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TEST BANK OF MCGRAW-HILL’S TAXATION OF INDIVIDUALS AND BUSINESS ENTITIES 2018
EDITION 9TH EDITION BY BRIAN SPILKER By Admin on Wednesday, November 8, 2017

Test Bank Of McGraw-Hill’s Taxation of Individuals and Business Entities 2018
Edition 9th Edition by Brian Spilker If you want to Purchase This Complete Test
Bank With Anawer Please follow the link below :
http://www.acehomework.net/?download=test-bank-of-mcgraw-hills-taxation-of-individuals-and-business-entities-2018-edition-9th-edition-by-brian-spilker
IF FACE ANY PROBLEM CONTACT US AT WHISPERHILLS@GMAIL.COM McGraw-Hill’s Taxation
of Individuals and Business Entities, 2018 Edition, 9e (Spilker) Chapter 1 An
Introduction to Tax 1) Taxes influence many types of business decisions but
generally do not influence personal decisions. 2) Taxes influence business
decisions such as where a business should locate or how a business should be
structured. 3) Tax policy rarely plays an important part in presidential
campaigns. 4) Margaret recently received a parking ticket. This is a common
example of a local tax. 5) George recently paid $50 to renew his driver’s
license. The $50 payment is considered a tax. 6) A 1% charge imposed by a local
government on football tickets sold is not considered a tax if all proceeds are
earmarked to fund local schools. 7) One key characteristic of a tax is that it
is a required payment to a governmental agency. 8) Common examples of sin taxes
include the taxes imposed on airline tickets and gasoline. 9) One benefit of a
sin tax (e.g., a tax on cigarettes) is that it should increase the demand for
the products being taxed. 10) In addition to raising revenues, specific U.S.
taxes may have other objectives (e.g., economic or social objectives). 11) The
two components of the tax calculation are the tax rate and the taxpayer’s
status. 12) The tax base for the federal income tax is taxable income. 13) A
flat tax is an example of a graduated tax system. 14) The main difficulty in
calculating an income tax is determining the correct amount of the tax base. 15)
A taxpayer’s average tax rate is the most appropriate tax rate to use in tax
planning. 16) The effective tax rate, in general, provides a better depiction of
a taxpayer’s tax burden than the average tax rate. 17) The effective tax rate
expresses the taxpayer’s total tax as a percentage of the taxpayer’s taxable and
nontaxable income. 18) In a proportional (flat) tax rate system, the marginal
tax rate will always equal the average tax rate. 19) In a regressive tax rate
system, the marginal tax rate will often be greater than the average tax rate.
20) A sales tax is a common example of a progressive tax rate structure. 21) In
terms of effective tax rates, the sales tax can be viewed as a regressive tax.
22) While sales taxes are quite common, currently the U.S. federal government
does not impose a sales tax. 23) The largest federal tax, in terms of revenue
collected, is the social security tax. 24) The 9th Amendment to the U.S.
Constitution removed all doubt that a federal income tax was allowed under the
U.S. Constitution. 25) A common example of an employment related tax is the
Medicare tax. 26) Self-employment taxes are charged on self-employment income in
addition to any federal income tax. 27) Excise taxes are typically levied on the
value of a good purchased. 28) The estate tax is assessed based on the fair
market values of transfers made during a taxpayer’s life. 29) A use tax is
typically imposed by a state on goods purchased within the state. 30) Property
taxes may be imposed on both real and personal property. 31) Relative to
explicit taxes, implicit taxes are much easier to estimate. 32) Implicit taxes
are indirect taxes on tax-favored assets. 33) Dynamic forecasting does not take
into consideration taxpayers’ responses to a tax change when estimating tax
revenues. 34) The income and substitution effects are two opposing effects that
one could consider in static forecasting. 35) Horizontal equity is defined in
terms of taxpayers in similar situations whereas vertical equity is defined in
terms of taxpayers in different situations. 36) Regressive tax rate structures
are typically considered to be vertically equitable. 37) Estimated tax payments
are one way the federal income tax system addresses the “certainty” criterion in
evaluating tax systems. 38) In considering the “economy” criterion in evaluating
tax systems, one must consider this criterion from both the taxpayer and the
government’s perspective. 39) Taxes influence which of the following decisions?
1. A) business decisions 2. B) personal decisions 3. C) political decisions 4.
D) investment decisions 5. E) all of the choices are correct 40) Margaret was
issued a $150 speeding ticket. This is: 1. A) A tax because payment is required
by law. 2. B) A tax because the payment is not related to any specific benefit
received from the government agency collecting the ticket. 3. C) Not a tax
because it is considered a fine intended to punish illegal behavior. 4. D) A tax
because it is imposed by a government agency. 5. E) Not a tax because Margaret
could have avoided payment if she did not speed. 41) Which of the following is a
tax? 1. A 1% special sales tax for funding local road construction. 2. A fee
paid to the state for a license to practice as an attorney. III. An income tax
imposed by Philadelphia on persons working within the city limits. 1. A special
property assessment for installing a new water system in the taxpayer’s
neighborhood. 2. A) Only I is correct. 3. B) Only IV is correct. 4. C) Only III
is correct. 5. D) III and IV are correct. 6. E) I and III are correct. 42) Which
of the following is considered a tax? 1. A) Tolls 2. B) Parking meter fees 3. C)
Annual licensing fees 4. D) A local surcharge paid on retail sales to fund
public schools 5. E) Entrance fees paid at national parks 43) Earmarked taxes
are: 1. A) Taxes assessed only on certain taxpayers. 2. B) Taxes assessed to
fund a specific purpose. 3. C) Taxes assessed for only a specific time period.
4. D) Taxes assessed to discourage less desirable behavior. 5. E) None of the
choices are correct. 44) Sin taxes are: 1. A) Taxes assessed by religious
organizations. 2. B) Taxes assessed on certain illegal acts. 3. C) Taxes
assessed to discourage less desirable behavior. 4. D) Taxes assessed to fund a
specific purpose. 5. E) None of the choices are correct. 45) To calculate a tax,
you need to know: 1. the tax base 2. the taxing agency III. the tax rate 1. the
purpose of the tax 2. A) Only I is correct. 3. B) Only IV is correct. 4. C) Only
III is correct. 5. D) Items I through IV are correct. 6. E) I and III are
correct. 46) Which of the following is not an example of a graduated tax rate
structure? 1. A) Progressive tax rate structure 2. B) Proportional tax rate
structure 3. C) U.S. Federal Income Tax 4. D) Regressive tax rate structure 5.
E) None of the choices are correct 47) The difficulty in calculating a tax is
typically in the determination of: 1. A) The correct tax rate. 2. B) Where to
file the tax return. 3. C) The tax base. 4. D) The due date for the return. 5.
E) None of the choices are correct. 48) Which of the following is not one of the
basic tax rate structures? 1. A) Proportional 2. B) Equitable 3. C) Regressive
4. D) Progressive 5. E) All of these are different kinds of the basic tax rate
structures 49) Marc, a single taxpayer, earns $60,000 in taxable income and
$5,000 in interest from an investment in city of Birmingham Bonds. Using the
U.S. tax rate schedule in the text for year 2017, how much federal tax will he
owe? (Use tax rate schedule in the text) 1. A) $15,000.00 2. B) $12,375.00 3. C)
$10,738.75 4. D) $9,252.50 5. E) None of the choices are correct 50) Marc, a
single taxpayer, earns $60,000 in taxable income and $5,000 in interest from an
investment in city of Birmingham Bonds. Using the U.S. tax rate schedule for
year 2017, what is his average tax rate (rounded)? (Use tax rate schedule in the
text) 1. A) 17.90% 2. B) 15.00% 3. C) 15.42% 4. D) 25.00% 5. E) None of the
choices are correct 51) Marc, a single taxpayer, earns $60,000 in taxable income
and $5,000 in interest from an investment in city of Birmingham Bonds. Using the
U.S. tax rate schedule for year 2017, what is his effective tax rate? (Use tax
rate schedule in the text) 1. A) 17.90% 2. B) 16.52% 3. C) 14.23% 4. D) 25.00%
5. E) None of the choices are correct 52) Marc, a single taxpayer, earns $60,000
in taxable income and $5,000 in interest from an investment in city of
Birmingham Bonds. Using the U.S. tax rate schedule for year 2017, what is his
current marginal tax rate? (Use tax rate schedule in the text) 1. A) 15.00% 2.
B) 25.00% 3. C) 28.00% 4. D) 33.00% 5. E) None of the choices are correct 53)
The city of Granby, Colorado recently enacted a 1.5% surcharge on vacation cabin
rentals that will help pay for the city’s new elementary school. This surcharge
is an example of ________. 1. A) A sin tax to discourage undesirable behavior 2.
B) A government fine 3. C) A sin tax to discourage undesirable behavior and An
earmarked tax 4. D) An earmarked tax 5. E) None of the choices are correct 54)
The state of Georgia recently increased its tax on a carton of cigarettes by
$2.00. What type of tax is this? 1. A) A sin tax 2. B) An excise tax 3. C) It is
not a tax; it is a fine 4. D) A sin tax and An excise tax are correct 5. E) None
of the choices are correct 55) Which of the following is false? 1. A) A
proportional tax rate structure imposes a constant tax rate while a progressive
tax rate structure imposes an increasing marginal rate related to the tax base.
2. B) The average tax rate changes under a proportional tax rate structure, but
it is static for a progressive tax rate system. 3. C) An example of a
proportional tax is the tax on gasoline. 4. D) An example of a progressive tax
is the federal tax on gifts. 5. E) None of the choices are correct. 56) Which of
the following is true? 1. A) A regressive tax rate structure imposes an
increasing marginal tax rate as the tax base increases. 2. B) Regressive tax
structures are the most common tax rate structure. 3. C) An example of a
regressive tax is an excise tax. 4. D) In terms of effective tax rates, a sales
tax can be viewed as a regressive tax. 5. E) None of the choices are correct.
57) The ultimate economic burden of a tax is best captured by: 1. A) The
marginal tax rate. 2. B) The effective tax rate. 3. C) The average tax rate. 4.
D) The proportional tax rate. 5. E) None of the choices are correct. 58) Which
of the following taxes represents the largest portion of U.S. Federal Tax
revenues? 1. A) Employment taxes 2. B) Corporate income taxes 3. C) Individual
income taxes 4. D) Estate and gift taxes 5. E) None of the choices are correct
59) Which of the following represents the largest percentage of average state
tax revenue? 1. A) Sales tax 2. B) Individual income tax 3. C) Other 4. D)
Property tax 5. E) None of the choices are correct 60) Which of the following is
true regarding use taxes? 1. A) A use tax is relatively easy to enforce compared
to a sales tax. 2. B) Use taxes attempt to eliminate any tax advantage of
purchasing goods out of state. 3. C) Use taxes encourage taxpayers to buy goods
out of state to avoid paying sales tax in their home state. 4. D) A use tax is
generally a progressive tax. 5. E) None of the choices are correct. 61) Which of
the following is true regarding real property taxes and personal property taxes?
1. A) Personal property taxes are assessed on permanent structures and land. 2.
B) Real property taxes are assessed on cars and boats. 3. C) All U.S. states
currently impose personal property taxes. 4. D) Real property taxes are
generally easier to administer than personal property taxes. 5. E) None of the
choices are correct. 62) Which of the following statements is true? 1. A)
Municipal bond interest is subject to explicit federal tax. 2. B) Municipal bond
interest is subject to implicit tax. 3. C) Municipal bonds typically pay a
higher interest rate than corporate bonds with similar risk. 4. D) All of the
choices are correct. 5. E) None of the choices are correct. 63) The concept of
tax sufficiency: 1. A) Suggests the need for tax forecasting. 2. B) Suggests
that a government should estimate how taxpayers will respond to changes in the
current tax structure. 3. C) Suggests that a government should consider the
income and substitution effects when changing tax rates. 4. D) All of the
choices are correct. 5. E) None of the choices are correct. 64) The substitution
effect: 1. A) Predicts that taxpayers will work harder to pay for consumer
products when tax rates increase. 2. B) Is one of the effects considered in
static forecasting. 3. C) Results in the government collecting more aggregate
tax revenue than under the income effect. 4. D) Is typically more descriptive
for taxpayers with lower disposable income. 5. E) None of the choices are
correct. 65) Which of the following federal government actions would make sense
if a tax system fails to provide sufficient tax revenue? 1. A) Only issue
treasury bonds. 2. B) Only cut funding to various federal projects. 3. C) Only
increase federal spending. 4. D) Issue treasury bonds and cut funding to various
federal projects but not increase federal spending. 5. E) None of the choices
are correct. 66) Geronimo files his tax return as a head of household for year
2017. If his taxable income is $72,000, what is his average tax rate? (Use tax
rate schedule in the text) 1. A) 17.02% 2. B) 18.24% 3. C) 19.08% 4. D) 25.00%
5. E) None of the choices are correct 67) Al believes that SUVs have negative
social and environmental effects because of their increased carbon monoxide
emissions. He proposes eliminating sales taxes on smaller automobiles in favor
of higher sales taxes levied on SUVs. Al performs some calculations and comes to
the conclusion that based on the current number of SUVs owned in the U.S.
exactly the same amount of total sales tax will be collected under his reformed
system. Which of the following concepts explains why Al’s idea may not work? 1.
A) The ability to pay principle. 2. B) Horizontal equity. 3. C) Substitution
effect. 4. D) Vertical equity. 5. E) None of the choices are correct. 68) Which
of the following would not be a failure of the horizontal equity concept? 1. A)
Two taxpayers with identical income pay different amounts of tax because one
taxpayer’s income includes tax exempt interest. 2. B) Two taxpayers pay
different amounts of property tax amounts on similar plots of land (i.e., same
value) because one plot of land is used to raise crops. 3. C) Two taxpayers pay
different amounts of estate tax because one taxpayer’s estate is worth
significantly more. 4. D) All of the choices are correct. 5. E) None of the
choices are correct. 69) Which of the following is true regarding tax-advantaged
assets? 1. A) They are typically subject to excise taxes to account for their
low explicit taxes. 2. B) A corporate bond is typically considered a
tax-advantaged asset. 3. C) They are often subject to implicit taxes. 4. D) A
corporate bond is typically considered a tax-advantaged asset and They are often
subject to implicit taxes are correct but not They are typically subject to
excise taxes to account for their low explicit taxes. 5. E) None of the choices
are correct. 70) Congress recently approved a new, smaller budget for the IRS.
What taxation concept evaluates the cost of administering our tax law? 1. A)
Convenience. 2. B) Economy. 3. C) Certainty. 4. D) Equity. 5. E) None of the
choices are correct. 71) Employers often withhold federal income taxes directly
from worker’s paychecks. This is an example of which principle in practice? 1.
A) Convenience. 2. B) Certainty. 3. C) Economy. 4. D) Equity. 5. E) None of the
choices are correct. 72) Which of the following principles encourages a
vertically equitable tax system? 1. A) Pay as you go. 2. B) Economy. 3. C)
Income effects. 4. D) Ability to pay principle. 5. E) None of the choices are
correct. 73) Manny, a single taxpayer, earns $65,000 per year in taxable income
and an additional $12,000 per year in city of Boston bonds. What is Manny’s
current marginal tax rate for year 2017? (Use tax rate schedule in the text) 1.
A) 18.44% 2. B) 28.00% 3. C) 15.57% 4. D) 22.86% 5. E) None of the choices are
correct. 74) Manny, a single taxpayer, earns $65,000 per year in taxable income
and an additional $12,000 per year in city of Boston bonds. If Manny earns an
additional $35,000 in taxable income in year 2017, what is his marginal tax rate
on this income? (Use tax rate schedule in the text) 1. A) 21.89% 2. B) 28.00% 3.
C) 25.69% 4. D) 25.00% 5. E) None of the choices are correct. 75) Leonardo, who
is married but files separately, earns $80,000 of taxable income. He also has
$15,000 in city of Tulsa bonds. His wife, Theresa, earns $50,000 of taxable
income. If Leonardo earned an additional $30,000 of taxable income this year,
what would be the marginal tax rate on the extra income for year 2017? (Use tax
rate schedule in the text) 1. A) 27.75% 2. B) 17.50% 3. C) 25.00% 4. D) 28.00%
5. E) None of the choices are correct. 76) Leonardo, who is married but files
separately, earns $80,000 of taxable income. He also has $15,000 in city of
Tulsa bonds. His wife, Theresa, earns $50,000 of taxable income. If Leonardo
instead had $30,000 of additional tax deductions for year 2017, his marginal tax
rate on the deductions would be: (Use tax rate schedule in the text) 1. A)
28.00% 2. B) 25.00% 3. C) 25.35% 4. D) 16.37% 5. E) None of the choices are
correct. 77) Leonardo earns $80,000 of taxable income. He also has $15,000 in
city of Tulsa bonds. His wife, Theresa, earns $50,000 of taxable income. If
Leonardo and his wife file married filing jointly in 2017, what would be their
average tax rate? (Use tax rate schedule in the text) 1. A) 15.00% 2. B) 25.00%
3. C) 18.44% 4. D) 23.47% 5. E) None of the choices are correct. 78) Leonardo
earns $80,000 of taxable income. He also has $15,000 in city of Tulsa bonds. His
wife, Theresa, earns $50,000 of taxable income. What is Leonardo and Theresa’s
effective tax rate for year 2017? (Use tax rate schedule in the text) 1. A)
15.00% 2. B) 18.44% 3. C) 21.04% 4. D) 28.00% 5. E) None of the choices are
correct. 79) Leonardo earns $80,000 of taxable income. He also has $15,000 in
city of Tulsa bonds. His wife, Theresa, earns $50,000 of taxable income. How
much money would Leonardo and Theresa save if they file jointly instead of
separately for year 2017? (Use tax rate schedule in the text) 1. A) Nothing 2.
B) $103.50 3. C) $309.75 4. D) $5,932.50 5. E) None of the choices are correct.
80) If Susie earns $750,000 in taxable income, how much tax will she pay as a
single taxpayer for year 2017? (Use tax rate schedule in the text) 1. A)
$242.230.80 2. B) $252,500.00 3. C) $252,818.85 4. D) $269,615.40 5. E) None of
the choices are correct. 81) If Susie earns $750,000 in taxable income and files
as head of household for year 2017, what is Susie’s average tax rate? (Use tax
rate schedule in the text) 1. A) 33.05% 2. B) 33.71% 3. C) 35.00% 4. D) 39.60%
5. E) None of the choices are correct. 82) Eliminating the current system of
withholding income taxes directly from employee paychecks would: 1. A) Violate
the convenience criterion of federal taxation. 2. B) Increase the rate of
compliance. 3. C) Make collection of federal income taxes easier. 4. D) All of
the choices are correct. 5. E) None of the choices are correct. 83) Curtis
invests $250,000 in a city of Athens bond that pays 7% interest. Alternatively,
Curtis could have invested the $250,000 in a bond recently issued by Initech,
Inc. that pays 9% interest with similar risk as the city of Athens bond. Assume
that Curtis’s marginal tax rate is 28%. What is Curtis’s after-tax rate of
return on the city of Athens bond? 1. A) 1.96% 2. B) 2.52% 3. C) 7.00% 4. D)
9.00% 5. E) None of the choices are correct. 84) Curtis invests $250,000 in a
city of Athens bond that pays 7% interest. Alternatively, Curtis could have
invested the $250,000 in a bond recently issued by Initech, Inc. that pays 9%
interest with similar risk as the city of Athens bond. Assume that Curtis’s
marginal tax rate is 28%. How much implicit tax would Curtis pay on the city of
Athens bond? 1. A) $17,500 2. B) $1,400 3. C) $1,300 4. D) $5,000 5. E) None of
the choices are correct. 85) Curtis invests $250,000 in a city of Athens bond
that pays 7% interest. Alternatively, Curtis could have invested the $250,000 in
a bond recently issued by Initech, Inc. that pays 9% interest with similar risk
as the city of Athens bond. Assume that Curtis’s marginal tax rate is 28%. If
Curtis invested in the Initech, Inc. bonds, what would be his after-tax rate of
return from this investment? 1. A) 5.04% 2. B) 7.00% 3. C) 6.48% 4. D) 2.52% 5.
E) None of the choices are correct. 86) Curtis invests $250,000 in a city of
Athens bond that pays 7% interest. Alternatively, Curtis could have invested the
$250,000 in a bond recently issued by Initech, Inc. that pays 9% interest with
similar risk as the city of Athens bond. Assume that Curtis’s marginal tax rate
is 28%. How much explicit tax would Curtis incur on interest earned on the
Initech, Inc. bond? 1. A) $16,200 2. B) $6,300 3. C) $4,900 4. D) $12,600 5. E)
None of the choices are correct. 87) Jackson has the choice to invest in city of
Mitchell bonds or Sundial, Inc. corporate bonds that pay 10% interest. Jackson
is a single taxpayer who earns $55,000 annually. Assume that the city of
Mitchell bonds and the Sundial, Inc. bonds have similar risk. What interest rate
would the city of Mitchell have to pay in order to make Jackson indifferent
between investing in the city of Mitchell and the Sundial, Inc. bonds for year
2017? 1. A) 7.50% 2. B) 10.00% 3. C) 8.00% 4. D) 7.20% 5. E) None of the choices
are correct. 88) Jackson has the choice to invest in city of Mitchell bonds or
Sundial, Inc. corporate bonds that pay 10% interest. Jackson is a single
taxpayer who earns $55,000 annually. Assume that the city of Mitchell bonds and
the Sundial, Inc. bonds have similar risk. Assume the original facts as given
except that Jackson is a head of household taxpayer and the city of Mitchell
pays interest of 7.8%. How would you advise Jackson to invest his money? 1. A)
Invest in Sundial, Inc. bonds because their explicit tax is greater than the
implicit tax on city of Mitchell bonds. 2. B) Invest in city of Mitchell bonds
because their implicit tax is greater than the explicit tax on Sundial, Inc.
bonds. 3. C) Invest in Sundial, Inc. bonds because their explicit tax is less
than the implicit tax on city of Mitchell bonds. 4. D) Invest in city of
Mitchell bonds because their implicit tax is less than the explicit tax on
Sundial, Inc. bonds. 5. E) None of the choices are correct. 89) Oswald is
beginning his first tax course and does not really have a solid understanding of
the role that taxes play in various decisions. Please describe for Oswald the
various types of decisions that taxes may influence. 90) For each of the
following, determine if each is a tax and why or why not. 1. $2.50 toll paid on
the Florida Turnpike 2. $300 ticket for reckless driving 3. 1% local surcharge
on hotel rooms to fund public roadways 4. 2% city surcharge on wages earned in
the city of Philadelphia 91) Although the primary purpose of a tax system is to
raise revenue, Congress uses the federal tax system for other purposes as well.
Describe the other ways in which Congress uses the federal tax system. Be
specific. 92) There are several different types of tax rates that taxpayers
might use in different contexts. Describe each tax rate and how a taxpayer might
use it. 93) Ricky and Lucy are debating several types of taxes. Their debate has
focused on the different types of tax rate structures and whether they are
“fair.” Please define each tax rate structure, provide examples of each
structure, and discuss how each structure may be viewed with respect to vertical
equity. 94) Bart is contemplating starting his own business. His new business
would operate as a sole proprietorship and would require hiring several
employees. Describe the employmentrelated taxes that Bart should be aware of as
he starts his new business as a self-employed business owner. 95) Raquel
recently overheard two journalism students discussing the merits of the federal
tax system. One student offered as an example of unfairness the spouse of a
well-known politician who paid little income tax as most of the spouse’s income
was earned in the form of municipal bond interest. What type of taxes is the
journalism student considering in his example? What type of taxes is he
ignoring? Define each type of tax. What role does each type of tax play in
calculating relative tax burdens? What role does each type of tax play in
evaluating fairness? 96) Mandy, the mayor of Bogart and a strong advocate of a
clean downtown, is proposing an increase in the city sales tax from 7% to 50% on
all packs of chewing gum purchased in Bogart. Based on the current gum sales,
Mandy estimates that this tax will actually reduce the tax revenue on gum sales.
What type of forecasting is Mandy using to derive her tax revenue estimates?
What “effect” is her estimate based on? Does this necessarily imply that Mandy
will be happy given her desire to have a clean downtown? 97) Milton and Rocco
are having a heated debate regarding a national sales tax. Milton argues that a
national sales tax is a proportional, vertically equitable tax. Rocco argues
that a national sales tax would be a regressive, vertically inequitable tax.
Explain both sides of the argument. 98) Evaluate the U.S. federal tax system on
the certainty and economy criteria. 99) Jonah, a single taxpayer, earns $150,000
in taxable income and $10,000 in interest from an investment in city of Denver
Bonds. Using the U.S. tax rate schedule for year 2017, how much federal tax will
he owe? What is his average tax rate? What is his effective tax rate? What is
his current marginal tax rate? If Jonah earned an additional $40,000 of taxable
income, what is his marginal tax rate on this income? (Round the tax rates to 2
decimal places, e.g.,.12345 as 12.35%) (Use tax rate schedule in the text) 100)
Heather, a single taxpayer who files as a head of household, earns $60,000 in
taxable income and $5,000 in interest from an investment in city of Oxford
Bonds. Using the U.S. tax rate schedule for year 2017, how much federal tax will
she owe? What is her average tax rate? What is her effective tax rate? What is
her current marginal tax rate? If Heather has an additional $20,000 of tax
deductions, what is her marginal tax rate on these deductions? (Round the tax
rates to 2 decimal places, e.g.,.12345 as 12.35%)(Use tax rate schedule in the
text) 101) Fred and Wilma, married taxpayers, earn $100,000 in taxable income
and $20,000 in interest from an investment in city of Bedrock Bonds. Using the
U.S. tax rate schedule for married filing jointly for year 2017, how much
federal tax will they owe? What is their average tax rate? What is their
effective tax rate? What is their current marginal tax rate? If Fred and Wilma
earn an additional $40,000 of taxable income, what is their marginal tax rate on
this income? (Round the tax rates to 2 decimal places, e.g.,.12345 as 12.35%)
(Use tax rate schedule in the text) 102) Nick and Jessica are married taxpayers
that file married filing separately. Jessica earns $250,000 of taxable income
per year. Nick earns $130,000 of taxable income per year. Using the appropriate
U.S. tax rate schedule for year 2017, how much tax does each of them pay? What
are their marginal and average tax rates? How much tax would they save, if any,
if they filed jointly? (Round the tax rates to 2 decimal places, e.g.,.12345 as
12.35%) (Use tax rate schedule in the text) 103) Ariel invests $50,000 in a city
of Las Vegas bond that pays 5% interest. Alternatively, Ariel could have
invested the $50,000 in a bond recently issued by Jittery Joe’s, Inc. that pays
8% interest with similar non-tax characteristics as the city of Las Vegas bond
(e.g., similar risk). Assume that Ariel’s marginal tax rate is 25%. What is her
after-tax rate of return for the city of Las Vegas bond? For the Jittery Joe’s,
Inc. bond? How much explicit tax does Ariel pay on the city of Las Vegas bond?
How much implicit tax does she pay on the city of Las Vegas bond? How much
explicit tax would she have paid on the Jittery Joe’s, Inc. bond? Which bond
should she choose? 104) Nelson has the choice between investing in a city of
Fruithurst bond at 4% or a J.B. Ribs, Inc. bond at 6.5%. Assuming that both
bonds have the same non-tax characteristics and that Nelson has a 40% marginal
tax rate, in which bond should he invest? What interest rate offered by J.B.
Ribs, Inc. would make Nelson indifferent between investing in the two bonds?
105) Namratha has the choice between investing in a city of Watkinsville bond at
4.5% or a Moe’s, Inc. bond at 7%. Assuming that both bonds have the same non-tax
characteristics and that Namratha has a 25% marginal tax rate, in which bond
should she invest? What interest rate offered by Moe’s, Inc. would make Namratha
indifferent between investing in the two bonds? 106) Given the following tax
structure, what is the minimum tax that would need to be assessed on Lizzy to
make the tax progressive with respect to average tax rates? What is the minimum
tax that would need to be assessed on Lizzy to make the tax progressive with
respect to effective tax rates? Taxpayer

Salary

Muni-Bond Interest

Total Tax

Mort

20,000

5,000

4,000

Lizzy

80,000

30,000

???

107) Given the following tax structure, what is the minimum tax that would need
to be assessed on Dora to make the tax progressive with respect to average tax
rates? What is the minimum tax that would need to be assessed on Dora to make
the tax progressive with respect to effective tax rates? Taxpayer

Salary

Muni-Bond Interest

Total Tax

Diego

30,000

10,000

1,500

Dora

50,000

5,000

???

108) Junior earns $80,000 taxable income as a regional circuit stock car driver
and is taxed at an average rate of 25 percent (i.e., $20,000 of tax). If
Congress increases the income tax rate such that Junior’s average tax rate
increases from 25% to 30%, how much more income tax will he pay assuming that
the income effect is larger than the substitution effect? What effect will this
tax rate change have on the tax base and tax collected? What will happen to the
government’s tax revenues if Junior chooses to spend more time pursuing his
other passions besides work (e.g., earns only $60,000 in taxable income) in
response to the tax rate change? What is the term that describes this type of
reaction to a tax rate increase? (Round your answers to two decimal places.)
109) Given the following tax structure, what amount of tax would need to be
assessed on Carrie to make the tax horizontally equitable? What is the minimum
tax that Simon should pay to make the tax structure vertically equitable based
on Fantasia’s tax rate? This would result in what type of tax rate structure?
Taxpayer

Salary

Total Tax

Fantasia

20,000

1,500

Simon

30,000

2,000

Carrie

20,000

???

110) Consider the following tax rate structures. Is it horizontally equitable?
Why or why not? Is it vertically equitable? Why or why not? Taxpayer

Salary

Total Tax

Lucy

40,000

4,500

Ricky

20,000

4,500

Ethel

40,000

4,500

111) Consider the following tax rate structure. Is it horizontally equitable?
Why or why not? Is it vertically equitable? Why or why not? Taxpayer

Salary

Total Tax

Moe

20,000

1,500

Larry

40,000

8,500

Curly

100,000

25,500

112) Jed Clampett is expanding his family-run beer distributorship into Georgia
or Tennessee. His parents began the business many years ago and now three
generations of Clampetts work in the family business. Jed will relocate the
entire family (his parents, spouse, children, etc.) to either state after the
move. What types of taxes may influence his decision of where to locate his
business? What non-tax factors may influence the decision? 113) Congress would
like to increase tax revenues by 20 percent. Assume that the average taxpayer in
the United States earns $80,000 and pays an average tax rate of 17.5%. If the
income effect is larger than the substitution effect, what average tax rate will
result in a 20 percent increase in tax revenues? This is an example of what type
of forecasting? McGraw-Hill’s Taxation of Individuals and Business Entities,
2018 Edition, 9e (Spilker) Chapter 3 Tax Planning Strategies and Related
Limitations 1) The goal of tax planning is tax minimization. 2) Nontax factors
do not play an important role in tax planning. 3) Virtually every transaction
involves the taxpayer and two other parties that have an interest in the tax
ramifications of the transaction. 4) The timing strategy is based on the idea
that the location of where the income is taxed affects the tax costs of the
income. 5) In general, tax planners prefer to accelerate deductions. 6) The
concept of present value is an important part of the timing strategy. 7)
Assuming an after-tax rate of return of 10%, John should prefer to pay an
expense of $85 today instead of an expense of $100 in one year. Use Exhibit 3.1
in the text. 8) The time value of money suggests that $1 in one year from now is
worth less than $1 today. 9) The present value concept becomes more important as
interest rates increase. 10) Future value can be computed as Future Value =
Present Value/(1 + r)n. 11) When considering cash inflows, higher present values
are preferred. 12) When considering cash outflows, higher present values are
preferred. 13) Tax savings generated from deductions are considered cash
inflows. 14) In general, tax planners prefer to defer income. This is an example
of the conversion strategy. 15) The timing strategy is particularly effective
for cash basis taxpayers. 16) The timing strategy becomes more attractive as tax
rates decrease. 17) The timing strategy becomes more attractive as interest
rates (i.e., rates of return) increase. 18) The timing strategy becomes more
attractive if a taxpayer is able to accelerate deductions by two or more years
(versus one year). 19) One limitation of the timing strategy is the difficulties
in accelerating a tax deduction without accelerating the actual cash outflow
that generates the tax deduction. 20) The constructive receipt doctrine is a
natural limitation for the conversion strategy. 21) The constructive receipt
doctrine is more of an issue for cash basis taxpayers. 22) If tax rates will be
higher next year, taxpayers should accelerate their deductions regardless of
their after-tax rate of return. 23) If tax rates will be lower next year,
taxpayers should accelerate their deductions regardless of their after-tax rate
of return. 24) If tax rates will be higher next year, taxpayers should defer
their income to next year regardless of their after-tax rate of return. 25) The
value of a tax deduction is higher for a taxpayer with a lower tax rate. 26) The
income shifting strategy requires taxpayers with varying tax rates. 27) The
assignment of income doctrine is a natural limitation to the timing strategy.
28) The business purpose, step-transaction, and substance-over-form doctrines
may limit the income shifting strategy. 29) Paying dividends to shareholders is
one effective way of shifting income from a corporation to its shareholders. 30)
The conversion strategy capitalizes on the fact that tax rates vary across
different activities. 31) An investment’s time horizon does not affect after-tax
rates of return on investments taxed annually. 32) Implicit taxes may reduce the
benefits of the conversion strategy. 33) Investors must consider complicit taxes
as well as explicit taxes in order to make correct investment choices. 34) The
business purpose, step-transaction, and substance-over-form doctrines may limit
the conversion strategy. 35) Tax avoidance is a legal activity that forms the
basis of the basic tax planning strategies. 36) Tax evasion is a legal activity
that forms the basis of the basic tax planning strategies. 37) The downside of
tax avoidance includes the potential of stiff monetary penalties and
imprisonment. 38) The goal of tax planning generally is to: 1. A) minimize
taxes. 2. B) minimize IRS scrutiny. 3. C) maximize after-tax wealth. 4. D)
support the Federal government. 5. E) None of the choices are correct. 39)
Effective tax planning requires all of these considerations except: 1. A) nontax
factors. 2. B) the taxpayer’s tax costs of alternative transactions. 3. C) the
other party’s tax costs of alternative transactions. 4. D) the other party’s
nontax costs of alternative transactions. 5. E) all of the choices are required
considerations. 40) Which is not a basic tax planning strategy? 1. A) Income
shifting. 2. B) Timing. 3. C) Conversion. 4. D) Arms-length transaction. 5. E)
None of the choices are correct. 41) Which of the following tax planning
strategies is based on the present value of money? 1. A) timing. 2. B) tax
avoidance. 3. C) income shifting. 4. D) conversion. 5. E) None of the choices
are correct. 42) Assuming a positive interest rate, the present value of money
suggests: 1. A) $1 today = $1 in one year. 2. B) $1 today > $1 in one year. 3.
C) $1 today < $1 in one year. 4. D) $1 today ≤ $1 in one year. 5. E) None of the
choices are correct. 43) If Joel earns a 10% after-tax rate of return, $10,000
received in two years is worth how much today? Use Exhibit 3.1 in the text.
(Round present and future value amounts to 3 places) 1. A) $10,000. 2. B)
$9,090. 3. C) $8,260. 4. D) $11,000. 5. E) None of the choices are correct. 44)
If Lucy earns a 6% after-tax rate of return, $8,000 received in four years is
worth how much today? Use Exhibit 3.1 in the text. (Round present and future
value amounts to 3 places) 1. A) $8,000. 2. B) $7,544. 3. C) $8,989. 4. D)
$6,336. 5. E) None of the choices are correct. 45) If Nicolai earns an 8%
after-tax rate of return, $20,000 today would be worth how much to Nicolai in 5
years? Use Exhibit 3.1 in the text. (Round present and future value amounts to 3
places) 1. A) $20,000. 2. B) $13,620. 3. C) $18,520. 4. D) $21,600. 5. E) None
of the choices are correct. 46) If Scott earns a 12% after-tax rate of return,
$15,000 today would be worth how much to Scott in 2 years? Use Exhibit 3.1 in
the text. (Round present and future value amounts to 3 places) 1. A) $15,000. 2.
B) $11,955. 3. C) $18,520. 4. D) $18,816. 5. E) None of the choices are correct.
47) If Rudy has a 25% tax rate and a 6% after-tax rate of return, a $30,000 tax
deduction in four years will save how much tax in today’s dollars? Use Exhibit
3.1 in the text. (Round present and future value amounts to 3 places) 1. A)
$30,000. 2. B) $7,500. 3. C) $23,760. 4. D) $5,940. 5. E) None of the choices
are correct. 48) If Jim invested $100,000 in an annual-dividend paying stock
today with a 7 percent return, what investment time period will give Jim the
greatest after-tax return? 1. A) 1 year. 2. B) 5 years. 3. C) 10 years. 4. D) 20
years. 5. E) All yield the same after-tax return. 49) If Julius has a 30% tax
rate and a 10% after-tax rate of return, a $40,000 tax deduction in two years
will save how much tax in today’s dollars? Use Exhibit 3.1 in the text. (Round
present and future value amounts to 3 places) 1. A) $40,000. 2. B) $9,912. 3. C)
$33,040. 4. D) $12,000. 5. E) None of the choices are correct. 50) If Thomas has
a 40% tax rate and a 6% after-tax rate of return, $50,000 of income in five
years will cost him how much tax in today’s dollars? Use Exhibit 3.1 in the
text. (Round present and future value amounts to 3 places) 1. A) $50,000. 2. B)
$20,000. 3. C) $37,350. 4. D) $14,940. 5. E) None of the choices are correct.
51) If Julius has a 20% tax rate and a 10% after-tax rate of return, $25,000 of
income in three years will cost him how much tax in today’s dollars? Use Exhibit
3.1 in the text. (Round present and future value amounts to 3 places) 1. A)
$3,755. 2. B) $18,775. 3. C) $5,000. 4. D) $25,000. 5. E) None of the choices
are correct. 52) Which of the following increases the benefits of income
deferral? 1. A) Increasing tax rates. 2. B) Smaller after-tax rate of return. 3.
C) Larger after-tax rate of return. 4. D) Smaller magnitude of transactions. 5.
E) None of the choices are correct. 53) Which of the following decreases the
benefits of accelerating deductions? 1. A) Decreasing tax rates. 2. B) Smaller
after-tax rate of return. 3. C) Larger after-tax rate of return. 4. D) Larger
magnitude of transactions. 5. E) None of the choices are correct. 54) Which of
the following does not limit the benefits of deferring income? 1. A) Increasing
tax rates. 2. B) A taxpayer with severe cash flow needs. 3. C) If continuing an
investment would generate a low rate of return. 4. D) If continuing an
investment would subject the taxpayer to unnecessary risk. 5. E) None of the
choices are correct. 55) The constructive receipt doctrine: 1. A) is
particularly restrictive for accrual basis taxpayers. 2. B) causes income to be
recognized before it is actually received. 3. C) causes income to be recognized
after it is actually received. 4. D) applies equally to income and expenses. 5.
E) None of the choices are correct. 56) Rolando’s employer pays year-end bonuses
each year on December 31. Rolando, a cash basis taxpayer, would prefer to not
pay tax on his bonus this year. So, he leaves town on December 31, 2016 and
doesn’t pick up his check until January 2, 2017. When should Rolando report his
bonus? 1. A) 2017. 2. B) 2016. 3. C) Rolando can choose the year to report the
income. 4. D) it does not matter. 5. E) None of the choices are correct. 57) If
tax rates are decreasing: 1. A) taxpayers should accelerate income. 2. B)
taxpayers should defer deductions. 3. C) taxpayers should defer income. 4. D)
taxpayers should defer deductions and accelerate income. 5. E) None of the
choices are correct. 58) If tax rates are decreasing: 1. A) taxpayers should
accelerate income. 2. B) taxpayers should defer deductions. 3. C) taxpayers
should accelerate deductions. 4. D) taxpayers should defer deductions and
accelerate income. 5. E) None of the choices are correct. 59) If tax rates are
increasing: 1. A) taxpayers should accelerate income. 2. B) taxpayers should
defer deductions. 3. C) taxpayers should defer income. 4. D) need more
information to make a recommendation. 5. E) None of the choices are correct. 60)
Which of the following is not required to determine the best timing strategy? 1.
A) The taxpayer’s after-tax rate of return. 2. B) The taxpayer’s tax rate this
year. 3. C) The taxpayer’s tax rate in future years. 4. D) The taxpayer’s tax
rate last year. 5. E) None of the choices are correct. 61) Which of the
following is an example of the timing strategy? 1. A) A corporation paying its
shareholders a $20,000 dividend. 2. B) A parent employing her child in the
family business. 3. C) A taxpayer gifting stock to his children. 4. D) A
cash-basis business delaying billing its customers until after year end. 5. E)
None of the choices are correct. 62) Which of the following is an example of the
timing strategy? 1. A) A cash basis taxpayer paying all outstanding bills by
year end. 2. B) A parent employing her child in the family business. 3. C) A
business paying its owner a $30,000 salary. 4. D) A taxpayer investing in a tax
preferred investment. 5. E) None of the choices are correct. 63) Which of the
following does not limit the income shifting strategy? 1. A) Assignment of
income doctrine. 2. B) Business purpose doctrine. 3. C) Substance-over-form
doctrine. 4. D) Step-transaction doctrine. 5. E) None of the choices are
correct. 64) A taxpayer paying his 10-year-old daughter $50,000 a year for
consulting likely violates which doctrine? 1. A) Constructive receipt doctrine.
2. B) Implicit tax doctrine. 3. C) Substance-over-form doctrine. 4. D)
Step-transaction doctrine. 5. E) None of the choices are correct. 65) A taxpayer
instructing her son to collect rent checks for the taxpayer’s property and to
report this as taxable income on the son’s tax return violates which doctrine?
1. A) Constructive receipt doctrine. 2. B) Implicit tax doctrine. 3. C)
Assignment of income doctrine. 4. D) Step-transaction doctrine. 5. E) None of
the choices are correct. 66) Which of the following is needed to implement the
income shifting strategy? 1. A) Taxpayers with varying tax rates. 2. B)
Decreasing tax rates. 3. C) Increasing tax rates. 4. D) Unrelated taxpayers. 5.
E) None of the choices are correct. 67) A common income shifting strategy is to:
1. A) shift income from low tax rate taxpayers to high tax rate taxpayers. 2. B)
shift deductions from low tax rate taxpayers to high tax rate taxpayers. 3. C)
shift deductions from high tax rate taxpayers to low tax rate taxpayers. 4. D)
accelerate tax deductions. 5. E) None of the choices are correct. 68) Jason’s
employer pays year-end bonuses each year on December 31. Jason, a cash basis
taxpayer, would prefer to not pay tax on his bonus this year (and actually would
prefer his daughter to pay tax on the bonus). So, he leaves town on December 31,
2016 and has his daughter, Julie, pick up his check on January 2, 2017. Who
reports the income and when? 1. A) Julie in 2016. 2. B) Julie in 2017. 3. C)
Jason in 2016. 4. D) Jason in 2017. 5. E) None of the choices are correct. 69)
Which of the following is more likely to receive IRS scrutiny under the
assignment of income doctrine? 1. A) A corporation paying its shareholders a
$20,000 dividend. 2. B) A parent employing her child in the family business. 3.
C) A taxpayer gifting stock to his children. 4. D) A cash-basis business
delaying billing its customers until after year end. 5. E) None of the choices
are correct. 70) Which of the following is an example of the income shifting
strategy? 1. A) A corporation paying its shareholders a $20,000 dividend. 2. B)
A corporation paying its owner a $20,000 salary. 3. C) A high tax rate taxpayer
investing in tax exempt municipal bonds. 4. D) A cash-basis business delaying
billing its customers until after year end. 5. E) None of the choices are
correct. 71) Which of the following is an example of the conversion strategy? 1.
A) A corporation paying its shareholders a $20,000 dividend. 2. B) A corporation
paying its owner a $20,000 salary. 3. C) A high tax rate taxpayer investing in
tax exempt municipal bonds. 4. D) A cash-basis business delaying billing its
customers until after year end. 5. E) None of the choices are correct. 72) Which
of the following may limit the conversion strategy? 1. A) Implicit taxes. 2. B)
Assignment of income doctrine. 3. C) Constructive receipt doctrine. 4. D)
Activities with preferential tax rates. 5. E) None of the choices are correct.
73) Assume that Bill’s marginal tax rate is 30%. If corporate bonds pay 8%
interest, what interest rate would a municipal bond have to offer for Bill to be
indifferent between the two bonds? 1. A) 30.00%. 2. B) 10.40%. 3. C) 8.00%. 4.
D) 7.00%. 5. E) None of the choices are correct. 74) Assume that John’s marginal
tax rate is 40%. If a city of Austin bond pays 6% interest, what interest rate
would a corporate bond have to offer for John to be indifferent between the two
bonds? 1. A) 30.00%. 2. B) 10.00%. 3. C) 6.00%. 4. D) 3.60%. 5. E) None of the
choices are correct. 75) Assume that Larry’s marginal tax rate is 25%. If
corporate bonds pay 10% interest, what interest rate would a municipal bond have
to offer for Larry to be indifferent between the two bonds? 1. A) 25.00%. 2. B)
12.50%. 3. C) 10.00%. 4. D) 7.50%. 5. E) None of the choices are correct. 76)
Assume that Lavonia’s marginal tax rate is 20%. If a city of Tampa bond pays 5%
interest, what interest rate would a corporate bond have to offer for Lavonia to
be indifferent between the two bonds? 1. A) 20%. 2. B) 8%. 3. C) 7%. 4. D) 4%.
5. E) None of the choices are correct. 77) Assume that Marsha is indifferent
between investing in a city of Destin bond that pays 6% interest and a corporate
bond that pays 8% interest. What is Marsha’s marginal tax rate? 1. A) 50%. 2. B)
40%. 3. C) 30%. 4. D) 20%. 5. E) None of the choices are correct. 78) Assume
that Javier is indifferent between investing in a city of El Paso bond that pays
5% interest and a corporate bond that pays 6.25% interest. What is Javier’s
marginal tax rate? 1. A) 50%. 2. B) 40%. 3. C) 30%. 4. D) 20%. 5. E) None of the
choices are correct. 79) Assume that Lucas’ marginal tax rate is 30% and his tax
rate on dividends is 15%. If a dividend-paying stock (with no growth potential)
pays an 8% dividend yield, what interest rate would a municipal bond have to
offer for Lucas to be indifferent between the two investments from a cash-flow
perspective? 1. A) 30%. 2. B) 15%. 3. C) 8%. 4. D) 6.8%. 5. E) None of the
choices are correct. 80) Assume that Keisha’s marginal tax rate is 40% and her
tax rate on dividends is 15%. If a city of Atlanta bond pays 7.65% interest,
what dividend yield would a dividend-paying stock (with no growth potential)
have to offer for Keisha to be indifferent between the two investments from a
cash-flow perspective? 1. A) 15%. 2. B) 10%. 3. C) 9%. 4. D) 7.65%. 5. E) None
of the choices are correct. 81) Assume that Shavonne’s marginal tax rate is 50%
and her tax rate on dividends is 15%. If a corporate bond pays 10.2% interest,
what dividend yield would a dividend-paying stock (with no growth potential)
have to offer for Shavonne to be indifferent between the two investments from a
cash-flow perspective? 1. A) 6%. 2. B) 7%. 3. C) 10.2%. 4. D) 15%. 5. E) None of
the choices are correct. 82) Assume that Will’s marginal tax rate is 32% and his
tax rate on dividends is 15%. If a dividend-paying stock (with no growth
potential) pays a dividend yield of 8%, what interest rate must the corporate
bond offer for Will to be indifferent between the two investments from a
cash-flow perspective? 1. A) 12%. 2. B) 11%. 3. C) 10%. 4. D) 8%. 5. E) None of
the choices are correct. 83) Assume that Jose is indifferent between investing
in a corporate bond that pays 10% interest and a stock with no growth potential
that pays an 8% dividend yield. Assume that the tax rate on dividends is 15%.
What is Jose’s marginal tax rate? 1. A) 47%. 2. B) 37%. 3. C) 32%. 4. D) 15%. 5.
E) None of the choices are correct. 84) Assume that Juanita is indifferent
between investing in a corporate bond that pays 10.2% interest and a stock with
no growth potential that pays a 6% dividend yield. Assume that the tax rate on
dividends is 15%. What is Juanita’s marginal tax rate? 1. A) 50%. 2. B) 40%. 3.
C) 30%. 4. D) 15%. 5. E) None of the choices are correct. 85) If Tom invests
$60,000 in a taxable corporate bond that provides a 5 percent before-tax return,
how much will Tom’s investment be worth in either 8 or 20 years from now when
the bond matures? Assume Tom’s marginal tax rate is 35 percent. 1. A) $88,647;
$159,198. 2. B) $92,782; $178,414. 3. C) $79,621; $121,716. 4. D) $77,495;
$113,750. 5. E) None of the choices are correct. 86) The income shifting and
timing strategies are examples of: 1. A) tax avoidance. 2. B) tax evasion. 3. C)
illegal taxpayer strategies. 4. D) All of the choices are correct. 5. E) None of
the choices are correct. 87) A taxpayer earning income in “cash” and not
reporting it as taxable income is an example of: 1. A) tax avoidance. 2. B) tax
evasion. 3. C) conversion. 4. D) income shifting. 5. E) None of the choices are
correct. 88) Investing in municipal bonds to avoid paying tax on interest earned
and to earn a higher after-tax yield is an example of: 1. A) conversion. 2. B)
tax evasion. 3. C) timing. 4. D) income shifting. 5. E) None of the choices are
correct. 89) Paying “fabricated” expenses in high tax rate years is an example
of: 1. A) conversion. 2. B) tax evasion. 3. C) timing. 4. D) income shifting. 5.
E) None of the choices are correct. 90) Danny argues that tax accountants suffer
from one-mindedness in their attempts at tax planning (i.e., reducing taxes at
all costs). Is Danny’s view of tax planning correct – i.e., does he understand
what the goal of tax planning is? Please elaborate. 91) An astute tax student
once summarized that many of the tax planning strategies merely make use of the
variation of taxation across different dimensions. Explain why this is true. Be
specific. 92) There are two basic timing-related tax rate strategies. What are
they? What is the intent of each strategy? In which situations do the tax rate
and timing strategies provide conflicting recommendations? What information do
you need to determine the appropriate action? 93) Based only on the information
provided for each scenario, determine whether Eddy or Scott will benefit more
from using the timing strategy and why there will be a benefit to that person.
Exhibit 3.1 in the text. 1. Eddy has a 40% tax rate. Scott has a 30% tax rate.
2. Eddy and Scott each have a 40% tax rate. Eddy has $10,000 of income that
could be deferred; Scott has $20,000 of income that could be shifted. 3. Eddy
and Scott each have a 40% tax rate and $20,000 of income that could be deferred.
Eddy’s after-tax rate of return is 8%. Scott’s after-tax rate of return is 10%.
4. Eddy and Scott each have a 40% tax rate, $20,000 of income that could be
deferred, and an after-tax rate of return of 10%. Eddy can defer income up to 3
years. Scott can defer income up to 2 years. 94) Based only on the information
provided for each scenario, determine whether Kristi or Cindy will benefit more
from using the timing strategy and why there will be a benefit to that person.
Use Exhibit 3.1 in the text. 1. Kristi has a 40% tax rate and can defer $20,000
of income. Cindy has a 30% tax rate and can defer $30,000 of income. 2. Kristy
has a 30% tax rate, a 10% after-tax rate of return, and can defer $25,000 of
income for three years. Cindy has a 40% tax rate, an 8% after-tax rate of
return, and can defer $20,000 of income for four years. 95) David, an attorney
and cash basis taxpayer, is new to the concept of tax planning and recently
learned of the timing strategy. To implement the timing strategy, David plans to
establish a new policy that allows his clients to wait up to five years to pay
their attorney fees. Assume that David expects his marginal tax rates to remain
constant over the foreseeable future. What is wrong with this strategy? 96)
Explain why $1 today is not equal to $1 in the future. Why is understanding this
concept particularly important for tax planning? What tax strategy exploits this
concept? 97) Luther was very excited to hear about the potential tax savings
from shifting income from his corporation to him. The next day he had his
corporation declare a $30,000 dividend to him. Is this an effective income
shifting strategy? If so, why? If not, why not? What recommendations do you have
for Luther? 98) Compare and contrast the constructive receipt doctrine and the
assignment of income doctrine. In what situations do these doctrines apply? What
tax planning strategies does each doctrine limit? 99) Lucinda is contemplating a
long range planning strategy that will allow her to defer sizable portions of
her income for 10 years. What type of planning strategy is she contemplating?
What are some potential risks associated with this type of strategy? 100) Jared,
a tax novice, has recently learned of several foreign tax havens (i.e.,
countries with low tax rates). He is considering locating his manufacturing
operations in one of these countries solely based on their low tax rates. What
types of taxes is Jared ignoring? Explain how these other taxes may affect the
viability of Jared’s choice to locate in a foreign tax haven. 101) Richard
recently received $10,000 of compensation for some consulting work (paid in
cash). Jeffrey recently received $10,000 of interest income from City of Dallas
bonds. Both taxpayers report no taxable income from these transactions. Is this
considered tax avoidance or tax evasion? What is the difference, if any, between
the two? 102) Antonella works for a company that pays a year-end bonus in
December of each year. Assume that Antonella expects to receive a $20,000 bonus
in December this year, her tax rate is 30%, and her after-tax rate of return is
8%. If Antonella’s employer paid her bonus on January 1 of next year instead of
in December, how much would this action save Antonella in today’s tax dollars?
If Antonella’s tax rate increased to 32% next year, would receiving the bonus in
January still be advantageous? Use Exhibit 3.1 in the text. 103) Joe Harry, a
cash basis taxpayer, owes $20,000 in tax deductible accounting fees for his
business. Assume that it is December 28 and that Joe Harry can avoid any finance
charges if he pays the accounting fees by January 10. Joe Harry’s tax rate this
year is 30%. His tax rate next year will be 33%. His after-tax rate of return is
8%. When should Joe Harry pay the $20,000 fees and why? Use Exhibit 3.1 in the
text. 104) Rodney, a cash basis taxpayer, owes $40,000 in tax deductible
consulting fees for his business. Assume that it is December 28 and that Rodney
can avoid any finance charges if he pays the accounting fees by January 10.
Rodney’s tax rate this year is 30% and his after-tax rate of return is 10%. At
what tax rate next year, will Rodney be indifferent between paying the $40,000
this year and next year? Use Exhibit 3.1 in the text. 105) Troy is not a very
astute investor. He has a knack for investing in losing stocks. In his latest
investment move, he has realized a loss of about $40,000 (original basis of
$50,000; current fair market value of $10,000) in High Tech, Inc. The good news
is that unlike prior years, he actually has $45,000 of gains that he can use to
offset the loss. Troy is considering either selling the High Tech, Inc. stock to
his sister, Louise, or on the stock market. Which should he choose and why?
Please explain why the IRS may treat the two transactions differently. 106)
O’Reilly is a masterful lottery player. The megamillion jackpot is now up to
$200 million. If O’Reilly wins the jackpot, he has a choice of receiving $200
million in 5 years or a smaller lump sum currently. Advise O’Reilly on his
choice under the following scenarios. Which option should he take and why? Use
Exhibit 3.1 in the text. 1. O’Reilly’s after-tax return is 10%. If he chooses
the current lump sum option, the lottery will pay him $130 million. 2.
O’Reilly’s after-tax return is 10%. His current tax rate will be 35% if he
receives the lottery payment now. His expected tax rate in five years will be
40%. If he chooses the current lump sum option, the lottery will pay him $100
million. 107) Sal, a calendar year taxpayer, uses the cash-basis method of
accounting for his sole proprietorship. In late December he performed $40,000 of
consulting services for a client. Sal typically requires his clients to pay his
bills immediately upon receipt. Assume that Sal’s marginal tax rate is 30% this
year and 35% next year and that he can earn an after-tax rate of return of 12%
on his investments. Should Sal send his client the bill in December or January?
Use Exhibit 3.1 in the text. 108) Lucky owns a maid service that cleans several
local businesses nightly. Lucky, a high-tax rate taxpayer, would like to shift
some income to his son Rocco. Lucky tells all of his customers (who are always
timely in their payments) to pay Rocco and then Rocco will report 50% of the
income as a collection fee. Lucky will report the remaining 50%. Will this shift
the income from Lucky to Rocco? Why or why not? What doctrines influence your
answer? Any suggestions for Lucky? 109) Bono owns and operates a sole
proprietorship and has a 30% marginal tax rate. He provides his son, Richie,
$12,000 a year for college expenses. Richie works as a street musician and has a
marginal tax rate of 15%. What could Bono do to reduce his family tax burden?
How much pre-tax income does it currently take Bono to generate the $12,000
after-taxes given to Richie? If Richie worked for his father’s sole
proprietorship, what salary would Bono have to pay him to generate $12,000 after
taxes? (Ignore any Social Security, Medicare, or Self Employment Tax issues.)
How much money would this strategy save? 110) Jayzee is a single taxpayer who
operates a sole proprietorship. He expects his taxable income next year to be
$150,000, of which $125,000 is attributed to his sole proprietorship. Jayzee is
contemplating incorporating his sole proprietorship. Using the 2017 single
individual tax brackets and the corporate tax brackets, how much current tax
could this strategy save Jayzee? (Ignore any Social Security, Medicare, or Self
Employment Tax issues.) How much income should be retained in the corporation?
(Use tax rate schedule in the text; Corporate tax rate schedule in the text)
111) Bobby and Whitney are husband and wife and Whitney operates a sole
proprietorship. They expect their joint taxable income next year to be $225,000,
of which $150,000 is attributed to the sole proprietorship. Whitney is
contemplating incorporating the sole proprietorship. Using the 2017 married
filing joint tax brackets and the corporate tax brackets, how much current tax
could this strategy save Bobby and Whitney? How much income should be retained
in the corporation? (Use tax rate schedule in the text; Corporate tax rate
schedule in the text) 112) Rob is currently considering investing in municipal
bonds that earn 4% interest or taxable bonds issued by Dell Computer that pay
6.5%. If Rob’s tax rate is 20%, which bond should he choose? Which bond should
he choose if his tax rate is 30%? At what tax rate would he be indifferent to
the municipal bond or to the corporate bond? What strategy is this decision
based upon? 113) Maurice is currently considering investing in a high dividend
yield stock with no growth potential that pays a 6% dividend yield or bonds
issued by The Coca Cola Company that pay 8%. If Maurice’s ordinary tax rate is
25% and his dividend tax rate is 15%, which investment should he choose? Which
investment should he choose if his ordinary tax rate is 30%? At what ordinary
tax rate would he be indifferent to the stock or to the bond? What strategy is
this decision based upon? 114) Susan Brown has decided that she would like to go
back to school after her kids leave home in five years. To save for her
education, Susan would like to invest $25,000 in an investment that provides a
high return. If her marginal tax rate is 35 percent, what is Susan’s after-tax
rate of return for the following investment options? Qualified dividends are
taxed at 15 percent. (Round your interim calculations to the nearest whole
number) (1) Corporate bond issued at face value with 10 percent stated interest
rate payable annually. (2) Dividend-paying stock with an annual qualifying
dividend equal to 10% of her investment. (3) Growth stock with an annual growth
rate of 8 percent and no dividends paid. 115) Boeing is considering opening a
plant in two neighboring states. One state has a corporate tax rate of 15%. If
operated in this state, the plant is expected to generate $1,200,000 pre-tax
profit. The other state has a corporate tax rate of 5%. If operated in this
state, the plant is expected to generate $1,085,000 of pre-tax profit. Which
state should Boeing choose based upon tax considerations only? Why do you think
the plant in the state with a lower tax rate would produce a lower pre-tax
income? McGraw-Hill’s Taxation of Individuals and Business Entities, 2018
Edition, 9e (Spilker) Chapter 4 Individual Income Tax Overview, Exemptions, and
Filing Status 1) Relative to for AGI deductions, from AGI deductions tend to
relate to items that are more personal in nature. 2) Taxpayers need not include
an income item in gross income unless there is a specific tax provision
requiring the taxpayer to include the income item in gross income. 3) The
standard deduction amount for married filing separately taxpayers (MFS) is less
than the standard deduction amount for married filing jointly taxpayers. 4)
Taxpayers are generally allowed to claim deductions for expenditures unless a
specific tax provision indicates the expenditure is not deductible. 5) From AGI
deductions are generally more valuable to taxpayers than for AGI deductions. 6)
From AGI deductions are commonly referred to as deductions “below the line.” 7)
For AGI deductions are commonly referred to as deductions “below the line.” 8)
For AGI deductions are commonly referred to as deductions “above the line.” 9)
Itemized deductions and the standard deduction are deductions from AGI but
deductions for personal and dependency exemptions are deductions for AGI. 10)
The standard deduction amount varies by filing status. 11) Taxpayers are allowed
to deduct more for each personal exemption they claim than for each dependency
exemption they claim. 12) A personal automobile is a capital asset. 13) The
character of income is a factor in determining the rate at which the income is
taxed. 14) Inventory is a capital asset. 15) Qualified dividends are taxed at
the same rate as ordinary income. 16) Certain types of income are taxed at a
lower rate than ordinary income. 17) In addition to the individual income tax,
individuals may be required to pay taxes imposed on tax bases other than the
individual’s regular taxable income. 18) Tax credits reduce taxable income
dollar for dollar. 19) Tax credits are generally more valuable than tax
deductions because tax credits reduce a taxpayer’s gross tax liability dollar
for dollar while tax deductions do not. 20) Taxpayers may prepay their tax
liability through withholdings and through estimated tax payments. 21) In
certain circumstances, a taxpayer who provides less than half the support of
another may still be able to claim a dependency exemption for that person as a
qualifying relative. 22) A child who is her parents’ qualifying child can claim
a personal exemption for herself as long as her parents choose not to claim her
as a dependent. 23) A taxpayer who is claimed as a dependent on another’s tax
return may not claim any personal or dependency exemptions on his or her tax
return. 24) Anna is a qualifying child of her parents. However, she was recently
married. Anna and her husband filed a joint return. If they had filed
separately, Anna would have owed no taxes, though her husband would have owed
just $5. Because Anna herself owed no taxes, her parents can still claim her as
a dependent. 25) To be considered a qualifying child of a taxpayer, the
individual must be the son or daughter of the taxpayer. 26) For purposes of the
qualifying child residence test, a child’s temporary absence from the taxpayer’s
home for attending school full-time is counted as though the child lived in the
taxpayer’s home during the absence. 27) An individual may never be considered as
both a qualifying relative and a qualifying child of the same taxpayer. 28) An
individual may be considered as a qualifying child of her parents and a
qualifying child of her grandparents in the same year. 29) An individual may
meet the relationship test to be a taxpayer’s qualifying relative even if the
individual has no family relationship with the taxpayer. 30) When determining
whether a child meets the qualifying child support test for the parents,
scholarships earned by the child do not count as self-support provided by the
child. 31) When determining whether a child meets the qualifying child support
test for the child’s grandparents, scholarships earned by the child do not count
as self-support provided by the child. 32) An individual with gross income of
$5,000 could qualify as a qualifying child of another taxpayer but could not
qualify as a qualifying relative of another taxpayer. 33) An individual
receiving $5,000 of tax exempt income during the year could qualify as a
qualifying child of another taxpayer but could not qualify as a qualifying
relative of another taxpayer. 34) The relationship requirement is more broadly
defined (includes more relationships) for a qualifying relative than it is for a
qualifying child. 35) The relationship requirement for qualifying relative
includes cousins. 36) The relationship test for qualifying relative requires the
potential qualifying relative to have a family relationship with the taxpayer.
37) For purposes of the dependency exemption qualification, the test for
qualifying children includes an age restriction but the test for qualifying
relative does not. 38) The test for a qualifying child includes a gross income
restriction while the test for qualifying relative does not. 39) If a taxpayer
does not provide more than half the support of a child, that child cannot
qualify as the taxpayer’s qualifying child. 40) To determine filing status, a
taxpayer’s marital status is determined on January 1 of each tax year in
question. 41) It is generally more advantageous from a tax perspective for a
married couple to file separately than it is for them to file jointly. 42) It is
generally more advantageous from a nontax perspective for a married couple to
file separately than it is for them to file jointly. 43) Jeremy and Annie are
married. During the year Jeremy dies. When Annie files her tax return for the
year in which her husband dies, she may file under the married filing jointly
filing status even if she does not remarry. 44) Jennifer and Stephan are married
at year end and they file separate tax returns. If Jennifer itemizes deductions
on her return, Stephan must also itemize deductions on his return even if his
itemized deductions don’t exceed his standard deduction. 45) Bonnie and Ernie
file a joint return. Bonnie works and receives income during the year but Ernie
does not. If the couple files a joint tax return, Ernie is responsible for
paying any taxes due if Bonnie is unable to pay the taxes. 46) Eric and
Josephine were married in year 1. In year 2, Eric dies. The couple did not have
any children. Assuming Josephine does not remarry, she may file as a qualifying
widow in year 3. 47) Taxpayers who file as qualifying widows/widowers are
treated exactly the same for tax purposes in all respects as taxpayers who are
married filing jointly for tax purposes. 48) A taxpayer may qualify for the head
of household filing status even if she does not have any dependent children. 49)
A taxpayer may qualify for the head of household filing status if she has no
dependent children but pays more than half of the cost of maintaining a separate
household for her dependent mother and/or father. 50) If an unmarried taxpayer
provides more than half the support for a cousin who lives in the taxpayer’s
home for the entire year, the taxpayer will qualify for head of household filing
status. 51) If an unmarried taxpayer is able to claim a dependency exemption for
another individual, the taxpayer is automatically eligible for the head of
household filing status. 52) Charles, who is single, pays all of the costs of
maintaining a home for himself and Damarcus. Charles and Damarcus have no family
relationship but Damarcus lives with Charles for the entire year. Damarcus
qualifies as a qualifying relative for Charles (Charles claims a dependency
exemption for Damarcus on his tax return). Charles qualifies for head of
household filing status. 53) In certain circumstances, a married taxpayer who
does not file a joint tax return with her spouse may qualify for the head of
household filing status. 54) If no one qualifies as the dependent of an
unmarried taxpayer, the unmarried taxpayer may still be able to qualify for the
head of household filing status. 55) The income tax base for an individual tax
return is: 1. A) Realized income from whatever source derived. 2. B) Gross
income. 3. C) Adjusted gross income. 4. D) Adjusted gross income minus from AGI
deductions. 56) Which of the following series of inequalities is generally most
accurate? 1. A) Gross income ≥ adjusted gross income ≥ taxable income 2. B)
Adjusted gross income ≥ gross income ≥ taxable income 3. C) Adjusted gross
income ≥ taxable income ≥ gross income 4. D) Gross income ≥ taxable income ≥
adjusted gross income 57) Which of the following statements regarding realized
income is true? 1. A) Taxpayers need not include realized income in gross income
unless a specific provision of the tax code requires them to do so. 2. B)
Realized income requires some type of transaction or exchange with a second
party. 3. C) Once income is realized it may not be excluded from gross income.
4. D) None of these statements is true. 58) Which of the following statements
regarding exclusions and/or deferrals is false? 1. A) Exclusions are favorable
because taxpayers never pay tax on income that is excluded. 2. B) Interest
income from municipal bonds is excluded from gross income. 3. C) Deferrals are
income items taxpayers realize in one year but include in gross income in a
subsequent year. 4. D) An income item need not be realized in order to qualify
as an exclusion item. 59) Sally received $50,000 of compensation from her
employer and she received $400 of interest from a corporate bond. What is the
amount of Sally’s gross income from these items? 1. A) $0. 2. B) $400. 3. C)
$50,000. 4. D) $50,400. 60) Lebron received $50,000 of compensation from his
employer and he received $400 of interest from a municipal bond. What is the
amount of Lebron’s gross income from these items? 1. A) $0. 2. B) $400. 3. C)
$50,000. 4. D) $50,400. 61) Joanna received $60,000 compensation from her
employer, the value of her stock in ABC company appreciated by $5,000 during the
year (but she did not sell any of the stock), she received $30,000 of life
insurance proceeds from the death of her husband. What is the amount of Joanna’s
gross income from these items? 1. A) $60,000. 2. B) $65,000. 3. C) $95,000. 4.
D) $90,000. 62) Which of the following statements regarding tax deductions is
false? 1. A) Taxpayers are not entitled to any deductions unless specific
provisions in the tax code allow the deductions. 2. B) Deductions can be labeled
as deductions above the line or deductions below the line. 3. C) From AGI
deductions tend to be associated with business activities while for AGI
deductions tend to be associated with personal activities. 4. D) The standard
deduction is a from AGI deduction. 63) Which of the following statements
regarding for AGI tax deductions is true? 1. A) Taxpayers subtract for AGI
deductions from gross income to determine AGI. 2. B) A taxpayer may deduct for
AGI deductions only if the deductions exceed the taxpayer’s standard deduction
amount. 3. C) A taxpayer may deduct for AGI deductions only if the deductions
exceed the taxpayer’s deductible exemption amounts. 4. D) A taxpayer may deduct
for AGI deductions only if the deductions exceed the taxpayer’s itemized
deductions. 64) All of the following are for AGI deductions except: 1. A) Moving
expenses. 2. B) Rental and royalty expenses. 3. C) Business expenses for a
self-employed taxpayer. 4. D) Charitable contributions. 65) Which of the
following is NOT a from AGI deduction? 1. A) Standard deduction. 2. B) Itemized
deduction. 3. C) Personal exemption. 4. D) None of these. All of these are from
AGI deductions. 66) Which of the following is not an itemized deduction? 1. A)
Alimony paid. 2. B) Medical expenses. 3. C) Real estate taxes. 4. D) Charitable
contributions. 67) Which of the following shows the correct relationship among
standard deduction amounts for the respective filing statuses? 1. A) Single >
Head of Household > Married Filing Jointly 2. B) Married Filing Jointly >
Married Filing Separately > Head of Household 3. C) Married Filing Jointly >
Head of Household > Single 4. D) Head of Household > Married Filing Separately >
Married Filing Jointly 68) Which of the following statements regarding
exemptions is correct? 1. A) Personal exemptions are more valuable than
dependency exemptions. 2. B) Taxpayers filing a married filing joint return are
limited to two exemptions on their tax returns. 3. C) Exemption amounts are
considered to be for AGI deductions. 4. D) Taxpayers subtract exemption
deductions from adjusted gross income in determining taxable income. 69) Which
of the following types of income are not considered ordinary income? 1. A)
Compensation income. 2. B) Net long-term capital gains (in excess of short-term
capital losses). 3. C) Qualified dividend income. 4. D) Both compensation income
and qualified dividend income. 5. E) Both net long-term capital gains (in excess
of short-term capital losses) and qualified dividend income. 70) All of the
following represents a type or character of income except: 1. A) Tax exempt. 2.
B) Capital. 3. C) Qualified dividend. 4. D) Normal. 71) Which of the following
statements is true? 1. A) Income character determines the tax year in which the
income is taxed. 2. B) Income character depends on the taxpayer’s filing status.
3. C) Qualified dividend income is taxed at a lower rate than an equal amount of
ordinary income. 4. D) A taxpayer selling a capital asset at a gain recognizes
ordinary income. 72) Which of the following statements regarding tax credits is
true? 1. A) Tax credits reduce taxable income dollar for dollar. 2. B) Tax
credits provide a greater tax benefit the greater the taxpayer’s marginal tax
rate. 3. C) Tax credits reduce taxes payable dollar for dollar. 4. D) None of
these statements is true. 73) Jamison’s gross tax liability is $7,000. Jamison
had $2,000 of available credits and he had $4,000 of taxes withheld by his
employer. What is Jamison’s taxes due (or taxes refunded) with his tax return?
1. A) $5,000 taxes due. 2. B) $1,000 taxes due. 3. C) $1,000 tax refund. 4. D)
$3,000 taxes due. 74) Madison’s gross tax liability is $9,000. Madison had
$3,000 of tax credits available and she had $8,000 of taxes withheld by her
employer. What is Madison’s taxes due (or taxes refunded) with her tax return?
1. A) $0 taxes due and $0 tax refund. 2. B) $6,000 taxes due. 3. C) $2,000 tax
refund. 4. D) $1,000 taxes due. 75) Which of the following statements regarding
personal and dependency exemptions is false? 1. A) A married couple filing
jointly may claim two personal exemptions. 2. B) To qualify as a dependent of
another, an individual must be a resident of the United States. 3. C) An
individual who qualifies as a dependent of another taxpayer may not claim a
personal exemption. 4. D) An individual cannot qualify as a dependent of another
as a qualifying relative taxpayer if the individual’s gross income exceeds the
exemption amount. 76) Which of the following statements regarding personal and
dependency exemptions is true? 1. A) To qualify as a dependent of another, an
individual must be a resident of the United States. 2. B) To qualify as a
dependent of another, an individual may not file a joint return with the
individual’s spouse under any circumstance. 3. C) To qualify as a dependent of
another, an individual must have a family relationship with the other person. 4.
D) To qualify as a dependent of another, an individual must be either a
qualifying child or a qualifying relative of the other person. 77) All of the
following are tests for determining qualifying child status except the ________.
1. A) gross income test 2. B) age test 3. C) support test 4. D) residence test
78) Which of the following relationships does NOT pass the relationship test for
a qualifying child? 1. A) Stepsister’s daughter. 2. B) Half-brother. 3. C)
Cousin. 4. D) Stepsister. 79) Anna is a 21-year-old full-time college student
(she plans on returning home at the end of the school year). Her total support
for the year was $34,000 (including $8,000 of tuition). Anna covered $12,000 of
her support costs out of her own pocket (from savings, she did not work) and she
received an $8,000 scholarship that covered all of her tuition costs. Which of
the following statements regarding who is allowed to claim Anna as an exemption
is true? 1. A) Even if Anna’s parents provided the remaining $14,000 of support
for Anna ($34,000 minus $12,000 minus $8,000), they would not be able to claim
her as a dependent. 2. B) Even if Anna’s grandparents provided the remaining
$14,000 of support for Anna ($34,000 minus $12,000 minus $8,000) they would not
be able to claim her as a dependent. 3. C) Because she provided more than half
her own support, Anna may claim a personal exemption for herself. 4. D) None of
these statements is true. 80) Charlotte is the Lucas family’s 22-year-old
daughter. She is a full-time student at an out-of-state university but plans to
return home when the school year ends. During the year, Charlotte earned $4,000
of income working part-time. Her support totaled $30,000 for the year. Of this
amount, Charlotte paid $7,000 with her own funds, her parents paid $14,000, and
Charlotte’s grandparents paid $9,000. Which of the following statements most
accurately describes whether Charlotte’s parents can claim a dependency
exemption for Charlotte? 1. A) Yes, Charlotte is a qualifying child of her
parents. 2. B) No, Charlotte fails the support test for both qualifying children
and qualifying relatives. 3. C) No, Charlotte does not pass the gross income
test. 4. D) Yes, Charlotte is a qualifying relative of her parents. 81) In year
1, the Bennetts’ 25-year-old daughter, Jane, is a full-time student at an
out-of-state university but she plans to return home after the school year ends.
In previous years, Jane has never worked and her parents have always been able
to claim her as a dependent. In year 1, a kind neighbor offers to pay for all of
Jane’s educational and living expenses. Which of the following statements is
most accurate regarding whether Jane’s parents would be allowed to claim an
exemption for Jane in year 1 assuming the neighbor pays for all of Jane’s
support? 1. A) No, Jane must include her neighbor’s gift as income and thus
fails the gross income test for a qualifying relative. 2. B) Yes, because she is
a full-time student and does not provide more than half of her own support, Jane
is considered her parent’s qualifying child. 3. C) No, Jane is too old to be
considered a qualifying child and fails the support test of a qualifying
relative. 4. D) Yes, because she is a student, her absence is considered as
“temporary.” Consequently she meets the residence test and is a considered a
qualifying child of the Bennetts. 82) Sheri and Jake Woodhouse have one
daughter, Emma, who is 16 years old. They also have taken in Emma’s friend,
Harriet, who has lived with them since February of the current year and is also
16 years of age. The Woodhouses have not legally adopted Harriet but Emma often
refers to Harriet as “her sister.” The Woodhouses provide all of the support for
both girls, and both girls live at the Woodhouse residence. Which of the
following statements is true regarding the dependency exemptions (and the reason
for the exemptions) Sheri and Jake may claim for the current year for these
girls? 1. A) One exemption for their daughter Emma as a qualifying child but no
exemption for Harriet. 2. B) One exemption for Emma as a qualifying child and
one exemption for Harriet as a qualifying child. 3. C) One exemption for Emma as
a qualifying child and one exemption for Harriet as a qualifying relative. 4. D)
None of these statements is true. 83) Char and Russ Dasrup have one daughter,
Siera, who is 16 years old. In November of last year, the Dasrup’s took in
Siera’s 16 year old friend, Angela, who has lived with them ever since. The
Dasrup’s have not legally adopted Angela but Siera often refers to Angela as
“her sister.” In the current year, the Dasrups provide all of the support for
both girls, neither girl receives any income during the year, and both girls
live at the Dasrup’s residence. Which of the following statements is true
regarding the dependency exemptions (and the reason for the exemptions) Char and
Russ may claim for the current year for these girls? 1. A) One exemption for
their daughter Siera as a qualifying child but no exemption for Angela. 2. B)
One exemption for Siera as a qualifying child and one exemption for Angela as a
qualifying child. 3. C) One exemption for Siera as a qualifying child and one
exemption for Angela as a qualifying relative. 4. D) None of these statements is
true. 84) In order to be a qualifying relative of another, an individual’s gross
income must be less than ________. 1. A) the applicable standard deduction
amount 2. B) the personal and dependency exemption amount 3. C) one-half of the
individual’s support 4. D) None of the choices are correct. 85) Catherine de
Bourgh has one child, Anne, who is 18 years old at the end of the year. Anne
lived at home for seven months during the year before leaving home to attend
State University for the rest of the year. During the year, Anne earned $6,000
while working part time. Catherine provided 80 percent of Anne’s support and
Anne provided the rest. Which of the following statements regarding whether Anne
is Catherine’s qualifying child for the current year is correct? 1. A) Anne is a
qualifying child of Catherine. 2. B) Anne is not a qualifying child of Catherine
because she fails the gross income test. 3. C) Anne is not a qualifying child of
Catherine because she fails the residence test. 4. D) Anne is not a qualifying
child of Catherine because she fails the support test. 86) Katy has one child,
Dustin, who is 18 years old at the end of the year. Dustin lived at home for
three months during the year before leaving home to work full-time in another
city. During the year, Dustin earned $15,000. Katy provided more than half of
Dustin’s support for the year. Which of the following statements regarding
whether Katy may claim Dustin as a dependent for the current year is accurate?
1. A) Yes, Dustin is a qualifying child of Katy. 2. B) Yes, Dustin fails the
residence test for a qualifying child but he is considered a qualifying relative
of Katy. 3. C) No, Dustin fails the support test for a qualifying relative. 4.
D) No, Dustin fails the gross income test for a qualifying relative. 87) William
and Charlotte Collins divorced in November of year 1. William moved out and
Charlotte remained in their house with their 10-month-old daughter Autumn.
Diana, Charlotte’s mother, lived in the home and acted as Autumn’s nanny for all
of year 1. William provided 70% of Autumn’s support, Diana provided 20%, and
Charlotte provided 10%. When the time came to file their tax returns for year 1,
William, Charlotte, and Diana each wanted to claim Autumn as a dependent. Their
respective AGIs for year 1 were $50,000, $35,000, and $52,000. Who has priority
to claim Autumn as a dependent? 1. A) William. 2. B) Charlotte. 3. C) Diana. 4.
D) They must negotiate amongst themselves. 88) All of the following are tests
for determining qualifying relative status except ________. 1. A) relationship
test 2. B) gross income test 3. C) support test 4. D) residence test 89) Which
of the following statements regarding the difference between the requirements
for a qualifying child and the requirements for a qualifying relative is false?
1. A) The relationship requirement is more broadly defined (more inclusive) for
qualifying relatives than for qualifying children. 2. B) Qualifying children are
subject to age restrictions while qualifying relatives are not. 3. C) The
support test for qualifying relatives focuses on the support the potential
dependent self-provides while the support test for qualifying children focuses
on the support the taxpayer provides. 4. D) Qualifying relatives are subject to
a gross income restriction while qualifying children are not. 90) Earl and
Lawanda Jackson have been married for 15 years. They have no children. Ned, who
is an old friend from high school, has been living with the Jacksons during the
current year. Which of the following is a true statement regarding whether the
Jacksons can claim a dependency exemption for Ned in the current year? 1. A) If
Ned moved into the Jackson’s home in June and he lived there for the remainder
of the year, he may qualify as the Jackson’s qualifying relative. 2. B) Assume
that Ned originally moved into the Jackson’s home two years ago and he has lived
there ever since. If this year Ned earned $3,000 at a part time job and he
received $5,000 in municipal bond interest, he may qualify as the Jackson’s
dependent so long as the Jacksons provided more than half his support. 3. C) If
Ned lived in the Jackson’s home for the entire year, he will qualify as their
dependent no matter who provided his support. 4. D) If Ned is over 19 or he is
not a full-time student, he cannot qualify as the Jackson’s dependent. 91)
Michael, Diane, Karen, and Kenny provide support for their mother Janet who is
75 years old. Janet lives by herself in an apartment in Los Angeles. Janet’s
gross income for the year is $3,000. Janet provides 10% of her own support,
Michael provides 40% of Janet’s support, Diane provides 8% of Janet’s support,
Karen provides 10% of Janet’s support, and Kenny provides the remaining 32% of
Janet’s support. Under a multiple support agreement, who may claim a dependency
exemption for Janet as a qualifying relative? 1. A) Michael, Diane, Karen, and
Kenny. 2. B) Michael, Karen, and Kenny. 3. C) Michael and Kenny. 4. D) Michael.
92) Filing status determines all of the following except ________ 1. A) the
applicable standard deduction amount. 2. B) the appropriate tax rate schedule or
tax table. 3. C) the standard amount of each personal and dependency exemption.
4. D) the AGI threshold for reductions in certain tax benefits. 93) Which of the
following is not a filing status? 1. A) Head of household. 2. B) Unmarried. 3.
C) Qualifying widow or widower. 4. D) Married filing jointly. 94) Lydia and John
Wickham filed jointly in year 1. They divorced in year 2. In late year 2, the
IRS discovered that the Wickham’s underpaid their year 1 taxes by $2,000. Both
Lydia and John worked in year 1 and received equal income but John had $2,000
less tax withheld than did Lydia. Who is legally liable for the tax
underpayment? 1. A) Lydia. 2. B) John. 3. C) Both Lydia and John. 4. D) Neither
Lydia nor John. 95) In June of year 1, Edgar’s wife Cathy died and Edgar did not
remarry during the year. What is his filing status for year 1 (assuming they did
not have any dependents)? 1. A) Married filing jointly. 2. B) Single. 3. C)
Qualifying widower. 4. D) Head of household. 96) In June of year 1, Eric’s wife
Savannah died. Eric did not remarry during year 1, year 2, or year 3. Eric
maintains the household for his dependent daughter Catherine in year 1, year 2,
and year 3. Which is the most advantageous filing status for Eric in year 2? 1.
A) Head of household. 2. B) Qualifying widower. 3. C) Single. 4. D) Married
filing separately. 97) Which of the following statements about a qualifying
person for head of household filing status is true? 1. A) One individual (who is
a qualifying person) may qualify more than one taxpayer for head of household
filing status. 2. B) The taxpayer is required to live with a qualifying person
for the entire year in order to qualify for head of household filing status. 3.
C) A taxpayer’s parent cannot be a qualifying person for purposes of determining
head of household filing status. 4. D) A qualifying person must have a family
relationship with the taxpayer in order for the qualifying person to qualify the
taxpayer for head of household filing status. 98) In June of year 1, Jake’s wife
Darla died. The couple did not have any children and Jake did not remarry in
year 1 or year 2. Which is the most favorable filing status for Jake in year 2?
1. A) Married filing separately. 2. B) Single. 3. C) Head of household. 4. D)
Qualifying widower. 99) Jan is unmarried and has no children, but she provides
all of the financial support for her mother, who lives in an apartment across
town. Jan’s mother qualifies as Jan’s dependent. Which is the most advantageous
filing status available to Jan? 1. A) Single. 2. B) Head of household. 3. C)
Qualifying individual. 4. D) Surviving single. 100) Jane is unmarried and has no
children, but provides more than half of her mother’s financial support. Jane’s
mother lives in an apartment across town and has a part-time job earning $5,000
a year. Which is the most advantageous filing status available to Jane? 1. A)
Single. 2. B) Head of household. 3. C) Qualifying individual. 4. D) Surviving
single. 101) In April of year 1, Martin left his wife Marianne. While the couple
was apart, they were not legally divorced. Marianne found herself having to
financially provide for the couple’s only child (who qualifies as Marianne’s
dependent) and to pay all the costs of maintaining the household. When Marianne
filed her tax return for year 1, she filed a return separate from Martin. What
is Marianne’s most favorable filing status for year 1? 1. A) Married filing
separately. 2. B) Single. 3. C) Head of household. 4. D) Qualifying widow. 102)
In April of year 1, Martin left his wife Marianne. The couple has two children
under the age of 15. While the couple was apart, they were not legally divorced.
Marianne remained in the home and paid all the costs of maintaining the home for
the remainder of the year. Assuming the couple does not file jointly, which of
the following statements regarding filing status is true? 1. A) No matter the
post separation residence(s) of the children, both spouses must file as married
filing separately. 2. B) No matter the post separation residence(s) of the
children, Martin must file as married filing separately but Marianne may qualify
to file as head of household. 3. C) No matter the post separation residence(s)
of the children, Marianne must file as married filing separately but Martin may
qualify to file as head of household. 4. D) Depending on the post separation
residence(s) of the children, both spouses may qualify to file as head of
household. 103) In determining filing status purposes, which of the following is
not a requirement for a married taxpayer to be treated as unmarried at the end
of the year? 1. A) The taxpayer claims a dependency exemption for a child. 2. B)
The taxpayer pays more than half the costs of maintaining his or her home for
the entire year and the home is the principal residence for a dependent
qualifying child for more than half the year. 3. C) The taxpayer files a tax
return separate from the other spouse. 4. D) The spouse does not live in the
taxpayer’s home at all during the year. 104) For filing status purposes, the
taxpayer’s marital status is determined at what point during the year? 1. A) The
beginning of the year 2. B) The end of the year 3. C) The middle of the year 4.
D) None of the choices are correct. 105) In year 1, Harold Weston’s wife died.
Since her death, he has maintained a household for their son Frank (age 3), his
qualifying child. Which is the most advantageous filing status available to
Harold in year 4? 1. A) Married filing joint. 2. B) Surviving spouse. 3. C)
Qualifying widower. 4. D) Head of household. 106) Mason and his wife Madison
have been married for five years. Jaxon, who is 18 years old and unrelated to
Mason and Madison, has been living with Mason and Madison for the last two
years. In May of year 1, Mason and Madison divorced. Mason and Jaxon stayed in
the home and Madison moved out. During year 2, Mason provided all of Jaxon’s
support and Jaxon lived in the home for all of year 2. Jaxon did not earn any
income during year 2. What is Mason’s most favorable filing status for year 2?
1. A) Single. 2. B) Married filing separately. 3. C) Surviving spouse. 4. D)
Head of household. 107) Miguel, a widower whose wife died in year 1, maintains a
household for himself and his daughter who qualifies as his dependent. Miguel
did not remarry. What is the most favorable filing status that Miguel qualifies
for in year 3? 1. A) Single. 2. B) Qualifying widower. 3. C) Head household. 4.
D) Married, filing separately. 108) Jasmine and her husband Arty have been
married for 25 years. In May of this year, the couple divorced. During the year,
Jasmine provided all the support for herself and her 22year-old child Dexter who
lived in the same home as Jasmine for the entire year. Dexter is employed
full-time, earning $29,000 this year. What is the Jasmine’s most favorable
filing status for the year? 1. A) Single. 2. B) Married filing separately. 3. C)
Surviving spouse. 4. D) Head of household. 109) Kabuo and Melinda got married on
December 15, year 1. Kabuo’s salary for the year was $54,000, and Melinda’s was
$62,000. In addition, Kabuo received $250 of interest income, ($100 of which was
from municipal bonds), and Melinda received $10,000 of alimony from a former
spouse. If Kabuo and Melinda choose to file jointly, what is their year 1 gross
income? 110) John Maylor is a self-employed plumber of John’s John Service, his
sole proprietorship. In the current year, John’s John Service had revenue of
$120,000 and $40,000 of business expenses. John also received $2,000 of interest
income from corporate bonds. What is John’s adjusted gross income assuming he
had no other income or expenses? (ignore any deduction for self-employment tax)
111) The Inouyes filed jointly in 2017. Their AGI is $78,000. They reported
$16,000 of itemized deductions and they have two children, one of whom qualifies
as their dependent. The 2017 standard deduction amount for MFJ taxpayers is
$12,700 and each exemption is $4,050. What is the total amount of from AGI
deductions they are allowed to claim on their 2017 tax return? 112) The Tanakas
filed jointly in 2017. Their AGI is $120,000. They reported $10,000 of itemized
deductions and they have two dependent children. The 2017 standard deduction
amount for MFJ taxpayers is $12,700 and each exemption is $4,050. What is the
total amount of from AGI deductions they are allowed to claim on their 2017 tax
return? 113) The Dashwoods have calculated their taxable income to be $80,000
for 2017, which includes $2,000 of long-term capital gains. Using the
appropriate tax rate schedule in the text, calculate the Dashwood’s income tax
liability assuming they are married and file a joint return. 114) Tom Suzuki’s
tax liability for the year is $2,450. He had $2,050 of federal income taxes
withheld from his paycheck during the year by his employer and has $2,000 in tax
credits. What are Tom’s taxes due or tax refund for the year? 115) Jane and Ed
Rochester are married with a two-year-old child who lives with them and whom
they support financially. In 2017, Ed and Jane realized the following items of
income and expense: Item

Amount

Ed’s Salary

$

35,000

Jane’s Salary

34,400

Municipal bond interest income

400

Alimony paid (for AGI deduction)

(7,000

)

Real property tax (from AGI deduction)

(10,000

)

They also qualified for a $1,000 tax credit. Their employers withheld $1,800 in
taxes from their paychecks (in the aggregate). Finally, the 2017 standard
deduction amount for MFJ taxpayers is $12,700 and the 2017 exemption amount is
$4,050. What is the couple’s gross income? 116) Jane and Ed Rochester are
married with a two-year-old child who lives with them and whom they support
financially. In 2017, Ed and Jane realized the following items of income and
expense: Item

Amount

Ed’s Salary

$

35,000

Jane’s Salary

34,400

Municipal bond interest income

400

Alimony paid (for AGI deduction)

(7,000

)

Real property tax (from AGI deduction)

(10,000

)

They also qualified for a $1,000 tax credit. Their employers withheld $1,800 in
taxes from their paychecks (in the aggregate). Finally, the 2017 standard
deduction amount for MFJ taxpayers is $12,700 and the 2017 exemption amount is
$4,050. What is the couple’s adjusted gross income? 117) Jane and Ed Rochester
are married with a two-year-old child who lives with them and whom they support
financially. In 2017, Ed and Jane realized the following items of income and
expense: Item

Amount

Ed’s Salary

$

35,000

Jane’s Salary

34,400

Municipal bond interest income

400

Alimony paid (for AGI deduction)

(7,000

)

Real property tax (from AGI deduction)

(10,000

)

They also qualified for a $1,000 tax credit. Their employers withheld $1,800 in
taxes from their paychecks (in the aggregate). Finally, the 2017 standard
deduction amount for MFJ taxpayers is $12,700 and the 2017 exemption amount is
$4,050. What is the couple’s taxable income? 118) Jane and Ed Rochester are
married with a two-year-old child who lives with them and whom they support
financially. In 2017, Ed and Jane realized the following items of income and
expense: Item

Amount

Ed’s Salary

$

35,000

Jane’s Salary

34,400

Municipal bond interest income

400

Alimony paid (for AGI deduction)

(7,000

)

Real property tax (from AGI deduction)

(10,000

)

They also qualified for a $1,000 tax credit. Their employers withheld $1,800 in
taxes from their paychecks (in the aggregate). Finally, the 2017 standard
deduction amount for MFJ taxpayers is $12,700 and the 2017 exemption amount is
$4,050. What are the couple’s taxes due or tax refund (use the tax rate
schedules in the text, not tax tables)? 119) Greg is single. During 2017, he
received $60,000 of salary from his employer. That was his only source of
income. He reported $3,000 of for AGI deductions and $7,000 of itemized
deductions. The 2017 standard deduction amount for a single taxpayer is $6,350
and the 2017 exemption amount is $4,050. What is Greg’s taxable income? 120) Sam
and Tacy have been married for 25 years. They have filed a joint return every
year of their marriage. They have two sons Christopher and Zachary. Christopher
is 19 years old and Zachary is 14 years old. Christopher lived in his parents’
home from January through August and he lived in his own apartment from
September through December. During the year, Christopher attended college for
one month before dropping out. Christopher’s living expenses totaled $12,000 for
the year. Of that, Christopher paid $5,000 from income he received while working
a part time job. Sam and Tacy provided the remaining $7,000 of Christopher’s
support. Zachary lived at home the entire year and did not earn any income. How
many personal and dependency exemptions are Sam and Tacy entitled to claim for
the year and for whom are they allowed to claim the exemption(s)? 121)
Sullivan’s wife Susan died four years ago. Sullivan has not remarried and he
maintains a home for his dependent child Sammy. In 2017, Sullivan received
$70,000 of salary from his employer and he paid $6,000 of itemized deductions.
What is Sullivan’s taxable income for 2017? 122) Hannah, who is single, received
a qualified dividend of $1,000. Hannah’s marginal ordinary income tax rate is
28%. What amount of tax must she pay on the $1,000 dividend? 123) Doug and Lisa
have determined that their tax liability on their joint return is $3,700. They
have made prepayments of $1,000 and also are entitled to child tax credits of
$2,000. What is the amount of their tax refund or taxes due? 124) By the end of
year 1, Harold and Jamie Allred had been married for 30 years and have filed a
joint return every year of their marriage. Their three sons, Jacob, Larry, and
Andi, are ages 13, 16, and 23 respectively and all live at home and are fully
supported by their parents. Andi is employed full time, earning $17,000 in year
1. How many exemptions are Harold and Jamie entitled to claim? 125) In 2017,
Brittany, who is single, cares for her father Raymond. Brittany pays the bills
relating to Raymond’s home. She also buys groceries and provides the rest of his
support. Raymond has no gross income. Brittany received $45,000 of salary from
her employer during the year. Brittany reports $3,000 of itemized deductions.
What is Brittany’s taxable income? 126) In February of 2016, Lorna and Kirk were
married. During 2017, Lorna received $40,000 of compensation from her employer
and Kirk received $30,000 of compensation from his employer. The couple together
reported $2,000 of itemized deductions. Lorna and Kirk filed separately in 2017.
What is Lorna’s taxable income and what is her tax liability (use the applicable
tax rate schedule in the text)? McGraw-Hill’s Taxation of Individuals and
Business Entities, 2018 Edition, 9e (Spilker) Chapter 5 Gross Income and
Exclusions 1) Gross income includes all income realized during the year. 2)
Excluded income will never be subject to the federal income tax. 3) The
all-inclusive definition of income means that gross income is defined very
broadly. 4) A taxpayer who borrows money will include that amount borrowed in
their gross income under the all-inclusive definition of income. 5) Realized
income is included in gross income unless a tax provision specifies that it can
be deferred or excluded. 6) The principle of realization for tax purposes is
very different from realization as it is understood for financial reporting
purposes. 7) Wherewithal-to-pay represents the principle that a realized
transaction should require a taxpayer to sell other assets in order to pay
income taxes. 8) Barter clubs are an effective means of avoiding realization for
tax purposes. 9) The cash method of accounting requires taxpayers to recognize
income only when income is received as cash. 10) When a carpenter provides $100
of services in exchange for $100 of groceries, the carpenter has realized $100
of income. 11) Recognized income may be in the form of cash or property received
(but not services received). 12) When a taxpayer sells an asset, the entire
proceeds from the sale must be included in gross income regardless of the cost
of the asset. 13) Jake sold his car for $2,400 in cash this year. He will
realize a taxable gain of $1,000 if he purchased the car for $1,400. 14) When an
asset is sold, the taxpayer calculates the gain or loss on the sale of the asset
by subtracting the tax basis of the asset from the proceeds of the sale. 15) The
tax benefit rule applies when a taxpayer refunds amounts that were previously
included in income. 16) Jim received a $500 refund of state income taxes this
year. Jim will not need to include the $500 in his gross income this year if he
did not deduct state income taxes last year. 17) Constructive receipt represents
the principle that cash basis taxpayers will be taxed on income when it is made
available to them without substantial restrictions. 18) Claim of right states
that income has been realized if a taxpayer receives income and there are
substantial restrictions on the taxpayer’s use of the income. 19) Community
property laws dictate that income earned by one spouse is treated as though it
was earned equally by both spouses. 20) Interest income is taxed in the year in
which it is received by the taxpayer or credited to the bank account. 21) The
assignment of income doctrine requires that in order to shift income from the
property producing the income to another person, the taxpayer must transfer only
the income to the other person. 22) For tax purposes, unearned income means
income that has not yet been realized. 23) A portion of each payment received
from a purchased annuity contract represents income. 24) The exclusion ratio for
a purchased annuity is the cost of the annuity divided by the interest rate. 25)
Rental income generated by a partnership is reported by the partners as dividend
income on their own individual tax returns. 26) The tax law defines alimony to
include transfers of property (but not cash) between former spouses. 27) The tax
law includes a complex set of restrictions called the anti-frontloading rules to
make it difficult for taxpayers to disguise and reclassify property payments as
alimony payments. 28) The receipt of prizes and awards is generally taxable. 29)
Gambling winnings are included in gross income only to the extent that the
winnings exceed gambling losses incurred during the same period. 30) Generally,
85 percent of Social Security benefits are included in income of high income
taxpayers. 31) Unemployment benefits are excluded from gross income. 32) A
taxpayer generally includes in gross income the amount of debt forgiven by a
lender. 33) An employee may exclude up to a 40 percent employer-provided
discount on services received by the employee. 34) A below-market loan (e.g.,
from an employer to an employee) is a common example of a transaction that
generates taxable imputed income. 35) Interest earned on a Federal Treasury bond
is excluded from gross income (for federal tax purposes). 36) Interest earned on
a city of Denver bond is excluded from gross income (for federal tax purposes).
37) Taxpayers meeting certain home ownership and use requirements can
permanently exclude up to $1,000,000 of realized gain on the sale of their
principal residence. 38) Qualified fringe benefits received by an employee can
be excluded from gross income. 39) Scholarships are excluded from gross income
for degree candidates even if the scholarship pays for required fees and books
in addition to tuition. 40) Earnings from Internal Revenue Code Section 529
plans and Coverdell education savings accounts are excluded from gross income as
long as the earnings are used to pay for qualifying educational expenditures.
41) Trevor received a gift of $25,000 in cash from his rich uncle. Trevor must
include $15,000 of this gift in his gross income this year. 42) Anna received
$15,000 from life insurance paid upon the death of her grandmother. Anna can
exclude the entire amount of the life insurance from her gross income. 43) U.S.
citizens generally are subject to tax on all income whether it is generated in
the United States or in foreign countries. 44) To provide relief from double
taxation, Congress allows a foreign-unearned income exclusion for interest and
dividends earned in foreign countries. 45) Worker’s compensation benefits are
excluded from gross income. 46) Fred must include in gross income a $7,500
payment received from his neighbor to compensate Fred for the emotional distress
he suffered when his neighbor accidentally ran over his dog. 47) Loretta
received $6,200 from a disability insurance policy that she purchased directly
this year. Loretta must include all $6,200 in her gross income. 48) Brad was
disabled for part of the year and he received $11,500 of benefits from a
disability insurance policy purchased by Brad’s employer. Brad must include all
$11,500 of benefits in his gross income because Brad was not taxed on the
disability insurance premiums paid by his employer. 49) Gross income includes:
1. A) all income from whatever source derived unless excluded by law. 2. B)
excluded income. 3. C) deferred income. 4. D) all realized income. 5. E) All of
the choices are correct. 50) Which of the following is not a necessary condition
for income to be included in gross income? 1. A) income must be realized. 2. B)
income must be paid in cash. 3. C) income cannot be excluded by law. 4. D)
income must be made available to a taxpayer on the cash basis. 5. E) All of the
choices are correct. 51) Sally is a cash basis taxpayer and a member of the
Valley Barter club. This year Sally provided 100 hours of sewing services to the
barter club in exchange for two football playoff tickets. Which of the following
is a true statement? 1. A) Sally need not recognize any gross income unless she
sells the football tickets. 2. B) Sally’s exchange does not result in taxable
income. 3. C) Sally is taxed on the value of the football tickets even if she
cannot attend the game. 4. D) Sally is taxed on the value of her sewing services
only if she is a professional seamstress. 5. E) None of the choices are true.
52) This year Barney purchased 500 shares of Bell common stock for $20 per
share. At year-end the Bell shares were only worth $2 per share. What amount can
Barney deduct as a loss this year? 1. A) $10,000 2. B) $9,000 3. C) $1,000 4. D)
Barney can deduct $10,000 only if he includes $1,000 in his taxable income 5. E)
None of the choices are correct – Barney is not entitled to a loss deduction.
53) Hillary is a cash-basis calendar-year taxpayer. During the last week of
December she received a letter containing a $5,000 check for services rendered.
Which of the following is a true statement? 1. A) Hillary is taxed on the $5,000
of service income in the year she cashes the check. 2. B) Hillary is taxed on
the $5,000 of service income in the year the check was mailed. 3. C) Hillary is
taxed on the $5,000 of service income in the year she receives the check. 4. D)
Hillary is taxed on the $5,000 of service income in the year she provides the
services. 5. E) None of the choices are true. 54) Identify the rule that
determines whether a taxpayer must include in income a refund of an amount
deducted in a previous year: 1. A) Tax refund rule. 2. B) Constructive receipt.
3. C) Return of capital principle. 4. D) Tax benefit rule. 5. E) None of the
choices are correct. 55) Identify the rule dictating that on a sale of an asset
a taxpayer need only include the incremental gain in gross income rather than
the entire proceeds from the sale: 1. A) Tax benefit rule. 2. B) Constructive
receipt. 3. C) Return of capital principle. 4. D) Wherewithal to pay. 5. E) None
of the choices are correct. 56) Identify the rule that states that income has
been realized when a taxpayer receives the income and there are no restrictions
on the taxpayer’s use of the income (e.g., no obligation to repay the amount):
1. A) Claim of right. 2. B) Constructive receipt. 3. C) Return of capital
principle. 4. D) Wherewithal to pay. 5. E) None of the choices are correct. 57)
Dave is a plumber who uses the cash method of accounting. This year Dave
requested that his clients make their checks payable to his son, Steve. This
year Steve received checks in the amount of $62,000 for Dave’s plumbing
services. Which of the following is a true statement? 1. A) Dave is taxed on
$62,000 of plumbing income this year. 2. B) Steve is taxed on $62,000 of
plumbing income this year. 3. C) Steve is taxed on $62,000 of income from gifts
received this year. 4. D) Dave may deduct the $62,000 received by Steve. 5. E)
None of the choices are true. 58) Jack and Jill are married. This year Jack
earned $72,000 and Jill earned $80,000 and they received $4,000 of interest
income from a joint savings account. How much gross income would Jack report if
he files married-filing-separate from Jill? 1. A) $72,000 if they reside in a
common law state. 2. B) $74,000 if they reside in a community property law
state. 3. C) $76,000 if they reside in a common law state. 4. D) $78,000 if they
reside in a community property law state. 5. E) None of the choices are correct.
59) Identify which of the items below help determine which taxpayer must
recognize earned income: 1. A) Residence in a community property law state. 2.
B) Assignment of income. 3. C) Residence in a common law state. 4. D) Residence
in a community property law state and assignment of income. 5. E) All of the
choices are correct. 60) Kevin provided services to several clients this year
who paid with different types of property. Which of the following payments is
not included in Kevin’s gross income? 1. A) Cash. 2. B) Shares of stock listed
on the New York Stock Exchange. 3. C) A used car. 4. D) Gold coins. 5. E) All of
the choices are included in gross income. 61) Emily is a cash basis taxpayer,
and she was an especially productive salesperson last year. In December of last
year her supervisor told Emily she had earned a $5,000 bonus. However, Emily
received the bonus check after year end. Identify the principle that will
determine when Emily is taxed on the bonus: 1. A) Assignment of income. 2. B)
Constructive receipt. 3. C) Return of capital principle. 4. D) Wherewithal to
pay. 5. E) All of the choices are correct. 62) Ophra is a cash basis taxpayer
who is employed in the publishing industry. This year her employer informed her
that because of her outstanding performance she is entitled to a free world
cruise. Ophra asked her employer to issue the cruise tickets to her parents, and
he complied with this request. Identify the principle that will determine
whether Ophra or her parents are taxed on the value of the cruise tickets: 1. A)
Assignment of income. 2. B) Constructive receipt. 3. C) Return of capital
principle. 4. D) Wherewithal to pay. 5. E) All of the choices are correct. 63)
This year Henry realized a gain on the sale of an antique car that he inherited
from his uncle. The buyer has promised to pay Henry in installment payments over
the next few years. Identify the principle that will determine when Henry should
be taxed on the gain from the sale: 1. A) Assignment of income. 2. B)
Constructive receipt. 3. C) Return of capital principle. 4. D) Wherewithal to
pay. 5. E) All of the choices are correct. 64) This year Mary received a $200
refund of state income taxes that she deducted on her tax return last year. Mary
included a total of $4,000 of state income taxes when she itemized deductions
last year. What amount of the refund, if any, should Mary include in her gross
income this year? 1. A) $200 is included because Mary itemized her deductions
last year. 2. B) $200 is included if itemized deductions exceeded the standard
deduction by $200. 3. C) $200 is included because itemized deductions exceeded
the standard deduction. 4. D) $200 is included even if Mary claimed the standard
deduction. 5. E) None of the choices are correct – refunds of state income taxes
are not included in gross income. 65) Opal deducted $2,400 of state income taxes
on her tax return last year. This year she received a state income tax refund of
$170. What amount of the refund, if any, should Opal include in her gross income
if last year her total itemized deductions exceeded the standard deduction by
$350? 1. A) $2,050 2. B) $350 3. C) $180 4. D) $170 5. E) None of the choices
are correct – refunds of state income taxes are not included in gross income.
66) Wilma has a $25,000 certificate of deposit (CD) at the local bank. The
interest on this certificate, $1,000, was credited to her account this year but
she must pay an early withdrawal penalty if she cashes in the CD before next
year. Which of the following is a true statement? 1. A) Wilma must include the
$1,000 of interest in her income this year. 2. B) Wilma must include the $1,000
of interest in her income when she cashes the CD. 3. C) Wilma must include the
$1,000 of interest in her income this year only if the bank waives the early
withdrawal penalty. 4. D) Wilma must include the $1,000 of interest in her
income next year if she does not pay the early withdrawal penalty. 5. E) All of
the choices are true. 67) Which of the following is a true statement about the
first payment received from a purchased annuity? 1. A) The payment is included
in gross income. 2. B) A portion of the payment is a return of capital. 3. C)
The payment can only be taxed in the year after the annuity was purchased. 4. D)
The payment is not taxed until the annuity payments cease altogether. 5. E) None
of the choices are a true statement. 68) Which of the following is a description
of how the annuity exclusion ratio is calculated for an annuity paid over a
fixed period? 1. A) The expected return is divided by the number of payments. 2.
B) The original investment is divided by the prevailing interest rate. 3. C) The
original investment is divided by the number of payments. 4. D) The expected
return is divided by the prevailing interest rate. 5. E) None of the choices are
correct. 69) George purchased a life annuity for $3,200 that will provide him
$80 monthly payments for as long as he lives. Based on IRS tables, George’s life
expectancy is 100 months. How much of the first $80 payment will George include
in his gross income? 1. A) $80 2. B) $72 3. C) $48 4. D) $32 5. E) None of the
choices are correct. 70) Fran purchased an annuity that provides $12,000
quarterly payments for the next 10 years. The annuity was purchased at a cost of
$300,000. How much of the first quarterly payment will Fran include in her gross
income? 1. A) $7,500 2. B) $4,500 3. C) $12,000 4. D) $32,400 5. E) None of the
choices are correct. 71) Harold receives a life annuity from his qualified
pension that pays him $5,000 per year for as long as he lives. Later this year
Harold will recover the remainder of his cost of the annuity. Which of the
following correctly describes how the annuity payments are taxed after Harold
has recovered the cost of the annuity? 1. A) Harold will continue to apply the
annuity exclusion ratio to determine the amount of each annuity payment
includible in gross income. 2. B) Harold will include the entire amount of each
annuity payment in gross income after he recovers the cost of the annuity. 3. C)
The entire amount of each annuity payment is excluded from gross income after
Harold recovers his cost of the annuity. 4. D) Harold must request that the IRS
calculate his exclusion ratio based upon a revised life expectancy. 5. E) All of
the choices are correct. 72) To calculate a gain or loss on the sale of an
asset, the proceeds from the sale are reduced by which of the following? 1. A)
Tax basis of the property. 2. B) Selling expenses. 3. C) Amount realized. 4. D)
Tax basis of the property and selling expenses. 5. E) All of the choices are
correct. 73) Nate is a partner in a partnership that received $5,000 of interest
income this year. Nate’s share of the interest is $1,000, and he should report
this income on his individual return as: 1. A) business income. 2. B) income
from a partnership. 3. C) interest income. 4. D) dividend income because the
partnership intends to organize next year as a limited liability company. 5. E)
None of the choices are correct. 74) Which of the following statements about
alimony payments is true? 1. A) To qualify as alimony, payments must be made in
cash. 2. B) Alimony payments are includible in the gross income of the
recipient. 3. C) To qualify as alimony, payments cannot continue after the death
of the recipient. 4. D) To qualify as alimony, payments must be made under a
written agreement or divorce decree that does not designate the payments as
“nonalimony” or child support. 5. E) All of the choices are correct. 75) Barney
and Betty got divorced this year. In the divorce decree Betty agreed to transfer
100 shares of common stock worth $50,000 and pay Barney $24,000 per year for
five years (or until Barney’s death or remarriage). What amount (if any) is
included in Barney’s gross income this year? 1. A) $24,000 2. B) $50,000 3. C)
$74,000 4. D) $170,000 5. E) None of the payments are included in gross income
76) Charles and Camilla are getting divorced. Under the terms of the decree
Charles will pay Camilla $50,000 in cash in each of the next five years (or
until Camilla’s death or remarriage). In addition, Charles will transfer a
castle worth $2,000,000 to Camilla and pay $12,000 per year to support their
son, Clyde, until he turns 19 years old. What amount (if any) is included in
Camilla’s gross income this year? 1. A) $2,062,000 2. B) $12,000 3. C) $50,000
4. D) $2,050,000 5. E) None of the payments are included in gross income 77) Hal
Gore won a $1 million prize for special contributions to environmental research.
This prize is awarded for public achievement, and Hal directed the awarding
organization to transfer $400,000 of the award to the Environmental Protection
Agency. How much of the prize should Hal include in his gross income? 1. A)
$400,000 2. B) $600,000 3. C) $1,000,000 4. D) None of the choices are correct,
because all prizes are excludible. 5. E) None of the choices are correct,
because prizes from charities are excludible. 78) Ethan competed in the annual
Austin Marathon this year and won a $25,000 prize for fastest wheelchair
entrant. Ethan indicated that he would transfer the prize to the local hospital.
How much of the prize should Hal include in his gross income? 1. A) $25,000. 2.
B) $25,000 because all prizes are taxable. 3. C) Zero because prizes transferred
to charities are excludible. 4. D) Zero because all prizes are excludible. 5. E)
Zero because prizes from charities are excludible. 79) This year Ed celebrated
his 25th year as an employee of Designer Jeans Company. In recognition of his
long and loyal service, the company awarded Ed a gold watch worth $250 and a
$2,000 cash bonus. What amount must Ed include in his gross income? 1. A)
$2,250. 2. B) $2,000. 3. C) $250. 4. D) Zero if Ed offers to contribute his
watch and bonus to a qualified charity. 5. E) Zero – all employee awards are
excluded from gross income. 80) Rhett made his annual gambling trip to Uwin
Casino. On this trip Rhett won $250 at the slots and $1,200 at poker. Also this
year, Rhett made several trips to the race track, but he lost $700 on his
various wagers. What amount must Rhett include in his gross income? 1. A) $1,450
2. B) $1,200 3. C) $750 4. D) $250 5. E) Zero – gambling winnings are not
included in gross income 81) Bernie is a former executive who is retired. This
year Bernie received $250,000 in pension payments and $10,000 of social security
payments. What amount must Bernie include in his gross income? 1. A) $250,000 2.
B) $255,000 3. C) $258,500 4. D) $260,000 5. E) Zero 82) Bart, a single
taxpayer, has recently retired. This year, he received $24,000 in pension
payments and $5,000 of social security payments. What amount must Bart include
in his gross income for the social security payments? 1. A) $4,250 2. B) $2,500
3. C) $1,500 4. D) $750 5. E) Zero 83) Karl works at Moe’s grocery. This year
Karl was paid $43,000 in salary but he was allowed to purchase his groceries at
10% below Moe’s cost. This year Karl spent $3,600 to purchase groceries costing
Moe $4,000 and worth $6,000. What amount must Karl include in his gross income?
1. A) $46,600 2. B) $47,000 3. C) $49,000 4. D) $43,400 5. E) $45,500 84)
Joyce’s employer loaned her $50,000 this year (interest-free) to buy a new car.
If the federal interest rate was 3%, which of the following is correct? 1. A)
Joyce recognizes $1,500 of taxable interest income. 2. B) Joyce’s employer
recognizes $1,500 of deductible interest expense. 3. C) Joyce recognizes $1,500
of imputed compensation income. 4. D) Joyce recognizes $1,500 of imputed
dividend income. 5. E) None of the choices are correct. 85) Janine’s employer
loaned her $5,000 this year (interest-free) to buy a used car. If the federal
interest rate was 4%, which of the following is correct? 1. A) Janine recognizes
$200 of taxable interest income. 2. B) Janine’s employer recognizes $200 of
deductible interest expense. 3. C) Janine recognizes $200 of imputed
compensation income. 4. D) Janine recognizes $200 of imputed dividend income. 5.
E) None of the choices are correct. 86) Deb has found it very difficult to repay
her loans. Because of these difficulties, the bank decided to forgive one of her
most recent loans, an amount of $45,000. After the loan was discharged, Deb had
total assets of $232,000 and her remaining loans total $217,000. What amount
must Deb include in her gross income? 1. A) $15,000 2. B) $45,000 3. C) $30,000
4. D) $28,000 5. E) Zero – Deb was not solvent when the loan was discharged 87)
Mike received the following interest payments this year. What amount must Mike
include in his gross income (for federal tax purposes)? Bond

Interest

General Motors

$

1,450

City of New York

900

State of New Jersey

1,200

U.S. Treasury

85

1. A) $1,450 2. B) $2,300 3. C) $2,650 4. D) $3,550 5. E) $4,400 88) This year,
Fred and Wilma, married filing joint, sold their home (sales price $750,000;
cost $200,000). All closing costs were paid by the buyer. Fred and Wilma owned
and lived in their home for 20 years. How much of the gain is included in gross
income? 1. A) $550,000 2. B) $300,000 3. C) $250,000 4. D) $50,000 5. E) None of
the choices are correct. 89) This year, Barney and Betty sold their home (sales
price $750,000; cost $200,000). All closing costs were paid by the buyer. Barney
and Betty owned and lived in their home for 18 months. Assuming no unusual or
hardship circumstances apply, how much of the gain is included in gross income?
1. A) $550,000 2. B) $300,000 3. C) $250,000 4. D) $50,000 5. E) None of the
choices are correct. 90) Frank received the following benefits from his employer
this year. What amount must Frank include in his gross income? Benefits Received

Amount

Salary

$

54,450

Health insurance

2,900

Group term life insurance (face $50,000)

1,800

1. A) $54,450 2. B) $57,350 3. C) $56,250 4. D) $59,150 5. E) Zero – these
benefits are excluded from gross income. 91) Ben’s employer offers employees the
following benefits. What amount must Ben include in his gross income? Benefit

Value

Health insurance coverage

$

5,800

Group term life insurance (face $50,000)

4,270

Disability insurance coverage (considered purchased by Ben)

3,600

Whole life insurance coverage ($100,000)

7,000

1. A) $9,400 2. B) $11,070 3. C) $10,600 4. D) $7,000 5. E) Zero – none of the
benefits is included in gross income. 92) Shaun is a student who has received an
academic scholarship to State University. The scholarship paid $14,000 for
tuition, $2,500 for fees, and $1,000 for books. In addition, Shaun’s dormitory
fees of $8,500 were paid by the University when he agreed as a condition of
receiving the dormitory fees to counsel freshman on campus living. What amount
must Shaun include in his gross income? 1. A) $9,500 2. B) $11,000 3. C) $2,500
4. D) $8,500 5. E) Zero – none of the benefits are included in gross income. 93)
Graham has accepted an offer to do graduate work in the chemistry department at
State University. The chemistry department offered Graham a $5,000 tuition
reduction and $3,500 toward the cost of room and meals. Under the terms of the
scholarship Graham must work in the chemistry labs during the summer as a
research assistant. What amount must Graham include in his gross income? 1. A)
$8,500 2. B) $5,000 3. C) $3,500 4. D) $2,500 5. E) Zero – none of the benefits
are included in gross income. 94) Sam, age 45, saved diligently for his college
education by putting part of his pay into U.S. Series EE saving bonds. Sam
purchased the bonds for $6,500, and this year he redeemed the bonds for $7,200.
He has no other income this year. What amount must Sam include in his gross
income? 1. A) $7,200. 2. B) $6,500. 3. C) A maximum of $350 if Sam uses the
proceeds to pay for his college tuition and fees. 4. D) $700 unless Sam uses at
least some portion of the proceeds to pay for his college tuition and fees. 5.
E) Zero – proceeds from cashing bonds sold at a discount is not realized income.
95) Brenda has $15,000 in U.S. Series EE saving bonds and she is considering
whether to cash in the bonds. Under what conditions can Brenda exclude the
interest on the savings bonds from her gross income? 1. A) Brenda can exclude
the interest if she uses the proceeds to pay for college tuition. 2. B) Brenda’s
modified AGI must be below a phase-out range for the exclusion. 3. C) The
proceeds must be used for higher education expenses of Brenda, her spouse, or
Brenda’s dependent. 4. D) All of the choices are necessary conditions for Brenda
to exclude the interest. 5. E) None of the choices are correct – the interest is
always included in gross income. 96) In January of the current year, Dora made a
gift of stock to her granddaughter. At the time of the gift, the stock was worth
$15,000. Several months later in the same year after the gift, a $500 dividend
was declared on the stock and paid to Dora’s granddaughter. What amount must
Dora’s granddaughter include in her gross income for the current year? 1. A)
$2,000 2. B) $15,000 3. C) $15,500 4. D) $2,500 5. E) None of the choices are
correct. 97) Irene’s husband passed away this year. After his death, Irene
received $250,000 of proceeds from life insurance on her husband, and she
inherited her husband’s stock portfolio worth $750,000. What amount must Irene
include in her gross income? 1. A) $1 million. 2. B) $750,000. 3. C) $500,000.
4. D) Zero but only if Irene does not opt to receive the life insurance proceeds
in a lump sum. 5. E) Zero – none of the benefits are included in gross income.
98) Helen is a U.S. citizen and CPA, who moved to London, England three years
ago to work for a British company. This year, she spent the entire year in
London and earned a salary of $110,000. How much of her salary will she be
allowed to exclude from gross income in the U.S.? 1. A) $82,000. 2. B) $102,100.
3. C) $105,500. 4. D) $108,000. 5. E) All of her salary is included in gross
income. 99) Hank is a U.S. citizen and is doing a three to six-year assignment
as a sales executive in Paris for a French company, which began this year. Hank
earned $109,500 working for the French company this year but only lived in
France for 180 days (out of 365 days). He will live full-time in France next
year. What amount of Hank’s $109,500 salary this year will he be allowed to
exclude from gross income in the U.S? (Round your answer to the nearest
one-hundred dollars). 1. A) Hank can exclude his entire salary because he worked
more than 330 days overseas. 2. B) 102,000. 3. C) 50,351. 4. D) 102,100. 5. E)
None of his salary can be excluded from gross income because Hank must reside
overseas for the entire year. 100) NeNe is an accountant and U.S. citizen, who
has accepted a permanent position in Madrid, Spain for a Spanish financial
services company. This year, NeNe spent the entire year working in Madrid.
NeNe’s employer paid $40,000 of her Madrid housing expenses this year. What
amount of the $40,000 housing payments may NeNe exclude? 1. A) NeNe can exclude
all of the housing payment because she worked more than 330 days overseas. 2. B)
16,336. 3. C) 23,664. 4. D) 14,294. 5. E) None of her salary can be excluded
from gross income. 101) Pam recently was sickened by eating spoiled peanut
butter. She successfully sued the manufacturer for her medical bills ($3,700),
her emotional distress ($6,000 − she now fears peanut butter), and punitive
damages ($44,000). What amount must Pam include in her gross income? 1. A)
$44,000 2. B) $50,000 3. C) $47,700 4. D) $9,700 5. E) Zero – none of the
benefits are included in gross income. 102) This year Zach was injured in an
auto accident. As a result, he received the following payments. Zach received
$18,000 of disability pay. Zach has disability insurance provided by his
employer as a nontaxable fringe benefit. Zach’s employer paid $4,300 in
disability premiums for Zach this year. Zach’s hospital bills totaled $4,500 and
were paid by his health insurance. Zach has health insurance provided by his
employer as a nontaxable fringe benefit. Zach’s employer paid $6,250 in health
insurance premiums for Zach this year. What amount must Zach include in his
gross income? 1. A) $22,500 2. B) $18,000 3. C) $4,500 4. D) $10,550 5. E) Zero
– none of the benefits are included in gross income. 103) Samantha was ill for
four months this year. Samantha missed work during this period, but disability
insurance paid $18,000 of disability pay to replace her missed salary. Samantha
shares the cost of the insurance with her employer. This year Samantha’s
employer paid $2,200 in disability premiums for Samantha as a nontaxable fringe
benefit and Samantha paid the remaining $1,100 of premiums from her salary. What
amount of the disability pay must Samantha include in her gross income? (Round
your answer to the nearest whole dollar) 1. A) $18,000 2. B) $12,000 3. C)
$7,000 4. D) $1,100 5. E) Zero – none of the disability pay is included in gross
income. 104) Acme published a story about Paul and as a result Paul sued Acme
for damage to his reputation, emotional distress, and punitive damages. Paul won
an award of $20,000 for damages, $5,500 for emotional distress, and $50,000 for
punitive damages. What amount must Paul include in his gross income? 1. A)
$5,500 2. B) $20,000 3. C) $50,000 4. D) $70,000 5. E) All of the benefits are
included in gross income. 105) This year Ann has the following stock
transactions. What amount is included in her gross income if Ann paid a $200
selling commission for each sale? Shares

Firm

Total Purchase price

Sales price

Value at year end

100

IBM

$

200

ATT

7,500

9,500

500

Dell

12,500

13,000

5,000

$7,000

106) Blake is a limited partner in Kling-On Partners. This year Kling-On
reported that Blake’s share of dividend income was $3,700 and his share of
municipal interest was $2,750. Early this year Blake found a bundle of $100
bills in the alley outside his apartment. When no one claimed the money, the
cash (a total of $2,400) was returned to Blake. Finally, Blake earned salary of
$42,000 but almost $6,500 was withheld for income taxes and FICA tax. Compute
Blake’s realized income and gross income. 107) Henry works part-time on auto
repairs and restoration projects. This year Henry was paid $5,400 for repairs he
made to his neighbor’s auto. Henry’s neighbor promised to pay Henry another
$2,200 in cash next year. Henry’s brother borrowed $4,100 in cash in December of
this year and gave him a negotiable promissory note for $4,300 due in three
months with interest. Henry sold the note in January of next year for $3,500.
Finally, Henry restored a car for the football coach. The coach paid him this
year with a pass to next year’s football games. The pass is worth $750. Compute
Henry’s gross income for this tax year assuming that he uses the cash basis of
accounting. 108) Juan works as a landscaper for local businesses on weekends,
and he often provides services in exchange for property. This year Juan provided
lawn-mowing services in exchange for $1,275 of car repair services, $3,570 of
groceries, and a certificate of deposit (C.D.) for $4,050. The C.D. matures next
year with interest. Finally, Juan received a gift card that can only be applied
for $850 of clothing at a local mall. Juan has only applied the gift card to
purchase $100 of clothing. Compute Juan’s gross income assuming that he uses the
cash basis of accounting. 109) This year Kelsi received a $1,900 refund of state
income taxes that she paid last year. Last year Kelsi claimed itemized
deductions of $7,400 including $2,800 of state income taxes. How much of the
refund, if any, must Kelsi include in gross income if the standard deduction
last year was $6,300? 110) In April of this year Victoria received a $1,400
refund of state income taxes that she paid last year. Last year Victoria claimed
itemized deductions of $8,890. Victoria’s itemized deductions included state
income taxes paid of $3,750. How much of the refund, if any, must Victoria
include in gross income if the standard deduction last year was $6,300? 111)
Aubrey and Justin divorced on June 30 of this year. Through June 30 Aubrey
earned $62,000 of salary, and Justin earned $45,000. For the year Aubrey
reported a total salary of $130,000, and Justin earned a total salary of
$88,000. Aubrey and Justin live in a community property state. How much income
earned will Justin report on his tax return for this year? 112) Aubrey and
Justin divorced on June 30 of this year. Through June 30 Aubrey earned $62,000
of salary and Justin earned $45,000. For the year Aubrey reported a total salary
of $130,000 and Justin earned a total salary of $88,000. Aubrey and Justin live
in a community property state. How much of the income will Aubrey report on her
tax return for this year? 113) Cyrus is a cash method taxpayer who reports on a
calendar-year. Last year Cyrus received salary of $88,000 and at year-end his
employer announced that Cyrus would receive an additional year-end bonus of
$10,000 in cash and a new TV worth $2,000. Cyrus didn’t receive his bonus check
until January of this year and the TV didn’t arrive until March of this year.
Determine the amount Cyrus should include in his gross income for last year.
114) Kathryn is employed by Acme and they have been very pleased with her
performance this year. In December Kathryn was granted an extra week off with
pay (pay for the week totaled $2,000). In addition, Kathryn was given tickets to
a football bowl game worth $800 (Kathryn didn’t use the tickets – she hates
football). Just right before year-end Kathryn was allowed to order new office
furniture and Acme told her to take the old office furniture home. The office
furniture was originally purchased for $7,000, but it was fully depreciated and
only worth about $1,000. Determine the amount Kathryn should include in her
gross income 115) Charles purchased an annuity from an insurance company that
promised to pay him $20,000 per year for the next 12 years. Charles paid
$180,000 for the annuity. How much of the first $20,000 payment should Charles
include in gross income? 116) This year Larry received the first payment from an
annuity that promises to pay him $3,000 per month for the rest of his life. The
IRS tables indicate that given Larry’s age, he should expect to receive 310
monthly payments. The cost of the annuity to Larry was $620,000. How much of the
first $3,000 payment should Larry include in gross income? 117) Desai and Lucy
divorced this year. Lucy has custody of their child, Andrea, and under the
divorce decree Desai pays Lucy $120,000 per year. The payments must be made in
cash and will cease if Lucy dies or remarries. The payments drop to $100,000 per
year once Andrea reaches the age of 18. How much of the payments should Lucy
include in gross income this year? 118) Terri and Mike are seeking a divorce.
Terri and Mike own an art collection worth $357,000 that would belong to Terri.
Mike offered to make annual payments of cash to Terri each year for five years
if Terry allows Mike to take possession of the art collection. Mike insists
however, that the annual payments must cease in the event of Terri’s death. What
amount of annual payment must Terri demand to make her indifferent after taxes
between taking possession of the ($357,000) art versus collecting the cash
payments? Assume that Terri has a marginal tax rate of 15 percent and Mike’s tax
rate is 35 percent and ignore the time value of money. 119) J.Z. (single
taxpayer) is retired and received $10,000 of Social Security benefits this year.
How much of the $10,000 Social Security benefits is taxable if his only other
income was $28,000 of pension income? 120) Wendell is an executive with CFO
Tires. At the beginning of this year the corporation loaned Wendell $50,000 at
an interest rate of one percent. Wendell would have paid interest of $2,500 this
year if the interest rate on the loan had been set at the prevailing Federal
interest rate. Wendell used the funds as a down payment on a vacation home and
during the year he paid $500 of interest to CFO. On December 31, CFO forgave the
loan and remaining interest. What amount of gross income does Wendell recognize
from the loan this year? 121) Bobby and Sissy got married 2.5 years ago. Since
that time, they have lived in Bobby’s home. Sissy sold her previous home three
years ago and excluded her entire gain ($80,000) at that time. Bobby and Sissy
decided to move to a bigger home this year. As a result, they sold Bobby’s home
for $500,000 (original cost $150,000). How much of the gain from the sale is
taxable? 122) Robert will be working overseas on a permanent assignment for an
international company beginning on March 1 of this year (306 days this year).
His salary is $11,000 per month while Robert is overseas, but only $9,200 per
month otherwise. What is the minimum amount of Robert’s salary that he must
include in gross income this year? (Round your final answer to the nearest whole
dollar amount & assume that there are 365 days in this year). 123) Simon was
awarded a scholarship to attend State Law School from Gary Harris & Associates,
Attorneys at Law. The scholarship pays Simon’s tuition ($7,000 per semester),
fees ($500 per semester), and a $4,500 per semester stipend to pay for food and
housing. In order to qualify for the stipend, Simon must work 10 hours per week
at Gary Harris & Associates during the term. How much of the scholarship is
Simon required to include in gross income? 124) This fall Angelina, age 35,
plans to attend college. To fund her tuition she cashed in Series EE savings
bonds with a redemption value of $24,000 and an original cost of $16,800.
Angelina plans on spending $7,200 of the proceeds to pay tuition. The redemption
proceeds are Angelina’s only source of income. What amount of interest must
Angelina include in gross income this year? 125) Teresa was married on November
1 of this year and on that day received numerous gifts from her extended family.
Her grandfather presented Teresa with a check for $15,000; her uncle gave Teresa
1,000 shares of Ford stock worth $10 per share (the uncle purchased the shares
for $25 each); and her aunt presented Teresa with $50,000 of corporate bonds
(Teresa received $1,500 of semiannual interest from the bonds on December 31 of
this year). Finally, Teresa’s parents paid off $50,000 of her student loans debt
including $2,000 of accrued interest. What amount, if any, must Teresa include
in gross income this year? 126) Andres has received the following benefits this
year.

Salary

$92,000

Contribution to qualified pension plan

10,200

Qualified health insurance premiums

8,400

Year-end bonus

15,000

Group-term life insurance premiums (face = $40,000)

1,750

Whole life insurance premiums (face = $100,000)

2,420

Disability insurance premiums

1,800

Besides these benefits Andres missed work for two months due to an illness.
During his illness Andres received $6,500 in sick pay from a disability
insurance policy. Assume Andres has disability insurance provided by his
employer as a nontaxable fringe benefit. What amount, if any, must Andres
include in gross income this year? 127) This year Joseph joined the board of
directors. Besides his director’s fees, Joseph received the following employee
benefits:

Salary

$204,000

Contribution to qualified pension plan

25,000

Qualified health insurance premiums

8,000

Stock bonus

20,000

Annual director’s fee

15,000

Group-term life insurance premiums (face = $40,000)

1,800

The stock bonus consisted of 5,000 shares of Bell stock given to Joseph as
compensation. At the time of the transfer the stock was listed at $4 per share.
What amounts, if any, should Joseph include in gross income this year? 128)
Caroline is retired and receives income from a number of sources. The interest
payments are from bonds that Caroline purchased over past years and a disability
insurance policy that Caroline purchased. Calculate Caroline’s gross income.

Distributions from qualified pension plan

$5,400

Interest on bonds issued by City of Austin, Texas

2,500

Social Security benefits

8,200

Interest on U.S. Treasury Bills

2,300

Interest on bonds issued by Ford Motor Company

1,900

Interest on bonds issued by City of Quebec, Canada

2,750

Disability insurance benefits

9,500

129) Alex is 63 years old and retired. This year Alex won $212,200 in the state
lottery. Alex also received $20,000 from an annuity he purchased eight years
ago. He purchased the annuity, to be paid annually for 15 years, for $157,500.
Alex received $10,000 in Social Security benefits for the year. Calculate Alex’s
gross income. 130) Vincent is a writer and U.S. citizen. After being out of work
for the 1st half of the year, Vincent moved permanently to Ireland on July 4. He
worked for an Irish magazine and earned $110,000 in salary from July 4th –
December 31st. Earlier in April of this year Vincent received a $1,500 refund of
the $3,600 in state income taxes his previous employer withheld from his pay
last year. Vincent claimed $7,100 in itemized deductions last year (the standard
deduction for a single filer was 6,300). Vincent wants to elect to use the
foreignearned income exclusion to the extent he is eligible. Calculate Vincent’s
gross income for this year. (Round your final answer to the nearest whole dollar
amount and assume there are 365 days in the year.) 131) Lisa and Collin are
married. Lisa works as an engineer and earns a salary of $116,000. Collin works
at a beauty salon and reported wages of $45,000. Lisa received $500 of interest
from corporate bonds and $250 of interest from a municipal bond. Lisa acquired
these bonds prior to her marriage to Collin. Collin’s father passed away on
April 14. He inherited cash of $50,000 and his baseball card collection, valued
at $2,000. As beneficiary of his father’s life insurance policy, Collin also
received $150,000. The couple spent a weekend in Atlantic City in November and
came home with gambling winnings of $1,200. Collin was injured in an accident at
the salon. He was unable to work for a month, but during this time he received
$5,000 from disability insurance he purchased several years ago. Collin also
received $2,000 in workman’s compensation, and $1,500 from the salon for the
emotional trauma he suffered from the accident. Calculate Lisa and Collin’s
gross income for this year assuming they will file married joint. McGraw-Hill’s
Taxation of Individuals and Business Entities, 2018 Edition, 9e (Spilker)
Chapter 6 Individual Deductions 1) The profit motive distinguishes “business”
activities from “personal” activities. 2) All business expense deductions are
claimed as “above the line” deductions. 3) All investment expenses are itemized
deductions. 4) Rental or royalty expenses are deductible “for” AGI. 5) To be
deductible, business expenses must be directly related to a business activity.
6) The phrase “ordinary and necessary” means that an expense must be appropriate
and helpful for generating a profit. 7) All reasonable moving expenses are
deductible if the move is a minimum of 35 miles in distance from the taxpayer’s
old residence to the taxpayer’s new residence. 8) To deduct a moving expense,
the taxpayer must be employed or self-employed for a specific amount of time
after the move. 9) Self-employed taxpayers can deduct the cost of health
insurance as long as they do not actually participate in their spouses’
employer-provided health plan. 10) Self-employed taxpayers can choose between
claiming a deduction or a credit for the employer portion of self-employment
taxes paid. 11) An individual who forfeits a penalty for prematurely withdrawing
a certificate of deposit (CD) is allowed to net the penalty against the interest
income from the CD. 12) Qualified education expenses for purposes of the
deduction of interest on educational loans are expenses paid for the education
of the taxpayer, the taxpayer’s spouse, or a taxpayer’s dependent to attend a
post-secondary institution of higher education. 13) The definition of qualifying
expenses is more restrictive for the qualified educational expense deduction
than it is for the education loan interest expense deduction. 14) The medical
expense deduction is designed to provide relief for doctors and medical
practitioners. 15) Deductible medical expenses include payments to medical care
providers such as doctors, dentists, and nurses and medical care facilities such
as hospitals. 16) Taxpayers traveling for the primary purpose of receiving
essential and deductible medical care may deduct the cost of travel. 17) The
deduction for medical expenses is limited to the amount of unreimbursed
qualifying medical expenses paid during the year reduced by two percent of the
taxpayer’s AGI. 18) The itemized deduction for taxes includes all types of
state, local, and foreign taxes. 19) Taxpayers may elect to deduct state and
local sales taxes instead of deducting state and local income taxes. 20)
Taxpayers are allowed to deduct mortgage interest on up to $1,000,000 of
acquisition debt for their qualified residence and on up to $500,000 of
home-equity debt. 21) The deduction for investment interest in excess of the net
investment income carries forward to the subsequent year. 22) To qualify as a
charitable deduction the donation must be made by cash or by check. 23) In
general, taxpayers are allowed to deduct the fair market value of long-term
capital gain property on the date of the donation to a qualified charitable
organization. 24) The deduction to individual taxpayers for charitable
contributions paid in cash made to public charities is limited to ten percent of
the taxpayer’s AGI whereas casualty losses on personal assets are only
deductible to the extent the losses exceed ten percent of the taxpayer’s AGI.
25) Unreimbursed employee business expenses, investment expenses, hobby
expenses, and certain other expenses are classified as miscellaneous itemized
deductions and are deductible only to the extent that their sum exceeds 2% of
the taxpayer’s AGI. 26) Taxpayers are allowed to deduct all ordinary and
necessary expenses incurred in connection with determining their tax obligations
imposed by federal authorities. 27) Bunching itemized deductions is one form of
tax evasion. 28) Taxpayers generally deduct the lesser of their standard
deduction or their itemized deductions. 29) Taxpayers filing single and
taxpayers filing married separate have the same basic standard deduction amount.
30) An individual who is eligible to be claimed as a dependent on another’s
return and has $1,000 of earned income may claim a standard deduction of $1,350.
31) In 2017, personal and dependency exemptions are $6,350 for single taxpayers.
32) Congress allows self-employed taxpayers to deduct the cost of health
insurance above the line (for AGI) because: 1. A) employers are allowed to
deduct social security (FICA) taxes as a business expense. 2. B) self-employed
taxpayers need an alternate mechanism for reducing the cost of health care. 3.
C) this deduction provides a measure of equity between employees and the
self-employed. 4. D) health insurance premiums cannot be deducted otherwise. 5.
E) None of the choices are correct. 33) Which of the following is a true
statement? 1. A) Congress allows self-employed taxpayers to deduct the employer
portion of their self-employment tax. 2. B) To deduct expenses associated with
any profit motivated activity, taxpayers must maintain a high level of
involvement or effort in the activity throughout the year. 3. C) Business
activities never require a relatively high level of involvement or effort from
the taxpayer. 4. D) All business expenses are deducted for AGI. 5. E) All of the
choices are true. 34) Which of the following is a true statement? 1. A)
Unreimbursed employee business expenses are deductible as miscellaneous itemized
deductions. 2. B) With one exception, investment expenses are deductible as
itemized deductions. 3. C) Business deductions are one of the most common
deductions for AGI but they are not readily visible on the front of Form 1040.
4. D) The distinction between business and investment expenses is critical for
determining whether a deduction is claimed above the line (for AGI) or below the
line (itemized). 5. E) All of the choices are true. 35) Which of the following
is a true statement? 1. A) All business expenses are deducted for AGI. 2. B)
Investment expenses are typically deducted for AGI. 3. C) Tax preparation fees
are deducted for AGI. 4. D) Rental and royalty expenses are deducted for AGI. 5.
E) All of the choices are true. 36) Which of the following is a true statement?
1. A) Individuals qualify for the moving expense deduction only if they change
employers. 2. B) To satisfy the distance test, the distance from the taxpayer’s
old residence to the new place of work must be at least 50 miles more than the
distance from the old residence to the old place of work. 3. C) To satisfy the
business test, the taxpayer must be employed full-time for 45 of the first 52
weeks after the move. 4. D) The moving expense deduction is restricted to
expenses associated with moving personal possessions to the new residence. 5. E)
All of the choices are true. 37) Which of the following is a true statement? 1.
A) The deduction for interest on educational loans is subject to a phase-out
limitation. 2. B) The deduction for moving expenses is subject to a phase-out
limitation. 3. C) Self-employed taxpayers are allowed to deduct health care
premiums even if the taxpayer is eligible to participate in an employer-provided
health plan. 4. D) Taxpayers are not allowed to receive a moving allowance from
their employers. 5. E) All of the choices are false. 38) Which of the following
is a true statement? 1. A) For purposes of the deduction for educational
interest, an educational loan must be used to pay tuition to any type of school.
2. B) The maximum deduction for educational interest is $5,000 for married
taxpayers filing jointly. 3. C) Self-employed taxpayers are not allowed to
deduct health care premiums if the taxpayer is eligible to participate in their
spouse’s employer-provided health plan. 4. D) Self-employment taxes paid by
self-employed taxpayers are deductible as business expenses. 5. E) All of the
choices are true. 39) Which of the following is a true statement? 1. A) For
purposes of the deduction for educational interest, expenses do not include
expenses for room, board and travel. 2. B) For purposes of the deduction for
educational interest, qualified education expenses are those paid for the
education of the taxpayer, the taxpayer’s spouse, or a taxpayer’s dependent. 3.
C) The maximum deduction for interest expense on qualified education loans is
$6,000. 4. D) A penalty paid for prematurely withdrawing a certificate of
deposit or similar deposit is deductible as an investment expense. 5. E) All of
the choices are false. 40) This year, Jong paid $3,000 of interest on a
qualified education loan. Jong files married filing joint and reports modified
AGI of $147,000. What is Jong’s deduction for interest expense on an educational
loan? 1. A) $2,500. 2. B) $3,000. 3. C) $1,500. 4. D) $1,000. 5. E) None of the
choices are correct. 41) Mason paid $4,100 of interest on a loan that paid
tuition for him to attend a private university this year. How much of this
payment can Mason deduct as interest expense on an educational loan if he files
single and reports modified AGI of $90,000? 1. A) $4,100. 2. B) $4,000. 3. C)
$2,667. 4. D) $2,000. 5. E) None of the choices are correct. 42) This year Riley
files single and reports modified AGI of $71,000. Riley paid $1,200 of interest
on a qualified education loan. What amounts can Riley deduct for qualifying
education interest? 1. A) The deduction for qualifying education interest is
$1,200. 2. B) The deduction for qualifying education interest is $1,000. 3. C)
The deduction for qualifying education interest is $720. 4. D) The deduction for
qualifying education interest is $200. 5. E) None of the choices are correct.
43) Max paid $5,000 of tuition for him to attend a private university this year.
How much of this payment can Max deduct as a qualifying education expense if he
files single and reports modified AGI of $60,000 (assume the 2016 rules apply
for purposes of the qualified education expense deduction)? 1. A) $5,000. 2. B)
$4,000. 3. C) $2,000. 4. D) $0. 5. E) None of the choices are correct. 44) Han
is a self-employed carpenter and his wife, Christine, works full-time as a grade
school teacher. Han paid $525 for carpentry tools and supplies, and Christine
paid $3,600 as her share of health insurance premiums (not with pre-tax dollars)
for Han and herself in a qualified plan provided by the school district (not
through an exchange). Which of the following is a true statement? 1. A) The
tools and supplies are deductible for AGI while the health insurance is an
itemized deduction. 2. B) Both expenditures are deductible for AGI. 3. C) The
tools and supplies are an itemized deduction but the health insurance is
deductible for AGI. 4. D) Both expenditures are itemized deductions. 5. E)
Neither of the expenditures is deductible. 45) Bruce is employed as an executive
and his wife, Marie, is a self-employed realtor. Besides Bruce’s salary, Bruce
and Marie own a warehouse that they rent to a local business for storage. This
year they paid $1,250 for electric service in the warehouse. Marie also paid
self-employment tax of $6,200 and Bruce had $7,000 of Social Security taxes
withheld from his pay. Marie paid $45 fee to rent a safe deposit box to store
records associated with her realty operation. Which of the following is a true
statement? 1. A) One-half of the social security tax is deductible for AGI. 2.
B) Only the electric bill is deductible for AGI. 3. C) The self-employment tax
is not deductible. 4. D) The safe deposit fee and the electric bill are
deductible for AGI. 5. E) None of the choices are true. 46) Casey currently
commutes 35 miles to work in the city. He is considering a new assignment in the
suburbs on the other side of the city that would increase his commute
considerably. He would like to accept the assignment, but he thinks it might
require that he move to the other side of the city. Which of the following is a
true statement? 1. A) Casey can deduct moving expenses if the distance between
his current residence and his new assignment is at least 50 miles. 2. B) If
Casey’s move qualifies for the moving expense deduction, he can deduct the cost
of meals while en route to his new residence. 3. C) To qualify for a moving
expense deduction the new commute from Casey’s current residence would need to
be a minimum of 85 miles. 4. D) If Casey’s move qualifies for the moving expense
deduction, he can deduct half the cost of meals while en route to his new
residence. 5. E) All of the choices are false. 47) Jill currently lives in the
suburbs and commutes 25 miles to her office in downtown Freeport. She is
considering quitting her current job to look for new employment in the downtown
area. Which of the following statements best describes how Jill can satisfy the
distance test for deducting moving expenses if she accepts a new job in downtown
Freeport? 1. A) Jill must move at least 25 miles further away from downtown
Freeport. 2. B) Jill must move 25 miles east from downtown Freeport. 3. C) Jill
must move 50 miles further away from downtown Freeport. 4. D) Jill need not move
her residence because she is starting a new job. 5. E) Jill cannot satisfy the
distance test if she accepts a job in downtown Freeport. 48) Which of the
following expenses can be deducted as moving expenses? 1. The cost of a trip to
purchase a new residence 2. The cost of moving personal belongings 3. Lodging
(one night) while en route 4. The cost of gasoline when traveling to the new
residence 5. One-half of the cost of meals while en route to the new residence
6. A) Numbers 1, 2, and 4 only. 7. B) Numbers 1 through 3 only. 8. C) Numbers 2
through 4 only. 9. D) Numbers 2 through 5 only. 10. E) All the numbers are
deductible as moving expenses. 49) Brice is a single, self-employed electrician
who earns $60,000 per year in self-employment income. Brice paid the following
expenses this year. Which of the expenses are deductible for AGI? 1. The cost of
health insurance (not purchased through an exchange) 2. The employer portion of
self-employment tax paid 3. Penalty on early withdrawal of funds from a
certificate of deposit 4. A) Numbers 1 and 2 only. 5. B) Numbers 1 and 3 only.
6. C) Numbers 2 and 3 only. 7. D) None of the numbers are deductible for AGI. 8.
E) All the numbers are deductible for AGI. 50) Hector is a married self-employed
taxpayer, and this year he paid $3,000 for his health insurance premiums (not
through an exchange). Under which of the following alternative conditions can
Hector deduct the cost of the premiums for AGI? 1. A) Hector chose not to
participate in the employer-sponsored plan of his spouse. 2. B) Hector’s spouse
participates in an employer-sponsored plan but Hector is not eligible to
participate in this plan. 3. C) Neither Hector nor his spouse participates in an
employer-sponsored plan although both are eligible to participate in a plan. 4.
D) Hector can deduct the health insurance premiums regardless of the insurance
status of his spouse. 5. E) None of the choices – health insurance premiums can
only be deducted as an itemized deduction. 51) Lewis is an unmarried law student
at State University, a qualified educational institution. Last year Lewis
borrowed $30,000 and used the proceeds to pay his university tuition. This year
Lewis paid $1,500 of interest on the loan. Which of the following is a true
statement if Lewis reports $40,000 of salary and no other items of income or
expense? 1. A) Lewis can deduct all the interest on his student loan for AGI. 2.
B) Lewis can deduct all the interest on his student loan as an itemized
deduction. 3. C) Lewis can only deduct $1,000 of the interest on his student
loan for AGI. 4. D) Lewis can only deduct $1,000 of the interest on his student
loan as an itemized deduction. 5. E) All of the choices are false. 52) Grace is
a single medical student at State University, a qualified educational
institution. This year Grace paid university tuition of $12,000. Grace works
part-time at the University library, and this year she reports $15,000 of salary
and no other items of income or expense. Which of the following is a true
statement? 1. A) Grace can deduct all of her tuition for AGI as a business
expense. 2. B) Grace can deduct all of her tuition as a miscellaneous itemized
deduction. 3. C) Grace can only deduct half of her tuition for AGI as a business
expense. 4. D) Grace can only deduct half of her tuition as a miscellaneous
itemized deduction. 5. E) All of the choices are false. 53) This fall Manfred
enrolled in the law school at State University (a qualified educational
institution) and paid $6,200 in tuition. Until his enrollment Manfred worked as
a stock broker and this year he reports $70,000 in wages. If Manfred files
single and reports no other items of income or expense how much of the tuition
can he deduct as a business expense? 1. A) Manfred can deduct half of his
tuition for AGI. 2. B) Manfred can deduct half of his tuition as a miscellaneous
itemized deduction. 3. C) Manfred can deduct $6,200 for AGI. 4. D) Manfred can
deduct $6,200 as a miscellaneous itemized deduction. 5. E) None – the tuition is
not deductible as a business expense. 54) This fall Millie finally repaid her
student loan. She originally borrowed the money to pay tuition several years ago
when she attended at State University (a qualified educational institution).
This year Millie paid a total of $2,400 of interest on the loan. If Millie files
single and reports $70,000 of income and no other items of income or expense how
much of the interest can she deduct? 1. A) Millie can deduct $2,400 for AGI. 2.
B) Millie can deduct $1,600 for AGI. 3. C) Millie can deduct $2,400 as an
itemized deduction. 4. D) Millie can deduct $800 for AGI. 5. E) None – the
tuition is not deductible. 55) This fall Marsha and Jeff paid $5,000 for their
son Josh’s tuition and fees at State University (a qualified education
institution). They also paid $1,000 for Josh’s books. How much of these two
payments can Marsha and Jeff deduct this year, assuming Josh is their dependent
and their modified AGI is $135,000? (Assume the 2016 rules apply for purposes of
the qualified education expense deduction.) 1. A) Marsha and Jeff can deduct
$5,000 for AGI. 2. B) Marsha and Jeff can deduct $4,000 for AGI. 3. C) Marsha
and Jeff can deduct $2,500 for AGI. 4. D) Marsha and Jeff can deduct $2,000 for
AGI. 5. E) None – the tuition is not deductible. 56) This fall, Josh paid $5,000
for his tuition and fees at State University (a qualified education
institution). Assume that Josh is Marsha and Jeff’s son and that Marsha and Jeff
claim Josh as a dependent. Marsha and Jeff’s modified AGI is $100,000. How much
of Josh’s $5,000 tuition and fees payments can Marsha and Jeff deduct this year?
(Assume the 2016 rules apply for purposes of the qualified education expense
deduction.) 1. A) Marsha and Jeff can deduct $5,000 for AGI. 2. B) Marsha and
Jeff can deduct $4,000 for AGI. 3. C) Marsha and Jeff can deduct $2,500 for AGI.
4. D) Marsha and Jeff can deduct $2,000 for AGI. 5. E) None – the tuition is not
deductible by Marsha and Jeff. 57) Ned is a head of household with a dependent
son, Todd, who is a full-time student. This year Ned made the following
expenditures related to Todd’s support:

Auto insurance premiums

$1,700

Room and board at Todd’s school

2,200

Health insurance premiums (not through an exchange)

600

Travel (to and from school)

35

What amount can Ned include in his itemized deductions? 1. A) $1,700 included in
Ned’s miscellaneous itemized deductions. 2. B) $2,050 included in Ned’s
miscellaneous itemized deductions. 3. C) $950 included in Ned’s miscellaneous
itemized deductions. 4. D) $600 included in Ned’s medical expenses. 5. E) None
of the choices are correct. 58) Which of the following is a true statement? 1.
A) A taxpayer can deduct medical expenses incurred for members of his family who
are dependents. 2. B) A taxpayer can deduct medical expenses incurred for a
qualified relative even if the relative does not meet the gross income test. 3.
C) A divorced taxpayer can deduct medical expenses incurred for a child even if
the child is claimed as a dependent by the former spouse. 4. D) Deductible
medical expenses include long-term care services for disabled spouses and
dependents. 5. E) All of the choices are true. 59) Which of the following costs
are deductible as an itemized medical expense? 1. A) The cost of prescription
medicine and over-the-counter drugs. 2. B) Medical expenses incurred to prevent
disease. 3. C) The cost of elective cosmetic surgery. 4. D) Medical expenses
reimbursed by health insurance. 5. E) None of the costs are deductible. 60)
Which of the following costs are NOT deductible as an itemized medical expense?
1. A) The cost of eyeglasses. 2. B) Payments to a hospital. 3. C) Transportation
for medical purposes. 4. D) The cost of insurance for long-term care services.
5. E) All of the choices are deductible as medical expenses. 61) Opal fell on
the ice and injured her hip this winter. As a result she paid $3,000 for a visit
to the hospital emergency room and $750 for follow-up visits with her doctor.
While she recuperated, Opal paid $500 for prescription medicine and $600 to a
therapist for rehabilitation. Insurance reimbursed Opal $1,200 for these
expenses. What is the amount of Opal’s qualifying medical expense? 1. A) $3,000.
2. B) $3,750. 3. C) $3,650. 4. D) $4,850. 5. E) All of the choices are correct.
62) Which of the following taxes will not qualify as an itemized deduction? 1.
A) personal property taxes assessed on the value of specific property. 2. B)
state, local, and foreign income taxes. 3. C) real estate taxes on a residence.
4. D) gasoline taxes on personal travel. 5. E) None of the choices qualify as an
itemized deduction. 63) This year Amanda paid $749 in Federal gift taxes on a
gratuitous transfer to her nephew. Amanda lives in Texas and does not pay any
state or local income taxes. Which of the following is a true statement? 1. A)
Amanda cannot deduct Federal gift taxes. 2. B) Amanda can deduct Federal gift
taxes for AGI. 3. C) Amanda can deduct Federal gift taxes paid as an itemized
deduction. 4. D) Amanda must include Federal gift taxes with other miscellaneous
itemized deductions. 5. E) None of the choices are true. 64) This year Norma
paid $1,200 of real estate taxes on her personal residence. Norma’s other
itemized deductions (state income taxes) only amount to $3,100. Which of the
following is a true statement if Norma files single with one personal exemption?
1. A) Norma can deduct 4,300 for AGI. 2. B) Norma should deduct $1,200 even if
her standard deduction is $6,350. 3. C) Norma should deduct $4,300 even if her
standard deduction is $6,350. 4. D) Norma should deduct $3,100 even if her
standard deduction is $6,350. 5. E) Norma should claim the standard deduction.
65) Madeoff donated stock (capital gain property) to a public charity. He
purchased the stock 3 years ago for $100,000, and on the date of the gift, it
had a fair market value of $200,000. What is his maximum charitable contribution
deduction for the year related to this stock if his AGI is $500,000 (before
considering the itemized deduction phase-out)? 1. A) $100,000. 2. B) $200,000.
3. C) $150,000. 4. D) $250,000. 5. E) None of the choices are correct. 66) Carly
donated inventory (ordinary income property) to a church. She purchased the
inventory last month for $100,000, and on the date of the gift, it had a fair
market value of $92,000. What is her maximum charitable contribution deduction
for the year related to this inventory if her AGI is $200,000? 1. A) $100,000.
2. B) $92,000. 3. C) $60,000. 4. D) $46,000 if the church sells the inventory.
5. E) None of the choices are correct. 67) Simone donated a landscape painting
(tangible capital gain property) to a library, a public charity. She purchased
the painting five years ago for $50,000, and on the date of the gift, it had a
fair market value of $200,000. What is her maximum charitable contribution
deduction for the year if her AGI is $300,000 (before considering the itemized
deduction phase-out)? 1. A) $100,000. 2. B) $200,000. 3. C) $90,000 if the
library uses the painting in its charitable purpose. 4. D) $150,000. 5. E) None
of the choices are correct. 68) Larry recorded the following donations this
year: $500 cash to a family in need $2,400 to a church $500 cash to a political
campaign To the Salvation Army household items that originally cost $1,200 but
are worth $300. What is Larry’s maximum allowable charitable contribution if his
AGI is $60,000? 1. A) $2,900. 2. B) $1,000. 3. C) $2,700. 4. D) $4,600. 5. E)
None of the choices are correct. 69) Which of the following is a true statement?
1. A) the deduction of cash contributions to public charities is limited to 30
percent of AGI. 2. B) the deduction of capital gain property to private
nonoperating foundations is limited to 50 percent of AGI. 3. C) the deduction of
capital gain property to public charities is limited to 20 percent of AGI. 4. D)
the deduction of cash contributions to private nonoperating foundations is
limited to 30 percent of AGI. 5. E) None of the choices are true. 70) When
taxpayers donate cash and capital gain property to a public charity, the AGI
percentage limitation is applied in the following order: 1. A) a 30 percent of
AGI limitation is applied to the aggregate donation. 2. B) a 50 percent of AGI
limitation is applied to the cash donation and a 20 percent of AGI limitation is
applied to the fair market value of the capital gain donation. 3. C) a 30
percent of AGI limitation is applied to the cash donation and a 20 percent of
AGI limitation is applied to the fair market value of the capital gain donation.
4. D) a 50 percent of AGI limitation is applied to the cash donation and the
fair market value of the capital gain donation is subject to the lesser of a 30
percent of AGI limitation or a 50 percent of AGI limitation after subtracting
the cash contributions. 5. E) donations to public charities are not subject to
AGI limitations. 71) Which of the following is a true statement? 1. A) Taxpayers
may only deduct interest on up to $1,500,000 of acquisition indebtedness. 2. B)
Taxpayers may deduct interest on up to $1,000,000 of home-equity debt. 3. C) The
deduction for investment interest expense is not subject to limitation. 4. D)
Interest on home-equity debt up to $100,000 is deductible, even if the loan
proceeds are used to buy a new car. 5. E) None of the choices are true. 72)
Margaret Lindley paid $15,000 of interest on her $300,000 acquisition debt for
her home (fair market value of $500,000), $4,000 of interest on her $30,000
home-equity loan, $1,000 of credit card interest, and $3,000 of margin interest
for the purchase of stock. Assume that Margaret Lindley has $10,000 of interest
income this year and no investment expenses. How much of the interest expense
may she deduct this year? 1. A) $23,000. 2. B) $22,000. 3. C) $19,000. 4. D)
$18,000. 5. E) None of the choices are correct. 73) Which of the following is a
true statement? 1. A) A casualty loss can only occur from storm damage. 2. B)
Personal casualty losses can only be deducted to the extent that aggregate
casualty losses exceed 10 percent of AGI after applying a $100 per incident
deduction. 3. C) Individual casualty losses are only deductible if each
individual loss exceeds $5,000. 4. D) Uninsured thefts of personal assets are
not included with casualty losses. 5. E) All of the choices are true. 74) Jim
was in an auto accident this year. Jim paid $2,450 to repair his personal-use
car after the accident and his insurance only reimbursed him $400. Jim bought
his car several years ago for $1,500. What is the amount of casualty loss from
this accident before Jim applies any casualty loss floor limitations? 1. A)
$2,450. 2. B) $2,050. 3. C) $1,500. 4. D) $1,100. 5. E) None of the choices are
correct. 75) Which of the following is a true statement? 1. A) Employees cannot
claim business expense deductions. 2. B) Employees can claim business expense
deductions for AGI. 3. C) Employees can claim business expense deductions as
miscellaneous itemized deductions not subject to the 2 percent of AGI
limitation. 4. D) Employees can claim business expense deductions as
miscellaneous itemized deductions subject to the 2 percent of AGI limitation. 5.
E) None of the choices are true. 76) Which of the following is a true statement?
1. A) Traveling from a personal residence to a place of business is deducted for
AGI as a moving expense. 2. B) Traveling from a personal residence to a place of
business is a miscellaneous itemized deduction subject to the 2 percent of AGI
limitation. 3. C) The standard mileage rate can be used to calculate the
deduction for traveling from a personal residence to a place of business. 4. D)
Traveling from a personal residence to a place of business is deductible if
reimbursed by an employer. 5. E) Traveling from a personal residence to a place
of business is nondeductible. 77) Which of the following is a true statement? 1.
A) Fees for investment advice are included in miscellaneous itemized deductions
subject to the 2 percent of AGI limitation. 2. B) Unreimbursed employee business
expenses are included in miscellaneous itemized deductions subject to the 2
percent of AGI limitation. 3. C) Fees for tax preparation are included in
miscellaneous itemized deductions subject to the 2 percent of AGI limitation. 4.
D) Reimbursed employee business expenses are included in miscellaneous itemized
deductions subject to the 2 percent of AGI limitation unless the employer’s
reimbursement plan qualifies as an accountable plan. 5. E) All of the choices
are true. 78) Fred’s employer dispatched him on a business trip from the Dallas
headquarters to New York this year. During the trip Fred incurred the following
unreimbursed expenses:

Air fare

$1,300

Lodging

750

Meals

600

Cab fare

220

What is the amount of Fred’s deduction before the application of any AGI
limitations? 1. A) $2,870. 2. B) $2,570. 3. C) $2,050. 4. D) $1,300. 5. E) $0 –
the expenses cannot be deducted unless Fred is reimbursed. 79) Which of the
following is a true statement? 1. A) Expenses associated with a “hobby” are
never deductible. 2. B) The deductibility of an activity’s expenses in excess of
revenues depends upon whether the activity is primarily profit-motivated or a
hobby as determined by facts and circumstances. 3. C) Taxpayers engaged in a
“hobby” are always presumed to be motivated by profit. 4. D) The regulations do
not provide any guidance for determining whether an activity is profit
motivated. 5. E) All of the choices are true. 80) Glenn is an accountant who
races stock cars as a hobby. This year Glenn was paid a salary of $80,000 from
his employer and won $2,000 in various races. What is the effect of the racing
activities on Glenn’s taxable income if Glenn has also incurred $4,200 of hobby
expenses this year? Assume that Glenn itemizes his deductions but has no other
miscellaneous itemized deductions. 1. A) increase in taxable income of $2,000.
2. B) increase in taxable income of $1,640. 3. C) no change in taxable income.
4. D) decrease in taxable income of $560. 5. E) decrease in taxable income of
$2,200. 81) Grace is employed as the manager of a sandwich shop. This year she
earned a salary of $45,000 and incurred the following expenses associated with
her employment:

Subscriptions to food publications

$300

Cooking class (“How to make better subs”)

250

Transportation between Grace’s home and the shop

500

What amount of miscellaneous itemized deductions can Grace claim on Schedule A
if these are her only miscellaneous itemized deductions? 1. A) $150. 2. B)
$1,050. 3. C) $550. 4. D) $200 if Grace was reimbursed $50 for her cooking
class. 5. E) None of the choices are correct. 82) Which of the following is a
miscellaneous itemized deduction that is not subject to the 2 percent of AGI
floor? 1. A) gambling losses to the extent of gambling winnings. 2. B) fees for
investment advice. 3. C) employee business expenses. 4. D) tax preparation fees.
5. E) All of the choices are subject to the 2 percent of AGI floor limit. 83)
Which of the following itemized deductions is not subject to the itemized
deduction phase-out? 1. A) gambling losses. 2. B) mortgage interest. 3. C) state
income tax. 4. D) charitable contributions. 5. E) All of the choices are subject
to the itemized deduction phase-out. 84) Frieda is 67 years old and deaf. If
Frieda files as a head of household, what amount of standard deduction can she
claim in 2017? 1. A) $10,900. 2. B) $9,350. 3. C) $10,400. 4. D) $12,700. 5. E)
$1,550. 85) Andres and Lakeisha are married and file joint. Andres is 72 years
old and in good health. Lakeisha is 62 years old and blind. What amount of
standard deduction can Andres and Lakeisha claim in 2017? 1. A) $15,200. 2. B)
$11,850. 3. C) $9,350. 4. D) $12,700. 5. E) None of the choices are correct. 86)
Which of the following is a true statement? 1. A) The standard deduction is
increased for taxpayers who are blind or deaf at year-end. 2. B) A married
couple is only entitled to one addition to their standard deduction even if both
spouses are both over age 65. 3. C) Bunching itemized deductions is an illegal
method of tax avoidance. 4. D) Before any applicable phase-out, the deduction
for personal and dependency exemptions is $4,050 times the number of exemptions.
5. E) All of the choices are true. 87) Which of the following is a true
statement? 1. A) Personal exemptions, but not dependency exemptions, are subject
to phase-out. 2. B) A married filing joint taxpayer with AGI of $500,000 would
not be able to deduct personal and dependency exemptions. 3. C) At most, only
80% of exemptions are subject to phase-out. 4. D) Itemized deductions, but not
exemptions, are subject to phase-out. 5. E) None of the choices are true. 88)
Scott is a self-employed plumber and his wife, Emily, is a full-time employee
for the University. Emily has health insurance from a qualified plan provided by
the University, but Scott has chosen to purchase his own health insurance rather
than participate in Emily’s plan. Besides paying $5,400 for his health insurance
premiums, Scott also pays the following expenses associated with his plumbing
business:

Plumbing tools and supplies

$1,300

Rent on Scott’s plumbing shop

6,250

Transportation between Scott’s shop and various job sites

500

Plumber’s uniform

50

Plumbing truck rental

7,200

Self employment tax (1/2 is employer share)

400

What is the amount of deductions for AGI that Scott can claim this year (2017)?
89) Constance currently commutes 25 miles from her house to her existing part
time job in the suburbs. Next week she begins a new full time job in another
state, and this job location is 100 miles from her existing home. Because of the
additional distance Constance is selling her house, and she has rented an
apartment that is only 2 miles from her new job. Constance expects to pay the
following moving expenses.

Cost of searching for an apartment

$325

Transportation – auto (computed using the mileage rate of 17 cents per mile,
rounded)

17

Cost of van to move furniture and possessions

815

Meals while en route

25

Determine if this move qualifies for a moving expense deduction and calculate
the amount (if any) of the deduction. 90) Alexandra operates a garage as a sole
proprietorship. Alexandra also owns a half interest in a partnership that
operates a gas station. This year Alexandra paid or reported the following
expenses related to her garage and other property. Determine Alexandra’s AGI for
2017.

Revenue from auto repairs

$143,930

Salaries paid to mechanics

72,210

Supplies and tools

18,500

Revenues from gas station partnership (Alexandra’s share)

125,000

Expenses from gas station partnership (Alexandra’s share)

95,200

Self-employment tax (1/2 is employer’s share)

12,702

91) Shelby is working as a paralegal while attending law school at night. This
year she has incurred the following expenses associated with school.

Tuition

$22,700

Room and board

9,200

Books

1,600

Transportation to work

350

What amount can Shelby deduct as an employee business expense if her modified
AGI this year is $25,000? 92) Last year Henry borrowed $15,000 to help pay for
his dependent daughter’s college tuition. This year Henry paid $2,800 of
interest on the loan. How much, if any, interest can Henry deduct if he files
single with AGI of $72,500? 93) Collin and Christine are married and file joint.
Their dependent son, Trevor, is a full-time college student at a qualified
educational institution. This year Collin and Christine borrowed $30,000 to pay
for Trevor’s tuition ($22,000) and room and board ($8,000). At year end Collin
paid $3,200 in interest on the loan. What amounts can Collin and Christine
deduct for interest and education expenses if they estimate that their AGI will
be $138,000 absent any deductions for AGI? Assume the 2016 rules apply for
purposes of the qualified education expense deduction. 94) Kaylee is a
self-employed investment counselor who also owns a rental property. This year,
she collected $85,000 in fees and paid the following expenses:

Health insurance premiums (not through an exchange)

$

4,200

Life insurance premiums (whole life)

1,900

Books on investing

200

Repairs of the rental property

450

Advertising for investment clients

1,770

State income taxes

4,300

Self employment tax (1/2 is employer share)

11,732

Kaylee files single with one personal exemption. Calculate her adjusted gross
income. 95) This year Tiffanie files as a single taxpayer. Tiffanie received
$62,700 of salary and paid $3,200 of qualified educational interest. This year
Tiffanie has also paid deductible moving expenses of $2,200 and received $12,000
of alimony. What is Tiffanie’s AGI? 96) Detmer is a successful doctor who earned
$204,800 in fees this year, but he also competes in weekend golf tournaments.
Detmer reported the following expenses associated with competing in almost a
dozen tournaments:

Transportation to various tournaments

$3,450

Lodging

1,890

Entry fees

920

Golf supplies (balls, tees, etc.)

75

This year Detmer won $5,200 from competing in various golf tournaments. Assuming
that Detmer itemizes his deductions and that he did not have any other
miscellaneous itemized deductions, what amount of the golfing expenses are
deductible after considering all limitations if the tournament golfing is
treated as a hobby activity? 97) Jenna (age 50) files single and reports AGI of
$40,000. This year she has incurred the following medical expenses:

Dentist charges

$

90

Physician’s fees

2,800

Cosmetic surgery

400

Cost of eyeglasses

250

Hospital charges

1,330

Prescription drugs

240

Over-the-counter drugs

75

Medical insurance premiums (not through an exchange)

1,200

Calculate the amount of medical expenses that will be included with Jenna’s
other itemized deductions. 98) Chuck has AGI of $70,000 and has made the
following payments

State income tax withholding

$1,900

State income tax estimated payments

850

Federal income tax withholding

7,100

Social Security tax withheld from wages

4,800

State excise tax on liquor

400

State inheritance tax

1,200

County real estate tax

790

School district tax on realty

510

Calculate the amount of taxes that Chuck can include with his itemized
deductions. 99) Homer is an executive who is paid a salary of $80,000. Homer
also paints landscapes as a hobby. This year Homer expects to sell paintings for
a total of $750 and incur the following expenses associated with his painting
activities:

Travel

$1,480

Paints and canvas

610

Painting classes

230

What is the effect of Homer’s hobby on his taxable income? Assume his AGI does
not reflect his painting activities and that he itemizes deductions but has no
other miscellaneous itemized deductions. 100) This year, Benjamin Hassell paid
$20,000 of interest on a mortgage on his home (Benjamin borrowed $600,000 to buy
the residence and it is currently worth $1,000,000), $12,000 on a $150,000 home
equity loan on his home, and $10,000 of interest on a mortgage on his vacation
home (loan of $300,000; home purchased for $400,000). How much interest expense
can Benjamin deduct as an itemized deduction? 101) This year Darcy made the
following charitable contributions: Donee

Property

Cost

FMV

State University

IBM stock

$15,000

$10,500

Salvation Army

clothes

2,500

500

State Art Museum

painting

5,000

45,000

City Hospital

cash

8,000

Determine the maximum amount of charitable deduction for Darcy’s contribution of
the painting if her AGI is $80,000 this year. You may assume that both the stock
and painting have been owned for 10 years and that the painting was used by the
State Art Museum consistent with museum’s charitable purpose. 102) Claire
donated 200 publicly-traded shares of stock (held for 5 years) to her father’s
nonoperating private foundation this year. The stock was worth $15,000 but
Claire’s basis was only $4,000. Determine the maximum amount of charitable
deduction for the donation if Claire’s AGI is $60,000 this year. 103) Erika (age
62) was hospitalized with injuries from an auto accident this year. She incurred
the following expenses from the accident:

Hospital charges

$3,280

Prescription medicine

510

Doctor’s fees

1,240

In addition, Erika’s auto was completely destroyed in the accident. She bought
the car several years ago for $18,000 and it was worth $4,700 at the time of the
accident. What are Erika’s itemized deductions this year if she was uninsured
and her AGI is $40,000? 104) Don’s personal auto was damaged in a wind storm
this year. Don purchased the auto several years ago for $32,000 and it was worth
$18,000 at the time of the storm. The damage was superficial, so Don decided not
to repair the car. Although Don collected $750 from his insurance company, the
value of the car dropped after the storm to $15,000. What is the amount of
casualty loss from the storm damage before Don applies any floor limitations?
105) Colby is employed full time as a food technician for a local restaurant
chain. This year he has incurred the following expenses associated with his
employment:

Transportation between various restaurants

$

280

Technician uniforms (not adaptable to daily wear)

310

Professional dues and license

1,200

Colby was reimbursed $125 of the expenses from his employer’s accountable plan.
What amount can he include with his remaining itemized deductions if his AGI
this year is $32,000? 106) Clark is a registered nurse and full time employee of
the Hays Hospital. To maintain his nursing license Clark has incurred the
following expenses:

Nursing uniforms

$1,650

Union dues

400

Professional dues and license

800

Continuing education courses

450

Clark was reimbursed $1,250 of his expenses from his Hays Hospital accountable
reimbursement plan. What amount can he include with his remaining itemized
deductions if his AGI this year is $52,000? 107) Karin and Chad (ages 30 and 31,
respectively) are married and together have $110,000 of AGI. This year they have
recorded the following expenses:

Home mortgage interest

$6,640

Real estate taxes

5,400

State income taxes paid

6,300

Medical expenses (unreimbursed)

1,800

Employee business expenses (unreimbursed)

450

Charitable contributions (cash to their church)

760

Karin and Chad will file married joint with two personal exemptions. Calculate
their taxable income. 108) Rochelle, a single taxpayer (age 47), has an AGI of
$275,200. This year, she paid medical expenses of $30,000, state income taxes of
$4,000, mortgage interest of $10,600, and charitable contributions of $6,000.
What would be the amount of her total itemized deductions that she may claim on
her tax return? 109) Bryan is 62 years old and lives alone. This year he has
received $25,000 in taxable interest and pension payments, and he has paid the
following expenses:

Real estate taxes

$1,640

Medical expenses ($2,000 was reimbursed by insurance)

3,650

Charitable contributions (cash to the Unity church)

460

If Bryan files single with one personal exemption, calculate his taxable income.
110) Misti purchased a residence this year. Misti is a single parent and lives
with her 1-year old daughter. This year, Misti received a salary of $63,000 and
made the following payments:

Home mortgage interest

$2,335

Real estate taxes

1,525

State income taxes paid

1,340

Income tax preparation fee

250

Charitable contributions (cash to their church)

120

Misti files as a head of household and claims two exemptions. Calculate her
taxable income this year. 111) Jon and Holly are married and live in a
retirement community. This year Jon celebrated his 65th birthday and Holly
turned 68 years old. For their ages, both Jon and Holly are in good health. This
year the only significant expense that they incurred was an unreimbursed medical
expense of $3,200. If Jon and Holly together have AGI of $42,000, what is the
amount of their standard deduction this year? 112) This year Kelly bought a new
auto for $20,000 plus $1,650 in state and local sales taxes. Besides this sales
tax, Kelly also paid $8,260 in state income taxes and had other itemized
deductions (e.g., mortgage interest) of $3,500. If Kelly files single with AGI
of $56,000, what amount of itemized deductions will she be eligible to claim?
113) Toshiomi works as a sales representative and travels extensively for his
employer’s business. This year Toshiomi was paid $75,000 in salary and made the
following expenditures:

State income taxes withheld

$6,300

Employee business expenses (unreimbursed portion)

1,450

Charitable contributions

200

Investment counseling fees

780

Tax preparation fee

310

Toshiomi also made a number of trips to Las Vegas for gambling. This year
Toshiomi won $12,000 in a poker tournament and this amount was almost enough to
offset his other gambling losses ($13,420). Calculate Toshiomi’s taxable income
if he files single with one personal exemption. 114) Justin and Georgia file
married jointly with one dependent. This year, their AGI is $327,800. What
dollar amount of personal and dependency exemptions would they be allowed to
deduct this year? McGraw-Hill’s Taxation of Individuals and Business Entities,
2018 Edition, 9e (Spilker) Chapter 7 Investments 1) Generally, interest income
is taxed at preferential capital gains rates and dividend income is taxed at
ordinary rates. 2) Interest earned on U.S. savings bonds is interest received at
sale or maturity but must be taxed annually. 3) When a taxable bond is issued at
a premium, the taxpayer may elect to calculate and apply the yearly amortization
amount to reduce a portion of the actual interest payments that taxpayers
include in gross income. 4) Qualified dividends are always taxed at a 15 percent
preferential rate. 5) The capital gains (losses) netting process for taxpayers
without 25 or 28 percent capital gains requires them to (1) net short-term and
long-term gains, (2) net short-term and longterm losses, and (3) net the outcome
to yield a final gain or loss to place on the tax return. 6) Two advantages of
investing in capital assets are (1) gains are generally deferred and (2) gains
are generally taxed at preferential rates. 7) Dave and Jane file a joint return.
They sell a capital asset at a $150,000 loss. Even though they have no capital
gains, $6,000 of the loss can still be deducted in the current year. 8)
Unrecaptured §1250 gain is taxed at the 28 percent preferential capital gains
rate. 9) Losses associated with personal-use assets, sales to related parties,
and wash sales are not currently deductible. 10) Capital loss carryovers for
individuals are carried forward indefinitely. 11) Nondeductible investment
expenses (other than investment interest expenses) are carried forward
indefinitely. 12) Taxpayers may make an election to include long-term capital
gains and qualified dividends in net investment income and deduct more
investment interest expense currently if they are willing to subject this income
to ordinary tax rates. 13) Investment expenses and investment interest expense
are for AGI deductions. 14) When electing to include long-term capital gains and
qualified dividends in net investment income, taxpayers must include all
long-term capital gains and dividends recognized for that year. 15) The
investment interest expense deduction is limited to the amount of net investment
income for the year. 16) Generally, losses from rental activities are considered
to be active losses. 17) Passive losses that exceed passive income are deferred
until the taxpayer generates passive income to offset these passive losses or
until the taxpayer disposes of that activity. 18) A loss from a passive activity
is fully deductible as long as the taxpayer has sufficient tax basis in the
activity. 19) A passive activity is any activity that involves a trade or
business or rental activity in which the taxpayer does not materially
participate. 20) To qualify under the passive activity rental real estate
exception, the taxpayer must (1) own at least 15 percent of the property and (2)
participate in the process of making management decisions. 21) Which of the
following types of interest income is not taxed as it is earned? 1. A) interest
from savings accounts 2. B) original issue discounts on corporate bonds 3. C)
accrued market discount on bonds 4. D) interest from money market accounts 5. E)
all of the choices are correct. 22) Nontax factor(s) investors should consider
when choosing between investments include: 1. A) before-tax rates of return. 2.
B) after-tax rates of return. 3. C) liquidity needs. 4. D) before-tax rates of
return and after-tax rates of return. 5. E) before-tax rates of return and
liquidity needs. 23) One primary difference between corporate and U.S. Treasury
bonds is: 1. A) Treasury bonds always pay interest periodically. 2. B) Corporate
bonds always pay interest periodically. 3. C) Interest from Treasury bonds is
exempt from federal taxation. 4. D) Interest from corporate bonds is exempt from
state taxation. 5. E) None of the choices are correct. 24) The amount of
interest income a taxpayer recognizes when he redeems a U.S. savings bond is: 1.
A) the excess of the taxpayer’s basis in the bonds over the bond proceeds. 2. B)
the bond proceeds. 3. C) the excess of the bond proceeds over the taxpayer’s
basis in the bonds. 4. D) the taxpayer’s basis in the bonds. 5. E) None of the
choices are correct. 25) Which of the following is not a tax advantage of a
Series EE Saving Bond? 1. A) taxes are paid as the original issue discount on
the bond is amortized 2. B) interest earned is exempt from state taxation 3. C)
taxes are deferred until the bond is cashed in at maturity 4. D) interest is
exempt from federal taxation when used for qualifying educational expenses 5. E)
None of the choices are correct. 26) When a bond is purchased in the secondary
bond market at a discount, the amount of discount treated as interest income
when the bond is sold prior to maturity is the: 1. A) market premium. 2. B)
market discount. 3. C) accrued market premium. 4. D) accrued market discount. 5.
E) None of the choices are correct. 27) When selling stocks, which method of
calculating basis provides the greatest opportunity for minimizing gains or
increasing losses? 1. A) LIFO 2. B) FIFO 3. C) Weighted average 4. D) Specific
identification 5. E) None of the choices are correct 28) Long-term capital gains
for individual taxpayers can be taxed at a maximum rate of: 1. A) 20 percent. 2.
B) 25 percent. 3. C) 28 percent. 4. D) Both 20 percent and 28 percent. 5. E) All
of the choices are correct. 29) Cory recently sold his qualified small business
stock (acquired in 2017) for $90,000 after holding it for ten years. His basis
in the stock is $40,000. Assuming his marginal tax rate is 35 percent, how much
tax will he owe on the sale? 1. A) $3,750 2. B) $7,000 3. C) $7,500 4. D)
$14,000 5. E) None of the choices are correct 30) In X8, Erin had the following
capital gains (losses) from the sale of her investments: $2,000 LTCG, $25,000
STCG, ($9,000) LTCL, and ($15,000) STCL. What is the amount and nature of Erin’s
capital gains and losses? 1. A) $3,000 net short-term capital gain. 2. B) $3,000
net long-term capital loss. 3. C) $4,000 net short-term capital gain. 4. D)
$4,000 net long-term capital loss. 5. E) None of the choices are correct. 31)
The netting process for capital gains (losses) with 0/15/20 percent, 25 percent,
and 28 percent capital assets helps maximize the tax benefit of: 1. A) current
year net loss in the 25 percent rate group. 2. B) net short-term capital losses.
3. C) long-term capital loss carryovers. 4. D) current year net loss in the 25
percent rate group and long-term capital loss carryovers. 5. E) net short-term
capital losses and long-term capital loss carryovers. 32) When the wash sale
rules apply, the realized loss is: 1. A) recognized at time of sale. 2. B) not
recognized at time of sale and does not affect basis of newly acquired stock. 3.
C) recognized at time of sale and added to basis of the newly acquired stock. 4.
D) not recognized at time of sale and added to basis of the newly acquired
stock. 5. E) not recognized at time of sale and subtracted from the basis of the
newly acquired stock. 33) The maximum amount of net capital losses individual
taxpayers may deduct against their ordinary income per year is: 1. A) $3,000. 2.
B) $5,000. 3. C) Zero, losses are not deductible. 4. D) There is no maximum. All
losses are allowed to be deducted. 5. E) None of the choices are correct. 34) In
the current year, Norris, an individual, has $50,000 of ordinary income, a Net
Short Term Capital Loss (NSTCL) of $10,000 and a Net Long Term Capital Gain
(NLTCG) of $2,800. From his capital gains and losses, Norris reports: 1. A) an
offset against ordinary income of $10,000. 2. B) an offset against ordinary
income of $3,000 and a NSTCL carryforward of $7,000. 3. C) an offset against
ordinary income of $2,800 and a NSTCL carryforward of $7,200. 4. D) an offset
against ordinary income of $3,000 and a NSTCL carryforward of $7,200. 5. E) an
offset against ordinary income of $3,000 and a NSTCL carryforward of $4,200. 35)
Ms. Fresh bought 1,000 shares of Ibis Corporation stock for $5,000 on January
15, 2015. On December 31, 2017 she sold all 1,000 shares of her Ibis stock for
$4,500. Based on a hot tip from her friend, she bought 1,000 shares of Ibis
stock on January 23, 2018 for $3,000. What is Ms. Fresh’s recognized loss on her
2017 sale and what is her basis in her 1,000 shares purchased in 2018? 1. A)
$-0- LTCL and $3,500 basis. 2. B) $200 LTCL and $3,300 basis. 3. C) $300 LTCL
and $3,200 basis. 4. D) $400 LTCL and $3,100 basis. 5. E) $500 LTCL and $3,000
basis. 36) Kevin bought 200 shares of Intel stock on January 1, 2017 for $50 per
share with a brokerage fee of $100. Then, Kevin sells all 200 shares for $75 per
share on December 12, 2017. The brokerage fee on the sale was $150. What is the
amount of the gain/loss Kevin must report on his 2017 tax return? 1. A) $4,500
2. B) $4,750 3. C) $5,000 4. D) $5,250 5. E) None of the choices are correct.
37) If an individual taxpayer’s marginal tax rate is 35 percent and he holds the
following assets for more than one year, which gain will be taxed at the highest
rate at the time of sale? 1. A) gain from investment land 2. B) gain from
personal-use property 3. C) gain from a coin collection 4. D) gain from the sale
of qualified small business stock held for 3 years 5. E) gain attributable to
tax depreciation taken on real property 38) John holds a taxable bond and a
municipal bond. Which fees are considered part of John’s investment expense? 1.
A) attorney and accounting fees on municipal bond 2. B) safe deposit box rental
fees on taxable bond 3. C) interest expense on taxable bond 4. D) attorney and
accounting fees on municipal bond and safe deposit box rental fees on taxable
bond 5. E) safe deposit box rental fees on taxable bond and interest expense on
taxable bond 39) Bill would like some tax benefits for his investment expenses
incurred this year. His AGI is $190,000. Currently, his expenses consist of: (1)
$1,000 investment advice fees, (2) $1,500 unreimbursed employee business
expenses (a miscellaneous itemized deduction), and (3) $600 tax return
preparation fees. How much more, if any, must Bill spend for investment expenses
this year before he receives any tax benefit? 1. A) Zero, Bill is already
receiving a benefit. 2. B) More than $500. 3. C) More than $700. 4. D) More than
$900. 5. E) None of the choices are correct. 40) When calculating net investment
income, gross investment income includes: 1. A) interest income. 2. B) net
short-term capital gains. 3. C) non-qualified dividends. 4. D) royalty income.
5. E) All of the choices are correct. 41) Unused investment interest expense: 1.
A) expires after the current year. 2. B) is carried back two years. 3. C) is
carried forward twenty years. 4. D) is carried forward indefinitely. 5. E) None
of the choices are correct. 42) Brandon and Jane Forte file a joint tax return
and decide to itemize their deductions. The Forte’s income for the year consists
of $120,000 in salary, $1,000 interest income, $1,500 nonqualifying dividends,
and $1,000 long-term capital gains. The Forte’s expenses for the year consist of
$3,000 investment interest expense and $900 tax preparation fees. Assuming that
the Forte’s marginal tax rate is 30% and they make no special elections, what is
the amount of investment interest expense deduction for the year? 1. A) Zero;
investment interest expense is below two percent of AGI. 2. B) $1,000. 3. C)
$2,500. 4. D) $3,000. 5. E) None of the choices are correct. 43) Investment
expenses treated as miscellaneous itemized deductions do not include: 1. A)
expenses incurred to generate tax-exempt income. 2. B) investment interest
expense. 3. C) expenses for investment advice. 4. D) expenses incurred to
generate tax-exempt income and investment interest expense. 5. E) investment
interest expense and expenses for investment advice. 44) Investment interest
expense does not include: 1. A) interest expense from loans to purchase
municipal bonds. 2. B) interest expense from loans to purchase corporate bonds.
3. C) interest expense from loans to purchase stocks. 4. D) interest expense
from loans to purchase U.S. savings bonds and interest expense from loans to
purchase corporate bonds. 5. E) interest expense from loans to purchase
corporate bonds and interest expense from loans to purchase stocks. 45) Assume
that Joe has a marginal tax rate of 35 percent and decides to make the election
to include long-term capital gains and qualified dividends as investment income.
What rate must Joe use when calculating the tax on these two items? 1. A) 20% 2.
B) 25% 3. C) 28% 4. D) 35% 5. E) None of the choices are correct. 46) Doug and
Sue Click file a joint tax return and decide to itemize their deductions. The
Click’s income for the year consists of $90,000 in salary, $2,000 interest
income, $800 longterm capital loss. The Click’s expenses for the year consist of
$1,500 investment interest expense. Assuming that the Click’s marginal tax rate
is 35%, what is the amount of their investment interest expense deduction for
the year? 1. A) $1,200 2. B) $1,500 3. C) $2,000 4. D) $2,300 5. E) None of the
choices are correct. 47) Bob Brain files a single tax return and decides to
itemize his deductions. Bob’s income for the year consists of $75,000 of salary,
$3,000 long-term capital gain, and $1,500 interest income. Bob’s expenses for
the year consists of $800 investment advice fees, $700 unreimbursed employee
business expenses (a miscellaneous itemized deduction), and $250 tax return
preparation fees. What is Bob’s actual deduction for miscellaneous itemized
deductions? 1. A) Zero; Bob’s investment expenses do not exceed two percent of
AGI floor. 2. B) $1,590. 3. C) $1,500. 4. D) $1,750. 5. E) None of the choices
are correct. 48) Alain Mire files a single tax return and has adjusted gross
income of $304,000. His net investment income is $53,000. What is the additional
tax that Alain will pay on his net investment income for the year? 1. A) Zero 2.
B) $2,014 3. C) $3,952 4. D) $1,938 5. E) None of the choices are correct. 49)
What is the correct order of the loss limitation rules? 1. A) tax basis, at-risk
amount, passive loss limits 2. B) at-risk amount, tax basis, passive loss limits
3. C) passive loss limits, at-risk amount, tax basis 4. D) tax basis, passive
loss limits, at-risk amount 5. E) passive loss limits, tax basis, at-risk amount
50) Sue invested $5,000 in the ABC Limited Partnership and received a 10 percent
interest in the partnership. The partnership had $20,000 of qualified
nonrecourse debt and $20,000 of debt she is not responsible to repay because she
is a limited partner. Sue is allocated a 10 percent share of both types of debt
resulting in a tax basis of $9,000 and an at risk amount of $7,000. During the
year, ABC LP generated a ($90,000) loss. How much of Sue’s loss is disallowed
due to her tax basis or at-risk amount? 1. A) Zero; all of her loss is allowed
to be deducted. 2. B) $2,000 disallowed because of her at-risk amount. 3. C)
$2,000 disallowed because of her tax basis. 4. D) $4,000 disallowed because of
her tax basis. 5. E) $4,000 disallowed because of her at-risk amount. 51) Which
taxpayer would not be considered a material participant of an activity? 1. A)
taxpayer materially participated in the activity for any five of the preceding
ten years 2. B) taxpayer participated on a regular, continuous, and substantial
basis last year 3. C) taxpayer participated 95 hours last year and participation
is not less than any other participants for the year 4. D) taxpayer participated
in the activity for 995 hours last year 5. E) None of the choices are correct.
52) Generally, which of the following does not correctly categorize the type of
income? 1. A) rental real estate − passive income/loss 2. B) salary − active
income/loss 3. C) dividends − portfolio income/loss 4. D) capital losses −
passive income/loss 5. E) All of the choices are correct. 53) Michelle is an
active participant in the rental condominium property she owns. During the year,
the property generates a ($15,000) loss; however, Michelle has sufficient tax
basis and at-risk amounts to absorb the loss. If Michelle has $115,000 of
salary, $10,000 of long-term capital gains, $3,000 of dividends, and no
additional sources of income or deductions, how much loss can Michelle deduct?
1. A) Zero; losses from rental property are passive losses and can only be
offset by passive income 2. B) $4,000 3. C) $11,000 4. D) $15,000 5. E) None of
the choices are correct. 54) The rental real estate exception favors: 1. A)
lower income taxpayers (AGI less than $80,000). 2. B) middle income taxpayers
(AGI greater than $80,000 and less than $150,000). 3. C) upper income taxpayers
(AGI greater than $150,000). 4. D) lower income taxpayers (AGI less than
$80,000) and middle income taxpayers (AGI greater than $80,000 and less than
$150,000). 5. E) middle income taxpayers (AGI greater than $80,000 and less than
$150,000) and upper income taxpayers (AGI greater than $150,000). 55) On the
sale of a passive activity, any suspended losses cannot be used to offset income
from: 1. A) active business income. 2. B) capital gains. 3. C) interest income.
4. D) wages and tips. 5. E) None of the choices are correct. 56) A taxpayer’s
at-risk amount in an activity is increased by: 1. A) a reduction in the amount
of debt related to the activity that the taxpayer is responsible for paying. 2.
B) cash contributions to the activity. 3. C) cash distributions from the
activity. 4. D) a reduction in the amount of debt related to the activity that
the taxpayer is responsible for paying and cash contributions to the activity.
5. E) a reduction in the amount of debt related to the activity that the
taxpayer is responsible for paying and cash distributions from the activity. 57)
Compare and contrast how interest income is reported for the following types of
bonds: (a) bond originally issued at a discount, (b) bond originally issued at a
premium, (c) bond purchased at a discount in a secondary market, (d) bond
purchased at a premium in a secondary market. 58) What requirements must be
satisfied before an investor may receive preferential tax treatment on dividend
income, and what preferential treatment will result? 59) On January 1, 20X1,
Fred purchased a corporate bond with a face value of $50,000 from the secondary
market at a premium. The bond has a coupon rate of 8 percent and matures in five
years. The market rate of the bond is a 6 percent annual before-tax return
compounded semiannually. If Fred was trying to minimize interest income, what is
the least amount of interest income Fred may report on his 20X1 tax return? 60)
On December 1, 20X7, George Jimenez needed a little extra cash for the upcoming
holiday season, and sold 250 shares of Microsoft stock for $50 per share less a
broker’s fee of $200 for the entire sale transaction. Prior to the sale, George
held the following blocks of Microsoft stock (associated broker’s fee paid at
the time of purchase): Acquisition Date

Market Price When Acquired

Number of Shares

Broker’s Fee

1/1/X4

300

$35 per share

$250

6/30/X6

300

$45 per share

$250

If his goal is to minimize his current capital gain, how much capital gain will
George report from the sale? 61) What are the rules limiting the amount of
capital losses a taxpayer may deduct in a given year? Name at least three. 62)
Henry, a single taxpayer with a marginal tax rate of 35 percent, sold the
following assets during the year: Asset

Sale Price

Tax Basis

Gain/Loss

ABC Stock

$

50,000

$

25,000

$

25,000

More than 1 Year

XYZ Stock

$

12,000

$

9,000

$

3,000

Less than 1 Year

Stamp Collection

$

10,000

$

5,000

$

5,000

More than 1 Year

RST Stock

$

13,000

$

19,000

$

(6,000 )

Less than 1 Year

Rental Home

$

100,000

$

50,000

$

50,000

More than 1 Year

*

Holding Period

*$25,000 of the gain is a 25 percent gain. The remaining gain is 0/15/20 percent
gain. What tax rate(s) will apply to Henry’s capital gains or losses? 63) Scott
Bean is a computer programmer and incurred the following transactions last year.
Sales Price Provo City Bonds*

$

Basis 10,000

Purchased $

Sold

5,000

11/1/2013

5/2/2017

Cisco Preferred Stock

25,000

6,000

7/15/2008

1/12/2017

Dreyer’s Grand Ice Cream Stock

14,000

10,000

7/1/2016

4/20/2017

Novell Common

2,000

10,000

2/12/2014

11/29/2017

IBM Stock

4,000

3,000

8/2/2005

5/2/2017

ABC Common

6,000

9,000

5/30/2015

10/20/2017

Prior year ST Capital Loss Carryforward

5,500

Prior year LT Capital Loss Carryforward

5,500

*Purchased when originally issued by Provo City What is the Net Short-Term
Capital Gain/Loss reported on the 2017 Schedule D? What is the Net Long-Term
Capital Gain/Loss reported on the 2017 Schedule D? What amount of capital gain
is subject to the preferential capital gains rate? 64) Mr. and Mrs. Smith
purchased 100 shares of stock for $45 per share on June 30, 20X6. On March 30,
20X8, the Smith family decides to sell these shares for $30 generating a loss of
$15 per share. On April 15, 20X8, the Smith family realized they made a mistake
and repurchased 100 shares for $35 per share. When will the Smith family receive
a tax benefit for the loss on the March 30, 20X8 sale? 65) What is the tax
treatment for qualified small business stock acquired in 2017 and held for more
than five years and what is the tax treatment if held for less than five years?
66) How are individual taxpayers’ investment expenses and investment interest
expense treated for tax purposes? 67) Sarantuya, a college student, feels that
now is a good time to buy stocks. However, because she doesn’t have any savings,
she decides to borrow $15,000 at an annual interest rate of 8 percent. She must
make an interest-only payment each year for five years plus repay the entire
principal in year five. On August 1, 20X8 when Sarantuya obtained the loan,
Sarantuya invested $10,000 in several individual stocks and used the remaining
$5,000 to pay her tuition for the year. Assuming Sarantuya’s net investment
income this year is greater than her investment interest expense this year, how
much investment interest expense can she deduct in 20X8? 68) Dan and Sue Hill
file a joint tax return and elect to itemize their deductions. For 20X7, the
Hills received the following income items: (1) $150,000 salary, (2) $3,000
long-term capital gain, and (3) $1,500 interest income. Other than these
amounts, no other events or transactions affected their AGI in 20X7. During the
same year, the Hills incurred the following expenses: (1) $500 tax preparation
fees, (2) $4,000 investment expenses, and (3) $10,000 additional miscellaneous
expenses. Assuming the Hills have a marginal tax rate of 30 percent, what is the
tax benefit they receive from the investment expenses they paid? 69) How can
electing to include long-term capital gains and qualifying dividends in the
computation of net investment income be beneficial to taxpayers? 70) Kerri, a
single taxpayer who itemizes deductions on Schedule A, incurs $15,000 of
interest expense on funds borrowed to acquire taxable bonds. Kerri also has
$20,000 of taxable interest income for the year. Assume Kerri is in a 30%
marginal tax bracket. How much of the interest expense can she deduct? Assuming
the same facts except that the $20,000 of investment income is a qualifying
dividend rather than taxable interest income, what should Kerry do if she wants
to minimize her current year tax liability? 71) The Crane family recognized the
following types of investment income during 20X6: (1) $1,500 qualified
dividends, (2) $3,000 long-term capital gains, and (3) $850 taxable interest.
Additionally, the Crane family has $500 in investment expenses and their other
miscellaneous itemized deductions exceed 2% of their AGI for the year. The Crane
family paid $3,333 in investment interest expense during 20X6. Calculate the
different possibilities to determine the maximum deduction for investment
interest expense for the Crane family in 20X6. From these possibilities, which
provides the maximum deduction? 72) Describe the three main loss limitations
that taxpayers must overcome before deducting losses allocated to them from a
specific activity. 73) Given that losses from passive activities can only offset
income from passive activities unless the passive activity is sold, what types
of activities are not considered to be passive? Name at least three ways a
taxpayer may be treated as an active participant in an activity. 74) Roy, a
resident of Michigan, owns 25 percent of a fourplex in the nearby college town
of Ann Arbor with three other friends. The fourplex is rented to students who
attend the University of Michigan. Roy’s responsibility is to approve new
tenants each year and take care of any maintenance issues. During the year, the
rental property generated a $25,000 loss, which was split equally among Roy and
his three friends. Assuming Roy’s only source of income was $145,000 of salary,
how much of the rental loss can Roy deduct this year and what amount must be
carried forward? 75) Judy, a single individual, reports the following items of
income and loss:

Salary

$

120,000

Loss from rental property

$

(40,000

)

Judy owns 100% of the rental property and actively participates in the rental of
the property. Calculate Judy’s AGI. 76) On January 1, 20X8, Jill contributed
$18,000 of cash to the XYZ limited partnership for a 25 percent limited
partnership interest. On April 6, 20X8, XYZ, limited partnership distributed
$2,000 to Jill. For the year ended December 31, 20X8, Jill received the
following income/loss allocations from her partnership investments: (1) XYZ,
limited partnership allocated a $5,000 loss to Jill (2) ABC limited partnership
allocated $2,300 of income to Jill. How much of the $5,000 loss from XYZ limited
partnership can Jill deduct in 20X8? McGraw-Hill’s Taxation of Individuals and
Business Entities, 2018 Edition, 9e (Spilker) Chapter 8 Individual Income Tax
Computation and Tax Credits 1) Both the width (or range) of the tax brackets
(the amount of income taxed at a particular rate) in the tax rate schedules and
the range of the tax rates in the tax rate schedules (the difference between the
lowest tax rate and the highest tax rate) vary by filing status. 2) The tax rate
schedules are set up to tax lower levels of income at higher tax rates than
higher levels of income. 3) Tax rate schedules are provided for use by
(relatively) higher income taxpayers while the tax tables are provided for use
by (relatively) lower income taxpayers. 4) If a married couple has one primary
breadwinner, filing a joint return will likely result in a marriage penalty. 5)
If both spouses of a married couple earn roughly equivalent wages, the couple is
likely to pay a marriage penalty due to the nature of the tax rate schedules. 6)
A marriage penalty occurs when a couple pays more taxes by filing a joint tax
return than they would have paid had they filed married filing separate returns.
7) All capital gains are taxed at preferential rates. 8) Long-term capital
gains, dividends, and taxable interest income are all taxed at preferential
rates. 9) Generally, income from an active trade or business is subject to the
3.8% net investment income tax. 10) In certain circumstances a child with very
little income may have at least a portion of their income taxed at the parents’
marginal tax rate. 11) The kiddie tax does not apply to children over 24 years
old at the end of the tax year. 12) The alternative minimum tax system requires
taxpayers to apply an alternative tax rate on the regular income tax base to
determine the amount of the alternative minimum tax. 13) Regular taxable income
is the starting point for determining the alternative minimum tax. 14) The
alternative minimum tax is the AMT base multiplied by the AMT rate. 15)
Long-term capital gains are taxed at the stated AMT rate for purposes of the
alternative minimum tax. 16) Taxpayers are not allowed to deduct personal or
dependency exemptions for alternative minimum tax purposes. 17) For alternative
minimum tax purposes, taxpayers are required to add back the regular tax
standard deduction amount for their filing status whether or not they itemized
deductions for regular tax purposes. 18) For alternative minimum tax purposes,
taxpayers are allowed to deduct state income taxes but are not allowed to deduct
charitable contributions. 19) The AMT exemption amount is phased-out for high
income taxpayers. 20) All else equal, a reduction in regular income tax rates
would require more taxpayers to pay the alternative minimum tax. 21) Due to the
alternative minimum tax rate structure, timing tax planning strategies are not
effective under the alternative minimum tax system. 22) Employees must pay both
Social Security tax and Medicare tax on the full amount of their wages no matter
the amount of their wages. 23) For married couples, the Social Security wage
base limitation applies separately to each spouse. 24) For married couples,
the.9 percent additional Medicare tax is based on the couple’s combined wages.
25) Alton reported net income from his sole proprietorship of $90,000. To
determine his self employment tax, he would multiply $90,000 by the
self-employment tax rate. 26) Employee status is always better than independent
contractor status for a taxpayer because the employee is responsible for paying
the employee portion of the FICA taxes. 27) Self-employed taxpayers are allowed
to deduct the full amount of the self-employment taxes they pay. 28) Employees
are not allowed to deduct FICA taxes they pay. 29) Employees are allowed to
deduct a portion of the FICA taxes they pay. 30) Katlyn reported $300 of net
income from her sole proprietorship. She is not required to pay self-employment
tax. 31) All else equal, taxpayers are more likely to be classified as employees
rather than independent contractors if they are allowed to determine their own
working hours and work without frequent oversight. 32) Tax credits reduce a
taxpayer’s taxable income dollar for dollar. 33) The child tax credit is subject
to phase-out based on the taxpayer’s AGI. 34) Parents may claim a child tax
credit for a dependent child who is 22 years of age at the end of the year if
the child is a full-time student. 35) Parents may claim a child and dependent
care credit for expenses incurred in providing for their dependents while the
parents work as long as the children are over age 14 and under age 20 at year
end. 36) John and Sally pay Janet (Sally’s older sister) to watch John and
Sally’s child Dexter during the day. Janet cares for Dexter in her home. John
and Sally may claim a child and dependent care credit based on the amount they
pay Janet to care for Dexter. 37) The child and dependent care credit entitles
qualifying taxpayers to a credit equal to the full amount of qualified expenses.
38) The American opportunity credit is available only for those students who are
in their first or second year of postsecondary education. 39) The lifetime
learning credit can be used toward the cost of any course of instruction to
acquire or improve a taxpayer’s job skills, no matter the age of the taxpayer.
40) The American opportunity credit and lifetime learning credit are available
to all taxpayers regardless of their income level. 41) The earned income credit
is sometimes referred to as a negative income tax. 42) To qualify for the earned
income credit, the taxpayer must have a qualified dependent. 43) An 80-year-old
taxpayer with earned income and no dependent children could qualify for the
earned income credit. 44) Business credits are generally refundable credits. 45)
Taxpayers are generally allowed to carry back and/or carry forward unused
business credits. 46) When applying credits against a taxpayer’s gross tax
liability, nonrefundable personal credits are applied first, then business
credits, and finally refundable personal credits. 47) An individual could pay
100% of her tax liability by the due date of her tax return and still be subject
to underpayment tax penalties. 48) Depending on the year, the original
(unextended) due date for an individual’s tax return may be after April 15. 49)
Depending on the year, the original (unextended) due date for an individual’s
tax return may be before April 15. 50) Individuals may file for and receive a
six-month extension of time to file their tax return and pay their taxes without
penalty. 51) The late payment penalty is based on the amount of tax owed and the
number of days that the tax is not paid. The maximum amount of the penalty is
unlimited. 52) Which of the following is not a taxpayer filing status for
purposes of determining the appropriate tax rate schedule? 1. A) Head of
Household 2. B) Qualifying Widow or Widower 3. C) Married Filing Separately 4.
D) Single 5. E) All of the choices are taxpayer filing statuses 53) The taxable
income levels in the married filing jointly tax rate schedule are ________ those
in the married filing separately schedule. 1. A) the same as 2. B) double 3. C)
half the amount of 4. D) None of the choices are correct. 54) Linda is a
qualifying widow in 2017. In 2017, she reports $80,000 of taxable income (all
ordinary). What is her gross tax liability using the tax rate schedules? (tax
rate schedule in the text) 1. A) $11,478 2. B) $14,253 3. C) $15,739 4. D)
$15,893 55) Miley, a single taxpayer, plans on reporting $28,950 of taxable
income this year (all of her income is from a part-time job). She is considering
applying for a second part-time job that would give her an additional $10,000 of
taxable income. By how much will the income from the second job increase her tax
liability? (use the tax rate schedules in the text) 1. A) $1,000 2. B) $1,500 3.
C) $1,600 4. D) $2,500 56) Tamra and Jacob are married and they file a joint tax
return. Tamra received nearly five times the salary that Jacob received. Which
of the following statements is true? 1. A) Tamra and Jacob likely pay no tax
marriage penalty nor receive a tax marriage benefit. 2. B) Tamra and Jacob
likely pay a tax marriage penalty. 3. C) Tamra and Jacob likely receive a tax
marriage benefit. 4. D) Tamra and Jacob likely will pay a tax marriage penalty
and receive a tax marriage benefit. 57) Stephanie and Mitch are married and they
file a joint tax return. Mitch received a slightly higher salary than Stephanie
did during the year. Which of the following statements is true? 1. A) Stephanie
and Mitch likely pay no tax marriage penalty nor receive a tax marriage benefit.
2. B) Stephanie and Mitch likely pay a tax marriage penalty. 3. C) Stephanie and
Mitch likely receive a tax marriage benefit. 4. D) Stephanie and Mitch likely
will pay a tax marriage penalty and receive a tax marriage benefit. 58) Harrison
received a qualified dividend. Without knowing any additional facts, which of
the following statements is true regarding the rate at which the dividend will
be taxed to Harrison? 1. A) The dividend will be taxed at a 15% tax rate. 2. B)
The dividend will be taxed at a 20% tax rate. 3. C) The entire dividend will be
taxed at either 15% or the entire dividend will be taxed at 20% depending on
Harrison’s marginal ordinary income tax rate. 4. D) None of the choices are
correct. 59) Jamie is single. In 2017, she reported $100,000 of taxable income,
including a long-term capital gain of $5,000. What is her gross tax liability,
rounded to the nearest whole dollar amount? (use the tax rate schedules in the
text) 1. A) $19,582 2. B) $20,982 3. C) $20,332 4. D) $15,000 60) Angelena files
as a head of household. In 2017, she reported $51,400 of taxable income,
including a $10,000 qualified dividend. What is her gross tax liability, rounded
to the nearest whole dollar amount? (use the tax rate schedules in the text) 1.
A) $5,543 2. B) $5,633 3. C) $7,521 4. D) $7,102 61) Allen Green is a single
taxpayer with an AGI (and modified AGI) of $210,000, which includes $170,000 of
salary, $25,000 of interest income, $10,000 of dividends, and $5,000 of
long-term capital gains. What is Allen’s net investment income tax liability
this year, rounded to the nearest whole dollar amount? 1. A) $2,465 2. B) $1,520
3. C) $570 4. D) $380 62) Which of the following is not a barrier to income
shifting among family members? 1. A) The assignment of income doctrine. 2. B)
Net unearned income for children 18 and younger taxed at parents’ marginal tax
rates. 3. C) Elimination of preferential tax rates (on dividends and long-term
capital gains) for dependents. 4. D) Two of the choices. 63) The Olympians have
three children. The kiddie tax applies to unearned income received by which of
the following children? 1. A) Poseidon is a 20-year-old full-time student who
does not support himself. 2. B) Demeter, a 23-year-old full-time student who
supports herself with a job at a grocery store. 3. C) Zeus is 20 years old and
not a student. 4. D) Two of the choices. 5. E) None of the choices are correct.
64) Assuming the kiddie tax applies, what amount of a child’s income is subject
to the kiddie tax? 1. A) All of it. 2. B) All of the unearned income. 3. C) The
net unearned income. 4. D) Taxable income less the standard deduction. 65)
During 2017, Montoya (age 15) received $2,200 from a corporate bond. He also
received $600 from a savings account established for him by his parents. Montoya
lives with his parents and he is their dependent. What is Montoya’s taxable
income? 1. A) $0 2. B) $2,200 3. C) $2,800 4. D) $1,750 66) During 2017, Jasmine
(age 12) received $2,400 from a corporate bond. She also received $600 from a
savings account established for her by her parents. Jasmine lives with her
parents and she is their dependent. Assuming her parents’ marginal tax rate is
28%, what is Jasmine’s gross tax liability? 1. A) $0 2. B) $105 3. C) $252 4. D)
$357 67) Hestia (age 17) is claimed as a dependent by her parents, Rhea and
Chronus. In 2017, Hestia received $1,000 of interest income from a corporate
bond that she owns. In addition, she has earned income of $200. What is her
taxable income for 2017? 1. A) $0 2. B) $150 3. C) $650 4. D) $1,200 68)
Montague (age 15) is claimed as a dependent by his parents Matt and Mary. In
2017, Montague received $5,000 of qualified dividends and he received $800 from
a part time job. What is his taxable income for 2017? 1. A) $0 2. B) $3,900 3.
C) $4,650 4. D) $4,750 69) Hester (age 17) is claimed as a dependent by his
parents, Charlton and Abigail. In 2017, Hester received $10,000 of qualified
dividends and he received $6,200 from a part time job. What is his taxable
income for 2017? 1. A) $16,200 2. B) $15,150 3. C) $9,850 4. D) $9,650 70) The
alternative minimum tax base is typically ________ the regular income tax base.
1. A) smaller than 2. B) about the same as 3. C) larger than 4. D) exactly the
same as 71) The computation of the alternative minimum tax base begins with
regular taxable income. Which of the following is not part of the formula for
computing the alternative minimum tax base? 1. A) Subtract personal exemptions.
2. B) Add the standard deduction amount if used for regular tax. 3. C) Subtract
the AMT exemption amount (if any). 4. D) Add back tax exempt interest from a
private activity bond not issued in 2009 or 2010. 72) In 2017, Maia (who files
as a head of household) reported regular taxable income of $115,000. She
itemized her deductions, deducting $8,000 in charitable contributions and $3,000
in state income taxes. She claimed exemptions for herself and her son, Hermes,
($4,050 each). What is Maia’s alternative minimum taxable income? 1. A) $115,000
2. B) $126,000 3. C) $134,100 4. D) $126,100 73) Which of the following items is
not added back to regular taxable income in computing alternative minimum
taxable income? 1. A) Home mortgage interest expense. 2. B) Real property taxes.
3. C) Tax exempt interest from a private activity bond issued in 2007. 4. D)
Miscellaneous itemized deductions in excess of the 2% floor. 74) Which of the
following statements regarding the AMT exemption amounts is not true? 1. A) The
amount of the exemption depends on the taxpayer’s filing status. 2. B) The
exemption amount is completely phased-out for high income taxpayers. 3. C)
Taxpayers must choose whether they will claim the exemption or itemize
deductions. 4. D) None of these statements is false (all of these statements are
true). 75) Persephone has a regular tax liability of $12,475 and a tentative
minimum tax of $11,500. Given just this information, what is her alternative
minimum tax liability for the year? 1. A) $0 2. B) $11,500 3. C) $975 4. D)
$12,475 76) Harmony reports a regular tax liability of $15,000 and tentative
minimum tax of $17,000. Given just this information, what is her alternative
minimum tax liability for the year? 1. A) $0 2. B) $2,000 3. C) $15,000 4. D)
$17,000 77) Which of the following statements accurately describes the
alternative minimum tax rate(s)? 1. A) The top AMT marginal rate is higher than
the top regular tax marginal tax rate. 2. B) The AMT rates represent a
progressive tax rate structure. 3. C) The AMT rate is the same rate for all
taxpayers. 4. D) None of the choices are correct. 78) Which of the following is
not typical of taxpayers who are most likely affected by the AMT? 1. A) Have
many dependents. 2. B) Pay high state income tax. 3. C) Pay high property taxes.
4. D) Have relatively low capital gains. 79) Which of the following could
explain why a large number of taxpayers are subject to (or could become subject
to) AMT? 1. A) Regular tax rates have decreased since the AMT was enacted. 2. B)
The AMT exemption amount is indexed to increase with inflation. 3. C) Property
values are decreasing. 4. D) The personal and dependency exemption amounts are
not increasing as fast as the AMT exemption is decreasing. 80) Asteria earned a
$25,500 salary as an employee in 2017. How much should her employer have
withheld from her paycheck for FICA taxes (rounded to the nearest whole dollar
amount)? 1. A) $370 2. B) $1,581 3. C) $1,951 4. D) $3,902 81) Baker earned
$225,000 of salary as an employee in 2017. How much should his employer have
withheld from his paycheck for FICA taxes (rounded to the nearest whole dollar
amount)? 1. A) $11,374 2. B) $11,149 3. C) $10,786 4. D) $17,213 82) Hera earned
$175,000 salary in 2017. Her husband, Zeus, earned $100,000 salary in 2017. Hera
and Zeus file a joint tax return. How much FICA taxes will they owe in 2017? 1.
A) $15,772 2. B) $19,985 3. C) $19,761 4. D) $4,213 83) Which of the following
statements regarding FICA taxes is true? 1. A) Low income employees are not
required to pay FICA taxes. 2. B) An employee who has two different employers
during the year may be entitled to a tax credit for overpaid FICA taxes. 3. C)
The maximum amount of Medicare taxes an employee is required to pay is capped
each year but the maximum amount of Social Security taxes is not. 4. D) The wage
base limit for Social Security taxes depends on the taxpayer’s filing status.
84) Which of the following suggests that a working taxpayer is an independent
contractor rather than an employee? 1. A) Works for more than one firm. 2. B)
May realize a loss from business activities. 3. C) Sets own working hours. 4. D)
Works somewhere other than on employer premises. 5. E) All of the these choices
suggest independent contractor status. 85) Which of the following statements
best describes the deductions independent contractors may claim for valid
business expenses? 1. A) for AGI deductions. 2. B) from AGI deductions not
subject to the two percent of AGI floor. 3. C) from AGI deductions subject to a
two percent of AGI floor. 4. D) for AGI deductions limited to income from the
business activities. 86) The wage base for which of the following taxes is
capped? 1. A) Federal income. 2. B) Social Security. 3. C) Medicare. 4. D)
Alternative minimum. 87) Which of the following statements regarding the
self-employment tax is most accurate? 1. A) The self-employment tax base is
generally the taxpayer’s net income from self-employment (usually net income
from Schedule C). 2. B) Taxpayers who report less than $600 of net income from
self-employment (usually net income from Schedule C) are not required to pay
self-employment taxes. 3. C) The self-employment tax base is net earnings from
self employment which is less than net income from self-employment. 4. D) The
Social Security tax limit does not apply to self-employment taxes. 88) Which of
the following best describes the manner in which self-employed taxpayers may
deduct self-employment taxes? 1. A) Deduct employer portion from AGI. 2. B)
Deduct entire amount from AGI. 3. C) Deduct employer portion for AGI. 4. D)
Deduct entire amount for AGI. 5. E) No deduction. 89) For taxpayers who receive
both salary as an employee and self-employment income as an independent
contractor in the same year, which of the following statements regarding FICA
and self-employment taxes is most accurate? 1. A) The Social Security limit
applies to the salary but not to the self-employment income. 2. B) The Social
Security limit applies to the self-employment income but not to the salary. 3.
C) Salary is first applied against the Social Security limit and then
self-employment income is applied against the Social Security limit. 4. D)
Self-employment income is first applied against the Social Security limit and
then salary is applied against the Social Security limit. 90) Which of the
following statements concerning a comparison between employees and independent
contractors is most accurate? 1. A) Employees and independent contractors deduct
business expenses as miscellaneous itemized deductions. 2. B) While employees
are typically eligible for nontaxable fringe benefits from employers,
independent contractors are not. 3. C) Employers are required to withhold either
FICA or self-employment taxes from compensation paid to employees and
compensation paid to independent contractors. 4. D) Employers typically withhold
federal income taxes from compensation paid to employees and to independent
contractors. 91) Which of the following statements concerning tax credits is
true? 1. A) The tax benefit a taxpayer receives from a credit depends on the
taxpayer’s marginal tax rate. 2. B) Refundable tax credits are limited to a
taxpayer’s gross tax liability. 3. C) Tax credits are generally more beneficial
than tax deductions. 4. D) None of these is a true statement. 92) Which of the
following is not one of the general tax credit categories? 1. A) Nonrefundable
personal. 2. B) Refundable personal. 3. C) Business. 4. D) Refundable business.
93) Which of the following statements regarding the child tax credit is false?
1. A) The child for whom the credit is claimed must be under the age of 15 at
the end of the year. 2. B) The credit is subject to phase-out based on the
taxpayer’s AGI. 3. C) The full credit for a child who qualifies is $1,000. 4. D)
The child for whom the credit is claimed must meet the definition of a
qualifying child. 94) Quantitatively, what is the relationship between the AGI
phase-out thresholds for the child tax credit? 1. A) Head of household/Single =
Married Filing Separately = Married Filing Jointly. 2. B) Head of
household/Single < Married Filing Separately < Married Filing Jointly. 3. C)
Head of household/Single = Married Filing Separately > Married Filing Jointly.
4. D) Head of household/Single > Married Filing Separately < Married Filing
Jointly. 95) Rhianna and Jay are married filing jointly in 2017. They have six
children for whom they may claim the child tax credit. Their AGI was $123,440.
What amount of child tax credit may they claim on their 2017 tax return? 1. A)
$5,300 2. B) $6,000 3. C) $12,000 4. D) $4,000 96) The amount of expenditures
eligible for the child and dependent care credit is the least of three amounts.
Which of the following is not one of those amounts? 1. A) The total amount of
child and dependent care expenditures for the year. 2. B) $3,000 for one
qualifying person or $6,000 for two or more qualifying persons. 3. C) The
dependent’s earned income for the year. 4. D) The taxpayer’s earned income for
the year. 97) Which of the following statements regarding the child and
dependent care credit is false? 1. A) Taxpayers may claim a credit for only a
portion of qualifying dependent care expenditures. 2. B) If a taxpayer’s income
is too high, she will be ineligible to claim any child and dependent care
credit. 3. C) A single taxpayer must have earned income to claim any child and
dependent care credit. 4. D) A taxpayer is not eligible to claim the dependent
care credit if any dependent relative provides the care. 98) Trudy is Jocelyn’s
friend. Trudy looks after Jocelyn’s four-year-old son during the day so Jocelyn
can go to work. During the year, Jocelyn paid Trudy $4,000 to care for her son.
What is the amount of Jocelyn’s child and dependent care credit if her AGI for
the year was $30,000? (Exhibit 8-9 in the text) 1. A) $0 2. B) $810 3. C) $1,080
4. D) $3,000 99) Kaelyn’s mother, Judy, looks after Kaelyn’s four-year-old twins
so Kaelyn can go to work (she drops off and picks up the twins from Judy’s home
every day). Since Judy is a relative, Kaelyn made sure, for tax purposes, to pay
her mother the going rate for child care ($6,300 for the year). What is the
amount of Kaelyn’s child and dependent care credit if her AGI for the year was
$36,000? (Exhibit 8-9 in the text) 1. A) $1,440 2. B) $2,100 3. C) $6,000 4. D)
$0 100) Which of the following statements regarding the child and dependent care
credit is true? 1. A) A married couple must file jointly to claim the credit. 2.
B) A taxpayer may claim a credit for dependent care expenses for a dependent who
is 14 years old or older but only if the dependent lives in the taxpayer’s home
for the entire year. 3. C) All else equal, a taxpayer making qualifying
expenditures for three children may claim more dependent care credit than a
taxpayer making (the same amount of) qualifying expenditures for two children.
4. D) None of these statements is true. 101) Which of the following is not true
of the American opportunity credit? 1. A) A taxpayer with multiple eligible
dependents can claim a credit for each dependent’s qualifying expenses. 2. B)
The credit is available for students during their first four years of
postsecondary education only. 3. C) It is phased out based on the taxpayer’s
AGI. 4. D) A taxpayer may not claim a credit unless the taxpayer pays a
dependent’s qualifying educational expenses. 102) Which of the following is not
true of the lifetime learning credit? 1. A) It is a nonrefundable credit. 2. B)
The credit can be claimed by taxpayers who have graduated from college and are
taking professional training courses to improve their job skills. 3. C) A
taxpayer with multiple dependents can claim a credit for each dependent’s
qualifying expenses. 4. D) The credit is subject to phase out based on the
taxpayer’s AGI. 103) Which of the following is not a true statement about the
American opportunity credit (AOC) and lifetime learning credits (assume the 2016
rules apply for the qualified education expense deduction)? 1. A) A taxpayer may
not report both an AOC and a lifetime learning credit on the same tax return. 2.
B) Certain educational expenses qualify for both credits but taxpayers must
claim one credit or the other for the expenditures (the taxpayer cannot claim
both credits for the same expenditures). 3. C) Taxpayers may choose to either
(1) deduct qualifying education expenses of an individual as for AGI deductions
or (2) claim educational credits for the individual’s expenses (but not both) 4.
D) The AGI phase-out threshold for phasing out the AOC is higher than the AGI
phase-out threshold for the lifetime learning credit. 104) Which of the
following statements regarding the earned income credit is true? 1. A) It is a
nonrefundable credit. 2. B) It is possible that a taxpayer with more earned
income may receive more credit than a taxpayer with less earned income. 3. C) A
70-year-old taxpayer with no dependents can qualify for the credit in certain
circumstances. 4. D) A taxpayer whose only source of income is interest from
corporate bonds is eligible for the credit. 105) Which of the following does not
affect the amount of the earned income credit? 1. A) Filing status. 2. B) Amount
of credit taken in previous years. 3. C) Number of qualifying children. 4. D)
Taxpayer’s AGI. 106) Carolyn has an AGI of $38,000 (all from earned income), two
qualifying children, and is filing as a head of household. What amount of earned
income credit is she entitled to? (Exhibit 8-10 in the text) 1. A) $0 2. B)
$1,476 3. C) $3,400 4. D) $4,140 5. E) $5,616 107) Which of the following
statements regarding credits is correct? 1. A) Business expenses are generally
refundable credits. 2. B) Business credits that are generated in one year but
are not utilized in that year expire. 3. C) Business credits that are generated
in one year but are not utilized in that year may be carried forward to future
years but not back to a prior year. 4. D) Business credits that are generated in
one year but are not utilized in that year may be carried back to the previous
year and then forward to future years. 108) If there is not enough gross tax
liability to use the foreign tax credit, ________. 1. A) it expires unused 2. B)
it is carried back 2 years or forward 20 years 3. C) it is carried back 3 years
or forward 5 years 4. D) it is carried back 1 year or forward 10 years 109)
Which of the following tax credits is fully refundable? 1. A) American
opportunity credit. 2. B) Dependent care credit. 3. C) Earned income credit. 4.
D) None of the choices are correct. 110) How could an individual obtain a
business tax credit? 1. A) Through self-employment activities. 2. B) Through
flow-through from a partnership or S corporation. 3. C) By working overseas and
obtaining a foreign tax credit. 4. D) All of the choices are correct. 111) Which
of the following represents the correct order in which credits are applied to
gross tax liability (from first to last)? 1. A) Nonrefundable personal,
business, refundable. 2. B) Business, nonrefundable personal, refundable. 3. C)
Refundable, nonrefundable personal, business. 4. D) Refundable, business,
nonrefundable personal. 112) Cassy reports a gross tax liability of $1,000. She
also claims $400 of nonrefundable personal credits, $700 of refundable personal
credits, and $200 of business credits. What is Cassy’s tax refund or tax
liability due after applying the credits? 1. A) $1,000 taxes payable. 2. B) $0
refund or taxes payable. 3. C) $700 refund. 4. D) $300 refund. 113) Sheryl’s AGI
is $250,000. Her current tax liability is $52,068. Last year, her tax liability
was $48,722. She will not owe underpayment penalties if her total estimated tax
payments are at least which of the following (rounded) amounts (assume she makes
the required payments each quarter)? 1. A) $46,861 2. B) $48,722 3. C) $51,547
4. D) $53,594 114) If an employer withholds taxes from an employee, in general,
when are these taxes treated as paid to the IRS? 1. A) As withheld. 2. B) As the
employee requests on his/her W-4 form. 3. C) Evenly throughout the year. 4. D)
On April 15. 115) Which of the following statements about estimated tax payments
and underpayment penalties is true for individual taxpayers? 1. A) Taxpayers who
have paid their full tax liability by the original tax return due date are
protected from underpayment penalties. 2. B) Taxpayers who have paid their full
tax liability by the extended tax return due date are protected from
underpayment penalties. 3. C) Taxpayers who have uneven income streams can pay
estimated tax quarterly in uneven amounts and not be susceptible to underpayment
penalties. 4. D) Taxpayers who have paid their required amount of estimated tax,
even though not on time, are protected from underpayment penalties. 116) Which
of the following statement(s) concerning estimated tax payments and underpayment
penalties for individuals is (are) true? 1. A) Whether taxpayers are subject to
underpayment penalties is determined on a quarterly basis. 2. B) Due dates for
estimated tax payments for a given year are April 15, June 15, September 15 of
that year and January 15 of the next year unless these dates fall on a weekend
or a holiday. 3. C) The amount of penalty depends on the amount of the
underpayment among other factors. 4. D) All of these statements are true. 117)
What happens if the taxpayer owes an underpayment penalty, but does not compute
it on Form 2210? 1. A) Nothing, unless the taxpayer is audited. 2. B) The
taxpayer is immediately sent to the Tax Court. 3. C) The IRS will compute and
assess the penalty. 4. D) The penalty is increased by five percentage points.
118) Happy, Sleepy, Grumpy, and Doc all did not make adequate estimated
payments. Which of them will not owe underpayment penalties for 2017 given the
following information? Tax liability 2017

2016

2015

Happy

$

2,200

$

0

$

500

Sleepy

$

1,500

$

500

$

700

Grumpy

$

1,200

$

200

$

0

Doc

$

800

$

1,100

$

1,001

1. A) Happy. 2. B) Sleepy. 3. C) Grumpy. 4. D) Doc. 5. E) Both “Grumpy” & “Doc”
are correct. 6. F) None of the choices are correct. 119) Taxpayers are not
required to file a tax return unless their gross income passes a certain
threshold. This threshold is generally the ________. 1. A) applicable standard
deduction amount. 2. B) personal exemption amount. 3. C) twice the applicable
standard deduction amount. 4. D) applicable standard deduction amount plus the
personal exemption amount. 120) Why would a taxpayer file a tax return if not
required to do so? 1. A) to remain in favor with the IRS. 2. B) to claim a
refund of taxes paid. 3. C) all taxpayers are required to file returns. 4. D) in
order to claim the standard deduction. 121) Looking at the following partial
calendar for April, when will individual tax returns be due? April Sunday

Monday

Tuesday

Wednesday

Thursday

Friday

Saturday 1

2

3

4

5

6

7

8

9

10

11

12

13

14

15

16

17 National Accountants 18 Day (Federal Holiday)

19

20

21

22

1. A) Friday, April 14. 2. B) Saturday, April 15. 3. C) Sunday, April 16. 4. D)
Monday, April 17. 5. E) Tuesday, April 18. 122) Which of the following is not
true of the extension to file an individual tax return? 1. A) It is granted
automatically by the IRS if requested. 2. B) It must be requested by the
original due date of the return. 3. C) It extends the due date for the return
and associated tax payments beyond the original due date of the tax return. 4.
D) The extension is for six months beyond the original due date. 123) Which of
the following taxpayers (all age 40) are required to file a return? Taxpayer

Filing Status

Number of exemptions

Gross Income

Jenny and Jim

Married Filing Jointly

2

$

21,700

Allen

Single

1

$

9,300

Timmy

Head of Household

2

$

11,000

1. A) Jenny and Jim. 2. B) Allen. 3. C) Timmy. 4. D) None of the choices are
correct. 124) What is the underpayment penalty rate that taxpayers pay when they
underpay their estimated taxes? 1. A) Federal short-term interest rate. 2. B)
Federal short-term interest rate plus three percentage points. 3. C) Federal
long-term interest rate plus six percentage points. 4. D) Zero. The government
does not pay interest on overpayments. 125) Which of the following statements
regarding late filing penalties is true? 1. A) If a taxpayer fails to file a tax
return, the late filing penalty will continue to grow until the taxpayer files
the tax return. 2. B) The amount of the late filing penalty is the same for both
fraudulent failure to file and non-fraudulent failure to file. 3. C) Taxpayers
who owe no tax as of the due date of their tax returns are not subject to late
filing penalties even if they file late. 4. D) None of the choices are correct.
126) Which of the following statements regarding late filing penalties and/or
late payment penalties is true? 1. A) An extension of time to file the tax
return protects a taxpayer from late payment penalties as long as the tax is
paid by the extended due date of the return. 2. B) The penalty rate for late
filing penalties is less than the penalty rate for late payment penalties. 3. C)
If a taxpayer has not paid the full tax liability by the original due date of
the return and the taxpayer has not filed a tax return by the due date of the
return, the maximum late filing and late payment penalty will be no greater than
the late filing penalty by itself. 4. D) None of the choices are correct. 127)
Jocelyn, a single taxpayer, had $742,000 of taxable income in 2017. All of the
income is ordinary. What is her tax liability for the year? (Use tax rate
schedule in the text.) 128) Paul and Melissa plan on filing jointly in 2017. For
the year, the couple reported taxable income of $130,000. What is their gross
tax liability? (Use tax rate schedule in the text.) 129) Maria and Tony are
married. They are preparing to file their 2017 tax return. If they were to file
as single taxpayers, Maria and Tony would report $40,000 and $60,000 of taxable
income, respectively. On their joint tax return, their taxable income is
$100,000. How much of a marriage penalty or benefit will Maria and Tony
experience in 2017? (Use tax rate schedule in the text.) 130) Maria and Tony are
married. They are preparing to file their 2017 tax return. If they were to file
as single taxpayers, Maria and Tony would report $10,000 and $70,000 of taxable
income, respectively. On their joint tax return, their taxable income is
$80,000. How much of a marriage penalty or benefit will Maria and Tony
experience in 2017? (Use tax rate schedule in the text.) 131) In 2017, Athena
reported $38,950 of taxable income. Of this, $33,950 came from her work at the
local library and the remaining $5,000 was from capital gains to be taxed at
preferential rates. Compute her tax liability for 2017 as a single taxpayer. Use
tax rate schedule in the text.) 132) Henry and Janice are married and file
jointly. They have an AGI (and modified AGI) of $290,000, which includes $90,000
of salary, $170,000 of active business income, $10,000 of interest income,
$15,000 of dividends, and $5,000 of long-term capital gains. What are Henry and
Janice’s net investment income tax liability this year, rounded to the nearest
whole dollar amount? 133) Hera wants to reduce her income tax liability by
shifting some of her income to her 10-year-old daughter (a dependent), Athena.
Last year, Hera gifted corporate bonds to Athena. This year, Athena received
$1,550 in interest income from the bonds. What amount of tax will Athena pay on
the interest income? 134) Max is a 14-year-old dependent of his parents. During
2017, Max earned $1,800 working part time jobs and he received $1,500 of
interest income from corporate bonds that were given to him last year. What is
Max’s 2017 taxable income? 135) Pyrrha, a 12-year-old dependent of Epimetheus
and Pandora, received $2,200 of interest income in 2017. Her parents’ marginal
tax rate is 35%. What is Pyrrha’s gross tax liability for the year? 136) Candace
is claimed as a dependent on her parent’s tax return. Her parents’ ordinary
income marginal tax rate is 33%. In 2017, Candace received $5,000 of interest
income from corporate bonds she obtained several years ago. This is her only
source of income. She is 15 years old at year-end. What is her gross tax
liability? 137) Jerusha is married and she files a separate tax return in 2017.
She claims two exemptions (2 × 4,050 = $8,100). She claimed the standard
deduction for regular tax purposes ($6,350). She had no other adjustments. Her
regular taxable income was $67,800. What is Jerusha’s AMTI? 138) Apollo is
single and his AMT base is $100,250. This amount includes $500 of qualified
dividends (the dividends were taxed at 15% in determining the regular tax
liability). What is Apollo’s tentative minimum tax? 139) Costa is a single
taxpayer. His regular tax liability was $38,000. For 2017, he reported $190,000
of alternative minimum taxable income. What is his alternative minimum tax? 140)
Selene made $54,300 in 2017 working at the local burger joint, Moon Café. How
much should her employer withhold from her paycheck for FICA taxes if the
calculation is made correctly? 141) Jackson earned a salary of $254,000 in 2017.
What amount of FICA taxes should Jackson’s employer withhold from his paycheck?
142) Harmony is single and was self-employed for the first half of 2017, earning
$18,000 of Schedule C (business) net income. During the second half of the year,
she began working as an employee and earned $38,000 in salary. What amount of
self-employment taxes is Harmony required to pay? 143) Lexa, a single taxpayer,
worked as an employee during the first half of the year earning $65,000 of
salary. Lexa’s employer withheld $4,030 of Social Security tax, $943 of Medicare
tax, and $0 of .9 percent additional Medicare tax. In the second half of the
year, she was self-employed and she reported $180,000 of self-employment income
on her Schedule C. What amount of self-employment taxes and.9 percent additional
Medicare tax is Lexa required to pay on her self-employment income? 144) Atlas
earned $17,300 from his sole proprietorship in 2017. This was his only source of
income. How much in self-employment taxes will Atlas be able to deduct? 145)
Demeter is a single taxpayer. Her AGI in 2017 is $81,200. Demeter may claim a
child tax credit for her daughter Persephone. What amount of child tax credit is
Demeter entitled to claim after any applicable phase-out? 146) Jack paid $5,000
in daycare expenses for his five-year-old daughter so he could work. His AGI for
the year was $37,500 (all earned income). What is the amount of his child and
dependent care credit? 147) Wolfina’s twins, Romulus and Remus, finished their
first year of school at an accredited university in 2017. She paid $10,000 in
qualified educational expenses for Romulus and $2,000 of qualifying expenses for
Remus. Wolfina is a head of household with an AGI of $85,000. What amount of
American opportunity credit may she claim? 148) Akiko and Hitachi (married
filing jointly for 2017) are both educators. They attended a conference to
further their job-related skills. Tuition for the conference was $2,000 for each
person. Their AGI was $118,000. How much lifetime learning credit can they
claim? 149) Julien and Sarah are married, file a joint return, and have two
children, Kaya and Christopher. Kaya just finished her third year at college and
Christopher just finished his first year of graduate school (fifth year of
college). Tuition and books for the past year were $1,800 for Kaya and $5,000
for Christopher. How much can Julien and Sarah claim in educational credits if
their joint AGI was $124,000 for 2017? 150) Sam is 30 years old. In 2017, he
reported an AGI of $12,000, all from his job as a server at the local café. He
is single and has no dependents. What amount of earned income credit may he
claim in 2017? Use Exhibit 8-10 in the text 151) In 2017, John (52 years old)
files as a head of household with one 18-year old dependent (qualifying) child.
John is eligible to claim a $700 American opportunity credit for the year. John
did not have any taxes withheld by his employer during the year and he did not
make any estimated tax payments. After taking credits into account, what is the
amount of John’s taxes payable or refund assuming that his AGI is $26,000 (all
from salary) and his taxable income is $9,000? 152) Clarissa’s gross tax
liability for 2017 is $1,300. She has a $1,500 nonrefundable personal tax
credit, a $750 business tax credit, and a $400 refundable personal tax credit.
Her employer withheld $1,000 from her pay for taxes. What is her net tax due or
refund for this year? 153) In 2017, Shawn’s AGI is $170,000. He earned the
income evenly throughout the year. He owed $24,900 in federal income tax plus
alternative minimum tax of $263, and selfemployment taxes of $2,590. Last year,
he had a gross tax liability of $50,000. What is the minimum quarterly estimated
tax payment Shawn must pay each quarter to avoid underpayment penalties for
2017? 154) Johann had a gross tax liability of $22,508 in 2017, but his employer
only withheld taxes of $19,500. Johann’s gross tax liability was $21,000 in
2016. Calculate Johann’s under/overpayment in each quarter for 2017 tax
purposes. 155) Assume Georgianne underpaid her estimated tax liability by $150
in the first quarter, $500 in the second quarter, $400 in the third quarter, and
$200 in the fourth quarter. Calculate her underpayment penalty for the year,
assuming the federal short-term interest rate is five percent. 156) Keith and
Nicole are married filing joint with two daughters who qualify as dependents.
Their gross income for 2017 is $21,100. Are they required to file a tax return?
How do you know this without memorizing the gross income thresholds? In 2017,
the standard deduction for taxpayers filing a joint return is $12,700 and the
personal exemption is $4,050. 157) During all of 2017, Mr. and Mrs. Clay lived
with their four children (all are under the age of 17). They provided over
one-half of the support for each child. Mr. and Mrs. Clay file jointly for 2017.
Neither is blind, and both are under age 65. They reported the following
tax-related information for the year: (use the tax rate schedules in the text)

Salary income

$125,000

Prize from local radio station

1,500

Medical expenses (no health insurance)

4,000

Real estate taxes

4,200

Alimony paid by Mr. Clay

12,000

State income taxes withheld in 2017

1,800

State income taxes paid with 2017 tax return (return was filed in April, 2018)

1,500

Federal income tax withholding

7,500

Qualified home mortgage interest

11,000

Charitable contributions

4,000

1. What is the Clays’ taxes payable or (refund due) (Ignore the alternative
minimum tax)? 2. What is the Clays’ tentative minimum tax and alternative
minimum tax? McGraw-Hill’s Taxation of Individuals and Business Entities, 2018
Edition, 9e (Spilker) Chapter 9 Business Income, Deductions, and Accounting
Methods 1) The Internal Revenue Code authorizes deductions for trade or business
activities if the expenditure is “ordinary and necessary.” 2) Business
activities are distinguished from personal activities in that business
activities are motivated by the pursuit of profits. 3) The phase “ordinary and
necessary” has been defined to mean that an expense must be essential and
indispensable to the conduct of a business. 4) Reasonable in amount means that
expenditures can be exorbitant as long as the activity is motivated by profit.
5) The test for whether an expenditure is reasonable in amount is whether the
expenditure was for an “arm’s length” amount. 6) Illegal bribes and kickbacks
are not deductible as business expenses but fines imposed by a governmental unit
are deductible as long as the fines are incurred in the ordinary course of
business. 7) Although expenses associated with illegal activities are not
deductible, political contributions can be deducted as long as the donation is
not made to a candidate for public office. 8) When a taxpayer borrows money and
invests the loan proceeds in municipal bonds, the interest paid by the taxpayer
on the debt will not be deductible. 9) Employees cannot deduct the cost of
uniforms if the uniforms are also appropriate for normal wear. 10) Only half the
cost of a business meal is deductible even if the meal is associated with the
active conduct of business. 11) Taxpayers must maintain written contemporaneous
records of business purpose when entertaining clients in order to claim a
deduction for the expenditures. 12) The domestic production activities deduction
is a deduction for the incremental cost of manufacturing tangible assets in the
United States. 13) Qualified production activity income for calculating the
domestic production activities deduction is limited to taxable income for a
business or modified AGI for an individual. 14) The domestic production
activities deduction cannot exceed 50 percent of the wages paid to employees
engaged in domestic manufacturing activities during the year. 15) A loss
deduction from a casualty of a business asset is only available if the asset is
completely destroyed. 16) All taxpayers must account for taxable income using a
calendar year. 17) A short tax year can end on any day of any month other than
December. 18) A fiscal tax year can end on the last day of any month other than
December. 19) A business generally adopts a fiscal or calendar year by using
that year end on the first tax return for the business. 20) Sole proprietorships
must use the same tax year as the proprietor of the business. 21) Even a cash
method taxpayer must consistently use accounting methods that “clearly reflect
income” for tax purposes. 22) The 12-month rule allows taxpayers to deduct the
entire amount of certain prepaid business expenses. 23) The all-events test for
income determines the period in which income will be recognized for tax
purposes. 24) The full-inclusion method requires cash basis taxpayers to include
prepayments for goods or services into realized income. 25) Uniform
capitalization of indirect inventory costs is required for most large taxpayers.
26) Individual proprietors report their business income and deductions on: 1. A)
Form 1065. 2. B) Form 1120S. 3. C) Schedule C. 4. D) Schedule A. 5. E) Form
1041. 27) According to the Internal Revenue Code §162, deductible trade or
business expenses must be one of the following? 1. A) incurred for the
production of investment income. 2. B) ordinary and necessary. 3. C) minimized.
4. D) appropriate and measurable. 5. E) personal and justifiable. 28) Which of
the following expenditures is NOT likely to be allowed as a current deduction
for a landscaping and nursery business? 1. A) cost of fertilizer. 2. B)
accounting fees. 3. C) cost of a greenhouse. 4. D) cost of uniforms for
employees. 5. E) a cash settlement for trade name infringement. 29) The IRS
would most likely apply the arm’s length transaction test to determine which of
the following? 1. A) whether an expenditure is related to a business activity.
2. B) whether an expenditure will be likely to produce income. 3. C) timeliness
of an expenditure. 4. D) reasonableness of an expenditure. 5. E) All of the
choices are correct. 30) Which of the following business expense deductions is
most likely to be unreasonable in amount? 1. A) Compensation paid to the
taxpayer’s spouse in excess of salary payments to other employees. 2. B) Amounts
paid to a subsidiary corporation for services where the amount is in excess of
the cost of comparable services by competing corporations. 3. C) Cost of
entertaining a former client when there is no possibility of any future benefits
from a relation with that client. 4. D) All of the choices are likely to be
unreasonable in amount. 5. E) None of the choices are likely to be unreasonable
in amount. 31) Which of the following is a true statement? 1. A) Interest
expense is not deductible if the loan is used to purchase municipal bonds. 2. B)
Insurance premiums are not deductible if paid for “key man” life insurance. 3.
C) One half of the cost of business meals is not deductible. 4. D) All of the
choices are true. 5. E) None of the choices are true. 32) Which of the following
expenditures is most likely to be deductible for a construction business? 1. A)
A fine for a zoning violation. 2. B) A tax underpayment penalty. 3. C) An “under
the table” payment to a government representative to obtain a better price for
raw materials. 4. D) A payment to a foreign official to expedite an application
for a business permit. 5. E) An arm’s length payment to a related party for
emergency repairs of a sewage line. 33) Which of the following is an explanation
for why insurance premiums on a key employee are not deductible? 1. A) A
deduction for the insurance premium would offset taxable income without the
potential for the proceeds generating taxable income. 2. B) The federal
government does not want to subsidize insurance companies. 3. C) It is
impractical to trace insurance premiums to the receipt of proceeds. 4. D)
Congress presumes that all expenses are not deductible unless specifically
allowed in the Internal Revenue Code. 5. E) This rule was grandfathered from a
time when the Internal Revenue Code disallowed all insurance premiums
deductions. 34) Paris operates a talent agency as a sole proprietorship, and
this year she incurred the following expenses in operating her talent agency.
What is the total deductible amount of these expenditures? $1,000 dinner with a
film producer where no business was discussed. $500 lunch with sister Nicky
where no business was discussed. $700 business dinner with a client but Paris
forgot to keep any records (oops!). $900 tickets to the opera with a client
following a business meeting. 1. A) $450. 2. B) $900. 3. C) $1,100. 4. D)
$1,200. 5. E) $800. 35) Dick pays insurance premiums for his employees. What
type of insurance premium is not deductible as compensation paid to the
employee? 1. A) Health insurance with benefits payable to the employee. 2. B)
Whole life insurance with benefits payable to the employee’s dependents. 3. C)
Group term life insurance with benefits payable to the employee’s dependents. 4.
D) Key man life insurance with benefits payable to Dick. 5. E) All of the
choices are deductible by Dick. 36) Which of the following is a true statement?
1. A) Meals are never deductible as a business expense. 2. B) An employer can
only deduct half of any meals provided to employees. 3. C) The cost of business
meals must be reasonable. 4. D) A taxpayer can only deduct a meal for a client
if business is discussed during the meal. 5. E) None of the choices are true.
37) In order to deduct a portion of the cost of a business meal which of the
following conditions must be met? 1. A) A client (not a supplier or vendor) must
be present at the meal. 2. B) The taxpayer or an employee must be present at the
meal. 3. C) The meal must occur on the taxpayer’s business premises. 4. D) None
of the choices is a condition for the deduction. 5. E) All of the choices are
conditions for a deduction. 38) Which of the following is likely to be a fully
deductible business expense? 1. A) Salaries in excess of the industry average
paid to attract talented employees. 2. B) The cost of employee uniforms that can
be adapted to ordinary personal wear. 3. C) A speeding fine paid by a trucker
who was delivering a rush order. 4. D) The cost of a three-year subscription to
a business publication. 5. E) None of the choices are likely to be deductible.
39) After a business meeting with a prospective client Holly took the client to
dinner and the theatre. Holly paid $290 for the meal and $250 for the theatre
tickets, amounts that were reasonable under the circumstances. What amount of
these expenditures can Holly deduct as a business expense? 1. A) $540 2. B) $415
3. C) $270 4. D) None unless Holly discussed business with the client during the
meal and the entertainment. 5. E) None – the meals and entertainment are not
deductible except during travel. 40) This year Clark leased a car to drive
between his office and various work sites. Clark carefully recorded that he
drove the car 23,000 miles this year and paid $7,200 of operating expenses
($2,700 for gas, oil, and repairs, and $4,500 for lease payments). What amount
of these expenses may Clark deduct as business expenses? 1. A) $7,200 2. B)
Clark cannot deduct these costs because taxpayers must use the mileage method to
determine any transportation deduction. 3. C) $4,500 4. D) $2,700 5. E) Clark is
not entitled to any deduction if he used the car for any personal trips. 41)
Shelley is employed in Texas and recently attended a two-day business conference
in New Jersey. Shelley spent the entire time at the conference and documented
her expenditures (described below). What amount can Shelley deduct as an
employee business expense (before considering any miscellaneous itemized
deduction limitations)?

Airfare to New Jersey

$

2,000

Meals

220

Lodging in New Jersey

450

Rental car

180

1. A) $2,850 2. B) $2,740 3. C) $1,850 if Shelley’s AGI is $50,000 4. D) All of
the expenses are deductible if Shelley is reimbursed under an accountable plan.
5. E) None of the expenses are deductible – only employers can deduct travel
expenses. 42) Which of the following is a true statement? 1. A) Meals, lodging,
and incidental expenditures are only deductible if the taxpayer is away from
home overnight while traveling. 2. B) Meals are deductible for an employee who
is forced to work during the lunch hour. 3. C) When a taxpayer travels solely
for business purposes, only half of the costs of travel are deductible. 4. D) If
travel has both business and personal aspects, the cost of transportation is
always deductible but the deductibility of lodging depends upon whether business
is conducted that day. 5. E) None of the choices are true. 43) Which of the
following is a true statement about travel that has both business and personal
aspects? 1. A) Transportation costs are always fully deductible. 2. B) Meals are
not deductible for this type of travel. 3. C) Only half of the cost of meals and
transportation is deductible. 4. D) The cost of lodging, and incidental
expenditures is limited to those incurred during the business portion of the
travel. 5. E) None of the choices are correct. 44) John is a self-employed
computer consultant who lives and works in Dallas. John paid for the following
activities in conjunction with his business. Which is not deductible in any
amount? 1. Dinner with a potential client where the client’s business was
discussed. 2. A trip to Houston to negotiate a contract. 3. A seminar in Houston
on new developments in the software industry. 4. A trip to New York to visit a
school chum who is also interested in computers. 5. A) 1 only. 6. B) 2 only. 7.
C) 3 only. 8. D) 4 only. 9. E) None of the choices are correct. 45) Which of the
following expenses are completely deductible? 1. A) $1,000 spent on compensating
your brother for a personal expense. 2. B) $50 spent on meals while traveling on
business. 3. C) $2,000 spent by the employer on reimbursing an employee for
entertainment. 4. D) All of the expenses are fully deductible. 5. E) None of the
expenses can be deducted in full. 46) Ed is a self-employed heart surgeon who
has incurred the following reasonable expenses. How much can Ed deduct? $1,000
in airfare to repair investment rental property in Colorado. $500 in meals while
attending a medical convention in New York. $300 for tuition for an investment
seminar “How to pick stocks.” $100 for tickets to a football game with hospital
administrators to celebrate successful negotiation of a surgical contract
earlier in the day. The correct answer is ________. 1. A) $1,300 “for AGI” 2. B)
$1,300 “for AGI” and $300 “from AGI” 3. C) $480 “for AGI” 4. D) $80 “for AGI”
and $1,300 “from AGI” 5. E) None of the choices are correct. 47) Ronald is a
cash method taxpayer who made the following expenditures this year. Which
expenditure is completely deductible in this period as a business expense? 1. A)
$4,000 for rent on his office that covers the next 24 months. 2. B) $3,000 for a
new watch for the mayor to keep “good relations” with city hall. 3. C) $2,500
for professional hockey tickets distributed to a customer to generate “goodwill”
for his business. 4. D) $55 to collect an account receivable from a customer who
has failed to pay for services rendered. 5. E) None of the choices are
completely deductible. 48) George operates a business that generated adjusted
gross income of $250,000 and taxable income of $170,000 this year (before the
domestic production activities deduction). Included in income was $70,000 of
qualified production activities income. George paid $60,000 of wages to
employees engaged in domestic manufacturing. What domestic production activities
deduction will George be eligible to claim this year? 1. A) $5,400. 2. B)
$6,300. 3. C) $7,200. 4. D) $15,300. 5. E) $22,500. 49) Which of the following
is a true statement about the domestic production activities deduction? 1. A)
This deduction is determined by the amount of goods manufactured in the United
States for export abroad. 2. B) The deduction is calculated as a percentage of
the cost of goods manufactured in the United States. 3. C) This deduction
represents a subsidy to taxpayers who manufacture or construct goods in the
United States. 4. D) The domestic production activities deduction is not
affected by the cost of labor. 5. E) All of the choices are true. 50) Qualified
production activities income is defined as follows for purposes of the domestic
production activities deduction: 1. A) net income from selling or leasing
property the taxpayer manufactured in the United States. 2. B) revenue from
selling or leasing property the taxpayer manufactured in the United States. 3.
C) revenue from selling or leasing property the taxpayer manufactured in the
United States but the revenue was less than 50 percent of qualifying wages used
in the production. 4. D) 6 percent of revenue from selling or leasing property
the taxpayer manufactured in the United States. 5. E) None of the choices are
correct. 51) Riley operates a plumbing business and this year the 3-year old van
he used in the business was destroyed in a traffic accident. The van was
originally purchased for $20,000 and the adjusted basis was $5,800 at the time
of the accident. Although the van was worth $6,000 at the time of accident,
insurance only paid Riley $1,200 for the loss. What is the amount of Riley’s
casualty loss deduction? 1. A) $6,000. 2. B) $14,000. 3. C) $5,800. 4. D)
$4,600. 5. E) $5,300. 52) Don operates a taxi business, and this year one of his
taxis was damaged in a traffic accident. The taxi was originally purchased for
$32,000 and the adjusted basis was $2,000 at the time of the accident. The taxi
was repaired at a cost of $2,500 and insurance reimbursed Don $700 of this cost.
What is the amount of Don’s casualty loss deduction? 1. A) $1,300. 2. B) $2,500.
3. C) $1,800. 4. D) $2,000. 5. E) Don is not eligible for a casualty loss
deduction. 53) Which of the following cannot be selected as a valid tax year
end? 1. A) December 31st. 2. B) January 31st. 3. C) The last Friday of the last
week of June. 4. D) December 15th. 5. E) A tax year can end on any of these
days. 54) Bill operates a proprietorship using the cash method of accounting,
and this year he received the following payments: $100 in cash from a customer
for services rendered this year. a promise to pay $200 from a customer for
services rendered this year. tickets to a football game worth $250 as payment
for services performed last year. a check for $170 for services rendered this
year that Bill forgot to cash. How much income should Bill realize on Schedule
C? 1. A) $100. 2. B) $300. 3. C) $350. 4. D) $270. 5. E) $520. 55) Clyde
operates a sole proprietorship using the cash method. This year Clyde made the
following expenditures: $480 to U.S. Bank for 12 months of interest accruing on
a business loan from September 1st of this year through August 31st of next
year. $600 for 12 months of property insurance beginning on July 1 of this year.
What is the maximum amount Clyde can deduct this year? 1. A) $760. 2. B) $600.
3. C) $480. 4. D) $160. 5. E) $360. 56) Beth operates a plumbing firm. In August
of last year she signed a contract to provide plumbing services for a
renovation. Beth began the work that August and finished the work in December of
last year. However, Beth didn’t bill the client until January of this year and
she didn’t receive the payment until March when she received payment in full.
When should Beth recognize income under the accrual method of accounting? 1. A)
In August of last year. 2. B) In December of last year. 3. C) In January of this
year. 4. D) In March of this year. 5. E) In April of this year. 57) Jim operates
his business on the accrual method and this year he received $4,000 for services
that he intends to provide to his clients next year. Under what circumstances
can Jim defer the recognition of the $4,000 of income until next year? 1. A) Jim
can defer the recognition of the income if he absolutely promises not to provide
the services until next year. 2. B) Jim must defer the recognition of the income
until the income is earned. 3. C) Jim can defer the recognition of the income if
he has requested that the client not pay for the services until the services are
provided. 4. D) Jim can elect to defer the recognition of the income if the
income is not recognized for financial accounting purposes. 5. E) Jim can never
defer the recognition of the prepayments of income. 58) When does the all-events
test under the accrual method require the recognition of income from the sale of
goods? 1. A) When the title of the goods passes to the buyer. 2. B) When the
business receives payment. 3. C) When payment is due from the buyer. 4. D) The
earliest of the above three dates. 5. E) None of the choices are correct. 59)
Colbert operates a catering service on the accrual method. In November of year 1
Colbert received a payment of $9,000 for 18 months of catering services to be
rendered from December 1st of year 1 through May 31st year 3. When must Colbert
recognize the income if his accounting methods are selected to minimize income
recognition? 1. A) $500 is recognized in year 1, $6,000 in year 2, and $2,500 in
year 3. 2. B) $500 is recognized in year 1 and $8,500 in year 2. 3. C) $9,000 is
recognized in year 3. 4. D) $2,500 is recognized in year 1 and $6,500 in year 2.
5. E) $9,000 is recognized in year 1. 60) Which of the following types of
transactions may not typically be accounted for using the cash method? 1. A)
sales of inventory. 2. B) services. 3. C) purchases of machinery. 4. D) payments
of debt. 5. E) sales of securities by an investor. 61) Which of the following
types of expenditures is not subject to capitalization under the UNICAP rules?
1. A) Selling expenditures. 2. B) Cost of manufacturing labor. 3. C)
Compensation of managers who supervise production. 4. D) Cost of raw materials.
5. E) All of the choices are subject to capitalization under the UNICAP rules.
62) Kip started a wholesale store this year selling bulk peanut butter. In
January of this year Kip purchased an initial five tubs of peanut butter for a
total cost of $5,000. In July Kip purchased three tubs for a total cost of
$6,000. Finally, in November Kip bought two tubs for a total cost of $1,000. Kip
sold six tubs by year end. What is Kip’s ending inventory under the FIFO
cost-flow method? 1. A) $12,000. 2. B) $6,000. 3. C) $5,000. 4. D) $2,500. 5. E)
$1,000. 63) Mike started a calendar year business on September 1st of this year
by paying 12 months rent on his shop at $1,000 per month. What is the maximum
amount of rent that Mike can deduct this year under each type of accounting
method? 1. A) $12,000 under the cash method and $12,000 under the accrual
method. 2. B) $4,000 under the cash method and $12,000 under the accrual method.
3. C) $12,000 under the cash method and $4,000 under the accrual method. 4. D)
$4,000 under the cash method and $4,000 under the accrual method. 5. E) $4,000
under the cash method and zero under the accrual method. 64) Which of the
following is a payment liability? 1. A) Tort claims. 2. B) Refunds. 3. C)
Insurance premiums. 4. D) Real estate taxes. 5. E) All of the choices are
correct. 65) Joe is a self-employed electrician who operates his business on the
accrual method. This year Joe purchased a shop for his business, and for the
first time at year end he received a bill for $4,500 of property taxes on his
shop. Joe didn’t pay the taxes until after year end but prior to filing his tax
return. Which of the following is a true statement? 1. A) If he elects to treat
the taxes as a recurring item, Joe can accrue and deduct $4,500 of taxes on the
shop this year. 2. B) The taxes are a payment liability. 3. C) The taxes would
not be deductible if Joe’s business was on the cash method. 4. D) Unless Joe
makes an election, the taxes are not deductible this year. 5. E) All of the
choices are true. 66) Brad operates a storage business on the accrual method. On
July 1 Brad paid $48,000 for rent on his storage warehouse and $18,000 for
insurance on the contents of the warehouse. The rent and insurance covers the
next 12 months. What is Brad’s deduction for the rent and insurance? 1. A)
$48,000 for the rent and $18,000 for the insurance. 2. B) $24,000 for the rent
and $18,000 for the insurance. 3. C) $24,000 for the rent and $9,000 for the
insurance. 4. D) $48,000 for the rent and $9,000 for the insurance. 5. E) None
of the choices are true. 67) Ajax Computer Company is an accrual method calendar
year taxpayer. Ajax has never advertised in the national media prior to this
year. In November of this year, however, Ajax paid $1 million for television
advertising time during a “super” sporting event scheduled to take place in
early February of next year. In addition, in November of this year the company
paid $500,000 for advertising time during a professional golf tournament which
will occur once in April of next year. What amount of these payments, if any,
can Ajax deduct this year? 1. A) $1 million. 2. B) $500,000. 3. C) $1.5 million.
4. D) $1.5 million only if the professional golf tournament is played before
April 15. 5. E) No deduction can be claimed this year. 68) Big Homes Corporation
is an accrual method calendar year taxpayer that manufactures and sells modular
homes. This year for the first time Big Homes was forced to offer a rebate on
the purchase of new homes. At year end, Big Homes had paid $12,000 in rebates
and was liable for an additional $7,500 in rebates to buyers. What amount of the
rebates, if any, can Big Homes deduct this year? 1. A) $12,000 because rebates
are payment liabilities. 2. B) $19,500 because Big Homes is an accrual method
taxpayer. 3. C) $19,500 if this amount is not material, Big Homes expects to
continue the practice of offering rebates in future years, and Big Homes expects
to pay the accrued rebates before filing their tax return for this year. 4. D)
$12,000 because the $7,500 liability is not fixed and determinable. 5. E) Big
Homes is not entitled to a deduction because rebates are against public policy.
69) Jones operates an upscale restaurant and he pays experienced cooks $35,000
per year. This year he hired his son as an apprentice cook. Jones agreed to pay
his son $40,000 per year. Which of the following is a true statement about this
transaction? 1. A) Jones will be allowed to deduct $40,000 only if his son
eventually develops into an expert cook. 2. B) Jones will be allowed to accrue
$40,000 only if he pays his son in cash. 3. C) Jones will be allowed to deduct
$35,000 as compensation and another $5,000 can be deducted as an employee gift.
4. D) Jones can only deduct $20,000 because an apprentice cook is only worth
half as much as an experienced cook. 5. E) None of the choices are true. 70)
Manley operates a law practice on the accrual method and calendar year. At the
beginning of the year Manley’s firm had an allowance for doubtful accounts with
a balance of $15,000. At the end of the year, Manley recorded bad debt expense
of $23,000 and the balance of doubtful accounts had increased to $18,000. What
is Manley’s deduction for bad debt expense this year? 1. A) $23,000. 2. B)
$3,000. 3. C) $26,000. 4. D) $5,000. 5. E) $20,000. 71) Which of the following
is NOT considered a related party for the purpose of limitation on accruals to
related parties? 1. A) Spouse when the taxpayer is an individual. 2. B) A
partner when the taxpayer is a partnership. 3. C) Brother when the taxpayer is
an individual. 4. D) A minority shareholder when the taxpayer is a corporation.
5. E) All of the parties in all the choices are related parties. 72) Which of
the following is a true statement about accounting for business activities? 1.
A) An overall accounting method can only be adopted with the permission of the
Commissioner. 2. B) An overall accounting method is initially adopted on the
first return filed for the business. 3. C) The cash method can only be adopted
by individual taxpayers. 4. D) The accrual method can only be adopted by
corporate taxpayers. 5. E) None of the choices are true. 73) Which of the
following is a true statement about impermissible accounting methods? 1. A) An
impermissible method is adopted by using the method to report results for two
consecutive years. 2. B) An impermissible method may never be used by a
taxpayer. 3. C) Cash method accounting is an impermissible method for
partnerships and Subchapter S electing corporations. 4. D) There is no
accounting method that is impermissible. 5. E) None of the choices are true. 74)
Todd operates a business using the cash basis of accounting. At the end of last
year, Todd was granted permission to switch his sales on account to the accrual
method. Last year Todd made $420,000 of sales on account and $64,000 was
uncollected at the end of the year. What is Todd’s §481 adjustment for this
year? 1. A) increase income by $420,000. 2. B) increase income by $16,000. 3. C)
increase expenses by $64,000. 4. D) increase expenses by $420,000. 5. E) Todd
has no §481 adjustment this year. 75) Which of the following is a true statement
about a request for a change in accounting method? 1. A) Some requests are
automatically granted. 2. B) Most requests require the permission of the
Commissioner. 3. C) Many requests require payment of a fee and a good business
purpose for the change. 4. D) Form 3115 is required to be filed with a request
for change in accounting method. 5. E) All of the choices are true. 76) Smith
operates a roof repair business. This year Smith’s business generated cash
receipts of $32,000 and Smith made the following expenditures associated with
his business:

Advertising

$

500

Car and truck expenses

1,360

Depreciation

3,200

Employee compensation

5,000

Education

1,000

The education expense was for a two-week, nighttime course in business
management. Smith believes the expenditure should qualify as an ordinary and
necessary business expense. What net income should Smith report from his
business? Smith is on the cash method and calendar year. 77) Bryon operates a
consulting business and he usually works alone. However, during the summer Bryon
will sometimes hire undergraduate students to collect data for his projects.
This past summer Bryon hired Fred, the son of a prominent businessman, for a
part-time summer job. The summer job usually pays about $17,000, but Bryon paid
Fred $27,000 to gain favor with Fred’s father. What amount of Fred’s summer
wages can Bryon deduct for tax purposes? Bryon is on the cash method and
calendar year. 78) Werner is the president and CEO of Acme, Inc. and this year
he took a prospective client to dinner. During the dinner the President and the
client discussed a proposed contract for over $6 million and personal matters.
After dinner the CEO took the client to a football game and no business was
discussed. The CEO paid $1,220 for an expensive dinner and spent $600 for
tickets to the game. What is the deductible amount of these expenses? 79)
Crystal operates a business that provides typing and delivery services. This
year Crystal spent $2,500 to purchase special shirts that identify her employees
and provide some notoriety for her business. The shirts are especially colorful
and include logos on the front pocket and back. Besides salary payments, Crystal
also compensates her employees by offering to pay whole life insurance premiums
for any that want to provide insurance coverage for their beneficiaries. This
year Crystal paid $5,000 in life insurance premiums. What amount of these
payments can Crystal deduct? Crystal is on the cash method and calendar year.
80) Judy is a self-employed musician who performs for a variety of events. This
year Judy was fined $250 by the city for violating the city’s noise ordinance
with a relatively loud performance. As a consequence, Judy contributed $1,000 to
a campaign committee formed to recall the city’s mayor. Judy normally hires
three part-time employees to help her schedule events and transport equipment.
Judy paid a total of $33,000 to her employees through June of this year. In June
Judy fired her part-time employees and hired her husband to replace them.
However, Judy paid him $55,000 rather than $33,000. Judy is on the cash method
and calendar year, and she wants to know what amount of these expenditures is
deductible as business expenses. 81) Danny owns an electronics outlet in Dallas.
This year he paid $600 to register for a four-day course in management in
Chicago. Danny paid $800 in airfare and $1,000 for five nights lodging. After
the course, Danny spent the last day sightseeing. During the trip, Danny also
paid $140 a day for meals, and $80 a day for a rental car. What amount of these
travel expenditures may Danny deduct as business expenses? 82) Sam operates a
small chain of pizza outlets in Fort Collins, Colorado. In November of this year
Sam decided to attend a two-day management training course. Sam could choose to
attend the course in Denver or Los Angeles. Sam decided to attend the course in
Los Angeles and take an eight-day vacation immediately after the course. Sam
reported the following expenditures from the trip:

Course Tuition

$

2,500

Air Fare

800

Hotel (10 nights)

1,200

Rental car (10 days)

900

Meals (10 days)

1,500

What amount of travel expenditures can Sam deduct? 83) Gabby operates a pizza
delivery service. This year she paid delivery personnel $18,000 in salary. She
carefully documented the business use of the auto (11,700 miles this year) and
her $7,350 of vehicle expenses (for gas, oil, repairs, and auto lease payments).
What amount of these expenses may Gabby deduct as business expenses? Gabby is on
the cash method and calendar year. 84) Alvin is a self-employed sound technician
who reports on the cash method and calendar year. Alvin has a shop in Austin,
Texas, but he spends much of his time away from his shop traveling to and from
various concerts around the country. Alvin leases a truck to move his equipment
around the country and this year he spent $12,000 in lease payments and paid
$18,000 for gas, oil, and repairs. Alvin keeps records of his personal use of
the truck and he estimates that 6,000 of the total 36,000 miles put on the truck
this year were for personal trips. What amount of these expenses may Alvin
deduct as business expenses? 85) Sandy Bottoms Corporation generated taxable
income (before the domestic manufacturing deduction) of $3 million this year.
The total income included $2,350,000 of qualified production activities income.
The company paid $460,000 in W-2 wages to generate the qualified production
activity income. What is Sandy Bottom’s domestic manufacturing deduction for the
year? 86) Rock Island Corporation generated taxable income (before the domestic
production activities deduction) of $10 million this year. The total income
included $4,500,000 of qualified production activities income. The company paid
$500,000 in W-2 wages to generate the qualified production activity income. What
is Rock Island’s domestic production activities deduction for the year? 87) Otto
operates a bakery and is on the cash method and calendar year. This year one of
Otto’s ovens caught fire and was partially destroyed. Otto bought it a few years
ago for $20,000 and claimed depreciation of $12,000 up to the fire. Otto was
charged $4,400 for repairs to the oven but the insurance company paid Otto
$1,500 for the damage. What is Otto’s casualty loss deduction? 88) David
purchased a deli shop on February 1st of last year and began to operate it as a
sole proprietorship. David reports his personal taxes using the cash method over
a calendar year, and he wants to use the cash method and fiscal year for his
sole proprietorship. He has summarized his receipts and expenses through January
31st of this year as follows: Receipts

Expenses

February thru. December last year

$112,000

$84,500

January this year

10,400

6,200

What income should David report from his sole proprietorship? 89) Marilyn
operates a day care center as a cash-method sole proprietorship. On August 1st
of this year Marilyn received a prepayment of $4,000 for child care services to
be rendered evenly over the next 20 months. How much income must Marilyn
recognize this year if she is attempting to minimize her tax burden? 90) Mike
operates a fishing outfitter as an accrual-method sole proprietorship. On March
1st of this year Mike received $15,000 for three outfitting trips. This is the
first time Mike agreed to such a payment and he is obligated to outfit one trip
per year for the next three summers beginning this year. How much income must
Mike recognize in each of the next three years if he is attempting to minimize
his tax burden? 91) Anne is a self-employed electrician who reports her business
income using the accrual method over a calendar year. On September 1st of this
year Anne paid $2,280 of interest on a loan. The interest accrues evenly over 19
months ($120 per month) from June 1st of this year through December 31st of next
year. In addition, on September 1st Anne also paid $2,700 for 18 months of
professional liability insurance ($150 per month). What amount of interest and
insurance can Anne deduct this year? 92) Bob operates a clothing business using
the accrual method over a calendar year. In October of last year, Bob contracted
with his father, Tim, for consulting advice. Tim is a cash basis calendar year
taxpayer and he billed Bob for $6,000 of consulting fees. This amount was
comparable to amounts charged by other consultants (a reasonable amount). Bob
paid $2,500 of the consulting fee by December 31st of last year, but the
remaining $3,500 was not paid until January of this year. When can Bob deduct
the consulting fee? 93) Colby Motors uses the accrual method and reports on a
calendar year. In December of last year, Colby acquired auto repair equipment.
As part of the acquisition, Colby purchased a warranty agreement that requires
the seller of the equipment to provide repairs on the equipment for three years.
Colby paid the cost of the warranty, $15,000, in January of this year. What can
Colby deduct for the cost of the warranty on the tax return for last year? 94)
Ranger Athletic Equipment uses the accrual method and reports on a calendar
year. Ranger provides two-year warranties on all sales of equipment. This year
Ranger estimated warranty expense for book purposes, and he accrued $1 million
of warranty expenses. However, during the year Ranger only spent $400,000
repairing equipment under the warranty. What can Ranger deduct for warranty
expense on the tax return for this year? 95) Blackwell Manufacturing uses the
accrual method and reports on a calendar year. This year a customer was injured
when visiting the Blackwell factory. The customer sued the company for $500,000,
and the case is still being litigated. However, Blackwell’s attorney expects
that the company will pay at least $250,000 to settle the claim. What amount, if
any, can Blackwell deduct for the expected claim settlement this year? 96) Joe
operates a plumbing business that uses the accrual method and reports on a
calendar year. This year Joe signed a $50,000 binding contract with Brian. Under
the contract Brian will provide Joe with up to 2,000 hours of vehicle repairs at
$25 per hour. This year Brian provided 200 hours of repair services and billed
Joe for $5,000. At year end Joe had not paid Brian for the services. What
amount, if any, can Joe deduct for the repair services this year? 97) Shadow
Services uses the accrual method and reports on a calendar year. This year
Shadow agreed to a uniform cleaning contract with Odie Cleaning. Under the
contract Odie bills Shadow for cleaning services as the services are provided.
At year end Shadow paid Odie $2,350 for the services rendered during the year.
In addition, Shadow paid Odie $700 for cleaning services expected in January of
next year. What amount, if any, can Shadow deduct for the cleaning services this
year? 98) Murphy uses the accrual method and reports on a calendar year. This
year Murphy signed a binding contract to provide consulting services to Kirby
beginning next year. Murphy incurred $15,000 to train his staff for this
particular project. In addition, Murphy estimates that he will incur another
$60,000 to complete the Kirby contract. What amount, if any, can Murphy deduct
this year for the services expected to be rendered next year? 99) Taffy Products
uses the accrual method and reports on a calendar year. On July 1st of this year
Taffy paid $48,000 for warehouse rent and $18,000 for insurance on the contents
of their warehouse. The rent and insurance covers the next 12 months. What
amount, if any, can Taffy deduct for rent and insurance this year? McGraw-Hill’s
Taxation of Individuals and Business Entities, 2018 Edition, 9e (Spilker)
Chapter 10 Property Acquisition and Cost Recovery 1) Like financial accounting,
most acquired business property must be capitalized for tax purposes. 2) Tax
cost recovery methods include depreciation, amortization, and depletion. 3) If a
business mistakenly claims too little depreciation, the business must only
reduce the asset’s basis by the depreciation actually taken rather than the
amount of the allowable depreciation. 4) An asset’s capitalized cost basis
includes only the actual purchase price; whereas expenses to purchase, prepare
the asset for use, and begin using the asset are immediately expensed. 5) The
basis for a personal use asset converted to business use is the lesser of the
asset’s cost basis or fair market value on the date of the transfer or
conversion. 6) Depreciation is currently computed under the Modified Accelerated
Cost Recovery System (MACRS). 7) The 200 percent or double declining balance
method is allowable for five and seven-year property. 8) Taxpayers may use
historical data to determine the recovery period for tax depreciation. 9)
Taxpayers use the half-year convention for all assets. 10) If a taxpayer places
only one asset (a building) in service during the fourth quarter of the year,
the mid-quarter convention must be used. 11) The MACRS depreciation tables
automatically switch to the straight-line method when the straight-line method
yields a higher annual depreciation amount than the declining balance method.
12) If tangible personal property is depreciated using the half-year convention
and is disposed of during the first quarter of a subsequent year, the taxpayer
must use the mid-quarter convention for the year of disposition. 13) If a
machine (seven-year property) being depreciated using the half-year convention
is disposed of during the seventh year, a taxpayer must multiply the appropriate
depreciation percentage from the MACRS table percentage by 50 percent to
calculate the depreciation expense properly. 14) Real property is always
depreciated using the straight-line method. 15) The mid-month convention applies
to real property in the year of acquisition and disposition. 16) All taxpayers
may use the §179 immediate expensing election on certain property. 17) The §179
immediate expensing election phases out based upon a taxpayer’s taxable income.
18) The §179 immediate expensing election phases out based upon the amount of
tangible personal property a taxpayer places in service during the year. 19)
Property expensed under the §179 immediate expensing election is not included in
the 40 percent test to determine whether the mid-quarter convention must be
used. 20) In general, a taxpayer should select longer-lived property for the
§179 immediate expensing election. 21) Occasionally bonus depreciation is used
as a stimulus tool by tax policy makers. 22) Business assets that tend to be
used for both business and personal purposes are referred to as listed property.
23) If the business use percentage for listed property falls below 50 percent,
the only adjustment is all future depreciation must be calculated under the
straight-line method. 24) Significant limits are placed on the depreciation of
luxury automobiles. 25) The alternative depreciation system requires both a
slower method of recovery and longer recovery periods. 26) The method for tax
amortization is always the straight-line method. 27) All assets subject to
amortization have the same recovery period. 28) Goodwill and customer lists are
examples of §197 amortizable assets. 29) Taxpayers may always expense a portion
of start-up costs and organizational expenditures. 30) Businesses may
immediately expense research and experimentation expenditures or they may elect
to capitalize these costs and amortize them using the straight-line method over
a period of not less than 60 months. 31) The manner in which a business
amortizes a patent or copyright is the same whether the business directly
purchases the patent or copyright or whether it self-creates the intangible. 32)
Depletion is the method taxpayers use to recover their capital investment in
natural resources. 33) In general, major integrated oil and gas producers may
take the greater of cost or percentage depletion. 34) Cost depletion is
available to all natural resource producers. 35) Businesses deduct percentage
depletion when they sell the natural resource and they deduct cost depletion in
the year they produce or extract the natural resource. 36) Tax cost recovery
methods do not include: 1. A) Amortization. 2. B) Capitalization. 3. C)
Depletion. 4. D) Depreciation. 5. E) All of the choices are tax cost recovery
methods. 37) Which of the following business assets is not depreciated? 1. A)
Automobile 2. B) Building 3. C) Patent 4. D) Machinery 5. E) All of the assets
are depreciated. 38) An office desk is an example of: 1. A) Personal property.
2. B) Personal-use property. 3. C) Real property. 4. D) Business property. 5. E)
Personal property and business property. 39) An example of an asset that is both
personal-use and personal property is: 1. A) A computer used solely to email
company employees regarding company activities. 2. B) A storage building used by
the CEO to store personal records. 3. C) A computer used solely to monitor the
CEO’s investments and to complete her Form 1040. 4. D) A company airplane used
by the CEO for business travel. 5. E) All of the assets are personal-use and
personal property. 40) Which of the following is not usually included in an
asset’s tax basis? 1. A) Purchase price 2. B) Sales tax 3. C) Shipping 4. D)
Installation costs 5. E) All of the choices are included in an asset’s tax
basis. 41) Which of the following would be considered an improvement rather than
a routine maintenance? 1. A) Oil change 2. B) Engine overhaul 3. C) Wiper blade
replacement 4. D) Air filter change 42) Tax depreciation is currently calculated
under what system? 1. A) Sum of the years digits 2. B) Accelerated cost recovery
system 3. C) Modified accelerated cost recovery system 4. D) Straight line
system 5. E) None of the choices are correct. 43) Which is not an allowable
method under MACRS? 1. A) 150 percent declining balance 2. B) 200 percent
declining balance 3. C) Straight line 4. D) Sum of the years digits 5. E) All of
the choices are allowable methods under MACRS. 44) Which of the allowable
methods allows the most accelerated depreciation? 1. A) 150 percent declining
balance 2. B) 200 percent declining balance 3. C) Straight line 4. D) Sum of the
years digits 5. E) None of the methods would allow accelerated depreciation. 45)
How is the recovery period of an asset determined? 1. A) Estimated useful life
2. B) Treasury regulation 3. C) Revenue Procedure 87-56 4. D) Revenue Ruling
87-56 5. E) None of the choices are correct. 46) Which of the following
depreciation conventions are not used under MACRS? 1. A) Full-month 2. B)
Half-year 3. C) Mid-month 4. D) Mid-quarter 5. E) All of the choices are used
under MACRS. 47) Which depreciation convention is the general rule for tangible
personal property? 1. A) Full-month 2. B) Half-year 3. C) Mid-month 4. D)
Mid-quarter 5. E) None of the choices are conventions for tangible personal
property. 48) The MACRS recovery period for automobiles and computers is: 1. A)
3 years. 2. B) 5 years. 3. C) 7 years. 4. D) 10 years. 5. E) None of the choices
are correct. 49) Lax, LLC purchased only one asset during the current year (a
full 12-month tax year). Lax placed in service computer equipment (5-year
property) on August 26 with a basis of $20,000. Calculate the maximum
depreciation expense for the current year (ignoring §179 and bonus
depreciation). (Use MACRS Table 1 in the text) 1. A) $2,000. 2. B) $2,858. 3. C)
$3,000. 4. D) $4,000. 5. E) None of the choices are correct. 50) Sairra, LLC
purchased only one asset during the current year (a full 12-month tax year).
Sairra placed in service furniture (7-year property) on April 16 with a basis of
$25,000. Calculate the maximum depreciation expense for the current year?
(ignoring §179 and bonus depreciation). (Use MACRS Table 1 in the text) (Round
final answer to the nearest whole number) 1. A) $1,786. 2. B) $3,573. 3. C)
$4,463. 4. D) $5,000. 5. E) None of the choices are correct. 51) Beth’s business
purchased only one asset during the current year (a full 12-month tax year).
Beth placed in service machinery (7-year property) on December 1 with a basis of
$50,000. Calculate the maximum depreciation expense (ignoring §179 and bonus
depreciation). (Use MACRS Table 2 in the text) 1. A) $1,785. 2. B) $2,500. 3. C)
$7,145. 4. D) $10,000. 5. E) None of the choices are correct. 52) Deirdre’s
business purchased two assets during the current year (a full 12-month tax
year). Deirdre placed in service computer equipment (5-year property) on January
20 with a basis of $15,000 and machinery (7-year property) on October 1 with a
basis of $15,000. Calculate the maximum depreciation expense (ignoring §179 and
bonus depreciation). (Use MACRS Table 2 in the text) (Round final answer to the
nearest whole number) 1. A) $1,286. 2. B) $5,144. 3. C) $5,786. 4. D) $6,000. 5.
E) None of the choices are correct. 53) Suvi, Inc. purchased two assets during
the current year (a full 12-month tax year). Suvi placed in service computer
equipment (5-year property) on August 10 with a basis of $20,000 and machinery
(7-year property) on November 18 with a basis of $10,000. Calculate the maximum
depreciation expense (ignoring §179 and bonus depreciation). (Use MACRS Table 1
in the text) (Round final answer to the nearest whole number) 1. A) $857. 2. B)
$3,357. 3. C) $5,429. 4. D) $6,000. 5. E) None of the choices are correct. 54)
Wheeler LLC purchased two assets during the current year (a full 12-month tax
year). Wheeler placed in service computer equipment (5-year property) on
November 16 with a basis of $15,000 and furniture (7-year property) on April 20
with a basis of $11,000. Calculate the maximum depreciation expense (ignoring
§179 and bonus depreciation). (Use MACRS Table 2 in the text) (Round final
answer to the nearest whole number) 1. A) $1,285. 2. B) $2,714. 3. C) $4,572. 4.
D) $5,200. 5. E) None of the choices are correct. 55) Tasha LLC purchased
furniture (7-year property) on April 20 for $20,000 and used the mid-quarter
convention. Tasha did not take §179 or bonus depreciation in the year it
acquired the furniture. During the current year, which is the fourth year Tasha
LLC owned the property, the property was disposed of on December 15. Calculate
the maximum depreciation expense. (Use MACRS Table 2 in the text) EXHIBIT 10-6
in the text (Round final answer to the nearest whole number) 1. A) $898. 2. B)
$2,095. 3. C) $2,461. 4. D) $2,394. 5. E) None of the choices are correct. 56)
Anne LLC purchased computer equipment (5-year property) on August 29 for $30,000
and used the half-year convention. Anne LLC did not take §179 or bonus
depreciation in the year it acquired the computer equipment. During the current
year, which is the fourth year Anne LLC owned the property, the property was
disposed of on January 15. Calculate the maximum depreciation expense. (Use
MACRS Table 1 in the text) 1. A) $432. 2. B) $1,728. 3. C) $1,874. 4. D) $3,456.
5. E) None of the choices are correct. 57) Poplock LLC purchased a warehouse and
land during the current year for $350,000. The purchase price was allocated as
follows: $275,000 to the building and $75,000 to the land. The property was
placed in service on August 12. Calculate Poplock’s maximum depreciation for
this first year. (Use MACRS Table 5 in the text) (Round final answer to the
nearest whole number) 1. A) $2,648. 2. B) $3,371. 3. C) $3,751. 4. D) $4,774. 5.
E) None of the choices are correct. 58) Tom Tom LLC purchased a rental house and
land during the current year for $150,000. The purchase price was allocated as
follows: $100,000 to the building and $50,000 to the land. The property was
placed in service on May 22. Calculate Tom Tom’s maximum depreciation for this
first year. (Use MACRS Table 3 in the text) 1. A) $1,605. 2. B) $2,273. 3. C)
$2,408. 4. D) $3,410. 5. E) None of the choices are correct. 59) Simmons LLC
purchased an office building and land several years ago for $250,000. The
purchase price was allocated as follows: $200,000 to the building and $50,000 to
the land. The property was placed in service on October 2. If the property is
disposed of on February 27 during the 10th year, calculate Simmons’ maximum
depreciation in the 10th year. (Use MACRS Table 5 in the text) EXHIBIT 10-6 in
the text 1. A) $641. 2. B) $909. 3. C) $5,128. 4. D) $7,346. 5. E) None of the
choices are correct. 60) Which of the following assets are eligible for §179
expensing? 1. A) Used office machinery 2. B) Qualified leasehold improvements 3.
C) A new delivery truck 4. D) Used office furniture 5. E) All of the choices are
correct. 61) Lenter LLC placed in service on April 29, 2017 machinery and
equipment (7-year property) with a basis of $600,000. Assume that Lenter has
sufficient income to avoid any limitations. Calculate the maximum depreciation
expense including section 179 expensing (but ignoring bonus expensing). (Use
MACRS Table 1 in the text) 1. A) $85,740. 2. B) $120,000. 3. C) $522,861. 4. D)
$585,740. 5. E) None of the choices are correct. 62) Littman LLC placed in
service on July 29, 2017 machinery and equipment (7-year property) with a basis
of $600,000. Littman’s income for the current year before any depreciation
expense was $100,000. Which of the following statements is true to maximize
Littman’s total depreciation expense for 2017? (Use MACRS Table 1 in the text)
1. A) Littman should take §179 expense equal to the maximum $510,000. 2. B)
Littman should take no §179 expense. 3. C) Littman’s §179 expense will be
greater than $100,000. 4. D) Littmen’s §179 expense will be less than $100,000.
5. E) None of the choices are correct. 63) Crouch LLC placed in service on May
19, 2017 machinery and equipment (7-year property) with a basis of $2,200,000.
Assume that Crouch has sufficient income to avoid any limitations. Calculate the
maximum depreciation expense including §179 expensing (but ignoring bonus
expensing). (Use MACRS Table 1 in the text) 1. A) $314,380. 2. B) $340,000. 3.
C) $605,794. 4. D) $742,930. 5. E) None of the choices are correct. 64) Clay LLC
placed in service machinery and equipment (7-year property) with a basis of
$2,450,000 on June 6, 2016. Assume that Clay has sufficient income to avoid any
limitations. Calculate the maximum depreciation expense including §179 expensing
(ignoring any possible bonus expensing) (Use MACRS Table 1 in the text) (Round
final answer to the nearest whole number) 1. A) $350,105 2. B) $427,244 3. C)
$778,070 4. D) $860,105 5. E) None of the choices are correct. 65) Bonnie Jo
purchased a used computer (5-year property) for use in her sole proprietorship.
The basis of the computer was $2,400. Bonnie Jo used the computer in her
business 60 percent of the time and used it for personal purposes the rest of
the time during the first year. Calculate Bonnie Jo’s depreciation expense
during the first year assuming the sole proprietorship had a loss during the
year (Bonnie did not place the property in service in the last quarter). (Use
MACRS Table 1 in the text) 1. A) $240. 2. B) $288. 3. C) $480. 4. D) $2,400. 5.
E) None of the choices are correct. 66) Billie Bob purchased a used computer
(5-year property) for use in his sole proprietorship in the prior year. The
basis of the computer was $2,400. Billie Bob used the computer in his business
60 percent of the time during the first year. During the second year, Billie Bob
used the computer 40 percent for business use. Calculate Billie Bob’s
depreciation expense during the second year assuming the sole proprietorship had
a loss during the year (Billie Bob did not place the asset in service in the
last quarter). (Use MACRS Table 1 in the text) 1. A) $0. 2. B) $48. 3. C) $192.
4. D) $336. 5. E) None of the choices are correct. 67) Which of the following
assets is eligible for bonus depreciation? 1. A) Used office machinery 2. B)
Qualified leasehold improvements 3. C) A new delivery truck 4. D) Used office
furniture 5. E) All of the choices are correct. 68) Potomac LLC purchased an
automobile for $30,000 on August 5, 2017. What is Potomac’s depreciation expense
for 2017 (ignore any possible bonus depreciation)? Exhibit 10-8 in the text 1.
A) $3,160 2. B) $4,287 3. C) $6,000 4. D) $30,000 5. E) None of the choices are
correct. 69) Arlington LLC purchased an automobile for $40,000 on July 5, 2017.
What is Arlington’s depreciation expense for 2017 if its business use percentage
is 75 percent (ignore any possible bonus depreciation)? Exhibit 10-8 in the text
1. A) $2,370 2. B) $3,160 3. C) $6,000 4. D) $8,000 5. E) None of the choices
are correct. 70) Assume that Bethany acquires a competitor’s assets on March
31st. The purchase price was $150,000. Of that amount, $125,000 is allocated to
tangible assets and $25,000 is allocated to goodwill (a §197 intangible asset).
What is Bethany’s amortization expense for the current year? (Round final answer
to the nearest whole number) 1. A) $0 2. B) $1,250 3. C) $1,319 4. D) $1,389 5.
E) None of the choices are correct. 71) Assume that Brittany acquires a
competitor’s assets on September 30th of year 1 for $350,000. Of that amount,
$300,000 is allocated to tangible assets and $50,000 is allocated equally to two
§197 intangible assets (goodwill and a 1-year non-compete agreement). Given,
that the non-compete agreement expires on September 30th of year 2, what is
Brittany’s amortization expense for the second year? (Round final answer to the
nearest whole number) 1. A) $0 2. B) $1,667 3. C) $2,917 4. D) $3,333 5. E) None
of the choices are correct. 72) Jasmine started a new business in the current
year. She incurred $10,000 of start-up costs. How much of the start-up costs can
be immediately expensed (excluding amounts amortized over 180 months) for the
year? 1. A) $0 2. B) $2,500 3. C) $5,000 4. D) $10,000 5. E) None of the choices
are correct. 73) Racine started a new business in the current year. She incurred
$52,000 of start-up costs. If her business started on November 23rd of the
current year, what is the total expense she may deduct with respect to the
start-up costs for her initial year, rounded to the nearest whole number? 1. A)
$2,555 2. B) $3,544 3. C) $5,522 4. D) $52,000 5. E) None of the choices are
correct. 74) Daschle LLC completed some research and development during June of
the current year. The related costs were $60,000. If Daschle wants to capitalize
and amortize the costs as quickly as possible, what is the total amortization
expense Daschle may deduct during the current year? 1. A) $0 2. B) $6,500 3. C)
$7,000 4. D) $12,000 5. E) None of the choices are correct. 75) Jorge purchased
a copyright for use in his business in the current year. The purchase occurred
on July 15th and the purchase price was $75,000. If the patent has a remaining
life of 75 months, what is the total amortization expense Jorge may deduct
during the current year? 1. A) $0 2. B) $5,500 3. C) $6,000 4. D) $12,000 5. E)
None of the choices are correct. 76) Geithner LLC patented a process it
developed in the current year. The patent is expected to create benefits for
Geithner over a 10-year period. The patent was issued on April 15th and the
legal costs associated with the patent were $43,000. In addition, Geithner had
unamortized research expenditures of $15,000 related to the process. What is the
total amortization expense Geithner may deduct during the current year? 1. A)
$2,417 2. B) $2,174 3. C) $4,108 4. D) $4,350 5. E) None of the choices are
correct. 77) Santa Fe purchased the rights to extract turquoise on a tract of
land over a five-year period. Santa Fe paid $300,000 for extraction rights. A
geologist estimates that Santa Fe will recover 5,000 pounds of turquoise. During
the current year, Santa Fe extracted 1,500 pounds of turquoise, which it sold
for $200,000. What is Santa Fe’s cost depletion expense for the current year? 1.
A) $60,000 2. B) $90,000 3. C) $110,000 4. D) $300,000 5. E) None of the choices
are correct. 78) Santa Fe purchased the rights to extract turquoise on a tract
of land over a five-year period. Santa Fe paid $300,000 for extraction rights. A
geologist estimated that Santa Fe will recover 5,000 pounds of turquoise. During
the past several years, 4,000 pounds were extracted. During the current year,
Santa Fe extracted 1,500 pounds of turquoise, which it sold for $250,000. What
is Santa Fe’s cost depletion expense for the current year? 1. A) $60,000 2. B)
$90,000 3. C) $190,000 4. D) $160,000 5. E) None of the choices are correct. 79)
Lucky Strike Mine (LLC) purchased a silver deposit for $1,500,000. It estimated
it would extract 500,000 ounces of silver from the deposit. Lucky Strike mined
the silver and sold it reporting gross receipts of $1.8 million, $2.5 million,
and $2 million for years 1 through 3, respectively. During years 1 – 3, Lucky
Strike reported net income (loss) from the silver deposit activity in the amount
of ($100,000), $400,000, and $100,000, respectively. In years 1 – 3, Lucky
Strike actually extracted 300,000 ounces of silver as follows: Ounces extracted
per year Year 1

Year 2

Year 3

50,000

150,000

100,000

What is Lucky Strike’s depletion expense for year 2 if the applicable percentage
depletion for silver is 15 percent? 1. A) $200,000 2. B) $375,000 3. C) $400,000
4. D) $450,000 5. E) None of the choices are correct. 80) Janey purchased
machinery on April 8th of the current year. The relevant costs for the year are
as follows: machinery for $10,000, $800 shipping, $50 for delivery insurance,
$500 for installation, $750 for sales tax, $150 for the annual tune up, and $200
of property taxes (an annual tax on business property). What is Janey’s tax
basis for the machinery? 81) Jaussi purchased a computer several years ago for
$2,200 and used it for personal purposes. On November 10th of the current year,
when the fair market value of the computer was $800, Jaussi converted it to
business use. What is Jaussi’s tax basis for the computer? 82) Flax, LLC
purchased only one asset this year. Flax placed in service a computer (5-year
property) on January 16 with a basis of $14,000. Calculate the maximum
depreciation expense (ignoring §179 and bonus depreciation). (Use MACRS Table 1
in the text) 83) Roth, LLC purchased only one asset during the current year.
Roth placed in service computer equipment (5-year property) on November 1st with
a basis of $42,500. Calculate the maximum depreciation expense (ignoring §179
and bonus depreciation). (Use MACRS Table 2 in the text) 84) Eddie purchased
only one asset during the current year. Eddie placed in service furniture
(7-year property) on May 1st with a basis of $26,500. Calculate the maximum
depreciation expense, rounded to the nearest whole number (ignoring §179 and
bonus depreciation). (Use MACRS Table 1 in the text) 85) Teddy purchased only
one asset during the current year. Teddy placed in service machinery (7-year
property) on October 1st with a basis of $76,500. Calculate the maximum
depreciation expense, rounded to the nearest whole number (ignoring §179 and
bonus depreciation). (Use MACRS Table 2 in the text) 86) Amit purchased two
assets during the current year. Amit placed in service computer equipment
(5-year property) on April 16th with a basis of $5,000 and furniture (7-year
property) on September 9th with a basis of $20,000. Calculate the maximum
depreciation expense (ignoring §179 and bonus depreciation). (Use MACRS Table 1
in the text) 87) Yasmin purchased two assets during the current year. Yasmin
placed in service computer equipment (5-year property) on May 26th with a basis
of $10,000 and machinery (7-year property) on December 9th with a basis of
$10,000. Calculate the maximum depreciation expense (ignoring §179 and bonus
depreciation). (Use MACRS Table 2 in the text) 88) Bonnie Jo used two assets
during the current year. The first was computer equipment with an original basis
of $15,000, currently in the second year of depreciation, and under the
half-year convention. This asset was disposed of on October 1st of the current
year. The second was furniture with an original basis of $24,000 placed in
service during the first quarter, currently in the fourth year of depreciation,
and under the mid-quarter convention. What is Bonnie Jo’s depreciation expense
for the current year? (Round final answer to the nearest whole number) (Use
MACRS Table 1 and Table 2 in the text) 89) Kristine sold two assets on March
20th of the current year. The first was machinery with an original basis of
$51,000, currently in the fourth year of depreciation, and under the halfyear
convention. The second was furniture with an original basis of $16,000 placed in
service during the fourth quarter, currently in the third year of depreciation,
and under the midquarter convention. What is Kristine’s depreciation expense for
the current year if the depreciation recovery period is 7-years? (Use MACRS
Table 1 and Table 2 in the text) EXHIBIT 10-6 in the text (Round final answer to
the nearest whole number) 90) Timothy purchased a new computer for his
consulting practice on October 15th of the current year. The basis of the
computer was $4,000. During the Thanksgiving holiday, he decided the computer
didn’t meet his business needs and gave it to his college-aged son in another
state. The computer was never used for business purposes again. Timothy had
$50,000 of taxable income before depreciation. What is Timothy’s total cost
recovery expense with respect to the computer during the current year? 91)
During August of the prior year, Julio purchased an apartment building that he
used as a rental property. The basis was $1,400,000. Calculate the maximum
depreciation expense during the current year. (Use MACRS Table 3 in the text)
92) During April of the current year, Ronen purchased a warehouse that he used
for business purposes. The basis was $1,600,000. Calculate the maximum
depreciation expense during the current year. (Use MACRS Table 5 in the text)
93) An office building was purchased on December 9th several years ago for
$2,500,000. The purchase price was allocated as follows: building $1,900,000,
landscaping $100,000, and land $500,000. During the current year, the 10th year,
the building was sold on March 10th. Calculate the maximum depreciation expense
for the real property during the current year, rounded to the nearest whole
number. (Use MACRS Table 5 in the text) 94) Olney LLC only purchased one asset
this year. Olney LLC placed in service on July 19, 2017 machinery and equipment
(7-year property) with a basis of $850,000. Assume that Olney has sufficient
income to avoid any limitations. Calculate the maximum depreciation expense
including §179 expensing, (but ignoring bonus expensing). (Use MACRS Table 1 in
the text) (Round final answer to the nearest whole number) 95) Columbia LLC only
purchased one asset this year. Columbia LLC placed in service on October 9, 2017
machinery and equipment (7-year property) with a basis of $2,150,000. Assume
that Columbia has sufficient income to avoid any limitations. Calculate the
maximum depreciation expense including §179 expensing (but ignoring bonus
expensing) for the year. (Use MACRS Table 2 in the text) (Round final answer to
the nearest whole number) 96) Northern LLC only purchased one asset this year.
In 2017, Northern LLC placed in service on September 6th machinery and equipment
(7-year property) with a basis of $2,200,000. Assume that Northern has
sufficient income to avoid any limitations. Calculate the maximum depreciation
expense including §179 expensing (ignore any potential bonus expensing). (Use
MACRS Table 1 in the text) (Round final answer to the nearest whole number) 97)
Reid acquired two assets in 2017: computer equipment (5-year property) acquired
on August 6th with a basis of $510,000 and machinery (7-year property) on
November 9th with a basis of $510,000. Assume that Reid has sufficient income to
avoid any limitations. Calculate the maximum depreciation expense including §179
expensing (but not bonus expensing). (Use MACRS Table 1 in the text) 98) Phyllis
purchased $8,000 of specialized audio equipment that she uses in her business
regularly. Occasionally, she uses the equipment for personal use. During the
first year, Phyllis used the equipment for business use 70 percent of the time;
however, during the current (second) year the business use fell to 40 percent.
Assume that the equipment is sevenyear MACRS property and is under the half-year
convention. Assume the ADS recovery period is 10 years. What is the depreciation
allowance for the current year? (Use MACRS Table 1 in the text) (Round final
answer to the nearest whole number) 99) Alexandra purchased a $35,000 automobile
during 2017. The business use was 70 percent. What is the allowable depreciation
for the current year (ignore any possible bonus depreciation)? Exhibit 10-8 in
the text 100) Boxer LLC has acquired various types of assets recently used 100%
in its trade or business. Below is a list of assets acquired during 2016 and
2017: Asset

Cost Basis

Convention

Date Placed in Service

Machinery

25,000

Half year

January 24, 2016

Warehouse

800,000

Mid month

August 1, 2016

Furniture

100,000

October 5, 2017

Computer equipment

65,000

October 10, 2017

Office equipment

34,000

September 28, 2017

Automobile

35,000

July 15, 2017

Office building

800,000

September 24, 2017

Boxer did not elect §179 expense and elected out of bonus depreciation in 2016,
but would like to elect §179 expense for 2017 (assume that taxable income is
sufficient). Calculate Boxer’s maximum depreciation expense for 2017, (ignore
bonus depreciation for 2017). If necessary, use the 2016 luxury automobile
limitation amount for 2017. (Use MACRS Table 1 and Use MACRS Table 5 in the
text) Exhibit 10-8 in the text (Round final answer to the nearest whole number)
101) Assume that Yuri acquires a competitor’s assets on May 1st. The purchase
price was $500,000. Of the amount, $325,000 is allocated to tangible assets and
$175,000 is allocated to goodwill (a §197 intangible asset). What is Yuri’s
amortization expense for the current year? (Round final answer to the nearest
whole number) 102) Assume that Cannon LLC acquires a competitor’s assets on June
15th of a prior year. The purchase price was $450,000. Of the amount, $196,200
is allocated to tangible assets and $253,800 is allocated to three §197
intangible assets: $153,000 to goodwill, $50,400 to a customer list with an
expected life of 8 years, and $50,400 to a 3 year non-compete agreement. On May
30th of the second year, the customer list is sold for $10,000. (e.g.,.1234 as
12%). (Round final answer to the nearest whole number. Round your allocation
percentage to the nearest whole percentage) 1) What is Cannon’s amortization
expense for the second year? 2) What is the basis of the intangibles at the end
of the second year? 103) Oksana started an LLC on November 2 of the current
year. She incurred $30,000 of start-up costs. How much of the start-up costs can
be immediately expensed for the year? How much amortization may Oksana deduct in
the first year? 104) Patin Corporation began business on September 23rd of the
current year. It incurred $40,000 of start-up costs and $60,000 of
organizational expenditures. How much total amortization may be deducted in the
first year? (Round final answer to the nearest whole number) 105) Paulsen
incurred $55,000 of research and experimental expenses and began amortizing them
over 60 months during June of year 1. During May of year 3, Paulsen received a
patent based upon the research being amortized. $36,000 of legal expenses for
the patent was incurred. The patent is expected to have a remaining useful life
of 17 years. 1) What is the basis of the patent, rounding amortization for each
year to the nearest whole number? 2) What is the amortization expense with
respect to the patent during the year it was issued, rounded to the nearest
whole number? 106) Sequoia purchased the rights to cut timber on several tracts
of land over a fifteen-year period. It paid $500,000 for cutting rights. A
timber engineer estimates that 500,000 board feet of timber will be cut. During
the current year, Sequoia cut 45,000 board feet of timber, which it sold for
$900,000. What is Sequoia’s cost depletion expense for the current year? 107) PC
Mine purchased a platinum deposit for $3,500,000. It estimated it would extract
17,000 ounces of platinum from the deposit. PC mined the platinum and sold it
reporting gross receipts of $500,000 and $8 million for years 1 and 2,
respectively. During years 1 and 2, PC reported net income (loss) from the
platinum deposit activity in the amount of ($100,000) and $3,800,000,
respectively. In years 1 and 2, PC actually extracted 2,000 and 8,000 ounces of
platinum. What is PC’s depletion expense for years 1 and 2 if the applicable
percentage depletion for platinum is 22 percent? (Round final answer to the
nearest whole number) McGraw-Hill’s Taxation of Individuals and Business
Entities, 2018 Edition, 9e (Spilker) Chapter 11 Property Dispositions 1) The
amount realized is the sale proceeds less the adjusted basis. 2) Generally, the
amount realized is everything of value received in a sale less selling expenses.
3) The adjusted basis is the cost basis less cost recovery deductions. 4) An
asset’s tax adjusted basis is usually greater than its book adjusted basis. 5)
The gain or loss realized on the sale of an asset is the amount realized less
the adjusted basis. 6) The gain or loss realized on the sale of an asset is
always recognized for tax purposes. 7) All tax gains and losses are ultimately
characterized as either ordinary or capital. 8) Ordinary gains and losses are
obtained on the sale of investments. 9) Accounts receivable and inventory are
examples of ordinary assets. 10) Assets held for investment and personal use
assets are examples of capital assets. 11) §1231 assets include all assets used
in a trade or business. 12) A parcel of land is always a capital asset. 13)
Taxpayers can recognize a taxable gain on the sale of an asset even though an
asset’s real economic value has declined. 14) After application of the look-back
rule, net §1231 gains become capital while net §1231 losses become ordinary. 15)
Depreciation recapture changes both the amount and character of a gain. 16) Only
accelerated depreciation is recaptured for §1245 assets. 17) §1250 recaptures
the excess of accelerated depreciation over straight line depreciation on real
property placed in service between 1981 and 1986 as ordinary income. 18) For
corporations, §291 recaptures 20 percent of the lesser of depreciation taken or
the realized gain as ordinary income. 19) Unrecaptured §1250 gain is taxed at a
maximum rate of 25 percent. 20) Unrecaptured §1250 gains apply only to
individuals. 21) §1239 recharacterizes 50 percent of the gain on sales to a
related party as ordinary income. 22) A net §1231 gain becomes ordinary while a
net §1231 loss becomes long-term capital gain. 23) The §1231 look-back rule
recharacterizes §1231 gains if §1231 losses have created ordinary losses in the
last 5 years. 24) The §1231 look-back rule applies whether there is a net gain
or loss. 25) Realized gains are recognized unless there is specific exception.
26) For a like-kind exchange, realized gain is deferred if the exchange is
solely for like-kind property. 27) Residential real property is not like-kind
with non-residential real property. 28) A simultaneous exchange must take place
for a transaction to qualify as a like-kind exchange. 29) Boot is not like-kind
property involved in a like-kind exchange. 30) In a deferred like-kind exchange
the like-kind property to be received must be identified within 45 days and
acquired within 180 days from the initial exchange. 31) A taxpayer that receives
boot in a like-kind exchange resulting in a gain recognizes as gain the lesser
of the fair market value of the boot received or the gain realized. 32) A loss
realized for property destroyed in a hurricane is deferred under the involuntary
conversion rules. 33) An installment sale is any sale where at least a portion
of the sales proceeds is received in a subsequent taxable year. 34) For an
installment sale, the gross profit percentage is the gain recognized divided by
the gain realized. 35) Losses on sales between related parties are realized but
not recognized. 36) Which of the following is not used in the calculation of the
amount realized: 1. A) Cash. 2. B) Adjusted basis. 3. C) Fair market value of
other property received. 4. D) Buyer’s assumption of liabilities. 5. E) All of
the choices are used. 37) Which of the following is not true regarding an
asset’s adjusted basis? 1. A) Tax adjusted basis is usually greater than book
adjusted basis. 2. B) Tax adjusted basis is usually less than book adjusted
basis. 3. C) Adjusted basis is cost basis less cost recovery deductions. 4. D)
Tax adjusted basis may change over time. 38) Which of the following is not
usually included in an asset’s tax basis? 1. A) Purchase price 2. B) Sales tax
3. C) Shipping costs 4. D) Installation costs 5. E) None of the choices are
correct. 39) Which of the following is how gain or loss realized is calculated?
1. A) Cash less selling costs. 2. B) Cost basis less cost recovery. 3. C) Cash
less cost recovery. 4. D) Amount realized less adjusted basis. 5. E) None of the
choices are correct. 40) Which of the following realized gains results in a
recognized gain? 1. A) Farm machinery traded for farm machinery. 2. B) Sale to a
related party. 3. C) Involuntary conversion. 4. D) Iowa cropland exchanged for a
Minnesota warehouse. 41) Leesburg sold a machine for $2,200 on November 10th of
the current year. The machine was purchased for $2,600. Leesburg had taken
$1,200 of depreciation deductions on the machine through the date of the sale.
What is Leesburg’s gain or loss realized on the machine? 1. A) $800 gain. 2. B)
$1,000 gain. 3. C) $1,200 loss. 4. D) $1,400 loss. 5. E) None of the choices are
correct. 42) The sale of land held for investment results in the following type
of gain or loss? 1. A) Capital. 2. B) Ordinary. 3. C) §1231. 4. D) §1245. 5. E)
None of the choices are correct. 43) The sale of machinery at a loss that was
used in a trade or business and held for more than one year results in the
following type of loss? 1. A) Capital. 2. B) §291. 3. C) §1231. 4. D) §1245. 5.
E) None of the choices are correct. 44) The sale of computer equipment used in a
trade or business for 9 months results in the following type of gain or loss? 1.
A) Capital. 2. B) Ordinary. 3. C) §1231. 4. D) §1245. 5. E) None of the choices
are correct. 45) The sale of machinery for more than the original cost basis
(before depreciation), used in a trade or business, and held for more than one
year results in the following types of gain or loss? 1. A) Capital and Ordinary.
2. B) Ordinary only. 3. C) Capital and §1231. 4. D) §1245 and §1231. 5. E) None
of the choices are correct. 46) Which of the following results in an ordinary
gain or loss? 1. A) Sale of a machine at a gain. 2. B) Sale of stock held for
investment. 3. C) Sale of a §1231 asset. 4. D) Sale of inventory. 5. E) None of
the choices are correct. 47) What is the character of land used in an active
trade or business for two years? 1. A) Capital. 2. B) Ordinary. 3. C) §1231. 4.
D) Investment. 5. E) None of the choices are correct. 48) Which of the following
is true regarding depreciation recapture? 1. A) Changes the character of a loss.
2. B) Changes the character of a gain. 3. C) Changes the amount of a gain. 4. D)
Only applies to ordinary assets. 5. E) None of the choices are correct. 49)
Which of the following gains does not result solely in an ordinary gain or loss?
1. A) Sale of equipment held for less than a year. 2. B) Sale of inventory. 3.
C) Sale of equipment where the gain realized exceeds the accumulated
depreciation. 4. D) Sale of equipment where the accumulated depreciation exceeds
the gain realized. 5. E) None of the choices are correct. 50) Which of the
following is not a §1245 asset if held for more than one year? 1. A) Machinery.
2. B) Automobile. 3. C) Business cell phone. 4. D) Land. 5. E) None of the
choices are correct. 51) Which of the following does not ultimately result in a
capital gain or loss? 1. A) Sale of a personal use asset. 2. B) Sale of
inventory. 3. C) Gain on equipment used in a trade or business held for more
than one year, if it is the only asset sale during the year. 4. D) Sale of
capital stock in another company. 5. E) None of the choices are correct. 52)
Foreaker LLC sold a piece of land that it uses in its business for $52,000.
Foreaker bought the land two years ago for $42,500. What is the amount and
character of Foreaker’s gain? 1. A) $9,500 §1221. 2. B) $9,500 §1231. 3. C)
$9,500 §1245. 4. D) $9,500 §1250. 5. E) None of the choices are correct. 53)
Butte sold a machine to a machine dealer for $50,000. Butte bought the machine
for $55,000 several years ago and has claimed $12,500 of depreciation expense on
the machine. What is the amount and character of Butte’s gain or loss? 1. A)
$7,500 §1231 loss. 2. B) $5,000 §1231 loss. 3. C) $7,500 ordinary gain. 4. D)
$7,500 capital gain. 5. E) None of the choices are correct. 54) Which of the
following sections does not recapture or recharacterize a taxpayer’s gain? 1. A)
§1239. 2. B) §1250. 3. C) §1245. 4. D) §291. 5. E) None of the choices are
correct. 55) Which of the following sections recaptures or recharacterizes only
corporate taxpayer’s gains? 1. A) §291. 2. B) §1239. 3. C) §1245. 4. D)
Unrecaptured §1250 gains. 5. E) None of the choices are correct. 56) Which of
the following transactions results solely in §1245 gain? 1. A) Sale of machinery
held for less than one year. 2. B) Sale of machinery held for more than one year
and where the gain realized exceeds the accumulated depreciation. 3. C) Sale of
machinery held for more than one year and where the accumulated depreciation
exceeds the gain realized. 4. D) Sale of land held for more than one year and
where the amount realized exceeds the adjusted basis. 5. E) None of the choices
are correct. 57) Bozeman sold equipment that it uses in its business for
$80,000. Bozeman bought the equipment two years ago for $75,000 and has claimed
$20,000 of depreciation expense. What is the amount and character of Bozeman’s
gain or loss? 1. A) $25,000 §1231 gain. 2. B) $20,000 ordinary gain, and $5,000
§1231 gain. 3. C) $5,000 ordinary gain, and $20,000 §1231 gain. 4. D) $25,000
capital gain. 5. E) None of the choices are correct. 58) Sumner sold equipment
that it uses in its business for $30,000. Sumner bought the equipment a few
years ago for $80,000 and has claimed $40,000 of depreciation expense. Assuming
that this is Sumner’s only disposition during the year, what is the amount and
character of Sumner’s gain or loss? 1. A) $10,000 §1231 loss. 2. B) $10,000
§1245 loss. 3. C) $50,000 ordinary loss. 4. D) $10,000 capital loss. 5. E) None
of the choices are correct. 59) Bateman Corporation sold an office building that
it used in its business for $800,000. Bateman bought the building ten years ago
for $600,000 and has claimed $200,000 of depreciation expense. What is the
amount and character of Bateman’s gain or loss? 1. A) $40,000 ordinary and
$360,000 §1231 gain. 2. B) $200,000 ordinary and $200,000 §1231 gain. 3. C)
$400,000 ordinary gain. 4. D) $400,000 capital gain. 5. E) None of the choices
are correct. 60) Brad sold a rental house that he owned for $250,000. Brad
bought the rental house five years ago for $225,000 and has claimed $50,000 of
depreciation expense. What is the amount and character of Brad’s gain or loss?
1. A) $25,000 ordinary and $50,000 unrecaptured §1250 gain. 2. B) $25,000 §1231
gain and $50,000 unrecaptured §1250 gain. 3. C) $75,000 ordinary gain. 4. D)
$75,000 capital gain. 5. E) None of the choices are correct. 61) Why does §1250
recapture generally no longer apply? 1. A) Congress repealed the code section.
2. B) The Tax Reform Act of 1986 changed the depreciation of real property to
the straight-line method. 3. C) §1245 recapture trumps §1250 recapture. 4. D)
Because unrecaptured §1250 gains now apply to all taxpayers instead. 5. E) None
of the choices are correct. 62) When does unrecaptured §1250 gains apply? 1. A)
When the taxpayer makes the election. 2. B) It applies only when non-corporate
taxpayers sell depreciable real property at a gain. 3. C) It applies when §1245
recapture trumps §1250 recapture. 4. D) It applies only when real property
purchased before 1986 is sold at a gain. 5. E) None of the choices are correct.
63) Alpha sold machinery, which it used in its business, to Beta, a related
entity, for $40,000. Beta used the machinery in its business. Alpha bought the
machinery a few years ago for $50,000 and has claimed $30,000 of depreciation
expense. What is the amount and character of Alpha’s gain? 1. A) $20,000
ordinary income under §1239. 2. B) $10,000 ordinary gain and $10,000 §1231 gain.
3. C) $20,000 ordinary gain. 4. D) $20,000 capital gain. 5. E) None of the
choices are correct. 64) Brandon, an individual, began business four years ago
and has never sold a §1231 asset. Brandon owned each of the assets for several
years. In the current year, Brandon sold the following business assets: Asset

Original Cost

Machinery

$

30,000

Accumulated Depreciation

Gain/Loss

$

$

7,000

10,000

Computers

10,000

6,000

(2,000

)

Building

90,000

20,000

(2,000

)

Assuming Brandon’s marginal ordinary income tax rate is 35 percent, what effect
do the gains and losses have on Brandon’s tax liability? 1. A) $7,000 ordinary
income, $1,000 §1231 loss and $2,100 tax liability. 2. B) $6,000 ordinary income
and $2,100 tax liability. 3. C) $7,000 §1231 gain and $2,450 tax liability. 4.
D) $7,000 §1231 gain and $1,050 tax liability. 5. E) None of the choices are
correct. 65) Brandon, an individual, began business four years ago and has sold
§1231 assets with $5,000 of losses within the last 5 years. Brandon owned each
of the assets for several years. In the current year, Brandon sold the following
business assets: Asset

Original Cost

Machinery

$

30,000

Accumulated Depreciation

Gain/Loss

$

$

7,000

10,000

Land

40,000

0

20,000

Building

90,000

20,000

(5,000

)

Assuming Brandon’s marginal ordinary income tax rate is 35 percent, what effect
do the gains and losses have on Brandon’s tax liability? 1. A) $25,000 ordinary
income, $8,750 tax liability. 2. B) $25,000 §1231 gain and $3,750 tax liability.
3. C) $13,000 §1231 gain, $12,000 ordinary income, and $6,150 tax liability. 4.
D) $12,000 §1231 gain, $13,000 ordinary income, and $6,350 tax liability. 5. E)
None of the choices are correct. 66) Ashburn reported a $105,000 net §1231 gain
in year 6. Assuming Ashburn reported $60,000 of nonrecaptured §1231 losses
during years 1-5, what amount of Ashburn’s net §1231 gain for year 6, if any, is
treated as ordinary income? 1. A) $0. 2. B) $45,000. 3. C) $60,000. 4. D)
$105,000. 5. E) None of the choices are correct. 67) Winchester LLC sold the
following business assets during the current year: (1) automobile, $30,000 cost
basis, $12,000 depreciation, proceeds $20,000; (2) machinery, $25,000 cost
basis, $20,000 depreciation, proceeds $10,000; (3) furniture, $15,000 cost
basis, $10,000 depreciation, proceeds $4,000; (4) computer equipment, $25,000
cost basis, $6,000 depreciation, proceeds $10,000; (5) Winchester had
unrecaptured §1231 losses of $3,000 in the prior 5 years. What is the amount and
character of Winchester’s gains and losses before the 1231 netting process?
Assume all assets were held for more than one year. 1. A) $3,000 ordinary loss,
$0 §1231 loss. 2. B) $7,000 ordinary gain, $10,000 §1231 loss. 3. C) $7,000
ordinary loss, $4,000 §1231 gain. 4. D) $1,000 ordinary gain, $4,000 §1231 loss.
5. E) None of the choices are correct. 68) Which of the following is true
regarding the §1231 look-back rule? 1. A) It only applies when a §1231 loss
occurs. 2. B) It only applies when a §1231 gain occurs. 3. C) It only applies
when a §1231 gain occurs and there is a nonrecaptured §1231 loss in the prior
five years. 4. D) It only applies when a §1231 gain occurs and there is a
nonrecaptured §1231 gain in the prior five years. 5. E) None of the choices are
correct. 69) Which of the following is not true regarding §1239? 1. A) It only
applies to related taxpayers. 2. B) It only applies to gains on sales of
depreciable property. 3. C) It only applies to gains on sales of non-residential
real property. 4. D) It does not apply to losses. 5. E) None of the choices are
correct. 70) Koch traded machine 1 for machine 2. Koch originally purchased
machine 1 for $75,000 and machine 1’s adjusted basis was $40,000 at the time of
the exchange. Machine 2’s seller purchased it for $65,000 and machine 2’s
adjusted basis was $55,000 at the time of the exchange. What is Koch’s adjusted
basis in machine 2 after the exchange? 1. A) $40,000. 2. B) $50,000. 3. C)
$55,000. 4. D) $75,000. 5. E) None of the choices are correct. 71) Mary traded
furniture used in her business to a furniture dealer for some new furniture.
Mary originally purchased the furniture for $45,000 and it had an adjusted basis
of $20,000 at the time of the exchange. The new furniture had a fair market
value of $40,000. Mary also gave $4,000 to the dealer in the transaction. What
is Mary’s adjusted basis in the new furniture after the exchange? 1. A) $20,000.
2. B) $24,000. 3. C) $36,000. 4. D) $40,000. 5. E) None of the choices are
correct. 72) Which one of the following is not considered boot in a like-kind
exchange? 1. A) Cash. 2. B) Other property. 3. C) Mortgage given. 4. D) Mortgage
received. 5. E) All of the choices can be considered as boot. 73) Which one of
the following is not true regarding a like-kind exchange? 1. A) Loss on
like-kind property is not recognized. 2. B) Gains on boot given are deferred. 3.
C) Losses on boot given are not recognized. 4. D) Securities can be like-kind
with any other securities. 5. E) All of the choices are true. 74) Which one of
the following is not a requirement of a deferred like-kind exchange? 1. A) The
like-kind property to be received must be identified within 45 days. 2. B) The
exchange must be completed within the taxable year. 3. C) The like-kind property
must be received within 180 days. 4. D) The exchanged property must be
like-kind. 5. E) All of the choices are correct. 75) How long after the initial
exchange does a taxpayer have to identify replacement property in a like-kind
exchange? 1. A) The like-kind property to be received must be identified within
45 days. 2. B) The like-kind property to be received must be identified by the
earlier of 45 days or the last day of the taxpayer’s taxable year. 3. C) The
like-kind property to be received must be identified within 180 days. 4. D)
There is no deadline for the identification of replacement property. 5. E) All
of the choices are correct. 76) The general rule regarding the exchanged basis
in the new property received in a like-kind exchange is: 1. A) The basis is
equal to the fair market value of the new property. 2. B) The basis is equal to
the fair market value of the old property. 3. C) The basis is equal to the
adjusted basis of the old property. 4. D) The basis is equal to the cost basis
of the old property. 5. E) All of the choices are correct. 77) What is the
primary purpose of a third-party intermediary in a deferred like-kind exchange?
1. A) To facilitate finding replacement property. 2. B) To help acquire the
replacement property. 3. C) To prevent the seller from receiving cash (boot)
that will taint the transaction. 4. D) To certify the taxpayer’s Form 8824. 5.
E) All of the choices are correct. 78) Arlington LLC traded machinery used in
its business to a machinery dealer for some new machinery. Arlington originally
purchased the machinery for $60,000 and it had an adjusted basis of $28,000 at
the time of the exchange. The new machinery had a fair market value of $35,000.
Arlington also received $2,000 of office equipment in the transaction. What is
Arlington’s gain or loss recognized on the exchange? 1. A) $0. 2. B) $2,000. 3.
C) $7,000. 4. D) $9,000. 5. E) None of the choices are correct. 79) Each of the
following is true except for: 1. A) A direct involuntary conversion occurs when
property taken under imminent domain is replaced with other property. 2. B)
Qualified replacement property rules are more restrictive than the like-kind
property rules. 3. C) An indirect involuntary conversion occurs when property is
destroyed and insurance proceeds are used to purchase qualified replacement
property. 4. D) Losses realized in involuntary conversions are deferred. 5. E)
All of the choices are true. 80) Which of the following is not an involuntary
conversion? 1. A) Destruction caused by a hurricane. 2. B) Imminent domain. 3.
C) A foreclosure. 4. D) Fire damage. 5. E) All of the choices could be
involuntary conversions. 81) Which of the following may qualify as an
installment sale? 1. A) Sale of inventory at a gain. 2. B) Sale of securities.
3. C) Sale of asset used in a business at a gain. 4. D) Land sold at a loss. 5.
E) All of the choices qualify for installment sale treatment. 82) Pelosi
Corporation sold a parcel of land valued at $300,000. Its basis in the land was
$250,000. For the land, Pelosi received $150,000 in cash in the current year and
a note providing Pelosi with $150,000 in the subsequent year. What is Pelosi’s
recognized gain in the current and subsequent year, respectively? 1. A) $0,
$50,000. 2. B) $10,000, $40,000. 3. C) $25,000, $25,000. 4. D) $50,000, $0. 5.
E) None of the choices are correct. 83) Which of the following is not true
regarding installment sales? 1. A) Only gains are eligible for installment sale
reporting. 2. B) Depreciation recapture is deferred in an installment sale. 3.
C) The gross profit percentage is needed to determine the annual gain
recognized. 4. D) Stock sales are ineligible for installment sale treatment. 5.
E) None of the choices are correct. 84) Which of the following is true regarding
disallowed losses between related taxpayers? 1. A) The tax laws essentially
treat related parties as the same taxpayer. 2. B) The holding period of the
seller carries over to the buyer. 3. C) The related person always receives a
carryover basis. 4. D) The seller’s realized loss is deferred until the buyer
sells the assets. 5. E) None of the choices are correct. 85) Sadie sold 10
shares of stock to her brother, George, for $500 sixteen months ago. Sadie had
purchased the stock for $600 two years earlier. If George sells the stock for
$700 six months later, what is the amount and character of his recognized gain
or loss in the current year? 1. A) $0. 2. B) $100 short-term capital gain. 3. C)
$100 long-term capital gain. 4. D) $200 short-term capital gain. 5. E) None of
the choices are correct. 86) Sandra sold some equipment for $10,000 in cash,
$1,000 of office products, the buyer assumption of her $1,500 loan, and incurred
selling expenses of $500. What is the Sandra’s amount realized in the
transaction? 87) Manassas purchased a computer several years ago for $2,200. On
November 10th of the current year, the computer was worth $800. If $1,000 of
depreciation deductions had been taken, what is Manassas’ tax adjusted basis for
the computer? 88) Bull Run sold a computer for $1,200 on November 10th of the
current year. The computer was purchased for $2,800. Bull Run had taken $1,000
of depreciation deductions. What is Bull Run’s gain or loss realized on the
computer? 89) Explain whether the sale of a machine used in a trade or business
that is sold at a loss generates an ordinary or capital loss? 90) Andrea sold a
piece of machinery she used in her business for 9 months. The amount realized
was $50,000 and the adjusted basis was $55,000. What is Andrea’s gain or loss
realized and what is the character of the gain or loss? 91) Jessie sold a piece
of land held for investment for $250,000. Jessie bought the land two years ago
for $195,000. What is the amount and character of Jessie’s gain? 92) Sunshine
LLC sold furniture for $75,000. Sunshine bought the furniture for $90,000
several years ago and has claimed $25,000 of depreciation expense on the
machine. What is the amount and character of Sunshine’s gain or loss? 93)
Alexandra sold equipment that she uses in her business for $100,000. Alexandra
bought the equipment two years ago for $90,000 and has claimed $25,000 of
depreciation expense. What is the amount and character of Alexandra’s gain or
loss? 94) Frederique sold furniture that she uses in her business for $15,000.
Frederique bought the furniture a few years ago for $40,000 and has claimed
$20,000 of depreciation expense. What is the amount and character of
Frederique’s gain or loss? 95) Buzz Corporation sold an office building that it
used in its business for $500,000. Buzz bought the building ten years ago for
$650,000 and has claimed $200,000 of depreciation expense. What is the amount
and character of Buzz’s gain or loss? 96) Brandy sold a rental house that she
owned for $150,000. Brandy bought the house four years ago for $140,000 and has
claimed $25,000 of depreciation expense. What is the amount and character of
Brandy’s gain or loss? 97) Silver sold machinery to Gold, a related entity,
which it used in its business for $55,000. Silver bought the equipment a few
years ago for $50,000 and has claimed $15,000 of depreciation expense. What is
the amount and character of Silver’s gain? 98) Andrew, an individual, began
business four years ago and has never sold a §1231 asset. Andrew owned each of
the assets for several years. In the current year, Andrew sold the following
business assets: Asset

Original Cost

Machinery

$

12,000

Accumulated Depreciation

Gain/Loss

$

$

7,000

6,000

Furniture

10,000

2,000

3,000

Building

90,000

20,000

(5,000

)

Assuming Andrew’s marginal ordinary income tax rate is 30 percent, what is the
character of the gains and losses and what affect do they have on Andrew’s tax
liability? 99) Suzanne, an individual, began business four years ago and has
never sold a §1231 asset. Suzanne owned each of the assets for several years. In
the current year, Suzanne sold the following business assets: Asset

Original Cost

Machinery

$

12,000

Accumulated Depreciation

Gain/Loss

$

$

7,000

6,000

Furniture

10,000

2,000

(3,000

Building

90,000

20,000

15,000

)

Assuming Suzanne’s marginal ordinary income tax rate is 35 percent, what is the
character of the gains and losses and what affect do they have on Suzanne’s tax
liability? 100) Gainesville LLC sold the following business assets during the
current year: (1) machinery, $20,000 cost basis, $4,000 depreciation, proceeds
$22,000; (2) automobile, $15,000 cost basis, $12,000 depreciation, proceeds
$7,000; (3) equipment, $15,000 cost basis, $10,000 depreciation, proceeds
$4,000; (4) computer equipment, $35,000 cost basis, $16,000 depreciation,
proceeds $15,000; (5) Winchester had unrecaptured §1231 losses of $5,000 in the
prior 5 years. What is the amount and character of Winchester’s gains and losses
before the 1231 netting process? 101) Collins Corporation, of Camden, Maine,
wants to exchange its manufacturing equipment for Rockland Company’s equipment.
Both parties agree that Collins’s machinery is worth $200,000 and that
Rockland’s machinery is worth $175,000. Collins will not enter into the
transaction unless it qualifies as a like-kind exchange. If Collins wants to
avoid gain, what could the parties do to equalize the value exchanged but still
allow the exchange to qualify as a like-kind exchange? 102) Odintz traded
machinery for machinery. Odintz originally purchased its machine for $150,000
and the adjusted basis was $90,000 at the time of the exchange. The machinery
received was purchased for $200,000, had an adjusted basis of $155,000 at the
time of the exchange, and was subject to a mortgage of $50,000 that was paid off
before the transfer. What is Odintz’s adjusted basis in the new machinery after
the exchange? 103) Misha traded computer equipment used in her business to a
computer dealer for some new computer equipment. Misha originally purchased the
computer equipment for $15,000 and it had an adjusted basis of $11,000 at the
time of the exchange. Misha also received a used copier worth $2,000 in the
transaction. What is Misha’s adjusted basis in the new equipment after the
exchange? 104) Tyson had a parcel of undeveloped investment land that he wanted
to trade for a warehouse to be used in his business. He found a buyer willing to
pay him $450,000 for the land. He transferred the land to a third party
intermediary on April 1st of the current year. On May 10th, with the help of a
commercial real estate agent, Tyson identified two suitable warehouses. On
August 10th he made an offer on the first building which was rejected. On August
13th an offer was accepted on the second warehouse. On September 23rd the third
party intermediary transferred $500,000 ($450,000 from the original property
plus $50,000 from Tyson) to the seller and conveyed title to the warehouse to
Tyson. Explain whether the exchange of property qualifies as a like-kind
exchange. 105) Redoubt LLC traded machinery used in its business to a machinery
dealer for some new machinery. Redoubt originally purchased the machinery for
$80,000 and it had an adjusted basis of $53,000 at the time of the exchange. The
new machinery had a fair market value of $62,000. Redoubt also received $7,000
of computer equipment in the transaction. What is Redoubt’s gain or loss
recognized on the exchange? 106) Reid had a business building destroyed in a
fire. The old building was purchased for $375,000 and $60,000 of depreciation
deductions had been taken. Although the old building had a fair market value of
$425,000 at the time of the fire, his insurance proceeds were limited to
$400,000. Reid found qualified replacement property which he acquired six months
later for $390,000. What is the amount of Reid’s realized gain and recognized
gain? 107) Kristi had a business building destroyed in an earthquake. The old
building was purchased for $250,000 and $80,000 of depreciation deductions had
been taken. Her insurance proceeds were $550,000. Although the replacement
property was much larger and nicer than her old building, Kristi’s new property
qualified as replacement property. She acquired the new property 13 months after
the earthquake for $620,000. What is the amount of Kristi’s realized gain and
recognized gain and the basis in her new property? 108) Luke sold land valued at
$210,000. His original basis in the land was $180,000. For the land, Luke
received $60,000 in cash in the current year and a note providing $150,000 in
the subsequent year. What is Luke’s recognized gain in the current and
subsequent year, respectively? 109) In the current year, Raven sold machinery
with a fair market value of $200,000. The machinery’s original basis was
$190,000 and Raven’s accumulated depreciation on the machinery was $40,000, so
its adjusted basis to Raven was $150,000. Raven received $50,000 in the current
year and a note paying Raven $75,000 a year for two years beginning in next
year. What is the amount and character of the gain that Raven will recognize in
the current year? 110) Sarah sold 1,000 shares of stock to her brother, David,
for $18,000 more than a year ago. Sarah had purchased the stock for $20,000
several years earlier. What is the amount and character of David’s recognized
gain or loss in the current year if he sells the stock for $15,000 and $25,000,
respectively? McGraw-Hill’s Taxation of Individuals and Business Entities, 2018
Edition, 9e (Spilker) Chapter 12 Compensation 1) Current compensation is usually
comprised of salary, wages, and bonuses. 2) Employees complete a Form W-2 to
specify their income tax withholding. 3) Employers computing taxable income
receive a deduction for reasonable salary and wages paid to employees. 4)
Employers computing taxable income under the accrual method to unrelated
taxpayers may deduct wages accrued as compensation expense in one year and paid
in the subsequent year, as long as the company makes the payment within 2½
months after the employer’s year-end. 5) One purpose of Form W-4 is to determine
an employee’s withholding. 6) On Form W-4, an employee can only claim one
allowance for each personal or dependency exemption that will be claimed on the
employee’s income tax return. 7) An employee can indicate whether they want an
additional amount withheld for payroll taxes on the Form W-4. 8) Employers
receive a deduction for compensation paid to and employment taxes paid on behalf
of employees. 9) An employer always receives a deduction for total compensation
paid to a CEO. 10) One primary purpose of equity compensation is to motivate
employees. 11) The date on which stock options are given to the employee is
called the exercise date. 12) Stock options will always provide employees with
future compensation. 13) The date on which stock options are no longer subject
to forfeiture is called the vesting date. 14) When stock options are exercised
they are converted into actual employer stock. 15) Employees will always prefer
to receive incentive stock options over nonqualified stock options. 16)
Employers always prefer to award incentive stock options rather than
nonqualified stock options. 17) Employer’s expense for stock options is
typically recognized earlier for book than tax purposes. 18) The use of
restricted stock is increasing relative to the use of stock options. 19) The
employee’s income for restricted stock is typically measured on the grant date.
20) An employee’s income with respect to restricted stock is the fair market
value on the vesting date. 21) A section 83(b) election freezes the value of
restricted stock for compensation purposes on the vesting date. 22) Fringe
benefits are generally a form of non-cash compensation. 23) Taxable fringe
benefits include automobile allowances, gym memberships, and personal use
tickets to the theatre or sporting events. 24) Group-term life insurance is a
fringe benefit that can be partially taxable and partially tax free. 25)
Employers sometimes pay a “gross-up” to employees to cover taxes associated with
taxable fringe benefits they provide. 26) Employers cannot discriminate between
highly and non-highly compensated employees when providing taxable fringe
benefits. 27) Health insurance is an example of a nontaxable fringe benefit. 28)
If certain conditions are met, an apartment manager can exclude the fair market
value of free rent from his or her income. 29) Up to $5,250 of educational
benefits can be excluded from an employee’s compensation. 30) Up to $10,000 of
dependent care expenses can be excluded from an employee’s compensation. 31)
Hotel employees can receive free nights lodging on a space available basis
without incurring compensation. 32) Qualified employee discounts allow employees
to purchase employer goods at a discount. 33) Cornhusker Bank reimburses
employees for dues to the local banker’s association. The reimbursement is
includible in the employee’s income. 34) Employees may exclude from income items
such as occasional theatre tickets, t-shirts, or a Thanksgiving turkey. 35) For
2017, up to $300 of qualified transportation fringe benefits can be excluded
from income. 36) A cafeteria plan provides employees discounted meals at a
company sponsored dining room. 37) Flexible spending accounts allow employees to
set aside before-tax dollars for medical and dependent care expenses. 38) Which
of the following forms is filled out by an employee, who is a citizen, at the
beginning of an employment relationship? 1. A) Form Q-2. 2. B) Form W-2. 3. C)
Form W-4. 4. D) Form 1099. 39) Which of the following items is not included on
an employee’s Form W-2? 1. A) Taxable wages, tips, and compensation. 2. B)
Social Security withholding. 3. C) Value of stock options granted during the
year. 4. D) Federal and state income tax withholding. 40) Which of the following
statements regarding compensation is false? 1. A) Wages are usually paid by the
hour. 2. B) Salary is usually a form of fixed compensation. 3. C) Bonuses are a
form of compensation obtained if certain criteria are met. 4. D) Bonuses paid
within 2½ months of year-end are included in employee’s compensation in the year
they were earned. 41) Which of the following statements regarding income tax
withholding is incorrect? 1. A) The withholding tables are designed so that
employee withholding approximates the tax liability. 2. B) Large itemized
deductions require the need for additional withholding. 3. C) The withholding
tables vary based on filing status. 4. D) Extra allowances can be claimed and
reduce withholding. 42) Which of the following isn’t reported on the Form W-2?
1. A) The employee’s taxable salary and wages. 2. B) Annual Federal and state
withholding information. 3. C) Indication as to whether an employee had more
than one employer during the year. 4. D) Annual amount of Social Security and
Medicare tax withholding information. 43) Which of the items is not correct
regarding withholding? 1. A) Employees that also have self-employment income can
have additional amounts of federal tax withheld to avoid estimated tax payments.
2. B) Employees cannot claim an allowance for a child unless they are entitled
to claim the child as a dependent. 3. C) Employees can claim exempt status and
avoid withholding. 4. D) Married employees can choose to have income tax
withholding on wages withheld at the higher single rates. 44) Which of the
following regarding the Form W-4 is incorrect? 1. A) Determines an employee’s
income tax withholding. 2. B) Employees can claim more allowances than personal
exemptions that will be claimed. 3. C) Employees can specify additional amounts
to be withheld each month. 4. D) The form can only be adjusted at the beginning
of year or start of employment. 45) Which of the following statements is true
regarding the $1,000,000 limit on covered employees for publicly-traded
companies? 1. A) The limitation applies to all employees. 2. B) The limitation
applies to all officers. 3. C) The limitation applies only to the CEO and three
other highest compensated officers. 4. D) The limitation applies only to the CEO
and three other highest compensated officers, not including the CFO. 46) When a
publicly-traded CEO’s salary exceeds $1,000,000, the employee ________ taxed on
the entire amount, and the employer ________ allowed a deduction on the entire
amount. 1. A) is; is 2. B) is; is not 3. C) is not; is 4. D) is not; is not 47)
Which of the following is not a purpose of equity-based compensation? 1. A)
Provide both risk and incentives to employees. 2. B) Motivate employees by
aligning employee and employer incentives. 3. C) Avoid compensation limits for
certain publicly-traded company executives. 4. D) Provides a low or no cost form
of compensation. 48) Which of the following is true regarding stock options? 1.
A) A loss is realized when stock options lapse. 2. B) There is typically no tax
effect on the grant date. 3. C) Income recognized on the exercise date is
greater for incentive stock options than nonqualified options. 4. D) The bargain
element on a nonqualified option is taxed to employees at capital gain rates.
49) Which of the following refers to the date stock options are awarded to an
employee? 1. A) Grant date. 2. B) Exercise date. 3. C) Lapse date. 4. D) Vesting
date. 50) Aharon exercises 10 stock options awarded several years ago. The
following information pertains to the options: (1) each option gives the
employee the right to buy 10 shares, (2) the market price on the grant date was
$7, (3) the strike price is $10, and (4) the market price on the exercise date
was $15. How much will it cost Aharon to purchase the options on the exercise
date? 1. A) $90. 2. B) $500. 3. C) $700. 4. D) $1,000. 51) Maren received 10
NQOs (each option gives her the right to purchase 10 shares of stock for $8 per
share) at the time she started working when the stock price was $6 per share.
When the share price was $15 per share, she exercised all of her options.
Eighteen months later she sold all of the shares for $20 per share. What is the
amount of Maren’s bargain element? 1. A) $0. 2. B) $700. 3. C) $900. 4. D)
$1,500. 5. E) None of the choices are correct. 52) Maren received 10 NQOs (each
option gives her the right to purchase 10 shares of stock for $8 per share) at
the time she started working when the stock price was $6 per share. When the
share price was $15 per share, she exercised all of her options. Eighteen months
later she sold all of the shares for $20 per share. How much gain will Maren
recognize on the sale of the shares and how much tax will she pay assuming her
marginal tax rate is 39.6 percent? 1. A) $0 gain and $0 tax. 2. B) $500 gain and
$100 tax. 3. C) $500 gain and $175 tax. 4. D) $1,200 gain and $180 tax. 53) How
is the bargain element for a stock option calculated? 1. A) The difference
between the strike price and the market price on the date of grant. 2. B) The
difference between the market price on the exercise date and the market price on
the date of grant. 3. C) The difference between the market price on the exercise
date and the strike price. 4. D) The difference between the market price on the
sale date and the strike price. 54) Which of the following pairs of items is not
needed to calculate the after-tax proceeds for a same-day sale? 1. A) Strike
price and market price on exercise date. 2. B) Strike price and market price on
grant date. 3. C) Market price on sale date and market price on exercise date.
4. D) Market price on sale date and marginal tax rate. 55) Bad Brad received 20
NQOs (each option gives him the right to purchase 30 shares of stock for $12 per
share) from his employer. At the time he started working, the stock price was
$11 per share. Now that the share price is $25 per share, he exercises all of
the options. Two years later Bad Brad sells the stock for $27 per share. What is
Bad Brad’s basis in his stock for purposes of calculating the gain or loss at
the time of the sale? 1. A) $7,200. 2. B) $7,800. 3. C) $15,000. 4. D) $16,200.
56) Which of the following statements regarding restricted stock is false? 1. A)
Like stock options, restricted stock has to vest before it can be sold. 2. B)
Like nonqualified stock options, the employee’s income inclusion for restricted
stock is the bargain element. 3. C) Even if the value of restricted stock
decreases from the price on the grant date, it retains some value to the
employee. 4. D) There is no effective tax planning elections for restricted
stock. 57) Tom recently received 2,000 shares of restricted stock from his
employer, Independence Corporation, when the share price was $10 per share.
Tom’s restricted shares vested three years later when the market price was $14.
Tom held the shares for a little more than a year and sold them when the market
price was $20. What is the amount of Tom’s income or loss on the vesting date?
1. A) $0. 2. B) $10,000. 3. C) $20,000. 4. D) $28,000. 58) Tom recently received
2,000 shares of restricted stock from his employer, Independence Corporation,
when the share price was $10 per share. Tom’s restricted shares vested three
years later when the market price was $14. Tom held the shares for a little more
than a year and sold them when the market price was $12. What is the amount of
Tom’s income or loss on the sale? 1. A) $0. 2. B) $2,000 loss. 3. C) $4,000
gain. 4. D) $4,000 loss. 59) Which of the following is false regarding a section
83(b) election? 1. A) The election freezes the value of the employee’s
compensation as of the grant date. 2. B) The election is an important tax
planning tool if the stock is expected to increase in value. 3. C) The election
must be made within 30 days of the grant date. 4. D) If an employee leaves
before the vesting date, any loss is limited to $3,000. 60) Stevie recently
received 1,000 shares of restricted stock from her employer, Nicks Corporation,
when the share price was $8 per share. Stevie’s restricted shares vested three
years later when the market price was $11. Stevie held the shares for a little
more than a year and sold them when the market price was $16. What is the amount
of Stevie’s ordinary income with respect to the restricted stock? 1. A) $0. 2.
B) $5,000. 3. C) $8,000. 4. D) $11,000. 61) Stevie recently received 1,000
shares of restricted stock from her employer, Nicks Corporation, when the share
price was $8 per share. Stevie’s restricted shares vested three years later when
the market price was $11. Stevie held the shares for a little more than a year
and sold them when the market price was $16. Assuming Stevie made a section
83(b) election, what is the amount of Stevie’s ordinary income with respect to
the restricted stock? 1. A) $0. 2. B) $5,000. 3. C) $8,000. 4. D) $11,000. 62)
Which of the following is not an example of a taxable fringe benefit? 1. A)
Personal use of corporate jet. 2. B) $1,000,000 group term life insurance
policy. 3. C) $225 of employer provided parking. 4. D) Automobile allowance. 63)
Bonnie’s employer provides her with an annual dinner club membership costing
$5,000. Her marginal tax rate is 25 percent. Her employer has a marginal tax
rate of 35 percent. What is Bonnie’s after-tax benefit? 1. A) $0. 2. B) $1,250.
3. C) $3,750. 4. D) $5,000. 64) Grace’s employer is now offering group-term life
insurance. The company will provide each employee with $200,000 of group-term
life insurance. It costs Grace’s employer $700 to provide this amount of
insurance to Grace each year. Assuming that Grace is 43 years old, use the table
to determine the monthly premium that Grace must include in income as a result
of receiving the group-term life benefit. EXHIBIT 12-10 Uniform Premiums for
$1,000 of Group-Term Life Insurance Protection 5-Year Age Bracket

Cost per $1,000 of Protection for One Month

Under 25

$0.05

25 to 29

0.06

30 to 34

0.08

35 to 39

0.09

40 to 44

0.10

45 to 49

0.15

50 to 54

0.23

55 to 59

0.43

60 to 64

0.66

65 to 69

1.27

70 and above

2.06

1. A) $0. 2. B) $15.00. 3. C) $22.00. 4. D) $58.33. 65) Which of the following
is not an example of a nontaxable fringe benefit? 1. A) Monthly employer
provided transit benefit of $100. 2. B) Group-term life insurance policy
providing $100,000 of coverage. 3. C) Employer provided parking of $100 per
month. 4. D) Qualified employee discounts. 66) Which of the following does not
qualify as a “for the convenience of the employer” nontaxable fringe benefit? 1.
A) The fair market value of the rent of an apartment manager living on the
premises. 2. B) An overtime meal provided to an employee while working late. 3.
C) A meal provided by a hospital to residents during their shift. 4. D) A
company picnic. 67) Rachel receives employer provided health insurance. The
employer’s cost of the health insurance is $6,000 annually. What is her
employer’s after-tax cost of providing the health insurance, assuming that the
employer’s marginal tax rate is 35 percent and is profitable? 1. A) $0. 2. B)
$3,900. 3. C) $4,198. 4. D) $6,000. 68) Which of the following statements
regarding employer provided educational benefits is true? 1. A) All
undergraduate tuition expenses can be excluded. 2. B) Only educational benefits
from public universities can be excluded. 3. C) Up to $5,250 in tuition benefits
can be excluded. 4. D) All graduate tuition expenses are included. 69) Which of
the following benefits cannot be excluded as a no additional cost service fringe
benefit? 1. A) Free tax return preparation from a client. 2. B) Complementary
dry cleaning for employees at a laundry company. 3. C) A car wash at an
automobile dealership. 4. D) Free local phone service for phone company
employees. 70) Which of the following is not a requirement of a “qualified
employee discount”? 1. A) The discount relates to goods or services of the
employer. 2. B) The discount on services doesn’t exceed 20 percent of the price
offered to customers. 3. C) The discount can be elected up to five times
annually. 4. D) The employee discount on goods is not greater than employer’s
average gross profit. 71) Francis works for a local fly fishing shop. The shop
allows employees to purchase two fly rods per year at a discount. This year,
Francis purchased one rod. The rod normally retails for $300, was purchased for
$225, was sold to Francis for $250, and the employer’s average gross profit
percentage is 30 percent. What amount of the discount must be included in
Francis’ income? 1. A) $0. 2. B) $25. 3. C) $40. 4. D) Some other amount. 72)
Kevin is the financial manager of Levingston BMW. The shop allows employees to
purchase up to two vehicles at a discount. Levingston’s average gross profit
percentage is 15%. This year Kevin purchased a 530 model and a new M3. Model

FMV

Dealer cost

Employee Price

530

$63,000

$50,000

$54,000

M3

$70,000

$60,000

$57,000

What amount must Kevin include in income? 1. A) $0. 2. B) $2,500. 3. C) $2,950.
4. D) $22,000. 73) Which of the following is false regarding dependent care
expenses? 1. A) Up to $5,000 of reimbursed expenses can qualify. 2. B) Employers
may discriminate among employees. 3. C) Dependent children under 13 qualify. 4.
D) Spouses who are physically or mentally unable to care for themselves qualify.
74) Tasha receives reimbursement from her employer for dependent care expenses
for up to $8,000. Tasha applies for and receives reimbursement of $6,000 for her
10-year-old son. How much, if any, is includible in her income? 1. A) $0. 2. B)
$1,000. 3. C) $3,000. 4. D) $6,000. 75) Which of the following statements
concerning cafeteria plans is true? 1. A) Allows employees to choose from a menu
of fringe benefits or to choose cash. 2. B) Most of the menu choices are
nontaxable fringe benefits. 3. C) Any receipt of cash option that is elected is
treated at taxable compensation. 4. D) All of the statements are true. 76)
Tanya’s employer offers a cafeteria plan that allows employees to choose among a
number of benefits. Each employee is allowed $6,000 in benefits. For 2017, Tanya
selected $3,300 ($275 per month) of parking, $2,200 in 401(k) contributions, and
$800 of cash. How much must Tanya include in taxable income? 1. A) $0. 2. B)
$1,040. 3. C) $1,120. 4. D) $4,000. 77) Which of the following is a fringe
benefit that employers can discriminate among employees? 1. A) No additional
cost service. 2. B) Qualified employee discount. 3. C) Qualified transportation
fringe. 4. D) Employee educational assistance. 78) Lara, a single taxpayer with
a 30 percent marginal tax rate, desires health insurance. The health insurance
would cost Lara $5,000 to purchase if she pays for it herself (Lara’s AGI is too
high to receive any tax deduction for the insurance as a medical expense).
Lara’s employer has a 40 percent marginal tax rate. Ignoring payroll taxes, what
is the maximum amount of before-tax salary Lara would give up to receive health
insurance? (Round your answer to the nearest whole number) 1. A) $1,500. 2. B)
$5,000. 3. C) $7,143. 4. D) $8,333. 79) Leesburg paid its employee $200,000 of
compensation for the year. What is the after-tax cost of paying the salary
assuming a 30 percent marginal tax rate (ignore payroll taxes)? 80) Big Bucks, a
publicly-traded corporation, paid its CEO $1,500,000 of base compensation for
the year. What is the after-tax cost of paying the salary assuming a 30 percent
marginal tax rate? 81) Hazel received 20 NQOs (each option gives her the right
to purchase 10 shares of stock for $7 per share) at the time she started working
when the stock price was $14 per share. Now that the share price is $20 per
share, she intends to exercise all of her options. How much cash will Hazel need
on the exercise date? 82) Hazel received 20 NQOs (each option gives her the
right to purchase 10 shares of stock for $7 per share) at the time she started
working when the stock price was $14 per share. Now that the share price is $20
per share, she intends to exercise all of her options. How much income will
Hazel recognize on the exercise date and how much tax will she pay assuming her
marginal tax rate is 25 percent? 83) Hazel received 20 NQOs (each option gives
her the right to purchase 10 shares of stock for $7 per share) at the time she
started working when the stock price was $14 per share. Now that the share price
is $20 per share, she intends to exercise all of her options. If Hazel holds the
shares for two years and sells them when the market price is $25, how much gain
will Hazel recognize on the sale and how much tax will she pay assuming her
marginal tax rate is 25 percent? 84) Suzanne received 20 ISOs (each option gives
her the right to purchase 20 shares of stock for $12 per share) at the time she
started working when the stock price was $14 per share. Three years later, when
the share price was $23 per share, she exercised all of her options. How much
cash will Suzanne need on the exercise date? 85) Suzanne received 20 ISOs (each
option gives her the right to purchase 20 shares of stock for $12 per share) at
the time she started working when the stock price was $13 per share. Three years
later, when the share price was $23 per share, she exercised all of her options.
If Suzanne holds the shares for two additional years and sells them when the
market price is $30, how much gain will Suzanne recognize on the sale and how
much tax will she pay assuming her marginal tax rate is 39.6 percent? 86)
Suzanne received 20 ISOs (each option gives her the right to purchase 20 shares
of stock for $12 per share) at the time she started working when the stock price
was $13 per share. Three years later, when the share price was $23 per share,
she exercised all of her options. If Suzanne holds the shares for ten additional
months and sells them when the market price is $30, how much gain will Suzanne
recognize on the sale and how much tax will she pay assuming her marginal tax
rate is 35 percent? 87) Raja received 20 NQOs (each option gives him the right
to purchase 15 shares of stock for $10 per share) from his employer at the time
he started working when the stock price was $11 per share. Now that the share
price is $20 per share, he intends to exercise all of the options using a
same-day sale. What are Raja’s after-tax proceeds from the sale if his marginal
tax rate is 30 percent? 88) Kaijsa received 20 NQOs (each option gives her the
right to purchase 30 shares of stock for $8 per share) from her employer at the
time she started working when the stock price was $9 per share. Now that the
share price is $18 per share, she intends to exercise all of her options. If
Kaijsa holds the shares for two years and sells them when the market price is
$25, what is the amount of the deduction and tax savings her employer will
receive (assume the employer’s marginal tax rate is 30 percent)? 89) Rick
recently received 500 shares of restricted stock from his employer, Crazy
Corporation, when the share price was $5 per share. Rick’s restricted shares
vested three years later when the market price was $12. Rick held the shares for
a little more than a year and sold them when the market price was $15. What is
the amount of Rick’s income on the vesting date? Assuming a marginal tax rate of
30 percent, what is Rick’s tax on the restricted stock? 90) Rick recently
received 500 shares of restricted stock from his employer, Crazy Corporation,
when the share price was $5 per share. Rick’s restricted shares vested three
years later when the market price was $12. Rick held the shares for a little
more than a year and sold them when the market price was $15. What is the amount
of Rick’s gain on the sale of the stock? Assuming a marginal tax rate of 39.6
percent, what is Rick’s tax on the sale of the stock? 91) Rick recently received
500 shares of restricted stock from his employer, Crazy Corporation, when the
share price was $5 per share. Rick’s restricted shares vested three years later
when the market price was $12. Rick held the shares for a little more than a
year after vesting and sold them when the market price was $15. What is the
amount of Rick’s compensation income if Rick made an election under section
83(b) when the stock was granted? Assuming a marginal tax rate of 30 percent,
what is the amount of Rick’s ordinary income amount and tax liability at the
time of the income inclusion? 92) Rick recently received 500 shares of
restricted stock from his employer, Crazy Corporation, when the share price was
$5 per share. Rick’s restricted shares vested three years later when the market
price was $12. Rick held the shares for a little more than a year after vesting
and sold them when the market price was $15. Assuming that Rick made an election
under section 83(b) when the stock was granted and that his marginal tax rate is
30 percent, what is the amount of Rick’s income inclusion and tax liability upon
the sale of the stock? 93) Kimberly’s employer provides her with a personal
travel allowance of $10,000 annually. Her marginal tax rate is 30 percent. Her
employer has a marginal tax rate of 35 percent. What is Kimberly’s after-tax
benefit, ignoring payroll taxes? 94) Hope’s employer is now offering group-term
life insurance. The company will provide each employee with $200,000 of
group-term life insurance. It costs Hope’s employer $700 to provide this amount
of insurance to Hope each year. Assuming that Hope is 27 years old, use the
table to determine the monthly premium that Hope must include in income as a
result of receiving the group-term life benefit? EXHIBIT 12-10 Uniform Premiums
for $1,000 of Group-Term Life Insurance Protection 5-Year Age Bracket

Cost per $1,000 of Protection for One Month

Under 25

$0.05

25 to 29

0.06

30 to 34

0.08

35 to 39

0.09

40 to 44

0.10

45 to 49

0.15

50 to 54

0.23

55 to 59

0.43

60 to 64

0.66

65 to 69

1.27

70 and above

2.06

95) Brandy graduated from Vanderbilt with her bachelor’s degree recently. She
works for Walton & Company CPAs. The firm pays her tuition ($8,000 per year) for
her so that she can receive her MBA. How much of the $8,000 tuition benefit does
Brandy need to include in her income? 96) Frederique works for a furniture
retailer. The shop allows all employees to purchase 10 pieces of furniture per
year at a discount. This year Frederique purchased eight pieces. She gave three
pieces as a gift to her brother as a wedding present. Her employer’s average
gross profit percentage is 25 percent. Each piece was 20 percent off of normal
retail prices and in all cases the employee price exceeded the employer’s cost.
What amount of the discount must be included in Frederique’s income? 97) Jane is
an employee of Rohrs Golf Emporium. The shop allows employees to purchase
equipment at significant discount. This year Jane purchased several new items to
improve her game. Model

FMV

Dealer cost

Employee Price

Driver

$

600

$

400

$

450

Irons

$

1,200

$

700

$

800

Balls

$

80

$

75

$

70

Bag

$

250

$

175

$

200

If the employer’s average gross profit percentage is 30 percent, what amount
must Jane include in income? 98) Annika’s employer provides only its executives
with parking benefits. The fair market value of the annual parking benefit is
$4,800 ($400 per month). What is the amount Annika must include into income with
respect to her parking benefit in 2017? 99) Annika’s employer provides each
employee with up to $200 of monthly vouchers for public transportation. What is
the amount that Annika must include into income with respect to her benefit in
2017? 100) Corinne’s employer offers a cafeteria plan that allows employees to
choose among a number of benefits. Each employee is allowed $12,000 in benefits.
For the current year, Corinne selected $4,500 of health insurance, $5,500 of
dependent care, $1,000 in 401(k) contributions, and $1,000 of cash. How much
must Corinne include in taxable income? 101) Lina, a single taxpayer with a 35
percent marginal tax rate, desires health insurance. The health insurance would
cost Lina $8,000 to purchase if she pays for it herself (Lina’s AGI is too high
to receive any tax deduction for the insurance as a medical expense). Lina’s
employer has a 30 percent marginal tax rate. What is the maximum amount of
before-tax salary Lina would give up to receive health insurance? (Round your
answer to the nearest whole number.) 102) Lina, a single taxpayer with a 35
percent marginal tax rate, desires health insurance. The health insurance would
cost Lina $8,000 to purchase if she pays for it herself (Lina’s AGI is too high
to receive any tax deduction for the insurance as a medical expense). Because of
group discounts, her employer can purchase the insurance for $6,000. Lina’s
employer has a 30 percent marginal tax rate. What would be the after-tax cost to
Lina’s employer to provide her with health insurance? McGraw-Hill’s Taxation of
Individuals and Business Entities, 2018 Edition, 9e (Spilker) Chapter 13
Retirement Savings and Deferred Compensation 1) Qualified retirement plans
include defined benefit plans but not defined contribution plans. 2) Defined
benefit plans specify the amount of benefit an employee will receive on
retirement while defined contribution plans specify the amounts that employers
and employees will (or can) contribute to an employee’s plan. 3) The standard
retirement benefit an employee will receive under a defined benefit plan depends
on the number of years of service the employee provides, but does not consider
the amount of the employee’s compensation near retirement. 4) Jacob participates
in his employer’s defined benefit plan. He has worked for his employer for four
full years. If his employer uses a five-year cliff vesting schedule, Jacob will
need to work another year in order to vest in any of his defined benefit plan
retirement benefits. 5) Distributions from defined benefit plans are taxed as
long-term capital gains to beneficiaries. 6) Taxpayers withdrawing funds from an
IRA before they turn 70½ are generally subject to a 10 percent penalty on the
amount of the withdrawal. 7) Both 401(k) plans and Roth 401(k) plans are forms
of defined contribution plans. 8) Both employers and employees may contribute to
defined contribution plans. However, the amount that employees may contribute to
the plan in a given year is limited by the tax law while the amount that
employers may contribute is not. 9) When an employer matches an employee’s
contribution to the employee’s 401(k) account, the employee is immediately taxed
on the amount of the employer’s matching contribution. 10) Employees who are at
least 50 years old at the end of the year are allowed to contribute more to
their 401(k) accounts than employees who are not 50 years old by year-end. 11)
Heidi retired from GE (her employer) at age 56. At the end of the year, when she
was 56 years of age, Heidi received a distribution from her GE sponsored 401(k)
account. Because Heidi was not at least 59½ years of age at the time of the
distribution, she must pay tax on the full amount of the distribution and a 10
percent penalty on the full amount of the distribution. 12) Retired taxpayers
over 59½ years of age at the end of the year must receive minimum distributions
from defined contribution plans or they are subject to a penalty. 13) On
December 1, 2017 Irene turned 71 years old. She is still working for her
employer and she participates in her employer’s 401(k) plan. Irene is not
required to receive a minimum distribution for 2017 from her 401(k) account
because she has not yet retired. 14) An employer may contribute to an employee’s
traditional 401(k) account but the employer may not contribute to an employee’s
Roth 401(k) account. 15) Employee contributions to traditional 401(k) accounts
are deductible by the employee, but employee contributions to Roth 401(k)
accounts are not. 16) When a taxpayer receives a nonqualified distribution from
a Roth 401(k) account the taxpayer contributions are deemed to be distributed
first. If the amount of the distribution exceeds the taxpayer contributions, the
remainder is from the account earnings. 17) Just like distributions from
qualified retirement plans, distributions from nonqualified deferred
compensation plans are taxed as ordinary income to the recipient. 18)
Participating in an employer-sponsored nonqualified deferred compensation plan
is potentially risky because employers are not required to fund nonqualified
plans. If the employer is not able to pay the employee when the payment is due,
the employee usually becomes an unsecured creditor of the employer. 19) From a
tax perspective, participating in a nonqualified deferred compensation plan is
an effective tax planning strategy when the employee anticipates that her
marginal tax rate will be higher when she receives the deferred compensation
than when she defers the compensation. 20) Employers may choose whom they allow
to participate and whom they do not allow to participate in their nonqualified
deferred compensation plans. 21) Taxpayers who participate in an
employer-sponsored retirement plan are not allowed to contribute to individual
retirement accounts (IRAs). 22) Taxpayers who participate in an
employer-sponsored retirement plan are not allowed to deduct contributions to
individual retirement accounts (IRAs) under any circumstances. 23) Darren is
eligible to contribute to a traditional 401(k) in 2017. He forgot to contribute
before year-end. If he contributes before April 15, 2018, he is allowed to treat
the contribution as though he made it during 2017. 24) Taxpayers never pay tax
on the earnings of a traditional 401(k) account. 25) Qualified distributions
from traditional IRAs are nontaxable while qualified distributions from Roth
IRAs are fully taxable as ordinary income. 26) Taxpayers contributing to and
receiving distributions from a Roth IRA generally earn a before-tax rate of
return on their contributions equal to their after-tax rate of return. 27) If a
taxpayer’s marginal tax rate is decreasing, a taxpayer contributing to a
traditional IRA can earn an after-tax rate of return greater than her before-tax
rate of return. 28) A SEP IRA is an example of a self-employed retirement
account. 29) Individual 401(k) plans generally have higher contribution limits
than SEP IRAs. 30) A taxpayer can only receive a saver’s credit if she
contributes to a qualified retirement account. 31) High-income taxpayers are not
allowed to receive the saver’s credit. 32) Which of the following statements is
true regarding employer-provided qualified retirement plans? 1. A) May
discriminate against rank and file employees. 2. B) Deductible contributions are
generally phased-out based on AGI. 3. C) Executives are generally ineligible to
participate in these plans. 4. D) They are generally referred to as defined
benefit plans or defined contribution plans. 33) Which of the following
describes a defined benefit plan? 1. A) Provides fixed income to the plan
participants based on a formula. 2. B) Distribution amounts determined by
employee and employer contributions. 3. C) Allows executives to defer income for
a period of years. 4. D) Retirement account set up by an individual. 34) Which
of the following statements regarding defined benefit plans is false? 1. A) The
benefits are based on a fixed formula. 2. B) The vesting period can be based on
a graded or cliff schedule. 3. C) Employees bear the investment risks of the
plan. 4. D) Employers are generally required to make annual contributions to
meet expected future liabilities. 35) Which of the following statements
regarding vesting in a defined benefit plan is correct? 1. A) Under a cliff
vesting schedule, a portion of an employee’s benefits vest each year. 2. B)
Under a graded vesting schedule, an employee’s entire benefit vests all at the
same time. 3. C) When an employee’s benefits vest, she is entitled to
participate in the employer’s defined benefit plan. 4. D) When an employee’s
benefits vest, she is legally entitled to receive the vested benefits. 36) Dean
has earned $70,000 annually for the past five years working as an architect for
WCC Inc. Under WCC’s defined benefit plan (which uses a 7-year graded vesting
schedule) employees earn a benefit equal to 3.5% of the average of their three
highest annual salaries for every full year of service with WCC. Dean has worked
for five full years for WCC and his vesting percentage is 60%. What is Dean’s
vested benefit (or annual retirement benefit he has earned so far)? 1. A)
$12,250. 2. B) $42,000. 3. C) $7,350. 4. D) $0. 37) Dean has earned $70,000
annually for the past 4½ years working as an architect for MWC. Under MWC’s
defined benefit plan (which uses a 5-year cliff vesting schedule) employees earn
a benefit equal to 3.5% of the average of their three highest annual salaries
for every full year of service with MWC. What is Dean’s vested benefit (or
annual benefit he has earned so far)? 1. A) $12,250. 2. B) $42,000. 3. C)
$7,350. 4. D) $0. 38) Which of the following best describes distributions from a
defined benefit plan? 1. A) Distributions from defined benefit plans are taxable
as ordinary income. 2. B) Distributions from defined benefit plans are partially
taxable as ordinary income and partially nontaxable as a return of capital. 3.
C) Distributions from defined benefit plans are taxable as capital gains. 4. D)
Distributions from defined benefit plans are partially taxable as capital gains
and partially nontaxable as a return of capital. 39) Which of the following is a
true statement regarding saving for retirement? 1. A) In a given year, a
taxpayer may participate in either an employer-sponsored defined benefit plan or
defined contribution plan but not both. 2. B) In a given year, a taxpayer who
receives salary as an employee and also receives self-employment income may
participate in an employer-sponsored defined contribution plan or may contribute
to a self-employed retirement account but not both. 3. C) In a given year, a
taxpayer may contribute to an IRA (either traditional or Roth) or contribute to
a self-employment retirement account but not both. 4. D) None of the choices is
a true statement. 40) Which of the following describes a defined contribution
plan? 1. A) Provides guaranteed income on retirement to plan participants. 2. B)
Employers and employees generally may contribute to the plan. 3. C) Generally
set up to defer income for executives and highly compensated employees but not
other employees. 4. D) Retirement account set up to provide an individual a
fixed amount of income on retirement. 41) Which of the following statements
regarding defined contribution plans is false? 1. A) Employers bear investment
risk relating to the plan. 2. B) Employees immediately vest in their
contributions to the plan. 3. C) Employers typically match employee
contributions to the plan to some extent. 4. D) An employer’s vesting schedule
is used for employers’ contributions in determining the amount of the plan
benefits the employee is entitled to receive on retirement. 42) Which of the
following statements regarding contributions to defined contribution plans is
true? 1. A) Employer contributions to a defined contribution plan are not
limited by the tax law. 2. B) Employee contributions to a defined contribution
plan are not limited by the tax law. 3. C) An employee who is at least 60 years
of age as of the end of the year may contribute more to a defined contribution
plan than an employee who has not reached age 60 by year-end. 4. D) The tax laws
limit the sum of the employer and employee contributions to a defined
contribution plan. 43) When employees contribute to a traditional 401(k) plan,
they ________ allowed to deduct the contributions and they ________ taxed on
distributions from the plan. 1. A) are; are not 2. B) are; are 3. C) are not;
are 4. D) are not; are not 44) When employees contribute to a Roth 401(k)
account, they ________ allowed to deduct the contributions and they ________
taxed on distributions from the plan. 1. A) are; are not 2. B) are; are 3. C)
are not; are 4. D) are not; are not 45) Which of the following statements
describes how a traditional 401(k) account is similar to a Roth 401(k) account?
1. A) Employees contribute before-tax dollars to both types of accounts. 2. B)
Distributions from a traditional 401(k) account and a Roth 401(k) account are
both subject to minimum distribution penalties. 3. C) Both accounts can receive
matching contributions from employers. 4. D) Employers generally choose how
funds in these accounts will be invested. 46) Which of the following best
describes distributions from a traditional defined contribution plan? 1. A)
Distributions from defined contribution plans are fully taxable to the recipient
as ordinary income. 2. B) Distributions from defined contribution plans are
partially taxable to the recipient as ordinary income and partially nontaxable
as a return of capital. 3. C) Distributions from defined contribution plans are
fully taxable to the recipient as long-term capital gains. 4. D) Distributions
from defined contribution plans are partially taxable to the recipient as
capital gains and partially nontaxable as a return of capital. 47) Shauna
received a distribution from her 401(k) account this year. In which of the
following situations will Shauna be subject to an early distribution penalty? 1.
A) Shauna is 60 years of age but not yet retired when she receives the
distribution. 2. B) Shauna is 58 years of age but not yet retired when she
receives the distribution. 3. C) Shauna is 56 years of age and retired when she
receives the distribution. 4. D) Shauna is 69 years of age but not yet retired
when she receives the distribution. 48) Shauna received a $100,000 distribution
from her 401(k) account this year. Assuming Shauna’s marginal tax rate is 25%,
what is the total amount of tax and penalty Shauna will be required to pay if
she receives the distribution on her 59th birthday and she has not yet retired?
1. A) $0. 2. B) $10,000. 3. C) $25,000. 4. D) $35,000. 5. E) None of the choices
are correct. 49) Riley participates in his employer’s 401(k) plan. He retired in
2017 at age 75. When must Riley receive his distribution pertaining to 2017 to
avoid minimum distribution penalties? 1. A) April 1, 2017. 2. B) April 1, 2018.
3. C) December 31, 2017. 4. D) December 31, 2018. 50) Riley participates in his
employer’s 401(k) plan. He turns 70 years of age on February 15, 2016 and he
plans on retiring on July 1, 2018. When must Riley receive his first
distribution from the plan to avoid minimum distribution penalties? 1. A) by
April 1, 2016. 2. B) by April 1, 2017. 3. C) by April 1, 2018. 4. D) by April 1,
2019. 51) Riley participates in his employer’s 401(k) plan. He turns 69 years of
age on February 15, 2017, and he plans on retiring on July 1, 2017. When must
Riley receive his first distribution from the plan to avoid minimum distribution
penalties? 1. A) by April 1, 2017. 2. B) by April 1, 2018. 3. C) by April 1,
2019. 4. D) by April 1, 2020. 52) Which of the following statements is true
regarding taxpayers receiving distributions from traditional defined
contribution plans? 1. A) A taxpayer who retires at age 71 in 2017 is required
to pay a minimum distribution penalty if she does not receive a distribution in
2017. 2. B) The minimum distribution penalty is 30% of the amount required to
have been distributed. 3. C) A taxpayer who receives a distribution from a
retirement account before she is 55 years old is subject to a 10% penalty on
both the distributed and undistributed portions of her retirement account. 4. D)
Taxpayers are not allowed to deduct either early distribution penalties or
minimum distribution penalties. 53) Jenny (35 years old) is considering making a
one-time contribution to either a traditional 401(k) plan or to a Roth 401(k)
plan. She plans to withdraw the account balance when she retires in 40 years.
Jenny expects to earn a 7% before-tax rate of return no matter which plan she
contributes to. Which of the following statements is true? 1. A) If Jenny’s
marginal tax rate in the year of contribution is higher than her marginal tax
rate in the year of distribution, she will earn a higher after-tax rate of
return on the traditional 401(k) plan than on the Roth 401(k) plan. 2. B) If
Jenny’s marginal tax rate in the year of contribution is lower than her marginal
tax rate in the year of distribution, she will earn a higher after-tax rate of
return on the traditional 401(k) plan than on the Roth 401(k) plan. 3. C) Jenny
will earn the same after-tax rate of return no matter which plan she contributes
to. 4. D) Jenny is not allowed to make a one-time contribution to either plan.
54) Which of the following statements regarding Roth 401(k) accounts is false?
1. A) Employees can make contributions to a Roth 401(k). 2. B) Employers can
make contributions to Roth accounts on behalf of their employees. 3. C)
Contributions to Roth 401(k) plans are not deductible. 4. D) Qualified
distributions from Roth 401(k) plans are not taxable. 55) Which of the following
statements is true regarding distributions from Roth 401(k) accounts? 1. A)
There are no minimum distribution requirements for distributions from Roth
401(k) accounts. 2. B) Qualified distributions are subject to taxation. 3. C) A
taxpayer receiving a nonqualified distribution from a Roth 401(k) account may be
taxed on a portion but not all of the distribution. 4. D) None of the choices is
a true statement. 56) Heidi, age 45, has contributed $20,000 in total to her
Roth 401(k) account over a six-year period. When her account was worth $50,000
and Heidi was in desperate need of cash, Heidi received a $30,000 nonqualified
distribution from the account. How much of the distribution will be subject to
income tax and 10% penalty? 1. A) $0. 2. B) $10,000. 3. C) $12,000. 4. D)
$18,000. 5. E) $30,000. 57) Which of the following is true concerning employer
funding of nonqualified deferred compensation plans? 1. A) Employers are
required to invest salary deferred by employees in investments specified by the
employees. 2. B) Employers are required to annually fund their deferred
compensation obligations to employees. 3. C) Employers annually deduct the
amount earned by employees under the plan. 4. D) Employers may discriminate in
terms of who they allow to participate in the plan. 58) Which of the following
statements concerning nonqualified deferred compensation plans is true? 1. A) If
an employer doesn’t have the funds to pay the employee, the employee becomes an
unsecured creditor of the employer. 2. B) These plans can be an important tax
planning tool for employers if they expect their marginal tax rate to decrease
over time. 3. C) These plans can be an important tax planning tool for employees
who expect their marginal tax rate to increase over time. 4. D) Distributions
are taxed at the same tax rate as long-term capital gains. 59) Which of the
following statements comparing qualified defined contribution plans and
nonqualified deferred compensation plans is false? 1. A) Employers must fund
qualified defined contribution plans but not nonqualified deferred compensation
plans. 2. B) Qualified defined contribution plans are subject to formal vesting
requirements while nonqualified deferred compensation plans are not. 3. C)
Distributions from both types of plans are taxed at ordinary income tax rates.
4. D) In terms of tax consequences to the employee, earnings on qualified plans
(except Roth plans) are deferred until distributed to the employee but earnings
on nonqualified plans are immediately taxable. 60) During 2017, Jacob, a 19 year
old full-time student, earned $4,500 during the year and was not eligible to
participate in an employer-sponsored retirement plan. The general limit for
deductible contributions to an IRA during 2017 is $5,500. How much of a
tax-deductible contribution can Jacob make to an IRA? 1. A) $0 (Full-time
students are not allowed to participate in IRAs). 2. B) $500. 3. C) $4,500. 4.
D) $5,500. 61) Which of the following statements regarding traditional IRAs is
true? 1. A) Once a taxpayer reaches age 55 years of age she is allowed to
contribute an additional $1,000 a year. 2. B) Taxpayers with high income are not
allowed to contribute to traditional IRAs. 3. C) Taxpayers who participate in an
employer-sponsored retirement plan are allowed to deduct contributions to a
traditional IRA regardless of their AGI. 4. D) A single taxpayer with no earned
income is not allowed to deduct contributions to traditional IRAs. 62) Which of
the following statements regarding IRAs is false? 1. A) Taxpayers who
participate in an employer-sponsored retirement plan may be allowed to make
deductible contributions to a traditional IRA. 2. B) The ability to make
deductible contributions to a traditional IRA and nondeductible contributions to
a Roth IRA may be subject to phase-out based on AGI. 3. C) A taxpayer may
contribute to a traditional IRA in 2017 but deduct the contribution on her 2016
tax return. 4. D) Taxpayers who have made nondeductible contributions to a
traditional IRA are taxed on the full proceeds when they receive distributions
from the IRA. 63) Bryan, who is 45 years old, had some surprise medical expenses
during the year. To pay for these expenses (which were claimed as itemized
deductions on his tax return), he received a $20,000 distribution from his
traditional IRA (he has only made deductible contributions to the IRA). Assuming
his marginal ordinary income tax rate is 15%, what amount of taxes and/or early
distribution penalties will Bryan be required to pay on this distribution? 1. A)
$3,000 income tax; $2,000 early distribution penalty. 2. B) $3,000 income tax;
$0 early distribution penalty. 3. C) $0 income tax; $2,000 early distribution
penalty. 4. D) $0 income tax; $0 early distribution penalty. 64) Jessica retired
at age 65. On the date of her retirement, the balance in her traditional IRA was
$200,000. Over the years, Jessica had made $20,000 of nondeductible
contributions and $60,000 of deductible contributions to the account. If Jessica
receives a $50,000 distribution from the IRA on the date of retirement, what
amount of the distribution is taxable? 1. A) $0. 2. B) $5,000. 3. C) $37,500. 4.
D) $45,000. 5. E) $50,000. 65) Which of the following statements regarding Roth
IRAs is false? 1. A) Contributions to Roth IRAs are not deductible. 2. B)
Qualified distributions from Roth IRAs are not taxable. 3. C) Whether or not
they participate in an employer-sponsored retirement plan, taxpayers are allowed
to contribute to Roth IRAs as long as their AGI does not exceed certain
thresholds. 4. D) Taxpayers who are married and file separately are not allowed
to contribute to Roth IRAs. 66) Which of the following statements regarding Roth
IRAs distributions is true? 1. A) A distribution is not a qualified distribution
unless the distribution is at least two years after the taxpayer has opened the
Roth IRA. 2. B) A taxpayer receiving a distribution from a Roth IRA before
reaching the age of 55 is generally not subject to an early distribution
penalty. 3. C) A Roth IRA does not have minimum distribution requirements. 4. D)
The full amount of all nonqualified distributions is subject to tax at the
taxpayer’s marginal tax rate. 67) Daniela retired at the age of 65. The current
balance in her Roth IRA is $200,000. Daniela established the Roth IRA 10 years
ago. Through a rollover and annual contributions Daniela has contributed $80,000
to her account. If Daniela receives a $50,000 distribution from the Roth IRA,
what amount of the distribution is taxable? 1. A) $0. 2. B) $20,000. 3. C)
$30,000. 4. D) $50,000. 68) Lisa, age 45, needed some cash so she withdrew
$50,000 from her Roth IRA. At the time of the distribution, the balance in the
Roth IRA was $200,000. Lisa established the Roth IRA 8 years ago. Through a
rollover and annual contributions, she has contributed $80,000 to her account.
What amount of the distribution is taxable and subject to early distribution
penalty? 1. A) $0. 2. B) $20,000. 3. C) $30,000. 4. D) $50,000. 69) Lisa, age
45, needed some cash so she withdrew $50,000 from her Roth IRA. At the time of
the distribution, the balance in the Roth IRA was $200,000. Lisa established the
Roth IRA 10 years ago. Over the years, she has contributed $20,000 to her
account. What amount of the distribution is taxable and subject to early
distribution penalty? 1. A) $0. 2. B) $5,000. 3. C) $30,000. 4. D) $50,000. 70)
Tyson (48 years old) owns a traditional IRA with a current balance of $50,000.
The balance consists of $30,000 of deductible contributions and $20,000 of
account earnings. Convinced that his marginal tax rate will increase in the
future, Tyson receives a distribution of the entire $50,000 balance of his
traditional IRA and he immediately contributes the $50,000 to a Roth IRA.
Assuming his marginal tax rate is 25%, what amount of penalty, if any, must
Tyson pay on the distribution from the traditional IRA? 1. A) $0. 2. B) $1,250.
3. C) $3,750. 4. D) $5,000. 71) Tyson (48 years old) owns a traditional IRA with
a current balance of $50,000. The balance consists of $30,000 of deductible
contributions and $20,000 of account earnings. Tyson’s marginal tax rate is 25%.
Convinced that his marginal tax rate will increase in the future, Tyson receives
a distribution of the entire $50,000 balance of his traditional IRA. He retains
$12,500 to pay tax on the distribution and he contributes $37,500 to a Roth IRA.
What amount of income tax and penalty must Tyson pay on this series of
transactions? 1. A) $0 income tax; $0 penalty. 2. B) $12,500 income tax; $1,250
penalty. 3. C) $12,500 income tax; $3,000 penalty. 4. D) $12,500 income tax;
$5,000 penalty. 72) Which of the following statements concerning traditional
IRAs and Roth IRAs is true? 1. A) A taxpayer may contribute to a Roth IRA at any
age but a taxpayer is not allowed to contribute to a traditional IRA after
reaching 70½ years of age. 2. B) The annual contribution limits for a
traditional IRA and Roth IRA are the same. 3. C) Taxpayers with high income are
allowed to contribute to traditional IRAs but not to Roth IRAs. 4. D) All of the
choices are true. 73) Which of the following is not a self-employed retirement
account? 1. A) SEP IRA. 2. B) SEM 403(c). 3. C) Individual 401(k). 4. D) None of
the choices are correct. All of the choices are self-employed retirement
accounts. 74) In general, which of the following statements regarding
self-employed retirement accounts is true? 1. A) In general, SEP IRAs have
higher contribution limits than individual 401(k)s if the contributing taxpayer
is at least 50 years of age at year end. 2. B) In general, SEP IRAs have higher
contribution limits than individual 401(k)s no matter the age of the
contributing taxpayer. 3. C) In general, Individual 401(k)s have higher
contribution limits than SEP IRAs. 4. D) None of the choices are true. In
general, both SEP IRAs and individual 401(k)s have exactly the same annual
contribution limits. 75) Which of the following statements regarding
self-employed retirement accounts is true? 1. A) A self-employed taxpayer who
has hired employees may not set up a SEP IRA. 2. B) A self-employed taxpayer who
has hired employees may set up either a SEP IRA or an individual 401(k). 3. C) A
self-employed taxpayer who has hired employees may not set up an individual
401(k). 4. D) All of the choices are false. 76) Which of the following is true
concerning SEP IRAs? 1. A) SEP IRAs are difficult to set up and have high
administrative costs. 2. B) Taxpayers may contribute unlimited amounts to SEP
IRAs. 3. C) Employees of the taxpayer cannot be included in SEP IRAs. 4. D)
Taxpayers with a SEP IRA must contribute for their employees. 77) Which of the
following statements concerning individual 401(k)s is false? 1. A) In general,
individual 401(k)s have higher administrative costs than SEP IRAs. 2. B)
Employees of the taxpayer cannot participate in individual 401(k)s. 3. C)
Individual 401(k)s are available only to self-employed taxpayers with 100 or
fewer employees. 4. D) Individual 401(k)s have contribution limitations. 78)
Kathy is 60 years of age and self-employed. During 2017 she reported $100,000 of
revenues and $40,000 of expenses relating to her self-employment activities. If
Kathy has no other retirement accounts in her name, what is the maximum amount
she can contribute to a simplified employee pension (SEP) IRA for 2017? (Round
your final answer to the nearest whole number) 1. A) $11,152. 2. B) $17,152. 3.
C) $60,000. 4. D) $54,000. 79) Kathy is 48 years of age and self-employed.
During 2017 she reported $100,000 of revenues and $40,000 of expenses relating
to her self-employment activities. If Kathy has no other retirement accounts in
her name, what is the maximum amount she can contribute to a simplified employee
pension (SEP) IRA for 2017? (Round your final answer to the nearest whole
number) 1. A) $11,152. 2. B) $17,152. 3. C) $60,000. 4. D) $54,000. 80) Kathy is
60 years of age and self-employed. During 2017 she reported $500,000 of revenues
and $100,000 of expenses relating to her self-employment activities. If Kathy
has no other retirement accounts in her name, what is the maximum amount she can
contribute to a simplified employee pension (SEP) IRA for 2017? (Round your
final answer to the nearest whole number) 1. A) $54,000. 2. B) $60,000. 3. C)
$77,351. 4. D) $369,400. 81) Kathy is 60 years of age and self-employed. During
2017, she reported $100,000 of revenues and $40,000 of expenses relating to her
self-employment activities. If Kathy has no other retirement accounts in her
name, what is the maximum amount she can contribute to an individual 401(k) for
2017? (Round your final answer to the nearest whole number) 1. A) $29,152. 2. B)
$35,152. 3. C) $54,000. 4. D) $60,000. 82) Kathy is 48 years of age and
self-employed. During 2017, she reported $100,000 of revenues and $40,000 of
expenses relating to her self-employment activities. If Kathy has no other
retirement accounts in her name, what is the maximum amount she can contribute
to an individual 401(k) for 2017? (Round your final answer to the nearest whole
number) 1. A) $11,152. 2. B) $17,152. 3. C) $29,152. 4. D) $54,000. 83) Kathy is
60 years of age and self-employed. During 2017, she reported $500,000 of
revenues and $100,000 of expenses relating to her self-employment activities. If
Kathy has no other retirement accounts in her name, what is the maximum amount
she can contribute to an individual 401(k) for 2017? (Round your final answer to
the nearest whole number) 1. A) $54,000. 2. B) $60,000. 3. C) $95,351. 4. D)
$77,351. 84) Kathy is 48 years of age and self-employed. During the year she
reported $500,000 of revenues and $100,000 of expenses relating to her
self-employment activities. If Kathy has no other retirement accounts in her
name, what is the maximum amount she can contribute to an individual 401(k)? 1.
A) $54,000. 2. B) $60,000. 3. C) $77,351. 4. D) $83,351. 85) Which of the
following taxpayers is most likely to qualify for the saver’s credit? 1. A) A
low AGI taxpayer who does not contribute to any qualified retirement plan. 2. B)
A low AGI taxpayer who contributes to her employer’s 401(k) plan. 3. C) A high
AGI self-employed taxpayer. 4. D) A high AGI employee who does not contribute to
any qualified retirement plan. 86) Amy is single. During 2017, she determined
her adjusted gross income was $12,000. During the year, Amy also contributed
$2,500 to a Roth IRA. What is the maximum saver’s credit she may claim for the
year? 1. A) $1,250. 2. B) $2,500. 3. C) $1,000. 4. D) $0. 87) Amy is single.
During 2017, she determined her adjusted gross income was $12,000. During the
year, Amy also contributed $1,500 to a Roth IRA. What is the maximum saver’s
credit she may claim for the year? 1. A) $750. 2. B) $1,000. 3. C) $1,500. 4. D)
$0. 88) Amy files as a head of household. She determined her 2017 adjusted gross
income was $70,000. During the year, she contributed $2,500 to a Roth IRA. What
is the maximum saver’s credit she may claim for 2017? 1. A) $1,000. 2. B)
$2,000. 3. C) $2,500. 4. D) $1,250. 5. E) $0. 89) What is the maximum saver’s
credit available to any taxpayer in 2017? 1. A) $2,000. 2. B) $1,000. 3. C)
$500. 4. D) It depends on the filing status of the taxpayer. 90) Joan recently
started her career with PDEK Accounting, LLP which provides a defined benefit
plan for all employees. Employees receive 1.5 percent of the average of their
three highest annual salaries for each full year of service. Plan benefits vest
under a 5-year cliff schedule. Joan worked 4½ years at PDEK before leaving for
another opportunity. She received an annual salary of $49,000, $52,000, $58,000
and $65,000 for years one through four, respectively. Joan earned $35,000 of her
$70,000 annual salary in year five. What is the vested benefit Joan is entitled
to receive from PDEK for her retirement? 91) Joan recently started her career
with PDEK Accounting, LLP which provides a defined benefit plan for all
employees. Employees receive 1.5 percent of the average of their three highest
annual salaries for each full year of service. Plan benefits vest under a 5-year
cliff schedule. Joan worked 5½ years at PDEK before leaving for another
opportunity. She received an annual salary of $49,000, $52,000, $58,000,
$65,000, and $75,000 for years one through five respectively. Joan earned
$40,000 of her $80,000 annual salary in year six. What is the vested benefit
Joan is entitled to receive from PDEK for her retirement? Exhibit 13-1 in the
text 92) Henry has been working for Cars Corp. for 40 years and 4 months. Cars
Corp. provides a defined benefit plan for its employees. Under the plan,
employees receive 2 percent of the average of their three highest annual
salaries for each full year of service. Cars Corp. uses a five year cliff
vesting schedule. Henry retired on January 1, 2017 Henry received annual
salaries of $520,000, $540,000, and $560,000 for 2014, 2015, and 2016,
respectively. What is the maximum benefit Henry can receive under the plan in
2017? 93) Georgeanne has been employed by SEC Corp. for the last 2½ years.
Georgeanne participates in SEC’s 401(k) plan. During her employment, Georgeanne
has contributed $6,000 to her 401(k) account. SEC has contributed $3,000 to
Georgeanne’s 401(k) account (it matched 50 cents of every dollar contributed).
SEC uses a three-year cliff vesting schedule. If Georgeanne were to quit her job
with SEC, what would be her vested benefit in her 401(k) account (assume the
account balance is $9,000)? 94) Christina made a one-time contribution of
$12,000 to her 401(k) account, and she received a matching contribution from her
employer in the amount of $4,000. Christina expects to earn a 6-percent
before-tax rate of return on her account balance. Assuming Christina withdraws
the entire balance in 25 years when she retires, what is Christina’s after-tax
accumulation from the $12,000 contribution to her 401(k) account? Assume her
marginal tax rate at retirement is 35 percent. (Round future value factors to 5
decimal places and the future value and final answers to the nearest whole
number) 95) This year, Ryan contributed 10 percent of his $75,000 annual salary
to a Roth 401(k) account sponsored by his employer, XYZ. XYZ offers a
dollar-for-dollar match up to 10 percent of the employee’s salary. The employer
contributions are placed in a traditional 401(k) account on the employee’s
behalf. Ryan expects to earn an 8-percent before-tax rate of return on
contributions to his Roth and traditional 401(k) accounts. Assuming Ryan leaves
the funds in the accounts until he retires in 25 years, what are his after-tax
accumulations in the Roth 401(k) and in the traditional 401(k) accounts if his
marginal tax rate at retirement is 30 percent? If Ryan’s marginal tax rate this
year is 35 percent will he earn a higher after tax rate of return from the Roth
401(k) or the traditional 401(k)? Explain. (Round future value factors to 5
decimal places and the future value and final answers to the nearest whole
number) 96) On March 30, Rodger (age 56) was laid off from his employer of 30
years due to rough economic times. During his 30 years of employment, Rodger
contributed $300,000 to his traditional 401(k) account. When Rodger was let go,
his 401(k) account balance was $900,000 (this included both employer matching
and account earnings). Rodger immediately withdrew $40,000 to use as an
emergency savings fund. What amount of tax and early distribution penalties must
Rodger pay on the $40,000 withdrawal if his ordinary marginal tax rate is 28
percent? 97) Heidi (age 57) invested $4,000 in her Roth 401(k) on January 1,
2009. This was her only contribution to the account. On July 1, 2017, when the
account balance was $6,000, she received a nonqualified distribution of $4,500.
What is the taxable portion of the distribution and what amount of early
distribution penalty will Heidi be required to pay on the distribution? 98) Sean
(age 74 at end of 2017) retired five years ago. The balance in his 401(k)
account on December 31, 2016 was $1,700,000 and the balance in his account on
December 31, 2017 was $1,800,000. Using the IRS tables below, what is Sean’s
required minimum distribution for 2017? Age of Participant

Distribution Period

Applicable Percentage

70

27.4

3.65%

71

26.5

3.77%

72

25.6

3.91%

73

24.7

4.05%

74

23.8

4.20%

75

22.9

4.37%

99) Sean (age 74 at end of 2017) retired five years ago. The balance in his
401(k) account on December 31, 2016 was $1,700,000 and the balance in his
account on December 31, 2017 was $1,750,000. In 2017, Sean received a
distribution of $50,000 from his 401(k) account. Assuming Sean’s marginal tax
rate is 25 percent, what amount of the $50,000 distribution will Sean have left
after paying income tax on the distribution and paying any minimum distribution
penalties (use the IRS table below in determining the minimum distribution
penalty, if any). Age of Participant

Distribution Period

Applicable Percentage

70

27.4

3.65%

71

26.5

3.77%

72

25.6

3.91%

73

24.7

4.05%

74

23.8

4.20%

75

22.9

4.37%

100) Kim (50 years of age) is considering whether to participate in her
company’s Roth 401(k) or traditional 401(k). This year, she plans to invest
either $4,000 in a Roth 401(k) or $5,000 in a traditional 401(k). Kim plans on
leaving the contribution in the retirement account for 20 years when she will
receive a distribution of the entire balance in the account. Her employer does
not have a matching program for employee contributions to retirement accounts.
Assume Kim can earn a 6 percent before tax return in either account and that she
anticipates that in 20 years her tax rate will be 30%. (Round future value
factors to 5 decimal places and the future value and final answers to the
nearest whole number) 1) What would be Kim’s after-tax accumulation in 20 years
if she contributes $4,000 to a Roth 401(k) account? 2) What would be her
after-tax accumulation in 20 years if she contributes $5,000 to a traditional
401(k) account? 101) Katrina’s executive compensation package allows her to
participate in the company’s nonqualified deferred compensation plan. This year,
Katrina defers 20 percent of her $400,000 salary. Katrina’s deemed investment
choice will earn 7 percent annually on the deferred compensation until she takes
a lump sum distribution in 10 years. Katrina’s current marginal tax rate is 30
percent and she expects her marginal tax rate will be 35 percent upon receipt of
the deferred salary. What is her after-tax accumulation from the deferred salary
in 10 years? (Round future value factors to 5 decimal places and the future
value and final answers to the nearest whole number) 102) Katrina’s executive
compensation package allows her to participate in the company’s nonqualified
deferred compensation plan. In the current year, Katrina defers 15 percent of
her $300,000 salary. Katrina’s deemed investment choice will earn 8 percent
annually on the deferred compensation until she takes a lump sum distribution in
10 years. Katrina’s current marginal tax rate is 30 percent and she expects her
marginal tax rate to be 28 percent upon receipt on the deferred salary. What is
her after-tax accumulation from the deferred salary in 10 years? (Round future
value factors to 5 decimal places and the future value and final answers to the
nearest whole number) 103) In 2017, Tyson (age 22) earned $3,500 from his
part-time job and he reported $15,000 of interest income (unearned income).
Assuming he does not participate in an employersponsored plan, what is the
maximum deductible IRA contribution Tyson can make in 2017? 104) In 2017, Tyson
(age 52) earned $50,000 of salary. Assuming he does not participate in an
employer-sponsored plan, what is the maximum deductible IRA contribution Tyson
can make in 2017? 105) In 2017, Madison is a single taxpayer who is 25 years of
age. During 2017, she contributed $3,000 to her employer sponsored 401(k)
account. Her 2017 AGI was $66,500 (before considering IRA deductions). What is
the maximum deductible contribution, if any, that Madison can make her to IRA?
106) Carmello and Leslie (ages 34 and 35, respectively) are married and want to
contribute to a Roth IRA. In 2017, their AGI totaled $42,000. Of the $42,000,
Carmello earned $35,000 and Leslie earned $7,000. How much can each spouse
contribute to a Roth IRA if they file jointly? How much can each spouse
contribute to a Roth IRA if they file separately? 107) Cassandra, age 33, has
made deductible contributions to her traditional IRA over the years. When the
balance in her IRA was $40,000, Cassandra received a distribution of $34,000
from her IRA in order to purchase a new car. How much of the $34,000
distribution will she have remaining after paying income taxes and early
distribution penalties on the distribution? Her marginal tax rate is 25 percent.
108) Ryan, age 48, received an $8,000 distribution from his traditional IRA to
pay for medical expenses. Ryan has made only deductible contributions to the IRA
and his marginal tax rate is 28 percent. What amount of taxes and early
distribution penalties will Ryan be required to pay on the distribution? 109)
Tatia, age 38, has made deductible contributions to her traditional IRA over the
past few years. When her account balance was $32,000, she transferred the entire
$32,000 out of her traditional IRA and immediately into a Roth IRA. Her current
marginal tax rate is 25 percent. What amount of tax and penalty is she required
to pay on this rollover? 110) Tatia, age 38, has made deductible contributions
to her traditional IRA over the past few years. When her account balance was
$30,000, she received a distribution of the entire $30,000 balance of her
traditional IRA. She retained $5,000 of the distribution to help her pay the
taxes due from the distribution and she immediately contributed the remaining
$25,000 to a Roth IRA. What amount of tax and early distribution penalty is she
required to pay on the $30,000 distribution from the traditional IRA if her
marginal tax rate is 25 percent? 111) Gordon is a 52-year-old self-employed
contractor (no employees). During 2017, his Schedule C net income was $88,000.
What is the maximum amount that Gordon can contribute to (1) a SEP IRA and (2)
an individual 401(k)? (Round your answers to the nearest whole number). 112)
Yvette is a 44-year-old self-employed contractor (no employees). During 2017,
her Schedule C net income was 500,000. Assuming Yvette has no contributions to
other retirement plans. What is the maximum amount that Yvette can contribute to
(1) a SEP IRA and (2) an individual 401(k)? (Round your answers to the nearest
whole number). 113) Scott and his wife Leanne (ages 39 and 37 respectively)
earned $50,000 in 2017. Scott was able to contribute $2,400 ($200/month) to his
employer sponsored 401(k). What amount of saver’s credit can Scott and Leanne
claim in 2017? 114) Deborah (single, age 29) earned $25,000 in 2017. Deborah was
able to contribute $1,800 ($150/month) to her employer sponsored 401(k). What is
the total saver’s credit that Deborah can claim for 2017? Exhibit 13-9 in the
text 115) Aiko (single, age 29) earned $40,000 in 2017. He was able to
contribute $1,800 ($150/month) to his employer sponsored 401(k). What is the
total saver’s credit that Aiko can claim for 2017? Exhibit 13-9 in the text
McGraw-Hill’s Taxation of Individuals and Business Entities, 2018 Edition, 9e
(Spilker) Chapter 14 Tax Consequences of Home Ownership 1) In general terms, the
tax laws favor taxpayers who own a principal residence relative to those who
rent a principal residence. 2) Renting a residence may have nontax advantages
over owning a home. 3) A personal residence is not a capital asset. 4) A
taxpayer may be required to include in gross income gain the taxpayer realizes
when she sells her principal residence. 5) For tax purposes a dwelling unit is a
residence if the taxpayer’s number of personal use days of the unit is more than
ten days. 6) When determining the number of days a taxpayer has rented out a
home during the year, any day when the home is available for rent but not
actually rented out counts as a day of rental use. 7) When determining the
number of days a taxpayer has rented out a home during the year, any day when
the home is available for rent but not actually rented out counts as a day of
personal use. 8) Taxpayers meeting certain requirements may be allowed to
exclude at least a portion of gain realized on the sale of a principal
residence. 9) The ownership test for excluding gain on the sale of a principal
residence requires the taxpayer to have owned the property for three or more
years during the five year period ending on the date of sale. 10) A taxpayer who
otherwise meets the ownership and use tests may not be allowed to exclude all of
her realized gain if the taxpayer has nonqualified use of the home before
selling. 11) To be allowed to exclude gain on the sale of a principal residence,
the taxpayer selling the home must be using the home as a principal residence at
the time of the sale. 12) For determining whether a taxpayer qualifies to
exclude gain on the sale of a principal residence, the periods of ownership and
use need not be continuous nor do they need to cover the same two-year period.
13) A married couple filing a joint tax return is eligible to exclude up to
$500,000 of gain realized on the sale of a personal residence if both spouses
meet the ownership test and at least one spouse meets the use test. 14) A
taxpayer can qualify for the home sale exclusion even if she has moved out of
the home and is renting the home to another at the time of the sale. 15) A
taxpayer who sells a principal residence that has been used (or is being used)
as a rental property since 2005 will not be allowed to exclude the portion of
the gain attributable to depreciation even if the taxpayer meets the ownership
and use tests and the gain realized on the sale is lower than the maximum
exclusion amount. 16) At most, a taxpayer is allowed to exclude gain on the sale
of a principal residence once every five years no matter the circumstances. 17)
In certain circumstances, a taxpayer who does not meet the ownership and use
tests may still be allowed to exclude the entire realized gain on the sale of a
principal residence. 18) The tax laws place a fixed dollar limit on the amount
of qualified residence interest a taxpayer may deduct in a particular year. 19)
A taxpayer who rents out a home for at least one day and does not use a home for
personal purposes for at least 15 days during the year is ineligible to deduct
any qualified residence interest expense on a loan secured by the home. 20)
Jacoby purchases a home for $1,500,000 by making a $150,000 down payment and by
borrowing the remaining $1,350,000 with a loan secured by the home. Jacoby can
deduct interest expense on $1,100,000 of the loan principal. 21) For regular tax
purposes, a taxpayer may deduct interest expense on qualifying home equity
indebtedness even if the taxpayer uses the loan proceeds for a purpose unrelated
to the home. 22) Taxpayers with high AGI are not allowed to deduct any interest
on qualifying home equity indebtedness. 23) Depending on AGI, taxpayers may be
able to deduct mortgage insurance premiums as a for AGI deduction. 24) When a
taxpayer finances her personal residence, in general, she may not deduct points
paid for loan origination fees, but she may deduct points paid as prepaid
interest. 25) A taxpayer who is financing his personal residence and who pays
points on the loan in the form of prepaid interest generally must deduct the
points over the life of the loan no matter whether the loan is an original loan
or a refinance of an existing loan. 26) The longer a taxpayer plans on living in
a home without refinancing the taxpayer’s mortgage on the home, the more likely
it is that paying points to receive a reduced interest rate on the loan makes
economic sense. 27) A taxpayer who purchases real property during the year is
allowed to deduct the property taxes on that property for the entire year in
which the property was purchased. 28) Taxpayers are allowed to deduct real
property taxes at the time they pay estimated real property taxes to an escrow
account established by the lender for the taxpayer’s property taxes. 29) In
certain circumstances, a taxpayer could rent her personal residence at a profit
and not pay any tax on the income. 30) Taxpayers who use a vacation home for
both personal and rental use generally must allocate expenses associated with
the home to the personal use and to the rental use. 31) When allocating expenses
of a vacation home between personal use and rental use, the amount of
depreciation expense allocated to the rental use is based on the number of
rental days over rental days plus personal use days. 32) Expenses of a vacation
home allocated to rental use are deductible for AGI. 33) In terms of allocating
expenses between rental use and personal use, the IRS method of allocation tends
to allocate more expenses to personal use than does the Tax Court method of
allocation. 34) Taxpayers renting a home would generally report the rental
income and expenses on Schedule E. 35) Jorge owns a home that he rents for 360
days and uses for personal purposes for five days. Jorge is not required to
allocate expenses associated with the home between rental and personal use. 36)
Jennifer owns a home that she rents for 364 days and uses for personal purposes
for one day. Jennifer is required to allocate expenses associated with the home
between rental and personal use. 37) A tax loss from a rental home is a passive
activity loss. 38) A self-employed taxpayer reports home office expenses as for
AGI deductions while employees report home office expenses as from AGI
deductions. 39) Taxpayers with home offices who use the actual expense method
for computing home office expenses must allocate indirect expenses of the home
between personal use and home office use. Only expenses allocated to the home
office use are deductible. 40) In general, total deductible home office expenses
are limited to the gross income derived from the business minus business
expenses unrelated to the home (that is, they are limited to net Schedule C
income before home office expenses). 41) Taxpayers using the simplified method
for computing home office expenses do not deduct depreciation expense for the
home office use. 42) Serena is single. She purchased her principal residence
three years ago. She lived in the home until she sold it at a $300,000 gain this
year. Serena was allowed to exclude $250,000 of the $300,000 gain. What is the
character of the $50,000 gain she was not able to exclude? 1. A) Ordinary
income/gain. 2. B) Short-term capital gain. 3. C) Long-term capital gain. 4. D)
Personal gain. 5. E) None of the choices are correct. 43) In order to be
eligible to exclude gain on the sale of a principal residence, the taxpayer must
meet which of the following test(s)? 1. A) Rental test. 2. B) Use test. 3. C)
Ownership test. 4. D) Business use test. 5. E) Ownership and use test. 44) Which
of the following statements regarding a taxpayer’s principal residence is true
for purposes of determining whether the taxpayer is eligible to exclude gain
realized on the sale of the residence? 1. A) A taxpayer may have more than one
principal residence at any one time. 2. B) A taxpayer’s principal residence may
not be a houseboat. 3. C) A taxpayer with more than one residence may annually
elect which residence is considered to be the principal residence. 4. D) None of
these statements is true. 45) Which of the following statements regarding the
exclusion of gain on the sale of a principal residence is correct? 1. A) A
taxpayer may not exclude gain if the taxpayer is renting the residence at the
time of the sale. 2. B) A taxpayer may simultaneously own two homes that are
eligible for the home sale exclusion. 3. C) A taxpayer must be living in a
residence at the time it is sold to qualify for the exclusion. 4. D) For a
married couple to qualify for the $500,000 exclusion, both spouses must meet the
ownership and use tests. 46) Larry owned and lived in a home for five years
before marrying Darlene. Larry and Darlene lived in the home for one year before
selling it at a $600,000 gain. Larry was the sole owner of the residence until
it was sold. How much of the gain may Larry and Darlene exclude? 1. A) $0. 2. B)
$250,000. 3. C) $500,000. 4. D) $600,000. 47) Shantel owned and lived in a home
for five years before marrying Daron. Shantel and Daron lived in the home for
two years before selling it at a $700,000 gain. Shantel was the sole owner of
the residence until it was sold. How much of the gain may Shantel and Daron
exclude? 1. A) $0. 2. B) $250,000. 3. C) $500,000. 4. D) $700,000. 48) On
February 1, 2017 Stephen (who is single) sold his principal residence (home 1)
at a $100,000 gain. He was able to exclude the entire gain on his 2017 tax
return. Stephen purchased and moved into home 2 on the same day. Assuming
Stephen lives in home 2 as his principal residence until he sells it, which of
the following statements is true? 1. A) Under no circumstance will Stephen be
allowed to exclude gain on home 2 if he sells home 2 in 2018. 2. B) Stephen will
be eligible to exclude gain on home 2 only if he waits until 2022 to sell it. 3.
C) In certain circumstances, Stephen may be able to exclude gain on home 2 even
if he sells home 2 in 2017. 4. D) None of these is a true statement. 49) On
November 1, year 1, Jamie (who is single) purchased and moved into her principal
residence. In the early part of year 2, Jamie was laid off from her job. On
February 1, year 2, Jamie sold the home at a $35,000 gain. She sold the home
because she found a new job in a different state. How much of the gain, if any,
may Jamie exclude from her gross income in year 2? 1. A) $0. 2. B) $3,125. 3. C)
$31,250. 4. D) $35,000. 50) Dawn (single) purchased her home on July 1, 2008. On
July 1, 2016 Dawn moved out of the home. She rented out the home until July 1,
2017 when she sold the home and realized a $230,000 gain (assume none of the
gain was attributable to depreciation). What amount of the gain is Dawn allowed
to exclude from her 2017 gross income? 1. A) $0. 2. B) $23,000. 3. C) $207,000.
4. D) $230,000. 51) Michael (single) purchased his home on July 1, 2007. On July
1, 2015 he moved out of the home. He rented out the home until July 1, 2016 when
he moved back into the home. On July 1, 2017 he sold the home and realized a
$300,000 gain. What amount of the gain is Michael allowed to exclude from his
2017 gross income? 1. A) $0. 2. B) $225,000. 3. C) $250,000. 4. D) $300,000. 52)
Ethan (single) purchased his home on July 1, 2008. On July 1, 2015 he moved out
of the home. He rented the home until July 1, 2017 when he moved back into the
home. On July 1, 2018 he sold the home and realized a $210,000 gain. What amount
of the gain is Ethan allowed to exclude from his 2018 gross income? 1. A) $0. 2.
B) $168,000. 3. C) $200,000. 4. D) $210,000. 53) What is the maximum amount of
gain on the sale of principal residence a married couple may exclude from gross
income? 1. A) $0. 2. B) $25,000. 3. C) $250,000. 4. D) $500,000. 54) Which of
the following statements regarding home-related transactions is correct? 1. A)
If a taxpayer converts a home from personal use to rental use, the basis of the
rental property is the greater of the basis of the property at the time of the
conversion or the fair market value of the property at the time of the
conversion. 2. B) If a taxpayer uses a residence as a rental property (and
deducts depreciation expense against the basis of the property) and as a
personal residence the taxpayer will not be allowed to exclude the entire amount
of gain even if the taxpayer otherwise meets the ownership and use tests and the
amount of the gain is less than the limit on excludable gain. 3. C) If a
taxpayer converts a rental home to a principal residence, the taxpayer’s basis
in the principal residence is the greater of the basis of the home at the time
of the conversion or the fair market value at the time of the conversion. 4. D)
None of these statements is correct. 55) When a taxpayer rents a residence for
part of the year, the residence is not eligible as a qualified residence for the
home mortgage interest expense deduction unless the taxpayer’s: 1. A) Personal
use of the home exceeds the taxpayer’s rental use of the home. 2. B) Personal
use of the home exceeds half of the taxpayer’s rental use of the home. 3. C)
Personal use of the home exceeds the lesser of 14 days or 10 percent of the
taxpayer’s rental use of the home. 4. D) Personal use of the home exceeds the
greater of 14 days or 10 percent of the taxpayer’s rental use of the home. 56)
Which of the following best describes a qualified residence for purposes of
determining a taxpayer’s deductible home mortgage interest expense? 1. A) Only
the taxpayer’s principal residence. 2. B) The taxpayer’s principal residence and
two other residences (chosen by the taxpayer). 3. C) The taxpayer’s principal
residence and one other residence (chosen by the taxpayer). 4. D) Any two
residences chosen by the taxpayer. 57) Which of the following statements
regarding interest expense on home-related debt is correct? 1. A) Taxpayers may
deduct interest expense on a limited amount of home equity indebtedness but they
may deduct interest expense on an unlimited amount of home acquisition
indebtedness. 2. B) Taxpayers may deduct interest expense on a limited amount of
acquisition indebtedness but an unlimited amount of home equity indebtedness. 3.
C) Taxpayers may deduct interest expense on a limited amount of acquisition
indebtedness and a limited amount of home equity indebtedness. 4. D) None of
these statements is correct. 58) Patrick purchased a home on January 1, year 1
for $600,000 by making a down payment of $100,000 and financing the remaining
$500,000 with a 30-year loan, secured by the residence, at 6 percent. During
year 1, Patrick made interest-only payments on the loan of $30,000. On July 1,
year 1, when his home was worth $600,000 Patrick borrowed an additional $75,000
secured by the home at an interest rate of 8 percent. During year 1, he made
interest-only payments on this loan in the amount of $3,000. What amount of the
$33,000 interest expense Patrick paid during year 1 may he deduct as an itemized
deduction? 1. A) $0. 2. B) $3,000. 3. C) $30,000. 4. D) $33,000. 59) Patricia
purchased a home on January 1, year 1 for $1,200,000 by making a down payment of
$100,000 and financing the remaining $1,100,000 with a 30-year loan, secured by
the residence, at 6 percent. During year 1, Patricia made interest-only payments
on the loan of $66,000. What amount of the $66,000 interest expense Patricia
paid during year 1 may she deduct as an itemized deduction? 1. A) $0. 2. B)
$6,000. 3. C) $60,000. 4. D) $66,000. 60) Lauren purchased a home on January 1,
year 1 for $500,000 by making a down payment of $200,000 and financing the
remaining $300,000 with a 30-year loan, secured by the residence. During year 1,
Lauren made interest-only payments on the loan. On July 1, year 1, when her home
was valued at $500,000, she borrowed an additional $150,000, secured by the
residence. During year 1, she made interest-only payments on the second loan.
Which of the following statements regarding the deductibility of the interest
Lauren paid is correct (assume she uses the exact method to determine deductible
interest expense if a limitation applies)? 1. A) Lauren may deduct all of the
interest on the first loan but she may deduct only two-thirds of the interest on
the second loan unless she uses the loan proceeds to substantially improve the
home in which case she would be able to deduct all of the interest. 2. B) Lauren
may deduct all of the interest on the first loan but she may deduct only
two-thirds of the interest on the second loan no matter what she does with the
proceeds of the second loan. 3. C) Lauren may deduct all of the interest on the
first loan or all of the interest on the second loan. 4. D) Lauren may deduct
all of the interest on the first loan and all of the interest on the second loan
no matter what she does with the loan proceeds. 61) Kimberly purchased a home on
January 1, year 1 for $500,000 by making a down payment of $200,000 and
financing the remaining $300,000 with a 30-year loan, secured by the residence,
at 6 percent. During year 1 and year 2 Kimberly made interest-only payments on
this loan in the amount of $18,000 each year. On July 1, year 1, when her home
was worth $500,000, Kimberly borrowed an additional $125,000 secured by the home
at an interest rate of 8 percent. During year 1, she made interest-only payments
on this loan in the amount of $5,000 and, during year 2, she made interest only
payments on the loan in the amount of $10,000. What is the maximum amount of the
$28,000 interest expense ($18,000 + $10,000) that Kimberly paid during year 2
may she deduct as an itemized deduction, if she used the proceeds of the second
loan to pay off student loans from law school? 1. A) $0. 2. B) $5,000. 3. C)
$18,000. 4. D) $26,000. 5. E) $26,353. 62) Jessica purchased a home on January
1, year 1 for $500,000 by making a down payment of $200,000 and financing the
remaining $300,000 with a 30-year loan, secured by the residence, at 6 percent.
During year 1 and year 2, Jessica made interest-only payments on this loan of
$18,000 (each year). On July 1, year 1, when her home was worth $500,000 Jessica
borrowed an additional $125,000 secured by the home at an interest rate of 8
percent. During year 1, she made interest-only payments on the second loan in
the amount of $5,000. During year 2, she made interest only on the second loan
in the amount of $10,000. What is the maximum amount of the $28,000 interest
expense Jessica paid during year 2 may she deduct as an itemized deduction if
she used the proceeds of the second loan to finish the basement in her home and
landscape her yard? 1. A) $0. 2. B) $10,000. 3. C) $26,353. 4. D) $26,000. 5. E)
$28,000. 63) In year 1, Jaspreet purchased a new home for $500,000 by making a
down payment of $400,000 and financing the remaining $100,000 with a loan,
secured by the residence, at 6 percent. In year 3, Jaspreet made interest only
payments of $6,000 on the $100,000 loan. On January 1, year 3 when his home was
valued at $500,000 Jaspreet executed two home equity loans (both secured by the
home). The first (early in the day) was for $80,000 at an interest rate of 9
percent. The second home equity loan from a different bank (later in the day)
was for $40,000 at an interest rate of 7 percent. In year 3, Jaspreet paid
$7,200 of interest payments on the first home equity loan and $2,800 interest
expense on the second. Jaspreet used the proceeds from both home-equity loans
for purposes unrelated to the home. What is the maximum amount of interest
expense Jaspreet can deduct on these loans as home related interest expense? 1.
A) $6,000. 2. B) $14,545. 3. C) $14,600. 4. D) $16,000. 64) In year 1, Gabby
purchased a new home for $500,000 by making a down payment of $200,000 and
financing the remaining $300,000 with a loan, secured by the residence, at 6
percent. In year 3, Gabby made interest-only payments of $18,000 on the $300,000
loan. On January 1, year 3, Gabby executed two home equity loans (both secured
by the home). The first was for $80,000 at an interest rate of 7 percent. The
second home equity loan from a different bank (later in the day) was for $40,000
at an interest rate of 9 percent. In year 3, Gabby paid $5,600 of interest
payments on the first home equity loan and $3,600 interest expense on the
second. Gabby used the loan proceeds for purposes unrelated to the home. What is
the maximum amount of interest expense Gabby can deduct on these loans as home
related interest expense? 1. A) $18,000. 2. B) $25,400. 3. C) $25,905. 4. D)
$27,200. 65) In year 1, Abby purchased a new home for $200,000 by making a down
payment of $150,000 and financing the remaining $50,000 with a loan, secured by
the residence, at 6 percent. As of January 1, year 4 the outstanding balance on
the loan was $40,000. On January 1, year 4, when her home was worth $300,000,
Abby refinanced the home by taking out a $120,000 mortgage at 5 percent. With
the loan proceeds, she paid off the $40,000 balance of the existing mortgage and
used the remaining $80,000 for purposes unrelated to the home. During year 4,
she made interest-only payments on the new loan of $6,000. What amount of the
$6,000 interest expense on the new loan can Abby deduct in year 4 on the new
mortgage as home related interest expense? 1. A) $0. 2. B) $2,000. 3. C) $5,000.
4. D) $6,000. 66) In year 1, Kris purchased a new home for $200,000 by making a
down payment of $150,000 and financing the remaining $50,000 with a loan,
secured by the residence, at 6 percent. As of January 1, year 4, the outstanding
balance on the loan was $40,000. On January 1, year 4, when his home was worth
$300,000, Kris refinanced the home by taking out a $150,000 mortgage at 5
percent. With the loan proceeds, he paid off the $40,000 balance of the existing
mortgage and used the remainder for purposes unrelated to the home. During year
4, he made interest only payments on the new loan of $7,500. What amount of the
$7,500 interest expense on the new loan can Kris deduct in year 4 on the new
mortgage as home related interest expense? 1. A) $2,000. 2. B) $5,000. 3. C)
$7,000. 4. D) $7,500. 67) Which of the following statements regarding qualified
home equity indebtedness is correct? 1. A) The limit on qualified home equity
indebtedness depends on filing status. 2. B) Limits on qualified home equity
indebtedness and qualified acquisition indebtedness do not apply to the same
loan. 3. C) If the value of a home drops, the amount of qualified home equity
indebtedness on an existing home equity loan also drops. 4. D) In order to
deduct interest on home equity indebtedness, taxpayers must use the proceeds of
a home equity loan to improve the home. 68) Amanda purchased a home for
$1,000,000 in year 1. She paid $200,000 cash and borrowed the remaining
$800,000. This is Amanda’s only residence. Assume that in year 10 when the home
had appreciated to $1,500,000 and the remaining mortgage was $600,000, interest
rates declined and Amanda refinanced her home. She borrowed $1,000,000 at the
time of the refinancing, paid off the first mortgage, and used the remainder for
purposes unrelated to the home. What is her total amount of qualifying
home-related debt for tax purposes? 1. A) $600,000. 2. B) $700,000. 3. C)
$1,000,000. 4. D) $1,100,000. 69) On March 31, year 1, Mary borrowed $200,000 to
buy her principal residence. Mary paid 3 points to reduce her interest rate from
6 percent to 5 percent. The loan is for a 30-year period. What is Mary’s year 1
deduction for her points paid? 1. A) $50. 2. B) $150. 3. C) $4,500. 4. D)
$6,000. 70) Which of the following statements regarding the tax deductibility of
points related to a home mortgage is correct? 1. A) Points paid in the form of a
loan origination fee on an original home loan are deductible over the life of
the loan. 2. B) Points paid in the form of prepaid interest on an original home
loan are deductible over the life of the loan. 3. C) Points paid in the form of
prepaid interest on a refinance are deductible over the life of the loan. 4. D)
None of these statements is correct. 71) Which of the following statements
regarding the break-even point for paying discount points in order to get a
lower interest rate on the loan is correct? 1. A) All else equal, the break-even
point for paying points on an original mortgage is longer than the break-even
point for paying points on a refinance. 2. B) All else equal, the break-even
point for paying points on an original mortgage is longer for a taxpayer who
does not make extra principal payments each year on the loan than for a taxpayer
who does make additional principal payments each year on the loan. 3. C) All
else equal, the break-even point for a taxpayer paying points on an original
mortgage is longer when the taxpayer’s marginal income tax rate increases in the
years subsequent to the original financing compared to a taxpayer whose marginal
tax rate does not change in the years subsequent to the year in which the loan
is executed. 4. D) None of these statements is correct. 72) On April 1, year 1,
Mary borrowed $200,000 to refinance the original mortgage on her principal
residence. Mary paid 3 points to reduce her interest rate from 6 percent to 5
percent. The loan is for a 30-year period. How much can Mary deduct in year 1
for her points paid? 1. A) $200. 2. B) $150. 3. C) $4,500. 4. D) $6,000. 73)
Which of the following statements regarding deductions for real property taxes
is incorrect? 1. A) A taxpayer is not allowed to deduct property taxes as the
taxpayer makes monthly mortgage payments to an escrow account held by her
mortgage company. 2. B) Taxpayers are not allowed to deduct payments made for
setting up water and sewer services. 3. C) An individual deducts real property
taxes on her principal residence as a for AGI deduction. 4. D) Taxpayers are not
allowed to deduct payments made for neighborhood sidewalks. 74) Which of the
following statements best describes the deductibility of real property taxes
when a taxpayer sells real property during a year? 1. A) The owner of the
property at the time the property taxes are due is responsible for paying all of
the real property taxes on the property for the year. Consequently, this person
is allowed to deduct all of the property taxes for the year. 2. B) Taxpayers are
allowed to deduct the real property taxes they actually pay for the year. 3. C)
Taxpayers are allowed to deduct the property taxes allocated to the portion of
the year that they owned the property. 4. D) None of these statements is
correct. 75) On July 1 of year 1, Elaine purchased a new home for $400,000. At
the time of the purchase, it was estimated that the property tax bill on the
home for the year would be $8,000 ($400,000 × 2%). On the settlement statement,
Elaine was charged $4,000 for the year in property taxes and the seller was
charged $4,000. On December 31, year 1 Elaine discovered that the real property
taxes on the home for the year were actually $9,000. Elaine wrote a $9,000 check
to the local government to pay the taxes for that calendar year (Elaine was
liable for the taxes because she owned the property when they became due). What
amount of real property taxes is Elaine allowed to deduct for year 1? 1. A) $0.
2. B) $4,000. 3. C) $4,500. 4. D) $5,000. 5. E) $9,000. 76) Which of the
following statements regarding personal and/or rental use of a home is false? 1.
A) A day for which a taxpayer rents a home to an unrelated party for less than
the property’s fair market value is considered to be a personal use day. 2. B) A
day for which a taxpayer rents a home to a relative for full fair market value
is considered to be a rental use day (home is not the relative’s principal
residence). 3. C) A day for which an unrelated non-owner stays in the home under
a vacation exchange arrangement is considered to be a personal use day. 4. D) A
day for which the home is available for rent but is not occupied does not count
as a personal use or a rental use day. 77) Kenneth lived in his home for the
entire year except for when he rented his home (near a very nice ski resort) to
a married couple for 14 days in December. The couple paid Kenneth $14,000 in
rent for the two weeks. Kenneth incurred $1,000 in direct expenses relating to
the home for the 14 days. Which of the following statements accurately describes
the manner in which Kenneth should report his rental receipts and expenses for
tax purposes? 1. A) Kenneth would include the rental receipts in gross income
and deduct the rental expenses for AGI. 2. B) Kenneth would exclude the rental
receipts from gross income and deduct the rental expenses for AGI. 3. C) Kenneth
would include the rental receipts in gross income and would not deduct the
rental expenses because he used the residence for personal purposes for most of
the year. 4. D) Kenneth would exclude the rental receipts, and he would not
deduct the rental expenses. 78) Katy owns a second home. During the year, she
used the home for 20 personal use days and 50 rental days. Katy allocates
expenses associated with the home between rental use and personal use. Katy did
not incur any expenses to obtain tenants. Which of the following statements is
correct regarding the tax treatment of Katy’s income and expenses from the home?
1. A) Katy includes the rental receipts in gross income and deducts the expenses
allocated to the rental use of the home for AGI. 2. B) Katy deducts from AGI
interest expense and property taxes associated with the home not allocated to
the rental use of the home. 3. C) Assuming Katy’s rental receipts exceed the
interest expense and property taxes allocated to the rental use, Katy’s
deductible expenses for the year may not exceed the amount of her rental
receipts (she may not report a loss from the rental property). 4. D) All of the
above statements are correct. 79) Which of the following statements regarding
the IRS and/or Tax Court approaches to allocating home-related expenses between
rental use and personal use is correct? 1. A) The Tax Court approach allocates
more property tax and interest expense to rental use than does the IRS approach.
2. B) The Tax Court and the IRS approaches allocate the same amount of expenses
other than interest expense and property taxes to rental use. 3. C) The IRS
approach allocates interest expense and property taxes to rental use based on
the ratio of the number of days of rental use to the total days of the year. 4.
D) None of these statements is correct. 80) Brady owns a second home that he
rents to others. During the year, he used the second home for 50 days for
personal use and for 100 days for rental use. Brady collected $20,000 of rental
receipts during the year. Brady allocated $7,000 of interest expense and
property taxes, $10,000 of other expenses, and $4,000 of depreciation expense to
the rental use. What is Brady’s net income from the property and what type and
amount of expenses will he carry forward to next year, if any? 1. A) $0 net
income. $1,000 depreciation expense carried forward to next year. 2. B) ($1,000)
net loss. $0 expenses carried over to next year. 3. C) $0 net income. $1,000 of
other expense carried over to next year. 4. D) $0 net income. $1,000 of interest
expense and property taxes carried over to next year. 81) Braxton owns a second
home that he rents to others. During the year, he used the second home for 50
days for personal use and for 100 days for rental use. After allocating the
home-related expenses between personal use and rental use, which of the
following statements regarding the sequence of deductibility of the expenses
allocated to the rental use is correct (assume taxpayer has no expenses to
obtain tenants)? 1. A) Depreciation expense, other expenses, property taxes and
interest expense. 2. B) Other expenses, depreciation expense, property taxes and
interest expense. 3. C) Property taxes and interest expense, depreciation
expense, other expenses. 4. D) Other expenses, property taxes and interest
expense, depreciation expense. 5. E) None of these statements is correct. 82)
Harriet owns a second home that she rents to others. During the year, she used
the second home for 10 personal days and for 200 rental days. Which of the
following statements regarding the manner in which she should account for her
income and/or expenses associated with the home is false? 1. A) Harriet’s
deductible expenses are not limited to the amount of gross rental income from
the property. 2. B) Harriet will be allowed to deduct all of the mortgage
interest on the loan secured by the property. 3. C) Harriet is required to
include all of the rental receipts in gross income. 4. D) Harriet is required to
allocate all expenses associated with the home to rental use or personal use.
83) For a home to be considered a rental (nonresidence) property, a taxpayer
must: 1. A) Rent the property for 15 days or more during the year. 2. B) Use the
property for personal purposes for no more than the greater of (a) 14 days or
(b) 10 percent of the total days rented. 3. C) Use the property for personal
purposes for no more than the lesser of (a) 14 days or (b) 10 percent of the
total days rented. 4. D) Rent the property for 1 day or more during the year and
use the property for personal purposes for no more than the greater of (a) 14
days or (b) 10 percent of the total days rented. 5. E) Rent the property for 15
days or more during the year and use the property for personal purposes for no
more than the lesser of (a) 14 days or (b) 10 percent of the total days rented.
84) When a taxpayer experiences a net loss from a nonresidence (rental
property): 1. A) The taxpayer will not be allowed to deduct the loss under any
circumstance if the taxpayer does not have passive income from other sources. 2.
B) The loss is fully deductible against the taxpayer’s ordinary income no matter
the circumstances. 3. C) If the taxpayer is not an active participant in the
rental, the taxpayer may be allowed to deduct the loss even if the taxpayer does
not have any sources of passive income. 4. D) If the taxpayer is not allowed to
deduct the loss due to the passive activity loss limitations, the loss is
suspended and carried forward until the taxpayer generates passive income or
until the taxpayer sells the property. 85) Harvey rents his second home. During
the year, Harvey reported a net loss of $35,000 from the rental. If Harvey is an
active participant in the rental and his AGI is $80,000, how much of the loss
can he deduct against ordinary income for the year? 1. A) $35,000. 2. B)
$25,000. 3. C) $5,000. 4. D) $0. 86) Ilene rents her second home. During the
year, Ilene reported a net loss of $15,000 from the rental. If Ilene is an
active participant in the rental and her AGI is $140,000, how much of the loss
can she deduct against ordinary income in the year? 1. A) $15,000. 2. B)
$10,000. 3. C) $5,000. 4. D) $0. 87) Jamison is self-employed and he works out
of an office in his home. After allocating the home-related expenses between the
business office and the rest of the home, which of the following statements
regarding the sequence of deductibility of the expenses allocated to the home
office business use is correct (Jamison does not use the simplified method for
determining the home office expense deduction)? 1. A) Depreciation expense,
other expenses, property taxes and interest expense. 2. B) Other expenses,
depreciation expense, property taxes and interest expense. 3. C) Property taxes
and interest expense, other expenses, depreciation expense. 4. D) Other
expenses, property taxes and interest expense, depreciation expense. 5. E) None
of these statements is correct. 88) Which of the following statements regarding
limitations on the deductibility of home office expenses of employees is
correct? 1. A) Deductible home office expenses of employees are miscellaneous
itemized deductions subject to the 2 percent of AGI floor. 2. B) Deductible home
office expenses of employees are miscellaneous itemized deductions not subject
to the 2 percent floor. 3. C) Deductible home office expenses of employees are
for AGI deductions limited to gross income from the business. 4. D) Deductible
home office expenses of employees are for AGI deductions not limited to gross
income from the business. 89) Which of the following statements regarding
limitations on the deductibility of home office expenses of self-employed
taxpayers is correct? 1. A) Deductible home office expenses are miscellaneous
itemized deductions subject to the 2 percent of AGI floor. 2. B) Deductible home
office expenses are miscellaneous itemized deductions not subject to the 2
percent floor. 3. C) Deductible home office expenses are for AGI deductions
limited to (gross income from the business minus non-home office related
expenses). 4. D) Deductible home office expenses are for AGI deductions and may
be deducted without limitation. 90) Which of the following statements regarding
the home office expense deduction is correct? 1. A) For home offices that are at
least 300 square feet, the amount of home office expense allowed under the
simplified method of computing home office expenses is limited to a fixed amount
no matter how much the income from the business. 2. B) Taxpayers may choose to
use the actual expense method for determining home office expenses in one year
and choose the simplified method in a different year. 3. C) Under the simplified
method of computing home office expenses, a taxpayer is not allowed to deduct
any depreciation associated with a home as a home office expense. 4. D) All of
the above statements are correct. 91) Alison Jacobs (single) purchased a home in
Las Vegas, Nevada for $400,000. She moved into the home on September 1, year 0.
She lived in the home as her primary residence until July 1 of year 4 when she
sold the home for $675,000. If Alison’s marginal ordinary tax rate is 25% what
amount of tax will Alison pay on the $275,000 gain? 92) Nelson Whiting (single)
purchased a home in Denver, Colorado for $300,000. He moved into the home on
July 1 of year 1. He lived in the home as his primary residence until December
1, year 2 when he sold the home for $450,000. Nelson sold the home because he
needed to move because he was changing jobs and his new job was located several
hundred miles away. What amount of gain must Nelson recognize on the home sale
in year 2? 93) Andrew Whiting (single) purchased a home in Boise, Idaho for
$300,000. He moved into the home on July 1 of year 1. He lived in the home as
his primary residence until November 1, year 2 when he sold the home for
$470,000. Andrew sold the home because he was changing jobs and his new job was
in a different state. What amount of gain must Andrew recognize on the home sale
in year 2? 94) Darren (single) purchased a home on January 1, 2013 for $400,000.
Darren lived in the home as his primary residence until January 1, 2015 when he
began using the home as a vacation home. He used the home as a vacation home
until January 1 2016 (he used a different home as his primary residence from
January 1, 2015 to January 1, 2016). On January 1, 2016, Darren moved back into
the home and used it as his primary residence until January 1, 2017 when he sold
the home for $500,000. What amount of the $100,000 gain Darren realized on the
sale must he recognize for tax purposes in 2017? 95) Heidi (single) purchased a
home on January 1, 2007 for $400,000. She lived in the home as her primary
residence until January 1, 2015 when she began using the home as a vacation
home. She used the home as a vacation home until January 1, 2016 (she used a
different home as her primary residence from January 1, 2015 to January 1,
2016). On January 1, 2016, Heidi moved back into the home and used it as her
primary residence until January 1, 2017 when she sold the home for $700,000.
What amount of the $300,000 gain Heidi realized on the sale must she recognize
for tax purposes in 2017? 96) Several years ago, Chara acquired a home that she
vacationed in part of the time and she rented part of the time. During the
current year Chara: Personally stayed in the home for 14 days, Rented it at full
fair market value to her parents for eight days, Rented it to her sister for
five days at half price, Rented it to her friend at a discounted rate for three
days, Rented it to another friend at fair market value for six days, Rented the
home to third parties for 42 days at the market rate, Did repair and maintenance
work for three days to keep the home ready for renters, and Marketed the
property and made it available for rent for 120 days during the year even though
it was not rented during this time. How many days of personal use and how many
days of rental use did Chara experience on the property during the year? 97)
Rafael and Sandra Gonzalez purchased a home on January 1 of year 1 for $400,000
by paying $40,000 down and borrowing the remaining $360,000 with a 6 percent
loan secured by the home. The loan requires interest-only payments for the first
five years. In year 2, when the home was valued at $400,000, Rafael and Sandra
took out a second loan secured by the home for $80,000 to fund expenses
unrelated to the home. The interest rate on the second loan is 8 percent. In
year 2, Rafael and Sandra paid $21,600 of interest expense on the first loan and
$6,400 of interest on the second loan. What is the maximum amount of the $28,000
of interest expense may Rafael and Sandra deduct in year 2? 98) Lebron Taylor
purchased a home on July 1, year 1 for $500,000. Lebron paid for the entire
purchase price with cash. In July of year 1, Lebron needed additional cash for
purposes unrelated to his home so he took out a home equity loan for $150,000.
During year 2, he made interest only payments of $4,500 on the loan. What amount
of the $4,500 interest expense can Lebron deduct in year 2? 99) Leticia
purchased a home on July 1, year 1 for $200,000. She paid $180,000 down and
financed the remaining $20,000. On January 1, year 3 when the outstanding
balance of her mortgage was $15,000 and her home was valued at $300,000, Leticia
refinanced her home for $200,000. With the $200,000 loan, she paid off the
remaining $15,000 balance of her original mortgage, she used $35,000 to
substantially improve her home and she used the remaining $150,000 for purposes
unrelated to her home. During year 5, Leticia made interest-only payments of
$15,000 on the loan. What amount of the $15,000 interest expense is Leticia
allowed to deduct in year 5? 100) Robin purchased a home on July 1, year 1 for
$300,000. She paid $200,000 down and financed the remaining $100,000. On January
1, year 6 when the outstanding balance of her mortgage was $85,000 and her home
was valued at $300,000, she refinanced her home for $250,000. With the $250,000
loan, she paid off the remaining $85,000 balance of her original mortgage, she
used $70,000 to substantially improve her home and she used the remaining
$95,000 for purposes unrelated to her home. During year 6, Robin made interest
only payments of $12,500 on the loan. What amount of the $12,500 interest
expense is Robin allowed to deduct in year 6? 101) Jasper is looking to purchase
a new home for $250,000. He is paying $50,000 as a down payment on the home and
financing the remaining $200,000 with a loan secured by the home. He has the
option of (1) paying no discount points on the loan and paying interest at 6.5
percent or (2) paying one discount point on the loan and paying interest of 5.5
percent on the loan. Both options require Jasper to make interest-only payments
for the first five years of the loan and to pay the loan principal over the 25
years after that (it is a 30-year loan). Jasper itemizes deductions irrespective
of any interest expense he may pay. Jasper’s marginal ordinary income tax rate
is 28 percent. What is Jasper’s break-even point in years (for simplicity,
ignore time value of money concerns)? 102) Amelia is looking to refinance her
home loan of $200,000. She has the option of (1) paying no discount points on
the loan and paying interest at 7 percent or (2) paying two discount points on
the loan and paying interest of 6 percent on the loan. Both options require
Amelia to make interest-only payments for the first five years of the loan and
pay back the loan over the 25 years after that (it is a 30-year loan). Amelia
itemizes deductions irrespective of any interest expense she may pay. Amelia’s
marginal ordinary income tax rate is 25 percent. What is Amelia’s break-even
point in years (for simplicity, ignore time value of money concerns)? 103) Jason
and Alicia Johnston purchased a home in Austin, Texas for $500,000. They moved
into the home on September 1, year 0. They lived in the home as their primary
residence until July 1 of year 5 when they sold the home for $800,000. What
amount of the $300,000 gain are they allowed to exclude? 104) Joshua and Mary
Sullivan purchased a new home on October 1 of year 1 for $400,000. At the time
of the purchase, it was estimated that the real property tax rate for the year
would be 1 percent of the property’s value. Because the taxing jurisdiction
collects taxes on a July 1 year-end, it was estimated that the Sullivans would
be required to pay $3,000 in property taxes for the property tax year relating
to October through June of year 2 ($400,000 × 1% × 9/12). The seller would be
required to pay the $1,000 for July through September of year 1. Along with
their monthly payment of principal and interest, the Sullivans paid $333 a month
to the mortgage company to cover the property taxes. The mortgage company placed
the money in escrow and used the escrow funds to pay the $3,000 property tax
bill in July of year 2. The Sullivans’ itemized deductions exceed the standard
deduction before considering property taxes. What amount are the Sullivans
allowed to deduct for property taxes relating to the property in year 1 (ending
July 1, year 1) and year 2 (ending July 1, year 2)? 105) Kristen rented out her
home for 10 days during the year for $5,000. She used the home for personal
purposes for the other 355 days. She allocated the following home expenses to
the rental use of the home:

Insurance

$

50

Mortgage interest

100

Property taxes

30

Repairs and maintenance

150

Utilities

40

Depreciation

600

Kristen’s AGI is $120,000 before considering the effect of the rental activity.
What is Kristen’s AGI after considering the tax effect of the rental use of her
home? 106) Careen owns a condominium near Newport Beach in California. This
year, she incurs the following expenses in connection with her condo:

Insurance

$

1,500

Mortgage interest

8,500

Property taxes

4,000

Repairs and maintenance

950

Utilities

1,900

Depreciation

5,500

During the year, Careen rented the condo for 90 days, receiving $20,000 of gross
income. She personally used the condo for 50 days. Assuming Careen uses the IRS
method of allocating expenses to rental use of the property. What is Careen’s
net rental income for the year? 107) Tyson owns a condominium near Laguna Beach,
California. This year, he incurs the following expenses in connection with his
condo:

Insurance

$

1,000

Mortgage interest

7,500

Property taxes

3,200

Repairs and maintenance

800

Utilities

1,700

Depreciation

5,700

During the year, Tyson rented the condo for 100 days, receiving $25,000 of gross
income. He personally used the condo for 60 days. Assuming Tyson uses the Tax
Court method of allocating expenses to rental use of the property. What is
Tyson’s net rental income for the year (assume this is not a leap year)? 108)
Rayleen owns a condominium near Orlando, Florida. This year, she incurs the
following expenses in connection with her condo:

Insurance

$

1,250

Mortgage interest

7,000

Property taxes

2,100

Repairs and maintenance

800

Utilities

2,300

Depreciation

9,000

During the year, Rayleen rented the condo for 130 days and she received $25,000
of rental receipts. She did not use the condo at all for personal purposes
during the year. Rayleen is considered to be an active participant in the
property. Rayleen’s AGI from all sources other than the rental property is
$130,000. Rayleen does not have passive income from any other sources. What is
Rayleen’s AGI? 109) Ashton owns a condominium near San Diego, California. This
year, he incurs the following expenses in connection with his condo:

Insurance

$

1,300

Mortgage interest

8,000

Property taxes

2,000

Repairs and maintenance

900

Utilities

2,200

Depreciation

10,000

During the year, Ashton rented the condo for 120 days and he received $24,000 of
rental receipts. He did not use the condo at all for personal purposes during
the year. Ashton is considered to be an active participant in the property.
Ashton’s AGI from all sources other than the rental property is $120,000. Ashton
does not have passive income from any other sources. What is Ashton’s AGI? 110)
Don owns a condominium near Orlando, California. This year, he incurs the
following expenses in connection with his condo:

Insurance

$

1,300

Mortgage interest

10,000

Property taxes

3,000

Repairs and maintenance

900

Utilities

2,200

Depreciation

12,000

During the year, Don rented the condo for 70 days and he received $17,400 of
rental receipts. He did not use the condo at all for personal purposes during
the year. Don is considered to be an active participant in the property. Don’s
AGI from all sources other than the rental property is $140,000. Don does not
have passive income from any other sources. What is Don’s AGI? 111) Mercury is
self-employed and she uses a room in her home as her principal place of
business. She meets clients there and doesn’t use the room for any other
purpose. The size of her home office is 400 square feet. The size of her entire
home is 2,400 square feet. During the year, Mercury received $6,300 of gross
income from her business activities and she reported $2,500 of business expenses
unrelated to her home office. For her entire home in the current year, she
reported $3,500 of mortgage interest, $1,000 of property taxes, $600 of
insurance, $500 of utilities and other operating expenses, and $3,200 of
depreciation expense. What amount of home office expenses is Mercury allowed to
deduct in the current year using the actual expense method? Indicate the amount
and type of expenses she must carry over to the next year, if any. What amount
of home office expenses is Mercury allowed to deduct in the current year using
the simplified method? 112) Alfredo is self-employed and he uses a room in his
home as his principal place of business. He meets clients there and doesn’t use
the room for any other purpose. The size of his home office is 600 square feet.
The size of his entire home is 3,000 square feet. During the current year,
Alfredo received $10,000 of gross income from his business activities and he
reports $7,500 of business expenses unrelated to his home office. For his entire
home, he reported $10,000 of mortgage interest, $2,000 of property taxes, $2,500
of home operating expenses, and $4,500 of depreciation expense. What amount of
home office expenses is Alfredo allowed to deduct in the current year (assume he
uses the actual expense method of computing home office expenses)? Indicate the
amount and type of expenses he must carry over to next year, if any.
McGraw-Hill’s Taxation of Individuals and Business Entities, 2018 Edition, 9e
(Spilker) Chapter 15 Entities Overview 1) Corporations are legally formed by
filing articles of organization with the state in which the corporation will be
created. 2) General partnerships are legally formed by filing a partnership
agreement with the state in which the partnership will be formed. 3) Limited
partnerships are legally formed by filing a certificate of limited partnership
with the state in which the partnership will be organized. 4) Sole
proprietorships are not treated as legal entities separate from their individual
owners. 5) S corporation shareholders are legally responsible for paying the S
corporation’s debts because S corporations are treated as flow-through entities
for tax purposes. 6) LLC members have more flexibility than corporate
shareholders to alter their legal arrangements with respect to one another, the
entity, and with outsiders. 7) Corporations are legally better suited for taking
a business public compared with LLCs and general partnerships. 8) Both tax and
nontax objectives should be considered when choosing an appropriate business
entity. 9) Tax rules require that entities be classified the same way for tax
purposes as they are classified for legal purposes. 10) C corporations and S
corporations are separate taxpaying entities that pay tax on their own income.
11) All unincorporated entities are generally treated as flow-through entities
for tax purposes. 12) In certain circumstances, C corporations can elect to be
treated as flow-through entities. 13) An unincorporated entity with more than
one owner is, by default, taxed as a partnership. 14) A single-member LLC is
taxed as a partnership. 15) For tax purposes, only unincorporated entities can
be considered to be disregarded entities. 16) Unincorporated entities with only
one individual owner are taxed as sole proprietorships. 17) S corporations have
more restrictive ownership requirements than other entities. 18) Entities taxed
as partnerships can use special allocations to reward owners based on their
responsibilities, contributions, and individual needs. 19) Sole proprietors are
subject to self-employment taxes on net income from their sole proprietorships.
20) Shareholders of C corporations receiving property distributions must
recognize dividend income equal to the fair market value of the distributed
property if the distributing corporation has sufficient earnings and profits.
21) Losses from C corporations are never available to offset a shareholder’s
personal income. 22) Which of the following legal entities file documents with
the state to be formally recognized by the state? 1. A) Limited Liability
Company. 2. B) General Partnership. 3. C) Sole Proprietorship. 4. D) None of the
choices are correct. 23) If an individual forms a sole proprietorship, which
nontax factor will be of greatest benefit to the sole proprietor? 1. A)
Liability protection. 2. B) Legal flexibility in defining rights and
responsibilities of owners. 3. C) Facilitates initial public offerings. 4. D)
Minimal time and cost to organize. 24) Which legal entity is correctly paired
with the party that bears the ultimate responsibility for paying the legal
entity’s liabilities? 1. A) LLC – LLC members. 2. B) Corporation – Corporation.
3. C) General Partnership – Partnership. 4. D) Limited Partnership – General
partner. 5. E) Corporation – Corporation and Limited Partnership – General
partner. 25) Which legal entity provides the least flexible legal arrangement
for owners? 1. A) Corporation. 2. B) LLC. 3. C) Partnership. 4. D) Sole
Proprietorship. 26) Which legal entity is generally best suited for going
public? 1. A) Corporation. 2. B) LLC. 3. C) Limited Liability Partnership. 4. D)
General Partnership. 5. E) All of these entities are equally suited for going
public. 27) What document must LLCs file with the state to organize their
business? 1. A) Articles of incorporation. 2. B) Certificate of LLC. 3. C)
Articles of organization. 4. D) Partnership agreement. 5. E) None of the choices
are correct. LLCs do not have to file with the state to organize their business.
28) Which of the following entity characteristics are generally key drivers for
small business owners in deciding which entity to choose? 1. A) Double taxation.
2. B) Required accounting period. 3. C) Liability protection. 4. D) Double
taxation and required accounting period. 5. E) Double taxation and liability
protection. 29) On which form is income from a single member LLC with one
corporate (C corporation) owner reported? 1. A) Form 1120 used by C corporations
to report their income. 2. B) Form 1120S used by S corporations to report their
income. 3. C) Form 1065 used by partnerships to report their income. 4. D) Form
1040, Schedule C used by sole proprietorships to report their income. 5. E) None
of the choices are correct. 30) On which tax form does a single member LLC with
one individual owner report its income and losses? 1. A) Form 1120. 2. B) Form
1120S. 3. C) Form 1065. 4. D) Form 1040, Schedule C. 31) On which tax form do
LLCs with more than one owner generally report their income and losses? 1. A)
Form 1120. 2. B) Form 1120S. 3. C) Form 1065. 4. D) Form 1040, Schedule C. 32)
Which tax classifications can potentially apply to LLCs? 1. A) S corporation. 2.
B) Partnership. 3. C) Sole proprietorship. 4. D) S corporation and Partnership.
5. E) S corporation and Sole proprietorship. 6. F) Partnership and Sole
proprietorship. 7. G) All of the choices are correct. 33) Generally, which of
the following flow-through entities can elect to be treated as a C corporation?
1. A) Limited partnership. 2. B) Limited Liability Company. 3. C) General
partnership. 4. D) All of the choices are correct. 34) Which of the following
legal entities are generally classified as C corporations for tax purposes? 1.
A) Limited Liability Company. 2. B) S corporations. 3. C) Limited partnerships.
4. D) Sole proprietorship. 5. E) None of the choices are correct. 35) If
individual taxpayers are the shareholders of PST Corporation and PST corporation
is a shareholder of MNO Corporation, how many levels of tax is MNO’s pre-tax
income potentially exposed to? 1. A) No taxation. 2. B) Single taxation. 3. C)
Double taxation. 4. D) Triple taxation. 36) Crocker and Company, Inc. had
taxable income of $550,000. At the end of the year, it distributes all its
after-tax earnings to Jimmy, the company’s sole shareholder. Jimmy’s marginal
ordinary tax rate is 34 percent and his marginal tax rate on dividends is 15
percent. What is the overall tax rate on Crocker and Company’s pre-tax income?
1. A) 9.9%. 2. B) 15.0%. 3. C) 35.0%. 4. D) 43.9%. 5. E) 66.7%. 37) If C
corporations retain their after-tax earnings, when will their shareholders be
taxed on the retained earnings? 1. A) Shareholders will be taxed when they sell
their shares at a gain. 2. B) Shareholders will be taxed in the year they elect
to be taxed on undistributed retained earnings. 3. C) Shareholders will be taxed
on undistributed retained earnings in the year the corporation files its tax
return. 4. D) None of the choices are correct. 38) Which of the following is
most effective in mitigating the double tax? 1. A) Shift income from high tax
rate shareholders to low tax rate corporations. 2. B) Shift income from low tax
rate shareholders to high tax rate corporations. 3. C) Shift income from high
tax rate corporations to low tax rate shareholders. 4. D) Shift income from low
tax rate corporations to high tax rate shareholders. 39) While a C corporation’s
losses cannot be used by their shareholders to offset personal income, a C
corporation may carry back and carry forward losses to help offset the taxable
income a corporation had or will have. How are these net operating losses
carried back and carried forward? 1. A) Carried back two years, carried forward
indefinitely. 2. B) Carried back indefinitely, carried forward two years. 3. C)
Carried back two years, carried forward five years. 4. D) Carried back two
years, carried forward twenty years. 5. E) None of the choices are correct. 40)
Logan, a 50 percent shareholder in Military Gear Inc., is comparing the tax
consequences of losses from C corporations with losses from S corporations.
Assume Military Gear Inc has a $100,000 loss for the year, Logan’s tax basis in
his Military Gear Inc. stock was $150,000 at the beginning of the year, and he
received $75,000 ordinary income from other sources during the year. Assuming
Logan’s marginal regular income tax rate is 15%, how much more tax will Logan
pay currently if Military Gear Inc. is a C corporation compared to the tax he
would pay if it were an S corporation? 1. A) $0. 2. B) $3,750. 3. C) $7,500. 4.
D) $11,250. 41) Which of the following is not an effective strategy for
mitigating double taxation in a C corporation? 1. A) C corporations can shift
income to shareholders via deductible payments. 2. B) C corporations can make an
S election. 3. C) C corporations can pay dividends to their shareholders. 4. D)
None of the choices are correct. All of the choices are effective strategies to
mitigate or avoid double taxation. 42) Robert is seeking additional capital to
expand ABC Inc. In order to qualify ABC as an S corporation, which type of
investor group could Robert obtain capital from? 1. A) 30 different
partnerships. 2. B) 10 different C corporations. 3. C) 90 nonresident
individuals. 4. D) 120 unrelated resident individuals. 5. E) None of the choices
are correct. 43) What tax year-end must an unincorporated entity with only one
owner adopt? 1. A) The entity is free to adopt any tax year-end. 2. B) The
entity must adopt the same year-end as its owner. 3. C) The entity must adopt a
calendar year-end. 4. D) The entity may adopt any year-end except for a calendar
year-end. 44) Roberto and Reagan are both 25 percent owner/managers for Bright
Light Inc. Roberto runs the retail store in Sacramento, CA, and Reagan runs the
retail store in San Francisco, CA. Bright Light Inc. generated a $125,000 profit
companywide made up of a $75,000 profit from the Sacramento store, a ($25,000)
loss from the San Francisco store, and a combined $75,000 profit from the
remaining stores. If Bright Light Inc. is an S corporation, how much income will
be allocated to Roberto? 1. A) $31,250. 2. B) $62,500. 3. C) $75,000. 4. D)
$125,000. 45) Roberto and Reagan are both 25 percent owner/managers for Bright
Light Enterprises. Roberto runs the retail store in Sacramento, CA, and Reagan
runs the retail store in San Francisco, CA. Bright Light generated a $125,000
profit companywide made up of a $75,000 profit from the Sacramento store, a
($25,000) loss from the San Francisco store, and a combined $75,000 profit from
the remaining stores. If Bright Light is taxed as a partnership and decides that
Roberto and Reagan will be allocated 70 percent of his own store’s profit with
the remaining profits allocated pro rata among all the owners, how much income
will be allocated to Reagan? 1. A) ($25,000). 2. B) ($17,500). 3. C) $5,000. 4.
D) $20,000. 46) When an employee/shareholder receives an income allocation from
an S corporation, what taxes apply to the income allocation? 1. A) FICA tax
only. 2. B) Self-employment tax only. 3. C) FICA and self-employment tax. 4. D)
None of the choices are correct. This income will never be taxed. 5. E) None of
the choices are correct. This income will, however, be subject to regular income
tax. 47) What is the tax impact to a C corporation or an S corporation when it
makes a property distribution to a shareholder? 1. A) Recognizes either gain or
loss. 2. B) Does not recognize gain or loss. 3. C) Recognizes gain but not loss.
4. D) Recognizes loss only. 48) Assume you plan to start a new enterprise; you
know the probability of having losses for the first three years of operations is
almost 90 percent, and you know you will report a substantial amount of income
from other sources during those same three years. From a tax perspective, which
of the following entity choices would be least favorable? 1. A) C corporation.
2. B) LLC. 3. C) General partnership. 4. D) S corporation. 49) From a tax
perspective, which entity choice is preferred when a liquidating distribution
occurs and the entity has assets that have declined in value? 1. A) Partnership.
2. B) S corporation. 3. C) LLC. 4. D) Partnership and S corporation. 5. E) S
corporation and LLC. 50) From a tax perspective, which entity choice is
preferred when a liquidating distribution occurs and the entity has appreciated
assets? 1. A) Partnership. 2. B) S corporation. 3. C) C corporation. 4. D) S
corporation and C corporation. 51) If you were seeking an entity with the most
favorable tax treatment regarding (1) the number of owners allowed, (2) the
flexibility to select your accounting period, and (3) the availability of
preferential capital gains rates when selling your ownership interest, which
entity should you decide to use? 1. A) C corporation. 2. B) S corporation. 3. C)
Partnership. 4. D) Sole proprietorship. 52) Which of the following is not an
effective strategy for mitigating the double tax associated with C corporations?
1. A) Paying a salary to a shareholder-employee. 2. B) Leasing property from a
shareholder. 3. C) Borrowing money from a shareholder. 4. D) Paying fringe
benefits to a shareholder-employee. 5. E) All of the choices are effective
strategies for mitigating double taxation. 53) What is the maximum number of
unrelated shareholders a C corporation can have, the maximum number of unrelated
shareholders an S corporation can have, and the maximum number of partners a
partnership may have respectively? 1. A) 100; no limit; no limit. 2. B) no
limit; 100; 2. 3. C) no limit; 100; no limit. 4. D) 100; 100; no limit. 54)
David would like to organize HOS as either an LLC or as a corporation (taxed as
a C corporation) generating a 12 percent annual before-tax return on a $300,000
investment. Individual and corporate tax rates are both 30 percent and
individual capital gains and dividend tax rates are 15 percent. HOS will pay out
its after-tax earnings every year to either its members or its shareholders. 1.
Ignoring self-employment taxes, how much would David keep after taxes if HOS is
organized as either an LLC or a corporation (taxed as a C corporation)? 2.
Ignoring self-employment taxes, what are the overall tax rates (combined owner
and entity level) if HOS is organized as either an LLC or a corporation (taxed
as a C corporation)? 55) Jaron would like to organize TMZ as either an LLC or as
a corporation (taxed as a C corporation) generating a 6 percent annual
before-tax rate of return on a $200,000 investment. Individual and corporate tax
rates are both 40 percent and individual capital gains and dividends tax rates
are 10 percent. TMZ will distribute its earnings annually to either its members
or shareholders. 1. Ignoring self-employment taxes (and the additional Medicare
Tax), how much would Jaron keep after taxes if TMZ is organized as either an LLC
or a corporation (taxed as a C corporation)? 2. Ignoring self-employment taxes
(and the additional Medicare Tax), what are the overall tax rates (combined
overall and entity level) if TMZ is organized as either an LLC or as a
corporation (taxed as a C corporation)? 56) Emmy would like to organize PRK as
either an LLC or as a corporation (taxed as a C corporation) generating a 15
percent annual before-tax rate of return on a $100,000 investment. Individual
ordinary rates are 25 percent, corporate rates are 15 percent, and individual
capital gains and dividends tax rates are 5 percent. PRK will distribute its
earnings annually to either its members or shareholders. 1. Ignoring
self-employment taxes, how much would Emmy keep after taxes if PRK is organized
as either an LLC or as a corporation (taxed as a C corporation)? 2. Ignoring
self-employment taxes, what are the overall tax rates (combined entity and owner
level) if PRK is organized as either an LLC or a corporation (taxed as a C
corporation)? 57) Jerry would like to organize FBC as either an LLC or as a
corporation (taxed as a C corporation) generating an 8 percent annual before-tax
rate of return on a $400,000 investment. Individual and corporate tax rates are
both 35 percent and individual capital gains and dividends tax rates are 15
percent. FBC will pay out its after-tax earnings every year to either its
members or its shareholders. 1. Ignoring self-employment taxes, how much would
Jerry keep after taxes if FBC is organized as either an LLC or as a corporation
(taxed as a C corporation)? 2. Ignoring self-employment taxes, what are the
overall tax rates (combined owner and entity level) tax rates if FBC is
organized as either an LLC or as a corporation (taxed as a C corporation)? 58)
Taylor would like to organize DRK as either an LLC or as a corporation (taxed as
a C corporation) generating a 13 percent annual before-tax rate of return on a
$250,000 investment. Individual and corporate tax rates are both 30 percent and
individual capital gains and dividends tax rates are 5 percent. DRK will
distribute its earnings annually to either its members or shareholders. 1.
Ignoring self-employment taxes, how much would Taylor keep after taxes if DRK is
organized as either an LLC or as a corporation (taxed as a C corporation)? 2.
Ignoring self-employment taxes, what are the overall (combined owner and entity
level) tax rates if DRK is organized as either an LLC or as a corporation (taxed
as a C corporation)? 59) Becca would like to organize BMI as either an LLC or as
a corporation (taxed as a C corporation) generating a 4 percent annual
before-tax rate of return on a $450,000 investment. Individual ordinary rates
are 28 percent, corporate rates are 15 percent, and individual capital gains and
dividends tax rates are 15 percent. BMI will distribute its earnings annually to
either its members or shareholders. 1. Ignoring self-employment taxes, how much
would Becca keep after taxes if BMI is organized as either a LLC or as a
corporation (taxed as a C corporation)? 2. Ignoring self-employment taxes, what
are the overall (combined owner and entity level) tax rates if BMI is organized
as either an LLC or as a corporation (taxed as a C corporation)? 60) SNL
corporation, a C corporation, reports $400,000 of taxable income in the current
year. SNL’s tax rate is 35 percent. Answer the following questions, assuming
Keegan, SNL’s sole shareholder, has a marginal tax rate of 39.6 percent on
ordinary income and 23.8 percent on dividend income (including the net
investment income tax). 1. Compute the first level of tax on SNL’s taxable
income for the year. 2. Compute the second level of tax on SNL’s income assuming
that SNL currently distributes all of its after-tax earnings to Keegan. What is
the overall (combined owner and entity level) tax rate on SNL’s taxable income
for the year? 61) In the current year, DNS (a C corporation) had taxable income
of $600,000 and distributed all of its after-tax earnings to Daniel, its sole
shareholder. DNS’s tax rate is 38 percent. Assuming Daniel’s marginal tax rate
on ordinary income is 28 percent and his dividend rate is 15 percent (he is not
subject to the net investment income tax), what is the overall tax rate
(combined corporate level and shareholder level) on DNS’s $600,000 of taxable
income? 62) In its first year of existence, BYC Corporation (a C corporation)
reported a loss for tax purposes of ($40,000). How much tax will BYC pay in year
2 if it reports taxable income from operations of $35,000 in year 2 before any
loss carryovers? 63) In its first year of existence Aspen Corp. (a C
corporation) reported a loss for tax purposes of $50,000. In year 2, it reports
a $30,000 loss. For year 3, it reports taxable income from operations of
$120,000. How much tax will Aspen Corp. pay for year 3? Consult the corporate
tax rate table provided to calculate your answer. (Use Corporate Tax Rate
Schedule.) 64) For the current year, Creative Designs Inc., a C corporation,
reports taxable income of $300,000 before paying salary to Ben, the sole
shareholder of Creative Designs Inc. (CD). Ben’s marginal tax rate on ordinary
income is 28 percent and 15 percent on dividend income. Assume CD’s tax rate is
39 percent. 1. How much total income tax will Creative Designs and Ben pay on
the $300,000 taxable income for the year if CD doesn’t pay any salary to Ben and
instead distributes all of its after-tax income to Ben as a dividend? 2. How
much total income tax will Creative Designs and Ben pay on the $300,000 of
income if CD pays Ben a salary of $100,000 and distributes its remaining
after-tax earnings to Ben as a dividend? 3. Compare your answer in part a. with
your answer to part b. Explain why these numbers are different. 65) For the
current year, Birch Corporation, a C corporation, reports taxable income of
$400,000 before paying salary to its sole shareholder Elaine. Elaine’s marginal
tax rate on ordinary income is 33 percent and 15 percent on dividend income. If
Birch pays Elaine a salary of $200,000 but the IRS determines that Elaine’s
salary in excess of $100,000 is unreasonable compensation, what is the overall
income tax rate on Birch’s $400,000 pre-salary income? Assume Birch’s tax rate
is 35 percent and it always distributes all after-tax earnings to Elaine. 66)
Cali Corp. (a C corporation) projects that it will have taxable income of
$250,000 for the year before paying any fringe benefits. Stacey, Cali’s sole
shareholder, has a marginal tax rate of 33 percent on ordinary income and 15
percent on dividend income. Assume Cali’s tax rate is 34 percent. 1. What is the
amount of the combined corporate and shareholder level income tax on Cali’s
$250,000 of pre-benefit income if Cali Corp. does not pay out any fringe
benefits and distributes all of its after-tax earnings to Stacey? 2. What is the
amount of the combined corporate and shareholder level income tax on Cali’s
$250,000 of pre-benefit income if Cali Corp. pays Stacey’s adoption expenses of
$50,000 and the payment is considered to be a qualified fringe benefit? Cali
Corp. distributes all of its after-tax earnings to Stacey. 3. What is the amount
of the combined corporate and shareholder level income tax on Cali’s $250,000 of
pre-benefit income if Cali Corp. pays Stacey’s adoption expenses of $50,000 and
the payment is considered to be a nonqualified fringe benefit? Cali Corp.
distributes all of its after-tax earnings to Stacey. 67) Jamal Corporation, a C
corporation, projects that it will have taxable income of $500,000 before
incurring any lease expenses. Jamal’s tax rate is 34 percent. Ali, Jamal’s sole
shareholder, has a marginal tax rate of 33 percent on ordinary income and 15
percent on dividend income. Jamal always distributes all of its after-tax
earnings to Ali. 1. What is the amount of the combined corporate and shareholder
level tax on Jamal Corp.’s $500,000 pre-lease expense income if Jamal Corp.
distributes all of its after-tax earnings to its sole shareholder Ali (ignore
the 3.8% net investment income tax)? 2. What is the amount of the combined
corporate and shareholder level tax on Jamal Corp.’s $500,000 pre-lease expense
income if Jamal leases equipment from Ali at a cost of $120,000 for the year
(ignore the 3.8% net investment income tax)? 3. What is the amount of the
combined corporate and shareholder level tax on Jamal Corp.’s $500,000 pre-lease
expense income if Jamal Corp. leases equipment from Ali at a cost of $120,000
for the year but the IRS determines that the fair market value of the lease
payments is $80,000 (ignore the 3.8% net investment income tax)? 68) Tuttle
Corporation (a C corporation) projects that it will have taxable income for the
year of $300,000 before incurring any interest expense. Assume Tuttle’s tax rate
is 35 percent. 1. What is the amount of the combined corporate and shareholder
level tax on the $300,000 of pre-interest expense earnings if Ruth, Tuttle’s
sole shareholder, lends Tuttle Corporation $100,000 at the beginning of the
year, Tuttle pays Ruth $10,000 of interest on the loan (interest is considered
to be reasonable), and Tuttle distributes all of its after-tax earnings to Ruth?
Assume her ordinary marginal rate is 33 percent and dividend tax rate is 15
percent. 2. Assume the same facts as in part a except that the IRS determines
that the fair market value of the interest should be $8,000. What is the amount
of the combined corporate and shareholder level tax on Tuttle Corporation’s
pre-interest expense earnings? 69) Nancy purchased a building and then leased
the building to ZML. Nancy is the sole shareholder of ZML. She leased the
building to ZML for $2,500 per month. However, the IRS determined that the fair
market value of the lease payment should only be $1,500 per month. How would the
lease payment be treated with respect to both Nancy and ZML? 70) Rodger owns
100% of the shares in Trevor Inc., a C corporation. Assume the following for the
current year: Trevor Inc.’s pre-tax income = $16,000 Trevor Inc.’s marginal tax
rate = 35% Percentage of after-tax earnings retained by Trevor Inc. = 0% (i.e.
all after-tax earnings distributed) Rodger’s dividend tax rate = 5% Given these
assumptions, how much cash does Rodger have from the dividend after all taxes
have been paid? 71) Corporation A owns 10% of Corporation C. The marginal tax
rate on non-dividend income for both A and C is 34%. Corporation C earns a total
of $200 million before taxes in the current year, pays corporate tax on this
income and distributes the remainder proportionately to its shareholders as a
dividend. In addition, Corporation A owns 20% of partnership P that earns $500
million in the current year. Given this fact pattern, answer the following
questions: 1. How much cash from the Corporation C dividend remains after
Corporation A pays the tax on the dividend assuming Corporation A is eligible
for the 70 percent dividends received deduction? 2. If partnership P distributes
all of its current year earnings in proportion to the partner’s ownership
percentages, how much cash from Partnership P does Corporation A have after
paying taxes on its share of income from the partnership? 3. If you were to
replace corporation A with individual A [her marginal tax rate on ordinary
income is 28% and on qualified dividends is 15% (the net investment income tax
does not apply)] in the original fact pattern above, how much cash does
individual A have from the Corporation C dividend after all taxes assuming the
dividends are qualified dividends? Consistent with the original facts, assume
that Corporation C distributes all of its after-tax income to its shareholders.
McGraw-Hill’s Taxation of Individuals and Business Entities, 2018 Edition, 9e
(Spilker) Chapter 16 Corporate Operations 1) In general, a corporation can elect
to use either the accrual or cash method of accounting no matter how large the
corporation. 2) Corporations calculate adjusted gross income (AGI) in the same
way as individuals. 3) Corporations have a larger standard deduction than
individual taxpayers because they generally have higher revenues. 4) Large
corporations (gross receipts of $5 million or more) are allowed to use the cash
method of accounting for at least the first two years of their existence. 5)
Although a corporation may report a temporary book-tax difference for an item of
income or deduction for a given year, over the long term the total amount of
income or deduction it reports with respect to that item will be the same for
both book and tax purposes. 6) An unfavorable temporary book-tax difference is
so named because it causes taxable income to decrease relative to book income.
7) Income that is included in book income, but excluded from taxable income,
results in a favorable, permanent book-tax difference. 8) Federal income tax
expense reported on a corporation’s books generates a temporary book-tax
difference for Schedule M-3 purposes. 9) For a corporation, goodwill created in
an asset acquisition generally leads to temporary book-tax differences. 10) For
incentive stock options granted when ASC 718 applies, the value of the options
that accrue in a given year always creates a permanent, unfavorable book-tax
difference. 11) In a given year, Adams Corporation has goodwill impairment in
excess of the allowable amortization for tax purposes. Adams has a favorable
temporary book-tax difference for that year. 12) For tax purposes, companies
using nonqualified stock options deduct expenses in the year the options are
exercised. 13) A nonqualified stock option will create a permanent book-tax
difference in a given year if it accrues during the year but is exercised in a
later year. 14) For tax purposes, a corporation may deduct the entire amount of
a net capital loss in the year incurred. 15) A corporation may carry a net
capital loss forward five years to offset capital gains in future years but it
may not carry a net capital loss back to offset capital gains in previous years.
16) A corporation may carry a net capital loss back two years and forward 20
years. 17) A corporation may carry a net capital loss back three years and
forward five years. 18) Corporations may carry a net operating loss sustained in
the current year back two years and forward 20 years. 19) Bingo Corporation
incurred a net operating loss in 2017. If Bingo carries the loss back, it must
first carry the loss back to offset its 2016 taxable income and then carry any
remaining loss back to offset its 2015 taxable income. 20) Net operating losses
generally create permanent book-tax differences. 21) Net capital loss carryovers
but not carrybacks are deductible against capital gains in determining a
corporation’s net operating loss for the year. 22) For 2017, accrual-method
corporations cannot deduct charitable contributions until they actually make
payment to the charity. 23) GenerUs Inc.’s board of directors approved a
charitable cash contribution to FoodBank, a qualified non-profit organization,
in November of 2017. GenerUs made payment to FoodBank on February 2, 2018.
GenerUs Inc. (a calendar-year corporation) may claim a deduction for the
contribution on its 2017 tax return. 24) NOL and capital loss carryovers are
deductible in calculating the charitable contribution limit modified taxable
income, while NOL and capital loss carrybacks are not. 25) Corporations may
carry excess charitable contributions forward five years, but they may not carry
them back. 26) A corporation generally will report a favorable, temporary
book-tax difference when it deducts a charitable contribution carryover. 27)
Corporations are not allowed to deduct charitable contributions in excess of 10%
of the corporation’s taxable income (before the charitable contribution and
certain other deductions). 28) The dividends received deduction is designed to
mitigate the extent to which corporate earnings are subject to more than two
levels of taxation. 29) Corporations compute their dividends received deduction
by multiplying the dividend amount by 10%, 50%, or 100% depending on their
ownership in the distributing corporation’s stock. 30) The dividends received
deduction cannot cause a net operating loss. The deduction can reduce income to
zero but not below zero. 31) The dividends received deduction is subject to a
limitation based on modified taxable income. 32) Taxable income of the most
profitable corporations is subject to a flat 35% tax rate. 33) Controlled group
provisions in the tax law prevent taxpayers from splitting a corporation into
several smaller corporations to take advantage of low marginal corporate tax
rates at low levels of income. 34) Three brothers each own 20% of the stock in
three corporations. Because no single brother owns more than 50% of a
corporation, the tax law would not treat the corporations as a controlled group.
35) A C corporation reports its taxable income or loss on Form 1065. 36)
Schedule M-1 reconciles from book income to bottom line taxable income (the
taxable income that is applied to the tax rates to determine the corporation’s
gross tax liability). 37) Both Schedules M-1 and M-3 require taxpayers to
identify book-tax differences as either temporary or permanent. 38) An
affiliated group must file a consolidated tax return. 39) The rules for
consolidated reporting for financial statement purposes are the same as the
rules for consolidated reporting for tax purposes. 40) Calendar-year
corporations that request an extension for filing their 2017 tax returns will
have a tax return due date of October 15. 41) Volos Company (a calendar-year
corporation) began operations in March of 2015 and was not profitable through
December of 2016. Volos has been profitable for the first quarter of 2017 and is
trying to determine its first quarter estimated tax payment. It will have no
estimated tax payment requirement in 2017 because it had no tax liability for
the 2016 tax year and has been in business for at least 12 months. 42) Most
corporations use the annualized income method to determine their required annual
payment for purposes of making quarterly estimated payments. 43) Large
corporations (corporations with more than $1,000,000 in taxable income in any of
the three years prior to the current year) can use their prior tax year
liability to determine all required estimated quarterly payments for the current
year. 44) For estimated tax purposes, a “large” corporation is any corporation
with average annual gross receipts of $5,000,000 in the three years prior to the
current year. 45) Small corporations (in terms of average annual gross receipts)
are exempt from the alternative minimum tax. 46) Urban Corporation receives
tax-exempt income from Denver municipal bonds. All the proceeds from the bonds
were used to fund public projects. In computing adjusted current earnings in its
AMT computation, Urban must add back the interest income from its municipal
bonds. 47) Depreciation adjustments can increase or decrease the AMT base
relative to taxable income. 48) The tax rate for the corporate alternative
minimum tax is a flat 26%. 49) The adjusted current earnings (ACE) adjustment is
75% of the difference between a corporation’s alternative minimum taxable income
before the ACE adjustment and its ACE. 50) Corporations are allowed to deduct at
least some AMT exemption regardless of profitability. 51) A corporation with an
AMTI of $400,000 will have all of its AMT exemption phased-out. 52) Minimum tax
credits generated by the corporate AMT can be carried forward indefinitely. 53)
A corporation with a minimum tax credit carryover may reduce regular tax down to
the amount of its tentative minimum tax when its regular tax exceeds its
tentative minimum tax. 54) The amount of a corporation’s AMT is the amount of
its tentative minimum tax in excess of its regular tax. 55) Which of the
following is not calculated in the corporate income tax formula? 1. A) Gross
income. 2. B) Adjusted gross income. 3. C) Taxable income. 4. D) Regular tax
liability. 56) WFO Corporation has gross receipts according to the following
schedule: Year 1

$2.00 million

Year 2

$4.00 million

Year 3

$6.00 million

Year 4

$4.50 million

Year 5

$5.00 million

Year 6

$7.00 million

If WFO began business as a cash-method corporation in Year 1, in which year
would it have first been required to use the accrual method? 1. A) Year 3. 2. B)
Year 4. 3. C) Year 5. 4. D) Year 6. 5. E) None of the choices are correct. 57)
Which of the following does NOT create a permanent book-tax difference? 1. A)
Organizational and start-up expenses. 2. B) Key employee death benefit income.
3. C) Fines and penalties expenses. 4. D) Municipal bond interest income. 58)
Which of the following does NOT create a temporary book-tax difference? 1. A)
Deferred compensation. 2. B) Bad-debt expense. 3. C) Depreciation expense. 4. D)
Domestic production activities deduction. 59) Which of the following statements
regarding book-tax differences is true? 1. A) Corporations are not required to
report book-tax differences on their income tax returns. 2. B) Corporations will
eventually recognize the same amount of income for book and tax purposes for
income-related temporary book-tax differences. 3. C) Income excludable for tax
purposes usually creates a temporary book-tax difference. 4. D) None of the
choices are true. 60) It is important to distinguish between temporary and
permanent book-tax differences for which of the following reasons? 1. A)
Temporary book-tax differences will reverse in future years whereas permanent
differences will not. 2. B) Certain corporations are required to disclose
book-tax differences as permanent or temporary on their tax returns. 3. C) Both
temporary book-tax differences will reverse in future years whereas permanent
differences will not and certain corporations are required to disclose book-tax
differences as permanent or temporary on their tax returns are reasons for why a
corporation might distinguish between temporary and permanent differences. 4. D)
Neither temporary nor permanent book-tax differences will reverse in future
years nor are certain corporations required to disclose book-tax differences as
permanent or temporary on their tax returns. 61) TrendSetter Inc. paid $50,000
in premiums for life insurance coverage for its key employees for which
TrendSetter Inc. is the beneficiary. What is the nature of the book-tax
difference created by this expense? 1. A) Permanent; favorable. 2. B) Permanent;
unfavorable. 3. C) Temporary; favorable. 4. D) Temporary; unfavorable. 62)
iScope Inc. paid $3,000 in interest on a loan it used to purchase municipal
bonds. What is the nature of the book-tax difference relating to this expense?
1. A) Permanent; favorable. 2. B) Permanent; unfavorable. 3. C) Temporary;
favorable. 4. D) Temporary; unfavorable. 63) AmStore Inc. sold some of its heavy
machinery at a gain. AmStore used the straight-line method for financial
accounting depreciation and MACRS for tax cost-recovery. If accumulated
depreciation for financial accounting purposes is less than accumulated
depreciation for tax reporting purposes, what is the nature of the book-tax
difference associated with the gain on the sale? 1. A) Permanent; favorable. 2.
B) Permanent; unfavorable. 3. C) Temporary; favorable. 4. D) Temporary;
unfavorable. 64) Corporation A receives a dividend from Corporation B.
Corporation A includes the dividend in its gross income for tax and financial
accounting purposes (no book-tax difference). If A has accounted for the
dividend correctly (following the general rule), how much of B stock does A own?
1. A) A owns less than 20 percent of the stock of B. 2. B) A owns at least 20
but not more than 50 percent of the stock of B. 3. C) A owns more than 50
percent of the stock of B. 4. D) Cannot be determined. 65) Corporation A
receives a dividend from Corporation B. It includes the dividend in gross income
for tax purposes but includes a pro-rata portion of B’s earnings in its
financial accounting income. If A has accounted for the dividend correctly
(using the general rule), how much of B’s stock does A own? 1. A) A owns less
than 20 percent of the stock of B. 2. B) A owns at least 20 but not more than 50
percent of the stock of B. 3. C) A owns more than 50 percent of the stock of B.
4. D) Cannot be determined. 66) Coop Inc. owns 40% of Chicken Inc., both Coop
and Chicken are corporations. Chicken pays Coop a dividend of $10,000 in the
current year. Chicken also reports financial accounting earnings of $20,000 for
that year. Assume that Coop follows the general rule of accounting for
investment in Chicken. What is the amount and nature of the book-tax difference
to Coop associated with the dividend distribution (ignoring the dividends
received deduction)? 1. A) $2,000 unfavorable. 2. B) $2,000 favorable. 3. C)
$10,000 unfavorable. 4. D) $10,000 favorable. 5. E) None of the choices are
correct. 67) Over what time period do corporations amortize purchased goodwill
for tax purposes? 1. A) 180 months. 2. B) 150 months. 3. C) 60 months. 4. D)
None of the choices are correct. 68) Which of the following statements regarding
book-tax differences associated with purchased goodwill is false? 1. A) It is
possible to have no book-tax difference in a year when there is no goodwill
amortization for tax purposes. 2. B) In a year when goodwill is impaired and yet
fully amortized for tax purposes (so no tax amortization of the goodwill for
that year), the book-tax difference will be unfavorable. 3. C) Temporary
book-tax differences associated with goodwill are always favorable. 4. D) If
goodwill has been fully amortized for tax purposes in a previous year, the
book-tax difference is equal to the amount of impairment recognized. 69) Which
of the following describes the correct treatment of incentive stock options
(ISOs) granted when ASC 718 applies? 1. A) Financial accounting—no expense;
tax—no deduction. 2. B) Financial accounting—no expense; tax—deduct bargain
element at exercise. 3. C) Financial—expense value over vesting period; tax—no
deduction. 4. D) Financial—expense value over vesting period; tax—deduct bargain
element at exercise. 70) Which of the following describes the correct treatment
of incentive stock options (ISOs) granted when ASC 718 does not apply? 1. A)
Financial accounting—no expense; tax—no deduction. 2. B) Financial accounting—no
expense; tax—deduct bargain element at exercise. 3. C) Financial
accounting—expense value over vesting period; tax—no deduction. 4. D) Financial
accounting—expense value over vesting period; tax—deduct bargain element at
exercise. 71) Which of the following describes the correct treatment of the
exercise of nonqualified stock options (NQOs) that were granted when ASC 718
applies? 1. A) Financial—no expense; tax—no deduction. 2. B) Financial—no
expense; tax—deduct bargain element at exercise. 3. C) Financial—expense value
over vesting period; tax—no deduction. 4. D) Financial—expense value over
vesting period; tax—deduct bargain element at exercise. 72) Which of the
following describes the correct treatment of nonqualified stock options (NQOs)
granted when ASC 718 did not apply? 1. A) Financial—no expense; tax—no
deduction. 2. B) Financial—no expense; tax—deduct bargain element at exercise.
3. C) Financial—expense value over vesting period; tax—no deduction. 4. D)
Financial—expense value over vesting period; tax—deduct bargain element at
exercise. 73) Which of the following statements regarding nonqualified stock
options (NQOs) is false? 1. A) If ASC 718 applies, book-tax differences
associated with NQOs may be either permanent or temporary. 2. B) In a given year
when ASC 718 applies, if the value of the options that accrue is greater than
the bargain element of options exercised, the book-tax difference for that year
is unfavorable. 3. C) Before ASC 718 applied, no expense recognition was
required for NQOs for financial accounting purposes. 4. D) If ASC 718 does not
apply, all stock option-related book-tax differences are temporary. 74) Which of
the following statements regarding incentive stock options (ISOs) is false? 1.
A) If ASC 718 does not apply, ISOs do not create book-tax differences. 2. B) For
ISOs granted when ASC 718 applies, book-tax differences are always unfavorable.
3. C) If ASC 718 applies, the value expensed for book purposes in a given year
is the value of the options that accrue. 4. D) If ASC 718 applies, book-tax
differences associated with ISOs may be either permanent or temporary. 75)
Orange Inc. issued 20,000 nonqualified stock options valued at $40,000 (in
total). The options vest over two years—half in 2017 (the year of issue) and
half in 2018. One thousand options are exercised in 2018 with a bargain element
on each option of $6. What is the 2018 book-tax difference associated with the
stock options? 1. A) $14,000 unfavorable. 2. B) $6,000 favorable. 3. C) $24,000
unfavorable. 4. D) $24,000 favorable. 5. E) None of the choices are correct. 76)
In January 2016, Khors Company issues nonqualified stock options to its CEO,
Jenny Svaro. Because the company does not expect Ms. Svaro to leave the company,
the options vest at the time they are granted with a total value of $50,000. In
December of 2017, the company experiences a surge in its stock price, and Ms.
Svaro exercises the options. The total bargain element at the time of exercise
is $60,000. For 2017, what is the book-tax difference due to the options
exercised? 1. A) 10,000 unfavorable. 2. B) 10,000 favorable. 3. C) 50,000
unfavorable. 4. D) 60,000 favorable. 77) In January 2017, Khors Company issues
nonqualified stock options to its CEO, Jenny Svaro. Because the company does not
expect Ms. Svaro to leave the company, the options vest at the time they are
granted with a total value of $50,000. In December of 2017, the company
experiences a surge in its stock price, and Ms. Svaro exercises the options. The
total bargain element at the time of exercise is $40,000. For 2017, what is the
nature of the book-tax difference due to the options exercised? 1. A) Favorable
and temporary. 2. B) Favorable and permanent. 3. C) Unfavorable and temporary.
4. D) Unfavorable and permanent. 5. E) Not enough information to determine. 78)
Which of the following statements regarding capital gains and losses is false?
1. A) In terms of tax treatment, corporations generally prefer capital gains to
ordinary income. 2. B) Like individuals, corporations can deduct $3,000 of net
capital losses against ordinary income in a given year. 3. C) C corporations can
carry back net capital losses three years and they can carry them forward for
five years. 4. D) Corporations must apply capital loss carrybacks and carryovers
in a particular order. 79) For corporations, which of the following regarding
net capital losses is true? 1. A) A corporation that experiences a net capital
loss has a favorable book-tax difference in the year of the loss. 2. B) A
corporation that experiences a net capital loss in year 4 first carries the loss
back to year 3, then year 2, and then year 1 before carrying it forward. 3. C)
Net capital loss carrybacks are deductible in determining a corporation’s net
operating loss. 4. D) Net capital loss carrybacks and carryovers create
temporary book-tax differences if they are used before they expire. 80) Studios
reported a net capital loss of $30,000 in year 5. It reported net capital gains
of $14,000 in year 4 and $27,000 in year 6. What is the amount and nature of the
book-tax difference in year 6 related to the net capital carryover? 1. A)
$11,000 unfavorable. 2. B) $11,000 favorable. 3. C) $16,000 unfavorable. 4. D)
$16,000 favorable. 81) Tatoo Inc. reported a net capital loss of $13,000 in
2017. It had a net capital gain of $4,300 in 2015 and $3,000 in 2014. In 2016,
although the company suffered a net operating loss, it had net capital gains of
$1,000. What is the amount of Tatoo’s capital loss carryover remaining after it
applies the carryback? 1. A) $4,700. 2. B) $5,700. 3. C) $8,700. 4. D) $13,000.
82) BTW Corporation has taxable income in the current year that can be offset
with an NOL from a previous year. What is the nature of the book-tax difference
created by the net operating loss carryover deduction in the current year? 1. A)
Permanent; favorable. 2. B) Permanent; unfavorable. 3. C) Temporary; favorable.
4. D) Temporary; unfavorable. 83) Which of the following is allowable as a
deduction in calculating a corporation’s net operating loss? 1. A) Charitable
contribution deduction. 2. B) Domestic production activities deduction. 3. C)
Net capital loss carryback. 4. D) Net operating losses from other years. 84)
Which of the following statements regarding net operating losses generated in
2017 is true? 1. A) Corporations can carry net operating losses back two years
and forward up to 15 years. 2. B) A corporation may elect to forgo carrying a
net operating loss back and instead carry it over to future years. 3. C) When a
corporation applies a net operating loss carryover, it reports a favorable,
permanent book-tax difference in the amount of the applied carryover. 4. D)
Marginal tax rates are irrelevant in determining the tax benefit of applying a
net operating loss carryback or carryover. 5. E) None of these is a true
statement. 85) Which of the following statements regarding charitable
contributions is false? 1. A) Only contributions made to qualified charitable
organizations are deductible. 2. B) Charitable contribution deductions are
subject to a limitation based on the corporation’s taxable income (before
certain deductions). 3. C) Corporations can qualify to deduct a contribution
before actually paying the contribution to the charity. 4. D) The amount
deductible for non-cash contributions is always the adjusted basis of the
property donated. 86) Which of the following is unnecessary to allow an
accrual-method corporation to deduct charitable contributions before actually
paying the contribution to charity? 1. A) Approval of the payment from the board
of directors. 2. B) Approval from the IRS prior to making the contribution. 3.
C) Payment made within three and one-half months of the tax year-end. 4. D) All
of the choices are necessary. 87) Canny Foods Co. is considering three ways it
could contribute to a local, qualified charity. First, it could give $5,000 in
cash. Second, it could give stock it initially purchased two years ago for
$4,000 but is now worth $6,000. Third, it could give items of inventory with a
fair market value of $7,000 but with an adjusted basis of $3,000. Which of the
following correctly describes the relation among possible charitable
contributions in terms of amount deductible for tax purposes? 1. A) Cash > Stock
> Inventory. 2. B) Stock > Cash > Inventory. 3. C) Inventory > Stock > Cash. 4.
D) Inventory > Cash > Stock. 88) Which of the following is deductible in
calculating the charitable contribution limit modified taxable income? 1. A) Net
capital loss carrybacks. 2. B) NOL carrybacks. 3. C) NOL carryovers. 4. D)
Charitable contributions. 89) Remsco has taxable income of $60,000 and a
charitable contribution limit modified taxable income of $72,000. Its charitable
contributions for the year were $7,500. What is Remsco’s current-year charitable
contribution deduction and contribution carryover? 1. A) $6,000 current-year
deduction; $1,500 carryover. 2. B) $7,500 current-year deduction; $0 carryover.
3. C) $1,200 current-year deduction; $6,300 carryover. 4. D) $7,200 current-year
deduction; $300 carryover. 90) If a corporation’s cash charitable contributions
exceed the charitable contribution deduction limit, what kind of book-tax
difference is created? 1. A) Permanent; favorable. 2. B) Permanent; unfavorable.
3. C) Temporary; favorable. 4. D) Temporary; unfavorable. 91) Which of the
following statements regarding excess charitable contributions (contributions in
excess of the modified taxable income limitation) by corporations is true? 1. A)
Corporations may not carry over or carry back excess charitable contributions.
2. B) Corporations can carry excess charitable contributions over to a future
year or back to a prior year. 3. C) Corporations can carry excess charitable
contributions over to a future year but not back to a prior year. 4. D)
Corporations can carry excess charitable contributions back to a prior year but
not over to a future year. 92) Which of the following statements regarding the
dividends and/or the dividends received deduction (DRD) is true? 1. A) Dividends
are taxed at preferential rates for corporations as well as for individuals. 2.
B) The DRD can increase the net operating loss of a corporation. 3. C)
Corporations are allowed to deduct from a dividend received the product of the
dividend and the percentage of the receiving corporation’s ownership in the
distributing corporation’s stock. 4. D) The DRD allows corporations to deduct
the amount of dividends that they distribute. 93) Which of the following is
deductible in calculating DRD modified taxable income? 1. A) Charitable
contribution deduction. 2. B) NOL carrybacks. 3. C) NOL carryovers. 4. D)
Dividends received deduction. 94) Jazz Corporation owns 50% of the Williams
Corp. stock. Williams distributed a $10,000 dividend to Jazz Corporation. Jazz
Corp.’s taxable income before the dividend was $100,000. What is the amount of
Jazz’s dividends received deduction on the dividend it received from Williams
Corp.? 1. A) $0. 2. B) $7,000. 3. C) $8,000. 4. D) $10,000. 95) Jazz Corporation
owns 10% of the Williams Corp. stock. Williams distributed a $10,000 dividend to
Jazz Corporation. Jazz Corp.’s taxable income (loss) before the dividend was
($2,000). What is the amount of Jazz’s dividends received deduction on the
dividend it received from Williams Corp.? 1. A) $0. 2. B) $5,600. 3. C) $7,000.
4. D) $8,000. 5. E) None of the choices are correct. 96) Jazz Corporation owns
10% of the Williams Corp. stock. Williams distributed a $10,000 dividend to Jazz
Corporation. Jazz Corp.’s taxable income (loss) before the dividend was
($6,000). What is the amount of Jazz’s dividends received deduction on the
dividend it received from Williams Corp.? 1. A) $0. 2. B) $2,800. 3. C) $4,200.
4. D) $7,000. 5. E) None of the choices are correct. 97) Which of the following
is not a type of controlled group as defined in the Internal Revenue Code? 1. A)
Parent-subsidiary. 2. B) Brother-sister. 3. C) Combined. 4. D) All of the
choices are types of controlled groups. 98) TireShop, Inc. owns 85% of Rubber
Supply Co.’s voting stock throughout the tax year. TireShop and Rubber Supply
would be considered as what kind of controlled group? 1. A) Parent-subsidiary.
2. B) Brother-sister. 3. C) Combined. 4. D) None of the choices are correct. 99)
Together, Kurt and Esmeralda own 60% of three corporations: RAZ, DVA, and TRE.
The three corporations would be considered as what kind of controlled group for
tax purposes? 1. A) Parent-subsidiary. 2. B) Brother-sister. 3. C) Combined. 4.
D) The three corporations would not be considered to be a controlled group for
tax purposes. 100) Which of the following statements regarding controlled groups
is false? 1. A) The purpose of the controlled group rules is to essentially
treat the group as though it were one entity for purposes of determining certain
tax benefits. 2. B) Having several entities treated as a controlled group is
advantageous for tax purposes because each corporation in the group is allowed
to use the 15% tax bracket in the corporate tax rate schedule in computing its
regular income tax liability. 3. C) Lauren owns 100% of Corporation A stock and
100% of Corporation B stock. Corporation A and Corporation B form a controlled
group. 4. D) Corporation A owns 100% of Corporation B. Corporation A and
Corporation B form a controlled group. 101) Which of the following regarding
Schedule M-1 and Schedule M-3 of Form 1120 is false? 1. A) In general, smaller
corporations are required to complete Schedule M-1 while larger corporations are
required to complete Schedule M-3. 2. B) Schedule M-3 lists more book-tax
differences than Schedule M-1. 3. C) Both Schedules M-1 and M-3 reconcile to a
corporation’s bottom line taxable income. 4. D) Schedule M-1 does not
distinguish between temporary and permanent book-tax differences whereas
Schedule M-3 does. 102) Which of the following statements is false regarding
consolidated tax returns? 1. A) An affiliated group can file a consolidated tax
return only if it elects to do so. 2. B) To file a consolidated tax return, one
corporation must own at least 50% of the stock of another corporation. 3. C) For
a group of corporations filing a consolidated tax return, an advantage is that
losses of one group member may offset gains of another group member. 4. D) For a
group of corporations filing a consolidated tax return, losses from certain
intercompany transactions are deferred until realized through a transaction
outside of the group. 103) What is the unextended due date of the tax return of
a calendar-year corporation for 2017? 1. A) February 15. 2. B) March 15. 3. C)
April 15. 4. D) September 15. 104) Which of the following is not an acceptable
method of determining the required annual payment of federal income tax for
corporations? 1. A) 100 percent of the prior year’s tax liability (with a few
exceptions). 2. B) 100 percent of the current year’s tax liability. 3. C) 100
percent of the estimated current year tax liability using the annualized income
method. 4. D) All of the choices are acceptable methods of determining the
required annual payment of federal income tax for corporations. 105) Which of
the following statements is false regarding corporate estimated tax payments? 1.
A) The due dates for estimated tax payments are the 15thday of the 4th, 6th,
9th, and 12thmonths of the corporation’s tax year. 2. B) Corporations must pay
estimated taxes only if they have a federal income tax liability greater than
$10,000 (including the alternative minimum tax). 3. C) Even though a corporation
extends its tax return, it still must pay its tax liability for the year by
three and one-half months after year-end. 4. D) Corporations using the
annualized income method for determining estimated tax payments project their
tax liability for the year based on income from the first, second, and third
quarters. 106) Omnidata uses the annualized income method to determine its
quarterly federal income tax payments. It had $100,000, $50,000, and $90,000 of
taxable income for the first, second, and third quarters, respectively ($240,000
in total through the first three quarters). What is Omnidata’s annual estimated
taxable income as of the end of the third quarter? 1. A) $300,000. 2. B)
$320,000. 3. C) $400,000. 4. D) $480,000. 107) Rapidpro Inc. had more than
$1,000,000 of taxable income two years prior to the current year. It would like
to use its prior year tax liability (which was very low but above zero) to
determine its quarterly estimated payments this year. Which of the following
statements is true? 1. A) Rapidpro may use the prior year tax liability to
determine its first and second quarter estimated tax payments only since it is a
large corporation. 2. B) To avoid penalty, the second quarter estimated payment
must be large enough to cover 50 percent of its estimated annual tax liability
annualized from its first quarter estimated taxable income (assume it does not
rely on its current year actual tax liability to determine its estimated tax
payment). 3. C) To avoid penalty, the third quarter estimated payment must be
large enough to cover 50 percent of its estimated annual tax liability
annualized from its third quarter estimated taxable income (assume it does not
rely on its current year actual tax liability to determine its estimated tax
payment). 4. D) None of the choices are true. 108) Which of the following
statements regarding the alternative minimum tax is false? 1. A) Corporations
compute the AMT by multiplying their AMT base by 35% and subtracting their
regular tax liability. 2. B) Small corporations are exempt from the AMT. 3. C)
All first-year corporations are exempt from the AMT. 4. D) None of the choices
are false (choose if you believe all of these above statements are true). 109)
Which of the following is not an AMT adjustment? 1. A) Adjustment for
depreciation. 2. B) Adjustment of gain or loss on sale of depreciable assets. 3.
C) Adjustment for adjusted current earnings (ACE). 4. D) Adjustment for domestic
production activities deduction. 110) In the current year, FurnitureKing
Corporation recognized $32,000 of income from an installment sale it made in a
previous tax year. If installment sales are the only difference between ACE and
alternative minimum taxable income (before the ACE adjustment), what is the
amount and nature of the ACE adjustment for the current tax year? 1. A) $24,000
favorable. 2. B) $24,000 unfavorable. 3. C) $32,000 favorable. 4. D) $32,000
unfavorable. 111) XPO Corporation has a minimum tax credit of $51,000 from 2016.
If its 2017 tentative minimum tax is $211,000 and its regular tax liability is
$250,000, what is its minimum tax credit carryover to 2018? 1. A) $51,000. 2. B)
$39,000. 3. C) $12,000. 4. D) $0. 112) Flywest Airlines, Inc. has regular
taxable income of $190 million. It also has $10 million of AMT preference items,
a $5 million unfavorable depreciation adjustment, and a $2 million favorable ACE
adjustment (after the 75% adjustment). What is Flywest’s alternative minimum tax
income (AMTI)? 1. A) $177 million. 2. B) $183 million. 3. C) $197 million. 4. D)
$203 million. 113) Z Corporation has AMTI of $250,000, which exceeds the AMT
exemption phase-out threshold by $100,000. What is Z’s tentative minimum tax? 1.
A) $47,000. 2. B) $45,000. 3. C) $40,000. 4. D) $30,000. 114) Which of the
following statements regarding AMT is true? 1. A) Only very profitable companies
(AMTI greater than $1 million) have their AMT exemption phased out. 2. B) The
AMT exemption is phased out dollar for dollar as AMTI increases. 3. C) Minimum
tax credits are generated whenever regular tax liability exceeds tentative
minimum tax. 4. D) Minimum tax credits can be carried forward indefinitely. 115)
Assume a corporation is not required to pay AMT in the current year but will pay
AMT next year. Also assume the corporation’s regular marginal tax rate is 35%.
Which tax planning strategy would minimize its after-tax cost of a charitable
contribution it is considering paying to a qualified charity? 1. A) Pay the
contribution this year. 2. B) Wait until next year to pay the contribution. 3.
C) The after-tax cost of the contribution will be the same no matter which year
it makes the contribution. 4. D) None of the choices are correct. 116) In 2017,
AutoUSA Inc. received $4,600,000 of book income, including $20,000 of interest
income from tax-exempt municipal bonds. AutoUSA reported $3,600,000 of regular
business expenses. If it made $350,000 of estimated tax payments (prepayments)
throughout the tax year, what is its tax due or tax refund when it files its
return? Assume AutoUSA pays taxes at a flat 34 percent rate and disregard the
alternative minimum tax. 117) For book purposes, RadioAircast Inc. reported
$15,000 of income from municipal bonds in 2017. It also expensed $12,000 of
radio station filing fines paid to the FCC the same year. What is the total
book-tax difference associated with these items? Is it favorable or unfavorable?
What amount of the total adjustment is permanent and what amount is temporary?
118) In 2017, US Sys Corporation received $250,000 in death benefits after its
CEO (a key employee) died (it included this amount in book income). For book
purposes, US Sys also expensed life insurance premiums for other key employees
in the amount of $20,000. In addition, for book purposes, it expensed $10,000 of
meals and entertainment expenditures. What is the total book-tax difference
associated with these items? Is it favorable or unfavorable? What amount of the
book-tax difference is temporary and what amount is permanent? 119) In 2017,
Carbonfab Manufacturers Inc. expensed $125,000 of depreciation for book
purposes, but for tax purposes, it deducted $179,000. Carbonfab also sold
equipment for $500,000. The book adjusted basis of the equipment sold was
$350,000, while the adjusted basis for tax purposes was $210,000. What is the
total book-tax difference associated with depreciation and the gain on sale? Is
it favorable or unfavorable? What amount of the book-tax difference is permanent
and what amount is temporary? 120) Atom Ventures Inc. (AV) owns stock in the
Primo and Faraday corporations. The following summarizes information relating to
AV’s investment in Primo and Faraday as follows: Corporation’s earnings for

Atom’s

Dividends distributed to

year

ownership

Atom during year

Primo

$625,000

35%

$

125,000

Faraday

$940,000

10%

$

50,000

Corporation

Assuming that AV follows the general rules for reporting its income from these
investments, what is the amount of AV’s book-tax difference associated with the
investment in these corporations (disregarding the dividends received
deduction)? Is it favorable or unfavorable? Is it permanent or temporary? 121)
On January 1, 2015, Credit Inc. recorded goodwill valued at $270,000 when it
acquired the assets of another company. At the end of 2016, the auditors of
Credit Inc. determined that the goodwill had been impaired by $50,000 and Credit
Inc. wrote down the book value of the goodwill by $50,000. During 2017, the
goodwill was not further impaired. In 2018, additional goodwill was impaired and
was written down another $18,000 for financial reporting purposes. What is the
temporary book-tax difference associated with the purchased goodwill in 2016,
2017, and 2018? Are the differences favorable or unfavorable? Are the
differences permanent or temporary? 122) On January 1, 2016, GrowCo issued
50,000 nonqualified stock options (NQOs) valued at $1 per option. Each option
entitles the owner to purchase one share of stock for $4. These options vest
(accrue) at 20 percent per year for five years beginning in 2016. By the end of
2016, 20,000 of the options had vested. At the end of 2017, these options were
exercised when the stock price is $6.25. What is the total value of the book-tax
difference associated with the stock options for 2017? Is it favorable or
unfavorable? How much of the adjustment is permanent and how much is temporary?
(Note that ASC 718 applies to these transactions.) 123) On January 1, 2005
[before the adoption of ASC 718], Net Optimizers Inc. granted 1,000 nonqualified
stock options (NQOs) valued at $.05 per option. Each option entitles the owner
to purchase one share of stock for $1. These options vest at 10 percent per year
for ten years. On December 31, 2017, 300 options are exercised when the stock
price is $5. In 2017, what is the book-tax difference associated with the stock
options? Is it favorable or unfavorable? Is it permanent or temporary? 124)
Imperial Construction Inc. (IC) issued 100,000 incentive stock options (ISOs) to
its employees on January 1, 2017 with an estimated value of $5.50 per option.
The options vest (accrue) at 25 percent per year for four years (beginning in
2017). Each option allows the holder to purchase one share of stock at $8. On
January 1, 2018, employees exercised 12,500 options as IC’s stock price reached
$14.72. What is the amount of the book-tax difference in 2018 associated with
the incentive stock options? Is it favorable or unfavorable? Is it temporary or
permanent? 125) Pure Action Cycles Inc., a bicycle manufacturer, has a net
capital loss in 2017 of $64,000. It had net capital gains of $21,500 in 2016,
$45,000 in 2015, $10,000 in 2014 (but suffered a net operating loss in 2014),
and $8,000 of net capital gain in 2012. What is the net capital gain in 2016
after the carryback is applied? 126) In 2014, Smith Traders Inc. reported
taxable income of $100,000. In 2015, it reported taxable income of $15,000. In
2016, it reported taxable income of $95,000. In 2017, Smith Traders experienced
a net operating loss of $25,000. What amount of refund can Smith Traders receive
if it does not elect to forgo the carry back (see the Corporate Tax Rate
Schedule.) ? 127) During 2017, Hughes Corporation sold a portfolio of stock it
had held for five years at a loss of $200,000. It also sold some investment land
and recognized a capital gain of $180,000. In 2015, Hughes reported a net
capital gain of $12,000 and in 2016 it recognized a net capital gain of $6,000.
What is the amount of its net capital loss carryover to 2018? 128) In 2017,
Webtel Corporation donated $50,000 to a qualifying charity. For the year, it
reported taxable income of $310,000, which included the following: the $50,000
charitable contribution (before limitation), a $100,000 dividends received
deduction, and a $20,000 net operating loss carryover. What is Webtel Corp.’s
charitable contribution deduction? 129) In 2017, Datasoft Inc. received $350,000
in dividends from CSLabs Inc. Datasoft’s taxable income before the dividends
received deduction and $20,000 charitable contribution deduction is $300,000.
What is Datasoft’s DRD assuming it owns 15% of the CSLabs Inc. stock? 130) AB
Inc. received a dividend from CD Corporation and is able to claim a dividends
received deduction without limitation. AB owns 10 percent of CD. What is AB’s
marginal tax rate (to the nearest tenth of a percent) on the dividends received
(after taking the DRD into account) assuming its ordinary marginal tax rate is
34%? 131) In 2017, LuxAir Inc. (LA) has book income of $160,000. Included in
this figure is income generated from ownership in Jet Repair Corporation (JRC),
of which LA owns 30%. JRC has $270,000 in earnings for the year and pays $32,000
in dividends to LA. Assuming accounting for the investment in JRC (income from
JRC and the DRD) are its only book-tax differences, what is LA’s tax liability
for 2017? (Use Corporate Tax Rate Schedule.) 132) Netgate Corporation’s gross
regular tax liability for 2017 was $95,375. What was its taxable income? (Use
Corporate Tax Rate Schedule.) 133) For 2017, SRH’s taxable income is $35,000 and
JHH’s taxable income is $45,000. Together, Scott and Jackson Howard own 100
percent of both corporations. What is the combined tax liability of the two
corporations? (Use Corporate Tax Rate Schedule.) 134) AR Systems Inc. (AR) had
$120,000 of tax liability last year. It anticipates a current-year tax liability
of $500,000. Assuming AR is considered a large corporation for purposes of
estimating tax liability, what are the minimum estimated tax payments it should
make to avoid underpayment penalties? Ignore the annualized income method. 135)
In the current year, Auto Rent Corporation reported the following taxable income
at the end of its first, second, and third quarters: (Use Exhibit 5-11) Quarter

Cumulative Taxable Income

First

$1,500,000

Second

$2,800,000

Third

$3,600,000

What amount of estimated tax payments would Auto Rent pay each quarter in order
to avoid estimated tax penalties under the annualized income method of computing
estimated tax payments? (Use Corporate Tax Rate Schedule.) 136) IndusTree Inc.
received $1,800,000 from the sale of a property in 2017. The property’s adjusted
basis for regular tax purposes was $200,000 at the time of the sale. The
property’s adjusted basis for AMT purposes was $290,000. What is the amount of
the AMT adjustment due to the sale of the asset? Does it increase or decrease
AMTI? 137) ValuCo gives you the following information: Current year items

Amount

Interest from tax-exempt bonds funding a public activity

$14,000

70 percent dividends received deduction

$60,000

80 percent dividends received deduction

$40,000

What is its ACE adjustment for the year? Is it favorable or unfavorable? 138)
TerraWise Inc. reported the following information for 2017:

Regular taxable income

$

5,620,000

Regular depreciation

$

810,000

AMT depreciation

$

570,000

Adjusted basis of equipment sold – Regular

$

100,000

Adjusted basis of equipment sold – AMT

$

140,000

Income from a private-activity municipal bond issued in 2006

$

45,000

Unfavorable ACE adjustment

$

35,000

What is TerraWise Inc.’s AMTI? 139) QDP Corporation’s AMTI is $569,000 for 2017.
Its regular tax liability is $110,000. What is its AMT? 140) VitalJuice
Corporation reports the following schedule of prior year taxes it owed: Year

Regular tax liability

Tentative minimum tax

Year 1

$750,000

$700,000

Year 2

$800,000

$900,000

Year 3

$850,000

$900,000

Year 4

$900,000

$700,000

What is VitalJuice’s tax liability for Year 4? McGraw-Hill’s Taxation of
Individuals and Business Entities, 2018 Edition, 9e (Spilker) Chapter 17
Accounting for Income Taxes 1) ASC 740 governs how a company accounts for all
taxes it incurs. 2) ASC 740 is the sole source of rules related to accounting
for income taxes. 3) Temporary differences create either a deferred tax asset or
a deferred tax liability. 4) Publicly-traded companies usually file their
financial statements before they file their federal income tax returns. 5) The
Emerging Issues Task Force assists the FASB by providing guidance on the
implementation of ASC 740 and other accounting pronouncements. 6) ASC 740
applies to accounting for state and local and international income taxes as well
as federal income taxes. 7) The “current income tax expense or benefit” always
represents just the taxes paid or refunded in the current year. 8) The focus of
ASC 740 is the income statement. 9) Tax-exempt interest from municipal bonds is
an example of a permanent book to tax difference. 10) The tax effects of
permanent differences are always reported solely in a company’s computation of
its effective tax rate. 11) In general, a temporary difference reflects a
difference in the financial basis and tax basis of an asset or liability on the
balance sheet. 12) Temporary differences that are cumulatively “favorable” are
defined as taxable temporary differences. 13) Brown Corporation reports $100,000
of gain from the sale of land on its income statement. For tax purposes, Brown
uses the installment method and reports gain of $10,000. The $90,000 difference
in the gain reported is a deductible temporary difference. 14) ASC 740 deals
with accounting for uncertain tax positions. 15) Assume Congress reduces the
corporate tax rate from 35 percent to 25 percent effective in 2017. The tax rate
change will affect only deferred tax assets and liabilities that arise in 2017
and thereafter. 16) A valuation allowance can reduce both a deferred tax asset
and a deferred tax liability. 17) A corporation evaluates the need for a
valuation allowance by comparing both positive and negative evidence that the
corporation will realize a deferred tax asset in the future. 18) A corporation
undertakes a valuation allowance analysis to determine if a deferred tax asset
should be recognized on the balance sheet. 19) A cumulative financial accounting
(book) loss over three years likely would be considered significant negative
evidence in a valuation allowance analysis. 20) ASC 740 applies a two-step
process in determining if an uncertain tax benefit should be recognized. 21)
Potential interest and penalties that would be assessed on a disallowed
unrecognized tax benefit must be recorded in a company’s income tax expense
under ASC 740. 22) Once determined, an unrecognized tax benefit under ASC 740 is
not readjusted for subsequent events. 23) ASC 740 permits a corporation to net
its deferred tax assets and deferred tax liabilities regardless of the
jurisdiction in which they arise. 24) Entities no longer have to classify
deferred tax assets and liabilities as current or long-term on the balance
sheet. 25) A corporation’s effective tax rate as computed in its income tax note
is the company’s cash tax rate for the year. 26) Which of the following taxes
would not be accounted for under ASC 740? 1. A) Income taxes paid to the German
government. 2. B) Income taxes paid to the U.S. government. 3. C) Value-added
taxes paid to the Swiss government. 4. D) Income taxes paid to the City of New
York. 27) Which of the following groups does not issue rules that apply to
accounting for income taxes? 1. A) FASB. 2. B) SEC. 3. C) EITF. 4. D) IRS. 28)
Which of the following statements best describes the objective(s) of ASC 740? 1.
A) To compute a corporation’s current income tax liability or benefit. 2. B) To
recognize deferred tax liabilities and assets. 3. C) To report permanent
differences in the balance sheet. 4. D) To both compute a corporation’s current
income tax liability or benefit and to recognize deferred tax liabilities and
assets. 29) Which of the following items does not result in a permanent
difference? 1. A) Accelerated tax depreciation in excess of straight-line book
depreciation. 2. B) Interest income from a tax-exempt municipal bond. 3. C)
Dividend received deduction on the income tax return. 4. D) Domestic
manufacturing deduction on the income tax return. 30) Which of the following
temporary differences creates a deferred tax asset in the year in which it
originates? 1. A) Accelerated tax depreciation in excess of straight-line book
depreciation. 2. B) Prepayment income reported as income on the tax return prior
to being reported as income on the financial income statement. 3. C) Gain
reported on the income statement prior to being reported on the tax return. 4.
D) Prepayment deduction reported on the tax return prior to being reported on
the income statement. 31) Which of the following statements is true? 1. A)
Another name for a taxable temporary difference is an unfavorable difference. 2.
B) Another name for a taxable temporary difference is a favorable difference. 3.
C) Another name for a deductible temporary difference is a favorable difference.
4. D) Another name for a deductible temporary difference is a permanent
difference. 32) Which of the following best describes the focus of ASC 740? 1.
A) ASC 740 uses an “asset and liability approach” that focuses on the balance
sheet. 2. B) ASC 740 uses an “income and expense approach” that focuses on the
income statement. 3. C) ASC 740 uses a “taxes paid or refunded approach” that
focuses on the statement of cash flows. 4. D) ASC 740 uses a “permanent
differences approach” that focuses on the effective tax rate reported in the
income tax note to the financial statements. 33) Grand River Corporation
reported pretax book income of $500,000. Included in the computation were
favorable temporary differences of $100,000, unfavorable temporary differences
of $10,000, and favorable permanent differences of $90,000. Assuming a tax rate
of 34%, the Corporation’s current income tax expense or benefit would be: 1. A)
$170,000. 2. B) $163,200. 3. C) $108,800. 4. D) $102,000. 34) Packard
Corporation reported pretax book income of $500,000. Included in the computation
were favorable temporary differences of $10,000, unfavorable temporary
differences of $100,000, and unfavorable permanent differences of $90,000.
Assuming a tax rate of 34%, the Corporation’s current income tax expense or
benefit would be: 1. A) $231,200. 2. B) $176,800. 3. C) $170,000. 4. D)
$108,800. 35) Abbot Corporation reported pretax book income of $500,000. During
the current year, the reserve for bad debts increased by $5,000. In addition,
tax depreciation exceeded book depreciation by $40,000. Finally, Abbot received
$3,000 of tax-exempt life insurance proceeds from the death of one of its
officers. Using a tax rate of 34%, Abbot’s current income tax expense or benefit
would be: 1. A) $186,320. 2. B) $170,000. 3. C) $157,080. 4. D) $153,680. 36)
Costello Corporation reported pretax book income of $500,000. During the current
year, the reserve for bad debts increased by $5,000. In addition, tax
depreciation exceeded book depreciation by $40,000. Finally, Costello received
$3,000 of tax-exempt life insurance proceeds from the death of one of its
officers. Using a tax rate of 34%, Costello’s deferred income tax expense or
benefit would be: 1. A) $11,900 net deferred tax expense. 2. B) $11,900 net
deferred tax benefit. 3. C) $15,300 net deferred tax benefit. 4. D) $15,300 net
deferred tax expense. 37) Davison Company determined that the book basis of its
net accounts receivable was less than the tax basis of its net accounts
receivable by $800,000 due to a difference in the allowance for bad debts
account. This basis difference is characterized as: 1. A) Deductible temporary
difference. 2. B) Taxable temporary difference. 3. C) Favorable permanent
difference. 4. D) Unfavorable permanent difference. 38) Which of the following
items is not a temporary difference? 1. A) Vacation pay accrued for tax purposes
in a prior period is deducted in the current period. 2. B) Tax depreciation for
the period exceeds book depreciation. 3. C) A goodwill impairment expense is
recorded on the income statement; the goodwill did not have a tax basis when it
was created. 4. D) Bad debts charged off in the current period exceed the bad
debts accrued in the current period. 39) Smith Company reported pretax book
income of $400,000. Included in the computation were favorable temporary
differences of $50,000, unfavorable temporary differences of $20,000, and
favorable permanent differences of $40,000. Using a tax rate of 34%, Smith’s
deferred income tax expense or benefit would be: 1. A) Net deferred tax expense
of $10,200. 2. B) Net deferred tax benefit of $10,200. 3. C) Net deferred tax
expense of $23,800. 4. D) Net deferred tax benefit of $23,800. 40) Which of the
following book-tax basis differences results in a deductible temporary
difference? 1. A) Book basis of an employee post-retirement benefits liability
exceeds its tax basis. 2. B) Book basis of a building exceeds the tax basis of
the building. 3. C) Book basis of an acquired intangible exceeds the tax basis
of the intangible. 4. D) Tax basis of a prepaid liability exceeds the book basis
of the liability. 41) Which of the following items is not a permanent book/tax
difference? 1. A) Tax-exempt life insurance proceeds. 2. B) Non-deductible meals
and entertainment expense. 3. C) Accrued vacation pay liability not paid within
the first 2½ months of the next tax year. 4. D) Domestic production activities
deduction. 42) Marlin Corporation reported pretax book income of $1,000,000.
During the current year, the net reserve for warranties increased by $25,000. In
addition, book depreciation exceeded tax depreciation by $100,000. Finally,
Marlin subtracted a dividends received deduction of $15,000 in computing its
current year taxable income. Using a tax rate of 34%, Marlin’s current income
tax expense or benefit would be: 1. A) $387,600. 2. B) $377,400. 3. C) $340,000.
4. D) $292,400. 43) Swordfish Corporation reported pretax book income of
$1,000,000. During the current year, the net reserve for warranties increased by
$25,000. In addition, book depreciation exceeded tax depreciation by $100,000.
In prior years, tax depreciation exceeded book depreciation by a cumulative
amount of $500,000. Finally, Swordfish subtracted a dividends received deduction
of $15,000 in computing its current year taxable income. Using a tax rate of
34%, Swordfish’s deferred income tax expense or benefit would be: 1. A) $25,500
net deferred tax expense. 2. B) $25,500 net deferred tax benefit. 3. C) $42,500
net deferred tax benefit. 4. D) $42,500 net deferred tax expense. 44) Kedzie
Company determined that the book basis of its liability for “other
post-retirement benefits” (OPEB) exceeded the tax basis of this account by
$10,000,000. This basis difference is characterized as: 1. A) Deductible
temporary difference. 2. B) Taxable temporary difference. 3. C) Favorable
permanent difference. 4. D) Unfavorable permanent difference. 45) Which of the
following statements is true? 1. A) ASC 740 focuses on the income tax expense or
benefit on the income statement. 2. B) ASC 740 focuses on the balances in the
deferred tax assets and liabilities on the balance sheet. 3. C) ASC 740 focuses
on the income taxes paid or refunded in the Statement of Cash Flows. 4. D) ASC
740 focuses on the computation of a company’s effective tax rate in the income
tax note to the financial statements. 46) Bruin Company received a $100,000
insurance payment on the death of its company president. The company annually
paid $1,000 of non-deductible insurance premiums on the policy. Bruin reported
the insurance receipt as income and deducted the premium payments on its books.
For ASC 740 purposes, the income and deduction are characterized as: 1. A) Both
are taxable temporary differences. 2. B) Both are deductible temporary
differences. 3. C) The insurance receipt is a favorable permanent difference and
the premium payment is an unfavorable permanent difference. 4. D) The insurance
receipt is a taxable temporary difference and the premium payment is an
unfavorable permanent difference. 47) Which of the following statements is true?
1. A) A change in capitalized inventory costs under §263A always produces an
increase in a deferred tax asset. 2. B) A change in capitalized inventory costs
under §263A always produces a decrease in a deferred tax asset. 3. C) A change
in capitalized inventory costs under §263A can produce an increase or a decrease
in a deferred tax asset. 4. D) A change in capitalized inventory costs under
§263A always produces a permanent difference. 48) Robinson Company had a net
deferred tax liability of $34,000 at the beginning of the year, representing a
net taxable temporary difference of $100,000. During the year, Robinson reported
pretax book income of $400,000. Included in the computation were favorable
temporary differences of $50,000 and unfavorable temporary differences of
$20,000. During the year, the company’s tax rate increased from 34% to 35%.
Robinson’s deferred income tax expense or benefit for the current year would be:
1. A) Net deferred tax benefit of $10,500. 2. B) Net deferred tax expense of
$10,500. 3. C) Net deferred tax benefit of $11,500. 4. D) Net deferred tax
expense of $11,500. 49) Which of the following statements is true? 1. A) In
determining if a valuation allowance is needed, positive evidence is considered
more persuasive than negative evidence. 2. B) In determining if a valuation
allowance is needed, negative evidence is considered more persuasive than
positive evidence. 3. C) In determining if a valuation allowance is needed,
negative and positive evidence must be evaluated equally. 4. D) In determining
if a valuation allowance is needed, only negative evidence is evaluated. 50)
Which of the following statements best describes a valuation allowance as it
relates to accounting for income taxes? 1. A) A valuation allowance is a contra
account to deferred tax assets only. 2. B) A valuation allowance is a contra
account to deferred tax liabilities only. 3. C) A valuation allowance is a
contra account to deferred tax assets and liabilities. 4. D) A valuation
allowance is a contra account to noncurrent deferred tax assets only. 51) A
valuation allowance is recorded against a deferred tax asset when: 1. A) It is
probable that the deferred tax asset will not be realized in the future. 2. B)
It is more likely than not that the deferred tax asset will not be realized in
the future. 3. C) It is highly likely the deferred tax asset will not be
realized in the future. 4. D) It is remote the deferred tax asset will not be
realized in the future. 52) Knollcrest Corporation has a cumulative book loss
over the past 36 months. Which of the following statements best describes how
this fact enters into the valuation allowance analysis? 1. A) The book loss is
considered sufficient negative evidence that a valuation must be recorded. 2. B)
The book loss is considered negative evidence that must be evaluated along with
other evidence as to whether a valuation allowance should be recorded. 3. C) The
book loss is not considered negative evidence because it relates to book income
and not taxable income. 4. D) A cumulative book loss is considered negative
evidence only after a period of 60 months. 53) Which of the following items is
not considered evidence in determining if a valuation allowance is necessary? 1.
A) A cumulative book loss over some period of time. 2. B) Management projects
future taxable income based on a backlog of signed contracts. 3. C) A net
operating loss expired unused in the current year. 4. D) Management can
implement a tax strategy to create future taxable income, but it will be
detrimental to the future profitability of the company. 54) Which of the
following statements best describes “book equivalent of taxable income” (BETI)?
1. A) BETI is book income adjusted for all permanent and temporary differences.
2. B) BETI is book income adjusted for all temporary differences. 3. C) BETI is
book income adjusted for all permanent differences. 4. D) BETI is book income
before adjustment for all permanent and temporary differences. 55) Jones Company
reported pretax book income of $400,000. Included in the computation were
favorable temporary differences of $50,000, unfavorable temporary differences of
$20,000, and favorable permanent differences of $40,000. Book equivalent of
taxable income is: 1. A) $440,000. 2. B) $400,000. 3. C) $360,000. 4. D)
$330,000. 56) Tuna Corporation reported pretax book income of $1,000,000. During
the current year, the net reserve for warranties increased by $25,000. In
addition, book depreciation exceeded tax depreciation by $100,000. Finally, Tuna
subtracted a dividends received deduction of $15,000 in computing its current
year taxable income. Book equivalent of taxable income is: 1. A) $1,125,000. 2.
B) $1,110,000. 3. C) $1,015,000. 4. D) $985,000. 57) Weaver Company had a net
deferred tax liability of $34,000 at the beginning of the year, representing a
net taxable temporary difference of $100,000. During the year, Weaver reported
pretax book income of $400,000. Included in the computation were favorable
temporary differences of $50,000 and unfavorable temporary differences of
$20,000. During the year, the company’s tax rate decreased from 34% to 30%.
Weaver’s deferred income tax expense or benefit for the current year would be:
1. A) Net deferred tax benefit of $9,000. 2. B) Net deferred tax expense of
$9,000. 3. C) Net deferred tax benefit of $5,000. 4. D) Net deferred tax expense
of $5,000. 58) Lynch Company had a net deferred tax asset of $68,000 at the
beginning of the year, representing a net taxable temporary difference of
$200,000. During the year, Lynch reported pretax book income of $800,000.
Included in the computation were favorable temporary differences of $20,000 and
unfavorable temporary differences of $50,000. During the year, the company’s tax
rate decreased from 34% to 30%. Lynch’s deferred income tax expense or benefit
for the current year would be: 1. A) Net deferred tax benefit of $9,000. 2. B)
Net deferred tax expense of $9,000. 3. C) Net deferred tax benefit of $1,000. 4.
D) Net deferred tax expense of $1,000. 59) Which of the following statements
about ASC 740 as it relates to uncertain tax positions is true? 1. A) ASC 740
deals with all tax benefits involving income and non-income taxes. 2. B) ASC 740
deals with whether a recognized income tax benefit will be realized. 3. C) ASC
740 deals with recognized tax benefits related to income tax positions claimed
on a filed tax return. 4. D) ASC 740 deals with recognized tax benefits related
to income tax positions regardless of whether the item is taken on a filed tax
return. 60) Which of the following statements best describes the ASC 740 process
for evaluating a company’s uncertain tax positions? 1. A) ASC 740 requires a
company to complete a two-step analysis every time it evaluates its uncertain
tax positions. 2. B) ASC 740 requires a company to complete step 2 (measurement)
in its evaluation of its uncertain tax positions only if it is
more-likely-than-not that that its tax position will be sustained on its merits
(recognition). 3. C) ASC 740 allows a company to take into account the
probability of audit by a tax authority in step 1 (measurement) in its
evaluation of its uncertain tax positions. 4. D) ASC 740 allows a company to
record a tax benefit from an uncertain tax position only if it is probable the
benefit will be sustained on audit by a tax authority. 61) As part of its
uncertain tax position assessment, Madison Corporation records interest and
penalties related to its unrecognized tax benefits of $1,000,000. Which of the
following statements about recording this amount is most correct? 1. A) Madison
must record the expense separate from its income tax provision. 2. B) Madison
can elect to include the expense as part of its income tax provision or record
the expense separate from its income tax provision, provided the company
discloses which option it chose. 3. C) Madison must record the expense in its
income tax provision. 4. D) Madison does not record the expense until it is
paid. 62) What confidence level must management have that a tax position will be
sustained on audit before it can recognize any portion of the related deferred
tax asset under ASC 740? 1. A) More likely than not. 2. B) Reasonable basis. 3.
C) Substantial authority. 4. D) Probable. 63) Which of the following statements
about uncertain tax position disclosures is false? 1. A) ASC 740 requires a
company to disclose the amount of unrecognized tax benefits for each country in
which it files a tax return. 2. B) ASC 740 requires a company to disclose the
aggregate amount of unrecognized tax benefits, separated between U.S., state and
local, and international tax positions. 3. C) ASC 740 requires a company to
disclose the aggregate amount of unrecognized tax benefits without separation
between U.S., state and local, and international tax positions. 4. D) None of
the choices are correct. 64) Which of the following statements is true with
respect to a company’s effective tax rate reconciliation? 1. A) The hypothetical
tax expense is the tax that would be due if the company’s statutory tax rate was
applied to the company’s net income from continuing operations. 2. B) The
hypothetical tax expense is the tax that would be due if the company’s statutory
tax rate was applied to the company’s taxable income. 3. C) The hypothetical tax
expense is the tax that would be due if the company’s statutory tax rate was
applied to the company’s book equivalent of taxable income. 4. D) The
hypothetical tax expense is another name for the company’s effective tax rate.
65) A company’s effective tax rate can best be described as: 1. A) The company’s
cash taxes paid divided by taxable income. 2. B) The company’s cash taxes paid
divided by net income from continuing operations. 3. C) The company’s financial
statement income tax provision divided by taxable income. 4. D) The company’s
financial statement income tax provision divided by net income from continuing
operations. 66) Which of the following statements best describes the disclosure
of a company’s deferred tax assets and liabilities beginning in 2016? 1. A)
Deferred tax assets and liabilities must be separately disclosed in the balance
sheet. 2. B) All deferred tax assets and liabilities are treated as noncurrent
and can be netted and disclosed as one aggregate amount on the balance sheet. 3.
C) Current deferred tax assets and liabilities and noncurrent deferred tax
assets and liabilities can always be netted on the balance sheet. 4. D) All
deferred tax assets and liabilities are treated as noncurrent and can be netted
on the balance sheet only if they arise in the same tax jurisdiction. 67) Which
of the following statements concerning the classification of deferred tax assets
and liabilities is true? 1. A) A deferred tax asset is classified as noncurrent
if the company expects the future tax benefit to be received more than 12 months
from the balance sheet date. 2. B) All deferred tax assets and liabilities are
treated as noncurrent beginning in 2016. 3. C) A deferred tax asset related to a
bad debt reserve is classified as current if the related accounts receivable is
classified as a current asset. 4. D) A deferred tax asset related to inventory
capitalization is classified as noncurrent if the company uses a FIFO accounting
method and the inventory to which the deferred tax asset relates will not be
treated as sold within 12 months from the balance sheet date. 68) ASC 740
requires a publicly traded company to disclose the components of its deferred
tax assets and liabilities only if the amounts are considered to be: 1. A)
Material. 2. B) Significant. 3. C) Pertinent. 4. D) Important. 69) Which of the
following temporary differences creates a deferred tax liability? 1. A)
Accumulated tax depreciation in excess of book depreciation on a building. 2. B)
Accumulated tax amortization in excess of book amortization on a customer list.
3. C) Compensation expensed for book purposes but deferred for tax purposes. 4.
D) Both “Accumulated tax depreciation in excess of book depreciation on a
building” and “Accumulated tax amortization in excess of book amortization on a
customer list” create a deferred tax liability.” 70) Which of the following
items is NOT a reconciling item in the income tax footnote? 1. A) Compensation
deduction related to incentive stock options. 2. B) Compensation deduction
related to nonqualified stock options that were expensed for financial
accounting purposes. 3. C) Domestic production activities deduction. 4. D) State
and local income taxes. 71) Angel Corporation reported pretax book income of
$1,000,000. During the current year, the net reserve for warranties increased by
$25,000. In addition, tax depreciation exceeded book depreciation by $100,000.
Finally, Angel subtracted a dividends received deduction of $25,000 in computing
its current year taxable income. Using a tax rate of 34%, Angel’s hypothetical
tax expense in its reconciliation of its income tax expense is: 1. A) $340,000.
2. B) $331,500. 3. C) $314,500. 4. D) $306,000. 72) TarHeel Corporation reported
pretax book income of $1,000,000. During the current year, the net reserve for
warranties increased by $25,000. In addition, tax depreciation exceeded book
depreciation by $100,000. Finally, TarHeel subtracted a dividends received
deduction of $25,000 in computing its current year taxable income. Assume a tax
rate of 34%. TarHeel’s accounting effective tax rate is: 1. A) 34%. 2. B)
33.15%. 3. C) 31.45%. 4. D) 30.6%. 73) Green Corporation reported pretax book
income of $1,000,000. During the current year, the net reserve for warranties
increased by $25,000. In addition, tax depreciation exceeded book depreciation
by $100,000. Finally, Green subtracted a dividends received deduction of $25,000
in computing its current year taxable income. Using a tax rate of 34%, Green’s
cash tax rate is: 1. A) 34%. 2. B) 33.15%. 3. C) 31.45%. 4. D) 30.6%. 74) Which
of the following items would likely not be included in the computation of a
company’s structural effective tax rate? 1. A) Tax effects of international
operations. 2. B) Tax effects of state and local operations. 3. C) Tax effects
from the domestic production activities deduction. 4. D) Tax effects from
goodwill impairment. 75) Which of the following statements best describes the
ASC 740 rules related to the disclosure of the components of deferred tax assets
and liabilities in the company’s income tax note? 1. A) A publicly traded
company should disclose the approximate “tax effect” (dollar amounts) of all of
the components of its deferred tax assets and liabilities in a footnote to the
financial statements. 2. B) A publicly traded company should disclose the
approximate “tax effect” (dollar amounts) of only those components of its
deferred tax assets and liabilities that give rise to a “significant” portion of
net deferred tax liabilities and deferred tax assets in a footnote to the
financial statements. 3. C) A privately-held company should disclose the
approximate “tax effect” (dollar amounts) of all of the components of its
deferred tax assets and liabilities in a footnote to the financial statements.
4. D) A privately-held company should disclose the approximate “tax effect”
(dollar amounts) of only those components of its deferred tax assets and
liabilities that give rise to a “significant” portion of net deferred tax
liabilities and deferred tax assets in a footnote to the financial statements.
76) Gull Corporation reported pretax book income of $2,000,000. Included in the
computation were favorable temporary differences of $300,000, unfavorable
temporary differences of $200,000, and favorable permanent differences of
$50,000. Assuming a tax rate of 34%, compute Gull’s current income tax expense
or benefit. 77) Heron Corporation reported pretax book income of $4,000,000.
Included in the computation were favorable temporary differences of $500,000,
unfavorable temporary differences of $700,000, and unfavorable permanent
differences of $200,000. Using a tax rate of 34%, compute Heron’s current income
tax expense or benefit. 78) Sparrow Corporation reported pretax book income of
$5,000,000. During the current year, the reserve for warranties increased by
$300,000. In addition, tax depreciation exceeded book depreciation by $400,000.
Finally, Sparrow received $50,000 of tax-exempt interest from municipal bonds.
Using a tax rate of 34%, compute Sparrow’s current income tax expense or
benefit. 79) Cardinal Corporation reported pretax book income of $3,000,000.
During the current year, the reserve for bad debts increased by $200,000. In
addition, book depreciation exceeded tax depreciation by $100,000. Cardinal sold
a fixed asset and reported a book gain of $60,000 and a tax gain of $80,000.
Finally, Cardinal deducted $50,000 of domestic production activities deduction
on its tax return. Using a tax rate of 34%, compute Cardinal’s current income
tax expense or benefit. 80) Purple Rose Corporation reported pretax book income
of $500,000. Tax depreciation exceeded book depreciation by $300,000. In
addition, the company received $250,000 of taxexempt life insurance proceeds.
The prior year tax return showed taxable income of $100,000. Using a tax rate of
34%, compute Purple Rose’s current income tax expense or benefit. 81) Yellow
Rose Corporation reported pretax book income of $1,000,000. Tax depreciation
exceeded book depreciation by $100,000. During the year Yellow Rose capitalized
$50,000 into ending inventory under §263A. Capitalized inventory costs of
$75,000 in beginning inventory were deducted as part of cost of goods sold on
the tax return. Using a tax rate of 34%, compute Yellow Rose’s taxes payable or
refundable. 82) Milton Corporation reported pretax book income of $2,500,000.
Included in the computation were favorable temporary differences of $400,000,
unfavorable temporary differences of $150,000, and favorable permanent
differences of $100,000. Using a tax rate of 34%, compute Milton’s deferred
income tax expense or benefit. 83) Frost Corporation reported pretax book income
of $3,000,000. Included in the computation were favorable temporary differences
of $200,000, unfavorable temporary differences of $350,000, and unfavorable
permanent differences of $50,000. Using a tax rate of 34%, compute Frost’s
deferred income tax expense or benefit. 84) Potter, Inc. reported pretax book
income of $5,000,000. During the current year, the reserve for bad debts
increased by $100,000. In addition, tax depreciation exceeded book depreciation
by $300,000. Potter sold a fixed asset and reported book gain of $60,000 and tax
gain of $80,000. Finally, the company received $50,000 of tax-exempt municipal
bond interest. Using a tax rate of 34%, compute Potter’s deferred income tax
expense or benefit. 85) Whitman Corporation reported pretax book income of
$400,000 in 2017. Book depreciation exceeded tax depreciation by $100,000. In
addition, the Company accrued vacation pay of $50,000 that was not deductible
until paid in 2018. Whitman has a net operating loss carryforward of $200,000
from 2016. Assuming a tax rate of 34%, compute the Company’s deferred income tax
expense or benefit for 2017. 86) Farm Corporation reported pretax book loss of
$500,000 in 2017. Tax depreciation exceeded book depreciation by $100,000. In
addition, Farm received prepaid income of $50,000, which was included on its tax
return but was not included in the book loss. Farm had $0 taxable income in 2016
and 2015. Assuming a tax rate of 34%, compute the Company’s income tax expense
or benefit for 2017. 87) Price Corporation reported pretax book income of
$600,000 in 2017. Tax depreciation exceeded book depreciation by $100,000. In
addition, the reserve for warranties increased by $40,000. Price had a net
deferred tax liability of $34,000 at the beginning of the year, representing a
net taxable temporary difference of $100,000. During the year, the company’s tax
rate decreased from 34% to 30%. Compute the Company’s current and deferred
income tax expense or benefit for 2017. 88) Stone Corporation reported pretax
book income of $1,000,000 in 2017. Tax depreciation exceeded book depreciation
by $300,000. In addition, the reserve for bad debts decreased by $50,000. Stone
had a net deferred tax asset of $29,000 at the beginning of the year,
representing a net deductible temporary difference of $100,000. During the year,
the company’s tax rate increased from 29% to 30%. Compute the Company’s current
and deferred income tax expense or benefit for 2017. 89) Identify the following
items as creating a temporary difference, permanent difference, or no
difference. Item

Temporary Difference

Permanent Difference

No Difference

Reserve for bad debts Accrued other post-employment benefits Domestic production
activities deduction Non-deductible fines and penalties Interest from municipal
bonds Net operating loss carryover Stock option expense under ASC 718 Deferred
compensation 90) Irish Corporation reported pretax book income of $1,000,000 in
2017. Included in the computation were favorable temporary differences of
$300,000, unfavorable temporary differences of $100,000, and favorable permanent
differences of $200,000. Compute Irish’s book equivalent of taxable income. Use
this number to compute the company’s total income tax provision or benefit for
2017, assuming a tax rate of 34%. 91) Weber Corporation reported pretax book
income of $400,000. Included in the computation were favorable temporary
differences of $100,000, unfavorable temporary differences of $300,000, and
unfavorable permanent differences of $200,000. Compute the Company’s book
equivalent of taxable income. Use this number to compute the Company’s total
income tax provision or benefit, assuming a tax rate of 34%. 92) DeWitt
Corporation reported pretax book income of $800,000. Tax depreciation exceeded
book depreciation by $400,000. In addition, the company received $100,000 of
taxexempt municipal bond interest. DeWitt used a net operating loss carryover of
$200,000 to offset taxable income in the current year. Compute DeWitt’s book
equivalent of taxable income. Use this number to compute DeWitt’s total income
tax provision or benefit for the current year, assuming a tax rate of 34%. 93)
MAC, Inc. completed its first year of operations with a pretax loss of $300,000.
The tax return showed a net operating loss of $500,000, which MAC will
carryforward. The $200,000 book-tax difference results from excess tax
depreciation over book depreciation. Management has determined that they should
record a valuation allowance equal to the net deferred tax asset. Assuming a tax
rate of 34%, prepare the journal entries to record the deferred tax provision
and the valuation allowance. 94) Lafayette, Inc. completed its first year of
operations with a pretax loss of $800,000. The tax return showed a net operating
loss of $750,000, which the company will carryforward. The $50,000 book-tax
difference results from a disallowed deduction for meals and entertainment.
Management has determined that they should record a valuation allowance equal to
the net deferred tax asset. Assuming a tax rate of 34%, prepare the journal
entries to record the deferred tax provision and the valuation allowance. 95)
Morgan Corporation determined that $2,000,000 of its domestic production
activities deduction on its current year tax return was uncertain, but that it
was more likely than not to be sustained on audit. Management made the following
assessment of the company’s potential tax benefit from the deduction and its
probability of occurring. Potential Estimated Benefit (000s)

Individual Probability of Occurring (%)

Cumulative Probability of Occurring

$680,000

20

20

510,000

35

55

340,000

30

85

0

15

100

Under ASC 740, what amount of the tax benefit related to the domestic production
activities deduction can Morgan recognize in calculating its income tax
provision in the current year? 96) Acai Corporation determined that $5,000,000
of its R&D credit on its current year tax return was uncertain. Acai determined
that there was a 40 percent chance of the credit being sustained on audit.
Management made the following assessment of the company’s potential tax benefit
from the R&D credit and its probability of occurring. Potential Estimated
Benefit (000s)

Individual Probability of Occurring (%)

Cumulative Probability of Occurring

$5,000,000

05

05

3,500,000

15

20

2,000,000

35

55

0

45

100

Under ASC 740, what amount of the tax benefit related to the R&D credit can Acai
recognize in calculating its income tax provision in the current year? 97) In
2017, Moody Corporation recorded the following deferred tax assets and
liabilities: Current deferred tax assets

$

500,000

Current deferred tax liabilities

(600,000

Noncurrent deferred tax assets

800,000

Noncurrent deferred tax liabilities

(2,000,000

)

(1,300,000

)

Net deferred tax liabilities

$

)

All of the deferred tax accounts relate to temporary differences that result
from the company’s U.S. operations. Moody wants to minimize the number of
deferred tax accounts it reports on the balance sheet. What is the minimum
number of deferred tax accounts Moody can report on its balance sheet and what
are the names and dollar amounts in each account? 98) For 2017, Manchester
Corporation recorded the following deferred tax assets and liabilities: Current
deferred tax assets

$

500,000

Current deferred tax liabilities

(600,000

Noncurrent deferred tax assets

800,000

Noncurrent deferred tax liabilities

(2,000,000

)

(1,300,000

)

Net deferred tax liabilities

$

)

The current deferred tax accounts and the noncurrent deferred tax liabilities
result from temporary differences that relate to the company’s U.S. operations.
The noncurrent deferred tax asset relates to the company’s German operations.
Manchester wants to minimize the number of deferred tax accounts it reports on
the balance sheet. What is the minimum number of deferred tax accounts
Manchester can report on its balance sheet and what are the names and dollar
amounts in each account? 99) Oriole Company reported pretax net income from
continuing operations of $1,000,000 and taxable income of $1,200,000. The
unfavorable book-tax difference of $200,000 was due to a $200,000 favorable
temporary difference relating to depreciation, an unfavorable temporary
difference of $300,000 due to an increase in the reserve for bad debts, and a
$100,000 unfavorable permanent difference from the disallowance of compensation
expense related to the exercise of incentive stock options. Oriole Company’s
applicable tax rate is 34%. 1. Compute Oriole Company’s current income tax
expense. 2. Compute Oriole Company’s deferred income tax expense or benefit. 3.
Compute Oriole Company’s effective tax rate. 4. Provide a reconciliation of
Oriole Company’s effective tax rate with its hypothetical tax rate of 34%. 100)
Izzo Company reported pretax net income from continuing operations of $1,000,000
and taxable income of $800,000. The favorable book-tax difference of $200,000
was due to a $100,000 favorable temporary difference relating to depreciation,
an unfavorable temporary difference of $50,000 due to accrued vacation pay, and
a $150,000 favorable permanent difference from the domestic manufacturing
deduction. Izzo Company’s applicable tax rate is 34%. 1. Compute Izzo Company’s
current income tax expense. 2. Compute Izzo Company’s deferred income tax
expense or benefit. 3. Compute Izzo Company’s effective tax rate. 4. Provide a
reconciliation of Izzo Company’s effective tax rate with its hypothetical tax
rate of 34%. McGraw-Hill’s Taxation of Individuals and Business Entities, 2018
Edition, 9e (Spilker) Chapter 18 Corporate Taxation: Nonliquidating
Distributions 1) The “double taxation” of corporate income refers to the
taxation of corporate income at both the entity-level and the shareholder-level.
2) A distribution from a corporation to a shareholder will always be treated as
a dividend for tax purposes. 3) A corporation’s “earnings and profits” account
is equal to the company’s “retained earnings” account on its balance sheet. 4) A
distribution from a corporation to a shareholder will only be treated as a
dividend for tax purposes if the distribution is paid out of current or
accumulated earnings and profits. 5) Green Corporation has current earnings and
profits of $100,000 and negative accumulated earnings and profits of ($200,000).
A $50,000 distribution from Green to its sole shareholder will not be treated as
a dividend because total earnings and profits is a negative $100,000. 6) Green
Corporation has negative current earnings and profits of ($100,000) and positive
accumulated earnings and profits of $250,000. A $50,000 distribution from Green
to its sole shareholder will be treated as a dividend because total earnings and
profits is a positive $150,000. 7) The term “earnings and profits” is well
defined in the Internal Revenue Code. 8) Only taxable income and deductible
expenses are included in the computation of current earnings and profits. 9)
Cedar Corporation incurs a net capital loss of $20,000 in 20X3 that cannot be
deducted on its income tax return but must be carried forward to 20X4. However,
Cedar will deduct the net capital loss in the computation of current earnings
and profits for 20X3. 10) Terrapin Corporation incurs federal income taxes of
$250,000 in 20X3. Terrapin deducts the federal income taxes in computing its
current earnings and profits for 20X3. 11) Evergreen Corporation distributes
land with a fair market value of $200,000 to its sole shareholder. Evergreen’s
tax basis in the land is $50,000. Assuming sufficient earnings and profits, the
amount of dividend reported by the shareholder is $200,000. 12) Evergreen
Corporation distributes land with a fair market value of $200,000 to its sole
shareholder. Evergreen’s tax basis in the land is $50,000. Evergreen will report
a gain of $150,000 on the distribution regardless of whether its earnings and
profits are positive or negative. 13) Evergreen Corporation distributes land
with a fair market value of $50,000 to its sole shareholder. Evergreen’s tax
basis in the land is $200,000. Evergreen will report a tax loss of $150,000 on
the distribution regardless of whether its earnings and profits are positive or
negative. 14) Compensation paid to a shareholder and subsequently
recharacterized by the IRS as a dividend because it was considered
“unreasonable” will affect only the income tax liability of the corporation
paying the compensation and the receiving shareholder. 15) Unreasonable
compensation issues are more likely to arise in audits of privately held
corporations rather than publicly traded corporations. 16) Stock dividends are
always tax-free to the recipient shareholder. 17) The recipient of a tax-free
stock dividend will have a zero tax basis in the stock. 18) The recipient of a
taxable stock dividend will have a tax basis in the stock equal to the fair
market value of the stock received. 19) A stock redemption is always treated as
a sale or exchange for tax purposes. 20) Tammy owns 60 percent of the stock of
Huron Corporation. Unrelated individuals own the remaining 40 percent. For a
stock redemption to be treated as an exchange under the “substantially
disproportionate” rule, the redemption must reduce Tammy’s stock ownership in
Huron Corporation below 48 percent. 21) Siblings are considered “family” under
the stock attribution rules that apply to stock redemptions. 22) Diego owns 30
percent of Azul Corporation. Azul Corporation owns 50 percent of Verde
Corporation. Under the attribution rules applying to stock redemptions, Diego is
treated as owning 15 percent of Verde Corporation. 23) The “family attribution”
rules are automatically waived in a complete redemption of a shareholder’s
stock. 24) Battle Corporation redeems 20 percent of its stock for $100,000 in a
stock redemption that is treated as an exchange by the shareholders. Battle’s
E&P at the date of the redemption is $200,000. Battle must reduce its earnings
and profits by $100,000 because of the redemption. 25) A distribution in partial
liquidation of a corporation is always treated as a sale or exchange by an
individual shareholder. 26) Which statement best describes the concept of the
“double taxation” of corporation income? 1. A) Corporate income is subject to
two levels of taxation: the regular tax and the alternative minimum tax. 2. B)
Corporate income is taxed twice at the corporate level: first when earned and
then a second time if appreciated property is distributed to a shareholder. 3.
C) Corporate income is taxed when earned by a C corporation and then a second
time at the shareholder level when distributed as a dividend. 4. D) Corporate
income is subject to two levels of taxation: at the federal level and a second
time at the state level. 27) Which of the following forms of earnings
distributions would not be subject to double taxation at the corporate and
shareholder level? 1. A) Dividend. 2. B) Stock redemption. 3. C) Partial
liquidation. 4. D) Compensation paid to a shareholder/employee of the
corporation. 28) Which of the following statements best describes the priority
of the tax treatment of a distribution from a corporation to a shareholder? 1.
A) The distribution is a dividend to the extent of the corporation’s earnings
and profits, then a return of capital, and finally gain from sale of stock. 2.
B) The distribution is a return of capital, then a dividend to the extent of the
corporation’s earnings and profits, and finally gain from sale of stock. 3. C)
The distribution is a return of capital, then gain from sale of stock, and
finally a dividend to the extent of the corporation’s earnings and profits. 4.
D) The shareholder can elect to treat the distribution as either a dividend to
the extent of the corporation’s earnings and profits or a return of capital,
followed by gain from sale of stock. 29) Which of the following statements best
describes current earnings and profits? 1. A) Current earnings and profits is
another name for a corporation’s retained earnings on its balance sheet. 2. B)
Current earnings and profits is a precisely defined tax term in the Internal
Revenue Code and represents a corporation’s economic income. 3. C) Current
earnings and profits is an ill-defined tax concept in the Internal Revenue Code
and represents a corporation’s economic income. 4. D) Current earnings and
profits is a conceptual tax concept with no definition in the Internal Revenue
Code. 30) Which of the following statements best describes the role of current
and accumulated earnings and profits in determining if a distribution is a
dividend? 1. A) A distribution will only be a dividend if total earnings and
profits (current plus accumulated) is positive at the time of the distribution.
2. B) A distribution can never be a dividend if current earnings and profits are
negative. 3. C) At a minimum, some portion of the distribution will be a
dividend if current earnings and profits for the year are positive, even if
accumulated earnings and profits are negative. 4. D) A distribution will never
be a dividend if current earnings and profits for the year are negative, even if
accumulated earnings and profits is positive. 31) A calendar-year corporation
has positive current E&P of $500 and accumulated negative E&P of $1,200. The
corporation makes a $400 distribution to its sole shareholder. Which of the
following statements is true? 1. A) The distribution will not be a dividend
because total earnings and profits is a negative $700. 2. B) The distribution
may be a dividend, depending on whether total earnings and profits at the date
of the distribution is positive. 3. C) The distribution will be a dividend
because current earnings and profits are positive and exceed the distribution.
4. D) A distribution from a corporation to a shareholder is always a dividend,
regardless of the balance in earnings and profits. 32) A calendar-year
corporation has negative current E&P of $500 and accumulated positive E&P of
$1,000. The corporation makes a $600 distribution to its sole shareholder. Which
of the following statements is true? 1. A) $500 of the distribution will be a
dividend because total earnings and profits is $500. 2. B) $0 of the
distribution will be a dividend because current earnings and profits are
negative. 3. C) $600 of the distribution will be a dividend because accumulated
earnings and profits is $1,000. 4. D) Up to $600 of the distribution could be a
dividend depending on the balance in accumulated earnings and profits on the
date of the distribution. 33) Which of these items is not an adjustment to
taxable income or net loss to compute current E&P? 1. A) Dividends received
deduction. 2. B) Tax-exempt income. 3. C) Net capital loss carryforward utilized
in the current year from the prior year tax return. 4. D) Refund of prior year
taxes for an accrual method taxpayer. 34) Grand River Corporation reported
taxable income of $500,000 in 20X3 and paid federal income taxes of $170,000.
Not included in the computation was a disallowed meals and entertainment expense
of $2,000, tax-exempt income of $1,000, and deferred gain on a current year
transaction treated as an installment sale of $25,000. The corporation’s current
earnings and profits for 20X3 would be: 1. A) $524,000. 2. B) $500,000. 3. C)
$354,000. 4. D) $331,000. 35) Au Sable Corporation reported taxable income of
$800,000 in 20X3 and paid federal income taxes of $272,000. Not included in the
computation was a disallowed penalty of $25,000, life insurance proceeds of
$100,000, and a Federal income tax refund from 20X2 of $50,000. Au Sable is an
accrual basis taxpayer. The corporation’s current earnings and profits for 20X3
would be: 1. A) $875,000. 2. B) $653,000. 3. C) $603,000. 4. D) $553,000. 36)
Oakland Corporation reported a net operating loss of $500,000 in 20X3 and
elected to carry the loss forward to 20X4. Not included in the computation was a
disallowed meals and entertainment expense of $20,000, tax-exempt income of
$10,000, and deferred gain on a current year transaction treated as an
installment sale of $250,000. The corporation’s current earnings and profits for
20X3 would be: 1. A) ($500,000). 2. B) ($720,000). 3. C) ($510,000). 4. D)
($260,000). 37) Packard Corporation reported taxable income of $1,000,000 in
20X3 and paid federal income taxes of $340,000. Included in the taxable income
computation was a dividends received deduction of $5,000, a net capital loss
carryover from 20X2 of $10,000 utilized in 20X3, and gain of $50,000 recognized
on the collection of cash from an installment sale that took place in 20X1. The
corporation’s current earnings and profits for 20X3 would be: 1. A) $1,015,000.
2. B) $965,000. 3. C) $675,000. 4. D) $625,000. 38) Abbot Corporation reported a
net operating loss of $400,000 in 20X3, which the corporation elected to
carryforward to 20X4. Included in the computation of the loss was regular
depreciation of $100,000 (E&P depreciation is $40,000), first year expensing
under §179 of $50,000, and a dividends received deduction of $10,000. The
corporation’s current earnings and profits for 20X3 would be: 1. A) ($290,000).
2. B) ($330,000). 3. C) ($400,000). 4. D) ($490,000). 39) Madison Corporation
reported taxable income of $400,000 in 20X3 and accrued federal income taxes of
$136,000. Included in the computation of taxable income was regular depreciation
of $200,000 (E&P depreciation is $60,000) and a net capital loss carryover of
$20,000 from 20X2 utilized in 20X3. The corporation’s current earnings and
profits for 20X3 would be: 1. A) $424,000. 2. B) $404,000. 3. C) $380,000. 4. D)
$344,000. 40) Greenwich Corporation reported a net operating loss of $800,000 in
20X3, which the corporation elected to carryforward to 20X4. The computation of
the loss did not include a disallowed fine of $50,000, life insurance proceeds
of $500,000, and a current year charitable contribution of $10,000 that will be
carried forward to 20X4. The corporation’s current earnings and profits for 20X3
would be: 1. A) ($250,000). 2. B) ($260,000). 3. C) ($300,000). 4. D)
($360,000). 41) Bruin Company reports current E&P of $200,000 in 20X3 and
accumulated E&P at the beginning of the year of $100,000. Bruin distributed
$400,000 to its sole shareholder on January 1, 20X3. How much of the
distribution is treated as a dividend in 20X3? 1. A) $400,000. 2. B) $300,000.
3. C) $200,000. 4. D) $100,000. 42) Aztec Company reports current E&P of
$200,000 in 20X3 and accumulated E&P at the beginning of the year of negative
$100,000. Aztec distributed $300,000 to its sole shareholder on January 1, 20X3.
How much of the distribution is treated as a dividend in 20X3? 1. A) $300,000.
2. B) $200,000. 3. C) $100,000. 4. D) $0. 43) Inca Company reports current E&P
of negative $100,000 in 20X3 and accumulated E&P at the beginning of the year of
$200,000. Inca distributed $300,000 to its sole shareholder on January 1, 20X3.
How much of the distribution is treated as a dividend in 20X3? 1. A) $0. 2. B)
$100,000. 3. C) $200,000. 4. D) $300,000. 44) Wildcat Corporation reports
current E&P of negative $200,000 in 20X3 and accumulated E&P at the beginning of
the year of $100,000. Wildcat distributed $300,000 to its sole shareholder on
December 31, 20X3. How much of the distribution is treated as a dividend in
20X3? 1. A) $0. 2. B) $100,000. 3. C) $200,000. 4. D) $300,000. 45) Beaver
Company reports current E&P of $100,000 in 20X3 and accumulated E&P at the
beginning of the year of $200,000. Beaver distributed $400,000 to its sole
shareholder on January 1, 20X3. The shareholder’s tax basis in her stock in
Beaver is $200,000. How is the distribution treated by the shareholder in 20X3?
1. A) $400,000 dividend. 2. B) $100,000 dividend, $200,000 tax-free return of
basis, and $100,000 capital gain. 3. C) $200,000 dividend and $200,000 tax-free
return of basis. 4. D) $300,000 dividend and $100,000 tax-free return of basis.
46) Longhorn Company reports current E&P of $100,000 in 20X3 and accumulated E&P
at the beginning of the year of negative $200,000. Longhorn distributed $300,000
to its sole shareholder on January 1, 20X3. The shareholder’s tax basis in his
stock in Longhorn is $100,000. How is the distribution treated by the
shareholder in 20X3? 1. A) $300,000 dividend. 2. B) $100,000 dividend, $100,000
tax-free return of basis, and $100,000 capital gain. 3. C) $100,000 dividend and
$200,000 tax-free return of basis. 4. D) $0 dividend, $100,000 tax-free return
of basis, and $200,000 capital gain. 47) Husker Corporation reports current E&P
of negative $200,000 in 20X3 and accumulated E&P at the beginning of the year of
$300,000. Husker distributed $200,000 to its sole shareholder on December 31,
20X3. The shareholder’s tax basis in her stock in Husker is $50,000. How is the
distribution treated by the shareholder in 20X3? 1. A) $200,000 dividend. 2. B)
$100,000 dividend, $50,000 tax-free return of basis, and $50,000 capital gain.
3. C) $100,000 dividend and $100,000 tax-free return of basis. 4. D) $0
dividend, $50,000 tax-free return of basis, and $150,000 capital gain. 48) Tar
Heel Corporation had current and accumulated E&P of $500,000 at December 31
20X3. On December 31, the company made a distribution of land to its sole
shareholder, William Roy. The land’s fair market value was $100,000 and its tax
and E&P basis to Tar Heel was $25,000. William assumed a mortgage attached to
the land of $10,000. The tax consequences of the distribution to William in 20X3
would be: 1. A) $100,000 dividend and a tax basis in the land of $100,000. 2. B)
$100,000 dividend and a tax basis in the land of $90,000. 3. C) Dividend of
$90,000 and a tax basis in the land of $100,000. 4. D) Dividend of $90,000 and a
tax basis in the land of $90,000. 49) Cavalier Corporation had current and
accumulated E&P of $500,000 at December 31 20X3. On December 31, the company
made a distribution of land to its sole shareholder, Tom Jefferson. The land’s
fair market value was $200,000 and its tax and E&P basis to Cavalier was
$50,000. The tax consequences of the distribution to Cavalier in 20X3 would be:
1. A) No gain recognized and a reduction in E&P of $200,000. 2. B) $150,000 gain
recognized and a reduction in E&P of $200,000. 3. C) $150,000 gain recognized
and a reduction in E&P of $50,000. 4. D) No gain recognized and a reduction in
E&P of $50,000. 50) Montclair Corporation had current and accumulated E&P of
$500,000 at December 31, 20X3. On December 31, the company made a distribution
of land to its sole shareholder, Molly Pitcher. The land’s fair market value was
$200,000 and its tax and E&P basis to Montclair was $50,000. Molly assumed a
liability of $25,000 attached to the land. The tax consequences of the
distribution to Montclair in 20X3 would be: 1. A) No gain recognized and a
reduction in E&P of $200,000. 2. B) $150,000 gain recognized and a reduction in
E&P of $200,000. 3. C) $150,000 gain recognized and a reduction in E&P of
$175,000. 4. D) No gain recognized and a reduction in E&P of $175,000. 51)
Catamount Company had current and accumulated E&P of $500,000 at December 31,
20X3. On December 31, the company made a distribution of land to its sole
shareholder, Caroline West. The land’s fair market value was $200,000 and its
tax and E&P basis to Catamount was $250,000. The tax consequences of the
distribution to Catamount in 20X3 would be: 1. A) No loss recognized and a
reduction in E&P of $250,000. 2. B) $50,000 loss recognized and a reduction in
E&P of $250,000. 3. C) $50,000 loss recognized and a reduction in E&P of
$150,000. 4. D) No loss recognized and a reduction in E&P of $200,000. 52)
Paladin Corporation had current and accumulated E&P of $500,000 at December 31,
20X3. On December 31, the company made a distribution of land to its sole
shareholder, Maria Mendez. The land’s fair market value was $200,000 and its tax
and E&P basis to Paladin was $250,000. Maria assumed a liability of $25,000
attached to the land. The tax consequences of the distribution to Paladin in
20X3 would be: 1. A) No loss recognized and a reduction in E&P of $200,000. 2.
B) $50,000 loss recognized and a reduction in E&P of $200,000. 3. C) $50,000
loss recognized and a reduction in E&P of $225,000. 4. D) No loss recognized and
a reduction in E&P of $225,000. 53) Which of the following payments could be
treated as a constructive dividend by the IRS? 1. A) End-of-year bonus payment
to a shareholder/employee. 2. B) Rent paid to a shareholder/lessor. 3. C)
Interest paid to a shareholder/creditor. 4. D) All of these payments could be
treated as a constructive dividend by the IRS 54) Which of the following factors
would not be considered in determining if compensation paid to a
shareholder/employee is reasonable? 1. A) The individual’s duties and
responsibilities. 2. B) What individuals performing in comparable capacities at
other companies are paid. 3. C) Whether the corporation has a formal
compensation policy. 4. D) The individual’s marginal income tax rate. 55) Which
of the following statements is not considered a potential answer to the question
of why corporations pay dividends? 1. A) Paying dividends avoids the double
taxation of corporate income. 2. B) Demanding that managers pay out dividends
restricts their investment activities and forces them to adopt more efficient
investment policies. 3. C) Paying dividends is a source of investor goodwill. 4.
D) Dividends are a signal to the capital markets about the health of a
corporation’s activities. 56) Which of the following stock dividends would be
tax-free to the shareholder? 1. A) A 2-for-1 stock split to all holders of
common stock. 2. B) A stock dividend where the shareholder could choose between
cash and stock. 3. C) A stock dividend to all holders of preferred stock. 4. D)
A 2-for-1 stock split to all holders of common stock and a stock dividend to all
holders of preferred stock are tax-free to the shareholder. 57) El Toro
Corporation declared a common stock dividend to all shareholders of record on
June 30, 20X3. Shareholders will receive 1 share of El Toro stock for each 2
shares of stock they already own. Raoul owns 300 shares of El Toro stock with a
tax basis of $60 per share. The fair market value of the El Toro stock was $100
per share on June 30, 20X3. What are the tax consequences of the stock dividend
to Raoul? 1. A) $0 dividend income and a tax basis in the new stock of $100 per
share. 2. B) $0 dividend income and a tax basis in the new stock of $60 per
share. 3. C) $0 dividend income and a tax basis in the new stock of $40 per
share. 4. D) $15,000 dividend and a tax basis in the new stock of $100 per
share. 58) Wonder Corporation declared a common stock dividend to all
shareholders of record on September 30, 20X3. Shareholders will receive three
shares of Wonder stock for each five shares of stock they already own. Diana
owns 300 shares of Wonder stock with a tax basis of $90 per share (a total basis
of $27,000). The fair market value of the Wonder stock was $180.00 per share on
September 30, 20X3. What are the tax consequences of the stock dividend to
Diana? 1. A) $0 dividend income and a tax basis in the new stock of $180.00 per
share. 2. B) $0 dividend income and a tax basis in the new stock of $67.50 per
share. 3. C) $0 dividend income and a tax basis in the new stock of $56.25 per
share. 4. D) $10,800 dividend and a tax basis in the new stock of $180.00 per
share. 59) Which of the following individuals is not considered “family” for
purposes of applying the stock attribution rules to a stock redemption? 1. A)
Parents. 2. B) Grandchildren. 3. C) Grandparents. 4. D) Spouse. 60) Which of the
following statements is true? 1. A) All stock redemptions are treated as
exchanges for tax purposes. 2. B) A stock redemption not treated as an exchange
will automatically be treated as a taxable dividend. 3. C) All stock redemptions
are treated as dividends if received by an individual. 4. D) A stock redemption
is treated as an exchange only if it meets one of three stock ownership tests
described in the Internal Revenue Code. 61) Sam owns 70 percent of the stock of
Club Corporation. Unrelated individuals own the remaining 30 percent. For a
stock redemption of Sam’s stock to be treated as an exchange under the
“substantially disproportionate” test, what percentage of Club stock must Sam
own after the redemption? 1. A) Any percentage less than 70 percent. 2. B) Any
percentage less than 56 percent. 3. C) Any percentage less than 50 percent. 4.
D) All stock redemptions involving individuals are treated as exchanges. 62)
Sara owns 60 percent of the stock of Lea Corporation. Unrelated individuals own
the remaining 40 percent. For a stock redemption of Sara’s stock to be treated
as an exchange under the “substantially disproportionate” test, what percentage
of Lea stock must Sara own after the redemption? 1. A) Any percentage less than
60 percent. 2. B) Any percentage less than 50 percent. 3. C) Any percentage less
than 48 percent. 4. D) All stock redemptions involving individuals are treated
as exchanges. 63) Comet Company is owned equally by Pat and his sister Pam, each
of whom hold 100 shares in the company. Pam wants to reduce her ownership in the
company, and it was decided that the company will redeem 50 of her shares for
$1,000 per share on December 31, 20X3. Pam’s income tax basis in each share is
$500. Comet has total E&P of $250,000. What are the tax consequences to Pam
because of the stock redemption? 1. A) $25,000 capital gain and a tax basis in
each of her remaining shares of $500. 2. B) $25,000 capital gain and a tax basis
in each of her remaining shares of $100. 3. C) $50,000 dividend and a tax basis
in each of her remaining shares of $100. 4. D) $50,000 dividend and a tax basis
in each of her remaining shares of $50. 64) Comet Company is owned equally by
Pat and his sister Pam, each of whom hold 100 shares in the company. Comet
redeems 50 of Pam’s shares on December 31, 20X3, for $1,000 per share in a
transaction that Pam treats as an exchange for tax purposes. Comet has total E&P
of $250,000 on December 31, 20X3. What are the tax consequences to Comet because
of the stock redemption? 1. A) No reduction in E&P because of the exchange. 2.
B) A reduction of $50,000 in E&P because of the exchange. 3. C) A reduction of
$62,500 in E&P because of the exchange. 4. D) A reduction of $125,000 in E&P
because of the exchange. 65) Comet Company is owned equally by Pat and his
sister Pam, each of whom hold 100 shares in the company. Comet redeems 50 of
Pam’s shares on December 31, 20X3, for $1,000 per share in a transaction that
Pam treats as an exchange for tax purposes. Comet has total E&P of $160,000 on
December 31, 20X3. What are the tax consequences to Comet because of the stock
redemption? 1. A) No reduction in E&P because of the exchange. 2. B) A reduction
of $50,000 in E&P because of the exchange. 3. C) A reduction of $40,000 in E&P
because of the exchange. 4. D) A reduction of $80,000 in E&P because of the
exchange. 66) Viking Corporation is owned equally by Sven and his wife Olga,
each of whom hold 100 shares in the company. Viking redeemed 75 shares of Sven’s
stock in the company on December 31, 20X3. Viking paid Sven $2,000 per share.
His income tax basis in each share is $1,000. Viking has total E&P of $500,000.
What are the tax consequences to Sven because of the stock redemption? 1. A)
$75,000 capital gain and a tax basis in each of his remaining shares of $1,000.
2. B) $75,000 capital gain and a tax basis in each of his remaining shares of
$2,000. 3. C) $150,000 dividend and a tax basis in each of his remaining shares
of $1,000. 4. D) $150,000 dividend and a tax basis in each of his remaining
shares of $4,000. 67) Viking Corporation is owned equally by Sven and his wife
Olga, each of whom hold 100 shares in the company. Viking redeemed 75 shares of
Sven’s stock for $2,000 per share on December 31, 20X3. Viking has total E&P of
$500,000. What are the tax consequences to Viking because of the stock
redemption? 1. A) No reduction in E&P because of the exchange. 2. B) A reduction
of $150,000 in E&P because of the exchange. 3. C) A reduction of $187,500 in E&P
because of the exchange. 4. D) A reduction of $375,000 in E&P because of the
exchange. 68) Corona Company is owned equally by Maria, her sister Carlita, her
mother Gabriella, and her grandmother Olivia, each of whom hold 100 shares in
the company. Under the family attribution rules, how many shares of Corona stock
is Maria deemed to own? 1. A) 100. 2. B) 200. 3. C) 300. 4. D) 400. 69) Panda
Company is owned equally by Min, her husband Bin, her sister Xiao, and her
grandson, Han, each of whom hold 100 shares in the company. Under the family
attribution rules, how many shares of Panda stock is Min deemed to own? 1. A)
100. 2. B) 200. 3. C) 300. 4. D) 400. 70) Beltway Company is owned equally by
George, his brother Thomas, and a partnership owned 50 percent by George and his
father Abe. Each of the three shareholders holds 100 shares in the company.
Under the §318 stock attribution rules, how many shares of Beltway stock is
George deemed to own? 1. A) 100. 2. B) 150. 3. C) 200. 4. D) 300. 71) Lansing
Company is owned equally by Jennifer, her husband Dan, and DeWitt Corporation,
which is owned 50 percent by Jennifer and her sister Jane. Each of the three
shareholders holds 100 shares in the company. Under the §318 stock attribution
rules, how many shares of Lansing stock is Jennifer deemed to own? 1. A) 100. 2.
B) 200. 3. C) 250. 4. D) 300. 72) Lansing Company is owned equally by Jennifer,
her husband Dan, and DeWitt Corporation, which is owned 50 percent by Jennifer
and her sister Jane. Each of the three shareholders holds 100 shares in the
company. Under the §318 stock attribution rules, how many shares of Lansing
stock is DeWitt Corporation deemed to own? 1. A) 100. 2. B) 200. 3. C) 250. 4.
D) 300. 73) Tammy owns 100 shares in Star Struck Corporation. The other 100
shares are owned by her husband Tommy. Which of the following statements is
true? 1. A) A stock redemption that completely terminates Tammy’s direct
interest in a corporation will be treated as an exchange for tax purposes. 2. B)
A stock redemption that completely terminates Tammy’s direct interest in a
corporation will be treated as a dividend for tax purposes. 3. C) A stock
redemption that completely terminates Tammy’s direct interest in a corporation
will be treated as an exchange if Tammy waives the family attribution rules and
files a “triple i” agreement with the IRS. 4. D) A stock redemption that
completely terminates Tammy’s direct interest in a corporation will be treated
as a dividend to the extent that the redemption exceeds Tammy’s tax basis in the
redeemed shares. 74) General Inertia Corporation made a distribution of $50,000
to Henry Tiara in partial liquidation of the company on December 31, 20X3. Henry
owns 500 shares (50%) of General Inertia. The distribution was in exchange for
250 shares of Henry’s stock in the company. After the partial liquidation, Henry
continued to own 50% of the remaining stock in General Inertia. At the time of
the distribution, the shares had a fair market value of $200 per share. Henry’s
income tax basis in the shares was $100 per share. General Inertia had total E&P
of $800,000 at the time of the distribution. What are the tax consequences to
Henry because of the transaction? 1. A) Henry has dividend income of $50,000 and
a tax basis in his remaining shares of $100 per share. 2. B) Henry has capital
gain of $25,000 and a tax basis in his remaining shares of $100 per share. 3. C)
Henry has dividend income of $50,000 and a tax basis in his remaining shares of
$200 per share. 4. D) Henry has capital gain of $25,000 and a tax basis in his
remaining shares of $200 per share. 75) General Inertia Corporation made a pro
rata distribution of $50,000 to Tiara, Inc. in partial liquidation of the
company on December 31, 20X3. Tiara, Inc. owns 500 shares (50%) of General
Inertia. The distribution was in exchange for 250 shares of Tiara’s stock in the
company. After the partial liquidation, Tiara continued to own 50% of the
remaining stock in General Inertia. At the time of the distribution, the shares
had a fair market value of $200 per share. Tiara’s income tax basis in the
shares was $100 per share. General Inertia had total E&P of $800,000 at the time
of the distribution. What amount of dividend or capital gain does Tiara
recognize because of the transaction? 1. A) Tiara does not recognize any
dividend income or capital gain. 2. B) Tiara recognizes capital gain of $50,000.
3. C) Tiara recognizes dividend income of $50,000. 4. D) Tiara recognizes
capital gain of $25,000. 76) Superior Corporation reported taxable income of
$1,000,000 in 20X3. Superior paid a dividend of $100,000 to its sole
shareholder, Mary Yooper. Superior Corporation is subject to a flat rate tax of
34%. The dividend meets the requirements to be a “qualified dividend” and Mary
is subject to a tax rate of 15% on the dividend. What is the total federal
income tax imposed on the corporate income earned by Superior including taxes on
the amount distributed to Mary as a dividend? 77) Erie Corporation reported
taxable income of $2,200,000 in 20X3 before any deduction for any payment to its
sole shareholder and employee, LaBron Cleveland. Erie paid a bonus of $200,000
to LaBron at year-end. Erie Corporation is subject to a flat-rate tax of 34%.
The bonus meets the requirements to be “reasonable” and is therefore deductible
by Erie. LaBron is subject to a marginal tax rate of 35% on the bonus. What is
the total federal income tax imposed on the corporate income earned by Erie and
paid to LaBron as a bonus? 78) St. Clair Company reports positive current E&P of
$500,000 in 20X3 and positive accumulated E&P at the beginning of the year of
$400,000. St. Clair Company distributed $600,000 to its sole shareholder,
Danielle Brush on December 31, 20X3. Danielle’s tax basis in her St. Clair stock
is $120,000. How much of the $600,000 distribution is treated as a dividend to
Danielle and what is her basis in St. Clair stock after the distribution? 79)
Austin Company reports positive current E&P of $200,000 and negative accumulated
E&P of $300,000. Austin distributed $250,000 to its sole shareholder, Betsy
Bevo, on December 31, 20X3. Betsy’ tax basis in her stock is $125,000. How much
of the $250,000 distribution is treated as a dividend to Betsy and what is her
tax basis in Austin stock after the distribution? 80) Elk Company reports
negative current E&P of $200,000 and positive accumulated E&P of $300,000. Elk
distributed $200,000 to its sole shareholder, Barney Rubble, on December 31,
20X3. Barney’s tax basis in his Elk stock is $75,000. What is the tax treatment
of the distribution to Barney and what is his tax basis in Elk stock after the
distribution? 81) Houghton Company reports negative current E&P of ($500,000)
and negative accumulated E&P of ($800,000). Houghton distributed $100,000 to its
sole shareholder, Blossom Applegate, on December 31, 20X3. Blossom’s tax basis
in her Houghton stock is $50,000. What is the tax treatment of the distribution
to Blossom and what is her tax basis in Houghton stock after the distribution?
82) Loon, Inc. reported taxable income of $600,000 in 20X3 and paid federal
income taxes of $202,000. Not included in the company’s computation of taxable
income is tax-exempt interest of $30,000, disallowed meals and entertainment
expenses of $15,000, and disallowed expenses related to the tax-exempt income of
$4,000. Loon deducted depreciation of $200,000 on its tax return. Under the
alternative (E&P) depreciation method, the deduction would have been $80,000.
Compute the company’s current E&P for 20X3. 83) Orchard, Inc. reported taxable
income of $800,000 in 20X3 and paid federal income taxes of $272,000. Included
in the company’s computation of taxable income is gain from sale of a
depreciable asset of $200,000. The income tax basis of the asset was $50,000.
The E&P basis of the asset using the alternative depreciation system was
$75,000. Compute the company’s current E&P for 20X3. 84) Walloon, Inc. reported
taxable income of $1,000,000 in 20X3 and paid federal income taxes of $340,000.
The company reported a capital gain from sale of investments of $150,000, which
was partially offset by a $40,000 net capital loss carryover from 20X2,
resulting in a net capital gain of $110,000 included in taxable income. Compute
the company’s current E&P for 20X3. 85) Otter Corporation reported taxable
income of $400,000 from operations for 20X3. The company paid federal income
taxes of $136,000 on this taxable income. During the year, the company made a
distribution of land to its sole shareholder, Emmet Jugg. The land’s fair market
value was $50,000 and its tax and E&P basis to Otter was $30,000. Emmet assumed
a mortgage attached to the land of $10,000. Any gain from the distribution will
be taxed at 34%. The company had accumulated E&P of $900,000 at the beginning of
the year. Compute Otter’s total taxable income and federal income tax paid
because of the distribution (assume a tax rate of 34%). Using your solution,
compute Otter’s current E&P for 20X3. 86) Ozark Corporation reported taxable
income of $500,000 from operations for 20X3. During the year, the company made a
distribution of land to its sole shareholder, Marcus Twain. The land’s fair
market value was $100,000 and its tax and E&P basis to Ozark was $125,000.
Marcus assumed a mortgage attached to the land of $25,000. Ozark’s tax rate is
34%. The company had accumulated E&P of $850,000 at the beginning of the year.
Compute Ozark’s total taxable income and federal income tax paid because of the
distribution. Using your solution, compute Ozark’s accumulated E&P at January 1,
20X4. 87) Sherburne Corporation reported current earnings and profits for 20X3
of $500,000. During the year, the company made a distribution of land to its
sole shareholder, Ted Bozeman. The land’s fair market value was $150,000 and its
tax and E&P basis to Sherburne was $100,000. Ted assumed a mortgage attached to
the land of $25,000. What amount of dividend income does Ted report because of
the distribution and what is Ted’s income tax basis in the land received from
Sherburne? 88) Sunapee Corporation reported taxable income of $700,000 from
operations for 20X3. During the year, the company made a distribution of land to
its sole shareholder, Jean McCarthy. The land’s fair market value was $125,000
and its tax and E&P basis to Sunapee was $75,000. Jean assumed a mortgage
attached to the land of $25,000. Sunapee’s tax rate is 34%. Compute Sunapee’s
total taxable income and federal income tax paid because of the distribution.
Using your solution, compute Sunapee’s current E&P for 20X3. 89) Tappan Company
pays its sole shareholder, Carlita Hill, a salary of $200,000. At the end of
each year, the company pays Carlita a “bonus” equal to the difference between
the corporation’s taxable income for the year (before the bonus) and $75,000.
For 20X3, Tappan reported pre-bonus taxable income of $800,000 and paid Carlita
a bonus of $725,000. On audit, the IRS determined that individuals working in
Carlita’s position earned on average $300,000 per year. The company had no
formal compensation policy and never paid a dividend. How much of Carlita’s
compensation (salary plus bonus) might the IRS recharacterize as a dividend?
Assuming the IRS recharacterizes $500,000 of Carlita’s bonus as a dividend, what
additional income tax liability does Tappan Company face? (Ignore payroll taxes)
90) Townsend Corporation declared a 1-for-1 stock split to all common stock
shareholders of record on December 31, 20X3. Townsend reported current E&P of
$400,000 and accumulated E&P of $1,000,000. The total fair market value of the
stock distributed was $500,000. Regina Williams owned 1,000 shares of Townsend
common stock with a tax basis of $200 per share ($2,000,000 total). The fair
market value of the common stock was $300 per share on December 31, 20X3. What
is Regina’s income tax basis per share in the new and existing common stock she
owns in Townsend, assuming the distribution is tax-free? 91) Sweetwater
Corporation declared a stock dividend to all common stock shareholders of record
on December 31, 20X3. Shareholders will receive 1 share of Sweetwater common
stock for each 5 shares of common stock they already own. Pierre Dorgan owns 500
shares of Sweetwater common stock with a tax basis of $150 per share. The fair
market value of the Sweetwater common stock was $90 per share on December 31.
What is Pierre’s income tax basis per share in his new and existing common stock
in Sweetwater, assuming the distribution is non-taxable? 92) Buckeye Company is
owned equally by James and his brother Terrelle, each of whom own 500 shares in
the company. Terrelle wants to reduce his ownership in the company, and it was
decided that the company will redeem 200 of his shares for $5,000 per share on
December 31, 20X3. Terrelle’s income tax basis in each share is $1,000. Buckeye
has current E&P of $10,000,000 and accumulated E&P of $20,000,000. What is the
amount and character (capital gain or dividend) recognized by Terrelle because
of the stock redemption? 93) Pine Creek Company is owned equally by Bob and his
sister Samantha, each of whom own 1,000 shares in the company. On December 31,
20X3, Pine Creek redeemed 200 of Samantha’s shares for $5,000,000 in a
transaction treated as an exchange by Samantha. Pine Creek has current E&P of
$10,000,000 and accumulated E&P of $30,000,000 (computed without regard to the
stock redemption). Assuming Pine Creek did not make any dividend distributions
during 20X3, by what amount does the company reduce its E&P because of the
redemption? 94) Goose Company is owned equally by Val and her sister Eugenia,
each of whom own 500 shares in the company. Val wants to reduce her ownership in
the company and have the transaction treated as an exchange for tax purposes.
Determine the minimum amount of stock that Goose must redeem from Val for her to
treat the redemption as being “substantially disproportionate with respect to
the shareholder” and receive exchange treatment. 95) Crystal, Inc. is owned
equally by John and his wife Arlene, each of whom own 500 shares in the company.
Arlene wants to reduce her ownership in the company, and it was decided that the
company will redeem 200 of her shares for $5,000 per share on December 31, 20X3.
Arlene’s income tax basis in each share is $1,000. Crystal has current E&P of
$1,000,000 and accumulated E&P of $3,000,000. What is the amount and character
(capital gain or dividend) recognized by Arlene as a result of the stock
redemption, assuming only the “substantially disproportionate with respect to
the shareholder” test is applied? 96) Crescent Corporation is owned equally by
George and his daughter Olympia, each of whom own 100 shares in the company.
George wants to retire from the company, and it was decided that the company
will redeem all 100 of his shares for $10,000 per share on December 31, 20X3.
George’s income tax basis in each share is $2,000. Crescent has current E&P of
$1,000,000 and accumulated E&P of $5,000,000. What must George do to ensure that
the redemption will be treated as an exchange? 97) Tiger Corporation, a
privately-held company, has one class of voting common stock, of which 1,000
shares are issued and outstanding. The shares are owned as follows: Mark Bird

300

Connie Bird (Mark’s wife)

250

Bonnie Bird (Mark’s daughter)

200

Billy Bird (Mark’s brother)

250

Total

1,000

How many shares of stock is Mark deemed to own under the family attribution
rules in a stock redemption? 98) Geneva Corporation, a privately-held company,
has one class of voting common stock, of which 1,000 shares are issued and
outstanding. The shares are owned as follows: Madison Cheeseman

350

Brewer Partnership

250

Brett Cheeseman (Madison’s granddaughter)

100

Packer Corporation

300

Total

1,000

Madison has a 20 percent interest in the partnership. The remaining 80 percent
is owned by unrelated individuals. Madison owns 40% of Packer Corporation. The
other 60 percent is owned by her father. How many shares of stock is Madison
deemed to own under the family attribution rules in a stock redemption? 99) Half
Moon Corporation made a distribution of $300,000 to Arnold Swartz in partial
liquidation of the company on December 31, 20X3. Arnold owns 100% of Half Moon
Corporation (1,200 shares). The distribution was in exchange for 50% of Arnold’s
stock in the company (600 shares). At the time of the distribution, the shares
had a fair market value of $500 per share. Arnold’s income tax basis in the
shares was $250 per share. Half Moon had total E&P of $2,000,000 at the time of
the distribution. What is the amount and character (capital gain or dividend) of
any income or gain recognized by Arnold as a result of the partial liquidation?
100) Yellowstone Corporation made a distribution of $300,000 to Cheney, Inc. in
partial liquidation of the company on December 31, 20X3. Cheney, Inc. owns 50
percent of Yellowstone Corporation (1,000 shares). The other 50 percent is owned
by an unrelated corporation. The distribution was in exchange for 50% of
Cheney’s stock in the company (500 shares). At the time of the distribution, the
shares had a fair market value of $800 per share. Cheney’s income tax basis in
the shares was $500 per share. Yellowstone had total E&P of $5,000,000 at the
time of the distribution. What is the amount and character (capital gain or
dividend) of any income or gain recognized by Cheney as a result of the partial
liquidation? McGraw-Hill’s Taxation of Individuals and Business Entities, 2018
Edition, 9e (Spilker) Chapter 19 Corporate Formation, Reorganization, and
Liquidation 1) Gain or loss is always recognized when realized for tax purposes.
2) Generally, before gain or loss is realized for tax purposes, the taxpayer
must engage in a transaction. 3) In a tax-deferred transaction, the calculation
of a taxpayer’s tax basis in property received always begins with its cost to
the taxpayer. 4) Maria defers $100 of gain realized in a section 351
transaction. The stock she receives in the exchange has a fair market value of
$500. Maria’s tax basis in the stock will be $400. 5) Control as it relates to a
section 351 transaction is strictly defined to be 80 percent or more of the
voting power of the stock of the corporation to which property is transferred.
6) The definition of property as it relates to a section 351 transaction
includes money. 7) To meet the control test under section 351, taxpayers
transferring property to a corporation must in aggregate own 80 percent or more
of the corporation’s voting stock and 80 percent of each class of nonvoting
stock after the transfer. 8) Gain and loss realized in a section 351 transaction
will be recognized if the taxpayer receives boot in the exchange. 9) A taxpayer
must receive voting common stock to be eligible for deferral in a section 351
exchange. 10) A taxpayer always will have a tax basis in boot received in a
section 351 transaction equal to its fair market value. 11) M Corporation
assumes a $200 liability attached to property transferred to it by Jane in a
section 351 transaction. In all cases, the assumed liability will be treated as
boot received by Jane. 12) Mandel transferred property to his new corporation in
a section 351 transaction. Among the several properties transferred by Mandel
was land with a fair market value of $200,000 and a tax basis of $250,000. In
all cases, the corporation will always take a tax basis in the land of $200,000
to prevent the “built-in loss” from being transferred from Mandel to the
corporation. 13) Han transferred land to his corporation in a section 351
transaction. Han had held the land for two years prior to the transfer. The
corporation will tack Han’s holding period for the land. 14) Type A
reorganizations involve the transfer of assets of targets corporation via a
merger or consolidation. 15) Tax considerations are always the primary reason
for structuring an acquisition. 16) A section 338 transaction is a stock
acquisition treated as an asset acquisition based on an election made by the
acquirer. 17) Continuity of interest as it relates to a tax reorganization
focuses on the aggregate equity received by the shareholders of the target
corporation in the transaction. 18) The shareholders in the target corporation
always receive a tax basis in the stock received from the acquirer equal to the
stock’s fair market value. 19) The requirements for tax deferral in a forward
triangular merger and a reverse triangular merger are the same. 20) A
stock-for-stock Type B reorganization will be tax-deferred to a target
corporation shareholder as long as at least 80 percent of the consideration
received is in the form of stock of the acquirer. 21) A shareholder will own the
same percentage of stock in the distributing corporation under both a spin-off
and a split-off of a subsidiary. 22) A liquidation of a corporation always is a
taxable event for the shareholder(s) of the liquidated corporation. 23) The tax
basis of property received by a noncorporate shareholder in a complete
liquidation will be the property’s fair market value. 24) A liquidated
corporation will always recognize gain in a complete liquidation. 25) A
liquidated corporation will always recognize loss in a complete liquidation
where none of the shareholders is a corporation. 26) Which statement best
describes the concept of realization as it applies to gain or loss? 1. A)
Realization is the recording of gain or loss on a tax return. 2. B) Realization
is the result of an exchange of property rights in a transaction. 3. C)
Realization is the excess of amount realized over adjusted basis. 4. D)
Realization is the excess of adjusted basis over amount realized. 27) Which of
the following amounts is not included in the computation of amount realized in
an exchange? 1. A) Cash received. 2. B) Fair market value of property received.
3. C) Selling expenses. 4. D) Adjusted basis of property transferred. 28) Which
of the following amounts is not included in the computation of a property’s
adjusted basis in an exchange? 1. A) Selling expenses incurred by the buyer. 2.
B) Acquisition cost of the buyer. 3. C) Capital improvements made to the
property by the buyer. 4. D) Depreciation of the property by the buyer. 29)
Which of the following statements best describes the tax law approach to
recognizing gain or loss realized in an exchange? 1. A) Gain and loss realized
is not recognized unless specifically stated otherwise in the Internal Revenue
Code. 2. B) Gain and loss realized is recognized unless specifically stated
otherwise in the Internal Revenue Code. 3. C) Gain realized is recognized unless
specifically stated otherwise in the Internal Revenue Code, but loss realized is
not recognized unless specifically stated otherwise in the Internal Revenue
Code. 4. D) Loss realized is recognized unless specifically stated otherwise in
the Internal Revenue Code, but gain realized is not recognized unless
specifically stated otherwise in the Internal Revenue Code. 30) Which of the
following requirements do not have to be met in a section 351 transaction? 1. A)
Each transferor of property must receive stock equal to at least 80 percent of
the fair market value of the property transferred. 2. B) In the aggregate, the
transferors of property to the corporation must collectively control the
corporation immediately after the transfers. 3. C) Only property transferred to
a corporation is eligible for deferral. 4. D) All transfers of property to a
corporation must be made simultaneously to qualify for deferral. 31) Roberta
transfers property with a tax basis of $400 and a fair market value of $500 to a
corporation in exchange for stock with a fair market value of $350 in a
transaction that qualifies for deferral under section 351. The corporation
assumed a liability of $150 on the property transferred. What is the amount
realized by Roberta in the exchange? 1. A) $500. 2. B) $400. 3. C) $350. 4. D)
$250. 32) Inez transfers property with a tax basis of $200 and a fair market
value of $300 to a corporation in exchange for stock with a fair market value of
$250 in a transaction that qualifies for deferral under section 351. The
corporation assumed a liability of $50 on the property transferred. What is the
corporation’s tax basis in the property received in the exchange? 1. A) $150. 2.
B) $200. 3. C) $250. 4. D) $300. 33) Antoine transfers property with a tax basis
of $500 and a fair market value of $600 to a corporation in exchange for stock
with a fair market value of $550 in a transaction that qualifies for deferral
under section 351. The corporation assumed a liability of $50 on the property
transferred. What is Antoine’s tax basis in the stock received in the exchange?
1. A) $600. 2. B) $550. 3. C) $500. 4. D) $450. 34) Camille transfers property
with a tax basis of $800 and a fair market value of $1,200 to a corporation in
exchange for stock with a fair market value of $850 and $350 in cash in a
transaction that qualifies for deferral under section 351. Camille also incurred
selling expenses of $100. What is the amount realized by Camille in the
exchange? 1. A) $1,200. 2. B) $1,100. 3. C) $850. 4. D) $750. 35) Carlos
transfers property with a tax basis of $500 and a fair market value of $800 to a
corporation in exchange for stock with a fair market value of $650 and $50 in
cash in a transaction that qualifies for deferral under section 351. The
corporation assumed a liability of $100 on the property transferred. What is the
corporation’s tax basis in the property received in the exchange? 1. A) $800. 2.
B) $600. 3. C) $550. 4. D) $450. 36) Roy transfers property with a tax basis of
$800 and a fair market value of $500 to a corporation in exchange for stock with
a fair market value of $400 and $50 in cash in a transaction that qualifies for
deferral under section 351. The corporation assumed a liability of $50 on the
property transferred. What is Roy’s tax basis in the stock received in the
exchange? 1. A) $800. 2. B) $750. 3. C) $700. 4. D) $500. 37) Casey transfers
property with a tax basis of $2,000 and a fair market value of $5,000 to a
corporation in exchange for stock with a fair market value of $4,000 and $400 in
cash in a transaction that qualifies for deferral under section 351. The
corporation assumed a liability of $600 on the property transferred. Casey also
incurred selling expenses of $300. What is the amount realized by Casey in the
exchange? 1. A) $5,000. 2. B) $4,700. 3. C) $4,600. 4. D) $4,200. 38) Tristan
transfers property with a tax basis of $900 and a fair market value of $1,200 to
a corporation in exchange for stock with a fair market value of $900 and $200 in
cash in a transaction that qualifies for deferral under section 351. The
corporation assumed a liability of $100 on the property transferred. What is the
corporation’s tax basis in the property received in the exchange? 1. A) $1,200.
2. B) $1,100. 3. C) $1,000. 4. D) $900. 39) Sybil transfers property with a tax
basis of $5,000 and a fair market value of $6,000 to a corporation in exchange
for stock with a fair market value of $3,000 and $2,000 in cash in a transaction
that qualifies for deferral under section 351. The corporation assumed a
liability of $1,000 on the property transferred. What is Sybil’s tax basis in
the stock received in the exchange? 1. A) $6,000. 2. B) $5,000. 3. C) $4,000. 4.
D) $3,000. 40) Ashley transfers property with a tax basis of $5,000 and a fair
market value of $3,000 to a corporation in exchange for stock with a fair market
value of $2,000 and $500 in cash in a transaction that qualifies for deferral
under section 351. The corporation assumed a liability of $500 on the property
transferred. What is Ashley’s tax basis in the stock received in the exchange?
1. A) $5,000. 2. B) $4,000. 3. C) $3,000. 4. D) $2,000. 41) Rachelle transfers
property with a tax basis of $800 and a fair market value of $900 to a
corporation in exchange for stock with a fair market value of $750 and $50 in
cash in a transaction that qualifies for deferral under section 351. The
corporation assumed a liability of $100 on the property transferred. What is
Rachelle’s tax basis in the stock received in the exchange? 1. A) $900. 2. B)
$850. 3. C) $750. 4. D) $700. 42) Rachelle transfers property with a tax basis
of $800 and a fair market value of $900 to a corporation in exchange for stock
with a fair market value of $750 and $50 in cash in a transaction that qualifies
for deferral under section 351. The corporation assumed a liability of $100 on
the property transferred. What is the corporation’s tax basis in the property
received in the exchange? 1. A) $900. 2. B) $850. 3. C) $800. 4. D) $750. 43)
Which of the following statements best describes the concept of control as it
applies to a section 351 transaction? 1. A) Control is defined as the ownership
of 80 percent or more of a corporation’s voting stock. 2. B) Control is defined
as the ownership of 80 percent or more of the fair market value of a
corporation’s stock. 3. C) Control is defined as the ownership of 80 percent or
more of a corporation’s voting stock and 80 percent or more of the fair market
value of a corporation’s stock. 4. D) Control is defined as the ownership of 80
percent or more of a corporation’s voting stock and 80 percent or more of the
total number of shares of each class of nonvoting stock. 44) Which of the
following class of stock is not allowed to be used in a section 351 transaction?
1. A) Voting common stock. 2. B) Voting preferred stock. 3. C) Nonvoting
preferred stock. 4. D) All of these classes of stock can be used in a section
351 transaction. 45) Which of the following statements best describes the impact
of receiving boot in a section 351 transaction? 1. A) Boot received has no
impact on the recognition of gain or loss realized in a section 351 transaction.
2. B) Boot received causes gain realized to be recognized, but not loss
realized. 3. C) Boot received causes loss realized to be recognized, but not
gain realized. 4. D) Boot received causes gain and loss realized to be
recognized. 46) Sami transferred property with a fair market value of $600 and a
tax basis of $300 to a corporation in exchange for stock with a fair market
value of $600. In addition, Sami received stock with a fair market value of $50
in exchange for services she provided to the corporation in the incorporation
process. Which of the following statements best describes the tax result to Sami
because of the exchanges? 1. A) Sami will recognize $50 of compensation income,
but she can count the shares of stock she receives in exchange for services in
determining if the control test is met under section 351. 2. B) Sami will
recognize $50 of compensation income, but she cannot count the shares of stock
she receives in exchange for services in determining if the control test is met
under section 351. 3. C) Sami will not recognize $50 of compensation income, but
she can count the shares of stock she receives in exchange for services in
determining if the control test is met under section 351. 4. D) Sami will not
recognize $50 of compensation income, and she cannot count the shares of stock
she receives in exchange for services in determining if the control test is met
under section 351. 47) Amy transfers property with a tax basis of $900 and a
fair market value of $600 to a corporation in exchange for stock with a fair
market value of $450 in a transaction that qualifies for deferral under section
351. The corporation assumed a liability of $150 on the property transferred.
What is Amy’s tax basis in the stock received in the exchange? 1. A) $900. 2. B)
$750. 3. C) $650. 4. D) $450. 48) Which of the following statements best
describes the tax results to a shareholder in a section 351 transaction when
liabilities on property transferred to the corporation are assumed by the
corporation? 1. A) Liabilities assumed by a corporation on a section 351
transfer are always treated as boot. 2. B) Liabilities assumed by a corporation
on a section 351 transfer are never treated as boot. 3. C) Liabilities assumed
by a corporation on a section 351 transfer are treated as boot if the total
liabilities assumed exceed the total basis of the assets transferred. 4. D)
Liabilities assumed by a corporation on a section 351 transfer are treated as
boot if there is no business purpose for the assumption of the liabilities by
the corporation. 49) Which of the following statements best describes the
“built-in loss” rules that apply to property transferred to a corporation under
section 351? 1. A) If the basis of a property transferred to a corporation under
section 351 exceeds its fair market value, the corporation will always take a
tax basis in the property equal to the property’s fair market value. 2. B) If
the basis of a property transferred to a corporation under section 351 exceeds
its fair market value, the corporation will always take a tax basis in the
property equal to the property’s tax basis in the hands of the shareholder. 3.
C) If the aggregate basis of all property transferred to a corporation under
section 351 exceeds its aggregate fair market value, the aggregate tax basis of
the property in the hands of the corporation cannot exceed the aggregate fair
market value of the property. 4. D) If the aggregate basis of all property
transferred to a corporation under section 351 exceeds its aggregate fair market
value, the aggregate tax basis of the property in the hands of the corporation
cannot exceed the aggregate tax basis of the property. 50) Which of the
following statements best describes the tax consequences that arise from a
contribution of capital to a corporation by an existing sole-shareholder? 1. A)
The shareholder recognizes gain and loss on the transfer and the corporation’s
basis in the property transferred equals its fair market value. 2. B) The
shareholder does not recognize gain and loss on the transfer and the
corporation’s basis in the property transferred equals the shareholder’s basis
in the property transferred. 3. C) The shareholder recognizes gain and loss on
the transfer and the corporation’s basis in the property transferred equals the
shareholder’s basis in the property transferred. 4. D) The shareholder does not
recognize gain and loss on the transfer and the corporation’s basis in the
property transferred equals zero. 51) Which of the following statements best
describes the tax benefits that arise from the sale of section 1244 stock? 1. A)
Section 1244 allows an individual shareholder to exempt gain from sale of the
stock from tax. 2. B) Section 1244 allows an individual shareholder to deduct
all of the loss from sale of the stock as an ordinary loss in the year of the
sale. 3. C) Section 1244 allows an individual shareholder to deduct up to
$50,000 of the loss from sale of the stock as an ordinary loss in the year of
the sale. 4. D) Section 1244 allows a corporate shareholder to deduct up to
$50,000 of the loss from sale of the stock as an ordinary loss in the year of
the sale. 52) Which of the following statements does not describe a motivation
by the buyer or seller in the acquisition or sale of a company? 1. A) Buyers
generally prefer to buy assets because they can take a tax basis in the assets
acquired equal to the assets’ fair market value. 2. B) Buyers generally prefer
to buy stock because they can take a tax basis in the underlying assets of the
company acquired equal to the assets’ fair market value. 3. C) Sellers generally
prefer to sell assets in a tax-deferred reorganization to avoid higher tax rates
imposed on gains from the sale of non-capital assets. 4. D) Sellers generally
prefer to sell stock because they can recognize capital gain on the sale taxed
at preferential rates. 53) Which of the following statements best describes a
section 338 transaction? 1. A) A section 338 transaction is an election made by
the buyer to treat a stock acquisition as an asset acquisition. 2. B) A section
338 transaction is an election made by the buyer to treat an asset acquisition
as a stock acquisition. 3. C) A section 338 transaction is an election made by
the seller to treat a stock acquisition as an asset acquisition. 4. D) A section
338 transaction is an election made by the seller to treat an asset acquisition
as a stock acquisition. 54) Which of the following statements best describes the
tax consequences of a section 338 election? 1. A) Gain or loss is recognized by
the acquired corporation on the deemed sale of its assets and the buyer gets a
stepped-up basis in the assets acquired. 2. B) Gain or loss is recognized by the
acquired corporation on the deemed sale of its assets and the buyer gets a
carryover basis in the assets acquired. 3. C) Gain or loss is not recognized by
the acquired corporation on the deemed sale of its assets and the buyer gets a
stepped-up basis in the assets acquired. 4. D) Gain or loss is not recognized by
the acquired corporation on the deemed sale of its assets and the buyer gets a
carryover basis in the assets acquired. 55) Which of the following statements
best describes the continuity of interest principle as it applies to a
tax-deferred acquisition? 1. A) Continuity of interest requires each shareholder
to receive at least 40 percent of the consideration received in equity of the
acquirer. 2. B) Continuity of interest requires shareholders in the aggregate to
receive at least 40 percent of the consideration received in equity of the
acquirer. 3. C) Continuity of interest requires each shareholder to receive at
least 80 percent of the consideration received in equity of the acquirer. 4. D)
Continuity of interest requires shareholders in the aggregate to receive at
least 80 percent of the consideration received in equity of the acquirer. 56)
Which of the following principles does not need to be satisfied for an
acquisition to be a tax-deferred reorganization? 1. A) Continuity of interest.
2. B) Continuity of purpose. 3. C) Business purpose. 4. D) Continuity of
business enterprise. 57) Which of the following statements best describes the
application of the continuity of enterprise principle to a Type A tax-deferred
reorganization? 1. A) The continuity of business enterprise principle must be
satisfied for both the acquirer and the target corporation. 2. B) The continuity
of business enterprise principle must be satisfied for only the target
corporation. 3. C) The continuity of business enterprise principle must be
satisfied for only the acquirer. 4. D) The continuity of business enterprise
principle does not have to be satisfied as long as the business purpose
principle is satisfied. 58) Simone transferred 100 percent of her stock in
Purple Company to Plum Corporation in a Type A merger. In exchange, she received
stock in Plum with a fair market value of $500,000 plus $500,000 in cash.
Simone’s tax basis in the Purple stock was $200,000. What amount of gain does
Simone recognize in the exchange and what is her basis in the Plum stock she
receives? 1. A) $800,000 gain recognized and a basis in Plum stock of
$1,000,000. 2. B) $800,000 gain recognized and a basis in Plum stock of
$500,000. 3. C) $500,000 gain recognized and a basis in Plum stock of $500,000.
4. D) $500,000 gain recognized and a basis in Plum stock of $200,000. 59) Jamie
transferred 100 percent of her stock in Fox Company to Otter Corporation in a
Type A merger. In exchange, she received stock in Otter with a fair market value
of $400,000 plus $600,000 in cash. Jamie’s tax basis in the Fox stock was
$600,000. What amount of gain does Jamie recognize in the exchange and what is
her basis in the Otter stock she receives? 1. A) $400,000 gain recognized and a
basis in Otter stock of $400,000. 2. B) $600,000 gain recognized and a basis in
Otter stock of $400,000. 3. C) $400,000 gain recognized and a basis in Otter
stock of $600,000. 4. D) $600,000 gain recognized and a basis in Otter stock of
$600,000. 60) Jasmine transferred 100 percent of her stock in Woodward Company
to Jefferson Corporation in a Type A merger. In exchange, she received stock in
Jefferson with a fair market value of $600,000 plus $400,000 in cash. Jasmine’s
tax basis in the Woodward stock was $1,500,000. What amount of loss does Jasmine
recognize in the exchange and what is her basis in the Jefferson stock she
receives? 1. A) $500,000 loss recognized and a basis in Jefferson stock of
$600,000. 2. B) $500,000 loss recognized and a basis in Jefferson stock of
$1,100,000. 3. C) No loss recognized and a basis in Jefferson stock of
$1,500,000. 4. D) No loss recognized and a basis in Jefferson stock of
$1,100,000. 61) Celeste transferred 100 percent of her stock in Supply Chain
Company to Marketing Corporation in a Type A merger. In exchange, she received
stock in Marketing with a fair market value of $500,000 plus $500,000 in cash.
Celeste’s tax basis in the Supply Chain stock was $1,200,000. What amount of
loss does Celeste recognize in the exchange and what is her basis in the
Marketing stock she receives? 1. A) $200,000 loss recognized and a basis in
Marketing stock of $1,200,000. 2. B) No loss recognized and a basis in Marketing
stock of $1,200,000. 3. C) $200,000 loss recognized and a basis in Marketing
stock of $700,000. 4. D) No loss recognized and a basis in Marketing stock of
$700,000. 62) Which of the following statements does not describe a requirement
that must be met in a tax-deferred forward triangular merger? 1. A) The 40
percent continuity of interest test must be met with respect to the stock
transferred from the acquisition corporation to the target corporation
shareholders. 2. B) The acquirer must hold substantially all of the target
corporation’s properties after the merger. 3. C) The continuity of business
enterprise test must be met with respect to the target corporation. 4. D) The
target corporation shareholders must receive voting stock in the acquiring
corporation. 63) Which of the following statements does not describe a
requirement that must be met in a tax-deferred reverse triangular merger? 1. A)
The 40 percent continuity of interest test must be met with respect to the stock
transferred from the acquisition corporation to the target corporation
shareholders. 2. B) The target must hold substantially all of the target
corporation’s properties and the properties of the acquisition subsidiary after
the merger. 3. C) The continuity of business enterprise test must be met with
respect to the target corporation. 4. D) The target corporation shareholders
must receive voting stock in the acquiring corporation. 64) Which of the
following statements best describes the requirement that must be met in a
tax-deferred Type B stock-for-stock reorganization? 1. A) The 40 percent
continuity of interest test must be met with respect to the stock transferred
from the acquisition corporation to the target shareholders. 2. B) The acquiring
corporation must hold substantially all of the target’s properties after the
acquisition. 3. C) The target corporation shareholders must receive “solely”
voting stock in the acquiring corporation in the exchange. 4. D) The target
corporation shareholders must receive voting stock in the acquiring corporation
in exchange for 60 percent or more of the target corporation stock. 65) Juan
transferred 100 percent of his stock in Rosa Company to Azul Corporation in a
Type B stock-for stock exchange. In exchange, he received stock in Azul with a
fair market value of $1,000,000. Juan’s tax basis in the Rosa stock was
$400,000. What amount of gain does Juan recognize in the exchange and what is
his basis in the Azul stock he receives? 1. A) $600,000 gain recognized and a
basis in Azul stock of $400,000. 2. B) No gain recognized and a basis in Azul
stock of $400,000. 3. C) $600,000 gain recognized and a basis in Azul stock of
$1,000,000. 4. D) No gain recognized and a basis in Azul stock of $1,000,000.
66) Julian transferred 100 percent of his stock in Lemon Company to Apricot
Corporation in a Type B stock-for stock exchange. In exchange, he received stock
in Apricot with a fair market value of $200,000. Julian’s tax basis in the Lemon
stock was $400,000. What amount of loss does Julian recognize in the exchange
and what is his basis in the Apricot stock he receives? 1. A) $200,000 loss
recognized and a basis in Apricot stock of $200,000. 2. B) No loss recognized
and a basis in Apricot stock of $400,000. 3. C) $200,000 loss recognized and a
basis in Apricot stock of $400,000. 4. D) No loss recognized and a basis in
Apricot stock of $200,000. 67) Which of the following statements does not
describe a tax consequence to shareholders in a complete liquidation? 1. A) All
complete liquidations are taxable to the shareholders. 2. B) Complete
liquidations are taxable to all individual shareholders. 3. C) Complete
liquidations are taxable to all corporate shareholders owning stock of the
liquidated corporation representing less than 80 percent or more of voting power
and value. 4. D) Complete liquidations are tax deferred to corporate
shareholders owning stock of the liquidated corporation representing 80 percent
or more of voting power and value. 68) Jalen transferred his 10 percent interest
to Wolverine Company as part of a complete liquidation of the company. In the
exchange, he received land with a fair market value of $100,000. Jalen’s basis
in the Wolverine stock was $50,000. The land had a basis to Wolverine Company of
$80,000. What amount of gain does Jalen recognize in the exchange and what is
his basis in the land he receives? 1. A) $50,000 gain recognized and a basis in
the land of $100,000. 2. B) $50,000 gain recognized and a basis in the land of
$80,000. 3. C) No gain recognized and a basis in the land of $80,000. 4. D) No
gain recognized and a basis in the land of $50,000. 69) Red Blossom Corporation
transferred its 40 percent interest to Tea Company as part of a complete
liquidation of the company. In the exchange, Red Blossom received land with a
fair market value of $500,000. The corporation’s basis in the Tea Company stock
was $300,000. The land had a basis to Tea Company of $600,000. What amount of
gain does Red Blossom recognize in the exchange and what is its basis in the
land it receives? 1. A) $200,000 gain recognized and a basis in the land of
$600,000. 2. B) $200,000 gain recognized and a basis in the land of $500,000. 3.
C) No gain recognized and a basis in the land of $600,000. 4. D) No gain
recognized and a basis in the land of $300,000. 70) Paladin Corporation
transferred its 90 percent interest to Furman Company as part of a complete
liquidation of the company. In the exchange, Paladin received land with a fair
market value of $1,000,000. The corporation’s basis in the Furman Company stock
was $400,000. The land had a basis to Furman Company of $200,000. What amount of
gain does Paladin recognize in the exchange and what is its basis in the land it
receives? 1. A) $600,000 gain recognized and a basis in the land of $1,000,000.
2. B) $600,000 gain recognized and a basis in the land of $400,000. 3. C) No
gain recognized and a basis in the land of $400,000. 4. D) No gain recognized
and a basis in the land of $200,000. 71) Katarina transferred her 10 percent
interest to Spartan Company as part of a complete liquidation of the company. In
the exchange, she received land with a fair market value of $200,000. Katarina’s
basis in the Spartan stock was $100,000. The land had a basis to Spartan Company
of $50,000. What amount of gain does Spartan recognize in the exchange and what
is Katarina’s basis in the land she receives? 1. A) $100,000 gain recognized by
Spartan and a basis in the land of $200,000 to Katarina. 2. B) $150,000 gain
recognized by Spartan and a basis in the land of $200,000 to Katarina. 3. C) No
gain recognized by Spartan and a basis in the land of $100,000 to Katarina. 4.
D) No gain recognized by Spartan and a basis in the land of $50,000 to Katarina.
72) Which of the following statements best describes the recognition of loss on
property transferred to shareholders in complete liquidation of a corporation?
1. A) The liquidated corporation always recognizes loss on the distribution of
property in complete liquidation of the corporation. 2. B) The liquidated
corporation never recognizes loss on the distribution of property in complete
liquidation of the corporation. 3. C) The liquidated corporation recognizes loss
on the distribution of property in complete liquidation of the corporation if
the property is distributed to individuals who are not related parties to the
corporation. 4. D) The liquidated corporation recognizes loss on the
distribution of property in complete liquidation of the corporation only if the
property is distributed to individuals who are related parties to the
corporation. 73) Billie transferred her 20 percent interest to Jean Company as
part of a complete liquidation of the company. In the exchange, she received
land with a fair market value of $200,000. Billie’s basis in the Jean stock was
$100,000. The land had a basis to Jean Company of $400,000. What amount of loss
does Jean recognize in the exchange and what is Billie’s basis in the land she
receives? Billie is not considered a related party to Jean Company. 1. A)
$200,000 loss recognized by Jean and a basis in the land of $200,000 to Billie.
2. B) $200,000 loss recognized by Jean and a basis in the land of $400,000 to
Billie. 3. C) No loss recognized by Jean and a basis in the land of $200,000 to
Billie. 4. D) No loss recognized by Jean and a basis in the land of $400,000 to
Billie. 74) Robin transferred her 60 percent interest to Cardinal Company as
part of a complete liquidation of the company. In the exchange, she received
land with a fair market value of $800,000. Robin’s basis in the Cardinal stock
was $900,000. The land had a basis to Cardinal Company of $1,000,000. What
amount of loss does Cardinal recognize in the exchange and what is Robin’s basis
in the land she receives? The distribution was non pro rata to Robin, a related
person. 1. A) $200,000 loss recognized by Cardinal and a basis in the land of
$1,000,000 to Robin. 2. B) $200,000 loss recognized by Cardinal and a basis in
the land of $800,000 to Robin. 3. C) No loss recognized by Cardinal and a basis
in the land of $1,000,000 to Robin. 4. D) No loss recognized by Cardinal and a
basis in the land of $800,000 to Robin. 75) Packard Corporation transferred its
100 percent interest to State Company as part of a complete liquidation of the
company. In the exchange, Packard received land with a fair market value of
$300,000. Packard’s basis in the State stock was $600,000. The land had a basis
to State Company of $500,000. What amount of loss does State recognize in the
exchange and what is Packard’s basis in the land it receives? 1. A) $200,000
loss recognized by State and a basis in the land of $300,000 to Packard. 2. B)
$200,000 loss recognized by State and a basis in the land of $500,000 to
Packard. 3. C) No loss recognized by State and a basis in the land of $300,000
to Packard. 4. D) No loss recognized by State and a basis in the land of
$500,000 to Packard. 76) Keegan incorporated his sole proprietorship by
transferring inventory, a building, and land to the corporation in return for
100 percent of the corporation’s stock. The property transferred to the
corporation had the following fair market values and tax-adjusted bases. FMV
Inventory

$

Adjusted basis 20,000

$

14,000

Building

70,000

50,000

Land

150,000

100,000

Total

$

240,000

$

164,000

The fair market value of the corporation’s stock received in the exchange
equaled the fair market value of the assets transferred to the corporation by
Keegan. What amount of gain or loss does Keegan realize on the transfer of the
property to his corporation? 77) Keegan incorporated his sole proprietorship by
transferring inventory, a building, and land to the corporation in return for
100 percent of the corporation’s stock. The property transferred to the
corporation had the following fair market values and tax-adjusted bases. FMV
Inventory

$

Adjusted basis 20,000

$

14,000

Building

70,000

50,000

Land

150,000

100,000

Total

$

240,000

$

164,000

The fair market value of the corporation’s stock received in the exchange
equaled the fair market value of the assets transferred to the corporation by
Keegan. Assuming the gain or loss realized in this problem is deferred under
§351, what is Keegan’s basis in the stock he receives in his corporation? 78)
Francine incorporated her sole proprietorship by transferring inventory, a
building, and land to the corporation in return for 100 percent of the
corporation’s stock. The property transferred to the corporation had the
following fair market values and tax-adjusted bases. FMV Inventory

$

Adjusted basis 30,000

$

10,000

Building

130,000

80,000

Land

50,000

100,000

Total

$

210,000

$

190,000

The corporation also assumed a mortgage of $60,000 attached to the building and
land. The fair market value of the corporation’s stock received in the exchange
was $150,000. 1. What amount of gain or loss does Francine realize on the
transfer of the property to her corporation? 2. What amount of gain or loss does
Francine recognize on the transfer of the property to her corporation? 3. What
is Francine’s basis in the stock she receives in her corporation? 79) Zhao
incorporated her sole proprietorship by transferring inventory, a building, and
land to the corporation in return for 100 percent of the corporation’s stock.
The property transferred to the corporation had the following fair market values
and tax-adjusted bases. FMV Inventory

$

Adjusted basis 80,000

$

40,000

Building

100,000

120,000

Land

200,000

150,000

Total

$

380,000

$

310,000

The corporation also assumed a mortgage of $50,000 attached to the building and
land. The fair market value of the corporation’s stock received in the exchange
was $330,000. The transaction met the requirements to be tax-deferred under
§351. 1. What amount of gain or loss does Zhao realize on the transfer of the
property to her corporation? 2. What amount of gain or loss does Zhao recognize
on the transfer of the property to her corporation? 3. What is the corporation’s
adjusted basis in each of the assets received in the exchange? 80) Phillip
incorporated his sole proprietorship by transferring inventory, a building, and
land to the corporation in return for 100 percent of the corporation’s stock.
The property transferred to the corporation had the following fair market values
and tax-adjusted bases. FMV Inventory

$

Adjusted basis 100,000

$

50,000

Building

100,000

250,000

Land

200,000

150,000

Total

$

400,000

$

450,000

The fair market value of the corporation’s stock received in the exchange was
$400,000. The transaction met the requirements to be tax-deferred under §351. 1.
What amount of net gain or loss does Phillip realize on the transfer of the
property to his corporation? 2. What amount of gain or loss does Phillip
recognize on the transfer of the property to his corporation? 3. What is the
corporation’s adjusted basis in each of the assets received in the exchange? 81)
Ken and Jim agree to go into business together selling old comic books and
records. According to the agreement, Ken will contribute inventory valued at
$200,000 in return for 80 percent of the stock in the corporation. Ken’s tax
basis in the inventory is $100,000. Jim will receive 20 percent of the stock in
return for providing accounting services to the corporation (these qualify as
organizational expenditures). The accounting services are valued at $50,000.
Please answer the following questions about the tax consequences of the
transaction to Ken. 1. What amount of gain or loss does Ken realize on the
formation of the corporation? 2. What amount of gain or loss, if any, does he
recognize? 3. What is Ken’s tax basis in the stock he receives in return for his
contribution of property to the corporation? 82) Ken and Jim agree to go into
business together selling old comic books and records. According to the
agreement, Ken will contribute inventory valued at $200,000 in return for 80
percent of the stock in the corporation. Ken’s tax basis in the inventory is
$100,000. Jim will receive 20 percent of the stock in return for providing
accounting services to the corporation (these qualify as organizational
expenditures). The accounting services are valued at $50,000. Please answer the
following questions about the tax consequences of the transaction to Jim. 1.
What amount of income, gain or loss does Jim realize on the formation of the
corporation? 2. What amount of gain or loss, if any, does he recognize? 3. What
is Jim’s tax basis in the stock he receives in return for his contribution of
services to the corporation? 83) Don and Marie formed Paper Lilies Corporation
on January 2. Don contributed cash of $400,000 in return for 50 percent of the
corporation’s stock. Marie contributed a building and land with the following
fair market values and tax-adjusted bases in return for 50 percent of the
corporation’s stock. FMV

Adjusted basis

Building

180,000

120,000

Land

270,000

80,000

Total

$

450,000

$

200,000

To equalize the exchange, Paper Lilies Corporation paid Marie $50,000 in
addition to her stock. 1. What amount of gain or loss does Marie realize on the
formation of the corporation? 2. What amount of gain or loss, if any, does she
recognize? 3. What is Marie’s tax basis in the stock she receives in return for
her contribution of property to the corporation? 4. What adjusted basis does
Paper Lilies Corporation take in the land and building received from Marie? 84)
Harry and Sally formed Empire Corporation on January 2. Harry contributed cash
of $500,000 in return for 50 percent of the corporation’s stock. Sally
contributed a building and land with the following fair market values and
adjusted basis in return for 50 percent of the corporation’s stock.
Stop Following Your Former Love Interest


TEST BANK OF MCGRAW-HILL'S TAXATION OF INDIVIDUALS AND

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