411. Beni t a expensed mi ni ng expl or at i on and devel opment cost s of
$500, 000 i ncur r ed i n 2013. She wi l l be r equi r ed t o make negat i ve AMT
adj ust ment s f or each of t he next t en year s and a posi t i ve AMT
adj ust ment i n t he cur r ent t ax year .

a. Tr ue
*b. Fal se

1412. The AMT adj ust ment f or r esear ch and exper i ment al expendi t ur es can
be avoi ded i f t he t axpayer capi t al i zes t he expendi t ur es and amor t i zes
t hemover a 10- year per i od.

*a. Tr ue
b. Fal se

1413. I ncome f r omsome l ong- t er mcont r act s can be r epor t ed usi ng t he
compl et ed cont r act met hod f or r egul ar i ncome t ax pur poses, but t he
per cent age of compl et i on met hod i s r equi r ed f or AMT pur poses f or al l
l ong- t er mcont r act s.

*a. Tr ue
b. Fal se

1414. Evan i s a cont r act or who const r uct s bot h commer ci al and
r esi dent i al bui l di ngs. Even t hough some of t he cont r act s coul d qual i f y
f or t he use of t he compl et ed cont r act met hod, Evan deci des t o use t he
per cent age of t he compl et i on met hod f or al l of hi s
cont r act s. Unf or t unat el y, t hi s wi l l have t he ef f ect of i ncr easi ng
Evan s AMT adj ust ment associ at ed wi t h l ong- t er mcont r act s f or t he
cur r ent year .

a. Tr ue
*b. Fal se

1415. El mer exer ci ses an i ncent i ve st ock opt i on ( I SO) i n 2013 f or
$6, 000 ( f ai r mar ket val ue of t he st ock on t he exer ci se dat e i s $7, 600) .
I f El mer sel l s t he st ock l at er i n 2013 f or $8, 000, t he AMT posi t i ve
adj ust ment i s $1, 600 and t he AMT negat i ve adj ust ment i s $2, 000.

a. Tr ue
*b. Fal se

1416. I n 2013, Ben exer ci sed an i ncent i ve st ock opt i on ( I SO) , acqui r i ng
st ock wi t h a f ai r mar ket val ue of $190, 000 f or $170, 000. Hi s AMT basi s
f or t he st ock i s $170, 000, hi s r egul ar i ncome t ax basi s f or t he st ock
i s $170, 000, and hi s AMT adj ust ment i s $0 ( $170, 000 $170, 000) .

a. Tr ue
*b. Fal se

1417. The r ecogni zed gai n f or r egul ar i ncome t ax pur poses and t he
r ecogni zed gai n f or AMT pur poses on t he sal e of st ock acqui r ed under an
i ncent i ve st ock opt i on ( I SO) pr ogr amar e al ways t he same because t he
adj ust ed basi s i s t he same.

a. Tr ue
*b. Fal se

1418. The sal e of busi ness pr oper t y mi ght r esul t i n an AMT adj ust ment .

*a. Tr ue
b. Fal se

1419. Cher sol d undevel oped l and t hat or i gi nal l y cost $150, 000 f or
$225, 000. Ther e i s a posi t i ve AMT adj ust ment of $75, 000 associ at ed wi t h
t he sal e of t he l and.

a. Tr ue
*b. Fal se

1420. Because passi ve l osses ar e not deduct i bl e i n comput i ng ei t her
t axabl e i ncome or AMTI , no adj ust ment f or passi ve l osses i s r equi r ed
f or AMT pur poses.

a. Tr ue
*b. Fal se

1421. The deduct i on f or char i t abl e cont r i but i ons i n cal cul at i ng t he
r egul ar i ncome t ax can di f f er f r omt hat i n cal cul at i ng t he AMT because
t he per cent age l i mi t at i ons ( 20%, 30%, and 50%) may be appl i ed t o a
di f f er ent base amount .

a. Tr ue
*b. Fal se

1422. AGI i s used as t he base f or appl i cat i on of per cent age l i mi t at i ons
( i . e. , 20%, 30%, 50%) t hat appl y t o t he char i t abl e cont r i but i on
deduct i on f or r egul ar i ncome t ax pur poses. Modified AGI i s used as t he
base f or appl i cat i on of per cent age l i mi t at i ons t hat appl y t o t he
char i t abl e cont r i but i on deduct i on f or AMT pur poses.

a. Tr ue
*b. Fal se

1423. I f a gambl i ng l oss i t emi zed deduct i on i s per mi t t ed f or r egul ar
i ncome t ax pur poses, t her e wi l l be no AMT adj ust ment associ at ed wi t h
t he gambl i ng l oss.

*a. Tr ue
b. Fal se

1424. Nel l has a per sonal casual t y l oss deduct i on of $14, 500 f or
r egul ar i ncome t ax pur poses. The deduct i on woul d have been $26, 600,
but i t had t o be r educed by $100 and by $12, 000 ( 10% $120, 000
AGI ) . For AMT pur poses, t he casual t y l oss deduct i on al so i s $14, 500.

*a. Tr ue
b. Fal se

1425. I f t he r egul ar i ncome t ax deduct i on f or medi cal expenses i s $0,
under cer t ai n ci r cumst ances t he AMT deduct i on f or medi cal expenses can
be gr eat er t han $0.

a. Tr ue
*b. Fal se

1426. The amount of t he deduct i on f or medi cal expenses under t he
r egul ar i ncome t ax may be di f f er ent t han f or AMT pur poses i f t he
t axpayer i s at l east age 65.

*a. Tr ue
b. Fal se

1427. Ker r i , who had AGI of $120, 000, i t emi zed her deduct i ons i n t he
cur r ent year . She i ncur r ed unr ei mbur sed empl oyee busi ness expenses of
$8, 500. Ker r i must make a posi t i ve AMT adj ust ment of $2, 400 i n
comput i ng AMT.

a. Tr ue
*b. Fal se

1428. I nt er est on a home equi t y l oan cannot be deduct ed f or AMT
pur poses.

a. Tr ue
*b. Fal se

1429. The deduct i on f or per sonal and dependency exempt i ons i s allowed
f or r egul ar i ncome t ax pur poses, but i s disallowed f or AMT
pur poses. Thi s r esul t s i n a posi t i ve AMT adj ust ment .

*a. Tr ue
b. Fal se

1430. Kay had per cent age depl et i on of $119, 000 f or t he cur r ent year f or
r egul ar i ncome t ax pur poses. Cost depl et i on was $60, 000. Her basi s i n
t he pr oper t y was $90, 000 at t he begi nni ng of t he cur r ent year . Kay must
t r eat t he per cent age depl et i on deduct ed i n excess of cost depl et i on, or
$59, 000, as a t ax pr ef er ence i n comput i ng AMTI .

a. Tr ue
*b. Fal se

1431. I f t he t axpayer el ect s t o capi t al i ze i nt angi bl e dr i l l i ng cost s
and t o amor t i ze t hemover a 3- year per i od f or r egul ar i ncome t ax
pur poses, t her e i s no adj ust ment or pr ef er ence f or AMT pur poses.

a. Tr ue
*b. Fal se

1432. I nt er est i ncome on pr i vat e act i vi t y bonds i ssued bef or e 2009 and
af t er 2010, r educed by expenses i ncur r ed i n car r yi ng t he bonds, i s a
t ax pr ef er ence i t emt hat i s included i n comput i ng AMTI .

*a. Tr ue
b. Fal se

1433. J ackson sel l s qual i f yi ng smal l busi ness st ock f or $125, 000
( adj ust ed basi s of $105, 000) i n 2013. I n cal cul at i ng gr oss i ncome f or
r egul ar i ncome t ax pur poses, he excl udes al l of hi s r eal i zed gai n of
$20, 000. The $20, 000 excl usi on i s a t ax pr ef er ence i n cal cul at i ng
J ackson s AMTI .

a. Tr ue
*b. Fal se

1434. For i ndi vi dual t axpayer s, t he AMT cr edi t i s appl i cabl e f or t he
AMT t hat r esul t s f r omt i mi ng di f f er ences, but i t i s not avai l abl e f or
t he AMT t hat r esul t s f r omt he adj ust ment f or i t emi zed deduct i ons or
excl usi on pr ef er ences.

*a. Tr ue
b. Fal se

1435. The cor por at e AMT no l onger appl i es.

a. Tr ue
*b. Fal se

1436. The AMT exempt i on f or a C cor por at i on i s $50, 000 r educed by 25%
of t he amount by whi ch AMTI exceeds $150, 000.

a. Tr ue
*b. Fal se

1437. The AMT exempt i on f or a cor por at i on wi t h $225, 000 of AMTI i s
$18, 750.

a. Tr ue
*b. Fal se

1438. Cer t ai n adj ust ment s appl y i n cal cul at i ng t he cor por at e AMT t hat
do not appl y i n cal cul at i ng t he noncor por at e AMT and cer t ai n
adj ust ment s appl y i n cal cul at i ng t he noncor por at e AMT t hat do not appl y
i n cal cul at i ng t he cor por at e AMT.

*a. Tr ue
b. Fal se

1439. C cor por at i ons ar e subj ect t o a posi t i ve AMT adj ust ment equal t o
75%of t he excess of ACE over AMTI bef or e t he ACE adj ust ment .

*a. Tr ue
b. Fal se

1440. Al l of a C cor por at i on s AMT i s avai l abl e f or car r yover as a
mi ni mumt ax cr edi t r egar dl ess of whet her t he adj ust ment s and
pr ef er ences or i gi nat e f r omt i mi ng di f f er ences or AMT excl usi ons.

*a. Tr ue
b. Fal se

1441. Whi ch of t he f ol l owi ng st at ement s i s incorrect?

a. The AMT cal cul at ed under t he di r ect and i ndi r ect met hods
pr oduces t he same amount .
b. The AMT cal cul at ed under t he di r ect and t he i ndi r ect met hods
pr oduces di f f er ent amount s.
c. The t ax f or ms use t he di r ect met hod t o cal cul at e t he AMT.
*d. Onl y b. and c. ar e i ncor r ect .
e. a. , b. , and c. ar e i ncor r ect .

1442. Ashby, who i s si ngl e and age 30, pr ovi des you wi t h t he f ol l owi ng
i nf or mat i on f r omhi s f i nanci al r ecor ds f or 2013.

Regular income tax
liability
$ 47,22
8
AMT positive
adjustments
40,000
AMT preferences 20,000
Taxable income 195,000

Calculate his AMT exemption for 2013.

a. $0.
b. $23, 450.
*c. $17, 000.
d. $51, 900.

1443. Beul a, who i s a head of househol d and age 40, pr ovi des you wi t h
t he f ol l owi ng i nf or mat i on f r omher f i nanci al r ecor ds f or 2013.

Regular income tax liability $ 35,77
6
AMT positive adjustments 33,000

Calculate her AMTI for 2013.

a. $0.
b. $171, 300.
c. $195, 925.
*d. $218, 000.

1444. Vi cki owns and oper at es a news agency ( as a sol e
pr opr i et or shi p) . Dur i ng 2013, she i ncur r ed expenses of $24, 000 t o
i ncr ease ci r cul at i on of newspaper s and magazi nes t hat her agency
di st r i but es. For r egul ar i ncome t ax pur poses, she el ect ed t o expense
t he $24, 000 i n 2013. I n addi t i on, Vi cki i ncur r ed $15, 000 i n
ci r cul at i on expendi t ur es i n 2014 and agai n el ect ed expense t r eat ment .
What AMT adj ust ment s wi l l be r equi r ed i n 2013 and 2014 as a r esul t of
t he ci r cul at i on expendi t ur es?

*a. $16, 000 posi t i ve i n 2013, $2, 000 posi t i ve i n 2014.
b. $16, 000 negat i ve i n 2013, $2, 000 posi t i ve i n 2014.
c. $16, 000 negat i ve i n 2013, $10, 000 posi t i ve i n 2014.
d. $16, 000 posi t i ve i n 2013, $10, 000 posi t i ve i n 2014.

1445. Whi ch of t he f ol l owi ng st at ement s i s cor r ect ?

a. I f t he t ent at i ve AMT i s $10, 000 and t he r egul ar i ncome t ax
l i abi l i t y i s $12, 000, t he AMT i s $2, 000.
b. I f t he t ent at i ve AMT i s $12, 000 and t he r egul ar i ncome t ax
c. I f t he t ent at i ve AMT i s $10, 000 and t he r egul ar i ncome t ax
l i abi l i t y i s $12, 000, t he AMT i s a negat i ve $2, 000.
*d. I f t he t ent at i ve AMT i s $12, 000, and t he r egul ar i ncome t ax

1446. Whi ch of t he f ol l owi ng st at ement s i s correct?

a. I f t he t ent at i ve mi ni mumt ax exceeds t he r egul ar i ncome t ax
l i abi l i t y, t he AMT i s $0.
*b. The exempt i on amount decr eases as AMTI i ncr eases.
c. The AMT t ax r at e f or an i ndi vi dual t axpayer can be as hi gh as
26%.
d. Onl y a. and c. ar e cor r ect .

1447. For r egul ar i ncome t ax pur poses, Yol anda, who i s si ngl e, i s i n
t he 35%t ax br acket . Her AMT base i s $220, 000. Her t ent at i ve AMT i s:

a. $57, 200.
*b. $58, 100.
c. $61, 600.
d. $77, 000.

1448. Ashl y i s abl e t o r educe her r egul ar i ncome t ax l i abi l i t y f r om
$47, 000 t o $43, 500 as t he r esul t of t he al t er nat i ve t ax on net capi t al
gai n. Ashl y s t ent at i ve AMT i s $51, 000.

*a. Ashl y s t ax l i abi l i t y i s r educed by $3, 500 as t he r esul t of
t he al t er nat i ve t ax cal cul at i on on net capi t al gai n.
b. Ashl y s AMT i s i ncr eased by $3, 500 as t he r esul t of t he
al t er nat i ve t ax cal cul at i on on net capi t al gai n.
c. Ashl y s t ax l i abi l i t y i s $43, 500.
d. Ashl y s t ax l i abi l i t y i s $47, 000.

1449. Pr i or t o t he ef f ect of t he t ax cr edi t s, J ust i n s r egul ar i ncome
t ax l i abi l i t y i s $200, 000 and hi s t ent at i ve AMT i s $195, 000. J ust i n has
t he f ol l owi ng cr edi t s:

Child tax credit $1,000
Adoption expenses credit 5,000

Calculate Justins tax liability after credits.

a. $190, 000.
*b. $194, 000.
c. $195, 000.
d. $200, 000.

1450. Pr i or t o t he ef f ect of t ax cr edi t s, Euni ce s r egul ar i ncome t ax
l i abi l i t y i s $325, 000 and her t ent at i ve AMT i s $312, 000. Euni ce has
gener al busi ness cr edi t s avai l abl e of $20, 000. Cal cul at e Euni ce s t ax
l i abi l i t y af t er t ax cr edi t s.

a. $0.
b. $305, 000.
*c. $312, 000.
d. $325, 000.

1451. Whi ch of t he f ol l owi ng nor mal l y pr oduces posi t i ve AMT adj ust ment s?

a. Real pr oper t y t axes deduct i on.
b. Per sonal exempt i on deduct i on.
c. Char i t abl e cont r i but i on deduct i on.
*d. Onl y a. and b. ar e cor r ect .

1452. Dal e owns and oper at es Dal e s Empor i umas a sol e pr opr i et or shi p.
On J anuar y 30, 1998, Dal e s Empor i umacqui r ed a war ehouse f or $100, 000.
For r egul ar i ncome t ax pur poses i n 2013, depr eci at i on was deduct ed
under MACRS usi ng a r at e of 2. 564%. Det er mi ne t he AMT adj ust ment f or
depr eci at i on and i ndi cat e whet her i t i s posi t i ve or negat i ve.

a. $64 negat i ve adj ust ment .
*b. $64 posi t i ve adj ust ment .
c. No adj ust ment i s r equi r ed because Dal e s Empor i umused t he
Al t er nat i ve Depr eci at i on Syst em( ADS) t o comput e depr eci at i on on
t he pr oper t y f or AMT pur poses.
d. No adj ust ment i s r equi r ed because Dal e s Empor i umused MACRS
t o comput e t he depr eci at i on of t he pr oper t y f or r egul ar i ncome
t ax pur poses.

1453. Omar acqui r es used 7- year per sonal pr oper t y f or $100, 000 t o use
i n hi s busi ness i n Febr uar y 2013. Omar does not el ect 179 expensi ng,
but does t ake t he maxi mumr egul ar cost r ecover y deduct i on. He el ect s
not t o t ake addi t i onal f i r st - year depr eci at i on. As a r esul t , Omar wi l l
have a posi t i ve AMT adj ust ment i n 2013 of what amount ?

a. $0.
*b. $3, 580.
c. $10, 710.
d. $14, 290.

1454. I n 2013, Bl ake i ncur s $270, 000 of mi ni ng expl or at i on expendi t ur es,
and deduct s t he ent i r e amount f or r egul ar i ncome t ax pur poses. Whi ch of
t he f ol l owi ng st at ement s i s correct?

a. For AMT pur poses, Bl ake wi l l have a posi t i ve adj ust ment of
$243, 000 i n 2013.
b. Bl ake wi l l have a negat i ve AMT adj ust ment of $27, 000 i n 2018.
c. Over a 10- year per i od, posi t i ve and negat i ve adj ust ment s wi l l
net t o zer o.
*e. a. , b. , and c. ar e cor r ect .

1455. Wal l ace owns a const r uct i on company t hat bui l ds bot h commer ci al
and r esi dent i al bui l di ngs. He cont r act s t o bui l d a r esi dent i al
bui l di ng f or $800, 000 f or whi ch he i s el i gi bl e t o use t he compl et ed
cont r act met hod of account i ng. I n t he cur r ent year f or r egul ar i ncome
t ax pur poses, Wal l ace does not r ecogni ze any i ncome on t he
cont r act . Under t he per cent age of compl et e met hod, t he i ncome
r ecogni zed under t he cont r act woul d have been $60, 000. Wal l ace s AMT
adj ust ment i s:

a. $0.
b. $60, 000 negat i ve adj ust ment .
*c. $60, 000 posi t i ve adj ust ment .
d. $800, 000 posi t i ve adj ust ment .

1456. I n 2005, Col l i es exer ci sed an i ncent i ve st ock opt i on ( I SO) ,
acqui r i ng 150 shar es of st ock at an opt i on pr i ce of $75 per shar e ( f ai r
mar ket val ue at t he dat e of exer ci se was $130 per shar e) . I n 2013, t he
r i ght s i n t he st ock become f r eel y t r ansf er abl e ( f ai r mar ket val ue i s
st i l l $130 per shar e) . Whi ch of t he f ol l owi ng st at ement s i s incorrect?

a. Col l i s has no AMT adj ust ment f r omt he I SO i n 2011.
b. Col l i s has no t axabl e i ncome f r omt he I SO i n 2011.
c. Col l i s has an AMT basi s of $19, 500 i n t he st ock.
d. Col l i s has an i ncome t ax basi s of $11, 250 i n t he st ock.
*e. Al l of t he above ar e cor r ect .

1457. Mar vi n, t he vi ce pr esi dent of Lavender , I nc. , exer ci ses st ock
opt i ons f or 100 shar es of st ock i n Mar ch 2013. The st ock opt i ons ar e
i ncent i ve st ock opt i ons ( I SOs) . Thei r exer ci se pr i ce i s $20 and t he
f ai r mar ket val ue on t he dat e of exer ci se i s $28. The opt i ons wer e
gr ant ed i n Mar ch 2010 and al l r est r i ct i ons on t he f r ee t r ansf er abi l i t y
had l apsed by t he exer ci se dat e.

a. I f Mar vi n sel l s t he st ock i n December 2013 f or $3, 000, hi s AMT
adj ust ment i n 2013 i s a posi t i ve adj ust ment of $800.
b. I f Mar vi n sel l s t he st ock i n December 2014 f or $3, 000, hi s AMT
adj ust ment i n 2014 i s $0.
c. I f Mar vi n sel l s t he st ock i n December 2013 f or $3, 000, hi s AMT
adj ust ment i n 2013 i s a negat i ve adj ust ment of $800.
d. I f Mar vi n sel l s t he st ock i n December 2014 f or $3, 000, hi s AMT
adj ust ment i n 2014 i s a negat i ve adj ust ment of $1, 000.

1458. Fact or s t hat can cause t he adj ust ed basi s f or AMT pur poses t o be
di f f er ent f r omt he adj ust ed basi s f or r egul ar i ncome t ax pur poses
i ncl ude t he f ol l owi ng:

a. A di f f er ent amount of depr eci at i on ( cost r ecover y) has been
deduct ed f or AMT pur poses and r egul ar i ncome t ax pur poses.
b. The spr ead on an i ncent i ve st ock opt i on ( I SO) i s r ecogni zed
f or AMT pur poses, but i s not r ecogni zed f or r egul ar i ncome t ax
pur poses.
c. A di f f er ent amount has been deduct ed f or ci r cul at i on
expendi t ur es f or AMT pur poses and f or r egul ar i ncome t ax pur poses.
d. Onl y a. and b.
*e. a. , b. , and c.

1459. I n 2013, Gl enn had a $108, 000 l oss on a passi ve act i vi t y. None of
t he l oss i s at t r i but abl e t o AMT adj ust ment s or pr ef er ences. She has no
ot her passi ve act i vi t i es. Whi ch of t he f ol l owi ng st at ement s i s cor r ect ?

a. I n 2013, Gl enn can deduct $108, 000 f or r egul ar i ncome t ax
pur poses and f or AMT pur poses.
b. Gl enn wi l l have a $108, 000 t ax pr ef er ence i n 2013 as a r esul t
of t he passi ve act i vi t y.
*c. For r egul ar i ncome t ax pur poses, none of t he l oss i s al l owed
i n 2013.
d. I n 2013, Gl enn wi l l have a posi t i ve adj ust ment of $25, 000 as a
r esul t of t he passi ve l oss.

1460. Akeem, who does not i t emi ze, i ncur r ed a net oper at i ng l oss ( NOL)
of $50, 000 i n 2013. Hi s deduct i ons i n 2013 i ncl uded AMT t ax pr ef er ence
i t ems of $20, 000, and he had no AMT adj ust ment s. Assumi ng t he NOL i s
not car r i ed back, what i s Akeem s ATNOLD car r yover t o 2014?

a. $50, 000.
*b. $30, 000.
c. $20, 000.
d. $40, 000.

1461. Vi nny s AGI i s $250, 000. He cont r i but ed $200, 000 i n cash t o t he
Boy Scout s, a publ i c char i t y. What i s Vi nny s char i t abl e cont r i but i on
deduct i on f or AMT pur poses?

a. $0.
b. $50, 000.
c. $75, 000.
*d. $125, 000.

1462. Mi t ch, who i s si ngl e and age 66 and has no dependent s, had AGI of
$100, 000 i n 2013. Hi s pot ent i al i t emi zed deduct i ons wer e as f ol l ows:

Medical expenses (before percentage
limitation)
$15,000
Mortgage (qualified housing and
residence) interest
9,000
Cash contributions to various
charities
4,000
Unreimbursed employee expenses
(before percentage limitation)
4,300

What is the amount of Mitchs AMT adjustment for itemized deductions for
2013?

*a. $14, 800.
b. $16, 800.
c. $19, 300.
d. $25, 800.

1463. Whi ch of t he f ol l owi ng i t emi zed deduct i ons def i ni t el y wi l l be t he
same amount f or t he r egul ar i ncome t ax and t he AMT and t hus r esul t i n
no AMT adj ust ment i n 2013?

a. Real pr oper t y t axes.
b. Casual t y l osses.
c. Char i t abl e cont r i but i ons.
*d. Onl y b. and c.
e. a. , b. , and c.

1464. Ted, who i s si ngl e, owns a per sonal r esi dence i n t he ci t y. He
al so owns a condo near t he ocean. He uses t he condo as a vacat i on home.
I n Mar ch 2013, he bor r owed $50, 000 on a home equi t y l oan and used t he
pr oceeds t o acqui r e a l uxur y aut omobi l e. Dur i ng 2013, he pai d t he
f ol l owi ng amount s of i nt er est :

on his personal residence $15,500
on the condo 6,200
on the home equity loan 4,800
on credit card obligations 1,700

What amount, if any, must Ted recognize as an AMT adjustment in 2013?

a. $0.
*b. $4, 800.
c. $6, 200.
d. $11, 000.


*a. The deduct i on f or per sonal and dependency exempt i ons i s not
per mi t t ed i n cal cul at i ng t he AMT. Ther ef or e, i n conver t i ng
r egul ar t axabl e i ncome t o AMTI , a posi t i ve adj ust ment i s r equi r ed.
b. To t he ext ent t hat i t emi zed deduct i ons exceed t he st andar d
deduct i on f or r egul ar i ncome t ax pur poses, a posi t i ve AMT
adj ust ment i s r equi r ed i n conver t i ng r egul ar t axabl e i ncome t o
AMTI .
c. The char i t abl e cont r i but i on deduct i on f or AMT pur poses and f or
r egul ar i ncome t ax pur poses can be di f f er ent . I f t hi s occur s, a
posi t i ve AMT adj ust ment i s r equi r ed f or t he amount of t he
di f f er ence.

1466. Eul a owns a mi ner al pr oper t y t hat had a basi s of $23, 000 at t he
begi nni ng of t he year . Cost depl et i on i s $19, 000. The pr oper t y
qual i f i es f or a 15%depl et i on r at e. Gr oss i ncome f r omt he pr oper t y was
$200, 000 and net i ncome bef or e t he per cent age depl et i on deduct i on was
$50, 000. What i s Eul a s t ax pr ef er ence f or excess depl et i on?

a. $15, 000.
b. $23, 000.
c. $25, 000.
d. $0.

1467. Whi ch of t he f ol l owi ng can pr oduce an AMT pr ef er ence r at her t han
an AMT adj ust ment ?

a. I nt er est on pr i vat e act i vi t y bonds i ssued i n 2013.
b. Per cent age depl et i on.
c. I ncent i ve st ock opt i ons ( I SOs) .
*d. Onl y a. and b.
e. a. , b. , and c.

1468. Cel i a and Amos, who ar e mar r i ed f i l i ng j oi nt l y, have one
dependent and do not i t emi ze deduct i ons. They have t axabl e i ncome of
$82, 000 and t ax pr ef er ences of $53, 000 i n 2013. What i s t hei r AMT base
f or 2013?

a. $0.
*b. $79, 350.
c. $94, 450.
d. $158, 900.

1469. Robi n, who i s a head of househol d and age 42, pr ovi des you wi t h
t he f ol l owi ng i nf or mat i on f r omhi s f i nanci al r ecor ds f or 2013.

Regular income tax liability $ 42,53
9
AMT positive adjustments 30,000

Calculate his AMT for 2013.

*a. $13, 601.
b. $17, 825.
c. $42, 539.
d. $62, 300.

1470. Kay, who i s si ngl e, had t axabl e i ncome of $0 i n 2013. She has
posi t i ve t i mi ng adj ust ment s of $206, 300 and excl usi on i t ems of $100, 000
f or t he year . What i s t he amount of her al t er nat i ve mi ni mumt ax cr edi t
f or car r yover t o 2014?

a. $80, 500.
*b. $68, 861.
c. $20, 930.
d. $13, 403.

1471. Sand Cor por at i on, a cal endar year t axpayer , has al t er nat i ve
mi ni mumt axabl e i ncome [ bef or e adj ust ment f or adj ust ed cur r ent ear ni ngs
( ACE) ] of $900, 000 f or 2013. I f Sand s ( ACE) i s $975, 000, i t s t ent at i ve
mi ni mumt ax f or 2013 i s:

a. $0.
b. $56, 250.
c. $180, 000.
*d. $191, 250.

1472. Mauve, I nc. , has t he f ol l owi ng f or 2012, 2013, and 2014 and no
pr i or ACE adj ust ment s.

2012 2013 2014
Pre-adjusted AMTI $12,000 $15,000 $8,000
Adjusted current
earnings
10,00
0
17,0
00
5,00
0

What is the ACE adjustment for each of the three
years?

2012 2013 2014

*a. $0 $1, 500 ( $1, 500)
b. ( $2, 000) $2, 000 ( $3, 000)
c. $2, 000 ( $2, 000) $3, 000
d. ( $1, 500) $1, 500 $2, 250
e. $1, 500 ( $1, 500) ( $2, 250)


a. A C cor por at i on cl assi f i ed as a smal l cor por at i on i s el i gi bl e
t o have t he AMT cal cul at ed usi ng t he AMT pr ovi si ons f or
i ndi vi dual s.
*b. A C cor por at i on cl assi f i ed as a smal l cor por at i on i s not
subj ect t o t he AMT.
c. A C cor por at i on cl assi f i ed as a smal l cor por at i on i s subj ect
t o t he AMT onl y on i t s adj ust ed cur r ent ear ni ngs.
d. A C cor por at i on cl assi f i ed as a smal l cor por at i on i s el i gi bl e
t o use t he 20%/ 15%/ 0%t ax r at e on net capi t al gai n and qual i f i ed
di vi dends r at her t han t he r egul ar t ax r at es appl i cabl e t o ot her C
cor por at i ons.

1474. Use t he f ol l owi ng dat a t o cal cul at e J ol ene s AMTI .

Taxabl e i ncome $190, 000
AMT adj ust ment s
Posi t i ve 70, 000
Negat i ve ( 14, 000)
Tax pr ef er ences 25, 000

Cor r ect Answer :
J ol ene s AMTI i s cal cul at ed as f ol l ows:

Plus: Positive AMT
adjustments
70,000
Minus: Negative AMT
adjustments
(14,000)
Plus: Tax preferences 25,000
AMTI $271,000

1475. Use t he f ol l owi ng sel ect ed dat a t o cal cul at e Devon s t axabl e
i ncome.

Tax pr ef er ences $ 45, 00
0
Posi t i ve AMT adj ust ment s 52, 000
Negat i ve AMT adj ust ment s 15, 000
AMTI 290, 000

Cor r ect Answer :
AMTI $290,000
Plus: Negative AMT
adjustments
15,000
Minus: Positive AMT
adjustments
(52,000)
Minus: Tax preferences (45,000)
Equals: Taxable income $208,000

1476. Ar l ene, who i s si ngl e, has t axabl e i ncome f or 2013 of $112, 000.
Cal cul at e her al t er nat i ve mi ni mumt ax, i f any, gi ven t he f ol l owi ng
addi t i onal i nf or mat i on.

AMT adj ust ment s
Posi t i ve $22, 000
Negat i ve ( 25, 000)

Cor r ect Answer :
Ar l ene s AMT i s cal cul at ed as f ol l ows:

Plus: Positive AMT
adjustments
22,000
Minus: Negative AMT
adjustments
(25,000)
AMTI $155,000
Minus: Exemption [$51,900
25%($155,000
$115,400)]
(42,000)
Alternative minimum tax base $113,000
Times: 26% rate 26%
Tentative AMT $ 29,380
Minus: Regular income tax
liability (Note 1)
(24,653)
AMT $ 4,72
7

Note 1

Tax on $87,850 $17,891
28% $24,150 ($112,000
$87,850)
6,76
2
$24,653

1477. Car ol i ne and Cl i nt ar e mar r i ed, have no dependent s, and f i l e a
j oi nt r et ur n i n 2013. Use t he f ol l owi ng sel ect ed dat a t o cal cul at e
t hei r Feder al i ncome t ax l i abi l i t y.

AMTI $285, 000
Regul ar i ncome t ax l i abi l i t y 42, 066
AMT t ax pr ef er ences 90, 000

Cor r ect Answer :
The AMT i s cal cul at ed as f ol l ows:

AMTI $285,000
AMT exemption [$80,800
25%($285,000 $153,900)]
(48,0
25)
AMT base $236,975

$175,000 26% = $ 45,500
$61,975 28% = 17,3
53
Tentative AMT $ 62,853
Regular income tax liability (42,06
6)
AMT $ 20,787

Note that the AMT preferences of $90,000 are already included in AMTI. The
Federal income tax liability is the summation of the regular income tax
liability and the AMT ($42,066 + $20,787 = $62,853).

1478. Bi anca and Bar ney have t he f ol l owi ng f or 2013:

Regul ar i ncome t ax bef or e
cr edi t s
$32, 000
Tent at i ve AMT bef or e
cr edi t s
45, 000

a. Cal cul at e Bi anca and Bar ney s AMT i f t hey
qual i f y f or t he adopt i on expense cr edi t of
$11, 000.

b. Cal cul at e Bi anca and Bar ney s AMT i f t hey
qual i f y f or t he adopt i on expense cr edi t of
$12, 970.

Cor r ect Answer :
a. In addition to the foreign tax credit,
nonrefundable personal credits (e.g., child
tax credit, adoption expense credit) in 2013
may offset both the regular income tax and
the AMT. Thus, Bianca and Barneys AMT is
calculated as follows:

Tentative AMT before credits $45,000
Less: Regular income tax
before credits
(32,500)
AMT before adoption expense
credit
$12,500
Less: Adoption expense
credit
(11,000)
AMT $ 1,500

b. Tentative AMT before
credits
$45,000
Less: Regular income tax
before credits
(32,500)
AMT before adoption
expense credit
$12,500
Less: Adoption expense
credit
(12,500)
AMT $
0

Only $12,500 of the adoption expense credit of $12,970 is needed to reduce
the AMT to $0.

1479. Gunt er , who i s di vor ced, has t he f ol l owi ng i t ems f or 2013.

Sal ar y $60, 000
Gai n on sal e of l and hel d
ni ne mont hs ( r egul ar i ncome
t ax basi s i s
$4, 000 l ess t han AMT
basi s)
10, 000
Tr adi t i onal I RA cont r i but i on 5, 000
Al i mony pai d 9, 000
I t emi zed deduct i ons:
Char i t abl e cont r i but i ons $3, 000
Home mor t gage i nt er est on
hi s pr i nci pal r esi dence
4, 000
St at e i ncome t axes 2, 000 9, 000

Cal cul at e Gunt er s AMTI f or 2013.

Cor r ect Answer :
Gunt er s r egul ar i ncome t ax t axabl e i ncome i s cal cul at ed as f ol l ows:

Gr oss i ncome:
Salary $60,000
Gain on sale of land 10,000 $70,000

Less: Deductions for AGI
Traditional IRA
contribution
$ 5,000
Alimony 9,00
0
(14,000)
AGI $56,000

Less: Deductions from AGI
Itemized deductions
Charitable
contributions
$ 3,000
Home mortgage
interest
4,000
0
(9,000)
Personal exemption
deduction (1
$3,900)
(3,9
00)

His AMTI is calculated as follows:

Plus: Positive AMT
adjustments:

Disallowed state
income taxes
$ 2,000
Disallowed
personal exemption
deduction
3,90
0
5,900
Minus: Negative AMT
adjustment:

Smaller gain on
sale of land
(4,000)
AMTI $60,000

1480. Tad and Audr i a, who ar e mar r i ed f i l i ng a j oi nt r et ur n, have AMTI
of $256, 000 f or 2013. Cal cul at e t hei r AMT exempt i on.

Cor r ect Answer :
Statutory amount $80,800
Less phaseout: 25%($256,000
$153,900)
(25,525)
AMTI exemption $55,275

1481. I n 2013, Li nda i ncur s ci r cul at i on expenses of $240, 000 whi ch she
deduct s i n cal cul at i ng t axabl e i ncome.

a. Cal cul at e Li nda s AMT adj ust ment f or
ci r cul at i on expenses f or 2013, 2014, 2015,
and 2016.

b. Advi se Li nda on how she coul d r educe or
el i mi nat e t he AMT adj ust ment i n 2013.

Cor r ect Answer :
a. Linda deducted the $240,000 circulation
expenses in 2013 for regular income tax
purposes. For AMT purposes, the $240,000
must be amortized over a 3-year period
($80,000 per year). So Linda has a positive
AMT adjustment of $160,000 ($240,000
$80,000) in 2013. In 2014 and 2015, she has
a negative AMT adjustment of $80,000 each
year. There is no regular income tax or AMT
effect in 2016.

b. Louise could elect to amortize the
circulation expenses of $240,000 over a 3-
year period ($80,000 each year). In this
case, the deduction for regular income tax
and AMT purposes would be the same and no
AMT adjustment is necessary.

1482. I n J une, Del l a pur chases a bui l di ng f or $800, 000 t o use i n her
busi ness as an of f i ce bui l di ng. Del l a uses t he depr eci at i on met hod
whi ch wi l l pr ovi de her wi t h t he gr eat est deduct i on f or r egul ar i ncome
t ax pur poses.

a. Cal cul at e t he AMT adj ust ment f or
depr eci at i on i n 2013 i f Del l a pur chased t he
bui l di ng i n 2013.

b. Cal cul at e t he AMT pr ef er ence f or
depr eci at i on i n 2013 i f Del l a pur chased t he
bui l di ng i n 1986.

Cor r ect Answer :
a. $0. For real property placed in service after
1998, the MACRS recovery periods are used in
calculating the AMT depreciation. Thus, the
depreciation deduction [$11,128 ($800,000
1.391%)] is the same for both regular income
tax and AMT purposes.

b. For real property placed in service before
1987, the AMT preference is the excess of
accelerated over straight-line depreciation.
However, since the building is fully
depreciated at the end of the 20th year for
both regular income tax and AMT purposes, the
AMT preference is $0. The 28th year of the
buildings life is 2013.

1483. Lavender , I nc. , i ncur s r esear ch and exper i ment al expendi t ur es of
$210, 000 i n 2013. Det er mi ne t he amount of t he AMT adj ust ment f or 2013
and f or 2014 i f f or r egul ar i ncome t ax pur poses:

a. Lavender expenses t he r esear ch and
exper i ment al expenses.

b. Lavender capi t al i zes t he r esear ch and
exper i ment al expenses and el ect s t o amor t i ze
t hemover a 10- year per i od.

Cor r ect Answer :
a. The expense for regular income tax purposes is
$210,000 in 2013 and $0 in 2014. For AMT
purposes, the expense is $21,000 ($210,000/10)
for 2013 and 2014. The AMT adjustment is:
2013 2014
Expense for regular
income tax purposes
$210,000 $ 0

Expense for AMT
purposes
(21,000) (21,000)
AMT adjustment $189,000 ($21,000)

b. The amount of the AMT adjustment is $0 for
both 2012 and 2013. No adjustment is needed
as the amount of the expense for regular
income tax and for AMT purposes in both 2013
and 2014 is the same.

1484. I n May 2012, Swal l ow, I nc. , i ssues opt i ons t o Kar r i e, a cor por at e
of f i cer , t o pur chase 100 shar es of Swal l ow st ock under an I SO pl an. At
t he dat e t he st ock opt i ons ar e i ssued, t he f ai r mar ket val ue of t he
st ock i s $1, 000 per shar e and t he opt i on pr i ce i s $1, 200 per shar e. The
st ock becomes f r eel y t r ansf er abl e i n 2013. Kar r i e exer ci ses t he opt i ons
i n November 2012 when t he st ock i s sel l i ng f or $1, 500 per shar e. She
sel l s t he st ock i n December 2014 f or $1, 800 per shar e.

a. Det er mi ne t he amount of t he AMT adj ust ment
f or 2012.

b. Det er mi ne t he amount of t he AMT adj ust ment
f or 2013.

c. Det er mi ne Kar r i e s r ecogni zed gai n f or
r egul ar i ncome t ax pur poses and f or AMT
pur poses i n 2014 on t he sal e of t he st ock.

d. Det er mi ne t he amount of t he AMT adj ust ment
f or 2014.

Cor r ect Answer :
a. For regular income tax purposes, Karrie does
not have income upon the exercise of the ISO
in November 2012. However, the $30,000
excess of the fair market value of the stock
over the exercise price ($150,000
$120,000 = $30,000) is a positive adjustment
for AMT purposes in the year the stock
becomes freely transferable (2013).
Therefore, there is no AMT adjustment in
2012.

b. A positive AMT adjustment of $30,000
($150,000 $120,000) occurs in 2013 when
the stock becomes freely transferable.

c. Regular
Income Tax AMT
Amount realized $180,000 $180,000
Adjusted basis (120,000)(150,000
)
Realized and recognized
gain
$ 60,000 $ 30,0
00

d. The AMT adjustment in 2014 is the excess of
the recognized gain for regular income tax
purposes over the recognized gain for AMT
purposes ($60,000 $30,000 = $30,000). The
adjustment is a negative adjustment.

1485. Fr eder i ck sel l s l and and bui l di ng whose adj ust ed basi s f or
r egul ar i ncome t ax pur poses i s $345, 000 and f or AMT pur poses i s
$380, 000. The sal es pr oceeds ar e $850, 000. Det er mi ne t he ef f ect on:

a. Taxabl e i ncome.

b. AMTI .

Cor r ect Answer :
Recognized gain $505,000

The recognized gain increases taxable income
by $505,000.

b. Amount realized $850,000

Using the direct method to calculate AMTI, the recognized gain increases
AMTI by $470,000. Using the indirect method, the recognized gain using the
regular income tax adjusted basis increases taxable income by $505,000
which would in turn increase AMTI by the same amount. However, a negative
AMT adjustment of $35,000 is made in calculating AMTI for the difference
between the recognized gain for regular income tax purposes of $505,000 and
the recognized gain for AMT purposes of $470,000.

1486. Ci ndy, who i s si ngl e and age 66, has no dependent s and has
adj ust ed gr oss i ncome of $50, 000 i n 2013. Her pot ent i al i t emi zed
deduct i ons ar e as f ol l ows:

Medi cal expenses ( bef or e
per cent age l i mi t at i on)
$10, 000
Real est at e t axes 4, 000
Mor t gage ( qual i f i ed housi ng and
r esi dence) i nt er est
5, 500
Unr ei mbur sed empl oyee expenses
( bef or e per cent age l i mi t at i on)
2, 600

What i s t he amount of Ci ndy s AMT adj ust ment f or i t emi zed deduct i ons
f or 2013?

Cor r ect Answer :
Ci ndy s adj ust ment s f or i t emi zed deduct i ons ar e as f ol l ows:

Medical expenses (Note 1) $1,250
Unreimbursed employee
expenses (Note 2)
1,600
Mortgage interest (Note 3)
0
Total $9,350

Notes

(1) Medical expenses:
For income tax [$10,000
(7.5% $50,000 AGI)]
$6,250
For AMT [$10,000 (10%
$50,000 AGI)]
(5,000)
Positive adjustment $1,250

(2) Unreimbursed employee
expenses: $2,600 (2%
$50,000 AGI)
$1,600

(3) The mortgage interest of $5,500 is the
same (i.e., qualified housing and
residence interest) in this case for AMT
purposes and regular income tax purposes.

1487. I n cal cul at i ng her 2013 t axabl e i ncome, Rhonda, who i s age 45,
deduct s t he f ol l owi ng i t emi zed deduct i ons.

10%( $60, 000) ]
$ 500
Pr oper t y t axes 3, 000
Home mor t gage i nt er est on
pr i nci pal r esi dence
5, 000
Mi scel l aneous i t emi zed
deduct i ons [ $2, 000
2%( $60, 000) ]
800
Tot al i t emi zed deduct i ons
f or r egul ar i ncome t ax
$15, 300

Cal cul at e Rhonda s AMT adj ust ment f or i t emi zed deduct i ons.

Cor r ect Answer :
Rhonda s al l owed i t emi zed deduct i ons f or AMT pur poses ar e as f ol l ows:

(10% $60,000)]
$ 500
Qualified residence interest 5,000
Total itemized deductions for
AMT
$9,000

Therefore, Rhondas positive adjustment in computing AMTI is $6,300
($15,300 $9,000).

1488. Dar i n s, who i s age 30, has i t emi zed deduct i ons i n cal cul at i ng
2013 t axabl e i ncome as f ol l ows:

10%( $100, 000) ]
$ 5, 000
Mor t gage i nt er est on per sonal
r esi dence
7, 000
Real pr oper t y t axes 4, 500
Per sonal pr oper t y t axes 2, 500
Casual t y l oss [ $14, 000 ( 10%
$100, 000) ]
4, 000
Gambl i ng l osses ( $3, 200
l i mi t ed t o gambl i ng i ncome of
$1, 000)
1, 000
Mi scel l aneous i t emi zed
deduct i ons [ $2, 500
2%( $100, 000) ]
500
I t emi zed deduct i ons $32, 000

a. Cal cul at e Dar i n s i t emi zed deduct i ons f or
AMT pur poses usi ng t he di r ect met hod.

b. Cal cul at e Dar i n s i t emi zed deduct i ons f or
AMT pur poses usi ng t he i ndi r ect met hod.

Cor r ect Answer :
a. For AMT purposes, the allowable
itemized deductions are as
follows:

Medical expenses [$15,000 (10%
$100,000)]
$ 5,000
Mortgage interest on personal
residence
7,000
Casualty loss [$14,000 (10%
$100,000)]
4,000
Gambling losses ($3,200 limited to
gambling income of $1,000)
1,
000
Itemized deductions $20,500

b. Using the indirect method, the effect of
itemized deductions on AMTI is as follows:

Itemized deductions
included in taxable income
$32,000
Positive adjustments 0
Negative adjustments:
(10% $100,000)]
(0)
State income taxes (4,000)
Real property taxes (4,500)
Personal property taxes (2,500)
Miscellaneous itemized
deductions
(500)
$20,500

1489. Abbygai l , who i s si ngl e, had t axabl e i ncome of $115, 000 f or 2013.
She had posi t i ve AMT adj ust ment s of $30, 000; negat i ve AMT adj ust ment s
of $12, 000; and t ax pr ef er ence i t ems of $50, 000.

a. Comput e her al t er nat i ve mi ni mumt axabl e
i ncome ( AMTI ) .

b. Assume t he same f act s as i n par t a. Comput e
Abbygai l s t ent at i ve mi ni mumt ax.

Cor r ect Answer :
a. Taxable income $115,000
Plus: Positive AMT
adjustments
30,000
Less: Negative AMT
adjustments
(12,000)
Plus: Tax preference items 50,000
AMTI $183,000

b. AMTI $183,000
Less: AMT exemption [$51,900
.25($183,000 $115,400)]
(35,000)
AMT base $148,000

Tentative minimum tax
$148,000 .26 $ 38,480

1490. Li l l y i s si ngl e and has no t axabl e i ncome f or 2013. She has
posi t i ve t i mi ng adj ust ment s of $600, 000 and AMT excl usi ons of $200, 000.

a. Cal cul at e Li l l y s t ent at i ve AMT.

b. Cal cul at e Li l l y s AMT cr edi t car r yover t o
2014.

Cor r ect Answer :
a. Taxable income $
0
AMT adjustments and preferences
($600,000 + $200,000)
800,000
AMTI $800,000
.25($800,000 $115,400)]

0
AMT base $800,000

Tentative minimum
tax

$175,000
.26 =
$ 45,500
$625,000
.28 =
175,000
Tentative AMT $220,500

b. Tentative AMT without
positive timing
adjustments

AMT exclusions $200,000
.25($200,000 $115,400)]
(30,750)
AMT base $169,250

Tentative minimum tax
$169,250 .26 = $44,005
Tentative AMT $220,500
Portion related to
AMT exclusions
(44,005)
AMT credit carryover $176,495

1491. Sage, I nc. , has t he f ol l owi ng gr oss r ecei pt s and t axabl e i ncome:

Gr oss
r ecei pt s
Taxabl e
i ncome
2001 $5, 600, 000 $120, 000
2002 4, 300, 000 190, 000
2003 7, 200, 000 162, 000
2004 9, 000, 000 180, 000
2005 6, 200, 000 150, 000
2006 6, 500, 000 160, 000
2007 6, 800, 000 162, 000
2008 7, 000, 000 154, 000
2009 7, 200, 000 190, 000
2010 7, 100, 000 200, 000
2011 7, 300, 000 185, 000
2012 7, 200, 000 201, 000
2013 7, 000, 000 225, 000

I s Sage, I nc. , subj ect t o t he AMT i n 2013?

Cor r ect Answer :
Sage, I nc. i s not subj ect t o t he AMT i n 2013. I t qual i f i es f or t he
smal l cor por at i on exempt i on ( i . e. , had aver age annual gr oss r ecei pt s of
l ess t han $5 mi l l i on f or t he 3- year per i od begi nni ng af t er 1993 and had
aver age annual gr oss r ecei pt s of l ess t han $7. 5 mi l l i on f or t he 3- year
per i od pr ecedi ng each subsequent cur r ent t ax year ) . Even i f t hese
r equi r ement s wer e not sat i sf i ed f or 2001, t he smal l cor por at i on
exempt i on woul d appl y f or t he f i r st year of exi st ence of t he
cor por at i on.

For 2002 ( t he $7. 5 mi l l i on r equi r ement )
[ ( $0 + $0 + $5, 600, 000) / 1] = $5. 6 mi l l i on

[ ( $0 + $5, 600, 000 + $4, 300, 000) / 2] = $4. 95 mi l l i on

[ ( $5, 600, 000 + $4, 300, 000 + $7, 200, 000) / 3] = $5. 7 mi l l i on

[ ( $4, 300, 000 + $7, 200, 000 + $9, 000, 000) / 3] = $6. 83 mi l l i on

[ ( $7, 200, 000 + $9, 000, 000 + $6, 200, 000) / 3] = $7. 47 mi l l i on

[ ( $9, 000, 000 + $6, 200, 000 + $6, 500, 000) / 3] = $7. 23 mi l l i on

[ ( $6, 200, 000 + $6, 500, 000 + $6, 800, 000) / 3] = $6. 5 mi l l i on

[ ( $6, 500, 000 + $6, 800, 000 + $7, 000, 000) / 3] = $6, 766, 667

[ ( $6, 800, 000 + $7, 000, 000 + $7, 200, 000) / 3] = $7 mi l l i on

[ ( $7, 000, 000 + $7, 200, 000 + $7, 100, 000) / 3] = $7. 1 mi l l i on

[ ( $7, 200, 000 + $7, 100, 000 + $7, 300, 000) / 3] = $7. 2 mi l l i on
[ ( $7, 100, 000 + $7, 300, 000 + $7, 200, 000) / 3) ] = $7. 2 mi l l i on

1492. Smoke, I nc. , pr ovi des you wi t h t he f ol l owi ng i nf or mat i on:

Regul ar cor por at e t ax l i abi l i t y $ 22, 25
0
AMT adj ust ment s and pr ef er ences
( excl udi ng ACE adj ust ment )
80, 000
ACE adj ust ment ( pr i or posi t i ve
adj ust ment s ar e $17, 000)
( 11, 000)
Taxabl e i ncome 100, 000

Cal cul at e Smoke s AMT f or 2013.

Cor r ect Answer :
Smoke s AMT i s cal cul at ed as f ol l ows:

+ AMT adjustments and preferences
(excluding ACE adjustment)
80,000
AMT adjustment for ACE (11,000
)
AMTI $169,000
25%($150,000 $150,000)]
(40,000
)
= AMT base $129,000
Rate 2
0%
= Tentative AMT $ 25,800
Regular income tax liability (22,250
)
AMT $ 3,55
0

1493. Sand, I nc. , has AMTI of $200, 000. Cal cul at e t he amount of t he
AMT exempt i on i f :

a. Sand i s a smal l cor por at i on f or AMT
pur poses.

b. Sand i s not a smal l cor por at i on f or AMT
pur poses.

Cor r ect Answer :
a. If Sand is a small corporation for AMT
purposes, the AMT does not apply to Sand.

b. If Sand is not a small corporation for AMT
purposes, the AMT exemption is calculated as
follows:

AMTI $200,000
AMT exemption threshold (150,000)
Excess ($ 50,000)
25%
= Phaseout of exemption amount $ 12,500

Statutory exemption amount $ 40,000
AMT exemption phaseout (12,500)
AMT exemption $ 27,500

1494. Why i s t her e a need f or a second t ax syst emcal l ed t he
al t er nat i ve mi ni mumt ax?

Cor r ect Answer :
The AMT was enact ed as a backup t o t he r egul ar i ncome t ax. The pur pose
i s t o ensur e t hat no t axpayer wi t h si gni f i cant economi c i ncome can
avoi d si gni f i cant t ax l i abi l i t y by usi ng t he excl usi ons, deduct i ons,
and cr edi t s cont ai ned i n t he r egul ar i ncome t ax syst em.

1495. What i s t he r el at i onshi p bet ween t axabl e i ncome and AMTI ?

Cor r ect Answer :
The i ndi r ect met hod, r at her t han t he di r ect met hod, i s nor mal l y used t o
cal cul at e t he AMT ( i . e. , t he st ar t i ng poi nt i s t axabl e i ncome) .

I f t he di r ect met hod wer e used, AMTI coul d be cal cul at ed as f ol l ows:

Gr oss i ncome comput ed by appl yi ng t he AMT r ul es
Minus: Deductions computed by
applying the AMT rules
Equals: AMTI before tax preferences
Plus: Tax preferences
Equals: Alternative minimum taxable
income

Since the indirect method is normally used to calculate AMTI, the model is
as follows:

Taxable income
Plus: Positive AMT adjustments
Minus: Negative AMT adjustments
Equals: Taxable income after AMT
adjustments
Plus: Tax preferences
Equals: Alternative minimum taxable income
(AMTI)

The above model illustrates the relationship between taxable income and
AMTI.

1496. What i s t he r el at i onshi p bet ween t he r egul ar i ncome t ax l i abi l i t y
and t he t ent at i ve AMT?

Cor r ect Answer :
I f t he t ent at i ve AMT exceeds t he r egul ar i ncome t ax l i abi l i t y, t he AMT
i s t he amount of t he excess. I f t he r egul ar i ncome t ax l i abi l i t y i s
equal t o or gr eat er t han t he t ent at i ve AMT, t he AMT i s zer o.

1497. I n cal cul at i ng t he AMT usi ng t he i ndi r ect met hod, do AMT
adj ust ment s and AMT t ax pr ef er ences i ncr ease or decr ease AMTI ?

Cor r ect Answer :
AMT adj ust ment s can be bot h posi t i ve and negat i ve. AMT pr ef er ences can
onl y be posi t i ve so AMT adj ust ment s can i ncr ease or decr ease AMTI
wher eas AMT t ax pr ef er ences can onl y i ncr ease AMTI .

1498. Wi l l al l AMT adj ust ment s r ever se? That i s, do t hey r el at e t o
t i mi ng di f f er ences?

Cor r ect Answer :
Most , but not al l , AMT adj ust ment s do r el at e t o t i mi ng di f f er ences and
t hus wi l l r ever se. However , si nce not al l AMT adj ust ment s r el at e t o
t i mi ng di f f er ences, not al l wi l l r ever se. For exampl e, some of t he AMT
adj ust ment s r el at i ng t o i t emi zed deduct i ons wi l l not r ever se.

1499. What i s t he pur pose of t he AMT exempt i on amount ? What i s t he
maxi mumamount f or each f i l i ng st at us f or an i ndi vi dual t axpayer and
f or a cor por at e t axpayer ?

Cor r ect Answer :
The AMT exempt i on amount can be t hought of as a mat er i al i t y pr ovi si on.
As such, i t enabl es a t axpayer wi t h a smal l amount of posi t i ve AMT
adj ust ment s and t ax pr ef er ences t o avoi d bei ng subj ect t o t he AMT.

For i ndi vi dual t axpayer s, t he maxi mumexempt i on amount s f or 2013 ar e as
f ol l ows:

Married filing
jointly
$80,800
Single 51,9
00
Married filing
separately
40,4
00

For corporate taxpayers, the maximum exemption amount is $40,000.

1500. Mel i nda i s i n t he 35%mar gi nal t ax br acket . She has a net capi t al
gai n of $150, 000 on t he sal e of l and whi ch i s el i gi bl e f or t he
al t er nat i ve t ax on net capi t al gai n i n cal cul at i ng t he r egul ar i ncome
t ax. Di scuss t he t ax r at e t hat appl i es t o t he $150, 000 net capi t al gai n
i n cal cul at i ng t he t ent at i ve AMT f or Mel i nda.

Cor r ect Answer :
The al t er nat i ve t ax r at e on net capi t al gai n i s avai l abl e i n
cal cul at i ng t he t ent at i ve AMT. Si nce t he 15%r at e i s l ower t han t he
r egul ar AMT r at es ( i . e. , 26%and 28%) , t he 15%r at e shoul d be used by
Mel i nda.

1501. What t ax r at es appl y i n cal cul at i ng t he t ent at i ve AMT f or an
i ndi vi dual t axpayer ?

Cor r ect Answer :
For an i ndi vi dual t axpayer , a 26%r at e appl i es t o t he f i r st $175, 000 of
AMT base and a 28%r at e appl i es t o t he AMT base i n excess of $175, 000.

1502. How can an AMT adj ust ment be avoi ded f or a t axpayer who i ncur s
ci r cul at i on expendi t ur es i n t he cur r ent t ax year ?

Cor r ect Answer :
For r egul ar i ncome t ax pur poses, t he t axpayer can capi t al i ze t he
expendi t ur es and amor t i ze t hemover a t hr ee- year per i od begi nni ng wi t h
t he t ax year i n whi ch t hey wer e made. For AMT pur poses, onl y t he t hr ee-
year amor t i zat i on i s al l owed. Thus, no adj ust ment wi l l be necessar y.

1503. I n det er mi ni ng t he amount of t he AMT adj ust ment s, di scuss t he
di f f er ence i n t he t r eat ment of a bui l di ng pl aced i n ser vi ce af t er 1986
and bef or e J anuar y 1, 1999 and a bui l di ng pl aced i n ser vi ce af t er
December 31, 1998.

Cor r ect Answer :
For a bui l di ng pl aced i n ser vi ce af t er December 31, 1998, t he same
MACRS r ecover y per i ods and met hods ar e used i n cal cul at i ng depr eci at i on
f or bot h r egul ar i ncome t ax pur poses and AMT pur poses. Ther ef or e, t her e
i s no AMT adj ust ment necessar y.

For a bui l di ng pl aced i n ser vi ce af t er 1986 and bef or e J anuar y 1, 1999,
depr eci at i on i s comput ed f or AMT pur poses under t he al t er nat i ve
depr eci at i on syst em( ADS) usi ng t he st r ai ght - l i ne met hod over a 40- year
l i f e. For a bui l di ng pl aced i n ser vi ce af t er 1986 and bef or e J anuar y 1,
1999, depr eci at i on i s comput ed f or r egul ar i ncome t ax pur poses under
MACRS usi ng t he st r ai ght - l i ne met hod over a 27. 5, 31. 5, or 39- year l i f e.
The di f f er ence bet ween t he depr eci at i on amount s i s t he adj ust ment i n
comput i ng t he AMT. However , i f t he t axpayer el ect s t o use ADS i n
cal cul at i ng depr ecat i on f or r egul ar i ncome t ax pur poses, t her e i s no
AMT adj ust ment .

1504. How can t he posi t i ve AMT adj ust ment f or r esear ch and exper i ment al
expendi t ur es be avoi ded?

Cor r ect Answer :
For r egul ar i ncome t ax pur poses, r esear ch and exper i ment al expenses can
be deduct ed i n t he year i ncur r ed. For AMT pur poses, such expenses must
be amor t i zed over a 10- year per i od. So t her e wi l l be a posi t i ve AMT
adj ust ment i n year 1 and negat i ve AMT adj ust ment s i n year s 2 t hr ough 10.

I f t he t axpayer el ect s t o amor t i ze t he r esear ch and exper i ment al
expenses over a 10- year per i od f or r egul ar i ncome t ax pur poses, t he
deduct i ons f or r egul ar i ncome t ax and AMT wi l l be t he same and no AMT
adj ust ment s ar e necessar y.

1505. Dur el l owns a const r uct i on company t hat bui l ds r esi dent i al
housi ng. The company i s el i gi bl e t o use t he compl et ed cont r act met hod
f or r egul ar i ncome t ax pur poses. What can Dur el l do t o mi ni mi ze hi s AMT?

Cor r ect Answer :
The use of t he compl et ed cont r act met hod f or r egul ar i ncome t ax
pur poses by Dur el l wi l l r esul t i n t he excess of t he i ncome cal cul at ed
under t he per cent age of compl et i on met hod over t hat r epor t ed under t he
compl et ed cont r act met hod bei ng t r eat ed as a posi t i ve adj ust ment f or
AMT pur poses. Li kewi se, i f f or a par t i cul ar t ax year , t he i ncome
cal cul at ed under t he per cent age of compl et i on met hod i s l ess t han t hat
under t he compl et ed cont r act met hod, t hi s di f f er ence i s a negat i ve
adj ust ment f or AMT pur poses. Dur el l can el i mi nat e t hi s AMT posi t i ve or
negat i ve adj ust ment by usi ng t he per cent age of compl et i on met hod f or
r egul ar i ncome t ax pur poses. Then, t he same met hod of account i ng wi l l
be used f or bot h r egul ar i ncome t ax pur poses and AMT pur poses.

1506. Di scuss t he t ax year i n whi ch an AMT adj ust ment i s f i r st r equi r ed
f or an I SO.

Cor r ect Answer :
For r egul ar i ncome t ax pur poses, no i ncome i s r ecogni zed due t o t he
exer ci se of an I SO. For AMT pur poses, t he exer ci se of an I SO t r i gger s
t he r ecogni t i on of i ncome ( t o t he ext ent of t he spr ead) i n t he t ax year
i n whi ch t he r i ght s i n t he st ock ar e f r eel y t r ansf er abl e or ar e not
subj ect t o a subst ant i al r i sk of f or f ei t ur e.

1507. I f J essi ca exer ci ses an I SO and di sposes of t he opt i on i n t he
same t ax year , ar e any AMT adj ust ment s r equi r ed?

Cor r ect Answer :
I n t hi s case, no AMT adj ust ment s ar e r equi r ed f or J essi ca because t he
posi t i ve AMT adj ust ment and t he negat i ve AMT adj ust ment woul d of f set .

1508. Dani ca owned a car t hat she used excl usi vel y f or busi ness. The
car was pur chased i n 2010 and sol d i n 2013 f or a r ecogni zed gai n of
$9, 000. However , t he sal e r esul t ed i n no AMT. Why?

Cor r ect Answer :
The car i s cl assi f i ed as per sonal t y used i n a busi ness. Si nce i t was
pl aced i n ser vi ce by Dani ca af t er December 31, 1998, t he depr eci at i on
f or AMT and r egul ar i ncome t ax pur poses can be t he same ( 150%
decl i ni ng- bal ance met hod) . Under t hi s assumpt i on, t her e was no annual
AMT adj ust ment f or depr eci at i on and no AMT adj ust ment i s necessar y on
t he sal e of t he car by Dani ca ( t he adj ust ed basi s f or AMT and r egul ar
i ncome t ax pur poses i s t he same) .

1509. A t axpayer has a passi ve act i vi t y l oss f or t he cur r ent t ax year
f or r egul ar i ncome t ax pur poses and f or AMT pur poses. I s i t possi bl e
t hat t he passi ve act i vi t y l osses wi l l be t he same amount ?

Cor r ect Answer :
The passi ve act i vi t y l oss f or r egul ar i ncome t ax pur poses and AMT
pur poses wi l l di f f er onl y i f t he r ul es r el at i ng t o t he cal cul at i on of
each di f f er .

1510. What i t emi zed deduct i ons ar e al l owed f or bot h r egul ar i ncome t ax
pur poses and f or AMT pur poses?

Cor r ect Answer :
The f ol l owi ng i t emi zed deduct i ons ar e al l owed f or bot h r egul ar i ncome
t ax pur poses and f or AMT pur poses.

Casualty losses.

Gambling losses.

Charitable contributions.

Medical expenses in excess of 10% of AGI for
AMT purposes. For regular income tax
purposes, medical expenses in excess of 10%
if the taxpayer is not at least age 65 and in
excess of 7.5% of AGI if the taxpayer is at
least age 65.

Estate tax on income in respect of a
decedent.

Qualified interest.

1511. What ef f ect do deduct i bl e gambl i ng l osses f or r egul ar i ncome t ax
pur poses have i n cal cul at i ng AMTI ?

Cor r ect Answer :
The amount al l owabl e i n cal cul at i ng t he gambl i ng l oss deduct i on under
t he r egul ar i ncome t ax i s t he same as t hat f or AMTI pur poses. So no
adj ust ment i s r equi r ed i n conver t i ng r egul ar t axabl e i ncome t o AMTI .

1512. Why i s t her e no AMT adj ust ment f or char i t abl e cont r i but i ons?

Cor r ect Answer :
The char i t abl e cont r i but i on deduct i on f or AMT pur poses i s t he same as
t he char i t abl e cont r i but i on deduct i on f or r egul ar i ncome t ax pur poses.

1513. I s i t possi bl e t hat no AMT adj ust ment i s necessar y f or medi cal
expenses i n cal cul at i ng AMTI f or a t axpayer who i s at l east age 65 even
t hough t he f l oor l i mi t at i on i s di f f er ent ( 7. 5%of AGI f or r egul ar
i ncome t ax compar ed t o 10%f or AMT pur poses) ?

Cor r ect Answer :
Yes, t hi s occur s when medi cal expenses ar e not l ar ge enough t o exceed
ei t her f l oor . Si nce t he medi cal expense deduct i on f or bot h pur poses i s
$0, t her e i s no AMT adj ust ment .

1514. When qual i f i ed r esi dence i nt er est exceeds qual i f i ed housi ng
i nt er est , t he posi t i ve adj ust ment r equi r ed i n cal cul at i ng AMT i s a
t i mi ng adj ust ment . That i s, i n t he f ut ur e, t her e wi l l be an of f set t i ng
negat i ve adj ust ment . Comment on t he val i di t y of t hi s st at ement .

Cor r ect Answer :
Thi s AMT adj ust ment i s not a t i mi ng adj ust ment . So i t wi l l not r ever se.

1515. Andr ea, who i s si ngl e, has a per sonal exempt i on deduct i on i n
cal cul at i ng her 2013 t axabl e i ncome. She has no dependency deduct i ons.
What i s t he amount of t he AMT adj ust ment i n cal cul at i ng AMTI ?

Cor r ect Answer :
I n cal cul at i ng Andr ea s 2013 t axabl e i ncome, she deduct s $3, 900 f or her
per sonal exempt i on deduct i on. So i n cal cul at i ng her AMTI , she has a
posi t i ve adj ust ment of $3, 900.

1516. How can i nt er est on a pr i vat e act i vi t y bond i ssued i n 2008 r esul t
i n bot h an AMT adj ust ment t hat decr eases AMTI and an AMT pr ef er ence
t hat i ncr eases AMTI ?

Cor r ect Answer :
The i nt er est on a pr i vat e act i vi t y bond i ssued i n 2008 i s not i ncl uded
i n t axabl e i ncome, but t he i nt er est ( net of r el at ed expenses) i s a t ax
pr ef er ence t hat i ncr eases AMTI .

For r egul ar i ncome t ax pur poses, t he i nt er est on a pr i vat e act i vi t y
bond i s not i ncl uded i n net i nvest ment i ncome i n cal cul at i ng t he
deduct i on f or i nvest ment i nt er est . However , f or AMT pur poses such
i nt er est i s i ncl uded i n net i nvest ment i ncome i n cal cul at i ng t he
deduct i on f or i nvest ment i nt er est . To t he ext ent t hat such pr i vat e
act i vi t y bond i nt er est i ncr eases t he amount of t he i nvest ment i nt er est
deduct i on f or AMT pur poses, t her ef or e, i t i s a negat i ve AMT
adj ust ment . I f t he bond had been i ssued i n 2009 or 2010, t he r el at ed
pr i vat e act i vi t y bond i nt er est woul d not be a t ax pr ef er ence.

1517. I f a t axpayer deduct s t he st andar d deduct i on i n cal cul at i ng
r egul ar t axabl e i ncome, what ef f ect does t hi s have i n cal cul at i ng AMTI ?

Cor r ect Answer :
I n conver t i ng r egul ar t axabl e i ncome t o AMTI , t he st andar d deduct i on i s
a posi t i ve adj ust ment .

1518. I dent i f y an AMT adj ust ment t hat appl i es f or t he i ndi vi dual
t axpayer t hat does not appl y f or t he cor por at e t axpayer and i dent i f y an
AMT adj ust ment t hat appl i es f or t he cor por at e t axpayer t hat does not
appl y f or t he i ndi vi dual t axpayer .

Cor r ect Answer :
Among t he AMT adj ust ment s t hat appl y f or t he i ndi vi dual t axpayer t hat
do not appl y f or t he cor por at e t axpayer ar e t he f ol l owi ng:

Adjustment for ISOs.

Adjustments for certain itemized deductions.

An adjustment that applies only to corporate taxpayers is the ACE
adjustment.

1519. Ar e t he AMT r at es f or t he i ndi vi dual t axpayer t he same as t hose
f or a cor por at e t axpayer ?

Cor r ect Answer :
No, t he r at es ar e di f f er ent . The cor por at e AMT r at e i s 20%. The
i ndi vi dual t axpayer has t wo r at es: 26%f or t he f i r st $175, 000 of AMT
base and 28%f or t he AMT basi s t hat i s gr eat er t han $175, 000.

1520. Under what ci r cumst ances ar e cor por at i ons exempt f r omt he AMT?

Cor r ect Answer :
Smal l cor por at i ons ar e exempt f r omt he AMT. A cor por at i on i s
aut omat i cal l y cl assi f i ed as a smal l cor por at i on i n t he f i r st t ax year
of exi st ence. For subsequent t ax year s, a cor por at i on i s a smal l
cor por at i on i f i t had aver age annual gr oss r ecei pt s of not mor e t han $5
mi l l i on f or t he t hr ee- year per i od begi nni ng af t er December 1993 and not
mor e t han $7. 5 mi l l i on f or i nt er veni ng t hr ee- year per i ods ( i . e. , t hr ee-
year r unni ng aver age up t o t hr ee- year per i od pr ecedi ng t he cur r ent t ax
year ) .

1521. For t he ACE adj ust ment , di scuss t he r el at i onshi p bet ween ACE and
unadj ust ed AMTI .

Cor r ect Answer :
A posi t i ve AMT adj ust ment occur s i f t he ACE amount exceeds unadj ust ed
AMTI . A negat i ve AMT adj ust ment occur s i f unadj ust ed AMTI exceeds t he
ACE amount . A negat i ve adj ust ment i s l i mi t ed t o t he aggr egat e of t he
posi t i ve adj ust ment s under ACE f or pr i or year s, r educed by t he
pr evi ousl y cl ai med negat i ve adj ust ment s.

1522. The t ax benef i t r ecei ved f r oma t ax cr edi t i s never af f ect ed by
t he t ax r at e of t he t axpayer .

*a. Tr ue
b. Fal se

1523. The t ax benef i t s r esul t i ng f r omt ax cr edi t s and t ax deduct i ons
ar e af f ect ed by t he t ax r at e br acket of t he t axpayer .

a. Tr ue
*b. Fal se

1524. Nonr ef undabl e cr edi t s ar e t hose t hat r educe t he t axpayer s t ax
l i abi l i t y but ar e not pai d when t he amount of t he cr edi t ( or cr edi t s)
exceeds t he t axpayer s t ax l i abi l i t y.

*a. Tr ue
b. Fal se

1525. The cr edi t f or chi l d and dependent car e expenses i s an exampl e of
a r ef undabl e cr edi t .

a. Tr ue
*b. Fal se

1526. Any unused gener al busi ness cr edi t must be car r i ed back 3 year s
and t hen f or war d f or 20 year s.

a. Tr ue
*b. Fal se

1527. A LI FO met hod i s appl i ed t o gener al busi ness cr edi t car r yover s,
car r ybacks, and ut i l i zat i on of cr edi t s ear ned dur i ng a par t i cul ar year .

a. Tr ue
*b. Fal se

1528. The pur pose of t he t ax cr edi t f or r ehabi l i t at i on expendi t ur es i s
t o encour age t he r el ocat i on of busi nesses f r omol der , economi cal l y
di st r essed ar eas ( i . e. , i nner ci t y) t o newer l ocat i ons.

a. Tr ue
*b. Fal se

1529. Qual i f i ed r ehabi l i t at i on expendi t ur es i ncl ude t he cost of
acqui r i ng t he bui l di ng, but not t he cost of acqui r i ng t he l and.

a. Tr ue
*b. Fal se

1530. The t ax cr edi t f or r ehabi l i t at i on expendi t ur es f or cer t i f i ed
hi st or i c st r uct ur es di f f er s f r omt hat f or qual i f yi ng st r uct ur es t hat
ar e not cer t i f i ed hi st or i c st r uct ur es.

*a. Tr ue
b. Fal se

1531. Some ( or al l ) of t he t ax cr edi t f or r ehabi l i t at i on expendi t ur es
wi l l have t o be r ecapt ur ed i f t he r ehabi l i t at ed pr oper t y i s di sposed of
pr emat ur el y or i f i t ceases t o be qual i f yi ng pr oper t y.

*a. Tr ue
b. Fal se

1532. I f a t axpayer i s r equi r ed t o r ecapt ur e any t ax cr edi t f or
r ehabi l i t at i on expendi t ur es, t he r ecapt ur e amount need not be added t o
t he adj ust ed basi s of t he r ehabi l i t at i on expendi t ur es.

a. Tr ue
*b. Fal se

1533. The pur pose of t he wor k oppor t uni t y t ax cr edi t i s t o encour age
empl oyer s t o hi r e i ndi vi dual s f r omspeci f i ed t ar get gr oups
t r adi t i onal l y subj ect t o hi gh r at es of unempl oyment .

*a. Tr ue
b. Fal se

1534. Empl oyer s ar e encour aged by t he wor k oppor t uni t y t ax cr edi t t o
hi r e i ndi vi dual s who have been l ong- t er mr eci pi ent s of f ami l y
assi st ance wel f ar e benef i t s.

*a. Tr ue
b. Fal se

1535. The wor k oppor t uni t y t ax cr edi t i s avai l abl e onl y f or wages pai d
t o qual i f yi ng i ndi vi dual s dur i ng t hei r f i r st year of empl oyment .

a. Tr ue
*b. Fal se

1536. An empl oyer s t ax deduct i on f or wages i s af f ect ed by t he wor k
oppor t uni t y t ax cr edi t .

*a. Tr ue
b. Fal se

1537. The i ncr ement al r esear ch act i vi t i es cr edi t i s 20%of t he
qual i f i ed r esear ch expenses t hat exceed t he base amount .

*a. Tr ue
b. Fal se

1538. Al l t axpayer s ar e el i gi bl e t o t ake t he basi c r esear ch cr edi t .

a. Tr ue
*b. Fal se

1539. Qual i f i ed r esear ch and exper i ment at i on expendi t ur es ar e not onl y
el i gi bl e f or t he 20%t ax cr edi t , but al so can be expensed i n t he year
i ncur r ed.

*a. Tr ue
b. Fal se

1540. The l ow- i ncome housi ng cr edi t i s avai l abl e t o l ow- i ncome t enant s
who r esi de i n qual i f yi ng l ow- i ncome housi ng.

a. Tr ue
*b. Fal se

1541. A t axpayer who qual i f i es f or t he l ow- i ncome housi ng cr edi t cl ai ms
t he cr edi t over a 20- year per i od.

a. Tr ue
*b. Fal se

1542. The di sabl ed access cr edi t was enact ed t o encour age smal l
busi nesses t o make t hei r busi nesses mor e accessi bl e t o di sabl ed
i ndi vi dual s.

*a. Tr ue
b. Fal se

1543. The di sabl ed access cr edi t i s comput ed at t he r at e of 50%of al l
access expendi t ur es i ncur r ed by t he t axpayer dur i ng t he year .

a. Tr ue
*b. Fal se

1544. I f t he cost of a bui l di ng const r uct ed and pl aced i nt o ser vi ce by
an el i gi bl e smal l busi ness i n t he cur r ent year i ncl udes t he cost of a
wheel chai r r amp, t he cost of t he r amp qual i f i es f or t he di sabl ed access
cr edi t .

a. Tr ue
*b. Fal se

1545. A smal l empl oyer i ncur s $1, 500 f or consul t i ng f ees r el at ed t o
est abl i shi ng a qual i f i ed r et i r ement pl an f or i t s 75 empl oyees. As a
r esul t , t he empl oyer may cl ai mt he cr edi t f or smal l empl oyer pensi on
pl an st ar t up cost s f or $750.

a. Tr ue
*b. Fal se

1546. Bl ueCo i ncur s $900, 000 dur i ng t he year t o const r uct a f aci l i t y
t hat wi l l be used excl usi vel y f or t he car e of i t s empl oyees pr e- school
age chi l dr en dur i ng nor mal wor ki ng hour s. The cr edi t f or empl oyer -
pr ovi ded chi l d car e avai l abl e t o Bl ueCo t hi s year i s $225, 000.

a. Tr ue
*b. Fal se

1547. Car di nal Company i ncur s $800, 000 dur i ng t he year t o const r uct a
f aci l i t y t hat wi l l be used excl usi vel y f or t he car e of i t s empl oyees
pr e- school age chi l dr en dur i ng nor mal wor ki ng hour s. Assumi ng Car di nal
cl ai ms t he cr edi t f or empl oyer - pr ovi ded chi l d car e t hi s year , i t s basi s
i n t he newl y const r uct ed f aci l i t y i s $640, 000.

a. Tr ue
*b. Fal se

1548. The ear ned i ncome cr edi t , a f or mof a negat i ve i ncome t ax, i s a
r ef undabl e cr edi t .

*a. Tr ue
b. Fal se

1549. The ear ned i ncome cr edi t i s avai l abl e onl y i f t he t axpayer has at
l east one qual i f yi ng chi l d i n t he househol d.

a. Tr ue
*b. Fal se

1550. A t axpayer s ear ned i ncome cr edi t i s dependent on t he number of
hi s or her qual i f yi ng chi l dr en.

*a. Tr ue
b. Fal se

1551. An el i gi bl e t axpayer may el ect t o r ecei ve advance payment s of t he
ear ned i ncome cr edi t f r omhi s or her empl oyer .

*a. Tr ue
b. Fal se

1552. Unl ess a t axpayer i s di sabl ed, t he t ax cr edi t f or t he el der l y or
di sabl ed i s avai l abl e onl y i f t he t axpayer i s at l east 59 1/ 2 year s ol d.

a. Tr ue
*b. Fal se

1553. A t axpayer who meet s t he age r equi r ement and r ecei ves no Soci al
Secur i t y benef i t s wi l l be ent i t l ed t o t he f ul l t ax cr edi t f or t he
el der l y.

a. Tr ue
*b. Fal se

1554. I n comput i ng t he f or ei gn t ax cr edi t , t he greater of t he f or ei gn
i ncome t axes pai d or t he over al l l i mi t at i on i s al l owed.

a. Tr ue
*b. Fal se

1555. Unused f or ei gn t ax cr edi t s can be car r i ed back t hr ee year s and
f or war d f i f t een year s.

a. Tr ue
*b. Fal se

1556. Al l f or ei gn t axes qual i f y f or t he f or ei gn t ax cr edi t .

a. Tr ue
*b. Fal se

1557. Because cur r ent U. S. cor por at e i ncome t ax r at es ar e hi gher t han
many f or ei gn cor por at e i ncome t ax r at es, t he over al l l i mi t at i on does
not yi el d a l ower f or ei gn t ax cr edi t t han t he amount of f or ei gn t axes
act ual l y pai d.

*a. Tr ue
b. Fal se

1558. I f a t axpayer chooses t o cl ai ma f or ei gn t ax cr edi t , par t of t he
f or ei gn i ncome t axes pai d can al so be cl ai med as a deduct i on.

a. Tr ue
*b. Fal se

1559. An i ndi vi dual gener al l y may cl ai ma cr edi t f or adopt i on expenses
i n t he year i n whi ch t he expenses ar e pai d.

a. Tr ue
*b. Fal se

1560. The chi l d t ax cr edi t i s based on t he number of t he t axpayer s
qual i f yi ng chi l dr en under age 17.

*a. Tr ue
b. Fal se

1561. The maxi mumchi l d t ax cr edi t under cur r ent l aw i s $1, 500 per
qual i f yi ng chi l d.

a. Tr ue
*b. Fal se

1562. The maxi mumcr edi t f or chi l d and dependent car e expenses i s
$2, 100 i f onl y one spouse i s empl oyed and t he ot her spouse i s a f ul l -
t i me st udent .

*a. Tr ue
b. Fal se

1563. Expenses t hat ar e r ei mbur sed by a t axpayer s empl oyer under a
dependent car e assi st ance pr ogr amcan al so qual i f y f or t he cr edi t f or
chi l d and dependent car e expenses.

a. Tr ue
*b. Fal se

1564. For pur poses of comput i ng t he cr edi t f or chi l d and dependent car e
expenses, t he qual i f yi ng empl oyment - r el at ed expenses ar e l i mi t ed t o an
i ndi vi dual s act ual or deemed ear ned i ncome.

*a. Tr ue
b. Fal se

1565. A t axpayer may qual i f y f or t he cr edi t f or chi l d and dependent
car e expenses i f t he t axpayer s dependent i s under age 17.

a. Tr ue
*b. Fal se

1566. Chi l d car e payment s t o a r el at i ve ar e not el i gi bl e f or t he cr edi t
f or chi l d and dependent car e expenses i f t he r el at i ve i s a chi l d ( under
age 19) of t he t axpayer .

*a. Tr ue
b. Fal se

1567. Chi l d and dependent car e expenses i ncl ude amount s pai d f or
gener al househol d ser vi ces.

*a. Tr ue
b. Fal se

1568. The educat i on t ax cr edi t s ( i . e. , t he Amer i can Oppor t uni t y cr edi t
and t he l i f et i me l ear ni ng cr edi t ) ar e avai l abl e t o hel p def r ay t he cost
of hi gher educat i on r egar dl ess of t he i ncome l evel of t he t axpayer .

a. Tr ue
*b. Fal se

1569. Bot h educat i on t ax cr edi t s ar e avai l abl e f or qual i f i ed t ui t i on
expenses, and i n cer t ai n i nst ances, al so may be avai l abl e f or r oomand
boar d.

a. Tr ue
*b. Fal se

1570. The Amer i can Oppor t uni t y cr edi t i s avai l abl e per el i gi bl e st udent ,
whi l e t he l i f et i me l ear ni ng cr edi t i s cal cul at ed per t axpayer .

*a. Tr ue
b. Fal se

1571. Qual i f yi ng t ui t i on expenses pai d f r omt he pr oceeds of a t ax-
exempt schol ar shi p do not gi ve r i se t o an educat i on t ax cr edi t .

*a. Tr ue
b. Fal se

1572. Even t hough an i t emof i ncome i s not subj ect t o i ncome t ax
wi t hhol di ng by a t axpayer s empl oyer , i t may be subj ect t o t he i ncome
t ax.

*a. Tr ue
b. Fal se

1573. For t he cur r ent year , t he base amount f or t he Soci al Secur i t y
por t i on ( ol d age, sur vi vor s, and di sabi l i t y i nsur ance) i s di f f er ent
f r omt hat f or t he Medi car e por t i on of FI CA.

*a. Tr ue
b. Fal se

1574. I f an empl oyee hol ds t wo j obs dur i ng t he year , an over wi t hhol di ng
of FI CA t ax wi l l r esul t .

a. Tr ue
*b. Fal se

1575. I n t he event t hat over wi t hhol di ng of FI CA t ax occur s because t he
t axpayer has mor e t han one empl oyer , t he excess amount shoul d be
cl ai med as a cr edi t on t he Feder al i ncome t ax r et ur n of t he empl oyee.

*a. Tr ue
b. Fal se

1576. J ohn owns and oper at es a r eal est at e agency as a sol e pr opr i et or .
On a f ul l - t i me basi s, he empl oys hi s 17- year ol d daught er as a
r ecept i oni st and hi s 22- year ol d son as a bookkeeper . Bot h chi l dr en ar e
subj ect t o FI CA wi t hhol di ng.

a. Tr ue
*b. Fal se

1577. Samand Bet t y ar e mar r i ed, have f our dependent chi l dr en, and bot h
ar e empl oyed. For wi t hhol di ng pur poses, t hey may al l ocat e t hei r t ot al
al l owances bet ween t hemsel ves as t hey see f i t .

*a. Tr ue
b. Fal se

1578. Cer t ai n si t uat i ons exi st wher e t he wage- br acket t abl e met hod of
det er mi ni ng i ncome t ax wi t hhol di ngs cannot be used.

*a. Tr ue
b. Fal se

1579. On Oct ober 2, 2013, Ross qui t s hi s j ob wi t h Bl ue Cor por at i on. I f
r equest ed by Ross, Bl ue Cor por at i on must f ur ni sh a For mW- 2 t o Ross
wi t hi n 45 days af t er t he dat e of t he r equest or t he f i nal wage payment ,
whi chever i s l at er .

a. Tr ue
*b. Fal se

1580. J uan r ef uses t o gi ve t he bank wher e he mai nt ai ns a savi ngs
account hi s Soci al Secur i t y number . J uan i s subj ect t o backup
wi t hhol di ng f or t he i nt er est ear ned on t he savi ngs account .

*a. Tr ue
b. Fal se

1581. Onl y sel f - empl oyed i ndi vi dual s ar e r equi r ed t o make est i mat ed t ax
payment s.

a. Tr ue
*b. Fal se

1582. The cal cul at i on of FI CA and t he sel f - empl oyment t ax bot h i nvol ve
t wo component s: t he Soci al Secur i t y por t i on and t he Medi car e por t i on,
each por t i on of whi ch i s i mposed on t he same base amount s.

a. Tr ue
*b. Fal se

1583. An expat r i at e who wor ks i n a count r y wi t h an i ncome t ax r at e
hi gher t han t he U. S. r at e pr obabl y wi l l f i nd t he f or ei gn ear ned i ncome
excl usi on pr ef er abl e t o t he f or ei gn t ax cr edi t .

a. Tr ue
*b. Fal se

1584. An empl oyee wi t h out si de i ncome may be abl e t o avoi d t he penal t y
f or under payment of est i mat ed t ax by havi ng hi s empl oyer i ncr ease
i ncome t ax wi t hhol di ngs.

*a. Tr ue
b. Fal se

1585. Cer t ai n hi gh- i ncome i ndi vi dual s ar e subj ect t o t hr ee addi t i onal
Medi car e t axes begi nni ng i n 2013on wages, unear ned i ncome, and t ax
cr edi t s cl ai med.

a. Tr ue
*b. Fal se

1586. The addi t i onal Medi car e t axes assessed on hi gh- i ncome i ndi vi dual s
car r y di f f er i ng t ax r at es dependi ng on t he t ax base.

*a. Tr ue
b. Fal se

1587. Roger i s consi der i ng maki ng a $6, 000 i nvest ment i n a vent ur e t hat
i t s pr omot er pr omi ses wi l l gener at e i mmedi at e t ax benef i t s f or hi m.
Roger , who does not ant i ci pat e i t emi zi ng hi s deduct i ons, i s i n t he 30%
mar gi nal i ncome t ax br acket . I f t he i nvest ment i s of a t ype t hat
pr oduces a t ax cr edi t of 40%of t he amount of t he expendi t ur e, by how
much wi l l Roger s t ax l i abi l i t y decl i ne because of t he i nvest ment ?

a. $0.
b. $1, 800.
c. $2, 200.
*d. $2, 400.

1588. Ahmad i s consi der i ng maki ng a $10, 000 i nvest ment i n a vent ur e
whi ch i t s pr omot er pr omi ses wi l l gener at e i mmedi at e t ax benef i t s f or
hi m. Ahmad, who nor mal l y i t emi zes hi s deduct i ons, i s i n t he 28%
mar gi nal t ax br acket . I f t he i nvest ment i s of a t ype wher e t he t axpayer
may cl ai meither a t ax cr edi t of 25%of t he amount of t he expendi t ur e
or an i t emi zed deduct i on f or t he amount of t he i nvest ment , what
t r eat ment nor mal l y woul d be most benef i ci al t o Ahmad and by how much
wi l l Ahmad s t ax l i abi l i t y decl i ne because of t he i nvest ment ?

a. $0, t ake nei t her t he i t emi zed deduct i on nor t he t ax cr edi t .
b. $2, 500, t ake t he t ax cr edi t .
*c. $2, 800, t ake t he i t emi zed deduct i on.
d. Bot h opt i ons pr oduce t he same benef i t .

1589. Ref undabl e t ax cr edi t s i ncl ude t he:

a. For ei gn t ax cr edi t .
b. Tax cr edi t f or r ehabi l i t at i on expenses.
c. Cr edi t f or cer t ai n r et i r ement pl an cont r i but i ons.
*d. Ear ned i ncome cr edi t .

1590. The component s of t he gener al busi ness cr edi t i ncl ude al l of t he
f ol l owi ng except:

a. Cr edi t f or empl oyer - pr ovi ded chi l d car e.
b. Di sabl ed access cr edi t .
c. Resear ch act i vi t i es cr edi t .
d. Tax cr edi t f or r ehabi l i t at i on expendi t ur es.
*e. Al l of t he above ar e component s of t he gener al busi ness
cr edi t .

1591. Whi ch of t he f ol l owi ng best descr i bes t he t r eat ment appl i cabl e t o
unused busi ness cr edi t s?

a. Unused amount s ar e car r i ed f or war d i ndef i ni t el y.
*b. Unused amount s ar e f i r st car r i ed back one year and t hen
f or war d f or 20 year s.
c. Unused amount s ar e f i r st car r i ed back one year and t hen
f or war d f or 10 year s.
d. Unused amount s ar e f i r st car r i ed back t hr ee year s and t hen
car r i ed f or war d f or 15 year s.

1592. Mol l y has gener at ed gener al busi ness cr edi t s over t he year s t hat
have not been ut i l i zed. The amount s gener at ed and not ut i l i zed f ol l ow:

2009 $2,5
00
2010 7,50
0
2011 5,00
0
2012 4,00
0

In the current year, 2013, her business generates an additional $15,000
general business credit. In 2013, based on her tax liability before credits,
she can utilize a general business credit of up to $20,000. After utilizing
the carryforwards and the current year credits, how much of the general
business credit generated in 2013 is available for future years?

a. $0.
b. $1, 000.
*c. $14, 000.
d. $15, 000.

1593. Whi ch of t he f ol l owi ng correctly descr i bes t he t ax cr edi t f or
r ehabi l i t at i on expendi t ur es?

a. The cost of enl ar gi ng any exi st i ng busi ness bui l di ng i s a
qual i f yi ng expendi t ur e.
b. The cost of f aci l i t i es r el at ed t o t he bui l di ng ( e. g. , a
par ki ng l ot ) i s a qual i f yi ng expendi t ur e.
c. No r ecapt ur e pr ovi si ons appl y.
*d. No cr edi t i s al l owed f or t he r ehabi l i t at i on of per sonal use
pr oper t y.

1594. Sever al year s ago, Sar ah pur chased a st r uct ur e f or $150, 000 t hat
was or i gi nal l y pl aced i n ser vi ce i n 1929. I n t he cur r ent year , she
i ncur r ed qual i f yi ng r ehabi l i t at i on expendi t ur es of $200, 000. The amount
of t he t ax cr edi t f or r ehabi l i t at i on expendi t ur es, and t he amount by
whi ch t he bui l di ng s basi s f or cost r ecover y woul d i ncr ease as a r esul t
of t he r ehabi l i t at i on expendi t ur es ar e t he f ol l owi ng amount s:

*a. $20, 000 cr edi t , $180, 000 basi s.
b. $20, 000 cr edi t , $200, 000 basi s.
c. $20, 000 cr edi t , $350, 000 basi s.
d. $40, 000 cr edi t , $160, 000 basi s.

1595. Sever al year s ago, Tompur chased a st r uct ur e f or $300, 000 t hat
was or i gi nal l y pl aced i n ser vi ce i n 1929. Thr ee and one- hal f year s ago
he i ncur r ed qual i f yi ng r ehabi l i t at i on expendi t ur es of $600, 000. I n t he
cur r ent year , Tomsol d t he pr oper t y i n a t axabl e t r ansact i on. Cal cul at e
t he amount of t he r ecapt ur e of t he t ax cr edi t f or r ehabi l i t at i on
expendi t ur es.

a. $0.
*b. $24, 000.
c. $36, 000.
d. $48, 000.

1596. Car di nal Cor por at i on hi r es t wo per sons cer t i f i ed t o be el i gi bl e
empl oyees f or t he wor k oppor t uni t y t ax cr edi t under t he gener al r ul es
( e. g. , f ood st amp r eci pi ent s) , each of whomi s pai d $9, 000 dur i ng t he
year . As a r esul t of t hi s event , Car di nal Cor por at i on may cl ai ma wor k
oppor t uni t y cr edi t of :

a. $1, 440.
b. $2, 880.
*c. $4, 800.
d. $7, 200.

1597. Bl ack Company pai d wages of $180, 000, of whi ch $40, 000 was
qual i f i ed wages f or t he wor k oppor t uni t y t ax cr edi t under t he gener al
r ul es. Bl ack Company s deduct i on f or wages f or t he year i s:

a. $140, 000.
*b. $164, 000.
c. $166, 000.
d. $180, 000.

1598. I n Mar ch 2013, Gr ay Cor por at i on hi r ed t wo i ndi vi dual s, bot h of
whomwer e cer t i f i ed as l ong- t er mr eci pi ent s of f ami l y assi st ance
benef i t s. Each empl oyee was pai d $11, 000 dur i ng 2013. Onl y one of t he
i ndi vi dual s cont i nued t o wor k f or Gr ay Cor por at i on i n 2014, ear ni ng
$9, 000 dur i ng t he year . No addi t i onal wor ker s wer e hi r ed i n 2014. Gr ay
Cor por at i on s wor k oppor t uni t y t ax cr edi t amount s f or 2013 and 2014 ar e:

a. $4, 000 i n 2013, $4, 000 i n 2014.
*b. $8, 000 i n 2013, $4, 500 i n 2014.
c. $8, 000 i n 2013, $5, 000 i n 2014.
d. $8, 000 i n 2013, $9, 000 i n 2014.

1599. Dur i ng t he year , Gr een, I nc. , i ncur s t he f ol l owi ng r esear ch
expendi t ur es:

In-house wages, supplies, computer
time
$60,000
Paid to Blue Foundation for
research
30,000

Greens qualifying research expenditures for the year are:

a. $60, 000.
b. $75, 000.
*c. $79, 500.
d. $90, 000.

1600. Whi ch, i f any, of t he f ol l owi ng correctly descr i bes t he r esear ch
act i vi t i es cr edi t ?

a. The r esear ch act i vi t i es cr edi t i s t he gr eat er of t he
i ncr ement al r esear ch cr edi t , t he basi c r esear ch cr edi t , or t he
ener gy r esear ch cr edi t .
b. I f t he r esear ch act i vi t i es cr edi t i s cl ai med, no deduct i on i s
al l owed f or r esear ch and exper i ment at i on expendi t ur es.
*c. The cr edi t i s not avai l abl e f or r esear ch conduct ed out si de
t he Uni t ed St at es.
d. Al l cor por at i ons qual i f y f or t he basi c r esear ch cr edi t .

1601. Gr een Company, i n t he r enovat i on of i t s bui l di ng, i ncur s $9, 000
of expendi t ur es t hat qual i f y f or t he di sabl ed access cr edi t . The
di sabl ed access cr edi t i s:

a. $8, 750.
b. $4, 500.
*c. $4, 375.
d. $4, 250.

1602. Amber i s i n t he pr ocess t hi s year of r enovat i ng t he of f i ce
bui l di ng ( or i gi nal l y pl aced i n ser vi ce i n 1976) used by her busi ness.
Because of cur r ent Feder al Regul at i ons t hat r equi r e t he st r uct ur e t o be
accessi bl e t o handi capped i ndi vi dual s, she i ncur s an addi t i onal $11, 000
f or var i ous f eat ur es, such as r amps and wi dened door ways, t o make her
of f i ce bui l di ng mor e accessi bl e. The $11, 000 i ncur r ed wi l l pr oduce a
di sabl ed access cr edi t of what amount ?

a. $0.
*b. $5, 000.
c. $5, 125.
d. $5, 500.

1603. Whi ch, i f any, of t he f ol l owi ng correctly descr i bes t he ear ned
i ncome cr edi t ?

a. Woul d be avai l abl e r egar dl ess of t he amount of t he t axpayer s
adj ust ed gr oss i ncome.
b. Not avai l abl e t o a sur vi vi ng spouse.
c. A t axpayer must have a qual i f yi ng chi l d t o t ake advant age of
t he cr edi t .
*d. I s a r ef undabl e cr edi t .

1604. Rex and Dena ar e mar r i ed and have t wo chi l dr en, Mi chel l e ( age 7)
and Nancy ( age 5) . Dur i ng 2013, Rex ear ned a sal ar y of $24, 500,
r ecei ved i nt er est i ncome of $300, and f i l ed a j oi nt i ncome t ax r et ur n.
Dena had $0 gr oss i ncome. Thei r ear ned i ncome cr edi t f or t he year i s:

a. $0.
b. $406.
*c. $4, 966.
d. $5, 372.

1605. Cher yl i s si ngl e, has one chi l d ( age 6) , and f i l es as head of
househol d dur i ng 2013. Her sal ar y f or t he year i s $19, 500. She
qual i f i es f or an ear ned i ncome cr edi t of t he f ol l owi ng amount :

a. $0.
b. $315.
*c. $2, 935.
d. $3, 250.

1606. Dur i ng 2013, Bar r y ( who i s si ngl e and has no chi l dr en) ear ned a
sal ar y of $13, 000. He i s age 30. Hi s ear ned i ncome cr edi t f or t he year
i s:

a. $0.
*b. $102.
c. $385.
d. $487.

1607. Geor ge and J i l l ar e husband and wi f e, ages 67 and 65 r espect i vel y.
Dur i ng t he year , t hey r ecei ve Soci al Secur i t y benef i t s of $4, 000 and
have adj ust ed gr oss i ncome of $11, 000. Assumi ng t hey f i l e a j oi nt
r et ur n, t hei r t ax cr edi t f or t he el der l y, bef or e consi der i ng any
possi bl e l i mi t at i on due t o t hei r t ax l i abi l i t y, i s:

a. $1, 125.
b. $750.
*c. $450.
d. $375.

1608. Dur i ng t he year , Gr een Cor por at i on ( a U. S. cor por at i on) has U. S. -
sour ce i ncome of $750, 000 and f or ei gn i ncome of $500, 000. The f or ei gn-
sour ce i ncome gener at es f or ei gn i ncome t axes of $240, 000. The U. S.
i ncome t ax bef or e t he f or ei gn t ax cr edi t i s $425, 000. Gr een
Cor por at i on s f or ei gn t ax cr edi t i s:

*a. $170, 000.
b. $240, 000.
c. $425, 000.
d. $500, 000.

1609. Dur i ng t he year , Pur pl e Cor por at i on ( a U. S. Cor por at i on) has
U. S. - sour ce i ncome of $1, 800, 000 and f or ei gn i ncome of $600, 000. The
f or ei gn- sour ce i ncome gener at es f or ei gn i ncome t axes of $150, 000. The
U. S. i ncome t ax bef or e t he f or ei gn t ax cr edi t i s $816, 000. Pur pl e
Cor por at i on s f or ei gn t ax cr edi t i s:

a. $112, 500.
*b. $150, 000.
c. $204, 000.
d. $816, 000.

1610. I n 2012, J uan and J uani t a i ncur $9, 800 i n l egal and adopt i on f ees
di r ect l y r el at ed t o t he adopt i on of an i nf ant son bor n i n a near by
st at e. Over t he next year , t hey i ncur anot her $4, 500 of adopt i on
expenses. The adopt i on becomes f i nal i n 2013. Whi ch of t he f ol l owi ng
choi ces pr oper l y r ef l ect s t he amount s and year s i n whi ch t he adopt i on
expenses cr edi t i s avai l abl e.
2012 2013

a. $9, 800 $ 4, 500
*b. None $12, 970
c. None $14, 300
d. $9, 800 $ 3, 170

1611. Whi ch of t he f ol l owi ng st at ement s r egar di ng t he adopt i on expenses
cr edi t i s not t r ue?

a. The adopt i on expenses cr edi t i s a nonr ef undabl e cr edi t .
b. The adopt i on expenses cr edi t st ar t s t o be phased out i n 2013
begi nni ng when a t axpayer s modi f i ed AGI exceeds $194, 580.
c. No adopt i on expenses cr edi t i s a avai l abl e i n 2013 i f a
t axpayer s modi f i ed AGI exceeds $234, 580.
*d. The adopt i on expenses cr edi t i s l i mi t ed t o no mor e t han
$12, 500 per el i gi bl e chi l d i n 2013.

1612. Geor ge and Mar t ha ar e mar r i ed and f i l e a j oi nt t ax r et ur n
cl ai mi ng t hei r t wo chi l dr en, ages 10 and 8 as dependent s. Assumi ng
t hei r AGI i s $119, 650, Geor ge and Mar t ha s chi l d t ax cr edi t i s:

a. $0.
b. $1, 000.
*c. $1, 500.
d. $2, 000.

1613. Har r y and Wi l ma ar e mar r i ed and f i l e a j oi nt i ncome t ax
r et ur n. On t hei r t ax r et ur n, t hey r epor t $44, 000 of adj ust ed gr oss
i ncome ( $20, 000 sal ar y ear ned by Har r y and $24, 000 sal ar y ear ned by
Wi l ma) and cl ai mt wo exempt i ons f or t hei r dependent chi l dr en. Dur i ng
t he year , t hey pay t he f ol l owi ng amount s t o car e f or t hei r 4- year ol d
son and 6- year ol d daught er whi l e t hey wor k.

ABC Day Care Center $3,200
Blue Ridge Housekeeping
Services
2,000
Mrs. Mason (Harrys
mother)
1,000

Harry and Wilma may claim a credit for child and dependent care expenses of:

a. $840.
b. $1, 040.
*c. $1, 200.
d. $1, 240.

1614. Kevi n and Sue have t wo chi l dr en, ages 8 and 14. They spend $6, 200
per year on el i gi bl e empl oyment r el at ed expenses f or t he car e of t hei r
chi l dr en af t er school . Kevi n ear ned a sal ar y of $20, 000 and Sue ear ned
a sal ar y of $18, 000. What i s t he amount of t he cr edi t f or chi l d and
dependent car e expenses?

*a. $690.
b. $713.
c. $1, 380.
d. $1, 426.

1615. Whi ch of t he f ol l owi ng st at ement s concer ni ng t he cr edi t f or chi l d
and dependent car e expenses i s not cor r ect ?

a. A t axpayer i s not al l owed bot h an excl usi on f r omi ncome and
t he cr edi t f or chi l d and dependent car e expenses on t he same
amount .
b. A t axpayer i s not al l owed bot h a deduct i on as a medi cal
expense and t he cr edi t f or chi l d and dependent car e expenses on
t he same amount .
c. I f a t axpayer s adj ust ed gr oss i ncome exceeds $43, 000, t he
r at e f or t he cr edi t f or chi l d and dependent car e expenses i s 20%.
*d. I f a t axpayer s adj ust ed gr oss i ncome exceeds $15, 000 but i s
not over $17, 000, t he r at e f or t he cr edi t f or chi l d and dependent
car e expenses i s 35%.

1616. J er mai ne and Kesha ar e mar r i ed, f i l e a j oi nt t ax r et ur n, have AGI
of $82, 500, and have t wo chi l dr en. Devona i s begi nni ng her f r eshman
year at St at e Uni ver si t y dur i ng Fal l 2013, and Ar et hi a i s begi nni ng her
seni or year at Nor t heast Uni ver si t y dur i ng Fal l 2013 af t er havi ng
compl et ed her j uni or year dur i ng t he spr i ng of t hat year . Bot h Devona
and Ar et hi a ar e cl ai med as dependent s on t hei r par ent s t ax r et ur n.
Devona s qual i f yi ng t ui t i on expenses and f ees t ot al $4, 000 f or t he f al l
semest er , whi l e Ar et hi a s qual i f yi ng t ui t i on expenses and f ees t ot al
$6, 200 f or each semest er dur i ng 2013. Ful l payment i s made f or t he
t ui t i on and r el at ed expenses f or bot h chi l dr en dur i ng each semest er .
The Amer i can Oppor t uni t y cr edi t avai l abl e t o J er mai ne and Kesha f or
2013 i s:

a. $2, 500.
b. $3, 000.
*c. $5, 000.
d. $6, 000.

1617. Bob and Sal l y ar e mar r i ed, f i l e a j oi nt t ax r et ur n, have AGI of
$108, 000, and have t wo chi l dr en. Del i s begi nni ng her f r eshman year at
St at e Col l ege dur i ng Fal l 2013, and Owen i s begi nni ng hi s seni or year
at Sout hwest Uni ver si t y dur i ng Fal l 2013. Owen compl et ed hi s j uni or
year dur i ng t he Spr i ng semest er of 2011 ( i . e. , he t ook a l eave of
absence dur i ng t he 2012- 2013 school year ) . Bot h Del and Owen ar e
cl ai med as dependent s on t hei r par ent s t ax r et ur n. Del s qual i f yi ng
t ui t i on expenses and f ees t ot al $5, 000 f or t he Fal l semest er , whi l e
Owen s qual i f yi ng t ui t i on expenses wer e $6, 100 f or t he Fal l 2013
semest er . Del s r oomand boar d cost s wer e $3, 200 f or t he Fal l semest er .
Owen di d not i ncur r oomand boar d cost s si nce he l i ved wi t h hi s aunt
and uncl e dur i ng t he year . Ful l payment i s made f or t he t ui t i on and
r el at ed expenses f or bot h chi l dr en at t he begi nni ng of each semest er .
I n addi t i on t o t he chi l dr en s col l ege expenses, Bob al so spent $3, 000
on pr of essi onal educat i on semi nar s dur i ng t he year i n or der t o mai nt ai n
hi s l i cense as a pr act i ci ng dent i st . Bob at t ended t he semi nar s dur i ng
J ul y and August 2013. Comput e t he avai l abl e educat i on t ax cr edi t s f or
Bob and Sal l y f or 2013.

a. $3, 100.
b. $5, 000.
*c. $5, 480.
d. $5, 600.

1618. Whi ch of t he f ol l owi ng st at ement s i s true r egar di ng t he educat i on
t ax cr edi t s?

a. The l i f et i me l ear ni ng cr edi t i s avai l abl e f or qual i f yi ng
t ui t i on and r el at ed expenses i ncur r ed by st udent s pur sui ng onl y
gr aduat e degr ees.
b. The Amer i can Oppor t uni t y cr edi t per mi t s a maxi mumcr edi t of
20%of qual i f i ed expenses up t o $10, 000 per year .
c. The Amer i can Oppor t uni t y cr edi t i s cal cul at ed per t axpayer ,
whi l e t he l i f et i me l ear ni ng cr edi t i s avai l abl e per el i gi bl e
st udent .
d. Cont i nui ng educat i on expenses do not qual i f y f or ei t her
educat i on cr edi t .
*e. None of t he above st at ement s i s t r ue.

1619. Real i zi ng t hat pr ovi di ng f or a comf or t abl e r et i r ement i s up t o
t hem, J i mand J ul i e commi t t o maki ng r egul ar cont r i but i ons t o t hei r
I RAs, begi nni ng t hi s year . Consequent l y, t hey each make a $2, 000
cont r i but i on t o t hei r t r adi t i onal I RA. I f t hei r AGI i s $35, 000 on t hei r
j oi nt r et ur n, what i s t he amount of t hei r cr edi t f or cer t ai n r et i r ement
pl an cont r i but i ons?

*a. $2, 000.
b. $1, 000.
c. $400.
d. $200.

1620. Whi ch of t he f ol l owi ng i ssues does not need r esol ut i on i n an
empl oyer s ef f or t t o compl y wi t h empl oyment t ax payment r equi r ement s?

a. Ascer t ai ni ng whi ch empl oyees and wages ar e cover ed by
empl oyment t axes and ar e subj ect t o wi t hhol di ng f or i ncome t axes.
b. Ar r i vi ng at t he amount t o be pai d and/ or wi t hhel d.
c. Repor t i ng and payi ng empl oyment t axes and i ncome t axes
wi t hhel d t o t he I RS on a t i mel y basi s t hr ough t he use of pr oper
f or ms.
*d. Each of t he above i ssues needs t o be r esol ved.
e. None of t he above i s r el evant t o t he empl oyer .

1621. An empl oyer cal cul at es t he amount of i ncome t ax wi t hhel d f r om
sal ar y or wages based on t he i nf or mat i on an empl oyee pr ovi des on t he
f ol l owi ng f or m:

a. For mW- 2.
b. For mW- 3.
*c. For mW- 4.
d. For m941.

1622. I n t er ms of t he wi t hhol di ng pr ocedur es, whi ch st at ement does not
r ef l ect cur r ent r ul es?

a. Penal t i es can be i mposed f or f i l i ng f al se i nf or mat i on wi t h
r espect t o wage wi t hhol di ng.
b. An empl oyer need not ver i f y t he number of exempt i ons cl ai med
by an empl oyee on For mW- 4 ( Empl oyee s Wi t hhol di ng Al l owance
Cer t i f i cat e) .
c. An empl oyee may cl ai mf ewer t han t he number of wi t hhol di ng
al l owances al l owed, but not mor e.
*d. I n pr epar i ng t he i ncome t ax r et ur n f or t he year , t he empl oyee
i s bound by t he number of exempt i ons cl ai med f or wi t hhol di ng
pur poses.

1623. I dent i f y t he st at ement bel ow t hat i s false.

*a. I f an empl oyer i s not r equi r ed t o wi t hhol d i ncome t axes f r om
an empl oyee s wages, t he wages ar e not t axabl e t o t he empl oyee.
b. I n cer t ai n si t uat i ons, i ncome t ax wi t hhol di ng by an empl oyer
i s vol unt ar y.
c. For 2013, an empl oyer must deposi t wi t h t he gover nment an
amount of FI CA t ax t hat i s t wi ce t he amount wi t hhel d f r omt he
empl oyee s sal ar y ( i . e. , t he empl oyee s and empl oyer s shar es) .
d. I f an excess amount of FI CA has been wi t hhel d f or an empl oyee
because t he empl oyee has mul t i pl e j obs, t he empl oyee may cl ai ma
cr edi t f or t he excess amount wi t hhel d on hi s or her i ncome t ax
r et ur n.

1624. I n descr i bi ng FI CA t axes, whi ch ( i f any) of t he f ol l owi ng
st at ement s i s incorrect?

a. The base amount s f or 2014 pr obabl y wi l l i ncr ease f r omt he 2013
amount s.
*b. The base amount s f or t he Soci al Secur i t y and Medi car e
por t i ons ar e t he same.
c. I f bot h spouses wor k, excess FI CA t axes need not r esul t .
d. Excess FI CA t axes can be cl ai med as an i ncome t ax cr edi t .

1625. Whi ch of t he f ol l owi ng correctly r ef l ect s cur r ent r ul es r egar di ng
est i mat ed t ax payment s f or i ndi vi dual s?

a. Empl oyees ar e not subj ect t o t he est i mat ed t ax payment
pr ovi si ons.
b. Any penal t y i mposed f or under payment i s deduct i bl e f or i ncome
t ax pur poses.
c. Mar r i ed t axpayer s may not make j oi nt est i mat ed t ax payment s
unl ess t hey f i l e a j oi nt i ncome t ax r et ur n.
*d. No quar t er l y payment s ar e r equi r ed i f t he t axpayer s
est i mat ed t ax i s under $1, 000.

1626. Dur i ng 2013, El eanor ear ns $120, 000 i n wages as an empl oyee of an
account i ng f i r m. She al so ear ns $13, 000 i n gr oss i ncome f r oman out si de
consul t i ng ser vi ce she oper at es. Deduct i bl e expenses pai d i n connect i on
wi t h t he consul t i ng ser vi ce amount t o $3, 000. El eanor al so has a
r ecogni zed l ong- t er mcapi t al gai n of $1, 000 f r omt he sal e of a st ock
i nvest ment . She must pay a sel f - empl oyment t ax on:

a. $0.
*b. $10, 000.
c. $13, 000.
d. $14, 000.

1627. Pat gener at ed sel f - empl oyment i ncome i n 2013 of $76, 000. The
sel f - empl oyment t ax i s:

a. $0.
*b. $5, 369. 23.
c. $10, 738. 46.
d. $11, 628. 00.

1628. The cei l i ng amount s and per cent ages f or 2013 f or t he t wo por t i ons
of t he sel f - empl oyment t ax ar e:

Soci al Secur i t y por t i on Medi car e por t i on

a. $110, 100; 12. 4% Unl i mi t ed; 2. 9%
b. $110, 100; 15. 3% Unl i mi t ed; 2. 9%
*c. $113, 700; 12. 4% Unl i mi t ed; 2. 9%
d. $113, 700; 2. 9% Unl i mi t ed; 13. 3%

1629. St eve has a t ent at i ve gener al busi ness cr edi t of $110, 000 f or t he
cur r ent year . Hi s net r egul ar t ax l i abi l i t y bef or e t he gener al busi ness
cr edi t i s $125, 000, and hi s t ent at i ve mi ni mumt ax i s $100, 000. Comput e
St eve s al l owabl e gener al busi ness cr edi t f or t he year .

Cor r ect Answer :
St eve s al l owabl e gener al busi ness cr edi t f or t he year i s l i mi t ed t o
$25, 000, det er mi ned as f ol l ows:

Net income
tax
$125,000*
Less: The
great
er
of:

$1
00,00
0
(tent
ative
minim
um
tax)

(100,000)

$2
5,000
[25%

($125
,000

$25,0
00)]

Amount of
general
business
credit
allowed
$ 25,000

*Net income tax = $125,000 (regular tax liability) + $0 [alternative
minimum tax ($100,000 tentative minimum tax $125,000 regular tax
liability)] $0 (nonrefundable credits).

1630. I n J anuar y 2013, Tammy acqui r ed an of f i ce bui l di ng i n downt own
Syr acuse, New Yor k f or $400, 000. The bui l di ng was or i gi nal l y
const r uct ed i n 1932. Of t he $400, 000 cost , $40, 000 was al l ocat ed t o t he
l and. Tammy i mmedi at el y pl aced t he bui l di ng i nt o ser vi ce, but qui ckl y
r eal i zed t hat subst ant i al r enovat i on woul d be r equi r ed t o keep and
at t r act new t enant s. The r enovat i ons, cost i ng $600, 000, wer e of t he
t ype t hat qual i f i es f or t he r ehabi l i t at i on cr edi t . The i mpr ovement s
wer e compl et ed i n Oct ober 2013.

a. Comput e Tammy s r ehabi l i t at i on t ax cr edi t
f or t he year of acqui si t i on.

b. Det er mi ne t he cost r ecover y deduct i on f or
2013.

c. What i s t he basi s i n t he pr oper t y at t he end
of i t s f i r st year of use by Tammy?

Cor r ect Answer :
a. Tammys adjusted basis in the building
before the rehabilitation expenditures and
current year cost recovery is $360,000
($400,000 $40,000) minus the cost
recovery for the period January through
September. Because the rehabilitation
expenditures of $600,000 exceed the greater
of (1) the adjusted basis of the building
before the rehabilitation ($360,000 minus
the cost recovery for the period January
through September), or (2) $5,000, Tammy is
allowed a rehabilitation tax credit of
$60,000 (10% $600,000).

b. The improvements are treated as separate
property items for purposes of computing
cost recovery. The recovery period for these
improvements begins in October 2013 when the
improvements are placed in service by Tammy.
(Rev. Rul. 87-57, 1987-2 C.B. 687) The cost
recovery period for the underlying structure
begins in January 2013 when it was placed in
service by Tammy. The straight-line method
over 39 years under MACRS of 168(c) must
be used. Using Table 8.6 in Chapter 8 for
straight-line depreciation for 39-year
nonresidential real property, the
appropriate cost recovery percentage for the
building is 2.461% and the percentage for
the improvements is 0.535%.

Cost recovery for the property for 2013 is as
follows:

Cost recovery of building ($360,000
2.461%)
$ 8,860
Plus: Cost recovery of improvements
Cost of improvements $600,000
Less: Credit (10%) (60,000)
Cost recovery basis $540,000
Cost recovery of
improvements ($540,000 0.535%)
2,88
9
Total cost recovery
for 2013
$11,749

c. Tammys basis in the property at the end of 2013 is
determined as follows:

Land $ 40,000
Building:
Cost [$400,000
$40,000 (land)]
$360,000
Less: Cost
recovery
(8,860)
Adjusted basis of
building
351,140
Improvements:
Cost [$600,000
$60,000 (credit)]
$540,000
Less: Cost
recovery
(2,889)
Adjusted basis of
improvements
537,111
Total adjusted basis of property $928,251

1631. I n May 2009, Ci ndy i ncur r ed qual i f yi ng r ehabi l i t at i on
expendi t ur es of $500, 000 on a cer t i f i ed hi st or i c st r uct ur e and pr oper l y
cl ai med t he t ax cr edi t f or r ehabi l i t at i on expendi t ur es. I n Mar ch 2013,
she sol d t he bui l di ng at a l oss. Cal cul at e t he r ehabi l i t at i on
expendi t ur es cr edi t r ecapt ur e t hat she must r epor t i n 2013.

Cor r ect Answer :
Amount of original credit ($500,000
20%)
$100,000

Amount of rehabilitation expenditures
credit recapture ($100,000 40%)
$ 40
,000

Because the property was held by Cindy for more than three years but less
than four years, the recapture percentage is 40%.

1632. I n May 2013, Bl ue Cor por at i on hi r ed Cami l l a, J ol ene, and Tyr one,
al l of whomar e cer t i f i ed as l ong- t er mf ami l y assi st ance r eci pi ent s.
Each empl oyee i s pai d $12, 000 dur i ng 2013. Cami l l a and Tyr one cont i nued
t o wor k f or Bl ue Cor por at i on i n 2014, ear ni ng $14, 000 each. Bl ue hi r ed
no addi t i onal empl oyees dur i ng 2014.

a. Comput e Bl ue Cor por at i on s wor k oppor t uni t y
t ax cr edi t s f or 2013 and 2014.

b. Assume Bl ue Cor por at i on pays t ot al wages of
$500, 000 t o i t s empl oyees dur i ng 2013 and
$560, 000 dur i ng 2014. How much may Bl ue
Cor por at i on cl ai mas a wage deduct i on f or
2013 and 2014 i f t he wor k oppor t uni t y t ax
cr edi t i s cl ai med i n bot h year s?

Cor r ect Answer :
a. The work opportunity tax credit for
2013 is calculated as follows:
3 qualified employees $10,000 limit
on wages for each employee 40%
$12,00
0
The work opportunity tax credit for
2014 is calculated as follows:
2 qualified employees in second year
of employment $10,000 limit on
wages
per employee 50%
$10,00
0

b. The wage deduction for 2013 is $488,000
[$500,000 (total wages) $12,000
(credit)].

The wage deduction for 2014 is $550,000
[$560,000 (total wages) $10,000
(credit)].

1633. Ri ck spends $750, 000 t o bui l d a qual i f i ed l ow- i ncome housi ng
pr oj ect , whi ch i s pl aced i n ser vi ce on J anuar y 1, 2013. He f i nanced t he
pr oj ect usi ng hi s per sonal f unds. What i s t he amount of t he l ow- i ncome
housi ng cr edi t t hat Ri ck may cl ai mi n 2013 ( assumi ng a r at e of 7. 36%) ?
What i s t he t ot al amount of t he cr edi t t hat Ri ck may cl ai mas a r esul t
of t he $750, 000 expendi t ur e?

Cor r ect Answer :
Ri ck may cl ai ma cr edi t of $55, 200 i n 2013 ( $750, 000 7. 36%) . I n
addi t i on, he may cl ai ma cr edi t of $55, 800 per year f or each of t he
next ni ne year s, begi nni ng i n 2014, f or a t ot al cr edi t of $552, 000.

1634. Gol den Cor por at i on i s an el i gi bl e smal l busi ness f or pur poses of
t he di sabl ed access cr edi t . Dur i ng t he year , Gol den makes t he f ol l owi ng
expendi t ur es on a st r uct ur e or i gi nal l y pl aced i n ser vi ce i n 1988.

Removal of ar chi t ect ur al bar r i er s $ 8, 500
Acqui r ed equi pment f or di sabl ed
per sons
6, 250
$14, 750

I n addi t i on, $8, 000 was expended by Gol den on a bui l di ng or i gi nal l y
pl aced i n ser vi ce i n t he cur r ent year t o ensur e easy accessi bi l i t y by
di sabl ed i ndi vi dual s. Cal cul at e t he amount of t he di sabl ed access
cr edi t avai l abl e t o Gol den Cor por at i on.

Cor r ect Answer :
Eligible access expenditures
($8,500 + $6,250); limited to
$10,250
$10,250
Less: Threshold amount (25
0)
Disabled access credit base $10,000
Tax credit rate 50%
Disabled access credit $ 5,000

The expenditures of $8,000 incurred on the building originally placed in
service in the current year do not qualify for the credit. The outlay is
not considered an eligible expenditure because it is incurred on a
structure placed in service after the enactment of the disabled access
credit provision (November 5, 1990).

1635. J ul i a i s 30 year s ol d, unmar r i ed wi t h a 9 year - ol d daught er , and
has ear ni ngs dur i ng 2013 of $19, 700. Does she qual i f y f or t he ear ned
i ncome cr edi t ? I f so, cal cul at e t he amount of cr edi t t hat i s avai l abl e
t o her .

Cor r ect Answer :
Maximum credit available
for 2013 ($9,560 34%)
$3,250
Less: Credit phaseout
Earned income $19,700
Base for phaseout (17,530)
Excess $ 2,170
Phaseout rate 15.98% (347)
Available earned
income credit
$2,903

1636. J ack and J i l l ar e mar r i ed, have t hr ee chi l dr en, and have ear ni ngs
dur i ng 2013 of $28, 500. Do t hey qual i f y f or t he ear ned i ncome cr edi t ?
I f so, cal cul at e t he amount of cr edi t t hat i s avai l abl e t o t hem.

Cor r ect Answer :
Earned income of $28,500 (but
subject to ceiling of $13,430)
$13,430
Rate 45.00%
Tentative credit $ 6,044
Less: Credit phase-out
Earned income $28,500
Base for phase-out (22,870)
Excess $5,630
Phase-out rate 21.06% (1,186)
Available earned
income credit
$ 4,858

1637. Henr y, age 68, and Wi l ma, age 69, ar e mar r i ed r et i r ees who
r ecei ved t he f ol l owi ng i ncome and r et i r ement benef i t s dur i ng t he year .

Ful l y t axabl e pensi on f r om
Henr y s f or mer empl oyer
$8, 800
Taxabl e i nt er est 4, 500
Soci al Secur i t y benef i t s 2, 400

Assume Henr y and Wi l ma f i l e a j oi nt r et ur n, have no deduct i ons for AGI ,
and do not i t emi ze t hei r deduct i ons. Ar e t hey el i gi bl e f or t he t ax
cr edi t f or t he el der l y? I f so, cal cul at e t he amount of t he cr edi t ,
assumi ng t he cr edi t i s not l i mi t ed by t hei r i ncome t ax l i abi l i t y.

Cor r ect Answer :
Base amount (married filing
jointly; both 65 or older)
$7,500
Less: Social Security benefits $2,400
1/2 (AGI over $10,000)
[1/2 ($8,800 + $4,500 1,650 (4,050)
$10,000)]
Balance subject to credit $3,450
Rate 15%
Tax credit $ 518

1638. Summer Cor por at i on s busi ness i s i nt er nat i onal i n scope and i s
subj ect t o i ncome t axes i n sever al count r i es. Summer s ear ni ngs and
i ncome t axes pai d i n t he r el evant f or ei gn count r i es ar e:

Count r y I ncome Taxes
A $1, 000, 00
0
$500, 000
B 300, 0
00
30, 00
0
C 400, 0
00
120, 000
Tot al $1, 700, 00
0
$650, 000

I f Summer Cor por at i on s wor l dwi de i ncome subj ect t o t axat i on i n t he
Uni t ed St at es i s $2, 400, 000 and t he U. S. i ncome t ax due pr i or t o t he
f or ei gn t ax cr edi t i s $816, 000, comput e t he al l owabl e f or ei gn t ax
cr edi t . I f , i nst ead, t he t ot al f or ei gn i ncome t axes pai d wer e $550, 000,
comput e t he al l owabl e f or ei gn t ax cr edi t .

Cor r ect Answer :
Over al l l i mi t at i on:

Foreign-source
taxable income
Worldwide taxable
income

U.S. tax
before
FTC

=
Overall
limitation

$1,700,000
$2,400,000

$816,000 =
$578,000

Therefore, because the overall limitation is less than the foreign taxes
actually paid ($650,000), the foreign tax credit is $578,000.

However, if $550,000 of foreign taxes were paid, the foreign tax credit
would be limited to the amount of foreign taxes actually paid, or $550,000.

1639. Dabney and Nancy ar e mar r i ed, bot h gai nf ul l y empl oyed, and have
t wo chi l dr en who ar e 3 and 6 year s ol d. Dabney s sal ar y i s $35, 000
whi l e Nancy s sal ar y i s $40, 000. Dur i ng t he year , t hey spend $7, 000 f or
chi l d car e expenses t hat ar e r equi r ed so bot h of t hemcan wor k out si de
of t he home. Cal cul at e t he cr edi t f or chi l d and dependent car e expenses.

Cor r ect Answer :
For t wo or mor e qual i f yi ng chi l dr en, t he maxi mumexpense al l owed f or
pur poses of t he cr edi t f or chi l d and dependent car e expenses i s $6, 000.
Si nce t hei r combi ned AGI i s mor e t han $43, 000, t he appl i cabl e r at e f or
t he cr edi t i s 20%. Thus, t he cr edi t al l owed i s $1, 200 ( 20% $6, 000) .

1640. Br adl ey has t wo col l ege- age chi l dr en, Cl i nt , a f r eshman at St at e
Uni ver si t y, and Abi gai l , a j uni or at Nor t hwest Uni ver si t y. Bot h Cl i nt
and Abi gai l ar e f ul l - t i me st udent s. Cl i nt s expenses dur i ng t he 2013
f al l semest er ar e as f ol l ows: $2, 400 t ui t i on, $250 books and cour se
mat er i al s, and $1, 600 r oomand boar d. Abi gai l s expenses f or t he 2013
cal endar year ar e as f ol l ows: $10, 200 t ui t i on, $1, 200 books and cour se
mat er i al s, and $3, 600 r oomand boar d. Tui t i on and t he appl i cabl e r oom
and boar d cost s ar e pai d at t he begi nni ng of each semest er . Br adl ey i s
mar r i ed, f i l es a j oi nt t ax r et ur n, cl ai ms bot h chi l dr en as dependent s,
and has a combi ned AGI wi t h hi s wi f e of $114, 000 f or 2013. Det er mi ne
Br adl ey s avai l abl e educat i on t ax cr edi t f or 2013.

Cor r ect Answer :
I n 2013, bot h Cl i nt and Abi gai l qual i f y f or t he Amer i can Oppor t uni t y
cr edi t . Cl i nt s qual i f yi ng expenses ar e $2, 650 ( $2, 400 t ui t i on and $250
books and cour se mat er i al s) ; Abi gai l s qual i f yi ng expenses ar e $11, 400
( $10, 200 t ui t i on and $1, 200 books and cour se mat er i al s) .

Cl i nt s Amer i can Oppor t uni t y cr edi t i s $2, 162. 50 [ 100%of t he f i r st
$2, 000 of qual i f yi ng expenses pl us 25%of t he next $2, 000 of qual i f yi ng
expenses; $2, 000 + ( $650 25%) ] . Abi gai l s Amer i can Oppor t uni t y cr edi t
i s $2, 500 ( 100%of t he f i r st $2, 000 of qual i f yi ng expenses pl us 25%of
t he next $2, 000 of qual i f yi ng expenses; $2, 000 + ( $2, 000 25%) ] .

Al t hough t he Amer i can Oppor t uni t y cr edi t s ar e subj ect t o a phaseout f or
hi gher i ncome t axpayer s, Br adl ey s AGI of $114, 000 i s l ess t han t he
phaseout st ar t i ng poi nt i n 2013 ( $160, 000 f or mar r i ed t axpayer s f i l i ng
j oi nt l y) .

So, t he t ot al educat i on cr edi t avai l abl e f or t he year i s $4, 662. 50
( $2, 162. 50 + $2, 500) .

1641. Phi l and Audr ey, husband and wi f e, ar e bot h empl oyed by Laur el
Cor por at i on. Phi l ear ns $115, 000 i n sal ar y i n 2013, and Audr ey ear ns
$70, 000. How much FI CA t ax must t hey pay f or 2013?

Cor r ect Answer :
Phi l wi l l pay $8, 716. 90 [ ( 6. 2% $113, 700) + ( 1. 45% $115, 000) ] and
Audr ey wi l l pay $5, 355. 00 [ ( 6. 2% $70, 000) + ( 1. 45% $70, 000) ] , f or a
t ot al of $14, 071. 90 f or t he coupl e.

1642. Ken i s mar r i ed t o a nonempl oyed spouse and has t hr ee chi l dr en. He
i s empl oyed by Skyvi ew, I nc. , and i s pai d a mont hl y sal ar y of $5, 150.
Usi ng t hese f act s, det er mi ne t he amount t o be wi t hhel d by Skyvi ew, I nc. ,
f or Feder al i ncome t ax pur poses under t he wage- br acket t abl es and under
t he per cent age met hod f or 2013.

Cor r ect Answer :
Wage- br acket t abl e met hod:
Wi t hhol di ng on $5, 150 mont hl y payr ol l per i od, si x wi t hhol di ng
al l owances, *
married taxpayer (from Table 13.6) $300.00

* The six withholding allowances include Ken, Kens spouse, 3 dependent
children, and the special withholding allowance (which is available because
Kens spouse is not employed).

Computation of Kens withholding using the percentage method (Tables 13.7
and 13.8):

Step 1 Multiply the amount of one monthly
allowance ($325.00) by the employees
total allowances (6) = $1,950.00.

Step 2 Reduce the employees wages ($5,150.00)
by the product that was reached in Step 1
($1,950.00) = $3,200.00.

Step 3 Compute the tax on the result that was
derived in Step 2 (referring to Table
13.8). Withholding on $3,200.00
[($3,200.00 $2,179.00) 15%] +
$148.70 = $301.85.

1643. Susan gener at ed $55, 000 of net ear ni ngs f r omt he conduct of a t ax
pr epar at i on busi ness t hat she oper at ed dur i ng t he t ax- f i l i ng season.
She al so r ecei ved wages of $63, 500 f r omher f ul l - t i me j ob. Comput e t he
sel f - empl oyment t axes due f or 2013.

Cor r ect Answer :
Sel f - empl oyment ear ni ngs subj ect t o t he Soci al Secur i t y por t i on of t he
sel f - empl oyment t ax:

Ceiling amount $113,700.00

Less: FICA wages (63,500.
00)
Net ceiling $ 50,200.
00

Net self-employment income
($55,000 92.35%)
$ 50,792.50

Lesser of net ceiling or net
self-employment income
$ 50,200.00

Social Security portion of the
tax ($50,200 12.4%)
$ 6,224.
80
Self-employment earnings subject
to the Medicare portion of the
self-

employment tax: $50,792.50
2.9%
1,4
72.98
Total self-employment tax $ 7,697.
78

1644. Di scuss t he t r eat ment of unused gener al busi ness cr edi t s.

Cor r ect Answer :
Unused gener al busi ness cr edi t s ar e i ni t i al l y car r i ed back one year and
appl i ed t o r educe t he i ncome t ax l i abi l i t y dur i ng t hat year . Thus, t he
t axpayer may r ecei ve a t ax r ef und as a r esul t of t he car r yback. Any
r emai ni ng unused cr edi t s ar e t hen car r i ed f or war d 20 year s. A FI FO
met hod i s appl i ed t o t he car r ybacks, car r yover s, and ut i l i zat i on of
cr edi t s ear ned dur i ng a par t i cul ar year . Thi s pr ocedur e mi ni mi zes t he
pot ent i al f or l oss of a gener al busi ness cr edi t benef i t .

1645. Expl ai n t he pur pose of t he t ax cr edi t f or r ehabi l i t at i on
expendi t ur es and descr i be t he gener al char act er i st i cs of i t s
comput at i on.

Cor r ect Answer :
The r ehabi l i t at i on expendi t ur es cr edi t i s i nt ended t o di scour age
busi nesses f r ommovi ng f r omol der , economi cal l y di st r essed ar eas ( e. g. ,
i nner ci t i es) t o newer l ocat i ons and t o encour age t he pr eser vat i on of
hi st or i c st r uct ur es. To t hat end, t axpayer s ar e al l owed a t ax cr edi t
f or expendi t ur es i ncur r ed t o r ehabi l i t at e i ndust r i al and commer ci al
bui l di ngs and cer t i f i ed hi st or i c st r uct ur es. To cal cul at e t he cr edi t ,
qual i f yi ng expendi t ur es ar e mul t i pl i ed by 10 per cent f or nonr esi dent i al
bui l di ngs and r esi dent i al r ent al pr oper t y ( ot her t han hi st or i c
st r uct ur es) or i gi nal l y pl aced i n ser vi ce bef or e 1936. For
nonr esi dent i al and r esi dent i al cer t i f i ed hi st or i c st r uct ur es, a 20
per cent r at e i s appl i ed. To qual i f y f or t he cr edi t , t he bui l di ngs must
be subst ant i al l y r ehabi l i t at ed.

1646. Expl ai n t he pur pose of t he di sabl ed access cr edi t and descr i be
t he gener al char act er i st i cs of i t s comput at i on.

Cor r ect Answer :
The di sabl ed access cr edi t i s desi gned t o encour age smal l busi nesses t o
make t hei r busi nesses mor e accessi bl e t o di sabl ed i ndi vi dual s. The
cr edi t i s onl y avai l abl e t o el i gi bl e smal l busi nesses and i s based on
el i gi bl e access expendi t ur es made by such t axpayer s. I n gener al , t he
cr edi t i s cal cul at ed at t he r at e of 50%of t he el i gi bl e expendi t ur es
t hat exceed $250 but do not exceed $10, 250. The cr edi t appl i es onl y t o
bui l di ngs pl aced i n ser vi ce bef or e November 6, 1990.

1647. Descr i be t he wi t hhol di ng r equi r ement s appl i cabl e t o empl oyer s.

Cor r ect Answer :
Empl oyer s ar e r equi r ed t o wi t hhol d empl oyment t axes ( i . e. , FI CA, whi ch
commonl y i s r ef er r ed t o as Soci al Secur i t y t ax) and appr opr i at e amount s
f or i ncome t axes f r omeach empl oyee s compensat i on payment s. Though not
wi t hhel d f r omt he empl oyees compensat i on, t he empl oyer al so i s
r equi r ed t o mat ch t he FI CA por t i on wi t hhel d and f ul l y absor b t he cost
of FUTA.

The FI CA t ax i s compr i sed of t wo el ement s: t he Soci al Secur i t y t ax and
t he Medi car e t ax. I n 2013, t he wi t hhol di ng f or t he Soci al Secur i t y
component i s equal t o t he gr oss compensat i on pai d ( up t o $113, 700 i n
2013) 6. 2%, whi l e t he ent i r e amount of compensat i on pai d i s subj ect t o
t he Medi car e t ax at t he r at e of 1. 45%.

To det er mi ne t he appr opr i at e amount of i ncome t ax wi t hhel d:

the employee must complete a Form W-4, which
indicates the number of withholding
allowances and any additional amounts to be
withheld,

determine the employees payroll period
(e.g., bi-weekly, monthly), and

compute the amount to be withheld by using
either the wage-bracket tables or the
percentage method.

1648. How does t he FI CA t ax compar e t o t he sel f - empl oyment t ax? How ar e
t hese t wo t axes si mi l ar and how do t hey di f f er ?

Cor r ect Answer :
These t axes, commonl y r ef er r ed t o as payr ol l t axes, ar e l evi ed t o
suppor t t he Soci al Secur i t y and Medi car e benef i t s payabl e t o t axpayer s
by t he Feder al gover nment dur i ng t hei r r et i r ement year s. The FI CA t ax
i s l evi ed on sal ar y and wages ear ned by an empl oyee, whi l e t he sel f -
empl oyment t ax i s l evi ed on ear ni ngs f r omsel f - empl oyment ( e. g. , gr oss
i ncome f r oma t r ade or busi ness l ess al l owabl e t r ade or busi ness
deduct i ons, t he di st r i but i ve shar e of any par t ner shi p i ncome or l oss
der i ved f r oma t r ade or busi ness act i vi t y, and t he net i ncome f or
r ender i ng per sonal ser vi ces as an i ndependent cont r act or ) .

Bot h t axes have t wo component s: t he Soci al Secur i t y t ax and t he
Medi car e t ax. For Soci al Secur i t y, wi t hhol di ngs f r omempl oyees must
cont i nue unt i l t he maxi mumbase amount i s r eached. I n 2013, Soci al
Secur i t y wi t hhol di ng ( cal cul at ed at 6. 2%t i mes ear ned wages subj ect t o
Soci al Secur i t y) ceases once t he empl oyee has ear ned wages i n t he
amount of $113, 700. For t he Medi car e por t i on, t he empl oyer i s r equi r ed
t o wi t hhol d at t he r at e of 1. 45%on al l wages wi t hout l i mi t . I n
addi t i on, t he empl oyer i s r equi r ed t o cont r i but e an amount equal t o t he
amount wi t hhel d f r oman empl oyee s ear ni ngs. For 2013, t he sel f -
empl oyment t ax i s 12. 4%of sel f - empl oyment i ncome up t o $113, 700 and
2. 9%of t he t ot al amount of sel f - empl oyment ear ni ngs.

1649. Real i zed gai n or l oss i s measur ed by t he di f f er ence bet ween t he
amount r eal i zed f r omt he sal e or ot her di sposi t i on of pr oper t y and t he
pr oper t y s adj ust ed basi s at t he dat e of di sposi t i on.

*a. Tr ue
b. Fal se

1650. I n comput i ng t he amount r eal i zed when t he f ai r mar ket val ue of
t he pr oper t y r ecei ved cannot be det er mi ned, t he f ai r mar ket val ue of
t he pr oper t y sur r ender ed may be used.

*a. Tr ue
b. Fal se

1651. I f Wal - Mar t st ock i ncr eases i n val ue dur i ng t he t ax year by
$6, 000, t he amount r eal i zed i s a posi t i ve $6, 000.

a. Tr ue
*b. Fal se

1652. I f t he buyer assumes t he sel l er s l i abi l i t y on t he pr oper t y
acqui r ed, t he sel l er s amount r eal i zed i s decr eased by t he amount of
t he l i abi l i t y assumed.

a. Tr ue
*b. Fal se

1653. The f ai r mar ket val ue of pr oper t y r ecei ved i n a sal e or ot her
di sposi t i on i s t he pr i ce at whi ch pr oper t y wi l l change hands bet ween a
wi l l i ng sel l er and a wi l l i ng buyer when nei t her i s compel l ed t o sel l or
buy.

*a. Tr ue
b. Fal se

1654. I f a sel l er assumes t he buyer s l i abi l i t y on t he pr oper t y
acqui r ed, t he buyer s adj ust ed basi s f or t he pr oper t y i s i ncr eased by
t he amount of t he l i abi l i t y assumed.

a. Tr ue
*b. Fal se

1655. Expendi t ur es made f or or di nar y r epai r s and mai nt enance of
pr oper t y ar e not added t o t he or i gi nal basi s i n t he det er mi nat i on of
t he pr oper t y s adj ust ed basi s wher eas capi t al expendi t ur es ar e added t o
t he or i gi nal basi s.

*a. Tr ue
b. Fal se

1656. Mi l t on pur chases l and and a f act or y bui l di ng f or hi s busi ness f or
$300, 000 wi t h $100, 000 bei ng al l ocat ed t o t he l and. Dur i ng t he f i r st
year , Mi l t on deduct s cost r ecover y of $4, 922. Mi l t on s adj ust ed basi s
f or t he bui l di ng at t he end of t he f i r st year i s $195, 078 ( $200, 000
$4, 922) .

*a. Tr ue
b. Fal se

1657. I n a casual t y or t hef t , t he basi s of pr oper t y i nvol ved i s r educed
by t he amount of i nsur ance pr oceeds r ecei ved and by any r esul t i ng
r ecogni zed l oss.

*a. Tr ue
b. Fal se

1658. Monr oe s del i ver y t r uck i s damaged i n an acci dent . Monr oe s
adj ust ed basi s f or t he del i ver y t r uck pr i or t o t he acci dent i s $20, 000.
I f Monr oe r ecei ves i nsur ance pr oceeds of $21, 000 and r ecogni zes a
casual t y gai n of $1, 000, hi s adj ust ed basi s f or t he del i ver y t r uck
af t er t he acci dent i s $21, 000.

a. Tr ue
*b. Fal se

1659. I f i nsur ance pr oceeds ar e r ecei ved f or pr oper t y used i n a t r ade
or busi ness, a casual t y t r ansact i on can r esul t i n r ecogni zed gai n, but
cannot r esul t i n a r ecogni zed l oss.

a. Tr ue
*b. Fal se

1660. I f t he amount of a cor por at e di st r i but i on i s l ess t han t he amount
of t he cor por at e ear ni ngs and pr of i t s, t he r et ur n of capi t al concept
does not appl y and t he shar ehol der s adj ust ed basi s f or t he st ock
r emai ns unchanged.

*a. Tr ue
b. Fal se

1661. Reggi e owns al l t he st ock of Amet hyst , I nc. ( adj ust ed basi s of
$100, 000) . I f he r ecei ves a di st r i but i on f r omAmet hyst of $90, 000 and
cor por at e ear ni ngs and pr of i t s ar e $15, 000, Reggi e has a capi t al gai n
of $5, 000 and an adj ust ed basi s f or hi s Amet hyst st ock of $0.

a. Tr ue
*b. Fal se

1662. The amount of a cor por at e di st r i but i on qual i f yi ng f or capi t al
r ecover y t r eat ment whi ch exceeds t he shar ehol der - r eci pi ent s basi s i n
t he st ock i nvest ment i s t r eat ed as a capi t al gai n.

*a. Tr ue
b. Fal se

1663. The adj ust ed basi s f or a t axabl e bond pur chased at a pr emi umi s
r educed i f t he amor t i zat i on el ect i on i s made. The amount of t he
amor t i zed pr emi umi s t r eat ed as an i nt er est deduct i on.

*a. Tr ue
b. Fal se

1664. Hel en pur chases a $10, 000 cor por at e bond at a pr emi umof $1, 000
and el ect s t o amor t i ze t he pr emi um. On t he l at er sal e of t he bond f or
$10, 800, she has amor t i zed $300 of t he pr emi um. Hel en has a r ecogni zed
gai n of $800 ( $10, 800 amount r eal i zed $10, 000 adj ust ed basi s) .

a. Tr ue
*b. Fal se

1665. The amount r ecei ved f or a ut i l i t y easement on l and i s i ncl uded i n
t he gr oss i ncome of t he t axpayer .

a. Tr ue
*b. Fal se

1666. A r eal i zed gai n on t he sal e or exchange of a per sonal use asset
i s r ecogni zed, but a r eal i zed l oss on t he sal e, exchange, or
condemnat i on of a per sonal use asset i s not r ecogni zed.

*a. Tr ue
b. Fal se

1667. A r eal i zed gai n whose r ecogni t i on i s post poned r esul t s i n t he
t empor ar y r ecover y of mor e t han t he t axpayer s cost or ot her basi s.

*a. Tr ue
b. Fal se

1668. A r eal i zed l oss whose r ecogni t i on i s post poned r esul t s i n t he
t empor ar y r ecover y of mor e t han t he t axpayer s cost or ot her basi s.

a. Tr ue
*b. Fal se

1669. Wade i s a sal esman f or a r eal est at e devel opment
company. Because he i s t he sal esper son of t he year , he i s per mi t t ed
t o pur chase a l ot f r omt he devel oper f or $90, 000. The f ai r mar ket
val ue of t he l ot i s $150, 000 and t he devel oper s adj ust ed basi s i s
$100, 000. Wade must r ecogni ze a gai n of $10, 000 ( $100, 000 devel oper s
adj ust ed basi s $90, 000 cost t o Wade) , and hi s adj ust ed basi s f or t he
l ot i s $100, 000 ( $90, 000 cost + $10, 000 r ecogni zed gai n) .

a. Tr ue
*b. Fal se

1670. When a t axpayer has pur chased sever al l ot s of st ock on di f f er ent
dat es at di f f er ent pur chase pr i ces and cannot i dent i f y t he l ot of st ock
t hat i s bei ng sol d, he shoul d use ei t her a wei ght ed aver age appr oach or
a LI FO appr oach.

a. Tr ue
*b. Fal se

1671. Lump- sumpur chases of l and and a bui l di ng ar e al l ocat ed on t he
basi s of t he r el at i ve f ai r mar ket val ues of t he i ndi vi dual asset s
acqui r ed.

*a. Tr ue
b. Fal se

1672. Pur chased goodwi l l i s assi gned a basi s equal t o cost , whi ch i s
cal cul at ed usi ng t he r esi dual met hod associ at ed wi t h t he pur chase of a
busi ness.

*a. Tr ue
b. Fal se

1673. The hol di ng per i od f or nontaxable st ock di vi dends t hat ar e t he
same t ype ( i . e. , common on common) i ncl udes t he hol di ng per i od of t he
or i gi nal shar es, but t he hol di ng per i od f or nont axabl e st ock di vi dends
t hat ar e not t he same t ype ( i . e. , pr ef er r ed on common) i s new and
begi ns on t he dat e t he di vi dend i s r ecei ved.

a. Tr ue
*b. Fal se

1674. For nont axabl e st ock r i ght s wher e t he f ai r mar ket val ue of t he
r i ght s i s 15%or mor e of t he f ai r mar ket val ue of t he st ock, t he
t axpayer i s r equi r ed t o al l ocat e a por t i on of t he st ock basi s t o t he
st ock r i ght s.

*a. Tr ue
b. Fal se

1675. The car r yover basi s t o a donee f or pr oper t y r ecei ved by gi f t can
be an amount gr eat er t han t he donor s adj ust ed basi s.

*a. Tr ue
b. Fal se

1676. Thi s year , Fr an r ecei ves a bi r t hday gi f t of st ock wor t h $75, 000
f r omher aunt . The aunt has owned t he st ock ( adj ust ed basi s $50, 000)
f or 10 year s and pays gi f t t ax of $27, 000 on t he t r ansf er . Fr an s basi s
i n t he st ock i s $75, 000t he l esser of $77, 000 ( $50, 000 + $27, 000) or
$75, 000.

a. Tr ue
*b. Fal se

1677. The amount of t he l oss basi s of a gi f t wi l l di f f er f r omt he
amount of t he gai n basi s onl y i f at t he dat e of t he gi f t t he adj ust ed
basi s of t he pr oper t y exceeds t he pr oper t y s f ai r mar ket val ue.

*a. Tr ue
b. Fal se

1678. The basi s f or depr eci at i on on depr eci abl e gi f t pr oper t y r ecei ved
i s t he donor s adj ust ed basi s of t he pr oper t y at t he dat e of t he gi f t
( assumi ng no gi f t t axes ar e pai d) . The r ul e appl i es r egar dl ess of
whet her t he f ai r mar ket val ue at t he dat e of t he gi f t i s gr eat er t han
or l ess t han t he donor s adj ust ed basi s.

*a. Tr ue
b. Fal se

1679. The hol di ng per i od f or pr oper t y acqui r ed by gi f t i s aut omat i cal l y
l ong t er m.

a. Tr ue
*b. Fal se

1680. The basi s of i nher i t ed pr oper t y usual l y i s i t s f ai r mar ket val ue
on t he dat e of t he decedent s deat h.

*a. Tr ue
b. Fal se

1681. I f t he f ai r mar ket val ue of t he pr oper t y on t he dat e of deat h i s
gr eat er t han on t he al t er nat e val uat i on dat e, t he use of t he al t er nat e
val uat i on amount i s mandat or y.

a. Tr ue
*b. Fal se

1682. I f t he al t er nat e val uat i on dat e i s el ect ed by t he execut or i n
2013, t he t ot al basi s of i nher i t ed pr oper t y wi l l be mor e t han what i t
woul d have been i f t he pr i mar y val uat i on dat e and amount had been used.

a. Tr ue
*b. Fal se

1683. I f t he al t er nat e val uat i on dat e i s el ect ed by t he execut or of t he
est at e, t he basi s of all of t he pr oper t y i ncl uded i n t he decedent s
est at e becomes t he f ai r mar ket val ue 6 mont hs af t er t he decedent s
deat h.

a. Tr ue
*b. Fal se

1684. I f a husband i nher i t s hi s deceased wi f e s shar e of j oi nt l y owned
pr oper t y i n a common l aw st at e, bot h t he husband s or i gi nal shar e and
t he shar e i nher i t ed f r omt he deceased wi f e ar e st epped- up or down t o
t he f ai r mar ket val ue at t he dat e of t he wi f e s deat h.

a. Tr ue
*b. Fal se

1685. Par ker bought a br and new Fer r ar i on J anuar y 1, 2013, f or
$125, 000. Par ker was f at al l y i nj ur ed i n an aut o acci dent on J une 23,
2013, when t he f ai r mar ket val ue of t he car was $105, 000. Par ker was
dr i vi ng a l oaner car f r omt he Fer r ar i deal er shi p whi l e hi s car was
bei ng ser vi ced. I n hi s wi l l , Par ker l ef t t he Fer r ar i t o hi s best
f r i end, Ryan. Ryan s hol di ng per i od f or t he Fer r ar i begi ns on J anuar y
1, 2013.

a. Tr ue
*b. Fal se

1686. Tr ansact i ons bet ween r el at ed par t i es t hat r esul t i n di sal l owed
l osses mi ght l at er pr ovi de a t ax benef i t t o t he r el at ed par t y buyer .

*a. Tr ue
b. Fal se

1687. For t he l oss di sal l owance pr ovi si on under 267, r el at ed par t i es
i ncl ude cer t ai n f ami l y member s, a shar ehol der and hi s or her cont r ol l ed
cor por at i on ( i . e. , gr eat er t han 50%i n val ue of t he cor por at i on s
out st andi ng st ock) , and a par t ner and hi s or her cont r ol l ed par t ner shi p
( i . e. , gr eat er t han 50%of t he capi t al i nt er est s or pr of i t s i nt er est i n
t he par t ner shi p) .

*a. Tr ue
b. Fal se

1688. I f l osses ar e di sal l owed i n a r el at ed par t y t r ansact i on, t he
hol di ng per i od f or t he buyer i ncl udes t he hol di ng per i od of t he sel l er .

a. Tr ue
*b. Fal se

1689. Ben sel l s st ock ( adj ust ed basi s of $25, 000) t o hi s son, Ray, f or
i t s f ai r mar ket val ue of $15, 000. Ray gi ves t he st ock t o hi s daught er ,
Tr i sh, who subsequent l y sel l s i t f or $26, 000. Ben s r ecogni zed l oss i s
$0 and Tr i sh s r ecogni zed gai n i s $1, 000 ( $26, 000 $15, 000 $10, 000) .

a. Tr ue
*b. Fal se

1690. The basi s of pr oper t y acqui r ed i n a wash sal e i s i t s cost pl us
t he l oss not r ecogni zed on t he wash sal e.

*a. Tr ue
b. Fal se

1691. Real i zed l osses f r omt he sal e or exchange of st ock ar e di sal l owed
i f wi t hi n 30 days bef or e or 30 days af t er t he sal e or exchange, t he
t axpayer acqui r es subst ant i al l y i dent i cal st ock.

*a. Tr ue
b. Fal se

1692. Gene pur chased an SUV f or $45, 000 whi ch he uses 100%f or per sonal
pur poses. When t he SUV i s wor t h $30, 000, he cont r i but es i t t o hi s
busi ness. The gai n basi s i s $45, 000, t he l oss basi s i s $30, 000, and t he
basi s f or cost r ecover y i s $45, 000.

a. Tr ue
*b. Fal se

1693. I f pr oper t y t hat has been conver t ed f r omper sonal use t o busi ness
use has appr eci at ed i n val ue, i t s basi s f or gai n wi l l be t he same as
t he basi s f or l oss.

*a. Tr ue
b. Fal se

1694. The basi s f or gai n and l oss of per sonal use pr oper t y conver t ed t o
busi ness use i s t he l ower of t he adj ust ed basi s or t he f ai r mar ket
val ue on t he dat e of conver si on.

a. Tr ue
*b. Fal se

1695. St uar t owns l and wi t h an adj ust ed basi s of $190, 000 and a f ai r
mar ket val ue of $500, 000. I f t he pr oper t y i s goi ng t o be gi ven t o
St uar t s nephew, Al ex, i t i s pr ef er abl e f or t he t r ansf er t o be by
i nher i t ance r at her t han by gi f t .

*a. Tr ue
b. Fal se

1696. The t axpayer owns st ock wi t h an adj ust ed basi s of $15, 000 and a
f ai r mar ket val ue of $8, 000. I f t he st ock or cash i s goi ng t o be gi ven
t o her ni ece, i t i s pr ef er abl e f or t he t axpayer t o sel l t he st ock and
gi ve t he $8, 000 of cash t o her ni ece. The same pr ef er ence woul d exi st
i f t he r eci pi ent wer e a qual i f i ed char i t abl e or gani zat i on.

*a. Tr ue
b. Fal se

1697. Br oker s commi ssi ons, l egal f ees, and poi nt s pai d by t he sel l er
r educe t he sel l er s amount r eal i zed.

*a. Tr ue
b. Fal se

1698. Si nce wash sal es do not appl y t o gai ns, i t may be desi r abl e t o
engage i n t hi s t ype of t r ansact i on bef or e t he end of t he t ax year .

*a. Tr ue
b. Fal se

1699. Al ber t pur chased a t r act of l and f or $140, 000 i n 2010 when he
hear d t hat a new hi ghway was goi ng t o be const r uct ed t hr ough t he
pr oper t y and t hat t he l and woul d soon be wor t h $200, 000. Hi ghway
engi neer s sur veyed t he pr oper t y and i ndi cat ed t hat he woul d pr obabl y
get $180, 000. The hi ghway pr oj ect was abandoned i n 2013 and t he val ue
of t he l and f el l t o $100, 000. What i s t he amount of l oss Al ber t can
cl ai mi n 2013?

a. $40, 000.
b. $60, 000.
c. $80, 000.
d. $100, 000.

1700. Abby sel l s r eal pr oper t y f or $300, 000. The buyer pays $5, 000 i n
pr oper t y t axes t hat had accr ued dur i ng t he year whi l e t he pr oper t y was
st i l l l egal l y owned by Abby. I n addi t i on, Abby pays $15, 000 i n
commi ssi ons and $3, 000 i n l egal f ees i n connect i on wi t h t he sal e. How
much does Abby r eal i ze ( t he amount r eal i zed) f r omt he sal e of her
pr oper t y?

a. $277, 000.
b. $282, 000.
*c. $287, 000.
d. $300, 000.

1701. Al i ce owns l and wi t h an adj ust ed basi s of $610, 000, subj ect t o a
mor t gage of $350, 000. Real est at e t axes ar e $9, 000 per cal endar year
and ar e payabl e on December 31. On Apr i l 1, 2013, Al i ce sel l s her l and
subj ect t o t he mor t gage f or $650, 000 i n cash, a not e f or $600, 000, and
pr oper t y wi t h a f ai r mar ket val ue of $120, 000. What i s t he amount
r eal i zed?

a. $1, 370, 000.
b. $1, 372, 219.
c. $1, 720, 000.
*d. $1, 722, 219.

1702. Pedr o bor r owed $250, 000 t o pur chase a machi ne cost i ng $300, 000.
He l at er bor r owed an addi t i onal $25, 000 usi ng t he machi ne as col l at er al .
Bot h not es ar e nonr ecour se. Ei ght year s l at er , t he machi ne has an
adj ust ed basi s of zer o and t wo out st andi ng not e bal ances of $145, 000
and $18, 000. Pedr o sel l s t he machi ne subj ect t o t he t wo l i abi l i t i es f or
$45, 000. What i s hi s r eal i zed gai n or l oss?

a. $0.
b. $45, 000.
c. $163, 000.
*d. $208, 000.

1703. The bank f or ecl oses on Li sa s apar t ment compl ex. The pr oper t y had
been pl edged as secur i t y on a nonr ecour se mor t gage, whose pr i nci pal
amount at t he dat e of f or ecl osur e i s $750, 000. The adj ust ed basi s of
t he pr oper t y i s $480, 000, and t he f ai r mar ket val ue i s $750, 000. What
i s Li sa s r ecogni zed gai n or l oss?

*a. $270, 000.
b. ( $750, 000) .
c. $0.
d. ( $480, 000) .

1704. Car l t on pur chases l and f or $550, 000. He i ncur s l egal f ees of
$10, 000 and br oker s commi ssi on of $28, 000 associ at ed wi t h t he pur chase.
He subsequent l y i ncur s addi t i onal l egal f ees of $25, 000 i n havi ng t he
l and r ezoned f r omagr i cul t ur al t o r esi dent i al . He subdi vi des t he l and
and i nst al l s st r eet s and sewer s at a cost of $800, 000. What i s
Car l t on s basi s f or t he l and and t he i mpr ovement s?

a. $1, 350, 000.
b. $1, 378, 000.
c. $1, 385, 000.
*d. $1, 413, 000.

1705. J ami e bought her house i n 2008 f or $395, 000. Si nce t hen, she has
deduct ed $70, 000 i n depr eci at i on associ at ed wi t h her home of f i ce and
has spent $45, 000 r epl aci ng al l t he ol d pi pes and pl umbi ng. She sel l s
t he house on J ul y 1, 2013. Her r eal t or char ged $34, 700 i n
commi ssi ons. Pr i or t o l i st i ng t he house wi t h t he r eal t or , she spent
$300 adver t i si ng i n t he l ocal newspaper . Sammy buys t he house f or
$500, 000 i n cash, assumes her mor t gage of $194, 000, and pays pr oper t y
t axes of $4, 200 f or t he ent i r e year on December 1, 2013. What i s
J ami e s adj ust ed basi s at t he dat e of t he sal e and t he amount r eal i zed?

a. $370, 000 adj ust ed basi s; $661, 400 amount r eal i zed.
*b. $370, 000 adj ust ed basi s; $661, 100 amount r eal i zed.
c. $370, 000 adj ust ed basi s; $665, 200 amount r eal i zed.
d. $325, 000 adj ust ed basi s; $663, 200 amount r eal i zed.
e. $325, 000 adj ust ed basi s; $694, 000 amount r eal i zed.

1706. Yol anda buys a house i n t he mount ai ns f or $450, 000 whi ch she uses
as her per sonal vacat i on home. She bui l ds an addi t i onal r oomon t he
house f or $40, 000. She sel l s t he pr oper t y f or $560, 000 and pays $28, 000
i n commi ssi ons and $4, 000 i n l egal f ees i n connect i on wi t h t he sal e.
What i s t he r ecogni zed gai n or l oss on t he sal e of t he house?

a. $0.
*b. $38, 000.
c. $70, 000.
d. $110, 000.

1707. On Febr uar y 2, 2013, Kar i n pur chases r eal est at e f or $375, 000.
The annual pr oper t y t axes of $5, 000 ar e payabl e on December 31.
Real i zi ng t hat she wi l l pay t he pr oper t y t axes f or t he ent i r e year ,
Kar i n r emi t s $374, 575 t o t he sel l er at cl osi ng. Kar i n s adj ust ed basi s
f or t he r eal est at e i s:

a. $374, 575.
*b. $375, 000.
c. $375, 425.
d. $379, 575.

1708. Capi t al r ecover i es i ncl ude:

a. The cost of capi t al i mpr ovement s.
b. Or di nar y r epai r and mai nt enance expendi t ur es.
c. Payment s made on t he pr i nci pal of a mor t gage on t axpayer s
bui l di ng.
*d. Amor t i zat i on of bond pr emi um.

1709. St eve pur chased hi s home f or $500, 000. As a sol e pr opr i et or , he
oper at es a cer t i f i ed publ i c account i ng pr act i ce i n hi s home. For t hi s
busi ness, he uses one r oomexcl usi vel y and r egul ar l y as a home of f i ce.
I n Year 1, $3, 042 of depr eci at i on expense on t he home of f i ce was
deduct ed on hi s i ncome t ax r et ur n. I n Year 2, St eve sust ai ned l osses i n
hi s busi ness; t her ef or e, no depr eci at i on was t aken on t he home of f i ce.
Had he been al l owed t o deduct depr eci at i on expense, hi s depr eci at i on
expense woul d have been $3, 175. What i s t he adj ust ed basi s i n t he home?

*a. $493, 783.
b. $496, 825.
c. $496, 958.
d. $500, 000.

1710. Sandr a s aut omobi l e, whi ch i s used excl usi vel y i n her t r ade or
busi ness, was damaged i n an acci dent . The adj ust ed basi s pr i or t o t he
acci dent was $11, 000. The f ai r mar ket val ue bef or e t he acci dent was
$10, 000 and t he f ai r mar ket val ue af t er t he acci dent i s $6, 000.
I nsur ance pr oceeds of $3, 200 ar e r ecei ved. What i s Sandr a s adj ust ed
basi s f or t he aut omobi l e af t er t he casual t y?

a. $0.
*b. $7, 000.
c. $7, 800.
d. $10, 200.

1711. J oyce s of f i ce bui l di ng was dest r oyed i n a f i r e ( adj ust ed basi s
of $350, 000; f ai r mar ket val ue of $400, 000) . Of t he i nsur ance pr oceeds
of $360, 000 she r ecei ves, J oyce uses $310, 000 t o pur chase addi t i onal
i nvent or y and i nvest s t he r emai ni ng $50, 000 i n shor t - t er mcer t i f i cat es
of deposi t . She r ecei ved onl y $360, 000 because of a co- i nsur ance
cl ause i n her i nsur ance pol i cy. What i s J oyce s r ecogni zed gai n or
l oss?

a. $0.
b. $10, 000 l oss.
*c. $10, 000 gai n.
d. $40, 000 gai n.

1712. El vi s owns al l of t he st ock of Whi t e Cor por at i on. The accumul at ed
ear ni ngs and pr of i t s of Whi t e Cor por at i on at t he begi nni ng of t he year
ar e a def i ci t of $20, 000. The cur r ent ear ni ngs and pr of i t s ar e $30, 000.
El vi s basi s f or hi s st ock i s $250, 000. He r ecei ves a di st r i but i on of
$300, 000 on t he l ast day of t he t ax year . How much di vi dend i ncome
and/ or capi t al gai n shoul d El vi s r epor t ?

a. $0.
*b. Di vi dend i ncome of $30, 000 and capi t al gai n of $20, 000.
c. Di vi dend i ncome of $30, 000 and capi t al gai n of $0.
d. Di vi dend i ncome of $10, 000 and capi t al gai n of $20, 000.

1713. Kar en owns Ci t y of Ri chmond bonds wi t h a f ace val ue of $10, 000.
She pur chased t he bonds on J anuar y 1, 2013, f or $11, 000. The mat ur i t y
dat e i s December 31, 2022. The annual i nt er est r at e i s 8%. What i s t he
amount of t axabl e i nt er est i ncome t hat Kar en shoul d r epor t f or 2013,
and t he adj ust ed basi s f or t he bonds at t he end of 2013, assumi ng
st r ai ght - l i ne amor t i zat i on i s appr opr i at e?

a. $0 and $11, 000.
*b. $0 and $10, 900.
c. $100 and $11, 000.
d. $100 and $10, 900.

1714. J ason owns Bl ue Cor por at i on bonds ( f ace val ue of $10, 000) ,
pur chased on J anuar y 1, 2013, f or $11, 000. The bonds have an annual
i nt er est r at e of 8%and a mat ur i t y dat e of December 31, 2022. I f J ason
el ect s t o amor t i ze t he bond pr emi um, what i s hi s t axabl e i nt er est
i ncome f or 2013 and t he adj ust ed basi s f or t he bonds at t he end of 2013
( assumi ng st r ai ght - l i ne amor t i zat i on i s appr opr i at e) ?

a. $800 and $11, 000.
b. $800 and $10, 900.
c. $700 and $11, 000.
*d. $700 and $10, 900.

1715. A st r i p al ong t he boundar y of J oy s l and i s condemned f or a
ut i l i t y easement . She r ecei ves a payment of $7, 500 f r omt he ut i l i t y
company. Her basi s i n t he l and i s $80, 000. Whi ch of t he f ol l owi ng i s
cor r ect ?

a. J oy must i ncl ude t he $7, 500 i n gr oss i ncome.
*b. J oy must r educe t he basi s of t he l and by $7, 500.
c. J oy must i ncl ude t he $7, 500 i n t he gr oss i ncome and i ncr ease
t he basi s of t he l and by $7, 500.

1716. Kat i e sel l s her per sonal use aut omobi l e f or $12, 000. She
pur chased t he car t hr ee year s ago f or $25, 000. What i s Kat i e s
r ecogni zed gai n or l oss?

*a. $0.
b. $12, 000.
c. ( $13, 000) .
d. ( $25, 000) .

1717. Noel l e owns an aut omobi l e whi ch she uses f or per sonal use. Her
adj ust ed basi s i s $45, 000 ( i . e. , t he or i gi nal cost ) . The car i s wor t h
$22, 000. Whi ch of t he f ol l owi ng st at ement s i s cor r ect ?

a. I f Noel l e sel l s t he car f or $22, 000, her r eal i zed l oss of
$23, 000 i s not r ecogni zed.
b. I f Noel l e exchanges t he car f or anot her car wor t h $22, 000, her
r eal i zed l oss of $23, 000 i s not r ecogni zed.
c. I f t he car i s st ol en and i t i s uni nsur ed, Noel l e may be abl e
t o r ecogni ze par t of her r eal i zed l oss of $23, 000.

1718. Mar y sel l s her per sonal use aut omobi l e f or $20, 000. She pur chased
t he car t wo year s ago f or $17, 000. What i s Mar y s r ecogni zed gai n or
l oss? I t i ncr eased i n val ue due t o i t s excel l ent mi l eage, yet saf e
desi gn.

a. $0.
*b. $3, 000.
c. $17, 000.
d. $20, 000.

1719. Whi ch of t he f ol l owi ng st at ement s i s f al se?

*a. A r eal i zed gai n t hat i s never r ecogni zed r esul t s i n t he
t empor ar y r ecover y of mor e t han t he t axpayer s cost or ot her
basi s f or t ax pur poses.
b. A r eal i zed gai n on whi ch r ecogni t i on i s post poned r esul t s i n
t he t empor ar y r ecover y of mor e t han t he t axpayer s cost or ot her
c. A r eal i zed l oss t hat i s never r ecogni zed r esul t s i n t he
per manent r ecover y of l ess t han t he t axpayer s cost or ot her
d. A r eal i zed l oss on whi ch r ecogni t i on i s post poned r esul t s i n
t he t empor ar y r ecover y of l ess t han t he t axpayer s cost or ot her

1720. Nat i s a sal esman f or a r eal est at e devel oper . Hi s empl oyer
per mi t s hi mt o pur chase a l ot f or $75, 000. The empl oyer s adj ust ed
basi s f or t he l ot i s $45, 000, and i t s nor mal sel l i ng pr i ce i s $90, 000.

What i s Nat s r ecogni zed gai n and hi s basi s f or t he l ot ?
Recogni zed gai n Basi s

a. $0 $ 75, 000
b. $0 $ 90, 000
c. $15, 000 $ 75, 000
*d. $15, 000 $ 90, 000
e. $30, 000 $105, 000

1721. Over t he past 20 year s, Al f r ed has pur chased 380 shar es of Gr een,
I nc. , common st ock. Hi s f i r st pur chase was i n 1992 when he acqui r ed 30
shar es f or $20 a shar e. I n 1997, Al f r ed bought 150 shar es at $10 a
shar e. I n 2012, Al f r ed acqui r ed 200 shar es at $50 a shar e. Al f r ed
i nt ends t o sel l 125 shar es at $60 per shar e i n t he cur r ent year ( 2013) .
I f Al f r ed s obj ect i ve i s t o mi ni mi ze gai n, what i s hi s r ecogni zed gai n?

*a. $1, 250.
b. $3, 520.
c. $5, 950.
d. $6, 250.

1722. Mona pur chased a busi ness f r omJ udah f or $1, 000, 000. J udah s
r ecor ds and an appr ai ser pr ovi ded her wi t h t he f ol l owi ng i nf or mat i on
r egar di ng t he asset s pur chased:

Adjusted Basis FMV
Land $195,000 $270,000
Building 310,000 450,000
Equipment 95,000 180,000

What is Monas adjusted basis for the land, building, and equipment?

*a. Land $270, 000, bui l di ng $450, 000, equi pment $180, 000.
b. Land $195, 000, bui l di ng $575, 000, equi pment $230, 000.
c. Land $195, 000, bui l di ng $310, 000, equi pment $95, 000.
d. Land $270, 000, bui l di ng $521, 429, equi pment $208, 571.

1723. Nont axabl e st ock di vi dends r esul t i n:

a. A hi gher cost per shar e f or al l shar es t han bef or e t he st ock
di vi dend.
*b. A l ower cost per shar e f or al l shar es t han bef or e t he st ock
di vi dend.
c. An i ncr ease i n t he t ot al cost of t he ol d and new st ock
combi ned.
d. A decr ease i n t he t ot al cost of t he ol d and new st ock combi ned.

1724. Kevi n pur chased 5, 000 shar es of Pur pl e Cor por at i on st ock at $10
per shar e. Two year s l at er , he r ecei ves a 5%common st ock di vi dend. At
t hat t i me, t he common st ock of Pur pl e Cor por at i on had a f ai r mar ket
val ue of $12. 50 per shar e. What i s t he basi s of t he Pur pl e Cor por at i on
st ock, t he per shar e basi s, and gai n r ecogni zed upon r ecei pt of t he
common st ock di vi dend?

a. $50, 000 basi s i n st ock, $10 basi s per shar e f or t he or i gi nal
st ock and $0 basi s per shar e f or t he di vi dend shar es, $0
r ecogni zed gai n.
*b. $50, 000 basi s i n st ock, $9. 52 basi s per shar e, $0 r ecogni zed
gai n.
c. $53, 125 basi s i n st ock, $10 basi s per shar e f or t he or i gi nal
st ock and $12. 50 basi s per shar e f or t he di vi dend shar es, $3, 125
r ecogni zed gai n.
d. $53, 125 basi s i n st ock, $10. 12 basi s per shar e, $3, 125
r ecogni zed gai n.

1725. Et t a r ecei ved nont axabl e st ock r i ght s on Oct ober 3, 2013. She
al l ocat ed $16, 000 of t he $50, 000 basi s f or t he associ at ed st ock t o t he
st ock r i ght s. The st ock r i ght s ar e exer ci sed on November 8, 2013. The
exer ci se pr i ce f or t he st ock i s $52, 000. What i s Et t a s basi s f or t he
acqui r ed st ock?

a. $0.
b. $16, 000.
c. $52, 000.
*d. $68, 000.

1726. Mi ke s basi s i n hi s st ock i n Tan Cor por at i on i s $75, 000. He
r ecei ves nont axabl e st ock r i ght s ( f ai r mar ket val ue of $20, 000) when
t he val ue of t he st ock i s $100, 000. What i s t he basi s f or t he st ock
r i ght s?

a. $0.
*b. $12, 500.
c. $15, 000.
d. The basi s i s $0 unl ess t he t axpayer el ect s t o al l ocat e a
por t i on of t he cost of t he st ock t o t he r i ght s.


a. Under no ci r cumst ances does par t of t he st ock basi s have t o be
al l ocat ed t o nont axabl e st ock r i ght s.
*b. I f t he f ai r mar ket val ue of st ock r i ght s i s equal t o at l east
15%of t he f ai r mar ket val ue of t he st ock, par t of t he st ock
basi s must be al l ocat ed t o nont axabl e st ock r i ght s.
c. An el ect i on may be made t o al l ocat e par t of t he st ock basi s t o
nont axabl e st ock r i ght s onl y i f t he f ai r mar ket val ue of t he
nont axabl e st ock r i ght s i s at l east 15%of t he f ai r mar ket val ue
of t he st ock.
e. Onl y a. and c. ar e cor r ect .

1728. I n 2009, Har ol d pur chased a cl assi c car t hat he pl anned t o
r est or e f or $12, 000. However , Har ol d i s t oo busy t o wor k on t he car and
he gi ves i t t o hi s daught er J ul i a i n 2013. At t hi s t i me, t he f ai r
mar ket val ue of t he car has decl i ned t o $10, 000. Har ol d pai d no gi f t
t ax on t he t r ansact i on. J ul i a compl et es some of t he r est or at i on her sel f
wi t h out - of - pocket cost s of $5, 000. She l at er sel l s t he car f or $30, 000.
What i s J ul i a s r ecogni zed gai n or l oss on t he sal e of t he car ?

a. $0.
*b. $13, 000.
c. $15, 000.
d. $18, 000.

1729. Ral ph gi ves hi s daught er , Angel a, st ock ( basi s of $8, 000; f ai r
mar ket val ue of $6, 000) . No gi f t t ax r esul t s. I f Angel a subsequent l y
sel l s t he st ock f or $10, 000, what i s her r ecogni zed gai n or l oss?

a. $0.
*b. $2, 000.
c. $4, 000.
d. $10, 000.

1730. Gi f t pr oper t y ( di sr egar di ng any adj ust ment f or gi f t t ax pai d by
t he donor ) :

a. Has no basi s t o t he donee because he or she di d not pay
anyt hi ng f or t he pr oper t y.
*b. Has t he same basi s t o t he donee as t he donor s adj ust ed basi s
i f t he donee di sposes of t he pr oper t y at a gai n.
c. Has t he same basi s t o t he donee as t he donor s adj ust ed basi s
i f t he donee di sposes of t he pr oper t y at a l oss, and t he f ai r
mar ket val ue on t he dat e of gi f t was l ess t han t he donor s
adj ust ed basi s.
d. Has no basi s t o t he donee i f t he f ai r mar ket val ue on t he dat e
of gi f t i s l ess t han t he donor s adj ust ed basi s.

1731. Shont el l e r ecei ved a gi f t of i ncome- pr oduci ng pr oper t y wi t h an
adj ust ed basi s of $49, 000 t o t he donor and f ai r mar ket val ue of $35, 000
on t he dat e of gi f t . Gi f t t ax of $6, 000 was pai d by t he donor .
Shont el l e subsequent l y sol d t he pr oper t y f or $31, 000. What i s t he
r ecogni zed gai n or l oss?

a. $0.
*b. ( $4, 000) .
c. ( $10, 000) .
d. ( $18, 000) .

1732. Rob was gi ven a r esi dence i n 2013. At t he t i me of t he gi f t , t he
r esi dence had a f ai r mar ket val ue of $201, 000, and i t s adj ust ed basi s
t o t he donor was $141, 000. The donor pai d a gi f t t ax of $10, 000 on t he
t axabl e gi f t of $187, 000. What i s Rob s basi s f or gai n?

a. $140, 000.
*b. $144, 200.
c. $150, 000.
d. $200, 000.

1733. I n addi t i on t o ot her gi f t s, Megan made a gi f t of st ock t o J er i i n
1976. Megan had pur chased t he st ock i n 1974 f or $7, 500. At t he t i me of
t he gi f t , t he st ock was wor t h $20, 000. I f Megan pai d $850 of gi f t t ax
on t he t r ansact i on i n 1976, what i s J er i s gai n basi s f or t he st ock?

a. $7, 500.
*b. $8, 350.
c. $9, 017.
d. $20, 000.

1734. Noel l e r ecei ved di ni ng r oomf ur ni t ur e as a gi f t f r omher f r i end,
J ane. J ane s adj ust ed basi s was $9, 200 and t he f ai r mar ket val ue on
t he dat e of t he gi f t was $7, 000. Noel l e deci ded she di d not need t he
f ur ni t ur e and sol d i t t o a nei ghbor si x mont hs l at er f or $6, 500. What
i s her r ecogni zed gai n or l oss?

*a. $0.
b. ( $500) .
c. ( $2, 700) .
d. $6, 500.

1735. The hol di ng per i od of pr oper t y acqui r ed by gi f t may begi n on:

a. The dat e t he pr oper t y was acqui r ed by t he donor onl y.
b. The dat e of gi f t onl y.
*c. Ei t her t he dat e t he pr oper t y was acqui r ed by t he donor or t he
dat e of gi f t .
d. The l ast day of t he t ax year i n whi ch t he pr oper t y was
or i gi nal l y acqui r ed by t he donor .

1736. Nancy gi ves her ni ece a cr ane t o use i n her busi ness wi t h a f ai r
mar ket val ue of $61, 000 and a basi s i n Nancy s hands of $80, 000. No
gi f t t ax was pai d. What i s t he ni ece s basi s f or depr eci at i on ( cost
r ecover y) ?

a. $0.
b. $19, 000.
c. $61, 000.
*d. $80, 000.


a. The gai n basi s f or pr oper t y r ecei ved by gi f t i s t he l esser of
t he donor s adj ust ed basi s or t he f ai r mar ket val ue on t he dat e
of t he gi f t .
b. The l oss basi s f or pr oper t y r ecei ved by gi f t i s t he same as
t he donor s basi s.
c. The gai n basi s f or i nher i t ed pr oper t y i s t he same as t he
decedent s basi s.
d. The l oss basi s f or i nher i t ed pr oper t y i s t he l esser of t he
decedent s basi s or t he f ai r mar ket val ue on t he dat e of t he
decedent s deat h.

1738. Tobi n i nher i t ed 100 acr es of l and on t he deat h of hi s f at her i n
2013. A Feder al est at e t ax r et ur n was f i l ed and t he l and was val ued at
$300, 000 ( i t s f ai r mar ket val ue at t he dat e of t he deat h) . The f at her
had or i gi nal l y acqui r ed t he l and i n 1970 f or $19, 000 and pr i or t o hi s
deat h had made per manent i mpr ovement s of $6, 000. What i s Tobi n s basi s
i n t he l and?

a. $19, 000.
b. $25, 000.
*c. $300, 000.
d. $325, 000.

1739. Al owns st ock wi t h an adj ust ed basi s of $100, 000 and a f ai r
mar ket val ue of $300, 000. He gi ves t he st ock t o J ane on J ul y 1, 2012.
When J ane di es, t he f ai r mar ket val ue of t he st ock i s $900, 000. J ane s
wi l l pr ovi des t hat Al i s t o r ecei ve t he st ock. Whi ch of t he f ol l owi ng
i s false?

a. I f J ane di es on J une 1, 2013, Al s basi s f or t he st ock i s
$100, 000.
b. I f J ane di es on August 1, 2013, Al s basi s f or t he st ock i s
$900, 000.
*c. I f J ane di es on J une 15, 2013, Al s basi s i s $300, 000.
d. I f J ane di es on J ul y 1, 2013, Al s basi s i s $100, 000.
e. Al l of t he above ar e t r ue.

1740. Emma gi ves 1, 000 shar es of Gr een, I nc. st ock t o her ni ece,
Mar gar et . Emma s adj ust ed basi s f or t he st ock i s $200, 000 and t he f ai r
mar ket val ue i s $300, 000. Seven mont hs af t er t he gi f t , Mar gar et i s
ki l l ed i n an ai r pl ane acci dent . Emma i nher i t s t he st ock whi ch t hen i s
wor t h $350, 000. What i s t he adj ust ed basi s of t he i nher i t ed st ock t o
Emma?

a. $0.
*b. $200, 000.
c. $300, 000.
d. $350, 000.

1741. Neal and hi s wi f e Faye r esi de i n Texas, a communi t y pr oper t y
st at e. Thei r communi t y pr oper t y consi st s of r eal est at e ( adj ust ed basi s
of $800, 000; f ai r mar ket val ue of $6 mi l l i on) and per sonal pr oper t y
( adj ust ed basi s of $390, 000; f ai r mar ket val ue of $295, 000) . Neal di es
f i r st and l eaves hi s est at e t o Faye. What i s Faye s basi s i n t he
pr oper t y af t er Neal s deat h?

a. $800, 000 r eal est at e and $295, 000 per sonal pr oper t y.
b. $800, 000 r eal est at e and $390, 000 per sonal pr oper t y.
c. $3, 400, 000 r eal est at e and $295, 000 per sonal pr oper t y.
*d. $6, 000, 000 r eal est at e and $295, 000 per sonal pr oper t y.

1742. Rober t and Di ane, husband and wi f e, l i ve i n Pennsyl vani a, a
common l aw st at e. They pur chased l and as j oi nt t enant s i n 2009 f or
$300, 000. I n 2013, Di ane di es and bequeat hs her shar e of t he l and t o
Rober t . The l and has a f ai r mar ket val ue of $450, 000. What i s Rober t s
adj ust ed basi s f or t he l and?

a. $300, 000.
*b. $375, 000.
c. $450, 000.
d. $750, 000.

1743. Tayl or i nher i t ed 100 acr es of l and on t he deat h of hi s f at her i n
2013. A Feder al est at e t ax r et ur n was f i l ed and t hi s l and was val ued
t her ei n at $650, 000, i t s f ai r mar ket val ue at t he dat e of t he f at her s
deat h. The f at her had or i gi nal l y acqui r ed t he l and i n 1967 f or $112, 000
and pr i or t o hi s deat h he had expended $20, 000 on per manent
i mpr ovement s. Det er mi ne Tayl or s hol di ng per i od f or t he l and.

a. Wi l l begi n wi t h t he dat e hi s f at her acqui r ed t he pr oper t y.
*b. Wi l l aut omat i cal l y be l ong- t er m.
c. Wi l l begi n wi t h t he dat e of hi s f at her s deat h.
d. Wi l l begi n wi t h t he dat e t he pr oper t y i s di st r i but ed t o hi m.

1744. Kel l y i nher i t s l and whi ch had a basi s t o t he decedent of $95, 000
and a f ai r mar ket val ue of $50, 000 on August 4, 2013, t he dat e of t he
decedent s deat h. The execut or di st r i but es t he l and t o Kel l y on
November 12, 2013, at whi ch t i me t he f ai r mar ket val ue i s $49, 000. The
f ai r mar ket val ue on Febr uar y 4, 2014, i s $45, 000. I n f i l i ng t he est at e
t ax r et ur n, t he execut or el ect s t he al t er nat e val uat i on dat e. Kel l y
sel l s t he l and on J une 10, 2014, f or $48, 000. What i s her r ecogni zed
gai n or l oss?

*a. ( $1, 000) .
b. ( $2, 000) .
c. ( $47, 000) .
d. $1, 000.

1745. Ar t hur owns a t r act of undevel oped l and ( adj ust ed basi s of
$145, 000) whi ch he sel l s t o hi s son, Ned, f or i t s f ai r mar ket val ue of
$105, 000. What i s Ar t hur s r ecogni zed gai n or l oss and Ned s basi s i n
t he l and?

*a. $0 and $105, 000.
b. $0 and $145, 000.
c. ( $40, 000) and $105, 000.
d. ( $40, 000) and $145, 000.

1746. Paul sel l s pr oper t y wi t h an adj ust ed basi s of $45, 000 t o hi s
daught er Dean, f or $38, 000. Dean subsequent l y sel l s t he pr oper t y t o her
br ot her , Pr est on, f or $38, 000. Thr ee year s l at er , Pr est on sel l s t he
pr oper t y t o Hun, an unr el at ed par t y, f or $50, 000. What i s Pr est on s
r ecogni zed gai n or l oss on t he sal e of t he pr oper t y t o Hun?

a. $0.
b. $5, 000.
*c. $12, 000.
d. ( $5, 000) .

1747. Kar en pur chased 100 shar es of Gol d Cor por at i on st ock f or $11, 500
on J anuar y 1, 2010. I n t he cur r ent t ax year ( 2013) , she sel l s 25
shar es of t he 100 shar es pur chased on J anuar y 1, 2010, f or $2, 500.
Twent y- f i ve days ear l i er , she had pur chased 30 shar es f or $3, 000. What
i s Kar en s r ecogni zed gai n or l oss on t he sal e of t he st ock, and what
i s her basi s i n t he 30 shar es pur chased 25 days ear l i er ?

a. $375 r ecogni zed l oss, $3, 000 basi s i n new st ock.
b. $0 r ecogni zed l oss, $3, 000 basi s i n new st ock.
*c. $0 r ecogni zed l oss, $3, 375 basi s i n new st ock.
d. $0 r ecogni zed l oss, $3, 450 basi s i n new st ock.

1748. Andr ew acqui r es 2, 000 shar es of Eagl e Cor por at i on st ock f or
$100, 000 on Mar ch 31, 2009. On J anuar y 1, 2013, he sel l s 125 shar es f or
$5, 000. On J anuar y 22, 2013, he pur chases 135 shar es of Eagl e
Cor por at i on st ock f or $6, 075. When does Andr ew s hol di ng per i od begi n
f or t he 135 shar es?

a. J anuar y 22, 2013.
b. J anuar y 1, 2013.
c. Mar ch 31, 2009.
*d. Mar ch 31, 2009, f or 125 shar es and J anuar y 22, 2013, f or 10
shar es.

1749. The basi s of per sonal use pr oper t y conver t ed t o busi ness use i s:

a. Al ways t he l ower of i t s adj ust ed basi s or f ai r mar ket val ue on
t he dat e of conver si on.
b. Al ways i t s adj ust ed basi s on t he dat e of conver si on.
c. Al ways i t s f ai r mar ket val ue on t he dat e of conver si on.
d. Al ways t he hi gher of i t s adj ust ed basi s or f ai r mar ket val ue
on t he dat e of conver si on.

1750. Lynn pur chases a house f or $52, 000. She conver t s t he pr oper t y t o
r ent al pr oper t y when t he f ai r mar ket val ue i s $115, 000. Af t er deduct i ng
depr eci at i on ( cost r ecover y) expense of $1, 130, she sel l s t he house f or
$120, 000. What i s her r ecogni zed gai n or l oss?

a. $0.
b. $6, 130.
c. $37, 630.
*d. $69, 130.

1751. Rober t sol d hi s r anch whi ch was hi s pr i nci pal r esi dence dur i ng
t he cur r ent t axabl e year . At t he dat e of t he sal e, t he r anch had an
adj ust ed basi s of $460, 000 and was encumber ed by a mor t gage of $200, 000.
The buyer pai d hi m$500, 000 i n cash, agr eed t o t ake t he t i t l e subj ect
t o t he $200, 000 mor t gage, and agr eed t o pay hi m$100, 000 wi t h i nt er est
at 6 per cent one year f r omt he dat e of sal e. How much i s Rober t s
r ecogni zed gai n on t he sal e?

Cor r ect Answer :
Amount r eal i zed:

Cash $500,000
Mortgage (property taken subject
to)
200,000
Note receivable 100,000
$800,000
Realized and recognized gain $340,000

1752. Ken i s consi der i ng t wo opt i ons f or sel l i ng l and f or whi ch he has
an adj ust ed basi s of $100, 000 and on whi ch t her e i s a mor t gage of
$80, 000. Under t he f i r st opt i on, Ken wi l l sel l t he l and f or $225, 000
wi t h a st i pul at i on i n t he sal es cont r act t hat he l i qui dat e t he mor t gage
bef or e t he sal e i s compl et e. Under t he second opt i on, Ken wi l l sel l t he
l and f or $145, 000 and t he buyer wi l l assume t he mor t gage. Cal cul at e
Ken s r ecogni zed gai n under bot h opt i ons.

Cor r ect Answer :
Option 1 Option 2
Amount realized $225,000 $225,000
Less: Adjusted basis (100,000) (100,000)
Recognized gain $125,000 $125,000

Since the liability assumption is included in the calculation of Kens
amount realized, the recognized gain is $125,000, the same as for the cash
sale.

1753. Annet t e pur chased st ock on Mar ch 1, 2013, f or $200, 000. At
December 31, 2013, i t was wor t h $210, 000. She al so pur chased a bond on
Sept ember 1, 2013, f or $20, 000. At year end, i t was wor t h $15, 000.
Det er mi ne Annet t e s r eal i zed and r ecogni zed gai n or l oss.

Cor r ect Answer :
Annet t e s r eal i zed gai n or l oss i s zer o and her r ecogni zed gai n or l oss
i s zer o. Si nce a sal e or ot her di sposi t i on has not occur r ed, t her e i s
no r eal i zat i on or r ecogni t i on on ei t her t he st ock or t he bond.

1754. Ni gel pur chased a bl endi ng machi ne f or $125, 000 f or use i n hi s
busi ness. As t o t he machi ne, he has deduct ed MACRS cost r ecover y of
$31, 024, mai nt enance cost s of $5, 200, and r epai r cost s of $4, 000.
Cal cul at e Ni gel s adj ust ed basi s f or t he machi ne.

Cor r ect Answer :
Ni gel s adj ust ed basi s f or t he machi ne i s cal cul at ed as f ol l ows:

Cost $125,000
Less: Cost recovery (31,024
)
Adjusted basis $ 93,976

Neither the maintenance cost of $5,200 nor the repair cost of $4,000 are
capital expenditures. These costs are deducted in the tax year incurred.

1755. Peggy uses a del i ver y van i n her busi ness. The adj ust ed basi s i s
$39, 000, and t he f ai r mar ket val ue i s $34, 000. The del i ver y van i s
st ol en and Peggy r ecei ves i nsur ance pr oceeds of $34, 000. Det er mi ne
Peggy s r eal i zed and r ecogni zed gai n or l oss.

Cor r ect Answer :
0)
Realized loss ($ 5,00
0)
Recognized loss ($ 5,00
0)

Since the proceeds received from the insurance company are less than the
adjusted basis, the realized loss of $5,000 is recognized.

1756. J an pur chases t axabl e bonds wi t h a f ace val ue of $250, 000 f or
$265, 000. The annual i nt er est pai d on t he bonds i s $10, 000. Assume J an
el ect s t o amor t i ze t he bond pr emi um. The t ot al pr emi umamor t i zat i on f or
t he f i r st year i s $1, 600.

a. What i s J an s i nt er est i ncome f or t he f i r st
year ?

b. What i s J an s i nt er est deduct i on f or t he
f i r st year ?

c. What i s J an s adj ust ed basi s f or t he bonds
at t he end of t he f i r st year ?

Cor r ect Answer :
a. Jan receives interest payments of $10,000
each year. This amount is included in her
gross income because the bonds are taxable.

b. Jan deducts the premium amortization of
$1,600 for the first year because the bonds
are taxable.

c. Jans adjusted basis for the bonds at the
end of the first year is $263,400 ($265,000
cost $1,600 premium amortization).

1757. Boyd acqui r ed t ax- exempt bonds f or $430, 000 i n December 2013. The
bonds, whi ch mat ur e i n December 2018, have a mat ur i t y val ue of $400, 000.
Boyd does not make any el ect i ons r egar di ng t he amor t i zat i on of t he bond
pr emi um. Det er mi ne t he t ax consequences t o Boyd when he r edeems t he
bonds i n December 2018.

Cor r ect Answer :
When Boyd r edeems t he bonds i n 2018, he has no r eal i zed or r ecogni zed
gai n or l oss.

Adjusted basis for bonds (400,000)
Realized gain $
0
Recognized gain $
0

Amortization of the premium on tax-exempt bonds is mandatory. Thus, the
adjusted basis of the bonds at the maturity date is $400,000 ($430,000 cost
$30,000 premium amortized). Since the bonds are tax-exempt, the amount
of interest income included in Boyds gross income (i.e., $0) is not
affected by the amortization of the bond premium.

1758. Mar i l yn owns 100%of t he st ock of Li l ac, I nc. , wi t h an adj ust ed
basi s of $45, 000. She r ecei ves a cash di st r i but i on of $160, 000 f r om
Li l ac when i t s ear ni ngs and pr of i t s ar e $90, 000.

a. What i s Mar i l yn s di vi dend i ncome?

b. What i s Mar i l yn s r ecogni zed gai n or l oss?

c. What i s Mar i l yn s adj ust ed basi s f or her
st ock af t er t he di st r i but i on?

Cor r ect Answer :
a. and b. The $160, 000 di st r i but i on i s account ed f or as f ol l ows:

Dividend income (Lilacs
earnings and profits)
$ 90,00
0
Return of capital (Marilyns
basis in the stock)
45,000
Capital gain (presuming the
stock is a capital asset)
25
,000
Total distribution $160,000

c. Marilyns adjusted basis for her stock is $0.

1759. Hi l ar y r ecei ves $10, 000 f or a 15- f oot wi de ut i l i t y easement al ong
one of t he boundar i es t o her pr oper t y. The easement pr ovi des t hat no
st r uct ur e can be bui l t on t hat por t i on of t he pr oper t y. Her adj ust ed
basi s f or t he pr oper t y i s $200, 000 and t he easement cover s 15%of t he
t ot al acr eage. Det er mi ne t he ef f ect of t he $10, 000 payment on Hi l ar y s
gr oss i ncome and her basi s f or t he pr oper t y.

Cor r ect Answer :
Hi l ar y does not r epor t t he $10, 000 payment i n her gr oss i ncome. I nst ead,
she r educes t he basi s f or t he pr oper t y by t he $10, 000 payment f r om
$200, 000 t o $190, 000.

1760. Ol l i e owns a per sonal use car f or whi ch he or i gi nal l y pai d
$48, 000. He t r ades t he car i n on a spor t s ut i l i t y vehi cl e ( SUV) payi ng
t he aut omobi l e deal er cash of $30, 000. I f t he negot i at ed pr i ce of t he
SUV i s $49, 000, what i s Ol l i e s r ecogni zed gai n or l oss and hi s
adj ust ed basi s f or t he SUV?

Cor r ect Answer :
Ol l i e s r eal i zed l oss on t he t r ade of hi s per sonal use car i s
cal cul at ed as f ol l ows:

Amount realized (trade-in
value)
$19,000
)
Realized loss ($29,000)

Since the car was a personal use asset, none of the realized loss of
$29,000 is recognized. Ollies adjusted basis for the SUV is his cost of
$49,000.

1761. Omar has t he f ol l owi ng st ock t r ansact i ons dur i ng 2013:

Dat e Number
of
Number Sel l i ng
St ock pur chased shar es
sol d
of
shar es
Basi s pr i ce
Or ange 1/ 2011 100 $1, 000
Bl ue 6/ 2011 200 3, 00
0

Yel l ow 4/ 2012 50 1, 25
0

Bl ue 2/ 2013 150 1, 80
0

Yel l ow 3/ 2013 175 5, 25
0

Bl ue 7/ 2013 250 $3, 500
Yel l ow 11/ 2013 200 7, 200

a. What i s Omar s r ecogni zed gai n or l oss on
t he st ock sal es i f hi s obj ect i ve i s t o
mi ni mi ze t he r ecogni zed gai n and t o maxi mi ze
t he r ecogni zed l oss?

b. What i s Omar s r ecogni zed gai n or l oss i f he
does not i dent i f y t he shar es sol d?

Cor r ect Answer :
a. Since Omars objective is to minimize
recognized gain and maximize recognized loss,
he will identify the specific shares (i.e.,
specific identification method) being sold.
He will select high basis shares to achieve
his objective.

Sale of Blue stock

Basis:
200 shares from 6/2011 lot
($15 per share)
$3,000
50 shares from 2/2013 lot ($12
per share)
600 (3,600)
Realized loss ($ 100)
Recognized loss ($ 100)

Sale of Yellow stock

Basis:
($30 per share)
$5,250
per share)
625 (5,875)
Realized gain $1,325

b. Since Omar does not identify the shares sold,
he is required to use the FIFO method.

Sale of Blue stock

Basis:
($15 per share)
$3,000
per share)
600 (3,600)
Realized loss ($ 100)
Recognized loss ($ 100)

Sale of Yellow stock

Basis:
50 shares from 4/2012
lot ($25 per share)
$1,250
150 shares from 3/2013
lot ($30 per share)
4,500 (5,750)


1762. Huber t pur chases Fr an s j ewel r y st or e f or $950, 000. The
i dent i f i abl e asset s of t he busi ness ar e as f ol l ows:
Basi s FMV
I nvent or y $ 90, 000 $ 97, 000

Account s r ecei vabl e 55, 00
0
50, 00
0
Bui l di ng 100, 000 225, 000
Land 280, 000 300, 000

Huber t and Fr an agr ee t o assi gn $110, 000 t o a 7- year covenant not t o
compet e. How shoul d Huber t al l ocat e t he $950, 000 pur chase pr i ce t o t he
asset s?

Cor r ect Answer :
The pur chase pr i ce i s al l ocat ed t o t he asset s as f ol l ows:

Inventory $ 97,000
Accounts receivable 50,000
Building 225,000
Land 300,000
Covenant 110,000
Goodwill 168,000
$950,000

Under the residual method, $168,000 ($950,000 $782,000) is assigned to
goodwill.

1763. Mar ge pur chases t he Kent wood Kr acker s, a AAA l evel basebal l t eam,
f or $1. 5 mi l l i on. The appr ai sed val ues of t he i dent i f i ed asset s ar e as
f ol l ows:

Pr epai d season t i cket s $150, 000
St adi uml ease 400, 000
Pl ayer cont r act s 500, 000
Equi pment 100, 000

The Kr acker s have won t he pennant f or t he past t wo year s. Det er mi ne
Mar ge s adj ust ed basi s f or t he asset s of t he Kent wood Kr acker s.

Cor r ect Answer :
The por t i on of t he pur chase pr i ce of $1. 5 mi l l i on assi gned t o t he
i dent i f i ed asset s i s as f ol l ows:

Prepaid season tickets $ 150,000
Stadium lease 400,000
Player contracts 500,000
Equipment 100,00
0
$1,150,000

The residual value of $350,000 ($1,500,000 $1,150,000) is assigned to
goodwill.

1764. Mel ody s adj ust ed basi s f or 10, 000 shar es of Car di nal , I nc.
common st ock i s $1, 000, 000. Dur i ng t he year , she r ecei ves a 5%st ock
di vi dend t hat i s a nont axabl e st ock di vi dend.

a. What i s t he amount of Mel ody s gr oss i ncome?

b. What i s Mel ody s t ot al basi s f or t he st ock?

c. What i s Mel ody s basi s per shar e?

Cor r ect Answer :
a. Melody has no gross income because the
dividend is a nontaxable stock dividend.

b. Melodys total stock basis remains at
$1,000,000.

c. The basis per share decreases to $95.24 per
share ($1,000,000/10,500 shares).

1765. I n 2013, Fel i x gi ves 10, 000 shar es of st ock t o hi s daught er ,
Moni ca. The st ock was acqui r ed i n 2004 f or $200, 000, and at t he t i me
of t he gi f t , i t had a f ai r mar ket val ue of $600, 000. Fel i x pai d a gi f t
t ax of $240, 000. [ Assume t he gi f t t ax excl usi on has been used by Fel i x
see Chapt er 1. ]

a. Does t he r ecei pt of t he st ock r esul t i n
gr oss i ncome t o Moni ca?

b. What i s Moni ca s basi s i n t he st ock?

Cor r ect Answer :
a. The receipt of the gift does not result in
gross income to Monica.

b. Monicas basis in the stock is calculated as
follows:

*Fraction rounded to 68%.
**The $586,000 is equal to the fair market value of the stock of $600,000
reduced by the per donee annual exclusion of $14,000.

1766. On Sept ember 18, 2013, J er r y r ecei ved l and and a bui l di ng f r om
Ted as a gi f t . Ted had pur chased t he l and and bui l di ng on Mar ch 5,
2010, and hi s adj ust ed basi s and t he f ai r mar ket val ue at t he dat e of
t he gi f t wer e as f ol l ows:

Asset Adj ust ed
Basi s
FMV
Land $150, 000 $200, 000
Bui l di ng 90, 000 100, 00
0

Ted pai d gi f t t ax on t he t r ansf er t o J er r y of $100, 000.

a. Det er mi ne J er r y s adj ust ed basi s and hol di ng
per i od f or t he l and and bui l di ng.

b. Assume i nst ead t hat t he FMV of t he l and was
$89, 000 and t he FMV of t he bui l di ng was
$60, 000. Det er mi ne J er r y s adj ust ed basi s
and hol di ng per i od f or t he l and and
bui l di ng.

Cor r ect Answer :
a. Jerrys total basis for the assets
received from Ted is:

$150,000 + $90,000 +[($60,000/$286,000*)
$96,000] = $261,000

The basis is allocated to the land and building as follows:

Land: ($200,000/$300,000) $261,000 = $174,000

Building: ($100,000/$300,000) $261,000 = $87,000

Jerrys holding period begins on March 5, 2010.

*The $286,000 is equal to the fair market value of the land and
building of $300,000 reduced by the per donee annual exclusion of $14,000.
The fraction was rounded to 21%.

b. Because the land and building have declined
in value, none of the gift tax paid by Ted
is considered in calculating Jerrys
adjusted basis. Jerrys basis for gain
is:

Land $150,000
Building 90,000

Jerrys basis for loss (the lower of Teds
adjusted basis or the FMV at the date of the
gift) is:

Land $89,000
Building 60,000

Jerrys holding period begins on March 5,
2010, for the gain basis and September 18,
2013, for the loss basis.

1767. Emma gi ves her per sonal use aut omobi l e ( cost of $32, 000; f ai r
mar ket val ue of $12, 000) t o her son, Loui s, on J ul y 3, 2013. She has
owned t he aut omobi l e si nce J ul y 1, 2010.

a. What i s Loui s basi s f or t he car ?
b. When does hi s hol di ng per i od begi n?

Cor r ect Answer :
a. Louis gain basis is $32,000 and his loss
basis is $12,000.

b. Louis holding period for gain begins on
July 1, 2010 and his holding period for
loss begins on July 3, 2013.

1768. Fai t h i nher i t s an undi vi ded i nt er est i n a par cel of l and f r omher
f at her on Febr uar y 15, 2013. Her f at her pur chased t he l and on August
25, 1986 and hi s basi s f or t he l and was $325, 000. The f ai r mar ket
val ue of t he l and i s $12, 500, 000 on t he dat e of her f at her s deat h and
i s $11, 000, 000 si x mont hs l at er . The execut or el ect s t he al t er nat e
val uat i on dat e. Fai t h has ni ne br ot her s and si st er s and each i nher i t ed
a one- t ent h i nt er est .

a. What i s Fai t h s adj ust ed basi s f or her one-
t ent h undi vi ded i nt er est i n t he l and?

b. What i s her hol di ng per i od f or t he l and?

Cor r ect Answer :
a. Faiths adjusted basis is $1,100,000
($11,000,000 X 10%), which is her share of
the fair market value of the land on the
alternate valuation date.

b. Since the property is inherited, Faiths
holding period is automatically long term.

1769. El ber t gi ves st ock wor t h $28, 000 ( no gi f t t ax r esul t ed) t o hi s
f r i end, J ef f , on J une 8, 2013. El ber t pur chased t he st ock on Sept ember
1, 2006, and hi s adj ust ed basi s i s $22, 000. J ef f di es on December 8,
2014, and bequeat hs t he st ock t o El ber t . At t hat dat e, t he f ai r mar ket
val ue of t he st ock i s $31, 000.

a. What i s J ef f s basi s and hol di ng per i od f or
t he st ock?

b. What i s El ber t s basi s and hol di ng per i od
f or t he st ock?

Cor r ect Answer :
a. Jeff has a carryover basis of $22,000 and a
carryover holding period of September 1,
2006.

b. Elbert has a new basis of $31,000. Since
Elbert inherited the stock, his holding
period is automatically long term. Since the
period between the date of the gift (June 8,
2013) and the date of Jeffs death
(December 8, 2014) is more than one year,
the deathbed gift provision does not apply.

1770. Ed and Cher yl have been mar r i ed f or 27 year s. They own l and
j oi nt l y wi t h a basi s of $300, 000. Ed di es i n 2013, when t he f ai r mar ket
val ue of t he l and i s $500, 000. Under t he j oi nt owner shi p ar r angement ,
t he l and passed t o Cher yl .

a. I f Ed and Cher yl r esi de i n a communi t y
pr oper t y st at e, what i s Cher yl s basi s i n
t he l and?

b. I f Ed and Cher yl r esi de i n a common l aw
st at e, what i s Cher yl s basi s i n t he l and?

Cor r ect Answer :
a. Cheryls basis in the land is $500,000
($250,000 + $250,000).

b. Cheryls basis in the land is $400,000
[($300,000 50%) + $250,000].

1771. On J anuar y 15 of t he cur r ent t axabl e year , Mer l e sol d st ock wi t h
a cost of $40, 000 t o hi s br ot her Ned f or $25, 000, i t s f ai r mar ket val ue.
On J une 21, Ned sol d t he st ock t o a f r i end f or $26, 000.

a. What ar e t he t ax consequences t o Mer l e and
Ned?

b. Woul d Ned r ecogni ze any gai n i f he sol d t he
st ock f or $41, 000?

Cor r ect Answer :
a. Merle realizes a loss of $15,000 [i.e.,
$25,000 (amount realized) $40,000
(adjusted basis)] which is disallowed
because the stock was sold to a related
party. Ned realizes a gain of $1,000 [i.e.,
(adjusted basis)] on the sale to a friend,
but does not recognize any gain. Neds gain
of $1,000 is less than Merles previously
disallowed loss of $15,000.

b. Ned would realize a gain of $16,000 [i.e.,
(adjusted basis)]. Gain of $1,000 would be
recognized [i.e., $16,000 (gain realized)
$15,000 (previously disallowed loss)].

1772. Moni ca sel l s a par cel of l and t o her son, El ber t , f or $90, 000.
Moni ca s adj ust ed basi s i s $100, 000. Thr ee year s l at er , El ber t gi ves
t he l and t o hi s f i ance, Kar en. At t hat dat e, t he l and i s wor t h
$104, 000. No gi f t t ax i s pai d. Si nce El ber t i s goi ng t o be st at i oned i n
t he U. S. Ar my i n Ger many f or 3 year s, t hey do not pl an on bei ng mar r i ed
unt i l hi s t our i s compl et ed. Si x mont hs af t er r ecei vi ng t he l and, Kar en
sel l s i t f or $110, 000. At t he same t i me, Kar en sends El ber t a Dear
J ohn emai l . Cal cul at e Kar en s r eal i zed and r ecogni zed gai n or l oss.

Cor r ect Answer :
El ber t s adj ust ed basi s f or t he l and i s hi s pur chase pr i ce of $90, 000.
When El ber t gi ves t he l and t o Kar en, her adj ust ed basi s i s a car r yover
basi s of $90, 000. Kar en s gai n on t he sal e i s cal cul at ed as f ol l ows:

)
Recognized gain $ 20,000

Monicas disallowed loss of $10,000 ($90,000 amount realized $100,000
adjusted basis) could have been used as an offset by Elbert if he had sold
the land at a realized gain. But, it cannot be used by Karen since she is
not the original transferee (i.e., related-party buyer).

1773. Mi t ch owns 1, 000 shar es of Or i ol e Cor por at i on common st ock
( adj ust ed basi s of $15, 000) . On Apr i l 27, 2013, he sel l s 400 shar es
f or $5, 200, whi l e on May 5, 2013, he pur chases 200 shar es f or $3, 600.

a. What i s Mi t ch s r ecogni zed gai n or l oss
r esul t i ng f r omt hese t r ansact i ons?

b. What i s Mi t ch s basi s f or t he st ock acqui r ed
on May 5, 2013?

c. Coul d Mi t ch have obt ai ned di f f er ent t ax
consequences i n a. and b. i f he had sol d t he
400 shar es on December 27, 2013, and
pur chased t he 200 shar es on J anuar y 5, 2014?

Cor r ect Answer :
a. To the extent of the substantially identical
shares purchased during the 60-day period
beginning 30 days before April 27 and ending
30 days after April 27, the transaction is a
wash sale. The realized loss on the April 27
sale is $800 ($5,200 amount realized $6,000
adjusted basis of 400 shares). Because Mitch
acquired fewer shares than he sold, only a
portion of the realized loss is
disallowed. The disallowed loss is $400
[(200 shares acquired/400 shares sold) $800]
and the recognized loss is $400 ($800
$400).

b. Mitchs adjusted basis for the stock acquired
on May 5, 2013, is $4,000 ($3,600 purchase
price + $400 disallowed loss).

c. The tax consequences would have been the
same. Mitch has a wash sale to the extent of
the 200 shares purchased. To avoid the
limitations of the wash sale, he should not
purchase substantially identical stock within
the 60-day window for a wash sale.

1774. Mar sha t r ansf er s her per sonal use aut omobi l e t o her busi ness ( a
sol e pr opr i et or shi p) . The car s adj ust ed basi s i s $30, 000 and t he f ai r
mar ket val ue i s $16, 000. No cost r ecover y had been deduct ed by Mar sha,
si nce she hel d t he car f or per sonal use. Det er mi ne t he adj ust ed basi s
of t he car t o Mar sha s sol e pr opr i et or shi p i ncl udi ng t he basi s f or cost
r ecover y.

Cor r ect Answer :
I n t hi s ci r cumst ance, t he car i s dual basi s pr oper t y. The adj ust ed
basi s t o t he sol e pr opr i et or shi p f or gai n i s $30, 000 and t he adj ust ed
basi s f or l oss i s $16, 000. The l oss basi s of $16, 000 i s used i n
cal cul at i ng cost r ecover y.

1775. J acob owns l and wi t h an adj ust ed basi s of $140, 000 and a f ai r
mar ket val ue of $115, 000. Det er mi ne t he amount of r eal i zed and
r ecogni zed gai n or l oss t o t he sel l er and t he adj ust ed basi s f or t he
buyer f or each of t he f ol l owi ng.

a. J acob sel l s t he l and f or $115, 000 t o a
cor por at i on i n whi ch he owns 60%of t he
st ock.

b. J acob sel l s t he l and f or $115, 000 t o a
par t ner shi p i n whi ch he has a capi t al and
pr of i t s i nt er est of 60%.

Cor r ect Answer :
a. Jacobs realized and recognized loss is calculated
as follows.

Realized loss

($ 25,000)
Recognized loss $ 0

Losses on sales to a controlled corporation (greater
than 50%) are disallowed under the related party
rules. The corporations adjusted basis for the
land is its cost of $115,000.

b. Jacobs realized and recognized loss is calculated
as follows.

Realized loss

($ 25,000)
Recognized loss $
0

Losses on sales to a controlled partnership (greater
than 50%) are disallowed under the related party
rules. The partnerships adjusted basis for the land
is its cost of $115,000.

1776. When a pr oper t y t r ansact i on occur s, what f our quest i ons shoul d be
consi der ed wi t h r espect t o t he sal e or ot her di sposi t i on?

Cor r ect Answer :
The f ol l owi ng quest i ons need t o be answer ed.

Is there a realized gain or loss?

If so, is the gain or loss recognized?

If the gain or loss is recognized, is it
ordinary or capital?

What is the basis of any replacement property
that is acquired?

1777. Di scuss t he ef f ect of a l i abi l i t y assumpt i on on t he sel l er s
amount r eal i zed and t he buyer s adj ust ed basi s.

Cor r ect Answer :
I f t he buyer assumes t he sel l er s l i abi l i t y associ at ed wi t h t he
acqui si t i on of pr oper t y, bot h t he sel l er s amount r eal i zed and t he
buyer s adj ust ed basi s ar e i ncr eased by t he amount of t he l i abi l i t y
assumed.

1778. Def i ne f ai r mar ket val ue as i t r el at es t o pr oper t y t r ansact i ons.

Cor r ect Answer :
The f ai r mar ket val ue of pr oper t y r ecei ved i n a sal e or ot her
di sposi t i on has been def i ned by t he cour t s as t he pr i ce at whi ch
pr oper t y wi l l change hands bet ween a wi l l i ng sel l er and a wi l l i ng buyer
when nei t her i s compel l ed t o sel l or t o buy.

1779. What i s t he gener al f or mul a f or cal cul at i ng t he adj ust ed basi s of
pr oper t y?

Cor r ect Answer :
Adj ust ed basi s i s det er mi ned as f ol l ows:

Cost ( or ot her adj ust ed basi s) on dat e of acqui si t i on
+ Capi t al addi t i ons
Capi t al r ecover i es
= Adj ust ed basi s

1780. What i s t he di f f er ence bet ween t he depr eci at i on ( or cost r ecover y)
al l owed and t he depr eci at i on ( or cost r ecover y) al l owabl e and what
ef f ect does each have on t he adj ust ed basi s of pr oper t y?

Cor r ect Answer :
Nor mal l y, t her e i s no di f f er ence bet ween t he depr eci at i on ( or cost
r ecover y) al l owed or al l owabl e. The al l owed depr eci at i on ( or cost
r ecover y) i s t he amount act ual l y t aken, wher eas t he al l owabl e
depr eci at i on ( cost r ecover y) i s t he amount t hat coul d have been t aken
under t he appl i cabl e depr eci at i on ( or cost r ecover y) met hod. The basi s
of t he pr oper t y i s r educed by t he cost r ecover y al l owed, but t hi s
amount cannot be l ess t han t he al l owabl e amount .

1781. What ef f ect does a deduct i bl e casual t y l oss have on t he adj ust ed
basi s of pr oper t y?

Cor r ect Answer :
A deduct i bl e casual t y l oss r educes t he basi s of pr oper t y.

1782. For a cor por at e di st r i but i on of cash or ot her pr oper t y t o a
shar ehol der , when does di vi dend i ncome or a r et ur n of capi t al r esul t ?

Cor r ect Answer :
To t he ext ent of cor por at e ear ni ngs and pr of i t s, a di st r i but i on t o a
shar ehol der i s t r eat ed as di vi dend i ncome. When t he di st r i but i on
exceeds cor por at e ear ni ngs and pr of i t s, a di st r i but i on t o a shar ehol der
i s t r eat ed as a r et ur n of capi t al ( i . e. , t ax- f r ee t o t he ext ent of
shar ehol der basi s and capi t al gai n f or any excess) .

1783. Under what ci r cumst ances wi l l a di st r i but i on by a cor por at i on t o
i t s onl y shar ehol der r esul t i n a capi t al gai n?

Cor r ect Answer :
Capi t al gai n wi l l r esul t i f t he amount of t he di st r i but i on exceeds t he
cor por at i on s ear ni ngs and pr of i t s and t he shar ehol der s basi s i n t he
st ock.

1784. I f a t axpayer pur chases t axabl e bonds at a pr emi um, t he
amor t i zat i on of t he pr emi umi s el ect i ve. However , i f a t axpayer
pur chases t ax- exempt bonds at a pr emi um, t he amor t i zat i on of t he
pr emi umi s mandat or y. Expl ai n t hi s di f f er ence i n t he t r eat ment .

Cor r ect Answer :
I f mandat or y amor t i zat i on wer e not r equi r ed f or t ax- exempt bonds, a
t axpayer who hel d such bonds t o mat ur i t y woul d have a r ecogni zed l oss
t o t he ext ent of t he pr emi um. Thi s i s not consi st ent wi t h t he r ul e t hat
i nt er est ear ned on t he bonds i s t ax- exempt . Mandat or y amor t i zat i on,
t her ef or e, r esul t s i n t he adj ust ed basi s of t he bonds ul t i mat el y bei ng
equal t o t he mat ur i t y val ue. Thus, no l oss r esul t s upon mat ur i t y.
Fur t her mor e, t he amor t i zat i on of t he pr emi umon t ax- exempt bonds i s not
deduct i bl e.

For t he t axabl e bonds and i f t he t axpayer does not el ect t o amor t i ze
t he pr emi um, a r ecogni zed capi t al l oss r esul t s t o t hi s ext ent at
mat ur i t y. Typi cal l y, t he t axpayer wi l l el ect t o amor t i ze t he pr emi umso
t hat i t can be cl ai med over t he l i f e of t he bond as an or di nar y ( r at her
t han capi t al ) deduct i on.

1785. Maur i ce sel l s hi s per sonal use aut omobi l e at a r eal i zed l oss.
Under what ci r cumst ances can Maur i ce deduct t he l oss? What i f t he
per sonal use asset was sol d at a r eal i zed gai n?

Cor r ect Answer :
Under no ci r cumst ance can Maur i ce r ecogni ze ( deduct ) a l oss on t he sal e
of a per sonal use asset . Not e t hat i f t he aut omobi l e had been used i n a
t r ade or busi ness or hel d f or t he pr oduct i on of i ncome, t he l oss coul d
have been deduct ed.

I f t he per sonal use asset was sol d at a r eal i zed gai n, t he r eal i zed
gai n woul d be r ecogni zed.

1786. Descr i be t he r el at i onshi p bet ween t he r ecover y of capi t al
doct r i ne and t he r eal i zed and r ecogni zed gai n and l oss concept s.

Cor r ect Answer :
The r el at i onshi p bet ween t he r ecover y of capi t al doct r i ne and t he
r eal i zed and r ecogni zed gai n and l oss concept s can be summar i zed as
f ol l ows:

A realized gain that is never recognized
results in the permanent recovery of more
than the taxpayers cost or other basis for
tax purposes.

A realized gain on which recognition is
postponed results in the temporary recovery
of more than the taxpayers cost or other
basis for tax purposes.

A realized loss that is never recognized
results in the permanent recovery of less
than the taxpayers cost or other basis for
tax purposes.

A realized loss on which recognition is
postponed results in the temporary recovery
of less than the taxpayers cost or other
basis for tax purposes.

1787. Def i ne a bar gai n pur chase of pr oper t y and di scuss t he r el at ed t ax
consequences.

Cor r ect Answer :
A bar gai n pur chase can occur when an empl oyer t r ansf er s pr oper t y t o an
empl oyee at l ess t han t he f ai r mar ket val ue. I t r esul t s i n compensat i on
f or ser vi ces. I t al so occur s when a cor por at i on sel l s pr oper t y t o a
shar ehol der at l ess t han i t s f ai r mar ket val ue. The r esul t i s a
di vi dend. The amount i ncl uded i n i ncome i s t he di f f er ence bet ween t he
pur chase pr i ce and t he pr oper t y s f ai r mar ket val ue. The basi s of t he
pr oper t y acqui r ed i n t he bar gai n pur chase i s t he pr oper t y s f ai r mar ket
val ue.

1788. I f a t axpayer pur chases a busi ness and t he pr i ce exceeds t he f ai r
mar ket val ue of t he l i st ed asset s, how i s t he excess al l ocat ed among
t he pur chased asset s?

Cor r ect Answer :
The excess i s not al l ocat ed among t he l i st ed asset s. I nst ead, t he
excess i s assi gned t o goodwi l l .

1789. Tar a owns common st ock i n Taupe, I nc. , wi t h an adj ust ed basi s of
$250, 000. She r ecei ves a pr ef er r ed st ock di vi dend whi ch i s nont axabl e.

a. What ef f ect does t he pr ef er r ed st ock
di vi dend have on Tar a s adj ust ed basi s of
t he common st ock?

b. How i s t he basi s of t he pr ef er r ed st ock
cal cul at ed?

c. What ef f ect does t he pr ef er r ed st ock
di vi dend have on Tar a s gr oss i ncome?

Cor r ect Answer :
a. Part of the adjusted basis of the common stock
must be allocated to the preferred stock
thereby decreasing the basis of the common.

b. The amount that is allocated to the preferred
stock is based on the relative fair market
values of the common stock and the preferred
stock on the date of the distribution.

c. Since the preferred stock dividend is
nontaxable, it has no effect on Taras gross
income.

1790. Loi s r ecei ved nont axabl e st ock r i ght s wi t h a f ai r mar ket val ue of
$6, 000. The f ai r mar ket val ue of t he st ock on whi ch t he r i ght s wer e
r ecei ved i s $24, 000 ( cost $14, 000) . Assume t he r i ght s ar e exer ci sed by
payi ng $32, 000 pl us t he r i ght s. Di scuss how t o cal cul at e t he basi s of
t he ol d st ock and t he basi s of t he new st ock.

Cor r ect Answer :
Si nce t he f ai r mar ket val ue of t he st ock r i ght s i s at l east 15%of t he
f ai r mar ket val ue of t he st ock, par t of t he basi s of t he st ock must be
al l ocat ed t o t he st ock r i ght s. Thus, t he basi s of t he new st ock
i ncl udes t he basi s of t he ol d st ock t hat i s al l ocat ed t o t he st ock
r i ght s.

Basi s of new st ock i s $34, 800 [ $32, 000 + ( $6, 000/ $30, 000 $14, 000) ] .
Basi s of ol d st ock i s $11, 200 ( $14, 000 $2, 800) .

1791. For gi f t s made af t er 1976, when wi l l par t of t he gi f t t ax pai d by
t he donor be added t o t he donee s basi s?

Cor r ect Answer :
Thi s r esul t woul d occur i f t he f ai r mar ket val ue at t he dat e of t he
gi f t exceeds t he donor s adj ust ed basi s. I n t hi s case, t he por t i on of
t he gi f t t ax pai d t hat i s r el at ed t o t he appr eci at i on i s added t o t he
donor s basi s i n cal cul at i ng t he donee s gai n basi s f or t he pr oper t y.

1792. How i s t he donee s basi s cal cul at ed f or t he gi f t of appr eci at ed
pr oper t y f or a gi f t made bef or e 1977? Assume t he donor pays gi f t t ax.

Cor r ect Answer :
I f t he gi f t i s made bef or e 1977, t he donee s adj ust ed basi s i s t he sum
of t he donor s adj ust ed basi s f or t he pr oper t y pl us al l of t he gi f t t ax
pai d by t he donor . However , t he t ot al cannot exceed t he f ai r mar ket
val ue of t he pr oper t y at t he dat e of t he gi f t .

1793. J oseph conver t s a bui l di ng ( adj ust ed basi s of $50, 000 and f ai r
mar ket val ue of $40, 000) f r omper sonal use t o busi ness use. J ust i n
r ecei ves a bui l di ng wi t h a $40, 000 f ai r mar ket val ue ( $50, 000 donor s
adj ust ed basi s) f r omhi s mot her as a gi f t . Di scuss t he t ax consequences
wi t h r espect t o J oseph s and J ust i n s adj ust ed basi s.

Cor r ect Answer :
Upon conver si on f r omper sonal use t o busi ness use, t he bui l di ng
r ecei ves dual basi s t r eat ment . That i s, J oseph s gai n basi s f or t he
bui l di ng i s $50, 000, t he adj ust ed basi s on t he dat e of t he conver si on
f r omper sonal use t o busi ness use. J oseph s l oss basi s i s $40, 000, t he
l ower of t he adj ust ed basi s or t he f ai r mar ket val ue on t he dat e of t he
conver si on. J ust i n s basi s f or t he bui l di ng upon r ecei pt of t he gi f t i s
t r eat ed i n t he same manner accor di ng t o gi f t basi s r ul es ( i . e. , dual
basi s t r eat ment ) .

1794. Di scuss t he appl i cat i on of hol di ng per i od r ul es t o pr oper t y
acqui r ed by gi f t and i nher i t ance.

Cor r ect Answer :
The hol di ng per i od f or i nher i t ed pr oper t y i s al ways l ong- t er m. For gi f t
pr oper t y, i f t he donee s basi s i s t he donor s adj ust ed basi s ( i . e. ,
gai n basi s) , t he hol di ng per i od st ar t s on t he dat e t he pr oper t y was
acqui r ed by t he donor . I f t he donee s basi s i s f ai r mar ket val ue ( i . e. ,
l oss basi s) , t he hol di ng per i od st ar t s on t he dat e of t he gi f t .

1795. What i s a deat hbed gi f t and what t ax consequences appl y?

Cor r ect Answer :
A deat hbed gi f t occur s when a donor makes a gi f t of appr eci at ed
pr oper t y t o a t er mi nal per son wi t h t he under st andi ng t hat t he donor ( or
t he donor s spouse) wi l l i nher i t t he pr oper t y on t he donee s deat h. I f
t he per i od bet ween t he dat e of t he gi f t and t he dat e of t he donee s
deat h exceeds one year , t he usual t r ansf er - by- deat h basi s r ul es appl y.
However , i f t hi s per i od i s one year or l ess, t he t r ansf er - by- gi f t basi s
r ul es appl y.

1796. Samand Cher yl , husband and wi f e, own pr oper t y j oi nt l y. The
pr oper t y has an adj ust ed basi s of $400, 000 and a f ai r mar ket val ue of
$500, 000.

a. Di scuss t he r ul es f or t he cal cul at i on of t he
adj ust ed basi s of t he pr oper t y t o Sami f he
i nher i t s hi s wi f e s shar e of t he pr oper t y
and Samand Cher yl l i ve i n a communi t y
pr oper t y st at e.

b. I f t hey l i ve i n a common l aw st at e?

Cor r ect Answer :
a. In a community property state, Sams basis
for the property will be stepped-up to fair
market value for both the decedents share
and the survivors share of the community
property (i.e., $250,000 + $250,000 =
$500,000).

b. In a common law state, his basis will be
stepped-up only for the decedents share
(i.e., $250,000 + $200,000 = $450,000).

1797. Expl ai n how t he sal e of i nvest ment pr oper t y at a l oss t o a
br ot her i s t r eat ed di f f er ent l y f r oma sal e t o a ni ece.

Cor r ect Answer :
The br ot her i s a r el at ed par t y under t he 267 l oss di sal l owance
pr ovi si on. Consequent l y, t he r eal i zed l oss on t he sal e of t he
i nvest ment pr oper t y i s di sal l owed. The br ot her s basi s f or t he
i nvest ment pr oper t y i s i t s cost . However , i f t he br ot her sel l s t he
i nvest ment pr oper t y at a r eal i zed gai n, he can of f set t hi s gai n wi t h as
much of t he pr i or di sal l owed l oss as i s needed t o r educe i t t o zer o.
Ot her wi se, t he di sal l owed l oss i s wast ed.

Because a ni ece i s not t r eat ed as a r el at ed par t y under 267, t he
r eal i zed l oss on t he sal e of t he i nvest ment pr oper t y i s r ecogni zed. The
ni ece s basi s f or t he i nvest ment pr oper t y i s i t s cost .

1798. For di sal l owed l osses on r el at ed- par t y t r ansact i ons, who has t he
right of offset?

Cor r ect Answer :
The right of offset i s avai l abl e onl y t o t he r el at ed- par t y buyer ( i . e. ,
t he or i gi nal t r ansf er ee) . I f t he r el at ed- par t y buyer t r ansf er s t he
pr oper t y t o anot her par t y by ei t her gi f t or i nher i t ance, t he right of
offset i s not avai l abl e t o t hat par t y.

1799. What i s t he easi est way f or a t axpayer who i s goi ng t o sel l
pr oper t y t hat has decl i ned i n val ue t o avoi d t he 267 l oss
di sal l owance pr ovi si on?

Cor r ect Answer :
I n t hi s ci r cumst ance, t he easi est way f or a t axpayer t o r ecogni ze t he
r eal i zed l oss ( by avoi di ng t he 267 l oss di sal l owance pr ovi si on) i s t o
sel l t he pr oper t y t o someone who i s not a r el at ed par t y as def i ned i n
267 ( i . e. , sel l i n t he mar ket pl ace) .

1800. Tar i q sol d cer t ai n U. S. Gover nment bonds and St at e of Or egon
bonds at a l oss t o of f set shor t - t er mcapi t al gai n f r oma pr evi ous
t r ansact i on. He f el t t hat t he U. S. Gover nment and St at e of Or egon bonds
wer e good i nvest ment s, so he r epur chased i dent i cal secur i t i es wi t hi n
one week. Do t hese t r ansact i ons const i t ut e wash sal es?

I f t he bond sal es r esul t ed i n t he r ecogni t i on of gai n ( r at her t han
l oss) , woul d t he wash sal e pr ovi si ons pr event t he gai ns f r ombei ng
r ecogni zed?

Cor r ect Answer :
The wash sal e r ul es appl y because Tar i q pur chased subst ant i al l y
i dent i cal secur i t i es wi t hi n t he meani ng of 1091. I f t he bonds wer e
sol d at a gai n, however , t he wash sal e r ul es woul d not appl y.

1801. Mor gan owned a conver t i bl e t hat he had pur chased t wo year s ago
f or $46, 000 and whi ch he t r ansf er s t o hi s sol e pr opr i et or shi p. How i s
t he sol e pr opr i et or shi p s basi s f or t he car cal cul at ed? What addi t i onal
i nf or mat i on does Mor gan need?

Cor r ect Answer :
Mor gan needs t o cal cul at e bot h t he gai n basi s and t he l oss basi s of t he
conver t i bl e f or t he sol e pr opr i et or shi p. The gai n basi s i s a car r yover
basi s and t he l oss basi s i s t he l ower of Mor gan s adj ust ed basi s or t he
f ai r mar ket val ue on t he dat e of t he t r ansf er . So Mor gan needs t o
det er mi ne t he FMV and t o i dent i f y t he begi nni ng of t he hol di ng per i od.
The hol di ng per i od associ at ed wi t h t he gai n basi s i ncl udes t he t wo
year s t hat Mor gan has owned t he conver t i bl e. The hol di ng per i od
associ at ed wi t h t he l oss basi s st ar t s on t he dat e of t he t r ansf er .

1802. J ami e i s t er mi nal l y i l l and does not expect t o l i ve much l onger .
Ponder i ng t he consequences of her est at e, she deci des how t o al l ocat e
her pr oper t y t o her nephews. She makes a gi f t of depr eci at ed pr oper t y
( i . e. , adj ust ed basi s exceeds f ai r mar ket val ue) t o Wi l l , a gi f t of
appr eci at ed pr oper t y ( i . e. , f ai r mar ket val ue exceeds adj ust ed basi s)
t o J i m, and l eaves appr eci at ed pr oper t y t o Sami n her wi l l . Each of t he
pr oper t i es has t he same f ai r mar ket val ue. Fr oman i ncome t ax
per spect i ve, whi ch nephew i s her f avor i t e?

Cor r ect Answer :
J ami e appear s t o l i ke Sambest . Samr ecei ves t he most benef i ci al t ax
t r eat ment by r ecei vi ng a st epped- up basi s ( i . e. , f ai r mar ket val ue on
t he dat e of J ami e s deat h) i n t he i nher i t ed pr oper t y. Ther ef or e, he
woul d r ecogni ze l ess gai n t han J i m. Fur t her , he woul d not have t o deal
wi t h t he dual basi s i ssue l i ke Wi l l i f he deci ded t o sel l t he pr oper t y.
Because J i mr ecei ves a gi f t of appr eci at ed pr oper t y, he wi l l r eal i ze
gai n equal t o t he amount of appr eci at i on i f he deci des t o sel l . Thi s i s
because hi s basi s ( i . e. , car r yover ) i s equal t o J ami e s adj ust ed basi s.

J ami e appear s t o be i ndi f f er ent about Wi l l . A gi f t of depr eci at ed
pr oper t y r ecei ves a l oss basi s t o Wi l l of t he l ower of t he adj ust ed
basi s or t he f ai r mar ket val ue on t he dat e of t he gi f t . Thi s el i mi nat es
a possi bl e l oss deduct i on f or J ami e and al so pr event s Wi l l f r omt aki ng
a l oss deduct i on f or t he decl i ne i n val ue whi l e J ami e owned t he
pr oper t y. On t he ot her hand, Wi l l s gai n basi s i s equal t o J ami e s
adj ust ed basi s f or t he pr oper t y ( and i s gr eat er t han Sam s basi s) .
Ther ef or e, i f t he pr oper t y appr eci at es whi l e owned by Wi l l , he wi l l
have r ecogni zed gai n on t he sal e onl y i f t he pr oper t y appr eci at es t o a
f ai r mar ket val ue i n excess of J ami e s adj ust ed basi s f or t he pr oper t y.

1803. Why i s i t gener al l y undesi r abl e t o pass pr oper t y by deat h when
i t s f ai r mar ket val ue i s l ess t han basi s?

Cor r ect Answer :
Assumi ng t he pr oper t y i s not per sonal use pr oper t y ( wher e nei t her t he
decedent nor t he benef i ci ar y i s abl e t o deduct any of t he l oss) , t he
decedent shoul d sel l t he pr oper t y pr i or t o hi s or her deat h.

1804. I dent i f y t wo t ax pl anni ng t echni ques t hat can be used t o avoi d
t he wash sal e di sal l owance of l oss.

Cor r ect Answer :
One t echni que t o avoi d a wash sal e r esul t i s t o not pur chase
subst ant i al l y i dent i cal st ock or secur i t i es. Anot her i s t o avoi d t he
60- day wash sal e wi ndow.

1805. Gai ns and l osses on nont axabl e exchanges ar e def er r ed because t he
t ax l aw r ecogni zes t hat nont axabl e exchanges r esul t i n a change i n t he
subst ance but not t he f or mof t he t axpayer s r el at i ve economi c posi t i on.

a. Tr ue
*b. Fal se

1806. Abby exchanges an SUV t hat she has hel d f or per sonal use pl us
$24, 000 f or a new SUV whi ch she wi l l use excl usi vel y i n her sol e
pr opr i et or shi p busi ness. Thi s exchange qual i f i es f or nont axabl e
exchange t r eat ment .

a. Tr ue
*b. Fal se

1807. I n a nont axabl e exchange, r ecogni t i on i s post poned. I n a t ax- f r ee
t r ansact i on, nonr ecogni t i on i s per manent .

*a. Tr ue
b. Fal se

1808. I n a nont axabl e exchange, t he r epl acement pr oper t y i s assi gned a
car r yover basi s i f t her e i s a r eal i zed gai n, but r ecei ves a new basi s
i f t her e i s a r eal i zed l oss.

a. Tr ue
*b. Fal se

1809. The nonr ecogni t i on of gai ns and l osses under 1031 i s mandat or y
f or gai ns and el ect i ve f or l osses.

a. Tr ue
*b. Fal se

1810. Leonor e exchanges 5, 000 shar es of Pel i can, I nc. , st ock f or 2, 000
shar es of Bl ue Her on, I nc. , st ock. Leonor e s adj ust ed basi s f or t he
Pel i can st ock i s $300, 000 and t he f ai r mar ket val ue of t he Bl ue Her on
st ock i s $350, 000. Leonor e s r ecogni zed gai n i s $0 and her adj ust ed
basi s f or t he Bl ue Her on st ock i s $300, 000.

a. Tr ue
*b. Fal se

1811. Li vest ock of di f f er ent sexes can qual i f y f or l i ke- ki nd exchange
t r eat ment i f t he l i vest ock has been hel d f or over 24 mont hs.

a. Tr ue
*b. Fal se

1812. To qual i f y as a l i ke- ki nd exchange, r eal pr oper t y must be
exchanged ei t her f or ot her r eal pr oper t y or f or per sonal pr oper t y wi t h
a st at ut or y l i f e of at l east 39 year s.

a. Tr ue
*b. Fal se

1813. The exchange of uni mpr oved r eal pr oper t y l ocat ed i n Topeka ( KS)
f or i mpr oved r eal pr oper t y l ocat ed i n At l ant a ( GA) does not qual i f y as
a l i ke- ki nd exchange.

a. Tr ue
*b. Fal se

1814. Lol a owns l and as an i nvest or . She exchanges t he l and f or a
war ehouse whi ch she l eases t o a t enant who uses i t t o st or e hi s
busi ness i nvent or y. The exchange does qual i f y f or l i ke- ki nd exchange
t r eat ment .

*a. Tr ue
b. Fal se

1815. A bui l di ng l ocat ed i n Vi r gi ni a ( used i n busi ness) exchanged f or a
bui l di ng l ocat ed i n Fr ance ( used i n busi ness) cannot qual i f y f or l i ke-
ki nd exchange t r eat ment .

*a. Tr ue
b. Fal se

1816. Pat owns a 1965 Must ang car whi ch he uses f or per sonal use. He
pur chased i t f our year s ago f or $22, 000, and i t cur r ent l y i s wor t h
$27, 000. He exchanges i t f or a 1979 Tr i umph Spi t f i r e conver t i bl e wor t h
$27, 000. Pat s r ecogni zed gai n i s $0 and hi s adj ust ed basi s f or t he
conver t i bl e i s $22, 000.

a. Tr ue
*b. Fal se

1817. Kat e exchanges l and hel d as an i nvest ment f or l and and a bui l di ng
owned by Cl ar k, t o be used i n her busi ness. I f Cl ar k i s Kat e s f at her ,
her r eal i zed gai n of $150, 000 must be r ecogni zed because t hey ar e
r el at ed par t i es.

a. Tr ue
*b. Fal se

1818. An exchange of t wo i t ems of per sonal pr oper t y ( per sonal t y) t hat
bel ong t o di f f er ent gener al busi ness asset cl asses qual i f i es f or
nonr ecogni t i on under 1031 as l ong as bot h pr oper t i es ar e used i n t he
t axpayer s t r ade or busi ness.

a. Tr ue
*b. Fal se

1819. I f boot i s r ecei ved i n a 1031 l i ke- ki nd exchange, t he
r ecogni zed gai n cannot exceed t he r eal i zed gai n.

*a. Tr ue
b. Fal se

1820. Shar i exchanges an of f i ce bui l di ng i n New Or l eans ( adj ust ed basi s
of $700, 000) f or an apar t ment bui l di ng i n Bat on Rouge ( f ai r mar ket
val ue of $900, 000) . I n addi t i on, she r ecei ves $100, 000 of cash. Shar i s
r ecogni zed gai n i s $100, 000 and her basi s f or t he apar t ment bui l di ng i s
$800, 000 ( $700, 000 adj ust ed basi s + $100, 000 r ecogni zed gai n) .

a. Tr ue
*b. Fal se

1821. When boot i n t he f or mof cash i s gi ven i n a l i ke- ki nd exchange,
r ecogni zed gai n i s t he gr eat er of t he boot or t he r eal i zed gai n.

a. Tr ue
*b. Fal se

1822. The sur r ender of depr eci at ed boot ( f ai r mar ket val ue i s l ess t han
adj ust ed basi s) i n a l i ke- ki nd exchange can r esul t i n t he r ecogni t i on
of l oss.

*a. Tr ue
b. Fal se

1823. Col e exchanges an asset ( adj ust ed basi s of $15, 000; f ai r mar ket
val ue of $25, 000) f or anot her asset ( f ai r mar ket val ue of $19, 000) . I n
addi t i on, he r ecei ves cash of $6, 000. I f t he exchange qual i f i es as a
l i ke- ki nd exchange, hi s r ecogni zed gai n i s $6, 000 and hi s adj ust ed
basi s f or t he pr oper t y r ecei ved i s $21, 000 ( $15, 000 + $6, 000 r ecogni zed
gai n) .

a. Tr ue
*b. Fal se

1824. The basi s of boot r ecei ved i n a l i ke- ki nd exchange i s i t s f ai r
mar ket val ue, unl ess t he r eal i zed gai n i s a smal l er amount .

a. Tr ue
*b. Fal se

1825. Ter r y exchanges r eal est at e ( acqui r ed on August 25, 2007) hel d
f or i nvest ment f or ot her r eal est at e t o be hel d f or i nvest ment on
Sept ember 1, 2013. None of t he r eal i zed gai n of $10, 000 i s r ecogni zed,
and Ter r y s adj ust ed basi s f or t he new r eal est at e i s a car r yover basi s
of $80, 000. Consequent l y, Ter r y s hol di ng per i od f or t he new r eal
est at e begi ns on August 25, 2007.

*a. Tr ue
b. Fal se

1826. I f boot i s r ecei ved i n a 1031 l i ke- ki nd exchange t hat r esul t s
i n some of t he r eal i zed gai n bei ng r ecogni zed, t he hol di ng per i od f or
bot h t he l i ke- ki nd pr oper t y and t he boot r ecei ved begi ns on t he dat e of
t he exchange.

a. Tr ue
*b. Fal se

1827. I f a t axpayer exchanges l i ke- ki nd pr oper t y under 1031 and
assumes a l i abi l i t y associ at ed wi t h t he pr oper t y r ecei ved, t he t axpayer
i s consi der ed t o have r ecei ved boot i n t he t r ansact i on.

a. Tr ue
*b. Fal se

1828. An i nvol unt ar y conver si on r esul t s f r omt he dest r uct i on ( compl et e
or par t i al ) , t hef t , sei zur e, r equi si t i on or condemnat i on, or t he sal e
or exchange under t hr eat or i mmi nence of r equi si t i on or condemnat i on of
t he t axpayer s pr oper t y.

*a. Tr ue
b. Fal se

1829. Sect i on 1033 ( nonr ecogni t i on of gai n f r oman i nvol unt ar y
conver si on) appl i es t o bot h gai ns and l osses.

a. Tr ue
*b. Fal se

1830. The amount r eal i zed does not i ncl ude any amount r ecei ved by t he
t axpayer t hat i s desi gnat ed as sever ance damages by bot h t he gover nment
and t he t axpayer .

*a. Tr ue
b. Fal se

1831. Under t he t axpayer - use t est f or a 1033 i nvol unt ar y conver si on,
t he t axpayer has l ess f l exi bi l i t y i n qual i f yi ng r epl acement pr oper t y
t han under t he f unct i onal - use t est .

a. Tr ue
*b. Fal se

1832. Mi l t s bui l di ng whi ch houses hi s r et ai l spor t i ng goods st or e i s
dest r oyed by a f l ood. Sandr a s war ehouse whi ch she i s l easi ng t o Mi l t
t o st or e t he i nvent or y of hi s busi ness al so i s dest r oyed i n t he same
f l ood. Bot h Mi l t and Sandr a r ecei ve i nsur ance pr oceeds t hat r esul t i n
a r eal i zed gai n. Sandr a wi l l have l ess f l exi bi l i t y t han Mi l t i n t he
t ype of bui l di ng i n whi ch she can i nvest t he pr oceeds and qual i f y f or
post ponement t r eat ment under 1033 ( nonr ecogni t i on of gai n f r oman
i nvol unt ar y conver si on) .

a. Tr ue
*b. Fal se

1833. Si dney, a cal endar year t axpayer , owns a bui l di ng i n Col umbus, OH,
i n whi ch he conduct s hi s r et ai l comput er sal es busi ness. The bui l di ng
i s dest r oyed by f i r e on December 12, 2013, and t wo weeks l at er he
r ecei ves i nsur ance pr oceeds of $600, 000. Due t o f ami l y t i es, Si dney
deci des t o move t o Col umbi a, SC. He r ei nvest s al l of t he i nsur ance
pr oceeds i n a bui l di ng i n Col umbi a wher e he opens a r et ai l comput er
sal es busi ness on Apr i l 2, 2014. By el ect i ng 1033, Si dney has no
r ecogni zed gai n and a basi s i n t he new bui l di ng of $450, 000 ( $600, 000
cost $150, 000 post poned gai n) .

*a. Tr ue
b. Fal se

1834. Denni s, a cal endar year t axpayer , owns a war ehouse ( adj ust ed
basi s of $190, 000) whi ch i s dest r oyed by a t or nado i n Oct ober 2013. He
r ecei ves i nsur ance pr oceeds of $250, 000 i n J anuar y 2014. I f bef or e
2017, Denni s r epl aces t he war ehouse wi t h anot her war ehouse cost i ng at
l east $250, 000, he can el ect t o post pone t he r ecogni t i on of any
r eal i zed gai n.

*a. Tr ue
b. Fal se

1835. I f a t axpayer r ei nvest s t he net pr oceeds ( amount r ecei ved
r el at ed expenses) r ecei ved i n an i nvol unt ar y conver si on i n qual i f yi ng
r epl acement pr oper t y wi t hi n t he st at ut or y t i me per i od, i t i s possi bl e
t o def er t he r ecogni t i on of t he r eal i zed gai n.

*a. Tr ue
b. Fal se

1836. The hol di ng per i od of r epl acement pr oper t y wher e t he el ect i on t o
post pone gai n i s made i ncl udes t he hol di ng per i od of t he i nvol unt ar i l y
conver t ed pr oper t y.

*a. Tr ue
b. Fal se

1837. A r eal i zed gai n on an i ndi r ect ( conver si on i nt o money)
i nvol unt ar y conver si on of busi ness pr oper t y can be post poned, but a
r eal i zed l oss on an i ndi r ect i nvol unt ar y conver si on of busi ness
pr oper t y cannot be post poned.

*a. Tr ue
b. Fal se

1838. Gi l s of f i ce bui l di ng ( basi s of $225, 000 and f ai r mar ket val ue
$275, 000) i s dest r oyed by a hur r i cane. Due t o a 30% co- i nsur ance cl ause,
Gi l r ecei ves i nsur ance pr oceeds of $192, 500 t wo mont hs af t er t he dat e
of t he l oss. One mont h l at er , Gi l uses t he i nsur ance pr oceeds t o
pur chase a new of f i ce bui l di ng f or $275, 000. Hi s adj ust ed basi s f or t he
new bui l di ng i s $307, 500 ( $275, 000 cost + $32, 500 post poned l oss) .

a. Tr ue
*b. Fal se

1839. Casual t y l osses and condemnat i on l osses on t he i nvol unt ar y
conver si on of a per sonal r esi dence r ecei ve t he same t ax t r eat ment .

a. Tr ue
*b. Fal se

1840. I f t he r ecogni zed gai n on an i nvol unt ar y conver si on equal s t he
r eal i zed gai n because of a r ei nvest ment def i ci ency, t he basi s of t he
r epl acement pr oper t y wi l l be mor e t han i t s cost ( cost pl us r eal i zed
gai n) .

a. Tr ue
*b. Fal se

1841. I f t her e i s an i nvol unt ar y conver si on ( i . e. , casual t y, t hef t , or
condemnat i on) of t he t axpayer s pr i nci pal r esi dence, t he r eal i zed gai n
may be post poned as a 1033 i nvol unt ar y conver si on or excl uded as a
121 sal e of a pr i nci pal r esi dence.

*a. Tr ue
b. Fal se

1842. The t axpayer must el ect t o have t he excl usi on of gai n under 121
( sal e of pr i nci pal r esi dence) appl y.

a. Tr ue
*b. Fal se

1843. At a par t i cul ar poi nt i n t i me, a t axpayer can have t wo pr i nci pal
r esi dences f or 121 excl usi on pur poses.

a. Tr ue
*b. Fal se

1844. To qual i f y f or t he 121 excl usi on, t he pr oper t y must have been
used by t he t axpayer f or t he 5 year s pr ecedi ng t he dat e of sal e and
owned by t he t axpayer as t he pr i nci pal r esi dence f or t he l ast 2 of
t hose year s.

a. Tr ue
*b. Fal se

1845. A t axpayer who sel l s hi s or her pr i nci pal r esi dence at a r eal i zed
l oss can el ect t o r ecogni ze t he l oss even i f a qual i f i ed r esi dence i s
acqui r ed dur i ng t he st at ut or y t i me per i od.

a. Tr ue
*b. Fal se

1846. Wyat t sel l s hi s pr i nci pal r esi dence i n December 2013 and
qual i f i es f or t he 121 excl usi on. He sel l s anot her pr i nci pal r esi dence
i n November 2014. Under no ci r cumst ance can Wyat t qual i f y f or t he 121
excl usi on on t he sal e of t he second r esi dence.

a. Tr ue
*b. Fal se

1847. Taxpayer owns a home i n At l ant a. Hi s company t r ansf er s hi mt o
Chi cago on J anuar y 2, 2013, and he sel l s t he At l ant a house i n ear l y
Febr uar y. He pur chases a r esi dence i n Chi cago on Febr uar y 3, 2013. On
December 15, 2013, t axpayer s company t r ansf er s hi mt o Los Angel es. I n
J anuar y 2014, he sel l s t he Chi cago r esi dence and pur chases a r esi dence
i n Los Angel es. Because mul t i pl e sal es have occur r ed wi t hi n a t wo- year
per i od, 121 t r eat ment does not appl y t o t he sal e of t he second home.

a. Tr ue
*b. Fal se

1848. The maxi mumamount of t he 121 gai n excl usi on on sal e of a
pr i nci pal r esi dence i s $250, 000 f or a si ngl e i ndi vi dual and $500, 000
f or a mar r i ed coupl e.

*a. Tr ue
b. Fal se

1849. Dei dr a has owned and occupi ed her pr i nci pal r esi dence f or 10
year s. Two and one- hal f year s ago she mar r i ed Doug who moved i nt o her
house. Doug has never owned a home. When Dei dr a i s t r ansf er r ed t o
anot her ci t y, she sel l s t he house and has a r eal i zed gai n of $425, 000.
Dei dr a can excl ude t he r eal i zed gai n of $425, 000 f r omher gr oss i ncome
under 121 i f she and Doug f i l e a j oi nt r et ur n.

*a. Tr ue
b. Fal se

1850. Al ex used t he 121 excl usi on t hr ee mont hs pr i or t o hi s mar r i age
t o J une. I f J une sel l s her pr i nci pal r esi dence f our mont hs af t er t hei r
mar r i age, she cannot use t he 121 excl usi on.

a. Tr ue
*b. Fal se

1851. Ki t t y, who i s si ngl e, sel l s her pr i nci pal r esi dence, whi ch she
has owned and occupi ed f or 8 year s, f or $375, 000. The adj ust ed basi s
i s $64, 000 and sel l i ng expenses ar e $22, 000. She pur chases anot her
pr i nci pal r esi dence t hr ee mont hs l at er f or $200, 000. Her r ecogni zed
gai n i s $39, 000 and her basi s f or t he new pr i nci pal r esi dence i s
$200, 000.

*a. Tr ue
b. Fal se

1852. Mat t , who i s si ngl e, sel l s hi s pr i nci pal r esi dence, whi ch he has
owned and occupi ed f or 5 year s, f or $435, 000. The adj ust ed basi s i s
$140, 000 and t he sel l i ng expenses ar e $20, 000. Thr ee days af t er t he
sal e he pur chases anot her r esi dence f or $385, 000. Mat t s r ecogni zed
gai n i s $25, 000 and hi s basi s f or t he new r esi dence i s $385, 000.

*a. Tr ue
b. Fal se

1853. A t axpayer whose pr i nci pal r esi dence i s dest r oyed i n a f i r e can
use bot h t he 121 ( sal e of r esi dence gai n excl usi on) and t he 1033
( i nvol unt ar y conver si on post ponement of gai n) pr ovi si ons.

*a. Tr ue
b. Fal se

1854. Owen and Pol l y have been mar r i ed f or f i ve year s. Owen sel l s
i nvest ment pr oper t y t o Pol l y f or a r eal i zed gai n of $140, 000. Owen s
gai n of $140, 000 i s not r ecogni zed and Pol l y s basi s f or t he pr oper t y
she pur chased i s her cost .

a. Tr ue
*b. Fal se


a. I n a nont axabl e exchange i n whi ch gai n i s r eal i zed, t he
t r ansact i on r esul t s i n a per manent r ecover y of mor e t han t he
t axpayer s cost or ot her basi s f or t ax pur poses.
b. I n a nont axabl e exchange i n whi ch l oss i s r eal i zed, t he
t r ansact i on r esul t s i n a per manent r ecover y of l ess t han t he
*c. I n a t ax- f r ee t r ansact i on i n whi ch gai n i s r eal i zed, t he
t r ansact i on r esul t s i n t he per manent r ecover y of mor e t han t he

1856. I n or der t o qual i f y f or l i ke- ki nd exchange t r eat ment under 1031,
whi ch of t he f ol l owi ng r equi r ement s must be sat i sf i ed?

a. The f or mof t he t r ansact i on i s a sal e or exchange.
*b. Bot h t he pr oper t y t r ansf er r ed and t he pr oper t y r ecei ved ar e
hel d ei t her f or pr oduct i ve use i n a t r ade or busi ness or f or
i nvest ment .
c. The exchange must be compl et ed by t he end of t he second t ax
year f ol l owi ng t he t ax year i n whi ch t he t axpayer r el i nqui shes
hi s or her l i ke- ki nd pr oper t y.
d. Onl y a. and b.
e. a. , b. , and c.

1857. Whi ch, i f any, of t he f ol l owi ng exchanges qual i f i es f or
nonr ecogni t i on t r eat ment as a 1031 l i ke- ki nd exchange?

a. Par t ner shi p i nt er est f or a par t ner shi p i nt er est .
b. I nvent or y f or i nvent or y.
c. Secur i t i es f or per sonal t y.
*d. Busi ness r eal t y f or i nvest ment r eal t y.

1858. Br et t owns i nvest ment l and l ocat ed i n Tucson, Ar i zona. He
exchanges i t f or ot her i nvest ment l and. I n whi ch of t he f ol l owi ng
l ocat i ons may t he ot her i nvest ment l and be l ocat ed and enabl e Br et t t o
qual i f y f or 1031 l i ke- ki nd exchange t r eat ment ?

a. Mexi co Ci t y, Mexi co.
b. Tor ont o, Canada.
c. Par i s, Fr ance.
d. Onl y a. and b.

1859. Li l y exchanges a bui l di ng she uses i n her r ent al busi ness f or a
bui l di ng owned by Kendal l , her br ot her , whi ch she wi l l use i n her
r ent al busi ness. The adj ust ed basi s of Li l y s bui l di ng i s $120, 000 and
t he f ai r mar ket val ue i s $170, 000. Whi ch of t he f ol l owi ng st at ement s i s
cor r ect ?

a. Li l y s r ecogni zed gai n i s $50, 000 and her basi s f or t he
bui l di ng r ecei ved i s $120, 000.
b. Li l y s r ecogni zed gai n i s $50, 000 and her basi s f or t he
bui l di ng r ecei ved i s $170, 000.
*c. Li l y s r ecogni zed gai n i s $0 and her basi s f or t he bui l di ng
r ecei ved i s $120, 000.
d. Li l y s r ecogni zed gai n i s $0 and her basi s f or t he bui l di ng
r ecei ved i s $170, 000.

1860. Lat i sha owns a war ehouse wi t h an adj ust ed basi s of $200, 000. She
exchanges i t f or a st r i p mal l bui l di ng wor t h $225, 000. Whi ch of t he
f ol l owi ng st at ement s i s cor r ect ?

a. I f t he war ehouse was used i n Lat i sha s busi ness t o st or e
i nvent or y and t he st r i p mal l bui l di ng i s t o be r ent ed t o t enant s,
her r ecogni zed gai n i s $25, 000 and her basi s f or t he st r i p mal l
bui l di ng i s $225, 000.
b. I f t he war ehouse was used i n Lat i sha s busi ness t o st or e
i nvent or y and t he st r i p mal l bui l di ng i s t o be used as a r et ai l
out l et f or her busi ness, her r ecogni zed gai n i s $0 and her basi s
f or t he st r i p mal l bui l di ng i s $200, 000.
c. I f t he war ehouse i s used by Lat i sha t o st or e per sonal use
i t ems such as excess f ur ni t ur e and t he st r i p mal l bui l di ng i s t o
be r ent ed t o t enant s, her r ecogni zed gai n i s $25, 000 and her
basi s f or t he st r i p mal l bui l di ng i s $225, 000.
*d. Onl y b. and c. ar e cor r ect .


a. The r ecei pt of boot i n a 1031 l i ke- ki nd exchange can r esul t
i n t he r ecogni t i on of gai n.
b. The r ecei pt of boot i n a 1031 l i ke- ki nd exchange cannot
r esul t i n t he r ecogni t i on of l oss.
c. The gi vi ng of boot i n a 1031 l i ke- ki nd exchange can r esul t
i n t he r ecogni t i on of gai n.
d. Onl y a. and b.
*e. a. , b. , and c.

1862. Bud exchanges a busi ness use machi ne wi t h an adj ust ed basi s of
$22, 000 and a f ai r mar ket val ue of $30, 000 f or anot her busi ness use
machi ne wi t h a f ai r mar ket val ue of $28, 000 and $2, 000 cash. What i s
Bud s r ecogni zed gai n or l oss?

a. $0.
*b. $2, 000.
c. $6, 000.
d. $8, 000.

1863. Maud exchanges a r ent al house at t he beach wi t h an adj ust ed basi s
of $225, 000 and a f ai r mar ket val ue of $200, 000 f or a r ent al house at
t he mount ai ns wi t h a f ai r mar ket val ue of $180, 000 and cash of $20, 000.
What i s t he r ecogni zed gai n or l oss?

*a. $0.
b. $20, 000.
c. ( $20, 000) .
d. ( $25, 000) .

1864. Mel vi n r ecei ves st ock as a gi f t f r omhi s uncl e. No gi f t t ax i s
pai d. The adj ust ed basi s of t he st ock i s $30, 000 and t he f ai r mar ket
val ue i s $38, 000. Mel vi n t r ades t he st ock f or bonds wi t h a f ai r mar ket
val ue of $35, 000 and $3, 000 cash. What i s hi s r ecogni zed gai n and t he
basi s f or t he bonds?

a. $0, $30, 000.
b. $5, 000, $33, 000.
c. $5, 000, $30, 000.
d. $8, 000, $33, 000.

1865. Moss exchanges a war ehouse f or a bui l di ng he wi l l use as an
of f i ce bui l di ng. The adj ust ed basi s of t he war ehouse i s $600, 000 and
t he f ai r mar ket val ue of t he of f i ce bui l di ng i s $350, 000. I n addi t i on,
Moss r ecei ves cash of $150, 000. What i s t he r ecogni zed gai n or l oss and
t he basi s of t he of f i ce bui l di ng?

a. $0 and $350, 000.
*b. $0 and $450, 000.
c. ( $150, 000) and $300, 000.
d. ( $200, 000) and $350, 000.

1866. Pamexchanges a r ent al bui l di ng, whi ch has an adj ust ed basi s of
$520, 000, f or i nvest ment l and whi ch has a f ai r mar ket val ue of $700, 000.
I n addi t i on, Pamr ecei ves $100, 000 i n cash. What i s t he r ecogni zed gai n
or l oss and t he basi s of t he i nvest ment l and?

a. $0 and $420, 000.
b. $100, 000 and $420, 000.
*c. $100, 000 and $520, 000.
d. $280, 000 and $700, 000.

1867. I f boot i s r ecei ved i n a 1031 l i ke- ki nd exchange and gai n i s
r ecogni zed, whi ch f or mul a cor r ect l y cal cul at es t he basi s f or t he l i ke-
ki nd pr oper t y r ecei ved?

a. Adj ust ed basi s of l i ke- ki nd pr oper t y sur r ender ed + gai n
r ecogni zed f ai r mar ket val ue of boot r ecei ved.
b. Fai r mar ket val ue of l i ke- ki nd pr oper t y sur r ender ed + gai n
r ecogni zed + f ai r mar ket val ue of boot r ecei ved.
c. Fai r mar ket val ue of l i ke- ki nd pr oper t y r ecei ved post poned
gai n.
*d. Onl y a. and c.

1868. I n det er mi ni ng t he basi s of l i ke- ki nd pr oper t y r ecei ved,
post poned l osses ar e:

a. Added t o t he basi s of t he ol d pr oper t y.
b. Subt r act ed f r omt he basi s of t he ol d pr oper t y.
*c. Added t o t he f ai r mar ket val ue of t he l i ke- ki nd pr oper t y
r ecei ved.
d. Subt r act ed f r omt he f ai r mar ket val ue of t he l i ke- ki nd
pr oper t y r ecei ved.

1869. Mol l y exchanges a smal l machi ne ( adj ust ed basi s of $85, 000; f ai r
mar ket val ue of $78, 000) used i n her busi ness and i nvest ment l and
( adj ust ed basi s of $10, 000; f ai r mar ket val ue of $15, 000) f or a l ar ge
machi ne ( f ai r mar ket val ue of $93, 000) t o be used i n her busi ness i n a
l i ke- ki nd exchange. What i s Mol l y s r ecogni zed gai n or l oss?

a. $0.
*b. $5, 000.
c. ( $2, 000) .
d. ( $7, 000) .

1870. I n Oct ober 2013, Ben and J er r y exchange i nvest ment r eal t y i n a
1031 l i ke- ki nd exchange. Ben bought hi s r eal est at e i n 2003 whi l e J er r y
pur chased hi s i n 2006. I n addi t i on t o t he r eal t y, Ben r ecei ves Pear l ,
I nc. st ock wor t h $10, 000 f r omJ er r y. Ben s r eal i zed gai n i s $30, 000. On
what dat e does t he hol di ng per i od f or Ben s r eal t y r ecei ved f r omJ er r y
begi n? When does t he hol di ng per i od f or t he st ock he r ecei ves begi n?

*a. 2003, 2013.
b. 2003, 2003.
c. 2006, 2006.
d. 2006, 2013.

1871. Dena owns 500 acr es of f ar ml and i n sout heast er n Mar yl and. Her
adj ust ed basi s f or t he l and i s $480, 000 and t her e i s a $400, 000
mor t gage on t he l and. She exchanges t he l and f or an of f i ce bui l di ng
owned by Chr i s i n Newar k, New J er sey. The bui l di ng has a f ai r mar ket
val ue of $900, 000. Chr i s assumes Dena s mor t gage on t he l and. What i s
t he amount of Dena s r ecogni zed gai n or l oss on t he exchange?

a. $0.
*b. $400, 000.
c. $500, 000.
d. $820, 000.

1872. On Oct ober 1, Paul a exchanged an apar t ment bui l di ng ( adj ust ed
basi s of $375, 000 and subj ect t o a mor t gage of $125, 000) f or anot her
apar t ment bui l di ng owned by Ni ck ( f ai r mar ket val ue of $550, 000 and
subj ect t o a mor t gage of $125, 000) . The pr oper t y t r ansf er s wer e made
subj ect t o t he mor t gages. What amount of gai n shoul d Paul a r ecogni ze?

*a. $0.
b. $25, 000.
c. $125, 000.
d. $175, 000.

1873. Nancy and Tonya exchanged asset s. Nancy gave Tonya her per sonal
r esi dence wi t h an adj ust ed basi s of $280, 000 and a f ai r mar ket val ue of
$560, 000. The house has a mor t gage of $200, 000 whi ch i s assumed by
Tonya. Tonya gave Nancy a yacht used i n her busi ness wi t h an adj ust ed
basi s of $250, 000 and a f ai r mar ket val ue of $360, 000. What i s Tonya s
r eal i zed and r ecogni zed gai n?

a. $310, 000 r eal i zed and $310, 000 r ecogni zed gai n.
b. $310, 000 r eal i zed and $0 r ecogni zed gai n.
*c. $110, 000 r eal i zed and $110, 000 r ecogni zed gai n.
d. $110, 000 r eal i zed and $0 r ecogni zed gai n.

1874. I f t he t axpayer qual i f i es under 1033 ( nonr ecogni t i on of gai n
f r oman i nvol unt ar y conver si on) , makes t he appr opr i at e el ect i on, and
t he amount r ei nvest ed i n r epl acement pr oper t y i s l ess t han t he amount
r eal i zed, r eal i zed gai n i s:

*a. Recogni zed t o t he ext ent of t he def i ci ency ( amount r eal i zed
not r ei nvest ed) .
b. Recogni zed t o t he ext ent of r eal i zed gai n.
c. Recogni zed t o t he ext ent of t he amount r ei nvest ed i n excess of
t he adj ust ed basi s.
d. Per manent l y not subj ect t o t axat i on.

1875. J oyce, a f ar mer , has t he f ol l owi ng event s occur dur i ng t he t ax
year . Whi ch of t he event s qual i f y as an i nvol unt ar y conver si on under
1033 ( nonr ecogni t i on of gai n f r oman i nvol unt ar y conver si on) ?

a. Her f ar mt r act or i s haul ed t o t he ci t y dump because i t i s wor n
out .
b. She sel l s 10 acr es of past ur e l and at a l oss of $40, 000
because she has r educed t he si ze of her dai r y her d i n pr epar at i on
f or her r et i r ement .
*c. Her per sonal r esi dence, adj ust ed basi s of $100, 000, i s
condemned t o make way f or an i nt er st at e hi ghway. She r ecover s
condemnat i on pr oceeds of $175, 000.
d. She sel l s 10 acr es of past ur e l and at a l oss of $40, 000
because she has r educed t he si ze of her dai r y her d due t o a
r educt i on i n mi l k pr i ces.

1876. Bet t y owns a hor se f ar mwi t h 500 acr es of l and ( adj ust ed basi s of
$600, 000) . Fi f t y acr es of t he l and ar e condemned by t he st at e f or
$400, 000 i n or der t o bui l d a muni ci pal st adi um. Si nce t he f ai r mar ket
val ue of Bet t y s f ar mi s si gni f i cant l y decr eased by t he pr oxi mi t y t o
t he f ut ur e st adi um, t he st at e awar ds Bet t y $300, 000 i n sever ance
damages. Bet t y does not use t he $300, 000 t o r est or e t he usef ul ness of
t he f ar mand al l of t he $700, 000 ( $400, 000 + $300, 000) pr oceeds ar e
i nvest ed i n t he st ock mar ket . What i s her r ecogni zed gai n or l oss
associ at ed wi t h t he r ecei pt of t he severance damages?

*a. $0.
b. $100, 000.
c. $300, 000.
d. $340, 000.

1877. An of f i ce bui l di ng wi t h an adj ust ed basi s of $320, 000 was
dest r oyed by f i r e on December 30, 2013. On J anuar y 11, 2014, t he
i nsur ance company pai d t he owner $450, 000. The f ai r mar ket val ue of t he
bui l di ng was $500, 000, but under t he co- i nsur ance cl ause, t he i nsur ance
company i s r esponsi bl e f or onl y 90 per cent of t he l oss. The owner
r ei nvest ed $410, 000 i n a new of f i ce bui l di ng on Febr uar y 12, 2014, t hat
was smal l er t han t he or i gi nal of f i ce bui l di ng. What i s t he r ecogni zed
gai n and t he basi s of t he new bui l di ng i f 1033 ( nonr ecogni t i on of
gai n f r oman i nvol unt ar y conver si on) i s el ect ed?

a. $0 and $320, 000.
b. $0 and $410, 000.
*c. $40, 000 and $320, 000.
d. $130, 000 and 410, 000.

1878. Whi ch of t he f ol l owi ng st at ement s i s cor r ect wi t h r espect t o
qual i f i ed r epl acement pr oper t y i n a 1033 i nvol unt ar y conver si on?

a. I f t he f unct i onal use t est appl i es, a war ehouse used t o st or e
i nvent or y can be r epl aced wi t h a smal l er bui l di ng t o be used t o
sel l i nvent or y.
b. I f t he t axpayer use t est appl i es, an of f i ce bui l di ng r ent ed t o
t enant s can be r epl aced wi t h an of f i ce bui l di ng t o be used i n t he
t axpayer s busi ness.
*c. I f t he l i ke- ki nd exchange t est appl i es, a bui l di ng used by
t he t axpayer f or manuf act ur i ng can be r epl aced wi t h an of f i ce
bui l di ng t o be used i n t he t axpayer s busi ness.
d. Onl y b. and c.
e. a. , b. , and c.

1879. J ar ed, a f i scal year t axpayer wi t h a August 31st year - end, owns
an of f i ce bui l di ng ( adj ust ed basi s of $800, 000) t hat was dest r oyed by
f i r e on December 24, 2013. I f t he i nsur ance set t l ement was $950, 000
( r ecei ved Mar ch 1, 2014) , what i s t he l at est dat e t hat J ar ed can
r epl ace t he of f i ce bui l di ng i n or der t o qual i f y f or 1033
nonr ecogni t i on of gai n?

a. December 31, 2013.
b. August 31, 2014.
c. December 31, 2015.
*d. August 31, 2016.

1880. Whi ch of t he f ol l owi ng st at ement s i s correct f or a 1033
i nvol unt ar y conver si on of an of f i ce bui l di ng whi ch i s dest r oyed by f i r e?

a. An el ect i on can be made t o post pone gai n on a 1033
i nvol unt ar y conver si on onl y i f t he pr oceeds r ecei ved ar e
r ei nvest ed i n qual i f yi ng pr oper t y no l at er t han t wo year s af t er
t he end of t he t ax year i n whi ch a pr oceeds i nf l ow i s r ecei ved
t hat i s l ar ge enough t o pr oduce a r eal i zed gai n.
b. The post ponement of r eal i zed gai n i n a 1033 i nvol unt ar y
conver si on i s el ect i ve.
c. The f unct i onal use t est i s sat i sf i ed i f a busi ness war ehouse
i s r epl aced wi t h anot her busi ness war ehouse.
d. The t axpayer use t est i s sat i sf i ed i f a shoppi ng mal l r ent ed
t o t enant s i s r epl aced wi t h an of f i ce bui l di ng t o be r ent ed t o
t enant s.
*e. Al l of t he above ar e cor r ect .

1881. Whi ch of t he f ol l owi ng sat i sf y t he t i me per i od r equi r ement f or
post ponement of gai n as a 1033 ( nonr ecogni t i on of gai n f r oman
i nvol unt ar y conver si on) i nvol unt ar y conver si on?

a. Al s busi ness war ehouse i s dest r oyed by a t or nado on Oct ober
31, 2013. Al i s a cal endar year t axpayer . He r ecei ves i nsur ance
pr oceeds on December 5, 2013. He r ei nvest s t he pr oceeds i n
anot her war ehouse t o be used i n hi s busi ness on December 29, 2015.
b. Heat her s per sonal r esi dence i s dest r oyed by f i r e on Oct ober
31, 2013. She i s a cal endar year t axpayer . She r ecei ves i nsur ance
pr oceeds on December 5, 2013. She pur chases anot her pr i nci pal
r esi dence wi t h t he pr oceeds on Oct ober 31, 2015.
c. Mack s of f i ce bui l di ng i s condemned by t he ci t y as par t of a
r oad const r uct i on pr oj ect . The dat e of t he condemnat i on i s
Oct ober 31, 2013. He i s a cal endar year t axpayer . He r ecei ves
condemnat i on pr oceeds f r omt he ci t y on t hat dat e. He pur chases
anot her of f i ce bui l di ng wi t h t he pr oceeds on December 5, 2016.
d. Li zzy s busi ness aut omobi l e i s dest r oyed i n an acci dent on
Oct ober 31, 2013. Li zzy i s a f i scal year t axpayer wi t h t he f i scal
year endi ng on J une 30t h. She r ecei ves i nsur ance pr oceeds on
December 5, 2013. She pur chases anot her busi ness aut omobi l e wi t h
t he pr oceeds on J une 1, 2016.

1882. Sam s of f i ce bui l di ng wi t h an adj ust ed basi s of $750, 000 and a
f ai r mar ket val ue of $900, 000 i s condemned on November 30, 2013. Sami s
a cal endar year t axpayer . He r ecei ves a condemnat i on awar d of $875, 000
on Mar ch 1, 2014. He bui l ds a new of f i ce bui l di ng at a cost of $845, 000
whi ch i s compl et ed and pai d f or on December 31, 2016. What i s Sam s
r ecogni zed gai n on r ecei pt of t he condemnat i on awar d and basi s f or t he
new of f i ce bui l di ng assumi ng hi s obj ect i ve i s t o mi ni mi ze gai n
r ecogni t i on?

a. $0; $720, 000.
*b. $30, 000; $750, 000.
c. $30, 000; $845, 000.
d. $150, 000; $750, 000.

1883. A f act or y bui l di ng owned by Amber , I nc. i s dest r oyed by a
hur r i cane. The adj ust ed basi s of t he bui l di ng was $400, 000 and t he
appr ai sed val ue was $425, 000. Amber r ecei ves i nsur ance pr oceeds of
$390, 000. A f act or y bui l di ng i s const r uct ed dur i ng t he ni ne- mont h
per i od af t er t he hur r i cane at a cost of $450, 000. What i s t he
r ecogni zed gai n or l oss and what i s t he basi s of t he new f act or y
bui l di ng?

a. $0 and $450, 000.
b. $0 and $460, 000.
c. ( $10, 000) and $440, 000.
*d. ( $10, 000) and $450, 000.

1884. I f t he t axpayer qual i f i es under 1033 ( nonr ecogni t i on of gai n
f r oman i nvol unt ar y conver si on) and t he amount r ei nvest ed i n
r epl acement pr oper t y exceeds t he amount r eal i zed, t he basi s of t he
r epl acement pr oper t y i s:

a. The cost of t he r epl acement pr oper t y.
b. The f ai r mar ket val ue of t he i nvol unt ar i l y conver t ed pr oper t y
mi nus t he post poned gai n.
*c. The cost of t he r epl acement pr oper t y mi nus t he post poned gai n.
d. The amount r eal i zed.

1885. Myr na s per sonal r esi dence ( adj ust ed basi s of $100, 000) was
condemned, and she r ecei ved a condemnat i on awar d of $80, 000. Myr na used
t he condemnat i on pr oceeds t o pur chase a new r esi dence f or $90, 000. What
i s her r ecogni zed gai n or l oss and her basi s i n t he new r esi dence?

a. $0; $70, 000.
*b. $0; $90, 000.
c. ( $20, 000) ; $90, 000.
d. ( $20, 000) ; $70, 000.

1886. Fr an was t r ansf er r ed f r omPhoeni x t o At l ant a. She sol d her
Phoeni x r esi dence ( adj ust ed basi s of $250, 000) f or a r eal i zed l oss of
$50, 000 and pur chased a new r esi dence i n At l ant a f or $375, 000. Fr an had
owned and l i ved i n t he Phoeni x r esi dence f or 6 year s. What i s Fr an s
r ecogni zed gai n or l oss on t he sal e of t he Phoeni x r esi dence and her
basi s f or t he r esi dence i n At l ant a?

*a. $0 and $375, 000.
b. $0 and $425, 000.
c. ( $50, 000) and $325, 000.
d. ( $50, 000) and $375, 000.

1887. Evel yn, a cal endar year t axpayer , l i st s her pr i nci pal r esi dence
wi t h a r eal t or on Febr uar y 7, 2013, ent er s i nt o a cont r act t o sel l on
J ul y 12, 2013, and sel l s ( i . e. , t he cl osi ng dat e) t he r esi dence on
August 1, 2013. The r eal i zed gai n on t he sal e i s $225, 000. Whi ch dat e
i s t he appr opr i at e endi ng dat e i n det er mi ni ng i f t he r esi dence has been
owned and used by t he Evel yn as t he pr i nci pal r esi dence f or at l east
t wo year s dur i ng t he pr i or f i ve- year per i od?

a. Febr uar y 7, 2013.
b. J ul y 12, 2013.
*c. August 1, 2013.
d. December 31, 2013.

1888. Dur i ng 2013, Howar d and Mabel , a mar r i ed coupl e, deci ded t o sel l
t hei r r esi dence. The r esi dence has a basi s of $162, 000 and has been
owned and occupi ed by t hemf or 11 year s. The house was sol d i n May f or
$395, 000 wi t h br oker s commi ssi ons and ot her sel l i ng expenses bei ng
$24, 000. They pur chased a new r esi dence i n J une f or $400, 000. What i s
t he adj ust ed basi s of t he new r esi dence?

a. $0.
b. $141, 000.
c. $162, 000.
d. $191, 000.

1889. Dur i ng 2013, Ted and J udy, a mar r i ed coupl e, deci ded t o sel l
t hei r r esi dence, whi ch had a basi s of $300, 000. They had owned and
occupi ed t he r esi dence f or 20 year s. To make i t mor e at t r act i ve t o
pr ospect i ve buyer s, t hey had t he out si de pai nt ed i n Apr i l at a cost of
$6, 000 and pai d f or t he wor k i mmedi at el y. They sol d t he house i n May
f or $880, 000. Br oker s commi ssi ons and ot her sel l i ng expenses amount ed
t o $53, 000. Si nce t hey bot h ar e age 68, t hey deci de t o r ent an
apar t ment . They pur chase an annui t y wi t h t he net pr oceeds f r omt he
sal e. What i s t he r ecogni zed gai n?

a. $0.
b. $17, 000.
*c. $27, 000.
d. $527, 000.

1890. Dur i ng 2013, Zeke and Al i ce, a mar r i ed coupl e, deci ded t o sel l
t hei r r esi dence, whi ch had a basi s of $200, 000. They had owned and
occupi ed t he r esi dence f or 20 year s. To make i t mor e at t r act i ve t o
pr ospect i ve buyer s, t hey had t he i nsi de pai nt ed i n Apr i l at a cost of
$5, 000 and pai d f or t he wor k i mmedi at el y. They sol d t he house i n May
f or $800, 000. Br oker s commi ssi ons and ot her sel l i ng expenses amount ed
t o $50, 000. They pur chased a new r esi dence i n J ul y f or $400, 000. What
i s t he r ecogni zed gai n and t he adj ust ed basi s of t he new r esi dence?

a. $45, 000 and $400, 000.
*b. $50, 000 and $400, 000.
c. $100, 000 and $600, 000.
d. $550, 000 and $800, 000.

1891. Car l sel l s hi s pr i nci pal r esi dence, whi ch has an adj ust ed basi s
of $150, 000 f or $200, 000. He i ncur s sel l i ng expenses of $20, 000 and
l egal f ees of $2, 000. He had pur chased anot her r esi dence one mont h
pr i or t o t he sal e f or $380, 000. What i s t he r ecogni zed gai n or l oss and
t he basi s of t he r epl acement r esi dence i f t he t axpayer el ect s t o f or go
t he 121 excl usi on ( excl usi on of gai n on sal e of pr i nci pal r esi dence) ?

a. $0 and $380, 000.
b. $0 and $408, 000.
c. $28, 000 and $352, 000.
*d. $28, 000 and $380, 000.

1892. Ross l i ves i n a house he r ecei ved as a gi f t f r omhi s f at her . Hi s
f at her had l i ved i n t he house f or 12 year s. The adj ust ed basi s of t he
house t o hi s f at her was $160, 000 and t he f ai r mar ket val ue at t he t i me
of t he gi f t was $140, 000. Ross sel l s t hi s r esi dence af t er l i vi ng i n i t
f or 18 mont hs f or $150, 000 and pur chases a new home f or $125, 000. He
i ncur s sel l i ng expenses of $7, 000. What i s Ross r ecogni zed gai n or
l oss and basi s f or t he new r esi dence?

a. ( $17, 000) ; $125, 000.
b. ( $17, 000) ; $142, 000.
c. $3, 000; $125, 000.
d. $3, 000; $128, 000.

1893. Paul a i nher i t s a home on J ul y 1, 2013, t hat had a basi s i n t he
hands of t he decedent at deat h of $290, 000 and a f ai r mar ket val ue of
$500, 000 at t he dat e of t he decedent s deat h. She deci des t o sel l her
ol d pr i nci pal r esi dence, whi ch she has owned and occupi ed f or 9 year s,
wi t h an adj ust ed basi s of $125, 000 and move i nt o t he i nher i t ed home. On
Sept ember 16, 2013, she sel l s t he ol d r esi dence f or $600, 000. Paul a
i ncur s sel l i ng expenses of $30, 000 and l egal f ees of $2, 000. She
deci des t o add a pool , deck, pool house, and r ecr eat i on r oomt o t he
i nher i t ed home at a cost of $100, 000. These addi t i ons ar e compl et ed and
pai d f or on November 1, 2013. What i s her r ecogni zed gai n on t he sal e
of her ol d pr i nci pal r esi dence and her basi s i n t he i nher i t ed home?

a. $0; $500, 000.
*b. $193, 000; $600, 000.
c. $443, 000; $600, 000.
d. $475, 000; $600, 000.

1894. West on sel l s hi s r esi dence t o J oanne on Oct ober 15,
2013. I ndi cat e whi ch of t he f ol l owi ng st at ement s i s cor r ect l y
associ at ed wi t h 121 ( excl usi on of gai n on sal e of pr i nci pal
r esi dence) .

a. Sel l i ng expenses decr ease t he sel l er s amount r eal i zed and
i ncr ease t he buyer s adj ust ed basi s.
b. Repai r expenses of t he sel l er decr ease t he sel l er s amount
r eal i zed and have no ef f ect on t he buyer s adj ust ed basi s.
*c. Capi t al expendi t ur es made by t he sel l er pr i or t o t he sal e
i ncr ease t he sel l er s adj ust ed basi s and have no ef f ect on t he
buyer s adj ust ed basi s.
d. Onl y a. and c.
e. a. , b. , and c.

1895. Er i c and Faye, who ar e mar r i ed, j oi nt l y own a house i n whi ch t hey
have r esi ded f or t he past 17 year s. They sel l t he house f or $375, 000
wi t h r eal t or s f ees of $10, 000. Thei r adj ust ed basi s f or t he house i s
$80, 000. Si nce t hey ar e i n t hei r r et i r ement year s, t hey pl an on movi ng
ar ound t he count r y and r ent i ng. What i s t hei r r ecogni zed gai n on t he
sal e of t he r esi dence i f t hey use t he 121 excl usi on ( excl usi on of
gai n on sal e of pr i nci pal r esi dence) and i f t hey el ect t o f or go t he
121 excl usi on?

Wi t h excl usi on El ect t o f or go

a. $0 $0
b. $35, 000 $35, 000
*c. $0 $285, 000
d. $35, 000 $285, 000
e. $285, 000 $225, 000

1896. Lenny and Bever l y have been mar r i ed and l i vi ng t oget her i n
Lenny s home f or 6 year s. He l i ved i n t he home al one f or 20 year s pr i or
t o t hei r mar r i age. They sel l t he home, whi ch has an adj ust ed basi s of
$120, 000, f or $700, 000. Lenny and Bever l y pl an t o use t he 121
excl usi on ( excl usi on of gai n on sal e of pr i nci pal r esi dence) . I n
Bever l y s pr i or mar r i age t o Dan, Dan sol d hi s pr i nci pal r esi dence and
used t he 121 excl usi on. Bever l y and Dan f i l ed j oi nt r et ur ns dur i ng
t hei r seven year s of mar r i age. They had l i ved i n Dan s house t hr oughout
t hei r mar r i age. Dan s sal e had occur r ed one year pr i or t o t he di vor ce.
Lenny and Bever l y pur chase a r epl acement r esi dence f or $650, 000 one
mont h af t er t he sal e. What i s t he r ecogni zed gai n and basi s f or t he new
home?

a. $0; $80, 000.
b. $80, 000; $150, 000.
*c. $80, 000; $650, 000.
d. $330, 000; $650, 000.

1897. Whi ch of t he f ol l owi ng i s i ncor r ect ?

a. The def er r al of r eal i zed gai n on a 1031 l i ke- ki nd exchange
i s mandat or y.
*b. The def er r al of r eal i zed gai n on an i ndi r ect ( i nt o cash and
t hen i nt o qual i f i ed pr oper t y) 1033 i nvol unt ar y conver si on i s
mandat or y.
c. The t axpayer can el ect t o f or go t he excl usi on of r eal i zed gai n
on a 121 sal e of r esi dence.
d. Bot h b. and c. ar e i ncor r ect .
e. a. , b. , and c. ar e i ncor r ect .

1898. Whi ch of t he f ol l owi ng t ypes of exchanges of i nsur ance cont r act s
qual i f y f or nonr ecogni t i on t r eat ment under 1035?

a. Exchange of l i f e i nsur ance cont r act s.
b. Exchange of a l i f e i nsur ance cont r act f or an endowment or
annui t y cont r act .
c. Exchange of an endowment cont r act f or an annui t y cont r act .
d. Onl y a. and b.
*e. a. , b. , and c.

1899. Whi ch of t he f ol l owi ng t ypes of t r ansact i ons qual i f y f or
nonr ecogni t i on t r eat ment ?

a. Exchange by a shar ehol der of st ock i n Chevr on f or st ock i n
Shel l .
b. I nvest ment of t he pr oceeds f r omt he sal e of t he st ock of a
publ i cl y t r aded company i n t he common st ock of a speci al i zed
smal l busi ness i nvest ment company ( SSBI C) wi t hi n 60 days of t he
sal e.
c. I nvest ment of pr oceeds f r omt he sal e of qual i f i ed smal l
busi ness st ock i n anot her qual i f i ed smal l busi ness st ock wi t hi n
60 days of t he sal e.
*d. Onl y b. and c.
e. a. , b. , and c.

1900. As par t of t he di vor ce agr eement , Tyl er t r ansf er s hi s owner shi p
i nt er est i n t hei r per sonal r esi dence t o Lupe. The house had been
j oi nt l y owned by Tyl er and Lupe and t he adj ust ed basi s i s $520, 000. At
t he t i me of t he t r ansf er t o Lupe, t he f ai r mar ket val ue i s $800, 000.
What i s t he r ecogni zed gai n t o Tyl er , and what i s Lupe s basi s f or t he
house?

*a. $0 and $520, 000.
b. $0 and $800, 000.
c. $140, 000 and $520, 000.
d. $280, 000 and $800, 000.

1901. Whi ch of t he f ol l owi ng st at ement s i s correct wi t h r espect t o
1044 ( r ol l over of publ i cl y t r aded secur i t i es gai n i nt o speci al i zed
smal l busi ness i nvest ment compani es) ?

a. Sect i on 1044 pr ovi des f or per manent excl usi on of gai n.
b. To qual i f y under 1044, t he pr oceeds must be r ei nvest ed
wi t hi n one year of t he sal e.
c. The st at ut or y cei l i ngs on 1044 t r eat ment ar e t he same f or
i ndi vi dual and cor por at e t axpayer s.

1902. Whi ch of t he f ol l owi ng mi ght mot i vat e a t axpayer t o t r y t o avoi d
l i ke- ki nd exchange t r eat ment ?

a. Taxpayer has unused NOL car r yover s.
b. Taxpayer has unused gener al busi ness cr edi t car r yover s.
c. Taxpayer has suspended or cur r ent passi ve act i vi t y l osses.

1903. For t he f ol l owi ng exchanges, i ndi cat e whi ch qual i f y as l i ke- ki nd
pr oper t y.

a. I nvent or y of a spor t i ng goods st or e i n
Char l est on f or i nvent or y of an appl i ance
st or e i n Savannah.

b. I nvent or y of a l adi es dr ess shop i n
Cl evel and f or i nvent or y of a l adi es dr ess
shop i n Ri chmond.

c. I nvest ment l and i n Vi r gi ni a Beach f or of f i ce
bui l di ng i n Wi l l i amsbur g.

d. Used aut omobi l e used i n a busi ness f or a new
aut omobi l e t o be used i n t he busi ness.

e. I nvest ment l and i n Par i s f or i nvest ment l and
i n San Fr anci sco.

f . Shar es of Texaco st ock f or shar es of Exxon
Mobi l st ock.

Cor r ect Answer :
Onl y i t ems c. ( i nvest ment r eal t y f or i nvest ment r eal t y or busi ness
r eal t y) and d. ( busi ness per sonal t y f or busi ness per sonal t y of t he same
gener al busi ness asset cl ass) qual i f y. I t ems a. and b. do not qual i f y
because t hey i nvol ve i nvent or y. I t eme. does not qual i f y because
f or ei gn r eal t y i s exchanged f or domest i c r eal t y. I t emf . does not
qual i f y because shar es of st ock ar e not el i gi bl e f or l i ke- ki nd exchange
t r eat ment .

1904. Chaney exchanges a t r uck used i n her busi ness f or maki ng
del i ver i es f or a smal l er mor e f uel - ef f i ci ent t r uck t o be used i n her
busi ness f or maki ng del i ver i es. The adj ust ed basi s f or her t r uck i s
$32, 000. The smal l er t r uck has a f ai r mar ket val ue of $33, 000. I n
addi t i on, Chaney r ecei ves cash of $4, 000.

a. Cal cul at e Chaney s r eal i zed and r ecogni zed
gai n or l oss.

b. Cal cul at e Chaney s basi s f or t he asset s she
r ecei ved.

Cor r ect Answer :
a. Amount realized ($33,000 +
$4,000)
$37,000


The realized gain is recognized to the
extent of the boot received of $4,000.

b. Basis for smaller
truck:

Fair market value $33,000
Less: Postponed gain (1,000)
Basis $32,000

Basis of the cash $ 4,000

1905. Sammy exchanges equi pment used i n hi s busi ness i n a l i ke- ki nd
exchange. The pr oper t y exchanged i s as f ol l ows:

Pr oper t y
Sur r ender ed
Pr oper t y
Recei ved
Adj .
Basi s
FMV Adj .
Basi s
FMV
Equi pment $44, 000 $60, 000 $50, 000 $43, 000
Cash $ 5, 000 $ 5, 00
0
Li abi l i t y on
equi pment
$12, 000 $12, 000

The ot her par t y assumes t he l i abi l i t y.

a. What i s Sammy s r ecogni zed gai n or l oss?

b. What i s Sammy s basi s f or t he asset s he
r ecei ved?

Cor r ect Answer :
a. Amount realized:
Equipment $43,000
Cash 5,000
Liability assumed 12,00
0
$60,000

The recognized gain is the lesser of the boot
received of $17,000 ($12,000 + $5,000) or the
realized gain of $16,000.

b. Basis for equipment:
Less: Postponed gain (
0)
Basis $43,000


1906. J ake exchanges an ai r pl ane used i n hi s busi ness f or a smal l er
ai r pl ane t o be used i n hi s busi ness. Hi s adj ust ed basi s f or t he
ai r pl ane i s $325, 000 and t he f ai r mar ket val ue i s $310, 000. The f ai r
mar ket val ue of t he smal l er ai r pl ane i s $300, 000. I n addi t i on, J ake
r ecei ves cash of $10, 000.

a. Cal cul at e J ake s r eal i zed and r ecogni zed
gai n or l oss and hi s adj ust ed basi s f or t he
asset s r ecei ved.

b. Assume t hat t he exchange i s bet ween J ake and
J ake s son. Cal cul at e J ake s r eal i zed and
r ecogni zed gai n or l oss and hi s adj ust ed
basi s f or t he asset s r ecei ved i f hi s son s
i nt ent i on i s t o use t he ai r pl ane i n hi s

Cor r ect Answer :
$10,000)
$310,000
Recognized loss $
0

Section 1031 postponement is mandatory. Thus,
the realized loss of $15,000 is postponed.

Basis for airplane:
Plus: Postponed loss 1
5,000
Basis $315,000

b. Amount realized ($300,000 +
$10,000)
$310,000
Recognized loss $
0

Section 1031 postponement is mandatory. Even
though the exchange is with a related party,
1031 postponement applies. However, if Jakes
son should dispose of the airplane within two
years of the date of the exchange, the realized
loss of $15,000 would normally be recognized as
of that date under 1031. However, since this
is a related party transaction, 267 would
then disallow the loss.

Basis for airplane:
Plus: Postponed loss 15,00
0
Basis $315,000


1907. a. Or ange Cor por at i on exchanges a war ehouse l ocat ed i n
Mi chi gan ( adj ust ed basi s of $560, 000) f or a war ehouse l ocat ed i n Ohi o
( adj ust ed basi s of $450, 000; f ai r mar ket val ue of $525, 000) . I ndi cat e
t he amount of gai n or l oss t hat i s r ecogni zed by Or ange Cor por at i on on
t he exchange, and t he basi s of t he war ehouse acqui r ed.

b. Assume t hat i n addi t i on t o t he war ehouse
Or ange Cor por at i on al so r ecei ved $100, 000 i n
cash. I ndi cat e t he amount of gai n or l oss
t hat i s r ecogni zed by Or ange Cor por at i on on
t he exchange, and t he basi s of t he war ehouse
acqui r ed.

c. How woul d your answer i n b. change i f
i nst ead of r ecei vi ng $100, 000 i n cash, t he
ot her par t y assumed Or ange s $100, 000
mor t gage on t he Mi chi gan war ehouse?

Cor r ect Answer :
a. This is a nontaxable like-kind exchange. No
gain or loss is recognized, and the basis for
the new warehouse (in Ohio) is $560,000, the
same as the basis for the old warehouse (in
Michigan).

b. Amount realized:
FMV of Ohio warehouse $525,000
Cash 100,000
$625,000
Adjusted basis of Michigan
warehouse
(560,000)


FMV of Ohio warehouse $525,000
Less: Postponed gain (
0)
Basis of New Jersey
warehouse
$525,000

c. The answer would the same as in b.

1908. Euni ce J ean exchanges l and hel d f or i nvest ment l ocat ed i n Rol l a,
Mi ssour i , f or l and t o be hel d f or i nvest ment l ocat ed near Madr i d, Spai n.
Her basi s f or t he l and gi ven up i s $450, 000 and t he f ai r mar ket val ue
of t he l and r ecei ved i s $500, 000. Euni ce J ean al so r ecei ves cash of
$45, 000.

a. What i s Euni ce J ean s r ecogni zed gai n?

b. What i s her basi s f or t he l and r ecei ved?

Cor r ect Answer :
$45,000)
$545,000
0
0

Real property located in the United States
(Rolla) exchanged for foreign real property
(near Madrid) does not qualify as like-kind
property. So the recognized gain is not limited
to the boot received of $45,000.

b. FMV of Madrid land $500,000
Less: Postponed gain ($95,000
$95,000)
(
0)
Basis for Madrid land $500,000

1909. For each of t he f ol l owi ng i nvol unt ar y conver si ons, det er mi ne i f
t he pr oper t y qual i f i es as r epl acement pr oper t y.

a. Chuck s r est aur ant bui l di ng i s dest r oyed by
f i r e. He cl ear s t he si t e and bui l ds anot her
r est aur ant bui l di ng.

b. Di ane s war ehouse whi ch she used f or st or i ng
i nvent or y i s dest r oyed by a t or nado. She
pur chases anot her war ehouse i n whi ch she
wi l l st or e i nvent or y.

c. Par t of Andr ew s dai r y f ar ml and i s
condemned t o make way f or an i nt er st at e
hi ghway. He uses t he condemnat i on pr oceeds
t o const r uct a bar n t o be used f or st or i ng
cat t l e f eed.

d. Li z owns a shoppi ng mal l whi ch i s dest r oyed
by a f l ood. Si nce t he t enant occupancy r at e
was down, she uses t he i nsur ance pr oceeds t o
pur chase an of f i ce bui l di ng whi ch she wi l l
r ent t o t enant s.

e. El eanor s Maser at i Gr an Tur i smo i s st ol en.
The or i gi nal cost was $125, 000, and she had
used i t excl usi vel y f or per sonal use. Due t o
t he l i mi t ed suppl y of t hi s model , i t had
appr eci at ed i n val ue. El eanor r ecei ved
i nsur ance pr oceeds of $130, 000 and uses t he
pr oceeds t o pur chase a r epl acement Gr an
Tur i smo.

Cor r ect Answer :
Al l of t he r epl acement s qual i f y as r epl acement pr oper t y f or pur poses of
an i nvol unt ar y conver si on. I t ems a. , b. , and e. qual i f y under t he
f unct i onal use t est ; i t emc. qual i f i es under t he l i ke- ki nd t est f or
condemned r eal t y; and i t emd. qual i f i es under t he t axpayer use t est .

1910. Samuel s hot el i s condemned by t he Ci t y Housi ng Aut hor i t y on J ul y
5, 2013, f or whi ch he i s pai d condemnat i on pr oceeds of $950, 000. He
f i r st r ecei ved of f i ci al not i f i cat i on of t he pendi ng condemnat i on on May
2, 2013. Samuel s adj ust ed basi s f or t he hot el i s $600, 000 and he uses
a f i scal year f or t ax pur poses wi t h a Sept ember 30 t ax year - end.

a. How much must Samuel r ei nvest i n qual i f yi ng
r epl acement pr oper t y i n or der t o post pone
t he r ecogni t i on of r eal i zed gai n?

b. I f Samuel r ei nvest s t he mi ni mumamount
r equi r ed t o avoi d r ecogni t i on of r eal i zed
gai n, what i s hi s basi s f or t he r epl acement
pr oper t y?

c. What i s qual i f yi ng r epl acement pr oper t y?

d. What i s t he ear l i est dat e t hat Samuel can
acqui r e qual i f yi ng r epl acement pr oper t y?

e. What i s t he l at est dat e t hat Samuel can
acqui r e qual i f yi ng r epl acement pr oper t y?

f . How woul d t he answer i n e. change i f
Samuel s hot el had been dest r oyed i n a
f l ood?

Cor r ect Answer :
a. Samuel must reinvest at least $950,000, an
amount equal to the amount realized. This
results in a postponed gain of $350,000
($950,000 amount realized $600,000
adjusted basis).

b. Samuels basis for the replacement property
would be:

FMV of replacement property $950,000
Basis $600,000

c. Since business real property has been
condemned, the broader like-kind exchange
rules apply. Thus, any realty (i.e.,
improved or unimproved) will suffice as
replacement property.

d. The earliest date that Samuel can acquire
another hotel is May 2, 2013, the date of
the threat or imminence of requisition or
condemnation of the property.

e. The latest date that Samuel can acquire
another hotel is September 30, 2016 (three
years after the close of the tax year in
which the proceeds received are large enough
to produce a realized gain).

f. The latest date that Samuel can acquire
another hotel is September 30, 2015 (two
years after the close of the tax year in
which the proceeds received are large enough
to produce a realized gain).

1911. Luci nda, a cal endar year t axpayer , owned a r ent al pr oper t y wi t h
an adj ust ed basi s of $312, 000 i n a maj or coast al ci t y. Her pr oper t y was
condemned by t he ci t y gover nment on Oct ober 12, 2013. I n or der t o bui l d
a convent i on cent er , Luci nda event ual l y r ecei ved qual i f i ed r epl acement
pr oper t y f r omt he ci t y gover nment on Mar ch 9, 2014. Thi s new pr oper t y
has a f ai r mar ket val ue of $410, 000.

a. What i s Luci nda s r ecogni zed gai n or l oss on
t he condemnat i on?

b. What i s her adj ust ed basi s f or t he new
pr oper t y?

c. I f , i nst ead of r ecei vi ng qual i f yi ng
r epl acement pr oper t y, Luci nda was pai d
$410, 000, what i s t he l at est dat e t hat she
can acqui r e qual i f yi ng r epl acement pr oper t y?

Cor r ect Answer :
a. Because the conversion of Lucindas
original property was directly into
qualified replacement property, the
nonrecognition of the realized gain of
$98,000 ($410,000 amount realized
$312,000 adjusted basis) is mandatory.

b. Due to the mandatory nonrecognition, the
basis in the replacement property is a
carryover basis of $312,000 ($410,000
$98,000).

c. The latest date that Lucinda can acquire
qualifying replacement property is December
31, 2017 (three years after the close of the
tax year in which the proceeds received are
large enough to produce a realized gain).

1912. Pat t y s f act or y bui l di ng, whi ch has an adj ust ed basi s of $475, 000,
i s dest r oyed by f i r e on Apr i l 8, 2013. I nsur ance pr oceeds of $500, 000
ar e r ecei ved on J une 1, 2013. She has a new f act or y bui l di ng
const r uct ed f or $490, 000, whi ch she occupi es on Oct ober 1, 2013.
Assumi ng Pat t y s obj ect i ve i s t o mi ni mi ze t he t ax l i abi l i t y, cal cul at e
her r ecogni zed gai n or l oss and t he basi s of t he new f act or y bui l di ng.

Cor r ect Answer :
Adjusted basis of building (475,000)
0
Less: Reinvestment (490,000)
Deficiency $ 10,00
0

Since Pattys objective is to minimize the tax liability, she would elect
1033 postponement treatment. Thus, her recognized gain would be $10,000.
The basis of the new factory building would be $475,000 ($490,000 cost
$15,000 postponed gain).

1913. Evel yn s of f i ce bui l di ng i s dest r oyed by f i r e on J ul y 12, 2013.
The adj ust ed basi s i s $315, 000. She r ecei ves i nsur ance pr oceeds of
$350, 000 on August 31, 2013. Cal cul at e t he amount t hat Evel yn must
r ei nvest i n qual i f yi ng pr oper t y i n or der t hat her r ecogni zed gai n be
$20, 000. Assume she el ect s 1033 ( nonr ecogni t i on of gai n f r oman
i nvol unt ar y conver si on) post ponement t r eat ment .

Cor r ect Answer :

Required reinvestment $350,000
Less: Deficiency (recognized gain) (20,000)
Actual reinvestment $330,000

1914. Car l os, who i s si ngl e, sel l s hi s per sonal r esi dence on November 5,
2013, f or $400, 000. Hi s adj ust ed basi s was $125, 000. He pays r eal t or s
commi ssi ons of $20, 000. He owned and occupi ed t he r esi dence f or 12
year s. Havi ng deci ded t hat he no l onger want s t he bur dens of home
owner shi p, he i nvest s t he sal es pr oceeds i n a mut ual f und and ent er s
i nt o a 1- year l ease on an apar t ment . The det r i ment s of r ent i ng,
i ncl udi ng a cr yi ng chi l d next door , cause Car l os t o r et hi nk hi s
deci si on. Ther ef or e, he pur chases anot her r esi dence on November 6, 2014,
f or $275, 000. I s Car l os el i gi bl e f or excl usi on of gai n t r eat ment under
121 ( excl usi on of gai n on sal e of pr i nci pal r esi dence) ? Cal cul at e
Car l os s r ecogni zed gai n and hi s basi s f or t he new r esi dence.

Cor r ect Answer :
Car l os i s el i gi bl e f or 121 excl usi on t r eat ment . At t he dat e of t he
sal e of hi s r esi dence, he owned and occupi ed i t as hi s pr i nci pal
r esi dence f or at l east t wo year s dur i ng t he 5- year per i od endi ng on t he
dat e of sal e.

Amount realized ($400,000
$20,000)
$380,000
121 exclusion (250,000)

Whether Carlos replaces his principal residence is not relevant in
determining his qualification for the 121 exclusion. His basis for his
new residence is the cost of $275,000.

1915. On J anuar y 5, 2013, Wal do sel l s hi s pr i nci pal r esi dence wi t h an
adj ust ed basi s of $270, 000 f or $690, 000. He has owned and occupi ed t he
r esi dence f or 15 year s. He pays $35, 000 i n commi ssi ons and $2, 000 i n
l egal f ees i n connect i on wi t h t he sal e. One mont h bef or e t he sal e,
Wal do pai nt ed t he ext er i or of t he house at a cost of $5, 000 and
r epai r ed var i ous i t ems at a cost of $3, 000. On Oct ober 15, 2013, Wal do
pur chases a new home f or $600, 000. On November 15, 2014, he pays
$25, 000 f or compl et i on of a new r oomon t he house, and on J anuar y 14,
2015, he pays $15, 000 f or t he const r uct i on of a pool . What i s t he
Wal do s r ecogni zed gai n on t he sal e of hi s ol d pr i nci pal r esi dence and
what i s t he basi s f or t he new r esi dence?

Cor r ect Answer :
Amount realized ($690,000 $35,000
$2,000)
$653,000
121 exclusion (250,000)

The $5,000 for painting and $3,000 for repairs are personal expenses that
do not decrease the amount realized or increase the adjusted basis.

The adjusted basis of the new residence is calculated as follows:

Cost of house $600,000
Cost of new room 25,000
Cost of pool 15,00
0
Adjusted basis $640,000

1916. Kat r i na, age 58, r ent ed ( as a t enant ) t he house t hat was her
pr i nci pal r esi dence f r omJ anuar y 1, 2013 t hr ough December 31, 2014. She
pur chased t he house on J anuar y 1, 2015, f or $150, 000 and cont i nued t o
occupy i t t hr ough J une 30, 2016. She l eased i t t o a t enant f r omJ ul y 1,
2016, t hr ough December 31, 2017. On J anuar y 1, 2018, she sel l s t he
house f or $350, 000. She i ncur s a r eal t or s commi ssi on of $20, 000.
Cal cul at e her r ecogni zed gai n i f her obj ect i ve i s t o mi ni mi ze t he
r ecogni t i on of gai n and she does not i nt end t o acqui r e anot her
r esi dence.

Cor r ect Answer :
To qual i f y f or 121 excl usi on t r eat ment on t he sal e of a pr i nci pal
r esi dence, Kat r i na must meet t he f ol l owi ng r equi r ement :

Owned and used the residence as her principal
residence for at least two years during the
five-year period ending on the date of sale.

Katrina meets this requirement. The ownership and use requirements do not
have to be the same period of time. She resided in the house from January 1,
2013 through June 30, 2016 (a period of three and one-half years). She
owned it from January 1, 2015 through December 31, 2017 (a period of three
years). It is not necessary that the property be Katrinas principal
residence at the date of the sale.

Her recognized gain is calculated as follows:

Amount realized ($350,000
$20,000)
$330,000
121 exclusion (180,000)
Recognized gain $ 0

1917. Use t he f ol l owi ng dat a t o det er mi ne t he sal es pr i ce of Et t a s
pr i nci pal r esi dence and t he r eal i zed gai n. She i s not mar r i ed. The sal e
of t he ol d r esi dence qual i f i es f or t he 121 excl usi on.

Sel l i ng expenses $ 45, 000
Recogni zed gai n 180, 000
Cost of new r esi dence 760, 000
Adj ust ed basi s of ol d r esi dence 225, 000
121 excl usi on 250, 000

Cor r ect Answer :
The sal e of r esi dence model can be used t o cal cul at e t he sal es pr i ce
and t he r eal i zed gai n f or Et t a.

Amount
realized:

Sales price $700,000
Less: Selling
expenses
(45,000) $655,000
Adjusted
basis
(225,000)
Realized
gain
$430,000
121
exclusion
(250,000)
Recognize
d gain
$180,000

The adjusted basis of the new residence is its cost of $760,000 and has no
effect on the prior calculations.

1918. Li z, age 55, sel l s her pr i nci pal r esi dence f or $600, 000. She
pur chased i t t went y- t wo year s ago f or $175, 000. Sel l i ng expenses ar e
$30, 000 and r epai r expenses t o get t he house i n a mar ket abl e condi t i on
t o sel l ar e $15, 000. Li z s obj ect i ve i s t o mi ni mi ze t he t axes she must
pay associ at ed wi t h t he sal e. Cal cul at e her r ecogni zed gai n.

Cor r ect Answer :
Amount realized ($600,000 $30,000) $570,000
121 exclusion (250,000)

The repair expenses of $15,000 do not affect the calculation.

1919. Mandy and Gr et a f or mTan, I nc. , by t r ansf er r i ng t he f ol l owi ng
asset s t o t he cor por at i on i n exchange f or 5, 000 shar es of st ock each.

Mandy: Cash of $450, 000
Gr et a: Land ( wor t h $450, 000; adj ust ed basi s of $90, 000) .

How much gai n must Tan r ecogni ze on t he r ecei pt of t hese asset s?

Cor r ect Answer :
Tan has no r ecogni zed gai n on t he r ecei pt of t hese asset s. Sect i on 1032
pr ovi des t hat a cor por at i on does not r ecogni ze any gai n or l oss on t he
r ecei pt of money or ot her pr oper t y i n exchange f or i t s st ock.

1920. Bet h sel l s i nvest ment l and ( adj ust ed basi s of $225, 000) t hat she
has owned f or 6 year s t o her husband, Ri char d, f or i t s f ai r mar ket
val ue of $195, 000.

a. Cal cul at e Bet h s r ecogni zed gai n or l oss.

b. Cal cul at e Ri char d s basi s f or t he l and.

c. How woul d your answer s i n a. and b. change
i f Bet h and Ri char d wer e not mar r i ed ( i . e. ,
mer el y good f r i ends) ?

d. Woul d t he answer i n a. and b. change i f t he
sel l i ng pr i ce was $270, 000?

Cor r ect Answer :
Recognized loss $
0

Since Richard is Beths spouse, Beths
realized loss of $30,000 is disallowed.

b. Because Richard is Beths spouse, he has a
carryover basis in the land of $225,000
rather than the $195,000 he paid Ashley.

c. Beths recognized loss would be $30,000.
Richards basis for the investment land
would be $195,000.

d. The answers in a. and b. would be the same.

1921. Af t er 5 year s of mar r i age, Dave and J anet deci ded t o get a
di vor ce. As par t of t he di vor ce set t l ement , J anet t r ansf er s t o Dave t he
house she pur chased pr i or t o t hei r mar r i age. J anet s adj ust ed basi s f or
t he house i s $230, 000 and t he f ai r mar ket val ue i s $410, 000 on t he dat e
of t he t r ansf er . What ar e t he t ax consequences t o J anet and t o Dave as
a r esul t of t he t r ansf er ?

Cor r ect Answer :
J anet has a r eal i zed gai n of $180, 000 ( $410, 000 $230, 000) . However ,
no gai n i s r ecogni zed as 1041 pr ovi des t hat t r ansf er s of pr oper t y
bet ween f or mer spouses i nci dent t o di vor ce ar e nont axabl e t r ansact i ons.

Dave s basi s i n t he house i s a car r yover basi s of $230, 000 ( i . e. , t he
same as J anet s adj ust ed basi s) .

1922. Wal t er owns st ock i n Tar get , I nc. ( adj ust ed basi s of $50, 000)
whi ch he sel l s f or $70, 000 on Mar ch 21, 2013. On May 1, 2013, he uses
t he $70, 000 t o acqui r e st ock i n Li me, I nc. , a speci al i zed smal l
busi ness i nvest ment company. Cal cul at e Wal t er s r ecogni zed gai n on t he
sal e of t he Tar get st ock and hi s basi s i n t he st ock acqui r ed.

Cor r ect Answer :
Realized gain

$20,000
Recognized gain $ 0

Under 1044, Walters realized gain of $20,000 is postponed because he
reinvested the sales proceeds in the stock of a specialized small business
investment company within the 60-day period.

Walters basis for the stock acquired is calculated as follows:

Cost of new stock $70,000
Basis for new stock $50,000

1923. Di scuss t he l ogi c f or mandat or y def er r al of r eal i zed gai n or l oss
f or a 1031 l i ke- ki nd exchange.

Cor r ect Answer :
The pr oper t y r ecei ved i s consi der ed t o be a cont i nuat i on of t he
pr oper t y exchanged ( i . e. , not hi ng of economi c si gni f i cance has
occur r ed) . Ther ef or e, a r eal i zed gai n or r eal i zed l oss i s not
r ecogni zed, and t he pr oper t y r ecei ved has a car r yover basi s and hol di ng
per i od.

1924. What r equi r ement s must be sat i sf i ed t o r ecei ve nont axabl e
exchange t r eat ment under 1031?

Cor r ect Answer :
The f ol l owi ng r equi r ement s must be sat i sf i ed t o r ecei ve nont axabl e
exchange t r eat ment under 1031.

The form of the transaction is an exchange.
Both the property transferred and the property
received are held either for productive use in
a trade or business or for investment.
The property is like-kind property.

1925. What ki nds of pr oper t y do not qual i f y under t he l i ke- ki nd
pr ovi si ons?

Cor r ect Answer :
The pr oper t y exchanged may not qual i f y f or 1031 t r eat ment f or f i ve
r easons. Fi r st , t he pr oper t y i nvol ved i n t he exchange ( i . e. ,
t r ansf er r ed and r ecei ved) must be busi ness use or i nvest ment pr oper t y.
Thus, per sonal use pr oper t y does not qual i f y. I n addi t i on, t he t ypes of
pr oper t y cont ai ned i n t he l anguage of 1031( a) ( 2) do not qual i f y as
busi ness use or i nvest ment pr oper t y ( i . e. , i nvent or y, par t ner shi p
i nt er est s, st ocks, bonds, not es, chooses i n act i on, cer t i f i cat es of
t r ust or benef i ci al i nt er est , or ot her secur i t i es or evi dences of
i ndebt edness or i nt er est ) . Second, one ki nd or cl ass of pr oper t y may
not be exchanged f or a di f f er ent ki nd or cl ass ( i . e. , r eal pr oper t y f or
per sonal pr oper t y or vi ce ver sa) . Thi r d, r eal pr oper t y l ocat ed i n t he
Uni t ed St at es exchanged f or f or ei gn r eal pr oper t y ( and vi ce ver sa) does
not qual i f y as l i ke- ki nd pr oper t y. Four t h, l i vest ock of di f f er ent sexes
do not qual i f y as l i ke- ki nd pr oper t y. Fi f t h, depr eci abl e t angi bl e
per sonal pr oper t y hel d f or pr oduct i ve use i n a busi ness i s l i ke- ki nd
pr oper t y onl y i f t he exchanged pr oper t i es ar e wi t hi n t he same gener al
busi ness asset cl ass or t he same pr oduct cl ass.

1926. Can r el at ed par t i es t ake advant age of t he l i ke- ki nd exchange
pr ovi si ons?

Cor r ect Answer :
Yes. A speci al r ul e exi st s f or r el at ed par t i es. I n addi t i on t o
sat i sf yi ng t he ot her r equi r ement s f or l i ke- ki nd exchange t r eat ment , a
hol di ng per i od r equi r ement must be met . The t axpayer and t he r el at ed
par t y must not di spose of t he l i ke- ki nd pr oper t y r ecei ved wi t hi n t he
t wo- year per i od f ol l owi ng t he dat e of t he exchange. I f an ear l y
di sposi t i on does occur , t he post poned gai n i s r ecogni zed as of t he dat e
of t he ear l y di sposi t i on.

1927. What r equi r ement s must be sat i sf i ed f or a del ayed swap t o qual i f y
f or 1031 l i ke- ki nd exchange t r eat ment ?

Cor r ect Answer :
I n a del ayed exchange ( nonsi mul t aneous) , t he t r ansact i on wi l l qual i f y
f or l i ke- ki nd exchange t r eat ment i f t he f ol l owi ng r equi r ement s ar e
sat i sf i ed.

Identification period. The property to be
received must be identified within 45 days of
the date when the old property was transferred.
Exchange period: The property to be received
must be received by the earlier of the
following:
Within 180 days of the date when the old
property was transferred.
The due date (including extensions) for the
tax return covering the period of the
transfer.

1928. Di scuss t he r el at i onshi p bet ween t he post ponement of r eal i zed
gai n under 1031 ( l i ke- ki nd exchanges) and t he adj ust ed basi s and
hol di ng per i od f or t he r epl acement pr oper t y.

Cor r ect Answer :
Sect i on 1031 r esul t s i n t he mandat or y post ponement of r eal i zed gai n or
r eal i zed l oss on l i ke- ki nd exchanges. Ther ef or e, t he basi s f or t he
r epl acement pr oper t y i s a car r yover basi s and t he hol di ng per i od i s a
car r yover hol di ng per i od.

1929. Di scuss t he r el at i onshi p bet ween r eal i zed gai n and boot r ecei ved
i n a 1031 l i ke- ki nd exchange.

Cor r ect Answer :
Real i zed gai n ser ves as t he cei l i ng on t he amount of t he gai n t hat i s
r ecogni zed i n a 1031 l i ke- ki nd exchange. I f no boot i s r ecei ved, t hen
none of t he r eal i zed gai n i s r ecogni zed. I f boot i s r ecei ved and i t s
f ai r mar ket val ue i s l ess t han t he r eal i zed gai n, t hen gai n i s
r ecogni zed t o t he ext ent of t he boot r ecei ved. I f boot i s r ecei ved and
i t s f ai r mar ket val ue i s gr eat er t han t he r eal i zed gai n, t hen gai n i s
r ecogni zed t o t he ext ent of t he r eal i zed gai n ( i . e. , f ul l r ecogni t i on
occur s) .

1930. Under what ci r cumst ance i s t her e r ecogni t i on of some or al l of
t he r eal i zed gai n associ at ed wi t h t he gi vi ng of boot by t he t axpayer i n
a l i ke- ki nd exchange?

Cor r ect Answer :
Gener al l y, t he gi vi ng of boot by t he t axpayer i n a l i ke- ki nd exchange
does not t r i gger t he r ecogni t i on of r eal i zed gai n ( e. g. , cash) . However ,
i f t he basi s of t he boot i s l ess t han t he f ai r mar ket val ue of t he boot ,
t hen gai n i s r ecogni zed t o t he ext ent of t hi s excess ( e. g. , appr eci at ed
st ock) .

1931. What ef f ect do t he assumpt i on of l i abi l i t i es have on a 1031
l i ke- ki nd exchange?

Cor r ect Answer :
For t he t axpayer who i s t r ansf er r i ng t he l i abi l i t y, t he l i abi l i t y
i ncr eases t he amount r eal i zed as i t i s t r eat ed as boot r ecei ved. For
t he t axpayer who i s assumi ng t he l i abi l i t y, t he l i abi l i t y i ncr eases
t hi s t axpayer s adj ust ed basi s f or t he pr oper t y and i s t r eat ed as boot
gi ven.

1932. Def i ne an i nvol unt ar y conver si on.

Cor r ect Answer :
An i nvol unt ar y conver si on r esul t s f r omt he dest r uct i on ( compl et e or
par t i al ) , t hef t , sei zur e, r equi si t i on, or condemnat i on, or sal e or
exchange under t hr eat or i mmi nence of r equi si t i on or condemnat i on of
t he t axpayer s pr oper t y.

1933. Di scuss t he t r eat ment of r eal i zed gai ns f r omi nvol unt ar y
conver si ons.

Cor r ect Answer :
Real i zed gai ns f r omi nvol unt ar y conver si ons ar e r ecogni zed unl ess t he
t axpayer el ect s post ponement t r eat ment under 1033. I n or der t o def er
t he r eal i zed gai n, t he t axpayer must r ei nvest an amount at l east equal
t o t he amount r eal i zed i n qual i f yi ng pr oper t y wi t hi n t he st at ut or y t i me
per i od. I f t her e i s an i nvest ment def i ci ency, r eal i zed gai n i s
r ecogni zed t o t he ext ent of t he def i ci ency. The cei l i ng on gai n
r ecogni t i on i s t he r eal i zed gai n. Not e t hat f or a di r ect conver si on
( i . e. , i nt o pr oper t y) , t he def er r al pr ovi si on i s mandat or y ( i . e. , an
el ect i on i s not r equi r ed) .

1934. Di scuss t he t r eat ment of l osses f r omi nvol unt ar y conver si ons.

Cor r ect Answer :
Busi ness l osses ar e 1231 l osses, per sonal casual t y and t hef t l osses
ar e i t emi zed deduct i ons, and per sonal condemnat i on l osses ar e not
r ecogni zed.

1935. To be el i gi bl e t o el ect post ponement of gai n t r eat ment f or an
i nvol unt ar y conver si on, what ar e t he t hr ee t est s f or qual i f yi ng
r epl acement pr oper t y?

Cor r ect Answer :
The t hr ee t est s f or qual i f yi ng r epl acement pr oper t y ar e as f ol l ows:

Functional use test: This test applies to
owners-users. The taxpayers use of the
replacement property and the involuntary
converted property must be the same.
Taxpayer use test: This test applies to
owner-investors. The properties must be used
by the taxpayer (owner-investor) in similar
endeavors.
Like-kind test: This test applies when
business real property or investment real
property is condemned. In this case, the
broader replacement rules for like-kind
exchanges replace the narrower replacement
rules discussed above.

1936. Edi t h s manuf act ur i ng pl ant i s dest r oyed by f i r e on t he af t er noon
of November 3, 2013. The adj ust ed basi s i s $800, 000. The i nsur ance
company of f er s a set t l ement of $700, 000. Af t er pr ot r act ed negot i at i ons,
Edi t h r ecei ves $825, 000 on J une 9, 2014. Edi t h i s a f i scal year
t axpayer whose t ax year ends on J une 30t h. What i s t he l at est dat e
t hat Edi t h can i nvest t he pr oceeds i n qual i f yi ng r epl acement pr oper t y
and el ect t o def er t he gai n under 1033?

Cor r ect Answer :
Si nce t he f or mof t he i nvol unt ar y conver si on i s a casual t y, Edi t h has 2
year s f r omt he end of t he t ax year i n whi ch she r ecei ved a pr oceeds
i nf l ow l ar ge enough t o pr oduce a r eal i zed gai n. Si nce t hi s occur r ed on
J une 9, 2014, she has unt i l 2 year s f r omJ une 30, 2014 ( i . e. , J une 30,
2016) .

1937. How does t he r epl acement t i me per i od di f f er f or t he condemnat i on
of r eal pr oper t y used i n a t r ade or busi ness or hel d f or i nvest ment
when compar ed wi t h t hat f or ot her i nvol unt ar y conver si ons?

Cor r ect Answer :
The pl us t wo year s i s r epl aced wi t h pl us t hr ee year s ( i . e. , an
addi t i onal year t o make t he r epl acement i s pr ovi ded) .

1938. Di st i ngui sh bet ween a di r ect i nvol unt ar y conver si on and an
i ndi r ect i nvol unt ar y conver si on.

Cor r ect Answer :
An i nvol unt ar y conver si on occur s when a t axpayer s pr oper t y i s st ol en,
dest r oyed, or condemned. For a di r ect i nvol unt ar y conver si on, t he
t axpayer r ecei ves pr oper t y r at her t han money. For an i ndi r ect
i nvol unt ar y conver si on, t he t axpayer r ecei ves money whi ch can t hen be
used t o acqui r e r epl acement pr oper t y.

1939. Loui s owns a condomi ni umi n New Or l eans whi ch has been hi s
pr i nci pal r esi dence f or 12 year s. He want s t o be near Lake Ponchar t r ai n
si nce he enj oys wat er act i vi t i es. Ther ef or e, he sel l s t he condomi ni um.
Hi s or i gi nal i nt ent was t o pur chase a house i n New Or l eans near t he
l ake. However , t he cost of such pr oper t i es f ar exceeded hi s sal es
pr oceeds. He was abl e t o pur chase a house on t he l ake i n Covi ngt on,
whi ch i s l ocat ed acr oss t he causeway. He i nvest ed al l of hi s sal es
pr oceeds i n t he Covi ngt on house. Af t er t wo mont hs of commut i ng over an
hour t o and f r omwor k each day, he deci des t o r ent an ef f i ci ency
apar t ment i n New Or l eans near hi s of f i ce. He spends t he weekends and
vacat i ons at hi s home i n Covi ngt on.

a. Does Loui s qual i f y f or excl usi on of gai n
under 121?

b. Does hi s Covi ngt on house qual i f y as hi s
pr i nci pal r esi dence?

Cor r ect Answer :
a. Louis satisfies the 121 exclusion
requirement. He has owned and occupied the
residence for at least two years during the
5-year period ending on the date of sale.

b. No. The Covington home does not qualify as
his principal residence. The principal
residence is where the taxpayer lives most
of the time. For Louis, this is the
efficiency apartment in New Orleans.

1940. Byr on, who l i ved i n New Hampshi r e, acqui r ed a per sonal r esi dence
t en year s ago when he was 52 year s ol d. Dur i ng t hi s per i od he has
occupi ed t he r esi dence f or onl y ei ght mont hs ( out of 12) each year due
t o wi nt er vacat i ons i n Fl or i da. I s Byr on el i gi bl e f or excl usi on of gai n
under 121?

Cor r ect Answer :
Yes, t empor ar y absences such as vacat i ons do not i nval i dat e t he
r equi r ement t hat t he t axpayer use t he house as a pr i nci pal r esi dence
f or at l east t wo year s dur i ng t he f i ve- year per i od endi ng on t he dat e
of t he sal e.

1941. Edwar d, age 52, l eased a house f or one year i n Memphi s wi t h an
opt i on t o buy as hi s per sonal r esi dence. At t he end of t he l ease, he
pur chased t he house. He l i ved t her e f or an addi t i onal 26 mont hs bef or e
hi s empl oyer t r ansf er r ed hi mt o Tucson. Expect i ng t o be i n Tucson f or
18 t o 24 mont hs, he r ent ed t he Memphi s house f or 18 mont hs wi t h an
opt i on t o ext end on a mont h t o mont h basi s f or an addi t i onal 6 mont hs.
At t he end of t he 18- mont h per i od, Edwar d s empl oyer of f er ed hi ma
per manent posi t i on i n Tucson as br anch manager . The t enant who had been
occupyi ng Edwar d s house i n Memphi s pur chased i t at t he end of t he 24-
mont h ext ended l ease per i od. I s Edwar d el i gi bl e t o el ect excl usi on
t r eat ment under 121?

Cor r ect Answer :
Yes. To qual i f y f or 121 excl usi on t r eat ment , Edwar d must have owned
and used t he r esi dence as hi s pr i nci pal r esi dence f or at l east t wo
year s dur i ng t he 5- year per i od endi ng on t he dat e of sal e. I t i s not
necessar y t hat t he house be hi s pr i nci pal r esi dence at t he dat e of sal e.
Edwar d has owned and occupi ed t he r esi dence f or at l east t wo year s out
of t he 5- year per i od endi ng on t he dat e of sal e.

1942. Mel i ssa, age 58, mar r i es Ar nol d, age 50, on J une 1, 2013. Mel i ssa
deci des t o sel l her pr i nci pal r esi dence on August 1, 2013, whi ch she
has owned and occupi ed f or t he past 30 year s. Ar nol d has never owned a
house. However , whi l e he was mar r i ed t o Kel l y who di ed 6 mont hs pr i or
t o hi s mar r i age t o Mel i ssa, Kel l y used t he 121 el ect i on on t he sal e
of her r esi dence i n J anuar y 2011 t o r educe her r eal i zed gai n f r om
$123, 000 t o $0. Kel l y used t he sal es pr oceeds t o pay of f Ar nol d s
gambl i ng debt s. Can Mel i ssa el ect t he 121 excl usi on on t he sal e of
her r esi dence? What i s t he maxi mum 121 excl usi on avai l abl e t o Mel i ssa
and Ar nol d i f t hey f i l e a j oi nt r et ur n?

Cor r ect Answer :
Mel i ssa i s el i gi bl e f or a maxi mum 121 excl usi on of $250, 000. Even i f
Mel i ssa and Ar nol d f i l e a j oi nt r et ur n, t he maxi mum 121 excl usi on
st i l l i s $250, 000. To i ncr ease t he 121 maxi mumexcl usi on amount f r om
$250, 000 t o $500, 000 on a j oi nt r et ur n, Ar nol d woul d need t o be
el i gi bl e f or t he 121 excl usi on. He i s i nel i gi bl e on Mel i ssa s sal e of
her r esi dence because he has not occupi ed t he r esi dence f or at l east
t wo year s.

1943. Under what ci r cumst ances may a par t i al 121 excl usi on be
avai l abl e even t hough t he t axpayer has used t he 121 excl usi on wi t hi n
t he t wo- year per i od pr ecedi ng t he sal e of t he cur r ent r esi dence?

Cor r ect Answer :
The r el i ef pr ovi si on whi ch per mi t s par t i al 121 excl usi on t r eat ment i s
avai l abl e i n any of t he f ol l owi ng si t uat i ons:

Change in place of employment.
Health.
To the extent provided for in the
Regulations, other unforeseen circumstances.

1944. Li bby s pr i nci pal r esi dence i s dest r oyed by a t or nado. She i s
si ngl e and her r eal i zed gai n i s $360, 000. I s i t possi bl e f or Li bby s
r ecogni zed gai n t o be $0?

Cor r ect Answer :
Yes, i t i s possi bl e f or t he Li bby s r ecogni zed gai n t o be $0. Thi s can
be achi eved by usi ng 1033 i n conj unct i on wi t h 121. To achi eve t he
desi r ed r esul t , 1033 post ponement t r eat ment needs t o be el ect ed and
t he t axpayer must i nvest i n anot her pr i nci pal r esi dence wi t h an amount
at l east equal t o t he amount r eal i zed r educed by t he 121 excl usi on
amount .

1945. Ramon sel l s l and wi t h an adj ust ed basi s of $120, 000 and a f ai r
mar ket val ue of $175, 000 t o Paul i ne, hi s wi f e, f or $175, 000. Di scuss
how t he t ax consequences woul d di f f er i f Ramon and Paul i ne had never
been mar r i ed.

Cor r ect Answer :
Sect i on 1041 pr ovi des t hat r eal i zed gai ns or l osses on t r ansf er s of
pr oper t y bet ween spouses ar e not r ecogni zed. Thus, none of Ramon s
r eal i zed gai n of $55, 000 ( $175, 000 amount r eal i zed $120, 000 adj ust ed
basi s) i s r ecogni zed. Even t hough Paul i ne pai d $175, 000 f or t he l and,
her basi s i s a car r yover basi s of $120, 000.

I f Ramon and Paul i ne had never been mar r i ed, Ramon s r eal i zed gai n of
$55, 000 ( $175, 000 amount r eal i zed $120, 000 adj ust ed basi s) woul d be
r ecogni zed. Paul i ne s basi s f or t he l and woul d be her cost of $175, 000.

1946. What t ypes of exchanges of i nsur ance cont r act s ar e el i gi bl e f or
nonr ecogni t i on t r eat ment under 1035?

Cor r ect Answer :
Exchanges of i nsur ance cont r act s qual i f yi ng f or nonr ecogni t i on
t r eat ment i ncl ude t he f ol l owi ng:

The exchange of l i f e i nsur ance cont r act s.
The exchange of a l i f e i nsur ance cont r act f or an endowment or
annui t y cont r act .
The exchange of an endowment cont r act f or anot her endowment cont r act
t hat pr ovi des f or r egul ar payment s begi nni ng at a dat e not l at er t han
t he dat e payment s woul d have begun under t he cont r act exchanged.
The exchange of an endowment cont r act f or an annui t y cont r act .
The exchange of annui t y cont r act s.

1947. Def i ne qual i f i ed smal l busi ness st ock under 1045.

Cor r ect Answer :
Qual i f i ed smal l busi ness st ock i s st ock of a qual i f i ed smal l busi ness
t hat i s acqui r ed by t he t axpayer at i t s or i gi nal i ssue i n exchange f or
money or ot her pr oper t y ( excl udi ng st ock) or as compensat i on f or
ser vi ces. A qual i f i ed smal l busi ness i s a domest i c cor por at i on t hat
sat i sf i es t he f ol l owi ng r equi r ement s:

The aggregate gross assets prior to the
issuance of the small business stock do not
exceed $50 million.
The aggregate gross assets immediately after
the issuance of the small business stock do
not exceed $50 million.

1948. The t ax l aw r equi r es t hat capi t al gai ns and l osses be separ at ed
f r omot her t ypes of gai ns and l osses because an al t er nat i ve t ax
cal cul at i on may be used when t axabl e i ncome i ncl udes net l ong- t er m
capi t al gai n.

*a. Tr ue
b. Fal se

f r omot her t ypes of gai ns and l osses because t her e ar e l i mi t at i ons on
t he deduct i on of net capi t al l osses.

*a. Tr ue
b. Fal se

1950. I f a capi t al asset i s sol d at a gai n, t he hol di ng per i od i s
i mpor t ant .

*a. Tr ue
b. Fal se

1951. An accr ual basi s t axpayer accept s a not e r ecei vabl e f r oma r et ai l
cust omer wi t h a weak cr edi t r at i ng. The t axpayer i mmedi at el y sel l s t he
not e t o a bank f or l ess t han t he not e s st at ed val ue. The t axpayer has
an or di nar y l oss.

*a. Tr ue
b. Fal se

1952. A busi ness t axpayer sel l s depr eci abl e busi ness pr oper t y wi t h an
adj ust ed basi s of $40, 000 f or $32, 000. The t axpayer hel d t he pr oper t y
f or mor e t han a year . The t axpayer has an $8, 000 capi t al l oss.

a. Tr ue
*b. Fal se

1953. An i ndi vi dual t axpayer r ecei ved a val uabl e pai nt i ng f r omhi s
uncl e, a f amous pai nt er . The pai nt er cr eat ed t he pai nt i ng. Af t er t he
t axpayer hel d t he pai nt i ng f or t wo year s, he sol d i t f or a $400, 000
gai n. The gai n i s a l ong- t er mcapi t al gai n.

a. Tr ue
*b. Fal se

1954. Si nce t he Code sect i on t hat def i nes capi t al asset says what i s
not a capi t al asset , ot her Code sect i ons have t o hel p det er mi ne what i s
and what i s not a capi t al gai n or l oss.

*a. Tr ue
b. Fal se

1955. I ndi vi dual s who ar e not pr of essi onal r eal est at e devel oper s may
get capi t al gai n t r eat ment f or sal e of t hei r r eal pr oper t y i f t hey
engage onl y i n l i mi t ed devel opment act i vi t i es.

*a. Tr ue
b. Fal se

1956. The subdi vi si on of r eal pr oper t y i nt o l ot s f or r esal e when no
subst ant i al physi cal i mpr ovement s have been made t o t he pr oper t y never
causes t he gai n f r omsal e of t he l ot s t o be t r eat ed as or di nar y i ncome.

a. Tr ue
*b. Fal se

1957. A secur i t y t hat was pur chased by an i ndi vi dual and qual i f i es as
1244 st ock becomes wor t hl ess. The t axpayer i s si ngl e and t he l oss i s
$30, 000. The l oss i s t r eat ed as an or di nar y l oss.

*a. Tr ue
b. Fal se

1958. For t ax pur poses, t her e i s no or i gi nal i ssue di scount on a bond
unl ess t he bond i s i ssued f or l ess t han i t s f ace val ue and t he
di f f er ence bet ween t he f ace val ue and t he bond i ssue pr i ce i s at l east
one- f our t h of 1 per cent of t he r edempt i on pr i ce at mat ur i t y mul t i pl i ed
by t he number of year s t o mat ur i t y.

*a. Tr ue
b. Fal se

1959. I f t he hol der of an opt i on f ai l s t o exer ci se t he opt i on, t he
l apse of t he opt i on i s consi der ed a sal e or exchange on t he opt i on
expi r at i on dat e.

*a. Tr ue
b. Fal se

1960. The onl y t hi ngs t hat t he gr ant ee of an opt i on may do wi t h t he
opt i on ar e exer ci se i t or l et i t expi r e.

a. Tr ue
*b. Fal se

1961. When a pat ent i s t r ansf er r ed, t he most common f or ms of payment
r ecei ved by t he t r ansf er or ar e a l ump sumand/ or per i odi c payment .

*a. Tr ue
b. Fal se

1962. A f r anchi sor l i censes i t s mode of busi ness oper at i on t o a
f r anchi see.

*a. Tr ue
b. Fal se

1963. A l ease cancel l at i on payment r ecei ved by a l essee i s gener al l y
t r eat ed as an exchange because t he l ease ext i ngui shed i s usual l y a
capi t al asset .

*a. Tr ue
b. Fal se

1964. Lease cancel l at i on payment s r ecei ved by a l essor ar e al ways
or di nar y i ncome because t hey ar e consi der ed t o be i n l i eu of r ent al
payment s.

*a. Tr ue
b. Fal se

1965. To comput e t he hol di ng per i od, st ar t count i ng on t he day af t er
t he pr oper t y was acqui r ed and i ncl ude t he day of di sposi t i on.

*a. Tr ue
b. Fal se

1966. The hol di ng per i od of pr oper t y gi ven up i n a l i ke- ki nd exchange
i ncl udes t he hol di ng per i od of t he asset r ecei ved i f t he pr oper t y t hat
has been exchanged i s a capi t al asset .

a. Tr ue
*b. Fal se

1967. Tomhas owned 40 shar es of Or ange Cor por at i on st ock f or f i ve
year s. He sel l s t he st ock shor t f or a t ot al of $1, 100. One mont h l at er ,
he cl oses t he shor t sal e by pur chasi ng and del i ver i ng 40 shar es of
Or ange Cor por at i on st ock f or a t ot al of $600. Tomhas a $500 shor t - t er m
capi t al gai n.

*a. Tr ue
b. Fal se

1968. Shor t - t er mcapi t al l osses ar e net t ed agai nst l ong- t er mcapi t al
gai ns and l ong- t er mcapi t al l osses ar e net t ed agai nst shor t - t er m
capi t al gai ns.

a. Tr ue
*b. Fal se

1969. Shor t - t er mcapi t al gai n i s el i gi bl e f or a speci al t ax r at e onl y
when i t exceeds l ong- t er mcapi t al gai n.

a. Tr ue
*b. Fal se

1970. A net shor t - t er mcapi t al l oss f i r st of f set s any 28%net l ong- t er m
capi t al gai n bef or e i t of f set s ei t her 25%net l ong- t er mcapi t al gai n or
0%/ 15%/ 20%net l ong- t er mcapi t al gai n.

*a. Tr ue
b. Fal se

1971. Al l col l ect i bl es shor t - t er mgai n i s subj ect t o a pot ent i al
al t er nat i ve t ax r at e of 28%.

a. Tr ue
*b. Fal se

1972. An i ndi vi dual t axpayer wi t h 2013 net shor t - t er mcapi t al l oss of
$5, 000 gener al l y can deduct up t o $3, 000 f or AGI and car r y t he bal ance
f or war d t o 2014.

*a. Tr ue
b. Fal se

f r omot her t ypes of gai ns and l osses. Among t he r easons f or t hi s
t r eat ment ar e:

a. Long- t er mcapi t al gai ns may be t axed at a l ower r at e t han
or di nar y gai ns.
b. Capi t al l osses t hat ar e shor t - t er mar e not deduct i bl e.
c. Net capi t al l oss i s deduct i bl e onl y up t o $3, 000 per year f or
i ndi vi dual t axpayer s.
*d. a. and c.

1974. Recogni zed gai ns and l osses f r omdi sposi t i on of a capi t al asset
may occur as a r esul t of a:

a. Sal e.
b. Exchange.
c. Casual t y.
d. Condemnat i on.

1975. The possi bl e hol di ng per i ods f or capi t al asset s i ncl ude:

a. Shor t - t er m= hel d 14 mont hs or l ess.
b. Long- t er m= gr eat er t han si x mont hs.
*c. Long- t er m= gr eat er t han 12 mont hs.
d. Shor t - t er m= gr eat er t han 12 mont hs.

1976. A busi ness t axpayer sel l s i nvent or y f or $80, 000. The adj ust ed
basi s of t he pr oper t y i s $58, 000 at t he t i me of t he sal e and t he
i nvent or y had been hel d mor e t han one year . The t axpayer has:

a. No gai n or l oss.
b. Sol d a l ong- t er mcapi t al asset .
c. Sol d a shor t - t er mcapi t al asset .
*d. An or di nar y gai n.

1977. St anl ey oper at es a r est aur ant as a sol e pr opr i et or shi p. Whi ch of
t he f ol l owi ng i t ems ar e capi t al asset s i n t he hands of St anl ey?

a. The r est aur ant s t abl es and chai r s.
b. A por t abl e sound syst emused t o pl ay t heme musi c f or t he
r est aur ant .
c. The r est aur ant bui l di ng t hat i s an asset of t he sol e
pr opr i et or shi p.
*d. An i nt er est - bear i ng savi ngs account used t o keep t he
r est aur ant s excess cash.

1978. Mi chael i s i n t he busi ness of cr eat i ng post er s ( di spl ay ar t ) f or
t he movi e i ndust r y. He cr eat es a post er and sel l s i t f or a l ump
sum. He has:

a. Sol d a capi t al asset .
b. Sol d an or di nar y asset .
c. No gai n or l oss.
d. An or di nar y gai n.
*e. b. and d.

1979. Ramon i s i n t he busi ness of buyi ng and sel l i ng secur i t i es. Whi ch
of t he f ol l owi ng i s a capi t al asset f or Ramon?

a. The secur i t i es he buys and sel l s each day i n t he nor mal cour se
of hi s busi ness.
*b. The secur i t i es he desi gnat es as hel d f or i nvest ment at t he
end of t he day of acqui si t i on.
c. The secur i t i es he hol ds mor e t han 12 mont hs.
d. Al l t he secur i t i es he owns.
e. b. , c. , and d.

1980. St el l a pur chased vacant l and i n 2006 t hat she subdi vi ded f or
r esal e as l ot s. Al l 10 of t he l ot s wer e sol d dur i ng 2013. The l ot s had
a t ax basi s of $12, 000 each and sol d f or $35, 000 each. St el l a made no
subst ant i al i mpr ovement s t o t he l ot s. She act ed as her own r eal est at e
br oker ; so t her e wer e no sal es expenses f or sel l i ng t he l ot s. Whi ch of
t he f ol l owi ng st at ement s i s correct?

a. St el l a must hol d t he l ot s f or at l east 10 year s bef or e she i s
el i gi bl e f or t he speci al capi t al gai n t r eat ment of 1237.
b. The $230, 000 gai n f r omt he sal e of t he t en l ot s i s al l
or di nar y i ncome.
c. Al l of t he $230, 000 gai n f r omt he sal e of t he t en l ot s i s
l ong- t er mcapi t al gai n.
d. To be el i gi bl e f or t he speci al capi t al gai n t r eat ment of
1237, St el l a must be a r eal est at e deal er .

1981. A wor t hl ess secur i t y had a hol di ng per i od of 6 mont hs when i t
became wor t hl ess on December 10, 2013. The i nvest or who had owned t he
secur i t y had a basi s of $20, 000 f or i t . Whi ch of t he f ol l owi ng
st at ement s i s correct?

a. The i nvest or has a l ong- t er mcapi t al l oss of $20, 000.
*b. The i nvest or has a shor t - t er mcapi t al l oss of $20, 000.
c. The i nvest or has a nondeduct i bl e l oss of $20, 000.
d. The i nvest or has a shor t - t er mcapi t al gai n of $20, 000.

1982. Lana pur chased f or $1, 410 a $2, 000 bond when i t was i ssued t wo
year s ago. Lana amor t i zed $200 of t he or i gi nal i ssue di scount and t hen
sol d t he bond f or $1, 800. Whi ch of t he f ol l owi ng st at ement s i s correct?

a. Lana has $10 of l ong- t er mcapi t al l oss.
*b. Lana has $190 of l ong- t er mcapi t al gai n.
c. Lana has no capi t al gai n or l oss.
d. Lana has $190 of l ong- t er mcapi t al l oss.

1983. On J une 1, 2013, Br ady pur chased an opt i on t o buy 1, 000 shar es of
Gener al , I nc. at $40 per shar e. He pur chased t he opt i on f or $3, 000. I t
was t o r emai n i n ef f ect f or f i ve mont hs. The mar ket exper i enced a
decl i ne dur i ng t he l at t er par t of t he year , so Br ady deci ded t o l et t he
opt i on l apse as of December 1, 2013. On hi s 2013 t ax r et ur n, what
shoul d Br ady r epor t ?

a. A $3, 000 l ong- t er mcapi t al l oss.
*b. A $3, 000 shor t - t er mcapi t al l oss.
c. A $3, 000 1231 l oss.
d. A $3, 000 or di nar y l oss.

1984. Whi ch of t he f ol l owi ng event s causes t he pur chaser of an opt i on
t o add t he cost of t he opt i on t o t he basi s of t he pr oper t y t o whi ch t he
opt i on r el at es?

*a. The opt i on i s exer ci sed.
b. The opt i on i s sol d.
c. The opt i on l apses.
d. The opt i on i s r esci nded.

1985. Hi r ami s a comput er engi neer and, whi l e unempl oyed, i nvent s a
swi t chi ng devi ce f or comput er net wor ks. He pat ent s t he devi ce, but does
not r educe i t t o pr act i ce. Hi r amhas a zer o t ax basi s f or t he pat ent .
I n consi der at i on of $800, 000 pl us a $1 r oyal t y per devi ce sol d, Hi r am
assi gns t he pat ent t o a comput er manuf act ur i ng company. Hi r amassi gned
al l subst ant i al r i ght s i n t he pat ent . Whi ch of t he f ol l owi ng i s cor r ect ?

a. Hi r amaut omat i cal l y has l ong- t er mcapi t al gai n f r omt he l ump
sumpayment , but not f r omt he r oyal t y payment s.
b. Hi r amaut omat i cal l y has l ong- t er mcapi t al gai n f r omt he
r oyal t y payment s, but not f r omt he l ump sumpayment .
*c. Hi r amaut omat i cal l y has l ong- t er mcapi t al gai n f r omboth t he
l ump sumpayment and t he r oyal t y payment s.
d. Hi r amdoes not have aut omat i c l ong- t er mcapi t al gai n f r om
either t he l ump sumpayment or t he r oyal t y payment s.

1986. Gol d Company si gns a 13- year f r anchi se agr eement wi t h Si l ver .
Si l ver r et ai ned si gni f i cant power s, r i ght s, and a cont i nui ng i nt er est .
Gol d Company ( t he f r anchi see) makes noncont i ngent payment s of $18, 000
per year f or t he f i r st f our year s of t he f r anchi se. Gol d Company al so
pays a cont i ngent f ee of 2%of gr oss sal es ever y mont h. Whi ch of t he

a. Gol d Company may deduct t he $18, 000 per year noncont i ngent
payment s i n f ul l as t hey ar e made.
*b. Gol d Company may deduct t he mont hl y cont i ngent f ee as i t i s
pai d.
c. Gol d Company may deduct both t he noncont i ngent annual f ee and
t he cont i ngent mont hl y f ees as t hey ar e pai d.
d. Gol d Company may not deduct either t he noncont i ngent annual
f ee or t he cont i ngent mont hl y f ees as t hey ar e pai d.

1987. A l essor i s pai d $45, 000 by i t s commer ci al t enant as a l ease
cancel l at i on f ee. The t enant want ed t o get out of i t s l ease so i t
coul d move t o a di f f er ent bui l di ng. The l essor had hel d t he l ease f or
t hr ee year s bef or e i t was cancel ed. The l essor had a zer o t ax basi s
f or t he l ease. The l essor has r ecei ved:

*a. Or di nar y i ncome of $45, 000.
b. Long- t er mcapi t al gai n of $45, 000.
c. Shor t - t er mcapi t al gai n of $45, 000.
d. Nei t her gai n nor l oss.

1988. Vi r gi l was l easi ng an apar t ment f r omMar pl e, I nc. Mar pl e pai d
Vi r gi l $1, 000 t o cancel hi s l ease and move out so t hat Mar pl e coul d
demol i sh t he bui l di ng. As a r esul t :

*a. Vi r gi l has a $1, 000 capi t al gai n.
b. Vi r gi l has a $1, 000 capi t al l oss.
c. Mar pl e has a $1, 000 capi t al l oss.
d. Mar pl e has a $1, 000 capi t al gai n.

1989. On J une 10, 2013, Ebon, I nc. acqui r ed an of f i ce bui l di ng as a
r esul t of a l i ke- ki nd exchange. Ebon had gi ven up a f act or y bui l di ng
t hat i t had owned f or 26 mont hs as par t of t he l i ke- ki nd exchange.
Whi ch of t he st at ement s bel ow i s cor r ect ?

a. The hol di ng per i od of t he f act or y bui l di ng i ncl udes t he
hol di ng per i od of t he of f i ce bui l di ng.
b. The hol di ng per i od of t he of f i ce bui l di ng st ar t s on J une 11,
2013.
c. The hol di ng per i od of t he of f i ce bui l di ng st ar t s on J une 10,
2013.
*d. The hol di ng per i od of t he of f i ce bui l di ng i ncl udes t he
hol di ng per i od of t he f act or y bui l di ng.

1990. Tan, I nc. , sol d a f or kl i f t on Apr i l 12, 2013, f or $8, 000 ( i t s FMV)
t o i t s 100%shar ehol der , Ashl ey. Tan s adj ust ed basi s f or t he f or kl i f t
was $12, 000. Ashl ey s hol di ng per i od f or t he f or kl i f t :

a. I ncl udes Tan s hol di ng per i od f or t he f or kl i f t .
b. Begi ns on Apr i l 12, 2013.
*c. Begi ns on Apr i l 13, 2013.
d. Does not begi n unt i l Ashl ey sel l s t he f or kl i f t .

1991. Hank i nher i t ed Gr een st ock f r omhi s mot her when she di ed. The
mot her had a t ax basi s of $366, 000 f or t he Gr een st ock when she di ed
and t he Gr een st ock was wor t h $437, 000 at t he dat e of her deat h. Whi ch
of t he st at ement s bel ow i s cor r ect ?

a. Hank s hol di ng per i od f or t he Gr een st ock i ncl udes hi s
mot her s hol di ng per i od f or t he st ock.
b. Hank s hol di ng per i od f or t he Gr een st ock does not i ncl ude hi s
mot her s hol di ng per i od f or t he st ock.
c. Hank s hol di ng per i od f or t he Gr een st ock i s aut omat i cal l y
l ong t er m.
*d. b. and c.

1992. Whi ch of t he f ol l owi ng i s correct concer ni ng shor t sal es of st ock?

a. At t he t i me t he shor t sal e i s made, t he t axpayer does not
del i ver t o t he pur chaser t he shar es sol d shor t .
*b. At t he t i me t he shor t sal e i s made, t he t axpayer del i ver s t o
t he pur chaser t he shar es sol d shor t .
c. At t he t i me t he shor t sal e i s made, t he t axpayer may al r eady
own t he shar es sol d shor t .
d. At t he t i me t he shor t sal e i s made, t he t axpayer al ways
al r eady owns t he shar es sol d shor t .

1993. Ryan has t he f ol l owi ng capi t al gai ns and l osses f or 2013: $6, 000
STCL, $5, 000 28%gai n, $2, 000 25%gai n, and $6, 000 0%/ 15%/ 20%gai n.
Whi ch of t he f ol l owi ng i s cor r ect :

*a. The net capi t al gai n i s composed of $1, 000 25%gai n and
$6, 000 0%/ 15%/ 20%gai n.
b. The net capi t al gai n i s composed of $5, 000 28%gai n and $2, 000
0%/ 15%/ 20%gai n.
c. The net capi t al gai n i s composed of $3, 000 28%gai n, $2, 000
25%gai n, and $2, 000 0%/ 15%/ 20%gai n.
d. The net capi t al gai n i s composed of $1, 000 28%gai n and $6, 000
0%/ 15%/ 20%gai n.

1994. I n 2013, Mar k has $18, 000 shor t - t er mcapi t al l oss, $7, 000 28%
gai n, and $6, 000 0%/ 15%/ 20%gai n. Whi ch of t he st at ement s bel ow i s
correct?

a. Mar k has a $5, 000 capi t al l oss deduct i on.
*b. Mar k has a $3, 000 capi t al l oss deduct i on.
c. Mar k has a $13, 000 net capi t al gai n.
d. Mar k has a $5, 000 net capi t al gai n.
e. Mar k has a $18, 000 net capi t al l oss.

1995. I n 2012, J enny had a $12, 000 net shor t - t er mcapi t al l oss and
deduct ed $3, 000 as a capi t al l oss deduct i on. I n 2013, J enny has a
$18, 000 0%/ 15%/ 20%l ong- t er mcapi t al gai n and no ot her capi t al gai n or
l oss t r ansact i ons. Whi ch of t he st at ement s bel ow i s correct?

a. J enny has a 2013 $18, 000 net capi t al gai n.
*b. J enny has a 2013 $9, 000 net capi t al gai n.
c. J enny has a 2013 $9, 000 net capi t al l oss.
d. J enny has a 2013 $3, 000 capi t al l oss deduct i on.
e. J enny has a 2013 $9, 000 capi t al l oss deduct i on.

1996. I n 2013, Sat esh has $5, 000 shor t - t er mcapi t al l oss, $13, 000
0%/ 15%/ 20% l ong- t er m capi t al gai n, and $7, 000 qual i f i ed di vi dend i ncome.
Sat esh i s si ngl e and has ot her t axabl e i ncome of $15, 000. Whi ch of t he
f ol l owi ng st at ement s i s correct?

a. No mor e t han $13, 000 of Sat esh s t axabl e i ncome i s t axed at 0%.
b. No mor e t han $7, 000 of Sat esh s t axabl e i ncome i s t axed at 0%.
*c. No mor e t han $15, 000 of Sat esh s t axabl e i ncome i s t axed at
0%.
d. None of Sat esh s t axabl e i ncome i s t axed at 0%.
e. Al l of Sat esh s t axabl e i ncome i s t axed at 0%.

1997. Cason i s f i l i ng as si ngl e and has 2013 t axabl e i ncome of $36, 000
whi ch i ncl udes $34, 000 of 0%/ 15%/ 20%net l ong- t er mcapi t al gai n. What
i s hi s t ax on t axabl e i ncome usi ng t he al t er nat i ve t ax met hod?

a. $0.
*b. $200.
c. $4, 954.
d. $300.

1998. Sar a i s f i l i ng as head of househol d and has 2013 t axabl e i ncome
of $57, 000 whi ch i ncl udes $3, 000 of net l ong- t emcapi t al gai n. The net
l ong- t er mcapi t al gai n i s made up of $1, 000 25%gai n and $2, 000
0%/ 15%/ 20%gai n. What i s t he t ax on her t axabl e i ncome usi ng t he
al t er nat i ve t ax met hod?

a. $0.
b. $8, 453.
c. $8, 753.
*d. $8, 553.

1999. Seamus had $16, 000 of net shor t - t er mcapi t al l oss i n 2012. I n
2013, Seamus has $17, 000 of l ong- t er mcapi t al l oss and $26, 000 of l ong-
t er mcapi t al gai n. Whi ch of t he f ol l owi ng st at ement s i s cor r ect ?

a. Seamus had a $13, 000 shor t - t er mcapi t al l oss car r yover t o 2013.
b. Seamus has an $9, 000 2013 net l ong- t er mcapi t al gai n.
c. Seamus has a $4, 000 2013 net shor t - t er mcapi t al l oss.
*d. a. and c.

2000. I n 2013, an i ndi vi dual t axpayer has $863, 000 of t axabl e i ncome
t hat i ncl udes $48, 000 of 0%/ 15%/ 20%l ong- t er mcapi t al gai n. Whi ch of
t he f ol l owi ng st at ement s i s cor r ect ?

a. Al l of t he LTCG wi l l be t axed at 0%.
b. Al l of t he LTCG wi l l be t axed at 15%.
*c. Al l of t he LTCG wi l l be t axed at 20%.
d. Some of t he LTCG wi l l be t axed at 15%and some at 20%.

2001. Mar t ha has bot h l ong- t er mand shor t - t er m2012 capi t al gai ns and
l osses. The r esul t of net t i ng t hese gai ns and l osses i s a net l ong- t er m
capi t al l oss. Mar t ha has no qual i f i ed di vi dend i ncome. Al so, Mar t ha s
2012 t axabl e i ncome put s her i n t he 28%t ax br acket . Whi ch of t he
f ol l owi ng i s correct?

a. Mar t ha wi l l use Par t s I , I I , and I I I of 2012 For m1040
Schedul e D.
b. Mar t ha wi l l not benef i t f r omt he speci al t r eat ment f or l ong-
t er mcapi t al gai ns.
c. Mar t ha wi l l have a capi t al l oss deduct i on.

2002. Whi ch of t he f ol l owi ng compar i sons i s correct?

*a. Cor por at i ons may car r yback capi t al l osses; i ndi vi dual s may
not .
b. Bot h cor por at i on and i ndi vi dual l ong- t er mcapi t al l osses
car r yover as shor t - t er mcapi t al l osses.
c. Cor por at i ons may car r yf or war d capi t al l osses i ndef i ni t el y;
i ndi vi dual s may onl y car r yf or war d capi t al l osses f or f i ve year s.
d. Bot h cor por at i ons and i ndi vi dual s may use an al t er nat i ve t ax
r at e on net capi t al gai ns.

2003. Robi n Cor por at i on has or di nar y i ncome f r omoper at i ons of $30, 000,
net l ong- t er mcapi t al gai n of $10, 000, and net shor t - t er mcapi t al l oss
of $15, 000. What i s t he t axabl e i ncome f or 2013?

a. $25, 000.
b. $27, 000.
c. $28, 500.
*d. $30, 000.

2004. Vi ol et , I nc. , has a 2013 $80, 000 l ong- t er mcapi t al gai n i ncl uded
i n i t s $285, 000 t axabl e i ncome. Whi ch of t he f ol l owi ng i s cor r ect ?

a. Vi ol et wi l l benef i t f r oman al t er nat i ve t ax on net capi t al
gai ns comput at i on.
*b. Vi ol et s r egul ar t ax on t axabl e i ncome wi l l be t he same as
i t s t ax usi ng an al t er nat i ve t ax on net capi t al gai ns appr oach.
c. Vi ol et s $80, 000 net capi t al gai n i s not t axabl e.
d. Vi ol et s r egul ar t ax on t axabl e i ncome wi l l be gr eat er t han
i t s t ax usi ng an al t er nat i ve t ax on net capi t al gai n appr oach.

2005. Ther esa and Ol i ver , mar r i ed f i l i ng j oi nt l y, and bot h over 65
year s of age, have no dependent s. Thei r 2013 i ncome t ax f act s ar e:

Ther esa s wages $165, 000
Ol i ver s wages 33, 000
Long- t er mcapi t al l oss ( 41, 000)

What i s t hei r t axabl e i ncome f or 2013?

Cor r ect Answer :
The coupl e s t axabl e i ncome i s $172, 600. Thei r l ong- t er mcapi t al l oss
car r yover i s $2, 000 ( $5, 000 $3, 000) .

Wages ($165,000 + $33,000) $198,000
Short-term capital gain $36,000
Long-term capital loss (41,00
0)

Net long-term capital loss ($ 5,00
0)

Capital loss deduction
(limited to $3,000)
(3,0
00)
Standard deduction (12,200)
Additional standard
deduction (2 $1,200)
(2,400)
Exemptions (2 $3,900) (7,8
00)

2006. Car ol had t he f ol l owi ng t r ansact i ons dur i ng 2013: a pai nt i ng hel d
f or t wo year s and sol d at a gai n of $85, 000; 100 shar es of Gr ay st ock
hel d si x mont hs and sol d f or a l oss of $6, 000; 50 shar es of Yel l ow
st ock hel d 18 mont hs and sol d f or a gai n of $36, 000. Car ol al so had
$264, 000 of t axabl e i ncome f r omot her sour ces t han t hese pr oper t y
t r ansact i ons. What i s Car ol s net capi t al gai n or l oss and what i s her
t axabl e i ncome?

Cor r ect Answer :
Car ol has t axabl e i ncome of $379, 000.

Long-term capital gain from
painting
$ 85,000
Long-term capital gain from
Yellow stock
36,000
Short-term capital loss from Gray
stock
(6,000
)
Other taxable income 264,000
Total taxable income $379,000

2007. On J anuar y 10, 2013, Wal l y sol d an opt i on f or $2, 000 on vacant
l and he hel d as an i nvest ment . He had pur chased t he l and i n 2009 f or
$76, 000. The opt i on al l owed t he opt i on hol der t o pur chase t he pr oper t y
f or $122, 000 pl us t he cost of t he opt i on. On Mar ch 1, 2013, t he opt i on
hol der exer ci sed t he opt i on. What i s t he amount and nat ur e of Wal l y s
gai n or l oss f r omdi sposi t i on of t he l and?

Cor r ect Answer :
Wal l y s pr oceeds f r omsel l i ng t he l and ar e $124, 000 ( $2, 000 opt i on
pr oceeds + $122, 000 sal e pr oceeds) . Wal l y s gai n i s $48, 000 ( $124, 000
$76, 000) and i s al l l ong- t er mcapi t al gai n because t he asset was a
capi t al asset hel d mor e t han 12 mont hs.

2008. Wi l l i e i s t he owner of vacant l and t hat he pur chased i n 2009 f or
$1, 400, 000 and hel d f or i nvest ment . On J anuar y 22, 2012, he was pai d
$145, 000 f or a t hi r t een- mont h opt i on on t he l and by Susan. Susan coul d
buy t he l and f or an addi t i onal $1, 200, 000 by exer ci si ng t he opt i on.
Susan had hoped t o bui l d a l uxur y home on t he l and, but was unabl e t o
get appr oval t o bui l d a bi g enough home t o sat i sf y her needs.
Consequent l y, Susan di d not exer ci se her opt i on and t he opt i on expi r ed
on Febr uar y 22, 2013. ( 1) What i s Wi l l i e s basi s, gai n or l oss, and
t ype of gai n or l oss f r omt hese event s? ( 2) What i s Susan s basi s,
gai n or l oss, and t ype of gai n or l oss f r omt hese event s?

Cor r ect Answer :
( 1) Wi l l i e hel d t he l and f or i nvest ment ; consequent l y i t was a
capi t al asset . Wi l l i e had no r ecogni zed gai n or l oss i n 2012 f r omt he
r ecei pt of t he $145, 000 opt i on pr oceeds. When t he opt i on expi r ed i n
2013, t he $145, 000 opt i on pr i ce i s or di nar y i ncome because t he opt i on
pr oper t y was not st ocks, secur i t i es, commodi t i es, or commodi t y
f ut ur es. The basi s of t he pr oper t y r emai ns $1, 400, 000.

( 2) The t ax st at us of an opt i on i s det er mi ned by what woul d be t he
t ax st at us of t he pr oper t y t o be acqui r ed wi t h t he opt i on. The l and
woul d have been used i n a per sonal use act i vi t y and, t her ef or e, woul d
have been a capi t al asset . Consequent l y, t he opt i on on t he l and was a
capi t al asset . The l apse of t he opt i on i s consi der ed a sal e or
exchange on t he opt i on expi r at i on dat e. However , t he $145, 000 l oss on
t he l apse of t he opt i on i s not usabl e because l osses on sal e or
exchange of per sonal use act i vi t y pr oper t y ar e not deduct i bl e.

2009. Lar r y was t he hol der of a pat ent on a vi deo game. Dur i ng 2013, he
sol d al l subst ant i al r i ght s i n t he pat ent f or $365, 000 i n cash and a 3%
r oyal t y on t he pur chaser s f i r st $10, 200, 000 of sal es each year r el at ed
t o t he pr oduct i n whi ch t he pat ent i s i ncor por at ed. Lar r y had not
r educed t he pat ent t o pr act i ce. He had a $86, 000 basi s f or t he pat ent .
Dur i ng 2013, he r ecei ved $30, 000 i n r oyal t i es. What i s t he nat ur e and
amount of Lar r y s gai n?

Cor r ect Answer :
Lar r y was t he hol der of a pat ent and t r ansf er r ed al l subst ant i al r i ght s
t o i t . Consequent l y, 1235 gr ant s aut omat i c l ong- t er mcapi t al gai n
t r eat ment t o bot h t he cash r ecei ved and t he r oyal t i es r ecei ved. Lar r y
r ecover s hi s $86, 000 basi s and has a $309, 000 ( $365, 000 + $30, 000
$86, 000) 0%/ 15%/ 20%l ong- t er mcapi t al gai n.

2010. Phi l s f at her di ed on J anuar y 10, 2013. The f at her had owned
st ock f or 20 year s wi t h a basi s of $45, 000 t hat was t r ansf er r ed t o Phi l
as a gi f t on August 10, 2012, when t he st ock was wor t h $430, 000. Hi s
f at her pai d gi f t t ax of $31, 000. Thi s st ock was wor t h $566, 000 at t he
dat e of t he f at her s deat h. Phi l sol d t he st ock f or $545, 000 net of
commi ssi ons on Febr uar y 23, 2013. What i s t he amount and nat ur e of
Phi l s gai n or l oss f r omdi sposi t i on of t hi s pr oper t y?

Cor r ect Answer :
Phi l had a t ax basi s f or t he st ock equal t o i t s $45, 000 basi s at t he
dat e of hi s f at her s gi f t of t he st ock i ncr eased by t he gi f t t ax pai d
on t he st ock s unr eal i zed appr eci at i on i n hi s f at her s hands. He al so
had a l ong- t er mhol di ng per i od because t he f at her s 20- year hol di ng
per i od i s added t o Phi l s hol di ng per i od. Consequent l y, he had a
$471, 379 ( $545, 000 $73, 621) l ong- t er mcapi t al gai n when he sol d t he
st ock.

2011. On J anuar y 18, 2012, Mar t ha pur chased 200 shar es of Bl ue
Cor por at i on st ock f or $2, 000. On November 11, 2013, she sol d shor t 200
shar es of Bl ue Cor por at i on st ock whi ch she bor r owed f r omher br oker f or
$2, 300. On Febr uar y 10, 2014, Mar t ha cl osed t he shor t sal e by
del i ver i ng t he 200 shar es of Bl ue Cor por at i on st ock whi ch she had
acqui r ed i n 2012. On t hat dat e, Bl ue Cor por at i on st ock had a mar ket
pr i ce of $4 per shar e. What i s Mar t ha s r ecogni zed gai n or l oss and i t s
char act er i n 2013? I n 2014?

Cor r ect Answer :
Si nce Mar t ha owned subst ant i al l y i dent i cal st ock on t he dat e of t he
shor t sal e and di d not cl ose t he shor t sal e bef or e J anuar y 31, 2014,
she i s deemed t o have cl osed t he shor t sal e on November 11, 2013 ( t he
dat e of t he shor t sal e) . On her 2013 t ax r et ur n, she woul d r epor t a
$300 l ong- t er mcapi t al gai n ( $2, 300 shor t sal e pr i ce $2, 000 cost ) . On
Febr uar y 10, 2014, Mar t ha has a $1, 500 shor t - t er mcapi t al l oss [ $2, 300
basi s f or t he shar es sol d $800 ( 200 shar es $4 per shar e) ] because
t he hol di ng per i od of t he shar es used t o cl ose t he shor t sal e commences
wi t h t he dat e of t he shor t sal e.

2012. Shar on has t he f ol l owi ng r esul t s of net t i ng her shor t - t er mand
l ong- t er mcapi t al gai ns and l osses f or 2013: $56, 000 shor t - t er m
capi t al l oss, and $82, 000 net l ong- t er mcapi t al gai n ( $21, 000
0%/ 15%/ 20%l ong- t er mcapi t al gai n, and $61, 000 25%l ong- t er mcapi t al
gai n) .

( a) What i s her net capi t al gai n or l oss f or
2013?

( b) I f t her e i s a net capi t al l oss, how much
of t he l oss and what t ype of l oss car r i es
over t o 2014?

( c) I f t her e i s a net l ong- t er mcapi t al gai n,
what i s i t made up of ?

Cor r ect Answer :
(a) Sharon has a 2013 net long-term capital
gain of $26,000 ($82,000 net long-term
capital gain $56,000 net short-term
capital loss).

(b) There is no net capital loss.

(c) The $56,000 short-term capital loss first
absorbs the $61,000 of 25% gain, leaving
$5,000 of 25% long-term capital gain and
$21,000 of 0%/15%/20% long-term capital
gain.

2013. The char t bel ow det ai l s Sheen s 2011, 2012, and 2013 st ock
t r ansact i ons. What i s t he capi t al l oss car r yover t o 2013 and what i s
t he net capi t al gai n or l oss f or 2013?

Tax
Year
Shor t - t er m
Capi t al
Gai ns
Shor t - t er m
Capi t al
Losses
Long- t er m
Capi t al
Gai ns
Long- t er m
Capi t al
Losses
2011 $ 4, 000 $ 6, 000 $ 2, 000 $13, 000
2012 $16, 000 $14, 000 $23, 000 $28, 000
2013 $55, 000 $52, 000 $67, 000 $33, 000

Cor r ect Answer :
Ther e was a $2, 000 net shor t - t er mcapi t al l oss and a $11, 000 net l ong-
t er mcapi t al l oss i n 2011. Al l of t he shor t - t er mcapi t al l oss and
$1, 000 of t he l ong- t er mcapi t al l oss wer e used f or t he $3, 000 capi t al
l oss deduct i on and $10, 000 of l ong- t er mcapi t al l oss car r i ed f or war d t o
2012. The $10, 000 l ong- t er mcapi t al l oss car r yf or war d i s gr ouped wi t h
t he 2012 l ong- t er ml osses. I n 2012, t her e i s $2, 000 net shor t - t er m
capi t al gai n t hat i s net t ed agai nst t he $15, 000 ( $23, 000 l ong- t er mgai n
$28, 000 2012 l ong- t er ml oss $10, 000 l ong- t er ml oss car r yf or war d)
net l ong- t er mcapi t al l oss, r esul t i ng i n a $13, 000 net l ong- t er m
capi t al l oss f or 2012. Af t er t he $3, 000 capi t al l oss deduct i on, $10, 000
i s car r i ed f or war d as l ong- t er mcapi t al l oss t o 2013. I n 2013, t he
$10, 000 i s added t o t he l ong- t er mcapi t al l osses. Ther e i s a 2013 net
shor t - t er mcapi t al gai n of $3, 000 and a net l ong- t er mgai n of $24, 000
( $67, 000 l ong- t er mgai n $33, 000 2013 l ong- t er ml oss $10, 000 l ong-
t er ml oss car r yf or war d) . The net r esul t f or 2013 i s both net shor t - t er m
capi t al gai n of $3, 000 and l ong- t er mcapi t al gai n of $24, 000.

2014. Samuel , head of househol d wi t h t wo dependent s, has 2013 wages of
$26, 000, pai d al i mony of $3, 000, has t axabl e i nt er est i ncome of $2, 000,
and a $12, 000 0%/ 15%/ 20%net l ong- t er mcapi t al gai n. Samuel uses t he
st andar d deduct i on and i s age 38. What i s hi s 2013 t axabl e i ncome and
t he t ax on t he t axabl e i ncome?

Cor r ect Answer :
Samuel has $16, 350 t axabl e i ncome and t he t ax on t hat t axabl e i ncome
usi ng t he al t er nat i ve t ax on net l ong- t er mcapi t al gai n i s $435.

Wages $26,000
Net long-term capital gain 12,000
Gross income $40,000
Alimony paid (3,000)
Standard deduction (head of household) (8,950
)
Exemptions (3 $3,900) (11,700)

Tax on regular taxable income ($16,350
$12,000)
$435
Alternative tax on $12,000 net long- 0
term capital gain @ 0%
Total tax $435

The regular tax liability on $16,350 taxable income would have been $1,815.

2015. Mar t ha i s si ngl e wi t h one dependent and f i l es as head of
househol d. She had 2013 t axabl e i ncome of $45, 000 whi ch i ncl uded
$16, 000 of 0%/ 15%/ 20%net l ong- t er mcapi t al gai n. What i s her t ax on
t axabl e i ncome usi ng t he al t er nat i ve t ax on net l ong- t er mcapi t al gai n
met hod?

Cor r ect Answer :
Mar t ha has a t ax of $3, 713. Her t ax on r egul ar t axabl e i ncome of
$29, 000 ( $45, 000 $16, 000) i s $3, 713. Her t ax on t he $16, 000 of
0%/ 15%/ 20%at 0%i s $0 ( she i s not out of t he 15%r egul ar t ax br acket ,
so she pays 0%on t he ent i r e net l ong- t er mcapi t al gai n of
$16, 000) . Mar t ha woul d have pai d t ax of $6, 113 on her t axabl e i ncome
i f i t di d not i ncl ude any net l ong- t er mcapi t al gai n.

2016. Har ol d i s a head of househol d, has $27, 000 of t axabl e i ncome i n
2013 f r omnon- capi t al gai n or l oss sour ces, and has t he f ol l owi ng
capi t al gai ns and l osses:

28%l ong- t er mcapi t al gai n $ 4, 300
28%l ong- t er mcapi t al l oss ( 2, 000)
0%/ 15%/ 20%l ong- t er mcapi t al
gai n
19, 000
Shor t - t er mcapi t al l oss ( 1, 700)

What i s Har ol d s t axabl e i ncome and t he t ax on t hat t axabl e i ncome?

Cor r ect Answer :
Har ol d has t axabl e i ncome of $46, 600 and t he t ax ( as a head of
househol d) on t hat t axabl e i ncome i s $3, 430.

28% long-term capital
gain
$ 4,300
28% long-term capital
loss
(2,000)
Net 28% long-term capital
gain
$ 2,300
loss
(1,700)
Remaining 28% long-term
gain
$ 600

0%/15%/20% long-term 19,000
capital gain
Net long-term capital
gain
$19,600
Other taxable income 27,000

Tax on $27,000 regular taxable income $3,413
Tax on 28% gain portion of net long-
term capital gain; Harold is still in
15%
bracket ($600 15%)
90
Tax on 0%/15%/20% net long-term
capital gain; Harold is still in 15%
bracket
[($46,600 $27,000 $600)
0%]

0
Total tax using the alternative tax $3,503

The regular tax liability on the $46,600 of taxable income would have been
$6,353.

2017. Mi ke i s a sel f - empl oyed TV t echni ci an. He i s usual l y pai d as soon
as he compl et es r epai r s, but occasi onal l y bi l l s a cust omer wi t h payment
expect ed wi t hi n 30 days. At t he end of t he year he has $2, 500 of
r ecei vabl es out st andi ng. He expect s t o col l ect $1, 200 of t hi s and wr i t e
of f t he r emai nder . Mi ke i s a cash basi s t axpayer and had net ear ni ngs
f r omhi s busi ness ( not i ncl udi ng t he ef f ect of t he i t ems above) of
$55, 000. He al so had $3, 500 i nt er est i ncome, $200 gambl i ng wi nni ngs,
and sol d cor por at e st ock f or $7, 000. The st ock had been pur chased i n
2010 f or $8, 200. Mi ke i s si ngl e, has no dependent s, and cl ai ms t he
st andar d deduct i on. What i s hi s 2013 t axabl e i ncome? ( I gnor e t he sel f -
empl oyment t ax deduct i on. )

Cor r ect Answer :
Si nce Mi ke i s a cash basi s t axpayer , he may not deduct bad debt s f r om
account s r ecei vabl e because he woul d not have i ncl uded t he account s
r ecei vabl e i n hi s gr oss i ncome.

Net business income $55,000
Gambling winnings 200
Long-term capital loss ($7,000
$8,200)
(1,200)
Standard deduction (6,100)
Personal exemption (3,900)

2018. J udi t h ( now 37 year s ol d) owns a col l ect i on of por cel ai n dol l s
t hat she acqui r ed when she was a gr ade school er . She had f or got t en
about t hemunt i l her mot her sent t hemt o her . Her mot her had
di scover ed t hemi n a box i n her at t i c whi l e she was cl eani ng out her
house bef or e sel l i ng i t . J udi t h had or i gi nal l y acqui r ed al l t he dol l s
as gi f t s f r omher par ent s, so she has no way t o est abl i sh a basi s f or
t he dol l s. Usi ng i nf or mat i on f r omt he I nt er net , she pr epar es a car ef ul
i nvent or y of t he dol l s t hat i ncl udes t hei r name, when t hey wer e f i r st
avai l abl e f or sal e, t hei r cur r ent val ue, and ot her per t i nent
i nf or mat i on. She t hen l i st s t hemf or sal e on t he I nt er net . To her
sur pr i se, she qui ckl y get s an of f er of $5, 000 f or al l of t hemand sel l s
t hem. J udi t h has no ot her gai n or l oss t r ansact i ons f or t he year and
i s i n t he 28%mar gi nal t ax br acket . What i ssues do t hese f act s cr eat e?

Cor r ect Answer :
J udi t h has t o det er mi ne t he hol di ng per i od, t ax st at us, basi s, gai n or
l oss f r omt he di sposi t i on of t he dol l s and, i f t hey ar e sol d at a gai n,
t he t ax r at e appl i cabl e t o t he gai n. At t he t i me of t he sal e, i t
appear s t hat J udi t h i s hol di ng t he dol l s as an i nvest ment and,
t her ef or e, t hey ar e a capi t al asset . Her or i gi nal i nt ent was t o hol d
t he dol l s as a per sonal use act i vi t y. However , when she di scover ed what
t hey wer e wor t h, her i nt ent seems t o have become i nvest ment . She has
no det er mi nabl e basi s f or t he dol l s, so t hei r basi s i s zer o. They have
been hel d l ong- t er m, so t he $5, 000 gai n i s a l ong- t er mcapi t al
gai n. The al t er nat i ve t ax r at e appl i cabl e t o t he gai n i s 15%because
J udi t h s r egul ar t axabl e i ncome put s her above t he 15%r egul ar t ax
br acket . The gai n i s not subj ect t o t he col l ect i bl es 28%al t er nat i ve
t ax r at e because t he dol l s ar e nei t her a wor k of ar t nor an ant i que.

2019. Hi l da l ent $2, 000 t o a cl ose per sonal f r i end t o hel p t he f r i end
avoi d over dr awi ng t he f r i end s checki ng account . The f r i end was
supposed t o r epay t he $2, 000 wi t hi n a mont h. I nst ead, t he f r i end
decl ar ed per sonal bankr upt cy and Hi l da wi l l never r ecover any of t he
$2, 000. What ar e t he t ax i mpl i cat i ons of t hese event s f or Hi l da?

Cor r ect Answer :
Assumi ng Hi l da i s not i n t he t r ade or busi ness of l endi ng money, t he
l oan was a capi t al asset f or Hi l da. Her basi s was $2, 000 and her l oss
i s $2, 000. Thi s i s a nonbusi ness bad debt and t he t ax l aw t r eat s t hi s
as a shor t - t er mcapi t al l oss.

2020. Ranj a acqui r es $200, 000 f ace val ue cor por at e bonds f or $186, 000
when t he bonds ar e i ssued. He hol ds t he bonds as an i nvest ment f or t wo
year s and t hen sel l s t hemf or $198, 000. He amor t i zes $2, 000 of t he OI D.
What t ax i ssues does Ranj a have wi t h r espect t o t hese bonds?

Cor r ect Answer :
The bonds have or i gi nal i ssue di scount of $14, 000 ( $200, 000 $186, 000) .
Ranj a must amor t i ze t hi s di scount whi l e he hol ds t he bonds. The
di scount amor t i zat i on of $2, 000 i ncr eases Ranj a s basi s f or t he bonds.
Consequent l y, when he sel l s t he bonds, hi s basi s i s $186, 000 pl us t he
$2, 000 di scount amor t i zat i on, so hi s l ong- t er mcapi t al gai n i s $10, 000
( $198, 000 $188, 000) .

2021. I n ear l y 2012, Wanda pai d $33, 000 f or an opt i on on a par cel of
l and she i nt ended t o hol d as an i nvest ment . Af t er a sur vey of t he l and
( pai d f or by t he gr ant or ) det er mi ned t hat t he par cel was much smal l er
t han t he gr ant or sai d i t was, she l et t he opt i on l apse when i t expi r ed
i n 2013 af t er 14 mont hs. How shoul d Wanda t r eat t hese event s i n
2012? 2013?

Cor r ect Answer :
I f an opt i on hol der ( gr ant ee) f ai l s t o exer ci se t he opt i on, t he l apse
of t he opt i on i s consi der ed a sal e or exchange on t he opt i on expi r at i on
dat e. Thus, t he l oss i s a capi t al l oss i f t he pr oper t y subj ect t o t he
opt i on i s ( or woul d be) a capi t al asset i n t he hands of t he gr ant ee.
Wanda has no gai n or l oss i n 2012 because t he opt i on had not yet
expi r ed. Wanda has a $33, 000 l ong- t er mcapi t al l oss i n 2013 when t he
opt i on expi r es because t he l and woul d have been a capi t al asset i f
Wanda had exer ci sed t he opt i on.

2022. J ambo i nvent ed a new f l exi bl e cover f or a popul ar br and of
cel l phone, but di d not have t he f i nances t o begi n pr oduct i on of t he
cover . I nst ead, he sol d al l hi s r i ght s t o t he i nvent i on ( af t er
pat ent i ng i t ) f or $450, 000 pl us $. 10 f or each cover sol d by t he company
t hat pur chased t he pat ent . J ambo had a zer o t ax basi s f or t he
i nvent i on. What i s t he char act er of hi s gai n f r omdi sposi t i on of t he
pat ent ?

Cor r ect Answer :
J ambo i s t he hol der of a pat ent because he i s an i ndi vi dual and ei t her
cr eat ed t he pat ent ed i nvent i on or t he i nvent i on was not yet r educed t o
pr act i ce. Ther ef or e, t he $450, 000 r ecei ved f or t he pat ent and each
$. 10 when ( and i f ) he r ecei ves i t ar e t r eat ed as l ong- t er mcapi t al gai n
aut omat i cal l y under 1235.

2023. Col l ect i bl es hel d l ong- t er mand sol d at a gai n ar e subj ect t o
maxi mumt ax r at e of 28%. An i ndi vi dual t axpayer r ecent l y sol d an
ant i que car f or $40, 000. The car had been hel d f or sever al year s and
$30, 000 was or i gi nal l y pai d f or i t . Expl ai n why t he car i s or i s not a
col l ect i bl e.

Cor r ect Answer :
The def i ni t i on of col l ect i bl es i s qui t e ambi guous. Consequent l y, t he
ant i que car i s a col l ect i bl e i f i t i s a wor k of ar t or an ant i que. Al so,
t he 408( m) r egul at i ons add hi st or i cal obj ect t o t he l i st of
col l ect i bl es. The car f i t s t hese cat egor i es, so i t i s a col l ect i bl e f or
t ax pur poses.

2024. When an i ndi vi dual t axpayer has a net l ong- t er mcapi t al gai n t hat
i ncl udes bot h 28%gai n and 0%/ 15%/ 20%gai n, whi ch of t hese gai ns wi l l
be t axed f i r st when t he al t er nat i ve t ax on net l ong- t er mcapi t al gai n
met hod i s used and what di f f er ence does i t make?

Cor r ect Answer :
The 28%gai n i s t axed af t er t he r egul ar t axabl e i ncome i s t axed, af t er
t he 25%gai n i s t axed, and bef or e t he 0%/ 15%/ 20%gai n i s t axed. Taxi ng
t he 28%gai n f i r st may mean t hat some or al l of t he 0%/ 15%/ 20%gai n
wi l l not be el i gi bl e f or t he 0%t ax i f t he t axpayer s t axabl e i ncome
af t er t axi ng t he r egul ar t axabl e i ncome, t he 25%gai n, and t he 28%gai n
put s t he t axpayer out of t he r egul ar 15%br acket .

2025. Sect i on 1231 appl i es t o t he sal e or exchange of busi ness
pr oper t i es, but not t o per sonal use act i vi t y casual t i es.

*a. Tr ue
b. Fal se

2026. Rent al use depr eci abl e machi ner y hel d mor e t han 12 mont hs i s an
exampl e of a 1231 asset .

*a. Tr ue
b. Fal se

2027. I f t her e i s a net 1231 l oss, i t i s t r eat ed as an or di nar y l oss.

*a. Tr ue
b. Fal se

2028. Sect i on 1231 pr oper t y i ncl udes nonper sonal use pr oper t y wher e
casual t y gai ns exceed casual t y l osses f or t he t axabl e year .

*a. Tr ue
b. Fal se

2029. Sect i on 1231 pr oper t y gener al l y i ncl udes cer t ai n purchased
i nt angi bl e asset s ( such as pat ent s and goodwi l l ) t hat ar e el i gi bl e f or
amor t i zat i on and hel d f or mor e t han one year .

*a. Tr ue
b. Fal se

2030. Sect i on 1231 pr oper t y gener al l y does not i ncl ude ar t i st i c
composi t i ons.

*a. Tr ue
b. Fal se

2031. Sect i on 1231 pr oper t y gener al l y does not i ncl ude account s
r ecei vabl es ar i si ng i n t he or di nar y cour se of busi ness.

*a. Tr ue
b. Fal se

2032. An i ndi vi dual busi ness t axpayer owns l and on whi ch he gr ows t r ees
f or l oggi ng. The l and has been hel d mor e t han 10 year s and t he t r ees
gr owi ng on t he l and wer e pl ant ed ei ght year s ago. Nor mal l y, t he t i mber
woul d be i nvent or y f or t hi s t axpayer , but t he t ax l aw al l ows t he
t axpayer t o el ect t o t r eat cut t i ng t he t i mber as t he di sposi t i on of a
1231 asset .

*a. Tr ue
b. Fal se

2033. A sheep must be hel d mor e t han 18 mont hs t o qual i f y as a 1231
asset .

a. Tr ue
*b. Fal se

2034. Casual t y gai ns and l osses f r omnonper sonal use asset s ar e not
net t ed agai nst casual t y gai ns and l osses f r omper sonal use asset s.

*a. Tr ue
b. Fal se

2035. I f 1231 asset casual t y gai ns and l osses net t o a gai n, t he gai n
i s t r eat ed as a 1231 gai n.

*a. Tr ue
b. Fal se

2036. I nvol unt ar y conver si on gai ns may be def er r ed i f t he pr oceeds of
t he i nvol unt ar y conver si on ar e r ei nvest ed.

*a. Tr ue
b. Fal se

2037. Per sonal use pr oper t y casual t y gai ns and l osses ar e not subj ect
t o t he 1231 r ul es.

*a. Tr ue
b. Fal se

2038. I n t he Gener al Pr ocedur e f or 1231 Comput at i on: St ep 2. 1231
Net t i ng, i f t he gai ns exceed t he l osses, t he net gai n i s of f set by t he
l ookback nonr ecapt ur ed 1231 l osses.

*a. Tr ue
b. Fal se

2039. Nonr ecapt ur ed 1231 l osses f r omt he si x pr i or t ax year s may
cause cur r ent year net 1231 gai n t o be t r eat ed as or di nar y i ncome.

a. Tr ue
*b. Fal se

2040. A per sonal use pr oper t y casual t y l oss i s gener al l y deduct i bl e
onl y t o t he ext ent i t exceeds 10%of AGI .

*a. Tr ue
b. Fal se

2041. The Code cont ai ns t wo maj or depr eci at i on r ecapt ur e pr ovi si ons
1245 and 1250.

*a. Tr ue
b. Fal se

2042. The maxi mum 1245 depr eci at i on r ecapt ur e gener al l y equal s t he
accumul at ed depr eci at i on.

*a. Tr ue
b. Fal se

2043. Sect i on 1245 may appl y t o amor t i zabl e 197 i nt angi bl e asset s.

*a. Tr ue
b. Fal se

2044. For 1245 r ecapt ur e t o appl y, accel er at ed depr eci at i on must have
been t aken on t he pr oper t y.

a. Tr ue
*b. Fal se

2045. Sect i on 1250 depr eci at i on r ecapt ur e wi l l appl y when accel er at ed
depr eci at i on was used on pr oper t y used out si de t he Uni t ed St at es and
t he pr oper t y i s sol d at a gai n.

*a. Tr ue
b. Fal se

2046. The maxi mumamount of t he unr ecapt ur ed 1250 gai n ( 25%gai n) i s
t he depr eci at i on t aken on r eal pr oper t y sol d at a r ecogni zed gai n.

*a. Tr ue
b. Fal se

2047. Sect i on 1231 l ookback l osses may conver t some or al l of 1245
gai n i nt o or di nar y i ncome.

a. Tr ue
*b. Fal se

2048. Sect i on 1245 depr eci at i on r ecapt ur e pot ent i al does not car r yover
f r omt he deceased t axpayer t o t he benef i ci ar y t axpayer .

*a. Tr ue
b. Fal se

2049. The 1245 depr eci at i on r ecapt ur e pot ent i al does not r educe t he
amount of t he char i t abl e cont r i but i on deduct i on under 170.

a. Tr ue
*b. Fal se

2050. Pr oper t y sol d t o a r el at ed par t y pur chaser t hat i s depr eci abl e by
t he pur chaser may cause t he sel l er t o have or di nar y gai n.

*a. Tr ue
b. Fal se

2051. Depr eci at i on r ecapt ur e under 1245 and 1250 i s r epor t ed on
For m4797.

*a. Tr ue
b. Fal se

2052. Par t I I I of For m4797 i s used t o r epor t gai ns f r omt he sal e of
depr eci abl e busi ness equi pment sol d at a gai n and hel d mor e t han one
year .

*a. Tr ue
b. Fal se

2053. Whi t e Company acqui r es a new machi ne f or $75, 000 and uses i t i n
Whi t e s manuf act ur i ng oper at i ons. A f ew mont hs af t er Whi t e pl aces t he
machi ne i n ser vi ce, i t di scover s t hat t he machi ne i s not sui t abl e f or
Whi t e s busi ness. Whi t e had f ul l y expensed t he machi ne i n t he year of
acqui si t i on usi ng 179. Whi t e sel l s t he machi ne f or $60, 000 i n t he
t ax year af t er i t was acqui r ed, but hel d t he machi ne onl y f or a t ot al
of 10 mont hs. What was t he t ax st at us of t he machi ne when i t was
di sposed of and t he amount of t he gai n or l oss?

a. A capi t al asset and $60, 000 gai n.
*b. An or di nar y asset and $60, 000 gai n.
c. A 1231 asset and $60, 000 gai n.
d. A 1231 asset and $60, 000 l oss.

2054. Whi ch of t he f ol l owi ng asset s hel d by a manuf act ur i ng busi ness is
a 1231 asset ?

a. I nvent or y.
b. Of f i ce f ur ni t ur e used i n t he busi ness and hel d l ess t han one
year .
*c. A f act or y bui l di ng used i n t he busi ness and hel d mor e t han
one year .
d. Account s r ecei vabl e.

2055. Whi ch of t he f ol l owi ng asset s hel d by a cash basi s account i ng
f i r mis a 1231 asset ?

a. An account r ecei vabl e f r oma cl i ent .
b. A desk used i n t he busi ness and hel d mor e t han one year .
c. An i nvest ment i n Or ange Company common st ock.
d. A comput er used i n t he busi ness, hel d mor e t han one year , but
f ul l y depr eci at ed under 179 when acqui r ed.
*e. b. and d.

2056. A bar n hel d mor e t han one year and used i n a busi ness i s
dest r oyed i n a t or nado. The bar n or i gi nal l y cost $356, 000 and was
f ul l y depr eci at ed usi ng st r ai ght - l i ne depr eci at i on. The bar n was
i nsur ed f or i t s $543, 000 r epl acement cost mi nus a deduct i bl e of
$1, 000. Whi ch of t he st at ement s bel ow i s correct concer ni ng t hese
f act s?

a. The bar n was a l ong- t er mper sonal use asset .
b. Ther e i s a casual t y l oss f r omdi sposi t i on of t he bar n.
c. The r ecogni zed gai n f r omdi sposi t i on of t he bar n i s $186, 000.
*d. The r ecogni zed gai n f r omdi sposi t i on of t he bar n i s subj ect
t o speci al net t i ng r ul es.
e. c. and d.

2057. Whi ch of t he f ol l owi ng woul d be i ncl uded i n t he net t i ng of 1231
gai ns and l osses?

a. Per sonal use pr oper t y net casual t y gai n.
b. Sect i on 1231 l oss.
c. Sect i on 1231 gai n.
*e. b. and c.

2058. Ver t i go, I nc. , has a 2013 net 1231 l oss of $64, 000 and had a
$32, 000 net 1231 gai n i n 2012. For 2013, Ver t i go s net 1231 l oss i s
t r eat ed as:

*a. Or di nar y l oss.
b. Or di nar y gai n.
c. Capi t al l oss.
d. Capi t al gai n.

2059. Ver t i cal , I nc. , has a 2013 net 1231 gai n of $67, 000 and had a
$22, 000 net 1231 l oss i n 2012. For 2013, Ver t i cal s net 1231 gai n
i s t r eat ed as:

a. $45, 000 l ong- t er mcapi t al gai n and $22, 000 or di nar y l oss.
b. $67, 000 or di nar y gai n.
*c. $45, 000 l ong- t er mcapi t al gai n and $22, 000 or di nar y gai n.
d. $67, 000 capi t al gai n.

2060. Ver way, I nc. , has a 2013 net 1231 gai n of $55, 000 and had a
$62, 000 net 1231 l oss i n 2012. For 2013, Ver way s net 1231 gai n i s
t r eat ed as:

*b. $55, 000 or di nar y gai n.
c. $55, 000 capi t al l oss.

2061. The f ol l owi ng asset s i n J ack s busi ness wer e sol d i n 2013:

Asset Holding Period Gain/(Loss)
Office Equipment 6 years $1,100
Automobile 8 months ($ 800)
ABC Stock
(capital asset)
2 years $1,400

The office equipment had a zero adjusted basis and was purchased for $8,000.
The automobile was purchased for $2,000 and sold for $1,200. The ABC stock
was purchased for $1,800 and sold for $3,200. In 2013 (the year of sale),
Jack should report what amount of net capital gain and net ordinary income?

a. $1, 700 LTCG.
b. $600 LTCG and $300 or di nar y gai n.
*c. $1, 400 LTCG and $300 or di nar y gai n.
d. $2, 500 LTCG and $800 or di nar y l oss.

2062. An i ndi vi dual had t he f ol l owi ng gai ns and l osses dur i ng 2013 on
pr oper t y hel d f or t he l ong- t er mhol di ng per i od: sal e of Or ange common
st ock ( $8, 000 gai n) ; sal e of r eal pr oper t y used i n t he t axpayer s
busi ness ( $1, 800 l oss) ; dest r uct i on of r eal pr oper t y used i n t he
t axpayer s busi ness by f i r e ( $1, 000 l oss) . Whi ch of t he f ol l owi ng

a. The f i r e l oss woul d r educe t he r eal pr oper t y sal e l oss.
b. The f i r e l oss woul d r educe t he st ock sal e gai n.
c. The sal e of r eal pr oper t y l oss woul d be net t ed agai nst t he
st ock sal e gai n.
*d. The sal e of r eal pr oper t y i s a 1231 l oss.


a. I mpr oper l y cl assi f yi ng a 1231 l oss as a capi t al l oss mi ght
af f ect adj ust ed gr oss i ncome.
b. I mpr oper l y cl assi f yi ng a capi t al l oss as a 1231 l oss mi ght
af f ect adj ust ed gr oss i ncome.
c. Mi scl assi f yi ng a 1231 gai n as a shor t - t er mcapi t al gai n
mi ght af f ect adj ust ed gr oss i ncome.
d. Mi scl assi f yi ng a shor t - t er mcapi t al gai n as a 1231 gai n
mi ght af f ect adj ust ed gr oss i ncome.

2064. Spencer has an i nvest ment i n t wo par cel s of vacant l and. Par cel 1
i s a capi t al asset and par cel 2 i s a 1231 asset . Spencer al r eady has
shor t - t er mcapi t al l oss f or t he year he woul d l i ke t o of f set wi t h
capi t al gai n. Spencer has 1231 l ookback l oss t hat exceeds t he gai n
f r omt he di sposi t i on of ei t her l and par cel . Spencer onl y want s t o sel l
one l and par cel and each of t hemwoul d yi el d t he same amount of gai n.
The gai n t hat woul d be r ecogni zed exceeds t he shor t - t er mcapi t al l oss
Spencer al r eady has. Whi ch of t he st at ement s bel ow i s cor r ect ?

a. Spencer wi l l have a net capi t al l oss no mat t er whi ch l and
par cel he sel l s.
*b. Spencer wi l l have a net capi t al l oss i f he sel l s par cel 2.
c. Spencer wi l l have a net capi t al l oss i f he sel l s par cel 1.
d. Spencer wi l l have a net capi t al gai n i f he sel l s ei t her par cel
1 or par cel 2.

2065. Copper Cor por at i on sol d machi ner y f or $47, 000 on December 31,
2013. The machi ner y had been pur chased on J anuar y 2, 2010, f or $60, 000
and had an adj ust ed basi s of $41, 000 at t he dat e of t he sal e. For 2013,
what shoul d Copper Cor por at i on r epor t ?

*a. Or di nar y i ncome of $6, 000.
b. A 1231 gai n of $3, 000 and $3, 000 of or di nar y i ncome.
c. A 1231 gai n of $6, 000.
d. A 1231 gai n of $6, 000 and $3, 000 of or di nar y i ncome.

2066. Whi ch of t he f ol l owi ng cr eat es pot ent i al 1245 depr eci at i on
r ecapt ur e and pot ent i al 1231 gai n?

*a. Depr eci abl e of f i ce f ur ni t ur e hel d mor e t han one year and sol d
f or mor e t han i t s or i gi nal cost .
b. Amor t i zabl e goodwi l l hel d mor e t han one year and di sposed of
f or l ess t han i t s adj ust ed basi s.
c. Land hel d mor e t han one year and sol d f or mor e t han was pai d
f or i t .
d. A not e r ecei vabl e hel d mor e t han one year and sol d f or l ess
t han was pai d f or i t .

2067. Bl ue Company sol d machi ner y f or $45, 000 on December 23, 2013. The
machi ner y had been acqui r ed on Apr i l 1, 2011, f or $69, 000 and i t s
adj ust ed basi s was $34, 200. The 1231 gai n, 1245 r ecapt ur e gai n, and
1231 l oss f r omt hi s t r ansact i on ar e:

*a. $0 1231 gai n, $10, 800 1245 r ecapt ur e gai n, $0 1231 l oss.
b. $0 1231 gai n, $0 1245 r ecapt ur e gai n, $14, 800 1231 l oss.
c. $0 1231 gai n, $34, 200 1245 r ecapt ur e gai n, $0 1231 l oss.
d. $0 1231 gai n, $10, 800 1245 r ecapt ur e gai n, $34, 200 1231
l oss.

2068. Red Company had an i nvol unt ar y conver si on on December 23, 2013.
The machi ner y had been acqui r ed on Apr i l 1, 2011, f or $49, 000 and i t s
adj ust ed basi s was $14, 200. The machi ner y was compl et el y dest r oyed by
f i r e and Red r ecei ved $10, 000 of i nsur ance pr oceeds f or t he machi ne and
di d not r epl ace i t . Thi s was Red s onl y casual t y or t hef t event f or t he
year . As a r esul t of t hi s event , Red initially has:

a. $10, 000 1231 l oss.
b. $10, 000 1245 r ecapt ur e gai n.
*c. $4, 200 casual t y l oss.
d. $4, 200 1231 l oss.

2069. Or ange Company had machi ner y dest r oyed by a f i r e on December 23,
2013. The machi ner y had been acqui r ed on Apr i l 1, 2011, f or $49, 000 and
i t s adj ust ed basi s was $14, 200. The machi ner y was compl et el y dest r oyed
and Or ange r ecei ved $30, 000 of i nsur ance pr oceeds f or t he machi ne and
di d not r epl ace i t . Thi s was Or ange s onl y casual t y or t hef t event f or
t he year . As a r esul t of t hi s event , Or ange has:

*b. $15, 800 1245 r ecapt ur e gai n.
c. $14, 200 1245 r ecapt ur e gai n.
d. $30, 000 1231 gai n.

2070. Whi ch of t he f ol l owi ng event s coul d r esul t i n 1250 depr eci at i on
r ecapt ur e?

a. Sal e at a l oss of a depr eci abl e busi ness bui l di ng hel d mor e
t han one year .
b. Sal e at a gai n of a busi ness bui l di ng hel d mor e t han a year on
whi ch st r ai ght - l i ne depr eci at i on was t aken.
c. Sal e at a l oss of a depr eci abl e busi ness bui l di ng hel d f or 9
mont hs.
d. Sal e at a gai n of depr eci abl e equi pment hel d mor e t han a year
on whi ch st r ai ght - l i ne depr eci at i on was t aken.

2071. Whi ch of t he f ol l owi ng r eal pr oper t y coul d be subj ect t o 1250
depr eci at i on r ecapt ur e?

a. Pr oper t y pl aced i n ser vi ce af t er 1986 on whi ch st r ai ght - l i ne
depr eci at i on was t aken.
*b. A bui l di ng on whi ch 168( k) depr eci at i on was t aken.
c. Equi pment on whi ch accel er at ed depr eci at i on was t aken.
d. Land whi ch was not depr eci at ed.
e. a. and b.

2072. Assume a bui l di ng i s subj ect t o 1250 depr eci at i on r ecapt ur e
because 168( k) was used t o depr eci at e i t . The bui l di ng i s dest r oyed
i n a hur r i cane and t hi s i s t he t axpayer s onl y casual t y or t hef t f or
t he year . I n whi ch of t he f ol l owi ng si t uat i ons coul d t her e be a 1250
depr eci at i on r ecapt ur e gai n?

a. Ther e i s a l oss because t he i nsur ance r ecover y i s l ess t han
t he adj ust ed basi s.
*b. Ther e i s a gai n because t he i nsur ance r ecover y exceeds t he
adj ust ed basi s.
c. Because of t he l engt h of t i me t he bui l di ng has been hel d,
t her e i s no r emai ni ng addi t i onal depr eci at i on.
d. Ther e i s no i nsur ance r ecover y and t he adj ust ed basi s of t he
bui l di ng i s gr eat er t han zer o.

2073. Lynne owns depr eci abl e r esi dent i al r ent al r eal est at e whi ch has
accumul at ed depr eci at i on ( al l f r omst r ai ght - l i ne) of $65, 000. I f Lynne
sol d t he pr oper t y, she woul d have a $53, 000 gai n. The i ni t i al
char act er i zat i on of t he gai n woul d be:

a. Sect i on 1245 gai n.
*b. Sect i on 1231 gai n.
c. Sect i on 1250 gai n.
d. Sect i on 1239 gai n.

2074. A r et ai l bui l di ng used i n t he busi ness of a sol e pr opr i et or i s
sol d on Mar ch 10, 2013, f or $342, 000. The bui l di ng was acqui r ed i n
2003 f or $400, 000 and st r ai ght - l i ne depr eci at i on of $104, 000 had been
t aken on t he bui l di ng. What i s t he maximum unr ecapt ur ed 1250 gai n
f r omt he di sposi t i on of t hi s bui l di ng?

a. $400, 000.
b. $322, 000.
*c. $104, 000.
d. $26, 000.

2075. Whi ch of t he f ol l owi ng st at ement s i s correct?

a. When depr eci abl e pr oper t y i s gi f t ed t o anot her i ndi vi dual
t axpayer , t he depr eci at i on r ecapt ur e pot ent i al i s ext i ngui shed.
*b. When depr eci abl e pr oper t y i s i nher i t ed by a t axpayer , t he
depr eci at i on r ecapt ur e pot ent i al i s ext i ngui shed.
c. When cor por at e depr eci abl e pr oper t y i s di st r i but ed as a
di vi dend, t he depr eci at i on r ecapt ur e pot ent i al i s gener al l y not
r ecogni zed.
d. When depr eci abl e pr oper t y i s cont r i but ed t o char i t y, t he
depr eci at i on r ecapt ur e pot ent i al has no ef f ect on t he amount of
t he char i t abl e cont r i but i on deduct i on.

2076. Whi ch of t he f ol l owi ng woul d ext i ngui sh t he 1245 r ecapt ur e
pot ent i al ?

a. An exchange of depr eci abl e busi ness equi pment f or l i ke- ki nd
busi ness equi pment wi t h gai n r eal i zed, but not r ecogni zed.
b. A nont axabl e i ncor por at i on under 351.
c. A nont axabl e cont r i but i on t o a par t ner shi p under 721.
d. A nont axabl e r eor gani zat i on.

2077. Sect i on 1239 ( r el at i ng t o t he sal e of cer t ai n pr oper t y bet ween
r el at ed t axpayer s) does not appl y unl ess t he pr oper t y:

a. Was depr eci at ed by t he t r ansf er or .
*b. I s depr eci abl e i n t he hands of t he t r ansf er ee.
c. I s a capi t al asset .
d. I s r eal pr oper t y.

2078. An i ndi vi dual has a $40, 000 1245 gai n, a $35, 000 1231 gai n, a
$33, 000 1231 l oss, a $3, 000 1231 l ookback l oss, and a $15, 000 l ong-
t er mcapi t al gai n. The net l ong- t er mcapi t al gai n i s:

a. $30, 000.
b. $40, 000.
c. $17, 000.
*d. $15, 000.

2079. An i ndi vi dual has t he f ol l owi ng r ecogni zed gai ns and l osses f r om
di sposi t i on of 1231 asset s ( al l t he asset s wer e vacant l and) : $15, 000
gai n, $10, 000 l oss, $25, 000 gai n, and $2, 000 l oss. The i ndi vi dual has a
$5, 500 1231 l ookback l oss. The i ndi vi dual al so has a $16, 000 net
shor t - t er mcapi t al l oss f r omt he di sposi t i on of st ock. Whi ch of t he

*a. The t axpayer has $5, 500 or di nar y gai n and $6, 500 net l ong-
t er mcapi t al gai n.
b. The t axpayer has $12, 000 net l ong- t er mcapi t al gai n.
c. The t axpayer has $28, 000 or di nar y gai n and $16, 000 net shor t -
t er mcapi t al l oss.
d. The t axpayer has $5, 500 or di nar y l oss and $6, 500 net l ong- t er m
capi t al gai n.

2080. Sect i on 1231 gai n t hat i s t r eat ed as l ong- t er mcapi t al gai n
car r i es f r omt he 2012 For m4797 t o t he 2012 For m1040, Schedul e D, l i ne
____.

a. 8.
b. 9.
c. 10.
*d. 11.

2081. Busi ness equi pment i s pur chased on Mar ch 10, 2012, used i n t he
busi ness unt i l Sept ember 29, 2012, and sol d at a $23, 000 l oss on
Oct ober 10, 2012. The equi pment was not sui t abl e f or t he wor k t he
busi ness had pur chased i t f or . The l oss on t he di sposi t i on shoul d have
been r epor t ed i n t he 2012 For m4797, Par t :

a. I .
*b. I I .
c. I I I .
d. I V.
e. Thi s t r ansact i on woul d not be r epor t ed i n t he For m4797.

2082. A busi ness t axpayer sol d al l t he depr eci abl e asset s of t he
busi ness, cal cul at ed t he gai ns and l osses, and woul d l i ke t o know t he
f i nal char act er of t hose gai ns and l osses. The t axpayer had $353, 000 of
adj ust ed gr oss i ncome bef or e consi der i ng t he gai ns and l osses f r omsal e
of t he busi ness asset s. The t axpayer had unr ecapt ur ed 1231 l ookback
l oss of $22, 000. What i s t he t r eat ment of t he gai ns and l osses
summar i zed i n t he char t bel ow af t er al l possi bl e net t i ng and
r ecl assi f i cat i on has been compl et ed? What i s t he t axpayer s adj ust ed
gr oss i ncome? ( I gnor e t he sel f - empl oyment t ax deduct i on. )

Asset Purchase
Date
Sale Date Depreciation Gain
(Loss)
Machi ne
#1
10/ 10/ 11 11/ 11/ 13 $323, 000 $66, 000
Machi ne
#2
10/ 02/ 10 11/ 11/ 13 65, 000 ( 15, 0
00)
Machi ne
#3
09/ 23/ 09 11/ 11/ 13 183, 000 23, 00
0
Machi ne
#4
09/ 23/ 09 11/ 11/ 13 28, 000 34, 00
0

Cor r ect Answer :
The t axpayer has adj ust ed gr oss i ncome of $461, 000 af t er i ncl udi ng t he
ef f ect of t he pr oper t y t r ansact i ons. Machi ne #1 s $66, 000 gai n i s al l
or di nar y i ncome due t o 1245 depr eci at i on r ecapt ur e. Machi ne #3 s
$23, 000 gai n i s al l or di nar y i ncome due t o 1245 depr eci at i on
r ecapt ur e. Machi ne #4 has $28, 000 of or di nar y i ncome due t o 1245
depr eci at i on r ecapt ur e ( equal s depr eci at i on t aken) and $6, 000 1231
gai n ( $34, 000 $28, 000) . Machi ne #2 s $15, 000 l oss i s a 1231 l oss.
Ther e i s a $9, 000 net 1231 l oss ( $6, 000 gai n $15, 000 l oss) f or t he
year . The net or di nar y gai n f or t he year i s $108, 000 ( $66, 000 + $23, 000
+ $28, 000 $9, 000) . Ther e i s no net 1231 gai n, so t he $22, 000 1231
unr ecapt ur ed l ookback l oss does not af f ect t he char act er of t he cur r ent
year s gai ns. Adj ust ed gr oss i ncome i s $461, 000 ( $353, 000 + $108, 000) .

2083. A busi ness t axpayer sol d al l t he depr eci abl e asset s of t he
busi ness, cal cul at ed t he gai ns and l osses, and woul d l i ke t o know t he
f i nal char act er of t hose gai ns and l osses. The t axpayer had $353, 000 of
adj ust ed gr oss i ncome bef or e consi der i ng t he gai ns and l osses f r omsal e
of t he busi ness asset s. The t axpayer had unr ecapt ur ed 1231 l ookback
l oss of $12, 000. What i s t he t r eat ment of t he gai ns and l osses
summar i zed i n t he char t bel ow af t er al l possi bl e net t i ng and
r ecl assi f i cat i on has been compl et ed? What i s t he t axpayer s adj ust ed
gr oss i ncome? ( I gnor e t he sel f - empl oyment t ax deduct i on. )

Asset

Purchase
Date

Sale Date Depreciation Gain
(Loss)
Machi ne
#1
10/ 10/ 11 11/ 11/ 13 $323, 000 $66, 000
Machi ne
#2
10/ 02/ 10 11/ 11/ 13 65, 000 ( 15, 0
00)
Machi ne
#3
09/ 23/ 09 11/ 11/ 13 183, 000 23, 00
0
Machi ne
#4
09/ 23/ 09 11/ 11/ 13 28, 000 64, 00
0

Cor r ect Answer :
The t axpayer has adj ust ed gr oss i ncome of $491, 000 af t er i ncl udi ng t he
ef f ect of t he pr oper t y t r ansact i ons. Machi ne #1 s $66, 000 gai n i s al l
or di nar y i ncome due t o 1245 depr eci at i on r ecapt ur e. Machi ne #3 s
$23, 000 gai n i s al l or di nar y i ncome due t o 1245 depr eci at i on
r ecapt ur e. Machi ne #4 has $28, 000 of or di nar y i ncome due t o 1245
depr eci at i on r ecapt ur e ( equal s depr eci at i on t aken) and $36, 000 1231
gai n ( $64, 000 $28, 000) . Machi ne #2 s $15, 000 l oss i s a 1231 l oss.
Ther e i s a $21, 000 net 1231 gai n ( $36, 000 gai n $15, 000 l oss) f or
t he year . The $12, 000 1231 unr ecapt ur ed l ookback l oss conver t s
$12, 000 of t hi s gai n t o or di nar y i ncome, l eavi ng $9, 000 of t he net
1231 gai n t o be t r eat ed as l ong- t er mcapi t al gai n. The net or di nar y
gai n f or t he year i s $129, 000 ( $66, 000 + $23, 000 + $28, 000 + $12, 000) .
Adj ust ed gr oss i ncome i s $491, 000 ( $353, 000 + $129, 000 + $9, 000) .

2084. A busi ness machi ne pur chased Apr i l 10, 2011, f or $98, 000 was
f ul l y depr eci at ed i n 2011 usi ng 179 i mmedi at e expensi ng. On August
15, 2013, t he machi ne was sol d f or $67, 000. What i s t he amount and
nat ur e of t he gai n or l oss f r omdi sposi t i on of t he machi ne?

Cor r ect Answer :
The machi ne was a 1231 asset because i t was hel d f or mor e t han 12
mont hs. However , al l of t he $67, 000 ( $67, 000 sal es pr i ce $0 adj ust ed
basi s) gai n i s or di nar y gai n due t o 1245 depr eci at i on r ecapt ur e.

2085. An i ndi vi dual t axpayer has t he gai ns and l osses shown bel ow.
Ther e ar e $3, 000 of 1231 l ookback l osses. What i s t he net l ong- t er m
capi t al gai n?

Holding Period/Property Character of
Gain or Loss
Amount
5 year s/ vacant l and 1231 gai n $7, 000
2 year s/ busi ness
equi pment
1245 gai n 3, 200
3 year s/ publ i cl y t r aded
st ock
Long- t er m
capi t al gai n
890
8 mont hs/ publ i cl y t r aded
st ock
Shor t - t er m
capi t al l oss
( 1, 870)

Cor r ect Answer :
The t axpayer has a net l ong- t er mcapi t al gai n of $4, 890 and a net
shor t - t er mcapi t al l oss of $1, 870. The $3, 200 of 1245 gai n i s
or di nar y i ncome and does not af f ect t he net l ong- t er mcapi t al gai n
comput at i on. Si nce t her e i s $3, 000 of 1231 l ookback l oss, $3, 000 of
t he $7, 000 1231 gai n i s t r eat ed as or di nar y i ncome and t he r emai ni ng
$4, 000 of 1231 gai n i s t r eat ed as l ong- t er mcapi t al gai n. The $1, 870
of shor t - t er mcapi t al l oss of f set s t he $4, 890 of l ong- t er mcapi t al gai n,
r esul t i ng i s a net capi t al gai n of $3, 020 ( 0%/ 15%/ 20%gai n) .

2086. Vanna owned an of f i ce bui l di ng t hat had been hel d mor e t han one
year when i t was sol d f or $567, 000. The r eal est at e had an adj ust ed
basi s of $45, 000 f or t he l and and $233, 000 f or t he bui l di ng. St r ai ght -
l i ne depr eci at i on of $162, 000 had been t aken on t he bui l di ng. What i s
t he amount and i ni t i al char act er of t he gai n or l oss f r omdi sposi t i on
of t he r eal est at e? I s any of t he gai n unr ecapt ur ed 1250 ( 25%) gai n?

Cor r ect Answer :
The r eal est at e was used i n busi ness and hel d mor e t han one year .
Ther ef or e, t he pr oper t y was a 1231 asset . Si nce st r ai ght - l i ne
depr eci at i on was t aken, t her e i s no 1250 depr eci at i on r ecapt ur e
because no accel er at ed depr eci at i on was t aken. The ent i r e gai n of
$289, 000 [ $567, 000 sal e pr i ce ( $45, 000 l and adj ust ed basi s + $233, 000
bui l di ng adj ust ed basi s) ] i s 1231 gai n. Si nce t he r ecogni zed gai n i s
gr eat er t han t he $162, 000 of depr eci at i on, t her e i s $162, 000 of
unr ecapt ur ed 1250 gai n i n t he $289, 000 r ecogni zed gai n.

2087. The char t bel ow descr i bes t he 1231 asset s sol d by t he Ecr u
Company ( a sol e pr opr i et or shi p) t hi s year . Comput e t he gai n or l oss
f r omeach asset di sposi t i on and det er mi ne t he net 1231 gai n t r eat ed
as l ong- t er mcapi t al gai n f or t he year . Assume t her e i s a 1231
l ookback l oss of $4, 000.

Asset Acquired Sold CostDepreciation Sale
Price
St ampi ng
machi ne
3/ 10/ 0
9
8/ 10/ 20
13
$40,
000
$29, 736 $32, 0
00
Fact or y
bui l di ng
2/ 12/ 0
6
7/ 23/ 20
13
80
, 000
18, 838 90,
000
Tr act or 5/ 16/ 0
8
11/ 13/ 201
3
52
, 000
52, 000 30,
000
Over head
cr ane
11/ 12/ 02 2/ 25/ 20
13
74
, 000
74, 000 18,
000

Cor r ect Answer :
The st ampi ng machi ne ( $21, 736) , t r act or ( $30, 000) , and over head cr ane
( $18, 000) ar e each sol d at a gai n and t he gai n i s or di nar y due t o
1245 depr eci at i on r ecapt ur e. The f act or y bui l di ng yi el ds a 1231 gai n
of $28, 838. Ther e i s no 1250 depr eci at i on r ecapt ur e because st r ai ght -
l i ne depr eci at i on was used ( i . e. , t he bui l di ng was pl aced i n ser vi ce
af t er 1986) . $4, 000 of t he $28, 838 gai n i s t r eat ed as or di nar y i ncome
because of t he $4, 000 1231 l ookback l oss. Consequent l y, t he net
1231 gai n t r eat ed as l ong- t er mcapi t al gai n i s $24, 838 ( $28, 838
$4, 000) . The char t bel ow pr ovi des det ai l on t he comput at i ons:

Asset

Acquired

Sold

Cost

Depreciation

Basis
Sale
Price
Gain
(Loss)
Stamping
machi
ne
3/10/
09
8/10/20
13
$40,
000
$29,736 $10,2
64
$32,0
00
$21,73
6
Factory
build
ing
2/12/
06
7/23/20
13
8
0,00
0
18,838 61,16
2
90
,000
28,
838
Tractor 5/16/
08
11/13/2013 5
2,00
0
52,000 0 30
,000
30,
000
Overhead
crane
11/12/02 2/25/20
13
7
4,00
0
74,000 0 18
,000
18,
000

2088. The char t bel ow descr i bes t he 1231 asset s sol d by t he Tan
Company ( a sol e pr opr i et or shi p) t hi s year . Comput e t he gai n or l oss
f r omeach asset di sposi t i on and det er mi ne t he net 1231 gai n t r eat ed
as l ong- t er mcapi t al gai n f or t he year . Assume t her e i s a 1231
l ookback l oss of $14, 000.

Asset Acquired Sold CostDepreciation Sale
Price
St ampi ng
machi ne
3/ 10/ 0
9
8/ 10/ 20
13
$40,
000
$29, 736 $ 2,
000
Fact or y
bui l di ng
2/ 12/ 0
6
7/ 23/ 20
13
80
, 000
18, 838 90,
000
Tr act or 5/ 16/ 0
8
11/ 13/ 201
3
52
, 000
52, 000 60,
000
Over head
cr ane
11/ 12/ 02 2/ 25/ 20
13
74
, 000
74, 000 18,
000

Cor r ect Answer :
The st ampi ng machi ne i s sol d at a $8, 264 l oss whi ch i s a 1231 l oss.
The f act or y bui l di ng yi el ds a 1231 gai n of $28, 838. Ther e i s no
1250 depr eci at i on r ecapt ur e because st r ai ght - l i ne depr eci at i on was used
( i . e. , t he bui l di ng was pl aced i n ser vi ce af t er 1986) . The t r act or has
$60, 000 of gai n, $52, 000 of or di nar y gai n due t o 1245 depr eci at i on
r ecapt ur e ( equal t o t he depr ecat i on t aken) and $8, 000 of 1231 gai n.
The $18, 000 gai n on t he over head cr ane i s or di nar y due t o 1245
depr eci at i on r ecapt ur e. $14, 574 of net 1231 gai n ( $28, 838 + $8, 000
$8, 264 $14, 000 1231 l ookback l oss) i s t r eat ed as l ong- t er mcapi t al
gai n. The char t bel ow pr ovi des det ai l s on t he comput at i ons:

Asset Acquired Sold CostDepr
ecia
tion
Basis Sale
Price
Gain
(Loss)
Stamping
machi
ne
3/10/
09
8/10/20
13
$40,
000
$29,
736
$10,2
64
$ 2
,000
($ 8
,264)
Factory
build
ing
2/12/
06
7/23/20
13
8
0,00
0
1
8,83
8
61,16
2
90
,000
28,
838
Tractor 5/16/
08
11/13/2013 5
2,00
0
5
2,00
0

0
60
,000
60,
000
Overhead
crane
11/12/02 2/25/20
13
7
4,00
0
7
4,00
0

0
18
,000
18,
000

2089. Resi dent i al r eal est at e was pur chased i n 2010 f or $345, 000, hel d
as r ent al pr oper t y, and depr eci at ed st r ai ght - l i ne. Assume t he l and
cost was $45, 000 and t he bui l di ng cost was $300, 000. Depr eci at i on
t ot al ed $34, 089. The bui l di ng and l and wer e sol d on J une 10, 2013, f or
$683, 000 t ot al . What i s t he t ax st at us of t he pr oper t y, t he nat ur e of
t he gai n f r omt he di sposi t i on, and i s any of i t 1250 depr eci at i on
r ecapt ur e gai n or unr ecapt ur ed 1250 gai n?

Cor r ect Answer :
The adj ust ed basi s of t he pr oper t y at t he dat e of sal e i s $310, 911
( $345, 000 cost $34, 089 depr eci at i on) . The asset i s a 1231 asset
because i t was depr eci abl e pr oper t y or r eal pr oper t y used i n busi ness
( r ent al i s a f or mof busi ness) and i t was hel d mor e t han one year . The
r ecogni zed gai n i s $372, 089 ( $683, 000 sal e pr i ce $310, 911 adj ust ed
basi s) and i t i s al l 1231 gai n si nce onl y st r ai ght - l i ne depr eci at i on
was t aken on t he bui l di ng. Thus, t her e i s no 1250 depr eci at i on
r ecapt ur e because t her e was no addi t i onal depr eci at i on due t o
accel er at ed depr eci at i on. However , t her e i s pot ent i al unr ecapt ur ed
1250 gai n of $34, 089 because t he depr eci at i on t aken i s l ess t han t he
r ecogni zed gai n. The $338, 000 ( $372, 089 $34, 089) bal ance of t he gai n
i s pot ent i al 0%/ 15%/ 20%l ong- t er mcapi t al gai n.

2090. Wi l l i ams owned an of f i ce bui l di ng ( but not t he l and) t hat was
dest r oyed by a f i r e. The bui l di ng was i nsur ed and Wi l l i ams has a
$156, 000 gai n because hi s i nsur ance r ecover y exceeded hi s adj ust ed
basi s f or t he bui l di ng. Wi l l i ams may r epl ace t he bui l di ng. Wi l l i ams
had t aken $145, 000 of depr eci at i on on t he bui l di ng, has no 1231
l ookback l oss, has no ot her 1231 t r ansact i ons f or t he year , and has
no Schedul e D t r ansact i ons f or t he year . What i s t he final nat ur e of
J ami son s gai n f or t he year and what t ax r at e( s) appl y t o t he gai n i f :

( a) He does r ei nvest t he i nsur ance pr oceeds?

( b) I f he doesn t r ei nvest t he i nsur ance
pr oceeds?

Cor r ect Answer :
(a) Williams initially has a casualty gain of
$156,000 from business use property. If he
reinvests the insurance proceeds, he will be
able to postpone this gain.

(b) If he does not reinvest, he will have a
recognized gain. Since he has a net
casualty gain, the gain is treated as
1231 gain and that gain is treated as a
long-term capital gain because he has no
1231 lookback loss. Williams has a net long-
term capital gain of $156,000 because he has
no other Schedule D transactions. The
unrecaptured 1250 portion of the gain is
$145,000 (equal to the depreciation taken on
the destroyed property). That portion of the
gain is subject to an alternative tax rate
of 25%. The $11,000 ($156,000 $145,000)
remaining gain is subject to the 0%/15%/20%
alternative tax rate.

2091. A busi ness machi ne pur chased Apr i l 10, 2012, f or $62, 000 was
f ul l y depr eci at ed i n 2012 usi ng 179 i mmedi at e expensi ng. On August
15, 2013, t he sol e pr opr i et or who owned t he machi ne gave i t t o hi s
son. On t hat dat e, t he machi ne s f ai r mar ket val ue was $57, 000. The
son di d not use t he machi ne i n busi ness or hol d i t as i nvent or y and t he
machi ne was sol d on November 22, 2013, f or $53, 000. What i s t he amount
and nat ur e of t he gai n or l oss f r omdi sposi t i on of t he machi ne? Wher e
i s i t r epor t ed i n t he son s t ax r et ur n?

Cor r ect Answer :
A gi f t does not ext i ngui sh pot ent i al 1245 depr eci at i on r ecapt ur e
pot ent i al . The son t hat r ecei ved t he machi ne had a $0 basi s f or t he
asset because he has a car r yover basi s f r omt he donor . The f at her s
hol di ng per i od t acks t o t he son s hol di ng per i od; t her ef or e, t he son
had a l ong- t er mhol di ng per i od on t he dat e of t he gi f t and pot ent i al
1245 depr eci at i on r ecapt ur e of $57, 000 [ t he l esser of t he depr eci at i on
t aken ( $62, 000) or t he r eal i zed gai n at t he dat e of t he gi f t
( $57, 000) ] . However , si nce t he machi ne was sol d f or onl y $53, 000,
t her e i s onl y $53, 000 of 1245 depr eci at i on r ecapt ur e gai n. The son
shoul d compl et e For m4797 Par t I I I f or t hi s t r ansact i on and t hen car r y
t he gai n t o Par t I I as or di nar y i ncome.

2092. Bet t y, a si ngl e t axpayer wi t h no dependent s, has t he gai ns and
l osses shown bel ow. Bef or e consi der i ng t hese t r ansact i ons, Bet t y has
$45, 000 of ot her t axabl e i ncome. What i s t he t r eat ment of t he gai ns
and l osses and what i s Bet t y s t axabl e i ncome?

1245 gai n #1 $18, 000
1245 gai n #2 5, 000
Busi ness equi pment l ong- t er m
casual t y l oss
( 8, 000)
Busi ness r eal pr oper t y l ong-
t er mcasual t y gai n
12, 000
1231 gai n 13, 000
1231 l ookback l oss ( 2, 000)

Cor r ect Answer :
The 1245 r ecapt ur e gai ns ar e combi ned and r esul t i n a $23, 000
or di nar y gai n. The nonper sonal use pr oper t y casual t y gai n and l oss ar e
combi ned and r esul t i n a $4, 000 net gai n. The net gai n i s t r eat ed as a
1231 gai n and when combi ned wi t h t he ot her $13, 000 1231 gai n
r esul t s i n a $17, 000 net 1231 gai n. Due t o t he $2, 000 1231
l ookback l oss, $2, 000 of t he net 1231 gai n i s an or di nar y gai n and
t he $15, 000 bal ance of t he gai n i s t r eat ed as a l ong- t er mcapi t al
gai n. Si nce t hi s i s t he onl y capi t al gai n or l oss, t her e i s a $15, 000
net l ong- t er mcapi t al gai n.

Other taxable income $45,000
Ordinary gain due to recapture 23,000
Ordinary gain due to 1231
lookback
2,000
Net long-term capital gain 15,000

2093. I n 2013 Angel a, a si ngl e t axpayer wi t h no dependent s, di sposed of
f or $44, 000 a busi ness bui l di ng whi ch cost $100, 000. $60, 000 of
depr eci at i on had been t aken on t he bui l di ng. Angel a has a shor t - t er m
capi t al l oss of $3, 000 t hi s year . She has t axabl e i ncome ( not r el at ed
t o pr oper t y t r ansact i ons) of $125, 000. She has no 1231 l ookback
l oss. What i s t he amount and nat ur e of t he gai n or l oss, what i s
Angel a s t axabl e i ncome, and what i s her t ax on t he t axabl e i ncome?

Cor r ect Answer :
The adj ust ed basi s of t he bui l di ng i s $40, 000 ( $100, 000 cost $60, 000
depr eci at i on) . The bui l di ng i s sol d f or a gai n of $4, 000 ( $44, 000 sal e
pr i ce $40, 000 adj ust ed basi s) . Si nce t he bui l di ng was hel d mor e t han
one year , i t i s a 1231 asset and t he gai n i s a 1231 gai n. Angel a
has a $4, 000 net 1231 gai n t r eat ed as a l ong- t er mcapi t al gai n. The
gai n i s net t ed agai nst her $3, 000 shor t - t er mcapi t al l oss, r esul t i ng i n
a $1, 000 net l ong- t er mcapi t al gai n. Si nce t he ot her t axabl e i ncome i s
$125, 000, t he t axabl e i ncome af t er addi ng t hi s gai n i s $126, 000
( $125, 000 + $1, 000) . The t ax on her $125, 000 r egul ar t axabl e i ncome i s
$28, 293. Al l of t he gai n i ncl uded i n her t axabl e i ncome i s
unr ecapt ur ed 1250 gai n because t he depr eci at i on on t he bui l di ng
exceeded t he gai n i ncl uded i n her t axabl e i ncome. Consequent l y, t he
t ax on t he $1, 000 net l ong- t er mcapi t al gai n i s $250 ( $1, 000
. 25) . Her t ot al t ax i s $28, 543 ( $28, 293 + $250) .

2094. Char mi ne, a si ngl e t axpayer wi t h no dependent s, has al r eady
i ncur r ed a $10, 000 1231 gai n i n 2013 and has no 1231 l ookback
l osses. The t axpayer pur chased a busi ness machi ne f or $100, 000 f i ve
year s ago, $70, 000 of depr eci at i on has been t aken on i t , and t he
machi ne i s now wor t h $90, 000. How wi l l t he net 1231 gai n or l oss be
af f ect ed i f t he t axpayer t r ades i n t he busi ness machi ne f or a l i ke- ki nd
busi ness machi ne and pays an addi t i onal $12, 000 i n cash t o obt ai n t he
r epl acement machi ne? I f Char mi ne al r eady has $322, 000 of t axabl e
i ncome whi ch does not i ncl ude a $10, 000 1231 gai n or any capi t al gai ns
or l osses, what i s her t axabl e i ncome?

Cor r ect Answer :
The cur r ent year 1231 gai n wi l l not be af f ect ed because no gai n or
l oss i s r ecogni zed on t he exchange of t he machi ne. A l i ke- ki nd
exchange causes r ecogni zed gai n onl y when boot i s r ecei ved. No boot
was r ecei ved i n t he exchange, so t he pot ent i al 1245 depr eci at i on
r ecapt ur e of $70, 000 car r i es over t o t he r epl acement machi ne. The
t axabl e i ncome i s $322, 000 + $10, 000 = $332, 000.

2095. Why i s i t gener al l y bet t er t o have a net 1231 gai n year
f ol l owed by a net 1231 l oss year r at her t han a net 1231 l oss year
f ol l owed by a net 1231 gai n year ?

Cor r ect Answer :
I t i s gener al l y bet t er t o have a net 1231 gai n year f ol l owed by a net
1231 l oss year r at her t han a net 1231 l oss year f ol l owed by a net
1231 gai n year because t he 1231 l ookback l oss r ul es wi l l be
avoi ded. The net 1231 gai n i n t he f i r st year i s t r eat ed as a l ong-
t er mcapi t al gai n and, t her ef or e, pot ent i al l y el i gi bl e f or t he r educed
l ong- t er mcapi t al gai n r at es. The second year net 1231 l oss i s
deduct i bl e for AGI as an or di nar y deduct i on.

2096. Descr i be t he ci r cumst ances i n whi ch t he pot ent i al 1245
depr eci at i on r ecapt ur e i s ext i ngui shed.

Cor r ect Answer :
Sect i on 1245 depr eci at i on r ecapt ur e pot ent i al i s ext i ngui shed i n at
l east t wo ci r cumst ances: ( 1) when t he pr oper t y wi t h t he depr eci at i on
r ecapt ur e pot ent i al i s sol d at a l oss and ( 2) when t he owner of t he
pr oper t y wi t h t he depr eci at i on r ecapt ur e pot ent i al di es.

2097. Descr i be t he ci r cumst ances i n whi ch t he maximum unr ecapt ur ed
1250 gai n ( 25%gai n) does not become par t of t he Schedul e D net t i ng
pr ocess f or an i ndi vi dual t axpayer ?

Cor r ect Answer :
Unr ecapt ur ed 1250 gai n ( 25%gai n) i s some or al l of t he 1231 gai n
t hat i s t r eat ed as l ong- t er mcapi t al gai n and r el at es t o a sal e of
depr eci abl e r eal est at e. The maxi mumamount of t hi s 25%gai n i s t he
depr eci at i on t aken on t he r eal pr oper t y sol d at a gai n. That maxi mum
amount i s r educed i n one or mor e of t he f ol l owi ng ways:

The gain recognized from disposition is less
than the depreciation taken. The 25% gain is
reduced to the gain amount. Refer to Example
13. The depreciation taken was $131,440, but
the gain recognized was only $111,440.
Consequently, all of the gain recognized is
potential 25% 1231 gain.

There is 1250 depreciation recapture because
the property is residential real estate
acquired in 1981-1986 on which accelerated
depreciation was taken. The 1250 recapture
reduces the 25% gain. Refer to Example 13
again. Of the $111,440 recognized gain, $0 was
recaptured by 1250 as ordinary income,
leaving $111,440 of potential 25% gain.

There is 1245 depreciation because the
property is nonresidential real estate acquired
in 1981-1986 on which accelerated depreciation
was used. There will be no 25% gain left
because 1245 will recapture all the
depreciation or the gain, whichever is less.
Refer to Example 12. There was $100,000 of
depreciation taken, but all of it was
recaptured as ordinary income by 1245. Thus,
there is no remaining potential 25% gain. The
entire $20,000 1231 gain in Example 12 is
potential 0%/15%/20% gain.

Section 1231 loss from disposition of other
1231 assets held long-term reduced the gain
from real estate. According to the IRS, 1231
losses first absorb potential 0%/15%/20%
1231 gain and then 25% 1231 gain.

Section 1231 lookback losses convert some or
all of the 25% gain to ordinary income.
According to the IRS, 1231 lookback losses
first absorb 28% net 1231 gain, then 25%
1231 gain, and then 0%/15%/20% 1231
gain.

2098. Depr eci abl e per sonal pr oper t y was sol d at a gai n i n 2012. On
what 2012 f or mwoul d t hi s t r ansact i on be r epor t ed, wher e i ni t i al l y i n
t hat f or m, and what wi l l t he f or mmost l i kel y do wi t h t he gai n?

Cor r ect Answer :
The t r ansact i on wi l l i ni t i al l y be r epor t ed on For m4797, Par t I I I . I n
t hat Par t , t he gai n r ecapt ur ed by 1245 wi l l be det er mi ned. Most
l i kel y, al l of t he gai n wi l l be t r eat ed as an or di nar y gai n because t he
gai n does not exceed t he or i gi nal cost of t he pr oper t y.

2099. A doct or s i ncor por at ed medi cal pr act i ce may end t he l ast day of
any mont h of t he year .

a. Tr ue
*b. Fal se

2100. A C cor por at i on t hat does not have a nat ur al busi ness year must
use a cal endar year as i t s t ax year .

a. Tr ue
*b. Fal se

2101. A C cor por at i on s sel ect i on of a t ax year , gener al l y, i s
i ndependent of t he t ax year of i t s pr i nci pal shar ehol der s.

*a. Tr ue
b. Fal se

2102. The DEF Par t ner shi p had t hr ee equal par t ner s when i t was
f or med. Par t ner s D and E wer e cal endar year t axpayer s and Par t ner F s
t ax year ended on J une 30t h bef or e he j oi ned t he par t ner shi p. The
par t ner shi p may use a cal endar year and par t ner F may cont i nue t o use
t he t ax year endi ng J une 30t h.

*a. Tr ue
b. Fal se

2103. The t ax year of one of t he pr i nci pal par t ner s may det er mi ne t he
par t ner shi p s t ax year .

*a. Tr ue
b. Fal se

2104. The Seagul l Par t ner shi p has t hr ee equal par t ner s. Par t ner A s t ax
year ends J une 30t h, and Par t ner s B and C use a cal endar year . I f t he
par t ner shi p uses t he cal endar year t o r epor t i t s i ncome, Par t ner A i s
per mi t t ed t o def er par t ner shi p i ncome ear ned f r omJ ul y t hr ough December
2013 unt i l he f i l es hi s t ax r et ur n f or hi s year endi ng J une 30, 2014.

*a. Tr ue
b. Fal se

2105. Red Cor por at i on and Gr een Cor por at i on ar e equal par t ner s i n t he R
& G Par t ner shi p. Red Cor por at i on s t ax year ends Sept ember 30t h, and
Gr een Cor por at i on i s a cal endar year t axpayer . The gr eat est aggr egat e
def er r al of i ncome woul d occur i f t he par t ner shi p used a cal endar year
f or t ax pur poses.

*a. Tr ue
b. Fal se

2106. A CPA pr act i ce t hat i s i ncor por at ed ear ns 40%of i t s annual
r evenues i n t he mont hs of Mar ch and Apr i l . Al t hough t he CPA pr act i ce
i s a pr of essi onal ser vi ces cor por at i on ( PSC) , i t may use a f i scal year
endi ng Apr i l 30t h.

*a. Tr ue
b. Fal se

2107. The abi l i t y of t he CPA t o t i mel y pr epar e a t ax r et ur n i s a
j ust i f i cat i on f or t he par t ner shi p s use of a par t i cul ar t ax year .

a. Tr ue
*b. Fal se

2108. I n 2004, a medi cal doct or who i ncor por at ed hi s pr act i ce el ect ed a
f i scal year endi ng Sept ember 30t h. Dur i ng t he f i scal year ended
Sept ember 30, 2013, he r ecei ved a sal ar y of $190, 000. Dur i ng t he per i od
f r omOct ober 1, 2013 t o December 31, 2013, t he cor por at i on pai d t he
doct or a t ot al sal ar y of $60, 000, and pai d hi m$240, 000 of sal ar y i n
t he f ol l owi ng 9 mont hs. The cor por at i on s sal ar y deduct i on f or t he
f i scal year endi ng Sept ember 30, 2014, i s l i mi t ed t o $240, 000.

*a. Tr ue
b. Fal se

2109. Laur a Cor por at i on changed i t s t ax year - end f r omJ ul y 31st t o
December 31st i n 2013. The i ncome f or t he per i od August 1, 2013 t hr ough
December 31, 2013 was $35, 000. The cor por at e t ax r at e i s 15%on t he
f i r st $50, 000 of i ncome, 25%on i ncome f r om$50, 001 t o $75, 000, and 34%
on i ncome f r om$75, 001 t o $100, 000. A por t i on of Laur a s J une
December 2013 i ncome wi l l be t axed at 34%.

*a. Tr ue
b. Fal se

2110. I n 2013, T Cor por at i on changed i t s t ax year f r omendi ng each
Apr i l 30t h t o endi ng each December 31st . The cor por at i on ear ned
$60, 000 dur i ng t he per i od May 1, 2013 t hr ough December 31, 2013. The
annual i zed i ncome f or t he shor t year i s $90, 000.

*a. Tr ue
b. Fal se

2111. Snow Cor por at i on began busi ness on May 1, 2013, and el ect ed t o
use t he cal endar year f or t ax pur poses. Br own Cor por at i on, a cal endar
year cor por at i on, sol d al l of i t s asset s and l i qui dat ed as of Apr i l 30,
2013. Nei t her Snow Cor por at i on nor Br own Cor por at i on must annual i ze
t hei r i ncome f or t hei r 2013 r et ur ns.

*a. Tr ue
b. Fal se

2112. Ted, a cash basi s t axpayer , r ecei ved a $150, 000 bonus i n 2013
when he was i n t he 35%mar gi nal t ax br acket . I n 2014, when Ted was i n
t he 28%mar gi nal t ax br acket , i t was di scover ed t hat t he bonus was
i ncor r ect l y comput ed, and Ted was r equi r ed t o r ef und $40, 000 t o hi s
empl oyer . As a r esul t of t he r ef und, Ted can r educe hi s 2014 t ax
l i abi l i t y by $14, 000 ( . 35 $40, 000) .

*a. Tr ue
b. Fal se

2113. Gener al l y, an advant age t o usi ng t he cash met hod of account i ng,
as compar ed t o t he accr ual met hod, i s t hat under t he cash met hod i ncome
i s not r ecogni zed unt i l i t i s col l ect ed, r at her t han bei ng t axed as
soon as t he t axpayer has t he r i ght t o col l ect t he i ncome.

*a. Tr ue
b. Fal se

2114. A cal endar year , cash basi s cor por at i on began busi ness on Apr i l 1,
2013, and pai d $2, 400 f or a 24- mont h l i abi l i t y i nsur ance pol i cy. An
accr ual basi s, cal endar year t axpayer al so began busi ness on Apr i l 1,
2013, and pur chased a 24- mont h l i abi l i t y i nsur ance pol i cy. Bot h t he
cash basi s and accr ual basi s t axpayer s deduct i on f or i nsur ance expense
on t he pol i cy f or 2013 i s $900 ( 9/ 12 $1, 200) .

a. Tr ue
*b. Fal se

2115. Al i ce, I nc. , i s an S cor por at i on t hat has been i n busi ness f or
f i ve year s. I t s annual gr oss r ecei pt s have never exceeded $1
mi l l i on. The cor por at i on oper at es a r et ai l st or e and al so owns r ent al
pr oper t y. The sal es f r omt he r et ai l st or e and t he r ent al i ncome may be
r epor t ed by t he cash met hod, unl ess Al i ce pr evi ousl y el ect ed t he
accr ual met hod.

*a. Tr ue
b. Fal se

2116. A r et ai l er must act ual l y r ecei ve a cl ai mf or r ef und f r omt he
cust omer bef or e a deduct i on can be t aken f or t he r ef und.

*a. Tr ue
b. Fal se

2117. A C cor por at i on pr ovi des l awn mai nt enance ser vi ces t o var i ous
busi nesses and homeowner s. The cor por at i on has aver age annual gr oss
r ecei pt s of $3, 500, 000. The cor por at i on may use t he cash met hod of
account i ng.

*a. Tr ue
b. Fal se

2118. Fr ankl i n Company began busi ness i n 2009 and has consi st ent l y used
t he cash met hod t o r epor t i ncome f r omt he sal e of i nvent or y i n i ncome
t ax r et ur ns f i l ed f or 2009 t hr ough 2013. As a r esul t of an audi t by t he
I RS, Fr ankl i n was r equi r ed t o change t o t he accr ual met hod of
account i ng begi nni ng wi t h 2014. The net adj ust ment due t o t he change
i s a posi t i ve adj ust ment t o i ncome. The adj ust ment may be spr ead
equal l y over 2014 and t he t hr ee f ol l owi ng year s.

a. Tr ue
*b. Fal se

2119. Sandst one, I nc. , has consi st ent l y i ncl uded some f act or y over head
as a cur r ent expense, r at her t han as a cost of pr oduci ng goods. As a
r esul t , t he begi nni ng i nvent or y f or 2013 i s under st at ed by $40, 000. I f
Sandst one vol unt ar i l y changes account i ng met hods ef f ect i ve J anuar y 1,
2013, t he posi t i ve adj ust ment t o t he i nvent or y i s a 481 adj ust ment
and $10, 000 must be added t o t axabl e i ncome f or each year 2013, 2014,
2015, and 2016.

*a. Tr ue
b. Fal se

2120. A cash basi s t axpayer sol d i nvest ment l and i n 2013 f or $200, 000.
He r ecei ved $40, 000 i n t he year of sal e and $160, 000 i n 2014. The cost
of t he l and was $80, 000. Under t he i nst al l ment met hod, t he t axpayer
woul d r epor t a $24, 000 gai n i n 2013.

*a. Tr ue
b. Fal se

2121. I n t he case of a sal e r epor t ed under t he i nst al l ment met hod, gai n
i s r ecogni zed i n each year t he sel l er col l ect s on t he i nst al l ment
cont r act .

*a. Tr ue
b. Fal se

2122. I f an i nst al l ment sal e cont r act does not char ge i nt er est on t he
sal e of a capi t al asset , onl y capi t al gai n wi l l be r ecogni zed over t he
l i f e of t he cont r act .

a. Tr ue
*b. Fal se

2123. When an accr ual basi s t axpayer f i nances t he const r uct i on of i t s
bui l di ng by bor r owi ng, t he i nt er est i s added t o t he cost of t he
bui l di ng.

*a. Tr ue
b. Fal se

2124. I n 2013, Cashmer e Const r uct i on Company ent er s i nt o a cont r act t o
bui l d a beach cot t age f or Mar t ha and Rob f or a t ot al pr i ce of $500, 000.
Cashmer e est i mat es t he t ot al cost t o compl et e t he cot t age t o be
$400, 000. I n 2013, Cashmer e i ncur r ed $300, 000 of cost s on t he cont r act ,
and i n 2014 t he cont r act was compl et ed at a t ot al cost of $425, 000.
Cashmer e i s not r equi r ed t o r ecogni ze any i ncome f r omt he cont r act
unt i l 2014.

*a. Tr ue
b. Fal se

2125. For a t axpayer who i s r equi r ed t o use t he per cent age of
compl et i on met hod, t he t axpayer can el ect t o def er t he r ecogni t i on of
i ncome and t he r el at ed cost s unt i l t he t axabl e year i n whi ch cumul at i ve
cont r act cost s ar e at l east 10 per cent of t he est i mat ed cont r act cost s.

*a. Tr ue
b. Fal se

2126. Bl ue Mar t oper at es a l ar ge chai n of r et ai l st or es. The company
has f our war ehouses t hat ar e l ocat ed i n var i ous par t s of t he
count r y. The cost of oper at i ng t he war ehouses can be expensed
i mmedi at el y because i t i s a cost t hat i s i ncur r ed even t hough t he goods
wer e not sol d dur i ng t he year .

a. Tr ue
*b. Fal se

2127. The l ower of cost or mar ket can be used i n conj unct i on wi t h bot h
t he FI FO and LI FO met hod.

a. Tr ue
*b. Fal se

2128. I n appl yi ng t he l ower of cost or mar ket f or t ax pur poses, t he
mar ket pr i ce i s t he r epl acement cost of t he goods, r at her t han t hei r
expect ed sel l i ng pr i ce.

*a. Tr ue
b. Fal se

2129. The t axpayer does need t he I RS s per mi ssi on t o change f r omt he
FI FO i nvent or y met hod t o t he LI FO met hod.

a. Tr ue
*b. Fal se

2130. Teal , I nc. , used t he l ower of cost or mar ket t o val ue i nvent or y
i n 2013. The endi ng i nvent or y at cost was $400, 000 and t he endi ng
i nvent or y at mar ket was $385, 000. I n 2014, Teal changed t o t he LI FO
met hod. The company s begi nni ng LI FO i nvent or y i s $400, 000.

*a. Tr ue
b. Fal se

2131. I f a company uses t he LI FO i nvent or y met hod t o r epor t t he cost of
i nvent or y and cost of goods sol d on i t s f i nanci al st at ement s, f oot not e
di scl osur e of t he i ncome as cal cul at ed by t he FI FO met hod does not
vi ol at e t he t ax and f i nanci al account i ng conf or mi t y r equi r ement .

*a. Tr ue
b. Fal se

2132. The LI FO met hod i s benef i ci al onl y when pr i ces ar e r i si ng and t he
t axpayer i s i ncr easi ng t he quant i t i es of i nvent or y i t ems on hand.

a. Tr ue
*b. Fal se

2133. Whi ch of t he f ol l owi ng st at ement s r egar di ng a 52- 53 week t ax year
i s not cor r ect ?

a. Some t ax year s wi l l i ncl ude mor e t han 366 cal endar days.
b. Whet her t he par t i cul ar t ax year i ncl udes 52 weeks or 53 weeks
i s not el ect i ve.
c. The year - end must be t he same day of t he week i n al l year s.
*d. Al l of t he above ar e cor r ect .

2134. Gol d Cor por at i on, Si l ver Cor por at i on, and Copper Cor por at i on ar e
equal par t ner s i n t he GSC Par t ner shi p. The par t ner s t ax year - ends ar e
as f ol l ows:

Gold December
31st
Silver April 30th
Copper September
30th

a. The par t ner shi p i s f r ee t o el ect any t ax year .
b. The par t ner shi p may use any of t he 3 year - end dat es t hat i t s
par t ner s use.
*c. The par t ner shi p must use a Sept ember 30t h year - end.
d. The par t ner shi p must use a Apr i l 30t h year - end.

2135. Gol d Cor por at i on, Si l ver Cor por at i on, and Pl at i numCor por at i on
ar e equal par t ner s i n t he GSP Par t ner shi p, whi ch was f or med on J ul y 1,
2013. Gol d and Si l ver use a cal endar t ax year , and Pl at i num s t ax year
ends J une 30t h. GSP i s not a seasonal busi ness.

*a. GSP must use a t ax year endi ng December 31st , and Pl at i num
can r et ai n i t s t ax year endi ng J une 30t h.
b. GSP must use a t ax year endi ng J une 30t h, and t he par t ner s
must change t hei r t ax year s t o end on J une 30t h.
c. GSP must use a t ax year endi ng December 31st and Pl at i nummust
change i t s t ax year t o December 31st .
d. GSP may el ect i t s t ax year wi t hout r egar d t o t he par t ner s t ax
year s.

2136. I n r egar d t o choosi ng a t ax year f or a busi ness owned by
i ndi vi dual s, whi ch f or mof busi ness pr ovi des t he gr eat er number of
opt i ons i n r egar d t o t he t ax year ?

a. A C cor por at i on f or med by medi cal doct or s t o conduct t hei r
pr act i ce.
*b. A C cor por at i on t hat i s i n t he r et ai l gr ocer y busi ness.
c. A r eal est at e par t ner shi p.
d. An S cor por at i on engaged i n manuf act ur i ng.
e. Al l of t he above have t he same opt i ons.

2137. Whi ch of t he f ol l owi ng st at ement s r egar di ng a 52- 53 week t ax year
i s cor r ect ?

*a. The year - end must be t he same day of t he week i n al l year s.
b. The year cannot cont ai n mor e t han 366 cal endar days.
c. Ever y f our year s, t her e wi l l be onl y 51 weeks.
d. The year cannot end on a Sunday.

2138. Pur pl e Cor por at i on, a per sonal ser vi ce cor por at i on ( PSC) , adopt ed
a f i scal year endi ng Sept ember 30t h. The sol e shar ehol der of t he
cor por at i on i s a cal endar year t axpayer . Dur i ng t he f i scal year endi ng
Sept ember 30, 2013, t he shar ehol der - empl oyee r ecei ved $120, 000 sal ar y.
The cor por at i on pai d t he shar ehol der - empl oyee a sal ar y of $15, 000
dur i ng t he per i od begi nni ng Oct ober 1, 2013 t hr ough December 31, 2013.

a. The cor por at i on sal ar y expense f or t he f i scal year endi ng
Sept ember 30, 2014 i s l i mi t ed t o $120, 000.
b. The cor por at i on sal ar y expense f or t he f i scal year endi ng
*c. The cor por at i on sal ar y expense f or t he f i scal year endi ng
d. The cor por at i on must swi t ch t o a cal endar year .

2139. A C cor por at i on i s r equi r ed t o annual i ze i t s i ncome:

a. The f i r st year t he cor por at i on i s i n exi st ence, i f t he f i r st
t ax r et ur n i ncl udes l ess t han 12 mont hs.
b. The l ast year t he cor por at i on i s i n exi st ence.
*c. The year t he cor por at i on changes i t s t ax year .
d. When t her e has been a gr eat er t han 50%change i n t he owner shi p
of t he st ock.

2140. I n 2013, Godf r ey r ecei ved a $50, 000 sal es commi ssi on on a l ong-
t er mcont r act . But i n 2014, t he cust omer f i l ed bankr upt cy and
Godf r ey s empl oyer was not abl e t o col l ect f r omt he cust omer . Under
t he bonus agr eement , Godf r ey was r equi r ed t o r epay t he empl oyer $20, 000
of t he bonus. Godf r ey was i n t he 35%mar gi nal t ax br acket i n 2013 but
he i s i n t he 25%mar gi nal t ax br acket i n 2014.

a. Godf r ey can amend hi s 2013 t ax r et ur n and r educe hi s t axabl e
i ncome by $20, 000.
b. Godf r ey shoul d deduct t he $20, 000 pai d i n 2014 and t hus hi s
t ax savi ngs wi l l be $5, 000.
*c. Godf r ey can r educe hi s 2014 t ax l i abi l i t y by 35% $20, 000 =
$7, 000.
d. Godf r ey shoul d not have r epor t ed t he i ncome i n 2013 because of
t he cont i ngenci es.

2141. Whi ch of t he f ol l owi ng t axpayer s i s r equi r ed t o use t he accr ual
met hod of account i ng?

a. A r et ai l busi ness wi t h aver age annual gr oss r ecei pt s of
$800, 000.
b. A medi cal doct or wi t h aver age annual gr oss r ecei pt s of $2
mi l l i on.
c. An i nsur ance agency wi t h aver age annual gr oss r ecei pt s of $2
mi l l i on.
d. Al l of t he above ar e r equi r ed t o use t he accr ual met hod.
*e. None of t he above i s r equi r ed t o use t he accr ual met hod.

2142. Kar en, an accr ual basi s t axpayer , sol d goods i n December 2013 f or
$20, 000. The cust omer was unabl e t o pay cash. So t he cust omer gave
Kar en a not e f or $20, 000 t hat was payabl e i n Apr i l 2014. The not e bor e
i nt er est at t he Feder al r at e. The f ai r mar ket val ue of t he not e at t he
end of 2013 was $18, 000. Kar en col l ect ed $20, 500 f r omt he cust omer i n
Apr i l 2014, $20, 000 pr i nci pal pl us $500 i nt er est . Under t he accr ual
met hod, Kar en must r ecogni ze i ncome of :

a. $20, 500 i n 2014.
b. $18, 000 i n 2013 and $2, 500 i n 2014.
*c. $20, 000 i n 2013 and $500 i n 2014.
d. $20, 500 i n 2014.

2143. The accr ual met hod gener al l y i s r equi r ed t o r epor t i ncome f or
whi ch of t he f ol l owi ng t ypes of busi nesses:

a. Fr oml ong- t er mconst r uct i on cont r act s.
b. Ear ned by an i ncor por at ed publ i c account i ng f i r mwi t h gr oss
r ecei pt s i n excess of $5 mi l l i on.
c. Ear ned by a par t ner shi p t hat has a par t ner t hat i s an S
cor por at i on.
d. A gr ocer y st or e wi t h aver age annual gr oss r ecei pt s of $800, 000.

2144. Whi ch of t he f ol l owi ng must use t he accr ual met hod of account i ng?

I. An incorporated property management
company with average annual gross
receipts of $50 million.
II. An incorporated law firm with average
annual gross receipts of $6 million.
III. An unincorporated grocery store with
average annual gross receipts of
$1,200,000.

a. Al l of t he above must use t he accr ual met hod.
b. None of t he above must use t he accr ual met hod.
c. Onl y I and I I must use t he accr ual met hod.
*d. Onl y I and I I I must use t he accr ual met hod.
e. Onl y I I I must use t he accr ual met hod.

2145. Andr ew owns 100%of t he st ock of Cr ow s Far mI nc. , an S
cor por at i on, t hat r ai ses cat t l e and cor n. The f ar m s annual gr oss
r ecei pt s have never exceeded $3 mi l l i on and t he f ar mi s not consi der ed
a t ax shel t er .

a. The f ar mmust r epor t i t s sal es and cost of goods sol d by t he
accr ual met hod because i nvent or i es ar e mat er i al t o t he busi ness.
*b. The i ncome f r omt he f ar mmay be r epor t ed by t he cash met hod.
c. The i ncome f r omt he sal es of cat t l e may be r epor t ed by t he
cash met hod, but t he i ncome f r omt he sal es of cor n must be
r epor t ed by t he accr ual met hod.
d. The i ncome f r omt he sal es of cor n may be r epor t ed by t he cash
met hod, but t he i ncome f r omcat t l e sal es must be r epor t ed by t he
accr ual met hod.

2146. I n t he case of an accr ual basi s t axpayer , an i t emof i ncome:

a. I s not r ecogni zed unt i l cash i s r ecei ved.
b. Fr omser vi ces i s never r ecogni zed unt i l t he ser vi ces ar e
per f or med.
c. I s not r ecogni zed i f t he cust omer can r et ur n t he goods.
*d. I s r ecogni zed when al l t he event s have occur r ed t o f i x t he
t axpayer s r i ght t o r ecei ve t he i ncome and t he amount of t he
i ncome can be det er mi ned wi t h r easonabl e accur acy.

2147. I vor y Fast Del i ver y Company, an accr ual basi s t axpayer ,
f r equent l y has cl ai ms f or damages t o pr oper t y t he company del i ver ed.
Of t en t he cl ai mi s not f i l ed unt i l a mont h af t er t he del i ver y. I n t he
past , appr oxi mat el y 80%of t he cl ai ms ar e pai d by I vor y. I n 2013,
cl ai ms f or $80, 000 wer e f i l ed. The company r ef used t o pay $20, 000 of
t he cl ai ms ( because t hey wer e not val i d) , and pai d $50, 000. The
r emai ni ng $10, 000 i n cl ai ms wer e pr ocessed and pai d i n J anuar y
2014. Al so, i n J anuar y 2014, cl ai ms f or $8, 000 wer e f i l ed f or
del i ver i es made i n 2013, and $6, 000 was pai d on t hese cl ai ms by Mar ch
15, 2014. I vor y has not el ect ed t o use t he r ecur r i ng i t emexcept i on t o
economi c per f or mance. Under t he al l - event s and economi c per f or mance
t est s, I vor y can accr ue as an expense f or 2013:

a. $68, 000.
b. $66, 000.
c. $60, 000.
*d. $50, 000.

2148. Col or , I nc. , i s an accr ual basi s t axpayer . I n December 2013, t he
company r ecei ved f r oma cust omer a $500 cl ai mf or def ect i ve mer chandi se.
Col or pai d t he cust omer i n J anuar y 2014. Al so, i n December 2013, t he
company r ecei ved a bi l l of $800 f or of f i ce suppl i es t hat had been
pur chased and used i n November 2013. The bi l l was not pai d unt i l
J anuar y 2014. I n J anuar y 2014, t he company r ecei ved a cl ai mf or $600
f or def ect i ve mer chandi se pur chased i n 2013. Col or pai d t he cust omer
t he $600 i n Febr uar y 2014. Assumi ng Col or uses t he r ecur r i ng i t em
except i on t o economi c per f or mance, t he company s deduct i ons f or 2013 as
a r esul t of t he above ar e:

a. $500.
b. $600.
c. $800.
*d. $1, 300.
e. $1, 900.

2149. Pi nk Cor por at i on i s an accr ual basi s t axpayer t hat uses t he
r ecur r i ng i t emexcept i on t o t he economi c per f or mance t est f or al l
r el evant year s. For 2013, t he cor por at i on s i ncome subj ect t o st at e
i ncome t ax was $500, 000 and t he st at e cor por at e t ax r at e was 6%. Dur i ng
2013, t he cor por at i on pai d $24, 000 on i t s est i mat ed st at e i ncome t ax
l i abi l i t y f or t hat year . The r emai ni ng $6, 000 of 2013 st at e i ncome t ax
was pai d i n Apr i l 2014. I n J une 2013, t he cor por at i on pai d $9, 000 on
i t s year 2012 st at e i ncome t ax l i abi l i t y, as a r esul t of an audi t of
t he 2012 r et ur n t hat was conduct ed i n 2013. The company has el ect ed t o
use t he r ecur r i ng i t emexcept i on t o economi c per f or mance. As a r esul t
of t he above, t he cor por at i on shoul d deduct i n 2013 on i t s Feder al
i ncome t ax r et ur n st at e i ncome t axes of :

a. $24, 000.
b. $30, 000.
c. $33, 000.
*d. $39, 000.

2150. Whi ch of t he f ol l owi ng st at ement s r egar di ng t he mat chi ng
pr i nci pl e i s cor r ect ?

a. Tax account i ng st r i ct l y f ol l ows t he mat chi ng pr i nci pl e.
b. The mat chi ng pr i nci pl e of f i nanci al account i ng i s an i mpor t ant
component of t he cash met hod of account i ng.
*c. The mat chi ng pr i nci pl e of f i nanci al account i ng i s somet i mes
r el evant t o t i mi ng deduct i ons f or an accr ual basi s t axpayer s
r ecur r i ng i t ems.
d. The mat chi ng pr i nci pl e has no r el evance t o t ax account i ng.

2151. Gr ay Company, a cal endar year t axpayer , al l ows cust omer s t o
r et ur n def ect i ve mer chandi se f or a f ul l r ef und wi t hi n 30 days of t he
pur chase. I n 2013, t he company r ef unded $400, 000 f or cl ai ms i nvol vi ng
sal es. The $400, 000 consi st ed of $350, 000 i n r ef unds f r om2013 sal es
and $50, 000 i n r ef unds f r om2012 sal es. Al l of t he r ef unds f r om2012
sal es wer e f or cl ai ms f i l ed i n 2012 and wer e pai d i n J anuar y and
Febr uar y 2013. At t he end of 2013, t he company had $12, 000 i n r ef und
cl ai ms f or sal es i n 2013 f or whi ch payment had been appr oved. These
cl ai ms wer e pai d i n J anuar y 2014. Al so i n J anuar y 2014, t he company
r ecei ved an addi t i onal $30, 000 i n cl ai ms f or sal es i n 2013. Thi s
$30, 000 was pai d by Gr ay i n Febr uar y 2014. Wi t h r espect t o t he above,
Gr ay can deduct :

a. $350, 000 i n 2013.
*b. $362, 000 i n 2013.
c. $392, 000 i n 2013.
d. $442, 000 i n 2013.

2152. Gener al l y, deduct i ons f or addi t i ons t o r eser ves f or est i mat ed
f ut ur e cost s ( e. g. , an al l owance f or est i mat ed war r ant y cost s) ar e not
al l owed f or Feder al i ncome t ax pur poses because al l owi ng t he deduct i on
woul d:

a. Resul t i n a mi smat chi ng of r evenues and expenses.
b. Vi ol at e est abl i shed publ i c pol i cy.
*c. Vi ol at e t he economi c per f or mance r equi r ement .
d. Vi ol at e t he t ax benef i t r ul e.

2153. I n 2013, Swan Company di scover ed t hat i t had f or t he past 10
year s capi t al i zed as a pr oduct i on cost cer t ai n expenses t hat ar e
pr oper l y cl assi f i ed as admi ni st r at i ve expenses. The t ot al amount of
t he expense f or 2012 was $300, 000, $60, 000 of t he i t emwas i ncl uded i n
t he endi ng i nvent or y t hat year and $240, 000 was deduct ed as cost of
goods sol d.

a. The company shoul d amend i t s 2012 t ax r et ur n and r educe i t s
i ncome by $240, 000.
*b. The company shoul d change i t s account i ng met hod i n 2013, wi t h
a $60, 000 negat i ve 481 adj ust ment whi ch decr eases i t s 2013
t axabl e i ncome.
c. The company shoul d change i t s account i ng met hod i n 2013, and
i ncr ease i t s 2013 i ncome by $60, 000, t he amount of t he posi t i ve
481 adj ust ment t o i ncome.
d. The company shoul d change i t s account i ng met hod i n 2013 and
r ecogni ze a $60, 000 negat i ve 481 adj ust ment t hat wi l l be spr ead
equal l y over 2013- 16.

2154. The t axpayer has consi st ent l y, but i ncor r ect l y, used an al l owance
f or bad debt s. At t he begi nni ng of t he year , t he bal ance i n t he
al l owance account i s $90, 000.

a. I f t he I RS exami nes t he t axpayer s r et ur n and r equi r es t he
t axpayer t o change account i ng met hods, t he t axpayer wi l l be
r equi r ed t o r ecogni ze an addi t i onal $90, 000 of i ncome ( one- hal f
i n t he cur r ent year and one- hal f i n t he f ol l owi ng year ) as t he
adj ust ment due t o t he change i n account i ng met hods.
*b. I f t he t axpayer vol unt ar i l y changes met hods, t he $90, 000
adj ust ment can be spr ead over t he cur r ent and t hr ee f ol l owi ng
year s.
c. I f t he t axpayer vol unt ar i l y changes met hods, t he $90, 000
r eser ve can be used t o absor b bad debt s unt i l t he account bal ance
i s zer o.
d. I f t he I RS exami nes t he t axpayer s r et ur n, no adj ust ment t o
t he r eser ve account wi l l be r equi r ed i f t he bal ance i s consi st ent
wi t h pr i or bad debt exper i ence.

2155. When t he I RS r equi r es a t axpayer t o change account i ng met hods:

a. The t axpayer may be subj ect t o penal t i es and i nt er est .
b. The t axpayer gener al l y i s r equi r ed t o make t he change as of
t he begi nni ng of t he ear l i est open year .
c. The adj ust ment s due t o t he change cannot be spr ead over
subsequent year s.

2156. The t axpayer had consi st ent l y used t he cash met hod of account i ng
even t hough i nvent or i es wer e a mat er i al i ncome- pr oduci ng f act or t o i t s
busi ness. The t axpayer deci ded t o vol unt ar i l y change t o t he accr ual
met hod of account i ng. The adj ust ment t o i ncome due t o t he change was
t hat t he cor r ect begi nni ng bal ances f or t he year of t he change as
f ol l ows: $60, 000 f or i nvent or i es, $30, 000 f or account s r ecei vabl e, and
$12, 000 f or account s payabl e. The adj ust ment due t o t he change i n
account i ng met hod i s:

a. A posi t i ve adj ust ment f or $102, 000.
b. A posi t i ve adj ust ment f or $90, 000.
*c. A posi t i ve adj ust ment f or $78, 000.
d. A posi t i ve adj ust ment f or $60, 000.

2157. The t axpayer had i ncor r ect l y been usi ng t he cash met hod of
account i ng. For 2013, t he company vol unt ar i l y changed t o t he accr ual
met hod. The adj ust ment due t o t he change i n met hod as cal cul at ed at
t he begi nni ng of 2013 was $120, 000 ( posi t i ve) . The adj ust ment as
cal cul at ed as of t he end of 2013 was $80, 000 ( posi t i ve) . As a r esul t of
t he change i n met hod, t he company must :

a. I ncr ease i t s i ncome f or 2013 by $120, 000.
b. I ncr ease i t s i ncome f or 2013 by $80, 000.
*c. I ncr ease i t s i ncome f or 2013 by $30, 000.
d. I ncr ease i t s i ncome f or 2013 by $40, 000.

2158. The accr ual basi s t axpayer sol d l and f or $100, 000 on December 31,
2013. He di d not col l ect t he $100, 000 unt i l J anuar y 2, 2014. The l and
was hel d as an i nvest ment .

a. I f t he accr ual basi s t axpayer s basi s i n t he l and was $110, 000,
t he l oss woul d be r ecogni zed i n 2014.
b. I f t he accr ual basi s t axpayer s basi s i n t he l and was $60, 000,
t he gai n must be r epor t ed i n 2013.
*c. I f t he accr ual basi s t axpayer s basi s i n t he l and was $60, 000,
t he gai n must be r epor t ed i n 2014, unl ess t he t axpayer el ect s t o
not use t he i nst al l ment met hod.
d. The accr ual basi s t axpayer must r ecogni ze t he gai n or l oss i n
t he year of sal e.

2159. The i nst al l ment met hod can be used f or whi ch of t he f ol l owi ng
sal es wi t h payment s bei ng made i n t he year f ol l owi ng t he year of sal e?

a. A depar t ment st or e s cr edi t car d sal es.
*b. An i ndi vi dual s sal e of common st ock i n a f ami l y owned
busi ness.
c. An i ndi vi dual s sal e of Gener al El ect r i c common.
d. Depr eci abl e equi pment sol d f or l ess t han i t s or i gi nal cost .

2160. The i nst al l ment met hod appl i es wher e a payment wi l l be r ecei ved
af t er t he t ax year of t he sal e:

*a. By an i nvest or who sol d r eal est at e at a gai n.
b. By an i nvest or who sol d r eal est at e at a l oss.
c. By an appl i ance deal er who sol d i nvent or y at a gai n.
d. By an i nvest or who sol d I BM Cor por at i on common st ock at a gai n.

2161. I n 2013, Bet h sol d equi pment used i n her busi ness. Her basi s i n
t he pr oper t y was $300, 000 ( $500, 000 cost l ess $200, 000 of depr eci at i on) .
Bet h sol d t he pr oper t y f or $400, 000, wi t h $100, 000 due on t he dat e of
t he sal e and $300, 000 ( pl us i nt er est at t he Feder al r at e) due i n 2014.
Bet h s r ecogni zed i nst al l ment sal e gai n i n 2014 i s:

a. $0.
b. $50, 000.
*c. $100, 000.
d. $200, 000.

2162. Abby sol d her uni ncor por at ed busi ness whi ch consi st ed of
equi pment and goodwi l l . The equi pment had an or i gi nal cost of $200, 000
and Abby had cl ai med $120, 000 i n depr eci at i on ( adj ust ed basi s =
$80, 000) . Abby had no basi s i n t he goodwi l l . The sal es pr i ce f or t he
busi ness was $250, 000, wi t h $150, 000 f or t he equi pment and $100, 000 f or
t he goodwi l l . The buyer agr eed t o pay $120, 000 on J une 30, 2013, and
$130, 000 ( pl us i nt er est at t he Feder al r at e) i n t wo year s. Abby s gai n
t o be r epor t ed i n 2013 ( excl usi ve of i nt er est ) i s:

a. $40, 000.
b. $51, 000.
c. $102, 000.
*d. $118, 000.
e. $170, 000.

2163. Hal sol d l and hel d as an i nvest ment wi t h a f ai r mar ket val ue of
$100, 000 f or $36, 000 cash and a not e f or $64, 000 t hat was due i n t wo
year s. The not e bor e i nt er est of 11%when t he appl i cabl e Feder al r at e
was 7%. Hal s cost of t he l and was $40, 000. Because of t he buyer s good
cr edi t r ecor d and t he hi gh i nt er est r at e on t he not e, Hal t hought t he
f ai r mar ket val ue of t he not e was at l east $74, 000.

a. Hal can el ect t o t r eat t he $36, 000 as a r ecover y of capi t al .
b. Hal must r ecogni ze $60, 000 gai n i n t he year of sal e.
c. Hal must r ecogni ze $36, 000 gai n i n t he year of sal e.
*d. Unl ess Hal el ect s not t o use t he i nst al l ment met hod, Hal must
r ecogni ze $21, 600 gai n i n t he year of sal e.

2164. Todd, a CPA, sol d l and f or $300, 000 cash on t he dat e of sal e pl us
a not e f or $500, 000 due i n one year . The i nt er est r at e on t he not e was
equal t o t he Feder al r at e. The f ai r mar ket val ue of t he not e was
$400, 000. Todd s basi s i n t he l and was $80, 000.

a. I f Todd uses t he cash basi s t o r epor t t he i ncome f r omhi s
pr act i ce, he cannot use t he i nst al l ment met hod t o r epor t t he gai n
on t he sal e of t he l and.
b. I f Todd uses t he accr ual basi s t o r epor t t he i ncome f r omhi s
pr act i ce, he cannot use t he i nst al l ment met hod t o r epor t t he gai n
f r omt he sal e of t he l and.
*c. I f Todd uses t he i nst al l ment met hod t o r epor t t he gai n, t he
cont r act pr i ce i s $800, 000.
d. I f Todd does not use t he i nst al l ment met hod, hi s gai n i n t he
year of sal e i s $620, 000 ( $700, 000 $80, 000) .

2165. J uan, not a deal er i n r eal pr oper t y, sol d l and t hat he owned. Hi s
adj ust ed basi s i n t he l and was $700, 000 and i t was encumber ed by a
mor t gage f or $100, 000. The t er ms of t he sal e r equi r ed t he buyer t o pay
J uan $200, 000 on t he dat e of t he sal e. The buyer assumed J uan s
mor t gage and gave J uan a not e f or $900, 000 ( pl us i nt er est at t he
Feder al r at e) due i n t he f ol l owi ng year . What i s t he gr oss pr of i t
per cent age ( gai n cont r act pr i ce) ?

a. $700/ $1, 100 = 63. 64%.
b. $500/ $1, 200 = 41. 67%.
c. $700/ $1, 200 = 58. 33%.
*d. $500/ $1, 100 = 45. 45%.

2166. Pedr o, not a deal er , sol d r eal pr oper t y t hat he owned wi t h an
adj ust ed basi s of $120, 000 and encumber ed by a mor t gage f or $56, 000 t o
Pat i n 2011. The t er ms of t he sal e r equi r ed Pat t o pay $28, 000 cash,
assume t he $56, 000 mor t gage, and gi ve Pedr o el even not es f or $12, 000
each ( pl us i nt er est at t he Feder al r at e) . The f i r st not e was payabl e
t wo year s f r omt he dat e of sal e and each succeedi ng not e became due at
t wo- year i nt er val s. Pedr o di d not " el ect out " of t he i nst al l ment met hod
f or r epor t i ng t he t r ansact i on. I f Pat pays t he 2013 not e as pr omi sed,
what i s t he r ecogni zed gai n t o Pedr o i n 2013 ( excl usi ve of i nt er est ) ?

a. $12, 000.
*b. $7, 200.
c. $4, 800.
d. $0.

2167. Char l ot t e sol d her uni ncor por at ed busi ness f or $600, 000 i n 2013.
The sal es cont r act al l ocat ed $120, 000 t o equi pment , $300, 000 t o l and,
and $180, 000 t o goodwi l l . Char l ot t e had a $0 basi s i n t he goodwi l l , t he
l and cost $150, 000, and t he equi pment or i gi nal l y cost $250, 000 but i t
was f ul l y depr eci at ed. What i s t he amount of t he gai n el i gi bl e f or
i nst al l ment sal es t r eat ment ?

a. $0.
*b. $330, 000.
c. $450, 000.
d. $600, 000.

2168. I n 2013, Nor ma sol d Zi nc, I nc. , common st ock f or $100, 000 cash
and a not e r ecei vabl e f or $900, 000. The not e was due i n 2014 wi t h
accr ued i nt er est at t he Feder al r at e. Nor ma s basi s i n t he st ock was
$250, 000. Thi s was Nor ma s onl y i nst al l ment sal e t r ansact i on. Whi ch of
t he f ol l owi ng st at ement s i s cor r ect ?

*a. Nor ma cannot use t he i nst al l ment met hod t o r epor t her gai n i f
t he st ock i s l i st ed on t he New Yor k St ock Exchange.
b. Nor ma must r ecogni ze $75, 000 gai n i n 2013 and she wi l l be
l i abl e f or i nt er est on t axes def er r ed under t he i nst al l ment
met hod.
c. Nor ma must r ecogni ze $75, 000 gai n i n 2013 and she wi l l not be
l i abl e f or i nt er est on t he t axes def er r ed under t he i nst al l ment
met hod i f t he st ock i s not publ i cl y t r aded.
d. Nor ma shoul d t r eat t he $100, 000 r ecei ved as a r ecover y of
capi t al .

2169. Al ber t i s i n t he 35%mar gi nal t ax br acket . He sol d a bui l di ng i n
t he cur r ent year f or $450, 000. Al ber t r ecei ved $110, 000 cash at cl osi ng,
t he buyer assumed Al ber t s mor t gage f or $120, 000, and t he buyer gave
Al ber t a 6% not e f or $220, 000 due i n t wo year s. The Feder al r at e was 6%.
Al ber t s basi s i n t he bui l di ng was $180, 000 ( $500, 000 cost $320, 000
accumul at ed st r ai ght - l i ne depr eci at i on) . Assumi ng he di d not el ect out
of t he i nst al l ment met hod, Al ber t s 1231 gai n and gai n t axed at t he
25%r at e i n t he year of sal e ar e what amount s?

Sect i on 1231 Gai n Unr ecapt ur ed 1250 Gai n Taxed at
25%

a. $66, 000 $0
b.
$0 $66, 00
0
*c.
$90, 000 $90, 000
d. $90, 000 $0
e.
$0 $110, 0
00

2170. Wal t er sol d l and ( a capi t al asset ) t o an unr el at ed par t y f or
$100, 000 cash and a 4%not e f or $150, 000 due i n t hr ee year s. Hi s basi s
i n t he l and was $40, 000. Wal t er and t he pur chaser ar e cash basi s
t axpayer s. Whi ch of t he f ol l owi ng st at ement s i s cor r ect ?

a. I f t he Feder al r at e i s 3%, i nt er est wi l l be i mput ed at t hat
r at e.
*b. I f t he Feder al r at e i s 5%, i nt er est wi l l be i mput ed at t hat
r at e and t he capi t al gai n wi l l be r educed.
c. I f t he Feder al r at e i s 4. 5%, i nt er est wi l l be i mput ed at t hat
r at e and t he capi t al gai n wi l l be i ncr eased.

2171. Tayl or sol d a capi t al asset on t he i nst al l ment basi s and di d not
char ge i nt er est on t he def er r ed payment due i n t hr ee year s.

a. I nt er est wi l l be i mput ed, t hus i ncr easi ng t he t ot al gr oss
i ncome f r omt he t r ansact i ons.
*b. I nt er est wi l l be i mput ed, t hus decr easi ng t he capi t al gai n.
c. I nt er est wi l l not be i mput ed because t he cont r act i s f or l ess
t han f i ve year s.
d. I nt er est wi l l be i mput ed, t hus i ncr easi ng t he buyer s basi s i n
t he asset .

2172. Rel at ed- par t y i nst al l ment sal es i ncl ude al l of t he f ol l owi ng
except t he f i r st sel l er s:

a. Br ot her s and si st er s.
b. Cont r ol l ed cor por at i ons.
c. Li neal descendant s and ancest or s.
d. Uncl es and aunt s.
*e. Al l of t he above woul d be consi der ed r el at ed par t i es.

2173. Fat her sol d l and t o Son f or $500, 000 i n 2013. Fat her s basi s i n
t he l and was $100, 000. Son pai d Fat her $50, 000 and gave Fat her a not e
f or $450, 000 due i n 2016. I n 2014, Son sol d t he l and f or $600, 000 cash.
The not e bor e i nt er est at t he appr opr i at e Feder al r at e and bot h Fat her
and Son hel d t he l and as an i nvest ment .

a. Fat her must r ecogni ze $400, 000 of i ncome i n 2014.
b. The i nst al l ment met hod i s not per mi t t ed because t hi s i s a
r el at ed- par t y t r ansact i on.
c. Fat her s gai n i s al l or di nar y i ncome.
*d. Fat her must r ecogni ze a $360, 000 gai n i n 2014.

2174. I n 2013, Fat her sol d l and t o Son f or $50, 000 cash and an
i nst al l ment not e f or $150, 000 due i n 2017. Fat her s basi s was $100, 000.
I n 2014, af t er payi ng $8, 000 i nt er est but not hi ng on t he pr i nci pal , Son
sol d t he l and f or $300, 000 cash. What gai n, i f any, must Fat her
r ecogni ze i n 2014?

a. $0.
*b. $75, 000.
c. $100, 000.
d. $200, 000.

2175. Kat hy was a shar ehol der i n Mat r i x, I nc. , when she sol d t he
cor por at i on a commer ci al bui l di ng. The bui l di ng cost $500, 000 and t he
bal ance i n t he accumul at ed depr eci at i on account was $400, 000. Mat r i x,
I nc. , pai d $100, 000 i n t he year of sal e and gave Kat hy a not e f or
$400, 000 pl us adequat e i nt er est due i n 2015.

a. Because Kat hy i s a shar ehol der i n Mat r i x, she cannot r epor t
t he gai n by t he i nst al l ment met hod.
*b. Gener al l y, i f Kat hy owned 100%of t he Mat r i x st ock, Kat hy
cannot use t he i nst al l ment met hod.
c. Gener al l y, i f Kat hy owned onl y 60%r at her t han 100%of t he
Mat r i x st ock, she coul d use t he i nst al l ment met hod.
d. Kat hy cannot use t he i nst al l ment met hod t o r epor t t he gai n
because t he r eal i zed gai n i s equal t o t he depr eci at i on she
cl ai med on t he bui l di ng.

2176. Whi ch of t he f ol l owi ng st at ement s i s t r ue concer ni ng t he
di sposi t i on of an i nst al l ment not e?

*a. Def er r ed gai n i s not r ecogni zed by t he t r ansf er or i f t he
i nst al l ment not e i s t r ansf er r ed i n a 351 t r ansact i on.
b. Def er r ed gai n must onl y be r ecogni zed i f t he i nst al l ment not e
was t r ansf er r ed as a gi f t t o a r el at ed par t y.
c. Tr ansf er of an i nst al l ment obl i gat i on t o anot her par t y wi l l
not t r i gger i mmedi at e r ecogni t i on of def er r ed gai n.
d. Def er r ed gai n must be r ecogni zed i f t he not e i s t r ansf er r ed t o
t he owner s est at e at hi s deat h.

2177. Wendy sol d pr oper t y on t he i nst al l ment basi s i n 2012 f or mor e
t han her basi s i n t he pr oper t y. Wendy was t o r ecei ve i nst al l ment
payment s at t he end of each year f or t he next f i ve year s. I n 2013,
Wendy was ki l l ed i n a car acci dent and t he not e was t r ansf er r ed t o her
est at e.

*a. The est at e must r ecogni ze t he gai n f r omal l t he amount s
col l ect ed on t he i nst al l ment obl i gat i on i n 2013.
b. The i ncome wi l l be r epor t ed on Wendy s 2013 i ncome t ax r et ur n
as i ncome i n r espect of a decedent .
c. The ent i r e gai n must be r ecogni zed i n 2012.
d. Gai n i s r ecogni zed by Wendy and r epor t ed on her 2013 i ncome
t ax r et ur n when t he not e i s t r ansf er r ed i nt o t he est at e.

2178. Gol d Cor por at i on sol d i t s 40%of t he Ruby Cor por at i on common
st ock. Gol d r ecei ved $10 mi l l i on i n t he year of t he sal e and a not e f or
$15 mi l l i on, payabl e i n t hr ee year s wi t h i nt er est at t he Feder al r at e.
Gol d s basi s i n t he st ock was $5 mi l l i on. Assume t hat Gol d Cor por at i on
wi l l r epor t t he gai n by t he i nst al l ment met hod wher e t he met hod i s
per mi t t ed.

a. The i nst al l ment met hod i s never per mi t t ed on t he sal e of st ock.
*b. I f Ruby Cor por at i on st ock i s t r aded on an est abl i shed
secur i t i es mar ket , Gol d must r ecogni ze a $20 mi l l i on gai n i n t he
year of sal e.
c. I f t he Ruby Cor por at i on st ock i s not t r aded on a nat i onal
exchange, Gol d must r ecogni ze a $20 mi l l i on gai n.
d. Al l of t he above ar e t r ue.

2179. I n t he case of a smal l home const r uct i on company t hat bui l ds
under l ong- t er mcont r act s, gener al l y:

a. The per cent age of compl et i on met hod i s r equi r ed t o r epor t t he
i ncome f r omt he const r uct i on cont r act s.
b. The per cent age of compl et i on met hod can be el ect ed and
gener al l y wi l l def er i ncome unt i l t he cont r act i s compl et ed.
*c. The compl et ed cont r act met hod can be used and gener al l y wi l l
def er i ncome.
d. The accr ual met hod must be used because i nvent or i es ar e an
i ncome- pr oduci ng f act or .

2180. Robi n Const r uct i on Company began a l ong- t er mcont r act i n 2013.
The cont r act pr i ce was $800, 000. The est i mat ed cost of t he cont r act at
t he t i me i t was begun was $500, 000. The act ual cost i ncur r ed i n 2013
was $350, 000. The cont r act was compl et ed i n 2014 and t he cost i ncur r ed
t hat year was $125, 000. Under t he per cent age of compl et i on met hod:

a. Robi n shoul d r epor t $300, 000 of i ncome i n 2013.
b. Robi n shoul d r epor t $90, 000 of i ncome i n 2014.
c. Robi n wi l l r ecei ve i nt er est ( under t he l ookback met hod) on t he
under payment of t axes i n 2013.
d. Robi n shoul d r epor t $325, 000 of i ncome i n 2013.
*e. None of t he above i s cor r ect .

2181. Under t he per cent age of compl et i on met hod, i f t he act ual cost s
ar e ____ t he est i mat ed cost s, t he t axpayer must pay i nt er est on t he
under payment of pr i or year s t axes.

a. Gr eat er t han.
*b. Less t han.
c. Equal t o or gr eat er t han.
d. Equal t o.

2182. Camel i a Company i s a l ar ge commer ci al r eal est at e cont r act or t hat
r epor t s i t s i ncome by t he per cent age of compl et i on met hod. I n 2013, t he
company ent er ed i nt o a cont r act t o const r uct a bui l di ng f or $900, 000.
Camel i a est i mat ed t hat t he cost of const r uct i ng t he bui l di ng woul d be
$600, 000. I n 2013, t he company i ncur r ed $150, 000 i n cost s under t he
cont r act . I n 2014, t he company i ncur r ed an addi t i onal $500, 000 i n cost s
t o compl et e t he cont r act . The company s mar gi nal t ax r at e i n al l year s
was 35%.

a. Camel i a must r epor t $300, 000 of i ncome i n 2013.
b. Camel i a i s not r equi r ed t o r epor t any i ncome f r omt he cont r act
unt i l 2014 when t he cont r act i s compl et ed.
*c. Camel i a must r ecogni ze $75, 000 of i ncome i n 2013.
d. Camel i a shoul d amend i t s 2013 t ax r et ur n t o decr ease t he
pr of i t on t he cont r act f or t hat year .

2183. I n t he case of a t axpayer who uses t he l ower - of - cost - or - mar ket
i nvent or y met hod:

a. Taxpayer s may not use t he l ower of cost or mar ket met hod f or
t ax pur poses.
b. Mar ket pr i ce means t he expect ed sel l i ng pr i ce.
c. Taxpayer s may deduct a r eser ve f or ant i ci pat ed i nvent or y pr i ce
changes.
*d. Each i nvent or y i t emmust be val ued at t he l ower of i t s cost
or i t s mar ket val ue.

2184. Aspen st or es i s a l ar ge r et ai l chai n. The company has f our
war ehouses t hat ar e l ocat ed i n var i ous par t s of t he count r y. The goods
ar e st or ed at t he war ehouses and t hen moved t o t he r et ai l st or es f or
sal e.

a. The cost s of oper at i ng t he war ehouses can be deduct ed i n t he
year t he cost s ar e i ncur r ed because i t i s a l oss i ncur r ed f r om
not sel l i ng goods.
b. The cost s of oper at i ng t he war ehouses can be deduct ed i n t he
year t he cost s ar e i ncur r ed because t hey di d not add t o t he val ue
of t he goods.
c. The cost s of oper at i ng t he war ehouses can be capi t al i zed or
expensed by el ect i ng one met hod or t he ot her .
d. The war ehouses ar e onsi ght st or age f aci l i t i es and, t her ef or e,
t hei r cost s must be added t o t he cost of goods on hand.

2185. A manuf act ur er must capi t al i ze t he f ol l owi ng cost s r el at i ve t o
i nvent or i es:

I. Maintenance cost for the factory building.
II. Health insurance for production workers.
III. Storage cost for finished goods.

a. Onl y I .
b. Onl y I and I I .
c. Onl y I I and I I I .
*d. I , I I , and I I I .

2186. I n det er mi ni ng t he cost of goods manuf act ur ed and t hus t he cost
of t he endi ng i nvent or y:

a. A pr oduct i on super vi sor s sal ar y must be t r eat ed as a per i od
cost ( not added t o pr oduct i on cost s and i nvent or y) because t he
sal ar y i s pai d r egar dl ess of t he amount pr oduced.
*b. The per sonnel depar t ment par t i ci pat es i n hi r i ng pr oduct i on
wor ker s, and t her ef or e a por t i on of i t s cost s must be al l ocat ed
t o pr oduct i on.
c. Pr oper t y t axes on t he f act or y bui l di ng ar e t r eat ed as per i od
cost s because t he same t axes ar e due r egar dl ess of t he vol ume of
pr oduct i on.
d. Onl y t he cost s of di r ect mat er i al s and di r ect l abor must be
capi t al i zed.

2187. The t axpayer i s an appl i ance deal er and has t he f ol l owi ng i t ems
of i nvent or y on hand at t he end of t he year :

Replacement Expected
Item Cost Cost Selling
Price
20 Big Screen
TVs
$12,000 $14,000 $18,000
200 DVD
Players
20,0
00
16,000 18,000
100 Stereo
Systems
24,0
00
21,000 35,000
$56,000 $51,000 $71,000

Under the lower-of-cost-or-market inventory method, the ending inventory
value is:

a. $71, 000.
b. $56, 000.
c. $51, 000.
*d. $49, 000.

2188. Duck Company has val ued i t s i nvent or i es at FI FO cost f or t he past
10 year s. The
company woul d l i ke t o change t o t he LI FO met hod, ef f ect i ve i n 2014.

*a. The el ect i on t o change can be made wi t h t he 2014 t ax r et ur n
and t he begi nni ng i nvent or y f or 2014 wi l l be t he same as t he FI FO
i nvent or y at t he end of 2013 and no 481 adj ust ment i s r equi r ed.
b. The begi nni ng i nvent or y val ue f or 2014 must be comput ed as
t hough t he company had been usi ng LI FO i n al l pr i or year s and a
481 adj ust ment i s r equi r ed.
c. The t axpayer must appl y i n 2013 f or per mi ssi on t o change
met hods ef f ect i ve i n 2014.
d. Duck must amend al l pr i or year s t ax r et ur ns t o comput e i ncome
by t he LI FO met hod.

2189. I n t he case of a change f r omt he l ower - of - cost - or - mar ket FI FO t o
t he LI FO i nvent or y met hod:

a. The t axpayer must val ue t he begi nni ng i nvent or y t o be t he same
as i f t he company had used t he LI FO met hod f or al l t he year s t he
company was i n busi ness.
b. The t axpayer must seek wr i t t en per mi ssi on f r omt he I RS i n
or der t o make t he change.
*c. The adj ust ment due t o t he change i n account i ng met hod must be
spr ead over 3 year s, t he year of change and t he t wo subsequent
year s.

2190. I n 2013, Geor ge used t he FI FO l ower of cost or mar ket i nvent or y
met hod. As of December 31, 2012, t he i nvent or y cost was $50, 000 and i t s
mar ket pr i ce was $40, 000. At t he t i me of f i l i ng hi s 2013 i ncome t ax
r et ur n, Geor ge changed t o t he LI FO met hod. The endi ng i nvent or y at cost
on December 31, 2013, was $75, 000 and t he mar ket pr i ce of t he goods
t ot al ed $35, 000. Whi ch of t he f ol l owi ng st at ement s i s cor r ect ?

*a. The begi nni ng i nvent or y f or 2013 i s $50, 000, and Geor ge must
spr ead a $10, 000 adj ust ment ( $50, 000 $40, 000) evenl y over 2013,
2014, and 2015.
b. The begi nni ng i nvent or y f or 2013 i s $40, 000.
c. The begi nni ng i nvent or y f or 2013 i s $50, 000, and Geor ge must
spr ead a $10, 000 adj ust ment over t he t hr ee pr evi ous year s.
d. The change i s i nval i d si nce t he t axpayer di d not appl y f or t he
change by t he end of t he t ax year of change.

2191. Cr ow Cor por at i on has used t he LI FO i nvent or y met hod f or t he past
10 year s. Dur i ng t hat t i me, t he pr i ces Cr ow pays f or t he i nvent or y have
i ncr eased by 50%. I t s i nvent or y val ue when i t f i r st adopt ed LI FO was
$5, 000, 000. The company began usi ng a j ust - i n- t i me i nvent or y syst emt he
same year i t adopt ed LI FO, and al t hough sal es have i ncr eased, t he
quant i t i es of goods on hand at year end has not changed i n t he past t en
year s. The cor por at i on s mar gi nal t ax r at e has been 35%i n al l of t he
year s. As a r esul t of t he LI FO el ect i on:

a. The company has def er r ed $5, 000, 000 of i ncome t ax.
b. The company has def er r ed $1, 750, 000 ( $5, 000, 000 . 35) of
i ncome t ax.
c. The LI FO el ect i on di d not def er any i ncome t ax because t he
quant i t y of goods on hand has not changed.
*d. The company has def er r ed $875, 000 [ ( . 50) ( $5, 000, 000) ( . 35) ] of
i ncome t ax.

2192. The use of t he LI FO i nvent or y met hod f or t ax pur poses:

a. Wi l l not def er i ncome i f t he pr i ces ar e i ncr easi ng and
quant i t i es of i nvent or i es ar e decr easi ng.
b. I s r equi r ed f or t ax pur poses i f t he t axpayer uses t he LI FO
met hod f or r epor t i ng t o st ockhol der s and cr edi t or s.
*c. Wi l l r esul t i n a r ecapt ur e of def er r ed i ncome i f t he
quant i t i es of i nvent or i es decr ease.
d. Does not af f ect t he company s f i nanci al account i ng f or
i nvent or i es and cost of goods sol d.

2193. Mal l ar d Aut o Par t s, I nc. has on hand 1, 000 f ender s f or 1953
St udebaker s. Mal l ar d pur chased t he f ender s i n 1965 f or $30 each and t he
sel l i ng pr i ce i s $400 each. Onl y r ar el y does Mal l ar d sel l a St udebaker
f ender and i t i s hi ghl y unl i kel y t hat mor e t han 100 of t he r emai ni ng
f ender s wi l l ever be sol d. However , Mal l ar d has ampl e st or age space and
f eel s an obl i gat i on t o St udebaker owner s. Ther ef or e, t he company wi l l
not sal vage t he f ender s and wi l l cont i nue t o sel l t hemf or $400 each.
Scr ap val ue of t he f ender s i s $5 each. Under t he l ower of cost or
mar ket i nvent or y met hod:

a. Mal l ar d can expense t he 900 excess f ender s.
b. Mal l ar d can expense al l 1, 000 of t he f ender s because of t he
unl i kel i hood t hey wi l l be sol d.
c. The f ender s shoul d be val ued at $7, 500 [ ( 100 $30) + ( 900
$5) ] .
d. The f ender s shoul d be val ued at $5, 000 ( 1, 000 $5) .

2194. The Mul t i Depar t ment st or e t akes physi cal i nvent or i es at each of
i t s 300 st or es on var i ous dat es bet ween August 1 and Sept ember 30t h
each year . The company s t ax year ends on t he Monday cl osest t o J anuar y
31st . The company s r educt i on i n i nvent or y due t o br eakage and t hef t
af t er t he l ast physi cal i nvent or y i n Sept ember 2013:

a. Cannot be det er mi ned unt i l t he physi cal i nvent or y i s act ual l y
t aken and t her ef or e br eakage t hat occur s i n December 2013 wi l l
not be deduct i bl e unt i l t he year endi ng i n J anuar y 2014.
b. Must be del ayed unt i l t he i nvent or y has been t aken as a r esul t
of t he al l - event s t est .
*c. Can be est i mat ed and deduct ed f or t he year endi ng i n J anuar y
2014.
d. Can be est i mat ed and deduct ed as of t he end of t he t ax year ,
but onl y i f t he t axpayer uses t he l ower of cost or mar ket
i nvent or y met hod.
e. None on t he above.

2195. Dr . St one i ncor por at ed her medi cal pr act i ce and el ect ed t o use a
f i scal year endi ng Sept ember 30t h. For t he f i scal year endi ng Sept ember
30, 2013, t he cor por at i on ear ned $40, 000 pr of i t s each mont h, bef or e Dr .
St one s sal ar y and i ncome t ax. Dr . St one r ecei ved a sal ar y t hat
aver aged $30, 000 per mont h. Next year ( f i scal year endi ng Sept ember 30,
2014) , Dr . St one expect s t he aver age mont hl y pr of i t s bef or e sal ar y and
t axes t o be $48, 000. What i s t he mi ni mumsal ar y Dr . St one can r ecei ve
f or t he l ast t hr ee mont hs of cal endar year 2013 t o ensur e t hat t he
cor por at i on can deduct sal ar y equal t o t he cor por at i on s bef or e sal ar y
i ncome f or t he f i scal year endi ng Sept ember 30, 2014?

Cor r ect Answer :
The cor por at i on must pay Dr . St one a sal ar y of $144, 000 ( $48, 000 3)
f or t he l ast t hr ee mont hs of 2013. Thi s means t hat she i s r ecei vi ng t he
same as her aver age 2013 f i scal year mont hl y sal ar y. Then, i n 2014, her
sal ar y can be r ai sed so t hat t he t ot al i ncome f or t he f i scal year ,
$576, 000 ( 12 $48, 000) i s pai d as sal ar y.

2196. The Yel l ow Equi pment Company, an accr ual basi s C cor por at i on, i s
a manuf act ur er s r epr esent at i ve and wor ks on a commi ssi on basi s ( 15%of
sal es t hat i t pl aces) and does not car r y i nvent or y. I n November 2013,
Yel l ow made a sal e and col l ect ed a commi ssi on f or $20, 000. I n J une of
2014, t he cust omer had not r ecei ved t he equi pment f r omt he manuf act ur er
and cancel ed t he or der . As a r esul t , Yel l ow was r equi r ed t o r ef und t he
$20, 000 commi ssi on t o t he manuf act ur er . Yel l ow s t axabl e i ncome i n 2013
was $70, 000, and i n 2014 Yel l ow s t axabl e i ncome was $25, 000 af t er
deduct i ng t he r ef und. The appl i cabl e t ax r at e schedul e i s 15%on t he
f i r st $50, 000 of i ncome and 25%on i ncome i n excess of $50, 000. What i s
t he ef f ect of t he r ef und on Yel l ow s 2014 t ax l i abi l i t y?

Cor r ect Answer :
2014 taxable income before
the refund ($25,000 +
$20,000)
$45,000
Applicable tax rate
.15

Tax before refund $6,750
Repayment $20,000
2013 marginal tax rate
.25

Reduction in tax from refund (5,000)
2014 tax liability $1,750

The $20,000 received in 2013 must be included in Yellows gross income for
that year and thus increased the tax liability by 5,000 ($20,000 25%).
Under 1341, the repayment that is deductible in 2014 can likewise reduce
the tax liability by $5,000, even though under the general rules of the
annual accounting period, the repayment would reduce the tax by only $3,750
($25,000 15%).

2197. Ramon sol d l and i n 2013 wi t h a cost of $80, 000 f or $200, 000. The
sal es agr eement cal l ed f or a $50, 000 down payment and a $50, 000 payment
pl us 8%i nt er est t o be r ecei ved on t he f i r st day of each year f or t he
next t hr ee year s. What woul d be t he consequences of t he f ol l owi ng
( t r eat each par t i ndependent l y and assume Ramon uses t he i nst al l ment
met hod whenever possi bl e) :

a. I n 2013, Ramon gave one of t he $50, 000
i nst al l ment obl i gat i ons t o a cl ose r el at i ve.

b. I n 2013, Ramon t r ansf er r ed t he i nst al l ment
obl i gat i ons ( $50, 000) t o hi s 100%owned
cor por at i on.

c. Ramon col l ect ed t he $50, 000 pl us $12, 000
i nt er est on J anuar y 1, 2014, and di ed on
J anuar y 2, 2014.

Cor r ect Answer :
a. The gift is a taxable disposition and, thus,
Ramon must recognize a $30,000 gain
($120,000/$200,000 $50,000).

b. The transfer to the controlled corporation
is not a taxable disposition. The
corporation will recognize the gain when it
collects the amount due.

c. Death is not a taxable disposition. Ramons
beneficiaries will recognize the gain (as
income in respect of a decedent) when the
payments are collected. Ramon recognizes a
$30,000 gain ($120,000/$200,000
$50,000) plus $12,000 interest on his
final return for 2014.

2198. Br own Cor por at i on el ect ed dol l ar - val ue LI FO i n 2008. I t s endi ng
i nvent or y at base year cost and i t s LI FO i ndexes ar e as f ol l ows:

( 1) ( 2) ( 3) = ( 1) / ( 2)
Endi ng
I nvent or y
Endi ng
I nvent or y@
At End of t he
Year Pr i ces
LI FO
I ndex
Base Year
Pr i ces

2008 $1, 000, 000 1. 00 $1, 000, 000
2009 1, 100, 000 1. 06 1, 037, 736
2010 1, 200, 000 1. 10 1, 090, 909
2011 1, 300, 000 1. 11 1, 171, 171
2012 1, 250, 000 1. 20 1, 041, 667
2013 1, 550, 000 1. 23 1, 260, 163

Comput e t he LI FO i nvent or y at t he end of 2013.

Cor r ect Answer :
The company exper i enced a decr ease i n i nvent or y i n 2012. Thi s
el i mi nat ed t he 2011 l ayer and decr eased t he 2010 l ayer added.

(1) (2) (3) = (1)/(2) (4) (5)

Ending
Inventory
At End of the

Ending

(4) (2)

Year
Prices
LIFO
Index
Inventory@
Base Year Prices

Layer
Added
@ Base
Layer
@Current

2008 $1,000,000 1.00 $1,000,000 $1,000,000 $
1,000,000

2009 1,100,000 1.06 1,037,736
37,736
4
0,000

2010 1,200,000 1.10 1,090,909
53,173
5
8,491

2011 1,300,000 1.11 1,171,171
80,262
8
9,091

2012 1,250,000 1.20 1,041,667
(129,504)
(
155,405)

2013 1,550,000 1.23 1,260,163
218,496

268
,750

Ending Inventory
$1
,300,927

*2012 Reduction
At Base $129,504 Index
Reduction at Current
Prices
From 2010

$ 80,262
1.11
$ 89,09
1

From 2009

49,2
42 1.10
54
,167

$129,504
$143,258

2199. Br own Cor por at i on had consi st ent l y r epor t ed i t s i ncome by t he
cash met hod. The cor por at i on shoul d have used t he accr ual met hod
because i nvent or i es ar e mat er i al t o t he busi ness. I n 2013, Br own t i mel y
f i l ed a r equest t o change t o t he accr ual met hod. At t he begi nni ng of
2013, Br own had account s r ecei vabl e of $75, 000. Al so, Br own had
mer chandi se on hand wi t h a cost of $150, 000 and account s payabl e f or
mer chandi se of $45, 000. The account s r ecei vabl e, i nvent or y, and
account s payabl e bal ance per books wer e zer o. Det er mi ne t he adj ust ment
t o i ncome due t o t he change i n account i ng met hod and t he amount t hat i s
al l ocat ed t o 2013.

Cor r ect Answer :
Adj ust ment due t o t he change:

Accounts receivable $ 75,000
Inventory 150,000
Accounts payable (45,000
)
Total adjustment $180,000

The change is from a clearly incorrect method to a correct method.
Therefore, the positive adjustment must be spread over four years. The
company must add $45,000 ($180,000 divided by 4) to 2013 income.

2200. J ohn sol d an apar t ment bui l di ng f or $600, 000. Hi s basi s i n t he
bui l di ng was $360, 000 and i t was subj ect t o $30, 000 of depr eci at i on
r ecapt ur e. J ohn r ecei ved $120, 000 i n t he year of sal e, t he buyer
assumed J ohn s mor t gage payabl e of $240, 000, and t he buyer gave J ohn an
8%( t he cur r ent Feder al r at e) not e of $210, 000 due i n 5 year s. The
i nt er est on t he not e was payabl e each J une 30t h, begi nni ng i n t he year
f ol l owi ng t he year of t he sal e. J ohn i ncur r ed $30, 000 of sel l i ng
expenses whi ch he pai d i n t he year of sal e. Comput e J ohn s i nst al l ment
sal es gai n t hat shoul d be r epor t ed i n t he year of sal e.

Cor r ect Answer :
Selling price $600,000
Less: Selling expenses (30,000)
Less: Basis (360,000)
Total gain $210,000
Less: Depreciation recapture (30,000)
Installment sale gain (all
1231 gain)
$180,000
Contract price:
Selling price $600,000
Less: Sellers
liability assumed
(240,000)
Contract price $360,000

Gross profit ratio $180,000/$360,000
= .50

Gain in the year of sale:
Depreciation recapture $30,000
Installment gross
profit
.50 $120,000 60,000
Total gain in the year
of sale
$90,000

2201. Ter r y, I nc. , makes gasol i ne st or age t anks. Al l pr oduct i on i s done
under cont r act . The company makes t hr ee basi c model s, but each model
must be adapt ed t o cust omer speci f i cat i ons f or t he l ocat i on of out l et s,
i nsul at i on, and pai nt . I t t akes f r omt hr ee t o si x mont hs t o compl et e a
t ank. How shoul d Ter r y account f or t he i ncome f or t he busi ness?

Cor r ect Answer :
Ter r y, I nc. coul d have t he per cent age of compl et i on or t he accr ual
met hod appl y. I f Ter r y woul d l i ke t o avoi d t he per cent age of compl et i on
met hod and i nst ead use t he accr ual met hod, i t shoul d ar gue t hat t he
pr oduct s ar e not uni que. Ter r y woul d ar gue t hat t he modi f i cat i ons f or
i ndi vi dual cust omer s ar e mi nor and add ver y l i t t l e t o t he cost s of
pr oduct i on.

2202. Comput er Consul t ant s I nc. , began busi ness as an advi ser t o chai ns
of r et ai l st or es. The company assi st ed t he st or es i n t he sel ect i on of
har dwar e and t he devel opment of sof t war e used by r et ai l chai n st or es.
Lat er t he company devel oped sof t war e and sol d i t t o i t s cust omer s. The
company al so began sel l i ng some of t he equi pment t o t he cust omer s. That
i s, t he company woul d bi d on a j ob t o pur chase and i nst al l equi pment
and t he sof t war e. The company has consi st ent l y r epor t ed i t s i ncome by
t he cash met hod. At t he end of t he year , t he company has subst ant i al
account s r ecei vabl es f r omcl i ent s and a smal l amount of i nvent or y on
hand. What advi ce can you of f er t he company r egar di ng i t s account i ng
met hod?

Cor r ect Answer :
I nvent or i es ar e an i ncome- pr oduci ng f act or f or t he busi ness. Ther ef or e,
t he company i s r equi r ed t o use t he accr ual met hod of account i ng. The
company shoul d vol unt ar i l y change t o t he accr ual met hod, bef or e t he I RS
r equi r es t he change. Wi t h a vol unt ar y change, t he company can avoi d
penal t i es and i nt er est . Al so, t he company wi l l be al l owed t o spr ead t he
gai n over t he cur r ent year and t he t hr ee f ol l owi ng year s.

2203. The buyer and sel l er have t ent at i vel y agr eed t o a cont r act f or
t he sal e of a bui l di ng t hat t he buyer wi l l use i n i t s busi ness. The
buyer wi l l pay t he sel l er $100, 000 ( pr i nci pal and i nt er est ) each year
f or 5 year s. The sel l er s cost of t he asset i s $200, 000, and he wi l l
r epor t t he capi t al gai n usi ng t he i nst al l ment met hod. The buyer and
sel l er ar e now negot i at i ng t he i nt er est r at e t hat wi l l be used t o
comput e t he i nt er est i ncl uded i n each $100, 000 payment . The r el evant
Feder al r at e i s 5%, but t he mar ket r at e on si mi l ar cont r act s i s i n t he
ar ea i s 7%.

a. Why woul d t he sel l er bar gai n f or a 5%
i nt er est r at e f or t he cont r act r at her t han
a 7%i nt er est r at e?

b. How does t he i nt er est r at e af f ect t he
buyer s f ut ur e t axabl e i ncome?

Cor r ect Answer :
a. The total payments the seller will receive
is not affected by the interest rate
included in the contract. However, the
interest rate will affect the sellers
ordinary income and capital gain. The seller
would bargain for a 5% interest rate rather
than 7% because the lower interest rate will
result in less ordinary income and more
capital gain, with no change in the total
taxable income from the contract. Also, with
the lower interest rate, more of each
payment is allocable to the recovery of
capital and thus more of the gain is
deferred.

b. The interest rate affects the buyers
interest and cost recovery
deductions. Each dollar allocated to
interest will result in a deduction for the
buyer, each year for the five years of the
installment contract. However, the amount
allocated to the building must be recovered
over the MACRS cost recovery period, which
may be more than thirty years. Therefore,
the present value of the tax benefits of the
interest deductions are much greater than
the cost recovery deductions.

2204. The company has consi st ent l y used t he LI FO i nvent or y met hod and
has def er r ed over $1 mi l l i on of i ncome f r omusi ng t hat met hod. However ,
i n t he l ast t wo year s, t he pr i ces i t pays f or goods has been
decr easi ng. Ther ef or e, t he company i s consi der i ng changi ng t o t he FI FO
i nvent or y met hod. What woul d be some t ax consequences of t he change?

Cor r ect Answer :
The company coul d vol unt ar i l y change t o FI FO, but t hi s woul d r equi r e
t hat t he company r est at e i t s begi nni ng i nvent or y f or t he year of change
t o equal i t s cost usi ng t he FI FO met hod. Because t he LI FO def er r al i s
$1 mi l l i on, t hi s means t hat t he begi nni ng i nvent or y woul d be i ncr eased
by $1 mi l l i on and t he company woul d have a $1 mi l l i on addi t i on t o i t s
i ncome t hat can be spr ead equal l y over t he year of t he change and t hr ee
subsequent year s. Thus, deci di ng whet her t he change woul d be
benef i ci al woul d r equi r e f ur t her anal yses of t he pr oj ect ed pr i ce
changes and i nvent or y l evel s. The r ecapt ur e of t he LI FO r eser ve woul d
be a cr i t i cal consi der at i on.

2205. Yar d Cor por at i on, a cash basi s t axpayer , r ecei ved $10, 000 f r oma
cust omer i n 2012. I n 2012, t he cust omer f i l ed a cl ai mf or a r ef und of
t he f ee. I n 2013, Yar d r ef unded t he cust omer $6, 000. I n 2012, Yar d pai d
$5, 000 i n est i mat ed st at e i ncome t ax. I n May 2013, Yar d r ecei ved a
st at e i ncome t ax r ef und of $2, 000 f or over payment of i t s 2012 i ncome
t ax. Yar d was i n t he 35%mar gi nal t ax br acket i n 2012 and i n t he 15%
mar gi nal t ax br acket i n 2013. What ar e t he t ax ef f ect s of t he 2013
payment t o t he cust omer and t he col l ect i on of t he st at e i ncome t axes
over pai d?

Cor r ect Answer :
The payment t o t he cust omer i s el i gi bl e f or 1341 t r eat ment . Because
t he amount r ecei ved f r omt he cust omer i n 2012 was t axed at 35%, t he
r ef und t o t he cust omer i n 2013 wi l l r educe t he t ax f or t hat year by
$2, 100 ( $6, 000 . 35) . On t he ot her hand, t he st at e i ncome t axes wer e
deduct ed when t he mar gi nal t ax r at e was 35%, but t he r ecover y of t he
pr i or deduct i on i s t axed at onl y 15%under 111.

2206. What i ncent i ves do t he t ax account i ng r ul es pr ovi de f or t axpayer s
t o vol unt ar i l y change f r oman i ncor r ect met hod of account i ng t hat has
r educed t he company s t ax l i abi l i t y i n pr i or year s?

Cor r ect Answer :
The i ncor r ect met hod t hat r educed t axabl e i ncome i n pr i or year s
gener al l y wi l l r esul t i n a posi t i ve 481 adj ust ment t o i ncome. The
t axpayer who vol unt ar i l y changes met hods i s per mi t t ed t o spr ead t he
adj ust ment over t he cur r ent and t hr ee succeedi ng year s. On t he ot her
hand, i f t he I RS exami nes t he r et ur n and makes t he adj ust ment , t he I RS
wi l l comput e t he adj ust ment as of t he begi nni ng of t he ear l i est open
year , r equi r e t hat al l of t he adj ust ment must be pai d upon compl et i on
of t he exami nat i on, and i nt er est and per haps penal t i es may be due.

2207. Mogo Manuf act ur i ng Company account s f or i t s i nvent or i es by t he
FI FO met hod. The company has consi st ent l y al l ocat ed bui l di ng
depr eci at i on t o pr oduct i on and gener al admi ni st r at i on on t he basi s of
t he number of squar e f eet occupi ed. Accor di ng t o t he measur ement s used,
manuf act ur i ng r equi r es 90%of t he squar e f oot age and gener al
admi ni st r at i on ut i l i zes 10%of t he t ot al squar e f eet . Thi s year , 2013,
t he account ant r eal i zed t hat 5 year s ago an addi t i on was made t o t he
por t i on of t he bui l di ng used f or gener al admi ni st r at i on, and t he
depr eci at i on al l ocat i on had not been adj ust ed. What ar e t he t ax
account i ng i mpl i cat i ons of t hi s di scover y?

Cor r ect Answer :
The company has consi st ent l y used an i ncor r ect account i ng met hod t o
al l ocat e i t s cost s t o pr oduct i on. The i ncor r ect met hod has al l ocat ed
t oo much of t he depr eci at i on t o pr oduct i on, and t hus t o endi ng
i nvent or i es. The company shoul d appl y f or per mi ssi on t o change i t s
met hod of al l ocat i ng depr eci at i on. The adj ust ment due t o t he change
wi l l be negat i ve ( r educi ng t axabl e i ncome) . Because Mogo i s changi ng
f r oman i ncor r ect t o a cor r ect met hod, t he negat i ve adj ust ment can be
used t o r educe t he 2013 i ncome, assumi ng t he r equest f or changi ng
met hods i s t i mel y f i l ed.

2208. Af t er 2008, i ncome aver agi ng i s al l owed f or Feder al i ncome t ax
pur poses.

a. Tr ue
*b. Fal se

2209. Qual i f i ed pl ans have hi gher st ar t up and admi ni st r at i ve cost s t han
nonqual i f i ed pl ans.

*a. Tr ue
b. Fal se

2210. A r est r i ct ed pr oper t y pl an i s consi der ed a def er r ed compensat i on
pl an.

*a. Tr ue
b. Fal se

2211. Gr oup l i f e i nsur ance i s consi der ed a def er r ed compensat i on pl an.

a. Tr ue
*b. Fal se

2212. For f ei t ur es may be al l ocat ed t o t he account s of t he r emai ni ng
par t i ci pant s i n def i ned cont r i but i on pl ans.

*a. Tr ue
b. Fal se

2213. I n a pr of i t shar i ng pl an, a separ at e account i s not mai nt ai ned
f or each par t i ci pant .

a. Tr ue
*b. Fal se

2214. A def i ned cont r i but i on pl an i s exempt f r omf undi ng r equi r ement s.

*a. Tr ue
b. Fal se

2215. I n a st ock bonus pl an, cont r i but i ons ar e dependent on t he
empl oyer s pr of i t s.

a. Tr ue
*b. Fal se

2216. A cash bal ance pl an i s a hybr i d f or mof pensi on pl an t hat i s
si mi l ar i n many aspect s t o a def i ned cont r i but i on pl an.

a. Tr ue
*b. Fal se

2217. The payout t o an empl oyee i n a cash bal ance pl an i s based upon a
f or mul a based on year s of ser vi ce.

a. Tr ue
*b. Fal se

2218. A f ai l ur e t o make a mi ni mumr equi r ed di st r i but i on t o a
par t i ci pant i n any t axabl e year r esul t s i n a 50%nondeduct i bl e exci se
t ax on any excess of t he amount t hat shoul d have been di st r i but ed over
t he amount t hat act ual l y was di st r i but ed.

*a. Tr ue
b. Fal se

2219. The mi ni mumannual di st r i but i ons must be made over t he l i f e of
t he par t i ci pant or t he l i f e of t he par t i ci pant and a desi gnat ed
i ndi vi dual benef i ci ar y.

*a. Tr ue
b. Fal se

2220. A def i ned benefit pl an must r educe t he $205, 000 ( i n 2013) maxi mum
benef i t s payabl e by one- t ent h f or each year of par t i ci pat i on under 10
year s t hat an empl oyee has per f or med.

*a. Tr ue
b. Fal se

2221. I f a t axpayer r ecei ves an ear l y di st r i but i on f r oma qual i f i ed
r et i r ement pl an, a 10%addi t i onal t ax i s l evi ed on t he f ul l amount of
any di st r i but i on i ncl udi bl e i n gr oss i ncome.

*a. Tr ue
b. Fal se

2222. A t axpayer who r ecei ves a di st r i but i on can avoi d cur r ent t axat i on
by r ol l i ng t he di st r i but i on i nt o anot her qual i f i ed empl oyer r et i r ement
pl an or i nt o an I RA.

*a. Tr ue
b. Fal se

2223. Under a def i ned benef i t pl an, t he annual benef i t payabl e t o an
empl oyee i s l i mi t ed t o t he smal l er of $205, 000 ( i n 2013) or 100%of t he
empl oyee s aver age compensat i on f or t he hi ghest 3 year s of empl oyment .

*a. Tr ue
b. Fal se

2224. A 20%exci se t ax i s i mposed on nondeduct i bl e cont r i but i ons by an
empl oyer t o a qual i f i ed pl an.

a. Tr ue
*b. Fal se

2225. Any pr e- t ax amount el ect ed by an empl oyee as a pl an cont r i but i on
t o a 401( k) pl an t hat does not exceed t he st at ut or y l i mi t i s not
i ncl udi bl e i n gr oss i ncome i n t he year of def er r al and i s 100%vest ed.

*a. Tr ue
b. Fal se

2226. Dana cont r i but es $2, 000 t oo much t o a 401( k) pl an whi ch i s not
r et ur ned wi t hi n 2 1/ 2 mont hs af t er t he cl ose of t he t ax year . The
empl oyer wi l l have t o pay a t ax of $200.

*a. Tr ue
b. Fal se

2227. I f an empl oyer s cont r i but i on t o a SEP I RA i s l ess t han $51, 000
i n 2013 ( or 25%of t he empl oyee s ear ned i ncome, i f l ess) , t he empl oyee
can cont r i but e t he di f f er ence.

a. Tr ue
*b. Fal se

2228. Tr adi t i onal I RA cont r i but i ons made af t er an i ndi vi dual r eaches
t he age of 65 ar e t r eat ed as excess cont r i but i ons and ar e subj ect t o a
nondeduct i bl e 6%exci se penal t y t ax.

a. Tr ue
*b. Fal se

2229. A par t i ci pant has an adj ust ed basi s of $0 i n any nondeduct i bl e
cont r i but i ons t o a t r adi t i onal I RA.

a. Tr ue
*b. Fal se

2230. I f a mar r i ed t axpayer i s an act i ve par t i ci pant i n anot her
qual i f i ed r et i r ement pl an, t he t r adi t i onal I RA deduct i on phaseout
begi ns at $95, 000 of AGI f or a j oi nt r et ur n i n 2013.

*a. Tr ue
b. Fal se

2231. I f an i ndi vi dual i s i nel i gi bl e t o make a deductible cont r i but i on
t o a t r adi t i onal I RA, nondeductible cont r i but i ons of any amount can be
made t o a t r adi t i onal I RA.

a. Tr ue
*b. Fal se

2232. The maxi mumannual cont r i but i on t o a Rot h I RA f or an unmar r i ed
t axpayer who i s age 35 i s t he smal l er of $5, 500 or t he i ndi vi dual s
compensat i on f or t he year .

*a. Tr ue
b. Fal se

2233. Cont r i but i ons t o a Rot h I RA can be made up t o t he due dat e
( excl udi ng ext ensi ons) of t he t axpayer s i ncome t ax r et ur n.

*a. Tr ue
b. Fal se

2234. An i ndi vi dual , age 40, who i s not subj ect t o t he phaseout
pr ovi si on may cont r i but e a nondeductible amount t o a Rot h I RA up t o
$5, 500 per year i n 2013.

*a. Tr ue
b. Fal se

2235. A par t i ci pant who i s at l east age 59 1/ 2 can make a t ax- f r ee
qual i f i ed wi t hdr awal f r oma Rot h I RA af t er a f i ve- year hol di ng per i od.

*a. Tr ue
b. Fal se

2236. Di st r i but i ons f r oma Rot h I RA t hat ar e subj ect t o t axat i on ar e
t r eat ed f i r st as f r omear ni ngs and l ast as f r omcont r i but i ons.

a. Tr ue
*b. Fal se

2237. Low- and mi ddl e- i ncome t axpayer s may make nondeduct i bl e
cont r i but i ons up t o $4, 000 per chi l d per year t o a Cover del l Educat i on
Savi ngs Account ( CESA) .

a. Tr ue
*b. Fal se

2238. An i ndi vi dual i s consi der ed an act i ve par t i ci pant i n an empl oyer -
sponsor ed r et i r ement pl an mer el y because an i ndi vi dual s spouse i s an
act i ve par t i ci pant f or any par t of a pl an year i n appl yi ng t he I RA
phaseout pr ovi si on.

a. Tr ue
*b. Fal se

2239. For t he spousal I RA pr ovi si on t o appl y, a j oi nt r et ur n must be
f i l ed.

*a. Tr ue
b. Fal se

2240. A di r ect t r ansf er of f unds f r oma qual i f i ed r et i r ement pl an t o an
I RA i s subj ect t o t he wi t hhol di ng r ul es.

a. Tr ue
*b. Fal se

2241. I n a di r ect t r ansf er f r omone qual i f i ed r et i r ement pl an t o
anot her qual i f i ed r et i r ement pl an, t he empl oyer does not have t o
wi t hhol d 20%of t he amount of t he di r ect t r ansf er .

*a. Tr ue
b. Fal se

2242. I ncome i s t axed i f a t axpayer s cont r ol over t he amount ear ned i s
subj ect t o subst ant i al r est r i ct i ons.

a. Tr ue
*b. Fal se

2243. A NQDC pl an cannot di scr i mi nat e i n f avor of of f i cer s or ot her
hi ghl y compensat ed empl oyees.

a. Tr ue
*b. Fal se

2244. A company i s deni ed a deduct i on f or a gol den par achut e payment t o
an empl oyee, but not f or a gol den par achut e payment t o an i ndependent
cont r act or .

a. Tr ue
*b. Fal se

2245. The $1 mi l l i on deduct i on l i mi t at i on on execut i ve compensat i on i s
decreased by any nondeduct i bl e gol den par achut e payment s made t o an
empl oyee.

*a. Tr ue
b. Fal se

2246. The spr ead on an i ncent i ve st ock opt i on i s subj ect t o t he
al t er nat i ve mi ni mumt ax.

*a. Tr ue
b. Fal se

2247. An empl oyer obt ai ns a t ax deduct i on at t he same t i me and t o t he
ext ent t hat or di nar y i ncome i s r ecogni zed by t he empl oyee who r ecei ves
nonqual i f i ed st ock opt i ons.

*a. Tr ue
b. Fal se

2248. I f a NQSO has a r eadi l y ascer t ai nabl e val ue, an empl oyee
r ecogni zes i ncome on t he gr ant dat e.

*a. Tr ue
b. Fal se

2249. A maj or di sadvant age of a NQSO i s t hat an empl oyee must r ecogni ze
or di nar y i ncome on t he exer ci se of t he opt i on or at t he dat e of t he
gr ant wi t hout r ecei vi ng cash t o pay t he t ax.

*a. Tr ue
b. Fal se

2250. Whi ch of t he f ol l owi ng char act er i st i cs does not descr i be a
defined benefit pensi on pl an?

a. Act uar i al cal cul at i ons ar e r equi r ed t o det er mi ne t he
empl oyer s annual cont r i but i on.
*b. Upon r et i r ement , t he empl oyee s pensi on amount depends on t he
val ue of t he empl oyee s account .
c. For f ei t ur es must r educe subsequent f undi ng cost s and cannot
i ncr ease t he benef i t s any par t i ci pant can r ecei ve under t he pl an.
d. A separ at e account i s not r equi r ed t o be mai nt ai ned f or each
par t i ci pant .

2251. Whi ch of t he f ol l owi ng char act er i st i cs i s not a char act er i st i c of
a st ock bonus pl an?

*a. Can be i n t he f or mof a def i ned benef i t pl an.
b. Cont r i but i ons need not be dependent on empl oyer s pr of i t s.
c. Exempt f r omf undi ng r equi r ement s.
d. Not subj ect t o pl an t er mi nat i on i nsur ance.

2252. Whi ch of t he f ol l owi ng char act er i st i cs i s not a char act er i st i c of
a cash bal ance pl an?

a. Si mi l ar i n many aspect s t o a def i ned benef i t pl an.
*b. Empl oyee bear s t he i nvest ment r i sk and r ewar ds.
c. Est abl i shes al l ocat i ons t o i ndi vi dual empl oyee account s.
d. Payout depends on how much bui l ds up over t i me i n t he
empl oyee s i ndi vi dual account .

2253. Whi ch of t he f ol l owi ng char act er i st i cs descr i bes a def i ned
benef i t pl an?

a. Subj ect t o PBGC pl an t er mi nat i on i nsur ance r ul es.
b. An account f or each par t i ci pant i s not est abl i shed.
c. Def i nes t he amount t he empl oyer i s r equi r ed t o cont r i but e.
*d. Onl y a. and b.
e. a. , b. , and c.

2254. A r et i r ement pl an cover s 72%of t he non- hi ghl y compensat ed
i ndi vi dual s. The pl an benef i t s 48 of t he 131 empl oyees. Whi ch i s t r ue?

a. The 70%cover age r equi r ement i s not met .
b. The pl an meet s t he mi ni mumpar t i ci pat i on t est .
*c. The pl an meet s t he 70%cover age r equi r ement , but f ai l s t he
mi ni mumpar t i ci pat i on t est .
d. The pl an does not meet t he 70%cover age r equi r ement , but does
meet t he mi ni mumpar t i ci pat i on t est .

2255. Zacki e has f i ve year s of ser vi ce compl et ed as of Febr uar y 5, 2013,
whi ch i s hi s empl oyment anni ver sar y dat e. I f hi s defined benefit plan
[ not a 401( m) ar r angement ] uses t he gr aded vest i ng r ul e, det er mi ne
Zacki e s nonf or f ei t abl e per cent age.

a. 40%.
*b. 60%.
c. 80%.
d. 100%.

2256. Dei dr e has f i ve year s of ser vi ce compl et ed as of Febr uar y 5, 2013,
her empl oyment anni ver sar y dat e. I f t he defined benefit plan [ not a
401( m) ar r angement ] uses t he cl i f f vest i ng schedul e, det er mi ne Dei dr e s
nonf or f ei t abl e per cent age.

a. 0%.
b. 60%.
c. 80%.
*d. 100%.

2257. Di anna par t i ci pat es i n a def i ned benef i t pl an t hat uses a f i xed
f or mul a pr ovi di ng an empl oyee wi t h a benef i t of 2%f or each year of
ser vi ce, up t o a maxi mumof 30 year s. The t ot al per cent age accumul at ed
bef or e r et i r ement i s appl i ed t o t he aver age of her t hr ee hi ghest year s
of sal ar y. Di anna wor ks f or 21 year s, and t he aver age of her t hr ee
hi ghest year s of sal ar y i s $290, 000. Cal cul at e t he amount of r et i r ement
benef i t s she wi l l r ecei ve each year .

a. $0.
b. $102, 800.
c. $110, 000.
d. $250, 000.

2258. Br own, I nc. , uses t he t hr ee- t o- seven year gr aded vest i ng appr oach
f or i t s r et i r ement pl an. Pet er has f i ve year s of ser vi ce compl et ed as
of Febr uar y 5, 2013, hi s empl oyment anni ver sar y dat e. Det er mi ne Pet er s
nonf or f ei t abl e per cent age.

a. 40%.
*b. 60%.
c. 80%.
d. 100%.

2259. Dani el l e, who i s r et i r ed, r eaches age 70 1/ 2 i n 2012, and she
wi l l al so be age 71 i n 2012. She has a $150, 000 bal ance i n her
t r adi t i onal I RA. I f her l i f e expect ancy i s 15. 3 year s, what
di st r i but i on, i f any, must be made by Apr i l 1, 2013?

a. $0.
*b. $9, 804.
c. $19, 608.
d. $150, 000.

2260. Heat her , age 48, i s t he sol e r emai ni ng par t i ci pant of a money
pur chase pensi on pl an. The pl an i s t er mi nat ed and a $240, 000 t axabl e
di st r i but i on i s made t o Heat her . The ear l y di st r i but i on penal t y t ax,
i f any, f or 2013 i s:

a. $0.
b. $12, 000.
*c. $24, 000.
d. $30, 000.

2261. Scot t , age 68, has accumul at ed $850, 000 i n a def i ned contribution
pl an, $100, 000 of whi ch r epr esent s hi s own af t er - t ax cont r i but i ons. I f
t he f ul l amount i s di st r i but ed i n 2013, hi s ear l y di st r i but i on penal t y
i s:

*a. $0.
b. $75, 000.
c. $85, 000.
d. $127, 500.

2262. I n 2013, J i ndal Cor por at i on pai d compensat i on of $42, 300 t o t he
par t i ci pant s i n a pr of i t shar i ng pl an and t hen cont r i but ed $12, 800 t o
t he pl an. J i ndal s deduct i bl e amount and any cont r i but i on car r yover ar e
as f ol l ows:

a. $0 deduct i bl e; $12, 800 car r yover .
b. $8, 460 deduct i bl e; $4, 340 car r yover .
*c. $10, 575 deduct i bl e; $2, 225 car r yover .
d. $12, 690 deduct i bl e; $110 car r yover .

2263. Fr ed i s a sel f - empl oyed account ant wi t h gr oss ear ned i ncome of
$140, 000 per year ( af t er t he deduct i on f or one- hal f of any sel f -
empl oyment t ax) . He has a pr of i t shar i ng pl an ( i . e. , def i ned
cont r i but i on pl an) . What i s t he maxi mumamount Fr ed can cont r i but e t o
hi s r et i r ement pl an?

*a. $28, 000.
b. $35, 000.
c. $40, 000.
d. $140, 000.

2264. The compensat i on pai d by Pur pl e Cor por at i on t o t he pl an
par t i ci pant s of a pr of i t shar i ng pl an i n 2013 was $38, 300. Dur i ng 2013,
Pur pl e Cor por at i on cont r i but ed $10, 000 t o t he pl an. Pur pl e s deduct i bl e
amount f or 2013 i s what amount , i f any?

a. $0.
b. $7, 660.
*c. $9, 575.
d. $10, 000.

2265. A par t i ci pant , who i s age 38, i n a cash or def er r ed ar r angement
pl an [ 401( k) ] may cont r i but e up t o what amount i n 2013?

a. $12, 000.
b. $16, 500.
c. $17, 000.
*d. $17, 500.

2266. Mer r i l l i s a par t i ci pant i n a SI MPLE 401( k) pl an, and he el ect s
t o cont r i but e 4%of hi s $40, 000 compensat i on t o t he account , whi l e hi s
empl oyer cont r i but es 3%. What amount wi l l vest i mmedi at el y, i f any?

a. $0.
b. $1, 200.
c. $1, 600.
*d. $2, 800.
e. None of above.

2267. Susan i s a sel f - empl oyed account ant wi t h a qual i f i ed def i ned
contribution pl an ( a Keogh pl an) . She has t he f ol l owi ng i ncome i t ems
f or t he year :

Earned income from self-employment $50,000
Dividend income 8,000
Net short-term capital gain 12,00
0

What is the maximum amount Susan can deduct as a contribution to her
retirement plan in 2013, assuming the self-employment tax rate is 15.3%?

a. $9, 235.
b. $12, 000.
c. $46, 000.
*d. $46, 468.

2268. J oyce, age 40, and Sam, age 42, who have been mar r i ed f or seven
year s, ar e bot h act i ve par t i ci pant s i n qual i f i ed r et i r ement pl ans.
Thei r t ot al AGI f or 2013 i s $120, 000. Each i s empl oyed and ear ns a
sal ar y of $65, 000. What ar e t hei r combi ned deduct i bl e cont r i but i ons t o
t r adi t i onal I RAs?

*a. $0.
b. $3, 000.
c. $4, 000.
d. $8, 000.

2269. Dana, age 31 and unmar r i ed, i s an act i ve par t i ci pant i n a
qual i f i ed r et i r ement pl an. Her AGI i s $116, 000. What amount , i f any,
may Dana cont r i but e t o a Rot h I RA i n 2013?

a. $0.
b. $3, 225.
*c. $4, 033.
d. $5, 500.

2270. Sammy, age 31, i s unmar r i ed and i s not an act i ve par t i ci pant i n a
qual i f i ed r et i r ement pl an. Hi s modi f i ed AGI i s $55, 000 i n 2013. The
maxi mumamount t hat Sammy can deduct f or a cont r i but i on t o a
t r adi t i onal I RA i s:

a. $2, 800.
b. $3, 500.
c. $5, 000.
*d. $5, 500.

2271. Fr ank est abl i shed a Rot h I RA at age 25 and cont r i but ed a t ot al of
$131, 244 t o i t over 38 year s. The account i s now wor t h $376, 000. How
much of t hese f unds can Fr ank wi t hdr aw t ax- f r ee?

a. $0.
b. $131, 244.
c. $244, 756.
*d. $376, 000.

2272. Mar y est abl i shes a Rot h I RA at age 50 and cont r i but es t he maxi mum
amount per year t o t he Rot h I RA f or 15 year s. The account i s now wor t h
$199, 000, consi st i ng of $75, 000 i n cont r i but i ons pl us $124, 000 i n
accumul at ed ear ni ngs. How much can Mar y wi t hdr aw t ax- f r ee?

a. $0.
b. $75, 000.
c. $124, 000.
*d. $199, 000.

2273. J ana has $225, 000 of ear ned i ncome i n 2013. Cal cul at e t he amount
she can cont r i but e t o a SEP.

a. $22, 500.
b. $24, 500.
*c. $51, 000.
d. $55, 000.

2274. I n 2015, Kat hy r ecei ves a $4, 000 di st r i but i on f r omher Cover del l
Educat i on Savi ngs Account ( CESA) , whi ch has a f ai r mar ket val ue of
$10, 000. Tot al cont r i but i ons t o her CESA have been $7, 000. Kat hy s AGI
i s $25, 000. I f Kat hy uses $3, 000 of t he $4, 000 di st r i but i on f or
qual i f i ed educat i on expenses, what amount shoul d she i ncl ude i n her
gr oss i ncome?

a. $0.
b. $450.
c. $750.
d. $1, 200.

2275. J uani t a r ecei ves a $2, 000 di st r i but i on f r omher Cover del l
Educat i on Savi ngs Account ( CESA) . The di st r i but i on consi st s of $1, 500
of cont r i but i ons and $500 of ear ni ngs. J uani t a pays $1, 700 i n qual i f i ed
hi gher educat i on expenses f or t he year . Cal cul at e t he amount t o be
i ncl uded i n J uani t a s gr oss i ncome.

a. $0.
*b. $75.
c. $425.
d. $500.

2276. Whi ch of t he f ol l owi ngs i s not a char act er i st i c of a Keogh pl an?

a. A t r ust i s est abl i shed.
b. Consi der ed t o be a qual i f i ed pl an.
c. Cont r i but i on t o pl an by ext ensi on due dat e.
*d. Favor abl e 10- year f or war d aver agi ng i s not avai l abl e.
e. Al l of t he above ar e char act er i st i cs.

2277. Whi ch st at ement i s true wi t h r espect t o gol den par achut e payment s?

a. Ref er s t o excess sever ance pay.
b. Does not i ncl ude payment s f r oma qual i f i ed pr of i t shar i ng pl an.
c. A deduct i on i s deni ed t o t he empl oyer .
d. A 20%exci se t ax i s i mposed on t he r eci pi ent .
*e. Al l of t he above ar e t r ue.

2278. Emmanuel , an execut i ve, r ecei ves a $600, 000 payment under a
gol den par achut e agr eement . Emmanuel s base amount f r omBl ue
Cor por at i on i s $140, 000. What amount , i f any, i s deduct i bl e by t he
cor por at i on?

a. $0.
*b. $140, 000.
c. $460, 000.
d. $600, 000.

2279. J ames, an execut i ve, r ecei ves a $600, 000 payment under a gol den
par achut e agr eement . J ames s base amount f r omSi l ver , I nc. , i s $140, 000.
What i s t he total t ax J ames must pay, assumi ng a 39. 6%i ndi vi dual t ax
r at e?

a. $0.
b. $92, 000.
c. $210, 000.
*d. $329, 600.

2280. Saysha i s an of f i cer of a l ocal bank t hat mer ges wi t h a nat i onal
bank, r esul t i ng i n a change of owner shi p. She l oses her j ob as a r esul t
of t he mer ger , but she r ecei ves a cash set t l ement of $390, 000 f r omher
empl oyer under her gol den par achut e. Her aver age annual compensat i on
f or t he past f i ve t ax year s i s $110, 000. Cal cul at e any nondeduct i bl e
exci se t ax Saysha must pay, i f any.

a. $0.
*b. $56, 000.
c. $110, 000.
d. $280, 000.
e. Some ot her amount .

2281. Lar r y negot i at es a $2. 5 mi l l i on cont r act wi t h Red, I nc. , a
publ i cl y- hel d cor por at i on t hat r ecei ves TARP f unds, t o become t hei r CEO
f or 2013. What amount i s deduct i bl e by Red, I nc. , i n 2013?

a. $0.
b. $1, 000, 000.
c. $2, 064, 000.
d. $2, 500, 000.

2282. Ni ck negot i at es a $4. 5 mi l l i on cont r act per year wi t h a maj or
col l ege f oot bal l pr ogr amt o become i t s head coach. What amount i s
deduct i bl e by t he pr ogr ami n 2013 hi s f i r st f ul l year of empl oyment .

a. None.
b. $1, 000, 000.
c. $3, 000, 000.
*d. $4, 500, 000.

2283. The speci al 83( b) el ect i on ( i . e. , wher e i ncome i s t axed i n t he
year of t he gr ant ) wi t h r espect t o a r est r i ct ed st ock pl an may be
advant ageous i n whi ch of t he f ol l owi ng si t uat i ons i n 2013?

a. The empl oyer i s an unst abl e company.
*b. The bar gai n el ement i s r el at i vel y smal l .
c. A mi ni mumamount of appr eci at i on i s expect ed i n t he f ut ur e.
d. The r est r i ct i on pr obabl y wi l l not be sat i sf i ed.

2284. Pony, I nc. , i ssues r est r i ct ed st ock t o empl oyees i n J ul y 2013,
wi t h a t wo- year vest i ng per i od and an SRF. An empl oyee must r emai n a
f ul l - t i me empl oyee of Pony f or t wo year s af t er t he r est r i ct ed st ock i s
i ssued. The st ock i s t r adi ng at $10 per shar e when t he st ock i s i ssued.
An empl oyee, Sam, deci des t o make t he 83( b) el ect i on wi t h hi s 1, 000
shar es. At t he end of 2013, t he st ock i s t r adi ng at $13 per shar e. How
much i ncome, i f any, must Samr ecogni ze i n 2013?

a. $0.
b. $10, 000 capi t al gai n.
*c. $10, 000 or di nar y i ncome.
e. $13, 000 or di nar y i ncome.

i ssued. The st ock i s t r adi ng at $10 per shar e when t he st ock i s i ssued.
An empl oyee, Sam, deci des t o make t he 83( b) el ect i on wi t h hi s 1, 000
shar es. At t he end of 2013, t he st ock i s sel l i ng f or $13 per shar e.
What amount , i f any, can Pony t ake as a compensat i on deduct i on?

a. $0.
*b. $10, 000 i n 2013.
c. $13, 000 i n 2013.
d. $10, 000 when st ock i s sol d.
e. $13, 000 when st ock i s sol d.

i ssued. The st ock i s t r adi ng at $10 per shar e when Sami s i ssued 1, 000
shar es, and he pr oceeds t o make a 83( b) el ect i on. At t he end of 2013,
t he st ock i s sel l i ng f or $13 per shar e. Samr emai ns a f ul l - t i me
empl oyee of Pony f or t he r equi r ed t wo- year vest i ng per i od at whi ch t i me
t he st ock i s wor t h $30 per shar e. Samsel l s hi s 1, 000 shar es i n 2017 at
$36 per shar e. What amount and t ype of i ncome wi l l Samr ecogni ze i n
2017?

*a. $26, 000 capi t al gai n.
b. $26, 000 or di nar y i ncome.
c. $23, 000 capi t al gai n.
d. $23, 000 or di nar y i ncome.
e. $36, 000 capi t al gai n.

i ssued. The st ock i s t r adi ng at $10 per shar e when Sami s i ssued 1, 000
shar es, and he does not make a 83( b) el ect i on. At t he end of 2013,
t he st ock i s sel l i ng f or $13 per shar e. Samr emai ns a f ul l - t i me
empl oyee of Pony f or t he r equi r ed t wo- year vest i ng per i od, at whi ch
t i me t he st ock i s wor t h $30 per shar e ( i n 2015) . Samsel l s hi s 1, 000
shar es i n 2017 at $36 per shar e. What amount and t ype of i ncome wi l l
Samr ecogni ze i n 2017?

a. $6, 000 or di nar y i ncome.
*b. $6, 000 capi t al gai n.
c. $26, 000 capi t al gai n.
d. $6, 000 capi t al gai n; $20, 000 or di nar y i ncome.
e. $20, 000 capi t al gai n; $6, 000 or di nar y i ncome.

2288. I f t he speci al el ect i on under 83( b) i s made as a r esul t of a
r est r i ct ed pr oper t y t r ansact i on, whi ch st at ement i s f al se?

a. A f act or suppor t i ng maki ng t he 83( b) el ect i on i s t he
expect at i on t he pr oper t y wi l l appr eci at e subst ant i al l y.
b. Or di nar y i ncome i s r ecogni zed on t he excess of t he FMV over
t he amount pai d f or t he pr oper t y on t he dat e r ecei ved.
c. Any appr eci at i on on t he pr oper t y af t er r ecei pt i s t r eat ed as
capi t al gai n.
*d. A deduct i on i s al l owed t o t he empl oyee f or any t axes pai d on
t he or i gi nal amount i ncl uded i n gr oss i ncome i f t he pr oper t y i s
subsequent l y f or f ei t ed.
e. None of t he above i s f al se.

2289. What st at ement i s false wi t h r espect t o an i ncent i ve st ock opt i on
( I SO) ?

a. To qual i f y as an I SO, t he opt i on pr i ce must equal or exceed
t he f ai r mar ket val ue of t he st ock at t he t i me t he opt i on i s
gr ant ed.
*b. The spr ead i s not subj ect t o t he al t er nat i ve mi ni mumt ax.
c. I f t he empl oyee meet s t he hol di ng per i od r equi r ement , t he
empl oyer does not obt ai n a busi ness deduct i on.
d. The spr ead i s t he excess of t he FMV of t he shar e at t he dat e
of exer ci se over t he opt i on pr i ce.
e. None of t he above ar e f al se.

2290. Under a nonqual i f i ed st ock opt i on ( NQSO) pl an whi ch i s gr ant ed t o
Damon on Mar ch 15, 2011, he may pur chase 200 shar es of st ock f r omhi s
empl oyer at $15 per shar e. At t hat dat e, t he opt i on does not have a
r eadi l y ascer t ai nabl e f ai r mar ket val ue. Ei ght mont hs l at er on t he dat e
of exer ci se t he f ai r mar ket val ue of t he st ock i s $20. On December 1,
2013, Damon sel l s 100 shar es f or $24 each. Whi ch of t he f ol l owi ng woul d
be t he r esul t of t hese t r ansact i ons on t he dat e of exer ci se and t he
dat e of sal e?

*a. Or di nar y i ncome of $1, 000 and a l ong- t er mcapi t al gai n of
$400.
b. Or di nar y i ncome of $1, 200 and a l ong- t er mcapi t al gai n of $300.
c. Or di nar y i ncome of $2, 400 and a l ong- t er mcapi t al gai n of $0.
d. Or di nar y i ncome of $1, 000 and a shor t - t er mcapi t al gai n of
$400.

2291. Yvonne exer ci ses i ncent i ve st ock opt i ons ( I SOs) f or 100 shar es of
Appl e Cor por at i on st ock at t he opt i on pr i ce of $100 per shar e on May 21,
2013, when t he f ai r mar ket val ue i s $120 per shar e. She sel l s t he 100
shar es of st ock 3 1/ 2 year s l at er f or $140. Det er mi ne t he r ecogni zed
gai n on t he sal e and cl assi f y i t as capi t al or or di nar y.

a. $2, 000 LTCG.
b. $2, 000 or di nar y i ncome.
*c. $4, 000 LTCG.
d. $4, 000 or di nar y i ncome.

2013, when t he f ai r mar ket val ue i s $120 per shar e. She hol ds t he st ock
f or onl y seven mont hs and sel l s t he shar es f or $140 per shar e.
Det er mi ne t he r ecogni zed gai n on t he sal e and cl assi f y i t as capi t al or
or di nar y.

*a. $2, 000 or di nar y i ncome and $2, 000 STCG.
b. $2, 000 or di nar y i ncome and $2, 000 LTCG.
c. $4, 000 or di nar y i ncome.
d. $4, 000 LTCG.

2013, when t he f ai r mar ket val ue i s $120 per shar e. She hol ds t he st ock
f or onl y t wo year s and sel l s t he shar es f or $115 per shar e. Det er mi ne
t he r ecogni zed gai n on t he sal e and cl assi f y i t as capi t al or or di nar y.

a. $2, 000 or di nar y i ncome and $2, 000 STCG.
b. $2, 000 or di nar y i ncome and $2, 000 LTCG.
c. $4, 000 or di nar y i ncome.
*d. $1, 500 LTCG.

2294. Whi ch i s not an advant age of a 401( k) pl an over a t r adi t i onal
I RA?

a. Deduct i on l i mi t at i on.
b. Ear l y wi t hdr awal opt i on wi t hout penal t y.
c. Loans f r omt he pl an.
*d. Recor d keepi ng.
e. Al l of t he above ar e advant ages of 401( k) pl an.

2295. Whi ch woul d not be consi der ed an advant age of a nonqual i f i ed
st ock opt i on pl an over an i ncent i ve st ock opt i on ( I SO) pl an?

a. Gr ant ed at any pr i ce.
b. May have any dur at i on.
c. Spr ead subj ect t o al t er nat i ve mi ni mumt ax.
*d. Gover ned by 83.
e. Al l ar e consi der ed advant ages.

2296. I n or der t o post pone i ncome t ax obl i gat i ons as l ong as possi bl e,
r et i r ement asset s shoul d be t aken f r omwhi ch asset s ( or account s) f i r st ?

a. Sect i on 457 account s of gover nment empl oyees si nce no
penal t i es appl y once t he empl oyee i s separ at ed f r omempl oyment .
b. Sect i on 401( k) and nonpr of i t 403( b) pl ans because t he age 55
separ at i on r ul e may appl y.
c. Tr adi t i onal I RAs si nce a t axpayer must be at l east age 59 1/ 2
t o obt ai n penal t y- f r ee wi t hdr awal s.
d. Rot h I RAs si nce no r equi r ed mi ni mumdi st r i but i on r ul es appl y.
*e. Taxabl e account s.

2297. Det er mi ne t he nonf or f ei t ur e per cent age under t hese i ndependent
si t uat i ons f or a def i ned benef i t pl an usi ng t he gr aded vest i ng r ul e.

a. Mar i has f i ve year s of ser vi ce compl et ed as
of Febr uar y 5, 2013 ( whi ch i s her empl oyment
anni ver sar y dat e) .

b. J ake, age 41, has si x year s of ser vi ce
compl et ed as of Mar ch 2, 2013 ( whi ch i s hi s
empl oyment anni ver sar y dat e) .

c. Sammi e, age 26, has f our year s of ser vi ce
compl et ed as of J ul y 21, 2013 ( whi ch i s hi s
empl oyment anni ver sar y dat e) .

Cor r ect Answer :
a. 60%.

b. 80%.

c. 40%.

2298. J oey has been an act i ve par t i ci pant i n a def i ned benef i t pl an f or
21 year s. Dur i ng hi s l ast 5 year s of empl oyment , J oey ear ned $32, 000,
$48, 000, $55, 000, $95, 000, and $105, 000, r espect i vel y ( r epr esent i ng hi s
hi ghest - i ncome year s) .

a. Cal cul at e J oey s maxi mum al l owabl e benef i t s
f r om t hi s qual i f i ed pl an ( assume t her e ar e
f ewer t han 100 par t i ci pant s) .

b. Assume t hat J oey s aver age compensat i on f or
hi s t hr ee hi gh year s i s $203, 000. Cal cul at e
J oey s maxi mumal l owabl e benef i t s.

Cor r ect Answer :
a. The limitation is the smaller of $205,000 in
2013 (indexed each year) or 100% of the
average of his three highest annual salaries:

$55,000 +
$95,000 +
$105,000
3

= $85,000 maximum
allowable benefit.

b. Smaller of: $205,000 in 2013 (indexed each
year) or 100% times highest three years
average, or $203,000. Thus, $203,000 is
Joeys maximum allowable benefit.

2299. Det er mi ne t he maxi mumannual benef i t s payabl e t o a par t i ci pant
f r oma def i ned benef i t pl an i n t he f ol l owi ng i ndependent si t uat i ons:

a. J acob, age 67, has been a par t i ci pant f or 14
year s, and hi s hi ghest aver age compensat i on
f or 3 year s i s $92, 000.

b. Sl oane, age 66, has been a par t i ci pant f or 8
year s ( 12 year s of ser vi ce) , and her hi ghest
aver age compensat i on f or 3 year s i s
$119, 000.

Cor r ect Answer :
a. $92,000 in 2013. The maximum allowable
benefits payable to Jacob from a defined
benefit plan is the smaller of $205,000 in
2013 (indexed each year) or 100% of his
average compensation for his highest three
years of employment.

b. $119,000 in 2013. The defined benefit plan
must reduce Sloanes maximum benefit payable
[e.g., $205,000 in 2013 (indexed each year)]
by one-tenth for each year of participation
under 10 years (e.g., $205,000 8/10 =
$164,000). Thus, the $119,000 average
compensation amount is below the ceiling.

2300. Chee i s a key empl oyee of an H. R 10 ( Keogh) def i ned contribution
pl an ( a pr of i t shar i ng pl an) cr eat ed by a par t ner shi p. Answer each of
t he f ol l owi ng independent quest i ons.

a. Dur i ng 2013, $7, 400 i s cont r i but ed t o t he
H. R. 10 pl an f or Chee. What amount i s
deduct i bl e i f Chee s ear ned i ncome i s
$45, 000 ( af t er t he deduct i on f or one- hal f of
sel f empl oyment t ax) ?

b. I n 2013, $8, 020 i s cont r i but ed t o t he H. R.
10 ( Keogh) pl an on Chee s behal f . I f Chee s
ear ned i ncome i s $36, 000 ( af t er t he
deduct i on f or one- hal f of sel f empl oyment
t ax) , what deduct i on, i f any i s al l owed?

c. The par t ner shi p had a bad year i n 2013, and
onl y $820 was cont r i but ed t o t he H. R. 10
pl an on Chee s behal f . Chee ear ned onl y
$700 dur i ng 2013. Cal cul at e Chee s al l owabl e
deduct i on.

Cor r ect Answer :
a. Lesser of $51,000 or 20% $45,000, so a
$9,000 ceiling applies. However, because only
$7,400 was contributed, only $7,400 can be
deductible.

b. Lesser of $51,000 or 20% $36,000. Therefore,
$7,200 can be taken as a deduction for AGI.

c. Lesser of $51,000 or 20% $700. Therefore,
$140 can be deductible.

2301. On J ul y 1, 2009, Red Cor por at i on sol d 100 of i t s common shar es
( wor t h $15 per shar e) t o i t s empl oyee Bobby f or $5 per shar e. The sal e
was subj ect t o Bobby s agr eement t o r esel l t he shar es t o t he
cor por at i on f or $5 per shar e i f hi s empl oyment i s t er mi nat ed wi t hi n t he
f ol l owi ng f our year s. The shar es wer e val ued at $26 per shar e on J ul y 1,
2013. He sol d t he shar es f or $30 per shar e on Sept ember 15, 2013. No
speci al el ect i on under 83( b) was made. I dent i f y t he cor r ect answer .

a. Bobby wi l l be t axed on what amount , i f any,
on J ul y 1, 2009?
( 1) Or di nar y i ncome of $1, 500.
( 2) Shor t - t er mcapi t al gai n of $1, 500.
( 3) Long- t er mcapi t al gai n of $1, 000.
( 4) Tax- exempt i ncome of $1, 500.
( 5) None of t he above.

b. Bobby wi l l be t axed on what amount , i f any,
on J ul y 1, 2013?

c. Bobby wi l l be t axed on what amount , i f any,
on Sept ember 15, 2013?
( 2) Shor t - t er mcapi t al gai n of $2, 000.
( 3) Long- t er mcapi t al gai n of $400.
( 4) Shor t - t er mcapi t al gai n of $400.

d. Red Cor por at i on wi l l obt ai n what deduct i on,
i f any?
( 1) Or di nar y deduct i on of $500 on Sept ember
15, 2013.
( 2) Or di nar y deduct i on of $2, 100 on J ul y 1,
2013.
( 3) Or di nar y deduct i on of $2, 500 on
Sept ember 15, 2013.
( 4) Or di nar y deduct i on of $500 on J ul y 1,
2013.
2013.

e. Assume t he same f act s, except t hat Bobby
makes an el ect i on under 83( b) . He wi l l be
t axed on what amount , i f any?
( 1) Or di nar y i ncome of $1, 000 on J ul y 1,
2009.
2013.
2013.
( 4) Long- t er mcapi t al gai n of $2, 000 on
Sept ember 15, 2013.

f . Red Cor por at i on i n e. above wi l l obt ai n what
deduct i on?
2009.
2013.
2013.
2013.

g. Suppose Bobby under e. above vol unt ar i l y
t er mi nat es hi s empl oyment on J anuar y 3,
2013, and goes i nt o busi ness f or hi msel f .
( 1) Bobby may t ake a $1, 000 deduct i on on hi s
2013 t ax r et ur n.
( 2) Bobby may appl y f or a r ef und of t he
$1, 000 on hi s 2009 t ax r et ur n.
( 3) Red Cor por at i on must r epay t he t axes
saved on t he $1, 000 deduct i on, and Bobby
get s no r ef und of t he t axes pai d on t he
$1, 000 pr evi ousl y i ncl uded i n gr oss
i ncome.
( 4) Bobby obt ai ns a $500 l oss on t he amount
he pai d f or t he st ock i ni t i al l y when he
sel l s i t back t o t he cor por at i on ( i . e. ,
he get s hi s money back) .

Cor r ect Answer :
a. 5; no income recognized given that the
resale feature qualifies as a substantial
risk of forfeiture.

b. 3; 100 shares ($26 $5) = $2,100
ordinary income.

c. 4; 100 shares ($30 $26) = $400 STCG.

d. 2; deduction in the same amount as Bobby
recognized as compensation income ($2,100).

e. 1; 100 shares ($15 $5) = $1,000 on
July 1, 2009.

f. 1; deduction equal to what Bobby recognizes
as income and at same time ($1,000).

g. 3; no refund of taxes Bobby paid on $1,000
recognized on July 1, 2009, as a result of
the special election. Bobby has a $0 gain
or loss on the resale of the stock to the
corporation.

2302. Roxy, I nc. , gr ant s 1, 000 NQSO t o an empl oyee, Car ol , ent i t l i ng
her t o pur chase Roxy st ock at $10 per shar e ( t he cur r ent pr i ce of t he
st ock) . Roxy si mul t aneousl y gr ant s 1, 000 I SOs t o anot her empl oyee,
Donna, ent i t l i ng her t o buy 1, 000 shar es of Roxy at $10 per shar e over
a t wo- year per i od. One year l at er , 2013, t he st ock has r i sen t o $20 per
shar e, and Car ol and Donna bot h exer ci se t hei r opt i ons i n f ul l ,
r ecei vi ng st ock not subj ect t o an SRF.

a. What happens t o Car ol t axwi se i n 2014?

b. What happens t o Donna t axwi se i n 2014?

c. What happens t o Roxy, I nc. , t axwi se i n
2014?

d. What happens t o Car ol t axwi se i n 2016 when
she sel l s her st ock f or $37?

e. What happens t o Donna t axwi se i n 2016 when
she sel l s her st ock f or $38?

f . What happens t o Roxy, I nc. , t axwi se i n 2016
wi t h r espect t o t hese t r ansact i ons?

Cor r ect Answer :
a. Carol recognizes $10 per share of ordinary
income or $10,000 (1,000 $10) in 2014.

b. Donna does not recognize any income at the
time of the exercise (2014).

c. Roxy, Inc., is entitled to a compensation
deduction of $10,000 associated with Carol.

d. Carols tax basis per share is $20 ($10 +
$10). So when she sells her stock for $37 per
share, she will have a $17,000 capital gain
[1,000 ($37 $20)].

e. Donnas tax basis is $10 per share. So when
she sells her stock for $38 per share, she
will have a $28,000 capital gain [1,000 ($38
$10)].

f. Roxy gets no deduction since there is no
ordinary income to Carol or Donna.

2303. On November 19, 2012, Rex i s gr ant ed a nonqual i f i ed st ock opt i on
t o pur chase 100 shar es of Tan Company. On t hat dat e, t he st ock i s
sel l i ng f or $8 per shar e, and t he opt i on pr i ce i s $9 per shar e. Rex
exer ci ses t he opt i on on August 21, 2013, when t he st ock i s sel l i ng f or
$10 per shar e. Fi ve mont hs l at er , Rex sel l s t he shar es f or $11. 50 per
shar e.

a. What amount i s i ncl uded i n Rex s gr oss
i ncome i n 2012?

b. What amount i s i ncl uded i n Rex s gr oss
i ncome i n 2013?

c. What amount and t ype of gai n i s r ecogni zed
by Rex i n 2014?

d. What amount , i f any, i s deduct i bl e by Tan
Company i n 2013?

e. What amount , i f any, i s r ecogni zed i n 2014
i f t he st ock i s sol d f or $9. 50 per shar e?

Cor r ect Answer :
a. No gain is recognized on the grant date since
the options have no readily ascertainable fair
market value.

b. $100 ordinary income [($10 $9) 100 shares
= $100].

c. $150 short-term capital gain [($11.50 $10)
100 shares = $150].

d. $100 is deductible by Tan Company in 2013, the
same amount that is taxed as ordinary income
to Rex.

e. $50 short-term capital loss [($9.50 $10)
100 shares = $50].

2304. On J anuar y 1, 2010, Gai l ( an execut i ve) r ecei ves a war r ant t o
pur chase one shar e of st ock at $70 and on t he same dat e t he f ai r mar ket
val ue of t he st ock i s $100. The war r ant has no r est r i ct i ons and has a
r eadi l y ascer t ai nabl e f ai r mar ket val ue on a st ock exchange of $30. She
exer ci ses t he war r ant on May 15, 2010, and sel l s t he st ock f or $200 on
December 20, 2013.

a. Cal cul at e t he amount Gai l woul d r ecogni ze i n
2010, i f any.

b. Cal cul at e t he amount Gai l woul d r ecogni ze i n
2013, i f any.

c. Suppose she sel l s t he war r ant i n 2014 f or
$39. What amount woul d Gai l r ecogni ze?

Cor r ect Answer :
a. Ordinary income of $30 in 2010.

b. Long-term capital gain of $100 in 2013
[$200 ($30 + $70)].

c. Long-term capital gain of $9 ($39 $30)
in 2014 on the sale of the warrant.

2305. What i s a def i ned cont r i but i on pl an?

Cor r ect Answer :
A def i ned cont r i but i on pensi on pl an ( or money pur chase) def i nes t he
amount t he empl oyer i s r equi r ed t o cont r i but e ( e. g. , a f l at dol l ar
amount , an amount based on a speci al f or mul a, or an amount equal t o a
cer t ai n per cent age of compensat i on) . A separ at e account must be
mai nt ai ned f or each par t i ci pant . Benef i t s ar e based sol el y on ( 1) t he
amount of cont r i but i on, and ( 2) i ncome f r omt he f unds t hat accr ues t o
t he par t i ci pant s account . Consequent l y, act uar i al cal cul at i ons ar e not
r equi r ed t o det er mi ne t he empl oyer s annual cont r i but i on. Upon
r et i r ement , an empl oyee s pensi on amount depends on t he val ue of hi s or
her account . Al t hough i t i s not mandat or y, a pl an may r equi r e or per mi t
empl oyee cont r i but i ons t o t he pensi on f und. Si nce empl oyer s r ecor d t he
expense f or bot h t ax and account i ng pur poses when f undi ng an empl oyee s
account , book- t ax di f f er ences do not of t en occur .

2306. What i s a pr of i t shar i ng pl an?

Cor r ect Answer :
A pr of i t shar i ng pl an i s a def er r ed compensat i on ar r angement
est abl i shed and mai nt ai ned by an empl oyer t o pr ovi de f or empl oyee
par t i ci pat i on i n a company s pr of i t s. Cont r i but i ons ar e pai d f r omt he
empl oyer t o a t r ust ee and ar e commi ngl ed i n a si ngl e t r ust f und.
Despi t e t he name, an empl oyer does not have t o have cur r ent or
accumul at ed pr of i t s t o make a cont r i but i on. The cont r i but i on f or mul a
can be based on compensat i on, ear ni ngs, gr oss sal es, or any ot her
measur ement chosen by t he empl oyer .

I n a pr of i t shar i ng pl an, a separ at e account i s mai nt ai ned f or each
par t i ci pant . The pl an must pr ovi de a def i ni t e, pr edet er mi ned f or mul a
f or al l ocat i ng t he cont r i but i ons made t o t he t r ust ee among t he
par t i ci pant s. Li kewi se, t he pl an must i ncl ude a def i ni t e,
pr edet er mi ned f or mul a f or di st r i but i ng t he accumul at ed f unds af t er a
f i xed number of year s, on t he at t ai nment of a st at ed age, or on t he
occur r ence of cer t ai n event s such as i l l ness, l ayof f , r et i r ement , or
t er mi nat i on of t he pl an. A company i s not r equi r ed t o cont r i but e a
def i ni t e, pr edet er mi ned amount t o t he pl an ever y year , al t hough
subst ant i al and r ecur r i ng cont r i but i ons must be made t o meet t he
per manency r equi r ement . For f ei t ur es ar i si ng under t hi s pl an may be used
t o i ncr ease t he i ndi vi dual account s of t he r emai ni ng par t i ci pant s as
l ong as t hese i ncr eases do not r esul t i n pr ohi bi t ed di scr i mi nat i on.
Benef i t s t o empl oyees may nor mal l y be di st r i but ed t hr ough l ump- sum
payout s i n a pr of i t shar i ng pl an. A 401( k) cash or def er r ed
ar r angement pl an i s t he most common t ype of pr of i t shar i ng pl an.

2307. Expl ai n t o a smal l busi ness owner some advant ages and
di sadvant ages of a si mpl i f i ed empl oyee pensi on pl an ( SEP) .

Cor r ect Answer :
Defined benefit and defined contribution plans have become compl ex and
cost l y due t o r est r i ct i ve l egi sl at i on over t he past 15 year s. Thus, a
SEP has become an al t er nat i ve t o t hese t r adi t i onal pl ans. Some
advant ages of t he SEP ar e as f ol l ows:

Less costly and complex.

Can establish after the end of the tax year.

Vesting immediately.

There are still some disadvantages of a SEP:

There is a 25% deduction limit for a SEP
rather than a 100% deduction for certain
defined contribution plans.

Participation rules are stricter.

There is no 10-year forward averaging
technique for certain lump-sum distributions.

Someone else other than a covered participant
must be the trustee.

2308. What i s a hi ghl y compensat ed empl oyee?

Cor r ect Answer :
An empl oyee i s a hi ghl y compensat ed empl oyee i f , at any t i me dur i ng t he
year or t he pr ecedi ng year , t he empl oyee sat i sf i es either of t he
f ol l owi ng:

Was a 5 percent owner of the company.
Received more than $115,000 (in 2013) in
annual compensation from the employer and was
a member of the top-paid group of the
employer. The top-paid group clause is
applicable only if the employer elects to
have it apply. An employee whose compensation
is in the top 20 percent of the employees is
a member of the top-paid group.

2309. Under what ci r cumst ances i s i t advant ageous f or an empl oyee t o
el ect t o be t axed i mmedi at el y as or di nar y i ncome on t he FMV i n excess
of t he amount pai d f or r est r i ct ed pr oper t y?

Cor r ect Answer :
The speci al el ect i on may be advant ageous i f :

The bargain element is relatively small.
Substantial appreciation is expected in the
future.
A high probability exists that the
restrictions will be met.

2310. Fr oman empl oyee s poi nt of vi ew, di scuss t he di f f er ence bet ween
t he t ax t r eat ment accor ded t o a nonqual i f i ed st ock opt i on ( NQSO) t hat
has an ascer t ai nabl e f ai r mar ket val ue and one t hat does not .

Cor r ect Answer :
I f a nonqual i f i ed st ock opt i on ( NQSO) has a r eadi l y ascer t ai nabl e f ai r
mar ket val ue ( i . e. , a war r ant t r aded on an est abl i shed mar ket ) , t he
val ue of t he opt i on must be i ncl uded i n t he gr oss i ncome of t he
empl oyee at t he dat e of gr ant . No i ncome i s r epor t ed when t he empl oyee
exer ci ses t he war r ant . Capi t al gai n or l oss t r eat ment occur s when t he
empl oyee di sposes of t he opt i oned st ock. The empl oyee s basi s at t he
dat e of di sposi t i on i s t he amount pai d f or t he st ock pl us any amount
r epor t ed as or di nar y i ncome.

Wher e a NQSO does not have a r eadi l y ascer t ai nabl e f ai r mar ket val ue,
t he empl oyee does not r ecogni ze i ncome on t he gr ant dat e. I nst ead, i n
t he year of exer ci se, t he empl oyee r epor t s as or di nar y i ncome t he
di f f er ence bet ween t he f ai r mar ket val ue of t he st ock on t he exer ci se
dat e and t he opt i on pr i ce. The amount pai d f or t he st ock, pl us t he
amount r epor t ed as or di nar y i ncome, becomes t he empl oyee s t ax basi s i n
t he st ock. Any appr eci at i on above such basi s i s t r eat ed as a capi t al
gai n upon di sposi t i on.

2311. Compar e a 401( k) pl an wi t h an I RA.

Cor r ect Answer :
An i nst r uct or can use Concept Summar y 19. 4 t o cover t hi s compar i son.
Most empl oyees wi l l f i nd a 401( k) pl an mor e at t r act i ve t han an I RA.
Pr obabl y t he bi ggest l i mi t at i on of an I RA i s t he $5, 500 maxi mumshel t er
i n 2013 ( i gnor i ng t he cat ch- up pr ovi si on) . Under 401( k) , empl oyees
ar e per mi t t ed t o shel t er compensat i on up t o $17, 500 ( i n 2013) . The
r est r i ct i ons on deduct i ng cont r i but i ons t o I RAs f or many mi ddl e- i ncome
and upper - i ncome t axpayer s may cause many empl oyees t o ut i l i ze 401( k)
pl ans mor e f r equent l y.

Another difference between 401(k) plans and IRAs is the manner in which
the money is treated. Money placed in an IRA may be tax deductible, whereas
dollars placed in a 401(k) plan are considered to be deferred
compensation. Thus, a 401(k) reduction may reduce profit sharing
payments, group term life insurance, and Social Security benefits.

2312. I f a per son has f unds f r omsour ces ot her t han r et i r ement asset s
when he or she r et i r es, whi ch r et i r ement asset shoul d be spent f i r st ?

Cor r ect Answer :
The most t ax- ef f i ci ent r esul t i s t o post pone t he i ncome t ax obl i gat i on
f or as l ong as possi bl e. Gener al l y, r et i r ement asset s shoul d be t aken
f r omasset s or account s i n t he f ol l owi ng or der so t hat t he t ax- def er r ed
gr owt h cont i nues:

Taxable accounts.

Section 457 accounts of government employees
since no penalties apply once the employee is
separated from employment.

Section 401(k) and nonprofit 403(b) plans
because the age 55 separation rule may apply.

Traditional IRAs since a taxpayer must be at
least age 59 1/2 to obtain penalty-free
withdrawals.

Roth IRAs since no required minimum
distribution rules apply.

2313. I n det er mi ni ng whet her an ent i t y i s t o be r ecogni zed as a
cor por at i on f or Feder al i ncome t ax pur poses, cl assi f i cat i on under st at e
l aw i s not concl usi ve.

*a. Tr ue
b. Fal se

2314. Under t he check- t he- box Regul at i ons, an ent i t y i s al l owed an
annual el ect i on on how i t wi l l be t r eat ed ( e. g. , cor por at i on,
par t ner shi p) f or Feder al i ncome t ax pur poses.

a. Tr ue
*b. Fal se

2315. I n or der t o obt ai n l i mi t ed l i abi l i t y, a sol e pr opr i et or
i ncor por at es hi s busi ness. Under t he check- t he- box Regul at i ons, t he
ent i t y can el ect t o be t r eat ed as a par t ner shi p.

a. Tr ue
*b. Fal se

2316. Under t he check- t he- box Regul at i ons, a mul t i - owner ent i t y t hat
def aul t s ( i . e. , makes no el ect i on) wi l l be t axed as a par t ner shi p.

*a. Tr ue
b. Fal se

2317. Taxpayer s who want bot h l i mi t ed l i abi l i t y and t he passt hr ough of
l osses shoul d choose ei t her t he Subchapt er S or t he LLC ent i t y f or mof
doi ng busi ness.

*a. Tr ue
b. Fal se

2318. I n t er ms of t he pass- t hr ough of t ax at t r i but es t o t he owner s,
bot h par t ner shi ps and C cor por at i ons f ol l ow t he conduit appr oach.

a. Tr ue
*b. Fal se

2319. Li ke i ndi vi dual s, cor por at i ons can t ake advant age of 1031 t o
el ect t o def er r ecogni zi ng gai n on l i ke- ki nd exchanges.

*a. Tr ue
b. Fal se

2320. The f or ei gn t ax cr edi t i s avai l abl e onl y t o i ndi vi dual s and not
t o C cor por at i ons.

a. Tr ue
*b. Fal se

2321. Some cor por at i ons ( e. g. , per sonal ser vi ce cor por at i ons) cannot
use a cal endar year f or t ax pur poses.

a. Tr ue
*b. Fal se

2322. Al t hough t he cor por at e i ncome t ax i s pr ogr essi ve, t he l ower
br acket s ar e phased out at hi gher t axabl e i ncome l evel s.

*a. Tr ue
b. Fal se

2323. Li ke i ndi vi dual s, cor por at i ons can cl ai mbot h deduct i ons for and
deduct i ons from AGI .

a. Tr ue
*b. Fal se

2324. For cor por at i ons and i ndi vi dual s, net shor t - t er mcapi t al gai ns
ar e t axed at or di nar y i ncome r at es.

*a. Tr ue
b. Fal se

2325. For i ncome t ax pur poses, excess capi t al l osses of i ndi vi dual s and
cor por at i ons ar e t r eat ed i n t he same manner .

a. Tr ue
*b. Fal se

2326. Bot h i ndi vi dual s and cor por at i ons can car r y over excess
char i t abl e cont r i but i ons i ndef i ni t el y.

a. Tr ue
*b. Fal se

2327. A C cor por at i on donat es i nvent or y ( basi s of $9, 000, f ai r mar ket
val ue of $10, 000) t o char i t y. Under cer t ai n ci r cumst ances, i t can cl ai m
a char i t abl e cont r i but i on deduct i on of $9, 500.

*a. Tr ue
b. Fal se

2328. The domest i c pr oduct i on act i vi t i es deduct i on ( DPAD) f or a
cor por at i on i s 9%of t he gr eat er of QPAI or TI .

a. Tr ue
*b. Fal se

2329. The domest i c pr oduct i on act i vi t i es deduct i on of an S cor por at i on
can be passed t hr ough t o i t s shar ehol der s.

*a. Tr ue
b. Fal se

2330. I n comput i ng t he NOL of a cor por at i on, t he di vi dends r ecei ved
deduct i on cannot be cl ai med.

a. Tr ue
*b. Fal se

2331. A cor por at i on s el ect i on t o f or ego a net oper at i ng l oss car r yback
i s i r r evocabl e and cannot l at er be changed.

*a. Tr ue
b. Fal se

2332. The amount of t he di vi dends r ecei ved deduct i on i s af f ect ed by t he
per cent age of owner shi p hel d by t he r eci pi ent cor por at i on i n t he payi ng
cor por at i on.

*a. Tr ue
b. Fal se

2333. Emer al d Cor por at i on and Gol d Cor por at i on each own 500 shar es of
I BM Cor por at i on common st ock and each r ecei ves t he same amount of cash
di vi dends on t hei r st ock i nvest ment . The di vi dends r ecei ved deduct i on
each cor por at i on can cl ai mwill be t he same.

a. Tr ue
*b. Fal se

2334. I n det er mi ni ng whi ch or gani zat i onal expendi t ur es can be amor t i zed,
i t i s t he year incurred ( and not paid) t hat cont r ol s i f t he cor por at i on
uses t he cash met hod of account i ng.

*a. Tr ue
b. Fal se

2335. I n f or mi ng a cor por at i on i n 2013, or gani zat i onal expendi t ur es ar e
i ncur r ed and pai d. These expendi t ur es must be amor t i zed over a per i od
of 180 mont hs.

a. Tr ue
*b. Fal se

2336. I f a cor por at i on does not el ect t o amor t i ze i t s or gani zat i onal
expendi t ur es, such expenses can never be deduct ed.

a. Tr ue
*b. Fal se

2337. Or gani zat i onal expendi t ur es i ncl ude t he cost s of t r ansf er r i ng
asset s t o t he new cor por at i on.

a. Tr ue
*b. Fal se

2338. I f a C cor por at i on has t axabl e i ncome i n excess of $18, 333, 333,
t he cor por at e t ax r at e i s 35%on all of i t s t axabl e i ncome.

*a. Tr ue
b. Fal se

2339. Qual i f i ed per sonal ser vi ce cor por at i ons ar e subj ect t o a f l at
i ncome t ax r at e of 35%and ar e not al l owed t o use t he gr aduat ed r at es
avai l abl e t o r egul ar cor por at i ons.

*a. Tr ue
b. Fal se

2340. The AMT t ax r at e appl i cabl e t o cor por at i ons i s t he same as t hat
appl i cabl e t o i ndi vi dual s.

a. Tr ue
*b. Fal se

2341. Cer t ai n smal l busi ness C cor por at i ons ar e not subj ect t o t he
al t er nat i ve mi ni mumt ax ( AMT) .

*a. Tr ue
b. Fal se

2342. An i ndi vi dual wi t h a f i scal year of J ul y 1- J une 30 has a due dat e
f or f i l i ng i t s Feder al i ncome t ax r et ur n of Oct ober 15.

*a. Tr ue
b. Fal se

2343. The Schedul e M- 1 t o For m1120 st ar t s wi t h t axabl e i ncome and,
af t er maki ng var i ous negat i ve and posi t i ve adj ust ment s, ends up wi t h
net i ncome per books.

a. Tr ue
*b. Fal se

2344. Schedul e M- 2 of For m1120 r econci l es unappr opr i at ed r et ai ned
ear ni ngs at t he begi nni ng of t he year wi t h unappr opr i at ed r et ai ned
ear ni ngs at year - end.

*a. Tr ue
b. Fal se

2345. Cur r ent l y al l C cor por at i ons must f i l e a Schedul e M- 3 wi t h For m
1120.

a. Tr ue
*b. Fal se

2346. A ci t y donat es l and t o a cor por at i on i n r et ur n f or t he
cor por at i on s const r uct i on of an assembl y pl ant on t he si t e. The f ai r
mar ket val ue of t he l and is t axed t o t he cor por at i on as i ncome.

a. Tr ue
*b. Fal se

2347. When f or mi ng a cor por at i on under 351, r ecogni zed gai n i s t he
lesser of r eal i zed gai n or t he amount of boot r ecei ved.

*a. Tr ue
b. Fal se

2348. I n t he f or mat i on of a cor por at i on under 351, t he shar ehol der s
basi s i n t he st ock r ecei ved i s decr eased by l oss r ecogni zed and boot
r ecei ved.

a. Tr ue
*b. Fal se

2349. I n a 351 t r ansf er t o a cont r ol l ed cor por at i on, t he
cor por at i on s basi s f or t he pr oper t y i t r ecei ves i s t he shar ehol der s
basi s i ncr eased by any boot gi ven by t he cor por at i on.

a. Tr ue
*b. Fal se

2350. A cor por at i on whose maj or sour ce of i ncome i s t ax- exempt i nt er est
pr obabl y wi l l not have much E & P.

a. Tr ue
*b. Fal se

2351. A di st r i but i on t o a shar ehol der coul d r esul t i n di vi dend i ncome
even i f t he cor por at i on had a def i ci t i n cur r ent E & P.

*a. Tr ue
b. Fal se

2352. Pr oper t y di st r i but i ons t o shar ehol der s can r esul t i n t he
di st r i but i ng cor por at i on r ecogni zi ng gai ns and l osses.

a. Tr ue
*b. Fal se

2353. A shar ehol der s basi s i n pr oper t y r ecei ved as a di vi dend i s i t s
f ai r mar ket val ue on t he dat e of t he di st r i but i on.

*a. Tr ue
b. Fal se

2354. Sar ah, a sol e shar ehol der , r ent s pr oper t y t o her cor por at i on. The
r ent i ncome she r ecei ves f r omt he l ease i s a const r uct i ve di vi dend t o
Sar ah.

a. Tr ue
*b. Fal se

2355. Unl i ke r egul ar di vi dends, const r uct i ve di vi dends need not be
di st r i but ed t o a cor por at i on s shar ehol der s on a pr o r at a basi s.

*a. Tr ue
b. Fal se

2356. I f a cor por at i on has no E & P, i t s shar ehol der s wi l l not have
const r uct i ve di vi dends.

*a. Tr ue
b. Fal se

2357. Sat i sf yi ng t he def i ni t i on of a smal l busi ness cor por at i on i s no
l onger necessar y once t he S el ect i on i s i ni t i al l y made.

a. Tr ue
*b. Fal se

2358. Under cer t ai n ci r cumst ances, an S cor por at i on can have mor e t han
100 shar ehol der s.

*a. Tr ue
b. Fal se

2359. I f t he shar ehol der s of a cal endar year C cor por at i on el ect S
st at us on Fr i day, Mar ch 15, 2013, t he el ect i on i s ef f ect i ve f or al l of
2013.

*a. Tr ue
b. Fal se

2360. An S cor por at i on can be a shar ehol der i n anot her cor por at i on.

*a. Tr ue
b. Fal se

2361. Canar y Cor por at i on, a cal endar year S cor por at i on, i ssues some of
i t s st ock t o a nonr esi dent al i en on Mar ch 5, 2013. Canar y becomes a C
cor por at i on as of Mar ch 6, 2013.

a. Tr ue
*b. Fal se

2362. I n or der t o vol unt ar i l y r evoke an S el ect i on, al l of t he
shar ehol der s must consent t o t he r evocat i on.

a. Tr ue
*b. Fal se

2363. On Mar ch 8, 2013, al l of t he shar ehol der s of Ki ngf i sher
Cor por at i on ( a cal endar year ent i t y) vol unt ar i l y r evoke t he S el ect i on
( ef f ect i ve as soon as possi bl e) . For al l of 2013, Ki ngf i sher
Cor por at i on wi l l be a C cor por at i on.

*a. Tr ue
b. Fal se

2364. The t axabl e i ncome ( or l oss) of an S cor por at i on i s al l ocat ed t o
each shar ehol der on a per - shar e and per - day of st ock owner shi p basi s.

*a. Tr ue
b. Fal se

2365. I n comput i ng t he t axabl e i ncome ( or l oss) of an S cor por at i on, a
domest i c pr oduct i on act i vi t i es deduct i on ( DPAD) is al l owed.

a. Tr ue
*b. Fal se

2366. I n comput i ng t he t axabl e i ncome ( or l oss) of an S cor por at i on, an
NOL car r yover f r oma pr i or year is not al l owed.

*a. Tr ue
b. Fal se

2367. The amor t i zat i on of or gani zat i onal expendi t ur es and t he di vi dends
r ecei ved deduct i on ar e al l owed i n det er mi ni ng t he t axabl e i ncome of an
S cor por at i on.

a. Tr ue
*b. Fal se

2368. As a separ at el y st at ed i t em, t he l ong- t er mcapi t al l osses of an S
cor por at i on wi l l pass t hr ough t o i t s shar ehol der s as shor t - t er mcapi t al
l osses.

a. Tr ue
*b. Fal se

2369. Exampl es of separ at el y st at ed i t ems of an S cor por at i on i ncl ude
t ax- exempt i nt er est .

*a. Tr ue
b. Fal se

2370. Dar l ene, a 30%shar ehol der i n a cal endar year S cor por at i on,
sel l s her st ock on J une 7, 2013. I f t he cor por at i on has an oper at i ng
l oss f or 2013, none of t hi s l oss can be cl ai med by Dar l ene because she
was not a shar ehol der as of December 31, 2013.

a. Tr ue
*b. Fal se

2371. J acob i s a shar ehol der i n Robi n Cor por at i on, an S cor por at i on.
J acob s shar e of Robi n s act i vi t i es f or t he cur r ent year i s a shor t -
t er mcapi t al gai n of $80, 000 and an oper at i ng l oss of $50, 000. As a
r esul t of t hese t r ansact i ons, J acob shoul d i ncr ease hi s basi s i n t he
Robi n st ock by $30, 000.

*a. Tr ue
b. Fal se

2372. An S cor por at i on makes a $20, 000 cash di st r i but i on t o a
shar ehol der whose basi s i n t he st ock i s $19, 000. The di st r i but i on will
r esul t i n a $1, 000 negat i ve basi s i n t he st ock.

a. Tr ue
*b. Fal se

2373. I f a shar ehol der i n an S cor por at i on makes a l oan t o t he
cor por at i on, t hi s i ncr eases t he basi s i n hi s st ock i nvest ment .

a. Tr ue
*b. Fal se

2374. Par t ner shi ps ar e not consi der ed t o be separ at e t axabl e ent i t i es
and, consequent l y, ar e not t axed at t he ent i t y l evel .

*a. Tr ue
b. Fal se

2375. Li ke S cor por at i ons, par t ner shi ps ser ve as condui t s f or t hei r
owner s.

*a. Tr ue
b. Fal se

2376. Even t hough par t ner shi ps ar e not subj ect t o i ncome t ax, t hey ar e
r equi r ed t o f i l e i ncome t ax r et ur ns.

*a. Tr ue
b. Fal se

2377. I f pr oper t y cont r i but ed t o a par t ner shi p i s subj ect t o a
l i abi l i t y ( assumed by t he par t ner shi p) , gai n i s r ecogni zed t o t he
cont r i but i ng par t ner t o t he ext ent of t he l i abi l i t y.

a. Tr ue
*b. Fal se

2378. I f a par t ner shi p i nt er est i s r ecei ved i n exchange f or ser vi ces
r ender ed, or di nar y i ncome must be r ecogni zed by t he r eci pi ent of t he
capi t al i nt er est .

*a. Tr ue
b. Fal se

2379. I n r et ur n f or a 10%i nt er est i n t he Sapphi r e Par t ner shi p, Li l y
t r ansf er s cash of $50, 000 and l and ( basi s of $200, 000; f ai r mar ket
val ue of $300, 000) . Li l y s basi s i n her Sapphi r e Par t ner shi p i nt er est
i s $250, 000.

*a. Tr ue
b. Fal se

2380. Changes i n t he l i abi l i t i es ( t r ade account s payabl e, bank l oans,
et c. ) of a par t ner shi p will not af f ect t he basi s of a par t ner shi p
i nt er est .

a. Tr ue
*b. Fal se

2381. A par t ner s basi s i n t he par t ner shi p i nt er est i s decreased by hi s
or her shar e of t he capi t al l osses i ncur r ed by t he par t ner shi p.

*a. Tr ue
b. Fal se

2382. A par t ner s basi s i n t he par t ner shi p i nt er est i s increased by hi s
or her shar e of t he t ax- exempt i ncome r ecei ved by t he par t ner shi p.

*a. Tr ue
b. Fal se

2383. J enny cont r i but es l and ( adj ust ed basi s of $300, 000; f ai r mar ket
val ue of $280, 000) and cash of $40, 000 t o t he newl y f or med Gr een
Par t ner shi p. Gr een wi l l have a basi s i n t he l and of $280, 000.

a. Tr ue
*b. Fal se

2384. The hol di ng per i od t o t he par t ner shi p of pr oper t y cont r i but ed by
a par t ner i ncl udes t he per i od dur i ng whi ch t he pr oper t y was hel d by t he
cont r i but i ng par t ner .

*a. Tr ue
b. Fal se

2385. A par t ner shi p s or di nar y i ncome or l oss i s comput ed wi t hout
consi der i ng any char i t abl e cont r i but i ons. Thi s i t emi s separ at el y
st at ed and passes t hr ough t o t he i ndi vi dual par t ner s.

*a. Tr ue
b. Fal se

2386. The domest i c pr oduct i on act i vi t i es deduct i on ( DPAD) i s det er mi ned
at t he par t ner shi p l evel and t hen passed t hr ough t o each i ndi vi dual
par t ner based on hi s or her par t ner shi p i nt er est .

a. Tr ue
*b. Fal se

2387. Par t ner s can car r y over par t ner shi p l osses t hat exceed t he basi s
i n t hei r par t ner shi p i nt er est s.

*a. Tr ue
b. Fal se

2388. I f t he basi s of a par t ner shi p i nt er est i s exhaust ed, a par t ner
can use l oans made t o t he par t ner shi p t o absor b excess l osses.

a. Tr ue
*b. Fal se

2389. J or dan and hi s t wo br ot her s ar e equal owner s i n Taupe Par t ner shi p.
I f J or dan sel l s busi ness pr oper t y ( basi s of $230, 000; f ai r mar ket val ue
of $180, 000) t o Taupe f or $180, 000, he cannot r ecogni ze t he $50, 000
r eal i zed l oss.

*a. Tr ue
b. Fal se

2390. Guar ant eed payment s are deduct i bl e by t he par t ner shi p and ar e
t axabl e t o t he par t ner r ecei vi ng t he payment s.

*a. Tr ue
b. Fal se

2391. Guar ant eed payment s have no ef f ect on t he basi s of a par t ner s
i nt er est i n t he par t ner shi p.

*a. Tr ue
b. Fal se

2392. Whi ch of t he f ol l owi ng, i f any, incorrectly char act er i ze t he
check- t he- box Regul at i ons?

a. A one- owner busi ness i s a sol e pr opr i et or shi p i f def aul t ( no
el ect i on i s made) occur s.
b. A one- owner busi ness can el ect t o be t axed as a cor por at i on.
c. I f def aul t ( no el ect i on i s made) occur s, a l i mi t ed l i abi l i t y
company i s t axed as a par t ner shi p.
*d. The check- t he- box Regul at i ons can appl y t o ent i t i es t hat ar e
al r eady i ncor por at ed under st at e l aw.

2393. Whi ch of t he f ol l owi ng, i f any, correctly descr i be t he st at us or
nat ur e of l i mi t ed l i abi l i t y compani es?

a. Can el ect par t ner shi p t ax st at us even i f i ncor por at ed under
st at e l aw.
*b. One of t he mai n r easons why t he check- t he- box Regul at i ons
wer e i ssued.
c. Cannot el ect t o be t axed as a cor por at i on.
d. St at ut es cr eat i ng t hese ent i t i es have been adopt ed by onl y a
mi nor i t y of t he st at es.

2394. Whi ch, i f any, of t he f ol l owi ng r ul es r el at e only t o t he i ncome
t axat i on of C cor por at i ons?

a. A domest i c pr oduct i on act i vi t i es deduct i on i s al l owed.
b. Li ke- ki nd exchanges ar e nont axabl e.
c. No deduct i on i s avai l abl e f or i nvent or y donat ed t o char i t y.
d. Net l ong- t er mcapi t al gai ns ar e subj ect t o a speci al
al t er nat i ve t ax.

2395. Whi ch of t he f ol l owi ng r ul es ar e t he same as t o t he i ncome
t axat i on of i ndi vi dual s and C cor por at i ons?

a. Recapt ur e of depr eci at i on on r eal pr oper t y ( 1250) .
*b. Excess shor t - t er mcapi t al l osses ar e car r i ed over as shor t -
t er mcapi t al l osses.
c. Di vi dends r ecei ved deduct i on.
d. Due dat e f or f i l i ng t he Feder al i ncome t ax r et ur n.

2396. I n compar i ng r egul ar ( C) cor por at i ons wi t h i ndi vi dual s, whi ch of
t he f ol l owi ng, i f any, r el at e only t o ( C) cor por at i ons?

a. A net shor t - t er mcapi t al gai n i s t axed as or di nar y i ncome.
b. An el ect i on can be made t o def er r ecogni t i on of gai n on an
i nvol unt ar y conver si on under 1033.
c. The car r yover per i od f or excess capi t al l osses i s unl i mi t ed.
*d. Excess capi t al l osses can be car r i ed back.

2397. I n compar i ng C cor por at i ons wi t h i ndi vi dual s, whi ch of t he
f ol l owi ng, i f any, r el at e only t o i ndi vi dual s?

*a. Excess l ong- t er mcapi t al l osses ar e car r i ed f or war d as l ong-
t er mcapi t al l osses.
b. Excess char i t abl e cont r i but i ons can be car r i ed f or war d.
c. Excess char i t abl e cont r i but i ons can be car r i ed back.
d. Est i mat ed i ncome t ax payment s may have t o be made.

2398. I n 2012, Cr eeper Cor por at i on had a $4, 000 net l ong- t er mcapi t al
l oss whi ch i t coul d not car r y back. For 2013, i t had t he f ol l owi ng
capi t al t r ansact i ons:

Long-term capital gain $2,000
Short-term capital gain 3,000

As a result of these transactions, for 2013 Creeper has a:

a. Net shor t - t er mcapi t al gai n of $1, 000.
b. Net shor t - t er mcapi t al gai n of $3, 000.
*c. Net l ong- t er mcapi t al gai n of $1, 000.
d. Car r yover t o 2014 of $2, 000 l ong- t er mcapi t al l oss.

2399. Madi son, a cal endar year i ndi vi dual t axpayer , has t he f ol l owi ng
r esul t s f or 2013: pr of i t f r omoper at i ons of $200, 000 and l ong- t er m
capi t al l oss f r omi nvest ment s of $20, 000. As t o t he capi t al l oss,
Madi son may:

a. Car r y back t he l oss f or t hr ee year s t o of f set any capi t al
gai ns.
b. Deduct $3, 000 and car r y f or war d $17, 000 f or f i ve year s as a
l ong- t er mcapi t al l oss.
*c. Deduct $3, 000 and car r y f or war d $17, 000 i ndef i ni t el y as a
l ong- t er mcapi t al l oss.
d. Deduct $3, 000 and car r y f or war d $17, 000 i ndef i ni t el y as a
shor t - t er mcapi t al l oss.

2400. Gr ay i s a cal endar year t axpayer . I n ear l y December 2013, Gr ay s
Boar d of Di r ect or s aut hor i zes a pl edge of an $80, 000 donat i on t o t he
Red Cr oss t o hel p pr ovi de f ood and shel t er t o vi ct i ms of nat ur al
di sast er s. The donat i on i s pai d as f ol l ows: $10, 000 i n l at e December
2013, $40, 000 i n Febr uar y 2014, and $30, 000 i n ear l y Apr i l
2014. Di sr egar di ng per cent age l i mi t at i ons, t he maxi mumdeduct i on f or
2013 i s:

a. $80, 000 i f Gr ay i s an accr ual basi s i ndi vi dual .
*b. $50, 000 i f Gr ay i s an accr ual basi s cor por at i on.
c. $50, 000 i f Gr ay i s a cash basi s cor por at i on.
d. $50, 000 i f Gr ay i s an accr ual basi s i ndi vi dual .

2401. Ci t r on Company i s a whol esal e di st r i but or of chi l dr en s cl ot hi ng.
Dur i ng t he year , i t donat es cl ot hes ( cost of $60, 000; r et ai l val ue of
$100, 000) t o Cl ot hes f or Needy ( a qual i f i ed char i t abl e
or gani zat i on) . Di sr egar di ng per cent age l i mi t at i ons, Ci t r on s
char i t abl e cont r i but i on deduct i on i s:

*a. $80, 000 i f Ci t r on i s a C cor por at i on.
b. $60, 000 i f Ci t r on i s a C cor por at i on.
c. $100, 000 i f Ci t r on i s a C cor por at i on.
d. $80, 000 i f Ci t r on i s an i ndi vi dual .

2402. Ski nner Cor por at i on, a cal endar year C cor por at i on, had t he
f ol l owi ng t r ansact i ons dur i ng t he cur r ent year :

Income from operations $800,000
Expenses from operations 900,000
Dividends from Siskin Corporation
(20% ownership)
200,000

Skinners taxable income (or NOL) for the current year is:

a. $100, 000 t axabl e i ncome.
b. $40, 000 NOL.
*c. $60, 000 NOL.
d. $100, 000 NOL.

2403. Dur i ng t he cur r ent year , Goose Cor por at i on ( a cal endar year , cash
basi s t axpayer ) r ecei ves cash di vi dends as f ol l ows:

Source of Dividends Ownership
Percentage
Dividends
Emu Corporation 90% $90,000
Robin Corporation 21% 60,000
Crane Corporation 10% 30,000

Presuming the taxable income limitation does not apply, Goose
Corporations dividends received deduction for the current year is:

a. $126, 000.
b. $135, 000.
c. $141, 000.
*d. $159, 000.

2404. I n t he cur r ent year , Aubur n Cor por at i on ( a cal endar year
t axpayer ) , has t he f ol l owi ng i ncome and expenses:

Gross income from operations $1,000,00
0
Expenses from operations 1,100,000
Dividends from Blond Corporation 200,000

Auburn Corporation owns 20% of the stock in Blond Corporation. The
dividends received deduction for the current year is:

a. $200, 000.
*b. $160, 000.
c. $100, 000.
d. $80, 000.

2405. I n t he cur r ent year , Mocki ngbi r d Cor por at i on ( a cal endar year
t axpayer ) has t he f ol l owi ng i ncome and expenses:

Gross income from operations $1,900,00
0
Expenses from operations 2,000,000
Dividends from Hummingbird
Corporation
400,000

Mockingbird Corporation owns 10% of the stock of Hummingbird Corporation.
The dividends received deduction for the current year is:

*a. $210, 000.
b. $280, 000.
c. $300, 000.
d. $320, 000.

2406. Whi ch, i f any, of t he f ol l owi ng cost s cannot be expensed or
amor t i zed as or gani zat i onal expenses?

*a. Cost of i ssui ng or sel l i ng st ock cer t i f i cat es.
b. Cost of or gani zat i onal meet i ngs of t he boar d of di r ect or s.
c. Fee pai d t o t he st at e f or i ncor por at i ng.
d. Legal f ees i ncur r ed f or pr epar i ng t he cor por at e char t er and
by- l aws.

2407. Teal Cor por at i on i s i ncor por at ed i n November 2013. The f ol l owi ng
f or mat i on expenses ar e incurred i n 2013:

Legal and accounting expenses incident
to organization
$4,000
Expenses of temporary directors and
organizational meetings of directors
and shareholders
2,000
Expenditures connected with the
transfer of assets to Teal
3,000

Except for the legal and accounting expenses which are paid in 2014, all
other expenses are paid in 2013. If Teal Corporation uses the cash basis
and adopts a calendar year for tax purposes, the amount of organizational
expenditures it can elect to expense for 2013 is:

a. $2, 000.
b. $5, 000.
c. $6, 000.
d. $9, 000.

2408. Al abast er Cor por at i on, a cal endar year t axpayer , was f or med on
J ul y 1, 2013, and i ncur r ed or gani zat i onal expendi t ur es of $52, 000. I t s
deduct i on f or t hese expendi t ur es f or 2013 can be a:

a. Maximum of $5, 000.
b. Maximum of $2, 000 + ( 6/ 180 $50, 000) .
*c. Maximum of $3, 000 + ( 6/ 180 $49, 000) .
d. Minimum of 6/ 180 $52, 000.

2409. Two unr el at ed, cal endar year C cor por at i ons have t he f ol l owi ng
t axabl e i ncome f or t he cur r ent year :

Olive Corporation Magenta
Corporation
Taxable income $70,000 $90,000

Magenta Corporation is a qualified personal service corporation. Based on
these facts, their corporate tax liability is:

a. $24, 500 f or Ol i ve and $18, 850 f or Magent a.
b. $24, 500 f or Ol i ve and $31, 500 f or Magent a.
c. $12, 500 f or Ol i ve and $18, 850 f or Magent a.
*d. $12, 500 f or Ol i ve and $31, 500 f or Magent a.

2410. I n compl et i ng Schedul e M- 1 ( r econci l i at i on of i ncome per books
wi t h i ncome per t ax r et ur n) of For m1120, t o net i ncome per books:

a. Add t ax- exempt i nt er est .
*b. Add excess of capi t al l oss over capi t al gai n.
c. Add pr oceeds of t er ml i f e i nsur ance r ecei ved by t he
cor por at i on due t o t he deat h of a key empl oyee.
d. Subt r act Feder al i ncome t ax.

2411. To i mpr ove i t s l i qui di t y, t he shar ehol der s of Spoonbi l l
Cor por at i on make a capi t al cont r i but i on of $200, 000 i n cash. To
f aci l i t at e t he bui l di ng of a manuf act ur i ng pl ant , t he Ci t y of Wi chi t a
donat es l and ( wor t h $800, 000) t o Spoonbi l l Cor por at i on. As a r esul t of
t hese t r ansact i ons, Spoonbi l l has:

*a. No i ncome and a basi s i n t he l and of zer o.
b. I ncome of $1 mi l l i on and a basi s i n t he l and of zer o.
c. I ncome of $800, 000 and a basi s i n t he l and of $800, 000.
d. No i ncome and a basi s i n t he l and of $800, 000.

2412. Whi ch of t he f ol l owi ng wi l l hel p avoid t he t hi n capi t al i zat i on
pr obl em?

a. Avoi d any pr ovi si on f or i nt er est .
b. Do not pr ovi de f or a def i ni t e mat ur i t y dat e.
c. Make r epayment cont i ngent on t he cor por at i on s ear ni ngs.
d. Subor di nat e t he debt t o ot her l i abi l i t i es.

2413. Ai den and Addi son f or mDove Cor por at i on wi t h t he f ol l owi ng
i nvest ment s:

From
Aiden
From Addison
Cash $800,00
0

Building (basis of $400,000, fair
market value of $300,000)
$300,000
Land (basis of $200,000; fair
500,000

Dove issues stock equally to Aiden and Addison. One of the tax consequences
of these transfers is:

*a. Dove has a basi s i n t he bui l di ng of $400, 000.
b. Addi son has a r ecogni zed l oss on t he bui l di ng of $100, 000.
c. Addi son has a basi s i n t he Dove st ock of $800, 000.
d. Addi son has a r ecogni zed gai n on l and of $300, 000 but no
r ecogni zed l oss on t he bui l di ng.

2414. Cami l l a and Dean f or mGr ouse Cor por at i on wi t h t he f ol l owi ng
i nvest ment :

From From Dean
Camilla
Cash $300,000
Property (basis of $320,000; fair
$330,000

Camilla and Dean each receive 300 shares of stock in Grouse Corporation and,
in addition, Dean receives $30,000 in cash. As a result of the transfer,
Deans basis in the stock and Grouses basis in the property will be:

a. $330, 000 and $300, 000.
*b. $300, 000 and $330, 000.
c. $310, 000 and $300, 000.
d. $290, 000 and $310, 000.

2415. J i m, Bet t y, and Bi l l f or mCr ow Cor por at i on. J i mand Bet t y each
cont r i but e cash of $500, 000, whi l e Bi l l cont r i but es l and ( basi s of
$550, 000; f ai r mar ket val ue of $600, 000) . Each shar ehol der r ecei ves
one- t hi r d of Cr ow s st ock, and Bi l l al so r ecei ves $100, 000 i n cash.
Whi ch, i f any, of t he f ol l owi ng choi ces i s a cor r ect r esul t of t he
i ncor por at i on?

a. Bi l l s basi s i n t he Cr ow st ock i s $650, 000.
b. Cr ow Cor por at i on s basi s i n t he l and i s $550, 000.
c. Cr ow s basi s i n t he l and i s $650, 000.
*d. Cr ow s basi s i n t he l and i s $600, 000.

2416. Mel , Fr ed, and Mar y f or mCanar y Cor por at i on. Mel and Fr ed each
cont r i but e cash of $250, 000, whi l e Mar y cont r i but es l and ( basi s of
$100, 000; f ai r mar ket val ue of $300, 000) . Each t r ansf er or r ecei ves one-
t hi r d of Canar y s shar es, and Mar y al so r ecei ves $50, 000 i n cash. Whi ch,
i f any, of t he f ol l owi ng choi ces i s a cor r ect r esul t of t he
i ncor por at i on?

a. Canar y Cor por at i on s basi s i n t he l and i s $100, 000.
*b. Canar y s basi s i n t he l and i s $150, 000.
c. Canar y s basi s i n t he l and i s $300, 000.
d. Mar y s basi s i n t he Canar y st ock i s $450, 000.

2417. J acob and Ashl ey f or mJ unco Cor por at i on wi t h t he f ol l owi ng
i nvest ment s:

From
Jacob
From Ashley
Cash $200,
000

Equipment (basis of $400,000;
fair market value of $300,000)
30
0,000

Land (basis of $300,000; fair
$600,000

Jacob and Ashley each receive one-half of the Junco stock. In addition,
Ashley receives cash of $100,000. One of the results of these transfers is:

a. J acob has a r ecogni zed l oss of $100, 000.
b. Ashl ey has a r ecogni zed gai n of $300, 000.
*c. J unco Cor por at i on has a basi s i n t he l and of $400, 000.
d. Ashl ey s basi s i n t he J unco Cor por at i on st ock i s $500, 000.

2418. As of J anuar y 1, 2013, Donal d, t he sol e shar ehol der of Sandpi per
( a cal endar year C cor por at i on) , had a basi s i n hi s st ock of $50, 000.
Dur i ng 2013, Sandpi per had an oper at i ng l oss of $100, 000 and
di st r i but ed a $70, 000 di vi dend t o Donal d. As of J anuar y 1, 2013,
Sandpi per had accumul at ed E & P of $200, 000. What i s Donal d s basi s i n
hi s Sandpi per st ock as of J anuar y 1, 2014?

a. ( $120, 000) .
b. ( $20, 000) .
c. $0.
*d. $50, 000.

2419. As of J anuar y 1, 2013, Amanda, t he sol e shar ehol der of Ter n ( a
cal endar year S cor por at i on) , had a basi s i n her st ock of $50, 000.
Dur i ng 2013, Ter n had a net oper at i ng l oss of $100, 000 and di st r i but ed
a $70, 000 di vi dend t o Amanda. What i s Amanda s basi s i n her Ter n st ock
as of J anuar y 1, 2014?

a. ( $120, 000) .
b. ( $20, 000) .
*c. $0.
d. $50, 000.

2420. As of J anuar y 1, 2013, Owl Cor por at i on ( a cal endar year C
cor por at i on) has a def i ci t i n accumul at ed ear ni ngs and pr of i t s ( E & P)
of $150, 000. I n 2013, i t has cur r ent E & P of $200, 000 and di st r i but es
a $220, 000 di vi dend t o i t s shar ehol der s. A r esul t of t hese t r ansact i ons
i s:

*a. As of J anuar y 1, 2014, Owl s def i ci t i n accumul at ed E & P i s
$150, 000.
b. As of J anuar y 1, 2014, Owl s accumul at ed E & P i s $50, 000.
c. The shar ehol der s r ecogni ze di vi dend i ncome of $50, 000.
d. The shar ehol der s r ecogni ze di vi dend i ncome of $220, 000.

2421. J er r y i s t he sol e shar ehol der of Bl uej ay Cor por at i on, a cal endar
year C cor por at i on. As of J anuar y 1, 2013, Bl uej ay has a def i ci t of
$50, 000 i n accumul at ed E & P. Dur i ng 2013, i t has cur r ent E & P of
$300, 000 and di st r i but es a cash di vi dend of $400, 000 t o i t s shar ehol der .
As of J anuar y 1, 2013, J er r y s basi s i n t he Bl uej ay st ock i s $75, 000.
One r esul t of t hese t r ansact i ons i s:

a. Di vi dend i ncome t o J er r y of $250, 000.
*b. Di vi dend i ncome t o J er r y of $300, 000.
c. Di vi dend i ncome t o J er r y of $400, 000.
d. As of J anuar y 1, 2014, Bl uej ay Cor por at i on has a def i ci t i n
accumul at ed ear ni ngs and pr of i t s of $150, 000.

2422. I n conver t i ng a cor por at i on s taxable income f or t he year t o
current E & P, whi ch of t he f ol l owi ng adj ust ment s ar e pr oper ?

a. Subt r act t he domest i c pr oduct i on act i vi t i es deduct i on ( DPAD) .
b. Add Feder al i ncome t axes pai d.
c. Subt r act t he di vi dends r ecei ved deduct i on.
d. Add char i t abl e cont r i but i ons i n excess of t he 10%l i mi t at i on.

2423. Sni pe Cor por at i on, a cal endar year t axpayer , has t ot al E & P of
$800, 000. Dur i ng t he cur r ent year , Sni pe makes pr oper t y di st r i but i ons
t o Tr acy ( t he sol e shar ehol der ) as f ol l ows:

Adjusted Basis Fair Market
Value
Stock investment $100,000 $ 90,000
Land 270,000 300,000

As a result of these distributions:

*a. Sni pe Cor por at i on must r ecogni ze a gai n of $30, 000 and no
r ecogni zed l oss.
b. Sni pe Cor por at i on must r ecogni ze a gai n of $30, 000 and
r ecogni ze a l oss of $10, 000.
c. Sni pe Cor por at i on r ecogni zes nei t her gai n nor l oss.
d. Tr acy wi l l have a basi s of $100, 000 i n t he st ock i nvest ment
and $270, 000 i n t he l and.

2424. Whi ch of t he f ol l owi ng st at ement s, i f any, i s char act er i st i c of
const r uct i ve di vi dends?

a. They must be avai l abl e t o t he shar ehol der s on a pr o r at a basi s.
b. They can occur even i f t he cor por at i on has no ear ni ngs and
pr of i t s.
c. They must be f or mal l y decl ar ed and pai d ( i . e. , decl ar at i on
dat e, r ecor d dat e, payment dat e) .
*d. They ar e not deduct i bl e by t he cor por at i on.

2425. Ni ck, Kr i st i n, Spencer , Gi sel l e, and Her ber t ar e equal
shar ehol der s i n Cuckoo Cor por at i on. Whi ch of t he f ol l owi ng, i f any,
could not be a const r uct i ve di vi dend?

a. Ni ck r ent s a bui l di ng t o Cuckoo.
b. Kr i st en sel l s l and t o Cuckoo.
*c. Cuckoo pays Spencer no sal ar y f or ser vi ces he per f or ms.
d. Cuckoo makes an advance t o Gi sel l e.
e. Her ber t makes an i nt er est - f r ee l oan t o Cuckoo.

2426. Hai l ey r edeems some of t he st ock she hol ds i n Mal l ar d Cor por at i on
f or $300, 000. The st ock has a basi s t o her of $100, 000 and has been
hel d by her as an i nvest ment f or many year s. Mal l ar d Cor por at i on has
mor e t han $2 mi l l i on i n ear ni ngs and pr of i t s. I n t he year of t he
r edempt i on, Hai l ey i s i n t he 33%i ncome t ax br acket . The r edempt i on
gener at es a t ax of :

a. $99, 000 i f i t does not qual i f y f or sal e or exchange t r eat ment .
*b. $45, 000 i f i t does not qual i f y f or sal e or exchange t r eat ment .
c. $45, 000 i f i t does qual i f y f or sal e or exchange t r eat ment .
d. $66, 000 i f i t does qual i f y f or sal e or exchange t r eat ment .

2427. Si l ver Cor por at i on has hel d an S el ect i on si nce i t s f or mat i on
f i ve year s ago. Whi ch, i f any, of t he f ol l owi ng wi l l cause Si l ver t o
l ose i t s el ect i on?

a. Si l ver buys st ock i n anot her cor por at i on.
*b. A shar ehol der sel l s her Si l ver st ock t o a par t ner shi p.
c. A shar ehol der sel l s hi s Si l ver st ock t o a ci t i zen of I t al y who
i s a r esi dent of New Yor k Ci t y.
d. A shar ehol der di es and t he Si l ver st ock passes t o her est at e.

2428. On J anuar y 1, 2013, Copper Cor por at i on ( a cal endar year S
cor por at i on f or many year s) became a C cor por at i on. A possi bl e r eason
f or t hi s change i n st at us i s:

a. The cor por at i on had t oo much passi ve i nvest ment i ncome f or
2013.
b. A par t ner shi p became a shar ehol der on Mar ch 4, 2013.
*c. A majority of t he shar ehol der s met on Mar ch 14, 2013, and
r evoked t he S el ect i on.
d. Al l of t he shar ehol der s met on Apr i l 12, 2013, and r evoked t he
el ect i on.

2429. Whi ch, i f any, of t he f ol l owi ng t r ansact i ons i ncur r ed by an S
cor por at i on is not a separ at el y st at ed i t em?

a. Tax- exempt i ncome.
b. For ei gn t ax cr edi t .
c. AMT adj ust ment s and t ax pr ef er ence i t ems.
*d. Amor t i zat i on of or gani zat i onal expendi t ur es.
e. Domest i c pr oduct i on act i vi t i es deduct i on ( DPAD) .

2430. Laur i e i s a 70%shar ehol der i n Mar t i n Lt d. , a cal endar year S
cor por at i on. As of J anuar y 1, 2013, Laur i e s basi s i n her st ock
i nvest ment was $400, 000. Dur i ng 2013, she made an addi t i onal capi t al
cont r i but i on t o Mar t i n of $90, 000 and al so l oaned t he cor por at i on
$80, 000. Dur i ng 2013, Mar t i n Lt d. had an oper at i ng l oss of $900, 000.
One of t he r esul t s of t hese t r ansact i ons as t o 2013 i s t hat :

a. Laur i e can r ecogni ze a l oss of $400, 000.
b. Laur i e can r ecogni ze a l oss of $490, 000.
c. Laur i e can r ecogni ze a l oss of $630, 000.
d. As of J anuar y 1, 2014, Laur i e s basi s i n her st ock i s a
negat i ve $60, 000.

2431. J ean i s a shar ehol der i n Par r ot Cor por at i on, a cal endar year S
cor por at i on. Dur i ng t he year , J ean s shar e of t he pass- t hr ough f r om
Par r ot i s:

Dividend distribution by
Parrot
$30,000
Long-term capital gain 5,000
Operating loss 20,000
Tax-exempt interest
income
10,000

If Jeans basis in the Parrot stock was $100,000 at the beginning of the
year, her basis at the end of the year is:

a. $45, 000.
b. $55, 000.
*c. $65, 000.
d. $95, 000.

2432. El i j ah cont r i but es l and ( basi s of $80, 000; f ai r mar ket val ue of
$400, 000) f or a 20%i nt er est i n a par t ner shi p. The l and i s subj ect t o
a mor t gage of $50, 000 whi ch t he par t ner shi p assumes. As a r esul t of
t he t r ansf er , El i j ah:

a. Must r ecogni ze a gai n of $40, 000.
*b. Has a basi s i n t he par t ner shi p of $40, 000.
c. Has a basi s i n t he par t ner shi p of $70, 000.
d. Has a basi s i n t he par t ner shi p of $360, 000.

2433. I n det er mi ni ng a par t ner s basi s i n t he par t ner shi p i nt er est ,
whi ch of t he f ol l owi ng r ef l ect s a cor r ect adj ust ment ?

a. Add capi t al l osses.
b. Subt r act t ax- exempt i ncome.
*c. Subt r act f or decr ease i n par t ner shi p l i abi l i t i es.
d. Add par t ner shi p oper at i ng l oss.

2434. I n det er mi ni ng t he t axabl e i ncome ( or l oss) of a par t ner shi p,
whi ch, i f any, of t he f ol l owi ng i t ems must be consi der ed?

a. Domest i c pr oduct i on act i vi t i es deduct i on.
b. Char i t abl e cont r i but i ons.
c. Qual i f i ed di vi dend i ncome.
*d. Guar ant eed payment s t o par t ner s.

2435. Tr avi s and hi s t hr ee si st er s ar e equal par t ner s i n t he Her on
Par t ner shi p. I n 2011, Tr avi s sel l s pr oper t y ( basi s of $300, 000) t o
Her on f or i t s f ai r mar ket val ue of $280, 000. I n 2013, Her on sel l s t he
pr oper t y t o a t hi r d par t y f or $290, 000. Whi ch of t he f ol l owi ng
st at ement s cor r ect l y descr i bes t hese t r ansact i ons?

a. Tr avi s has no r ecogni zed l oss, and Her on has a r ecogni zed gai n
of $10, 000.
*b. Tr avi s has no r ecogni zed l oss, and Her on has no r ecogni zed
gai n or l oss.
c. Tr avi s has a r ecogni zed l oss of $20, 000, and Her on has no
r ecogni zed gai n or l oss.
d. Tr avi s has a r ecogni zed l oss of $20, 000, and Her on has a
r ecogni zed gai n of $10, 000.

2436. Using the legend provided, classify each statement
accordingly.Tax r at es ar e pr ogr essi ve. A net shor t - t er mcapi t al l oss can
be used t o of f set a net l ong- t er mcapi t al gai n. An excess l ong- t er m
capi t al l oss car r yover i s f i r st used t o of f set cur r ent shor t - t er m
capi t al gai ns. A domest i c pr oduct i on act i vi t i es deduct i on i s
avai l abl e. Excess capi t al l osses cannot be of f set agai nst or di nar y
i ncome. A cash basi s t axpayer cannot deduct a char i t abl e cont r i but i on
unt i l t he year of payment . Net l ong- t er mcapi t al gai ns ar e subj ect t o a
pr ef er ent i al al t er nat i ve t ax r at e. The f or ei gn t ax cr edi t i s not
avai l abl e. Li ke- ki nd exchange pr ovi si ons appl y. I nt er est on muni ci pal
bonds i s excl uded f r omgr oss i ncome. Net shor t - t er mcapi t al gai ns ar e
t axed as or di nar y i ncome. Est i mat ed t ax payment s may have t o be
made. Appl i es t o both t he i ncome t axat i on of i ndi vi dual s and of C
cor por at i ons Appl i es t o both t he i ncome t axat i on of i ndi vi dual s and of
C cor por at i ons Appl i es only t o t he i ncome t axat i on of C cor por at i ons
Appl i es t o both t he i ncome t axat i on of i ndi vi dual s and of C
cor por at i ons Appl i es only t o t he i ncome t axat i on of C cor por at i ons
cor por at i ons Appl i es only t o t he i ncome t axat i on of i ndi vi dual s Appl i es
t o neither t he i ncome t axat i on of i ndi vi dual s nor of C cor por at i ons
cor por at i ons Appl i es t o both t he i ncome t axat i on of i ndi vi dual s and of
C cor por at i ons Appl i es t o both t he i ncome t axat i on of i ndi vi dual s and
of C cor por at i ons Appl i es t o both t he i ncome t axat i on of i ndi vi dual s
and of C cor por at i ons

[ a] 1. Tax r at es ar e pr ogr essi ve.
[ b] 2. A net shor t - t er mcapi t al l oss can be used t o of f set a
net l ong- t er mcapi t al gai n.
[ c] 3. An excess l ong- t er mcapi t al l oss car r yover i s f i r st
used t o of f set cur r ent shor t - t er mcapi t al gai ns.
[ d] 4. A domest i c pr oduct i on act i vi t i es deduct i on i s avai l abl e.
[ e] 5. Excess capi t al l osses cannot be of f set agai nst or di nar y
i ncome.
[ f ] 6. A cash basi s t axpayer cannot deduct a char i t abl e
cont r i but i on unt i l t he year of payment .
[ g] 7. Net l ong- t er mcapi t al gai ns ar e subj ect t o a
pr ef er ent i al al t er nat i ve t ax r at e.
[ h] 8. The f or ei gn t ax cr edi t i s not avai l abl e.
[ i ] 9. Li ke- ki nd exchange pr ovi si ons appl y.
[ j ] 10. I nt er est on muni ci pal bonds i s excl uded f r omgr oss
i ncome.
[ k] 11. Net shor t - t er mcapi t al gai ns ar e t axed as or di nar y
i ncome.
[ l ] 12. Est i mat ed t ax payment s may have t o be made.

a. Appl i es t o both t he i ncome t axat i on of i ndi vi dual s and of C
cor por at i ons
b. Appl i es t o both t he i ncome t axat i on of i ndi vi dual s and of C
cor por at i ons
c. Appl i es only t o t he i ncome t axat i on of C cor por at i ons
d. Appl i es t o both t he i ncome t axat i on of i ndi vi dual s and of C
cor por at i ons
e. Appl i es only t o t he i ncome t axat i on of C cor por at i ons
f . Appl i es t o both t he i ncome t axat i on of i ndi vi dual s and of C
cor por at i ons
g. Appl i es only t o t he i ncome t axat i on of i ndi vi dual s
h. Appl i es t o neither t he i ncome t axat i on of i ndi vi dual s nor
of C cor por at i ons
i . Appl i es t o both t he i ncome t axat i on of i ndi vi dual s and of C
cor por at i ons
j . Appl i es t o both t he i ncome t axat i on of i ndi vi dual s and of C
cor por at i ons
k. Appl i es t o both t he i ncome t axat i on of i ndi vi dual s and of C
cor por at i ons
l . Appl i es t o both t he i ncome t axat i on of i ndi vi dual s and of C
cor por at i ons

accordingly.Excess l ong- t er mcapi t al l osses ar e car r i ed f or war d as
shor t - t er mcapi t al l osses. Excess char i t abl e cont r i but i ons can be
car r i ed over f or f i ve year s. Excess capi t al l osses can be car r i ed over
i ndef i ni t el y. Al l of t he appr eci at i on on or di nar y i ncome pr oper t y
donat ed t o char i t y can be cl ai med as a deduct i on. Gai n on an i nvol unt ar y
conver si on cannot be def er r ed. Di vi dends r ecei ved deduct i on i s not
avai l abl e. Coul d be exempt f r omt he AMT. Recapt ur e of depr eci at i on on
r eal pr oper t y ( i . e. , 1250) can be mor e sever e. Concept of i t emi zed
deduct i ons i s not r el evant . The al l owabl e deduct i on f or char i t abl e
cont r i but i ons i s subj ect t o per cent age l i mi t at i ons. Once t axabl e i ncome
r eaches a cer t ai n l evel , t he benef i t s of t he l ower t ax br acket s phase
out . The t ax r et ur n i s due on or bef or e t he f i f t eent h day of t he f our t h
mont h f ol l owi ng t he end of t he t ax year . Appl i es only t o t he i ncome
t axat i on of C cor por at i ons Appl i es t o both t he i ncome t axat i on of
i ndi vi dual s and of C cor por at i ons Appl i es only t o t he i ncome t axat i on
of i ndi vi dual s Appl i es t o neither t he i ncome t axat i on of i ndi vi dual s
nor of C cor por at i ons Appl i es t o neither t he i ncome t axat i on of
i ndi vi dual s nor of C cor por at i ons Appl i es only t o t he i ncome t axat i on
of i ndi vi dual s Appl i es only t o t he i ncome t axat i on of C cor por at i ons
Appl i es only t o t he i ncome t axat i on of C cor por at i ons Appl i es only t o
t he i ncome t axat i on of C cor por at i ons Appl i es t o both t he i ncome
t axat i on of i ndi vi dual s and of C cor por at i ons Appl i es only t o t he
i ncome t axat i on of C cor por at i ons Appl i es only t o t he i ncome t axat i on
of i ndi vi dual s

[ a] 1. Excess l ong- t er mcapi t al l osses ar e car r i ed f or war d as
shor t - t er mcapi t al l osses.
[ b] 2. Excess char i t abl e cont r i but i ons can be car r i ed over f or
f i ve year s.
[ c] 3. Excess capi t al l osses can be car r i ed over i ndef i ni t el y.
[ d] 4. Al l of t he appr eci at i on on or di nar y i ncome pr oper t y
donat ed t o char i t y can be cl ai med as a deduct i on.
[ e] 5. Gai n on an i nvol unt ar y conver si on cannot be def er r ed.
[ f ] 6. Di vi dends r ecei ved deduct i on i s not avai l abl e.
[ g] 7. Coul d be exempt f r omt he AMT.
[ h] 8. Recapt ur e of depr eci at i on on r eal pr oper t y ( i . e. ,
1250) can be mor e sever e.
[ i ] 9. Concept of i t emi zed deduct i ons i s not r el evant .
[ j ] 10. The al l owabl e deduct i on f or char i t abl e cont r i but i ons
i s subj ect t o per cent age l i mi t at i ons.
[ k] 11. Once t axabl e i ncome r eaches a cer t ai n l evel , t he
benef i t s of t he l ower t ax br acket s phase out .
[ l ] 12. The t ax r et ur n i s due on or bef or e t he f i f t eent h day
of t he f our t h mont h f ol l owi ng t he end of t he t ax year .

a. Appl i es only t o t he i ncome t axat i on of C cor por at i ons
b. Appl i es t o both t he i ncome t axat i on of i ndi vi dual s and of C
cor por at i ons
c. Appl i es only t o t he i ncome t axat i on of i ndi vi dual s
d. Appl i es t o neither t he i ncome t axat i on of i ndi vi dual s nor
e. Appl i es t o neither t he i ncome t axat i on of i ndi vi dual s nor
f . Appl i es only t o t he i ncome t axat i on of i ndi vi dual s
g. Appl i es only t o t he i ncome t axat i on of C cor por at i ons
h. Appl i es only t o t he i ncome t axat i on of C cor por at i ons
i . Appl i es only t o t he i ncome t axat i on of C cor por at i ons
j . Appl i es t o both t he i ncome t axat i on of i ndi vi dual s and of C
cor por at i ons
k. Appl i es only t o t he i ncome t axat i on of C cor por at i ons
l . Appl i es only t o t he i ncome t axat i on of i ndi vi dual s

accordingly.Cannot be a shar ehol der i n anot her cor por at i on. Cannot have
a par t ner shi p as a shar ehol der . Amount t he cor por at i on bor r ows f r oma
bank i ncr eases t he basi s i t s shar ehol der s have i n t hei r
st ock. Cor por at i on can have bot h common and pr ef er r ed st ock
out st andi ng. The cor por at i on s domest i c pr oduct i on act i vi t i es deduct i on
i s cl ai med by t he cor por at i on ( not t he shar ehol der s) . A di vi dends
r ecei ved deduct i on i s not al l owed. A deduct i on f or or gani zat i onal
expendi t ur es i s al l owed. Upon i t s f or mat i on, 351 ( t r ansf er s t o
cont r ol l ed cor por at i ons) can appl y. A r esi dent and ci t i zen of Mexi co can
be a shar ehol der . The cor por at i on may ut i l i ze an NOL car r yover f r oma
pr i or year . A shar ehol der cannot have a negat i ve basi s i n hi s or her
st ock i nvest ment . Tax- exempt i ncome r ecei ved by t he cor por at i on wi l l
pass t hr ough t o i t s shar ehol der s as t ax- exempt i ncome. Appl i es t o
neither t he i ncome t axat i on of C cor por at i ons nor of S cor por at i ons.
Appl i es only t o t he i ncome t axat i on of S cor por at i ons. Appl i es t o
neither t he i ncome t axat i on of C cor por at i ons nor of S cor por at i ons.
Appl i es only t o t he i ncome t axat i on of C cor por at i ons. Appl i es only t o
t he i ncome t axat i on of C cor por at i ons. Appl i es only t o t he i ncome
t axat i on of S cor por at i ons. Appl i es t o both t he i ncome t axat i on of C
cor por at i ons and S cor por at i ons. Appl i es t o both t he i ncome t axat i on of
C cor por at i ons and S cor por at i ons. Appl i es only t o t he i ncome t axat i on
of C cor por at i ons. Appl i es only t o t he i ncome t axat i on of C
cor por at i ons. Appl i es t o both t he i ncome t axat i on of C cor por at i ons and
S cor por at i ons. Appl i es only t o t he i ncome t axat i on of S cor por at i ons.

[ a] 1. Cannot be a shar ehol der i n anot her cor por at i on.
[ b] 2. Cannot have a par t ner shi p as a shar ehol der .
[ c] 3. Amount t he cor por at i on bor r ows f r oma bank i ncr eases
t he basi s i t s shar ehol der s have i n t hei r st ock.
[ d] 4. Cor por at i on can have bot h common and pr ef er r ed st ock
out st andi ng.
[ e] 5. The cor por at i on s domest i c pr oduct i on act i vi t i es
deduct i on i s cl ai med by t he cor por at i on ( not t he shar ehol der s) .
[ f ] 6. A di vi dends r ecei ved deduct i on i s not al l owed.
[ g] 7. A deduct i on f or or gani zat i onal expendi t ur es i s al l owed.
[ h] 8. Upon i t s f or mat i on, 351 ( t r ansf er s t o cont r ol l ed
cor por at i ons) can appl y.
[ i ] 9. A r esi dent and ci t i zen of Mexi co can be a shar ehol der .
[ j ] 10. The cor por at i on may ut i l i ze an NOL car r yover f r oma
pr i or year .
[ k] 11. A shar ehol der cannot have a negat i ve basi s i n hi s or
her st ock i nvest ment .
[ l ] 12. Tax- exempt i ncome r ecei ved by t he cor por at i on wi l l
pass t hr ough t o i t s shar ehol der s as t ax- exempt i ncome.

a. Appl i es t o neither t he i ncome t axat i on of C cor por at i ons
nor of S cor por at i ons.
b. Appl i es only t o t he i ncome t axat i on of S cor por at i ons.
c. Appl i es t o neither t he i ncome t axat i on of C cor por at i ons
nor of S cor por at i ons.
d. Appl i es only t o t he i ncome t axat i on of C cor por at i ons.
e. Appl i es only t o t he i ncome t axat i on of C cor por at i ons.
f . Appl i es only t o t he i ncome t axat i on of S cor por at i ons.
g. Appl i es t o both t he i ncome t axat i on of C cor por at i ons and S
cor por at i ons.
h. Appl i es t o both t he i ncome t axat i on of C cor por at i ons and S
cor por at i ons.
i . Appl i es only t o t he i ncome t axat i on of C cor por at i ons.
j . Appl i es only t o t he i ncome t axat i on of C cor por at i ons.
k. Appl i es t o both t he i ncome t axat i on of C cor por at i ons and S
cor por at i ons.
l . Appl i es only t o t he i ncome t axat i on of S cor por at i ons.

2439. Dur i ng 2013, Scar l et had t axabl e i ncome of $150, 000 and t he
f ol l owi ng capi t al asset t r ansact i ons:

Long t er m:
Gai n $4, 000
Loss 3, 000
Shor t t er m:
Gai n $2, 000
Loss 1, 000

How ar e t hese t r ansact i ons handl ed i f Scar l et i s:

a. An i ndi vi dual ?

b. A C cor por at i on?

Cor r ect Answer :
a. Netting the long-term and short-term
transactions yields a $1,000 net LTCG and a
$1,000 net STCG. The $1,000 LTCG is subject
to an alternative tax and the $1,000 STCG is
taxed at ordinary income rates.

b. The same netting process (as in part a.)
takes place, but the end result is
different. As the alternative tax is not
available to corporations, the full $2,000
gain ($1,000 LTCG + $1,000 STCG) is taxed at
ordinary income rates.

2440. Dur i ng 2013, Br own had t axabl e i ncome of $200, 000 and t he
f ol l owi ng capi t al asset t r ansact i ons:

Long t er m:
Gai n $ 1, 000
Loss

3, 000
Shor t t er m:
Gai n $ 6, 000
Loss 10, 000

How ar e t hese t r ansact i ons handl ed i f Br own i s:



Cor r ect Answer :
a. Netting the long-term and short-term
transactions yields a net LTCL of $2,000
and a net STCL of $4,000. Of the $4,000
STCL, $3,000 is applied against ordinary
income. To be carried over to future years
is a LTCL of $2,000 and a STCL of
$1,000. Carryovers are indefinite (have
no time limit).

b. The same netting process (as in part a.)
takes place, but corporations cannot apply
capital losses against ordinary income.
They can be carried back for three years
and forward five (or until exhausted, if
sooner). The $6,000 of losses ($2,000 LTCL
+ $4,000 STCL) become short term when
carried back and carried forward.

2441. Dur i ng 2013, Vi ol et had t he f ol l owi ng capi t al gai ns and l osses:

Long- t er mcapi t al gai n $4, 000

I n 2012, Vi ol et had a net l ong- t er mcapi t al l oss of $6, 000 whi ch coul d
not be used. Assume al l capi t al gai ns and l osses r esul t f r omt he sal e
of secur i t i es hel d as i nvest ment s. How ar e t hese t r ansact i ons handl ed
i f Vi ol et i s:



Cor r ect Answer :
a. If Violet is an individual, the 2012
capital loss of $6,000 carries over as long
term. It will offset the 2013 long-term
gain of $4,000 and $2,000 of the short-term
gain of $5,000. The balance of $3,000
short-term capital gain is taxed at
ordinary income rates.

b. If Violet is a C corporation, the 2012 loss
carries over as short term. In 2013, it
will offset the short-term gain of $5,000
and $1,000 of the long-term gain. The end
result, a $3,000 long-term capital gain, is
taxed at ordinary income rates.

2442. I n December 2013, Swal l ow Company s boar d aut hor i zes a cash
donat i on of $60, 000 t o t he Hami l t on Count y School Di st r i ct . The amount
aut hor i zed i s pai d t o t he count y i n t wo $30, 000 amount s i n J anuar y and
Apr i l 2014. Pr esumi ng a cal endar year and accr ual met hod t axpayer , when
i s t he char i t abl e cont r i but i on deduct i on avai l abl e i f Swal l ow Company
i s a:

a. Par t ner shi p?

b. C ( r egul ar ) cor por at i on?

Cor r ect Answer :
a. Both amounts are separately stated
partnership items in 2014, as the year of
payment controls.

b. For year 2013 (i.e., the year authorized),
$30,000 can be deducted as Swallow Company
is an accrual basis taxpayer. The second
$30,000 installment cannot be deducted
until 2014 as the payment was not made on
or before March 15, 2014. At the option of
the taxpayer, the $60,000 paid can be
deducted for year 2014.

2443. Ruby Company, a cl ot hi ng r et ai l er , donat es chi l dr en s cl ot hi ng t o
Sal vat i on Ar my ( a qual i f i ed char i t y) . The cl ot hi ng i s par t of Ruby s
i nvent or y and has an adj ust ed basi s of $100, 000 and a f ai r mar ket val ue
of $180, 000. What i s t he amount of Ruby s char i t abl e donat i on i f i t i s
a:

a. Par t ner shi p?

b. Cor por at i on?

Cor r ect Answer :
a. $100,000. Inventory is ordinary income
property. As a result, the deduction is
limited to basis and none of the
appreciation can be considered.

b. $140,000. A special exception permits
corporations to deduct one-half of the
appreciation if the charity uses the
inventory to care for the needy, children,
and certain other purposes. Thus, $100,000
(basis) + $40,000 (50% $80,000
appreciation) = $140,000.

2444. Cr i mson Cor por at i on owns st ock i n ot her C cor por at i ons as
f ol l ows: 90%of Mai ze; 30%of Mocha; and 10%of Saf f r on. Dur i ng t he
cur r ent year , i t r ecei ves di vi dends f r omt he cor por at i ons as
f ol l ows: $80, 000 f r omMai ze; $60, 000 f r omMocha; and $100, 000 f r om
Saf f r on. Pr esumi ng no t axabl e i ncome l i mi t at i ons, what i s Cr i mson s
di vi dends r ecei ved deduct i on?

Cor r ect Answer :
$198, 000 [ ( 100% $80, 000) + ( 80% $60, 000) + ( 70% $100, 000) ] .

2445. Cer ul ean Cor por at i on owns 6%of t he st ock i n Aubur n Cor por at i on.
Dur i ng t he year , Aubur n r ecei ved cash di vi dends of $800, 000 f r omt hi s
i nvest ment . Det er mi ne Aubur n Cor por at i on s di vi dends r ecei ved deduct i on
based on t he f ol l owi ng assumpt i ons:

a. Taxabl e i ncome bef or e t he deduct i on i s
$960, 000.

b. Taxabl e i ncome bef or e t he deduct i on i s
$720, 000.

c. Taxabl e i ncome bef or e t he deduct i on i s
$480, 000.

Cor r ect Answer :
a. $560,000 (70% $800,000).

b. $504,000 (70% $720,000). The taxable
income limitation applies.

c. $560,000 (70% $800,000). The taxable
income limitation does not apply as the
full dividends received deduction results
in a net operating loss.

2446. Dr ab Cor por at i on, a cal endar year and cash basi s t axpayer , i s
f or med i n December 2013. I n t he same mont h, expenses ar e i ncur r ed as
f ol l ows:

At t or ney f ees f or dr af t i ng t he
char t er and by- l aws
$14, 000
Expenses f or i ssui ng and sel l i ng
st ock
16, 000
CPA f ees f or est abl i shi ng account i ng
syst em
7, 000
Fees f or t r ansf er of asset s t o t he
cor por at i on
10, 000
Expenses of or gani zat i onal meet i ngs
of t empor ar y di r ect or s and
shar ehol der s
3, 000
I ncor por at i on f ee pai d t o t he st at e 2, 000

a. How much qual i f i es as or gani zat i onal
expendi t ur es t hat can be deduct ed or
amor t i zed over a per i od of 180 mont hs or
mor e?

b. Woul d i t mat t er i f some of t hese expenses
wer e not pai d unt i l 2014?

Cor r ect Answer :
a. $26,000. Attorneys fees ($14,000), CPA
fees ($7,000), organizational meetings
($3,000), and incorporation fee ($2,000).
Remaining expenses do not qualify for
amortization.

b. No. It is the year incurred that controls.

2447. Four unr el at ed, cal endar year cor por at i ons ar e f or med on J anuar y
1, 2013, and have t he f ol l owi ng qual i f i ed or gani zat i onal expendi t ur es:
$4, 000 f or Rust Cor por at i on; $15, 000 f or Or ange Cor por at i on; $53, 000
f or Pear l Cor por at i on; and $56, 000 f or Chest nut Cor por at i on. What i s
t he maxi mumdeduct i on each can cl ai mf or 2013?

Cor r ect Answer :
$4, 000 f or Rust Cor por at i on; $5, 667 [ $5, 000 + 12( $10, 000/ 180) ] f or
Or ange Cor por at i on; $5, 400 or $2, 000 [ $5, 000 ( $53, 000 $50, 000) ] +
$3, 400 [ ( $53, 000 $2, 000) / 180 12] f or Pear l Cor por at i on; and $3, 733
( $56, 000/ 180 12) f or Chest nut Cor por at i on.

2448. I n t he cur r ent year , Rose Cor por at i on, a cal endar year
cor por at i on, has t axabl e i ncome f r omoper at i ons of $95, 000 and a l ong-
t er mcapi t al gai n of $10, 000.

a. What i s Rose Cor por at i on s Feder al i ncome
t ax l i abi l i t y?

b. What i f Rose Cor por at i on i s a per sonal
ser vi ce cor por at i on?

Cor r ect Answer :
a. $24,200 (15% $50,000) + (25% $25,000) +
(34% $25,000) + (39% $5,000). Capital
gains are included in ordinary income.

b. $36,750 (35% $105,000).

2449. For 2012, Pl over Cor por at i on, a cal endar year t axpayer , had net
i ncome per books ( af t er t ax) of $75, 250. Ot her t r ansact i ons havi ng a
t ax ef f ect i ncl ude:

I ncome t ax l i abi l i t y $22, 250
I nt er est on t ax- exempt bonds 10, 000
Excess capi t al l osses 7, 500
Excess char i t abl e cont r i but i ons 5, 000
( not deduct i bl e due t o t he 10%
l i mi t )

What i s Pl over Cor por at i on s t axabl e i ncome f or 2012?

Cor r ect Answer :
$100, 000. Usi ng t he appr oach t aken by Schedul e M- 1 of For m1120,
pr oceed as f ol l ows:

Net income per books (after tax) $ 75,250
Add Federal income tax 22,250
Add excess capital losses 7,500
Add excess charitable contributions 5,000
Deduct interest on tax-exempt bonds (10,000)

2450. I n or der t o get t he Car di nal Cor por at i on t o bui l d a pl ant i n t he
ar ea, Uni on Count y gi ves i t l and wor t h $900, 000. The l and was pur chased
by t he count y many year s ago f or $50, 000.

a. How much i ncome, i f any, must Car di nal
Cor por at i on r ecogni ze f or r ecei vi ng t he
l and?

b. What basi s wi l l Car di nal Cor por at i on have i n
t he l and?

Cor r ect Answer :
a. $0.

b. $0.

2451. Ar t hur f or ms Cat bi r d Cor por at i on wi t h t he f ol l owi ng i nvest ment :

Fai r Mar ket
Asset Basi s Val ue
Mar ket abl e
secur i t i es
$600, 000 $400, 000
Land 500, 000 800, 000

Ar t hur r ecei ves al l of t he st ock of Cat bi r d.

a. What i s Ar t hur s basi s i n t he Cat bi r d
Cor por at i on st ock?

b. What i s Cat bi r d Cor por at i on s basi s i n t he
mar ket abl e secur i t i es? The l and?

Cor r ect Answer :
a. $1,100,000 ($600,000 + $500,000).

b. $600,000 for the marketable securities and
$500,000 for the land.

2452. Sophi a and Wi l l i amf or mt he Bobwhi t e Cor por at i on wi t h t he
f ol l owi ng i nvest ment s:

Fai r Mar ket
Basi s Val ue
Fr omSophi a
Cash $300, 000 $300, 000

Fr omWi l l i am
Land 280, 000 350, 000

Each per son i s i ssued one- hal f of Bobwhi t e s st ock and, i n addi t i on,
Wi l l i amr ecei ves cash of $50, 000.

a. How much gai n, i f any, must Wi l l i am
r ecogni ze and what basi s does he have i n t he
Bobwhi t e st ock?

b. What i s Bobwhi t e s basi s i n t he l and?

Cor r ect Answer :
a. $50,000 gain [the lesser of boot received
($50,000) or realized gain ($70,000)]. Basis
in the stock is $280,000 [$280,000 (original
basis) + $50,000 (gain recognized) $50,000
(boot received)].

b. $330,000 basis in the land [$280,000
(Williams basis) + $50,000 (gain
recognized)].

2453. Rowena i s t he sol e shar ehol der of Rai l , a cal endar year C
cor por at i on. As of J anuar y 1, 2013, Rai l had a $300, 000 def i ci t i n
accumulated E & P. For 2013, i t had current E & P of $110, 000 and
di st r i but ed t o Rowena a cash di vi dend of $170, 000. As of J anuar y 1,
2013, Rowena has a basi s i n her Rai l st ock of $40, 000.

a. What ar e t he t ax consequences t o Rowena of
t he di st r i but i on?

b. What wi l l be Rai l Cor por at i on s bal ance i n
i t s accumul at ed E & P account as of J anuar y
1, 2014?

Cor r ect Answer :
a. Rowena accounts for the $170,000 distribution
as follows:

Dividend income (covered by current
E & P)
$110,000
Return of capital (i.e., stock
basis)
40,000
Capital gain 20,0
00
Total distribution $170,000

b. ($300,000). Only a loss can add to a
deficita dividend cannot.

2454. Azur e Cor por at i on, a cal endar year t axpayer , has t axabl e i ncome
of $850, 000 f or t he cur r ent year . Among t he t r ansact i ons t hat r el at ed
t o Azur e dur i ng t he year ar e t he f ol l owi ng:

I ncome t axes $289, 000
Domest i c pr oduct i on act i vi t i es
deduct i on
30, 000
Di vi dends r ecei ved deduct i on 20, 000
I nt er est on St at e of Mar yl and
bonds
10, 000
Char i t abl e cont r i but i ons i n
excess of 10%l i mi t at i on
15, 000
Fi ne pai d f or i mpr oper wast e
di sposal
5, 000

Conver t Azur e s t axabl e i ncome t o cur r ent E & P.

Cor r ect Answer :
$601, 000 det er mi ned as f ol l ows: $850, 000 ( t axabl e i ncome) + $30, 000
( domest i c pr oduct i on act i vi t i es deduct i on) + $20, 000 ( di vi dends
r ecei ved deduct i on) + $10, 000 ( t ax- exempt i nt er est ) $289, 000 ( i ncome
t axes) $15, 000 ( excess char i t abl e cont r i but i on) $5, 000 ( f i ne) .

2455. St ar l i ng Cor por at i on i s a cal endar year S cor por at i on. For t he
cur r ent year , St ar l i ng had t he f ol l owi ng t r ansact i ons:

Sal es $800, 000
Cost of goods sol d 500, 000
I nt er est f r omCi t y of Rochest er
bonds
4, 000
Payr ol l 100, 000
Long- t er mcapi t al gai ns 3, 000
Rent expense on busi ness pr emi ses 40, 000

a. What i s St ar l i ng Cor por at i on s t axabl e
i ncome?

b. What ar e t he separ at el y st at ed i t ems?

Cor r ect Answer :
a. $160,000. $800,000 (sales) $500,000 (cost
of goods sold) $100,000 (payroll)
$40,000 (rent) = $160,000 (taxable income).

b. $4,000 (interest on Rochester bonds); $5,000
(charitable contributions); $3,000 (long-
term capital gains).

2456. Mur r el et Cor por at i on i s a cal endar year t axpayer t hat hol ds S
st at us. For t he cur r ent year , i t had t he f ol l owi ng t r ansact i ons:

Sal es $500, 000
Cost of goods sol d ( 400, 000)
I nt er est on Ci t y of Char l ot t e
bonds
5, 000
Capi t al gai ns and l osses
Long- t er mgai n ( secur i t i es hel d as
i nvest ment s)
8, 000
Long- t er mgai n ( ant i que car col l ect i on) 20, 000
Shor t - t er ml oss ( 2, 000)
Char i t abl e cont r i but i ons ( 4, 000)
Di vi dends r ecei ved f r omanot her
cor por at i on ( 1%owner shi p)
9, 000
Amor t i zat i on of or gani zat i onal
expendi t ur es
( 1, 000)
Payr ol l expenses ( 80, 000)

a. What i s Mur r el et Cor por at i on s t axabl e
i ncome?

b. What ar e t he separ at el y st at ed i t ems?

Cor r ect Answer :
a. An operating profit of $19,000 results,
computed as follows:

Sales $500,000
Cost of goods sold (400,000)
Organizational expenditures (1,000)
Payroll expenses (80
,000)
Operating profit ($ 19,00
0)

b. Separately stated items are as follows:

Interest on City of Charlotte bonds $ 5,000
Long-term capital gain (15%/0%
category)
8,000
Long-term capital gain (28% category) 20,000
Short-term capital loss (2,000)
Charitable contributions (4,000)
Dividends received 9,000

2457. Spencer owns 50%of t he st ock of Cr ossbi l l Cor por at i on, a
cal endar year t axpayer t hat has el ect ed Subchapt er S st at us. As of
J anuar y 1, 2013, Spencer s basi s i n t he st ock i s $40, 000. Cr ossbi l l has
an oper at i ng l oss of $100, 000 f or 2013 and t axabl e i ncome of $60, 000
f or 2014.

a. What shoul d Spencer r epor t f or 2013?

b. What shoul d Spencer r epor t f or 2014?

c. What i s Spencer s basi s i n Cr ossbi l l
Cor por at i on st ock as of J anuar y 1, 2014? As
of J anuar y 1, 2015?

Cor r ect Answer :
a. Spencers loss deduction is limited to his
stock basis of $40,000. Of his $50,000
share of the loss, $10,000 cannot be
deducted in 2013 due to a lack of basis.

b. $30,000 income (50% $60,000) and $10,000
loss from 2013.

c. $0 as of January 1, 2014, and $20,000 as of
January 1, 2015. For the 2013 loss,
Spencers stock basis cannot be reduced
below zero. The 2014 taxable income of
$30,000 is added to basis, while $10,000 is
subtracted for the unused 2013 loss now
used. Thus, $0 (January 1, 2014, basis) +
$30,000 (taxable income for 2014)
$10,000 (unused 2013 loss) = $20,000 (basis
of stock on January 1, 2015).

2458. I sabel l a cont r i but es l and t o t he Whi t e Par t ner shi p f or a 20%
i nt er est i n capi t al and pr of i t s. The l and ( adj ust ed basi s of $900, 000
and f ai r mar ket val ue of $1. 4 mi l l i on) i s subj ect t o a mor t gage of
$600, 000 whi ch t he par t ner shi p assumes. What i s I sabel l a s basi s i n t he
Whi t e Par t ner shi p?

Cor r ect Answer :
$420, 000. $900, 000 ( basi s i n t he l and) $480, 000 ( por t i on of mor t gage
assumed by ot her par t ner s) .

2459. J ack i s a 40%par t ner i n t he Gul l Par t ner shi p, a cal endar year
t axpayer . As of J anuar y 1, 2013, J ack s basi s i n hi s par t ner shi p
i nt er est i s $100, 000. Gul l s oper at i ng r esul t s ar e: $400, 000 l oss f or
2013 and $300, 000 pr of i t f or 2014.

a. What i s J ack s basi s f or hi s par t ner shi p
i nt er est as of J anuar y 1, 2014?

b. What i s J ack s basi s f or hi s par t ner shi p
i nt er est as of J anuar y 1, 2015?

Cor r ect Answer :
a. $0. $100,000 (1/1/13 basis in partnership
interest) $160,000 (Jacks share of
loss) = $0 (basis cannot be negative).

b. $60,000. $0 (1/1/14 basis in partnership
interest ) + $120,000 (Jacks share of
profit) $60,000 (unabsorbed loss from
2013) = $60,000 (1/1/15 basis in partnership
interest).

2460. J oshua i s an equal par t ner wi t h hi s par ent s i n t he St i l t
Par t ner shi p. I n 2010, he sel l s a t r act of undevel oped l and ( basi s of
$250, 000) t o St i l t f or i t s f ai r mar ket val ue of $240, 000. I n 2013,
St i l t r esel l s t he l and t o t he l ocal school di st r i ct f or $255, 000.

a. What ar e t he t ax consequences of t he 2010
sal e?

b. Of t he 2013 sal e?

Cor r ect Answer :
a. Joshua has a realized loss of $10,000.
However, none of the loss can be recognized
due to the related-party rules of 267.

b. Stilt appears to have a realized gain of
$15,000 [$255,000 (sale price) $240,000
(cost basis)]. However, only $5,000 of this
gain is recognized as Stilt can utilize
Joshuas disallowed loss of $10,000 to offset
the remaining gain.

2461. Why wer e t he check- t he- box Regul at i ons i ssued?

Cor r ect Answer :
The conf usi on over t he i ncome t ax st at us of l i mi t ed l i abi l i t y compani es
l ed t o t he i ssuance of t hese Regul at i ons. Under t he Regul at i ons, t he
pr esence ( or absence) of cor por at e char act er i st i cs ar e no l onger
cont r ol l i ng i n det er mi ni ng cor por at e st at us.

2462. Regar di ng t he check- t he- box Regul at i ons, comment on each of t he
f ol l owi ng:

a. An ent i t y i s a cor por at i on under st at e l aws

b. A l i mi t ed l i abi l i t y company def aul t s ( no
el ect i on i s made) .

c. A one- per son busi ness def aul t s ( no el ect i on
i s made) .

Cor r ect Answer :
a. If an entity is incorporated under state
law, then it is a corporation. The check-
the-box Regulations are not applicable to
such situations.

b. Under the Regulations, it will be treated as
a partnership for Federal income tax
purposes.

c. A sole proprietorship is the result for
Federal income tax purposes, since no
election was made.

2463. A cal endar year t axpayer t hat i n 2012 el ect ed ( under t he check-
t he- box Regul at i ons) t o be t axed as a cor por at i on want s t o be t axed as
a par t ner shi p i n 2013. I s t hi s per mi ssi bl e?

Cor r ect Answer :
No. New el ect i ons ar e per mi t t ed but onl y af t er a 60- mont h wai t i ng
per i od.

2464. The Car son br ot her s pl an t o open an aut o r epai r f aci l i t y. They
ant i ci pat e l osses i n t he ear l y year s of t he busi ness and ar e concer ned
about pot ent i al l i abi l i t y. What t ype of busi ness ent i t y shoul d t hey
choose?

Cor r ect Answer :
To achi eve bot h t he pass- t hr ough of l osses and l i mi t ed l i abi l i t y, t he
choi ce shoul d be ei t her an S cor por at i on or a l i mi t ed l i abi l i t y company
( LLC) . A C cor por at i on of f er s l i mi t ed l i abi l i t y but no pass- t hr ough,
whi l e a par t ner shi p pr ovi des a pass- t hr ough but no l i mi t ed l i abi l i t y.

2465. Cor por at e t axpayer s l ose t he benef i t s of l ower t ax br acket s and
t he r at es cease t o be pr ogr essi ve once t axabl e i ncome r eaches a cer t ai n
l evel . Expl ai n t hi s st at ement .

Cor r ect Answer :
The l ower t ax r at es of 15%and 25%begi n t o phase out once t he $335, 000
br acket i s r eached. The benef i t of t he l ower br acket s i s r ecover ed by
i mposi ng a 39%r at e. When t axabl e i ncome r eaches $15, 000, 000, a 38%
r at e r ecover s any i ncome t axed at 34%. Once t axabl e i ncome r eaches
$18, 333, 333, al l benef i t s of t he l ower r at es ( i . e. , bel ow 35%) have
been r ecouped. Thus, pr ogr essi on i s el i mi nat ed and ever y dol l ar i s
subj ect t o a mar gi nal t ax r at e of 35%.

2466. I n what manner do t he t ax r ul es deal i ng wi t h capi t al gai ns di f f er
f or cor por at i ons and i ndi vi dual s?

Cor r ect Answer :
Cor por at i ons do not have access t o t he al t er nat i ve t ax avai l abl e f or
net l ong- t er mcapi t al gai ns. Thus, such gai ns ar e t axed as or di nar y
i ncome and are not subj ect t o a maxi mumr at e of 15%( 0%i n some cases)
avai l abl e t o i ndi vi dual s.

2467. I n cont r ast i ng t he t ax t r eat ment of excess capi t al l osses of
cor por at i ons wi t h i ndi vi dual t axpayer s:

a. What advant ages do cor por at e t axpayer s
enj oy?

b. Di sadvant ages?

Cor r ect Answer :
a. Capital losses can be carried back three
years.

b. Cannot apply up to $3,000 offset against
ordinary income. Carryovers limited to five
years (not indefinite).

2468. The r ul es deal i ng wi t h t he r ecapt ur e of depr eci at i on on r eal
est at e ar e di f f er ent f or cor por at i ons t han f or i ndi vi dual s. Expl ai n.

Cor r ect Answer :
Cor por at i ons sel l i ng depr eci abl e r eal est at e may have or di nar y i ncome
i n addi t i on t o t hat r equi r ed by 1250. Under 291, t he addi t i onal
or di nar y i ncome el ement i s 20%of t he excess of t he 1245 r ecapt ur e
pot ent i al over t he 1250 r ecapt ur e. Consequent l y, t he 1231 gai n i s
cor r espondi ngl y decr eased by t he addi t i onal r ecapt ur e.

2469. Regar di ng t he t ax t r eat ment of char i t abl e cont r i but i ons,
cor por at i ons enj oy t wo maj or advant ages over i ndi vi dual s. El abor at e.

Cor r ect Answer :
I f cer t ai n r equi r ement s ar e sat i sf i ed, accr ual basi s cor por at i ons can
deduct a cont r i but i on i n t he year i t was aut hor i zed, r at her t han t he
year pai d. Al so, i t i s possi bl e f or cor por at e t axpayer s t o deduct one-
hal f of t he appr eci at i on on cer t ai n or di nar y i ncome pr oper t y.

2470. How does t he domest i c pr oduct i on act i vi t i es deduct i on di f f er f or
cor por at i ons t han f or i ndi vi dual s?

Cor r ect Answer :
I n t he case of cor por at i ons, t he domest i c pr oduct i on act i vi t i es
deduct i on cannot exceed 9%of t he lesser of QPAI or t axabl e i ncome. I n
appl yi ng t hi s l i mi t at i on as t o i ndi vi dual s, AGI i s subst i t ut ed f or
t axabl e i ncome.

2471. Kest r el i s a C cor por at i on t hat i s engaged sol el y i n buyi ng and
r esel l i ng goods i t acqui r es f r omSki mmer , anot her C cor por at i on.
Al t hough Kest r el conduct s no manuf act ur i ng act i vi t y and i s excl usi vel y
i nvol ved i n a mar ket i ng f unct i on, i t may st i l l be ent i t l ed t o a
domest i c pr oduct i on act i vi t i es deduct i on ( DPAD) . Expl ai n how t hi s coul d
be possi bl e.

Cor r ect Answer :
Ski mmer does t he manuf act ur i ng and t he t wo cor por at i ons ar e member s of
t he same af f i l i at ed gr oup. Pr esumi ng t he condi t i ons of 199 ar e
sat i sf i ed, al l member s of t he gr oup coul d be el i gi bl e f or a DPAD.

2472. The domest i c pr oduct i on act i vi t i es deduct i on ( DPAD) i s handl ed
di f f er ent l y f or a par t ner shi p t han f or a C cor por at i on. Expl ai n

Cor r ect Answer :
For a C cor por at i on, t he DPAD i s cl ai med at t he ent i t y l evel . I n t he
case of a par t ner shi p, however , t he DPAD i s a passt hr ough i t emand i s
cl ai med at t he par t ner l evel .

2473. I n det er mi ni ng t he NOL of a C cor por at i on, f ewer adj ust ment s ar e
necessar y t han i n t he case of i ndi vi dual t axpayer s. Why i s t hi s t he
case?

Cor r ect Answer :
I n t he case of C cor por at i ons, no adj ust ment s ar e r equi r ed f or
nonbusi ness i t ems ( e. g. , medi cal expenses) and ar t i f i ci al deduct i ons
( e. g. , per sonal and dependency exempt i ons) . A cor por at i on s l oss mor e
cl ear l y appr oxi mat es a t r ue economi c l oss.

2474. When mi ght an NOL car r yback t o pr i or year s be i l l - advi sed?

Cor r ect Answer :
A car r yback woul d not be advi sabl e i f t he cor por at i on had l i t t l e, i f
any, t axabl e i ncome f or t he pr i or year s and ant i ci pat es l ar ge amount s
i n t he i mmedi at e f ut ur e. Keep i n mi nd, however , t hat t he el ect i on t o
f or go t he car r yback i s i r r evocabl e.

2475. J ohn owns st ock i n Gr een Cor por at i on, whi ch, i n t ur n, owns st ock
i n I BM. When I BM ear ns i ncome, i t i s subj ect t o t he cor por at e i ncome
t ax ( i . e. , t he f i r st t ax) . When I BM pays a di vi dend, Gr een Cor por at i on
must pay a cor por at e i ncome t ax on i t s shar e ( i . e. , t he second t ax) .
When Gr een Cor por at i on pays a di vi dend, J ohn must pay an i ndi vi dual
i ncome t ax on what he r ecei ves ( i . e. , t he t hi r d t ax) . Thus, t he same
i ncome i s subj ect t o t r i pl e t axat i on.

a. How does t he t ax l aw mi t i gat e t he t ax on
Gr een Cor por at i on?

b. How does t he t ax l aw mi t i gat e t he t ax
i mposed on J ohn?

Cor r ect Answer :
a. By allowing the dividends received deduction.
Thus, Green Corporation can deduct a portion
of the dividends received from IBM.

b. Qualified dividends are subject to tax at the
top rate applicable to net long-term capital
gain (15%/0%). Consequently, the dividends
John receives from Green Corporation are taxed
at 15% (if he is in a 25% or higher income tax
bracket) or 0% (if he is in the 10% or 15%
income tax bracket).

2476. A cor por at i on t hat cl ai ms t he di vi dends r ecei ved deduct i on may
completely or only partly avoi d any t ax on t he di vi dends i nvol ved. What
account s f or t he di f f er ence i n t ax consequences?

Cor r ect Answer :
The appl i cabl e deduct i on per cent age makes t he di f f er ence. I f t he
per cent age i s 100%, no t ax r esul t s. I f , however , 80%or 70%appl i es,
20%or 30%of t he di vi dend wi l l be subj ect t o t ax. The deduct i on
per cent age depends on t he amount of st ock owned i n t he payer
cor por at i on [ i . e. , 100%( 80%or mor e owner shi p) , 80%( 20%or mor e but
l ess t han 80%owner shi p) , 70%( l ess t han 20%owner shi p) .

2477. Bl ue Cor por at i on and Red Cor por at i on ar e unr el at ed C cor por at i ons
and hol d as i nvest ment s t he same number of shar es of st ock i n BP
Cor por at i on. As such, t hey each r ecei ve an equal amount of di vi dends
f r omBP Cor por at i on. I f each cl ai ms a di f f er ent di vi dends r ecei ved
deduct i on, what coul d cause t he var i at i on?

Cor r ect Answer :
The cor por at i on cl ai mi ng t he l esser deduct i on pr obabl y i s subj ect t o
t he t axabl e i ncome l i mi t at i on. See t he f act s i nvol vi ng Ospr ey
Cor por at i on i n Exampl e 15 i n t he t ext .

2478. I s t her e a l ogi cal expl anat i on why S cor por at i ons ar e not al l owed
a di vi dends r ecei ved deduct i on when comput i ng t axabl e i ncome?

Cor r ect Answer :
The maj or pur pose of t he di vi dends r ecei ved deduct i on i s t o mi t i gat e
( or el i mi nat e) t he t r i pl e t axat i on t hat occur s wi t h t he use of t he
cor por at e f or m. Si nce S cor por at i ons do not i ncur t he cor por at e i ncome
t ax, no t r i pl e t axat i on exi st s.

2479. I n compl et i ng a Schedul e M- 1 of For m1120, t he Feder al i ncome t ax
per books i s added t o net i ncome per books t o ar r i ve at t axabl e i ncome.
Why?

Cor r ect Answer :
The Feder al i ncome t ax i s cl ai med f or account i ng pur poses and i s,
t her ef or e, r ef l ect ed i n book i ncome. Because i t i s not al l owed f or t ax
pur poses, i t i s not consi der ed i n ar r i vi ng at t axabl e i ncome.

2480. As of J anuar y 1, 2013, Cr i mson Cor por at i on, a cal endar year C
cor por at i on, has a def i ci t of $300, 000 i n accumul at ed E & P. For 2013,
i t has cur r ent E & P of $100, 000, and dur i ng t he year di st r i but es
$120, 000 as a di vi dend t o t he shar ehol der s. Comment on t he f ol l owi ng
assumpt i ons.

a. The shar ehol der s r ecogni ze no di vi dend
i ncome as Cr i mson st i l l has negat i ve E & P
f or t he year of t he di st r i but i on [ ( $300, 000)
begi nni ng def i ci t + $100, 000 cur r ent E & P =
( $200, 000) endi ng def i ci t ] .

b. Cr i mson s accumul at ed E & P on J anuar y 1,
2014, i s ( $320, 000) .

Cor r ect Answer :
a. Distributions are treated as first coming from
current E & P. Thus, the shareholders will
have dividend income of $100,000. The
remaining $20,000 distributed is treated as a
return of capital. See the results reached
in Examples 24 and 25 of the text.

b. Crimson Corporations balance in accumulated
E & P as of January 1, 2013, is ($300,000).
The $120,000 distribution negated the $100,000
of current E & P, and the $20,000 balance
cannot add to the deficit in accumulated
E & P

2481. I n adj ust i ng t he t axabl e i ncome of a cor por at i on t o ar r i ve at
cur r ent E & P, t he di vi dends r ecei ved deduct i on i s added. Why?

Cor r ect Answer :
E & P r epr esent s a cor por at i on s economi c capaci t y t o pay di vi dends t o
i t s shar ehol der s. Si nce t he di vi dends pr ovi de addi t i onal f unds, t hey
add t o a cor por at i on s abi l i t y t o pay di vi dends.

2482. Expl ai n how a const r uct i ve di vi dend r esul t coul d occur i n each of
t he f ol l owi ng si t uat i ons.

a. A shar ehol der i s empl oyed by a cor por at i on.

b. A shar ehol der l ends f unds t o t he
cor por at i on.

c. A cor por at i on sel l s pr oper t y t o t he
shar ehol der .

d. A cor por at i on r ent s pr oper t y f r omt he
shar ehol der .

e. A shar ehol der dr i ves a car owned by t he
cor por at i on.

Cor r ect Answer :
a. If the salary paid to the shareholder-
employee is deemed to be unreasonable, a
constructive dividend results. This has the
effect of converting the payment from
compensation income to dividend income and
makes it nondeductible to the payor
corporation.

b. The main problem with shareholder loans to
the corporation is the thin capitalization
danger. In this eventuality, the debt is
reclassified as equity and any interest or
debt repayment is a constructive dividend.

c. If the property is sold for less than its
fair market value, the difference is a
constructive dividend.

d. If the corporation pays more than a fair
rental for the property, the difference is a
constructive dividend.

e. If the use of the car is personal, the fair
rental value of such use is a constructive
dividend.

2483. Descr i be how a Subchapt er S el ect i on can be l ost .
a. Vol unt ar i l y.

b. I nvol unt ar i l y.

Cor r ect Answer :
a. A voluntary termination occurs when the
holders of a majority of the shares choose to
do so.

b. An involuntary termination occurs when the
entity ceases to qualify as a small business
corporation. In certain cases, an involuntary
termination occurs when the corporation has
too much passive investment income.

2484. Pr i or t o t he end of i t s t ax year , t he shar ehol der s of an S
cor por at i on ei t her make addi t i onal capi t al cont r i but i ons or advance
f unds i n t he f or mof l oans. Coul d t hi s shar ehol der act i vi t y be
mot i vat ed by i ncome t ax consi der at i ons? Expl ai n.

Cor r ect Answer :
Yes, i t coul d be mot i vat ed by i ncome t ax consi der at i ons. An S
cor por at i on may be i nvol ved t hat i s ant i ci pat i ng net l osses f or t he
year . I f t he shar ehol der s l ack basi s i n or der t o t ake advant age of t he
passt hr ough of such l osses, t hey coul d be maki ng addi t i onal capi t al
cont r i but i ons or l oans t o i ncr ease basi s.

2485. Ni ck and Ava each own a 20%i nt er est i n t he Tanager
Par t ner shi p. For t he cur r ent year , one of t he pass- t hr ough i t ems i s a
char i t abl e cont r i but i on. On t hei r i ndi vi dual i ncome t ax r et ur ns, Ni ck
can deduct hi s shar e of t he char i t abl e cont r i but i on but Ava
cannot . What coul d cause t he di spar i t y i n r esul t s?

Cor r ect Answer :
Most l i kel y, Ava i s cl ai mi ng t he st andar d deduct i on, whi l e Ni ck i s
i t emi zi ng hi s deduct i ons from AGI . Less l i kel y, bot h par t i es ar e
i t emi zi ng, but Ava i s subj ect t o t he per cent age l i mi t at i ons i mposed on
char i t abl e cont r i but i ons, whi l e Ni ck i s not .

2486. What causes a par t ner s basi s i n a par t ner shi p i nt er est t o
f l uct uat e?

Cor r ect Answer :
A par t ner s basi s i s increased by addi t i onal cont r i but i ons and t he sum
of t he par t ner s shar e of t he par t ner shi p s:

Taxable income (including capital gains).

Tax-exempt income.

The excess of the deductions for depletion over
the basis of the partnerships property
subject to depletion.

Similarly, a partners basis is decreased by the distributive share of the
following:

Partnership losses (including capital losses).

Partnership expenditures that are not
deductible in computing taxable income or loss
and that are not capital expenditures.

Changes in partnership liabilities also affect the basis of a partnership
interest.

2487. Al t hough some di f f er ences exi st , t he t ax t r eat ment of S
cor por at i ons and par t ner shi ps ar e ver y si mi l ar . I n t hi s connect i on,
comment on t he f ol l owi ng.

a. Tax at t he ent i t y l evel .

b. Condui t appr oach.

c. Tr eat ment by owner s ( i . e. , shar ehol der s,
par t ner s) of excess ent i t y l osses.

Cor r ect Answer :
a. Generally, the entity is not taxed. In
limited situations (e.g., built-in gains,
excessive passive investment income), S
corporations may incur a tax.

b. Income, deductions, credits do not lose
their identity as they pass through to the
owners.

c. Excess losses area carried over by the
owners and applied against future basis
increases. In taking advantage of a loss,
however, only in S corporations can owners
use the basis in loans made to the entity.

2488. Mar gi e owns a 30%di r ect i nt er est i n t he capi t al and pr of i t s of a
f ami l y par t ner shi p. Dur i ng t he year , Mar gi e sel l s l and ( basi s of
$400, 000) t o t he par t ner shi p f or i t s f ai r mar ket val ue of $380, 000.
Coul d t her e be a r eason why Mar gi e s r eal i zed l oss of $20, 000 f r omt he
sal e cannot be r ecogni zed? Expl ai n.

Cor r ect Answer :
The l oss can be r ecogni zed unl ess Mar gi e and t he par t ner shi p ar e
r el at ed par t i es. Mar gi e has no pr obl emas t o her direct owner shi p, but
what about indirect owner shi p? Thus, who ar e t he ot her par t ner s and ar e
t hey r el at ed par t i es?

2489. I n some si t uat i ons, a par t ner shi p makes guar ant eed payment s t o
one or mor e of i t s par t ner s.

a. What ar e t hese payment s?

b. What ar e t hei r t ax ef f ect s t o t he
par t ner shi p?

c. What ar e t he t ax ef f ect s t o t he par t ner ?

Cor r ect Answer :
a. These are payments made by a partnership to
one or more of its partners for services
rendered or for the use of capital, to the
extent they are determined without regard
to the income of the partnership.

b. Guaranteed payments are deductible by the
partnership and taxed as ordinary income to
the receiving partner.

c. Guaranteed payments are taxed as ordinary
income to the recipient partner. They have
no effect on the basis in the partnership
interest.

2490. For var i ous r easons, Bi l l woul d l i ke t o i ncor por at e hi s ver y
successf ul busi ness. Bef or e doi ng so, however , he has t he f ol l owi ng
r eser vat i ons:

Recogni zi ng gai n on appr eci at ed busi ness
asset s.

Avoi di ng ( or mi ni mi zi ng) any f ut ur e
cor por at e i ncome t ax.

Ret ai ni ng owner shi p of t he bui l di ng
occupi ed by t he busi ness.

Suggest a r esol ut i on of Bi l l s concer ns.

Cor r ect Answer :
Thr ough t he pr oper use of 351, Bi l l wi l l avoi d r ecogni zi ng any gai n
on t he i ncor por at i on of hi s busi ness. The cor por at e i ncome t ax can be
avoi ded ( or mi ni mi zed) by t he j udi ci ous combi nat i on of sal ar i es, r ent ,
and i nt er est payment s t o t he shar ehol der s on t he par t of t he
cor por at i on. As an al t er nat i ve, an el ect i on under Subchapt er S can be
made.

Ther e i s no r equi r ement t hat al l of a busi ness be t r ansf er r ed t o t he
newl y f or med cor por at i on. Thus, Bi l l can r et ai n t i t l e t o t he bui l di ng.
I n f act , r ent i ng t he pr oper t y t o t he cor por at i on wi l l r educe t axabl e
i ncome and hel p avoi d any cor por at e i ncome t ax ( see pr i or comment ) .

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South-Western Federal Taxation 2014 Individual Income Taxes, 37th Edition

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1. The r at i f i cat i on of t he Si xt eent h Amendment t o t he U. S.

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