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1. The r at i f i cat i on of t he Si xt eent h Amendment t o t he U. S.

Const i t ut i on
was necessar y t o val i dat e t he Feder al i ncome t ax on cor por at i ons.

a. Tr ue
*b. Fal se


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

a. Tr ue
*b. Fal se


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

*a. Tr ue
b. Fal se


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

*a. Tr ue
b. Fal se


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

a. Tr ue
*b. Fal se


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

*a. Tr ue
b. Fal se


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

a. Tr ue
*b. Fal se


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

*a. Tr ue
b. Fal se


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

*a. Tr ue
b. Fal se


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

a. Tr ue
*b. Fal se


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

*a. Tr ue
b. Fal se


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

a. Tr ue
*b. Fal se


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

*a. Tr ue
b. Fal se


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

*a. Tr ue
b. Fal se


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

*a. Tr ue
b. Fal se


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

a. Tr ue
*b. Fal se


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

a. Tr ue
*b. Fal se


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

a. Tr ue
*b. Fal se


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

a. Tr ue
*b. Fal se


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

*a. Tr ue
b. Fal se


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

*a. Tr ue
b. Fal se


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

a. Tr ue
*b. Fal se


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

a. Tr ue
*b. Fal se


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

*a. Tr ue
b. Fal se


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

a. Tr ue
*b. Fal se


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

*a. Tr ue
b. Fal se


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

*a. Tr ue
b. Fal se


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

*a. Tr ue
b. Fal se


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

a. Tr ue
*b. Fal se


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

a. Tr ue
*b. Fal se


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

*a. Tr ue
b. Fal se


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

*a. Tr ue
b. Fal se


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

a. Tr ue
*b. Fal se


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

*a. Tr ue
b. Fal se


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

a. Tr ue
*b. Fal se


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

*a. Tr ue
b. Fal se


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

a. Tr ue
*b. Fal se


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

*a. Tr ue
b. Fal se


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

a. Tr ue
*b. Fal se


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

*a. Tr ue
b. Fal se


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

a. Tr ue
*b. Fal se


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

a. Tr ue
*b. Fal se


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

*a. Tr ue
b. Fal se


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

*a. Tr ue
b. Fal se


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

*a. Tr ue
b. Fal se


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

a. Tr ue
*b. Fal se


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

a. Tr ue
*b. Fal se


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

*a. Tr ue
b. Fal se


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

a. Tr ue
*b. Fal se


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

*a. Tr ue
b. Fal se


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

*a. Tr ue
b. Fal se


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

a. Tr ue
*b. Fal se


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

a. Tr ue
*b. Fal se


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

*a. Tr ue
b. Fal se


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

*a. Tr ue
b. Fal se


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

a. Tr ue
*b. Fal se


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

*a. Tr ue
b. Fal se


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

*a. Tr ue
b. Fal se


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

a. Tr ue
*b. Fal se


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

a. Tr ue
*b. Fal se


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

*a. Tr ue
b. Fal se


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

*a. Tr ue
b. Fal se


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

*a. Tr ue
b. Fal se


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

a. Tr ue
*b. Fal se


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

*a. Tr ue
b. Fal se


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

a. Tr ue
*b. Fal se


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

a. Tr ue
*b. Fal se


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

*a. Tr ue
b. Fal se


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

*a. Tr ue
b. Fal se


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

a. Tr ue
*b. Fal se


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

*a. Tr ue
b. Fal se


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

a. Tr ue
*b. Fal se


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

*a. Tr ue
b. Fal se


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

*a. Tr ue
b. Fal se


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

*a. Tr ue
b. Fal se


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

*a. Tr ue
b. Fal se


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

a. Tr ue
*b. Fal se


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

a. Tr ue
*b. Fal se


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

a. Tr ue
*b. Fal se


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

a. Tr ue
*b. Fal se


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

a. Tr ue
*b. Fal se


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

*a. Tr ue
b. Fal se


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

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


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

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


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

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


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

a. A r esi dent di es and l eaves hi s f ar mt o hi s chur ch.
b. A l ar ge pr oper t y owner i ssues a conser vat i on easement as t o
some of her l and.
*c. A t ax hol i day i ssued 10 year s ago has expi r ed.
d. A bankr upt mot el i s acqui r ed by t he Red Cr oss and i s t o be
used t o pr ovi de housi ng f or homel ess per sons.
e. None of t he above.


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

*a. A t ax hol i day i s gr ant ed t o an out - of - st at e busi ness t hat i s
sear chi ng f or a new f act or y si t e.
b. An abandoned chur ch i s conver t ed t o a r est aur ant .
c. A publ i c school i s r azed and t ur ned i nt o a ci t y par k.
d. A l ocal uni ver si t y sel l s a dor mi t or y t hat wi l l be conver t ed
f or use as an apar t ment bui l di ng.
e. None of t he above.


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

a. Taxpayer compl i ance i s gr eat er f or per sonal use pr oper t y t han
f or busi ness use pr oper t y.
*b. The t ax on aut omobi l es somet i mes consi der s t he age of t he
vehi cl e.
c. Most st at es i mpose a t ax on i nt angi bl es.
d. The t ax on i nt angi bl es gener at es consi der abl e r evenue si nce i t
i s di f f i cul t f or t axpayer s t o avoi d.
e. None of t he above.


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

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


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

a. Tobacco exci se t ax.
b. Cust oms dut i es ( t ar i f f s on i mpor t s) .
*c. Tax on r ent car s.
d. Gas guzzl er t ax.
e. None of t he above.


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

a. Gener al sal es t ax.
b. Cust omdut i es.
c. Hot el occupancy t ax.
d. Fr anchi se t ax.
*e. None of t he above.


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

*a. Tobacco exci se t ax.
b. I ndi vi dual i ncome t ax.
c. I nher i t ance t ax.
d. Gener al sal es t ax.
e. None of t he above.


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

a. The Feder al gover nment and al l st at es.
b. The Feder al gover nment and a maj or i t y of t he st at es.
c. Al l st at es and not t he Feder al gover nment .
*d. Most of t he st at es and not t he Feder al gover nment .
e. None of t he above.


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

a. $14, 000.
b. $28, 000.
c. $56, 000.
*d. $112, 000.
e. None of t he above.


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

a. To t ake advant age of t he hi gher uni f i ed t r ansf er t ax cr edi t
avai l abl e under t he gi f t t ax.
b. To avoi d a f ut ur e decl i ne i n val ue of t he pr oper t y t r ansf er r ed.
*c. To t ake advant age of t he per donee annual excl usi on.
d. To shi f t i ncome t o hi gher br acket donees.
e. None of t he above.


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

a. Can pi ggyback t o t he Feder al ver si on.
*b. Cannot appl y t o vi si t i ng nonr esi dent s.
c. Can decoupl e f r omt he Feder al ver si on.
d. Can pr ovi de occasi onal amnest y pr ogr ams.
e. None of t he above.


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

*a. The same dat e f or f i l i ng as t he Feder al i ncome t ax.
b. No pr ovi si on f or wi t hhol di ng pr ocedur es.
c. Al l owance of a deduct i on f or Feder al i ncome t axes pai d.
d. Appl yi ng onl y t o i ndi vi dual s and not appl yi ng t o cor por at i ons.
e. None of t he above.


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

a. I t does not appl y when one spouse wor ks f or t he ot her spouse.
b. I t i s i mposed onl y on t he empl oyer .
c. I t pr ovi des a modest sour ce of i ncome i n t he event of l oss of
empl oyment .
d. I t i s admi ni st er ed by bot h st at e and Feder al gover nment s.
*e. None of t he above.


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

a. I t i s i mposed on bot h empl oyer and empl oyee.
b. I t i s i mposed sol el y on t he empl oyee.
*c. Compl i ance r equi r es f ol l owi ng gui del i nes i ssued by bot h st at e
and Feder al r egul at or y aut hor i t i es.
d. I t i s appl i cabl e t o spouses of empl oyees but not t o any
chi l dr en under age 18.
e. None of t he above.


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

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


101. The pr oposed flat tax:

a. Woul d el i mi nat e t he i ncome t ax.
*b. Woul d si mpl i f y t he i ncome t ax.
c. Woul d t ax t he i ncr ement i n val ue as goods move t hr ough t he
pr oduct i on and manuf act ur i ng st ages t o t he mar ket pl ace.
d. I s a t ax on consumpt i on.
e. None of t he above.


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

*a. I s r egr essi ve i n i t s ef f ect .
b. Has not pr oved popul ar out si de of t he U. S.
c. I s not a t ax on consumpt i on.
d. I s used excl usi vel y by t hi r d wor l d ( l ess devel oped) count r i es.
e. None of t he above.


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

a. Abol i t i on of t he Feder al i ndi vi dual ( but not t he cor por at e)
i ncome t ax.
b. Abol i t i on of al l Feder al i ncome t axes but r et ent i on of payr ol l
t axes ( i ncl udi ng t he sel f - empl oyment t ax) .
c. Abol i t i on of al l Feder al i ncome t axes and payr ol l t axes but
r et ent i on of t he Feder al est at e and gi f t t axes.
*d. Abol i t i on of al l Feder al i ncome and payr ol l t axes as wel l as
t he Feder al est at e and gi f t t axes.
e. None of t he above.


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

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


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

a. Most t axpayer audi t s i nvol ve speci al agent s.
b. Sel f - empl oyed t axpayer s ar e l ess l i kel y t o be sel ect ed f or
audi t t han empl oyed t axpayer s.
*c. Less i mpor t ant i ssues ar e handl ed by means of a
cor r espondence audi t .
d. I f a t axpayer di sagr ees wi t h t he I RS audi t or s f i ndi ng, t he
onl y r esor t i s t o t he cour t s.
e. None of t he above.


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

a. $400.
b. $3, 600.
*c. $4, 000.
d. $4, 400.
e. None of t he above.


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

a. When negl i gence and ci vi l f r aud appl y t o a def i ci ency, t he
negl i gence penal t y pr edomi nat es.
*b. Cr i mi nal f r aud can r esul t i n a f i ne and a pr i son sent ence.
c. The cr i mi nal f r aud penal t y i s 75%of t he def i ci ency
at t r i but abl e t o t he f r aud.
d. The I RS has t he same bur den of pr oof i n t he case of cr i mi nal
f r aud t han wi t h ci vi l f r aud.
e. None of t he above.


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

*a. The use of cl i ent est i mat es i n pr epar i ng a r et ur n may be
accept abl e.
b. Under no ci r cumst ances shoul d a quest i on on a t ax r et ur n be
l ef t unanswer ed.
c. I f a cl i ent has made a mi st ake i n a pr i or year s r et ur n and
r ef uses t o cor r ect i t , you shoul d wi t hdr aw f r omt he engagement .
d. I f t he exact amount of a deduct i on i s not cer t ai n ( e. g. ,
ar ound mi d- $600s) , i t should be r ecor ded as an odd amount ( i . e. ,
$649) so as t o i ncr ease t he appear ance of gr eat er cer t ai nt y.
e. None of t he above.


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

a. Favor abl e t ax t r eat ment f or acci dent and heal t h pl ans pr ovi ded
f or empl oyees and f i nanced by empl oyer s.
b. Di sal l owance of any deduct i on f or expendi t ur es deemed t o be
cont r ar y t o publ i c pol i cy ( e. g. , f i nes, penal t i es, i l l egal
ki ckbacks, br i bes t o gover nment of f i ci al s) .
*c. Var i ous t ax cr edi t s, deduct i ons, and excl usi ons t hat ar e
desi gned t o encour age t axpayer s t o obt ai n addi t i onal educat i on.
d. Al l owance of a deduct i on f or st at e and l ocal i ncome t axes pai d.
e. None of t he above.


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

*a. Al l owance of a cr edi t f or chi l d car e expenses.
b. Al l owi ng excess capi t al l osses t o be car r i ed over t o ot her
year s.
c. Al l owi ng accel er at ed amor t i zat i on f or t he cost of i nst al l i ng
pol l ut i on cont r ol f aci l i t i es.
d. Al l owi ng a Feder al i ncome t ax deduct i on f or st at e and l ocal
sal es t axes.
e. None of t he above.


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

a. As mi t i gat i ng t he ef f ect of t he annual account i ng per i od
concept .
b. As pr omot i ng admi ni st r at i ve f easi bi l i t y.
*c. By economi c consi der at i ons.
d. Based on t he wher ewi t hal t o pay concept .
e. None of t he above.


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

a. Pol i t i cal consi der at i ons.
*b. Economi c and soci al consi der at i ons.
c. Pr omot i ng admi ni st r at i ve f easi bi l i t y.
d. Encour agement of smal l busi ness.
e. None of t he above.


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

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


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

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


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

a. A cl ear r ef l ect i on of i ncome r esul t .
b. The t ax benef i t r ul e.
c. The ar m s l engt h concept .
*d. The wher ewi t hal t o pay concept .
e. None of t he above.


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

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

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


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

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

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


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

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

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


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

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


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

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

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

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



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

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

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




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

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

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




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

a. Negl i gence.

b. Ci vi l f r aud.

c. Cr i mi nal f r aud.



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

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

c. Various fines and/or prison sentence.




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

a. $210, 000?

b. $360, 000?

c. $630, 000?

d. Why?



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

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

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

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




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

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


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

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


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

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


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

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


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

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


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

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

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


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

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


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

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


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

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

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



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

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




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

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

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

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



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

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

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




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

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


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

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


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

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


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

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


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

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


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

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

b. Tax amnest y pr ovi si ons.

c. I nt er net shami ng.



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

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

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




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

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


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

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


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

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


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

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


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

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


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

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


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

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


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

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


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

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


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

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


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

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

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



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

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




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

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


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

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

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



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

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




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

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


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

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

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



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

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




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

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


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

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

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

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



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

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

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




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

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


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

a. Tr ue
*b. Fal se


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

a. Tr ue
*b. Fal se


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

a. Tr ue
*b. Fal se


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

a. Tr ue
*b. Fal se


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

a. Tr ue
*b. Fal se


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

a. Tr ue
*b. Fal se


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

a. Tr ue
*b. Fal se


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

a. Tr ue
*b. Fal se


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

a. Tr ue
*b. Fal se


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

a. Tr ue
*b. Fal se


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

a. Tr ue
*b. Fal se


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

a. Tr ue
*b. Fal se


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

*a. Tr ue
b. Fal se


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

*a. Tr ue
b. Fal se


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

*a. Tr ue
b. Fal se


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

a. Tr ue
*b. Fal se


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

*a. Tr ue
b. Fal se


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

*a. Tr ue
b. Fal se


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

*a. Tr ue
b. Fal se


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

*a. Tr ue
b. Fal se


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

a. Tr ue
*b. Fal se


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

a. Tr ue
*b. Fal se


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

a. Tr ue
*b. Fal se


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

*a. Tr ue
b. Fal se


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

a. Tr ue
*b. Fal se


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

a. Tr ue
*b. Fal se


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

a. Tr ue
*b. Fal se


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

*a. Tr ue
b. Fal se


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

a. Tr ue
*b. Fal se


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

a. Tr ue
*b. Fal se


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

a. Tr ue
*b. Fal se


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

*a. Tr ue
b. Fal se


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

*a. Tr ue
b. Fal se


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

a. Tr ue
*b. Fal se


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

a. Tr ue
*b. Fal se


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

a. Tr ue
*b. Fal se


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

*a. Tr ue
b. Fal se


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

a. Tr ue
*b. Fal se


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

*a. Tr ue
b. Fal se


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

*a. Tr ue
b. Fal se


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

*a. Tr ue
b. Fal se


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

a. Tr ue
*b. Fal se


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

*a. Tr ue
b. Fal se


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

a. Tr ue
*b. Fal se


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

*a. Tr ue
b. Fal se


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

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


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

a. Taxat i on Commi t t ee.
*b. Ways and Means Commi t t ee.
c. Fi nance Commi t t ee.
d. Budget Commi t t ee.
e. None of t he above.


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

a. I nt er nal Revenue Ser vi ce.
b. Senat e Fi nance Commi t t ee.
*c. House Ways and Means Commi t t ee.
d. Senat e Fl oor .
e. None of t he above.


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

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


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

a. Sect i on number .
b. Subsect i on number .
*c. Par agr aph desi gnat i on.
d. Subpar agr aph desi gnat i on.
e. None of t he above.


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

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


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

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


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

a. Revenue Rul i ng.
b. Revenue Pr ocedur e.
c. Regul at i ons.
*d. Internal Revenue Code sect i on.
e. None of t he above.


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

a. Tempor ar y.
*b. Legi sl at i ve.
c. I nt er pr et i ve.
d. Pr ocedur al .
e. None of t he above.


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

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


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

*a. Gi ve equal wei ght t o t he Code and t he Regul at i ons.
b. Gi ve mor e wei ght t o t he Code r at her t han t o a Regul at i on.
c. Gi ve mor e wei ght t o t he Regul at i on r at her t han t o t he Code.
d. Gi ve l ess wei ght t o t he Code r at her t han t o a Regul at i on.
e. None of t he above.


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

a. Regul at i ons.
b. Tempor ar y Regul at i ons.
*c. Techni cal Advi ce Memor anda.
d. U. S. Di st r i ct Cour t deci si on.
e. None of t he above.


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

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


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

*a. Let t er Rul i ng.
b. Techni cal Advi ce Memor andum.
c. Det er mi nat i on Let t er .
d. Fi el d Ser vi ce Advi ce.
e. None of t he above.


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

*a. Stare decisis.
b. Golsen doct r i ne.
c. En banc.
d. Reenact ment doct r i ne.
e. None of t he above.


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

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


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

a. Appr opr i at e U. S. Ci r cui t Cour t of Appeal s.
b. U. S. Di st r i ct Cour t .
*c. U. S. Tax Cour t .
d. U. S. Cour t of Feder al Cl ai ms.
e. None of t he above.


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

a. U. S. Tax Cour t .
b. U. S. Cour t of Feder al Cl ai ms.
*c. U. S. Di st r i ct Cour t .
d. U. S. Ci r cui t Cour t of Appeal s.
e. None of t he above.


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

a. U. S. Di st r i ct Cour t .
b. U. S. Ci r cui t Cour t of Appeal s.
c. U. S. Cour t of Feder al Cl ai ms.
*d. Smal l Case Di vi si on of t he U. S. Tax Cour t .
e. None of t he above.


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

a. U. S. Di st r i ct Cour t .
b. U. S. Tax Cour t .
c. U. S. Cour t of Feder al Cl ai ms.
*d. Smal l Case Di vi si on of t he U. S. Tax Cour t .
e. Al l of t he above.


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

a. Resear ch I nst i t ut e of Amer i ca.
*b. Commer ce Cl ear i ng House.
c. Pr ent i ce- Hal l .
d. Lexi sNexi s.
e. None of t he above.


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

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


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

*a. Resear ch I nst i t ut e of Amer i ca.
b. Commer ce Cl ear i ng House.
c. Lexi sNexi s.
d. Tax Anal yst s.
e. None of t he above.


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

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


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

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


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

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


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

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


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

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


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

a. Pr ocedur al Regul at i ons.
b. Fi nal i zed Regul at i ons.
*c. Legi sl at i ve Regul at i ons.
d. I nt er pr et i ve Regul at i ons.
e. Al l of t he above.


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

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


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

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


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

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


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

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


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

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


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

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


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

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


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

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

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


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

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


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

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


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

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


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

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


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

a. Tr ue
*b. Fal se


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

*a. Tr ue
b. Fal se


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

a. Tr ue
*b. Fal se


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

*a. Tr ue
b. Fal se


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

*a. Tr ue
b. Fal se


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

a. Tr ue
*b. Fal se


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

*a. Tr ue
b. Fal se


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

a. Tr ue
*b. Fal se


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

*a. Tr ue
b. Fal se


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

a. Tr ue
*b. Fal se


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

*a. Tr ue
b. Fal se


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

a. Tr ue
*b. Fal se


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

a. Tr ue
*b. Fal se


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

*a. Tr ue
b. Fal se


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

a. Tr ue
*b. Fal se


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

*a. Tr ue
b. Fal se


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

a. Tr ue
*b. Fal se


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

*a. Tr ue
b. Fal se


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

*a. Tr ue
b. Fal se


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

a. Tr ue
*b. Fal se


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

*a. Tr ue
b. Fal se


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

*a. Tr ue
b. Fal se


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

a. Tr ue
*b. Fal se


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

a. Tr ue
*b. Fal se


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

a. Tr ue
*b. Fal se


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

*a. Tr ue
b. Fal se


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

a. Tr ue
*b. Fal se


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

a. Tr ue
*b. Fal se


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

*a. Tr ue
b. Fal se


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

*a. Tr ue
b. Fal se


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

a. Tr ue
*b. Fal se


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

a. Tr ue
*b. Fal se


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

*a. Tr ue
b. Fal se


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

*a. Tr ue
b. Fal se


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

a. Tr ue
*b. Fal se


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

*a. Tr ue
b. Fal se


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

a. Tr ue
*b. Fal se


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

a. Tr ue
*b. Fal se


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

*a. Tr ue
b. Fal se


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

*a. Tr ue
b. Fal se


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

*a. Tr ue
b. Fal se


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

*a. Tr ue
b. Fal se


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

a. Tr ue
*b. Fal se


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

*a. Tr ue
b. Fal se


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

a. Tr ue
*b. Fal se


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

a. Tr ue
*b. Fal se


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

*a. Tr ue
b. Fal se


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

*a. Tr ue
b. Fal se


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

a. Tr ue
*b. Fal se


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

*a. Tr ue
b. Fal se


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

a. Tr ue
*b. Fal se


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

a. Tr ue
*b. Fal se


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

*a. Tr ue
b. Fal se


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

a. Tr ue
*b. Fal se


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

*a. Tr ue
b. Fal se


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

*a. Tr ue
b. Fal se


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

a. Tr ue
*b. Fal se


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

*a. Tr ue
b. Fal se


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

*a. Tr ue
b. Fal se


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

a. Tr ue
*b. Fal se


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

*a. Tr ue
b. Fal se


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

a. Tr ue
*b. Fal se


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

a. Tr ue
*b. Fal se


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

a. Tr ue
*b. Fal se


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

*a. Tr ue
b. Fal se


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

a. Tr ue
*b. Fal se


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

*a. Tr ue
b. Fal se


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

a. Tr ue
*b. Fal se


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

*a. Tr ue
b. Fal se


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

*a. I n ar r i vi ng at t axabl e i ncome, a t axpayer must choose bet ween
t he st andar d deduct i on and deduct i ons from AGI .
b. I n ar r i vi ng at AGI , per sonal and dependency exempt i ons must be
subt r act ed f r omgr oss i ncome.
c. I n ar r i vi ng at t axabl e i ncome, a t axpayer must choose bet ween
t he st andar d deduct i on and cl ai mi ng per sonal and dependency
exempt i ons.
d. The f or mul a does not appl y i f a t axpayer el ect s t o cl ai mt he
st andar d deduct i on.
e. None of t he above.


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

a. I n ar r i vi ng at AGI , a t axpayer must el ect bet ween cl ai mi ng
deduct i ons for AGI and deduct i ons from AGI .
b. I n ar r i vi ng at t axabl e i ncome, a t axpayer must el ect bet ween
cl ai mi ng deduct i ons for AGI and deduct i ons from AGI .
c. I f a t axpayer has deduct i ons for AGI , t he st andar d deduct i on
i s not avai l abl e.
d. I n ar r i vi ng at t axabl e i ncome, a t axpayer must el ect bet ween
deduct i ons for AGI and t he st andar d deduct i on.
*e. None of t he above.


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

a. Most excl usi ons f r omgr oss i ncome ar e r epor t ed on page 2 of
For m1040.
b. An above t he l i ne deduct i on r ef er s t o a deduct i on from AGI .
*c. A page 1 deduct i on r ef er s t o a deduct i on for AGI .
d. The t axabl e i ncome ( TI ) amount appear s bot h at t he bot t omof
page 1 and at t he t op of page 2 of For m1040.
e. None of t he above.


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

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


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

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


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

a. St at e and l ocal sal es t axes.
b. I nt er est on home mor t gage.
c. Char i t abl e cont r i but i ons.
*d. Unr ei mbur sed movi ng expenses of an empl oyee.
e. None of t he above.


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

*a. Some t axpayer s may qual i f y f or t wo t ypes of st andar d
deduct i ons.
b. Not avai l abl e t o t axpayer s who choose t o deduct t hei r per sonal
and dependency exempt i ons.
c. Not avai l abl e t o t axpayer s who choose t o cl ai mt hei r deduct i on
for AGI .
d. The basi c st andar d deduct i on i s i ndexed f or i nf l at i on but t he
addi t i onal st andar d deduct i on i s not .
e. None of t he above.


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

a. I f a t axpayer di es dur i ng t he year , hi s ( or her ) st andar d
deduct i on must be pr or at ed.
*b. I f a t axpayer i s cl ai med as a dependent of anot her , hi s ( or
her ) addi t i onal st andar d deduct i on i s al l owed i n f ul l ( i . e. , no
adj ust ment i s necessar y) .
c. I f spouses f i l e separ at e r et ur ns, bot h spouses must cl ai mt he
st andar d deduct i on ( r at her t han i t emi ze t hei r deduct i ons from
AGI ) .
d. I f a t axpayer i s cl ai med as a dependent of anot her , no basi c
st andar d deduct i on i s al l owed.
e. None of t he above.


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

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


Marvins AGI is:

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


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

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


Esthers AGI is:

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


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

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


Sarahs AGI is:

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


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

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


Cindys AGI is:

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


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

a. $4, 200 $4, 550 = $0.
b. $6, 200 $5, 700 = $500.
*c. $6, 200 $4, 550 = $1, 650.
d. $6, 200 $1, 000 = $5, 200.
e. None of t he above.


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

a. $1, 700.
b. $1, 700 $700 $1, 000 = $0.
*c. $1, 700 $1, 050 = $650.
d. $1, 700 $1, 000 = $700.
e. None of t he above.


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

*a. $4, 150 $1, 000 $3, 000 = $150.
b. $4, 150 $3, 000 = $1, 150.
c. $4, 150 $1, 000 $1, 500 = $1, 650.
d. $8, 950 $1, 000 $3, 000 = $4, 950.
e. None of t he above.


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

a. $700.
b. $850.
c. $1, 800.
d. $2, 250.
*e. None of t he above.


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

a. Two.
b. Thr ee.
*c. Four .
d. Fi ve.
e. None of t he above.


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

a. Two.
*b. Thr ee.
c. Four .
d. Fi ve.
e. None of t he above.


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

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


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

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


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

a. Two.
*b. Thr ee.
c. Four .
d. Fi ve.
e. None of t he above.


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

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


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

a. Onl y her f at her .
b. Onl y her gr andf at her and uncl e.
c. Onl y her uncl e.
*d. Al l par t i es i nvol ved ( i . e. , f at her , gr andf at her , and uncl e) .
e. None of t he above.


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

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


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

*a. West on and Fai t h.
b. Fai t h.
c. West on, Fai t h, J ake, and Br ayden.
d. Fai t h, J ake, and Br ayden.
e. None of t he above.


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

a. Two.
b. Thr ee.
*c. Four .
d. Fi ve.
e. None of t he above.


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

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


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

a. Mar r i ed per sons who f i l e j oi nt r et ur ns cannot l at er ( af t er t he
due dat e of t he r et ur n) subst i t ut e separ at e r et ur ns.
b. Mar r i ed per sons who f i l e separ at e r et ur ns can l at er ( af t er t he
due dat e of t he r et ur n) subst i t ut e a j oi nt r et ur n.
*c. The usual t est as t o when a t axpayer must f i l e a r et ur n i s
based on t he t ot al of t he f ol l owi ng: per sonal exempt i on + basi c
st andar d deduct i on + bot h addi t i onal st andar d deduct i ons.
d. Speci al f i l i ng r equi r ement r ul es exi st f or t axpayer s who ar e
cl ai med as dependent s of anot her .
e. None of t he above.


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

*a. Head of househol d.
b. Sur vi vi ng spouse.
c. Si ngl e.
d. Mar r i ed f i l i ng separ at el y.
e. None of t he above.


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

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


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

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

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

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

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


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

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


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

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


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

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


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

a. The chi l d i s mar r i ed but does not f i l e a j oi nt r et ur n.
*b. The chi l d has unear ned i ncome of $2, 000 or l ess.
c. The chi l d has unear ned i ncome t hat exceeds mor e t han hal f of
hi s ( or her ) suppor t .
d. The chi l d i s under age 24 and a f ul l - t i me st udent .
e. None of t he above.


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

a. I f t he par ent s ar e di vor ced, t he i ncome of t he noncust odi al
par ent i s used t o det er mi ne t he al l ocabl e par ent al t ax.
b. The component s f or t he appl i cat i on of t he ki ddi e t ax ar e not
subj ect t o adj ust ment f or i nf l at i on.
c. I f t he ki ddi e t ax appl i es, t he par ent s must i ncl ude t he i ncome
of t he chi l d on t hei r own i ncome t ax r et ur n.
*d. The ki ddi e t ax does not appl y i f bot h par ent s of t he chi l d
ar e deceased.
e. None of t he above.


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

a. $0.
b. $1, 000.
*c. $2, 000.
d. $3, 000.
e. None of t he above.


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

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


Perrys tax consequences from these gains are as follows:

a. ( 15% $30, 000) + ( 33% $4, 000) .
*b. ( 15% $10, 000) + ( 28% $30, 000) + ( 33% $4, 000) .
c. ( 0% $10, 000) + ( 28% $30, 000) + ( 33% $4, 000) .
d. ( 15% $40, 000) + ( 33% $4, 000) .
e. None of t he above.


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

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


Kirbys tax consequences from these gains are as follows:

a. ( 5% $10, 000) + ( 15% $13, 000) .
b. ( 15% $13, 000) + ( 28% $11, 000) .
*c. ( 0% $10, 000) + ( 15% $13, 000) .
d. ( 15% $23, 000) .
e. None of t he above.


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

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


What is Davids AGI for the current year?

a. $76, 000.
*b. $77, 000.
c. $78, 000.
d. $89, 000.
e. None of t he above.


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

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


After the netting process, the following results:

a. Long- t er mcol l ect i bl e gai n of $2, 000.
b. LTCG of $6, 000, Long- t er mcol l ect i bl e gai n of $2, 000, and a
STCL of $6, 000.
c. LTCG of $6, 000, Long- t er mcol l ect i bl e gai n of $2, 000, and a
STCL car r yover t o 2014 of $3, 000.
*d. LTCG of $2, 000.
e. None of t he above.


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

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

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


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

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

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


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

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

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


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

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


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

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


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

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

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


What i s Edgar s AGI f or 2013?

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


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

Sal ar y $ 85, 000

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


What i s Tayl or s AGI f or 2013?

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


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

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


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

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

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



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

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




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

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


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

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


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

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


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

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


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

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

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



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

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




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

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

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



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


b. Ashley satisfies the requirements for a
surviving spouse.




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

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


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

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


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

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


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

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



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

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




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

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


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

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



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

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




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

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


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

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


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

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


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

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


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

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


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

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


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

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


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

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


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


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

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



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

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




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

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

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



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

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




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

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


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

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


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

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


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

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

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


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

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


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

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


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

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


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

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


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

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

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

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



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

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

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




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

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

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



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

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




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

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


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

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

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

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



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

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

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





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

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


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

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


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

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


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

a. Why t he di f f er ence?

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



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

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




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

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


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

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


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

Houseboat used f or r ecr eat i on.

Tr uck used i n busi ness.

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

Eval uat e each choi ce.

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


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

a. Expl ai n what has happened.

b. What r emedy do you suggest ?



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

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




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

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


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

a. Tr ue
*b. Fal se


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

*a. Tr ue
b. Fal se


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

*a. Tr ue
b. Fal se


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

a. Tr ue
*b. Fal se


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

a. Tr ue
*b. Fal se


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

*a. Tr ue
b. Fal se


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

*a. Tr ue
b. Fal se


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

*a. Tr ue
b. Fal se


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

*a. Tr ue
b. Fal se


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

a. Tr ue
*b. Fal se


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

*a. Tr ue
b. Fal se


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

a. Tr ue
*b. Fal se


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

*a. Tr ue
b. Fal se


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

*a. Tr ue
b. Fal se


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

a. Tr ue
*b. Fal se


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

*a. Tr ue
b. Fal se


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

a. Tr ue
*b. Fal se


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

*a. Tr ue
b. Fal se


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

*a. Tr ue
b. Fal se


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

*a. Tr ue
b. Fal se


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

a. Tr ue
*b. Fal se


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

a. Tr ue
*b. Fal se


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

*a. Tr ue
b. Fal se


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

a. Tr ue
*b. Fal se


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

*a. Tr ue
b. Fal se


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

a. Tr ue
*b. Fal se


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

*a. Tr ue
b. Fal se


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

a. Tr ue
*b. Fal se


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

a. Tr ue
*b. Fal se


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

*a. Tr ue
b. Fal se


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

a. Tr ue
*b. Fal se


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

*a. Tr ue
b. Fal se


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

a. Tr ue
*b. Fal se


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

*a. Tr ue
b. Fal se


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

*a. Tr ue
b. Fal se


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

*a. Tr ue
b. Fal se


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

a. Tr ue
*b. Fal se


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

a. Tr ue
*b. Fal se


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

*a. Tr ue
b. Fal se


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

*a. Tr ue
b. Fal se


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

a. Tr ue
*b. Fal se


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

*a. Tr ue
b. Fal se


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

*a. Tr ue
b. Fal se


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

*a. Tr ue
b. Fal se


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

a. Tr ue
*b. Fal se


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

a. Tr ue
*b. Fal se


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

a. Tr ue
*b. Fal se


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

*a. Tr ue
b. Fal se


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

*a. Tr ue
b. Fal se


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

*a. Tr ue
b. Fal se


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

*a. Tommust ear n mor e t han $160 i f he i s i n t he 25%mar gi nal t ax
br acket .
b. Tommust ear n at l east $160 i f he i s i n t he 33%mar gi nal t ax
br acket .
c. Tommust ear n at l east $150 i f he i s i n t he 25%mar gi nal t ax
br acket .
d. Tommust ear n at l east $135 i f he i s i n t he 15%mar gi nal t ax
br acket .
e. None of t he above.


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

a. The f ai r r ent al val ue of an owner - occupi ed home shoul d be
i ncl uded i n i ncome.
b. The i ncr ease i n val ue of asset s hel d f or t he ent i r e year
shoul d be i ncl uded i n i ncome f or t he year .
*c. Rent i ncome f or 2014 col l ect ed i n 2013 i s i ncome f or 2013.
d. Al l of t he above.
e. None of t he above.


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

a. Sue must r ecogni ze $2, 000 gr oss i ncome i n t he cur r ent year i f
t he company di d not i nst al l t he cabl e dur i ng t he year .
*b. Sue i s not r equi r ed t o r ecogni ze gr oss i ncome f r omt he
r ecei pt of t he f unds, but she must r educe her cost basi s i n t he
l and by $2, 000.
c. Sue must r ecogni ze $2, 000 gr oss i ncome i n t he cur r ent year
r egar dl ess of whet her t he company i nst al l ed t he cabl e dur i ng t he
year .
d. Sue must r ecogni ze $2, 000 gr oss i ncome i n t he cur r ent year ,
and when t he cabl e i s i nst al l ed, she must r educe her cost basi s
i n t he l and by $2, 000.
e. None of t he above.


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

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


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

a. The $1, 500, 000 i s not t axabl e because i t r epr esent s a r ecover y
of capi t al .
*b. The $1, 500, 000 i s t axabl e because Det r oi t has no basi s i n t he
goodwi l l .
c. The $1, 500, 000 i s not t axabl e because Det r oi t di d not hi ng t o
ear n t he money.
d. The $1, 500, 000 i s not t axabl e because Det r oi t set t l ed t he case.
e. None of t he above.


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

a. I s t axed when t he i ndi vi dual di es and t he hei r s col l ect t he
i nsur ance pr oceeds.
b. Must be i ncl uded i n gr oss i ncome each year under t he or i gi nal
i ssue di scount r ul es.
c. Reduces t he deduct i on f or l i f e i nsur ance expense.
*d. I s not i ncl uded i n gr oss i ncome each year because of t he
subst ant i al r est r i ct i ons on gai ni ng access t o t he pol i cy s val ue.
e. None of t he above.


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

a. I f t he empl oyer accept s Tur ner s count er of f er , Tur ner wi l l
r ecogni ze $660, 000 at t he t i me t he of f er i s accept ed.
b. I f t he empl oyer accept s Tur ner s count er of f er , Tur ner wi l l
r ecogni ze as gr oss i ncome $55, 000 per mont h [ ( $480, 000 +
$180, 000) / 12] .
*c. I f t he empl oyer accept s Tur ner s count er of f er , Tur ner wi l l
r ecogni ze $40, 000 i ncome each mont h f or t he year and $180, 000 i n
year 5.
d. I f t he empl oyer accept s Tur ner s count er of f er , Tur ner must
r ecogni ze i mput ed i nt er est i ncome on t he $180, 000 t o be r ecei ved
i n 5 year s.
e. None of t he above.


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

a. The empl oyee woul d be r equi r ed t o r ecogni ze t he i ncome i n
December 2013 because i t i s const r uct i vel y r ecei ved at t he end of
t he mont h.
b. The empl oyee woul d be r equi r ed t o r ecogni ze t he i ncome i n
December 2013 because t he empl oyee has a cl ai mof r i ght t o t he
i ncome when i t i s ear ned.
*c. The empl oyee wi l l not be r equi r ed t o r ecogni ze t he i ncome
unt i l i t i s r ecei ved, i n 2014.
d. The empl oyee can el ect t o ei t her i ncl ude t he pay i n 2013 or
2014.
e. None of t he above.


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

a. I s t axed accor di ng t o t he or i gi nal i ssue di scount r ul es.
*b. I s not i ncl uded i n gr oss i ncome because t he pol i cy must be
sur r ender ed t o r ecei ve t he cash sur r ender val ue.
c. Reduces t he deduct i on f or l i f e i nsur ance expense.
d. I s exempt because i t i s l i f e i nsur ance pr oceeds.
e. None of t he above.


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

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


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

a. Fr eddy must r ecogni ze $1, 218 gr oss i ncome i n 2013.
b. Fr eddy must r ecogni ze $1, 218 gr oss i ncome i n 2015.
c. Fr eddy must r ecogni ze $600 ( . 03 $20, 000) gr oss i ncome i n 2015.
*d. Fr eddy must r ecogni ze $300 ( . 03 $20, 000 . 5) gr oss i ncome
i n 2013.
e. None of t he above.


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

*a. J er r y can def er t he i nt er est i ncome unt i l t he bond mat ur es i n
10 year s.
b. J er r y must r epor t ( $1, 000 $744) / 10 = $25. 60 i nt er est i ncome
each year he owns t he bond.
c. The i nt er est on t he bonds i s exempt f r omFeder al i ncome t ax.
d. J er r y can r epor t al l of t he $256 as a capi t al gai n i n t he year
i t mat ur es.
e. None of t he above.


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

a. $0 i n 2013, i f Of f i ce Pal ace i s an accr ual basi s t axpayer .
b. $7, 800 i n 2014, i f Of f i ce Pal ace i s a cash basi s t axpayer .
c. $2, 700 i n 2013, i f Of f i ce Pal ace i s a cash basi s t axpayer .
*d. $1, 200 i n 2013, i f Of f i ce Pal ace i s an accr ual basi s t axpayer .
e. None of t he above.


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

a. $420 i n 2013.
b. $960 i n 2013.
c. $180 i n 2015.
*d. $780 i n 2014.
e. None of t he above.


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

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


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

a. $272, 000 i n 2012.
b. $128, 000 i n 2012.
c. $168, 000 i n 2013.
*d. $222, 000 i n 2013.
e. None of t he above.


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

a. The t r eat ment of pr epai d i ncome i s t he same f or t ax and
f i nanci al account i ng.
b. A cash basi s t axpayer can spr ead t he i ncome over t he per i od
ser vi ces ar e t o be pr ovi ded i f al l of t he ser vi ces wi l l be
compl et ed by t he end of t he t ax year f ol l owi ng t he year of
r ecei pt .
*c. An accr ual basi s t axpayer can spr ead t he i ncome over t he
per i od ser vi ces ar e t o be pr ovi ded i f al l of t he ser vi ces wi l l be
compl et ed by t he end of t he t ax year f ol l owi ng t he year of
r ecei pt .
d. An accr ual basi s t axpayer can spr ead t he i ncome over t he
per i od ser vi ces ar e t o be pr ovi ded on a cont r act f or t hr ee year s
or l ess.
e. None of t he above.


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

a. The i ncome i s al ways amor t i zed over t he per i od t he ser vi ces
wi l l be r ender ed by an accr ual basi s t axpayer .
b. A cash basi s t axpayer can spr ead t he i ncome f r oma 24- mont h
ser vi ce cont r act over t he cont r act per i od.
*c. I f an accr ual basi s t axpayer sel l s a 36- mont h ser vi ce
cont r act on J ul y 1, 2013 f or $3, 600, t he t axpayer s 2013 gr oss
i ncome f r omt he cont r act i s $600.
d. I f an accr ual basi s t axpayer sel l s a 24- mont h ser vi ce cont r act
on J ul y 1, 2013, one- hal f ( 12/ 24) t he i ncome i s r ecogni zed i n
2014.
e. None of t he above.


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

a. $60, 000.
b. $50, 000.
*c. $10, 000.
d. $0.
e. None of t he above.


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

*a. Teal must r ecogni ze t he i ncome i n 2013.
b. Teal must r ecogni ze t he i ncome i n t he year t i t l e t o t he goods
passed t o t he cust omer , as det er mi ned under t he st at e l aws i n
whi ch t he st or e i s l ocat ed.
c. Teal can el ect t o r ecogni ze t he i ncome i n ei t her 2013 or 2014.
d. Teal must r ecogni ze t he i ncome i n 2014.
e. None of t he above.


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

a. Ti mmust i ncl ude al l of t he i nt er est i n hi s gr oss i ncome.
b. J ane must r epor t $1, 800 gr oss i ncome f or 2013.
*c. J ane r epor t s $1, 350 of i nt er est i ncome i n 2013, and Ti m
r epor t s $450 of i nt er est i ncome i n 2013.
d. J ane r epor t s $450 of i nt er est i ncome i n 2013, and Ti mr epor t s
$1, 350 of i nt er est i ncome i n 2013.
e. None of t he above i s cor r ect .


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

*a. Mi ke s gr oss i ncome i s $6, 500.
b. Mi ke must r ecogni ze t he $8, 000 gr oss i ncome because he
pr ovi ded t he ser vi ce.
c. Mi ke must r ecogni ze $8, 000 gr oss i ncome si nce t he pat i ent
obvi ousl y want ed hi mt o per f or mt he oper at i on.
d. The Kr amCompany cor por at i on s gr oss i ncome i s $1, 500.
e. None of t he above.


469. As a gener al r ul e:
I. Income from property is taxed to the
person who owns the property.
II. Income from services is taxed to the
person who earns the income.
III. The assignee of income from property must
pay tax on the income.
IV. The person who receives the benefit of
the income must pay the tax on the
income.



*a. Onl y I and I I ar e t r ue.
b. Onl y I I I and I V ar e t r ue.
c. I , I I , and I I I ar e t r ue, but I V i s f al se.
d. I , I I , I I I , and I V ar e t r ue.
e. None of t he above i s t r ue.


470. On November 1, 2013, Bob, a cash basi s t axpayer , gave Dave common
st ock. On Oct ober 30, 2013, t he cor por at i on had decl ar ed t he di vi dend
payabl e t o shar ehol der s of r ecor d as of November 22, 2013. The di vi dend
was pai d on December 15, 2013. The cor por at i on has pai d t he $1, 200
di vi dend once each year f or t he past t en year s, dur i ng whi ch Bob owned
t he st ock. When Dave col l ect ed t he di vi dend on December 15, 2013:

a. Bob must i ncl ude $1, 000 ( 10/ 12 x $1, 200) of t he di vi dend i n
hi s gr oss i ncome.
*b. Bob must i ncl ude al l of t he di vi dend i n hi s gr oss i ncome.
c. Dave must i ncl ude al l of t he di vi dend i n hi s gr oss i ncome.
d. Dave shoul d t r eat t he $1, 200 as a r ecover y of capi t al .
e. None of t he above i s cor r ect .


471. Dani el pur chased a bond on J ul y 1, 2013, at par of $10, 000 pl us
accr ued i nt er est of $300. On December 31, 2013, Dani el col l ect ed t he
$600 i nt er est f or t he year . On J anuar y 1, 2014, Dani el sol d t he bond
f or $10, 200.

*a. Dani el must r ecogni ze $300 i nt er est i ncome f or 2013 and a
$200 gai n on t he sal e of t he bond i n 2014.
b. Dani el must r ecogni ze $600 i nt er est i ncome f or 2013 and a $200
gai n on t he sal e of t he bond i n 2014.
c. Dani el must r ecogni ze $600 i nt er est i ncome f or 2013 and a $100
l oss on t he sal e of t he bond i n 2014.
d. Dani el must r ecogni ze $300 i nt er est i ncome f or 2013 and a $100
l oss on t he sal e of t he bond i n 2014.
e. None of t he above.


472. Ther esa, a cash basi s t axpayer , pur chased a bond on J ul y 1, 2009,
f or $10, 000, pl us $400 of accr ued i nt er est . The bond pai d $800 of
i nt er est each December 31. On Mar ch 31, 2013, she sol d t he bond f or
$9, 800, whi ch i ncl uded $200 of accr ued i nt er est .

*a. Ther esa has $200 i nt er est i ncome and a $400 l oss f r omt he
bond i n 2013.
b. Ther esa has $200 i nt er est i ncome and a $200 gai n f r omt he bond
i n 2013.
c. Ther esa has a $100 l oss f r omt he sal e of t he bond and no
i nt er est i ncome.
d. Ther esa s l oss on t he sal e of t he bond i s $600.
e. None of t he above.


473. Dar r yl , a cash basi s t axpayer , gave 1, 000 shar es of Copper Company
common st ock t o hi s daught er on Sept ember 29, 2013. Copper Company i s a
publ i cl y hel d company t hat has decl ar ed a $2. 00 per shar e di vi dend on
Sept ember 30t h ever y year f or t he l ast 20 year s. J ust as Dar r yl had
expect ed, Copper Company decl ar ed a $2. 00 per shar e di vi dend on
Sept ember 30t h, payabl e on Oct ober 15t h, t o st ockhol der s of r ecor d as
of Oct ober 10t h. The daught er r ecei ved t he $2, 000 di vi dend on Oct ober
18, 2013.

*a. The daught er must r ecogni ze t he i ncome because she owned t he
st ock when t he di vi dend was decl ar ed and she r ecei ved t he $2, 000.
b. Dar r yl must r ecogni ze t he i ncome of $2, 000 because t he pur pose
of t he gi f t was t o avoi d t axes.
c. Dar r yl must r ecogni ze $1, 500 of t he di vi dend because he owned
t he st ock f or t hr ee- f our t hs of t he year .
d. Dar r yl must r ecogni ze t he $2, 000 di vi dend as hi s i ncome
because he const r uct i vel y r ecei ved t he di vi dend.
e. None of t he above.


474. Wayne owns a 30%i nt er est i n t he capi t al and pr of i t s of Emer al d
Company ( a cal endar year par t ner shi p) . For t ax year 2013, t he
par t ner shi p ear ned r evenue of $900, 000 and had oper at i ng expenses of
$660, 000. Dur i ng t he year , Wayne wi t hdr ew f r omt he par t ner shi p a t ot al
of $90, 000. He al so i nvest ed an addi t i onal $30, 000 i n t he par t ner shi p.
For 2013, Wayne s gr oss i ncome f r omt he par t ner shi p i s:

*a. $72, 000.
b. $90, 000.
c. $132, 000.
d. $162, 000.
e. None of t he above.


475. Har r y and Wanda wer e mar r i ed i n Texas, a communi t y pr oper t y st at e,
but moved t o Vi r gi ni a, a common l aw st at e. The cal cul at i on of t hei r
i ncome on a j oi nt r et ur n:

a. Wi l l i ncr ease as a r esul t of changi ng t hei r st at e of r esi dence.
b. Wi l l decr ease as a r esul t of changi ng t hei r st at e of r esi dence.
*c. Wi l l not change as a r esul t of changi ng t hei r st at e of
r esi dence.
d. Wi l l not be per mi t t ed.
e. None of t he above.


476. J i mand Nor a, r esi dent s of a communi t y pr oper t y st at e, wer e
mar r i ed i n ear l y 2011. Lat e i n 2011 t hey separ at ed, and i n 2013 t hey
wer e di vor ced. Each ear ned a sal ar y, and t hey r ecei ved i ncome f r om
communi t y owned i nvest ment s i n al l r el evant year s. They f i l ed separ at e
r et ur ns i n 2011 and 2012.

*a. I n 2012, Nor a must r epor t onl y her sal ar y and one- hal f of t he
i ncome f r omcommuni t y pr oper t y on her separ at e r et ur n.
b. I n 2012, Nor a must r epor t on her separ at e r et ur n one- hal f of
t he J i mand Nor a sal ar y and one- hal f of t he communi t y pr oper t y
i ncome.
c. I n 2013, Nor a must r epor t on her separ at e r et ur n one- hal f of
t he J i mand Nor a sal ar y f or t he per i od t hey wer e mar r i ed as wel l
as one- hal f of t he communi t y pr oper t y i ncome and her i ncome
ear ned af t er t he di vor ce.
d. I n 2013, Nor a must r epor t onl y her sal ar y on her separ at e
r et ur n.
e. None of t he above.


477. Under t he al i mony r ul es:

a. To det er mi ne whet her a cash payment i s al i mony, one must
consul t t he st at e l aws t hat def i ne al i mony.
b. A per son who r ecei ves a pr oper t y di vi si on has exper i enced an
i ncr ease i n weal t h and t hus shoul d be subj ect t o t ax.
*c. The i ncome i s i ncl uded i n t he gr oss i ncome of t he r eci pi ent
of t he payment s.
d. A per son who ear ns $90, 000 and pays $20, 000 i n al i mony i s
t axed on $90, 000 because t he $20, 000 al i mony i s i ncome assi gned
t o t he f or mer spouse.
e. None of t he above.


478. Tr avi s and Andr ea wer e di vor ced. Thei r onl y mar i t al pr oper t y
consi st ed of a per sonal r esi dence ( f ai r mar ket val ue of $400, 000, cost
of $200, 000) , and publ i cl y- t r aded st ocks ( f ai r mar ket val ue of $800, 000,
cost basi s of $500, 000) . Under t he t er ms of t he di vor ce agr eement ,
Andr ea r ecei ved t he per sonal r esi dence and Tr avi s r ecei ved t he st ocks.
I n addi t i on, Andr ea was t o r ecei ve $50, 000 f or ei ght year s.
I. If the $50,000 annual payments are to be
made to Andrea or her estate (if she dies
before the end of the eight years), the
payments will qualify as alimony.
II. Andrea has a taxable gain from an
exchange of her one-half interest in the
stocks for Travis one-half interest in
the house and cash.
III. If Travis sells the stocks for $900,000,
he must recognize a $400,000 gain.



*a. Onl y I I I i s t r ue.
b. Onl y I and I I I ar e t r ue.
c. Onl y I and I I ar e t r ue.
d. I , I I , and I I I ar e t r ue.
e. None of t he above ar e t r ue.


479. Whi ch of t he f ol l owi ng i s not a r equi r ement f or an al i mony
deduct i on?

a. The payment s must be i n cash.
b. The payment s must cease upon t he deat h of t he payee.
*c. The payment s must ext end over at l east t hr ee year s.
d. The payor and payee must not l i ve i n t he same househol d at t he
t i me of t he payment s.
e. Al l of t he above ar e r equi r ement s f or an al i mony deduct i on.


480. Ti mand J anet wer e di vor ced. Thei r onl y mar i t al pr oper t y was a
per sonal r esi dence wi t h a val ue of $120, 000 and cost of $50, 000. Under
t he t er ms of t he di vor ce agr eement , J anet woul d r ecei ve t he house and
J anet woul d pay Ti m$15, 000 each year f or 5 year s, or unt i l Ti m s deat h,
whi chever shoul d occur f i r st . Ti mand J anet l i ved apar t when t he
payment s wer e made t o Ti m. The di vor ce agr eement di d not cont ai n t he
wor d al i mony.

a. Ti mmust r ecogni ze a $35, 000 [ $60, 000 1/ 2( $50, 000) ] gai n on
t he sal e of hi s i nt er est i n t he house.
b. Ti mdoes not r ecogni ze any i ncome f r omt he above t r ansact i ons.
c. J anet i s not al l owed any al i mony deduct i ons.
*d. J anet i s al l owed t o deduct $15, 000 each year f or al i mony pai d.
e. None of t he above.


481. Thel ma and Mi t ch wer e di vor ced. The coupl e had a j oi nt br oker age
account t hat i ncl uded st ocks wi t h a basi s of $600, 000 and a f ai r mar ket
val ue of $1, 000, 000. Under t he t er ms of t he di vor ce agr eement , Mi t ch
woul d r ecei ve t he st ocks and Mi t ch woul d pay Thel ma $100, 000 each year
f or 6 year s, or unt i l Thel ma s deat h, whi chever shoul d occur f i r st .
Thel ma and Mi t ch l i ved apar t when t he payment s wer e made by Mi t ch.
Mi t ch pai d t he $600, 000 t o Thel ma over t he si x- year per i od. The di vor ce
agr eement di d not cont ai n t he wor d al i mony. Then, Mi t ch sol d t he
st ocks f or $1, 300, 000. Mi t ch s r ecogni zed gai n f r omt he sal e i s:

a. $0.
b. $1, 000, 000 ( $1, 300, 000 $300, 000) .
*c. $700, 000 ( $1, 300, 000 $600, 000) .
d. $300, 000 ( $1, 300, 000 $1, 000, 000) .
e. None of t he above.


482. The al i mony r ecapt ur e r ul es ar e i nt ended t o:

a. Assi st f or mer spouses i n col l ect i ng al i mony when t he ot her
spouse moves t o anot her st at e.
*b. Pr event t ax deduct i ons f or pr oper t y di vi si ons.
c. Reduce t he net cash out f l ow f or t he payor .
d. Di st i ngui sh chi l d suppor t payment s f r omal i mony.
e. None of t he above.


483. The al i mony r ul es:

a. Ar e based on t he pr i nci pl e t hat t he per son who ear ns t he
i ncome shoul d pay t he t ax.
b. Per mi t t ax deduct i ons f or pr oper t y di vi si ons.
c. Look t o st at e l aw t o det er mi ne t he def i ni t i on of al i mony.
*d. Di st i ngui sh chi l d suppor t payment s f r omal i mony.
e. None of t he above.


484. Under t he t er ms of a di vor ce agr eement , Ki mwas t o pay her husband
Tom$7, 000 per mont h i n al i mony. Ki m s payment s wi l l be r educed t o
$3, 000 per mont h when t hei r 9 year - ol d son becomes 21. The husband has
cust ody of t hei r son. For a t wel ve- mont h per i od, Ki mcan deduct f r om
gr oss i ncome ( and Tommust i ncl ude i n gr oss i ncome) :

a. $60, 000.
b. $48, 000.
*c. $36, 000.
d. $0.
e. None of t he above.


485. Under t he t er ms of a di vor ce agr eement , Lanny was t o pay hi s wi f e
J oyce $2, 000 per mont h i n al i mony and $500 per mont h i n chi l d suppor t .
For a t wel ve- mont h per i od, Lanny can deduct f r omgr oss i ncome ( and
J oyce must i ncl ude i n gr oss i ncome) :

a. $0.
b. $6, 000.
*c. $24, 000.
d. $30, 000.
e. None of t he above.


486. Under t he t er ms of a di vor ce agr eement , Ron i s t o pay hi s f or mer
wi f e J i l l $10, 000 per mont h. The payment s ar e t o be r educed t o $7, 000
per mont h when t hei r 15 year - ol d chi l d r eaches age 18. Dur i ng t he
cur r ent year , Ron pai d $120, 000 under t he agr eement . Assumi ng al l of
t he ot her condi t i ons f or al i mony ar e sat i sf i ed, Ron can deduct f r om
gr oss i ncome ( and J i l l must i ncl ude i n gr oss i ncome) as al i mony:

a. $120, 000.
*b. $84, 000.
c. $36, 000.
d. $0.
e. None of t he above i s cor r ect .


487. The pur pose of t he t ax r ul es t hat appl y t o bel ow- mar ket l oans
bet ween f ami l y member s i s t o:

a. Di scour age l oans bet ween r el at ed par t i es.
*b. Pr event shi f t i ng of i ncome among f ami l y member s.
c. Pr event gi f t s f r ombei ng di sgui sed as bad debt expenses.
d. Pr event gi f t t ax avoi dance.
e. None of t he above i s t r ue.


488. On J anuar y 1, Fat her ( Dave) l oaned Daught er ( Debr a) $100, 000 t o
pur chase a new car and t o pay of f col l ege l oans. Ther e wer e no ot her
l oans out st andi ng bet ween Dave and Debr a. The r el evant Feder al r at e on
i nt er est was 6 per cent . The l oan was out st andi ng f or t he ent i r e year .

*a. I f Debr a has $15, 000 of i nvest ment i ncome, Dave must
r ecogni ze $6, 090 of i mput ed i nt er est i ncome.
b. Dave must r ecogni ze $6, 090 of i mput ed i nt er est i ncome
r egar dl ess of t he amount of Debr a s i nvest ment i ncome.
c. Debr a must r ecogni ze $6, 090 of i mput ed i nt er est i ncome.
d. Debr a must r ecogni ze $6, 090 of i mput ed i nt er est i ncome i f Dave
has at l east $6, 090 of i nvest ment i ncome.
e. None of t he above.


489. The ef f ect s of a bel ow- mar ket l oan f or $100, 000 made by a
cor por at i on t o i t s chi ef execut i ve of f i cer as an ent i cement t o get hi m
t o r emai n wi t h t he company ar e:

a. The cor por at i on has i mput ed i nt er est i ncome and t he empl oyee
i s deemed t o have r ecei ved a gi f t .
b. The cor por at i on has i mput ed i nt er est i ncome and di vi dends pai d.
c. The empl oyee has no i ncome unl ess t he f unds ar e i nvest ed and
pr oduce i nvest ment i ncome f or t he year .
*d. The empl oyee has i mput ed compensat i on i ncome and t he
cor por at i on has i mput ed i nt er est i ncome.
e. None of t he above.


490. Sar ah, a maj or i t y shar ehol der i n Teal , I nc. , made a $200, 000
i nt er est - f r ee l oan t o t he cor por at i on. Sar ah i s not an empl oyee of t he
cor por at i on.

a. Sar ah must r ecogni ze i mput ed i nt er est expense and t he
cor por at i on must r ecogni ze i mput ed i nt er est i ncome.
*b. Sar ah must r ecogni ze i mput ed i nt er est i ncome and t he
cor por at i on must r ecogni ze i mput ed i nt er est expense.
c. Sar ah must r ecogni ze i mput ed di vi dend i ncome and t he
cor por at i on may r ecogni ze i mput ed i nt er est expense.
d. Nei t her Sar ah s nor t he cor por at i on s gr oss i ncome i s af f ect ed
by t he l oans because no i nt er est was char ged.
e. None of t he above.


491. Shar on made a $60, 000 i nt er est - f r ee l oan t o her son, Todd, who
used t he money t o st ar t a new busi ness. Todd s onl y sour ces of i ncome
wer e $25, 000 f r omt he busi ness and $490 of i nt er est on hi s checki ng
account . The r el evant Feder al i nt er est r at e was 5%. Based on t he above
i nf or mat i on:

a. Todd s busi ness net pr of i t wi l l be r educed by $3, 000 ( . 05
$60, 000) of i nt er est expense.
b. Shar on must r ecogni ze $3, 000 ( . 05 $60, 000) of i mput ed
i nt er est i ncome on t he bel ow- mar ket l oan.
c. Todd s gr oss i ncome must be i ncr eased by t he $3, 000 ( . 05
$60, 000) i mput ed i nt er est i ncome on t he bel ow mar ket l oan.
*d. Shar on does not r ecogni ze any i mput ed i nt er est i ncome and
Todd does not r ecogni ze any i mput ed i nt er est expense.
e. None of t he above i s cor r ect .


492. J ay, a si ngl e t axpayer , r et i r ed f r omhi s j ob as a publ i c school
t eacher i n 2013. He i s t o r ecei ve a r et i r ement annui t y of $1, 200 each
mont h and hi s l i f e expect ancy i s 180 mont hs. He cont r i but ed $36, 000 t o
t he pensi on pl an dur i ng hi s 35- year car eer ; so hi s adj ust ed basi s i s
$36, 000. J ay col l ect ed 192 payment s bef or e he di ed. What i s t he
cor r ect met hod f or r epor t i ng t he pensi on i ncome?

a. Si nce J ay i s no l onger wor ki ng, none of t he pensi on payment s
must be i ncl uded i n hi s gr oss i ncome.
b. The f i r st $36, 000 r ecei ved i s a nont axabl e r ecover y of capi t al ,
and al l subsequent annui t y payment s ar e t axabl e.
c. The f i r st $180, 000 he r ecei ves i s t axabl e and t he l ast $36, 000
i s a nont axabl e r ecover y of capi t al .
*d. Al l of t he l ast 12 payment s he r ecei ved ( $14, 400) ar e t axabl e.
e. None of t he above.


493. I n 2013, Todd pur chased an annui t y f or $150, 000. The annui t y i s t o
pay hi m$2, 500 per mont h f or t he r est of hi s l i f e. Hi s l i f e expect ancy
i s 100 mont hs. Whi ch of t he f ol l owi ng i s cor r ect ?

a. Todd i s not r equi r ed t o r ecogni ze any i ncome unt i l he has
col l ect ed 60 payment s ( 60 $2, 500 = $150, 000) .
b. I f Todd col l ect s 30 payment s and t hen di es i n 2015, Todd s
est at e shoul d amend hi s t ax r et ur ns f or 2013 and 2014 and
el i mi nat e al l of t he r epor t ed i ncome f r omt he annui t y f or t hose
year s.
*c. For each $2, 500 payment r ecei ved i n t he f i r st year , Todd must
i ncl ude $1, 000 i n gr oss i ncome.
d. For each $2, 500 payment r ecei ved i n t he f i r st year , Todd must
i ncl ude $1, 500 i n gr oss i ncome.
e. None of t he above.


494. Set h, a cal endar year t axpayer , pur chased an annui t y f or $50, 000
i n 2011. The annui t y was t o pay hi m$3, 000 on t he f i r st day of each
year , begi nni ng i n 2011, f or t he r emai nder of hi s l i f e. Set h s l i f e
expect ancy at t he t i me he pur chased t he annui t y was 20 year s. I n 2013,
Set h devel oped a deadl y di sease, and doct or s est i mat ed t hat he woul d
l i ve f or no mor e t han 24 mont hs.

*a. I f Set h di es i n 2014, a l oss can be cl ai med on hi s f i nal
r et ur n f or hi s unr ecover ed cost of t he annui t y.
b. I f Set h di es i n 2014, hi s r et ur ns f or t he t wo pr evi ous year s
can be amended t o al l ocat e t he ent i r e cost of t he annui t y t o t he
year s i n whi ch he r ecei ved payment s and r epor t ed gr oss i ncome.
c. I f Set h i s st i l l al i ve at t he end of 2013, he i s not r equi r ed
t o r ecogni ze any gr oss i ncome because of hi s t er mi nal i l l ness.
d. I f Set h i s st i l l al i ve i n 2033, hi s r ecover y of capi t al f or
t hat year i s $500.
e. None of t he above.


495. Bet t y pur chased an annui t y f or $24, 000 i n 2013. Under t he cont r act ,
Bet t y wi l l r ecei ve $300 each mont h f or t he r est of her l i f e. Accor di ng
t o t he act uar i al est i mat es, Bet t y wi l l l i ve t o r ecei ve 96 payment s and
wi l l r ecei ve a 3%r et ur n on her or i gi nal i nvest ment .

a. I f Bet t y col l ect s $3, 000 i n 2013, her gr oss i ncome i s $630
( . 03 $21, 000) .
b. Bet t y has no gr oss i ncome unt i l she has col l ect ed $24, 000.
*c. I f Bet t y l i ves t o col l ect mor e t han 96 payment s, al l of t he
amount s col l ect ed af t er t he 96t h payment must be i ncl uded i n
t axabl e i ncome.
d. I f Bet t y l i ves t o col l ect onl y 60 payment s bef or e her deat h,
she wi l l r epor t a $6, 000 l oss f r omt he annui t y [ $24, 000 ( 60
$300) = $6, 000] on her f i nal r et ur n.
e. None of t he above.


496. Gor don, an empl oyee, i s pr ovi ded gr oup t er ml i f e i nsur ance
cover age equal t o t wi ce hi s annual sal ar y of $125, 000 per
year . Accor di ng t o t he I RS Uni f or mPr emi umTabl e ( based on Gor don s
age) , t he amount i s $12 per year f or $1, 000 of pr ot ect i on. The cost of
an i ndi vi dual pol i cy woul d be $15 per year f or $1, 000 of pr ot ect i on.
Si nce Gor don pai d not hi ng t owar ds t he cost of t he $250, 000 pr ot ect i on,
Gor don must i ncl ude i n hi s 2012 gr oss i ncome whi ch of t he f ol l owi ng
amount s?

a. $1, 350.
*b. $2, 400.
c. $3, 000.
d. $3, 750.
e. None of t he above.


497. Gr een, I nc. , pr ovi des gr oup t er ml i f e i nsur ance f or al l of i t s
empl oyees. The cover age equal s t wi ce t he empl oyee s annual sal ar y. Sam,
a vi ce- pr esi dent , wor ked al l year f or Gr een, I nc. , and r ecei ved
$200, 000 of cover age f or t he year at a cost t o Gr een of $1, 500. The
Uni f or mPr emi ums ( based on Sam s age) ar e $. 25 per mont h f or $1, 000 of
pr ot ect i on. How much must Sami ncl ude i n gr oss i ncome t hi s year ?

a. $0.
b. $375.
*c. $450.
d. $600.
e. None of t he above.


498. Tur ner , I nc. , pr ovi des gr oup t er ml i f e i nsur ance t o t he of f i cer s
of t he cor por at i on onl y. J anet , a vi ce- pr esi dent , r ecei ved $400, 000 of
cover age f or t he year at a cost t o Tur ner , I nc. of $5, 600. The Uni f or m
Pr emi ums ( based on J anet s age) ar e $15 a year f or $1, 000 pr ot ect i on.
How much of t hi s must J anet i ncl ude i n gr oss i ncome t hi s year ?

a. $0.
b. $2, 700.
c. $5, 600.
*d. $6, 000.
e. None of t he above.


499. The amount of Soci al Secur i t y benef i t s r ecei ved by an i ndi vi dual
t hat he or she must i ncl ude i n gr oss i ncome:

a. I s comput ed i n t he same manner as an annui t y [ excl usi on =
( cost / expect ed r et ur n) amount r ecei ved] .
b. May not exceed t he por t i on cont r i but ed by t he empl oyer .
c. May not exceed 50%of t he Soci al Secur i t y benef i t s r ecei ved.
*d. May be zer o or as much as 85%of t he Soci al Secur i t y benef i t s
r ecei ved, dependi ng upon t he t axpayer s Soci al Secur i t y benef i t s
and ot her i ncome.
e. None of t he above.


500. The t axabl e por t i on of Soci al Secur i t y benef i t s may be af f ect ed by:

a. The t axpayer s i t emi zed deduct i ons.
*b. The i ndi vi dual s t ax- exempt i nt er est i ncome.
c. The number of quar t er s t he i ndi vi dual wor ked.
d. The i ndi vi dual s st andar d deduct i on.
e. None of t he above.


501. Debbi e i s age 67 and unmar r i ed and her onl y sour ces of i ncome ar e
$200, 000 i n t axabl e i nt er est and $20, 000 of Soci al Secur i t y benef i t s.
Debbi e s adj ust ed gr oss i ncome f or t he year i s:

a. $220, 000.
*b. $217, 000.
c. $203, 000.
d. $200, 000.
e. None of t he above.


502. Our t ax l aws encour age t axpayer s t o ____ asset s t hat have
appr eci at ed i n val ue and ____ asset s t hat have decl i ned i n val ue.

a. sel l , keep.
b. sel l , sel l .
*c. keep, sel l .
d. keep, keep.
e. None of t he above.


503. Mar gar et owns l and t hat appr eci at es at t he r at e of 10%each year .
Ral ph owns a zer o coupon ( i . e. , al l of t he i nt er est i s pai d at mat ur i t y
but i s t axed annual l y) cor por at e bond wi t h a yi el d t o mat ur i t y of 10%.
At t he end of 10 year s, t he bond wi l l mat ur e and t he l and wi l l be sol d.
At t he end of t he 10 year s,

a. Mar gar et and Ral ph wi l l have accumul at ed t he same af t er - t ax
amount s.
b. Ral ph wi l l have accumul at ed a gr eat er af t er - t ax amount because
t he i nt er est on t he bond i s t ax- exempt .
c. Mar gar et wi l l have accumul at ed t he gr eat er af t er - t ax amount
because t he gai n on t he l and i s t ax- exempt .
d. Mar gar et wi l l have accumul at ed t he gr eat er af t er - t ax amount
but onl y i f her mar gi nal t ax r at e never exceeds 27%.
*e. Mar gar et wi l l accumul at e t he gr eat er af t er - t ax amount because
she ear ns a r et ur n on t he def er r ed t axes.


504. Ted was shoppi ng f or a new aut omobi l e. He f ound one t hat met hi s
needs and agr eed t o pur chase i t f or $23, 000. He had shopped ar ound and
concl uded t hat he coul d not get a bet t er pr i ce f r omanot her
deal er . Af t er he had pai d f or t he aut omobi l e, t he deal er cal l ed t o
not i f y Ted t hat he was ent i t l ed t o a manuf act ur er s r ebat e of
$1, 500. The next week he r ecei ved a $1, 500 check f r omt he manuf act ur er .
How much shoul d Ted i ncl ude i n gr oss i ncome?

Cor r ect Answer :
Per haps i n Ted s mi nd he i s $1, 500 r i cher as a r esul t of t he r ebat e,
si nce he was wi l l i ng t o pay $23, 000 f or t he aut omobi l e wi t hout any
knowl edge of t he f act t hat he was ent i t l ed t o t he r ebat e. However ,
f r omt he poi nt of vi ew of measur i ng gr oss i ncome, one coul d r eason t hat
he pur chased an aut omobi l e f or a net cost of $21, 500 ( $23, 000
$1, 500) . The f act t hat t he net cost i s l ess t han t he amount Ted was
wi l l i ng t o pay shoul d not af f ect t he det er mi nat i on of gr oss i ncome.


505. Det er mi ne t he pr oper t ax year f or gr oss i ncome i ncl usi on i n each
of t he f ol l owi ng cases.
a. An aut omobi l e deal er has sever al new car s
i n i nvent or y, but of t en does not have t he
r i ght combi nat i on of body st yl e, col or , and
accessor i es. I n some cases t he deal er makes
an of f er t o sel l a car at a cer t ai n pr i ce,
accept s a deposi t , and t hen or der s t he car
f r omt he manuf act ur er . When t he car i s
r ecei ved f r omt he manuf act ur er , t he sal e i s
cl osed, and t he deal er r ecei ves t he bal ance
of t he sal es pr i ce. At t he end of t he
cur r ent year , t he deal er has deposi t s
t ot al i ng $8, 200 f or car s t hat have not been
r ecei ved f r omt he manuf act ur er . When i s t he
$8, 200 subj ect t o t ax?

b. Pur pl e Cor por at i on, an ext er mi nat i ng
company, i s a cal endar year t axpayer . I t
cont r act s t o pr ovi de ser vi ce t o homeowner s
once a mont h under a one- , t wo- , or t hr ee-
year cont r act . On Apr i l 1 of t he cur r ent
year , t he company sol d a cust omer a one-
year cont r act f or $120. How much of t he
$120 i s t axabl e i n t he cur r ent year i f t he
company i s an accr ual basi s t axpayer . I f
t he $120 i s payment on a t wo- year cont r act ,
how much i s t axed i n t he year t he cont r act
i s sol d and i n t he f ol l owi ng year ? I f t he
$120 i s payment on a t hr ee- year cont r act ,
how much i s t axed i n t he year t he cont r act
i s sol d and i n t he f ol l owi ng year ?

c. Pi nk, I nc. , an accr ual basi s t axpayer , owns
an amusement par k whose f i scal year ends
Sept ember 30. To i ncr ease busi ness dur i ng
t he f al l and wi nt er mont hs, Pi nk sol d
passes t hat woul d al l ow t he hol der t o r i de
f r ee dur i ng t he mont hs of Oct ober t hr ough
Mar ch. Dur i ng t he mont h of Sept ember ,
$6, 000 was col l ect ed f r omt he sal e of
passes f or t he upcomi ng f al l and wi nt er .
When wi l l t he $6, 000 be t axabl e t o Pi nk?

d. The t axpayer i s i n t he of f i ce equi pment
r ent al busi ness and uses t he accr ual basi s
of account i ng. I n December he col l ect ed
$5, 000 i n r ent s f or t he f ol l owi ng J anuar y.
When i s t he $5, 000 t axabl e?



Cor r ect Answer :
a. Reg. 1.451-5 specifies that accrual basis
taxpayers may defer the recognition of income
from advance payments for the future sale of
inventories that are not on hand the last day
of the year and the amount collected is less
than the sellers cost of the goods. The
$8,200 would not be includible in the gross
income of the dealer for the current year and
would be includible in gross income at the
time the sale is consummated upon delivery of
the car.

b. Revenue Procedure 2004-34 permits the accrual
basis taxpayer to amortize the prepaid income
for the first year under the contract.
However, the balance of the unearned income
must be recognized in the tax year following
the year of receipt. In the case of a contract
sold on April 1 that was for services over the
twelve-month period beginning on that date,
the taxpayer would recognize 9/12 of the
income in the year of sale, and the remaining
balance (3/12) in the following year. In the
case of a contract sold on April 1 that was
for services over the 24-month period
beginning on that date, the taxpayer would
recognize 9/24 of the income in the year of
sale and the remaining balance (15/24) in the
following year. In the case of a contract sold
on April 1 that was for services over the 36-
month period beginning on that date, the
taxpayer would recognize 9/36 of the income in
the year of sale and the remaining balance
(27/36) in the following year.

c. Revenue Procedure 2004-34 would permit
deferral of $6,000 from income until the
following tax year since all services will be
performed by the end of the tax year following
the year of receipt.

d. Prepaid rent is taxable in the year of receipt
to both the accrual and cash basis taxpayers.
Revenue Procedure 2004-34 is not applicable to
prepaid rent income.




506. On J anuar y 1, 2013, Faye gave Todd, her son, a 36- mont h
cer t i f i cat e of deposi t she pur chased December 31, 2011, f or $8, 638.
Faye gave Todd 1, 000 shar es of ABC, I nc. , on December 2, 2013. The
cer t i f i cat e had a mat ur i t y val ue of $10, 000 and t he yi el d t o mat ur i t y
was 5%. On November 30, 2013, ABC, I nc. , had decl ar ed a di vi dend of
$1. 00 payabl e t o st ockhol der s of r ecor d on December 5t h. How much
i nt er est and di vi dends shoul d Todd i ncl ude i n hi s gr oss i ncome f or 2013?

Cor r ect Answer :
Todd must r epor t $454 of i nt er est i ncome and no di vi dends. The
cer t i f i cat e of deposi t i s an or i gi nal i ssue di scount i nst r ument .
Ther ef or e, Faye shoul d have r epor t ed $432 ( . 05 $8, 638) of i nt er est
i ncome i n 2012, and t hus t he adj ust ed basi s of t he CD i s $9, 070 ( $8, 638
+ $432) . Todd must r epor t i nt er est i ncome f or 2013 cal cul at ed as
f ol l ows: $454 ( . 05 $9, 070) . The di vi dends had been decl ar ed bef or e
Todd r ecei ved t he st ock. Accor di ng t o t he I RS i n t hi s case, t he i ncome
bel ongs t o Faye si nce she was t he owner of t he st ock when t he di vi dend
was decl ar ed and she assi gned t o Todd t he r i ght t o r ecei ve i t .


507. J os, a cash met hod t axpayer , i s a par t ner i n J &T Account i ng
Ser vi ces, a cal endar year par t ner shi p. Under t he par t ner shi p agr eement ,
J os i s t o r ecei ve 20%of t he par t ner shi p s pr of i t s or l osses. Each
par t ner i s al l owed t o wi t hdr aw $10, 000 each mont h f or hi s or her l i vi ng
expenses. J os wi t hdr ew $120, 000 dur i ng t he year as hi s mont hl y dr aw i n
2013. However , i n December t he par t ner shi p was shor t on cash and J os
was r equi r ed t o i nvest an addi t i onal $10, 000 i n t he par t ner shi p. I n
Mar ch 2013, J os r ecei ved $40, 000 as hi s shar e of di st r i but ed 2012
pr of i t s. The par t ner shi p ear ni ngs bef or e par t ner s wi t hdr awal s f or 2013
t ot al ed $1 mi l l i on. Comput e J os s gr oss i ncome f r omt he par t ner shi p
f or 2013.

Cor r ect Answer :
J os s gr oss i ncome f r omt he par t ner shi p i s hi s shar e of t he
par t ner shi p pr of i t s of $200, 000 ( . 20 $1 mi l l i on) . The amount of t he
di st r i but i ons he r ecei ves ( a r ecover y of capi t al nor mal l y) gener al l y
does not af f ect t he amount he i ncl udes i n hi s gr oss i ncome. A
wi t hdr awal of pr of i t s i s anal ogous t o wi t hdr awi ng cash f r oma bank
account cr eat ed wi t h af t er - t ax ear ni ngs. Hi s i nvest ment i s a $10, 000
cont r i but i on t o capi t al .


508. Ted and Al i ce wer e i n t he pr ocess of negot i at i ng a di vor ce
agr eement . They own bonds wi t h a basi s of $800, 000 and a f ai r mar ket
val ue of $800, 000. They al so own common st ock wi t h a basi s of $600, 000
and a f ai r mar ket val ue of $800, 000. Al i ce i s t r yi ng t o deci de whet her
t o bar gai n t o r ecei ve t he bonds or t he st ock. She has no pl ans f or
sel l i ng t he bonds or st ock, whi chever she r ecei ves.

a. Whi ch woul d you advi se Al i ce t o r ecei ve?

b. Fr omTed s per spect i ve, ar e t he asset s of equal val ue?

Cor r ect Answer :
a. The si gni f i cant di f f er ence bet ween t he asset s f r om a t ax
per spect i ve i s t hat t he per son who r ecei ves t he st ock wi l l have a
$600, 000 basi s when t he val ue i s $800, 000. Ther ef or e, a t axabl e gai n
wi l l be r ecogni zed i f t he asset s ar e sol d f or mor e t han $600, 000. The
bonds do not have t hi s t axabl e gai n possi bi l i t y. Al i ce cannot be
absol ut el y cer t ai n t hat t he pr oper t y wi l l never be sol d; t her ef or e, she
shoul d accept t he bonds.

b. The bonds and stock are not of equal value because the
stock has the lower tax basis thus creating a potential tax liability upon
their sale.


509. Mar gar et made a $90, 000 i nt er est - f r ee l oan t o her son, Adam, who
used t he money t o r et i r e a mor t gage on hi s per sonal r esi dence and t o
buy a cer t i f i cat e of deposi t . Adam s onl y i ncome f or t he year i s hi s
sal ar y of $35, 000 and $1, 400 i nt er est i ncome on t he cer t i f i cat e of
deposi t . The r el evant Feder al i nt er est r at e i s 8%compounded
semi annual l y. The l oan i s out st andi ng f or t he ent i r e year .

a. Based on t he above i nf or mat i on, what i s t he
ef f ect of t he l oan on Mar gar et s gr oss
i ncome f or t he year ?

b. The f act s ar e t he same as above, except you
di scover ed t hat Mar gar et had made an
addi t i onal l oan of $15, 000 t o Adami n t he
pr evi ous year . Adamused t he f unds t o pay
hi s chi l d s pr i vat e school t ui t i on. What ar e
t he ef f ect s of t he l oans on Mar gar et s gr oss
i ncome?



Cor r ect Answer :
a. Margarets interest income from the loan is
$1,400, which is equal to Adams net
investment income for the year. Thus,
Margarets imputed interest income for the
year is $1,400, which is the lesser of the
imputed interest at the Federal rate of $7,344
[($90,000 8% 1/2) + ($93,600 8% 1/2)]
or Adams net investment income of $1,400.

b. Margarets loans to Adam exceed $100,000
($90,000 + $15,000). Therefore, Margaret must
recognize interest income equal to the Federal
rate times the outstanding loans.


(.08 $105,000 1/2) = $4,200; (.08 $109,200 1/2) =
$4,368

Total = $8,568


510. Ar nol d was empl oyed dur i ng t he f i r st si x mont hs of t he year and
ear ned a $90, 000 sal ar y. Dur i ng t he next 6 mont hs, he col l ect ed $7, 200
of unempl oyment compensat i on, bor r owed $6, 000 ( usi ng hi s per sonal
r esi dence as col l at er al ) , and wi t hdr ew $1, 000 f r omhi s savi ngs account
( i ncl udi ng $60 i nt er est ) . When he l ef t hi s f or mer empl oyer , he
wi t hdr ew hi s r et i r ement benef i t s ( a qual i f i ed annui t y) i n a l ump- sumof
$50, 000. He made no cont r i but i ons t o t he pl an. Ar nol d s par ent s
l oaned hi m$10, 000 ( i nt er est - f r ee) on J ul y 1 of t he cur r ent year , when
t he Feder al r at e was 3%. Ar nol d di d not r epay t he l oan dur i ng t he year
and used t he money f or l i vi ng expenses. Cal cul at e Ar nol d s adj ust ed
gr oss i ncome f or t he year .

Cor r ect Answer :
Salary $ 90,000
Unemployment compensation 7,200
Interest income 60
Retirement benefit 50,0
00
Adjusted gross income $147,260


The interest-free loan does not result in gross income to Arnold because of
the $10,000 exception.


511. How does t he t axat i on of Soci al Secur i t y benef i t s di f f er f r omt he
t axat i on of an annui t y pur chased by t he t axpayer ?

Cor r ect Answer :
I n case of Soci al Secur i t y benef i t s, t he t axpayer pays i nt o t he f und
out of hi s or her bef or e t ax ear ni ngs, and t he empl oyer mat ches t he
empl oyee s cont r i but i on. The amount of Soci al Secur i t y benef i t s t hat
ar e i ncl uded i n gr oss i ncome ( 50%or 85%) i s dependent upon t he
per son, s ot her i ncome combi ned wi t h t he Soci al Secur i t y benef i t . The
empl oyee s cont r i but i on t o t he Soci al Secur i t y f und does not di r ect l y
ent er i nt o t he cal cul at i on of t he t axabl e por t i on.

I n t he case of an annui t y pur chased by t he i ndi vi dual , t he t axabl e
por t i on i s comput ed by subt r act i ng f r omt he amount r ecei ved t he act ual
amount pai d by t he i ndi vi dual . The t axabl e por t i on i s spr ead over t he
i ndi vi dual s l i f e expect ancy, and a l oss i s r ecogni zed i f t he empl oyee
di es bef or e t he end of hi s or her l i f e expect ancy.


512. Sar ah, a wi dow, i s r et i r ed and r ecei ves $20, 000 i nt er est i ncome
and di vi dends and $10, 000 i n Soci al Secur i t y benef i t s. Sar ah i s
consi der i ng sel l i ng a st ock at a $8, 000 gai n. What wi l l be t he i ncr ease
i n Sar ah s gr oss i ncome as a r esul t of t he sal e of t he st ock?

Cor r ect Answer :
None of Sar ah s Soci al Secur i t y benef i t s wi l l be t axabl e i f she does
not sel l t he st ock {50%[ $20, 000 + 50%( $10, 000) $25, 000] = $0}.

The $8, 000 gai n wi l l cause Sar ah s t axabl e Soci al Secur i t y benef i t s t o
i ncr ease by $4, 000, whi ch i s t he l esser of t he f ol l owi ng:

50%($10,000) $5,000
50%[$28,000 + 50%($10,000)
$25,000]
$4,000


Therefore, the $8,000 gain will cause Sarahs gross income to increase by
$12,000 ($8,000 + $4,000).


513. Roy i s consi der i ng pur chasi ng l and f or $10, 000. He expect s t he
l and t o appr eci at e i n val ue 8%each year ( compounded) and he wi l l sel l
i t at t he end of 10 year s. He al so i s consi der i ng pur chasi ng a bond f or
$10, 000. The bond does not pay any annual i nt er est , but wi l l pay
$21, 589 at mat ur i t y i n 10 year s. The bef or e- t ax r at e of r et ur n on t he
bond i s 8%. Roy i s i n t he 40%( combi ned Feder al and St at e) mar gi nal t ax
br acket . Roy has ot her i nvest ment s t hat ear n a 8%bef or e- t ax r at e of
r et ur n. Gi ven t hat t he compound i nt er est f act or at 8%i s 2. 1589, and at
4. 8%t he f act or i s 1. 5981, whi ch al t er nat i ve shoul d Roy choose?

Cor r ect Answer :
Roy shoul d sel ect t he i nvest ment i n t he l and. The i nvest ment i n t he
bond ear ns a 4. 8%af t er - t ax r at e of r et ur n. The t ax on t he or i gi nal
i ssue di scount must be pai d each year ; t her ef or e, owni ng t he bond i s
equi val ent t o owni ng an i nvest ment t hat appr eci at es at an af t er - t ax
r at e of 4. 8%. At t he end of 10 year s, Roy wi l l have accumul at ed $15, 981
( 1. 5981 $10, 000) . Wi t h t he l and, Roy s i nvest ment wi l l appr eci at e t o
$21, 589 ( 2. 1589 $10, 000) whi ch exceeds t he $15, 981 amount accumul at ed
wi t h t he bond.


514. I n J anuar y 2013, Tammy pur chased a bond due i n 24 mont hs. The cost
of t he bond i s $857 and i t s mat ur i t y val ue i s $1, 000. No i nt er est i s
pai d each year , but t he compound i nt er est r at e on t he bond i s 8%. Tammy
al so pur chased a Ser i es EE Uni t ed St at es Gover nment bond f or $558, wi t h
a mat ur i t y val ue i n 10 year s of $1, 000. Thi s i s t he onl y Ser i es EE bond
she has ever owned. The Ser i es EE bond i s sol d t o yi el d 6%i nt er est .
Tammy i s 13 year s ol d and has no ot her sour ce of i ncome. She i s cl ai med
as a dependent by her par ent s. Comput e Tammy s gr oss i ncome f r omt he
bond and Ser i es EE bond f or 2013.

Cor r ect Answer :
Tammy s onl y r ecogni zed i ncome i s f r omt he or i gi nal i ssue di scount of
$69 ( $857 8%) on t he bond. The Ser i es EE bonds ar e exempt f r omt he
or i gi nal i ssue di scount r ul es. However , Tammy coul d el ect t o i ncl ude
t he or i gi nal i ssue di scount on t he Ser i es EE bond each year , and i t
appear s t hat t he el ect i on shoul d be made. Because Tammy has no ot her
sour ces of i ncome, t he ef f ect i ve t ax r at e on t he accr ued Ser i es EE bond
i nt er est i s zer o because of t he avai l abl e st andar d deduct i on of $900.
The i nt er est r epor t ed wi l l i ncr ease Tammy s basi s i n t he Ser i es EE bond
and, t her ef or e, she wi l l not have t o r ecogni ze any i ncome at mat ur i t y.
The i nt er est on t he Ser i es EE bond f or 2013, i f t he el ect i on i s made,
i s $33 ( $558 6%) .


515. I n some f or ei gn count r i es, t he t ax l aw speci f i cal l y desi gnat es t he
t ypes of i ncome i t ems t hat ar e i ncl udi bl e i n gr oss i ncome. How does
t hi s appr oach compar e wi t h t he U. S. I nt er nal Revenue Code ( 61) ? What
i s a maj or advant age t o t he appr oach used i n t he U. S. t ax l aw?

Cor r ect Answer :
The I nt er nal Revenue Code def i nes gr oss i ncome as al l i ncome unl ess
speci f i cal l y excl uded. The advant age of t he U. S. syst emi s t hat an al l -
i ncl usi ve l i st of t ypes of i ncome does not have t o be devel oped.


516. Mel i ssa i s a compul si ve coupon cl i pper . She of t en br ags about t he
t i me she pur chased a car t f ul l of gr ocer i es f or $5. 00, when t he cost
wi t hout coupons woul d have been $50. Di scuss whet her Mel i ssa r eal i zes
gr oss i ncome f r omher coupon cl i ppi ng.

Cor r ect Answer :
Under t he al l - i ncl usi ve concept of gr oss i ncome, one coul d r eason t hat
Mel i ssa r eal i zes i ncome f r omher coupon col l ect i ng act i vi t i es. She
cl ear l y i ncr eases her weal t h, as she acqui r es f ood at 1/ 10t h of t he
amount pai d by t hose who do not spend t hei r t i me and ef f or t savi ng
coupons. I n some cases, t he coupons may have been obt ai ned when ot her
goods wer e pur chased. One coul d r eason t hat t he pr i ce pai d i ncl uded a
cost of t he coupon; t hus, t he pr i ce pai d woul d be al l ocat ed bet ween t he
goods r ecei ved and t he cost of t he coupon. Then, when t he coupon was
ut i l i zed, t he di f f er ence bet ween Mel i ssa s cost and t he r edempt i on
val ue woul d be i ncome.

However , i t seems unl i kel y t hat t he I RS woul d at t empt t o t ax t he
ear ni ngs f r omcoupon cl i ppi ng because of t he t i me and ef f or t r equi r ed
t o col l ect smal l amount s of t axes.


517. Kat her i ne i s 60 year s ol d and i s bar gai ni ng wi t h her empl oyer over
def er r ed compensat i on. I n exchange f or r educi ng her cur r ent year s
sal ar y by $50, 000, she can r ecei ve a l ump- sumamount i n 5 year s, when
she wi l l r et i r e. I f she r ecei ves t he $50, 000 i n t he cur r ent year , she
wi l l i nvest i n cer t i f i cat es of deposi t t hat yi el d 5%. Kat her i ne i s i n
t he 28%mar gi nal t ax br acket i n al l r el evant year s. What i s t he
mi ni mumamount Kat her i ne shoul d accept as a def er r ed pay opt i on? [ Hi nt :
t he compound i nt er est f act or i s 1. 1934. ]

Cor r ect Answer :
$59,669

The $50,000 salary will be $36,000 [(1 .28)($50,000)] after-tax. When
this is invested in a CD that yields 3.6% [(1 .28)(.05)] after-tax for
five years, the compounded amount will be $42,962 ($36,000
1.1934). If a lump-sum is received in five years, it will be subject to
tax. Therefore, Katherine should receive at least $59,669 [$42,962/(1
.28)].


518. Di ck and J ane ar e di vor ced i n 2012. At t he t i me of t he di vor ce,
Di ck had a l awsui t pendi ng. He had f i l ed sui t agai nst a f or mer empl oyer
f or over t i me pay. As par t of a di vor ce agr eement , Di ck agr eed t o pay
J ane one- hal f of t he pr oceeds f r omt he l awsui t . I n 2013, Di ck col l ect ed
$250, 000 f r omt he f or mer empl oyer and pai d J ane $125, 000. What ar e t he
t ax consequences f or Di ck r ecei vi ng t he $250, 000 and t hen payi ng J ane
t he $125, 000?

Cor r ect Answer :
The $250, 000 payment i s addi t i onal gr oss i ncome t o Di ck. I n or der f or
Di ck t o avoi d t ax on t he $125, 000 he t r ansf er r ed t o J ane, t he payment
must qual i f y as al i mony. Thi s means t he payment must be made onl y i f
she i s al i ve at t he t i me Di ck r ecei ves t he awar d. Mor eover , even i f t he
payment qual i f i es as al i mony, t he l ar ge payment r ecei ved i n 2013 wi l l
pr obabl y r esul t i n some al i mony r ecapt ur e.


519. Rachel owns r ent al pr oper t i es. When Rachel r ent s t o a new t enant ,
she usual l y r equi r es t he t enant t o pay an amount i n addi t i on t o t he
f i r st mont h s r ent . The addi t i onal amount ser ves as secur i t y f or
damages t o t he pr oper t y and t he t enant s f ai l ur e t o pay f ut ur e r ent s.
How shoul d t he payment s be char act er i zed ( e. g. , on l ease document s) t o
mi ni mi ze Rachel s cur r ent t ax l i abi l i t y?

Cor r ect Answer :
The payment s shoul d be char act er i zed as damage deposi t s. Thi s wi l l
ensur e t hat t he I RS wi l l not t ax t he payment s as pr epai d i ncome. A
payment t o secur e f ut ur e r ent s woul d pr obabl y be t r eat ed as pr epai d
r ent i ncome.


520. Rachel , who i s i n t he 35%mar gi nal t ax br acket , i s consi der i ng
pur chasi ng an annui t y t hat wi l l pay her $10, 000 per year f or t he
r emai nder of her l i f e. Her l i f e expect ancy i s 15 year s. The cost of t he
annui t y i s $97, 120, and t he cost i s cal cul at ed t o yi el d her an expect ed
6%r et ur n on her i nvest ment . As an al t er nat i ve, Rachel coul d pl ace t he
$97, 120 i n a savi ngs account yi el di ng 6%and she coul d wi t hdr aw $10, 000
each year f or 15 year s ( r educi ng t he val ue of t he account t o zer o at
t he end of 15 year s) . How mi ght t he t ax l aws appl i cabl e t o annui t i es
af f ect Rachel s deci si on?

Cor r ect Answer :
The t ax l aws f avor t he pur chase of t he annui t y. Thi s r esul t s because
t he annui t y r ul es al l ow t he t axpayer t o r ecover hi s or her i nvest ment
mor e qui ckl y t han under t he savi ngs account pl an. Each al t er nat i ve
yi el ds t he same t axabl e i ncome over t he 15 year s. However , Rachel s
t axes ar e def er r ed wi t h t he annui t y cont r act . Under t he annui t y r ul es,
Rachel woul d t r eat as a r ecover y of capi t al $6, 475 ( $97, 120/ 15) each
year . Wi t h t he savi ngs account , Rachel has l ess r ecover y of capi t al i n
t he ear l y year s t han i n t he l at er year s. For exampl e, i n t he f i r st year
Rachel ear ns i nt er est on t he savi ngs account of $5, 827 ( $97, 120 . 06)
and has a r ecover y of capi t al of $4, 173 ( $10, 000 $5, 827) . Thus, t he
pr esent val ue of t he t axes ar e gr eat er wi t h t he savi ngs account .


521. I n t he case of a zer o i nt er est bel ow- mar ket l oan by a cor por at i on
t o a shar ehol der - empl oyee, what di f f er ence does i t make t o t he
cor por at i on and t he shar ehol der whet her t he l oan i s char act er i zed as a
cor por at i on s l oan t o i t s shar ehol der or a cor por at i on s l oan t o i t s
empl oyee?

Cor r ect Answer :
I mput ed i nt er est on t he l oan t o an empl oyee woul d cr eat e compensat i on
expense equal t o t he amount of i mput ed i nt er est t hat i s not char ged t he
empl oyee. The compensat i on expense woul d be deduct i bl e by t he
cor por at i on. On t he ot her hand, t he i mput ed i nt er est on t he shar ehol der
l oan cr eat es a non- deduct i bl e di vi dend pai d by t he cor por at i on. Fr om
t he shar ehol der - empl oyee s per spect i ve, di vi dend t r eat ment mi ght be
pr ef er abl e because t he di vi dends ar e not subj ect t o 1. 45%Medi car e t ax
and ar e el i gi bl e f or t he benef i ci al t ax r at e f or qual i f i ed di vi dends.


522. Under t he f or mul a f or t axi ng Soci al Secur i t y benef i t s, l ow i ncome
t axpayer s ar e not r equi r ed t o i ncl ude any of t he Soci al Secur i t y
benef i t s i n gr oss i ncome. But as i ncome i ncr eases, 50%of t he Soci al
Secur i t y benef i t s may be i ncl uded i n gr oss i ncome. Fur t her i ncr eases i n
i ncome wi l l cause as much as 85%of t he Soci al Secur i t y benef i t s bei ng
subj ect t o t ax. Does t hi s mean t hat t he t axat i on of Soci al Secur i t y
benef i t s i s mor e or l ess pr ogr essi ve t han t he t axat i on of ot her t ypes
of i ncome?

Cor r ect Answer :
The f or mul a f or t he t axat i on of Soci al Secur i t y benef i t s i s mor e
pr ogr essi ve t han t he t axat i on of ot her sour ces of i ncome. Under a
pr ogr essi ve syst em, as i ncome i ncr eases t he t ax as a per cent of i ncome
i ncr eases. Thi s i s accompl i shed by i ncr easi ng t he mar gi nal t ax r at e as
i ncome i ncr eases. Wi t h t he Soci al Secur i t y t axi ng f or mul a, as i ncome
i ncr eases, and t he t axpayer i s subj ect ed t o hi gher mar gi nal r at es, t he
amount of t axabl e i ncome i ncr eases as mor e of t he Soci al Secur i t y
benef i t s ar e subj ect t o t ax.


523. For a per son who i s i n t he 35%mar gi nal t ax br acket , $1, 000 of
t ax- exempt i ncome i s equi val ent t o $1, 350 of i ncome t hat i s subj ect t o
t ax.

a. Tr ue
*b. Fal se


524. J ohn t ol d hi s nephew, St eve, i f you mai nt ai n my house when I
cannot , I wi l l l eave t he house t o you when I di e. St eve mai nt ai ned t he
house and when J ohn di ed St eve i nher i t ed t he house. The val ue of t he
r esi dence can be excl uded f r omSt eve s gr oss i ncome as an i nher i t ance.

a. Tr ue
*b. Fal se


525. Br ooke wor ks par t - t i me as a wai t r ess i n a r est aur ant . For gr oups
of 7 or mor e cust omer s, t he cust omer i s char ged 15%of t he bi l l f or
Br ooke s ser vi ces. For par t i es of l ess t han 7, t he t i ps ar e
vol unt ar y. Br ooke r ecei ved $11, 000 f r omt he gr oups of 7 or mor e and
$7, 000 i n vol unt ar y t i ps f r omal l ot her cust omer s. Usi ng t he cust omar y
15%r at e, her vol unt ar y t i ps woul d have been onl y $6, 000. Br ooke must
i ncl ude $18, 000 ( $11, 000 + $7, 000) i n gr oss i ncome.

*a. Tr ue
b. Fal se


526. Mel was t he benef i ci ar y of a $45, 000 gr oup t er ml i f e i nsur ance
pol i cy on hi s wi f e. Hi s wi f e s empl oyer pai d al l of t he pr emi ums on
t he pol i cy. Mel used t he l i f e i nsur ance pr oceeds t o pur chase a Uni t ed
St at es Gover nment bond, whi ch pai d hi m$2, 500 i nt er est dur i ng t he
cur r ent year . Mel s Feder al gr oss i ncome f r omt he above i s $2, 500.

*a. Tr ue
b. Fal se


527. Zack was t he benef i ci ar y of a l i f e i nsur ance pol i cy on hi s wi f e.
Zack had pai d $20, 000 i n pr emi ums on t he pol i cy. He col l ect ed $50, 000
on t he pol i cy when hi s wi f e di ed f r oma t er mi nal i l l ness. Because i t
t ook sever al mont hs t o pr ocess t he cl ai m, t he i nsur ance company pai d
Zack $53, 000, t he f ace amount of t he pol i cy pl us $3, 000 i nt er est . Zack
must i ncl ude $23, 000 i n hi s gr oss i ncome.

a. Tr ue
*b. Fal se


528. Ed di ed whi l e empl oyed by Vi ol et Company. Hi s wi f e col l ect ed
$40, 000 on a gr oup t er ml i f e i nsur ance pol i cy t hat Vi ol et pr ovi ded i t s
empl oyees, and $6, 000 of accr ued sal ar y Ed had ear ned pr i or t o hi s
deat h. Al l of t he pr emi ums on t he gr oup t er ml i f e i nsur ance pol i cy
wer e excl uded f r omt he Ed s gr oss i ncome. Ed s wi f e i s r equi r ed t o
r ecogni ze as gr oss i ncome onl y t he $6, 000 she r ecei ved f or t he accr ued
sal ar y.

*a. Tr ue
b. Fal se


529. Gar y cashed i n an i nsur ance pol i cy on hi s l i f e. He needed t he
f unds t o pay f or hi s t er mi nal l y i l l wi f e s medi cal expenses. He had
pai d $12, 000 i n pr emi ums and he col l ect ed $30, 000 f r omt he i nsur ance
company. Gar y i s not r equi r ed t o i ncl ude t he gai n of $18, 000 ( $30, 000
$12, 000) i n gr oss i ncome.

a. Tr ue
*b. Fal se


530. When Bet t y was di agnosed as havi ng a t er mi nal i l l ness, she sol d
her l i f e i nsur ance pol i cy t o I nsur ance Pur chase, I nc. , a company t hat
i s l i censed t o i nvest i n t hese t ypes of cont r act s. Bet t y sol d t he
pol i cy f or $32, 000 and I nsur ance Pur chase, I nc. , became t he benef i ci ar y.
She had pai d t ot al pr emi ums of $19, 000. Bet t y di ed 8 mont hs af t er t he
sal e. I nsur ance Pur chase, I nc. , col l ect ed $50, 000 on t he pol i cy. The
company had pai d addi t i onal pr emi ums of $4, 000 on t he pol i cy. Bet t y i s
not r equi r ed t o r ecogni ze a $13, 000 gai n f r omt he sal e of her l i f e
i nsur ance pol i cy and I nsur ance Pur chase, I nc. , i s r equi r ed t o
r ecogni ze a $14, 000 gai n f r omt he i nsur ance pol i cy.

*a. Tr ue
b. Fal se


531. Agnes r ecei ves a $5, 000 schol ar shi p whi ch cover s her t ui t i on at
Par ochi al Hi gh School . She may not excl ude t he $5, 000 because t he
excl usi on appl i es onl y t o schol ar shi ps t o at t end col l ege.

a. Tr ue
*b. Fal se


532. I f a schol ar shi p does not sat i sf y t he r equi r ement s f or a gi f t , t he
schol ar shi p must be i ncl uded i n gr oss i ncome.

a. Tr ue
*b. Fal se


533. Ashl ey r ecei ved a schol ar shi p t o be used as f ol l ows: t ui t i on
$6, 000; r oomand boar d $9, 000; and books and l abor at or y suppl i es
$2, 000. Ashl ey i s r equi r ed t o i ncl ude onl y $9, 000 i n her gr oss i ncome.

*a. Tr ue
b. Fal se


534. I n December 2013, Emi l y, a cash basi s t axpayer , r ecei ved a $2, 500
cash schol ar shi p f or t he Spr i ng semest er of 2014. However , she di d not
use t he f unds t o pay t he t ui t i on unt i l J anuar y 2014. Emi l y can excl ude
t he $2, 500 f r omher gr oss i ncome i n 2013.

*a. Tr ue
b. Fal se


535. Bet t y r ecei ved a gr aduat e t eachi ng assi st ant shi p t hat was awar ded
on t he basi s of academi c achi evement . The payment s must be i ncl uded i n
her gr oss i ncome.

*a. Tr ue
b. Fal se


536. I n 2013, Ther esa was i n an aut omobi l e acci dent and suf f er ed
physi cal i nj ur i es. The acci dent was caused by Ramon s negl i gence. I n
2014, Ther esa col l ect ed f r omhi s i nsur ance company. She r ecei ved
$15, 000 f or l oss of i ncome, $10, 000 f or pai n and suf f er i ng, $50, 000 f or
puni t i ve damages, and $6, 000 f or medi cal expenses whi ch she had
deduct ed on her 2013 t ax r et ur n ( t he amount i n excess of 10%of
adj ust ed gr oss i ncome) . As a r esul t of t he above, Ther esa s 2014 gr oss
i ncome i s i ncr eased by $56, 000.

*a. Tr ue
b. Fal se


537. Wor ker s compensat i on benef i t s ar e i ncl uded i n gr oss i ncome i f t he
empl oyer al so pays t he empl oyee whi l e t he empl oyee i s r ecover i ng f r om
hi s or her i nj ur y.

a. Tr ue
*b. Fal se


538. Samwas unempl oyed f or t he f i r st t wo mont hs of 2013. Dur i ng t hat
t i me, he r ecei ved $4, 000 of st at e unempl oyment benef i t s. He wor ked f or
t he next si x mont hs and ear ned $14, 000. I n Sept ember , he was i nj ur ed
on t he j ob and col l ect ed $5, 000 of wor ker s compensat i on benef i t s.
Sam s Feder al gr oss i ncome f r omt he above i s $18, 000 ( $4, 000 + $14, 000) .

*a. Tr ue
b. Fal se


539. Sar ah s empl oyer pays t he hospi t al i zat i on i nsur ance pr emi ums f or a
pol i cy t hat cover s al l empl oyees and r et i r ed f or mer empl oyees. Af t er
Sar ah r et i r es, t he hospi t al i nsur ance pr emi ums pai d f or her by her
empl oyer can be excl uded f r omher gr oss i ncome.

*a. Tr ue
b. Fal se


540. Meg s empl oyer car r i es i nsur ance on i t s empl oyees t hat wi l l pay an
empl oyee hi s or her r egul ar sal ar y whi l e t he empl oyee i s away f r omwor k
due t o i l l ness. The pr emi ums f or Meg s cover age wer e $1, 800. Meg was
absent f r omwor k f or t wo mont hs as a r esul t of a ki dney i nf ect i on.
Meg s empl oyer s i nsur ance company pai d Meg s r egul ar sal ar y of $8, 000
whi l e she was away f r omwor k. Meg al so col l ect ed $2, 000 on a wage
cont i nuat i on pol i cy she had pur chased. Meg must i ncl ude $11, 800 i n her
gr oss i ncome.

a. Tr ue
*b. Fal se


541. Mel ody wor ks f or a company wi t h onl y 22 empl oyees. Her empl oyer
cont r i but ed $2, 000 t o her heal t h savi ngs account ( HSA) , and t he account
ear ned $100 i n i nt er est dur i ng t he year . Mel ody wi t hdr ew onl y $1, 200
t o pay medi cal expenses dur i ng t he year . Mel ody i s not r equi r ed t o
r ecogni ze any gr oss i ncome f r omt he HSA f or t he year .

*a. Tr ue
b. Fal se


542. I f an empl oyer pays f or t he empl oyee s l ong- t er mcar e i nsur ance
pr emi ums, t he empl oyee can excl ude f r omgr oss i ncome t he pr emi ums but
al l of t he benef i t s col l ect ed must be i ncl uded i n gr oss i ncome.

a. Tr ue
*b. Fal se


543. Empl oyees of a CPA f i r ml ocat ed i n Vi r gi ni a may excl ude f r omgr oss
i ncome t he meal s and l odgi ng pr ovi ded by t he empl oyer whi l e t hey wer e
on an audi t i n Texas.

a. Tr ue
*b. Fal se


544. Car l a i s a deput y sher i f f . Her empl oyer r equi r es t hat she l i ve i n
t he count y wher e she i s empl oyed. Housi ng i s ver y expensi ve; so t he
count y agr eed t o pay her $4, 800 per year t o cover t he hi gher cost of
housi ng. Car l a must i ncl ude t he housi ng suppl ement i n her gr oss i ncome.

*a. Tr ue
b. Fal se


545. Roger i s i n t he 35%mar gi nal t ax br acket . Roger s empl oyer has
cr eat ed a f l exi bl e spendi ng account f or medi cal and dent al expenses
t hat ar e not cover ed by t he company s heal t h i nsur ance pl an. Roger had
hi s sal ar y r educed by $1, 200 dur i ng t he year f or cont r i but i ons t o t he
f l exi bl e spendi ng pl an. However , Roger i ncur r ed onl y $1, 100 i n act ual
expenses f or whi ch he was r ei mbur sed. Under t he pl an, he must f or f ei t
t he $100 unused amount . Hi s af t er - t ax cost of over f undi ng t he pl an i s
$65.

*a. Tr ue
b. Fal se


546. Mauve Company per mi t s empl oyees t o occasi onal l y use t he copyi ng
machi ne f or per sonal pur poses. The copyi ng machi ne i s l ocat ed i n t he
of f i ce wher e t he hi gher pai d execut i ves wor k, so t hey occasi onal l y use
t he machi ne. However , t he machi ne i s not conveni ent f or use by t he
l ower pai d war ehouse empl oyees and, t hus, t hey never use t he copi er .
The use of t he copy machi ne may not be excl uded f r omgr oss i ncome
because t he benef i t i s di scr i mi nat or y.

a. Tr ue
*b. Fal se


547. Fr esh Baker y of t en has unsol d donut s at t he end of t he day. The
baker y al l ows empl oyees t o t ake t he l ef t over s home. The empl oyees ar e
not r equi r ed t o r ecogni ze gr oss i ncome because t he baker y does not
i ncur any addi t i onal cost .

a. Tr ue
*b. Fal se


548. Ni col e s empl oyer pays her $150 per mont h t owar ds t he cost of
par ki ng near a r ai l way st at i on wher e Ni col e cat ches t he t r ai n t o wor k.
The empl oyer al so pays t he cost of t he r ai l pass, $75 per mont h. Ni col e
can excl ude bot h of t hese payment s f r omher gr oss i ncome.

*a. Tr ue
b. Fal se


549. A U. S. ci t i zen who wor ks i n Fr ance f r omFebr uar y 1, 2013 unt i l
J anuar y 31, 2014 i s el i gi bl e f or t he f or ei gn ear ned i ncome excl usi on i n
2013 and 2014.

*a. Tr ue
b. Fal se


550. Gener al l y, a U. S. ci t i zen i s r equi r ed t o i ncl ude i n gr oss i ncome
t he sal ar y and wages ear ned whi l e wor ki ng i n a f or ei gn count r y even i f
t he f or ei gn count r y t axes t he i ncome.

a. Tr ue
*b. Fal se


551. Cal vi n mi scal cul at ed hi s i ncome i n 2011 and over pai d hi s st at e
i ncome t ax by $10, 000. I n 2013, he amended hi s 2011 st at e i ncome t ax
r et ur n and r ecei ved a $10, 000 r ef und and $900 i nt er est . Cal vi n i t emi zed
hi s deduct i ons i n 2011, deduct i ng $12, 000 i n st at e i ncome t ax and
$30, 000 t ot al i t emi zed deduct i ons. As a r esul t of t he amended r et ur n
i n 2013, Cal vi n must r ecogni ze $10, 900 of gr oss i ncome.

*a. Tr ue
b. Fal se


552. A cash basi s t axpayer t ook an i t emi zed deduct i on of $5, 500 f or
st at e i ncome t ax pai d i n 2013. Hi s t ot al i t emi zed deduct i ons i n 2013
wer e $18, 000. I n 2014, he r ecei ved a $900 r ef und of hi s 2013 st at e
i ncome t ax. The t axpayer must i ncl ude t he $900 r ef und i n hi s 2014
Feder al gr oss i ncome i n accor dance wi t h t he t ax benef i t r ul e.

*a. Tr ue
b. Fal se


553. The t axpayer i ncor r ect l y t ook a $5, 000 deduct i on ( e. g. ,
i ncor r ect l y cal cul at ed depr eci at i on) i n 2013 and as a r esul t hi s
t axabl e i ncome was r educed by $5, 000. The t axpayer di scover ed hi s
er r or i n 2014. The t axpayer must add $5, 000 t o hi s 2014 gr oss i ncome
i n accor dance wi t h t he t ax benef i t r ul e t o cor r ect f or t he 2013 er r or .

a. Tr ue
*b. Fal se


554. Mot her par t i ci pat ed i n a qual i f i ed st at e t ui t i on pr ogr amf or t he
benef i t of her son. She cont r i but ed $15, 000. When t he son ent er ed
col l ege, t he bal ance i n t he f und sat i sf i ed t he t ui t i on char ge of
$20, 000. When t he f unds wer e wi t hdr awn t o pay t he col l ege t ui t i on f or
her son, nei t her Mot her nor son must i ncl ude $5, 000 ( $20, 000 $15, 000)
i n gr oss i ncome.

*a. Tr ue
b. Fal se


555. The ear ni ngs f r oma qual i f i ed st at e t ui t i on pr ogr amaccount ar e
def er r ed f r omt axat i on unt i l t hey ar e used f or qual i f i ed hi gher
educat i on expenses. At t hat t i me, t he amount t aken f r omt he f und must
be i ncl uded i n t he gr oss i ncome of t he per son who cont r i but ed t o t he
account .

a. Tr ue
*b. Fal se


556. Benny l oaned $100, 000 t o hi s cont r ol l ed cor por at i on. When i t
became appar ent t he cor por at i on woul d not be abl e t o r epay t he l oan i n
t he near f ut ur e, Benny cancel ed t he debt . The cor por at i on shoul d t r eat
t he cancel l at i on as a nont axabl e cont r i but i on t o capi t al .

*a. Tr ue
b. Fal se


557. Zor k Cor por at i on was ver y pr of i t abl e and had accumul at ed excess
cash. The company deci ded t o r epur chase some of i t s bonds t hat had
been i ssued f or $1, 000, 000. Because of an i ncr ease i n mar ket i nt er est
r at es, Zor k was abl e t o r et i r e t he bonds f or $900, 000. The company i s
not r equi r ed t o r ecogni ze $100, 000 of i ncome f r omt he di schar ge of i t s
i ndebt edness but must r educe t he basi s i n i t s asset s.

a. Tr ue
*b. Fal se


558. Amber Machi ner y Company pur chased a bui l di ng f r omTed f or $250, 000
cash and a mor t gage of $750, 000. One year af t er t he t r ansact i on, t he
mor t gage had been r educed t o $725, 000 by pr i nci pal payment s by Amber ,
but i t was appar ent t hat Amber woul d not be abl e t o cont i nue t o make
t he mont hl y payment s on t he mor t gage. Ted r educed t he amount owed by
Amber t o $600, 000. Thi s r educed t he mont hl y payment s t o a l evel t hat
Amber coul d pay. Amber must r ecogni ze $125, 000 i ncome f r omt he
r educt i on i n t he debt by Ted.

a. Tr ue
*b. Fal se


559. The t axpayer s mar gi nal t ax br acket i s 25%. Whi ch woul d t he
t axpayer pr ef er ?

a. $1. 00 t axabl e i ncome r at her t han $1. 25 t ax- exempt i ncome.
b. $1. 00 t axabl e i ncome r at her t han $. 75 t ax- exempt i ncome.
c. $1. 25 t axabl e i ncome r at her t han $1. 00 t ax- exempt i ncome.
*d. $1. 40 t axabl e i ncome r at her t han $1. 00 t ax- exempt i ncome.
e. None of t he above.


560. Cash r ecei ved by an i ndi vi dual :

a. I s not i ncl uded i n gr oss i ncome i f i t was not ear ned.
b. I s not t axabl e unl ess t he payor i s l egal l y obl i gat ed t o make
t he payment .
c. Must al ways be i ncl uded i n gr oss i ncome.
*d. May be i ncl uded i n gr oss i ncome al t hough t he payor is not
l egal l y obl i gat ed t o make t he payment .
e. None of t he above.


561. Shar on had some i nsi der i nf or mat i on about a cor por at e
t akeover . She uni nt ent i onal l y i nf or med a f r i end, who i mmedi at el y
bought t he st ock i n t he t ar get cor por at i on. The t akeover occur r ed and
t he f r i end made a subst ant i al pr of i t f r ombuyi ng and sel l i ng t he
st ock. The f r i end t ol d Shar on about hi s st ock deal i ngs, and gave her a
pear l neckl ace because she made i t al l possi bl e. The neckl ace was
wor t h $10, 000, but she al r eady owned mor e j ewel r y t han she desi r ed.

a. The neckl ace i s a nont axabl e gi f t r ecei ved by Shar on because
t he f r i end was not l egal l y r equi r ed t o make t he gi f t .
b. The val ue of t he neckl ace i s not i ncl uded i n Shar on s gr oss
i ncome unl ess she sel l s i t .
c. The val ue of t he neckl ace i s not i ncl uded i n Shar on s gr oss
i ncome because passi ng t he i nf or mat i on was an i l l egal act and t he
SEC can conf i scat e t he neckl ace.
*d. The val ue of t he neckl ace must be i ncl uded i n Shar on s gr oss
i ncome f or t he t ax year i t was r ecei ved by her .
e. None of t he above.


562. Car i n, a wi dow, el ect ed t o r ecei ve t he pr oceeds of a $150, 000 l i f e
i nsur ance pol i cy on t he l i f e of her deceased husband i n 10 i nst al l ment s
of $17, 500 each. Her husband had pai d pr emi ums of $60, 000 on t he
pol i cy. I n t he f i r st year , Car i n col l ect ed $17, 500 f r omt he i nsur ance
company. She must i ncl ude i n gr oss i ncome:

a. $0.
*b. $2, 500.
c. $10, 000.
d. $25, 000.
e. None of t he above.


563. I r i s col l ect ed $150, 000 on her deceased husband s l i f e i nsur ance
pol i cy. The pol i cy was pur chased by t he husband s empl oyer under a
gr oup pol i cy. I r i s s husband had i ncl uded $5, 000 i n gr oss i ncome f r om
t he gr oup t er ml i f e i nsur ance pr emi ums dur i ng t he year s he wor ked f or
t he empl oyer . She el ect ed t o col l ect t he pol i cy i n 10 equal annual
payment s of $18, 000 each.

a. None of t he payment s must be i ncl uded i n I r i s s gr oss i ncome.
b. The amount she r ecei ves i n t he f i r st year i s a nont axabl e
r et ur n of capi t al .
c. For each $18, 000 payment t hat I r i s r ecei ves, she can excl ude
$500 ( $5, 000/ $180, 000 $18, 000) f r omgr oss i ncome.
*d. For each $18, 000 payment t hat I r i s r ecei ves, she can excl ude
$15, 000 ( $150, 000/ $180, 000 $18, 000) f r omgr oss i ncome.
e. None of t he above.


564. Tur quoi se Company pur chased a l i f e i nsur ance pol i cy on t he
company s chi ef execut i ve of f i cer , J oe. Af t er t he company had pai d
$400, 000 i n pr emi ums, J oe di ed and t he company col l ect ed t he $1. 5
mi l l i on f ace amount of t he pol i cy. The company al so pur chased gr oup
t er ml i f e i nsur ance on al l i t s empl oyees. J oe had i ncl uded $16, 000 i n
gr oss i ncome f or t he gr oup t er ml i f e i nsur ance pr emi ums. J oe s wi dow,
Rebecca, r ecei ved t he $100, 000 pr oceeds f r omt he gr oup t er ml i f e
i nsur ance pol i cy.

a. Rebecca can excl ude t he l i f e i nsur ance pr oceeds of $100, 000,
but Tur quoi se Company must i ncl ude $1, 100, 000 ( $1, 500, 000
$400, 000) i n gr oss i ncome.
*b. Tur quoi se Company and Rebecca can excl ude t he l i f e i nsur ance
pr oceeds of $1, 500, 000 and $100, 000, r espect i vel y, f r omgr oss
i ncome.
c. Tur quoi se Company can excl ude $1, 100, 000 ( $1, 500, 000
$400, 000) f r omgr oss i ncome, but Rebecca must i ncl ude $84, 000 i n
gr oss i ncome.
d. Tur quoi se Company must i ncl ude $1, 100, 000 ( $1, 500, 000
$400, 000) i n gr oss i ncome and Rebecca must i ncl ude $100, 000 i n
gr oss i ncome.
e. None of t he above.


565. Swan Fi nance Company, an accr ual met hod t axpayer , r equi r es al l of
i t s cust omer s t o car r y cr edi t l i f e i nsur ance. I f a cust omer di es, t he
company r ecei ves f r omt he i nsur ance company t he bal ance due on t he
cust omer s l oan. Al i , a cust omer , di ed owi ng Swan $1, 500. The bal ance
due i ncl uded $200 accr ued i nt er est t hat Swan has i ncl uded i n i ncome.
When Swan col l ect s $1, 500 f r omt he i nsur ance company, Swan:

a. Must r ecogni ze $1, 500 i ncome f r omt he l i f e i nsur ance pr oceeds.
b. Must r ecogni ze $1, 300 i ncome f r omt he l i f e i nsur ance pr oceeds.
c. Does not r ecogni ze i ncome because l i f e i nsur ance pr oceeds ar e
t ax- exempt .
*d. Does not r ecogni ze i ncome f r omt he l i f e i nsur ance because t he
ent i r e amount i s a r ecover y of capi t al .
e. None of t he above.


566. Ben was di agnosed wi t h a t er mi nal i l l ness. Hi s physi ci an est i mat ed
t hat Ben woul d l i ve no mor e t han 18 mont hs. Af t er he r ecei ved t he
doct or s di agnosi s, Ben cashed i n hi s l i f e i nsur ance pol i cy and used
t he pr oceeds t o t ake a t r i p t o see r el at i ves and f r i ends bef or e he
di ed. Ben had pai d $12, 000 i n pr emi ums on t he pol i cy, and he col l ect ed
$50, 000, t he cash sur r ender val ue of t he pol i cy. Henr y enj oys excel l ent
heal t h, but he cashed i n hi s l i f e i nsur ance pol i cy t o pur chase a new
home. He had pai d pr emi ums of $12, 000 and col l ect ed $50, 000 f r omt he
i nsur ance company.

a. Nei t her Ben nor Henr y i s r equi r ed t o r ecogni ze gr oss i ncome.
b. Bot h Ben and Henr y must r ecogni ze $38, 000 ( $50, 000 $12, 000)
of gr oss i ncome.
*c. Henr y must r ecogni ze $38, 000 ( $50, 000 $12, 000) of gr oss
i ncome, but Ben does not r ecogni ze any gr oss i ncome.
d. Ben must r ecogni ze $38, 000 ( $50, 000 $12, 000) of gr oss i ncome,
but Henr y does not r ecogni ze any gr oss i ncome.
e. None of t he above.


567. Al ber t had a t er mi nal i l l ness whi ch r equi r ed al most const ant
nur si ng car e f or t he r emai ni ng t wo year s of hi s est i mat ed l i f e,
accor di ng t o hi s doct or . Al ber t had a l i f e i nsur ance pol i cy wi t h a f ace
amount of $100, 000. Al ber t had pai d $25, 000 of pr emi ums on t he pol i cy.
The i nsur ance company has of f er ed t o pay hi m$80, 000 t o cancel t he
pol i cy, al t hough i t s cash sur r ender val ue was onl y $55, 000. Al ber t
accept ed t he $80, 000. Al ber t used $15, 000 t o pay hi s medi cal expenses.
Al ber t made a mi r acul ous r ecover y and l i ved anot her 20 year s. As a
r esul t of cashi ng i n t he pol i cy:

a. Al ber t must r ecogni ze $55, 000 of gr oss i ncome, but he has
$15, 000 of deduct i bl e medi cal expenses.
b. Al ber t must r ecogni ze $65, 000 ( $80, 000 $15, 000) of gr oss
i ncome.
c. Al ber t must r ecogni ze $40, 000 ( $80, 000 $25, 000 $15, 000) of
gr oss i ncome.
*d. Al ber t i s not r equi r ed t o r ecogni ze any gr oss i ncome because
of hi s t er mi nal i l l ness.
e. None of t he above.


568. A schol ar shi p r eci pi ent at St at e Uni ver si t y may excl ude f r omgr oss
i ncome t he schol ar shi p pr oceeds used t o pay f or :

a. Onl y t ui t i on.
*b. Tui t i on, books, and suppl i es.
c. Tui t i on, books, suppl i es, meal s, and l odgi ng.
d. Meal s and l odgi ng.
e. None of t he above.


569. Ron, age 19, i s a f ul l - t i me gr aduat e st udent at Ci t y Uni ver si t y.
Dur i ng 2013, he r ecei ved t he f ol l owi ng payment s:

Cash award for being the outstanding
resident adviser
$ 1,500
Resident adviser housing 2,500
State scholarship for ten months
(tuition and books)
6,000
State scholarship (meals allowance) 2,400
Loan from college financial aid
office
3,000
Cash support from parents 2,00
0
$17,400


Ron served as a resident advisor in a dormitory and, therefore, the
university waived the $2,500 charge for the room he occupied. What is
Rons adjusted gross income for 2013?

a. $1, 500.
*b. $3, 900.
c. $9, 000.
d. $15, 400.
e. None of t he above.


570. Bar ney i s a f ul l - t i me gr aduat e st udent at St at e Uni ver si t y. He
ser ves as a t eachi ng assi st ant f or whi ch he i s pai d $700 per mont h f or
9 mont hs and hi s $5, 000 t ui t i on i s wai ved. The uni ver si t y wai ves
t ui t i on f or al l of i t s empl oyees. I n addi t i on, he r ecei ves a $1, 500
r esear ch gr ant t o pur sue hi s own r esear ch and st udi es. Bar ney s gr oss
i ncome f r omt he above i s:

a. $0.
*b. $6, 300.
c. $11, 300.
d. $12, 800.
e. None of t he above.


571. J ena i s a f ul l - t i me under gr aduat e st udent at St at e Uni ver si t y and
i s cl ai med by her par ent s as a dependent . Her onl y sour ce of i ncome i s
a $10, 000 at hl et i c schol ar shi p ( $1, 000 f or books, $5, 500 t ui t i on, $500
st udent act i vi t y f ee, and $3, 000 r oomand boar d) . J ena s gr oss i ncome
f or t he year i s:

a. $10, 000.
b. $4, 000.
*c. $3, 000.
d. $500.
e. None of t he above.


572. As an execut i ve of Cher r y, I nc. , Ol l i e r ecei ves a f r i nge benef i t
i n t he f or mof annual t ui t i on schol ar shi ps of $10, 000 t o each of hi s
t hr ee chi l dr en. The schol ar shi ps ar e pai d by t he company di r ect l y t o
each chi l d s educat i onal i nst i t ut i on and ar e payabl e onl y i f t he
st udent mai nt ai ns a B aver age.

a. The t ui t i on payment s of $30, 000 may be excl uded f r omOl l i e s
gr oss i ncome as a schol ar shi p.
b. The t ui t i on payment s of $10, 000 each must be i ncl uded i n t he
chi l d s gr oss i ncome.
c. The t ui t i on payment s of $30, 000 may be excl uded f r omOl l i e s
gr oss i ncome because t he payment s ar e f or t he academi c
achi evement s of t he chi l dr en.
*d. The t ui t i on payment s of $30, 000 must be i ncl uded i n Ol l i e s
gr oss i ncome.
e. None of t he above.


573. The t axpayer i s a Ph. D. st udent i n account i ng at Ci t y Uni ver si t y.
The st udent i s pai d $1, 500 per mont h f or t eachi ng t wo cl asses. The
t ot al amount r ecei ved f or t he year i s $13, 500.

a. The $13, 500 i s excl udi bl e i f t he money i s used t o pay f or
t ui t i on and books.
*b. The $13, 500 i s t axabl e compensat i on.
c. The $13, 500 i s consi der ed a schol ar shi p and, t her ef or e, i s
excl uded.
d. The $13, 500 i s excl uded because t he t ot al amount r ecei ved f or
t he year i s l ess t han her st andar d deduct i on and per sonal
exempt i on.
e. None of t he above.


574. I n 2013, Khal i d was i n an aut omobi l e acci dent and suf f er ed
physi cal i nj ur i es. The acci dent was caused by Rashad s negl i gence.
Khal i d t hr eat ened t o f i l e a l awsui t agai nst Amber Tr ucki ng Company,
Rashad s empl oyer , cl ai mi ng $50, 000 f or pai n and suf f er i ng, $90, 000 f or
l oss of i ncome, and $70, 000 i n puni t i ve damages. Amber s i nsur ance
company wi l l not pay puni t i ve damages; t her ef or e, Amber has of f er ed t o
set t l e t he case f or $100, 000 f or pai n and suf f er i ng, $90, 000 f or l oss
of i ncome, and not hi ng f or puni t i ve damages. Khal i d i s i n t he 35%
mar gi nal t ax br acket . What i s t he af t er - t ax di f f er ence t o Khal i d
bet ween Khal i d s or i gi nal cl ai mand Amber s of f er ?

a. Amber s of f er i s $20, 000 l ess. ( $50, 000 + $90, 000 + $70, 000
$100, 000 $90, 000) .
b. Amber s of f er i s $7, 000 l ess. [ ( $50, 000 + $90, 000 + $70, 000
$100, 000 $90, 000) . 35) ] .
*c. Amber s of f er i s $4, 500 mor e. {$190, 000 ( $50, 000 + $90, 000)
+ [ $70, 000 ( 1 . 35) ] }.
d. Amber s of f er i s $22, 000 mor e. [ ( $190, 000 $210, 000) +
( $120, 000 . 35) ] .
e. None of t he above.


575. Chr i st i e sued her f or mer empl oyer f or a back i nj ur y she suf f er ed
on t he j ob i n 2013. As a r esul t of t he i nj ur y, she was par t i al l y
di sabl ed. I n 2014, she r ecei ved $240, 000 f or her l oss of f ut ur e i ncome,
$160, 000 i n puni t i ve damages because of t he empl oyer s f l agr ant
di sr egar d f or t he empl oyee s saf et y, and $15, 000 f or medi cal
expenses. The medi cal expenses wer e deduct ed on her 2013 r et ur n,
r educi ng her t axabl e i ncome by $12, 000. Chr i st i e s 2014 gr oss i ncome
f r omt he above i s:

a. $415, 000.
b. $412, 000.
c. $255, 000.
d. $175, 000.
*e. $172, 000.


576. Ear l y i n t he year , Mar i on was i n an aut omobi l e acci dent dur i ng t he
cour se of hi s empl oyment . As a r esul t of t he physi cal i nj ur i es he
sust ai ned, he r ecei ved t he f ol l owi ng payment s dur i ng t he year :

Reimbursement of medical expenses
Marion paid by a medical insurance
policy he purchased
$10,000
Damage settlement to replace his lost
salary
15,000


What is the amount that Marion must include in gross income for the current
year?

a. $25, 000.
b. $15, 000.
c. $12, 500.
d. $10, 000.
*e. $0.


577. Ther esa sued her f or mer empl oyer f or age, r ace, and gender
di scr i mi nat i on. She cl ai med $200, 000 i n damages f or l oss of i ncome,
$300, 000 f or emot i onal har m, and $500, 000 i n puni t i ve damages. She
set t l ed t he cl ai mf or $700, 000. As a r esul t of t he set t l ement , Ther esa
must i ncl ude i n gr oss i ncome:

*a. $700, 000.
b. $500, 000.
c. $490, 000 [ ( $700, 000/ $1, 000, 000) $700, 000] .
d. $0.
e. None of t he above.


578. J ack r ecei ved a cour t awar d i n a ci vi l l i bel and sl ander sui t
agai nst National Gossip. He r ecei ved $120, 000 f or damages t o hi s
pr of essi onal r eput at i on, $100, 000 f or damages t o hi s per sonal
r eput at i on, and $50, 000 i n puni t i ve damages. J ack must i ncl ude i n hi s
gr oss i ncome as a damage awar d:

a. $0.
b. $100, 000.
c. $120, 000.
*d. $270, 000.
e. None of t he above.


579. Ol af was i nj ur ed i n an aut omobi l e acci dent and r ecei ved $25, 000
f or hi s physi cal i nj ur y, $50, 000 f or hi s l oss of i ncome, and $10, 000
puni t i ve damages. As a r esul t of t he awar d, t he amount Ol af must
i ncl ude i n gr oss i ncome i s:

*a. $10, 000.
b. $50, 000.
c. $60, 000.
d. $85, 000.
e. None of t he above.


580. The excl usi on f or heal t h i nsur ance pr emi ums pai d by t he empl oyer
appl i es t o:

a. Onl y cur r ent empl oyees and t hei r spouses.
b. Onl y cur r ent empl oyees and t hei r spouses and dependent s.
c. Onl y cur r ent empl oyees and t hei r di sabl ed spouses.
*d. Pr esent empl oyees, r et i r ed f or mer empl oyees, and t hei r
spouses and dependent s.
e. None of t he above.


581. J ul i e was suf f er i ng f r oma vi r al i nf ect i on t hat caused her t o mi ss
wor k f or 90 days. Dur i ng t he f i r st 30 days of her absence, she r ecei ved
her r egul ar sal ar y of $8, 000 f r omher empl oyer . For t he next 60 days,
she r ecei ved $12, 000 under an acci dent and heal t h i nsur ance pol i cy
pur chased by her empl oyer . The pr emi ums on t he heal t h i nsur ance pol i cy
wer e excl uded f r omher gr oss i ncome. Dur i ng t he l ast 30 days, J ul i e
r ecei ved $6, 000 on an i ncome r epl acement pol i cy she had pur chased. Of
t he $26, 000 she r ecei ved, J ul i e must i ncl ude i n gr oss i ncome:

a. $0.
b. $6, 000.
c. $8, 000.
d. $14, 000.
*e. $20, 000.


582. Mat i l da wor ks f or a company wi t h 1, 000 empl oyees. The company has
a hospi t al i zat i on i nsur ance pl an t hat cover s al l empl oyees. However ,
t he empl oyee must pay t he f i r st $3, 000 of hi s or her medi cal expenses
each year . Each year , t he empl oyer cont r i but es $1, 500 t o each
empl oyee s heal t h savi ngs account ( HSA) . Mat i l da s empl oyer made t he
cont r i but i ons i n 2012 and 2013, and t he account ear ned $100 i nt er est i n
2013. At t he end of 2013, Mat i l da wi t hdr ew $3, 100 f r omt he account t o
pay t he deduct i bl e por t i on of her medi cal expenses f or t he year and
ot her medi cal expenses not cover ed by t he hospi t al i zat i on i nsur ance
pol i cy. As a r esul t , Mat i l da must i ncl ude i n her 2013 gr oss i ncome:

*a. $0.
b. $100.
c. $1, 600.
d. $3, 100.
e. None of t he above.


583. Al l empl oyees of Uni t ed Company ar e cover ed by a gr oup
hospi t al i zat i on i nsur ance pl an, but t he empl oyees must pay t he pr emi ums
( $8, 000 f or each empl oyee) . None of t he empl oyees has suf f i ci ent
medi cal expenses t o deduct t he pr emi ums. I nst ead of gi vi ng r ai ses next
year , Uni t ed i s consi der i ng payi ng t he empl oyee s hospi t al i zat i on
i nsur ance pr emi ums. I f t he change i s made, t he empl oyee s af t er - t ax
and i nsur ance pay wi l l :

a. Decr ease by t he same amount f or al l empl oyees.
b. I ncr ease mor e f or t he l ower pai d empl oyees ( 10%and 15%
mar gi nal t ax br acket ) .
*c. I ncr ease mor e f or t he hi gher i ncome ( 35% mar gi nal t ax br acket )
empl oyees.
d. I ncr ease by t he same amount f or al l empl oyees.
e. None of t he above.


584. The pl ant uni on i s negot i at i ng wi t h t he Eagl e Company, whi ch i s on
t he ver ge of bankr upt cy. Eagl e has of f er ed t o pay f or t he empl oyees
hospi t al i zat i on i nsur ance i n exchange f or a wage r educt i on. The
empl oyees each cur r ent l y pay pr emi ums of $4, 000 a year f or t hei r
i nsur ance.

a. I f an empl oyee s wages ar e r educed by $5, 000 and t he empl oyee
i s i n t he 28%mar gi nal t ax br acket , t he empl oyee woul d benef i t
f r omt he of f er .
b. I f an empl oyee s wages ar e r educed by $4, 000 and t he empl oyee
i s i n t he 15%mar gi nal t ax br acket , t he empl oyee woul d benef i t
f r omt he of f er .
c. I f an empl oyee s wages ar e r educed by $6, 000 and t he empl oyee
i s i n t he 35%mar gi nal t ax br acket , t he empl oyee woul d benef i t
f r omt he of f er .
*d. a. , b. , and c.
e. None of t he above.


585. J ames, a cash basi s t axpayer , r ecei ved t he f ol l owi ng compensat i on
and f r i nge benef i t s i n 2013:

Salary $66,000
Disability income protection premiums 3,000
Long-term care insurance premiums 4,000


His actual salary was $72,000. He received only $66,000 because his
salary was garnished and the employer paid $6,000 on Jamess credit card
debt he owed. The wage continuation insurance is available to all
employees and pays the employee three-fourths of the regular salary if the
employee is sick or disabled. The long-term care insurance is available to
all employees and pays $150 per day towards a nursing home or similar
facility. What is Jamess gross income from the above?

a. $66, 000.
*b. $72, 000.
c. $73, 000.
d. $75, 000.
e. None of t he above.


586. The Fi r st Chance Casi no has gambl i ng f aci l i t i es, a bar , a
r est aur ant , and a hot el . Al l empl oyees ar e al l owed t o obt ai n f ood f r om
t he r est aur ant at no char ge dur i ng wor ki ng hour s. I n t he case of t he
empl oyees who oper at e t he gambl i ng f aci l i t i es, bar , and r est aur ant , 60%
of al l of Casi no s empl oyees, t he meal s ar e pr ovi ded f or t he
conveni ence of t he Casi no. However , t he hot el wor ker s, demanded equal
t r eat ment and t her ef or e wer e al so al l owed t o eat i n t he r est aur ant at
no char ge whi l e t hey ar e at wor k. Whi ch of t he f ol l owi ng i s cor r ect ?

a. Al l t he empl oyees ar e r equi r ed t o i ncl ude t he val ue of t he
meal s i n t hei r gr oss i ncome.
b. Onl y t he r est aur ant empl oyees may excl ude t he val ue of t hei r
meal s f r omgr oss i ncome.
c. Onl y t he empl oyees who wor k i n gambl i ng, t he bar , and t he
r est aur ant may excl ude t he meal s f r omgr oss i ncome.
*d. Al l of t he empl oyees may excl ude t he val ue of t he meal s f r om
gr oss i ncome.
e. None of t he above.


587. An empl oyee can excl ude f r omgr oss i ncome t he val ue of meal s
pr ovi ded by hi s or her empl oyer whenever :

a. The meal i s not ext r avagant .
*b. The meal s ar e pr ovi ded on t he empl oyer s pr emi ses f or t he
empl oyer s conveni ence.
c. Ther e ar e no pl aces t o eat near t he wor k l ocat i on.
d. The meal s ar e pr ovi ded f or t he conveni ence of t he empl oyee.
e. None of t he above.


588. Ri dge i s t he manager of a mot el . As a condi t i on of hi s empl oyment ,
Ri dge i s r equi r ed t o l i ve i n a r oomon t he pr emi ses so t hat he woul d be
t her e i n case of emer genci es. Ri dge consi der ed t hi s a f r i nge benef i t ,
si nce he woul d ot her wi se be r equi r ed t o pay $800 per mont h r ent . The
r oomt hat Ri dge occupi ed nor mal l y r ent ed f or $70 per ni ght , or $2, 100
per mont h. On t he aver age, 90%of t he mot el r ooms wer e occupi ed. As a
r esul t of t hi s r ent - f r ee use of a r oom, Ri dge i s r equi r ed t o i ncl ude i n
gr oss i ncome.

*a. $0.
b. $800 per mont h.
c. $2, 100 per mont h.
d. $1, 890 ( $2, 100 . 90) .
e. None of t he above.


589. Adamr epai r s power l i nes f or t he Egr et Ut i l i t i es Company. He i s
gener al l y wor ki ng on a power l i ne dur i ng t he l unch hour . He must eat
when and wher e he can and st i l l get hi s wor k done. He usual l y pur chases
somet hi ng at a conveni ence st or e and eat s i n hi s t r uck. Egr et
r ei mbur ses Adamf or t he cost of hi s meal s.

*a. Adammust i ncl ude t he r ei mbur sement i n hi s gr oss i ncome.
b. Adamcan excl ude t he r ei mbur sement f r omhi s gr oss i ncome si nce
t he meal s ar e pr ovi ded f or t he conveni ence of t he empl oyer .
c. Adamcan excl ude t he r ei mbur sement f r omhi s gr oss i ncome
because he eat s t he meal s on t he empl oyer s busi ness pr emi ses
( t he t r uck) .
d. Adammay excl ude f r omhi s gr oss i ncome t he di f f er ence bet ween
what he pai d f or t he meal s and what i t woul d have cost hi mt o eat
at home.
e. None of t he above.


590. Tommy, a seni or at St at e Col l ege, r ecei ves f r ee r oomand boar d as
f ul l compensat i on f or wor ki ng as a r esi dent advi sor at t he uni ver si t y
dor mi t or y. The r egul ar housi ng cont r act i s $2, 000 a year i n t ot al ,
$1, 200 f or l odgi ng and $800 f or meal s i n t he dor mi t or y. Tommy had t he
opt i on of r ecei vi ng t he meal s or $800 i n cash. Tommy accept ed t he meal s.
What must Tommy i ncl ude i n gr oss i ncome f r omwor ki ng as a r esi dent
advi sor ?

a. Al l i t ems can be excl uded f r omgr oss i ncome as a schol ar shi p.
*b. The meal s must be i ncl uded i n gr oss i ncome.
c. The meal s may be excl uded because he di d not r ecei ve cash.
d. The l odgi ng must be i ncl uded i n gr oss i ncome because i t was
compensat i on f or ser vi ces.
e. None of t he above.


591. Under t he Swan Company s caf et er i a pl an, al l f ul l - t i me empl oyees
ar e al l owed t o sel ect any combi nat i on of t he benef i t s bel ow, but t he
t ot al r ecei ved by t he empl oyee cannot exceed $8, 000 a year .

I. Group medical and hospitalization
insurance for the employee, $3,600 a year.
II. Group medical and hospitalization
insurance for the employees spouse and
children, $1,200 a year.
III. Child-care payments, actual cost but not
more than $4,800 a year.
IV. Cash required to bring the total of
benefits and cash to $8,000.


Which of the following statements is true?

a. Sam, a f ul l - t i me empl oyee, sel ect s choi ces I I and I I I and
$2, 000 cash. Hi s gr oss i ncome must i ncl ude t he $2, 000.
b. Paul , a f ul l - t i me empl oyee, el ect s t o r ecei ve $8, 000 cash
because hi s wi f e s empl oyer pr ovi ded t hese same i nsur ance
benef i t s f or hi m. Paul i s not r equi r ed t o i ncl ude t he $8, 000 i n
gr oss i ncome.
c. Sue, a f ul l - t i me empl oyee, el ect s t o r ecei ve choi ces I , I I and
$3, 200 f or I I I . Sue i s r equi r ed t o i ncl ude $3, 200 i n gr oss i ncome.
*d. Al l of t he above.
e. None of t he above.


592. Heat her i s a f ul l - t i me empl oyee of t he Dr ake Company and
par t i ci pat es i n t he company s f l exi bl e spendi ng pl an t hat i s avai l abl e
t o al l empl oyees. Whi ch of t he f ol l owi ng i s cor r ect ?

a. Heat her r educed her sal ar y by $1, 200, act ual l y spent $1, 500,
and r ecei ved onl y $1, 200 as r ei mbur sement f or her medi cal
expenses. Heat her s gr oss i ncome wi l l be r educed by $1, 500.
*b. Heat her r educed her sal ar y by $1, 200, and r ecei ved onl y $900
as r ei mbur sement f or her act ual medi cal expenses. She i s not
r ef unded t he $300 r emai ni ng bal ance, but her gr oss i ncome i s
r educed by $1, 200.
c. Heat her r educed her sal ar y by $1, 200, and r ecei ved onl y $800
as r ei mbur sement f or her medi cal expenses. She i s not r ef unded
t he $400. Her gr oss i ncome i s r educed by $800.
d. Heat her r educed her sal ar y by $1, 200, and r ecei ved onl y $900
as r ei mbur sement f or her medi cal expenses. She f or f ei t s t he $300.
Her gr oss i ncome i s r educed by $300.
e. None of t he above.


593. Empl oyees of t he Val l ey Count r y Cl ub ar e al l owed t o use t he gol f
cour se wi t hout char ge bef or e and af t er wor ki ng hour s on Mondays, when
t he number of pl ayer s on t he cour se i s at i t s l owest . Tom, an empl oyee
of t he count r y cl ub pl ayed 40 r ounds of gol f dur i ng t he year at no
char ge when t he non- empl oyee char ge was $20 per r ound.

a. Tommust i ncl ude $800 i n gr oss i ncome.
b. Tomi s not r equi r ed t o i ncl ude anyt hi ng i n gr oss i ncome
because i t i s a de mi ni mi s f r i nge benef i t .
c. Tomi s not r equi r ed t o i ncl ude t he $800 i n gr oss i ncome
because t he use of t he cour se was a gi f t .
*d. Tomi s not r equi r ed t o i ncl ude anyt hi ng i n gr oss i ncome
because t hi s i s a no- addi t i onal - cost ser vi ce f r i nge benef i t .
e. None of t he above.


594. The Royal Mot or Company manuf act ur es aut omobi l es. Empl oyees of t he
company can buy a new aut omobi l e f or Royal s cost pl us 2%. The
aut omobi l es ar e sol d t o deal er s at cost pl us 20%. Gener al l y, empl oyees
of Local Deal er , I nc. , ar e al l owed t o buy a new aut omobi l e f r omt he
company at t he deal er s cost . Of f i cer s of Local Deal er ar e al l owed t o
use a company vehi cl e ( f or per sonal use) at no cost .

*a. The empl oyees who buy aut omobi l es at a di scount ar e not
r equi r ed t o r ecogni ze i ncome f r omt he pur chase.
b. None of t he empl oyees who t ake advant age of t he f r i nge
benef i t s descr i bed above ar e r equi r ed t o r ecogni ze i ncome.
c. Empl oyees of Royal ar e r equi r ed t o r ecogni ze as gr oss i ncome
18%( 20% 2%) of t he cost of t he aut omobi l e pur chased.
d. Al l empl oyees must r ecogni ze gr oss i ncome f r omt hei r per sonal
use of t he company vehi cl es.
e. None of t he above.


595. Peggy i s an execut i ve f or t he Tan Fur ni t ur e Manuf act ur i ng Company.
Peggy pur chased f ur ni t ur e f r omt he company f or $9, 500, t he pr i ce Tan
or di nar i l y woul d char ge a whol esal er f or t he same i t ems. The r et ai l
pr i ce of t he f ur ni t ur e was $12, 500, and Tan s cost was $9, 000. The
company al so pai d f or Peggy s par ki ng space i n a gar age near t he of f i ce.
The par ki ng f ee was $600 f or t he year . Al l empl oyees ar e al l owed t o buy
f ur ni t ur e at a di scount ed pr i ce compar abl e t o t hat char ged t o Peggy.
However , t he company does not pay ot her empl oyees par ki ng f ees.
Peggy s gr oss i ncome f r omt he above i s:

*a. $0.
b. $600.
c. $3, 500.
d. $4, 100.
e. None of t he above.


596. The empl oyees of Mauve Account i ng Ser vi ces ar e per mi t t ed t o use
t he copy machi ne f or per sonal pur poses, pr ovi ded t he pr i vi l ege i s not
abused. Ed i s t he pr esi dent of a ci vi c or gani zat i on and uses t he
copi er t o make sever al copi es of t he or gani zat i on s agenda f or i t s
meet i ngs. The copi es made dur i ng t he year woul d have cost $150 at a
l ocal of f i ce suppl y.

a. Ed must i ncl ude $150 i n hi s gr oss i ncome.
b. Ed may excl ude t he cost of t he copi es as a no- addi t i onal cost
f r i nge benef i t .
c. Ed may excl ude t he cost of t he copi es onl y i f t he or gani zat i on
i s a cl i ent of Mauve.
*d. Ed may excl ude t he cost of t he copi es as a de minimis f r i nge
benef i t .
e. None of t he above.


597. The Per f ect i on Tax Ser vi ce gi ves empl oyees $12. 50 as supper
money when t hey ar e r equi r ed t o wor k over t i me, appr oxi mat el y 25 days
each year . The supper money r ecei ved:

a. Must be i ncl uded i n t he empl oyee s gr oss i ncome.
b. Must be i ncl uded i n t he empl oyee s gr oss i ncome i f t he
empl oyee does not spend i t f or supper .
c. May be excl uded f r omt he empl oyee s gr oss i ncome as a no-
addi t i onal cost f r i nge benef i t .
*d. May be excl uded f r omt he empl oyee s gr oss i ncome as a de
minimis f r i nge benef i t .
e. None of t he above.


598. The de minimis f r i nge benef i t :

a. Excl usi on appl i es onl y t o pr oper t y r ecei ved by t he empl oyee.
*b. Can be pr ovi ded on a di scr i mi nat or y basi s.
c. Excl usi on i s l i mi t ed t o $250 per year .
d. Excl usi on appl i es t o empl oyee di scount s.
e. None of t he above.


599. Eval uat e t he f ol l owi ng st at ement s:

I. De minimis fringe benefits are those that
are so immaterial that accounting for them
is impractical.
II. De minimis fringe benefits are subject to
strict anti-discrimination requirements.
III. Generally, a fringe benefit of less than
$50 is considered de minimis and can be
excluded from gross income.



*a. Onl y I i s t r ue.
b. Onl y I I I i s t r ue.
c. Onl y I and I I I ar e t r ue.
d. I , I I , and I I I ar e t r ue.
e. None of t he above.


600. Kr i st en s empl oyer owns i t s bui l di ng and pr ovi des par ki ng space
f or i t s empl oyees. The val ue of t he f r ee par ki ng i s $150 per
mont h. Kar en s empl oyer does not have par ki ng f aci l i t i es, but
r ei mbur ses i t s empl oyee f or t he cost of par ki ng i n a near by gar age, up
t o $150 per mont h.

a. Kr i st en and Kar en must r ecogni ze gr oss i ncome f r omt he par ki ng
ser vi ces.
b. Kr i st en can excl ude t he empl oyer pr ovi ded par ki ng f r omgr oss
i ncome, but Kar en must i ncl ude her r ei mbur sement i n gr oss i ncome.
c. Kr i st en must i ncl ude t he val ue of t he empl oyer pr ovi ded
par ki ng f r omher gr oss i ncome, but Kar en can excl ude her
r ei mbur sement f r omgr oss i ncome.
*d. Nei t her Kr i st en nor Kar en i s r equi r ed t o i ncl ude t he cost of
par ki ng i n gr oss i ncome.
e. None of t he above.


601. A company has a medi cal r ei mbur sement pl an f or of f i cer s t hat
cover s al l cost s t hat t he i nsur er wi l l not pay. However , f or al l
empl oyees who ar e not of f i cer s, t he medi cal r ei mbur sement pl an appl i es
onl y af t er t he empl oyee has pai d $1, 000 f r omhi s or her own f unds. An
of f i cer i ncur r ed $1, 500 i n medi cal expenses and was r ei mbur sed f or t hat
amount . An hour l y wor ker al so i ncur r ed $1, 500 i n medi cal expense and
was r ei mbur sed $500.

a. Bot h empl oyees must i ncl ude al l benef i t s r ecei ved i n gr oss
i ncome.
b. The of f i cer must i ncl ude $500 i n gr oss i ncome.
*c. The of f i cer must i ncl ude $1, 500 i n gr oss i ncome.
d. The hour l y empl oyee must i ncl ude $1, 000 i n gr oss i ncome.
e. None of t he above.


602. A U. S. ci t i zen wor ked i n a f or ei gn count r y f or t he per i od J ul y 1,
2012 t hr ough August 1, 2013. Her sal ar y was $10, 000 per mont h. Al so, i n
2012 she r ecei ved $5, 000 i n di vi dends f r omf or ei gn cor por at i ons ( not
qual i f i ed di vi dends) . No di vi dends wer e r ecei ved i n 2013. Whi ch of t he
f ol l owi ng i s cor r ect ?

a. The t axpayer cannot excl ude any of t he i ncome because she was
not pr esent i n t he f or ei gn count r y mor e t han 330 days i n ei t her
2012 or 2013.
b. The t axpayer can excl ude a por t i on of t he sal ar y f r omU. S.
gr oss i ncome i n 2012 and 2013, and al l of t he di vi dend i ncome.
c. The t axpayer can excl ude f r omU. S. gr oss i ncome $60, 000 sal ar y
i n 2012, but i n 2013 t he t axpayer wi l l exceed t he t wel ve mont h
l i mi t at i on and, t her ef or e, al l of t he 2013 compensat i on must be
i ncl uded i n gr oss i ncome. Al l of t he di vi dends must be i ncl uded
i n 2012 gr oss i ncome.
*d. The t axpayer must i ncl ude t he di vi dend i ncome of $5, 000 i n
2012 gr oss i ncome, but t he t axpayer can excl ude a por t i on of t he
compensat i on i ncome f r omU. S. gr oss i ncome i n 2012 and 2013.
e. None of t he above.


603. Loui se wor ks i n a f or ei gn br anch of her empl oyer s busi ness. She
ear ned $5, 000 per mont h t hr oughout t he r el evant per i od.

*a. I f Loui se wor ked i n t he f or ei gn br anch f r omMay 1, 2012 unt i l
Oct ober 31, 2013, she may excl ude $40, 000 f r omgr oss i ncome i n
2012 and excl ude $50, 000 i n 2013.
b. I f Loui se wor ked i n t he f or ei gn br anch f r omMay 1, 2012 unt i l
Oct ober 31, 2013, she cannot excl ude anyt hi ng f r omgr oss i ncome
because she was not pr esent i n t he count r y f or 330 days i n ei t her
year .
c. I f Loui se began wor k i n t he f or ei gn count r y on May 1, 2012,
she must wor k t hr ough November 30, 2013 i n or der t o excl ude
$55, 000 f r omgr oss i ncome i n 2013 but none i n 2012.
d. Loui se wi l l not be al l owed t o excl ude any f or ei gn ear ned
i ncome because she made l ess t han $97, 600.
e. None of t he above.


604. I n t he case of i nt er est i ncome f r omst at e and Feder al bonds:

a. I nt er est on Uni t ed St at es gover nment bonds r ecei ved by a st at e
r esi dent can be subj ect t o t hat st at e s i ncome t ax.
*b. I nt er est on Uni t ed St at es gover nment bonds i s subj ect t o
Feder al i ncome t ax.
c. I nt er est on bonds i ssued by St at e A r ecei ved by a r esi dent of
St at e B cannot be subj ect t o i ncome t ax i n St at e B.
d. Al l of t he above ar e cor r ect .
e. None of t he above ar e cor r ect .


605. Heat her s i nt er est and gai ns on i nvest ment s f or 2013 wer e as
f ol l ows:

Interest on Bland County school
bonds
$600
Interest on U.S. government bonds 700
Interest on a Federal income tax
refund
200
Gain on the sale of Bland County
school bonds
500


Heathers gross income from the above is:

a. $2, 000.
b. $1, 800.
*c. $1, 400.
d. $1, 300.
e. None of t he above.


606. Emi l y i s i n t he 35%mar gi nal t ax br acket . She can pur chase a Yor k
Count y school bond yi el di ng 3. 5%i nt er est and t he i nt er est i s not
subj ect t o a 5%st at e t ax. But she i s i nt er est ed i n ear ni ng a hi gher
r et ur n f or compar abl e r i sk.

a. I f she buys a cor por at e bond t hat pays 6%i nt er est , her af t er -
t ax r at e of r et ur n wi l l be l ess t han i f she pur chased t he Yor k
Count y school bond.
*b. I f she buys a U. S. gover nment bond payi ng 5%, her af t er - t ax
r at e of r et ur n wi l l be l ess t han i f she pur chased t he Yor k Count y
school bond.
c. I f she buys a common st ock payi ng a 4%di vi dend, her af t er - t ax
r at e of r et ur n wi l l be hi gher t han i f she pur chased t he Yor k
Count y school bond.
d. Al l of t he above ar e cor r ect .
e. None of t he above ar e cor r ect .


607. Doug and Pat t i e r ecei ved t he f ol l owi ng i nt er est i ncome i n t he
cur r ent year :

Savings account at Greenbacks Bank $4,000
United States Treasury bonds 250
Interest on State of Virginia bonds 200
Interest on Federal tax refund 150
Interest on state income tax refund 75


Greenbacks Bank also gave Doug and Pattie a cellular phone (worth $100) for
opening the savings account. What amount of interest income should they
report on their joint income tax return?

a. $4, 775.
b. $4, 675.
*c. $4, 575.
d. $4, 300.
e. None of t he above.


608. Geor ge, an unmar r i ed cash basi s t axpayer , r ecei ved t he f ol l owi ng
amount s dur i ng 2013:

Interest on savings accounts $2,000
Interest on a State tax refund 600
Interest on City of Salem school bonds 350
Interest portion of proceeds of a 5% bank
certificate of deposit purchased on
July 1, 2012, and matured on June
30, 2013
250
Dividends on USG common stock 300


What amount should George report as gross income from dividends and
interest for 2013?

a. $2, 300.
b. $2, 550.
*c. $3, 150.
d. $3, 500.
e. None of t he above.


609. St uar t owns 300 shar es of Tur quoi se Cor por at i on st ock and 2, 000
shar es of Bl ue Cor por at i on st ock. Dur i ng t he year , St uar t r ecei ved 150
shar es of Tur quoi se as a r esul t of a 1 f or 2 st ock spl i t . The val ue of
t he shar es r ecei ved was $4, 800. St uar t al so r ecei ved 100 shar es of Bl ue
Cor por at i on st ock as a r esul t of a 5%st ock di vi dend. St uar t di d not
have t he opt i on of r ecei vi ng cash f r omBl ue. The addi t i onal shar es he
r ecei ved had a val ue of $7, 200. St uar t s gr oss i ncome f r omt he r ecei pt
of t he addi t i onal Tur quoi se and Bl ue shar es i s:

*a. $0.
b. $4, 800.
c. $7, 200.
d. $12, 000.
e. None of t he above.


610. Assumi ng a t axpayer qual i f i es f or t he excl usi on t r eat ment , t he
i nt er est i ncome on educat i onal savi ngs bonds:

a. I s gr oss i ncome t o t he per son who pur chased t he bond i n t he
year t he i nt er est i s ear ned.
b. I s gr oss i ncome t o t he st udent i n t he year t he i nt er est i s
ear ned.
c. I s i ncl uded i n t he st udent s gr oss i ncome i n t he year t he
savi ngs bonds ar e sol d or r edeemed t o pay educat i onal expenses.
*d. I s not i ncl uded i n anyone s gr oss i ncome i f t he pr oceeds ar e
used t o pay col l ege t ui t i on.
e. None of t he above.


611. The excl usi on of i nt er est on educat i onal savi ngs bonds:

a. Appl i es onl y t o savi ngs bonds owned by t he chi l d.
*b. Appl i es t o par ent s who pur chase bonds f or whi ch t he pr oceeds
ar e used f or t hei r chi l d s educat i on.
c. Means t hat t he chi l d must i ncl ude t he i nt er est i n i ncome i f
t he bond i s owned by t he par ent .
d. Does appl y even i f used t o pay f or r oomand boar d.
e. None of t he above.


612. Mar t ha par t i ci pat ed i n a qual i f i ed t ui t i on pr ogr amf or t he benef i t
of her son. She i nvest ed $6, 000 i n t he f und. Four year s l at er her son
wi t hdr ew $8, 000, t he ent i r e bal ance i n t he pr ogr am, t o pay hi s col l ege
t ui t i on.

*a. Mar t ha i s not r equi r ed t o i ncl ude t he $2, 000 ( $8, 000 $6, 000)
i n her gr oss i ncome when t he f unds ar e used t o pay t he t ui t i on.
b. Mar t ha s son must i ncl ude t he $2, 000 ( $8, 000 $6, 000) i n hi s
gr oss i ncome when t he f unds ar e used t o pay t he t ui t i on.
c. Mar t ha must i ncl ude $8, 000 i n her gr oss i ncome.
d. Mar t ha s son must i ncl ude $8, 000 i n hi s gr oss i ncome.
e. None of t he above.


613. I n December 2013, Todd, a cash basi s t axpayer , pai d $1, 200 of f i r e
i nsur ance pr emi ums f or t he cal endar year 2014 on a bui l di ng he hel d f or
r ent al i ncome. Todd deduct ed t he $1, 200 of i nsur ance pr emi ums on hi s
2013 t ax r et ur n. He had $150, 000 of t axabl e i ncome t hat year . On J une
30, 2014, he sol d t he bui l di ng and, as a r esul t , r ecei ved a $500 r ef und
on hi s f i r e i nsur ance pr emi ums. As a r esul t of t he above:

a. Todd shoul d amend hi s 2013 r et ur n and cl ai m$500 l ess
i nsur ance expense.
*b. Todd shoul d i ncl ude t he $500 i n 2014 gr oss i ncome i n
accor dance wi t h t he t ax benef i t r ul e.
c. Todd shoul d add t he $500 t o hi s sal es pr oceeds f r omt he
bui l di ng.
d. Todd shoul d i ncl ude t he $500 i n 2014 gr oss i ncome i n
accor dance wi t h t he cl ai mof r i ght doct r i ne.
e. None of t he above.


614. Tonya i s a cash basi s t axpayer . I n 2013, she pai d st at e i ncome
t axes of $8, 000. I n ear l y 2014, she f i l ed her 2013 st at e i ncome t ax
r et ur n and r ecei ved a $900 r ef und.

a. I f Tonya i t emi zed her deduct i ons i n 2013 on her Feder al i ncome
t ax r et ur n, she shoul d amend her 2013 r et ur n and r educe her
i t emi zed deduct i ons by $900.
b. I f Tonya i t emi zed her deduct i ons i n 2013 on her Feder al i ncome
t ax r et ur n and her i t emi zed deduct i ons exceeded t he st andar d
deduct i on by at l east $900, t he r ef und wi l l not af f ect her 2014
t ax r et ur n.
c. I f Tonya i t emi zed her deduct i ons i n 2013 on her Feder al i ncome
t ax r et ur n, she must amend her 2013 Feder al i ncome t ax r et ur n and
use t he st andar d deduct i on.
*d. I f Tonya i t emi zed her deduct i ons i n 2013 on her Feder al
i ncome t ax r et ur n and her i t emi zed deduct i ons exceeded t he
st andar d deduct i on by mor e t han $900, she must r ecogni ze $900
i ncome i n 2014 under t he t ax benef i t r ul e.
e. None of t he above.


615. Har ol d bought l and f r omJ ewel f or $150, 000. Har ol d pai d $50, 000
cash and gave J ewel an 8%not e f or $100, 000. The not e was t o be pai d
over a f i ve- year per i od. When t he bal ance on t he not e was $80, 000,
J ewel began havi ng f i nanci al di f f i cul t i es. To accel er at e her cash
i nf l ows, J ewel agr eed t o accept $60, 000 cash f r omHar ol d i n f i nal
payment of t he not e pr i nci pal .

a. Har ol d must r ecogni ze $20, 000 ( $80, 000 $60, 000) of gr oss
i ncome.
*b. Har ol d i s not r equi r ed t o r ecogni ze gr oss i ncome, but must
r educe hi s cost basi s i n t he l and t o $130, 000.
c. Har ol d i s not r equi r ed t o r ecogni ze gr oss i ncome, si nce he
pai d t he debt bef or e i t was due.
d. J ewel must r ecogni ze gr oss i ncome of $20, 000 ( $80, 000
$60, 000) f r omdi schar ge of t he debt .
e. None of t he above.


616. Hazel , a sol vent i ndi vi dual but a r ecover i ng al cohol i c, embezzl ed
$6, 000 f r omher empl oyer . I n t he same year t hat she embezzl ed t he f unds,
her empl oyer di scover ed t he t hef t . Her empl oyer di d not f i r e her and
t ol d her she di d not have t o r epay t he $6, 000 i f she woul d at t end
Al cohol i cs Anonymous. Hazel met t he condi t i ons and her empl oyer
cancel ed t he debt .

a. Hazel di d not r eal i ze any i ncome because her empl oyer made a
gi f t t o her .
*b. Hazel must i ncl ude $6, 000 i n gr oss i ncome f r omdi schar ge of
i ndebt edness.
c. Hazel must i ncl ude $6, 000 i n gr oss i ncome under t he t ax
benef i t r ul e.
d. Hazel may excl ude t he $6, 000 f r omgr oss i ncome because t he
debt never exi st ed.
e. None of t he above.


617. Gol d Company was exper i enci ng f i nanci al di f f i cul t i es, but was not
bankr upt or i nsol vent . The Nat i onal Bank, whi ch hel d a mor t gage on
ot her r eal est at e owned by Gol d, r educed t he pr i nci pal f r om$110, 000 t o
$85, 000. The bank had made t he l oan t o Gol d when i t pur chased t he r eal
est at e f r omSi l ver , I nc. Pi nk, I nc. , t he hol der of a mor t gage on Gol d s
bui l di ng, agr eed t o accept $40, 000 i n f ul l payment of t he $55, 000 due.
Pi nk had sol d t he bui l di ng t o Gol d f or $150, 000 t hat was t o be pai d i n
i nst al l ment s over 8 year s. As a r esul t of t he above, Gol d must :

a. I ncl ude $40, 000 i n gr oss i ncome.
b. Reduce t he basi s i n i t s asset s by $40, 000.
*c. I ncl ude $25, 000 i n gr oss i ncome and r educe i t s basi s i n i t s
asset s by $15, 000.
d. I ncl ude $15, 000 i n gr oss i ncome and r educe i t s basi s i n t he
bui l di ng by $25, 000.
e. None of t he above.


618. On J anuar y 1, 2003, Car di nal Cor por at i on i ssued 5%25- year bonds
at par and used t he $12, 000, 000 pr oceeds t o f i nance t he const r uct i on of
a new pl ant . On J anuar y 1, 2013, t he company acqui r ed t he bonds on t he
open mar ket f or $11, 500, 000. Assumi ng t hat Car di nal Cor por at i on i s
nei t her bankr upt nor i nsol vent , t he acqui si t i on and r et i r ement of t he
bonds r esul t s i n whi ch of t he f ol l owi ng:

*a. The company must r ecogni ze a $500, 000 gai n.
b. The company can make an el ect i on t o r ecogni ze a $500, 000 gai n
or r educe t he company s basi s i n t he pl ant by $500, 000.
c. The company must r ecogni ze a $500, 000 gai n and i ncr ease t he
company s basi s i n t he pl ant by $500, 000.
d. The company can amor t i ze t he $500, 000 gai n, r ecogni zi ng i ncome
over t he r emai ni ng l i f e of t he bonds.
e. None of t he above.


619. Denny was nei t her bankr upt nor i nsol vent but was shor t of cash and
coul d not make t he mor t gage payment s on hi s per sonal r esi dence i n
2013. The bank t hat hel d t he mor t gage agr eed t o r educe t he pr i nci pal
on t he debt f r om$100, 000 t o $80, 000 so t hat Denny s mont hl y mor t gage
payment s coul d be r educed t o a manageabl e amount . Denny al so had a
vacat i on home wi t h a mor t gage whose payment s wer e beyond hi s means. The
mor t gage hol der on t he vacat i on home agr eed t o r educe t he mor t gage f r om
$60, 000 t o $50, 000. The val ue of t he per sonal r esi dence was $80, 000 and
t he val ue of t he vacat i on home was $45, 000 at t he dat es of t he debt
r educt i on.

a. Denny i s not r equi r ed t o r ecogni ze any i ncome as a r esul t of
t he r educt i on i n t he pr i nci pal of t he mor t gages.
*b. Denny i s r equi r ed t o r ecogni ze $10, 000 i ncome f r omt he
r educt i on i n t he mor t gage on t he vacat i on home, but has no gr oss
i ncome f r omt he r educt i on i n t he mor t gage pr i nci pal on hi s
per sonal r esi dence.
c. Denny i s r equi r ed t o r ecogni ze $5, 000 i ncome f r omt he
r educt i on i n t he mor t gage on t he vacat i on home, but not hi ng f or
t he r educt i on i n t he mor t gage on hi s per sonal r esi dence.
d. Denny i s r equi r ed t o r ecogni ze $10, 000 i ncome f r omt he
r educt i on i n t he mor t gage on t he vacat i on home and $20, 000 i ncome
f or t he r educt i on i n t he mor t gage on hi s per sonal r esi dence.
e. None of t he above.


620. Fl or a Company owed $95, 000, a debt i ncur r ed t o pur chase l and t hat
ser ves as secur i t y f or t he debt .

a. I f Fl or a had bor r owed t he f unds f r oma bank, t he bank accept s
$85, 000 i n f ul l payment of t he debt , and Fl or a i s sol vent af t er
t he t r ansf er , Fl or a does not r ecogni ze i ncome, but t he company
must r educe t he cost of t he l and by $10, 000.
b. I f Fl or a had bor r owed t he f unds f r oma bank, and t he bank
accept s $85, 000 i n f ul l payment of t he debt , when t he val ue of
t he pr oper t y i s $80, 000, Fl or a can deduct a l oss.
c. I f Fl or a t r ansf er s t o t he bank ot her pr oper t y, wi t h a basi s of
$90, 000 and a f ai r mar ket val ue of $95, 000, i n f ul l payment of
t he debt , Fl or a can r ecogni ze a $5, 000 l oss.
*d. I f t he $95, 000 i s owed t o t he per son who sol d t he pr oper t y t o
Fl or a, and t he cr edi t or accept s $85, 000 i n f ul l payment f or t he
debt , Fl or a does not r ecogni ze gai n but must r educe i t s basi s i n
t he l and.
e. None of t he above.


621. Sandy i s mar r i ed, f i l es a j oi nt r et ur n, and expect s t o be i n t he
28%mar gi nal t ax br acket f or t he f or eseeabl e f ut ur e. Al l of hi s i ncome
i s f r omsal ar y and al l of i t i s used t o mai nt ai n t he househol d. He has
a pai d- up l i f e i nsur ance pol i cy wi t h a cash sur r ender val ue of $100, 000.
He pai d $60, 000 of pr emi ums on t he pol i cy. Hi s gai n f r omcashi ng i n t he
l i f e i nsur ance pol i cy woul d be or di nar y i ncome. I f he r et ai ns t he
pol i cy, t he i nsur ance company wi l l pay hi m$3, 000 ( 3%) i nt er est each
year . Sandy t hi nks he can ear n a hi gher r et ur n i f he cashes i n t he
pol i cy and i nvest s t he pr oceeds.

a. What bef or e- t ax r at e of r et ur n woul d Sandy
be r equi r ed t o ear n on t he pr oceeds f r om
cashi ng i n t he pol i cy t o equal t he r et ur n
ear ned wi t h t he i nsur ance company?

b. Assume Sandy est i mat es he can ear n a 6%
bef or e- t ax r at e of r et ur n on t he pr oceeds
f r omcashi ng i n t he pol i cy. Assume he can
ear n a 6%r et ur n f or t he r emai nder of hi s
l i f e and t hat he wi l l r ei nvest al l ear ni ngs
at t he same 6%bef or e- t ax r at e of r et ur n. I f
Sandy expect s t o l i ve 10 mor e year s, whi ch
al t er nat i ve wi l l yi el d t he gr eat er amount t o
hi s benef i ci ar i es upon Sandy s deat h?
( Gi ven: The f ut ur e val ue of an annui t y i n 10
year s assumi ng a 4. 32%af t er - t ax r et ur n i s
12. 19. The f ut ur e val ue of an annui t y i n 10
year s assumi ng a 2. 16%r et ur n i s 11. 03) .



Cor r ect Answer :
a. If Sandy cashes in the policy, he must
recognize a $40,000 gain and pay taxes of
$11,200 [.28($100,000 $60,000) =
$11,200]. Therefore, he will have only
$88,800 to invest ($100,000 $11,200 =
$88,800). To earn $3,000, the same as he
receives from the insurance company, Sandy
must earn a .03378 return on the after-tax
proceeds ($88,800 .03378 = $3,000).

b. The life insurance proceeds will be exempt
from income tax. Therefore, if Sandy retains
the policy, the beneficiaries receive
$100,000 plus the compound amount of (1
.28)($3,000) = $2,160 interest earned each
year. The interest will be reinvested at 6%
before tax, or (1. .28)(.06) = 4.32%
after-tax interest. Given the compound
interest factor of 12.19, the annual income
will accumulate to 12.19 $2,160 = $26,330.
The after-tax policy proceeds are $100,000.

Therefore, if Sandy retains the policy, his
beneficiaries would expect to receive
$126,330 ($100,000 + $26,330). If Sandy
cashed in the policy, his beneficiaries will
receive the after-tax amount of the policy,
as computed in a., above, of $88,800, plus
the compound amount of the earnings on the
$88,800, at a 4.32% after-tax return. The
annual after-tax earnings on $88,800 is
$3,836 (.0432 $88,800). This will
accumulate to $3,836 12.19 = $46,761 in 10
years. Therefore, his beneficiaries would
receive $135,561 ($88,800 +
$46,761). Cashing in the policy is the
better alternative.




622. Bever l y di ed dur i ng t he cur r ent year . At t he t i me of her deat h,
her accr ued sal ar y and commi ssi ons t ot al ed $3, 000 and wer e pai d t o her
husband. The empl oyer al so pai d t he husband $35, 000 whi ch r epr esent ed
an amount equal t o Bever l y s sal ar y f or t he year pr i or t o her deat h.
The empl oyer had a pol i cy of maki ng t he sal ar y payment s t o hel p out
t he f ami l y i n t he t i me of i t s gr eat est need. Bever l y s spouse
col l ect ed her i nt er est i n t he empl oyer s qual i f i ed pr of i t shar i ng pl an
amount i ng t o $30, 000. As benef i ci ar y of hi s wi f e s l i f e i nsur ance
pol i cy, Bever l y s spouse el ect ed t o col l ect t he pr oceeds i n
i nst al l ment s. I n t he year of deat h, he col l ect ed $8, 000 whi ch i ncl uded
$1, 500 i nt er est i ncome. Whi ch of t hese i t ems ar e subj ect t o i ncome t ax
f or Bever l y s spouse?

Cor r ect Answer :
Salary and commissions $ 3,000
Profit sharing plan 30,000
Interest income 1,50
0
Included in gross income $34,500


All nonforfeitable rights to funds are includible in income (salary,
commissions). This includes the accrued salary of $3,000. The collection
of Beverlys interest in the profit sharing plan of $30,000 is subject to
taxation. The $35,000 payment by the employer was pursuant to a policy of
charity to families of deceased employees, and there is authority for
excluding this item as a gift. The IRS will probably challenge the
exclusion of the $35,000. The IRS would argue that a policy of making the
payment to all families of deceased employees makes the payment appear to
be in the nature of compensation for prior services. Life insurance
proceeds are tax-exempt. However, all interest paid on life insurance
proceeds is includible in gross income


623. Bar bar a was i nj ur ed i n an aut omobi l e acci dent . She has t hr eat ened
t o f i l e a sui t agai nst t he ot her par t y i nvol ved i n t he acci dent and has
pr oposed t he f ol l owi ng set t l ement :

Damages f or 25%l oss of t he use of
her r i ght ar m
$200, 000
Medi cal expenses 30, 000
Loss of wages 10, 000
Puni t i ve damages 100, 000
$340, 000


The def endant s i nsur ance company i s r el uct ant t o pay puni t i ve damages.
Al so, t he company di sput es t he amount of her l oss of wages amount .
I nst ead, t he company of f er s t o pay her $300, 000 f or damages t o her ar m
and $30, 000 medi cal expenses. Assumi ng Bar bar a i s i n t he 35%mar gi nal
t ax br acket , wi l l her af t er - t ax pr oceeds f r omaccept i ng t he of f er be
equal t o what she consi der s t o be her act ual damages ( l i st ed above) ?

Cor r ect Answer :
Bar bar a s cl ai mf or puni t i ve damages of $100, 000 i s t he onl y t axabl e
amount . Ther ef or e, her af t er - t ax pr oceeds f r omr ecei vi ng t he $340, 000
woul d be $305, 000 [ $340, 000 . 35( $100, 000) ] . None of t he of f er f r om
t he i nsur ance company ( $340, 000) woul d be t axabl e and t her ef or e her
af t er - t ax pr oceeds f r omt he set t l ement woul d be $340, 000. Thus, bot h
t he i nsur ance company and Bar bar a woul d benef i t f r omher accept i ng t he
i nsur ance company s of f er .


624. Geor ge i s empl oyed by t he Qual i t y Appl i ance Company. Al l t he f ul l
t i me empl oyees ar e al l owed t o pur chase appl i ances at t he company s cost
pl us 10%. The empl oyee al so i s gi ven, at no cost , a 1- year ser vi ce
cont r act on al l t he goods pur chased f r omt he company. Geor ge pur chased
a r ef r i ger at or f or $500. The company s nor mal sel l i ng pr i ce f or t he
r ef r i ger at or i s $800. Geor ge al so r ecei ved a ser vi ce cont r act , at no
char ge, t hat had a val ue of $150. Dur i ng t he year , Geor ge was r equi r ed
t o have hi s r ef r i ger at or ser vi ced once. The cost of t he cal l woul d have
been $75 i f he had not had t he ser vi ce cont r act . I s Geor ge r equi r ed t o
r ecogni ze any i ncome f r omt he pur chase of t he r ef r i ger at or , t he r ecei pt
of t he ser vi ce cont r act , and t he ser vi ce cal l ?

Cor r ect Answer :
Geor ge wi l l pr obabl y be r equi r ed t o r ecogni ze $120 i ncome f r omt he
ser vi ce cont r act . The company can sel l t he ser vi ce cont r act t o an
empl oyee at a 20%di scount and t he empl oyee i s not r equi r ed t o
r ecogni ze i ncome. Geor ge r ecei ved a 100%di scount ; t her ef or e, $120 ( 80%
$150) must be i ncl uded i n hi s gr oss i ncome. However , Geor ge can
per haps make a convi nci ng ar gument t hat he i s mer el y r ecei vi ng a no-
addi t i onal - cost ser vi ce, and t hus woul d not be r equi r ed t o r ecogni ze
i ncome. Geor ge wi l l not be r equi r ed t o r ecogni ze i ncome f r omt he
bar gai n pur chase of t he r ef r i ger at or because he pai d mor e t han t he
empl oyer s cost .


625. Sonj a i s a Uni t ed St at es ci t i zen who has wor ked i n Spai n f or t he
past 10 mont hs. She r ecei ved $8, 000 a mont h as compensat i on. Her
empl oyer has of f er ed t o ext end Sonj a s cont r act t o wor k i n Spai n f or
anot her 6 mont hs at t he same r at e of pay. I f she r ej ect s t he of f er , she
can r et ur n t o t he Uni t ed St at es and r ecei ve a sal ar y of $10, 000 per
mont h. Whi l e wor ki ng i n Spai n, she i s subj ect t o t he Spai n i ncome t ax,
whi ch i s appr oxi mat el y 11%of her gr oss pay. The mar gi nal t ax r at e on
her i ncome t axed i n t he Uni t ed St at es i s 25%. Compar e Sonj a s af t er - t ax
i ncome assumi ng she r emai ns i n Spai n wi t h her af t er - t ax i ncome i f she
r et ur ns t o t he Uni t ed St at es.

Cor r ect Answer :
I f Sonj a r et ur ns t o t he Uni t ed St at es, she wi l l not be pr esent i n t he
f or ei gn count r y f or t he r equi si t e per i od ( at l east 330 days dur i ng any
12 consecut i ve mont hs) . Thus, she wi l l not be el i gi bl e f or t he f or ei gn
ear ned i ncome excl usi on. Her i ncome wi l l be subj ect t o t he 25%r at e i n
t he Uni t ed St at es. Al t hough she wi l l be gi ven cr edi t f or t he t axes pai d
i n Spai n, t he net ef f ect of not ext endi ng t he st ay i s t o i ncr ease her
t ax r at e f r om11%t o 25%on her i ncome f or t he 15- mont h per i od ( t he
or i gi nal 10 mont hs pl us t he addi t i onal 5 mont hs under consi der at i on) .
Thi s woul d cost her $16, 800 [ ( . 25 . 11) ( 15 $8, 000) ] . The hi gher
pay i n t he Uni t ed St at es woul d yi el d onl y addi t i onal af t er - t ax i ncome
of $9, 000 [ ( $10, 000 $8, 000) ( 1 . 25) ( 6 mont hs) ] . Si nce t he benef i t s
of t he f or ei gn i ncome excl usi on ar e gr eat er t han t he l oss of i ncome, i t
woul d be benef i ci al t o st ay i n Spai n, f r oman af t er - t ax i ncome poi nt of
vi ew.


626. J uan, was consi der i ng pur chasi ng an i nt er est i n a t ax- exempt bond
f und f or $100, 000, when he di scover ed t hat t he i nt er est must be
i ncl uded on hi s st at e i ncome t ax r et ur n. The i nt er est r at e i s 5%. Hi s
mar gi nal Feder al t ax r at e i s 35%, and hi s mar gi nal st at e i ncome t ax
r at e i s 10%. J uan i t emi zes hi s deduct i ons on hi s Feder al i ncome t ax
r et ur n. As an al t er nat i ve, J uan can pur chase a st at e bond ( a doubl e-
exempt bond) yi el di ng 4. 9%i nt er est t hat i s exempt f r ombot h Feder al
and st at e i ncome t ax. Whi ch i nvest ment woul d yi el d t he gr eat er af t er -
t ax r et ur n?

Cor r ect Answer :
J uan wi l l r ecei ve $5, 000 bef or e- t ax f r omt he bond f und. The st at e
i ncome t ax i s $500 [ ( . 10) ( $5, 000) ] . The st at e i ncome t ax wi l l be
deduct i bl e on t he Feder al r et ur n; t hus, t he st at e t axes wi l l r educe
J uan s af t er - t ax i ncome by onl y $325 [ ( 1 . 35) ( $500] . Ther ef or e, t he
annual af t er - t ax r et ur n i s $4, 675 ( $5, 000 $325) , or 4. 675%. The
doubl e- exempt bonds wi l l yi el d 4. 9%af t er t ax; t her ef or e, i t i s t he
pr ef er r ed i nvest ment , assumi ng equal r i sks.


627. Mar gar et i s t r yi ng t o deci de whet her t o pl ace f unds i n a qual i f i ed
t ui t i on pr ogr am. Her son wi l l be at t endi ng col l ege i n 4 year s. She i s
i n t he 35%mar gi nal t ax br acket and she bel i eves she can ear n an 7%
bef or e t ax r et ur n on al t er nat i ve i nvest ment s. Thus, $10, 000 wi l l
accumul at e t o $11, 948 ( af t er - t ax) i n 4 year s. Mar gar et expect s t ui t i on
t o i ncr ease at t he r at e of 5%each year t o $12, 155 i n 4 year s. Her son
wi l l be i n t he 15%mar gi nal t ax br acket i n al l r el evant year s. Gi ven
t hese assumpt i ons, shoul d Mar gar et par t i ci pat e i n t he qual i f i ed t ui t i on
pr ogr am?

Cor r ect Answer :
Mar gar et can accumul at e $11, 948 by i nvest i ng her f unds f or 4 year s, but
t hen she must pay t he act ual t ui t i on. Al t er nat i vel y, i f she i nvest s t he
$10, 000 i n a qual i f i ed t ui t i on pr ogr am, t he t ui t i on wi l l be pai d i n 4
year s, r egar dl ess of t he amount . The amount of t he t ui t i on l ess t he
$10, 000 wi l l not be subj ect t o t ax. Thus, t he af t er - t ax f ut ur e val ue of
t he qual i f i ed t ui t i on f und i s $12, 155 ( $12, 155 $0) , whi ch i s gr eat er
t han t he al t er nat i ve accumul at ed val ue. Ther ef or e, i t appear s t hat
Mar gar et shoul d par t i ci pat e.


628. Gul l Cor por at i on was under goi ng r eor gani zat i on under t he
bankr upt cy l aws. The shar ehol der s, who had made l oans of $300, 000 t o
t he cor por at i on, agr eed t o accept addi t i onal st ock wi t h a val ue of
$200, 000 i nst ead of r epayment on t he debt . The Ol d Li ne I nsur ance
Company, whi ch had a $400, 000 mor t gage on t he bui l di ng, agr eed t o
r educe t he pr i nci pal t o $250, 000. A t r ade cr edi t or wi t h a r ecei vabl e of
$150, 000 f r omt he company agr eed t o accept $70, 000 i n f ul l payment f or
t he debt i ncur r ed t o pur chase goods t hat wer e st i l l on hand. Fi nal l y,
t he company t r ansf er r ed some equi pment wi t h an adj ust ed basi s of
$90, 000 i n sat i sf act i on of a l i abi l i t y f or $120, 000. Comput e t he
cor por at i on s gr oss i ncome and ot her adj ust ment s necessar y as a r esul t
of t he above t r ansact i ons.

Cor r ect Answer :
Gul l i s not r equi r ed t o r ecogni ze i ncome f r omt he shar ehol der s
exchangi ng t he debt f or st ock ( a nont axabl e cont r i but i on t o
capi t al ) . The $80, 000 r educt i on i n debt ( $150, 000 $70, 000) t o t r ade
cr edi t or s can be used t o r educe t he basi s i n t he goods
pur chased. However , Gul l i s r equi r ed t o r ecogni ze $30, 000 gai n
( $120, 000 $90, 000) f r omt r ansf er r i ng t he equi pment i n sat i sf act i on of
t he debt . However , because Gul f i s i n bankr upt cy, t he $150, 000 i ncome
f r omdi schar ge of i ndebt edness on t he mor t gage hel d by Ol d Li ne, can be
used t o r educe t ax at t r i but es ( e. g. , net oper at i ng l oss car r yover ,
basi s i n asset s) .


629. Car men had wor ked f or Spar r ow Cor por at i on f or t hi r t y year s when
she di ed of a hear t at t ack at age 60. She was pr act i cal l y penni l ess at
t he t i me of her deat h, owed a $12, 000 hospi t al bi l l , and had a di sabl ed
spouse. The company was ver y concer ned about i t s publ i c i mage, and
r at her t han r un t he r i sk of embar r assment f r omone of i t s l ong- t er m
empl oyees dyi ng and l eavi ng her spouse wi t h i nsuf f i ci ent means, t he
Boar d of Di r ect or s agr eed t o pay Car men s hospi t al bi l l and t o gi ve her
spouse $6, 000 per year f or t he r est of hi s l i f e. Di scuss bot h si des of
t he quest i on whet her Car men ( or her est at e) and her spouse r eal i ze any
t axabl e i ncome f r omt he above.

Cor r ect Answer :
The ar gument t hat Car men and her spouse r eal i ze i ncome f r omt he
payment s i s as f ol l ows: t he empl oyer was compensat i ng f or t he
empl oyee s pr i or ser vi ces. The f act t hat t he empl oyer had no l egal
obl i gat i on t o make t he payment s i s not r el evant si nce t he empl oyer
r eal i zed a benef i t ( pr event i on of embar r assment ) .

The ar gument t hat Car men and her spouse do not r eal i ze i ncome i s
pr edi cat ed upon char act er i zi ng t he payment s as a gi f t . Condi t i ons whi ch
i ndi cat e t hat a gi f t was i nt ended i ncl ude t he f ol l owi ng: t he spouse s
di r e f i nanci al condi t i on; t he decedent had been f ul l y compensat ed f or
her past ser vi ces, and any benef i t s t he cor por at i on r ecei ved f r omt he
payment s wer e i ndi r ect because t her e was no obl i gat i on t o pay such
amount s.

The $12, 000 hospi t al payment i s t axabl e because t he gi f t i s l i kel y
t axabl e i ncome t o her est at e, as i ncome i n r espect of t he decedent ,
because t he gi f t excl usi on does not appl y t o payment s by t he empl oyer
t o t he empl oyee.


630. What ar e t he t ax pr obl ems associ at ed wi t h payment s r ecei ved by a
wi f e f r omher deceased husband s empl oyer ? ( Assume t he wi f e r ender s no
ser vi ces t o t he empl oyer . )

Cor r ect Answer :
An amount pai d i n r espect of compensat i on owed t o t he empl oyee at t he
t i me of hi s deat h i s t axabl e t o t he spouse, j ust as t he amount woul d
have been t axabl e t o t he decedent i f he had r ecei ved t he money pr i or t o
deat h. Addi t i onal noni nvest ed amount s pai d by t he empl oyer pr obabl y
shoul d be t ot al l y excl uded f r omt he spouse s i ncome as a gi f t . However ,
t he I RS gener al l y consi der s such payment s t o be compensat i on f or past
ser vi ces r at her t han gi f t s.

Payment s r ecei ved f r omt he empl oyer s qual i f i ed pensi on or pr of i t
shar i ng pl an ar e subj ect t o t axat i on. Al so, i f t he empl oyee cont r i but ed
t o t he pensi on and pr of i t shar i ng pl an, t he benef i ci ar y i s al l owed t o
t r eat t hi s amount as a nont axabl e r ecover y of capi t al .


631. Bob had a t er mi nal i l l ness and r eal i zed t hat he can t t ake i t
wi t h hi m. Ther ef or e, he cashed i n hi s i nsur ance pol i cy and r ecei ved
$120, 000. He had pai d $50, 000 i n pr emi ums on t he pol i cy. He used t he
money t o f ul f i l l hi s l i f el ong ambi t i ons of goi ng t o t he Super Bowl ,
dr i vi ng an expensi ve spor t s car , and vacat i oni ng i n Ber muda.

Was Bob s behavi or consi st ent wi t h t he Congr essi onal i nt ent i n
pr ovi di ng t he t ax exempt i on he was per mi t t ed t o use?

Cor r ect Answer :
No. Bob was per mi t t ed t o excl ude f r omhi s gr oss i ncome t he $70, 000 gai n
( $120, 000 $50, 000) he r eal i zed f r omcashi ng i n t he pol i cy. The
excl usi on was per mi t t ed because he was t er mi nal l y i l l . The r at i onal e
f or t he excl usi on i s t hat of t en t he per son wi t h t he t er mi nal i l l ness
wi l l have t he need f or f unds t o be used f or hi s or her medi cal car e.
Bob i s cl ear l y not usi ng t he f unds f or t hi s pur pose t o be ser ved by t he
l aw. Never t hel ess, t he l aw does not pr event Bob f r omobt ai ni ng t he
excl usi on.


632. Ben was hospi t al i zed f or back pr obl ems. Whi l e he was away f r omt he
j ob, he col l ect ed hi s r egul ar sal ar y f r oman empl oyer - sponsor ed i ncome
pr ot ect i on i nsur ance pol i cy. Ben s empl oyer - sponsor ed hospi t al i zat i on
i nsur ance pol i cy al so pai d f or 90%of hi s medi cal expenses. Ben al so
col l ect ed on an i ncome pr ot ect i on pol i cy t hat he pur chased. Whi ch of
t he above sour ces of i ncome ar e t axabl e? Expl ai n t he basi s f or
excl udi ng any i t emor i t ems.

Cor r ect Answer :
Onl y t he col l ect i ons on t he empl oyer - sponsor ed i ncome pr ot ect i on pol i cy
ar e subj ect t o t ax. The hospi t al i zat i on benef i t s r ecei ved f r omt he
empl oyer sponsor ed pl an ar e speci f i cal l y excl uded. Bot h t he pr emi ums
and t he payment s can be excl uded. The amount s Ben col l ect ed on a pol i cy
he pur chased ar e speci f i cal l y excl uded under t he r at i onal e t hat t he
payment s ar e a r ecover y of Ben s pr emi ums.


633. The CEO of Ci r t r oni cs I nc. , di scover ed t hat t he company s
compet i t or had adopt ed a caf et er i a pl an f or i t s empl oyees. The CEO i s
concer ned about r et ai ni ng hi s t al ent ed empl oyees and woul d l i ke you t o
pr ovi de a br i ef expl anat i on as t o why a caf et er i a pl an may be
at t r act i ve t o t he company s empl oyees.

Cor r ect Answer :
Caf et er i a pl ans ar e benef i ci al wher e empl oyees desi r e di f f er ent t ypes
of benef i t s. Thi s of t en occur s when empl oyees ar e mar r i ed and t hei r
spouses r ecei ve some benef i t s f r omt hei r empl oyer s. For exampl e, i f t he
husband i s cover ed by heal t h i nsur ance pr ovi ded by hi s empl oyer , t her e
i s no need f or t he wi f e s empl oyer t o pr ovi de cover age f or t he husband
al so. Mor eover , some empl oyees may need chi l d car e benef i t s whi l e t hose
wi t hout chi l dr en may pr ef er cash. The caf et er i a pl an pr ovi des much
gr eat er f l exi bi l i t y i n pl anni ng benef i t s.


634. What Feder al i ncome t ax benef i t s ar e pr ovi ded f or col l ege st udent s?

Cor r ect Answer :
The Feder al i ncome t ax syst empr ovi des di r ect benef i t s t o col l ege
st udent s and i ndi r ect benef i t s by pr ovi di ng t ax r el i ef f or t he par ent s
of t he st udent s. Col l ege st udent s can r ecei ve t ax- exempt schol ar shi ps.
The i nt er est on educat i onal savi ngs bonds, whi ch ar e of t en pur chased by
par ent s may be exempt wher e t he pr oceeds ar e used t o pay qual i f i ed
educat i onal expenses. The qual i f i ed t ui t i on pr ogr amenabl es par ent s t o
f und t he educat i onal expenses of t hei r chi l dr en wi t hout any i ncome
bei ng t axed t o t he par ent s or t o chi l dr en.


635. The t axpayer was i n t he 35%mar gi nal t ax br acket i n 2013 and
deduct ed $15, 000 i n st at e i ncome t axes as an i t emi zed deduct i on t hat
year . I n 2014, he f i l ed hi s 2013 st at e i ncome t ax r et ur n and r ecei ved
a $5, 000 r ef und of st at e i ncome t axes pai d i n 2013. Hi s mar gi nal t ax
r at e i n 2013 was 15%. What was t he t axpayer s Feder al t ax benef i t f r om
t he over payment of hi s 2013 st at e i ncome t ax?

Cor r ect Answer :
The t axpayer r eal i zed a benef i t because t he deduct i on i n 2013 yi el ded
benef i t s of $. 35 f or each dol l ar of deduct i ons, whi l e t he r ecover y of
t he pr i or deduct i on was t axed at onl y 15%. The t axpayer s benef i t was
$1, 000 [ ( . 35 . 15) ( $5, 000) ] .


636. Empl oyer s can pr ovi de numer ous benef i t s t o t hei r empl oyees and t he
empl oyees ar e per mi t t ed t o excl ude t he val ue of t hese benef i t s f r om
gr oss i ncome. What ar e t he ef f ect s of t he excl usi ons on:

a. The pr ogr essi veness of t he t ax syst em?

b. The compl exi t y of t he t ax syst em?



Cor r ect Answer :
a. The benefit of an exclusion varies directly
with the recipients marginal tax rate.
Thus, individuals with the highest marginal
tax rate enjoy the greatest benefit from the
exclusion and those taxpayers in the lowest
marginal tax rate enjoy the least benefit.
Also, generally, the exclusions are often
available with the better paying jobs. This
also causes the tax system to be less
progressive than if the exclusions were not
permitted.

b. Any exclusion creates complexities in the
system because tests must be established to
determine whether the benefit is eligible
(e.g., whether the benefit is provided on in
a discriminatory manner) for the special
treatment. Also, often limitations are often
created, which requires even more testing.




637. Sal l y and Ed each own pr oper t y wi t h a f ai r mar ket val ue l ess t han
t he amount of t he out st andi ng mor t gage on t he pr oper t y and al so l ess
t han t he or i gi nal cost basi s. They each wer e abl e t o convi nce t he
mor t gage hol der t o r educe t he pr i nci pal amount on t he mor t gage. Sal l y s
mor t gage i s on her per sonal r esi dence and Ed s mor t gage i s on r ent al
pr oper t y he owns.

a. Expl ai n whet her each of t hese i ndi vi dual s
has r eal i zed i ncome f r omt he r educt i on i n
t he debt .

b. Assume t hat under t he cur r ent syst emof
measur i ng i ncome, each of t hese t axpayer s
r eal i zed i ncome f r omt he r educt i ons i n t he
mor t gages. Shoul d ei t her of t hese t axpayer s
be per mi t t ed t o excl ude any of t he debt
r educt i on i ncome?



Cor r ect Answer :
a. Each taxpayers liabilities were reduced.
Therefore, their net worth has increased as
measured using the cost basis in the assets.
Each taxpayer also experienced a loss in the
value of their assets. However, the losses
were not realized (because each taxpayer
still owns the property). Thus, each
taxpayer had income from the reduction in
debt, but no recognized loss. Fortunately,
recent legislation permits the taxpayer
whose property is a personal residence to
exclude the amount of the debt reduction
from gross income. The taxpayer who owns the
rental home is not eligible for the debt
reduction exclusion.

b. Allowing the exclusion from income for the
homeowner but not for the investor can only
be justified on the basis of a value system
that says we should bend the otherwise
equitable rules to favor home ownership.




638. I f a t ax- exempt bond wi l l yi el d appr oxi mat el y . 65 ( 1 . 35) t i mes
t he yi el d on a t axabl e bond of equal r i sk, who benef i t s f r omt he t ax
exempt i on: t he Feder al gover nment , t he st at e and l ocal gover nment s who
i ssue t he bonds, or t he i nvest or s?

Cor r ect Answer :
The st at e and l ocal gover nment s benef i t f r omt he exempt i on because t hey
ar e r equi r ed t o pay l ess i nt er est . The exempt i on cost s t he Feder al
gover nment , and t hus t he exempt i on shi f t s r esour ces f r omt he Feder al t o
t he st at e and l ocal gover nment s. The i nvest or s do not der i ve any
benef i t f r omt he exempt i on, i n t hi s exampl e, because t he mar ket dr i ves
t he pr i ce of t he exempt bonds upwar d so t hat t he af t er - t ax yi el ds on
t he bonds ar e equal f or i nvest or s i n t he hi ghest mar gi nal t ax br acket
( 35%) .


639. Deduct i ons ar e al l owed unl ess a speci f i c pr ovi si on i n t he t ax l aw
pr ovi des ot her wi se.

a. Tr ue
*b. Fal se


640. Mi t ch i s i n t he 28%t ax br acket . He may r ecei ve a di f f er ent t ax
benef i t f or a $2, 000 expendi t ur e t hat i s cl assi f i ed as a deduct i on from
AGI t han he wi l l r ecei ve f or a $1, 000 expendi t ur e t hat i s cl assi f i ed as
a deduct i on for AGI .

*a. Tr ue
b. Fal se


641. Dependi ng on t he nat ur e of t he expendi t ur e, expenses i ncur r ed i n a
t r ade or busi ness may be deduct i bl e for or from AGI .

a. Tr ue
*b. Fal se


642. Onl y some empl oyment r el at ed expenses ar e cl assi f i ed as deduct i ons
for AGI .

*a. Tr ue
b. Fal se


643. Sect i on 212 expenses t hat ar e r el at ed t o r ent and r oyal t y i ncome
ar e deduct i ons for AGI .

*a. Tr ue
b. Fal se


644. Al i ce i ncur s qual i f i ed movi ng expenses of $12, 000. I f she i s
r ei mbur sed by her empl oyer , t he deduct i on i s cl assi f i ed as a deduct i on
for AGI . I f not r ei mbur sed, t he deduct i on i s cl assi f i ed as an i t emi zed
deduct i on.

a. Tr ue
*b. Fal se


645. Expenses i ncur r ed f or t he pr oduct i on or col l ect i on of i ncome
generally ar e deduct i ons from adj ust ed gr oss i ncome.

*a. Tr ue
b. Fal se


646. The Code does not speci f i cal l y def i ne what const i t ut es a t r ade or
busi ness.

*a. Tr ue
b. Fal se


647. An expense need not be r ecur r i ng i n or der t o be or di nar y.

*a. Tr ue
b. Fal se


648. Aar on, a shar ehol der - empl oyee of Pi geon, I nc. , r ecei ves a $300, 000
sal ar y. The I RS cl assi f i es $100, 000 of t hi s amount as unr easonabl e
compensat i on. The ef f ect of t hi s r ecl assi f i cat i on i s t o decr ease
Aar on s gr oss i ncome by $100, 000 and i ncr ease Pi geon s gr oss i ncome by
$100, 000.

a. Tr ue
*b. Fal se


649. The por t i on of a shar ehol der - empl oyee s sal ar y t hat i s cl assi f i ed
as unr easonabl e has no ef f ect on t he amount of a shar ehol der - empl oyee s
gr oss i ncome, but r esul t s i n an i ncr ease i n t he t axabl e i ncome of t he
cor por at i on.

*a. Tr ue
b. Fal se


650. Gener al l y, a cl osel y- hel d f ami l y cor por at i on i s not per mi t t ed t o
t ake a deduct i on f or a sal ar y pai d t o a f ami l y member i n cal cul at i ng
cor por at e t axabl e i ncome.

a. Tr ue
*b. Fal se


651. Onl y under l i mi t ed ci r cumst ances can a l oss on t he sal e of a
per sonal use asset be deduct ed.

a. Tr ue
*b. Fal se


652. The i ncome of a sol e pr opr i et or shi p ar e r epor t ed on Schedul e C
( Pr of i t or Loss f r omBusi ness) .

*a. Tr ue
b. Fal se


653. The cash met hod can be used even i f i nvent or y and cost of goods
sol d ar e an i ncome pr oduci ng f act or i n t he busi ness.

a. Tr ue
*b. Fal se


654. A t axpayer s not e or pr omi se t o pay sat i sf i es t he act ual l y pai d
r equi r ement f or t he cash basi s met hod of account i ng.

a. Tr ue
*b. Fal se


655. I sabel l a owns t wo busi ness ent i t i es. She may be abl e t o use t he
cash met hod f or one and t he accr ual met hod f or t he ot her .

*a. Tr ue
b. Fal se


656. Under t he one- year r ul e f or t he cur r ent per i od deduct i on of
pr epai d expenses of cash basi s t axpayer s, t he asset must expi r e or be
consumed by t he end of t he t ax year f ol l owi ng t he year of payment .

*a. Tr ue
b. Fal se


657. None of t he pr epai d r ent pai d on Sept ember 1 by a cal endar year
cash basi s t axpayer f or t he next 18 mont hs i s deduct i bl e i n t he cur r ent
per i od.

a. Tr ue
*b. Fal se


658. The per i od i n whi ch an accr ual basi s t axpayer can deduct an
expense i s det er mi ned by appl yi ng t he economi c per f or mance and al l
event s t est s.

*a. Tr ue
b. Fal se


659. The amount of t he addi t i on t o t he r eser ve f or bad debt s f or an
accr ual met hod t axpayer i s al l owed as a deduct i on f or t ax pur poses, but
i s not al l owed f or a cash met hod t axpayer .

a. Tr ue
*b. Fal se


660. Al l domest i c br i bes ( i . e. , t o a U. S. of f i ci al ) ar e di sal l owed as
deduct i ons.

*a. Tr ue
b. Fal se


661. Fi nes and penal t i es pai d f or vi ol at i ons of t he l aw ( e. g. , i l l egal
dumpi ng of hazar dous wast e) ar e deduct i bl e onl y i f t hey r el at e t o a
t r ade or busi ness.

a. Tr ue
*b. Fal se


662. Susan i s a sal es r epr esent at i ve f or a U. S. weapons manuf act ur er .
She makes a $100, 000 gr ease payment t o a U. S. gover nment of f i ci al
associ at ed wi t h a weapons pur chase by t he U. S. Ar my. She makes a
si mi l ar payment t o a Saudi Ar abi an gover nment of f i ci al associ at ed wi t h
a si mi l ar sal e. Nei t her of t hese payment s i s deduct i bl e by Susan s
empl oyer .

a. Tr ue
*b. Fal se


663. The cost of l egal advi ce associ at ed wi t h t he pr epar at i on of an
i ndi vi dual s Feder al i ncome t ax r et ur n i s not deduct i bl e because i t i s
a per sonal expense.

a. Tr ue
*b. Fal se


664. Two- t hi r ds of t r ebl e damage payment s under t he ant i t r ust l aw ar e
not deduct i bl e.

a. Tr ue
*b. Fal se


665. The l egal cost of havi ng a wi l l pr epar ed i s not deduct i bl e.

*a. Tr ue
b. Fal se


666. Legal expenses i ncur r ed i n connect i on wi t h r ent al pr oper t y ar e
deduct i ons from AGI .

a. Tr ue
*b. Fal se


667. Legal f ees i ncur r ed i n connect i on wi t h a cr i mi nal def ense ar e not
deduct i bl e even i f t he cr i me i s associ at ed wi t h a t r ade or busi ness.

a. Tr ue
*b. Fal se


668. I f a t axpayer oper at es an i l l egal busi ness, no deduct i ons ar e
per mi t t ed.

a. Tr ue
*b. Fal se


669. Or di nar y and necessar y busi ness expenses, ot her t han cost of goods
sol d, of an i l l egal dr ug t r af f i cki ng busi ness do not r educe t axabl e
i ncome.

*a. Tr ue
b. Fal se


670. J acques, who i s not a U. S. ci t i zen, makes a cont r i but i on t o t he
campai gn of a candi dat e f or gover nor . Cassi e, a U. S. ci t i zen, al so
makes a cont r i but i on t o t he same campai gn f und. I f cont r i but i ons by
nonci t i zens ar e i l l egal under st at e l aw, t he cont r i but i on by Cassi e i s
deduct i bl e, whi l e t hat by J acques i s not .

a. Tr ue
*b. Fal se


671. A basebal l t eamt hat pays a st ar pl ayer an annual sal ar y of $25
mi l l i on can deduct t he ent i r e $25 mi l l i on as sal ar y expense. I f t he
same amount i s pai d t o t he CEO of I BM, onl y $1 mi l l i on i s deduct i bl e.

*a. Tr ue
b. Fal se


672. For a t axpayer who i s engaged i n a t r ade or busi ness, t he cost of
i nvest i gat i ng a busi ness i n t he same f i el d i s deduct i bl e onl y i f t he
t axpayer acqui r es t he busi ness.

a. Tr ue
*b. Fal se


673. I nvest i gat i on of a busi ness unr el at ed t o one s pr esent busi ness
never r esul t s i n a cur r ent per i od deduct i on of t he ent i r e amount i f t he
amount of t he i nvest i gat i on expenses exceeds $5, 000.

*a. Tr ue
b. Fal se


674. I n det er mi ni ng whet her an act i vi t y shoul d be cl assi f i ed as a
busi ness or as a hobby, t he sat i sf act i on of t he pr esumpt i on ( i . e. ,
pr of i t i n at l east 3 out of 5 year s) ensur es t r eat ment as a busi ness.

a. Tr ue
*b. Fal se


675. I f a t axpayer can sat i sf y t he t hr ee- out - of - f i ve year pr esumpt i on
t est associ at ed wi t h hobby l osses, t hen expenses f r omt he act i vi t y can
be deduct ed i n excess of t he gr oss i ncome f r omt he act i vi t y.

a. Tr ue
*b. Fal se


676. I f an act i vi t y i nvol ves hor ses, a pr of i t i n at l east t wo of seven
consecut i ve year s meet s t he pr esumpt i ve r ul e of 183.

*a. Tr ue
b. Fal se


677. A hobby act i vi t y can r esul t i n al l of t he hobby i ncome bei ng
i ncl uded i n AGI and no deduct i ons bei ng al l owed.

*a. Tr ue
b. Fal se


678. I f an i t emsuch as pr oper t y t axes and home mor t gage i nt er est
exceed t he i ncome f r oma hobby, t he excess amount of t hi s i t emover t he
hobby i ncome can be deduct ed i f t he t axpayer i t emi zes deduct i ons.

*a. Tr ue
b. Fal se


679. Hobby act i vi t y expenses ar e deduct i bl e from AGI t o t he ext ent of
hobby i ncome. Such expenses not i n excess of hobby i ncome ar e not
subj ect t o t he 2%of AGI f l oor .

a. Tr ue
*b. Fal se


680. Mar t ha r ent s part of her per sonal r esi dence i n t he summer f or 3
weeks f or $3, 000. Anne r ent s all of her per sonal r esi dence f or one week
i n December f or $2, 500. Anne i s not r equi r ed t o i ncl ude t he $2, 500 i n
her gr oss i ncome wher eas Mar t ha i s r equi r ed t o i ncl ude t he $3, 000 i n
her gr oss i ncome.

*a. Tr ue
b. Fal se


681. I f a vacat i on home i s r ent ed f or l ess t han 15 days dur i ng a year ,
t he onl y expenses t hat can be deduct ed ar e mor t gage i nt er est , pr oper t y
t axes, and per sonal casual t y l osses.

*a. Tr ue
b. Fal se


682. I f a vacat i on home i s cl assi f i ed as pr i mar i l y r ent al use, a
deduct i on f or al l of t he r ent al expenses i s al l owed.

a. Tr ue
*b. Fal se


683. I f a vacat i on home i s cl assi f i ed as pr i mar i l y per sonal use ( i . e. ,
r ent ed f or f ewer t han 15 days) , none of t he r el at ed expenses can be
deduct ed.

a. Tr ue
*b. Fal se


684. The por t i on of pr oper t y t ax on a vacat i on home t hat i s
at t r i but abl e t o per sonal use i s an i t emi zed deduct i on.

*a. Tr ue
b. Fal se


685. I f a vacat i on home i s cl assi f i ed as pr i mar i l y per sonal use, par t
of t he mai nt enance and ut i l i t y expenses can be al l ocat ed and deduct ed
as a r ent al expense.

a. Tr ue
*b. Fal se


686. A vacat i on home at t he beach whi ch i s r ent ed f or 200 days and used
per sonal l y f or 16 days i s cl assi f i ed i n t he per sonal / r ent al use
cat egor y.

a. Tr ue
*b. Fal se


687. I f a vacat i on home i s a per sonal / r ent al r esi dence, no mai nt enance
and ut i l i t y expenses can be cl ai med as a deduct i on.

a. Tr ue
*b. Fal se


688. Beul ah s per sonal r esi dence has an adj ust ed basi s of $450, 000 and
a f ai r mar ket val ue of $390, 000. Beul ah conver t s t he pr oper t y t o r ent al
use on November 1, 2013. The vacat i on home r ul es t hat l i mi t t he amount
of t he deduct i on t o t he r ent al i ncome wi l l appl y and t he adj ust ed basi s
f or depr eci at i on i s $390, 000.

a. Tr ue
*b. Fal se


689. Wal t want s t o gi ve hi s daught er $1, 800 f or Chr i st mas. As an
al t er nat i ve, she suggest s t hat he pay t he pr oper t y t axes on her
r esi dence. I f Ral ph pays t he pr oper t y t axes, he can deduct t hem.

a. Tr ue
*b. Fal se


690. LD Par t ner shi p, a cash basi s t axpayer , pur chases l and and a
bui l di ng f or $200, 000 wi t h $150, 000 of t he cost bei ng al l ocat ed t o t he
bui l di ng. The gr oss r ecei pt s of t he par t ner shi p ar e l ess t han $100, 000.
LD must capi t al i ze t he $50, 000 pai d f or t he l and, but can deduct t he
$150, 000 pai d f or t he bui l di ng i n t he cur r ent t ax year .

a. Tr ue
*b. Fal se


691. Pur chased goodwi l l must be capi t al i zed, but can be amor t i zed over
a 60- mont h per i od.

a. Tr ue
*b. Fal se


692. Mar ge sel l s l and t o her adul t son, J ason, f or i t s $20, 000
appr ai sed val ue. Her adj ust ed basi s f or t he l and i s $25, 000. Mar ge s
r ecogni zed l oss i s $5, 000 and J ason s adj ust ed basi s f or t he l and i s
$25, 000 ( $20, 000 cost + $5, 000 r ecogni zed gai n of Mar ge) .

a. Tr ue
*b. Fal se


693. For pur poses of t he 267 l oss di sal l owance pr ovi si on, a
t axpayer s aunt i s a r el at ed par t y.

a. Tr ue
*b. Fal se


694. Sammy, a cal endar year cash basi s t axpayer who i s age 66, has t he
f ol l owi ng t r ansact i ons:

Salary from job $90,000
Alimony received
from ex-wife
10,000
Medical expenses 8,000


Based on this information, Sammy has:

a. AGI of $90, 000.
b. AGI of $95, 000.
c. AGI of $99, 500.
d. Deduct i on f or medi cal expenses of $0.
*e. None of t he above.


695. Tr ade and busi ness expenses shoul d be t r eat ed as:

a. A deduct i on from AGI subj ect t o t he 2%- of - AGI f l oor .
b. A deduct i on from AGI not subj ect t o t he 2%- of - AGI f l oor .
*c. Deduct i bl e for AGI .
d. An i t emi zed deduct i on i f not r ei mbur sed.
e. None of t he above.


696. Al i s si ngl e, age 60, and has gr oss i ncome of $140, 000. Hi s
deduct i bl e expenses ar e as f ol l ows:

Alimony $20,000
Charitable contributions 4,000
Contribution to a traditional IRA 5,000
Expenses paid on rental property 7,500
Interest on home mortgage and property
taxes on personal residence
7,200
State income tax 2,200


What is Als AGI?

a. $94, 100.
b. $103, 500.
*c. $107, 500.
d. $127, 500.
e. None of t he above.


697. Mar sha i s si ngl e, had gr oss i ncome of $50, 000, and i ncur r ed t he
f ol l owi ng expenses:

Charitable contribution $2,000
Taxes and interest on home 7,000
Legal fees incurred in a tax dispute 1,000
Medical expenses 3,000
Penalty on early withdrawal of savings 250


Her AGI is:

a. $39, 750.
*b. $49, 750.
c. $40, 000.
d. $39, 750.
e. None of t he above.


698. Whi ch of t he f ol l owi ng can be cl ai med as a deduct i on for AGI ?

a. Per sonal casual t y l osses.
b. I nvest ment i nt er est expenses.
c. Medi cal expenses.
d. Pr oper t y t axes on per sonal use r eal est at e.
*e. None of t he above.


699. Whi ch of t he f ol l owi ng i s a deduct i on for AGI ( i t emi zed deduct i on) ?

*a. Cont r i but i on t o a t r adi t i onal I RA.
b. Roof r epai r s t o a per sonal use home.
c. Saf e deposi t box r ent al f ee i n whi ch st ock cer t i f i cat es ar e
st or ed.
d. Pr oper t y t ax on per sonal r esi dence.
e. Al l of t he above.


700. Whi ch of t he f ol l owi ng i s cor r ect ?

a. A per sonal casual t y l oss i s cl assi f i ed as a deduct i on from AGI .
b. Real est at e t axes on a t axpayer s per sonal r esi dence ar e
cl assi f i ed as deduct i ons from AGI .
c. An expense associ at ed wi t h r ent al pr oper t y i s cl assi f i ed as a
deduct i on for AGI.
d. Onl y a. and b. ar e cor r ect .
*e. a. , b. , and c. , ar e cor r ect .


701. Whi ch of t he f ol l owi ng ar e deduct i ons for AGI ?

a. Mor t gage i nt er est on a per sonal r esi dence.
b. Pr oper t y t axes on a per sonal r esi dence.
*c. Mor t gage i nt er est on a bui l di ng used i n a busi ness.
d. Fi nes and penal t i es i ncur r ed i n a t r ade or busi ness.
e. None of t he above.


702. Whi ch of t he f ol l owi ng i s incorrect?

a. Al i mony i s a deduct i on for AGI .
*b. The expenses associ at ed wi t h r oyal t y pr oper t y ar e a deduct i on
from AGI .
c. Cont r i but i ons t o a t r adi t i onal I RA ar e a deduct i on for AGI .
d. Pr oper t y t axes on t axpayer s per sonal r esi dence ar e a
deduct i on from AGI
e. Al l of t he above ar e cor r ect .


703. Whi ch of t he f ol l owi ng i s not a t r ade or busi ness expense?

a. I nt er est on busi ness i ndebt edness.
b. Pr oper t y t axes on busi ness pr oper t y.
*c. Par ki ng t i cket pai d on busi ness aut o.
d. Depr eci at i on on busi ness pr oper t y.
e. Al l of t he above ar e t r ade or busi ness expenses.


704. Whi ch of t he f ol l owi ng i s a r equi r ed t est f or t he deduct i on of a
busi ness expense?

a. Or di nar y.
b. Necessar y.
c. Reasonabl e.
*d. Al l of t he above.
e. None of t he above.


705. Paul a i s t he sol e shar ehol der of Vi ol et , I nc. For 2013, she
r ecei ves f r omVi ol et a sal ar y of $300, 000 and di vi dends of $100, 000.
Vi ol et s t axabl e i ncome f or 2013 i s $500, 000. On audi t , t he I RS t r eat s
$100, 000 of Paul a s sal ar y as unr easonabl e. Whi ch of t he f ol l owi ng
st at ement s i s cor r ect ?

a. Paul a s gr oss i ncome wi l l i ncr ease by $100, 000 as a r esul t of
t he I RS adj ust ment .
b. Vi ol et s t axabl e i ncome wi l l not be af f ect ed by t he I RS
adj ust ment .
c. Paul a s gr oss i ncome wi l l decr ease by $100, 000 as a r esul t of
t he I RS adj ust ment .
d. Vi ol et s t axabl e i ncome wi l l decr ease by $100, 000 as a r esul t
of t he I RS adj ust ment .
*e. None of t he above i s cor r ect .


706. Dur i ng 2012, t he f i r st year of oper at i ons, Si l ver , I nc. , pays
sal ar i es of $175, 000. At t he end of t he year , empl oyees have ear ned
sal ar i es of $20, 000, whi ch ar e not pai d by Si l ver unt i l ear l y i n
2013. What i s t he amount of t he deduct i on f or sal ar y expense?

a. I f Si l ver uses t he cash met hod, $175, 000 i n 2012 and $0 i n
2013.
b. I f Si l ver uses t he cash met hod, $0 i n 2012 and $195, 000 i n
2013.
c. I f Si l ver uses t he accr ual met hod, $175, 000 i n 2012 and
$20, 000 i n 2013.
*d. I f Si l ver uses t he accr ual met hod, $195, 000 i n 2012 and $0 i n
2013.
e. None of t he above i s cor r ect .


707. Beni t a i ncur r ed a busi ness expense on December 10, 2013, whi ch she
char ged on her bank cr edi t car d. She pai d t he cr edi t car d st at ement
whi ch i ncl uded t he char ge on J anuar y 5, 2014. Whi ch of t he f ol l owi ng i s
cor r ect ?

a. I f Beni t a i s a cash met hod t axpayer , she cannot deduct t he
expense unt i l 2014.
*b. I f Beni t a i s an accr ual met hod t axpayer , she can deduct t he
expense i n 2013.
c. I f Beni t a uses t he accr ual met hod, she can choose t o deduct
t he expense i n ei t her 2013 or 2014.
d. Onl y b. and c. ar e cor r ect .
e. a. , b. , and c. ar e cor r ect .


708. Payment s by a cash basi s t axpayer of capi t al expendi t ur es:

a. Must be expensed at t he t i me of payment .
b. Must be expensed by t he end of t he f i r st year af t er t he asset
i s acqui r ed.
*c. Must be deduct ed over t he act ual or st at ut or y l i f e of t he
asset .
d. Can be deduct ed i n t he year t he t axpayer chooses.
e. None of t he above.


709. Pet al , I nc. i s an accr ual basi s t axpayer . Pet al uses t he agi ng
appr oach t o cal cul at e t he r eser ve f or bad debt s. Dur i ng 2013, t he
f ol l owi ng occur associ at ed wi t h bad debt s.

Credit sales $400,000
Collections on credit sales 250,000
Amount added to the reserve 10,000
Beginning balance in the reserve 0
Identifiable bad debts during 2013 12,000


The amount of the deduction for bad debt expense for Petal for 2013 is:

a. $10, 000.
*b. $12, 000.
c. $22, 000.
d. $140, 000.
e. None of t he above.


710. Whi ch of t he f ol l owi ng l egal expenses ar e deduct i bl e for AGI ?

a. I ncur r ed i n connect i on wi t h a t r ade or busi ness.
b. I ncur r ed i n connect i on wi t h r ent al or r oyal t y pr oper t y hel d
f or t he pr oduct i on of i ncome.
c. I ncur r ed f or t ax advi ce r el at i ve t o t he pr epar at i on of an
i ndi vi dual s i ncome t ax r et ur n.
*d. Onl y a. and b. qual i f y.
e. a. , b. , and c. qual i f y.


711. Rex, a cash basi s cal endar year t axpayer , r uns a bi ngo oper at i on
whi ch i s i l l egal under st at e l aw. Dur i ng 2013, a bi l l desi gnat ed H. R. 9
i s i nt r oduced i nt o t he st at e l egi sl at ur e whi ch, i f enact ed, woul d
l egi t i mi ze bi ngo games. I n 2013, Rex had t he f ol l owi ng expenses:

Operating expenses in conducting bingo
games
$247,000
Payoff money to state and local police 24,000
Newspaper ads supporting H.R. 9 3,000
Political contributions to legislators
who support H.R. 9
8,000


Of these expenditures, Rex may deduct:

*a. $247, 000.
b. $250, 000.
c. $258, 000.
d. $282, 000.
e. None of t he above.


712. Andr ew, who oper at es a l aundr y busi ness, i ncur r ed t he f ol l owi ng
expenses dur i ng t he year .

Parking ticket of $250 for one of his
delivery vans that parked illegally.
Parking ticket of $75 when he parked
illegally while attending a rock concert in
Tulsa.
DUI ticket of $500 while returning from the
rock concert.
Attorneys fee of $600 associated with the
DUI ticket.

What amount can Andrew deduct for these expenses?

*a. $0.
b. $250.
c. $600.
d. $1, 425.
e. None of t he above.


713. Whi ch of t he f ol l owi ng may be deduct i bl e?

a. Br i bes t hat r el at e t o a U. S. busi ness.
b. Fi nes pai d f or vi ol at i ons of t he l aw.
*c. I nt er est on a l oan used i n a hobby.
d. Al l of t he above.
e. None of t he above.


714. Ter r y and J i mar e bot h i nvol ved i n oper at i ng i l l egal busi nesses.
Ter r y oper at es a gambl i ng busi ness and J i moper at es a dr ug r unni ng
busi ness. Bot h busi nesses have gr oss r evenues of $500, 000. The
busi nesses i ncur t he f ol l owi ng expenses.

Terry Jim
Employee salaries $200,000 $200,000
Bribes to police 25,000 25,000
Rent and utilities 50,000 50,000
Cost of goods sold 0 125,000


Which of the following statements is correct?

a. Nei t her Ter r y nor J i mcan deduct any of t he above i t ems i n
cal cul at i ng t he busi ness pr of i t .
*b. Ter r y shoul d r epor t pr of i t f r omhi s busi ness of $250, 000.
c. J i mshoul d r epor t pr of i t f r omhi s busi ness of $500, 000.
d. J i mshoul d r epor t pr of i t f r omhi s busi ness of $250, 000.
e. None of t he above.


715. Tomoper at es an i l l egal dr ug- r unni ng oper at i on and i ncur r ed t he
f ol l owi ng expenses:

Salaries $ 75,000
Illegal kickbacks 20,000
Bribes to border guards 25,000
Cost of goods sold 160,000
Rent 8,000
Interest 10,000
Insurance on furniture and fixtures 6,000
Utilities and telephone 20,000


Which of the above amounts reduces his taxable income?

a. $0.
*b. $160, 000.
c. $279, 000.
d. $324, 000.
e. None of t he above.


716. For a pr esi dent of a publ i cl y hel d cor por at i on, whi ch of t he
f ol l owi ng ar e not subj ect t o t he $1 mi l l i on l i mi t on execut i ve
compensat i on?

a. Cont r i but i on t o medi cal i nsur ance pl an.
b. Cont r i but i on t o pensi on pl an.
c. Pr emi ums on gr oup t er ml i f e i nsur ance of $50, 000.
d. Onl y b. and c. ar e not subj ect t o t he l i mi t .
*e. a. , b. , and c. , ar e not subj ect t o t he l i mi t .


717. Tommy, an aut omobi l e mechani c empl oyed by an aut o deal er shi p, i s
consi der i ng openi ng a f ast f ood f r anchi se. I f Tommy deci des not t o
acqui r e t he f ast f ood f r anchi se, any i nvest i gat i on expenses ar e:

a. A deduct i on for AGI .
b. A deduct i on from AGI , subj ect t o t he 2 per cent f l oor .
c. A deduct i on from AGI , not subj ect t o t he 2 per cent f l oor .
d. Deduct i bl e up t o $5, 000 i n t he cur r ent year wi t h t he bal ance
bei ng amor t i zed over a 180- mont h per i od.
*e. Not deduct i bl e.


718. I r i s, a cal endar year cash basi s t axpayer , owns and oper at es
sever al TV r ent al out l et s i n Fl or i da, and want s t o expand t o ot her
st at es. Dur i ng 2013, she spends $14, 000 t o i nvest i gat e TV r ent al st or es
i n Sout h Car ol i na and $9, 000 t o i nvest i gat e TV r ent al st or es i n Geor gi a.
She acqui r es t he Sout h Car ol i na oper at i ons, but not t he out l et s i n
Geor gi a. As t o t hese expenses, I r i s shoul d:

a. Capi t al i ze $14, 000 and not deduct $9, 000.
*b. Expense $23, 000 f or 2013.
c. Expense $9, 000 f or 2013 and capi t al i ze $14, 000.
d. Capi t al i ze $23, 000.
e. None of t he above.


719. Whi ch of t he f ol l owi ng st at ement s i s cor r ect i n connect i on wi t h
t he i nvest i gat i on of a busi ness?

a. I f t he t axpayer i s not al r eady engaged i n t he t r ade or
busi ness, t he expenses i ncur r ed ar e deduct i bl e i f t he pr oj ect i s
abandoned.
*b. I f t he busi ness i s acqui r ed, t he expenses may be deduct ed
i mmedi at el y by a t axpayer engaged i n a si mi l ar t r ade or busi ness
r egar dl ess of whet her t he busi ness bei ng i nvest i gat ed i s acqui r ed.
c. That busi ness must be r el at ed t o t he t axpayer s pr esent
busi ness f or any expense ever t o be deduct i bl e.
d. Regar dl ess of whet her t he t axpayer i s al r eady engaged i n t he
t r ade or busi ness, t he expenses must be capi t al i zed and amor t i zed.
e. None of t he above.


720. Whi ch of t he f ol l owi ng i s not r el evant i n det er mi ni ng whet her an
act i vi t y i s pr of i t - seeki ng or a hobby?

a. Whet her t he act i vi t y i s enj oyed by t he t axpayer .
b. The exper t i se of t he t axpayer s or t hei r advi ser s.
c. The t i me and ef f or t expended.
d. The r el at i onshi p of pr of i t s ear ned and l osses i ncur r ed.
*e. Al l of t he above ar e r el evant f act or s.


721. For an act i vi t y cl assi f i ed as a hobby, t he expenses ar e
cat egor i zed as f ol l ows:

( 1) Amount s t hat af f ect adj ust ed basi s and woul d be deduct i bl e
under ot her Code sect i ons i f t he act i vi t y had been engaged i n f or
pr of i t ( e. g. , depr eci at i on, amor t i zat i on, and depl et i on) .

( 2) Amount s deduct i bl e under ot her Code sect i ons wi t hout r egar d
t o t he nat ur e of t he act i vi t y, such as pr oper t y t axes and home mor t gage
i nt er est .

( 3) Amount s deduct i bl e under ot her Code sect i ons i f t he act i vi t y
had been engaged i n f or pr of i t , but onl y i f t hose amount s do not af f ect
adj ust ed basi s ( e. g. , mai nt enance, ut i l i t i es, and suppl i es) .

I f t hese expenses exceed t he gr oss i ncome f r omt he act i vi t y and ar e
t hus l i mi t ed, t he sequence i n whi ch t hey ar e deduct i bl e i s:

a. ( 1) , ( 2) , ( 3) .
b. ( 1) , ( 3) , ( 2) .
*c. ( 2) , ( 3) , ( 1) .
d. ( 2) , ( 1) , ( 3) .
e. ( 3) , ( 2) , ( 1) .


722. Pr i scel l a pur sued a hobby of maki ng bedspr eads i n her spar e t i me.
Her AGI bef or e consi der i ng t he hobby i s $40, 000. Dur i ng t he year she
sol d t he bedspr eads f or $10, 000. She i ncur r ed expenses as f ol l ows:

Supplies $4,000
Interest on loan to get business started 500
Advertising 6,500


Assuming that the activity is deemed a hobby, how should she report these
items on her tax return?

a. I ncl ude $10, 000 i n i ncome and deduct $11, 000 for AGI .
b. I gnor e bot h i ncome and expenses si nce hobby l osses ar e
di sal l owed.
c. I ncl ude $10, 000 i n i ncome, deduct not hi ng for AGI , and cl ai m
$11, 000 of t he expenses as i t emi zed deduct i ons.
d. I ncl ude $10, 000 i n i ncome and deduct i nt er est of $500 for AGI .
*e. None of t he above.


723. Cor y i ncur r ed and pai d t he f ol l owi ng expenses:

Tax return preparation fee $ 600
Moving expenses 2,000
Investment expenses 500
Expenses associated with rental
property
1,500
Interest expense associated with loan
to finance tax-exempt bonds
400


Calculate the amount that Cory can deduct (before any percentage
limitations).

a. $5, 000.
*b. $4, 600.
c. $3, 000.
d. $1, 500.
e. None of t he above.


724. Whi ch of t he f ol l owi ng i s not deduct i bl e?

a. Movi ng expenses i n excess of r ei mbur sement .
b. Tax r et ur n pr epar at i on f ees of an i ndi vi dual .
c. Expenses i ncur r ed associ at ed wi t h i nvest ment s i n st ocks and
bonds.
*d. Al l owabl e hobby expenses i n excess of hobby i ncome.
e. None of t he above.


725. I f a r esi dence i s used pr i mar i l y f or per sonal use ( r ent ed f or
f ewer t han 15 days per year ) , whi ch of t he f ol l owi ng i s cor r ect ?

*a. No i ncome i s i ncl uded i n AGI .
b. No expenses ar e deduct i bl e.
c. Expenses must be al l ocat ed bet ween r ent al and per sonal use.
d. Onl y a. and b. ar e cor r ect .
e. a. , b. , and c. ar e cor r ect .


726. Robyn r ent s her beach house f or 60 days and uses i t f or per sonal
use f or 30 days dur i ng t he year . The r ent al i ncome i s $6, 000 and t he
expenses ar e as f ol l ows:

Mortgage interest $9,000
Real estate taxes 3,000
Utilities 2,000
Maintenance 1,000
Insurance 500
Depreciation (rental part) 4,000


Using the IRS approach, total expenses that Robyn can deduct on her tax
return associated with the beach house are:

a. $0.
b. $6, 000.
c. $8, 000.
*d. $12, 000.
e. None of t he above.


727. I f a vacat i on home i s det er mi ned t o be a per sonal / r ent al use
r esi dence, whi ch of t he f ol l owi ng st at ement s i s cor r ect ?

a. Al l r ent al i ncome i s i ncl uded i n gr oss i ncome.
b. Al l r ent al r el at ed expenses t hat ar e deduct i bl e ar e cl assi f i ed
as deduct i ons from AGI .
c. Expenses must be al l ocat ed bet ween r ent al and per sonal use.
*d. Onl y a. and c. ar e cor r ect .
e. a. , b. , and c. ar e cor r ect .


728. Bob and Apr i l own a house at t he beach. The house was r ent ed t o
unr el at ed par t i es f or 8 weeks dur i ng t he year . Apr i l and t he chi l dr en
used t he house 12 days f or t hei r vacat i on dur i ng t he year . Af t er
pr oper l y di vi di ng t he expenses bet ween r ent al and per sonal use, i t was
det er mi ned t hat a l oss was i ncur r ed as f ol l ows:

Gross rental income $4,000
Less: Mortgage interest and
property taxes
$3,500
Other allocated
expenses
2,00
0
(5,50
0)
Net rental loss ($1,500)


What is the correct treatment of the rental income and expenses on Bob and
Aprils joint income tax return for the current year assuming the IRS
approach is used if applicable?

*a. A $1, 500 l oss shoul d be r epor t ed.
b. Onl y t he mor t gage i nt er est and pr oper t y t axes shoul d be
deduct ed.
c. Si nce t he house was used mor e t han 10 days per sonal l y by Bob
and Apr i l , t he r ent al expenses ( ot her t han mor t gage i nt er est and
pr oper t y t axes) ar e l i mi t ed t o t he gr oss r ent al i ncome i n excess
of deduct i ons f or i nt er est and t axes al l ocat ed t o t he r ent al use.
d. Si nce t he house was used l ess t han 50%per sonal l y by Bob and
Apr i l , al l expenses al l ocat ed t o per sonal use may be deduct ed.
e. Bob and Apr i l shoul d i ncl ude none of t he i ncome or expenses
r el at ed t o t he beach house i n t hei r cur r ent year i ncome t ax
r et ur n.


729. Because Scot t i s t hr ee mont hs del i nquent on t he mor t gage payment s
f or hi s per sonal r esi dence, J eanet t e ( hi s si st er ) i s goi ng t o cover t he
ar r ear age. Based on past exper i ence, she does not expect t o be r epai d
by Scot t . Whi ch of t he f ol l owi ng st at ement s i s cor r ect ?

a. I f Scot t r ecei ves t he money f r omJ eanet t e and pays t he
mor t gage company, J eanet t e can deduct t he i nt er est par t .
b. I f J eanet t e pays t he mor t gage company di r ect l y, nei t her Scot t
nor J eanet t e can deduct t he i nt er est par t .
c. I f J eanet t e pays t he mor t gage company di r ect l y, she cannot
deduct t he i nt er est par t .
*d. Onl y b. and c. ar e cor r ect .
e. a. , b. , and c. ar e cor r ect .


730. Mel ba i ncur r ed t he f ol l owi ng expenses f or her dependent daught er
dur i ng t he cur r ent year :

Payment of principal on daughters
automobile loan
$3,600
Payment of interest on above loan 2,900
Payment of daughters property taxes 1,800
Payment of principal on daughters
personal residence loan
2,800
Payment of interest on daughters
personal residence loan
7,000


How much may Melba deduct in computing her itemized deductions?

*a. $0.
b. $8, 800.
c. $11, 700.
d. $18, 100.
e. None of t he above.


731. Vel ma and Bud di vor ced. Vel ma s at t or ney f ee of $5, 000 i s
al l ocat ed as f ol l ows:

General representation in obtaining the
divorce
$1,500
Services in obtaining custody of the
child
900
Services in settlement of martial
property
600
Determining the tax consequences of:
Dependency deduction for child 700
Property settlement 1,300


Of the $5,000 Velma pays to her attorney, the amount she may deduct as an
itemized deduction is:

a. $0.
b. $700.
*c. $2, 000.
d. $5, 000.
e. None of t he above.


732. Whi ch of t he f ol l owi ng must be capi t al i zed by a busi ness?

a. Repl acement of a wi ndshi el d of a busi ness t r uck whi ch was
br oken i n an acci dent .
b. Repai r of a r oof of a bui l di ng used i n busi ness.
*c. Amount pai d f or a covenant not t o compet e.
d. Onl y b. and c. must be capi t al i zed.
e. a. , b. , and c. can be expensed r at her t han capi t al i zed.


733. On J anuar y 2, 2013, Fr an acqui r es a busi ness f r omChuck. Among t he
asset s pur chased ar e t he f ol l owi ng i nt angi bl es: pat ent wi t h a 7- year
r emai ni ng l i f e, a covenant not t o compet e f or 10 year s, and goodwi l l .

Of t he pur chase pr i ce, $140, 000 was pai d f or t he pat ent and $60, 000 f or
t he covenant . The amount of t he excess of t he pur chase pr i ce over t he
i dent i f i abl e asset s was $100, 000. What i s t he amount of t he
amor t i zat i on deduct i on f or 2013?

a. $10, 667.
b. $16, 000.
*c. $20, 000.
d. $32, 667.
e. None of t he above.


734. I n J anuar y, Lance sol d st ock wi t h a cost basi s of $26, 000 t o hi s
br ot her , J ames, f or $24, 000, t he f ai r mar ket val ue of t he st ock on t he
dat e of sal e. Fi ve mont hs l at er , J ames sol d t he same st ock t hr ough hi s
br oker f or $27, 000. What i s t he t ax ef f ect of t hese t r ansact i ons?

a. Di sal l owed l oss t o J ames of $2, 000; gai n t o Lance of $1, 000.
b. Di sal l owed l oss t o Lance of $2, 000; gai n t o J ames of $3, 000.
c. Deduct i bl e l oss t o Lance of $2, 000; gai n t o J ames of $3, 000.
*d. Di sal l owed l oss t o Lance of $2, 000; gai n t o J ames of $1, 000.
e. None of t he above.


735. Ni keya sel l s l and ( adj ust ed basi s of $120, 000) t o her adul t son,
Shamed, f or i t s appr ai sed val ue of $95, 000. Whi ch of t he f ol l owi ng
st at ement s i s cor r ect ?

a. Ni keya s r ecogni zed l oss i s $25, 000 ( $95, 000 amount r eal i zed
$120, 000 adj ust ed basi s) .
b. Shamed s adj ust ed basi s f or t he l and i s $120, 000 ( $95, 000 cost
+ $25, 000 di sal l owed l oss f or Ni keya) .
*c. I f Shamed subsequent l y sel l s t he l and f or $112, 000, he has no
r ecogni zed gai n or l oss.
d. Onl y a. and b. ar e cor r ect .
e. a. , b. , and c. ar e cor r ect .


736. Whi ch of t he f ol l owi ng i s not a r el at ed par t y f or const r uct i ve
owner shi p pur poses under 267?

*a. The t axpayer s aunt .
b. The t axpayer s br ot her .
c. The t axpayer s gr andmot her .
d. A cor por at i on owned mor e t han 50%by t he t axpayer .
e. None of t he above.


737. Aust i n, a si ngl e i ndi vi dual wi t h a sal ar y of $100, 000, i ncur r ed
and pai d t he f ol l owi ng expenses dur i ng t he year :

Medi cal expenses $ 5, 000
Al i mony 24, 000
Char i t abl e cont r i but i ons 2, 000
Casual t y l oss ( af t er $100
f l oor )
1, 000
Mor t gage i nt er est on per sonal
r esi dence
4, 500
Pr oper t y t axes on per sonal
r esi dence
4, 200
Movi ng expenses 2, 500
Cont r i but i on t o a t r adi t i onal
I RA
4, 000
Sal es t axes ( no st at e or
l ocal i ncome t ax i s i mposed)
1, 300


Cal cul at e Aust i n s deduct i ons for AGI .

Cor r ect Answer :
Onl y t he f ol l owi ng expenses ar e deduct i bl e for AGI :

Alimony $24,000

Moving expenses 2,500

Contribution to IRA 4,000

Deductions for AGI $30,500


The other expenses, after applying any statutory
floors, are deductions from AGI.




738. Ar nol d and Bet h f i l e a j oi nt r et ur n. Use t he f ol l owi ng dat a t o
cal cul at e t hei r deduct i on for AGI .


Mor t gage i nt er est on per sonal r esi dence $ 6, 0
00
Pr oper t y t axes on per sonal r esi dence 2, 500
Al i mony payment s 12, 000
Movi ng expenses 7, 000
Char i t abl e cont r i but i ons 1, 500
St at e i ncome t axes 5, 000
I nvest ment i nt er est ( $8, 000 of expenses
l i mi t ed t o net i nvest ment i ncome of
$7, 500)
7, 500
Unr ei mbur sed empl oyee expenses 2, 500
Sal es t axes 2, 600



Cor r ect Answer :
Ar nol d and Bet h s deduct i on for AGI i s $19, 000 and consi st s of t he
f ol l owi ng i t ems:

Alimony payments $12,000
Moving expenses 7,00
0
Deduction for AGI $19,000


All of the other items are itemized deductions. Note that the taxpayer must
choose between the state income taxes and the sales taxes.


739. Robi n and J ef f own an uni ncor por at ed har dwar e st or e. They
det er mi ne t hei r sal ar i es at t he end of t he year by usi ng t he amount
r equi r ed t o r educe t he net i ncome of t he har dwar e st or e t o $0. Based on
t hi s pol i cy, Robi n and J ef f each r ecei ve a t ot al sal ar y of $125, 000.
Thi s i s pai d as f ol l ows: $8, 000 per mont h and $29, 000 on December 31.
Det er mi ne t he amount of t he sal ar y deduct i on.

Cor r ect Answer :
Si nce t he har dwar e st or e i s not i ncor por at ed, t he i ssue of t he
r easonabl eness of t he sal ar i es i s not r el evant . Robi n and J ef f wi l l
r epor t i ncome of $125, 000 each r egar dl ess of whet her i t i s l abel ed as
sal ar y or as a di st r i but i on of t he har dwar e st or e s net i ncome.
Ther ef or e, t her e i s not hi ng wr ong wi t h t he har dwar e st or e ( i . e. , a
par t ner shi p) t aki ng a $250, 000 sal ar y deduct i on.


740. Sandr a owns an i nsur ance agency. The f ol l owi ng sel ect ed dat a ar e
t aken f r omt he agency bal ance sheet and i ncome st at ement pr epar ed usi ng
t he accrual met hod.


Revenue $250, 000
Sal ar i es and commi ssi ons 100, 000
Rent 10, 000
I nsur ance 5, 000
Ut i l i t i es 6, 000
Account s r ecei vabl e, 1/ 1/ 2013 40, 000
Account s r ecei vabl e, 12/ 31/ 2013 38, 000
Account s payabl e, 1/ 1/ 2013 12, 000
Account s payabl e, 12/ 31/ 2013 11, 000


Cal cul at e Sandr a s net pr of i t usi ng t he cash met hod f or 2013.

Cor r ect Answer :
Sandr a s accr ual met hod net pr of i t i s cal cul at ed as f ol l ows:

Revenue $250,000
Less: Expenses
Salaries and
commissions
$100,000
Rent 10,000
Insurance 5,000
Utilities 6,0
00
(121,000)
Net profit $129,000


To convert to cash method net profit, the following adjustments must be
made.

Net profitaccrual method $129,000
Deduct: Decrease in accounts
payable ($11,000 $12,000)
(1,000)
Add: Decrease in accounts
receivable ($38,000 $40,000)
2,0
00
Net profitcash method $130,000




741. Al f r ed s Ent er pr i ses, an uni ncor por at ed ent i t y, pays empl oyee
sal ar i es of $100, 000 dur i ng t he year . At t he end of t he year , $12, 000
of addi t i onal sal ar i es have been ear ned but not pai d unt i l t he
begi nni ng of t he next year .

a. Det er mi ne t he amount of t he deduct i on f or
sal ar i es i f Al f r ed i s a cash met hod
t axpayer .

b. Det er mi ne t he amount of t he deduct i on f or
sal ar i es i f Al f r ed i s an accr ual met hod
t axpayer .



Cor r ect Answer :
a. The deduction for salaries is the amount
paid of $100,000.

b. The deduction for salaries is calculated as
follows:

Salaries $100,000
Accrued salaries 12,0
00

Salary deduction $112,000




742. Tayl or , a cash basi s ar chi t ect , r ent s t he bui l di ng i n whi ch hi s
of f i ce i s l ocat ed f or $5, 000 per mont h. He commenced hi s pr act i ce on
Febr uar y 1, 2013. I n or der t o guar ant ee no r ent i ncr eases dur i ng an 18-
mont h per i od, he si gned an 18- mont h l ease and pr epai d t he $90, 000 on
Febr uar y 1, 2013. How much can Tayl or deduct as r ent expense f or 2013?

Cor r ect Answer :
Tayl or i s a cash basi s t axpayer . Thus, he i s el i gi bl e t o use t he one-
year r ul e on pr epayment s. Si nce hi s pr epayment s of 18- mont hs r ent does
not ext end beyond t he end of 2014, he can deduct t he $90, 000 pai d i n
2013.


743. I n or der t o pr ot ect agai nst r ent i ncr eases on t he bui l di ng i n
whi ch she oper at es a dance st udi o, Mel l a si gns an 18- mont h l ease f or
$36, 000. The l ease commences on Oct ober 1, 2013. How much of t he
$36, 000 payment can she deduct i n 2013 and 2014?

a. I f Mel l a i s an accr ual basi s t axpayer ?

b. I f Mel l a i s a cash basi s t axpayer ?



Cor r ect Answer :
a. As an accrual basis taxpayer, Mella can
deduct the amount of the rent expenses
incurred in 2013 of $6,000 ($2,000 3
months) for 2013 and the $24,000 ($2,000 12
months) incurred in 2014.

b. Since Mella is a cash basis taxpayer, she can
deduct the entire $36,000 prepayment in 2013
if she can satisfy the one-year rule.
However, since the rental period of 18 months
extends beyond the end of 2014, she fails the
requirement for the one-year rule.
Consequently, she can deduct only $6,000 in
2013 and $24,000 in 2014.




744. Pet ul a s busi ness sel l s heat pumps whi ch have a one- year war r ant y.
Based on hi st or i cal dat a, t he war r ant y cost s amount t o 11%of sal es.
Dur i ng 2013, heat pump sal es ar e $400, 000. Act ual war r ant y expenses
pai d i n 2013 ar e $40, 000.

a. Det er mi ne t he amount of t he war r ant y
expense deduct i on f or 2013 i f Pet ul a s
busi ness uses t he accr ual met hod.

b. How woul d your answer change i f Pet ul a used
t he cash met hod f or ext ended war r ant i es and
t he pur chaser s pai d $25, 000 f or t he
war r ant i es whi ch cover ed t he second and
t hi r d year s of owner shi p?



Cor r ect Answer :
a. Even though Petulas business uses the
accrual method, reserves for estimated
warranty expenses are not permitted.
Therefore, the deduction for warranty
expenses is the amount paid of $40,000.

b. Petula would record gross income in 2013 of
$425,000 ($400,000 + $25,000). The deduction
for warranty expense would still be $40,000.




745. Bei ge, I nc. , an ai r l i ne manuf act ur er , i s conduct i ng negot i at i ons
f or t he sal e of mi l i t ar y ai r cr af t . One negot i at i on i s wi t h a U. S.
assi st ant secr et ar y of def ense. She can cl ose t he deal on t he pur chase
of 50 at t ack hel i copt er s i f she i s pai d $750, 000 under t he t abl e.
Anot her negot i at i on i s wi t h t he mi ni st er of def ense of a t hi r d wor l d
count r y. To compl et e t he sal e of 20 j et f i ght er s t o hi s gover nment , he
demands t hat he be pai d a $1 mi l l i on gr ease payment . Bei ge makes t he
payment s and cl oses t he deal s. How much of t hese payment s ar e
deduct i bl e by Bei ge, I nc. ?

Cor r ect Answer :
The $750, 000 payment t o t he U. S. assi st ant secr et ar y of def ense i s a
br i be and i s not deduct i bl e. I f t he gr ease payment of $1 mi l l i on t o t he
mi ni st er of def ense of t he t hi r d wor l d count r y does not vi ol at e t he
For ei gn Cor r upt Pr act i ces Act of 1977, t hen t he ent i r e $1 mi l l i on
payment i s deduct i bl e. However , i f t he gr ease payment does vi ol at e t he
Act , t hen none of i t i s deduct i bl e.


746. Al bi e oper at es an i l l egal dr ug- r unni ng busi ness and has t he
f ol l owi ng i t ems of i ncome and expense. What i s Al bi e s adj ust ed gr oss
i ncome f r omt hi s oper at i on?

I ncome $800, 000
Expense
s:

Rent 24, 000
Ut i l i t i es 9, 000
Br i bes t o pol i ce 55, 000
Medi cal expense 5, 000
Legal f ees 25, 000
Depr eci at i on 30, 000
I l l egal ki ckbacks 30, 000
Cost of goods sol d 300, 000



Cor r ect Answer :
Al bi e i s al l owed t o r educe hi s AGI onl y by t he cost of goods sol d; t hus,
hi s AGI i s $500, 000 ( $800, 000 $300, 000) . Not e t hat t he cost of goods
sol d i s t r eat ed as a negat i ve i t emi n cal cul at i ng gr oss i ncome.


747. Ki t t y r uns a br ot hel ( i l l egal under st at e l aw) and has t he
f ol l owi ng i t ems of i ncome and expense. What i s t he amount t hat she must
i ncl ude i n t axabl e i ncome f r omher oper at i on?

I ncome $200, 000
Expense
s:

Rent 8, 000
Ut i l i t i es 2, 000
Br i bes t o pol i ce 10, 000
Medi cal expense 5, 000
Legal f ees 20, 000
Depr eci at i on 14, 000
I l l egal ki ckbacks 15, 000



Cor r ect Answer :
Income $200,000
Expenses:
Rent $ 8,000
Utilities 2,000
Medical 5,000
Legal fees 20,000
Depreciation 14,000 (49,000)
$151,000


The bribes to police of $10,000 and illegal kickbacks of $15,000 are not
deductible.


748. J anet i s t he CEO f or Si l ver , I nc. , a cl osel y hel d
cor por at i on. Her t ot al compensat i on f or 2013 i s $5 mi l l i on. Of t hi s
amount , $2 mi l l i on i s a sal ar y and $3 mi l l i on i s a bonus. The bonus
was cal cul at ed as 5%of Si l ver s net i ncome bef or e t he bonus and bef or e
t axes ( $60 mi l l i on X 5%= $3 mi l l i on) . The bonus pr ovi si on has been i n
ef f ect si nce J anet became CEO f i ve year s ago and i s r el at ed t o Si l ver s
per f or mance. I t i s appr oved annual l y by t he ent i r e boar d of di r ect or s
( 1 of t he 5 di r ect or s i s an out si de di r ect or ) of Si l ver . How much of
J anet s compensat i on can Si l ver deduct f or 2013?

Cor r ect Answer :
Al l of t he $5 mi l l i on i s deduct i bl e by Si l ver . Si nce Si l ver i s a
cl osel y hel d, r at her t han a publ i cl y hel d cor por at i on, t he $1 mi l l i on
st at ut or y l i mi t on t he deduct i on of cer t ai n execut i ve compensat i on i s
not appl i cabl e.


749. Agnes oper at es a Chr i st mas Shop i n At l ant i c Ci t y, NJ . She makes a
weekend t r i p t o Ver o Beach, FL, f or t he pur pose of det er mi ni ng t he
f easi bi l i t y of openi ng anot her shop. Her t r avel expenses ar e $2, 000
( i ncl udes $500 f or meal s) . I n addi t i on, she pays $5, 000 t o a mar ket
r esear ch f i r mi n Ver o Beach t o pr epar e a f easi bi l i t y st udy. Det er mi ne
t he amount of t he expenses t hat Agnes can deduct i f :

a. She opens a new shop i n Ver o Beach.

b. She deci des not t o open a new shop i n Ver o
Beach.



Cor r ect Answer :
a. Because Agnes is already in the Christmas
Shop business, all of the investigation
expenses ($2,000 + $5,000 = $7,000) are
deductible regardless of whether or not she
opens a shop in Vero Beach. Note, however,
that as discussed in Chapter 9, only 50% of
the cost of the meals is deductible.

b. Same response as in a.




750. Whi l e she was a col l ege st udent , Angel l i ved by a bookst or e
l ocat ed near campus. She t hi nks a bookst or e l ocat ed on t he ot her si de
of campus woul d be successf ul . She i ncur s expenses of $42, 800 ( l egal
f ees, account i ng f ees, mar ket i ng sur vey, et c. ) i n expl or i ng i t s
busi ness pot ent i al . Her par ent s have agr eed t o l oan her t he money
r equi r ed t o st ar t t he busi ness. What amount of t hese i nvest i gat i on
cost s can Angel deduct i f :

a. She opens t he bookst or e on August 1,
2013.

b. She deci des not t o open t he bookst or e.



Cor r ect Answer :
a. If Angel opens the bookstore on August 1,
2013, she can deduct the following
investigation expenses in 2013.


Allowed expense deduction in
first year
$5,000
Amortization ($37,800/180
months 5 months)
1,050
Deductible investigation
expenses
$6,050


b. If Angel does not open the bookstore, she
cannot deduct any of the $42,800 of
expenses she incurred.




751. Cal cul at e t he net i ncome i ncl udi bl e i n t axabl e i ncome f or t he
f ol l owi ng hobby:

I ncome $23, 000
Mor t gage i nt er est and pr oper t y t axes
al l ocabl e t o hobby
12, 000
Depr eci at i on 4, 000
Suppl i es and f ees 7, 000
Tel ephone f or hobby 3, 000



Cor r ect Answer :
Income (includible in
gross income)
$23,000
Itemized
deductions
:

Mortgage interest and
property taxes
$12,000
Supplies and fees 7,000
Telephone 3,000
Depreciation (limited
to $23,000 $12,000
$7,000 $3,000)
1,0
00
(23,000)
$
0


Otherwise deductible expenses must be deducted first; only enough other
expenses are allowed to offset the remaining income. Deductions affecting
depreciable basis are taken last. The mortgage interest and property taxes
are deductible as itemized deductions and the other hobby-related expenses
are subject to the 2%-of-AGI floor. Once the taxpayers AGI is determined,
the effect of the 2%-of-AGI floor on itemized deductions can be calculated.


752. Dur i ng t he year , Ri t a r ent ed her vacat i on home f or t wel ve days f or
$2, 400 and she used i t per sonal l y f or t hr ee mont hs. The f ol l owi ng
expenses wer e i ncur r ed on t he home:

Pr oper t y t axes $ 2, 200
Mor t gage i nt er est 10, 800
Ut i l i t i es and mai nt enance 1, 900
Depr eci at i on 5, 000
I nsur ance 900


Cal cul at e her r ent al gai n or l oss and i t emi zed deduct i ons.

Cor r ect Answer :
Ri t a excl udes t he $2, 400 of r ent al i ncome f r omgr oss i ncome because t he
home i s cl assi f i ed as pr i mar i l y per sonal . She can deduct t he pr oper t y
t axes ( $2, 200) and mor t gage i nt er est ( $10, 800) as i t emi zed
deduct i ons. No ot her expenses ar e deduct i bl e.


753. Dur i ng t he year , J i mr ent ed hi s vacat i on home f or 200 days and
l i ved i n i t f or 19 days. Dur i ng t he r emai ni ng days, t he vacat i on home
was avai l abl e f or r ent al use. I s t he vacat i on home subj ect t o t he
l i mi t at i on on t he deduct i ons of a per sonal / r ent al vacat i on home?

Cor r ect Answer :
The vacat i on home i s not subj ect t o t he l i mi t at i ons on t he deduct i ons
of a per sonal / r ent al vacat i on home. I t does sat i sf y t he r ent al par t of
t he cl assi f i cat i on because i t i s r ent ed f or gr eat er t han 14
days. However , t he per sonal use of 19 days does not exceed t he gr eat er
of ( 1) 14 days or ( 2) 10%of t he r ent al days, si nce 10%of t he r ent al
days i s 20 ( 200 r ent al days 10%) days. Ther ef or e, t he appr opr i at e
cl assi f i cat i on i s pr i mar i l y r ent al use r at her t han per sonal / r ent al use.


754. Dur i ng t he year , Mar t i n r ent ed hi s vacat i on home f or t hr ee mont hs
and spent one mont h t her e. Gr oss r ent al i ncome f r omt he pr oper t y was
$5, 000. Mar t i n i ncur r ed t he f ol l owi ng expenses: mor t gage i nt er est ,
$3, 000; r eal est at e t axes, $1, 500; ut i l i t i es, $800; mai nt enance, $500;
and depr eci at i on, $4, 000. Comput e Mar t i n s al l owabl e deduct i ons f or t he
vacat i on home.

Cor r ect Answer :
Si nce t he vacat i on home i s r ent ed f or 15 or mor e days and i s used f or
per sonal pur poses f or mor e t han t he gr eat er of ( 1) 14 days or ( 2) 10%
of t he r ent al days, t he deduct i ons ar e scal ed down, usi ng t he courts
approach, as f ol l ows:

Gross income $5,000
Deduct: Taxes and interest (3/12
$4,500)
(1,125)
Remainder applicable to other rental
expenses
$3,875
Deduct: Allocable share of utilities
and maintenance [3/4 ($800 + $500)]
(97
5)
Balance applicable to depreciation $2,900
Deduct: Depreciation (3/4 $4,000 =
$3,000) but limited to above balance
(2,900)
Net income $
0


Thus, Martin may deduct $1,125 taxes and interest, $975 utilities and
maintenance, and $2,900 depreciation against the gross income of $5,000.
The personal portion of taxes and interest ($3,375) is deductible as an
itemized deduction. Example 29

Using the IRSs approach, though, the deductions are as follows:


Gross income $5,000
Deduct: Taxes and interest (3/4
$4,500)
(3,375)
Remainder applicable to other rental
expenses
$1,625
Deduct: Allocable share of utilities
and maintenance [3/4 ($800 + $500)]
(975)
Balance applicable to depreciation $ 650

Deduct: Depreciation (3/4 $4,000 =
$3,000) but limited to above balance
(650)
Net income $
0


Thus, Martin may deduct $3,375 taxes and interest, $975 utilities and
maintenance, and $650 depreciation against the gross income of $5,000. The
personal portion of taxes and interest ($1,125) is deductible as an
itemized deduction.


755. Br i dget t s son, Cl yde, i s $12, 000 i n ar r ear s on hi s r esi dent i al
mor t gage payment s. Of t he $12, 000, $7, 500 r epr esent s i nt er est and
$4, 500 r epr esent s pr i nci pal .

a. I f Br i dget t pays t he $12, 000 t o t he
l ender , how much can she deduct ? How much
can Cl yde deduct ?

b. I f Br i dget t pays t he $7, 500 of i nt er est
t o t he l ender and l oans or gi ves $4, 500
t o Cl yde, who pays t he $4, 500 of
pr i nci pal , how much can Br i dget t deduct ?
How much can Cl yde deduct ?

c. I f Br i dget t gi ves or l ends t he $12, 000 t o
Cl yde who pays t he l ender , how much can
he deduct ? How much can Br i dget t deduct ?

d. Advi se Br i dget t and Cl yde on how t he
payment shoul d be made.



Cor r ect Answer :
a. A deduction cannot be taken for paying
another taxpayers obligation. So if
Bridgett pays the lender, neither Bridgett
nor Clyde could deduct the $7,500 of
mortgage interest expense.

b. Bridgett cannot deduct the $7,500 payment
identified as interest since this represents
the payment of another taxpayers
obligation. Even though Clyde has identified
the $4,500 payment as relating to the
principal of the mortgage, he probably can
deduct the $4,500 as mortgage interest
expense since Bridgett is not allowed the
deduction. In any event, Bridgett is not
allowed a deduction.

c. Clyde could deduct the $7,500 of mortgage
interest expense, and Bridgett would receive
no deduction.

d. Bridgett should either loan or give the
funds to Clyde who then makes the mortgage
payments of $12,000 ($7,500 interest +
$4,500 principal).




756. Mat t i e and El mer ar e separ at ed and ar e i n t he pr ocess of obt ai ni ng
a di vor ce. They i ncur l egal f ees f or t hei r r espect i ve at t or neys wi t h
t he expenses bei ng i t emi zed as f ol l ows:

For Mat t i e El mer
Gener al cost s of t he di vor ce $3, 500 $3, 000
Det er mi nat i on of dependency
exempt i ons
1, 500 0
Pr oper t y set t l ement t ax
consequences
400 1, 500
$5, 400 $4, 500


Al t hough t her e i s no r equi r ement t hat he do so, El mer pays Mat t i e s
l awyer as a gest ur e of t he posi t i ve f eel i ngs he st i l l has f or her .

a. Det er mi ne t he deduct i ons f or Mat t i e and f or
El mer .

b. Cl assi f y t he deduct i ons as for AGI and from
AGI .



Cor r ect Answer :
a. Only the legal fees associated with the
divorce that relate solely to tax advice are
deductible. Therefore, Elmer may deduct the
following:


Property settlement tax consequences $1,500


If Mattie had paid her attorney, she
could have deducted the following:



Determination of dependency
exemptions
$1,500
Property settlement tax
consequences
400
$1,900


However, since Elmer paid Matties lawyer,
Mattie is ineligible to take the deduction.
Likewise, Elmer is ineligible to take the
deduction for this $1,900 since the
obligation was that of Mattie.



b. Any expenses that are deductible in this
situation are classified as itemized
deductions (i.e., from AGI).




757. Mar vi n spends t he f ol l owi ng amount s on a house he owns:

Repai r t o r oof $1, 100
Car pet i ng f or t he
l i vi ng r oom
1, 200
Pai nt i ng of t he
ext er i or
4, 000
Repl acement of
f r ont door
800


a. How much of t hese expenses can Mar vi n
deduct i f t he house i s hi s pr i nci pal
r esi dence?
b. How much of t hese expenses can Mar vi n
deduct i f he r ent s t he house t o a t enant ?
c. Cl assi f y any deduct i bl e expenses as
deduct i ons for AGI or as deduct i ons from
AGI .



Cor r ect Answer :
a. Since these expenditures are personal
expenditures, no deduction is allowed.
b. Since these expenditures are for rental
property, Marvin can deduct $7,100 ($1,100 +
$1,200 + $4,000 + $800).
c. The $7,100 deduction associated with the
rental property is classified as a deduction
for AGI.




758. Wal t er sel l s l and wi t h an adj ust ed basi s of $175, 000 and a f ai r
mar ket val ue of $160, 000 t o hi s mot her , Shi r l ey, f or $160, 000. Wal t er
r ei nvest s t he pr oceeds i n t he st ock mar ket . Shi r l ey hol ds t he l and f or
one year and a day and sel l s i t i n t he mar ket pl ace f or $169, 000.

a. Det er mi ne t he t ax consequences t o Wal t er .

b. Det er mi ne t he t ax consequences t o Shi r l ey.



Cor r ect Answer :
a. Amount realized $160,000
Adjusted basis (175,000)
Realized loss ($ 15,000)

Walters realized loss of $15,000 is
disallowed because Walter and Shirley are
related parties.

b. Amount realized $169,000
Adjusted basis (160,000)
Realized gain $ 9,000
Walters disallowed loss
needed to reduce
Shirleys gain to zero
(9,000)
Recognized gain $
0

Shirley may use as much of Walters
disallowed loss as she needs to reduce her
realized gain (i.e., $9,000) to $0. Thus,
Shirleys recognized gain is $0 and the
$6,000 ($15,000 $9,000) of Walters
disallowed loss that is not used by Shirley
is permanently lost.




759. Sandr a sol d 500 shar es of Wr en Cor por at i on t o Bob, her br ot her ,
f or i t s f ai r mar ket val ue. She had pai d $26, 000 f or t he st ock.
Cal cul at e Sandr a s and Bob s gai n or l oss under t he f ol l owi ng
ci r cumst ances:

a. Sandr a sol d t he shar es t o Bob f or $20, 000.
One year l at er , Bob sol d t hemf or $18, 000.

b. Sandr a sol d t he shar es t o Bob f or $30, 000.
One year l at er , Bob sol d t hemf or $27, 000.

c. Sandr a sol d t he shar es t o Bob f or $20, 000.
One year l at er , Bob sol d t hemf or $28, 000.



Cor r ect Answer :
a. Sandra has no deductible loss. Bobs
recognized loss is $2,000.

b. Sandra has a recognized gain of $4,000. Bob
has a recognized loss of $3,000. Related party
transaction rules apply only to losses.

c. Sandra has no deductible loss. Bob has a
recognized gain of $2,000 ($28,000 $20,000
= $8,000 less Sandras disallowed loss of
$6,000).




760. The st ock of Eagl e, I nc. i s owned as f ol l ows:

Tom 23%
Tom s uncl e 22%
Tom s daught er 7%
Tom s si st er 15%
Tom s spouse 15%
Tom s nephew 8%
Tom s CPA, unr el at ed 10%


Tomsel l s l and and a bui l di ng t o Eagl e, I nc. f or $212, 000. Hi s adj ust ed
basi s f or t hese asset s i s $225, 000. Cal cul at e Tom s r eal i zed and
r ecogni zed l oss associ at ed wi t h t he sal e.

Cor r ect Answer :
Tom s r eal i zed l oss i s $13, 000.

Amount realized $212,000
Adjusted basis (225,000
)
Realized loss ($ 13,000
)


However, his recognized loss is $0 because the loss is disallowed as a
267 related party transaction.

A related party includes a corporation more than 50% (directly or
indirectly) owned by the taxpayer. Toms total ownership (i.e., both
direct and constructive) of Eagle, Inc. is 60%.

Tom 23%
Toms daughter 7%
Toms sister 15%
Toms spouse 15%
60%


Toms uncle, nephew, and the CPA are not related parties for 267
purposes.


761. Tr acy i nvest ed i n t he f ol l owi ng st ocks and bonds dur i ng 2013.

Bl ue, I nc. $25, 000
Ci t y of Fal con bonds 75, 000


To f i nance t he i nvest ment s, she bor r owed $100, 000 f r omSwan Bank.
I nt er est expense pai d on t he l oan dur i ng 2013 was $5, 000. Dur i ng 2013,
Tr acy r ecei ved $1, 250 of di vi dend i ncome f r omBl ue, I nc. and $3, 000 of
i nt er est i ncome on t he muni ci pal bonds.

a. Det er mi ne t he amount of Tr acy s gr oss
i ncome.

b. Det er mi ne t he maxi mumamount of Tr acy s
deduct i bl e i nt er est expense.



Cor r ect Answer :
a. Tracy must include the $1,250 of dividend
income in her gross income. The interest on
the municipal bonds of $3,000 is tax-exempt.

b. Tracy can deduct the interest paid of $1,250
($5,000 1/4) on the portion of the loan
that relates to the Blue, Inc. stock. The
interest paid of $3,750 on the portion of
the loan that relates to the municipal bonds
is disallowed because the interest income
from the bonds is tax-exempt.




762. Tr ade of busi ness expenses ar e cl assi f i ed as deduct i ons for AGI .
Sect i on 212 expenses, bar r i ng cer t ai n except i ons, ar e cl assi f i ed as
deduct i ons from AGI . What ar e t hese except i ons?

Cor r ect Answer :
The nor mal cl assi f i cat i on f or 212 expenses i s as a deduct i on from AGI .
However , expenses pai d i n connect i on wi t h t he det er mi nat i on, col l ect i on,
or r ef und of t axes r el at ed t o t he i ncome of sol e pr opr i et or shi ps, r ent s
and r oyal t i es, or f ar mi ng oper at i ons ar e cl assi f i ed as deduct i ons for
AGI . I n addi t i on, ot her r ent al and r oyal t y expenses ar e cl assi f i ed as
deduct i ons for AGI.


763. Ar e al l per sonal expenses di sal l owed as deduct i ons?

Cor r ect Answer :
No. Sel ect ed per sonal expenses can be deduct ed as i t emi zed deduct i ons.
The f ol l owi ng ar e exampl es of deduct i bl e per sonal expenses.

Cont r i but i ons t o qual i f i ed char i t abl e or gani zat i ons ( not t o
exceed a speci f i ed per cent age of AGI ) .

Medi cal expenses ( i n excess of 7. 5%of AGI ) .

Cer t ai n st at e and l ocal t axes ( e. g. , r eal est at e t axes and st at e
and l ocal i ncome or sal es t axes) .

Per sonal casual t y l osses ( i n excess of an aggr egat e f l oor of 10%
of AGI and a $100 f l oor per casual t y) .

Cer t ai n per sonal i nt er est ( e. g. , mor t gage i nt er est on per sonal
r esi dence) .


764. Under what ci r cumst ance can a br i be be deduct ed?

Cor r ect Answer :
Br i bes pai d t o a domest i c of f i ci al ar e di sal l owed i f t he br i be i s
i l l egal under t he l aws of t he Uni t ed St at es. However , a br i be pai d t o a
f or ei gn of f i ci al i s di sal l owed onl y i f i t i s unl awf ul under t he For ei gn
Cor r upt Pr act i ces Act of 1977.


765. Can a t r ade or busi ness expense be deduct i bl e i f i t i s necessar y
but not or di nar y?

Cor r ect Answer :
No. To be deduct i bl e as a t r ade or busi ness expense, t he expense must
be bot h or di nar y and necessar y.


766. Sal ar i es ar e consi der ed an or di nar y and necessar y expense of a
t r ade or busi ness i f t hey meet what ot her r equi r ement ? What ar e t he t ax
consequences i f t hi s r equi r ement i s not met ?

Cor r ect Answer :
Reasonabl eness i s an addi t i onal r equi r ement t hat appl i es t o sal ar i es.
Gener al l y, t he unr easonabl e expense i s di sal l owed as a deduct i on t o t he
cor por at i on and t axabl e as a di vi dend, r at her t han as sal ar y, t o t he
shar ehol der .


767. I f par t of a shar ehol der / empl oyee s sal ar y i s cl assi f i ed as
unr easonabl e, det er mi ne t he ef f ect on t he:

a. Shar ehol der / empl oyee s gr oss i ncome.

b. Cor por at i on s t axabl e i ncome.



Cor r ect Answer :
a. The reclassification of part of a
shareholder/employees salary as
unreasonable will have no effect on the
shareholder/employees gross income. That
is, the shareholder/employees salary income
will decrease by the same amount as his
dividend income increases. Note that if the
dividends are qualified dividends, they are
eligible for the same preferential tax rate
of 15%/0% applicable to long-term capital
gains.

b. Salaries are deductible in calculating
corporate taxable income, whereas dividends
are not. So, the taxable income of the
corporation will increase due to a reduced
salary deduction.




768. What l osses ar e deduct i bl e by an i ndi vi dual t axpayer ?

Cor r ect Answer :
Gener al l y deduct i bl e l osses of i ndi vi dual t axpayer s ar e l i mi t ed t o ( 1)
t hose i ncur r ed i n a t r ade or busi ness or ( 2) i n a t r ansact i on ent er ed
i nt o f or pr of i t . However , i ndi vi dual s ar e al so al l owed t o deduct l osses
t hat ar e t he r esul t of a casual t y ( subj ect t o cer t ai n st at ut or y
mat er i al i t y l i mi t at i ons) .


769. Br uce owns sever al sol e pr opr i et or shi ps. Must Br uce use t he same
account i ng met hod f or each of t hese busi nesses?

Cor r ect Answer :
No. I f a t axpayer owns mul t i pl e busi nesses, i t may be possi bl e t o use
t he cash met hod f or some and t he accr ual met hod f or ot her s.


770. Max opened hi s dent al pr act i ce ( a sol e pr opr i et or shi p) i n Mar ch
2013. At t he end of t he year , he has unpai d account s r ecei vabl e of
$62, 000 and no unpai d account s payabl e. Shoul d Max use t he accr ual
met hod or t he cash met hod f or hi s dent al pr act i ce?

Cor r ect Answer :
A ser vi ce pr ovi der gener al l y shoul d use t he cash met hod. Under t he cash
met hod, Max r ecor ds i ncome f r omhi s dent al pr act i ce onl y as he col l ect s
f r omhi s pat i ent s and/ or t hei r i nsur ance compani es. Max has i ncome f r om
t he uncol l ect ed account s r ecei vabl e onl y as he r ecei ves payment . Not e
t hat si nce hi s account s payabl e can onl y be deduct ed when pai d under
t he cash met hod, he shoul d cont i nue t o mi ni mi ze t he account s payabl e
bal ance at t he end of t he t ax year .


771. Di scuss t he appl i cat i on of t he one- year r ul e on pr epayment s by a
cash basi s t axpayer .

Cor r ect Answer :
The Regul at i ons set f or t h t he gener al r ul e t hat an expendi t ur e t hat
cr eat es an asset havi ng a usef ul l i f e t hat ext ends subst ant i al l y beyond
t he end of t he t ax year must be capi t al i zed. However , under t he one-
year r ul e on pr epayment s f or cash basi s t axpayer s, t he pr epayment can
be expensed i n t he cur r ent t ax year i f t he asset wi l l expi r e or be
consumed by t he end of t he t ax year f ol l owi ng t he year of payment .
Ot her wi se, t he t axpayer must capi t al i ze t he pr epayment and deduct i t
over t he benef i t per i od.


772. Br i ef l y di scuss t he t wo t est s t hat an accr ual basi s t axpayer must
appl y bef or e an expense can be deduct ed.

Cor r ect Answer :
The t wo t est s t hat an accr ual basi s t axpayer must appl y bef or e an
expense can be deduct ed ar e ( 1) t he al l event s t est and ( 2) t he
economi c per f or mance t est . The all events test pr ovi des t hat a
deduct i on cannot be cl ai med unt i l al l t he event s t hat cr eat e t he
t axpayer s l i abi l i t y have occur r ed and t hat t he amount of t he l i abi l i t y
can be det er mi ned wi t h r easonabl e accur acy. The economic performance
test pr ovi des t hat t he ser vi ce, pr oper t y, or use of pr oper t y gi vi ng
r i se t o t he l i abi l i t y must have been per f or med f or , pr ovi ded t o, or
used by t he t axpayer .


773. Gr aham, a CPA, has submi t t ed a pr oposal t o do t he annual audi t f or
a muni ci pal i t y. Owen, t he ci t y t r easur er , t el l s Gr ahamt hat f or a
$1, 000 f ee, he wi l l use hi s i nf l uence t o have t he audi t awar ded t o
Gr aham. What f act or s ar e r el evant i n det er mi ni ng i f Gr ahamcan deduct
t he $1, 000 payment assumi ng he pays t he f ee t o Owen?

Cor r ect Answer :
The payment f r omGr ahamt o Owen appear s t o be a br i be. To be di sal l owed,
t he br i be must be i l l egal under ei t her Feder al or st at e l aw and al so
must subj ect t he payer t o a cr i mi nal penal t y or t he l oss of l i cense or
pr i vi l ege t o engage i n a t r ade or busi ness. For a br i be t hat i s i l l egal
under st at e l aw, a deduct i on i s deni ed onl y i f t he st at e l aw i s
gener al l y enf or ced.


774. How can an i ndi vi dual s consul t at i on wi t h a l awyer be cl assi f i ed
as a deduct i on for AGI i n some cases and a deduct i on from AGI i n ot her
i nst ances?

Cor r ect Answer :
Legal expenses ar e deduct i bl e when t hey ar e di r ect l y r el at ed t o a t r ade
or busi ness ( for AGI ) ; an i ncome- pr oduci ng act i vi t y ( ei t her for AGI or
from AGI ) ; or t he det er mi nat i on, col l ect i on, or r ef und of a t ax ( ei t her
for AGI or from AGI ) . Or di nar y and necessar y l egal expenses i ncur r ed i n
conj unct i on wi t h a t r ade/ busi ness or i n conj unct i on wi t h r ent al / r oyal t y
pr oper t y ar e deduct i bl e for AGI . Al l ot her deduct i bl e l egal expenses
ar e deduct i ons from AGI .


775. I f a t axpayer oper at ed an i l l egal busi ness ( not dr ug t r af f i cki ng) ,
what expenses can be deduct ed and what expenses ar e di sal l owed?

Cor r ect Answer :
The usual expenses of oper at i ng a busi ness ar e deduct i bl e. However , t he
f ol l owi ng expenses ar e di sal l owed.

Fi nes.

Br i bes t o publ i c of f i ci al s.

I l l egal ki ckbacks.

Ot her i l l egal payment s.


776. Bobby oper at es a dr ug t r af f i cki ng busi ness. Because he has an
account i ng backgr ound, he keeps det ai l ed f i nanci al r ecor ds. What
expenses can Bobby deduct on hi s Feder al i ncome t ax r et ur n?

Cor r ect Answer :
Bobby cannot deduct any of t he expenses associ at ed wi t h oper at i ng hi s
i l l egal dr ug t r af f i cki ng busi ness. However , gr oss i ncome f or t ax
pur poses i s def i ned as sal es mi nus cost of goods sol d. So i n
cal cul at i ng t he net i ncome of t he busi ness f or t ax pur poses, cost of
goods sol d i s t r eat ed as a negat i ve i ncome i t emr at her t han as an
expense.


777. Abner cont r i but es $2, 000 t o t he campai gn of t he Tea Par t y
candi dat e f or gover nor , $1, 000 t o t he campai gn of t he Tea Par t y
candi dat e f or senat or , and $500 t o t he campai gn of t he Tea Par t y
candi dat e f or mayor . Can Abner deduct t hese pol i t i cal cont r i but i ons?

Cor r ect Answer :
No. Pol i t i cal cont r i but i ons cannot be deduct ed.


778. Ar e t her e any ci r cumst ances under whi ch l obbyi ng expendi t ur es ar e
deduct i bl e?

Cor r ect Answer :
Yes. Lobbyi ng expendi t ur es ar e deduct i bl e under t he f ol l owi ng t hr ee
ci r cumst ances.

I nf l uenci ng l ocal l egi sl at i on.

Act i vi t i es devot ed sol el y t o moni t or i ng l egi sl at i on.

De minimis pr ovi si on f or annual i n- house expendi t ur es ( l obbyi ng
expenses ot her t han t hose pai d t o pr of essi onal l obbyi st s) i f such
expendi t ur es do not exceed $2, 000.


779. I n appl yi ng t he $1 mi l l i on l i mi t on deduct i ng execut i ve
compensat i on, what cor por at i ons ar e subj ect t o t he deduct i on l i mi t ?
What execut i ves ar e cover ed?

Cor r ect Answer :
The $1 mi l l i on l i mi t on deduct i ng t he compensat i on of a cover ed
execut i ve appl i es t o cor por at i ons t hat have at l east one cl ass of st ock
r egi st er ed under t he Secur i t i es Exchange Act of 1934. Cover ed empl oyees
i ncl ude t he chi ef execut i ve of f i cer and t he f our ot her most hi ghl y
compensat ed of f i cer s.


780. Under what ci r cumst ances may a t axpayer deduct t he expenses of
i nvest i gat i ng a possi bl e busi ness acqui si t i on, i f ( 1) t he busi ness i s
not acqui r ed; and ( 2) t he busi ness i s acqui r ed?

Cor r ect Answer :
(1) The expenses of investigation may be
deducted if the taxpayer is in the same or
similar business to that being
investigated, even if the business is not
acquired. If the taxpayer is not in the
same or similar trade or business to the
one being investigated, the investigation
expenses are nondeductible if the business
is not acquired.

(2) The expenses of investigation must be
capitalized by a taxpayer not in a similar
business when the business is acquired.
Such expenses may be immediately expensed
(up to $5,000 if such expenses do not
exceed $50,000) and the balance amortized
over a 180-month minimum period. If the
taxpayer is in the same or similar trade
or business as that acquired,
investigation expenses are currently
deductible.




781. What ar e t he r el evant f act or s t o be consi der ed i n det er mi ni ng
whet her an act i vi t y i s pr of i t - seeki ng or a hobby?

Cor r ect Answer :
The ni ne r el evant f act or s det ai l ed i n Reg. 1. 183- 2( b) ar e as f ol l ows:

( 1) Whet her t he act i vi t y i s conduct ed i n a busi nessl i ke manner .

( 2) The exper t i se of t he t axpayer s or t hei r advi ser s.

( 3) he t i me and ef f or t expended.

( 4) The expect at i on t hat t he asset s of t he act i vi t y wi l l
appr eci at e i n val ue.

( 5) The pr evi ous success of t he t axpayer i n t he conduct of si mi l ar
act i vi t i es.

( 6) The hi st or y of i ncome and l osses f r omt he act i vi t y.

( 7) The r el at i onshi p of pr of i t s ear ned t o l osses i ncur r ed.

( 8) The f i nanci al st at us of t he t axpayer .

( 9) El ement s of per sonal pl easur e or r ecr eat i on i n t he act i vi t y.


782. I n di st i ngui shi ng whet her an act i vi t y i s a hobby or a t r ade or
busi ness, di scuss t he pr esumpt i ve r ul e.

Cor r ect Answer :
The Code pr ovi des a r ebut t abl e pr esumpt i on t hat an act i vi t y i s pr of i t -
seeki ng ( i . e. , a t r ade or busi ness) r at her t han a hobby i f t he act i vi t y
shows a pr of i t i n at l east t hr ee of any f i ve ( t wo out of seven f or
hor ses) pr i or consecut i ve year s. I f t hi s t est i s met , t he act i vi t y i s
pr esumed t o be a t r ade or busi ness. The bur den of pr oof t hus shi f t s t o
t he I RS t o show ot her wi se.


783. Assumi ng an act i vi t y i s deemed t o be a hobby, di scuss t he or der
and l i mi t s i n whi ch expenses must be deduct ed.

Cor r ect Answer :
Amount s deduct i bl e under ot her Code sect i ons wi t hout r egar d t o t he
nat ur e of t he act i vi t y ( e. g. , pr oper t y t axes and mor t gage i nt er est )
must be deduct ed f i r st .

Amount s deduct i bl e under ot her Code sect i ons had t he act i vi t y been
pr of i t - seeki ng whi ch do not af f ect adj ust ed basi s ar e deduct ed next .

Deduct i ons af f ect i ng adj ust ed basi s ( e. g. , depr eci at i on) ar e t aken next .
At any poi nt wher e t he expenses exceed i ncome, t he deduct i on i s l i mi t ed
t o t he r emai ni ng i ncome.


784. Descr i be t he ci r cumst ances under whi ch a t axpayer can r ecei ve r ent
i ncome f r oma per sonal r esi dence, but does not have t o r epor t i t as
gr oss i ncome.

Cor r ect Answer :
I f t he per sonal r esi dence i s r ent ed f or f ewer t han 15 days i n a year ,
t he r ent i ncome i s excl uded f r omgr oss i ncome. Onl y mor t gage i nt er est
and r eal est at e t axes can be deduct ed.


785. For a vacat i on home t o be cl assi f i ed i n t he pr i mar i l y r ent al use
cat egor y, what at t r i but es must be pr esent ?

Cor r ect Answer :
To be cl assi f i ed i n t he pr i mar i l y r ent al use cat egor y, t he f ol l owi ng
at t r i but es must be pr esent .

The r esi dence i s r ent ed f or 15 days or mor e dur i ng t he year .
The r esi dence i s not used f or per sonal pur poses f or mor e t han t he
gr eat er of :
14 days
10 per cent of t he t ot al days r ent ed.


786. For a vacat i on home t o be cl assi f i ed i n t he per sonal / r ent al use
cat egor y, what at t r i but es must be pr esent ?

Cor r ect Answer :
To be cl assi f i ed i n t he per sonal / r ent al use cat egor y, t he f ol l owi ng
at t r i but es must be pr esent .

The r esi dence i s r ent ed f or 15 days or mor e i n a year .

The r esi dence i s used f or per sonal pur poses f or mor e t han t he
gr eat er of ( 1) 14 days or ( 2) 10%of t he t ot al days r ent ed.


787. What i s t he appr opr i at e t ax t r eat ment f or expendi t ur es pai d by a
t axpayer f or anot her s benef i t ?

Cor r ect Answer :
To be deduct i bl e, an expense must be i ncur r ed f or t he t axpayer s
benef i t or ar i se f r omt he t axpayer s obl i gat i on. An i ndi vi dual cannot
cl ai ma t ax deduct i on f or t he payment of t he expenses of anot her
i ndi vi dual . One except i on t o t hi s r ul e i s t he payment of medi cal
expenses f or a dependent . Such medi cal expenses ar e deduct i bl e by t he
payor subj ect t o t he nor mal r ul es t hat gover n t he deduct i bi l i t y of
medi cal expenses.


788. Ar e t her e any except i ons t o t he r ul e t hat per sonal expendi t ur es
cannot be deduct ed?

Cor r ect Answer :
Gener al l y per sonal expendi t ur es cannot be deduct ed. However , t he Code
pr ovi des t hat f or a per sonal expendi t ur e t o be deduct i bl e t he t axpayer
must be abl e t o i dent i f y a par t i cul ar sect i on of t he Code t hat per mi t s
t he deduct i on ( e. g. , char i t abl e cont r i but i ons, medi cal expenses,
cer t ai n t axes, cer t ai n i nt er est ) .


789. Br i ef l y di scuss t he di sal l owance of deduct i ons f or capi t al
expendi t ur es.

Cor r ect Answer :
Any expendi t ur es t hat add t o t he val ue or pr ol ong t he l i f e of pr oper t y
or adapt t he pr oper t y t o a new or di f f er ent use ar e capi t al
expendi t ur es whi ch must be capi t al i zed and depr eci at ed or amor t i zed.


790. Why ar e t her e r est r i ct i ons on t he r ecogni t i on of gai ns and l osses
r esul t i ng f r omt r ansact i ons bet ween r el at ed par t i es?

Cor r ect Answer :
Shamt r ansact i ons can be st r uct ur ed bet ween r el at ed par t i es such t hat
no r eal economi c change occur s i n t he st at us of t he par t i es, but a t ax
savi ngs r esul t s. Thi s i s an abuse of t he t ax l aw whi ch has r esul t ed i n
r est r i ct i ons on t he r ecogni t i on of such t r ansact i ons.


791. I n a r el at ed par t y t r ansact i on wher e r eal i zed l oss i s di sal l owed,
when can t he di sal l owed l oss be used by t he buyer on t he subsequent
sal e of t he pr oper t y? I n t he case of a r el at ed par t y di sal l owed l oss
t r ansact i on, can t he r el at ed par t y sel l er s di sal l owed l oss be used by
a t axpayer ot her t han t he r el at ed par t y buyer ?

Cor r ect Answer :
The r el at ed par t y buyer i s per mi t t ed t o use as much of t he di sal l owed
l oss of t he sel l er as i s needed t o r educe any r eal i zed gai n on t he
subsequent sal e of t he pr oper t y. I f t he pr oper t y i n t he hands of t he
buyer appr eci at es t o at l east t he amount of t he sel l er s adj ust ed basi s
at t he dat e of t he or i gi nal sal e, al l of t he di sal l owed l oss can be
used by t he buyer on t he subsequent sal e. The r el at ed par t y sel l er s
di sal l owed l oss can be used onl y by t he r el at ed par t y buyer .


792. Ol i ve, I nc. , an accr ual met hod t axpayer , i s a cor por at i on t hat i s
equal l y owned by Maur i ce and Al ex, who ar e br ot her s. The cor por at i on
uses t he accr ual met hod of account i ng and t he shar ehol der s use t he cash
met hod. To pr ovi de Ol i ve wi t h f unds t o acqui r e addi t i onal wor ki ng
capi t al , t he shar ehol der s each l oan Ol i ve $100, 000 wi t h a 6%i nt er est
r at e. At t he end of t he t ax year , t her e i s unpai d accr ued i nt er est of
$3, 000 due t o each shar ehol der . Fr oma t i mi ng per spect i ve, when shoul d
Ol i ve deduct t hi s $6, 000 and when shoul d Maur i ce and Al ex i ncl ude t he
$3, 000 i n gr oss i ncome? Ol i ve pays t he $3, 000 t o each shar ehol der ear l y
next year .

Cor r ect Answer :
Maur i ce and Al ex ar e r el at ed par t i es wi t h Ol i ve. So Ol i ve ( accr ual
met hod) must cl ai mt he deduct i on of $6, 000 i n t he same t ax year t hat
t he cash met hod shar ehol der s i ncl ude t he $3, 000 each i n gr oss i ncome
( next year ) . Not e t hat t hi s mat chi ng pr ovi si on appl i es onl y i f t he
payor uses t he accr ual met hod and t he payee uses t he cash met hod.


793. Br i ef l y expl ai n why i nt er est on money bor r owed t o buy t ax- exempt
muni ci pal bonds i s di sal l owed as a deduct i on.

Cor r ect Answer :
Because t he i nt er est i ncome on muni ci pal bonds i s excl udi bl e f r omgr oss
i ncome, t he r el at ed expense shoul d not be deduct i bl e. Ot her wi se, a
t axpayer coul d bor r ow money, at say 10%, i nvest t he f unds i n t ax- exempt
secur i t i es, at say 8%, and r eal i ze a pr of i t i f t he i nt er est expense
wer e deduct i bl e. The ent i r e pr of i t woul d be der i ved f r omt he t ax
t r eat ment .


794. J ames i s i n t he busi ness of debt col l ect i on. He pur chased a
$20, 000 account r ecei vabl e f r omGr een Cor por at i on f or $15, 000. Dur i ng
t he year , J ames col l ect ed $17, 000 i n f i nal set t l ement of t he
account . J ames can t ake a $2, 000 bad debt deduct i on i n t he cur r ent
year .

a. Tr ue
*b. Fal se


795. I f a busi ness debt pr evi ousl y deduct ed as par t i al l y wor t hl ess
becomes t ot al l y wor t hl ess t hi s year , onl y t he amount not pr evi ousl y
deduct ed can be deduct ed t hi s year .

*a. Tr ue
b. Fal se


796. Last year , t axpayer had a $10, 000 nonbusi ness bad debt . Taxpayer
al so had an $8, 000 shor t - t er mcapi t al gai n and t axabl e i ncome of
$35, 000. I f t axpayer col l ect s t he ent i r e $10, 000 dur i ng t he cur r ent
year , $8, 000 needs t o be i ncl uded i n gr oss i ncome.

a. Tr ue
*b. Fal se


797. A cash basi s t axpayer must i ncl ude as i ncome t he pr oceeds f r omt he
sal e of an account r ecei vabl e t o a col l ect i on agency.

*a. Tr ue
b. Fal se


798. I f an account r ecei vabl e wr i t t en of f dur i ng a pr i or year i s
subsequent l y col l ect ed dur i ng t he cur r ent year , t he amount col l ect ed
must be i ncl uded i n t he gr oss i ncome of t he cur r ent year t o t he ext ent
i t cr eat ed a t ax benef i t i n t he pr i or year .

*a. Tr ue
b. Fal se


799. A nonbusi ness bad debt deduct i on can be t aken any year af t er t he
debt becomes t ot al l y wor t hl ess.

a. Tr ue
*b. Fal se


800. A busi ness bad debt i s a debt unr el at ed t o t he t axpayer s t r ade or
busi ness ei t her when i t was cr eat ed or when i t became wor t hl ess.

*a. Tr ue
b. Fal se


801. I n det er mi ni ng whet her a debt i s a busi ness or nonbusi ness bad
debt , t he debt or s use of t he bor r owed f unds i s i mpor t ant .

a. Tr ue
*b. Fal se


802. A cor por at i on whi ch makes a l oan t o a shar ehol der can have a
nonbusi ness bad debt deduct i on.

a. Tr ue
*b. Fal se


803. A nonbusi ness bad debt can of f set an unl i mi t ed amount of l ong- t er m
capi t al gai n.

*a. Tr ue
b. Fal se


804. The amount of par t i al wor t hl essness on a nonbusi ness bad debt i s
deduct ed i n t he year par t i al wor t hl essness i s det er mi ned.

a. Tr ue
*b. Fal se


805. A bona f i de debt cannot ar i se on a l oan bet ween f at her and son.

a. Tr ue
*b. Fal se


806. A bond hel d by an i nvest or t hat i s uncol l ect i bl e wi l l be t r eat ed
as a wor t hl ess secur i t y and hence, pr oduce a capi t al l oss.

*a. Tr ue
b. Fal se


807. A l oss f r oma wor t hl ess secur i t y i s al ways t r eat ed as a shor t - t er m
capi t al l oss.

a. Tr ue
*b. Fal se


808. A l oss i s not al l owed f or a secur i t y t hat decl i nes i n val ue.

*a. Tr ue
b. Fal se


809. Sever al year s ago, J ohn pur chased 2, 000 shar es of Red Cor por at i on
1244 st ock f r omMar k f or $40, 000. Last year , J ohn sol d one- hal f of
hi s Red Cor por at i on st ock t o Mi ke f or $12, 000. Dur i ng t he cur r ent year ,
J ohn sol d t he r emai ni ng Red Cor por at i on st ock f or $3, 000. J ohn has a
$17, 000 ( $3, 000 $20, 000) or di nar y l oss f or t he cur r ent year .

a. Tr ue
*b. Fal se


810. I f a t axpayer sel l s t hei r 1244 st ock at a l oss, al l of t he l oss
wi l l be or di nar y l oss.

a. Tr ue
*b. Fal se


811. Al , who i s si ngl e, has a gai n of $40, 000 on t he sal e of 1244
st ock ( smal l busi ness st ock) and a l oss of $80, 000 on t he sal e of
1244 st ock. As a r esul t , Al has a $40, 000 or di nar y l oss.

a. Tr ue
*b. Fal se


812. An i ndi vi dual may deduct a l oss on r ent al pr oper t y even i f i t does
not meet t he def i ni t i on of a casual t y l oss.

*a. Tr ue
b. Fal se


813. Ot her casual t y means casual t i es si mi l ar t o t hose associ at ed wi t h
f i r es, st or ms, or shi pwr ecks.

*a. Tr ue
b. Fal se


814. A f at her cannot cl ai ma l oss on hi s daught er s r ent al use pr oper t y.

*a. Tr ue
b. Fal se


815. A per sonal casual t y l oss deduct i on may be al l owed f or l osses
r esul t i ng f r omt er mi t es.

*a. Tr ue
b. Fal se


816. I f t he amount of t he i nsur ance r ecover y f or a t hef t of busi ness
pr oper t y i s gr eat er t han t he asset s f ai r mar ket val ue but l ess t han
i t s adj ust ed basi s, a gai n i s r ecogni zed.

a. Tr ue
*b. Fal se


817. A t hef t l oss i s t aken i n t he year of t he t hef t .

a. Tr ue
*b. Fal se


818. Last year , Amos had AGI of $50, 000. Amos al so had a di amond r i ng
st ol en whi ch cost $20, 000 and was wor t h $17, 000 at t he t i me of t he
t hef t . He i t emi zed deduct i ons on l ast year s t ax r et ur n. I n t he
cur r ent year , Amos r ecover ed $17, 000 f r omt he i nsur ance
company. Ther ef or e, he must i ncl ude $11, 900 i n gr oss i ncome on t he t ax
r et ur n f or t he cur r ent year .

*a. Tr ue
b. Fal se


819. I f i nvest ment pr oper t y i s st ol en, t he amount of t he l oss i s t he
adj ust ed basi s of t he pr oper t y at t he t i me of t he t hef t r educed by $100
and 10%of AGI .

a. Tr ue
*b. Fal se


820. The cost of r epai r s t o damaged pr oper t y i s not an accept abl e
measur e of t he l oss i n val ue of t he pr oper t y.

a. Tr ue
*b. Fal se


821. Taxpayer s home was dest r oyed by a st or mi n t he cur r ent year and
t he ar ea was decl ar ed a di sast er ar ea. I f t he t axpayer el ect s t o t r eat
t he l oss as havi ng occur r ed i n t he pr i or year , i t wi l l be subj ect t o
t he 10%- of - AGI r educt i on based on t he AGI of t he cur r ent year .

a. Tr ue
*b. Fal se


822. The amount of l oss f or par t i al dest r uct i on of busi ness pr oper t y i s
t he decl i ne i n f ai r mar ket val ue of t he busi ness pr oper t y.

a. Tr ue
*b. Fal se


823. I f per sonal casual t y gai ns exceed per sonal casual t y l osses ( af t er
deduct i ng t he $100 f l oor ) , t her e i s no i t emi zed deduct i on.

*a. Tr ue
b. Fal se


824. The amount of a l oss on i nsur ed per sonal use pr oper t y i s r educed
by t he i nsur ance cover age i f no cl ai mi s made agai nst t he i nsur er .

*a. Tr ue
b. Fal se


825. Losses on r ent al pr oper t y ar e cl assi f i ed as deduct i ons for AGI .

*a. Tr ue
b. Fal se


826. When a nonbusi ness casual t y l oss i s spr ead bet ween t wo t axabl e
year s, t he l oss i n t he second year i s r educed by 10%of adj ust ed gr oss
i ncome f or t he f i r st year .

a. Tr ue
*b. Fal se


827. A t hef t l oss of i nvest ment pr oper t y i s an i t emi zed deduct i on not
subj ect t o t he 2%- of - AGI f l oor .

*a. Tr ue
b. Fal se


828. Resear ch and exper i ment al expendi t ur es do not i ncl ude t he cost of
consumer sur veys.

*a. Tr ue
b. Fal se


829. The cost of depr eci abl e pr oper t y i s not a r esear ch and
exper i ment al expendi t ur e.

*a. Tr ue
b. Fal se


830. I f an el ect i on i s made t o def er deduct i on of r esear ch expendi t ur es,
t he amor t i zat i on per i od i s based on t he expect ed l i f e of t he r esear ch
pr oj ect i f l ess t han 60 mont hs.

a. Tr ue
*b. Fal se


831. For t ax year s begi nni ng i n 2013, t he domest i c pr oduct i on
act i vi t i es deduct i on ( DPAD) f or a sol e pr opr i et or i s cal cul at ed by
mul t i pl yi ng 9%t i mes adj ust ed gr oss i ncome.

a. Tr ue
*b. Fal se


832. I f qual i f i ed pr oduct i on act i vi t i es i ncome ( QPAI ) cannot be used i n
t he cal cul at i on of t he domest i c pr oduct i on act i vi t i es deduct i on i n 2013
because of t he t axabl e i ncome l i mi t at i on, t he pr oduct of t he amount not
al l owed mul t i pl i ed by 9%can be car r i ed over f or 5 year s.

a. Tr ue
*b. Fal se


833. The l i mi t f or t he domest i c pr oduct i on act i vi t i es deduct i on ( DPAD)
uses al l W- 2 wages pai d t o empl oyees by t he t axpayer dur i ng t he t ax
year .

a. Tr ue
*b. Fal se


834. A r ei mbur sed empl oyee busi ness expense cannot cr eat e an NOL f or an
i ndi vi dual .

*a. Tr ue
b. Fal se


835. A t axpayer can car r y any NOL i ncur r ed f or war d 20 year s.

*a. Tr ue
b. Fal se


836. A f ar mi ng NOL may be car r i ed back 2 year s.

*a. Tr ue
b. Fal se


837. The amount of a f ar mi ng l oss cannot exceed t he amount of t he
t axpayer s NOL f or t he t axabl e year .

*a. Tr ue
b. Fal se


838. Nonbusi ness i ncome f or net oper at i ng l oss pur poses i ncl udes
di vi dends r ecei ved.

*a. Tr ue
b. Fal se


839. A t hef t of i nvest ment pr oper t y can cr eat e or i ncr ease a net
oper at i ng l oss f or an i ndi vi dual .

*a. Tr ue
b. Fal se


840. An NOL car r yf or war d i s used i n det er mi ni ng t he cur r ent year s
char i t abl e cont r i but i on deduct i on.

*a. Tr ue
b. Fal se


841. The excess of nonbusi ness capi t al gai ns over nonbusi ness capi t al
l osses must be added t o t axabl e i ncome t o comput e t he net oper at i ng
l oss of an i ndi vi dual .

a. Tr ue
*b. Fal se


842. An i ndi vi dual t axpayer who does not i t emi ze deduct i ons uses t he
st andar d deduct i on t o comput e t he excess of nonbusi ness deduct i ons over
t he sumof nonbusi ness i ncome and net nonbusi ness capi t al gai ns f or
pur poses of comput i ng net oper at i ng l oss.

*a. Tr ue
b. Fal se


843. When a net oper at i ng l oss i s car r i ed back t o a non- l oss year , t he
net oper at i ng l oss can af f ect t he medi cal expense deduct i on of t he
car r yback year .

*a. Tr ue
b. Fal se


844. Peggy i s i n t he busi ness of f act or i ng account s r ecei vabl e. Last
year , she pur chased a $30, 000 account r ecei vabl e f or $25, 000. Thi s year ,
t he account was set t l ed f or $25, 000. How much l oss can Peggy deduct and
i n whi ch year ?

a. $5, 000 f or t he cur r ent year .
b. $5, 000 f or t he pr i or year and $5, 000 f or t he cur r ent year .
c. $5, 000 f or t he pr i or year .
d. $10, 000 f or t he cur r ent year .
*e. None of t he above.


845. J ed i s an el ect r i ci an. J ed and hi s wi f e ar e accr ual basi s
t axpayer s and f i l e a j oi nt r et ur n. J ed wi r ed a new house f or Al i son
and bi l l ed her $15, 000. Al i son pai d J ed $10, 000 and r ef used t o pay t he
r emai nder of t he bi l l , cl ai mi ng t he f ee t o be exor bi t ant . J ed t ook
Al i son t o Smal l Cl ai ms Cour t f or t he unpai d amount and was awar ded a
$2, 000 j udgement . J ed was abl e t o col l ect t he j udgement but not t he
r emai nder of t he bi l l f r omAl i son. What amount of l oss may J ed deduct
i n t he cur r ent year ?

a. $0.
b. $2, 000.
*c. $3, 000.
d. $5, 000.
e. None of t he above.


846. On J une 2, 2012, Fr ed s TV Sal es sol d Mar k a l ar ge HD TV, on
account , f or $12, 000. Fr ed s TV Sal es uses t he accr ual met hod. I n
2013, when t he bal ance on t he account was $8, 000, Mar k f i l ed f or
bankr upt cy. Fr ed was not i f i ed t hat he coul d not expect t o r ecei ve any
of t he amount owed t o hi m. I n 2014, f i nal set t l ement was made and Fr ed
r ecei ved $1, 000. How much bad debt l oss can Fr ed deduct i n 2014?

*a. $0.
b. $7, 000.
c. $8, 000.
d. $12, 000.
e. None of t he above.


847. Mar y i ncur r ed a $20, 000 nonbusi ness bad debt l ast year . She al so
had an $8, 000 l ong- t er mcapi t al gai n l ast year . Her t axabl e i ncome f or
l ast year was an NOL of $15, 000. Dur i ng t he cur r ent year , she
unexpect edl y col l ect ed $12, 000 on t he debt . How shoul d Mar y account
f or t he col l ect i on?

a. $0 i ncome.
*b. $8, 000 i ncome.
c. $11, 000 i ncome.
d. $12, 000 i ncome.
e. None of t he above.


848. Last year , Lucy pur chased a $100, 000 account r ecei vabl e f or
$90, 000. Dur i ng t he cur r ent year , Lucy col l ect ed $97, 000 on t he account .
What ar e t he t ax consequences t o Lucy associ at ed wi t h t he col l ect i on of
t he account r ecei vabl e? No subsequent col l ect i ons ar e expect ed.

a. $0.
b. $2, 000 gai n.
c. $3, 000 l oss.
d. $13, 000 l oss.
*e. None of t he above.


849. Two year s ago, Gi na l oaned Tom$50, 000. Tomsi gned a not e t he
t er ms of whi ch cal l ed f or mont hl y payment s of $2, 000 pl us 6%i nt er est
on t he out st andi ng bal ance. Last year , when t he bal ance owi ng on t he
l oan was $18, 000, Tomdef aul t ed on t he not e. As of t he end of l ast
year , t her e appear ed t o be no r easonabl e pr ospect of Gi na r ecover i ng
t he $18, 000. As a consequence, Gi na cl ai med t he $18, 000 as a
nonbusi ness bad debt . Last year , Gi na had AGI of a negat i ve $6, 000
whi ch i ncl uded $5, 000 net l ong- t er mcapi t al gai ns and $4, 000 of
qual i f i ed di vi dends. Gi na di d not i t emi ze her deduct i ons. Dur i ng t he
cur r ent year , Tompai d Gi na $13, 000 i n f i nal set t l ement of t he
l oan. How shoul d Gi na account f or t he payment i n t he cur r ent year ?

a. Fi l e an amended t ax r et ur n f or l ast year .
b. Repor t no i ncome f or t he cur r ent year .
c. Repor t $8, 000 of i ncome f or t he cur r ent year .
d. Repor t $12, 000 of i ncome f or t he cur r ent year .
*e. None of t he above.


850. Fi ve year s ago, Toml oaned hi s son J ohn $20, 000 t o st ar t a
busi ness. A not e was execut ed wi t h an i nt er est r at e of 8%, whi ch i s t he
Feder al r at e. The not e r equi r ed mont hl y payment s of t he i nt er est wi t h
t he $20, 000 due at t he end of t en year s. J ohn al ways made t he i nt er est
payment s unt i l l ast year . Dur i ng t he cur r ent year , J ohn not i f i ed hi s
f at her t hat he was bankr upt and woul d not be abl e t o r epay t he $20, 000
or t he accr ued i nt er est of $1, 800. Tomi s an accr ual basi s t axpayer
whose onl y i ncome i s sal ar y and i nt er est i ncome. The pr oper t r eat ment
f or t he nonpayment of t he not e i s:

a. No deduct i on.
*b. $3, 000 deduct i on.
c. $20, 000 deduct i on.
d. $21, 800 deduct i on.
e. None of t he above.


851. Thr ee year s ago, Shar on l oaned her si st er $30, 000 t o buy a car . A
not e was i ssued f or t he l oan wi t h t he pr ovi si on f or mont hl y payment s of
pr i nci pal and i nt er est . Last year , Shar on pur chased a car f r omt he same
deal er , Hank s Aut o. As par t i al payment f or t he car , t he deal er
accept ed t he not e f r omShar on s si st er . At t he t i me Shar on pur chased
t he car , t he not e had a bal ance of $18, 000. Dur i ng t he cur r ent year ,
Shar on s si st er di ed. Hank s Aut o was not i f i ed t hat no f ur t her payment s
on t he not e woul d be r ecei ved. At t he t i me of t he not i f i cat i on, t he
not e had a bal ance due of $15, 500. What i s t he amount of l oss, wi t h
r espect t o t he not e, t hat Hank s Aut o may cl ai mon t he cur r ent year t ax
r et ur n?

a. $0.
b. $3, 000.
*c. $15, 500.
d. $18, 000.
e. None of t he above.


852. On Sept ember 3, 2012, Abl e, a si ngl e i ndi vi dual , pur chased 1244
st ock i n Red Cor por at i on f r omhi s f r i end Al f or $60, 000. On December 31,
2012, t he st ock was wor t h $85, 000. On August 15, 2013, Abl e was
not i f i ed t hat t he st ock was wor t hl ess. How shoul d Abl e r epor t t hi s i t em
on hi s 2013 t ax r et ur n?

a. $85, 000 capi t al l oss.
b. $85, 000 or di nar y l oss.
c. $50, 000 or di nar y l oss and $35, 000 capi t al l oss.
d. $60, 000 or di nar y l oss.
*e. None of t he above.


853. On Febr uar y 20, 2012, Bi l l pur chased st ock i n Pi nk Cor por at i on
( t he st ock i s not smal l busi ness st ock) f or $1, 000. On May 1, 2013, t he
st ock became wor t hl ess. Dur i ng 2013, Bi l l al so had an $8, 000 l oss on
1244 smal l busi ness st ock pur chased t wo year s ago, a $9, 000 l oss on a
nonbusi ness bad debt , and a $5, 000 l ong- t er mcapi t al gai n. How shoul d
Bi l l t r eat t hese i t ems on hi s 2013 t ax r et ur n?

a. $4, 000 l ong- t er mcapi t al l oss and $9, 000 shor t - t er mcapi t al
l oss.
b. $4, 000 l ong- t er mcapi t al l oss and $3, 000 shor t - t er mcapi t al
l oss.
*c. $8, 000 or di nar y l oss and $3, 000 shor t - t er mcapi t al l oss.
d. $8, 000 or di nar y l oss and $5, 000 shor t - t er mcapi t al l oss.
e. $8, 000 l ong- t er mcapi t al l oss and $6, 000 shor t - t er mcapi t al
l oss.


854. J ohn f i l es a r et ur n as a si ngl e t axpayer . I n 2013, he had t he
f ol l owi ng i t ems:

Salary of $40,000.
Loss of $65,000 on the sale of 1244 stock
acquired two years ago.
Interest income of $6,000.


Determine Johns AGI for 2013.

a. ( $5, 000) .
*b. $0.
c. $45, 000.
d. $51, 000.
e. None of t he above.


855. Br uce, who i s si ngl e, had t he f ol l owi ng i t ems f or t he cur r ent year :

Salary of $80,000.
Gain of $20,000 on the sale of 1244 stock
acquired two years earlier.
Loss of $75,000 on the sale of 1244 stock
acquired three years earlier.
Worthless stock of $15,000. The stock was
acquired on February 1 of the prior year and
became worthless on January 15 of the current
year.


Determine Bruces AGI for the current year.

*a. $27, 000.
b. $38, 000.
c. $42, 000.
d. $47, 000.
e. None of t he above.


856. On J ul y 20, 2011, Mat t ( who f i l es a j oi nt r et ur n) pur chased 3, 000
shar es of Or ange Cor por at i on st ock ( t he st ock i s 1244 smal l busi ness
st ock) f or $24, 000. On November 10, 2012, Mat t pur chased an addi t i onal
1, 000 shar es of Or ange Cor por at i on st ock f r oma f r i end f or
$150, 000. On Sept ember 15, 2013, Mat t sol d t he 4, 000 shar es of st ock
f or $120, 000. How shoul d Mat t t r eat t he sal e of t he st ock on hi s 2013
r et ur n?

a. $54, 000 or di nar y l oss.
b. $100, 000 or di nar y l oss; $46, 000 net capi t al gai n.
c. $100, 000 or di nar y l oss; $20, 000 STCL.
d. $130, 000 or di nar y l oss; $66, 000 LTCG.
*e. None of t he above.


857. Whi ch of t he f ol l owi ng event s woul d pr oduce a deduct i bl e l oss?

a. Er osi on of per sonal use l and due t o r ai n or wi nd.
b. Ter mi t e i nf est at i on of a per sonal r esi dence over a sever al
year per i od.
c. Damages t o per sonal aut omobi l e r esul t i ng f r oma t axpayer s
wi l l f ul negl i gence.
*d. A mi spl aced di amond r i ng.
e. None of t he above.


858. I n 2013, Wal l y had t he f ol l owi ng i nsur ed per sonal casual t y l osses
( ar i si ng f r omone casual t y) . Wal l y al so had $42, 000 AGI f or t he year
bef or e consi der i ng t he casual t y.

Fair Market
Value
Insurance
Asset Adjusted
Basis
Before After Recovery
A $9,200 $8,000 $1,000 $2,000
B 3,000 4,000
0
4,000
C 3,700 1,700
0
9
00


Wallys casualty loss deduction is:

a. $1, 500.
b. $1, 600.
c. $4, 800.
d. $58, 000.
*e. None of t he above.


859. J i mhad a car acci dent i n 2013 i n whi ch hi s car was compl et el y
dest r oyed. At t he t i me of t he acci dent , t he car had a f ai r mar ket val ue
of $30, 000 and an adj ust ed basi s of $40, 000. J i mused t he car 100%of
t he t i me f or busi ness use. J i mr ecei ved an i nsur ance r ecover y of 70%of
t he val ue of t he car at t he t i me of t he acci dent . I f J i m s AGI f or t he
year i s $60, 000, det er mi ne hi s deduct i bl e l oss on t he car .

a. $900.
b. $2, 900.
c. $3, 000.
d. $9, 000.
*e. None of t he above.


860. Nor m s car , whi ch he uses 100%f or per sonal pur poses, was
compl et el y dest r oyed i n an acci dent i n 2013. The car s adj ust ed basi s
at t he t i me of t he acci dent was $13, 000. I t s f ai r mar ket val ue was
$10, 000. The car was cover ed by a $2, 000 deduct i bl e i nsur ance pol i cy.
Nor mdi d not f i l e a cl ai magai nst t he i nsur ance pol i cy because of a
f ear t hat r epor t i ng t he acci dent woul d r esul t i n a subst ant i al i ncr ease
i n hi s i nsur ance r at es. Hi s adj ust ed gr oss i ncome was $14, 000 ( bef or e
consi der i ng t he l oss) . What i s Nor m s deduct i bl e l oss?

a. $0.
b. $100.
*c. $500.
d. $9, 500.
e. None of t he above.


861. I n 2013, Gr ant s per sonal r esi dence was compl et el y dest r oyed by
f i r e. Gr ant was i nsur ed f or 100%of hi s act ual l oss, and he r ecei ved
t he i nsur ance set t l ement . Gr ant had adj ust ed gr oss i ncome, bef or e
consi der i ng t he casual t y i t em, of $30, 000. Per t i nent dat a wi t h r espect
t o t he r esi dence f ol l ows:

Cost basis $280,000
Value before casualty 250,000
Value after casualty 0


What is Grants allowable casualty loss deduction?

*a. $0.
b. $6, 500.
c. $6, 900.
d. $10, 000.
e. $80, 000.


862. J ohn had adj ust ed gr oss i ncome of $60, 000. Dur i ng t he year hi s
per sonal use summer home was damaged by a f i r e. Per t i nent dat a wi t h
r espect t o t he home f ol l ows:

Cost basis $260,000
Value before the fire 400,000
Value after the fire 100,000
Insurance recovery 270,000


John had an accident with his personal use car. As a result of the accident,
John was cited with reckless driving and willful negligence. Pertinent data
with respect to the car follows:

Cost basis $80,000
Value before the accident 56,000
Value after the accident 20,000
Insurance recovery 18,000


What is Johns itemized casualty loss deduction?

*a. $0.
b. $2, 000.
c. $17, 000.
d. $18, 000.
e. None of t he above.


863. I n 2013, Mar y had t he f ol l owi ng i t ems:

Salary $30,000
Personal use casualty gain 10,000
Personal use casualty loss (after
$100 floor)
17,000
Other itemized deductions 4,000


Assuming that Mary files as head of household (has one dependent child),
determine her taxable income for the current year.

*a. $13, 250.
b. $14, 100.
c. $14, 300.
d. $24, 300.
e. None of t he above.


864. I n 2013, Mor l ey, a si ngl e t axpayer , had an AGI of $30, 000 bef or e
consi der i ng t he f ol l owi ng i t ems:

Loss from damage to rental property ($6,000)
Loss from theft of bonds (3,000)
Personal casualty gain 4,000
Personal casualty loss (after $100
floor)
(9,000)


Determine the amount of Morleys itemized deduction from the losses.

a. $0.
b. $2, 900.
c. $5, 120.
*d. $5, 600.
e. None of t he above.


865. I n 2013, Theo, an empl oyee, had a sal ar y of $30, 000 and
exper i enced t he f ol l owi ng l osses:

Loss from damage to rental property ($10,000)
Unreimbursed loss from theft of
business computer
(5,000)
Personal casualty gain 4,000
Personal casualty loss (after $100
floor)
(9,000)


Determine the amount of Theos itemized deduction from these losses.

a. $0.
b. $2, 800.
c. $2, 900.
d. $4, 580.
*e. None of t he above.


866. Al i ci a was i nvol ved i n an aut omobi l e acci dent i n 2013. Her car was
used 60%f or busi ness and 40%f or per sonal use. The car had or i gi nal l y
cost $40, 000. At t he t i me of t he acci dent , t he car was wor t h $20, 000
and Al i ci a had t aken $8, 000 of depr eci at i on. The car was t ot al l y
dest r oyed and Al i ci a had l et her car i nsur ance expi r e. I f Al i ci a s AGI
i s $50, 000 ( bef or e consi der i ng t he l oss) , det er mi ne her i t emi zed
deduct i on f or t he casual t y l oss.

*a. $4, 500.
b. $6, 100.
c. $8, 000.
d. $24, 000.
e. None of t he above.


867. Last year , Sar ah ( who f i l es as si ngl e) had si l ver war e wor t h
$10, 000 ( basi s $6, 000) st ol en f r omher home. Sar ah s i nsur ance company
t ol d her t hat her pol i cy di d not cover t he t hef t . Sar ah s ot her
i t emi zed deduct i ons l ast year wer e $2, 000. She had AGI of $30, 000 l ast
year . I n August of t he cur r ent year , Sar ah s i nsur ance company deci ded
t hat Sar ah s pol i cy di d cover t he t hef t of t he si l ver war e and t hey pai d
Sar ah $5, 000. Det er mi ne t he t ax t r eat ment of t he $5, 000 r ecei ved by
Sar ah dur i ng t he cur r ent year .

*a. None of t he $5, 000 shoul d be i ncl uded i n gr oss i ncome.
b. $2, 900 shoul d be i ncl uded i n gr oss i ncome.
c. $5, 000 shoul d be i ncl uded i n gr oss i ncome.
d. Last year s r et ur n shoul d be amended t o i ncl ude t he $5, 000.
e. None of t he above.


868. Al ma i s i n t he busi ness of dai r y f ar mi ng. Dur i ng t he year , one of
her bar ns was compl et el y dest r oyed by f i r e. The adj ust ed basi s of t he
bar n was $90, 000. The f ai r mar ket val ue of t he bar n bef or e t he f i r e was
$75, 000. The bar n was i nsur ed f or 95%of i t s f ai r mar ket val ue, and
Al ma r ecover ed t hi s amount under t he i nsur ance pol i cy. Al ma has
adj ust ed gr oss i ncome f or t he year of $40, 000 ( bef or e consi der i ng t he
casual t y) . Det er mi ne t he amount of l oss she can deduct on her t ax
r et ur n f or t he cur r ent year .

a. $3, 750.
b. $14, 650.
c. $14, 750.
*d. $18, 750.
e. None of t he above.


869. I n 2013, J uan s home was bur gl ar i zed. J uan had t he f ol l owi ng i t ems
st ol en:

Securities worth $25,000. Juan purchased the
securities four years ago for $20,000.
New tools which Juan had purchased two weeks
earlier for $8,000. Juan uses the tools in
making repairs at an apartment house that he
owns and manages.
An antique worth $15,000. Juan inherited the
antique (a family keepsake) when the property
was worth $11,000.


Juans homeowners policy had a $50,000 deductible clause for thefts. If
Juans salary for the year is $50,000, determine the amount of his
itemized deductions as a result of the theft.

a. $3, 100.
b. $6, 000.
c. $26, 100.
d. $26, 500.
*e. None of t he above.


870. Regar di ng r esear ch and exper i ment al expendi t ur es, whi ch of t he
f ol l owi ng ar e not qual i f i ed expendi t ur es?

*a. Cost s of or di nar y t est i ng of mat er i al s.
b. Cost s t o devel op a pl ant pr ocess.
c. Cost s of devel opi ng a f or mul a.
d. Depr eci at i on on a bui l di ng used f or r esear ch.
e. Al l of t he above ar e qual i f i ed expendi t ur es.


871. Bl ue Cor por at i on i ncur r ed t he f ol l owi ng expenses i n connect i on
wi t h t he devel opment of a new pr oduct :

Salaries $100,000
Utilities 18,000
Materials 25,000
Advertising 5,000
Market survey 3,000
Depreciation on machine 9,000


Blue expects to begin selling the product next year. If Blue elects to
amortize research and experimental expenditures over 60 months, determine
the amount of the deduction for research and experimental expenditures for
the current year.

*a. $0.
b. $118, 000.
c. $143, 000.
d. $152, 000.
e. $160, 000.


872. Last year , Gr een Cor por at i on i ncur r ed t he f ol l owi ng expendi t ur es
i n t he devel opment of a new pl ant pr ocess:

Salaries $250,000
Materials 90,000
Utilities 20,000
Quality control testing costs 40,000
Management study costs 5,000
Depreciation of equipment 15,000


During the current year, benefits from the project began being realized in
May. If Green Corporation elects a 60 month deferral and amortization
period, determine the amount of the deduction for the current year.

a. $48, 000.
*b. $50, 400.
c. $54, 667.
d. $57, 067.
e. None of t he above.


873. I vor y, I nc. , has t axabl e i ncome of $600, 000 and qual i f i ed
pr oduct i on act i vi t i es i ncome ( QPAI ) of $700, 000 i n 2013. I vor y s
domest i c pr oduct i on act i vi t i es deduct i on i s:

a. $36, 000.
b. $42, 000.
*c. $54, 000.
d. $63, 000.
e. None of t he above.


874. For t he year 2013, Amber Cor por at i on has t axabl e i ncome of
$880, 000, al t er nat i ve mi ni mumt axabl e i ncome of $600, 000, and qual i f i ed
pr oduct i on act i vi t i es i ncome ( QPAI ) of $640, 000. The t ot al W- 2 wages
pai d t o empl oyees engaged i n qual i f i ed domest i c pr oduct i on act i vi t i es
ar e $116, 000. Amber s DPAD f or 2013 i s:

*a. $54, 000.
b. $57, 600.
c. $58, 000.
d. $79, 200.
e. None of t he above.


875. Cr eam, I nc. s t axabl e i ncome f or 2013 bef or e any deduct i on f or an
NOL car r yf or war d of $30, 000 i s $70, 000. Cr eam s qual i f i ed pr oduct i on
act i vi t i es i ncome ( QPAI ) i s $60, 000. What i s t he amount of Cr eam s
domest i c pr oduct i on act i vi t i es deduct i on ( DPAD) f or 2013?

a. $1, 200.
b. $1, 800.
c. $2, 400.
*d. $3, 600.
e. None of t he above.


876. I n t he comput at i on of a net oper at i ng l oss, whi ch of t he f ol l owi ng
i t ems i s not added t o t he negat i ve t axabl e i ncome?

a. Losses i ncur r ed i n a t r ansact i on ent er ed i nt o f or pr of i t .
*b. Deduct i bl e al i mony payment s.
c. Per sonal t hef t l oss.
d. Losses f r omt hef t of secur i t i es.
e. None of t he above.


877. I f a t axpayer has an NOL i n 2013 of $20, 000, of whi ch $8, 000 i s
at t r i but abl e t o a t hef t of r ent al use pr oper t y, t he t axpayer may:

a. Car r y al l of t he NOL of $20, 000 back 5 year s.
b. Car r y al l of t he NOL of $20, 000 back 3 year s.
*c. Car r y $8, 000 of t he NOL back 3 year s and t he r emai nder of t he
NOL of $12, 000 back 2 year s.
d. Al l of t he above.
e. None of t he above.


878. Wu, who i s si ngl e, has t he f ol l owi ng i t ems f or 2013:

Salary $25,000
Interest income 8,000
Itemized deductions ($27,000
attributable to casualty loss)
(32,000)


What is Wus NOL for 2013?

*a. $0.
b. $1, 000.
c. $2, 000.
d. $25, 000.
e. None of t he above.


879. Khal i d, who i s si ngl e, had t he f ol l owi ng i t ems f or 2013:

Salary $40,000
Interest income on U.S. Treasure
bonds
8,000
Loss on theft of securities (60,000)
Interest income on New York state
bonds
12,000


What is Khalids NOL for 2013?

a. $10, 000.
*b. $12, 000.
c. $15, 000.
d. $25, 100.
e. None of t he above.


880. J ani ce, si ngl e, had t he f ol l owi ng i t ems f or t he year 2013:

Salary $30,000
Dividend income 8,000
Loss on 1244 small business stock
held for three years
(45,000)
Total itemized deductions (5,000)


Determine Janices net operating loss for the year 2013.

a. $0.
b. $5, 000.
c. $15, 000.
d. $20, 000.
*e. None of t he above.


881. Bi l l , age 40, i s mar r i ed wi t h t wo dependent s. Bi l l had t he
f ol l owi ng i t ems f or t he year 2013:

Bills business loss ($40,000)
Bills salary 50,000
Personal casualty gains 5,000
Personal casualty loss (after $100
floor)
(23,000)
Other itemized deductions (15,000)


Based on the above information, what is the net operating loss for Bill and
his spouse for the year 2013?

a. $0.
b. $5, 000.
*c. $7, 000.
d. $12, 000.
e. None of t he above.


882. J ack, age 30 and mar r i ed wi t h no dependent s, i s a sel f - empl oyed
i ndi vi dual . For 2013, hi s sel f - empl oyed busi ness sust ai ned a net l oss
f r omoper at i ons of $10, 000. The f ol l owi ng addi t i onal i nf or mat i on was
obt ai ned f r omhi s per sonal r ecor ds f or t he year :

Nonbusiness long-term capital gain $ 2,0
00
Interest income 6,000
Itemized deductionsconsisting of
taxes and interest
(12,000
)


Based on the above information, what is Jacks net operating loss for the
current year if he and his spouse file a joint return?

a. $2, 000.
b. $8, 000.
*c. $10, 000.
d. $11, 000.
e. $16, 400.


883. St el l a, age 38, i s si ngl e wi t h no dependent s. The f ol l owi ng
i nf or mat i on was obt ai ned f r omher per sonal r ecor ds f or t he cur r ent year .

Salary $30,000
Interest income 7,000
Alimony received 12,000
Individual retirement account
contribution
2,000
Home mortgage interest expense 4,000
Property taxes 2,000
Personal casualty loss (after the
$100 floor)
38,000
Stolen investment property 16,000
Unreimbursed employee business loss 3,000


Based on the above information, what is Stellas net operating loss for
the current year?

a. $0.
b. ( $9, 000) .
*c. ( $10, 360) .
d. ( $11, 200) .
e. None of t he above.


884. Ral ph i s si ngl e and has t he f ol l owi ng i t ems f or t he cur r ent year :

Nonbusiness capital gains $ 9,000
Nonbusiness capital losses (3,000)
Interest income 6,000
Itemized deductions (none of the
amount resulted from a casualty loss)
(10,000)


In calculating Ralphs net operating loss, and with respect to the above
amounts only, what amount must be added back to taxable income (loss)?

*a. $0.
b. $2, 000.
c. $3, 000.
d. $4, 000.
e. None of t he above.


885. El i zabet h has t he f ol l owi ng i t ems f or t he cur r ent year :

Nonbusiness capital gains $ 5,000
Nonbusiness capital losses (3,000)
Interest income 3,000
Itemized deductions (including a
$20,000 casualty loss)
(27,000)


In calculating Elizabeths net operating loss, and with respect to the
above amounts only, what amount must be added back to taxable income (loss)?

a. $0.
b. $1, 000.
*c. $2, 000.
d. $20, 000.
e. None of t he above.


886. St eve and Hol l y have t he f ol l owi ng i t ems f or 2013:

Dividend income $8,000
Interest income 7,000
Itemized deductions (none of the
amount resulted from a casualty loss)
(13,000)
Business capital gains 1,000
Business capital losses (5,000)


In calculating their net operating loss, and with respect to the above
amounts only, what amount must be added back to taxable income (loss)?

a. $0.
b. $1, 300.
*c. $2, 000.
d. $3, 000.
e. None of t he above.


887. Tonya had t he f ol l owi ng i t ems f or l ast year :

Sal ar y $40, 000
Shor t - t er mcapi t al gai n 12, 000
Nonbusi ness bad debt ( 25, 000)
Long- t er mcapi t al gai n 8, 000


For t he cur r ent year , Tonya had t he f ol l owi ng i t ems:

Sal ar y $45, 000
Col l ect i on of l ast year s bad debt 25, 000


Det er mi ne Tonya s adj ust ed gr oss i ncome f or t he cur r ent year .

Cor r ect Answer :
Salary $45,000
Income under tax benefit rule 23,000
Long-term capital loss carryover (2,000
)
AGI $66,000

Income on collection of nonbusiness
bad debt (classified as STCL) to the
extent of tax benefit in the prior
year ($20,000 offset against capital
$23,000
gain and $3,000 offset against
ordinary income).




888. Mar i a, who i s si ngl e, had t he f ol l owi ng i t ems f or 2013:

Sal ar y $80, 000
Loss on sal e of 1244 smal l
busi ness st ock acqui r ed 3 year s ago
( 60, 000)
St ock acqui r ed 2 year s ago became
wor t hl ess dur i ng t he year
( 5, 000)
Long- t er mcapi t al gai n 25, 000
Nonbusi ness bad debt ( 15, 000)
Casual t y l oss on pr oper t y hel d 6
mont hs
( 6, 000)
Casual t y gai n on pr oper t y hel d 4
year s
4, 000


Det er mi ne Mar i a s adj ust ed gr oss i ncome f or 2013.

Cor r ect Answer :
Salary $80,000
Ordinary loss from
1244 stock
(50,000)
Capital gains and
losses

Long-term capital gain
($25,000 + $4,000)
$29,000
Less: Long-term capital loss
[($60,000
$50,000) + $5,000]
(15,000)
Net long-term capital gain $14,000
Less: Short-term capital loss
($15,000 + $4,000*)
(19,000)
Net capital loss (limited to
$3,000)
(5,000) (3,000)
Adjusted gross
income
$27,000


*Casualty losses to the extent of casualty gains.


889. Mi ke, si ngl e, age 31, had t he f ol l owi ng i t ems f or 2013:

Sal ar y $50, 000
Nonbusi ness bad debt ( 6, 000)
Casual t i esi ndependent event s
Asset A ( per sonal use pr oper t y
hel d f or t wo year s) gai n
3, 000
Secur i t i es ( st ol en) l oss ( 8, 000)
Di vi dends 2, 000
I nt er est expense on per sonal
r esi dence
10, 000


Comput e Mi ke s t axabl e i ncome f or 2013.

Cor r ect Answer :
Salary $50,000
Dividends 2,000
Casualty gain (long-term capital
gain)
$3,000
Nonbusiness bad debt (short-term
capital loss)
(6,000)
Net short-term capital
loss
(3,00
0)
Adjusted gross income $49,000
Less: Interest expense on personal
residence
(10,000)
Miscellaneous itemized deduction:
casualty loss
(8,000)
Personal exemption (3,90
0)
Taxable income $27,100




890. J ose, si ngl e, had t he f ol l owi ng i t ems f or 2013:

Sal ar y $44, 000
1244 l oss on st ock acqui r ed
3 year s ago
( 70, 000)
1244 gai n on st ock acqui r ed
10 mont hs ago
26, 000
Wor t hl ess secur i t y pur chased
i n J une of l ast year
( 4, 000)
Nonbusi ness bad debt ( 7, 000)
I nt er est i ncome 8, 000
Comput e J ose s adj ust ed gr oss
i ncome f or 2013.




Cor r ect Answer :
Salary $44,000
Ordinary loss from
1244 stock
(50,000)
Interest income 8,000
Short-term capital
gain
$26,000
Short-term capital
loss
(7,000)
Net short-term capital
gain
$19,000
Long-term loss from
1244 stock

($70,000 $50,000) ($20,000)
Worthless security (4,00
0)
(24,000)
Net long-term capital loss ($ 5,000)
Limit (2,000)
Adjusted gross income $
0




891. J ul i e, who i s si ngl e, has t he f ol l owi ng i t ems f or 2013:

Sal ar y$100, 000.

A hur r i cane compl et el y dest r oyed J ul i e s
dupl ex dur i ng t he cur r ent year . J ul i e
l i ved i n one- hal f of t he dupl ex and r ent ed
out t he ot her hal f . J ul i e pai d $400, 000
f or t he dupl ex and has t aken $80, 000 of
cost r ecover y on t he r ent al por t i on of t he
dupl ex. The dupl ex was wor t h $420, 000 at
t he t i me of t he dest r uct i on. J ul i e s
i nsur ance pol i cy pai d her 90%of t he f ai r
mar ket val ue of t he dupl ex.

Househol d i t ems dest r oyed i n t he hur r i cane
had a basi s of $15, 000 and a f ai r mar ket
val ue of $8, 500. Ther e was no i nsur ance
r ecover y on t he househol d i t ems.

J ul i e pur chased a pai nt i ng t hr ee year s ago
f or $4, 000. At t he t i me of t he hur r i cane,
t he pai nt i ng was wor t h $10, 000. J ul i e
pur chased t he pai nt i ng as an i nvest ment
wi t h t he i nt ent t hat she woul d sel l i t
when i t s val ue exceeded $12, 000. Ther e was
no i nsur ance r ecover y on t he pai nt i ng.

J ul i e had an aut omobi l e acci dent i n t he
cur r ent year . J ul i e used t he car 100%f or
per sonal pur poses. The car cost $37, 000
and had a decl i ne i n FMV as a r esul t of
t he acci dent of $5, 000. The car was
i nsur ed, but t he pol i cy had a $2, 000
deduct i bl e cl ause. J ul i e chose not t o
f i l e a cl ai mf or t he damage.

J ul i e owned a comput er t hat she used 100%
f or busi ness. The comput er was al so
compl et el y dest r oyed i n t he hur r i cane. I t
had a basi s of $6, 000 and a FMV of $4, 000
at t he t i me i t was dest r oyed. J ul i e was
not r ei mbur sed by her empl oyer f or t he
l oss on t he comput er .

Home mor t gage i nt er est $10, 000.

Det er mi ne t he amount of J ul i e s t axabl e
i ncome f or 2013.



Cor r ect Answer :
Salary $100,000
Plus: Gain on rental
duplex


Recovery [($420,000 90%) 50%] $189,000

Cost (50% 400,000) $200,000

Less: cost recovery (80,000)

Adjusted basis (120,000)

Casualty gain 69,000
AGI $169,000
Less: Itemized deductions

Casualty loss

Dwelling

Basis ($400,000
50%)
$200,000
Recovery (189,000)
Loss $ 11,000
Household items 8,50
0

Total loss $ 19,500
Less: $100 floor (1
00)
$ 19,400
Automobile
Loss $ 5,000
Recovery if claim
filed
(3,000)
Loss $ 2,000
Less: $100 floor (1
00)
1,900
Total loss $ 21,300
Less: 10% $169,000 (AGI) (16,900)
Deductible casualty loss $ 4,400
Home mortgage interest 10,000
Other miscellaneous itemized deduction
painting
4,000
Computer loss [$6,000 (2% $169,000)] 2,
620

Total itemized deductions (21,020)
Personal exemption (3,900
)

Taxable income $144,080




892. J uani t a, si ngl e and age 43, had t he f ol l owi ng i t ems f or 2013:

Sal ar y $60, 000
I nt er est i ncome 6, 000
Casual t y l oss on busi ness pr oper t y ( 15, 000)
Casual t y l oss on r ent al pr oper t y ( 5, 000)
Loss on t hef t of secur i t i es ( 8, 000)
Per sonal casual t y gai ns 9, 000
Per sonal casual t y l oss ( af t er $100
f l oor )
( 13, 000)
Ot her i t emi zed deduct i ons ( 9, 000)


Comput e J uani t a s t axabl e i ncome f or 2013.

Cor r ect Answer :
Salary $60,000
Interest income 6,000
Casualty loss on
business property
(15,000)
Casualty loss on
rental property
(5,000)
Personal casualty
gains
$9,000
Personal casualty
loss
(9,000) 0
AGI $46,000
Less: Itemized deductions
Casualty loss
[($13,000 $9,000)
(10% $46,000)]
(0)
Theft of
securities
(8,000)
Other itemized
deductions
(9,000)
Personal exemption (3,900)
Taxable income $25,100




893. Whi l e Susan was on vacat i on dur i ng t he cur r ent year , someone br oke
i nt o her home and st ol e t he f ol l owi ng i t ems:

A comput er used 60%i n connect i on wi t h
Susan s empl oyment as an empl oyee and 40%
f or her per sonal use. The cost of t he
comput er was $8, 000. Depr eci at i on of
$3, 000 had been t aken on t he comput er and
i t had a f ai r mar ket val ue of $4, 000 at t he
t i me of t he t hef t .

A pai nt i ng, whi ch Susan pur chased as an
i nvest ment f or $10, 000, had a f ai r mar ket
val ue of $17, 000.

Si l ver war e pur chased f or $3, 000 had a f ai r
mar ket val ue of $5, 000.

Cash of $30, 000.



Susan s adj ust ed gr oss i ncome, bef or e consi der i ng any of t he above
i t ems, i s $60, 000.
Det er mi ne t he t ot al amount of Susan s i t emi zed deduct i ons r esul t i ng
f r omt he t hef t .

Cor r ect Answer :
Painting loss (investment property) $10,000
Casualty loss
Computer ($4,000 40%) $ 1,60
0

Silverware 3,000
Cash 30,00
0

Total $34,600
Less: $100 floor (100)
10% $60,000 (AGI)

(6,00
0)
28
Loss on nonreimbursed employee business expensecomputer


Lesser of:
(1) Cost ($8,000 60%) $4,800
Depreciation (3,000)


Adjusted basis $1,800
(2) Fair market value ($4,000
60%)
$2,400
Loss $1,800
Less: 2% $60,000 (AGI) (1,200)
Total itemized deductions $3




894. Neal , si ngl e and age 37, has t he f ol l owi ng i t ems f or 2013:

Sal ar y $50, 000
Casual t y l oss on busi ness
pr oper t y
( 8, 000)
Casual t y l oss on r ent al pr oper t y ( 5, 000)
Per sonal casual t y gai ns 3, 000
Per sonal casual t y l osses ( af t er
$100 f l oor )
( 12, 000)
I nt er est expense on per sonal
r esi dence
( 7, 000)


Det er mi ne Neal s t axabl e i ncome f or 2013.

Cor r ect Answer :
Salary $50,000
Casualty loss on
business property
(8,000)
Casualty loss on
rental property
(5,000)
Personal casualty
gains
$3,000
Personal casualty (3,000)
losses 0
AGI $37,000
Less: Itemized
deductions

Casualty loss
($12,000
$3,000)
$9,000
Less: 10%
$37,000 (AGI)
(3,700)
Casualty loss
deduction
$5,300
Interest
expense
7,000 (12,300)
Personal
exemption
(3,900)
Taxable income $20,800




895. Gar y, who i s an empl oyee of Red Cor por at i on, has t he f ol l owi ng
i t ems f or 2013:

Sal ar y $80, 000
Per sonal casual t y gai n 7, 000
Per sonal casual t y l oss f r omone
event ( bef or e t he $100 f l oor )
15, 000
Loss on r ent al pr oper t y 6, 000
Thef t of bear er bonds 18, 000
Unr ei mbur sed l oss f r omt hef t of a
comput er used 100%f or busi ness
4, 000


Det er mi ne Gar y s AGI and t ot al amount of i t emi zed deduct i ons f or 2013.

Cor r ect Answer :
Salary $80,000
Loss on rental property (6,000)
Personal casualty gain 7,000
Personal casualty loss (7,000)
Adjusted gross income

$74,000
Personal casualty loss ($15,000
$7,000)
$ 8,000
Less: $100 floor (100)
10% $74,000
(AGI)
(7,400)
$ 500

Theft of bearer bonds 18,000
Theft of computer [$4,000 (.02
$74,000)]
2,52
0
Total itemized deductions $21,020




896. Susan has t he f ol l owi ng i t ems f or 2013:
Loss on r ent al pr oper t y caused by t er mi t es$150, 000. I nsur ance
cover ed 80%of t he l oss.

Loss on per sonal use aut omobi l e$10, 000. The i nsur ance pol i cy
does not cover t he f i r st $3, 000 of l oss. Susan deci ded not t o f i l e a
cl ai mf or t he l oss.

Loss on a pai nt i ng st ol en f r omSusan s house. Susan pur chased t he
pai nt i ng t hr ee year s ago as an i nvest ment . She pai d $40, 000 f or t he
pai nt i ng and i t was wor t h $35, 000 at t he t i me of t he t hef t . The
pai nt i ng was i nsur ed f or t he f ai r mar ket val ue.

Sal ar y$40, 000.

Det er mi ne Susan s AGI and t ot al amount of i t emi zed deduct i ons f or 2013.

Cor r ect Answer :
Salary $40,000
Loss on rental property [(80%
$150,000) $150,000]
(30,000)
Adjusted gross income $10,000

Casualty loss (limited to $3,000 not
subject to insurance)
$3,000
Less: $100 floor (100)
10% $10,000 (AGI) (1,000)
Casualty loss deduction $1,900
Loss on stolen painting ($40,000
$35,000)
5,000
Total itemized deductions $6,900




897. Roger , an i ndi vi dual , owns a pr opr i et or shi p cal l ed Gr een
Thi ng. For t he year 2013, Roger has t he f ol l owi ng i t ems:

Busi ness i ncome$200, 000.
Busi ness expense$150, 000.
Loss on a compl et el y dest r oyed busi ness machi ne. The machi ne had
an adj ust ed basi s of $25, 000 and a f ai r mar ket val ue of $20, 000.

Loss on a busi ness t r uck. The t r uck had an adj ust ed basi s of
$8, 000. The r epai r s t o f i x t he t r uck cost $10, 000.

Det er mi ne Roger s adj ust ed gr oss i ncome f or 2013.

Cor r ect Answer :
Business income $200,000
Business expense (150,000)
Loss on business machine (25,000)
Loss on business truck (8,0
00)
Adjusted gross income $ 17,000




898. I n 2012, Robi n Cor por at i on i ncur r ed t he f ol l owi ng expendi t ur es i n
connect i on wi t h t he devel opment of a new pr oduct :

Sal ar i es $100, 000
Suppl i es 40, 000
Mar ket sur vey 10, 000
Depr eci at i on 25, 000


I n 2013, Robi n i ncur r ed t he f ol l owi ng addi t i onal expendi t ur es i n
connect i on wi t h t he devel opment of t he pr oduct :

Sal ar i es $125, 000
Suppl i es 50, 000
Depr eci at i on 30, 000
Adver t i si ng 10, 000


I n Oct ober 2013, Robi n began r ecei vi ng benef i t s f r omt he pr oj ect . I f
Robi n el ect s t o expense r esear ch and exper i ment al expendi t ur es,
det er mi ne t he amount and year of t he deduct i on.

Cor r ect Answer :
Deduct i bi l i t y of r esear ch and exper i ment al expendi t ur es i s per mi t t ed i n
t he year of i ncur r ence.

2012
Salaries $100,000
Supplies 40,000
Depreciation 25,00
0
Deductible expenses $165,000


The market survey is not a research and experimental expenditure.

2013
Salaries $125,000
Supplies 50,000
Depreciation 30,0
00
Deductible expenses $205,000


The advertising is not a research and experimental expenditure


899. I n 2013, Tan Cor por at i on i ncur r ed t he f ol l owi ng expendi t ur es i n
connect i on wi t h t he devel opment of a new pr oduct :

Sal ar i es $ 60, 000
Suppl i es 20, 000
Depr eci at i on on r esear ch equi pment 10, 000
Test i ng f or qual i t y cont r ol 5, 000
Adver t i si ng 8, 000
Over head al l ocat ed t o r esear ch 2, 000


Tan began sel l i ng t he pr oduct i n November , 2013. I f Tan el ect s t o
amor t i ze r esear ch and exper i ment al expendi t ur es, det er mi ne Tan s
deduct i on f or 2013.

Cor r ect Answer :
Salaries $60,000
Supplies 20,000
Depreciation 10,000
Overhead allocated to research 2,00
0
Total qualifying research
expenditures
$92,000


[($92,000/60 months) 2 months] = $3,067


900. Gr een, I nc. , manuf act ur es and sel l s wi dget s. Dur i ng 2013, an
exami nat i on of t he company r ecor ds showed t he f ol l owi ng i t ems:

Domest i c pr oduct i on gr oss $3, 000, 00
r ecei pt s 0
Cost of goods sol d f or domest i c
pr oduct s
750, 000
Expenses di r ect l y r el at ed t o
domest i c pr oduct i on gr oss
r ecei pt s ( ot her t han wages)
300, 000
W- 2 wages pai d t o empl oyees
engaged i n qual i f i ed domest i c
pr oduct i on act i vi t i es
300, 000
Rat abl e por t i on of ot her
expenses
100, 000
Tot al W- 2 wages 325, 000
Taxabl e i ncome 1, 600, 000


Det er mi ne Gr een s domest i c pr oduct i on act i vi t i es deduct i on f or 2013.

Cor r ect Answer :
Domestic production gross receipts $3,000,00
0
Less: Cost of goods sold (750,000)
Direct expenses (300,000)
W-2 wages directly
related
(300,000)
Allocated expenses (100
,000)
Qualified production activities
income (QPAI)
$1,550,00
0

Domestic production activities
deduction

Lessor of: QPAI 9% ($1,550,000
9%)
Taxable income 9%
($1,600,000 9%)
$ 139
,500

Limited to 50% of related W-2 wages
(50% $300,000) [no limit]
$ 150
,000




901. Red Company i s a pr opr i et or shi p owned by Sal l y, a si ngl e
i ndi vi dual . Red manuf act ur es and sel l s wi dget s. Dur i ng 2013, an
exami nat i on of Red s r ecor ds shows t he f ol l owi ng i t ems:

Domest i c pr oduct i on gr oss
r ecei pt s
$2, 500, 00
0
Cost of goods sol d f or domest i c 600, 000
pr oduct s
Expenses di r ect l y r el at ed t o
domest i c pr oduct i on gr oss
r ecei pt s ( ot her t han wages)
280, 000
Rat abl e por t i on of ot her
expenses
100, 000
Ot her expenses not al l ocat ed t o
domest i c pr oduct i on
gr oss r ecei pt s
30, 000
W- 2 wages pai d t o empl oyees
engaged i n qual i f i ed domest i c
pr oduct i on act i vi t i es
270, 000
Tot al W- 2 wages 320, 000

Sal l y al so had t he f ol l owi ng
addi t i onal i t ems:

Di vi dends r ecei ved $ 20, 00
0
I nt er est i ncome 10, 000


Det er mi ne Sal l y s domest i c pr oduct i on act i vi t i es deduct i on f or 2013.

Cor r ect Answer :
Gross receipts $2,500,000
Less: Cost of goods sold (600,000)
Expenses directly
related
(280,000)
Other allocated
and nonallocated expenses ($100,000
+ $30,000)
(130,000)
Wages (320,000)
Dividends received 20,000
Interest received
10,000
Modified adjusted gross income $1,200,000

Domestic production gross receipts $2,500,000
Less: Cost of goods sold (600,000)
Direct expenses (280,000)
Allocated
expenses
(100,000)
W-2 wages
directly related
(270,
000)
Qualified production activities
income (QPAI)
$1,250,000

Lesser of: QPAI 9% ($1,250,000)
= $112,500

Mod
ified AGI 9% ($1,200,000) =
$108,000

Not to exceed 50% $270,000 =
$135,000

Sallys QPAD = $108,000




902. Nor a, si ngl e, had t he f ol l owi ng i ncome and deduct i ons f or 2013:

Sal es $ 50, 00
0
Busi ness expenses ( 100, 000
)
Al i mony r ecei ved 30, 000
I nt er est i ncome 1, 000
Di vi dends 2, 000
Nonbusi ness capi t al gai ns 4, 000
1244 st ock l oss ( 18, 000)
I t emi zed deduct i ons ( 4, 000)
Busi ness capi t al l oss ( 2, 000)
Busi ness capi t al gai n 1, 000


Comput e Nor a s net oper at i ng l oss f or 2013.

Cor r ect Answer :
Sales $ 50,000
Business
expenses
(100,000)

Alimony received 30,000
Interest income 1,000
Dividends 2,000
1244 stock
(ordinary loss)
(18,000)

Capital gains
($4,000 +
$1,000)
$5,000

Less: Capital
losses
(2,000)

Net capital
gains
3,000

Adjusted gross
income
($ 32,000)

Standard
deduction
(6,100)

(single)
Personal
exemption (1
$3,900)
(3,900)

Taxable income ($ 42,000)



Taxable income ($ 42,000)

Personal
exemption
3,900
Excess of
nonbusiness
capital losses
over nonbusiness
capital gains

0

Excess of
nonbusiness
deductions over
sum of
nonbusiness
income and net
nonbusiness
capital gains


Standard
deduction
$6,100

Interest (1,000)

Dividends (2,000)

Alimony received (30,000)

Nonbusiness
capital gains
(4,000) 0
Excess of business
capital losses over
the sum of business
capital gains and
the excess of
nonbusiness capital
gains
over nonbusiness
deductions {$2,000
[$1,000 +
($1,000 + $2,000 +
$30,000 + $4,000
$6,100)]}


0

Net operating ($ 38,100)
loss




903. J uan, mar r i ed and f i l i ng j oi nt l y, had t he f ol l owi ng i ncome and
deduct i ons f or 2013:

Sal es $600, 000
Busi ness expenses ( 650, 000)
I nt er est i ncome 3, 000
Di vi dends 4, 000
Per sonal casual t y l oss ( af t er
deduct i ng t he $100 f l oor )
( 25, 000)
Taxes pai d on per sonal r esi dence ( 7, 000)
I nt er est pai d on per sonal
r esi dence
( 9, 000)
Al i mony pai d ( 18, 000)


J uan has t hr ee dependent chi l dr en. Cal cul at e t he net oper at i ng l oss f or
2013.

Cor r ect Answer :
Sales $600,000
Business expense (650,000)
Interest income 3,000
Dividends 4,000
Alimony paid (18,000)
Adjusted gross
income
($ 61,000)
Less: Itemized deductions
Casualty loss
[$25,000 (10%
$0)]
$25,000
Taxes on personal
residence
7,000
Interest on
personal residence
9,000

(41,000)
Personal and
dependency exemptions
(5 $3,900)
(19,500)
Taxable income ($121,500)

Taxable income ($121,500)
Personal and dependency
exemptions
19,500
Excess of nonbusiness
deductions over nonbusiness
income:
Itemized deductions
($41,000
$25,000)
$16,000
Alimony paid 18,000
Total nonbusiness
deductions
$34,000
Interest income (3,000)
Dividends (4,000) 27,0
00
Net operating loss ($ 75,000)




904. J ason, mar r i ed and f i l i ng j oi nt l y, had t he f ol l owi ng i ncome f or
2013:

Sal ar y $ 70, 00
0
Loss on t he sal e of 1244 st ock
hel d f or 5 year s
( 110, 000
)
Di vi dends 25, 000
I nt er est i ncome 10, 000
I t emi zed deduct i ons ( no casual t y
l osses)
( 12, 000)


J ason has f our dependent chi l dr en. Cal cul at e t he net oper at i ng l oss f or
2013.

Cor r ect Answer :
Salary $ 70,000
Ordinary loss ( 1244 stock) (100,000)
Long-term capital loss
[($110,000 $100,000) =
$10,000] limited to
(3,000)
Dividends 25,000
Interest income 10,000
AGI $ 2,000
Itemized deductions (12,000)
Personal exemptions (6
$3,900)
(23,400)
Taxable income ($ 33,400)

Taxable income ($ 33,400)
Excess of nonbusiness
deductions over nonbusiness
income

[$12,000 ($25,000 +
$10,000 $3,000)]
0
Personal exemptions (6
$3,900)
23,40
0
Net operating loss ($ 10,000)




905. Rut h, age 66, sust ai ns a net oper at i ng l oss ( NOL) of $15, 000 f or
2013. Because Rut h had no t axabl e i ncome i n 2011, t he l oss i s car r i ed
back t o 2012. For 2012, t he j oi nt i ncome t ax r et ur n of Rut h and her
husband was as f ol l ows:

Sal ar y $20, 000
I nt er est i ncome 5, 000
Net shor t - t er mcapi t al l oss ( 2, 000
)
AGI $23, 000
I t emi zed deduct i ons
Char i t abl e cont r i but i ons $4, 000
Medi cal expenses [ $2, 000
( $23, 000 . 075) ]
275
I nt er est 5, 000
Taxes 2, 500 ( 11, 775)
Per sonal exempt i ons ( 2 $3, 800) ( 7, 600
)
Taxabl e i ncome $ 3, 625

Cal cul at e Rut h s r emai ni ng 2013 NOL
t o be car r i ed t o 2014.




Cor r ect Answer :
Salary $20,000
Interest income 5,000
Net short-term capital loss (not
permitted)
(
0)
Adjusted gross income $25,000
Itemized deductions
Charitable contributions $4,000
Medical expenses [$2,000
($25,000 .075)]
125
Interest 5,000
Taxes 2,500 (11,625)
Personal exemptions (
0)
Modified taxable income

$13,375
NOL for 2013 ($15,000)
Modified taxable income 13,375
NOL to carry forward ($ 1,625)




906. Mi l t , mar r i ed and f i l i ng j oi nt l y, had t he f ol l owi ng i t ems f or 2013:

Sal es $200, 000
Busi ness expenses 210, 000
I nt er est i ncome 3, 000
Di vi dends 5, 000
Sal ar y 20, 000
Al i mony r ecei ved 8, 000
Nonbusi ness l ong- t er mcapi t al
gai ns
5, 000
Nonbusi ness shor t - t er mcapi t al
l osses
7, 000
Busi ness shor t - t er mcapi t al
l osses
4, 000
Busi ness l ong- t er mcapi t al
gai ns
2, 000
I RA cont r i but i ons 5, 000
Char i t abl e cont r i but i ons 9, 000
Medi cal expenses 8, 450
Pr oper t y t axes 7, 000
Casual t y l oss on per sonal
pr oper t y ( af t er t he $100 f l oor )
35, 000
Loss on st ol en bonds 5, 000
Unr ei mbur sed empl oyee busi ness
expenses
8, 000


Mi l t has t wo dependent chi l dr en. I f Mi l t and hi s wi f e f i l e a j oi nt
r et ur n, comput e t hei r net oper at i ng l oss f or 2013.

Cor r ect Answer :
Sales $200,000
Less: business expenses (210,000)
Net business loss (10,000)
Interest income 3,
000
Dividends 5,
000
Salary 20,0
00
Alimony received 8,
000
Long-term capital gains ($5,000 + $2,000) $ 7,000
Short-term capital losses ($7,000 + $4,000) (11,000)
Net short-term capital losses ($ 4,000)
Limit (3,000)
IRA contributions (5
,000)
Adjusted gross income (AGI) $ 18,00
0
Less: Itemized deductions
Charitable contributions $ 9,000
Medical expenses [$8,450 ($18,000
.10)]
6,650
Property taxes 7,000
Casualty loss [$35,000 ($18,000
.10)]
33,200
Theft loss on stolen bonds 5,000
Nonreimbursed business expenses
[$8,000 ($18,000 .02)] 7,640 (68,490)
Personal and dependency exemption deduction (4
$3,900)
(15,600)
Taxable income ($66,090)
Personal exemptions and dependency
deductions
15,600
Nonbusiness capital losses in excess of
nonbusiness
capital gains ($7,000 $5,000)

2,000
Nonbusiness deductions in excess of
nonbusiness income

IRA $ 5,000
Itemized deductions $68,490
Less: Casualty
loss (33,200)

Bonds theft loss (5,000)
Employee business
expenses (7,640)
22,650
Total nonbusiness
deductions
$27,650
Nonbusiness income
Interest $3,000
Dividends 5,000
Alimony received 8,000 (16,000) 11,650
Business capital losses in excess of
business capital
gains ($4,000 $2,000) limited
to $1,000

1,000
Net operating loss (NOL) ($35,840)




907. I dent i f y t he f act or s t hat shoul d be consi der ed i n det er mi ni ng
whet her a t r ansact i on i s a busi ness bad debt or a nonbusi ness bad debt .

Cor r ect Answer :
Fact or s t o be consi der ed i n det er mi ni ng whet her a t r ansact i on i s a
busi ness bad debt or a nonbusi ness bad debt ar e as f ol l ows:

Was the debt related to the taxpayers
business when it was created?

Was the debt related to the taxpayers
business when it became worthless?

Was the lender engaged in the business of
lending money?

Was there a proximate relationship between
the creation of the debt and the lenders
business?




908. Di scuss t he t ax t r eat ment of non- r ei mbur sed l osses of an empl oyee
i n connect i on wi t h a t r ade or busi ness.

Cor r ect Answer :
The l oss i s deduct i bl e f r omadj ust ed gr oss i ncome as a mi scel l aneous
i t emi zed deduct i on subj ect t o t he 2 per cent - of - AGI l i mi t at i on.


909. A t axpayer who sust ai ns a casual t y l oss i n an ar ea desi gnat ed by
t he Pr esi dent of t he Uni t ed St at es as a di sast er ar ea may t ake t he l oss
i n t he year i n whi ch t he l oss occur r ed or el ect t o t ake t he l oss i n t he
pr evi ous year . I dent i f y f act or s t hat shoul d be consi der ed i n deci di ng
i n whi ch year t o t ake t he l oss.

Cor r ect Answer :
Fact or s t hat shoul d be consi der ed i ncl ude:

The marginal tax rates of the two different
years.

The adjusted gross incomes of the two
different years.

Other casualty losses in the two different
years.

The benefits of a faster refund (or reduction
of tax).




910. Di scuss t he t r eat ment , i ncl udi ng t he car r yback and car r yf or war d
per i ods, of casual t y l osses i ncur r ed wi t h per sonal use pr oper t y.

Cor r ect Answer :
These l osses ar e subj ect t o t he $100 per event f l oor and t he 10%of AGI
l i mi t at i ons. The l osses ar e i t emi zed deduct i ons. Casual t y l osses on
per sonal use pr oper t y can have a t hr ee- year car r yback. The car r yover
per i od i s 20 year s.


911. What ar e t he t hr ee met hods of handl i ng r esear ch and exper i ment al
expendi t ur es i ncur r ed i n a t r ade or busi ness? Under what ci r cumst ances
woul d you choose each?

Cor r ect Answer :
The f ol l owi ng met hods ar e per mi t t ed:

The expense method, where the expenditures
are written off immediately, is attractive
where the taxpayer is currently in a high tax
bracket and has sufficient other income to
offset the deductions.

Deferral and amortization of expenditures
over a period of not less than 60 months is
generally chosen when the total deduction is
not wanted immediately because future income
is expected to be available to offset the
deduction.

The capitalization method allows no deduction
until the project is abandoned or becomes
worthless. Usually taxpayers do not choose
this method, since the tax benefit is
deferred for an indefinite period.




912. Why was t he domest i c pr oduct i on act i vi t i es deduct i on ( DPAD)
enact ed by Congr ess?

Cor r ect Answer :
The Amer i can J obs Cr eat i on Act of 2004 pr ovi si on cr eat i ng DPADs was
enact ed t o r epl ace cer t ai n t ax pr ovi si ons t hat our wor l d t r adi ng
par t ner s r egar ded as al l owi ng unf ai r advant age t o U. S. expor t s. Not e,
however , i n no way i s t he DPAD l i mi t ed t o expor t s.


913. How i s qual i f i ed pr oduct i on act i vi t i es i ncome ( QPAI ) cal cul at ed?

Cor r ect Answer :
QPAI i s cal cul at ed as f ol l ows:

The excess of domest i c pr oduct i on gr oss r ecei pt s ( DPGR) over t he sumof :

Cost of goods sold allocated to such
receipts.

Other deductions, expenses, or losses
directly allocated to such receipts.

The ratable portion of deductions, expenses,
and losses not directly allocable to such
receipts or another class of income.




914. Sal l y i s an empl oyee of Bl ue Cor por at i on. Last year , she
pur chased a ver y expensi ve comput er wi t h her own f unds. She used t he
comput er 100%f or busi ness pur poses. Dur i ng t he cur r ent year , t he
comput er was compl et el y dest r oyed i n a f i r e. Bl ue Cor por at i on di d not
r ei mbur se her f or her l oss. Di scuss whet her Sal l y s l oss wi l l cr eat e
or i ncr ease Sal l y s net oper at i ng l oss.

Cor r ect Answer :
The l oss i s i ncur r ed i n connect i on wi t h Sal l y s t r ade or
busi ness. However , because Sal l y i s an empl oyee and t he l oss i s not
r ei mbur sed, i t i s an i t emi zed deduct i on whi ch i s a deduct i on from
adj ust ed gr oss i ncome. The l oss i s not i ncur r ed i n a t r ansact i on
ent er ed i nt o f or pr of i t nor i s t he l oss a casual t y l oss on per sonal use
pr oper t y. However , t he l oss i s connect ed wi t h Sal l y s t r ade or
busi ness and t her ef or e, even t hough i t i s an i t emi zed deduct i on and
subj ect t o t he 2%- of - AGI f l oor , i t can cr eat e an NOL.


915. Di scuss t he t r eat ment of al i mony pai d and deduct i bl e i ndi vi dual
r et i r ement account cont r i but i ons i n comput i ng an i ndi vi dual s net
oper at i ng l oss.

Cor r ect Answer :
Al i mony pai d and deduct i bl e i ndi vi dual r et i r ement account cont r i but i ons
ar e t r eat ed as nonbusi ness deduct i ons i n comput i ng a net oper at i ng
l oss. Hence, nei t her i t emcan cr eat e or i ncr ease a net oper at i ng l oss.


916. Di scuss t he comput at i on of NOL r emai ni ng t o be car r i ed f or war d
af t er t he NOL has been appl i ed i n a car r yback year .

Cor r ect Answer :
The NOL amount t o be car r i ed f or war d i s t he excess of t he NOL over t he
t axabl e i ncome of t he year t o whi ch t he NOL i s bei ng appl i ed. However ,
t he t axabl e i ncome of t he year t o whi ch t he NOL i s bei ng appl i ed must
be comput ed wi t h t he f ol l owi ng modi f i cat i ons:

No deduction is allowed for the excess of
capital losses over capital gains.

No deduction is allowed for the NOL that is
being carried back. However, deductions are
allowed for NOLs occurring before the loss
year.

Any deductions claimed that are based on or
limited by AGI must be determined after
making the preceding adjustments. However,
charitable contributions do not take into
account any NOL carryback.

No deduction is allowed for personal or
dependency exemptions.




917. Di scuss t he ef f ect of al i mony i n comput i ng a net oper at i ng l oss.

Cor r ect Answer :
Al i mony r ecei ved i s t r eat ed as nonbusi ness i ncome. Al i mony pai d i s
t r eat ed as a nonbusi ness deduct i on.


918. Pr oper t y whi ch i s cl assi f i ed as per sonal t y may be depr eci at ed.

*a. Tr ue
b. Fal se


919. The basi s of cost r ecover y pr oper t y must be r educed by at l east
t he cost r ecover y al l owabl e.

*a. Tr ue
b. Fal se


920. Ant i ques may be el i gi bl e f or cost r ecover y i f t hey ar e used i n a
t r ade or busi ness.

a. Tr ue
*b. Fal se


921. The key dat e f or cal cul at i ng cost r ecover y i s t he dat e t he asset
i s pl aced i n ser vi ce.

*a. Tr ue
b. Fal se


922. Land i mpr ovement s ar e gener al l y not el i gi bl e f or cost r ecover y.

a. Tr ue
*b. Fal se


923. The cost r ecover y basi s f or pr oper t y conver t ed f r omper sonal use
t o busi ness use may be t he f ai r mar ket val ue of t he pr oper t y at t he
t i me of t he conver si on.

*a. Tr ue
b. Fal se


924. The maxi mumcost r ecover y met hod f or al l per sonal pr oper t y under
MACRS i s 150%decl i ni ng bal ance.

a. Tr ue
*b. Fal se


925. The cost r ecover y per i od f or 3- year cl ass pr oper t y i s 4 year s.

*a. Tr ue
b. Fal se


926. Al l per sonal pr oper t y pl aced i n ser vi ce i n 2013 and used i n a
t r ade or busi ness qual i f i es f or addi t i onal f i r st - year depr eci at i on.

a. Tr ue
*b. Fal se


927. I f mor e t han 40%of t he val ue of pr oper t y, ot her t han r eal
pr oper t y, i s pl aced i n ser vi ce dur i ng t he l ast quar t er , al l of t he
pr oper t y pl aced i n ser vi ce i n t he second quar t er wi l l be al l owed 7. 5
mont hs of cost r ecover y.

*a. Tr ue
b. Fal se


928. Under MACRS, i f t he mi d- quar t er convent i on i s appl i cabl e, al l
pr oper t y sol d i s t r eat ed as bei ng sol d at t he mi d- poi nt of t he quar t er
i n whi ch i t i s pl aced i n ser vi ce.

a. Tr ue
*b. Fal se


929. The f act or f or det er mi ni ng t he cost r ecover y f or el i gi bl e r eal
est at e under MACRS, i n t he year of di sposi t i on, i s t aken f r omt he mont h
of t he di sposi t i on.

a. Tr ue
*b. Fal se


930. Resi dent i al r ent al r eal est at e i ncl udes pr oper t y wher e 80%or mor e
of t he net r ent al r evenues ar e f r omnont r ansi ent dwel l i ng uni t s.

a. Tr ue
*b. Fal se


931. Mot el bui l di ngs have a cost r ecover y per i od of 27. 5 year s.

a. Tr ue
*b. Fal se


932. Taxpayer s may el ect t o use t he st r ai ght - l i ne met hod under MACRS
f or per sonal t y.

*a. Tr ue
b. Fal se


933. Under t he MACRS st r ai ght - l i ne el ect i on f or per sonal t y, onl y t he
hal f - year convent i on i s appl i cabl e.

a. Tr ue
*b. Fal se


934. The cost r ecover y met hod f or new f ar mequi pment pl aced i n ser vi ce
dur i ng 2013 i s 200%decl i ni ng bal ance.

a. Tr ue
*b. Fal se


935. I n a f ar mi ng busi ness, MACRS st r ai ght - l i ne cost r ecover y i s
r equi r ed f or al l f r ui t bear i ng t r ees.

*a. Tr ue
b. Fal se


936. I n a f ar mi ng busi ness, i f t he uni f or mcapi t al i zat i on r ul es ar e not
used, cost i s r ecover ed usi ng t he ADS st r ai ght - l i ne met hod.

*a. Tr ue
b. Fal se


937. When l essor owned l easehol d i mpr ovement s ar e abandoned because of
t he t er mi nat i on of t he l ease, a l oss can be t aken f or t he unr ecover ed
basi s.

*a. Tr ue
b. Fal se


938. The cost s of qual i f i ed l easehol d i mpr ovement s qual i f y f or
addi t i onal f i r st - year depr eci at i on.

*a. Tr ue
b. Fal se


939. For per sonal pr oper t y pl aced i n ser vi ce i n 2013, t he 179 maxi mum
deduct i on i s l i mi t ed t o $500, 000.

*a. Tr ue
b. Fal se


940. The 179 deduct i on can exceed $500, 000 i n 2013 i f t he t axpayer
had a 179 amount whi ch exceeded t he t axabl e i ncome l i mi t at i on i n t he
pr i or year .

a. Tr ue
*b. Fal se


941. Any 179 expense amount t hat i s car r i ed f or war d i s subj ect t o t he
busi ness i ncome l i mi t at i on i n t he car r yf or war d year .

*a. Tr ue
b. Fal se


942. Taxabl e i ncome f or pur poses of 179 l i mi t ed expensi ng i s comput ed
by i ncl udi ng t he MACRS deduct i on.

*a. Tr ue
b. Fal se


943. The basi s of an asset on whi ch $500, 000 has been expensed under
179 wi l l be r educed by $500, 000, even i f $500, 000 cannot be expensed i n
t he cur r ent year because of t he t axabl e i ncome l i mi t at i on.

*a. Tr ue
b. Fal se


944. Pr oper t y used f or t he pr oduct i on of i ncome i s not el i gi bl e f or
179 expensi ng.

*a. Tr ue
b. Fal se


945. The st at ut or y dol l ar cost r ecover y l i mi t s under 280F does appl y
t o al l aut omobi l es.

a. Tr ue
*b. Fal se


946. The 179 l i mi t f or a spor t s ut i l i t y vehi cl e wi t h a GVWof 7, 000
pounds wi l l not appl y i f t he spor t s ut i l i t y vehi cl e i s used as a t axi .

a. Tr ue
*b. Fal se


947. Once t he mor e- t han- 50%busi ness usage t est i s passed f or l i st ed
pr oper t y, i t does mat t er i f t he busi ness usage f or t he pr oper t y dr ops
t o 50%or l ess dur i ng t he r ecover y per i od.

*a. Tr ue
b. Fal se


948. I f a new car t hat i s used pr edomi nant l y i n busi ness i s pl aced i n
ser vi ce i n 2013, t he st at ut or y dol l ar cost r ecover y l i mi t under 280F
wi l l depend on whet her t he t axpayer t akes MACRS or st r ai ght - l i ne
depr eci at i on.

a. Tr ue
*b. Fal se


949. I f an aut omobi l e i s pl aced i n ser vi ce i n 2013, t he l i mi t at i on f or
cost r ecover y i n 2015 wi l l be based on t he cost r ecover y l i mi t s f or t he
year 2013.

*a. Tr ue
b. Fal se


950. The st at ut or y dol l ar cost r ecover y l i mi t s under 280F f or
passenger aut omobi l es ar e changed i f mi d- quar t er cost r ecover y i s used.

a. Tr ue
*b. Fal se


951. I f a used $35, 000 aut omobi l e used 100%f or busi ness i n t he f i r st
year ( 2013) f ai l s t he 50%busi ness usage t est i n t he second year , no
cost r ecover y wi l l be r ecapt ur ed.

*a. Tr ue
b. Fal se


952. The i ncl usi on amount f or a l eased aut omobi l e i s adj ust ed by a
busi ness usage per cent age.

*a. Tr ue
b. Fal se


953. Al l l i st ed pr oper t y i s subj ect t o t he subst ant i at i on r equi r ement s
of 274.

*a. Tr ue
b. Fal se


954. I f a t axpayer uses r egul ar MACRS f or al l pr oper t y, an al t er nat i ve
mi ni mumt ax adj ust ment i s made wi t h r espect t o t he depr eci at i on on al l
pr oper t y, r egar dl ess of t he cl ass l i f e.

a. Tr ue
*b. Fal se


955. MACRS depr eci at i on i s used t o comput e ear ni ngs and pr of i t s.

a. Tr ue
*b. Fal se


956. Under t he al t er nat i ve depr eci at i on syst em( ADS) , t he hal f - year
convent i on must be used f or per sonal t y.

a. Tr ue
*b. Fal se


957. A t axpayer may el ect t o use t he al t er nat i ve depr eci at i on syst em
( ADS) t o comput e depr eci at i on f or ear ni ngs and pr of i t s.

*a. Tr ue
b. Fal se


958. An el ect i on t o use st r ai ght - l i ne under ADS i s made on an asset - by-
asset basi s f or pr oper t y ot her t han el i gi bl e r eal est at e.

a. Tr ue
*b. Fal se


959. For r eal pr oper t y, t he ADS convent i on i s t he mi d- mont h convent i on.

*a. Tr ue
b. Fal se


960. The cost of a covenant not t o compl et e f or 10 year s i ncur r ed i n
connect i on wi t h t he acqui si t i on of a busi ness i s amor t i zed over 10
year s.

a. Tr ue
*b. Fal se


961. Goodwi l l associ at ed wi t h t he acqui si t i on of a busi ness cannot be
amor t i zed.

a. Tr ue
*b. Fal se


962. A pur chased t r ademar k i s a 197 i nt angi bl e.

*a. Tr ue
b. Fal se


963. I f st ar t up expenses t ot al $53, 000 i n 2013, $51, 000 i s amor t i zed
over 180 mont hs.

*a. Tr ue
b. Fal se


964. The amor t i zat i on per i od i n 2013 f or $58, 000 of st ar t up expenses i s
180 mont hs.

*a. Tr ue
b. Fal se


965. Cost depl et i on i s det er mi ned by mul t i pl yi ng t he depl et i on cost per
uni t by t he number of uni t s sol d.

*a. Tr ue
b. Fal se


966. Per cent age depl et i on enabl es t he t axpayer t o r ecover mor e t han t he
cost of an asset .

*a. Tr ue
b. Fal se


967. I nt angi bl e dr i l l i ng cost s must be capi t al i zed and wr i t t en of f
t hr ough depl et i on.

a. Tr ue
*b. Fal se


968. Gr ape Cor por at i on pur chased a machi ne i n December of t he cur r ent
year . Thi s was t he onl y asset pur chased dur i ng t he cur r ent year . The
machi ne was pl aced i n ser vi ce i n J anuar y of t he f ol l owi ng year . No
asset s wer e pur chased i n t he f ol l owi ng year . Gr ape Cor por at i on s cost
r ecover y woul d begi n:

a. I n t he cur r ent year usi ng a mi d- quar t er convent i on.
b. I n t he cur r ent year usi ng a hal f - year convent i on.
c. I n t he f ol l owi ng year usi ng a mi d- quar t er convent i on.
*d. I n t he f ol l owi ng year usi ng a hal f - year convent i on.
e. None of t he above.


969. Whi ch of t he f ol l owi ng asset s woul d be subj ect t o cost r ecover y?

a. A pai nt i ng by Pi casso hangi ng on a doct or s of f i ce wal l .
b. An ant i que vase i n a doct or s wai t i ng r oom.
*c. Landscapi ng ar ound t he doct or s of f i ce.
d. a. , b. , and c.
e. None of t he above.


970. On J une 1 of t he cur r ent year , Tab conver t ed a machi ne f r om
per sonal use t o r ent al pr oper t y. At t he t i me of t he conver si on, t he
machi ne was wor t h $90, 000. Fi ve year s ago Tab pur chased t he machi ne f or
$120, 000. The machi ne i s st i l l encumber ed by a $50, 000 mor t gage. What
i s t he basi s of t he machi ne f or cost r ecover y?

a. $70, 000.
*b. $90, 000.
c. $120, 000.
d. $140, 000.
e. None of t he above.


971. Tar a pur chased a machi ne f or $40, 000 t o be used i n her busi ness.
The cost r ecover y al l owed and al l owabl e f or t he t hr ee year s t he machi ne
was used ar e as f ol l ows:

Cost Recovery
Allowed
Cost Recovery
Allowable
Year 1 $16,000 $ 8,000
Year 2 9,600 12,800
Year 3 5,760 7,680


If Tara sells the machine after three years for $15,000, how much gain
should she recognize?

a. $3, 480.
b. $6, 360.
c. $9, 240.
*d. $11, 480.
e. None of t he above.


972. Hazel pur chased a new busi ness asset ( f i ve- year asset ) on
Sept ember 30, 2013, at a cost of $100, 000. On Oct ober 4, 2013, Hazel
pl aced t he asset i n ser vi ce. Thi s was t he onl y asset Hazel pl aced i n
ser vi ce i n 2013. The onl y el ect i on wi t h r espect t o t he asset was not
t o t ake 179. On August 20, 2014, Hazel sol d t he asset . Det er mi ne
t he cost r ecover y f or 2014 f or t he asset .

a. $9, 600.
*b. $11, 875.
c. $23, 750.
d. $38, 000.
e. None of t he above.


973. Tan Company acqui r es a new machi ne ( t en- year pr oper t y) on J anuar y
15, 2013, at a cost of $200, 000. Tan al so acqui r es anot her new machi ne
( seven- year pr oper t y) on November 5, 2013, at a cost of $40, 000. No
el ect i on i s made t o use t he st r ai ght - l i ne met hod. The company does not
make t he 179 el ect i on. Tan el ect s t o not t ake addi t i onal f i r st - year
depr eci at i on. Det er mi ne t he t ot al deduct i ons i n cal cul at i ng t axabl e
i ncome r el at ed t o t he machi nes f or 2013.

a. $24, 000.
*b. $25, 716.
c. $102, 000.
d. $132, 858.
e. None of t he above.


974. J ames pur chased a new busi ness asset ( t hr ee- year per sonal t y) on
J ul y 23, 2013, at a cost of $40, 000. J ames t akes addi t i onal f i r st - year
depr eci at i on Det er mi ne t he cost r ecover y deduct i on f or 2013.

a. $8, 333.
*b. $26, 666.
c. $33, 333.
d. $41, 665.
e. None of t he above.


975. Al i ce pur chased of f i ce f ur ni t ur e on Sept ember 20, 2012, f or
$100, 000. On Oct ober 10, 2012, she pur chased busi ness comput er s f or
$80, 000. Al i ce pl aced al l of t he asset s i n ser vi ce on J anuar y 15, 2013.
Al i ce di d not el ect t o expense any of t he asset s under 179, nor di d
she el ect st r ai ght - l i ne cost r ecover y. She di d not t ake addi t i onal
f i r st - year depr eci at i on. Det er mi ne t he cost r ecover y deduct i on f or t he
busi ness asset s f or 2013.

a. $6, 426.
b. $14, 710.
c. $25, 722.
*d. $30, 290.
e. None of t he above.


976. Bar r y pur chased a used busi ness asset ( seven- year pr oper t y) on
Sept ember 30, 2013, at a cost of $200, 000. Thi s i s t he onl y asset he
pur chased dur i ng t he year . Bar r y di d not el ect t o expense any of t he
asset under 179, nor di d he el ect st r ai ght - l i ne cost r ecover y. Bar r y
sol d t he asset on J ul y 17, 2014. Det er mi ne t he cost r ecover y deduct i on
f or 2014.

a. $19, 133.
*b. $24, 490.
c. $34, 438.
d. $55, 100.
e. None of t he above.


977. Bonni e pur chased a new busi ness asset ( f i ve- year pr oper t y) on
Mar ch 10, 2013, at a cost of $30, 000. She al so pur chased a new busi ness
asset ( seven- year pr oper t y) on November 20, 2013, at a cost of $13, 000.
Bonni e di d not el ect t o expense ei t her of t he asset s under 179, nor
di d she el ect st r ai ght - l i ne cost r ecover y. Bonni e t akes addi t i onal
f i r st - year depr eci at i on. Det er mi ne t he cost r ecover y deduct i on f or
2013 f or t hese asset s.

a. $5, 858.
b. $7, 464.
c. $9, 586.
d. $19, 429.
*e. None of t he above.


978. Doug pur chased a new f act or y bui l di ng on J anuar y 15, 1988, f or
$400, 000. On Mar ch 1, 2013, t he bui l di ng was sol d. Det er mi ne t he cost
r ecover y deduct i on f or t he year of t he sal e assumi ng he di d not use t he
MACRS st r ai ght - l i ne met hod.

a. $0.
b. $1, 587.
*c. $2, 645.
d. $12, 696.
e. None of t he above.


979. Cor a pur chased a hot el bui l di ng on May 17, 2013, f or $3, 000, 000.
Det er mi ne t he cost r ecover y deduct i on f or 2014.

a. $48, 150.
b. $59, 520.
c. $69, 000.
*d. $76, 920.
e. None of t he above.


980. Car l os pur chased an apar t ment bui l di ng on November 16, 2013, f or
$3, 000, 000. Det er mi ne t he cost r ecover y f or 2013.

a. $9, 630.
b. $11, 910.
c. $13, 950.
d. $22, 740.
*e. None of t he above.


981. Di ane pur chased a f act or y bui l di ng on Apr i l 15, 1993, f or
$5, 000, 000. She sel l s t he f act or y bui l di ng on Febr uar y 2, 2013.
Det er mi ne t he cost r ecover y deduct i on f or t he year of t he sal e.

a. $16, 025.
*b. $19, 838.
c. $26, 458.
d. $158, 750.
e. None of t he above.


982. Howar d s busi ness i s r ai si ng and har vest i ng peaches. On Mar ch 10,
2013, Howar d pur chased 10, 000 new peach t r ees at a cost of $60, 000.
Howar d does not el ect t o expense asset s under 179. I f el i gi bl e,
Howar d t akes addi t i onal f i r st - year depr eci at i on. Det er mi ne t he cost
r ecover y deduct i on f or 2013.

a. $0.
b. $3, 000.
*c. $31, 500.
d. $60, 000.
e. None of t he above.


983. On May 15, 2013, Br ent pur chased new f ar mequi pment f or $200, 000.
Br ent used t he equi pment i n connect i on wi t h hi s f ar mi ng
busi ness. Br ent does not el ect t o expense asset s under 179. Br ent
does not t ake addi t i onal f i r st - year depr eci at i on. Det er mi ne t he cost
r ecover y deduct i on f or 2013.

a. $12, 852.
*b. $21, 420.
c. $30, 000.
d. $36, 000.
e. None of t he above.


984. On J une 1, 2013, Sampur chased used f ar mmachi ner y f or $150, 000.
Samused t he machi ner y i n connect i on wi t h hi s f ar mi ng busi ness. Sam
does not el ect t o expense asset s under 179. Samhas, however , made an
el ect i on t o not have t he uni f or mcapi t al i zat i on r ul es appl y t o t he
f ar mi ng busi ness. Samt akes addi t i onal f i r st - year depr eci at i on when
avai l abl e. Det er mi ne t he cost r ecover y deduct i on f or 2013.

a. $5, 000.
*b. $7, 500.
c. $10, 000.
d. $78, 750.
e. None of t he above.


985. On May 30, 2013, J ane si gned a 20- year l ease on a f act or y bui l di ng
t o use f or her busi ness. The l ease begi ns on J une 1, 2013. I n August
2013, J ane pai d $300, 000 f or qual i f i ed l easehol d i mpr ovement s t o t he
bui l di ng. J ane t akes addi t i onal f i r st - year depr eci at i on. Det er mi ne
J ane s t ot al deduct i on wi t h r espect t o t he l easehol d i mpr ovement s f or
2013.

a. $2, 890.
b. $150, 000.
*c. $154, 995.
d. $300, 000.
e. None of t he above.


986. On Febr uar y 20, 2013, Susan pai d $200, 000 f or a l easehol d
i mpr ovement t o an of f i ce bui l di ng t hat she i s goi ng t o l ease t o J ohn.
The l easehol d i mpr ovement i s not a qual i f i ed l easehol d i mpr ovement . The
l ease wi l l begi n on J une 1, 2013, and t er mi nat e on May 31, 2023. At t he
t er mi nat i on of t he l ease, t he i mpr ovement wi l l be wor t hl ess. Det er mi ne
Susan s deduct i bl e l oss as a r esul t of t he t er mi nat i on of t he l ease.

a. $0.
b. $123, 503.
c. $127, 990.
d. $128, 631.
*e. None of t he above.


987. Whi t e Company acqui r es a new machi ne ( seven- year pr oper t y) on
J anuar y 10, 2013, at a cost of $600, 000. Whi t e makes t he el ect i on t o
expense t he maxi mumamount under 179. No el ect i on i s made t o use t he
st r ai ght - l i ne met hod. Whi t e does t ake addi t i onal f i r st - year
depr eci at i on. Det er mi ne t he t ot al deduct i ons i n cal cul at i ng t axabl e
i ncome r el at ed t o t he machi ne f or 2013 assumi ng Whi t e has t axabl e
i ncome of $800, 000.

a. $71, 593.
b. $128, 610.
c. $385, 296.
d. $390, 868.
*e. None of t he above.


988. Augi e pur chased one new asset dur i ng t he year ( f i ve- year pr oper t y)
on November 10, 2013, at a cost of $650, 000. She made t he 179
el ect i on. The i ncome f r omt he busi ness bef or e t he cost r ecover y
deduct i on and t he 179 deduct i on was $600, 000. She t akes addi t i onal
f i r st - year depr eci at i on. Det er mi ne t he t ot al cost r ecover y deduct i on
wi t h r espect t o t he asset f or 2013.

a. $22, 500.
b. $154, 550.
c. $500, 000.
d. $600, 700.
*e. None of t he above.


989. I n 2012, Gai l had a 179 deduct i on car r yover of $30, 000. I n 2013,
she el ect ed 179 f or an asset acqui r ed at a cost of $115, 000. Gai l s
179 busi ness i ncome l i mi t at i on f or 2013 i s $140, 000. Det er mi ne Gai l s
179 deduct i on f or 2013.

a. $25, 000.
b. $115, 000.
c. $130, 000.
*d. $140, 000.
e. None of t he above.


990. The onl y asset Bi l l pur chased dur i ng 2013 was a new seven- year
cl ass asset . The asset , whi ch was l i st ed pr oper t y, was acqui r ed on J une
17 at a cost of $50, 000. The asset was used 40%f or busi ness, 30%f or
t he pr oduct i on of i ncome, and t he r est of t he t i me f or per sonal use.
Bi l l al ways el ect s t o expense t he maxi mumamount under 179 whenever
i t i s appl i cabl e. The net i ncome f r omt he busi ness bef or e t he 179
deduct i on i s $100, 000. Det er mi ne Bi l l s maxi mumdeduct i on wi t h r espect
t o t he pr oper t y f or 2013.

a. $1, 428.
*b. $2, 499.
c. $26, 749.
d. $33, 375.
e. None of t he above.


991. Mar y pur chased a new f i ve- year cl ass asset on Mar ch 7, 2013. The
asset was l i st ed pr oper t y ( not an aut omobi l e) . I t was used 60%f or
busi ness and t he r est of t he t i me f or per sonal use. The asset cost
$900, 000. Mar y made t he 179 el ect i on. The i ncome f r omt he busi ness
bef or e t he 179 deduct i on was $600, 000. Mar y does t ake addi t i onal
f i r st - year depr eci at i on. Det er mi ne t he t ot al deduct i ons wi t h r espect
t o t he asset f or 2013.

a. $72, 000.
b. $271, 600.
*c. $524, 000.
d. $600, 000.
e. None of t he above.


992. Hans pur chased a new passenger aut omobi l e on August 17, 2013, f or
$30, 000. Dur i ng t he year t he car was used 40%f or busi ness and 60%f or
per sonal use. Det er mi ne hi s cost r ecover y deduct i on f or t he car f or
2013.

a. $500.
b. $1, 000.
c. $1, 224.
d. $1, 500.
*e. None of t he above.


993. On J une 1, 2013, I r ene pl aces i n ser vi ce a new aut omobi l e t hat
cost $21, 000. The car i s used 70% f or busi ness and 30% f or per sonal use.
( Assume t hi s per cent age i s mai nt ai ned f or t he l i f e of t he car . ) She
does not t ake addi t i onal f i r st - year depr eci at i on. Det er mi ne t he cost
r ecover y deduct i on f or 2014.

a. $3, 160.
b. $3, 290.
*c. $3, 570.
d. $6, 720.
e. None of t he above.


994. On J une 1, 2013, J ames pl aces i n ser vi ce a new aut omobi l e t hat
cost $40, 000. The car i s used 60% f or busi ness and 40% f or per sonal use.
( Assume t hi s per cent age i s mai nt ai ned f or t he l i f e of t he car . ) J ames
does t ake addi t i onal f i r st - year depr eci at i on. Det er mi ne t he cost
r ecover y deduct i on f or 2013.

a. $1, 776.
b. $1, 836.
*c. $6, 696.
d. $11, 160.
e. None of t he above.


995. On May 2, 2013, Kar en pl aced i n ser vi ce a new spor t s ut i l i t y
vehi cl e t hat cost $60, 000 and has a gr oss vehi cl e wei ght of 6, 300
l bs. The vehi cl e i s used 60%f or busi ness and 40%f or per sonal
use. Det er mi ne t he cost r ecover y f or 2013. Kar en want s t o maxi mi ze her
deduct i ons.

a. $2, 200.
b. $3, 060.
c. $25, 000.
d. $27, 200.
*e. None of t he above.


996. On J ul y 17, 2013, Kevi n pl aces i n ser vi ce a used aut omobi l e t hat
cost $25, 000. The car i s used 80% f or busi ness and 20% f or per sonal use.
I n 2014, he used t he aut omobi l e 40%f or busi ness and 60%f or per sonal
use. Det er mi ne t he cost r ecover y r ecapt ur e f or 2014.

a. $0.
*b. $528.
c. $2, 000.
d. $2, 500.
e. None of t he above.


997. J anet pur chased a new car on J une 5, 2013, at a cost of $20, 000.
She used t he car 80%f or busi ness and 20%f or per sonal use i n 2013. She
used t he aut omobi l e 40%f or busi ness and 60%f or per sonal use i n
2014. J anet t akes addi t i onal f i r st - year depr eci at i on. Det er mi ne
J anet s cost r ecover y r ecapt ur e f or 2014.

a. $0.
b. $928.
c. $1, 008.
*d. $7, 328.
e. None of t he above.


998. On J ul y 10, 2013, Ar i f f pl aces i n ser vi ce a new spor t s ut i l i t y
vehi cl e t hat cost $70, 000 and wei ghed 6, 300 pounds. The SUV i s used
100%f or busi ness. Det er mi ne Ar i f f s maxi mumdeduct i on f or 2013,
assumi ng Ar i f f s 179 busi ness i ncome i s $110, 000. Ar i f f does not
t ake addi t i onal f i r st - year depr eci at i on.

a. $2, 960.
b. $25, 000.
*c. $34, 000.
d. $70, 000.
e. None of t he above.


999. On Mar ch 1, 2013, Lana l eases and pl aces i n ser vi ce a passenger
aut omobi l e. The l ease wi l l r un f or f i ve year s and t he payment s ar e $500
per mont h. Dur i ng 2013, she uses her car 60%f or busi ness and 40%f or
per sonal act i vi t i es. Assumi ng t he dol l ar amount f r omt he I RS t abl e i s
$20, det er mi ne Lana s i ncl usi on as a r esul t of t he l ease.

a. $0.
*b. $10.
c. $17.
d. $20.
e. None of t he above.


1000. On J une 1, 2013, Nor ml eases a t axi and pl aces i t i n ser vi ce. The
l ease payment s ar e $1, 000 per mont h. Assumi ng t he dol l ar amount f r om
t he I RS t abl e i s $241, det er mi ne Nor m s i ncl usi on amount .

*a. $0.
b. $241.
c. $907.
d. $1, 687.
e. None of t he above.


1001. Bhaskar pur chased a new f act or y bui l di ng on Sept ember 10, 2013,
f or $3, 700, 000. Fi ve hundr ed t housand of t he pur chase pr i ce was
al l ocat ed t o t he l and. He el ect ed t he al t er nat i ve depr eci at i on syst em
( ADS) . Det er mi ne t he cost r ecover y deduct i on f or 2014.

a. $23, 328.
*b. $80, 000.
c. $82, 048.
d. $92, 500.
e. None of t he above.


1002. Pat pur chased a used f i ve- year cl ass asset on Mar ch 15, 2013, f or
$60, 000. He di d not el ect 179 expensi ng. Det er mi ne t he cost r ecover y
deduct i on f or 2013 f or ear ni ngs and pr of i t s pur poses.

a. $2, 000.
b. $3, 000.
*c. $6, 000.
d. $12, 000.
e. None of t he above.


1003. Geor ge pur chases used seven- year cl ass pr oper t y at a cost of
$200, 000 on Apr i l 20, 2013. Det er mi ne Geor ge s cost r ecover y deduct i on
f or 2013 f or al t er nat i ve mi ni mumt ax pur poses, assumi ng Geor ge does not
el ect 179.

a. $2, 500.
b. $10, 000.
c. $14, 280.
d. $28, 580.
*e. None of t he above.


1004. Dur i ng t he past t wo year s, t hr ough ext ensi ve adver t i si ng and
i mpr oved cust omer r el at i ons, Or ange Cor por at i on est i mat ed t hat i t had
devel oped cust omer goodwi l l wor t h $500, 000. For t he cur r ent year ,
det er mi ne t he amount of goodwi l l Or ange Cor por at i on may amor t i ze.

a. $16, 667.
b. $26, 667.
c. $33, 333.
d. $100, 000.
*e. None of t he above.


1005. On J une 1, 2013, Red Cor por at i on pur chased an exi st i ng busi ness.
Wi t h r espect t o t he acqui r ed asset s of t he busi ness, Red al l ocat ed
$300, 000 of t he pur chase pr i ce t o a pat ent . The pat ent wi l l expi r e i n
20 year s. Det er mi ne t he t ot al amount t hat Red may amor t i ze f or 2013 f or
t he pat ent .

a. $0.
b. $1, 667.
*c. $11, 667.
d. $35, 000.
e. None of t he above.


1006. Or ange Cor por at i on begi ns busi ness on Apr i l 2, 2013. The
cor por at i on has st ar t up expendi t ur es of $64, 000 whi ch i t i ncur r ed l ast
year . I f Or ange Cor por at i on el ect s 195, det er mi ne t he t ot al amount
t hat Or ange may deduct i n 2013.

a. $0.
*b. $3, 200.
c. $4, 267.
d. $7, 950.
e. None of t he above.


1007. On J anuar y 15, 2013, Ver n pur chased t he r i ght s t o a mi ner al
i nt er est f or $3, 500, 000. At t hat t i me i t was est i mat ed t hat t he
r ecover abl e uni t s woul d be 500, 000. Dur i ng t he year , 40, 000 uni t s wer e
mi ned and 25, 000 uni t s wer e sol d f or $800, 000. Ver n i ncur r ed expenses
dur i ng 2013 of $500, 000. The per cent age depl et i on r at e i s 22%.
Det er mi ne Ver n s depl et i on deduct i on f or 2013.

a. $150, 000.
*b. $175, 000.
c. $176, 000.
d. $200, 000.
e. $250, 000.


1008. Tompur chased and pl aced i n ser vi ce used of f i ce f ur ni t ur e on
J anuar y 3, 2013, f or $40, 000. Tom s account ant depr eci at ed t he
f ur ni t ur e usi ng st r ai ght - l i ne depr eci at i on over 10 year s f or f i nanci al
r epor t i ng pur poses. The account ant al so used t he same depr eci at i on
amount s when f i l i ng Tom s i ncome t ax r et ur ns. On J anuar y 10, 2018, Tom
sol d t he f ur ni t ur e. Det er mi ne t he t ax basi s of t he f ur ni t ur e at t he
t i me of t he sal e.

Cor r ect Answer :
The cost of t he asset must be r educed by t he gr eat er of t he cost
r ecover y al l owed or al l owabl e i n cal cul at i ng t he t ax basi s.

Cost $40,000
2013 allowable ($40,000
.1429)
(5,716)
2014 allowable ($40,000
.2449)
(9,796)
2015 allowable ($40,000
.1749)
(6,996)
2016 allowable ($40,000
.1249)
(4,996)
2017 allowed ($40,000
.0893)
(3,572)
2018 allowable ($40,000
.0892 .50)
(1,784)
Tax basis $ 7,140




1009. J i macqui r es a new seven- year cl ass asset on Sept ember 20, 2013,
f or $80, 000. He pl aced t he asset i n ser vi ce on Oct ober 5, 2013. He
does not el ect t o expense any of t he asset under 179 or el ect
st r ai ght - l i ne, cost r ecover y. He t akes addi t i onal f i r st - year
depr eci at i on. He sel l s t he asset on August 25, 2014. Thi s i s t he onl y
asset he acqui r es i n 2013. Det er mi ne J i m s cost r ecover y i n 2013 and
2014.

Cor r ect Answer :
The mi d- quar t er convent i on appl i es.

2013
Additional first-year depreciation
($80,000 .50)
$40,000
MACRS cost recovery ($40,000 .0357) 1,42
8
Total for 2013

$41,428
2014
MACRS cost recovery [$40,000 .2755
(2.5/4)]
$ 6,888




1010. Rod pai d $1, 950, 000 f or a new war ehouse on Apr i l 14, 2013. He
sol d t he war ehouse on Sept ember 29, 2018. Det er mi ne t he cost r ecover y
deduct i on f or 2013 and 2018.

Cor r ect Answer :
2013: $1, 950, 000 . 01819 = $35, 471.

2018: $1, 950, 000 . 02564 8. 5/ 12 = $35, 415.


1011. On Mar ch 3, 2013, Sal l y pur chased and pl aced i n ser vi ce a
bui l di ng cost i ng $12, 000, 000. The bui l di ng has 10 f l oor s. The bot t om
t hr ee f l oor s ar e r ent ed out t o busi nesses. The t op seven f l oor s ar e
r esi dent i al apar t ment s. The gr oss r ent s f r omt he busi nesses ar e
$60, 000 and t he gr oss r ent s f r omt he apar t ment s ar e
$110, 000. Det er mi ne Sal l y s cost r ecover y f or t he bui l di ng i n 2013.

Cor r ect Answer :
The gr oss r ent s f r omt he apar t ment s ar e not 80%or mor e of t he t ot al
gr oss r ent s and hence, t he whol e bui l di ng cannot be t r eat ed as
r esi dent i al r ent al r eal est at e.

Residential [(70% $12,000,000)
.02879]
$241,836
Nonresidential [(30% $12,000,000)
.02033]
73,1
88
Total cost recovery $315,024




1012. Si d bought a new $1, 210, 000 seven- year cl ass asset on August 2,
2013. On December 2, 2013, he pur chased $860, 000 of used f i ve- year
cl ass asset s. Si d does t ake addi t i onal f i r st - year depr eci at i on i f
avai l abl e. I f Si d el ect s 179, what i s t he maxi mumwr i t e- of f f or t hese
pur chases f or 2013?

Cor r ect Answer :
179 expense [$500,000
($2,070,000 $2,000,000)]

$430,000
Taking 179 expense on 7-year
property:


7-year property
179 expense $ 430,000
Additional first-year
depreciation [($1,210,000
$430,000) .50]
390,000
MACRS cost recovery ($390,000
.1429)
55,731

5-year property
MACRS cost recovery ($860,000
.20)
172,000
Total deduction $1,047,731

Taking 179 expense on 5-year
property:


7-year property
Additional first-year
depreciation ($1,210,000 .50)
$ 605,000
MACRS cost recovery ($605,000
.1429)

86,455
5-year property
179 expense 430,000
MACRS cost recovery [($860,000
$430,000) .20]
86,
000
Total deduction $1,207,455


Using 179 on the used 5-year asset produces the greater total deduction
in 2013.


1013. Pol l y pur chased a new hot el on J ul y 20, 2013, f or $6, 000, 000. On
J anuar y 20, 2020, t he bui l di ng was sol d. Det er mi ne t he cost r ecover y
deduct i on f or t he year of t he sal e.

Cor r ect Answer :
$6, 000, 000 . 02564 . 5/ 12 = $6, 410.


1014. Rust i n bought used 7- year cl ass pr oper t y on May 15, 2013, f or
$728, 000. Rust i n el ect s 179 and st r ai ght - l i ne cost r ecover y. Rust i n s
t axabl e i ncome woul d not cr eat e a l i mi t at i on f or pur poses of t he 179
deduct i on. Det er mi ne t he maxi mumwr i t e- of f Rust i n can t ake i n 2013.

Cor r ect Answer :
179 expense election $500,000
Cost recovery [($728,000
$500,000) .0714 (Table 8.3)]
16,27
9
Total deduction $516,279




1015. Audr a acqui r es t he f ol l owi ng new f i ve- year cl ass pr oper t y i n 2013:

Asset Acqui si t i on
Dat e
Cost
A J anuar y
10
$ 106, 000
B J ul y 5 70, 000
C Novembe
r 15
1, 950, 000
Tot al $2, 126, 000


Audr a el ect s 179 f or Asset C. Audr a s t axabl e i ncome f r omher
busi ness woul d not cr eat e a l i mi t at i on f or pur poses of t he 179
deduct i on. Audr a t akes addi t i onal f i r st - year depr eci at i on. Det er mi ne
her t ot al cost r ecover y deduct i on ( i ncl udi ng t he 179 deduct i on) f or
t he year .

Cor r ect Answer :
$1, 950, 000/ $2, 126, 000 = 91. 7%. Ther ef or e, Audr a must use t he mi d-
quar t er convent i on.

Asset A:
Additional first-year
depreciation ($106,000 .50)
$ 53,000
MACRS cost recovery ($53,000
.35)

18,550
Asset B:
Additional first-year
depreciation ($70,000 .50)
35,000
MACRS cost recovery ($35,000
.15)

5,250
Asset C:
179 expense [$500,000
($2,126,000 $2,000,000)]
374,000
Additional first-year
depreciation [($1,950,000
$374,000) .50]
788,000
MACRS cost recovery ($788,000 39
.05) ,400
Total deduction $1,313,200




1016. On Apr i l 5, 2013, Or ange Cor por at i on pur chased, and pl aced i n
ser vi ce, seven- year cl ass asset s cost i ng $540, 000 and f i ve- year cl ass
asset s cost i ng $140, 000. Or ange el ect s t o expense t he maxi mumamount
under 179. Or ange does not t ake addi t i onal f i r st - year
depr eci at i on. Assume t axabl e i ncome i s not a l i mi t at i on. Det er mi ne
Or ange Cor por at i on s cost r ecover y wi t h r espect t o t he asset s f or 2013.

Cor r ect Answer :
179 limit $500,000

Seven-year assets
179 expense $500,000
Regular MACRS [($540,000
$500,000) .1429]
5,716
Five-year assets
Regular MACRS ($140,000 .20) 28,00
0
Total cost recovery $533,716




1017. Mar t i n i s a sol e pr opr i et or of a busi ness. On Mar ch 4, 2013,
Mar t i n pur chased and pl aced i n ser vi ce new seven- year cl ass asset s
cost i ng $560, 000. Mar t i n s busi ness has i ncome f or t he year , bef or e
any deduct i ons associ at ed wi t h t he pur chased asset s, of
$160, 000. Mar t i n al so has $30, 000 of i nt er est i ncome f or t he year
whi ch i s not r el at ed t o t he busi ness. Mar t i n want s hi s adj ust ed gr oss
i ncome f or t he year t o be as l ow as possi bl e. Wi t h t hi s obj ect i ve i n
mi nd, det er mi ne how Mar t i n shoul d r ecover t he cost of t he acqui r ed
asset s.

Cor r ect Answer :
El ect i ng 179:

179 expense

$500,000
Business income before MACRS
deductions
$160,000
Additional first-year
depreciation
[($560,000 $500,000)
(30,000)
50%]
MACRS cost recovery ($30,000
.1429)
(4,287)
Business income limitation

$125,713
179 limit

$125,713
Business income $
0
Interest income 30,000
Adjusted gross income $ 30,000

Not electing 179:

Business income before MACRS
deductions
$160,000
Additional first-year
depreciation ($560,000 50%)
(280,000)
MACRS cost recovery ($280,000
.1429)
(40,012)
Business income ($160,012)
Interest income 30,000

Adjusted gross income ($130,012)


Not electing 179 will produce the lowest adjusted gross income because
the 179 expense cannot create a business loss.


1018. On Febr uar y 21, 2013, J oe pur chased new f ar mequi pment f or
$600, 000. J oe has made an el ect i on t o not have t he uni f or m
capi t al i zat i on r ul es appl y t o hi s f ar mi ng busi ness. He does not t ake
addi t i onal f i r st - year depr eci at i on. I f J oe el ect s 179, what i s t he
maxi mumwr i t e- of f f or t hi s pur chase f or 2013?

Cor r ect Answer :
179 expense $500,000
ADS straight-line [($600,000
$500,000) .05]
5,0
00
Total deduction $505,000




1019. On Apr i l 15, 2013, Sampl aced i n ser vi ce a st or age f aci l i t y ( a
si ngl e- pur pose agr i cul t ur al st r uct ur e) cost i ng $80, 000. Samal so
pur chased and pl ant ed f r ui t t r ees cost i ng $40, 000. Samdoes not el ect
t o expense any of t he acqui si t i ons under 179. Samel ect ed not t o
t ake addi t i onal f i r st - year depr eci at i on. Det er mi ne Sam s cost r ecover y
f r omt hese t wo i t ems f or 2013.

Cor r ect Answer :
Storage facility ($80,000
.075) (Table 8.4)
$6,000
Trees ($40,000 .05) (Table
8.3)
2,000
Total cost recovery $8,000




1020. On August 20, 2012, May si gned a 10- year l ease on a bui l di ng f or
her busi ness. On November 28, 2013, May pai d $80, 000 f or a qual i f i ed
l easehol d i mpr ovement t o t he bui l di ng. She t akes addi t i onal f i r st - year
depr eci at i on, but does not el ect 179 expensi ng. What i s May s cost
r ecover y deduct i on f or t he i mpr ovement i n 2013?

Cor r ect Answer :
Additional first-year depreciation
($80,000 .50)
$40,000
MACRS cost recovery ($40,000 .0333) 1,33
2
Total deduction $41,332




1021. On J ul y 15, 2013, Mavi s pai d $275, 000 f or qual i f i ed l easehol d
i mpr ovement s on a commer ci al bui l di ng she was l easi ng. Det er mi ne t he
maxi mumt ot al cost r ecover y f r omt he i mpr ovement s i n 2013.

Cor r ect Answer :
179 expense $250,000
Additional first-year
depreciation [($275,000
$250,000) 50%]
12,500
Regular MACRS ($12,500
.0333)
416
$262,916




1022. J oe pur chased a new f i ve- year cl ass asset on J une 1, 2013. The
asset i s l i st ed pr oper t y ( not an aut omobi l e) . I t was used 55%f or
busi ness and 45%f or t he pr oduct i on of i ncome. The asset cost
$1, 000, 000. J oe made t he 179 el ect i on. J oe s t axabl e i ncome woul d not
cr eat e a l i mi t at i on f or pur poses of t he 179 deduct i on. J oe does not
t ake addi t i onal f i r st - year depr eci at i on. Det er mi ne J oe s t ot al cost
r ecover y ( i ncl udi ng t he 179 deduct i on) f or t he year .

Cor r ect Answer :
Busi ness use: $550, 000 ( $1, 000, 000 55%)
179 expense $500,000
Regular MACRS [($550,000 $500,000)
.20]
10,000

Production of income use: $450,000
($1,000,000 45%)

Regular MACRS ($450,000 .20) 90,0
00
Total deduction $600,000


*Property used for the production of income is not eligible for 179
expensing.


1023. Nor a pur chased a new aut omobi l e on J ul y 20, 2013, f or $29, 000.
The car was used 60%f or busi ness and 40%f or per sonal use. I n 2014,
t he car was used 30%f or busi ness and 70%f or per sonal use. Nor a
el ect s not t o t ake addi t i onal f i r st - year depr eci at i on. Det er mi ne t he
cost r ecover y r ecapt ur e and t he cost r ecover y deduct i on f or 2014.

Cor r ect Answer :
Cost r ecover y i n 2013:
MACRS ($29,000 .20) = $5,800 (limited
to $3,160*); $3,160 60%
$1,896
Straight-line ($29,000 .10) = $2,900
(limited to $3,160*); $2,900 60%
(1,740)
Cost recovery recapture in 2014

$ 156
Cost recovery in 2014:
Straight-line ($29,000 .20) = $5,800
(limited to $5,100*); $5,100 .30
$1,530


*These depreciation limits are indexed annually.


1024. Nor mpur chases a new spor t s ut i l i t y vehi cl e ( SUV) on Oct ober 12,
2013, f or $50, 000. The SUV has a gr oss vehi cl e wei ght of 6, 200 l bs. I t
i s used 100%of t he t i me f or busi ness and i t i s t he onl y busi ness asset
acqui r ed by Nor mdur i ng 2013. Comput e t he maxi mumdeduct i on wi t h
r espect t o t he SUV f or 2013. Nor mdoes t ake addi t i onal f i r st - year
depr eci at i on.

Cor r ect Answer :
The SUV i s not cl assi f i ed as a passenger aut omobi l e because of i t s GVW
exceedi ng 6, 000 l bs. Ther ef or e, i t i s not subj ect t o t he cost r ecover y
l i mi t s of 280F.

Section 179 expense (limited to
$25,000)
$25,000
Additional first-year
depreciation [($50,000
$25,000) .50]
12,500
MACRS cost recovery ($12,500
.05)
625
Total deduction $38,125




1025. On J une 1, 2013, Gabr i el l a pur chased a comput er and per i pher al
equi pment ( f i ve- year pr oper t y) f or $25, 000. She used t he asset s 40%f or
busi ness, 50%f or t he pr oduct i on of i ncome, and 10%f or per sonal use.
These ar e t he onl y asset s Gabr i el l a pur chased dur i ng t he cur r ent year .
Det er mi ne her t ot al cost r ecover y deduct i on f or t he cur r ent year .

Cor r ect Answer :
A comput er and per i pher al equi pment ar e l i st ed pr oper t y. Si nce t he
mor e- t han- 50%busi ness use t est i s not sat i sf i ed, Gabr i el l a cannot
el ect 179 expensi ng, she must use st r ai ght - l i ne cost r ecover y, and i s
not el i gi bl e f or addi t i onal f i r st - year depr eci at i on. The 10%of
per sonal usage does not qual i f y f or cost r ecover y.

$25, 000 . 10 90%= $2, 250.


1026. I n 2013, Mar ci i s consi der i ng st ar t i ng a new busi ness. Mar ci had
t he f ol l owi ng cost s associ at ed wi t h t hi s vent ur e:

Adver t i si ng $ 5, 000
Tr avel 10, 000
Mar ket sur veys 8, 000
Pr of essi onal ser vi ces 30, 000
I nt er est expense 2, 000
Taxes 1, 000


Mar ci st ar t ed t he new busi ness on J anuar y 5, 2014. Det er mi ne t he
deduct i on f or Mar ci s st ar t up cost s f or 2013.

Cor r ect Answer :
Mar ci i s not al l owed t o deduct any st ar t up cost s i n 2013 because t he
busi ness was not st ar t ed unt i l 2014.


1027. Ri ck pur chased a ur ani umi nt er est f or $10, 000, 000 on J anuar y 3,
2013, when r ecover abl e r eser ves wer e est i mat ed at 200, 000 uni t s. A
t ot al of 10, 000 uni t s wer e ext r act ed i n 2013 and 7, 000 uni t s wer e sol d
i n 2013. Gr oss i ncome f r omt he pr oper t y was $2, 800, 000 and t axabl e
i ncome wi t hout t he al l owance f or depl et i on was $1, 000, 000. Det er mi ne
t he depl et i on deduct i on f or 2013.

Cor r ect Answer :
Cost depl et i on



Per cent age depl et i on

Lesser of :
22% $2, 800, 000 = $616, 000
50% $1, 000, 000 = $500, 000

Ther ef or e t he depl et i on deduct i on woul d be $500, 000.


1028. Di scuss t he di f f er ence bet ween t he hal f - year convent i on and t he
mi d- quar t er convent i on.

Cor r ect Answer :
The hal f - year convent i on assumes pr oper t y i s pl aced i n ser vi ce at mi d-
year and t hus pr ovi des f or a hal f - year s cost r ecover y f or t hat year .
The mi d- quar t er convent i on assumes pr oper t y pl aced i n ser vi ce dur i ng
t he year i s pl aced i n ser vi ce at t he mi ddl e of t he quar t er i n whi ch i t
i s act ual l y pl aced i n ser vi ce.


1029. Di scuss t he cr i t er i a used t o det er mi ne whet her a bui l di ng i s
r esi dent i al or nonr esi dent i al r eal t y. Al so expl ai n t he t ax consequences
r esul t i ng f r omt hi s det er mi nat i on i f t he pr oper t y i s pl aced i n ser vi ce
i n 2013.

Cor r ect Answer :
Resi dent i al r eal t y i s pr oper t y f or whi ch 80%or mor e of t he gr oss
r ent al r evenues ar e f r omnont r ansi ent dwel l i ng uni t s. Resi dent i al
r eal t y has a r ecover y per i od of 27. 5 year s. Nonr esi dent i al r eal t y has a
r ecover y per i od of 39 year s.


1030. Di scuss t he ef f ect on t he cost r ecover y met hod of a t axpayer
el ect i on i f t he uni f or mcapi t al i zat i on r ul es appl y t o a f ar mi ng
busi ness.

Cor r ect Answer :
The cost r ecover y met hod i s gener al l y MACRS usi ng t he 150%decl i ni ng-
bal ance met hod.


1031. Di scuss t he t ax consequences of l i st ed pr oper t y bei ng used f or
t he pr oduct i on of i ncome compar ed t o bei ng used i n a t r ade or busi ness.

Cor r ect Answer :
Sect i on 179 expensi ng cannot be t aken on pr oper t y used f or t he
pr oduct i on of i ncome. However , addi t i onal f i r st - year depr eci at i on can
be t aken.


1032. Di scuss t he benef i ci al t ax consequences of an SUV not bei ng
cl assi f i ed as a passenger aut omobi l e.

Cor r ect Answer :
I f an aut omobi l e i s not cl assi f i ed as a passenger aut omobi l e, i t i s not
subj ect t o t he st at ut or y dol l ar cost r ecover y l i mi t s under 280F. I n
addi t i on t o a l ar ger cost r ecover y deduct i on each year , i t al so r esul t s
i n t he t ot al r ecover y of t he cost over a si x- year per i od. Whi l e t he
aut omobi l e i s st i l l l i st ed pr oper t y, i f i t passes t he mor e- t han- 50%
busi ness use t est , MACRS cost r ecover y can be used as wel l as an
el ect i on under 179. However , t he 179 l i mi t f or SUVs i s $25, 000
r at her t han $500, 000 i n 2013. The aut omobi l e al so i s el i gi bl e f or
addi t i onal f i r st - year depr eci at i on.


1033. Di scuss t he r eason f or t he i ncl usi on amount wi t h r espect t o
l eased aut omobi l es.

Cor r ect Answer :
The pur pose of t he i ncl usi on amount i s t o pr event t axpayer s f r om
ci r cumvent i ng t he cost r ecover y dol l ar l i mi t at i ons by l easi ng, i nst ead
of pur chasi ng, an aut omobi l e.


1034. Di scuss t he r equi r ement s i n or der f or st ar t up expendi t ur es t o be
amor t i zed under 195.

Cor r ect Answer :
The expendi t ur es must meet t wo r equi r ement s.

The expenditures must be paid or incurred in
connection with:


Creating an active trade or business;

Investigating the creation or acquisition
of an active trade or business; or

Any activity engaged in for profit in
anticipation of such activity becoming an
active trade or business.

Such costs must be the kinds of costs that
would be currently deductible if paid or
incurred in connection with the operation of
an existing trade or business in the same
field as that entered into by the taxpayer.




1035. Di scuss t he t ax i mpl i cat i ons of a sel l er al l ocat i ng t he sel l i ng
pr i ce t o goodwi l l or a covenant not t o compet e.

Cor r ect Answer :
Goodwi l l i s a capi t al asset and any gai n or l oss r ecogni zed on t he sal e
of t he goodwi l l wi l l be capi t al gai n or l oss. A covenant not t o
compet e i s an or di nar y asset and any gai n or l oss wi l l be or di nar y gai n
or l oss.


1036. One i ndi ci a of i ndependent cont r act or ( r at her t han empl oyee)
st at us i s when t he i ndi vi dual per f or mi ng t he ser vi ces i s pai d based on
t i me spent ( r at her t han on t asks per f or med) .

a. Tr ue
*b. Fal se


1037. I n some cases i t may be appr opr i at e f or a t axpayer t o r epor t
wor k- r el at ed expenses by usi ng both For m2106 and Schedul e C.

*a. Tr ue
b. Fal se


1038. The I RS will i ssue advanced r ul i ngs as t o whet her a wor ker s
st at us i s t hat of an empl oyee or an i ndependent cont r act or .

*a. Tr ue
b. Fal se


1039. J ake per f or ms ser vi ces f or Maude. I f Maude pr ovi des t he hel per
and t ool s, t hi s i s i ndi cat i ve of i ndependent cont r act or ( r at her t han
empl oyee) st at us.

a. Tr ue
*b. Fal se


1040. A st at ut or y empl oyee i s not a common l aw empl oyee but i s subj ect
t o Soci al Secur i t y t ax.

*a. Tr ue
b. Fal se


1041. For t ax pur poses, a st at ut or y empl oyee i s t r eat ed t he same as a
common l aw empl oyee.

a. Tr ue
*b. Fal se


1042. I f an i ndi vi dual i s subj ect t o t he di r ect i on or cont r ol of
anot her onl y t o t he ext ent of t he end r esul t but not as t o t he means of
accompl i shment , an empl oyer - empl oyee r el at i onshi p does not exi st .

*a. Tr ue
b. Fal se


1043. The wor k- r el at ed expenses of an i ndependent cont r act or will be
subj ect t o t he 2%- of - AGI f l oor .

a. Tr ue
*b. Fal se


1044. Af t er she f i ni shes wor ki ng at her mai n j ob, Ann r et ur ns home, has
di nner , t hen dr i ves t o her second j ob. Ann may deduct t he mi l eage
bet ween her f i r st and second j ob.

*a. Tr ue
b. Fal se


1045. A t axpayer who mai nt ai ns an of f i ce i n t he home t o conduct hi s
onl y busi ness wi l l not have nondeduct i bl e commut i ng expense.

*a. Tr ue
b. Fal se


1046. Af t er t he aut omat i c mi l eage r at e has been set by t he I RS f or a
year , i t cannot l at er be changed by t he I RS.

a. Tr ue
*b. Fal se


1047. I n choosi ng bet ween t he act ual expense met hod and t he aut omat i c
mi l eage met hod, a t axpayer shoul d consi der t he cost of i nsur ance on t he
aut omobi l e.

*a. Tr ue
b. Fal se


1048. A t axpayer who uses t he aut omat i c mi l eage met hod t o comput e aut o
expenses can al so deduct t he busi ness por t i on of t ol l s and par ki ng.

*a. Tr ue
b. Fal se


1049. A deduct i on f or par ki ng and ot her t r af f i c vi ol at i ons i ncur r ed
dur i ng busi ness use of t he aut omobi l e i s al l owed under t he act ual cost
met hod but not t he aut omat i c mi l eage met hod.

a. Tr ue
*b. Fal se


1050. A t axpayer who uses t he aut omat i c mi l eage met hod f or t he busi ness
use of an aut omobi l e can change t o t he act ual cost met hod i n a l at er
year .

*a. Tr ue
b. Fal se


1051. Once t he act ual cost met hod i s used, a t axpayer cannot change t o
t he aut omat i c mi l eage met hod i n a l at er year .

a. Tr ue
*b. Fal se


1052. For t ax pur poses, t r avel i s a br oader cl assi f i cat i on t han
t r anspor t at i on.

*a. Tr ue
b. Fal se


1053. Amy l i ves and wor ks i n St . Loui s. I n t he mor ni ng she f l i es t o
Bost on, has a t hr ee- hour busi ness meet i ng, and r et ur ns t o St . Loui s
t hat eveni ng. For t ax pur poses, Amy was away f r omhome.

a. Tr ue
*b. Fal se


1054. J anet , who l i ves and wor ks i n Newar k, t r avel s t o At l ant a f or a
Thur sday- Fr i day busi ness conf er ence. She st ays over af t er t he
conf er ence and vi si t s r el at i ves and f r i ends on Sat ur day. Under cer t ai n
ci r cumst ances, t he meal s and l odgi ng expenses f or Sat ur day can be
consi der ed as busi ness r el at ed.

*a. Tr ue
b. Fal se


1055. Mar vi n l i ves wi t h hi s f ami l y i n Al abama. He has t wo j obs: one
i n Al abama and one i n Nor t h Car ol i na. Mar vi n s t ax home i s wher e he
l i ves ( Al abama) .

a. Tr ue
*b. Fal se


1056. A t axpayer who l i ves and wor ks i n Kansas Ci t y i s sent t o Chi cago
on an ei ght - day busi ness t r i p. Whi l e i n Chi cago, t axpayer uses t he
hot el val et ser vi ce t o have some l aundr y done. The val et char ge i s a
nondeduct i bl e per sonal t r avel expense.

a. Tr ue
*b. Fal se


1057. The t ax l aw speci f i cal l y pr ovi des t hat a t axpayer cannot be
t empor ar i l y away f r omhome f or any per i od of empl oyment t hat exceeds
one year .

*a. Tr ue
b. Fal se


1058. A t axpayer who l i ves and wor ks i n Tul sa t r avel s t o Buf f al o f or
f i ve days. I f t hr ee days ar e spent on busi ness and t wo days ar e spent
on vi si t i ng r el at i ves, onl y 60%of t he ai r f ar e i s deduct i bl e.

a. Tr ue
*b. Fal se


1059. Bob l i ves and wor ks i n Newar k, NJ . He t r avel s t o London f or a
t hr ee- day busi ness meet i ng, af t er whi ch he spends t hr ee days t our i ng
Scot l and. Al l of hi s ai r f ar e i s deduct i bl e.

*a. Tr ue
b. Fal se


1060. Ei l een l i ves and wor ks i n Mobi l e. She t r avel s t o Rome f or an
ei ght - day busi ness meet i ng, af t er whi ch she spends t wo days t our i ng
I t al y. Al l of Ei l een s ai r f ar e i s deduct i bl e.

*a. Tr ue
b. Fal se


1061. Li amj ust gr aduat ed f r omcol l ege. Because i t i s hi s f i r st j ob,
t he cost of movi ng hi s per sonal bel ongi ngs f r omhi s par ent s home t o
t he j ob si t e does not qual i f y f or t he movi ng expense deduct i on.

a. Tr ue
*b. Fal se


1062. Si ck of her 65 mi l e dai l y commut e, Edna pur chases a condo t hat i s
onl y f our mi l es f r omher j ob. Edna s movi ng expenses t o her new condo
ar e not al l owed and cannot be cl ai med by her as a deduct i on.

*a. Tr ue
b. Fal se


1063. I n November 2013, Kat i e i ncur s unr ei mbur sed movi ng expenses t o
accept a new j ob. Kat i e cannot deduct any of t hese expenses when she
t i mel y f i l es her 2013 i ncome t ax r et ur n si nce she has not yet sat i sf i ed
t he 39- week t i me t est .

a. Tr ue
*b. Fal se


1064. I n May 2013, af t er 11 mont hs on a new j ob, Ken i s f i r ed af t er he
assaul t s a cust omer . Ken must i ncl ude i n hi s gr oss i ncome f or 2013 any
deduct i on f or movi ng expenses he may have cl ai med on hi s 2012 t ax
r et ur n.

a. Tr ue
*b. Fal se


1065. A movi ng expense deduct i on i s al l owed even i f at t he t i me of t he
move t he t axpayer di d not have a j ob at t he new l ocat i on.

*a. Tr ue
b. Fal se


1066. Kel l y, an unempl oyed ar chi t ect , moves f r omBost on t o Phoeni x t o
accept a j ob as a chef at a r est aur ant . Kel l y s movi ng expenses ar e not
deduct i bl e because her new j ob i s i n a di f f er ent t r ade or busi ness.

a. Tr ue
*b. Fal se


1067. Al exi s ( a CPA) sol d her publ i c account i ng pr act i ce i n Des Moi nes
and accept ed a j ob wi t h t he Seat t l e of f i ce of a nat i onal account i ng
f i r m. Her movi ng expenses ar e not deduct i bl e because she has changed
empl oyment st at us ( i . e. , went f r omsel f - empl oyed t o empl oyee) .

a. Tr ue
*b. Fal se


1068. Qual i f i ed movi ng expenses i ncl ude t he cost of l odgi ng but not
meal s dur i ng t he move.

*a. Tr ue
b. Fal se


1069. Qual i f i ed movi ng expenses of an empl oyee t hat ar e not r ei mbur sed
ar e a deduct i on for AGI .

*a. Tr ue
b. Fal se


1070. At age 65, Cami l l a r et i r es f r om her j ob i n Bost on and moves t o
Fl or i da. As a r et i r ee, she i s not subj ect t o t he t i me t est i n deduct i ng
her movi ng expenses.

a. Tr ue
*b. Fal se


1071. Af t er compl et i ng an over seas assi gnment i n Osl o ( Nor way) , Dani el
r et i r es f r omPel i can Cor por at i on and moves t o a r et i r ement communi t y i n
Key West ( Fl or i da) . Dani el s movi ng expenses f r om Osl o t o Key West ar e
deduct i bl e as t hey ar e exempt f r omt he t i me t est .

*a. Tr ue
b. Fal se


1072. An educat i on expense deduct i on may be al l owed even i f t he
educat i on r esul t s i n a pr omot i on or pay r ai se f or t he empl oyee.

*a. Tr ue
b. Fal se


1073. Ll oyd, a pr act i ci ng CPA, pays t ui t i on t o at t end l aw
school . Si nce a l aw degr ee i nvol ves educat i on l eadi ng t o a new t r ade
or busi ness, t he t ui t i on i s not deduct i bl e.

a. Tr ue
*b. Fal se


1074. Under t he r i ght ci r cumst ances, a t axpayer s meal s and l odgi ng
expense can qual i f y as a deduct i bl e educat i on expense.

*a. Tr ue
b. Fal se


1075. Ther e i s no cut back adj ust ment f or meal s and ent er t ai nment as t o
empl oyees who ar e subj ect t o r egul at i on by t he U. S. Depar t ment of
Tr anspor t at i on.

a. Tr ue
*b. Fal se


1076. Mal l ar d Cor por at i on pays f or a t r i p t o Ar uba f or i t s t wo t op
sal esper sons. Thi s expense is subj ect t o t he cut back adj ust ment .

a. Tr ue
*b. Fal se


1077. Fl ami ngo Cor por at i on f ur ni shes meal s at cost t o i t s empl oyees by
means of a caf et er i a i t mai nt ai ns. The cost of oper at i ng t he caf et er i a
is not subj ect t o t he cut back adj ust ment .

*a. Tr ue
b. Fal se


1078. A t axpayer t akes si x cl i ent s t o an NBA pl ayof f game. I f al l of
t he t i cket s ( l i st pr i ce of $120 each) ar e pur chased on t he I nt er net f or
$1, 800 ( $300 each) , onl y $60 ( $120 50%cut back adj ust ment ) per t i cket
i s deduct i bl e.

*a. Tr ue
b. Fal se


1079. Et han, a bachel or wi t h no i mmedi at e f ami l y, uses t he Pi ne Shadows
Count r y Cl ub excl usi vel y f or hi s busi ness ent er t ai ni ng. Al l of Et han s
annual dues f or hi s cl ub member shi p ar e deduct i bl e.

a. Tr ue
*b. Fal se


1080. J ackson gi ves hi s super vi sor and her husband each a $30 box of
chocol at es at Chr i st mas. J ackson may cl ai monl y $25 as a deduct i on.

a. Tr ue
*b. Fal se


1081. On t hei r bi r t hdays, Li l y sends gi f t cer t i f i cat es ( each val ued at
$25) t o Caden ( a key cl i ent ) and t o each of Caden s t wo mi nor chi l dr en.
Li l y can deduct onl y $25 as t o t hese gi f t s.

*a. Tr ue
b. Fal se


1082. Ti cket s t o a t heat er per f or mance or spor t i ng event can be t r eat ed
as either busi ness ent er t ai nment or a busi ness gi f t i f t he t axpayer
does not accompany t he cl i ent t o t he event .

*a. Tr ue
b. Fal se


1083. I n t he case of an of f i ce i n t he home deduct i on, t he excl usi ve
busi ness use t est does not appl y when t he home i s used as a daycar e
cent er .

*a. Tr ue
b. Fal se


1084. I f a t axpayer does not own a home but r ent s an apar t ment , t he
of f i ce i n t he home deduct i on i s not avai l abl e.

a. Tr ue
*b. Fal se


1085. A t axpayer who cl ai ms t he st andar d deduct i on wi l l not be abl e t o
cl ai man of f i ce i n t he home deduct i on.

a. Tr ue
*b. Fal se


1086. The por t i on of t he of f i ce i n t he home deduct i on t hat exceeds t he
i ncome f r omt he busi ness can be car r i ed over t o f ut ur e year s.

*a. Tr ue
b. Fal se


1087. I f t he cost of uni f or ms i s deduct i bl e, t hei r mai nt enance cost
( e. g. , l aundr y, dr y cl eani ng, al t er at i ons) al so i s deduct i bl e.

*a. Tr ue
b. Fal se


1088. Ti r ed of r ent i ng, Dr . Smi t h buys t he academi c r obes she wi l l wear
at her col l ege s gr aduat i on pr ocessi on. The cost of t hi s at t i r e does
not qual i f y as a uni f or mexpense.

a. Tr ue
*b. Fal se


1089. Fr ank, a r ecent l y r et i r ed FBI agent , pays j ob sear ch expenses t o
obt ai n a posi t i on wi t h a ci t y pol i ce depar t ment . Fr ank s j ob sear ch
expenses do qual i f y as deduct i ons.

*a. Tr ue
b. Fal se


1090. Af t er gr aduat i ng f r omcol l ege wi t h a degr ee i n chemi st r y, Al ber t o
obt ai ns a j ob as a chemi st wi t h DuPont . Al ber t o s j ob sear ch expenses
qual i f y as deduct i ons.

a. Tr ue
*b. Fal se


1091. Qual i f yi ng j ob sear ch expenses are deduct i bl e even i f t he
t axpayer does not change j obs.

*a. Tr ue
b. Fal se


1092. Madi son i s an i nst r uct or of f i ne ar t s at a l ocal communi t y
col l ege. I f she spends $600 ( not r ei mbur sed) on ar t suppl i es f or her
cl asses, $250 of t hi s amount can be cl ai med as a deduct i on for AGI .

a. Tr ue
*b. Fal se


1093. Bot h t r adi t i onal and Rot h I RAs possess t he advant age of t ax- f r ee
accumul at i on of i ncome wi t hi n t he pl an.

*a. Tr ue
b. Fal se


1094. When cont r i but i ons ar e made t o a t r adi t i onal I RA, t hey ar e
deduct i bl e by t he par t i ci pant . Lat er di st r i but i ons f r omt he I RA upon
r et i r ement ar e f ul l y t axed.

*a. Tr ue
b. Fal se


1095. By i t sel f , cr edi t car d r ecei pt s wi l l not const i t ut e adequat e
subst ant i at i on f or t r avel expenses.

*a. Tr ue
b. Fal se


1096. The Feder al per di emr at es t hat can be used f or deemed
subst ant i at ed pur poses ar e t he same f or al l l ocat i ons i n t he count r y.

a. Tr ue
*b. Fal se


1097. For sel f - empl oyed t axpayer s, t r avel expenses ar e not subj ect t o
t he 2%- of - AGI f l oor .

*a. Tr ue
b. Fal se


1098. A t axpayer who cl ai ms t he st andar d deduct i on wi l l not avoi d t he
2%f l oor on unr ei mbur sed empl oyee expenses.

a. Tr ue
*b. Fal se


1099. Empl oyees who r ender an adequat e account i ng t o t he empl oyer and
ar e f ul l y r ei mbur sed wi l l shi f t t he 50%cut back adj ust ment t o t hei r
empl oyer .

*a. Tr ue
b. Fal se


1100. Ai den per f or ms ser vi ces f or Lucas. Whi ch, i f any, of t he
f ol l owi ng f act or s i ndi cat e t hat Ai den i s an empl oyee, r at her t han an
i ndependent cont r act or ?

a. Ai den pr ovi des hi s own suppor t ser vi ces ( e. g. , wor k
assi st ant s) .
b. Ai den obt ai ned hi s t r ai ni ng ( i . e. , j ob ski l l s) f r omhi s f at her .
*c. Ai den i s pai d based on hour s wor ked.
d. Ai den makes hi s ser vi ces avai l abl e t o ot her s.
e. None of t he above.


1101. J or dan per f or ms ser vi ces f or Ryan. Whi ch, i f any, of t he
f ol l owi ng f act or s i ndi cat e t hat J or dan i s an i ndependent cont r act or ,
r at her t han an empl oyee?

a. Ryan set s t he wor k schedul e.
b. Ryan pr ovi des t he t ool s used.
c. J or dan f i l es a For m2106 wi t h hi s For m1040.
*d. J or dan i s pai d based on t asks per f or med.
e. None of t he above.


1102. Whi ch, i f any, of t he f ol l owi ng f act or s is not a char act er i st i c
of i ndependent cont r act or st at us?

*a. Wor k- r el at ed expenses ar e r epor t ed on For m2106.
b. Recei pt of a For m1099 r epor t i ng payment s r ecei ved.
c. Wor kpl ace f r i nge benef i t s ar e not avai l abl e.
d. Ser vi ces ar e per f or med f or mor e t han one par t y.
e. None of t he above.


1103. A wor ker may pr ef er t o be t r eat ed as an i ndependent cont r act or
( r at her t han an empl oyee) f or whi ch of t he f ol l owi ng r easons:

a. Avoi ds t he cut back adj ust ment as t o busi ness meal s.
b. Al l of t he sel f - empl oyment t ax i s deduct i bl e f or i ncome t ax
pur poses.
*c. Wor k- r el at ed expenses ar e not subj ect t o t he 2%- of - AGI f l oor .
d. A Schedul e C does not have t o be f i l ed.
e. None of t he above.


1104. A wor ker may pr ef er t o be cl assi f i ed as an empl oyee ( r at her t han
an i ndependent cont r act or ) f or whi ch of t he f ol l owi ng r easons:

a. To cl ai munr ei mbur sed wor k- r el at ed expenses as a deduct i on for
AGI .
*b. To avoi d t he sel f - empl oyment t ax.
c. To avoi d t he cut back adj ust ment on unr ei mbur sed busi ness
ent er t ai nment expenses.
d. To avoi d t he 2%- of - AGI f l oor on unr ei mbur sed wor k- r el at ed
expenses.
e. None of t he above.


1105. St at ut or y empl oyees:

a. Repor t t hei r expenses on For m2106.
b. I ncl ude common l aw empl oyees.
c. Ar e subj ect t o i ncome t ax wi t hhol di ngs.
*d. Cl ai mt hei r expenses as deduct i ons for AGI .
e. None of t he above.


1106. Cor ey i s t he ci t y sal es manager f or RI BS, a nat i onal f ast f ood
f r anchi se. Ever y wor ki ng day, Cor ey dr i ves hi s car as f ol l ows:

Miles
Home to office 20
Office to RIBS No. 1 15
RIBS No. 1 to No. 2 18
RIBS No. 2 to No. 3 13
RIBS No. 3 to home 30


Coreys deductible mileage is:

a. 0 mi l es.
b. 50 mi l es.
c. 66 mi l es.
d. 76 mi l es.
*e. None of t he above.


1107. Amy wor ks as an audi t or f or a l ar ge maj or CPA f i r m. Dur i ng t he
mont hs of Sept ember t hr ough November of each year , she i s per manent l y
assi gned t o t he t eamaudi t i ng Gar net Cor por at i on. As a r esul t , ever y
day she dr i ves f r omher home t o Gar net and r et ur ns home af t er wor k.
Mi l eage i s as f ol l ows:

Miles
Home to office 10
Home to Garnet 30
Office to Garnet 35


For these three months, Amys deductible mileage for each workday is:

a. 0.
b. 30.
c. 35.
*d. 60.
e. None of t he above.


1108. Aaron is a self-employed practical nurse who works out of his home.
He provides nursing care for disabled persons living in their residences.
During the day he drives his car as follows.

Miles
Aarons home to
patient Louise
12
Patient Louise to
patient Carl
4
Patient Carl to
patient Betty
6
Patient Betty to
Aarons home
10


Aarons deductible mileage for each workday is:

a. 10 mi l es.
b. 12 mi l es.
c. 20 mi l es.
d. 22 mi l es.
*e. 32 mi l es.


1109. When usi ng t he aut omat i c mi l eage met hod, whi ch, i f any, of t he
f ol l owi ng expenses also can be cl ai med?

a. Engi ne t une- up.
*b. Par ki ng.
c. I nt er est on aut omobi l e l oan.
d. MACRS depr eci at i on.
e. None of t he above.


1110. I n whi ch, i f any, of t he f ol l owi ng si t uat i ons i s t he aut omat i c
mi l eage avai l abl e?

a. A l i mousi ne t o be r ent ed by t he owner f or speci al occasi ons
( e. g. , weddi ngs, hi gh school pr oms) .
b. The aut o bel ongs t o t axpayer s mot her .
c. One of seven car s used t o del i ver pi zzas.
d. MACRS st at ut or y per cent age met hod has been cl ai med on t he
aut omobi l e.
*e. None of t he above.


1111. Under t he act ual cost met hod, whi ch, i f any, of t he f ol l owi ng
expenses will not be al l owed?

a. Car r egi st r at i on f ees.
b. Aut o i nsur ance.
*c. I nt er est expense on a car l oan ( t axpayer i s an empl oyee) .
d. Dues t o aut o cl ubs.
e. Al l of t he above wi l l be al l owed.


1112. Dave i s t he r egi onal manager f or a nat i onal chai n of aut o- par t s
st or es and i s based i n Sal t Lake Ci t y. When t he company opens new
st or es i n Boi se, Dave i s gi ven t he t ask of super vi si ng t hei r i ni t i al
oper at i on. For t hr ee mont hs, he wor ks weekdays i n Boi se and r et ur ns
home on weekends. He spends $350 r et ur ni ng t o Sal t Lake Ci t y but woul d
have spent $410 had he st ayed i n Boi se f or t he weekend. As t o t he
weekend t r i ps, how much, i f any, qual i f i es as a deduct i on?

a. $0, si nce t he t r i ps ar e per sonal and not wor k r el at ed.
b. $0, si nce Dave s t ax home has changed f r omSal t Lake Ci t y t o
Boi se.
c. $60.
*d. $350.
e. $410.


1113. Al l owi ng f or t he cut back adj ust ment ( 50%r educt i on f or meal s and
ent er t ai nment ) , whi ch of t he f ol l owi ng t r i ps, i f any, wi l l qual i f y f or
t he t r avel expense deduct i on?

*a. Dr . J ones, a gener al dent i st , at t ends a t wo- day semi nar on
devel opi ng a dent al pr act i ce.
b. Dr . Br own, a sur geon, at t ends a t wo- day semi nar on f i nanci al
pl anni ng.
c. Paul , a r omance l anguage hi gh school t eacher , spends summer
br eak i n Fr ance, Por t ugal , and Spai n i mpr ovi ng hi s l anguage
ski l l s.
d. Myr na went on a t wo- week vacat i on i n Bost on. Whi l e t her e, she
vi si t ed her empl oyer s home of f i ce t o have l unch wi t h f or mer co-
wor ker s.
e. Al l of t he above.


1114. Dur i ng t he year , J ohn went f r omMi l waukee t o Al aska on busi ness.
Pr ecedi ng a f i ve- day busi ness meet i ng, he spent f our days vacat i oni ng
at t he beach. Excl udi ng t he vacat i on cost s, hi s expenses f or t he t r i p
ar e:

Air fare $3,200
Lodging 900
Meals 800
Entertainment 600


Presuming no reimbursement, deductible expenses are:

a. $3, 200.
b. $3, 900.
*c. $4, 800.
d. $5, 500.
e. None of t he above.


1115. Dur i ng t he year , Sophi e went f r omOmaha t o Li ma ( Per u) on
busi ness. She spent f our days on busi ness, t wo days on t r avel , and f our
days on vacat i on. Di sr egar di ng t he vacat i on cost s, Sophi e s
unr ei mbur sed expenses ar e:

Air fare $3,000
Lodging 800
Meals 600
Entertainment 400


Sophies deductible expenses are:

a. $4, 300.
*b. $3, 100.
c. $2, 800.
d. $2, 500.
e. None of t he above.


1116. Dur i ng t he year , Wal t t r avel s f r omSeat t l e t o Tokyo ( J apan) on
busi ness. Hi s t i me was spent as f ol l ows: 2 days t r avel ( one day each
way) , 2 days busi ness, and 2 days per sonal . Hi s expenses f or t he t r i p
wer e as f ol l ows ( meal s and l odgi ng r ef l ect onl y t he busi ness por t i on) :

Air fare $3,000
Lodging 2,000
Meals and entertainment 1,000


Presuming no reimbursement, Walts deductible expenses are:

a. $3, 500.
b. $4, 500.
*c. $5, 500.
d. $6, 000.
e. None of t he above.


1117. I n t er ms of meet i ng t he di st ance t est f or pur poses of deduct i ng
movi ng expenses, whi ch of t he f ol l owi ng st at ement s i s cor r ect ?

a. The t axpayer s new j ob l ocat i on must be at l east 50 mi l es away
f r omt he ol d j ob.
b. The t axpayer s new r esi dence must be at l east 50 mi l es away
f r omt he new j ob.
c. The t axpayer s new r esi dence must be at l east 50 mi l es away
f r omt he ol d r esi dence.
*d. The t axpayer s new j ob l ocat i on must be at l east 50 mi l es
f ar t her f r omt he ol d r esi dence t han t he ol d r esi dence was t o t he
ol d j ob.
e. None of t he above.


1118. As t o meet i ng t he t i me t est f or pur poses of deduct i ng movi ng
expenses, whi ch of t he f ol l owi ng st at ement s i s cor r ect ?

*a. Wor k at t he new l ocat i on must i nvol ve a f ul l - t i me j obpar t -
t i me j ob wi l l not suf f i ce.
b. The t axpayer has t wo year s i n whi ch t o sat i sf y t he 39- weeks or
78- weeks r equi r ement .
c. The t i me t est i s wai ved f or per sons whose move f ol l ows
r et i r ement .
d. The movi ng expense deduct i on cannot be cl ai med i f t he t axpayer
has not yet met t he t i me t est .
e. None of t he above.


1119. Due t o a mer ger , Al l i son t r ansf er s f r omMi ami t o Chi cago. Under a
new j ob descr i pt i on, she i s r ecl assi f i ed f r omempl oyee t o i ndependent
cont r act or st at us. Her movi ng expenses, whi ch ar e not r ei mbur sed, ar e
as f ol l ows:

Transportation $1,400
Meals 400
Lodging 500
Cost of moving household
goods
4,000
Penalty for breaking
lease on Miami apartment
3,000


Allisons deductible moving expense is:

a. $0.
*b. $5, 900.
c. $6, 100.
d. $8, 900.
e. $9, 300.


1120. Rachel i s si ngl e and has a col l ege degr ee i n f i nance. She i s
empl oyed as a l oan of f i cer at a bank; her year l y AGI appr oxi mat es
$50, 000. Dur i ng t he year , she enr ol l ed i n a weekend MBA pr ogr amand
i ncur r ed t he f ol l owi ng nonr ei mbur sed expenses: $4, 100 ( t ui t i on) , $300
( books) , $200 ( ot her school suppl i es) , and $200 ( t r anspor t at i on t o and
f r omcampus) . Di sr egar di ng t he 2%- of - AGI l i mi t at i on, as t o t he MBA
pr ogr am, Rachel has a:

a. Deduct i on for and deduct i on from AGI of $0.
*b. Deduct i on for AGI of $4, 000 and deduct i on from AGI of $800.
c. Deduct i on for AGI of $4, 000 and deduct i on from AGI of $700.
d. Deduct i on for AGI of $4, 100 and deduct i on from AGI of $700.
e. None of t he above.


1121. The 222 deduct i on f or t ui t i on and r el at ed expenses i s avai l abl e:

a. Onl y i f t he t axpayer i t emi zes deduct i ons from AGI .
b. To deduct t hat por t i on of t he t ui t i on i n excess of t hat
al l owed under t he l i f et i me l ear ni ng cr edi t .
c. To cover t he t ui t i on of a son who does not qual i f y as
t axpayer s dependent .
d. Onl y i f j ob r el at ed.
*e. None of t he above.


1122. The 222 deduct i on f or t ui t i on and r el at ed expenses i s avai l abl e:

a. Regar dl ess of t he amount of a t axpayer s MAGI .
b. To cover r oomand boar d expenses t o at t end col l ege.
c. To a mar r i ed t axpayer f i l i ng a separ at e r et ur n.
*d. Even i f a t axpayer does cl ai mt he st andar d deduct i on.
e. None of t he above.


1123. Whi ch, i f any, of t he f ol l owi ng i s subj ect t o a cut back
adj ust ment ?

*a. An ai r l i ne pi l ot f or an execut i ve j et r ent al company who pays
hi s own t r avel expenses.
b. Meal s pr ovi ded at cost t o empl oyees by a caf et er i a f unded by
t he empl oyer .
c. Four t h of J ul y company pi cni c f or empl oyees.
d. A t r i p t o Ber muda awar ded t o t he company s t op sal esper son.
e. None of t he above.


1124. Rober t ent er t ai ns sever al of hi s key cl i ent s on J anuar y 1 of t he
cur r ent year . Expenses pai d by Rober t ar e as f ol l ows:

Cab fare $ 60
Cover charge at supper
club
200
Dinner at club 800
Tips to waiter 160


Presuming proper substantiation, Roberts deduction is:

a. $610.
*b. $640.
c. $740.
d. $1, 220.
e. None of t he above.


1125. Tr acy, t he r egi onal sal es di r ect or f or a manuf act ur er of exer ci se
equi pment , pays $2, 500 t o r ent a skybox f or a vi si t i ng per f or mance of
t he Har l emGl obet r ot t er s. The skybox hol ds 10 seat s, and Tr acy i nvi t es
7 cl i ent s t o t he event . Nonl uxur y seat s r ange i n pr i ce f r om$80 t o $120.
The r ef r eshment s pr ovi ded dur i ng t he event cost $600. I f Tr acy meet s
al l of t he r equi r ement s f or deduct i bi l i t y ( i . e. , busi ness di scussi on,
subst ant i at i on) , she may deduct :

*a. $900.
b. $1, 100.
c. $1, 260.
d. $1, 500.
e. $1, 550.


1126. Ral ph made t he f ol l owi ng busi ness gi f t s dur i ng t he year .

To Robert (a key client) at Christmas $50
To Angel (Roberts 8-year old
daughter) on her birthday
20
To Art (Ralphs secretary) on his
birthday ($3 was for gift wrapping)
30
To Paige (Ralphs boss) at Christmas 40


Presuming proper substantiation, Ralphs deduction is:

a. $0.
*b. $53.
c. $73.
d. $78.
e. $98.


1127. Whi ch of t he f ol l owi ng expenses, i f any, qual i f y as deduct i bl e?

a. Cont r i but i ons t o a Cover del l Educat i on Savi ngs Account ( CESA) .
b. Cont r i but i ons t o a qual i f i ed t ui t i on pr ogr am( 529 pl an) .
c. J ob hunt i ng expense of FBI agent who appl i es f or t he j ob of
ci t y manager of Beaumont ( TX) .
*d. Cont r i but i on t o a t r adi t i onal I RA.
e. None of t he above.


1128. Whi ch, i f any, of t he f ol l owi ng expenses is subj ect t o t he 2%- of -
AGI f l oor ?

a. Qual i f i ed t ui t i on expenses under 222.
b. Cont r i but i on t o t r adi t i onal I RA.
c. Cost of a CPA examr evi ew cour set axpayer j ust began
empl oyment wi t h an account i ng f i r m.
d. Of f i ce i n t he home deduct i on f or a sel f - empl oyed t axpayer .
*e. None of t he above.


1129. Whi ch, i f any, of t he f ol l owi ng expenses is subj ect t o t he 2%- of -
AGI f l oor ?

a. Gambl i ng l osses ( t o t he ext ent of gambl i ng gai ns) .
b. Movi ng expenses ( not r ei mbur sed by empl oyer ) .
*c. Teachi ng suppl i es ( i n excess of $250) pur chased by a f i f t h
gr ade t eacher .
d. Uni on dues of sel f - empl oyed machi ni st .
e. None of t he above.


1130. Whi ch, i f any, of t he f ol l owi ng expenses are not subj ect t o t he
2%- of - AGI f l oor ?

a. Saf et y shoes pur chased by an empl oyed pl umber .
*b. Rei mbur sed empl oyee expenses. Taxpayer - empl oyee r ender s an
adequat e account i ng t o t he empl oyer .
c. Unr ei mbur sed empl oyee expenses.
d. Tax r et ur n pr epar at i on f ee pai d by a non- empl oyed r et i r ee.
e. None of t he above.


1131. I n cont r ast i ng t he r epor t i ng pr ocedur es of empl oyees and sel f -
empl oyed per sons r egar di ng j ob- r el at ed t r ansact i ons, whi ch of t he
f ol l owi ng i t ems i nvol ve sel f - empl oyed?

*a. Schedul e C of For m1040.
b. For m2106.
c. For mW- 2.
d. Schedul e A of For m1040.
e. None of t he above.


1132. One of t he t ax advant ages of bei ng sel f - empl oyed ( r at her t han
bei ng an empl oyee) i s:

a. The sel f - empl oyment t ax i s l ower t han t he Soci al Secur i t y t ax.
b. The cut back adj ust ment does not appl y.
c. The act ual cost met hod f or deduct i ng t he busi ness use of an
aut omobi l e can be sel ect ed.
*d. J ob- r el at ed expenses ar e deduct i ons for AGI .
e. A deduct i on f or an of f i ce i n t he home i s avai l abl e.


1133. Sue performs services for Lynn. Regarding this arrangement, use
the legend provided to classify each statement.The ser vi ces ar e
per f or med at Sue s pr emi ses. Sue does not wor k f or ot her par t i es. Lynn
det er mi nes when t he ser vi ces ar e t o be per f or med. Sue has unr ei mbur sed
expenses. Sue was t r ai ned by Lynn. Sue uses her own hel per s. Sue char ges
by t he hour f or her wor k. Sue f i l es a For m2106 wi t h her For m1040. Sue
f i l es a Schedul e SE wi t h her For m1040. Sue uses her own t ool s. I ndi cat es
i ndependent cont r act or st at us. I ndi cat es empl oyee st at us. I ndi cat es
empl oyee st at us. I ndi cat es i ndependent cont r act or st at us. I ndi cat es
empl oyee st at us. I ndi cat es i ndependent cont r act or st at us. I ndi cat es
empl oyee st at us. I ndi cat es empl oyee st at us. I ndi cat es i ndependent
cont r act or st at us. I ndi cat es i ndependent cont r act or st at us.

[ a] 1. The ser vi ces ar e per f or med at Sue s pr emi ses.
[ b] 2. Sue does not wor k f or ot her par t i es.
[ c] 3. Lynn det er mi nes when t he ser vi ces ar e t o be per f or med.
[ d] 4. Sue has unr ei mbur sed expenses.
[ e] 5. Sue was t r ai ned by Lynn.
[ f ] 6. Sue uses her own hel per s.
[ g] 7. Sue char ges by t he hour f or her wor k.
[ h] 8. Sue f i l es a For m2106 wi t h her For m1040.
[ i ] 9. Sue f i l es a Schedul e SE wi t h her For m1040.
[ j ] 10. Sue uses her own t ool s.

a. I ndi cat es i ndependent cont r act or st at us.
b. I ndi cat es empl oyee st at us.
c. I ndi cat es empl oyee st at us.
d. I ndi cat es i ndependent cont r act or st at us.
e. I ndi cat es empl oyee st at us.
f . I ndi cat es i ndependent cont r act or st at us.
g. I ndi cat es empl oyee st at us.
h. I ndi cat es empl oyee st at us.
i . I ndi cat es i ndependent cont r act or st at us.
j . I ndi cat es i ndependent cont r act or st at us.


1134. Match the statements that relate to each other. (Note: Choice L
may be used more than once.)Char act er i st i c of a t axpayer who has t he
st at us of an empl oyeeChar act er i st i c of a t axpayer who i s sel f -
empl oyedAct ual cost met hod of det er mi ni ng aut o expenseAut omat i c mi l eage
met hodDeduct i bl e movi ng expenseNondeduct i bl e movi ng expenseMi xed use
( bot h busi ness and pl easur e) f or ei gn t r avel Educat i on expense t hat is
not deduct i bl e t o mai nt ai n or i mpr ove exi st i ng ski l l sTax home has
changedDeduct i bl e j ob- hunt i ng expensesDeduct i on by an empl oyee of
unr ei mbur sed of f i ce- i n- t he- home expensesMi xed use ( bot h busi ness and
pl easur e) domest i c t r avel . Taxpayer has t ool s and hel per pr ovi ded f or
hi mPayment f or ser vi ces r ender ed based on t asks per f or med Can i ncl ude
act ual cost of par ki ng Excl udes use of MACRS depr eci at i on Lodgi ng whi l e
i n r out e Meal s whi l e i n r out e Tr anspor t at i on must be al l ocat ed i f
t axpayer spends t wo weeks on busi ness and one week si ght seei ng
Par al egal obt ai ns a l aw degr ee Out - of - t own j ob assi gnment l ast s f or
mor e t han one year Must i nvol ve t he same t r ade or busi ness Must be f or
t he conveni ence of t he empl oyer Cor r ect mat ch not pr ovi ded

[ a] 1. Char act er i st i c of a t axpayer who has t he st at us of an
empl oyee
[ b] 2. Char act er i st i c of a t axpayer who i s sel f - empl oyed
[ c] 3. Act ual cost met hod of det er mi ni ng aut o expense
[ d] 4. Aut omat i c mi l eage met hod
[ e] 5. Deduct i bl e movi ng expense
[ f ] 6. Nondeduct i bl e movi ng expense
[ g] 7. Mi xed use ( bot h busi ness and pl easur e) f or ei gn t r avel
[ h] 8. Educat i on expense t hat is not deduct i bl e t o mai nt ai n or
i mpr ove exi st i ng ski l l s
[ i ] 9. Tax home has changed
[ j ] 10. Deduct i bl e j ob- hunt i ng expenses
[ k] 11. Deduct i on by an empl oyee of unr ei mbur sed of f i ce- i n-
t he- home expenses
[ l ] 12. Mi xed use ( bot h busi ness and pl easur e) domest i c t r avel .

a. Taxpayer has t ool s and hel per pr ovi ded f or hi m
b. Payment f or ser vi ces r ender ed based on t asks per f or med
c. Can i ncl ude act ual cost of par ki ng
d. Excl udes use of MACRS depr eci at i on
e. Lodgi ng whi l e i n r out e
f . Meal s whi l e i n r out e
g. Tr anspor t at i on must be al l ocat ed i f t axpayer spends t wo
weeks on busi ness and one week si ght seei ng
h. Par al egal obt ai ns a l aw degr ee
i . Out - of - t own j ob assi gnment l ast s f or mor e t han one year
j . Must i nvol ve t he same t r ade or busi ness
k. Must be f or t he conveni ence of t he empl oyer
l . Cor r ect mat ch not pr ovi ded


1135. Match the statements that relate to each other. (Note: Choice L
may be used more than once.)Act ual cost met hod of det er mi ni ng car
expenseDi st ance t est ( f or movi ng expenses) not sat i sf i edTi me t est ( f or
movi ng expenses) wai vedRot h I RAsKeogh ( H. R. 10) pl ansCut back adj ust ment
appl i esCut back adj ust ment does not appl yDeemed subst ant i at i onJ ob
hunt i ng expensesQual i f i ed t ui t i on and r el at ed expenses ( under
222) Cl ub dues deduct i bl eCl ub dues not deduct i bl eCan i ncl ude cost of car
i nsur ance and aut omobi l e cl ub dues Taxpayer moves t o a new r esi dence 55
mi l es cl oser t o hi s pr esent j ob Expat r i at e ( U. S. per son who i s empl oyed
over seas) r et ur ns home t o r et i r e Di st r i but i on f r ompl an i s not t axabl e
Di st r i but i on f r ompl an i s t axabl e Cover char ge pai d t o ent er t ai n cl i ent
at a ni ght cl ub. Company pi cni c sponsor ed by empl oyer Use of Feder al
per di emal l owance t o subst ant i at e meal s whi l e i n t r avel st at us
Deduct i bl e even i f t axpayer does not t ake t he new j ob Does not have t o
be j ob r el at ed Cor r ect mat ch not pr ovi ded Count r y cl ub member shi p f ee

[ a] 1. Act ual cost met hod of det er mi ni ng car expense
[ b] 2. Di st ance t est ( f or movi ng expenses) not sat i sf i ed
[ c] 3. Ti me t est ( f or movi ng expenses) wai ved
[ d] 4. Rot h I RAs
[ e] 5. Keogh ( H. R. 10) pl ans
[ f ] 6. Cut back adj ust ment appl i es
[ g] 7. Cut back adj ust ment does not appl y
[ h] 8. Deemed subst ant i at i on
[ i ] 9. J ob hunt i ng expenses
[ j ] 10. Qual i f i ed t ui t i on and r el at ed expenses ( under 222)
[ k] 11. Cl ub dues deduct i bl e
[ l ] 12. Cl ub dues not deduct i bl e

a. Can i ncl ude cost of car i nsur ance and aut omobi l e cl ub dues
b. Taxpayer moves t o a new r esi dence 55 mi l es cl oser t o hi s
pr esent j ob
c. Expat r i at e ( U. S. per son who i s empl oyed over seas) r et ur ns
home t o r et i r e
d. Di st r i but i on f r ompl an i s not t axabl e
e. Di st r i but i on f r ompl an i s t axabl e
f . Cover char ge pai d t o ent er t ai n cl i ent at a ni ght cl ub.
g. Company pi cni c sponsor ed by empl oyer
h. Use of Feder al per di emal l owance t o subst ant i at e meal s
whi l e i n t r avel st at us
i . Deduct i bl e even i f t axpayer does not t ake t he new j ob
j . Does not have t o be j ob r el at ed
k. Cor r ect mat ch not pr ovi ded
l . Count r y cl ub member shi p f ee


1136. Mer edi t h hol ds t wo j obs and at t ends gr aduat e school on weekends.
The educat i on i mpr oves her ski l l s, but does not qual i f y her f or a new
t r ade of busi ness. Bef or e goi ng t o t he second j ob, she r et ur ns home f or
di nner . Rel evant mi l eage i s as f ol l ows?

Home t o f i r st j ob 9 mi l es
Fi r st j ob t o second j ob 13 mi l es
Home t o second j ob 15 mi l es
Home t o uni ver si t y 7 mi l es


How much of t he mi l eage qual i f i es f or deduct i on pur poses?

Cor r ect Answer :
27 mi l es. The mi l eage f r omt he f i r st j ob t o t he second j ob, 13 mi l es,
qual i f i es. Al so, r ound t r i p mi l eage t o t he uni ver si t y ( 14 mi l es) can be
cl ai med i f t he educat i on Mer edi t h i s obt ai ni ng i s deduct i bl e.


1137. Paul i s empl oyed as an audi t or by a CPA f i r m. On most days, he
commut es by aut o f r omhi s home t o t he of f i ce. Dur i ng one mont h, however ,
he has an ext ensi ve audi t assi gnment cl oser t o home. For t hi s
engagement , Paul dr i ves di r ect l y f r omhome t o t he cl i ent s pr emi ses and
back. Mi l eage i nf or mat i on i s summar i zed bel ow:

Home t o
of f i ce
12 mi l es
Of f i ce t o
audi t cl i ent
15 mi l es
Audi t cl i ent
t o home
10 mi l es


I f Paul spends 20 days on t he audi t , what i s hi s deduct i bl e mi l eage?

Cor r ect Answer :
400 mi l es [ 20 mi l es ( each day) 20 days] .


1138. Dur i ng 2013, Eva used her car as f ol l ows: 12, 000 mi l es ( busi ness) ,
1, 400 mi l es ( commut i ng) , and 4, 000 mi l es ( per sonal ) . I n addi t i on, she
spent $440 f or t ol l s ( busi ness) and $620 f or par ki ng ( busi ness) . I f Eva
uses t he aut omat i c mi l eage met hod, what i s t he amount of her deduct i on?

Cor r ect Answer :
$7, 840. ( 12, 000 mi l es $0. 565) + $440 + $620 = $7, 840.


1139. Rod uses hi s aut omobi l e f or bot h busi ness and per sonal use and
cl ai ms t he aut omat i c mi l eage r at e f or al l pur poses. Dur i ng 2013, hi s
mi l eage was as f ol l ows:

Mi l es
Dr i ven
Per sonal 4, 000
Busi ness 8, 000
Qual i f yi ng movi ng
expense
3, 500
Medi cal 1, 800
Char i t abl e 1, 500
Qual i f yi ng educat i on
( MBA pr ogr am)
800



How much can Rod cl ai mf or mi l eage?

Cor r ect Answer :
$6, 454 [ ( 8, 800 mi l es $0. 565, busi ness and educat i on) + ( 3, 500 mi l es
$0. 24, movi ng) + ( 1, 800 mi l es $0. 24, medi cal ) + ( 1, 500 mi l es $0. 14,
char i t abl e) ] .


1140. El si e l i ves and wor ks i n Det r oi t . She i s t he r egi onal sal es
manager f or a nat i onal f ast - f ood chai n. Due t o unusual devel opment s,
she i s compel l ed t o wor k si x st r ai ght weeks i n t he Cl evel and ar ea.
I nst ead of spendi ng t he weekend t her e, she f l i es home ever y Fr i day
ni ght and r et ur ns ear l y Monday mor ni ng. The cost of comi ng home f or t he
weekend appr oxi mat es $600. Had she st ayed i n Cl evel and, deduct i bl e
meal s and l odgi ng woul d have been $700. How much, i f any, may El si e
deduct as t o each weekend?

Cor r ect Answer :
$600 f or each weekend, t he l esser of t he $600 cost of r et ur ni ng home or
t he $700 cost of st ayi ng i n Cl evel and.


1141. Al f r edo, a sel f - empl oyed pat ent at t or ney, f l ew f r om hi s home i n
Chi cago t o Mi ami , had l unch al one at t he ai r por t , conduct ed busi ness i n
t he af t er noon, and r et ur ned t o Chi cago i n t he eveni ng. Hi s expenses
wer e as f ol l ows:

Ai r f ar e $900
Ai r por t par ki ng
( Chi cago)
60
Lunch 30
Taxi s ( Mi ami ) 42


What i s Al f r edo s deduct i bl e expense f or t he t r i p?

Cor r ect Answer :
$1,002 ($900 + $60 + $42). As Alfredo was not away from home, his lunch is
not deductible.


1142. Li l y went f r omher of f i ce i n Por t l and t o Li sbon on busi ness.
Whi l e t her e, she spent par t of t he t i me on vacat i on. How much of t he
ai r f ar e of $5, 000 can she deduct based on t he f ol l owi ng assumpt i ons:

a. Li l y was gone f i ve days ( i . e. , t hr ee
busi ness and t wo per sonal ) .

b. Li l y was gone f i ve weeks ( i . e. , f our
busi ness and one per sonal ) .

c. Li l y was gone f i ve weeks ( i . e. , t hr ee
busi ness and t wo per sonal ) .



Cor r ect Answer :
a. $5,000.

b. $5,000.

c. $3,000. (60% $5,000).


Transportation costs for mixed use (i.e., both business and personal) need
not be allocated as long as domestic trips are involved. Such allocation is
necessary, however, for foreign trips unless one of two exceptions applies.
One exception deals with trips lasting seven days or less and covers part a.
(but not part b. or part c.) above. The second exception, less than 25% of
the time was for personal use, applies to part b. but not to part c. Thus,
in part b. no allocation is necessary, while in part c. the air fare must
be allocated.


1143. Noah moved f r om Del awar e t o Ar i zona t o accept a bet t er j ob. He
i ncur r ed t he f ol l owi ng unr ei mbur sed movi ng expenses:

Tr anspor t at i on $3, 000
Lodgi ng 400
Meal s i n r out e 500
Penal t y f or br eaki ng
apar t ment l ease
1, 000
For f ei t ur e of at hl et i c
cl ub member shi p
500
Movi ng company cost 7, 000


What i s Noah s movi ng expense deduct i on?

Cor r ect Answer :
$10,400 ($3,000 + $400 + $7,000). Meals ($500), lease penalty ($1,000), and
membership forfeiture ($500) are not qualifying moving expenses.


1144. Af t er gr aduat i ng f r omcol l ege, Cl i nt obt ai ned empl oyment i n Omaha.
I n movi ng f r omhi s par ent s home i n Bal t i mor e t o Omaha, Cl i nt i ncur r ed
t he f ol l owi ng expenses:

Tr anspor t at i on $ 700
Meal s 380
Lodgi ng 400
Cost of movi ng househol d goods 3, 500


a. How much may Cl i nt deduct as movi ng expense?

b. Woul d any deduct i on be al l owed i f Cl i nt
cl ai med t he st andar d deduct i on f or t he year
of t he move? Expl ai n.



Cor r ect Answer :
a. $4,600 ($700 + $400 + $3,500). No deduction
is allowed for meals.

b. Yes. Moving expenses are deductions for AGI
and can be claimed regardless of whether a
taxpayer takes the standard deduction or
chooses to itemize.




1145. Ar nol d i s empl oyed as an assi st ant manager i n t he f ur ni t ur e
di vi si on of a nat i onal chai n of depar t ment st or es. He i s a r ecent
col l ege gr aduat e wi t h a degr ee i n mar ket i ng. Dur i ng 2013, he enr ol l s i n
t he eveni ng MBA pr ogr amof a l ocal uni ver si t y and i ncur s t he f ol l owi ng
expenses: t ui t i on, $4, 200; books and comput er suppl i es, $800;
t r anspor t at i on expense t o and f r omt he uni ver si t y, $450; and meal s
whi l e on campus, $400. Ar nol d i s si ngl e and hi s annual AGI i s $64, 000.
As t o t hese expenses, what ar e Ar nol d s:

a. Deduct i ons for AGI ?

b. Deduct i ons from AGI ?



Cor r ect Answer :
a. $4,000. Although the tuition was $4,200,
222 imposes a limitation of $4,000.

b. $1,450. $200 (excess tuition not allowed under
222) + $800 (books and computer supplies) +
$450 (transportation) = $1,450. No deduction
is allowed for meals, since Arnold is not in
travel status. Further adjustment will be
required due to the 2%-of-AGI limitation on
certain itemized deductions.




1146. Cat hy t akes f i ve key cl i ent s t o a ni ght cl ub and i ncur s t he
f ol l owi ng cost s: $320 l i mousi ne r ent al , $460 cover char ge, $920 dr i nks
and di nner , and $200 t i ps. Sever al days af t er t he f unct i on, Cat hy mai l s
each cl i ent a pen cost i ng $25. To t he cost must be added $4 f or
engr avi ng of t he cl i ent s name. Assumi ng adequat e subst ant i at i on and a
busi ness j ust i f i cat i on, what i s Cat hy s deduct i on?

Cor r ect Answer :
$1, 255. $320 + [ ( $460 + $920 + $200) 50%] = $1, 110. Al so al l owed ar e
t he gi f t s of $145 ( 5 $29) . The cost of engr avi ng ( $4) can be added t o
t he maxi mumamount of gi f t al l owed ( $25) .


1147. For t he cur r ent f oot bal l season, Ter n Cor por at i on pays $40, 000
f or a skybox ( cont ai ni ng 12 seat s) at Vet er ans St adi umf or ei ght home
games. Regul ar nonskybox seat s at each game r ange f r om$120 t o $150 a
seat . I n November , a Ter n empl oyee and t en cl i ent s use t he skybox t o
at t end a game. The event i s pr eceded by a bona f i de busi ness di scussi on,
and Ter n spent $1, 000 f or f ood and dr i nks dur i ng t he game. What i s
Ter n s deduct i on?

Cor r ect Answer :
$1, 400. ( 12 seat s $150) + $1, 000 = $2, 800 50%( cut back adj ust ment ) =
$1, 400. Even t hough onl y t en cl i ent s at t ended, al l avai l abl e set s ar e
consi der ed. The hi ghest cost of a r egul ar seat ( $150) i s used i n t he
comput at i on.


1148. Br i an makes gi f t s as f ol l ows:

Reci pi ent Cost of
Gi f t
Mr . Br own ( a cl i ent ) $27*
Mr s. Br own ( Mr . Br own s wi f e) 15
Ms. Smi t h ( Br i an s
r ecept i oni st )
30
Mr . J ones ( Br i an s boss) 40


* I ncl udes $2 f or engr avi ng

Pr esumi ng adequat e subst ant i at i on and no r ei mbur sement , how much may
Br i an deduct ?

Cor r ect Answer :
$52 ( $27 + $25) . The deduct i on f or Mr . Br own s gi f t can i ncl ude nomi nal
cost s f or gi f t - wr appi ng and engr avi ng. No deduct i on i s al l owed f or t he
gi f t t o Mr s. Br own unl ess she i s i n a separ at e busi ness. Ot her wi se, she
f al l s under t he $25 l i mi t appl i cabl e t o Mr . Br own. The deduct i on f or Ms.
Smi t h s gi f t i s l i mi t ed t o $25. No deduct i on i s al l owed f or Br i an s
gi f t t o hi s boss.


1149. Rocky has a f ul l - t i me j ob as an el ect r i cal engi neer f or t he ci t y
ut i l i t y. I n hi s spar e t i me, Rocky r epai r s TV set s i n t he basement of
hi s per sonal r esi dence. Most of hi s busi ness comes f r omf r i ends and
r ef er r al s f r omf or mer cust omer s, al t hough occasi onal l y he r uns an ad i n
t he l ocal subur bi a newspaper . Typi cal l y, t he set s ar e dr opped of f at
Rocky s house and l at er pi cked up by t he owner when not i f i ed t hat t he
r epai r s have been made.

The f l oor space of Rocky s r esi dence i s 2, 500 squar e f eet , and he
est i mat es t hat 20%of t hi s i s devot ed excl usi vel y t o t he r epai r
busi ness. Gr oss i ncome f r omt he busi ness i s $13, 000, whi l e expenses
( ot her t han home of f i ce) ar e $5, 000. Expenses r el at i ng t o t he r esi dence
ar e as f ol l ows:

Real pr oper t y t axes $4, 500
I nt er est on home mor t gage 8, 000
Oper at i ng expenses of
r esi dence
3, 000
Depr eci at i on ( based on 20%
busi ness use)
1, 000


What i s Rocky s net i ncome f r omt he r epai r busi ness?

Cor r ect Answer :
Business income $13,000
Less: Expenses (5,000
)
Net business income before
home office expenses
$ 8,000
Less: Real property taxes ($4,500
20%)
(900)
Mortgage interest ($8,000
20%)
(1,600)
Operating expenses ($3,000
20%)
(600)
Depreciation (1,000
)
Net income from business $ 3,900




1150. I n t he cur r ent year , Bo accept ed empl oyment wi t h a Kansas Ci t y
l aw f i r maf t er gr aduat i ng f r oml aw school . Her expenses f or t he year
ar e l i st ed bel ow:

Cost of bar r evi ew cour se $1, 500
Qual i f i ed movi ng expenses 2, 100
J ob hunt i ng expenses 1, 800
Subscr i pt i ons t o l egal
j our nal s
450
Member shi p dues i n bar
associ at i ons
620
St at e bar dues 300


Si nce Bo wor ked j ust par t of t he year , her sal ar y was onl y $32, 100. I n
t er ms of deduct i ons from AGI , how much does Bo have?

Cor r ect Answer :
$770. AGI i s $30, 000 [ $32, 100 ( sal ar y) $2, 100 ( movi ng expenses) ] .
Thus, t he 2%- of - AGI f l oor i s $600 ( $30, 000 2%) . Qual i f yi ng i t emi zed
deduct i ons ar e $1, 370 ( $450 + $620 + $300) . Thus, $1, 370 $600 = $770
i s t he al l owabl e i t emi zed deduct i on. No deduct i on i s al l owed f or t he
bar r evi ew cour se and t he j ob hunt i ng expenses. I n t hi s case, i t i s
appar ent t hat Bo shoul d cl ai mt he st andar d deduct i on and not i t emi ze.


1151. For t he cur r ent year , Wi l bur i s empl oyed as a deput y sher i f f of a
count y. He has AGI of $50, 000 and t he f ol l owi ng unr ei mbur sed empl oyee
expenses:

At t endance at a l aw enf or cement
conf er ence ( $800 f or t r avel and $220
f or meal s)
$1, 020
Uni f or ms ( does not i ncl ude $300 f or
l aundr y and dr y cl eani ng)
1, 000
Pr of essi onal dues and j our nal s 300
Cont r i but i on t o sher i f f s r eel ect i on
campai gn ( hi ghl y r ecommended by
Wi l bur s boss)
400


How much of t hese expenses ar e al l owed as deduct i ons from AGI ?

Cor r ect Answer :
$1, 510. $910 + $1, 300 + $300 = $2, 510 ( 2% $50, 000) = $1, 510. A
cut back adj ust ment of $110 ( $220 50%) i s r equi r ed f or t he meal s
obt ai ned dur i ng t he conf er ence. No deduct i on i s avai l abl e f or t he
campai gn cont r i but i on.


1152. I f a busi ness r et ai ns someone t o pr ovi de ser vi ces, t hat per son
may ei t her be an empl oyee or be sel f - empl oyed ( i . e. , i ndependent
cont r act or ) .

a. What ar e t he t ax advant ages to the business
of havi ng t he ser vi ce pr ovi der cl assi f i ed as
sel f - empl oyed?

b. What ar e t he advant ages and di sadvant ages to
the service provider of sel f - empl oyed
st at us?



Cor r ect Answer :
a. Self-employed persons do not have to be
included in various fringe benefits programs
(e.g., group-term life insurance, accident and
health plans) and retirement plans. Because
they are not covered by FICA and FUTA, these
payroll costs are avoided.

b. The advantages are that expenses qualify as
deductions for AGI. Consequently,
deductibility is not affected by the choice of
the standard deduction, and no reduction is
required for the 2%-of-AGI floor. In terms of
disadvantages, being self-employed can lead to
other state and local taxes (e.g., license
fees, franchise taxes, occupation taxes, gross
receipts levy). The most significant, however,
is the self-employment tax that materializes.




1153. I n t er ms of i ncome t ax t r eat ment , what i s t he di f f er ence bet ween
common l aw and st at ut or y empl oyees?

Cor r ect Answer :
Al t hough subj ect t o Soci al Secur i t y t ax, st at ut or y empl oyees ar e not
subj ect t o I ncome t ax wi t hhol di ng. St at ut or y empl oyees may cl ai mal l of
t hei r unr ei mbur sed expenses as deduct i ons for AGI . For common l aw
empl oyees, such expenses ar e deduct i ons from AGI .


1154. Myr a s cl assi f i cat i on of t hose who wor k f or her as i ndependent
cont r act or s i s bei ng quest i oned by t he I RS. I t i s t he posi t i on of t he
I RS t hat t hese wor ker s ar e r eal l y empl oyees. What t ype of f act or s can
Myr a ut i l i ze t o j ust i f y her cl assi f i cat i on?

Cor r ect Answer :
Myr a needs t o show t hat she has a reasonable basis f or not t r eat i ng her
wor ker s as empl oyees. I n t hi s r egar d, can she pr ove r el i ance on any of
t he f ol l owi ng?

J udi ci al pr ecedent , publ i shed r ul i ng, or t echni cal advi ce.

A past I RS audi t t hat r esul t ed i n no empl oyment t ax assessment .

A l ongst andi ng pr act i ce of i ndependent cont r act or st at us i n t he
same i ndust r y.

Has Myr a consi st ent l y t r eat ed t hese wor ker s as i ndependent
cont r act or s? Has she r epor t ed t hei r ear ni ngs by f i l i ng For m1099- MI SC?


1155. Tayl or per f or ms ser vi ces f or J onat han on a r egul ar basi s. Ther e
exi st s consi der abl e doubt as t o whet her Tayl or i s an empl oyee or an
i ndependent cont r act or .

a. What can J onat han do t o cl ar i f y t he mat t er ?

b. Suppose J onat han t r eat s Tayl or as an
i ndependent cont r act or but Tayl or t hi nks she
i s an empl oyee. What i s Tayl or s r ecour se,
i f any?



Cor r ect Answer :
a. Jonathan can obtain a ruling from the IRS by
filing Form SS8 (Determination of Worker
Status for Purposes of Federal Employment
Taxes and Income Tax Withholding).

b. Taylor should file a Form 8919 (Uncollected
Social Security and Medicare Tax on Wages)
with the IRS.




1156. J acob i s a l andscape ar chi t ect who wor ks out of hi s home. He
wonder s whet her or not he wi l l have nondeduct i bl e commut i ng expenses
when he dr i ves t o t he l ocat i ons of hi s cl i ent s. Pl ease comment .

Cor r ect Answer :
Jacob has no commuting expenses since his tax home is his residence. Thus,
his mileage to and from the premises of his clients should be fully
deductible.


1157. Under t he aut omat i c mi l eage met hod, one r at e does not cover ever y
t ype of expense. For 2013, what ar e t he r at es f or busi ness use,
educat i on, movi ng, char i t abl e, and medi cal ?

Cor r ect Answer :
$0.565 (business use); $0.565 (education); $0.24 (moving); $0.14
(charitable); and $0.24 (medical).


1158. Chr i st opher j ust pur chased an aut omobi l e f or $40, 000 whi ch he
pl ans t o cl ai m100%as bei ng f or busi ness use. I n or der t o t ake
advant age of MACRS and 179, he pl ans t o use t he act ual cost met hod
f or det er mi ni ng hi s deduct i on i n t he f i r st year . I n subsequent year s,
he wi l l swi t ch t o t he aut omat i c mi l eage met hod. Comment on
Chr i st opher s pr oposed appr oach.

Cor r ect Answer :
Fi r st , l i mi t at i ons ar e i mposed on how much depr eci at i on can be cl ai med
over each year of t he f i ve- year wr i t e- of f per i od. I n most cases, such
l i mi t at i ons si gni f i cant l y r educe t he depr eci at i on nor mal l y al l owed.
Second, t he use of MACRS and/ or 179 pr ecl udes l at er conver t i ng t o t he
aut omat i c mi l eage met hod. Last l y, how many aut omobi l es does Chr i st opher
own? I f j ust one, 100%busi ness use coul d be al most i mpossi bl e t o
j ust i f y si nce i t negat es any per sonal use.


1159. Once set f or a year , when mi ght t he I RS change t he r at e f or t he
aut omat i c mi l eage met hod?

Cor r ect Answer :
Changes i n t he past have been j ust i f i ed by si gni f i cant i ncr eases i n
f uel pr i ces. Such a change pl aces a pr emi umon keepi ng t r ack of mi l eage
on a mont hl y basi s.


1160. Tr avel st at us r equi r es t hat t he t axpayer be away f r omhome
over ni ght .

a. What does away f r omhome over ni ght mean?

b. What t ax advant ages r esul t f r ombei ng i n
t r avel st at us?



Cor r ect Answer :
a. Home for this purpose is the place of
taxpayers principal employment.
Overnight need not be a 24-hour period,
but it must be a time duration substantially
longer than an ordinary days work such as
to require rest or sleep.

b. If travel status exists, many otherwise
nondeductible expenses (e.g., meals,
lodging, transportation) become deductible.




1161. When i s a t axpayer s wor k assi gnment i n a new l ocal e t empor ar y?
Per manent ? What di f f er ence does i t make?

Cor r ect Answer :
Temporary indicates that the assignments termination is expected within a
reasonably short period of time. In no event can the period of absence
exceed one year. If the taxpayers assignment is indefinite, and not
temporary, his or her tax home changes and travel status ends.


1162. Ni ck Lee i s a l i nebacker f or t he Bal t i mor e Ravens ( a pr of essi onal
f oot bal l cl ub) . Dur i ng t he f oot bal l season he r ent s an apar t ment i n a
Bal t i mor e subur b. The r est of t he t i me he l i ves wi t h hi s f ami l y i n Ann
Ar bor ( MI ) and wor ks at a l ocal bank as a vi ce pr esi dent i n char ge of
publ i c r el at i ons. Can Ni ck deduct hi s expenses whi l e away f r om Ann
Ar bor ? Expl ai n.

Cor r ect Answer :
Probably not. Although his personal residence is in Ann Arbor, Nicks tax
home is likely to be the Baltimore area. Considering the salaries of
professional football players, Nicks income from the Ravens must heavily
outweigh that received from an Ann Arbor bank. Furthermore, his principal
activity and the time spent (e.g., conditioning, training, playing) is that
of a player and not a banker.


1163. How ar e combi ned busi ness/ pl easur e t r i ps t r eat ed f or t r avel
wi t hi n t he Uni t ed St at es as opposed t o f or ei gn t r avel ?

Cor r ect Answer :
The maj or di f f er ence i s t hat t r anspor t at i on char ges ar e f ul l y
deduct i bl e i f t he t r i p i s pr i mar i l y f or busi ness and wi t hi n t he Nor t h
Amer i can ar ea. I f t he f or ei gn t r i p i s pr i mar i l y busi ness,
t r anspor t at i on expenses must be al l ocat ed bet ween busi ness and per sonal
unl ess ( 1) t he t axpayer was away f r omhome f or seven days or l ess or ( 2)
i f l ess t han 25%of t he t i me was spent on per sonal pur sui t s.


1164. Concer ni ng t he deduct i on f or movi ng expenses, what ci r cumst ances,
i f any, wi l l excuse a t axpayer f r ommeet i ng t he t i me t est of 39 or 78
weeks?

Cor r ect Answer :
The t i me t est wi l l be di sr egar ded i f t he t axpayer di es, becomes
di sabl ed, or i s di schar ged ( ot her t han f or wi l l f ul mi sconduct ) or
t r ansf er r ed by t he new empl oyer . Under cer t ai n condi t i ons, expat r i at es
who r et i r e whi l e over seas ar e exempt f r omt he t i me t est .


1165. A t axpayer j ust changed j obs and i ncur r ed unr ei mbur sed movi ng
expenses.

a. What ar e hi s ( or her ) opt i ons i f an i ncome
t ax r et ur n has t o be f i l ed bef or e t he t i me
t est i s met ?

b. What happens i f t he movi ng expense deduct i on
has been cl ai med and t he t i me t est i s not
l at er sat i sf i ed?



Cor r ect Answer :
a. The taxpayer may claim the deduction right
away or wait until the time test is met and
file an amended return for the year of the
move.

b. If the moving expense is claimed and the time
test is not later met, a taxpayer has two
options. First, he can increase the income for
the following year by the amount of the
deduction claimed. Second, he can file an
amended return for the year of the move in
which the deduction is not claimed.




1166. Ni col e j ust r et i r ed as a par t ner i n a Phi l adel phi a l aw f i r m. She
moved t o San Fr anci sco wher e she t ook a j ob as an adj unct pr of essor at
a l ocal l aw school . Can Ni col e deduct her movi ng expenses? Expl ai n

Cor r ect Answer :
She can deduct her moving expenses if her status as an adjunct professor is
full-time employment. She cannot if her status is regarded as part-time
employment.


1167. I n t er ms of I RS at t i t ude, what do t he f ol l owi ng expenses have i n
common?

a. Cost of a CPA examr evi ew cour se.

b. Cost of a r evi ew cour se f or t he bar exam.

c. Cost of a l aw degr ee by a t axpayer who does
not i nt end t o pr act i ce l aw.



Cor r ect Answer :
a. It is the position of the IRS that the costs
associated with becoming a CPA are incurred
in order to acquire a basic skill and thus
are not deductible as education expenses.

b. The same reasoning as noted in part a. above
applies to review course taken to pass the
bar exam.

c. Regardless of a taxpayers career goals,
the IRS considers a law degree to be the
acquisition of a basic skill.




1168. Madi son and Chr i st opher ar e st af f account ant s at a maj or publ i c
account i ng f i r m. Bot h ar e pur sui ng a l aw degr ee i n a ni ght pr ogr am at
l ocal l aw school . Madi son cont ends t hat t he cost of t he pr ogr am i s a
deduct i on f or i ncome t ax pur poses, whi l e Chr i st opher mai nt ai ns t hat i t
i s not . Who i s cor r ect and why?

Cor r ect Answer :
Both are partly correct and incorrect. The IRS takes the position that
pursuing a law degree is not maintaining or improving existing skills but
results in acquiring a new job skill. Thus, a legal education is not job
related to accounting but constitutes a new trade or business. However,
222 allows a deduction for tuition (up to $4,000 or less) even if the
education is not job related. This provision allows some or all of the law
school tuition to be deductible but not other associated expenses (e.g.,
textbooks, transportation). In summary, some costs can be claimed and some
cannot.


1169. Logan, Caden, and Ol i vi a ar e t hr ee unr el at ed par t i es who cl ai m
t he st andar d deduct i on. Al l ar e mar r i ed and at t end Ci t r on Uni ver si t y
and each pays t ui t i on of $6, 100. Of t hi s payment , Logan can cl ai m a
deduct i on of $4, 000; Caden a deduct i on of $2, 000; and Ol i vi a no
deduct i on at al l . Expl ai n.

Cor r ect Answer :
The most apparent explanation is the limitation imposed on the 222
tuition deduction. Logans MAGI must be less than $130,000, while Cadens
MAGI is more than $130,000 but not more than $160,000. Lastly, Olivias
MAGI must be in excess of $160,000.


1170. Meg t eaches t he f i f t h gr ade at a l ocal school . Dur i ng t he year ,
she spends $1, 200 f or school suppl i es f or use i n her cl assr oom. On her
i ncome t ax r et ur n, some of t hi s expense i s not r epor t ed and t he bal ance
i s deduct ed i n t wo di f f er ent pl aces. Expl ai n what has pr obabl y
happened.

Cor r ect Answer :
Meg pr obabl y has been r ei mbur sed f or some of t hese expenses. I f she
r ender s an adequat e account i ng t o her empl oyer , t he r ei mbur sement i s
not r epor t ed i n her i ncome nor i s t he expense i nvol ved deduct ed. As t o
t he r emai ni ng expenses, she has cl ai med $250 as a deduct i on for AGI and
t he bal ance as a mi scel l aneous i t emi zed deduct i on.


1171. I n connect i on wi t h t he of f i ce i n t he home deduct i on, comment on
t he f ol l owi ng:

a. Mi xed use ( i . e. , busi ness and per sonal ) of
t he por t i on of t he home al l ocat ed t o
busi ness.

b. The di f f er ence bet ween direct and indirect
expenses f or deduct i on pur poses.

c. The cl assi f i cat i on of t he expense ( i . e. ,
dfor or dfrom AGI ) .



Cor r ect Answer :
a. In most cases, mixed use of the portion
allocated to business is not
allowed. Consequently, the office must be
exclusively used for business. An
exception is made, however, when the home is
used as a daycare center. Here, mixed use
is allowed.

b. Direct expenses (e.g., painting the office)
are deductible in full because they only
benefit the office area. Indirect expenses
(e.g., homeowners casualty insurance) must
be allocated since they relate to both the
business and personal portions of the home.

c. Like most job-related expenses, the
taxpayers status (i.e., employed, self-
employed) governs the classification of the
expense. Thus, an office in the home expense
to an employee is a deduction from AGI,
while that of a self-employed taxpayer is a
deduction for AGI.




1172. Fai t h j ust gr aduat ed f r omcol l ege and she needs advi ce on t he t ax
t r eat ment of t he cost s she i ncur s i n connect i on wi t h her f i r st j ob ( a
sal es per son f or a phar maceut i cal company) . Speci f i cal l y, she want s t o
know about t he f ol l owi ng i t ems:

a. J ob sear ch cost s.

b. Busi ness war dr obe cost .

c. Movi ng expenses.

d. Deduct i on f or of f i ce i n t he home.



Cor r ect Answer :
a. Not deductible since it involves Faiths
first job.

b. Not deductible since the clothes are
suitable for street wear.

c. As long as the time and distance
requirements are met, the moving expenses
are deductible.

d. Unless Faiths employer has an office
available for her in the locale where she
works, she can qualify for an office in the
home deduction. This result is consistent
with the convenience of the employer
requirement applicable in the case of
employees.




1173. Regar di ng t ax f avor ed r et i r ement pl ans f or empl oyees and sel f -
empl oyed per sons, comment on t he f ol l owi ng:

a. The excl usi on ver sus deduct i on appr oaches as
t o cont r i but i ons by par t i ci pant s.

b. Tax- f r ee accumul at i on of ear ni ngs.

c. The def er r al of i ncome t ax consequences.

d. Empl oyee ver sus sel f - empl oyed st at us.



Cor r ect Answer :
a. Contributions by employees to retirement
plans that are qualified provide a tax
benefit either in the form of an exclusion
from gross income or as a deduction for AGI.
The traditional IRA takes the deduction
approach. This is also the case of
contributions by a self-employed person to a
Keogh (H.R. 10) plan.

b. A characteristic of all tax-favored
retirement plans is that income accumulates
free of tax. This allows for a greater
accumulation to take place up to the point
of distribution.

c. Except in the Roth IRA, the main objective
of retirement plans is to defer taxation
until distributions are made.

d. Keogh (H.R. 10) plans are, in effect, the
self-employed version of employee retirement
plans.




1174. Ashl ey and Mat t hew ar e husband and wi f e and bot h ar e pr act i ci ng
CPAs. On a j oi nt r et ur n, Ashl ey get s t o deduct her pr of essi onal dues
but Mat t hew does not . Expl ai n.

Cor r ect Answer :
Most likely Ashley is self-employed, while Matthew is employed. Thus,
Ashleys expenses are deductions for AGI and Matthews are itemized
deduction subject to the 2% floor. If they do not itemize (or if they do
and cannot exceed the 2% floor), Matthew loses the deduction for his
professional dues.


1175. I sabel l a i s a dent al hygi eni st who wor ks f or f i ve di f f er ent
dent i st s. She spends one day a week ( i . e. , Monday t hr ough Fr i day) wi t h
each. Al l of t he dent i st s except Dr . St anki ( t he Wednesday assi gnment )
t r eat her as an empl oyee. Dr . St anki , however , cl assi f i es her as bei ng
sel f - empl oyed. Comment on t hi s di scr epancy i n t r eat ment .

Cor r ect Answer :
Unl ess I sabel l a s Wednesday dut i es ar e si gni f i cant l y di f f er ent t han t he
r est of t he week, Dr . St anki has pl aced hi msel f i n a vul ner abl e
posi t i on. I n t er ms of t he pr oper wor k cl assi f i cat i on of a ser vi ce
pr ovi der , one key consi der at i on i s how t hey ar e t r eat ed by ot her
compar abl e busi nesses. I n al l l i kel i hood, t her ef or e, Dr . St anki wi l l
have a t ough t i me convi nci ng t he I RS t hat I sabel l a i s an i ndependent
cont r act or when f our of hi s col l eagues consi der her t o be an empl oyee.
Mor e l i kel y, Dr . St anki desi r es t o save on payr ol l t axes and avoi d
cover i ng I sabel l a i n any f r i nge benef i t s of f er ed t o ot her empl oyees.


1176. Fel i ci a, a r ecent col l ege gr aduat e, i s empl oyed as an account ant
by an oi l company. She woul d l i ke t o cont i nue her educat i on and obt ai n
a l aw degr ee. Di scuss Fel i ci a s t ax st at us i f she at t ends a l ocal l aw
school on a:

a. Par t - t i me basi s.

b. Ful l - t i me basi s.



Cor r ect Answer :
a. Regarding the usual education expense
justification of maintaining and improving
on existing skills, Felicia will not
succeed. The IRS has successfully maintained
that obtaining a law degree leads to a new
trade or business. Reliance on 222,
however, is appropriate since the education
need not be job related. Unfortunately,
222 only covers tuition, is limited to
$4,000, and may be reduced (or eliminated)
by an AGI limitation.

b. If Felicia quits her job and returns to
college on a full-time basis, she no longer
is in a trade or business. A temporary break
in employment status (e.g., leave of
absence), however, will cure this problem if
properly structured. However, Felicia will
still encounter the new trade or business
provision.




1177. Di scuss t he 2%- of - AGI f l oor and t he 50%cut back l i mi t at i on i n
connect i on wi t h var i ous empl oyee expenses under t he f ol l owi ng
ar r angement s:

a. The empl oyee i s not r ei mbur sed by t he
empl oyer .

b. The empl oyee i s f ul l y r ei mbur sed under a
nonaccount abl e pl an.

c. The empl oyee i s par t i al l y r ei mbur sed under
an account abl e pl an.

d. The empl oyee i s f ul l y r ei mbur sed under an
account abl e pl an.



Cor r ect Answer :
a. Any cutback adjustment and the 2%-of-AGI floor
are imposed on the employee. The employee has
the burden of being able to substantiate the
expenses involved. Furthermore, no deduction
is available if the employee does not itemize
deductions from AGI.

b. The reimbursement must be reported as income.
Deductions are handled as in part a. above.

c. Unless the reimbursement identifies the
expenses covered, it must be allocated between
the items that are and are not subject to the
cutback adjustment.

d. A washout results. In effect the expenses are
treated as deductions for AGI and fully offset
the reimbursement. As far as the employee is
concerned, the expenses are not subject to the
cutback adjustment or the 2%-of-AGI floor.




1178. Ramon and I ngr i d wor k i n t he f i el d of publ i c r el at i ons and i ncur
si zabl e ent er t ai nment expenses. Ramon i s empl oyed by a consumer
pr oduct s company, whi l e I ngr i d i s a sel f - empl oyed consul t ant . Regar di ng
t he t ax t r eat ment of t he ent er t ai nment expenses, when woul d:

a. Ramon be bet t er of f t han I ngr i d?

b. I ngr i d be bet t er of f t han Ramon?



Cor r ect Answer :
a. If Ramon renders an adequate accounting to
his employer and is fully reimbursed. In
such a case, the employee reports no income
or deduction as to these expenses. The
cutback adjustment is suffered by the
employer.

b. If Ramon does not render an adequate
accounting to his employer, he will have to
recognize any reimbursement as income and
substantiate any deduction. Even worse, he
will be subject to the cutback adjustment
and the deduction will be a miscellaneous
itemized deduction upon which the 2%-of-AGI
limit is imposed. Although Ingrid also will
be subject to the cutback adjustment, she
has a deduction for AGI upon which the 2%
rule does not apply.




1179. Per sonal expendi t ur es t hat ar e deduct i bl e as i t emi zed deduct i ons
i ncl ude medi cal expenses, Feder al i ncome t axes, st at e i ncome t axes,
pr oper t y t axes on a per sonal r esi dence, mor t gage i nt er est , and
char i t abl e cont r i but i ons.

a. Tr ue
*b. Fal se


1180. The el ect i on t o i t emi ze i s appr opr i at e when t ot al i t emi zed
deduct i ons ar e l ess t han t he st andar d deduct i on based on t he t axpayer s
f i l i ng st at us.

a. Tr ue
*b. Fal se


1181. Adr i enne sust ai ned ser i ous f aci al i nj ur i es i n a mot or cycl e
acci dent . To r est or e her physi cal appear ance, Adr i enne had cosmet i c
sur ger y. She cannot deduct t he cost of t hi s pr ocedur e as a medi cal
expense.

a. Tr ue
*b. Fal se


1182. A physi ci an r ecommends a pr i vat e school f or El l en s dependent
chi l d. Because of t he physi ci an s r ecommendat i on, t he cost of t he
pr i vat e school wi l l qual i f y as a medi cal expense deduct i on ( subj ect t o
per cent age l i mi t at i ons) .

a. Tr ue
*b. Fal se


1183. Mi ndy pai d an appr ai ser t o det er mi ne how much a capi t al
i mpr ovement made f or medi cal r easons i ncr eased t he val ue of her
per sonal r esi dence. The appr ai sal f ee qual i f i es as a deduct i bl e medi cal
expense.

a. Tr ue
*b. Fal se


1184. Upon t he r ecommendat i on of a physi ci an, Ed has a swi mmi ng pool
i nst al l ed at hi s r esi dence because of a hear t condi t i on. I f he i s
al l owed t o deduct al l or par t of t he cost of t he pool , Ed s i ncr ease i n
ut i l i t y bi l l s due t o t he oper at i on of t he pool qual i f i es as a medi cal
expense.

*a. Tr ue
b. Fal se


1185. Mason, age 70, a physi cal l y handi capped i ndi vi dual , pays $10, 000
i n 2013 f or t he i nst al l at i on of wheel chai r r amps, suppor t bar s, and
r ai l i ngs i n hi s per sonal r esi dence. These i mpr ovement s i ncr ease t he
val ue of hi s per sonal r esi dence by $2, 000. Onl y $8, 000 of t he
expendi t ur e qual i f i es as a medi cal deduct i on ( subj ect t o t he AGI f l oor ) .

a. Tr ue
*b. Fal se


1186. Chad pays t he medi cal expenses of hi s son, J ames. J ames woul d
qual i f y as Chad s dependent except t hat he ear ns $7, 500 dur i ng t he year .
Chad may cl ai mJ ames medi cal expenses even i f he i s not a dependent .

*a. Tr ue
b. Fal se


1187. Bi l l pai d $2, 500 of medi cal expenses f or hi s daught er , Mar i e.
Mar i e i s mar r i ed t o J ohn and t hey f i l e a j oi nt r et ur n. Bi l l can i ncl ude
t he $2, 500 of expenses when cal cul at i ng hi s medi cal expense deduct i on.

*a. Tr ue
b. Fal se


1188. I n 2013, Dena t r avel ed 600 mi l es f or speci al i zed medi cal
t r eat ment t hat was not avai l abl e i n her homet own. She pai d $90 f or
meal s dur i ng t he t r i p, $145 f or a hot el r oomon Tuesday ni ght , and $15
i n par ki ng f ees. She di d not keep r ecor ds of ot her out - of - pocket cost s
f or t r anspor t at i on. Dena can i ncl ude $209 i n comput i ng her medi cal
expenses.

*a. Tr ue
b. Fal se


1189. Mar i a t r avel ed t o Rochest er , Mi nnesot a, wi t h her son, who was
oper at ed on at t he Mayo Cl i ni c. Her son st ayed at t he cl i ni c f or t he
dur at i on of hi s t r eat ment . She pai d ai r f ar e of $300 and $50 per ni ght
f or l odgi ng. The cost of Mar i a s ai r f ar e and l odgi ng cannot be i ncl uded
i n det er mi ni ng her medi cal expense deduct i on.

a. Tr ue
*b. Fal se


1190. I n 2013, Br andon, age 72, pai d $3, 000 f or l ong- t er mcar e
i nsur ance pr emi ums. He may i ncl ude t he $3, 000 i n comput i ng hi s medi cal
expense deduct i on f or t he year .

*a. Tr ue
b. Fal se


1191. J i m s empl oyer pays hal f of t he pr emi ums on a gr oup medi cal
i nsur ance pl an cover i ng al l empl oyees, and empl oyees pay t he ot her
hal f . J i mcan excl ude t he hal f of t he pr emi umpai d by hi s empl oyer
f r omhi s gr oss i ncome and may i ncl ude t he hal f he pays i n det er mi ni ng
hi s medi cal expense deduct i on.

*a. Tr ue
b. Fal se


1192. Mat t , a cal endar year t axpayer , pays $11, 000 i n medi cal expenses
i n 2013. He expect s $5, 000 of t hese expenses t o be r ei mbur sed by an
i nsur ance company i n 2014. I n det er mi ni ng hi s medi cal expense deduct i on
f or 2013, Mat t must r educe hi s 2013 medi cal expenses by t he amount of
t he r ei mbur sement he expect s i n 2014.

a. Tr ue
*b. Fal se


1193. I n 2014, Rhonda r ecei ved an i nsur ance r ei mbur sement f or medi cal
expenses i ncur r ed i n 2013. She i s not r equi r ed t o i ncl ude t he
r ei mbur sement i n gr oss i ncome i n 2014 i f she cl ai med t he st andar d
deduct i on i n 2013.

*a. Tr ue
b. Fal se


1194. Geor gi a cont r i but ed $2, 000 t o a qual i f yi ng Heal t h Savi ngs Account
i n 2013. The ent i r e amount qual i f i es as an expense deduct i bl e for AGI .

*a. Tr ue
b. Fal se


1195. Shi r l ey pays FI CA ( empl oyer s shar e) on t he wages she pays her
mai d t o cl ean and mai nt ai n Shi r l ey s per sonal r esi dence. The FI CA
payment i s not deduct i bl e as an i t emi zed deduct i on.

*a. Tr ue
b. Fal se


1196. Fees f or aut omobi l e i nspect i ons, aut omobi l e t i t l es and
r egi st r at i on, br i dge and hi ghway t ol l s, par ki ng met er deposi t s, and
post age ar e not deduct i bl e i f i ncur r ed f or per sonal r easons, but t hey
ar e deduct i bl e as deduct i ons for AGI i f i ncur r ed as a busi ness expense
by a sel f - empl oyed t axpayer .

*a. Tr ue
b. Fal se


1197. A t axpayer may not deduct t he cost of new cur bi ng ( r el at i ve t o a
per sonal r esi dence) , even i f t he const r uct i on i s r equi r ed by t he ci t y
and t he cur bi ng pr ovi des an i nci dent al benef i t t o t he publ i c wel f ar e.

*a. Tr ue
b. Fal se


1198. Ser gi o was r equi r ed by t he ci t y t o pay $2, 000 f or t he cost of new
cur bi ng i nst al l ed by t he ci t y i n f r ont of hi s per sonal r esi dence. The
new cur bi ng was i nst al l ed t hr oughout Ser gi o s nei ghbor hood as par t of a
st r eet upgr ade pr oj ect . Ser gi o may not deduct $2, 000 as a t ax, but he
may add t he $2, 000 t o t he basi s of hi s pr oper t y.

*a. Tr ue
b. Fal se


1199. Tr ent sel l s hi s per sonal r esi dence t o Chest er on J ul y 1, 2013. He
had pai d $7, 000 i n r eal pr oper t y t axes on Mar ch 1, 2013, t he due dat e
f or pr oper t y t axes f or 2013. Tr ent may not deduct t he por t i on of t he
t axes he pai d f or t he per i od t he pr oper t y was owned by Chest er .

*a. Tr ue
b. Fal se


1200. Her ber t i s t he sol e pr opr i et or of a f ur ni t ur e st or e. He can
deduct r eal pr oper t y t axes on hi s st or e bui l di ng but he cannot deduct
st at e i ncome t axes r el at ed t o hi s net i ncome f r omt he f ur ni t ur e st or e
as a busi ness deduct i on.

*a. Tr ue
b. Fal se


1201. Gr ace s sol e sour ce of i ncome i s f r oma r est aur ant t hat she owns
and oper at es as a pr opr i et or shi p. Any st at e i ncome t ax Gr ace pays on
t he busi ness net i ncome must be deduct ed as a busi ness expense r at her
t han as an i t emi zed deduct i on.

a. Tr ue
*b. Fal se


1202. I n Apr i l 2013, Ber t i e, a cal endar year cash basi s t axpayer , had
t o pay t he st at e of Mi chi gan addi t i onal i ncome t ax f or 2012. Even
t hough i t r el at es t o 2012, f or Feder al i ncome t ax pur poses t he payment
qual i f i es as a t ax deduct i on f or t ax year 2013.

*a. Tr ue
b. Fal se


1203. I n J anuar y 2014, Pam, a cal endar year cash basi s t axpayer , made
an est i mat ed st at e i ncome t ax payment f or 2013. The payment i s
deduct i bl e i n 2013.

a. Tr ue
*b. Fal se


1204. Phyl l i s, a cal endar year cash basi s t axpayer who i t emi zed
deduct i ons, over pai d her 2012 st at e i ncome t ax and i s ent i t l ed t o a
r ef und of $400. Phyl l i s chooses t o appl y t he $400 over payment t owar d
her st at e i ncome t axes f or 2013. She i s r equi r ed t o r ecogni ze t hat
amount as i ncome i n 2013.

*a. Tr ue
b. Fal se


1205. Tom, whose MAGI i s $40, 000, pai d $3, 500 of i nt er est on a
qual i f i ed st udent l oan i n 2013. Tomi s si ngl e. He may deduct t he $3, 500
i nt er est as an i t emi zed deduct i on.

a. Tr ue
*b. Fal se


1206. For pur poses of comput i ng t he deduct i on f or qual i f i ed r esi dence
i nt er est , a qual i f i ed r esi dence i ncl udes onl y t he t axpayer s pr i nci pal
r esi dence.

a. Tr ue
*b. Fal se


1207. For pur poses of comput i ng t he deduct i on f or qual i f i ed r esi dence
i nt er est , a qual i f i ed r esi dence i ncl udes t he t axpayer s pr i nci pal
r esi dence and t wo ot her r esi dences of t he t axpayer or spouse.

a. Tr ue
*b. Fal se


1208. I nt er est pai d or accr ued dur i ng t he t ax year on aggr egat e
acqui si t i on i ndebt edness of $2 mi l l i on or l ess ( $1 mi l l i on or l ess f or
mar r i ed per sons f i l i ng separ at e r et ur ns) i s deduct i bl e as qual i f i ed
r esi dence i nt er est .

a. Tr ue
*b. Fal se


1209. A t axpayer pays poi nt s t o obt ai n f i nanci ng t o pur chase a second
r esi dence. At t he el ect i on of t he t axpayer , t he poi nt s can be deduct ed
as i nt er est expense f or t he year pai d.

a. Tr ue
*b. Fal se


1210. Poi nt s pai d by t he owner of a per sonal r esi dence t o r ef i nance an
exi st i ng mor t gage must be capi t al i zed and amor t i zed over t he l i f e of
t he new mor t gage.

*a. Tr ue
b. Fal se


1211. J ack sol d a per sonal r esi dence t o St even and pai d poi nt s of
$3, 500 on t he l oan t o hel p St even f i nance t he pur chase. J ack can deduct
t he poi nt s as i nt er est .

a. Tr ue
*b. Fal se


1212. Let ha i ncur r ed a $1, 600 pr epayment penal t y t o a l endi ng
i nst i t ut i on because she pai d of f t he mor t gage on her home ear l y. The
$1, 600 i s deduct i bl e as i nt er est expense.

*a. Tr ue
b. Fal se


1213. Leona bor r ows $100, 000 f r omFi r st Nat i onal Bank and uses t he
pr oceeds t o pur chase Ci t y of Houst on bonds. The i nt er est Leona pays on
t hi s l oan i s deduct i bl e as i nvest ment i nt er est subj ect t o t he
i nvest ment i nt er est l i mi t s.

a. Tr ue
*b. Fal se


1214. J oe, a cash basi s t axpayer , t ook out a 12- mont h busi ness l oan on
December 1, 2013. He pr epai d al l $3, 600 of t he i nt er est on t he l oan on
December 1, 2013. J oe can deduct onl y $300 of t he pr epai d i nt er est i n
2013.

*a. Tr ue
b. Fal se


1215. Sadi e mai l ed a check f or $2, 200 t o a qual i f i ed char i t abl e
or gani zat i on on December 31, 2013. The $2, 200 cont r i but i on i s
deduct i bl e on Sadi e s 2013 t ax r et ur n.

*a. Tr ue
b. Fal se


1216. On December 31, 2013, Lynet t e used her cr edi t car d t o make a $500
cont r i but i on t o t he Uni t ed Way, a qual i f i ed char i t abl e
or gani zat i on. She wi l l pay her cr edi t car d bal ance i n J anuar y
2014. I f Lynet t e i t emi zes, she can deduct t he $500 i n 2013.

*a. Tr ue
b. Fal se


1217. J udy pai d $40 f or Gi r l Scout cooki es and $40 f or Boy Scout
popcor n. J udy may cl ai man $80 char i t abl e cont r i but i on deduct i on.

a. Tr ue
*b. Fal se


1218. For al l of t he cur r ent year , Randy ( a cal endar year t axpayer )
al l owed t he Sal vat i on Ar my t o use a bui l di ng he owns r ent - f r ee. The
bui l di ng nor mal l y r ent s f or $24, 000 a year . Randy wi l l be al l owed a
char i t abl e cont r i but i on deduct i on t hi s year of $24, 000.

a. Tr ue
*b. Fal se


1219. Al cont r i but ed a pai nt i ng t o t he Met r opol i t an Ar t Museumof St .
Loui s, Mi ssour i . The pai nt i ng, pur chased si x year s ago, was wor t h
$40, 000 when donat ed, and Al s basi s was $20, 000. I f t hi s pai nt i ng i s
i mmedi at el y sol d by t he museumand t he pr oceeds ar e pl aced i n t he
gener al f und, Al s char i t abl e cont r i but i on deduct i on i s $20, 000
( subj ect t o per cent age l i mi t at i ons) .

*a. Tr ue
b. Fal se


1220. Dur i ng t he year , Vi ct or spent $300 on bi ngo games sponsor ed by
hi s chur ch. I f al l pr of i t s went t o t he chur ch, Vi ct or has a char i t abl e
cont r i but i on deduct i on of $300.

a. Tr ue
*b. Fal se


1221. I n 2013, Al l i son dr ove 800 mi l es t o vol unt eer i n a pr oj ect
sponsor ed by a qual i f i ed char i t abl e or gani zat i on i n Ut ah. I n addi t i on,
she spent $250 f or meal s whi l e away f r omhome. I n t ot al , Al l i son may
t ake a char i t abl e cont r i but i on deduct i on of $112 ( 800 mi l es $. 14) .

a. Tr ue
*b. Fal se


1222. Dur i ng t he year , Eve ( a r esi dent of Bi l l i ngs, Mont ana) spends
t hr ee consecut i ve weeks i n Loui svi l l e, Kent ucky. One week i s spent
r epr esent i ng t he Bi l l i ngs Fi r st Chr i st i an Chur ch at t he nat i onal
convent i on, and t wo weeks ar e spent vacat i oni ng wi t h r el at i ves. One
t hi r d of Eve s t r avel expenses wi l l qual i f y as a char i t abl e deduct i on.

a. Tr ue
*b. Fal se


1223. I n or der t o di ssuade hi s past or f r omr esi gni ng and t aki ng a
posi t i on wi t h a l ar ger chur ch, Mi chael , an ar dent l eader of t he
congr egat i on, gi ves t he past or a new car . The cost of t he car i s
deduct i bl e by Mi chael as a char i t abl e cont r i but i on.

a. Tr ue
*b. Fal se


1224. Dan cont r i but ed st ock wor t h $16, 000 t o hi s col l ege al ma mat er , a
qual i f i ed char i t y. He acqui r ed t he st ock el even mont hs ago f or
$4, 000. He may deduct $16, 000 as a char i t abl e cont r i but i on deduct i on
( subj ect t o per cent age l i mi t at i ons) .

a. Tr ue
*b. Fal se


1225. Ronal do cont r i but ed st ock wor t h $12, 000 t o t he Chi l dr en s
Pr ot ect i ve Agency, a qual i f i ed char i t y. He acqui r ed t he st ock t went y
mont hs ago f or $6, 000. He may deduct $6, 000 as a char i t abl e
cont r i but i on deduct i on ( subj ect t o per cent age l i mi t at i ons) .

a. Tr ue
*b. Fal se


1226. Any capi t al asset donat ed t o a publ i c char i t y t hat woul d r esul t
i n l ong- t er mcapi t al gai n i f sol d, i s subj ect t o t he 30%- of - AGI cei l i ng
l i mi t at i on on char i t abl e cont r i but i ons f or i ndi vi dual s.

*a. Tr ue
b. Fal se


1227. J ohn gave $1, 000 t o a f ami l y whose house was dest r oyed by f i r e.
J ohn may cl ai ma char i t abl e deduct i on of $1, 000 on hi s t ax r et ur n f or
t he cur r ent year .

a. Tr ue
*b. Fal se


1228. I n t he year of her deat h, Mar i a made si gni f i cant char i t abl e
cont r i but i ons of capi t al gai n pr oper t y. I n f act , t he amount of t he
cont r i but i ons exceeds 30%of her AGI . Mar i a s execut or can el ect t o
deduct char i t abl e cont r i but i ons of up t o 50%of Mar i a s AGI on Mar i a s
f i nal i ncome t ax r et ur n.

*a. Tr ue
b. Fal se


1229. The r educed deduct i on el ect i on enabl es a t axpayer t o move f r om
t he 30%- of - AGI l i mi t at i on t o t he 50%- of - AGI l i mi t at i on.

*a. Tr ue
b. Fal se


1230. Excess char i t abl e cont r i but i ons t hat come under t he 30%- of - AGI
cei l i ng ar e al ways subj ect t o t he 30%- of - AGI cei l i ng i n t he car r yover
year .

*a. Tr ue
b. Fal se


1231. Cont r i but i ons t o publ i c char i t i es i n excess of 50%of AGI may be
car r i ed back 3 year s or f or war d f or up t o 5 year s.

a. Tr ue
*b. Fal se


1232. Empl oyee busi ness expenses f or t r avel qual i f y as i t emi zed
deduct i ons subj ect t o t he 2%f l oor i f t hey ar e not r ei mbur sed.

*a. Tr ue
b. Fal se


1233. Gambl i ng l osses may be deduct ed t o t he ext ent of t he t axpayer s
gambl i ng wi nni ngs. Such l osses ar e subj ect t o t he 2%f l oor f or
mi scel l aneous i t emi zed deduct i ons.

a. Tr ue
*b. Fal se


1234. The phaseout of cer t ai n i t emi zed deduct i ons has been r ei nst at ed
f or year s begi nni ng i n 2013.

*a. Tr ue
b. Fal se


1235. Edna had an acci dent whi l e compet i ng i n a r odeo. She sust ai ned
f aci al i nj ur i es t hat r equi r ed cosmet i c sur ger y. Whi l e havi ng t he
sur ger y done t o r est or e her appear ance, she had addi t i onal sur ger y done
t o r eshape her chi n, whi ch was not i nj ur ed i n t he acci dent . The
sur ger y t o r est or e her appear ance cost $9, 000 and t he sur ger y t o
r eshape her chi n cost $6, 000. How much of Edna s sur gi cal f ees wi l l
qual i f y as a deduct i bl e medi cal expense ( bef or e appl i cat i on of t he AGI
l i mi t at i on) ?

a. $0.
b. $6, 000.
*c. $9, 000.
d. $15, 000.
e. None of t he above.


1236. Fr ed and Lucy ar e mar r i ed, ages 33 and 32, and t oget her have AGI
of $120, 000 i n 2013. They have f our dependent s and f i l e a j oi nt r et ur n.
They pay $5, 000 f or a hi gh deduct i bl e heal t h i nsur ance pol i cy and
cont r i but e $2, 600 t o a qual i f i ed Heal t h Savi ngs Account . Dur i ng t he
year , t hey pai d t he f ol l owi ng amount s f or medi cal car e: $9, 200 i n
doct or and dent i st bi l l s and hospi t al expenses, and $3, 000 f or
pr escr i bed medi ci ne and dr ugs. I n Oct ober 2013, t hey r ecei ved an
i nsur ance r ei mbur sement of $4, 400 f or t he hospi t al i zat i on. They expect
t o r ecei ve an addi t i onal r ei mbur sement of $1, 000 i n J anuar y 2014.
Det er mi ne t he maxi mumdeduct i on al l owabl e f or medi cal expenses i n 2013.

*a. $800.
b. $3, 400.
c. $9, 200.
d. $12, 800.
e. None of t he above.


1237. Ri char d, age 50, i s empl oyed as an act uar y. For cal endar year
2013, he had AGI of $130, 000 and pai d t he f ol l owi ng medi cal expenses:

Medical insurance premiums $5,300
Doctor and dentist bills for
Derrick and Jane (Richards
parents)
7,900
Doctor and dentist bills for
Richard
5,100
Prescribed medicines for Richard 830
Nonprescribed insulin for Richard 960


Derrick and Jane would qualify as Richards dependents except that they
file a joint return. Richards medical insurance policy does not cover
them. Richard filed a claim for $4,800 of his own expenses with his
insurance company in November 2013 and received the reimbursement in
January 2014. What is Richards maximum allowable medical expense
deduction for 2013?

a. $0.
*b. $7, 090.
c. $13, 000.
d. $20, 090.
e. None of t he above.


1238. Sandr a i s si ngl e and does a l ot of busi ness ent er t ai ni ng at
home. Because Ar t hur , Sandr a s 80- year ol d dependent gr andf at her who
l i ved wi t h Sandr a, needs medi cal and nur si ng car e, he moved t o Twi l i ght
Nur si ng Home. Dur i ng t he year , Sandr a made t he f ol l owi ng payment s on
behal f of Ar t hur :

Room at Twilight $4,500
Meals for Arthur at
Twilight
850
Doctor and nurse fees 700
Cable TV service for
Arthurs room
107
Total $6,157


Twilight has medical staff in residence. Disregarding the AGI floor, how
much, if any, of these expenses qualify for a medical deduction by Sandra?

a. $6, 157.
*b. $6, 050.
c. $5, 200.
d. $1, 550.
e. None of t he above.


1239. Phi l l i p, age 66, devel oped hi p pr obl ems and was unabl e t o cl i mb
t he st ai r s t o r each hi s second- f l oor bedr oom. Hi s physi ci an advi sed hi m
t o add a f i r st - f l oor bedr oomt o hi s home. The cost of const r uct i ng t he
r oomwas $32, 000. The i ncr ease i n t he val ue of t he r esi dence as a
r esul t of t he r oomaddi t i on was det er mi ned t o be $17, 000. I n addi t i on,
Phi l l i p pai d t he cont r act or $5, 500 t o const r uct an ent r ance r amp t o hi s
home and $8, 500 t o wi den t he hal l ways t o accommodat e hi s wheel chai r .
Phi l l i p s AGI f or 2013 was $100, 000. How much of t hese expendi t ur es can
Phi l l i p deduct as a medi cal expense i n 2013?

a. $14, 000.
b. $15, 000.
*c. $21, 500.
d. $29, 000.
e. None of t he above.


1240. Qui nn, who i s si ngl e and l i ves al one, i s physi cal l y handi capped
as a r esul t of a di vi ng acci dent . I n or der t o l i ve i ndependent l y, he
modi f i es hi s per sonal r esi dence at a cost of $30, 000. The modi f i cat i ons
i ncl uded wi deni ng hal l s and door ways f or a wheel chai r , i nst al l i ng
suppor t bar s i n t he bat hr oomand ki t chen, i nst al l i ng a st ai r way l i f t ,
and r ewi r i ng so he coul d r each el ect r i cal out l et s and appl i ances. Qui nn
pays $200 f or an appr ai sal t hat pl aces t he val ue of t he r esi dence at
$129, 000 bef or e t he i mpr ovement s and $140, 000 af t er . As a r esul t of t he
oper at i on of t he st ai r way l i f t , Qui nn exper i enced an i ncr ease of $680
i n hi s ut i l i t y bi l l s f or t he cur r ent year . Di sr egar di ng t he per cent age
of AGI l i mi t at i on, how much of t he above expendi t ur es qual i f y as
medi cal expense deduct i ons?

a. $11, 680.
*b. $30, 680.
c. $30, 880.
d. $34, 880.
e. None of t he above.


1241. Br ad, who woul d ot her wi se qual i f y as Faye s dependent , had gr oss
i ncome of $9, 000 dur i ng t he year . Faye, who had AGI of $120, 000, pai d
t he f ol l owi ng medi cal expenses i n 2013:

Cataract operation for Brad $ 5,400
Brads prescribed contact
lenses
1,800
Fayes doctor and dentist
bills
12,600
Prescribed drugs for Faye 2,55
0
Total $22,350


Assuming Faye is age 45, she has a medical expense deduction of:

a. $3, 150.
b. $4, 950.
*c. $10, 350.
d. $13, 350.
e. None of t he above.


1242. Tom, age 48, i s advi sed by hi s f ami l y physi ci an t hat he needs
back sur ger y t o cor r ect a pr obl emf r omhi s l ast back sur ger y. Si nce
Tomi s i n a wheel chai r , he needs hi s wi f e, J ean, t o accompany hi mon
hi s t r i p t o Rochest er , Mi nnesot a, f or i n- pat i ent t r eat ment at t he Mayo
Cl i ni c, whi ch speci al i zes i n t hi s t ype of sur ger y. Tomi ncur r ed t he
f ol l owi ng cost s i n 2013:

Round-trip airfare ($350
each)
$ 700
Jeans hotel in Rochester
for four nights ($95 per
night)
380
Jeans meals while in
Rochester
105
Toms medical treatment 3,500
Toms prescription medicine 600


Compute Toms medical expenses for the trip (subject to the 10% floor).

a. $4, 000.
*b. $5, 000.
c. $5, 180.
d. $5, 285.
e. None of t he above.


1243. Your f r i end Scot t y i nf or ms you t hat he r ecei ved a t ax- f r ee
r ei mbur sement i n 2013 of some medi cal expenses he pai d i n 2012. Whi ch
of t he f ol l owi ng st at ement s best expl ai ns why Scot t y i s not r equi r ed t o
r epor t t he r ei mbur sement i n gr oss i ncome?

a. Scot t y i t emi zed deduct i ons i n 2012.
*b. Scot t y di d not i t emi ze deduct i ons i n 2012.
c. Scot t y i t emi zed deduct i ons i n 2013.
d. Scot t y di d not i t emi ze deduct i ons i n 2013.
e. Scot t y i t emi zed deduct i ons i n 2013 but not i n 2012.


1244. I n 2013, Bor i s pays a $3, 800 pr emi umf or hi gh- deduct i bl e medi cal
i nsur ance f or hi msel f and hi s f ami l y. I n addi t i on, he cont r i but es
$3, 400 t o a Heal t h Savi ngs Account . Whi ch of t he f ol l owi ng st at ement s
i s true?

*a. I f Bor i s i s sel f - empl oyed, he may deduct $7, 200 as a
deduct i on for AGI .
b. I f Bor i s i s sel f - empl oyed, he may deduct $3, 400 as a deduct i on
for AGI and may i ncl ude t he $3, 800 pr emi umwhen cal cul at i ng hi s
i t emi zed medi cal expense deduct i on.
c. I f Bor i s i s an empl oyee, he may deduct $7, 200 as a deduct i on
for AGI .
d. I f Bor i s i s an empl oyee, he may i ncl ude $7, 200 when
cal cul at i ng hi s i t emi zed medi cal expense deduct i on.
e. None of t he above.


1245. Dur i ng 2013, Hugh, a sel f - empl oyed i ndi vi dual , pai d t he f ol l owi ng
amount s:

Real estate tax on Iowa residence $3,800
State income tax 1,700
Real estate taxes on land in
Puerto Rico (held as an
investment)
1,100
Gift tax paid on gift to daughter 1,200
State sales taxes 1,750
State occupational license fee 300
Property tax on value of his
automobile (used 100% for
business)
475


What is the maximum amount Hugh can claim as taxes in itemizing deductions
from AGI?

a. $6, 600.
*b. $6, 650.
c. $7, 850.
d. $8, 625.
e. None of t he above.


1246. Dur i ng 2013, Nancy pai d t he f ol l owi ng t axes:

Tax on residence (for the period from
March 1 through August 31, 2013)
$5,250
State motor vehicle tax (based on the
value of the personal use automobile)
430
State sales tax 3,500
State income tax 3,050


Nancy sold her personal residence on June 30, 2013, under an agreement in
which the real estate taxes were not prorated between the buyer and the
seller. What amount qualifies as a deduction from AGI for 2013 for Nancy?

a. $9, 180.
b. $9, 130.
*c. $7, 382.
d. $5, 382.
e. None of t he above.


1247. I n Lawr ence Count y, t he r eal pr oper t y t ax year i s t he cal endar
year . The r eal pr oper t y t ax becomes a per sonal l i abi l i t y of t he owner
of r eal pr oper t y on J anuar y 1 i n t he cur r ent r eal pr oper t y t ax year
( assume t hi s year i s not a l eap year ) . The t ax i s payabl e on J une 1. On
May 1, Reggi e sel l s hi s house t o Dana f or $350, 000. On J une 1, Dana
pays t he ent i r e r eal est at e t ax of $7, 950 f or t he year endi ng December
31. How much of t he pr oper t y t axes may Reggi e deduct ?

a. $0.
*b. $2, 614.
c. $2, 625.
d. $7, 950.
e. None of t he above.


1248. Br ad, who uses t he cash met hod of account i ng, l i ves i n a st at e
t hat i mposes an i ncome t ax ( i ncl udi ng wi t hhol di ng f r omwages) . On Apr i l
14, 2013, he f i l es hi s st at e r et ur n f or 2012, payi ng an addi t i onal $600
i n st at e i ncome t axes. Dur i ng 2013, hi s wi t hhol di ngs f or st at e i ncome
t ax pur poses amount t o $3, 550. On Apr i l 13, 2014, he f i l es hi s st at e
r et ur n f or 2013 cl ai mi ng a r ef und of $800. Br ad r ecei ves t he r ef und on
J une 3, 2014. I f he i t emi zes deduct i ons, how much may Br ad cl ai mas a
deduct i on f or st at e i ncome t axes on hi s Feder al i ncome t ax r et ur n f or
cal endar year 2013 ( f i l ed i n Apr i l 2014) ?

a. $3, 350.
b. $3, 550.
*c. $4, 150.
d. $5, 150.
e. None of t he above.


1249. Bar r y and Lar r y, who ar e br ot her s, ar e equal owner s i n Chi ckadee
Cor por at i on. On J ul y 1, 2013, each l oans t he cor por at i on $10, 000 at an
annual i nt er est r at e of 10%. Bot h shar ehol der s ar e on t he cash met hod
of account i ng, whi l e Chi ckadee Cor por at i on i s on t he accr ual met hod.
Al l par t i es use t he cal endar year f or t ax pur poses. On J une 30, 2014,
Chi ckadee r epays t he l oans of $20, 000 t oget her wi t h t he speci f i ed
i nt er est of $2, 000. How much of t he i nt er est can Chi ckadee Cor por at i on
deduct i n 2013?

*a. $0.
b. $500.
c. $1, 000.
d. $2, 000.
e. None of t he above.


1250. Ri ck and Car ol Ryan, mar r i ed t axpayer s, t ook out a mor t gage of
$160, 000 when pur chasi ng t hei r home t en year s ago. I n Oct ober of t he
cur r ent year , when t he home had a f ai r mar ket val ue of $200, 000 and
t hey owed $125, 000 on t he mor t gage, t he Ryans t ook out a home equi t y
l oan f or $110, 000. They used t he f unds t o pur chase a sai l boat t o be
used f or r ecr eat i onal pur poses. The sai l boat does not qual i f y as a
r esi dence. What i s t he maxi mumamount of debt on whi ch t he Ryans can
deduct home equi t y i nt er est ?

*a. $75, 000.
b. $90, 000.
c. $110, 000.
d. $125, 000.
e. None of t he above.


1251. J oseph and Sandr a, mar r i ed t axpayer s, t ook out a mor t gage on
t hei r home f or $350, 000 i n 1991. I n May of t hi s year , when t he home had
a f ai r mar ket val ue of $450, 000 and t hey owed $250, 000 on t he mor t gage,
t hey t ook out a home equi t y l oan f or $220, 000. They used t he f unds t o
pur chase a si ngl e engi ne ai r pl ane t o be used f or r ecr eat i onal t r avel
pur poses. What i s t he maxi mumamount of debt on whi ch t hey can deduct
home equi t y i nt er est ?

a. $50, 000.
*b. $100, 000.
c. $220, 000.
d. $230, 000.
e. None of t he above.


1252. Pedr o s chi l d at t ends a school oper at ed by t he chur ch t he f ami l y
at t ends. Pedr o made a donat i on of $1, 000 t o t he chur ch i n l i eu of t he
nor mal r egi st r at i on f ee of $200. I n addi t i on, Pedr o pai d t he r egul ar
t ui t i on of $6, 000 t o t he school . Based on t hi s i nf or mat i on, what i s
Pedr o s char i t abl e cont r i but i on?

a. $0.
*b. $800.
c. $1, 000.
d. $6, 800.
e. $7, 000.


1253. I n 2013, J er r y pays $8, 000 t o become a char t er member of Mammot h
Uni ver si t y s At hl et i c Counci l . The member shi p ensur es t hat J er r y wi l l
r ecei ve choi ce seat i ng at al l of Mammot h s home basket bal l games. Al so
i n 2013, J er r y pays $2, 200 ( t he r egul ar r et ai l pr i ce) f or season
t i cket s f or hi msel f and hi s wi f e. For t hese i t ems, how much qual i f i es
as a char i t abl e cont r i but i on?

a. $6, 200.
*b. $6, 400.
c. $8, 000.
d. $10, 200.
e. None of t he above.


1254. Emi l y, who l i ves i n I ndi ana, vol unt eer ed t o t r avel t o Loui si ana
i n Mar ch t o wor k on a home- bui l di ng pr oj ect f or Habi t at f or Humani t y ( a
qual i f i ed char i t abl e or gani zat i on) . She was i n Loui si ana f or t hr ee
weeks. She nor mal l y makes $500 per week as a car pent er s assi st ant and
pl ans t o deduct $1, 500 as a char i t abl e cont r i but i on. I n addi t i on, she
i ncur r ed t he f ol l owi ng cost s i n connect i on wi t h t he t r i p: $600 f or
t r anspor t at i on, $1, 200 f or l odgi ng, and $400 f or meal s. What i s Emi l y s
deduct i on associ at ed wi t h t hi s char i t abl e act i vi t y?

a. $600.
b. $1, 200.
c. $1, 800.
*d. $2, 200.
e. $3, 700.


1255. Hannah makes t he f ol l owi ng char i t abl e donat i ons i n t he cur r ent
year :

Basis Fair
Market
Value
Inventory held for resale
in Hannahs business
(a sole
proprietorship)

$8,000

$ 7,200
Stock in HBM, Inc., held
as an investment (acquired
four years ago)

16,000

40,000
Baseball card collection
held as an investment
(acquired six
years ago)

4,000

20,000


The HBM stock and the inventory were given to Hannahs church, and the
baseball card collection was given to the United Way. Both donees
promptly sold the property for the stated fair market value. Disregarding
percentage limitations, Hannahs current charitable contribution deduction
is:

a. $28, 000.
*b. $51, 200.
c. $52, 000.
d. $67, 200.
e. None of t he above.


1256. Byr on owned st ock i n Bl ossomCor por at i on t hat he donat ed t o a
museum( a qual i f i ed char i t abl e or gani zat i on) on J une 8 t hi s year . What
i s t he amount of Byr on s deduct i on assumi ng t hat he had pur chased t he
st ock f or $10, 500 l ast year on August 7, and t he st ock had a f ai r
mar ket val ue of $13, 800 when he made t he donat i on?

a. $3, 300.
*b. $10, 500.
c. $12, 150.
d. $13, 800.
e. None of t he above.


1257. Zeke made t he f ol l owi ng donat i ons t o qual i f i ed char i t abl e
or gani zat i ons dur i ng 2013:

Basis Fair Market
Value
Used clothing (all
acquired before 2012) of
taxpayer
and his family

$ 1,350

$ 375
Stock in ABC, Inc., held
as an investment for
fifteen months

12,000

10,875
Stock in MNO, Inc., held
as an investment for
eleven months

15,000

18,000
Real estate held as an
investment for two years
15,000 30,000


The used clothing was donated to the Salvation Army; the other items of
property were donated to Eastern State University. Both are qualified
charitable organizations. Disregarding percentage limitations, Zekes
charitable contribution deduction for 2013 is:

a. $43, 350.
*b. $56, 250.
c. $59, 250.
d. $60, 375.
e. None of t he above.


1258. Kar en, a cal endar year t axpayer , made t he f ol l owi ng donat i ons t o
qual i f i ed char i t abl e or gani zat i ons i n 2013:

Basis Fair Market
Value
Cash donation to State
University
$30,000 $ 30,000
Unimproved land to the
City of Terre Haute,
Indiana
70,000 210,000


The land had been held as an investment and was acquired 4 years ago.
Shortly after receipt, the City of Terre Haute sold the land for $210,000.
Karens AGI is $450,000. The allowable charitable contribution deduction
is:

a. $84, 000 i f t he r educed deduct i on el ect i on i s not made.
b. $100, 000 i f t he r educed deduct i on el ect i on i s not made.
*c. $165, 000 i f t he r educed deduct i on el ect i on i s not made.
d. $170, 000 i f t he r educed deduct i on el ect i on i s made.
e. None of t he above.


1259. Dur i ng 2013, Ral ph made t he f ol l owi ng cont r i but i ons t o t he
Uni ver si t y of Or egon ( a qual i f i ed char i t abl e or gani zat i on) :

Cash $63,000
Stock in Raptor, Inc. (a
publicly traded corporation)
94,500


Ralph acquired the stock in Raptor, Inc., as an investment fourteen months
ago at a cost of $42,000. Ralphs AGI for 2013 is $189,000. What is
Ralphs charitable contribution deduction for 2013?

a. $56, 700.
b. $63, 000.
*c. $94, 500.
d. $157, 500.
e. None of t he above.


1260. Pat di ed t hi s year . Bef or e she di ed, Pat gave 5, 000 shar es of
st ock i n Coyot e Cor por at i on ( a publ i cl y t r aded cor por at i on) t o her
chur ch ( a qual i f i ed char i t abl e or gani zat i on) . The st ock was wor t h
$180, 000 and she had acqui r ed i t as an i nvest ment f our year s ago at a
cost of $150, 000. I n t he year of her deat h, Pat had AGI of $300, 000. I n
compl et i ng her f i nal i ncome t ax r et ur n, how much of t he char i t abl e
cont r i but i on shoul d Pat s execut or deduct ?

a. $90, 000.
*b. $150, 000.
c. $180, 000.
d. $210, 000.
e. None of t he above.


1261. Whi ch of t he f ol l owi ng i t ems woul d be an i t emi zed deduct i on on
Schedul e A of For m1040 not subject to t he 2%- of - AGI f l oor ?

a. Pr of essi onal dues pai d by an account ant ( empl oyed by For d
Mot or Co. ) t o t he Nat i onal Associ at i on of Account ant s.
*b. Gambl i ng l osses t o t he ext ent of gambl i ng wi nni ngs.
c. J ob hunt i ng cost s.
d. Appr ai sal f ee pai d t o a val uat i on exper t t o det er mi ne t he f ai r
mar ket val ue of ar t wor k donat ed t o a qual i f i ed museum.
e. None of t he above.


1262. Paul , a cal endar year mar r i ed t axpayer , f i l es a j oi nt r et ur n f or
2013. I nf or mat i on f or 2013 i ncl udes t he f ol l owi ng:

AGI $175,000
State income taxes 13,500
State sales tax 3,000
Real estate taxes 18,900
Gambling losses (gambling
gains were $12,000)
6,800


Pauls allowable itemized deductions for 2013 are:

a. $13, 500.
b. $32, 400.
*c. $39, 200.
d. $42, 200.
e. None of t he above.


1263. Mar i l yn, age 38, i s empl oyed as an ar chi t ect . For cal endar year
2013, she had AGI of $204, 000 and pai d t he f ol l owi ng medi cal expenses:

Medi cal i nsur ance pr emi ums $ 7, 800
Doct or bi l l s f or Pet er and
Est her ( Mar i l yn s par ent s)
7, 300
Doct or and dent i st bi l l s f or
Mar i l yn
11, 100
Pr escr i pt i on medi ci nes f or
Mar i l yn
750
Nonpr escr i pt i on i nsul i n f or
Mar i l yn
950


Pet er and Est her woul d qual i f y as Mar i l yn s dependent s except t hat t hey
f i l e a j oi nt r et ur n. Mar i l yn s medi cal i nsur ance pol i cy does not cover
t hem. Mar i l yn f i l ed a cl ai mf or r ei mbur sement of $6, 000 of her own
expenses wi t h her i nsur ance company i n December 2013 and r ecei ved t he
r ei mbur sement i n J anuar y 2014. What i s Mar i l yn s maxi mumal l owabl e
medi cal expense deduct i on f or 2013?

Cor r ect Answer :
Mar i l yn s medi cal expense deduct i on i s $7, 500, det er mi ned as f ol l ows:

Medical insurance
premiums
$ 7,800
Doctor and dentist bills
for Peter and Esther
7,300
Doctor and dentist bills
for Marilyn
11,100
Prescription medicines
for Marilyn
750
Nonprescription insulin
for Marilyn
9
50
Total medical expenses $27,900
Less: 10% of $204,000
(AGI)
(20,400)
Deductible portion of
medical expenses
$ 7,500


Although Peter and Esther cannot be claimed as Marilyns dependents, they
could have been had they not filed a joint return. Therefore, they qualify
for the medical expense deduction. Insulin is an exception to the rule that
nonprescribed drugs do not qualify as medical expenses. The insurance
recovery was not received until 2014. Therefore, it has no effect on the
medical expense deduction for 2013.


1264. Aar on, age 45, had AGI of $40, 000 f or 2013. He was i nj ur ed i n a
ski i ng acci dent and pai d $3, 600 f or hospi t al expenses and $1, 400 f or
doct or bi l l s. Aar on al so i ncur r ed medi cal expenses of $1, 200 f or hi s
chi l d, who l i ves wi t h hi s f or mer wi f e and i s cl ai med as a dependent by
her . I n 2014, Aar on was r ei mbur sed $1, 300 by hi s i nsur ance company f or
t he medi cal expenses at t r i but abl e t o t he ski i ng acci dent .

a. Comput e Aar on s deduct i on f or medi cal
expenses i n 2013.

b. Assume t hat Aar on woul d have el ect ed t o
i t emi ze hi s deduct i ons even i f he had no
medi cal expenses i n 2013. How much, i f any,
of t he $1, 300 r ei mbur sement must be
i ncl uded i n gr oss i ncome i n 2014?

c. Assume t hat Aar on s ot her i t emi zed
deduct i ons i n 2013 wer e $7, 000 and t hat he
f i l ed as a head of househol d. How much of
t he $1, 300 r ei mbur sement must he i ncl ude i n
gr oss i ncome i n 2014?



Cor r ect Answer :
a. Aaron can claim medical expenses he paid for
his child, even though his former wife is the
custodial parent. His deduction for medical
expenses in 2013 is computed as follows:

Hospitalization $3,600
Bills for doctors services 1,400
Medical expenses for child 1,200
Total $6,200
Less: 10% of $40,000 AGI (4,000)
Medical expense deduction (assuming
Aaron itemizes his deductions)
$2,200

b. If the reimbursement for medical care had
occurred in 2013, the medical expense
deduction would have been only $900 [$6,200
(total medical expenses) $1,300
(reimbursement) $4,000 (floor)], and Aaron
would have paid more income tax. Since the
reimbursement was made in a subsequent year,
Aaron would include $1,300 in gross income for
2014. If Aaron had not itemized in 2013, he
would not include the $1,300 reimbursement in
2014 gross income because he would have
received no tax benefit in 2013.

c. Aarons deduction for medical expenses in
2013 would have been $2,200 (see computation
in a. above). He would include the
reimbursement in gross income to the extent of
his $250 tax benefit, as computed below:

Other itemized deductions $7,000
Medical expenses in excess of 10%
floor
2,200
Total itemized deductions $9,200
Standard deduction for head of
household in 2013
(8,950)
Tax benefit from medical expense
deduction
$ 250





1265. Dur i ng 2013, Kat hy, who i s sel f - empl oyed, pai d $650 per mont h f or
an HSA cont r act t hat pr ovi des medi cal i nsur ance cover age wi t h a $3, 000
deduct i bl e. The pl an cover s Kat hy, her husband, and t hei r t hr ee
chi l dr en. Of t he $650 mont hl y f ee, $300 was f or t he hi gh- deduct i bl e
pol i cy, and $350 was deposi t ed i nt o an HSA. How much of t he amount pai d
f or t he hi gh- deduct i bl e pol i cy can Kat hy deduct as a deduct i on for AGI ?

Cor r ect Answer :
Because Kat hy i s sel f - empl oyed, she can deduct $3, 600 ( $300 per mont h
12 mont hs) of t he amount pai d f or t he hi gh- deduct i bl e pol i cy as a
deduct i on for AGI ( r ef er t o Exampl e 10) . I n addi t i on, she may deduct
t he $4, 200 ( $350 per mont h 12 mont hs) pai d t o t he HSA as a deduct i on
for AGI . Thus, Kat hy may deduct $7, 800 ( $3, 600 + $4, 200) for AGI .


1266. I n 2013, Shi r l ey sol d her per sonal r esi dence t o Mi ke f or $400, 000.
Bef or e t he sal e, Shi r l ey pai d t he r eal est at e t axes of $7, 030 f or t he
cal endar year . For i ncome t ax pur poses, t he deduct i on i s appor t i oned as
f ol l ows: $4, 000 t o Shi r l ey and $3, 030 t o Mi ke.

a. What i s Mi ke s basi s i n t he r esi dence?

b. What i s Shi r l ey s amount r eal i zed f r om t he sal e of t he
r esi dence?

c. What amount of r eal est at e t axes can Mi ke deduct ?

d. What amount of r eal est at e t axes can Shi r l ey deduct ?

Cor r ect Answer :
Gener al di scussi on. For Feder al i ncome t ax pur poses, r eal est at e t axes
must be appor t i oned bet ween t he buyer and t he sel l er . The t axes pai d by
t he sel l er t hat ar e appor t i oned t o t he buyer af f ect bot h t he basi s of
t he buyer s pr oper t y and t he amount r eal i zed by t he sel l er .

a. Mi ke s basi s i n t he r esi dence i s $396, 970 [ $400, 000
( pur chase pr i ce) $3, 030 ( pr oper t y t axes al l ocat ed t o Mi ke but pai d by
Shi r l ey) ] .

b. Shi r l ey s amount r eal i zed i s $396, 970 [ $400, 000 ( sal es pr i ce)
$3, 030 ( pr oper t y t axes al l ocat ed t o Mi ke but pai d by Shi r l ey) ] .

c. Mike can deduct the $3,030 apportioned to him, even
though the tax was paid by Shirley.
d. Shirley can deduct only the tax apportioned to her of
$4,000, even though she paid the entire amount of $7,030.


1267. Br i an, a sel f - empl oyed i ndi vi dual , pays st at e i ncome t ax payment s
of :

$900 on J anuar y 15, 2013 ( 4t h est i mat ed t ax payment f or 2012)
$1, 000 on Apr i l 15, 2013 ( 1st est i mat ed t ax payment i n 2013)
$1, 000 on J une 17, 2013 ( 2nd est i mat ed t ax payment i n 2013)
$1, 000 on Sept ember 16, 2013 ( 3r d est i mat ed t ax payment i n 2013)
$800 on J anuar y 15, 2014 ( 4t h est i mat ed t ax payment of 2013)

Br i an had a t ax over payment of $500 on hi s 2012 st at e i ncome t ax r et ur n
and appl i ed t hi s t o hi s 2013 st at e i ncome t axes. What i s t he amount of
Br i an s st at e i ncome t ax i t emi zed deduct i on f or hi s 2013 Feder al i ncome
t ax r et ur n?

Cor r ect Answer :
$4, 400 i s t he i t emi zed deduct i on. $900 + $1, 000 + $1, 000 + $1, 000 +
$500 ( over payment ) .


1268. I n Pi at t Count y, t he r eal pr oper t y t ax year i s t he cal endar
year . The r eal pr oper t y t ax becomes a per sonal l i abi l i t y of t he owner
of r eal pr oper t y on J anuar y 1 and i s payabl e on J ul y 1 i n t he r eal
pr oper t y t ax year . On J une 30 of t hi s year ( assume not a l eap year ) ,
Har r y sel l s hi s house t o J udy f or $110, 000 and on J ul y 1, J udy pays t he
ent i r e r eal est at e t ax of $4, 380 f or t he cur r ent year endi ng December
31.

a. How much of t he pr oper t y t axes may Har r y
deduct ?

b. How much of t he pr oper t y t axes may J udy
deduct ?



Cor r ect Answer :
Gener al di scussi on. Real pr oper t y t axes must be appor t i oned,
r egar dl ess of whet her t he buyer or sel l er pays t he t axes. I n maki ng
t he appor t i onment , t he dat e of sal e count s as a day t he pr oper t y i s
owned by t he buyer .

a. Rate of tax per day
($4,380/365)
$ 12
Days Harry owned property
(January 1 - June 29)
180
Taxes apportioned to Harry
($12 180)
$2,160

b. Rate of tax per day
($4,380/365)
$ 12
Days Judy owned property
(June 30 - December 31)
185
Taxes apportioned to Judy
($12 185)
$2,220




1269. I n 2006, Ross, who i s si ngl e, pur chased a per sonal r esi dence f or
$170, 000 and t ook out a mor t gage of $100, 000 on t he pr oper t y. I n May
of t he cur r ent year , when t he r esi dence had a f ai r mar ket val ue of
$220, 000 and Ross owed $70, 000 on t he mor t gage, he t ook out a home
equi t y l oan f or $110, 000. He used t he f unds t o pur chase a BMWf or
hi msel f and a Lexus SUV f or hi s wi f e. For bot h vehi cl es, 100%of t he
use i s f or per sonal act i vi t i es. What i s t he maxi mumamount on whi ch
Ross can deduct home equi t y i nt er est ?

Cor r ect Answer :
I nt er est i s deduct i bl e onl y on t he por t i on of a home equi t y l oan t hat
does not exceed t he lesser of :

The fair market value of the residence,
reduced by the acquisition indebtedness
($220,000 FMV $70,000 acquisition
indebtedness = $150,000).

$100,000 ($50,000 for married persons filing
separate returns).


Ross can deduct all of the interest on the first mortgage since it is
acquisition indebtedness. Of the $110,000 home equity loan, interest on
$100,000 is deductible as home equity interest.


1270. Geor gi a had AGI of $100, 000 i n 2013. She donat ed Her on
Cor por at i on st ock wi t h a basi s of $8, 500 t o a qual i f i ed char i t abl e
or gani zat i on on J ul y 5, 2013.

a. What i s t he amount of Geor gi a s deduct i on,
assumi ng t hat she pur chased t he st ock on
December 4, 2012, and t he st ock had a f ai r
mar ket val ue of $15, 000 when she made t he
donat i on?

b. Assume t he same f act s as i n a. , except t hat
Geor gi a pur chased t he st ock on J ul y 1,
2005.

c. Assume t he same f act s as i n a. , except t hat
t he st ock had a f ai r mar ket val ue of $6, 000
( r at her t han $15, 000) when Geor gi a donat ed
i t t o t he char i t y.



Cor r ect Answer :
Gener al di scussi on. The deduct i on f or a cont r i but i on of capi t al gai n
pr oper t y i s based on t he f ai r mar ket val ue, whi l e t he deduct i on f or a
cont r i but i on of or di nar y i ncome pr oper t y i s equal t o t he l esser of t he
adj ust ed basi s or t he f ai r mar ket val ue.

a. Because Georgia did not hold the stock for
the long-term holding period (December 4,
2012 - July 5, 2013), it is short-term
capital gain property that is subject to the
rules for ordinary income
property. Therefore, her deduction is
limited to $8,500.

b. Georgia held the stock for the long-term
holding period (July 1, 2005 - July 5,
2013); so it is capital gain
property. Therefore, her deduction is
equal to the fair market value of the stock,
$15,000.

c. The deduction for a contribution of loss
property (FMV is less than adjusted basis)
is limited to the fair market
value. Therefore, Georgias deduction is
$6,000.




1271. Li nda, who has AGI of $120, 000 i n 2013, cont r i but es st ock i n
Mauve Cor por at i on ( a publ i cl y t r aded cor por at i on) t o t he Sal vat i on Ar my,
a qual i f i ed char i t abl e or gani zat i on. The st ock i s wor t h $65, 000, and
Li nda acqui r ed i t as an i nvest ment f our year s ago at a cost of $50, 000.

a. What i s t he t ot al amount t hat Li nda can
deduct as a char i t abl e cont r i but i on,
assumi ng she car r i es over any di sal l owed
cont r i but i on f r om2013 t o f ut ur e year s?

b. What i s t he maxi mumamount t hat Li nda can
deduct as a char i t abl e cont r i but i on i n 2013?

c. What f act or s shoul d Li nda consi der i n
deci di ng how t o t r eat t he cont r i but i on f or
Feder al i ncome t ax pur poses?

d. Assume Li nda di es i n December 2013. What
advi ce woul d you gi ve t he execut or of her
est at e wi t h r egar d t o possi bl e el ect i ons
t hat can be made r el at i ve t o t he
cont r i but i on?



Cor r ect Answer :
Gener al di scussi on. The st ock i s appr eci at ed l ong- t er mcapi t al gai n
pr oper t y. The gener al r ul e l i mi t s t he deduct i on f or t he cont r i but i on of
such pr oper t y t o 30%of AGI . However , under t he r educed deduct i on
el ect i on, a t axpayer may choose t o f or go a deduct i on of t he
appr eci at i on on capi t al gai n pr oper t y. Thi s enabl es t he t axpayer t o
move f r omt he 30%l i mi t at i on t o a 50%l i mi t at i on.

a. Linda can deduct a total of $65,000, the
fair market value of the stock. The
deduction for 2013 is limited to $36,000
(30% of $120,000 AGI). The remaining $29,000
can be carried forward and deducted in the
future, subject to the same percentage
limitations.

b. If Linda makes the reduced deduction
election, she can deduct $50,000 in 2013,
but she will forgo a deduction for the
$15,000 appreciation ($65,000 FMV $50,000
adjusted basis).

c. Although the reduced deduction election
appears attractive, it should be considered
carefully. The election sacrifices a
deduction for the appreciation on capital
gain property that might eventually be
allowed. Linda should do a present value
analysis to compare the value of a deduction
of $50,000 in 2013 versus the value of a
$36,000 deduction in 2013 plus $29,000 of
deductions to be carried over to future
years.

d. If Linda dies in December 2013, her executor
should make the reduced deduction election,
which would yield a charitable contribution
deduction of $50,000. If the election is not
made, the deduction will be $36,000 (30% of
$120,000) and the $29,000 carryover will be
lost because the 2013 return will be the
final return for Linda.




1272. Geor ge i s si ngl e and age 56, has AGI of $255, 000, and i ncur s t he
f ol l owi ng expendi t ur es i n 2013.

Medi cal expenses ( bef or e 10%
f l oor )
$27, 000
I nt er est on home mor t gage 15, 500
St at e i ncome t ax 7, 500
St at e sal es t ax 4, 500
Real est at e t ax 8, 600
Char i t abl e cont r i but i on 6, 500


What i s t he amount of i t emi zed deduct i ons Geor ge may cl ai m?

Cor r ect Answer :
Geor ge i s subj ect t o t he over al l l i mi t at i on on cer t ai n i t emi zed
deduct i ons because hi s AGI exceeds t he $250, 000 t hr eshol d f or si ngl e
f i l er s. Hi s i t emi zed deduct i ons i n 2013 af t er appl i cat i on of t he
over al l l i mi t at i on ar e comput ed bel ow:

Itemized deductions
subject to overall
limitation:

Interest on home
mortgage
$15,500
State income tax 7,500
Real estate tax 8,600
Charitable
contributions
6,50
0
Total $38,100
Reduction equals the
lesser of the
following:

[3% ($255,000 AGI
$250,000)]
$
150

80% of itemized
deductions subject to
limitation

($38,100 80%) 30,480
Amount of reduction
(150)
Deductible itemized
deductions subject to
overall limitation
$37,950
Itemized deductions
not subject to overall
limitation:

Medical expenses
[$27,000 (10%
$255,000 AGI)]
1,50
0
Total itemized
deductions
$39,450


The state sales tax is not deductible because George deducts the (higher)
state income tax expense.


1273. For cal endar year 2013, J on and Bet t y Hansen ( ages 59 and 60)
f i l e a j oi nt r et ur n r ef l ect i ng AGI of $280, 000. They i ncur t he
f ol l owi ng expendi t ur es:

Medi cal expenses bef or e AGI
f l oor
$30, 000
Casual t y l oss ( not cover ed
by i nsur ance) bef or e
st at ut or y f l oor s
30, 000
I nt er est on home mor t gage 10, 000
I nt er est on cr edi t car ds 800
Pr oper t y t axes on home 13, 000
Char i t abl e cont r i but i ons 17, 000
St at e i ncome t ax 15, 000
Tax r et ur n pr epar at i on f ees 1, 20
0


What i s t he amount of i t emi zed deduct i ons t he Hansens may cl ai m?

Cor r ect Answer :
For t he medi cal expenses, t he t axpayer s ar e al l owed $2, 000 [ $30, 000
( 10% $280, 000 AGI ) ] . The casual t y l oss must f i r st be r educed by $100
and t hen by $28, 000 ( 10% $280, 000 AGI ) . Thus, onl y $1, 900 [ $30, 000
$28, 100 ( $100 + $28, 000) ] can be deduct ed. Al so, not e t hat t he t ax
r et ur n pr epar at i on f ees ar e mi scel l aneous i t emi zed deduct i ons subj ect
t o t he 2%f l oor . The f l oor of $5, 600 ( 2% $280, 000 AGI ) r educes t he
$1, 200 t o $0.

The Hansens ar e not subj ect t o t he over al l l i mi t at i on on cer t ai n
i t emi zed deduct i ons because t hei r AGI does not exceed t he $300, 000
t hr eshol d f or j oi nt f i l er s.

The i t emi zed deduct i ons t ot al $58, 900 ( $10, 000 mor t gage i nt er est +
$13, 000 pr oper t y t ax + $17, 000 cont r i but i ons + $15, 000 st at e i ncome t ax
+ $2, 000 medi cal + $1, 900 casual t y) .


1274. Char l es, who i s si ngl e and age 61, had AGI of $400, 000 dur i ng
2013. He i ncur r ed t he f ol l owi ng expenses and l osses dur i ng t he year .

Medi cal expenses bef or e 10%-
of - AGI l i mi t at i on
$39, 500
St at e and l ocal i ncome t axes 5, 200
Real est at e t axes 4, 400
Home mor t gage i nt er est 5, 400
Char i t abl e cont r i but i ons 4, 800
Casual t y l oss bef or e 10%
l i mi t at i on ( af t er $100 f l oor )
47, 000
Unr ei mbur sed empl oyee expenses
subj ect t o 2%- of - AGI
l i mi t at i on
8, 900
Gambl i ng l osses ( Char l es had
$7, 400 of gambl i ng i ncome)
9, 800


Comput e Char l es s t ot al i t emi zed deduct i ons f or t he year .

Cor r ect Answer :
Char l es s i t emi zed deduct i ons ar e comput ed bel ow:

Medical expenses [$39,500
(10% $400,000 AGI)]
$
0
State and local income taxes 5,200
Real estate taxes 4,400
Home mortgage interest 5,400
Charitable contributions 4,800
Casualty loss [$47,000 (10% 7,000
$400,000 AGI)]
Unreimbursed employee expenses
[$8,900 (2% $400,000 AGI)]
900
Gambling losses ($9,800 loss
limited to $7,400 of gambling
income)
7,
400
Total itemized deductions $35,100


Charless itemized deductions in 2013 after application of the overall
limitation are computed below:

Itemized deductions subject
to overall limitation:

State and local income
taxes
$ 5,200
Real estate taxes 4,400
Home mortgage interest 5,400
Charitable contributions 4,800
Unreimbursed employee
expenses
9
00
Total itemized deductions $20,700


Reduction equals the lesser
of the following:

[3% ($400,000 AGI
$250,000)]
$ 4
,500

80% of itemized deductions
subject to limitation

($20,700 80%) 16
,560

Amount of reduction (4,
500)
Deductible itemized
deductions subject to
overall limitation
$16,200

Itemized deductions not
subject to overall
limitation:

Casualty loss 7,000
Gambling loss 7
,400
Total itemized deductions $30,600





1275. Hel en pays nur si ng home expenses of $3, 000 per mont h f or her
mot her . The mont hl y char ge cover s t he f ol l owi ng i t ems: $1, 400 f or
medi cal car e, $900 f or l odgi ng, and $700 f or f ood. Under what
ci r cumst ances can Hel en i ncl ude t he $3, 000 per mont h payment when
comput i ng her medi cal expense deduct i on f or t he year ? I f Hel en i s not
al l owed t o i ncl ude t he ent i r e payment , how much can she i ncl ude?

Cor r ect Answer :
Hel en may i ncl ude t he ent i r e amount pai d t o t he nur si ng home ( $3, 000
per mont h) i f t he primary r eason f or bei ng i n t he nur si ng home i s t o
get medi cal car e. I f t he pr i mar y r eason f or bei ng i n t he nur si ng home
i s per sonal , Hel en may i ncl ude onl y t he $1, 400 cost of medi cal car e i n
cal cul at i ng her medi cal expense deduct i on.


1276. Manny, age 57, devel oped a sever e hear t condi t i on, and hi s
physi ci an advi sed hi mt o i nst al l an el evat or i n hi s home. The cost of
i nst al l i ng t he el evat or was $15, 000, and t he i ncr ease i n t he val ue of
t he r esi dence was det er mi ned t o be $5, 800. Manny s AGI f or t he year
was $52, 000.

a. How much of t he expendi t ur e can Manny deduct
as a medi cal expense?

b. Assume t he same f act s as i n par t a. , except
t hat Manny was par al yzed i n an aut omobi l e
acci dent and t he expendi t ur es wer e i ncur r ed
t o bui l d ent r ance and exi t r amps and wi den
t he hal l ways i n hi s home t o accommodat e hi s
wheel chai r . How much of t he expendi t ur e can
Manny deduct as a medi cal expense?



Cor r ect Answer :
a. A capital improvement that ordinarily would
not have a medical purpose qualifies as a
medical expense if it is directly related to
prescribed medical care and is deductible to
the extent that the expenditure exceeds the
increase in value of the related
property. The medical expense deduction is
$4,000 [($15,000 $5,800) ($52,000
10%)].

b. The full cost of certain home-related capital
expenditures incurred to enable a physically
handicapped individual to live independently
and productively qualifies as a medical
expense. Qualifying costs include expenditures
for constructing entrance and exit ramps to
the residence, widening hallways and doorways
to accommodate wheelchairs, installing support
bars and railings in bathrooms and other
rooms, and adjusting electrical outlets and
fixtures. These expenditures are subject to
the 10% floor only, and the increase in the
homes value is deemed to be zero. Mannys
deduction is $9,800 [$15,000 ($52,000
10%)].




1277. Samuel , a 36 year ol d i ndi vi dual who has been physi cal l y
handi capped f or a year , pai d $15, 000 f or t he i nst al l at i on of wheel chai r
r amps, suppor t bar s, r ai l i ngs, and wi deni ng door ways i n hi s per sonal
r esi dence. These i mpr ovement s i ncr eased t he val ue of hi s per sonal
r esi dence by $4, 000. How much of Samuel s expendi t ur es qual i f y as a
medi cal expense deduct i on ( subj ect t o t he 10%f l oor ) ? Expl ai n.

Cor r ect Answer :
The f ul l cost of cer t ai n home- r el at ed capi t al expendi t ur es i ncur r ed t o
enabl e a physi cal l y handi capped i ndi vi dual t o l i ve i ndependent l y and
pr oduct i vel y qual i f i es as a medi cal expense. Qual i f yi ng cost s i ncl ude
expendi t ur es f or const r uct i ng ent r ance and exi t r amps t o t he r esi dence,
wi deni ng hal l ways and door ways t o accommodat e wheel chai r s, i nst al l i ng
suppor t bar s and r ai l i ngs i n bat hr ooms and ot her r ooms, and adj ust i ng
el ect r i cal out l et s and f i xt ur es. These expendi t ur es ar e subj ect t o t he
10%f l oor onl y, and t he i ncr ease i n t he home s val ue i s deemed t o be
zer o. So even t hough t he i mpr ovement s i ncr eased t he val ue of Samuel s
per sonal r esi dence by $4, 000, t he ent i r e $15, 000 of t he expendi t ur e
qual i f i es as a medi cal expense deduct i on ( subj ect t o t he 10%f l oor ) .


1278. Paul and Pat t y Bl ack ( bot h ar e age 66) ar e mar r i ed and t oget her
have AGI of $140, 000 i n 2013. They have t wo dependent s and f i l e a j oi nt
r et ur n. Dur i ng t he year , t hey pai d $8, 000 f or medi cal i nsur ance,
$15, 000 i n doct or bi l l s and hospi t al expenses, and $1, 000 f or
pr escr i bed medi ci ne and dr ugs.

a. I n December 2013, t he Bl acks r ecei ved an
i nsur ance r ei mbur sement of $3, 500 f or
hospi t al i zat i on expenses. Det er mi ne t he
deduct i on al l owabl e f or medi cal expenses
pai d dur i ng t he year .

b. Assume i nst ead t hat t he Bl acks r ecei ved t he
$3, 500 i nsur ance r ei mbur sement i n Febr uar y
2014. Det er mi ne t he deduct i on al l owabl e f or
medi cal expenses i ncur r ed i n 2013.

c. Assume t hat t he Bl acks r ecei ved t he $3, 500
i nsur ance r ei mbur sement i n Febr uar y 2014.
Di scuss whet her t he r ei mbur sement wi l l be
i ncl uded i n t hei r gr oss i ncome f or 2014.



Cor r ect Answer :
Gener al di scussi on. Al l of t he f ol l owi ng expenses ar e deduct i bl e,
subj ect t o t he 7. 5%f l oor : $8, 000 f or medi cal i nsur ance, $15, 000 i n
doct or bi l l s and hospi t al expenses, and $1, 000 f or pr escr i bed medi ci ne
and dr ugs.

a. Assuming Paul and Patty received the insurance
reimbursement in December 2013, their medical
expense deduction would be $6,000, computed as
follows:


Medical insurance $ 8,000

Doctor bills and hospital
expenses
15,000
Prescribed medicine and
drugs
1,0
00
Total medical expenses
incurred
$24,000
Minus: December 2013
reimbursement
(3,500)
Total medical expenses
after reimbursement
$20,500
Minus: 7.5% $140,000 AGI (10,500)
Medical expense deduction $10,000


b. Assuming Paul and Patty received the insurance
reimbursement in February 2014, they could
ignore the reimbursement in computing their
2013 medical expense deduction. Their medical
expense deduction would be $13,500, computed
as follows:


Medical insurance $ 8,000
Doctor bills and hospital
expenses
15,000
Prescribed medicine and
drugs
1,0
00
Total medical expenses
incurred
$24,000
Minus: 7.5% $140,000 AGI (10,500)
Medical expense deduction $13,500


c. If Paul and Patty itemized in 2013, they would
report the reimbursement as gross income in
2014, to the extent they received a tax
benefit from itemizing in 2013. If they did
not itemize in 2013 (i.e., took the standard
deduction), they would not be required to
report the reimbursement as gross income in
2014.




1279. Har r y and Sal l y wer e di vor ced t hr ee year s ago. I n J ul y of t he
cur r ent year , t hei r son, J oe, br oke hi s ar mf al l i ng out of a t r ee. J oe
l i ves wi t h Sal l y and Sal l y cl ai ms hi mas a dependent on her t ax
r et ur n. Har r y pai d f or t he medi cal expenses r el at ed t o J oe s i nj ur y.
Can Har r y cl ai mt he medi cal expenses he pai d f or J oe on hi s t ax r et ur n?

Cor r ect Answer :
Har r y may be abl e t o i ncl ude t he payment s r el at ed t o J oe s i nj ur y wi t h
hi s own medi cal expenses. For di vor ced par ent s wi t h chi l dr en, t he
noncust odi al par ent may cl ai many medi cal expenses he or she pays even
t hough t he cust odi al par ent cl ai ms t he chi l dr en as dependent s. Thi s
r ul e appl i es i f t he dependency exempt i on coul d have been shi f t ed t o t he
noncust odi al par ent by t he cust odi al par ent s wai ver ( see Chapt er 3) .


1280. For t he past sever al year s, J eanne and her t wo si st er s have t aken
t ur ns cl ai mi ng a dependency exempt i on deduct i on f or t hei r mot her under
a mul t i pl e suppor t agr eement . Thi s year J eanne wi l l be ent i t l ed t o t he
exempt i on, and her mot her needs money f or sur ger y and new eyegl asses.
Shoul d J eanne pay f or t he medi cal expenses as her shar e of her mot her s
expenses? How woul d t hi s benef i t J eanne?

Cor r ect Answer :
Si nce J eanne i s cl ai mi ng her mot her as a dependent on her t ax r et ur n
t hi s year , she i s al l owed t o deduct any medi cal expenses she pays f or
her . J eanne can cl ai mt he medi cal expenses as par t of her por t i on of
her mot her s suppor t .


1281. Li nda i s pl anni ng t o buy Vi cki s home. They want t o keep t he
t r ansact i on si mpl e, so t he sal es agr eement wi l l not appor t i on t he
pr oper t y t axes t hat Vi cki has al r eady pai d on t he home. Comment on t he
t ax i mpl i cat i ons f or Li nda and Vi cki .

Cor r ect Answer :
Real est at e t axes ar e appor t i oned bet ween buyer and sel l er based upon
t he number of days t he pr oper t y i s owned by each. Li nda and Vi cki wi l l
each be abl e t o deduct t axes based on t he number of days t hey each own
t he home. When t he sel l er pays t he ent i r e r eal est at e t ax bi l l ,
adj ust ment s ar e made t o t he amount r eal i zed by t he sel l er and t he basi s
of t he home i n t he hands of t he buyer . Vi cki wi l l r educe t he amount
r eal i zed on t he sal e by t he amount of t axes appor t i oned t o Li nda, and
Li nda wi l l r educe her basi s i n t he home by t he same amount .


1282. Li nda bor r owed $60, 000 f r omher par ent s f or a down payment on a
condomi ni um. She pai d i nt er est of $5, 500 i n 2011, $0 i n 2012, and
$9, 000 i n 2013. The I RS di sal l owed t he deduct i on. Can you of f er any
expl anat i on f or t he di sal l owance?

Cor r ect Answer :
Because of t he i r r egul ar pat t er ns of Li nda s payment s, i t does not
appear t hat t hi s i s a bona f i de l oan. Thus, t he amount s pai d coul d not
be i nt er est . Addi t i onal l y, t he i nt er est woul d not r epr esent deduct i bl e
qual i f i ed r esi dence i nt er est unl ess t he l oan was secur ed by t he
condomi ni um.


1283. Di ane cont r i but ed a par cel of l and t o t he Uni t ed Way. I n addi t i on,
she cont r i but ed bi bl es and song books f r omher pr opr i et or shi p s book
st or e i nvent or y t o Fi r st Chur ch, a qual i f i ed char i t abl e or gani zat i on.
Shoul d Di ane s char i t abl e cont r i but i on deduct i on f or t hese
cont r i but i ons be det er mi ned by t he basi s or f ai r mar ket val ue of t he
cont r i but ed i t ems?

Cor r ect Answer :
The l and i s a capi t al asset . Di ane s deduct i on f or t he l and
cont r i but i on wi l l be det er mi ned by t he f ai r mar ket val ue i f she has
hel d t he l and f or t he l ong- t er mhol di ng per i od. Ot her wi se, i t wi l l be
det er mi ned by t he basi s ( i . e. , assumi ng t he FMV i s at l east equal t o
t he basi s) . I nvent or y i s or di nar y i ncome pr oper t y, so Di ane s deduct i on
wi l l be det er mi ned by her basi s i n t he bi bl es and song books.


1284. J oe, who i s i n t he 33%t ax br acket i n 2013, expect s t o r et i r e i n
2014 and be i n t he 25%t ax br acket . He pl ans t o donat e $50, 000 t o hi s
chur ch. Because he wi l l not have t he cash avai l abl e unt i l 2014, J oe
donat es l and ( l ong- t er mcapi t al gai n pr oper t y) wi t h a basi s of $10, 000
and f ai r mar ket val ue of $50, 000 t o t he chur ch i n December 2013. He
r eacqui r es t he l and f or $50, 000 i n Febr uar y 2014. Di scuss J oe s t ax
obj ect i ves and al l t ax i ssues r el at ed t o hi s act i ons.

Cor r ect Answer :
J oe i s at t empt i ng t o accel er at e hi s char i t abl e cont r i but i on deduct i on
i nt o 2013. Ther e ar e sever al pot ent i al advant ages t o accel er at i ng t he
deduct i on by donat i ng t he l and i n 2013.

His contribution will be deducted in a tax year
when his marginal tax rate is 33% rather than
25%.

He might avoid disallowance of part of the
deduction due to AGI percentage limitations
because his contribution base will be higher in
2013 than in 2014.

He can deduct the fair market value of the land
without recognizing the $40,000 appreciation as
income.

He can step up his basis in the land from
$10,000 to $50,000 when he reacquires it in
2014.


Joes plan will generate many favorable outcomes if he does not run afoul
of the IRS. While it does not appear that Joe has done anything that does
not comply with the tax law, the IRS might collapse the transaction; that
is, focus on the outcome and ignore the steps involved. The outcome is
that Joe has transferred $50,000 cash to his church. The IRS might
disallow the deduction for the land contribution in 2013 and treat the
transaction as a cash contribution in 2014. In this case, Joes basis
for the purchased land would be $10,000 and his deduction would be at the
lower 2014 marginal tax rate.


1285. Sher r i owns an i nt er est i n a busi ness t hat i s not a passi ve
act i vi t y and i n whi ch she has $20, 000 at r i sk. I f t he busi ness i ncur s
a l oss f r omoper at i ons dur i ng t he year and her shar e of t he l oss i s
$32, 000, t hi s l oss wi l l be f ul l y deduct i bl e.

a. Tr ue
*b. Fal se


1286. J ack owns a 10%i nt er est i n a par t ner shi p ( not r eal est at e) i n
whi ch hi s at - r i sk amount i s $42, 000 at t he begi nni ng of t he year .
Dur i ng t he year , t he par t ner shi p bor r ows $80, 000 on a nonr ecour se not e
and i ncur s a l oss of $60, 000 f r omoper at i ons. J ack s at - r i sk amount at
t he end of t he year i s $44, 000.

a. Tr ue
*b. Fal se


1287. I n t he cur r ent year , Don has a $55, 000 l oss f r oma busi ness he
owns. Hi s at - r i sk amount at t he end of t he year , pr i or t o consi der i ng
t he cur r ent year l oss, i s $36, 000. He wi l l be al l owed t o deduct t he
$55, 000 l oss t hi s year i f he i s a mat er i al par t i ci pant i n t he busi ness.

a. Tr ue
*b. Fal se


1288. J udy owns a 20%i nt er est i n a par t ner shi p ( not r eal est at e) i n
whi ch her at - r i sk amount was $35, 000 at t he begi nni ng of t he year . The
par t ner shi p bor r owed $50, 000 on a r ecour se not e and made a $40, 000
pr of i t dur i ng t he year . Her at - r i sk amount at t he end of t he year i s
$43, 000.

a. Tr ue
*b. Fal se


1289. Tonya owns an i nt er est i n an act i vi t y ( not r eal est at e) t hat
conver t ed r ecour se f i nanci ng t o nonr ecour se f i nanci ng. Recapt ur e of
pr evi ousl y al l owed l osses i s r equi r ed i f Tonya s at - r i sk amount i s
r educed bel ow zer o as a r esul t of t he debt r est r uct ur i ng.

*a. Tr ue
b. Fal se


1290. Kel l y, who ear ns a year l y sal ar y of $120, 000, sol d an act i vi t y
wi t h a suspended passi ve l oss of $44, 000. The act i vi t y was sol d at a
l oss and Kel l y has no ot her passi ve act i vi t i es. The suspended l oss i s
not deduct i bl e.

a. Tr ue
*b. Fal se


1291. Al l of a t axpayer s t ax cr edi t s r el at i ng t o a passi ve act i vi t y
can be ut i l i zed when t he act i vi t y i s sol d at a l oss.

a. Tr ue
*b. Fal se


1292. J ackson Company i ncur s a $50, 000 l oss on a passi ve act i vi t y
dur i ng t he year . The company has act i ve i ncome of $34, 000 and por t f ol i o
i ncome of $24, 000. I f J ackson i s a per sonal ser vi ce cor por at i on, i t may
deduct $34, 000 of t he passi ve l oss.

a. Tr ue
*b. Fal se


1293. Or i ol e Cor por at i on has act i ve i ncome of $45, 000 and a passi ve
l oss of $23, 000 i n t he cur r ent year . Under an except i on, Or i ol e can
deduct t he $23, 000 l oss i f i t i s a per sonal ser vi ce cor por at i on.

a. Tr ue
*b. Fal se


1294. Gr ay Company, a cl osel y hel d C cor por at i on, i ncur s a $50, 000 l oss
on a passi ve act i vi t y dur i ng t he year . The company has act i ve i ncome of
$34, 000 and por t f ol i o i ncome of $24, 000. I f Gr ay i s not a per sonal
ser vi ce cor por at i on, i t may deduct $34, 000 of t he passi ve l oss.

*a. Tr ue
b. Fal se


1295. Wol f Cor por at i on has act i ve i ncome of $55, 000 and a passi ve l oss
of $33, 000 i n t he cur r ent year . Wol f cannot deduct t he $33, 000 l oss i f
i t i s a cl osel y hel d C cor por at i on t hat i s not a per sonal ser vi ce
cor por at i on.

a. Tr ue
*b. Fal se


1296. Li nda owns i nvest ment s t hat pr oduce por t f ol i o i ncome and Act i vi t y
A t hat pr oduces l osses. Fr oma t ax per spect i ve, Li nda wi l l be bet t er
of f i f Act i vi t y A i s not passi ve.

*a. Tr ue
b. Fal se


1297. Nat han owns Act i vi t y A, whi ch pr oduces i ncome, and Act i vi t y B,
whi ch pr oduces passi ve l osses. Fr oma t ax pl anni ng per spect i ve, Nat han
wi l l be bet t er of f i f Act i vi t y A i s passi ve.

*a. Tr ue
b. Fal se


1298. A t axpayer i s consi der ed t o be a mat er i al par t i ci pant i f he or
she spends mor e t han 500 hour s i n t he act i vi t y.

*a. Tr ue
b. Fal se


1299. Di ck par t i ci pat es i n an act i vi t y f or 90 hour s dur i ng t he year . He
has no empl oyees and t her e ar e no ot her par t i ci pant s. Di ck i s a
mat er i al par t i ci pant .

*a. Tr ue
b. Fal se


1300. Mar y J ane par t i ci pat es f or 100 hour s dur i ng t he year i n an
act i vi t y she owns. She has no empl oyees and i s t he onl y par t i ci pant i n
t he act i vi t y. The act i vi t y i s a si gni f i cant par t i ci pat i on act i vi t y.

a. Tr ue
*b. Fal se


1301. A t axpayer i s consi der ed t o be a mat er i al par t i ci pant i n a
si gni f i cant par t i ci pat i on act i vi t y i f he or she spends at l east 400
hour s i n t he act i vi t y.

a. Tr ue
*b. Fal se


1302. Tompar t i ci pat es f or 300 hour s i n Act i vi t y A and 250 hour s i n
Act i vi t y B, bot h of whi ch ar e nonr ent al busi nesses. Bot h act i vi t i es ar e
act i ve.

*a. Tr ue
b. Fal se


1303. Tompar t i ci pat es f or 100 hour s i n Act i vi t y A and 450 hour s i n
Act i vi t y B, bot h of whi ch ar e nonr ent al busi nesses. Bot h act i vi t i es ar e
act i ve.

a. Tr ue
*b. Fal se


1304. Fr omJ anuar y t hr ough November , Ver n par t i ci pat ed f or 420 hour s as
a sal esman i n a par t ner shi p i n whi ch he owns a 50%i nt er est . The
par t ner shi p has f our f ul l - t i me empl oyees. Dur i ng December , Ver n spends
110 hour s cl eani ng t he st or e and pai nt i ng t he wal l s i n or der t o meet
t he mat er i al par t i ci pat i on st andar ds. Ver n qual i f i es as a mat er i al
par t i ci pant .

a. Tr ue
*b. Fal se


1305. J oyce owns an act i vi t y ( not r eal est at e) i n whi ch she
par t i ci pat es f or 100 hour s a year ; her husband par t i ci pat es f or 450
hour s. J oyce qual i f i es as a mat er i al par t i ci pant .

*a. Tr ue
b. Fal se


1306. When det er mi ni ng whet her an i ndi vi dual i s a mat er i al par t i ci pant ,
par t i ci pat i on by an owner s spouse gener al l y count s.

*a. Tr ue
b. Fal se


1307. I f an owner par t i ci pat es f or mor e t han 500 hour s i n a DVD r ent al
act i vi t y, any l oss f r omt hat act i vi t y i s t r eat ed as an act i ve l oss t hat
can of f set act i ve i ncome.

*a. Tr ue
b. Fal se


1308. Br uce owns a smal l apar t ment bui l di ng t hat pr oduces a $25, 000
l oss dur i ng t he year . Hi s AGI bef or e consi der i ng t he r ent al l oss i s
$85, 000. Br uce must be a mat er i al par t i ci pant wi t h r espect t o t he
r ent al act i vi t y i n or der t o deduct t he $25, 000 l oss under t he r eal
est at e r ent al except i on.

a. Tr ue
*b. Fal se


1309. Wayne owns a smal l apar t ment bui l di ng t hat pr oduces a $45, 000
l oss dur i ng t he year . Hi s AGI bef or e consi der i ng t he r ent al l oss i s
$85, 000. Because Wayne i s an act i ve par t i ci pant wi t h r espect t o t he
r ent al act i vi t y, he may deduct t he $45, 000 l oss.

a. Tr ue
*b. Fal se


1310. Ser vi ces per f or med by an empl oyee ar e t r eat ed as bei ng r el at ed t o
a r eal est at e t r ade or busi ness i f t he empl oyee per f or mi ng t he ser vi ces
has mor e t han a 5%owner shi p i nt er est i n t he empl oyer .

*a. Tr ue
b. Fal se


1311. I n t he cur r ent year , Kel l y had a $35, 000 l oss f r oma r eal est at e
r ent al act i vi t y i n whi ch she i s a 10%owner . I f she i s an act i ve
par t i ci pant and i f her modi f i ed AGI i s $100, 000, she can deduct $25, 000
of t he l oss.

*a. Tr ue
b. Fal se


1312. I ndi vi dual s can deduct f r omact i ve or por t f ol i o i ncome l osses of
up t o $25, 000 f r omr eal est at e r ent al act i vi t i es i n whi ch t hey act i vel y
par t i ci pat e.

*a. Tr ue
b. Fal se


1313. I ndi vi dual s wi t h modi f i ed AGI of $100, 000 can deduct agai nst
act i ve or por t f ol i o i ncome l osses of up t o $25, 000 f r omr eal est at e
r ent al act i vi t i es i n whi ch t hey act i vel y par t i ci pat e.

*a. Tr ue
b. Fal se


1314. Roger owns and act i vel y par t i ci pat es i n t he oper at i ons of an
apar t ment bui l di ng whi ch pr oduces a $40, 000 l oss dur i ng t he year . He
has AGI of $150, 000 f r oman act i ve busi ness. He may deduct $25, 000 of
t he l oss.

a. Tr ue
*b. Fal se


1315. Lucy owns and act i vel y par t i ci pat es i n t he oper at i ons of an
apar t ment compl ex t hat pr oduces a $50, 000 l oss dur i ng t he year . Her
modi f i ed AGI i s $125, 000 f r oman act i ve busi ness. Di sr egar di ng any at -
r i sk amount l i mi t at i on, she may deduct $25, 000 of t he l oss, and t he
r emai ni ng $25, 000 i s a suspended passi ve l oss.

a. Tr ue
*b. Fal se


1316. Ki mdi es owni ng a passi ve act i vi t y wi t h a basi s of $75, 000, a
f ai r mar ket val ue of $140, 000, and suspended l osses of $80, 000. Al l of
t he $80, 000 passi ve l oss can be deduct ed on Ki m s f i nal i ncome t ax
r et ur n.

a. Tr ue
*b. Fal se


1317. Chr i s r ecei ves a gi f t of a passi ve act i vi t y f r omhi s f at her whose
basi s was $60, 000. Suspended l osses r el at ed t o t he act i vi t y ar e $18, 000.
Chr i s wi l l be al l owed t o of f set t he $18, 000 suspended l osses agai nst
f ut ur e passi ve i ncome.

a. Tr ue
*b. Fal se


1318. Er i c makes an i nst al l ment sal e of a passi ve act i vi t y havi ng
suspended l osses of $40, 000. He col l ect s 25%of t he sal es pr i ce i n t he
cur r ent year , and wi l l col l ect 25%i n each of t he next t hr ee year s.
Er i c can deduct $10, 000 of t he passi ve l oss t hi s year .

*a. Tr ue
b. Fal se


1319. Gai l exchanges passi ve Act i vi t y A, whi ch has suspended l osses of
$15, 000, f or passi ve Act i vi t y B i n a nont axabl e exchange. The new owner
of passi ve Act i vi t y A can of f set t he $15, 000 suspended l osses agai nst
passi ve i ncome i n t he f ut ur e.

a. Tr ue
*b. Fal se


1320. Davi d ear ned i nvest ment i ncome of $20, 000, i ncur r ed i nvest ment
i nt er est expense of $12, 000, and ot her i nvest ment expenses of $9, 000
dur i ng t he cur r ent year . Davi d can deduct $12, 000 of i nvest ment
i nt er est f or t hi s year .

a. Tr ue
*b. Fal se


1321. I nvest ment i ncome can i ncl ude gr oss i ncome f r omi nt er est ,
di vi dends, annui t i es, and r oyal t i es not der i ved i n t he or di nar y cour se
of a t r ade or busi ness; i ncome f r oma passi ve act i vi t y; and i ncome f r om
a r eal est at e act i vi t y i n whi ch t he t axpayer act i vel y par t i ci pat es.

a. Tr ue
*b. Fal se


1322. Bob r eal i zed a l ong- t er mcapi t al gai n of $8, 000. I n cal cul at i ng
hi s net i nvest ment i ncome, Bob may el ect t o i ncl ude t he gai n i n
i nvest ment i ncome.

*a. Tr ue
b. Fal se


1323. Har r y ear ned i nvest ment i ncome of $18, 500, i ncur r ed i nvest ment
i nt er est expense of $15, 500, and ot her i nvest ment expenses of $9, 000
dur i ng t he cur r ent year . Har r y may deduct $9, 500 of i nvest ment i nt er est
expense t hi s year and car r y f or war d $6, 000 t o f ut ur e year s.

*a. Tr ue
b. Fal se


1324. I n 2013, Ar nol d i nvest s $80, 000 f or a 20%i nt er est i n a
par t ner shi p i n whi ch he i s a mat er i al par t i ci pant . The par t ner shi p
i ncur s a l oss wi t h $100, 000 bei ng Ar nol d s shar e. Whi ch of t he
f ol l owi ng st at ement s i s incorrect?

a. Si nce Ar nol d has onl y $80, 000 of capi t al at r i sk, he cannot
deduct any mor e t han t hi s amount agai nst hi s ot her i ncome.
b. Ar nol d s nondeduct i bl e l oss of $20, 000 can be car r i ed over and
used i n f ut ur e year s ( subj ect t o t he at - r i sk pr ovi si ons) .
c. I f Ar nol d has t axabl e i ncome of $40, 000 f r omt he par t ner shi p
i n 2014 and t her e ar e no ot her t r ansact i ons t hat af f ect hi s at -
r i sk amount , he can use al l of t he $20, 000 l oss car r i ed over f r om
2013.
*d. Ar nol d s $100, 000 l oss i s nondeduct i bl e i n 2013 and 2014
under t he passi ve l oss pr ovi si ons.
e. Al l of t he st at ement s ar e cor r ect .


1325. Last year , Ted i nvest ed $100, 000 f or a 50%i nt er est i n a
par t ner shi p i n whi ch he was a mat er i al par t i ci pant . The par t ner shi p
i ncur r ed a l oss, and Ted s shar e was $150, 000. Whi ch of t he f ol l owi ng
st at ement s i s incorrect?

a. Ted s nondeduct i bl e l oss of $50, 000 can be car r i ed over and
used i n t he f ut ur e ( subj ect t o t he at - r i sk pr ovi si ons) .
b. I f Ted has t axabl e i ncome of $50, 000 f r omt he par t ner shi p i n
t he cur r ent year and no ot her t r ansact i ons t hat af f ect hi s at -
r i sk amount , he can use al l of t he $50, 000 l oss car r i ed over .
c. Si nce Ted has onl y $100, 000 of capi t al at r i sk, he cannot
deduct mor e t han $100, 000 agai nst hi s ot her i ncome.
*d. None of t he above i s i ncor r ect .


1326. I n 2013, J oanne i nvest ed $90, 000 f or a 20%i nt er est i n a l i mi t ed
l i abi l i t y company ( LLC) i n whi ch she i s a mat er i al par t i ci pant . The
LLC r epor t ed l osses of $340, 000 i n 2013 and $180, 000 i n 2014. J oanne s
shar e of t he LLC s l osses was $68, 000 i n 2013 and $36, 000 i n 2014. How
much of t hese l osses can J oanne deduct ?

a. $68, 000 i n 2013; $36, 000 i n 2014.
*b. $68, 000 i n 2013; $22, 000 i n 2014.
c. $0 i n 2013; $0 i n 2014.
d. $68, 000 i n 2013; $0 i n 2014.
e. None of t he above.


1327. I n 2013, Ki pp i nvest ed $65, 000 f or a 30%i nt er est i n a
par t ner shi p conduct i ng a passi ve act i vi t y. The par t ner shi p r epor t ed
l osses of $200, 000 i n 2013 and $100, 000 i n 2014, Ki pp s shar e bei ng
$60, 000 i n 2013 and $30, 000 i n 2014. How much of t he l osses f r omt he
par t ner shi p can Ki pp deduct assumi ng he owns no ot her i nvest ment s and
does not par t i ci pat e i n t he par t ner shi p s oper at i ons?

a. $0 i n 2013; $30, 000 i n 2014.
b. $60, 000 i n 2013; $30, 000 i n 2014.
c. $60, 000 i n 2013; $5, 000 i n 2014.
d. $60, 000 i n 2013; $0 i n 2014.
*e. None of t he above.


1328. J osh has i nvest ment s i n t wo passi ve act i vi t i es. Act i vi t y A
( acqui r ed t hr ee year s ago) pr oduces i ncome of $30, 000 t hi s year , whi l e
Act i vi t y B ( acqui r ed t wo year s ago) pr oduces a l oss of $50, 000. What
i s t he amount of J osh s suspended l oss f or t he year ?

a. $0.
b. $18, 000.
*c. $20, 000.
d. $50, 000.
e. None of t he above.


1329. Car l , a physi ci an, ear ns $200, 000 f r omhi s medi cal pr act i ce i n
t he cur r ent year . He r ecei ves $45, 000 i n di vi dends and i nt er est dur i ng
t he year as wel l as $5, 000 of i ncome f r oma passi ve act i vi t y. I n
addi t i on, he i ncur s a l oss of $50, 000 f r oman i nvest ment i n a passi ve
act i vi t y. What i s Car l s AGI f or t he cur r ent year af t er consi der i ng t he
passi ve i nvest ment ?

a. $195, 000.
b. $200, 000.
c. $240, 000.
*d. $245, 000.
e. None of t he above.


1330. Nel l sel l s a passi ve act i vi t y wi t h an adj ust ed basi s of $45, 000
f or $105, 000. Suspended l osses at t r i but abl e t o t hi s pr oper t y t ot al
$45, 000. The t ot al gai n and t he t axabl e gai n ar e:

a. $60, 000 t ot al gai n; $105, 000 t axabl e gai n.
b. $10, 000 t ot al gai n; $15, 000 t axabl e gai n.
c. $60, 000 t ot al gai n; $0 t axabl e gai n.
*d. $60, 000 t ot al gai n; $15, 000 t axabl e gai n.
e. None of t he above.


1331. Mat t has t hr ee passi ve act i vi t i es and has at - r i sk amount s i n
excess of $100, 000 f or each. Dur i ng t he year , t he act i vi t i es pr oduced
t he f ol l owi ng i ncome ( l osses) .

Activity A ($60,000)
Activity B (40,000)
Activity C 75
,000
Net passive loss ($25,000)


Matts suspended losses are as follows:

a. $25, 000 i s al l ocat ed t o C; $0 t o A and B.
b. $12, 500 i s al l ocat ed t o A; $12, 500 t o B.
*c. $15, 000 i s al l ocat ed t o A; $10, 000 t o B.
d. $8, 333 i s al l ocat ed t o A, B, and C.
e. None of t he above.


1332. Gr een Cor por at i on ear ns act i ve i ncome of $50, 000 and r ecei ves
$40, 000 i n di vi dends dur i ng t he year . I n addi t i on, Gr een i ncur s a l oss
of $70, 000 f r oman i nvest ment i n a passi ve act i vi t y acqui r ed sever al
year s ago. Consi der t he f ol l owi ng t wo st at ement s:

(1) Greens current deduction for passive
losses is $50,000 if it is a closely held C
corporation that is not a personal service
corporation.

(2) Greens current deduction for passive
losses is $0 if it is a personal service
corporation.


Which of the following answers is correct?

a. Onl y st at ement 1.
b. Onl y st at ement 2.
*c. Bot h st at ement s 1 and 2.
d. Nei t her st at ement 1 or 2.
e. None of t he above.


1333. Whi t e Cor por at i on, a cl osel y hel d per sonal ser vi ce cor por at i on,
has $150, 000 of passi ve l osses, $120, 000 of act i ve busi ness i ncome, and
$30, 000 of por t f ol i o i ncome. How much of t he passi ve l oss can Whi t e
Cor por at i on deduct ?

*a. $0.
b. $30, 000.
c. $120, 000.
d. $150, 000.
e. None of t he above.


1334. Char l es owns a busi ness wi t h t wo separ at e depar t ment s. Depar t ment
A pr oduces $100, 000 of i ncome and Depar t ment B i ncur s a $60, 000 l oss.
Char l es par t i ci pat es f or 550 hour s i n Depar t ment A and 100 hour s i n
Depar t ment B. He has f ul l - t i me empl oyees i n bot h depar t ment s.

a. I f Char l es el ect s t o t r eat bot h depar t ment s as a si ngl e
act i vi t y, he cannot of f set t he $60, 000 l oss agai nst t he $100, 000
i ncome.
b. Char l es may not t r eat Depar t ment A and Depar t ment B as
separ at e act i vi t i es because t hey ar e par t s of one busi ness.
c. I f Char l es el ect s t o t r eat t he t wo depar t ment s as separ at e
act i vi t i es, he can of f set t he $60, 000 l oss agai nst t he $100, 000
i ncome.
*d. I f Char l es el ect s t o t r eat bot h depar t ment s as a si ngl e
act i vi t y, he can of f set t he $60, 000 l oss agai nst t he $100, 000
i ncome.
e. None of t he above.


1335. Tar a owns a shoe st or e and a bookst or e. Bot h busi nesses ar e
oper at ed i n a mal l . She al so owns a r est aur ant acr oss t he st r eet and a
j ewel r y st or e sever al bl ocks away.

*a. Al l f our busi nesses can be t r eat ed as a si ngl e act i vi t y i f
Tar a el ect s t o do so.
b. Onl y t he shoe st or e and bookst or e can be t r eat ed as a si ngl e
act i vi t y, t he r est aur ant must be t r eat ed as a separ at e act i vi t y,
and t he j ewel r y st or e must be t r eat ed as a separ at e act i vi t y.
c. The shoe st or e, bookst or e, and r est aur ant can be t r eat ed as a
si ngl e act i vi t y, and t he j ewel r y st or e must be t r eat ed as a
separ at e act i vi t y.
d. Al l f our busi nesses must be t r eat ed as separ at e act i vi t i es.
e. None of t he above.


1336. Whi ch of t he f ol l owi ng f act or s shoul d be consi der ed i n
det er mi ni ng whet her an act i vi t y i s t r eat ed as an appr opr i at e economi c
uni t ?

a. The si mi l ar i t i es and di f f er ences i n t ypes of busi ness.
b. The ext ent of common cont r ol .
c. The ext ent of common owner shi p.
d. The geogr aphi c l ocat i on.
*e. Al l of t he above.


1337. Whi ch of t he f ol l owi ng i s not a f act or t hat shoul d be consi der ed
i n det er mi ni ng whet her an act i vi t y i s t r eat ed as an appr opr i at e
economi c uni t ?

a. The i nt er dependenci es bet ween t he act i vi t i es.
b. The ext ent of common cont r ol .
c. The ext ent of common owner shi p.
d. The geogr aphi cal l ocat i on.
*e. Al l of t he above ar e r el evant f act or s.


1338. Tess owns a bui l di ng i n whi ch she r ent s apar t ment s t o t enant s and
oper at es a r est aur ant . Whi ch of t he f ol l owi ng st at ement s i s incorrect?

a. I f 60%of Tess s gr oss i ncome i s f r omapar t ment r ent al s and
40%i s f r omt he r est aur ant , t he r ent al oper at i on and t he
r est aur ant busi ness must be t r eat ed as separ at e act i vi t i es.
b. I f 95%of Tess s gr oss i ncome i s f r omapar t ment r ent al s and 5%
i s f r omt he r est aur ant , she may t r eat t he r ent al oper at i on and
t he r est aur ant busi ness as a si ngl e act i vi t y t hat is a r ent al
act i vi t y.
c. I f 5%of Tess s gr oss i ncome i s f r omapar t ment r ent al s and 95%
i s f r omt he r est aur ant , she may t r eat t he r ent al oper at i on and
t he r est aur ant busi ness as a si ngl e act i vi t y t hat is not a r ent al
act i vi t y.
*d. I f 98%of Tess s gr oss i ncome i s f r omapar t ment r ent al s and
2%i s f r omt he r est aur ant , t he r ent al oper at i on and t he
r est aur ant busi ness must be t r eat ed as a si ngl e act i vi t y t hat is
not a r ent al act i vi t y.
e. None of t he above.


1339. Ri ck, a comput er consul t ant , owns a separ at e busi ness ( not r eal
est at e) i n whi ch he par t i ci pat es. He has one empl oyee who wor ks par t -
t i me i n t he busi ness.

a. I f Ri ck par t i ci pat es f or 500 hour s and t he empl oyee
par t i ci pat es f or 620 hour s dur i ng t he year , Ri ck qual i f i es as a
mat er i al par t i ci pant .
*b. I f Ri ck par t i ci pat es f or 550 hour s and t he empl oyee
par t i ci pat es f or 2, 000 hour s dur i ng t he year , Ri ck qual i f i es as a
mat er i al par t i ci pant .
c. I f Ri ck par t i ci pat es f or 120 hour s and t he empl oyee
par t i ci pat es f or 120 hour s dur i ng t he year , Ri ck does not qual i f y
as a mat er i al par t i ci pant .
d. I f Ri ck par t i ci pat es f or 95 hour s and t he empl oyee
par t i ci pat es f or 5 hour s dur i ng t he year , Ri ck pr obabl y does not
qual i f y as a mat er i al par t i ci pant .
e. None of t he above.


1340. Ned, a col l ege pr of essor , owns a separ at e busi ness ( not r eal
est at e) i n whi ch he par t i ci pat es i n t he cur r ent year . He has one
empl oyee who wor ks par t - t i me i n t he busi ness.

a. I f Ned par t i ci pat es f or 120 hour s and t he empl oyee
par t i ci pat es f or 120 hour s dur i ng t he year , Ned does not qual i f y
as a mat er i al par t i ci pant .
b. I f Ned par t i ci pat es f or 95 hour s and t he empl oyee par t i ci pat es
f or 5 hour s dur i ng t he year , Ned pr obabl y does not qual i f y as
mat er i al par t i ci pant .
c. I f Ned par t i ci pat es f or 500 hour s and t he empl oyee
par t i ci pat es f or 520 hour s dur i ng t he year , Ned qual i f i es as
mat er i al par t i ci pant .
*d. I f Ned par t i ci pat es f or 600 hour s and t he empl oyee
par t i ci pat es f or 2, 000 hour s dur i ng t he year , Ned qual i f i es as a
mat er i al par t i ci pant .
e. None of t he above.


1341. Ahmad owns f our act i vi t i es. He par t i ci pat ed f or 120 hour s i n
Act i vi t y A, 150 hour s i n Act i vi t y B, 140 hour s i n Act i vi t y C, and 100
hour s i n Act i vi t y D. Whi ch of t he f ol l owi ng st at ement s i s correct?

a. Act i vi t i es A, B, C, and D ar e al l si gni f i cant par t i ci pat i on
act i vi t i es.
*b. Act i vi t i es A, B, and C ar e si gni f i cant par t i ci pat i on
act i vi t i es.
c. Ahmad i s a mat er i al par t i ci pant wi t h r espect t o Act i vi t i es A,
B, and C.
d. Ahmad i s a mat er i al par t i ci pant wi t h r espect t o Act i vi t i es A,
B, C, and D.
e. None of t he above.


1342. Paul a owns f our separ at e act i vi t i es. She el ect s not t o gr oup t hem
t oget her as a si ngl e act i vi t y under t he appr opr i at e economi c uni t
st andar d. Paul a par t i ci pat es f or 130 hour s i n Act i vi t y A, 115 hour s i n
Act i vi t y B, 260 hour s i n Act i vi t y C, and 100 hour s i n Act i vi t y D. She
has one empl oyee, who wor ks 125 hour s i n Act i vi t y D. Whi ch of t he
f ol l owi ng st at ement s i s correct?

a. Act i vi t i es A, B, C, and D ar e al l si gni f i cant par t i ci pat i on
act i vi t i es.
b. Paul a i s a mat er i al par t i ci pant wi t h r espect t o Act i vi t i es A,
B, C, and D.
c. Paul a i s not a mat er i al par t i ci pant wi t h r espect t o Act i vi t i es
A, B, C, and D.
d. Losses f r omal l of t he act i vi t i es can be used t o of f set
Paul a s act i ve i ncome.
*e. None of t he above.


1343. Dena owns i nt er est s i n f i ve busi nesses and has f ul l - t i me
empl oyees i n each busi ness. She par t i ci pat es f or 100 hour s i n Act i vi t y
A, 120 hour s i n Act i vi t y B, 130 hour s i n Act i vi t y C, 140 hour s i n
Act i vi t y D, and 125 hour s i n Act i vi t y E.

a. Al l f i ve of Dena s act i vi t i es ar e si gni f i cant par t i ci pat i on
act i vi t i es.
b. Dena i s a mat er i al par t i ci pant wi t h r espect t o al l f i ve
act i vi t i es.
c. Dena i s not a mat er i al par t i ci pant i n any of t he act i vi t i es.
*d. Dena i s a mat er i al par t i ci pant wi t h r espect t o Act i vi t i es B,
C, D, and E.
e. None of t he above.


1344. Mar i a, who owns a 50%i nt er est i n a r est aur ant , has been a
mat er i al par t i ci pant i n t he r est aur ant act i vi t y f or t he l ast 20 year s.
She r et i r ed f r omt he r est aur ant at t he end of l ast year and wi l l not
par t i ci pat e i n t he r est aur ant act i vi t y i n t he f ut ur e. However , she
cont i nues t o be a mat er i al par t i ci pant i n a r et ai l st or e i n whi ch she
i s a 50%par t ner . The r est aur ant oper at i ons pr oduce a l oss f or t he
cur r ent year , and Mar i a s shar e of t he l oss i s $80, 000. Her shar e of
t he i ncome f r omt he r et ai l st or e i s $150, 000. She does not own
i nt er est s i n any ot her act i vi t i es.

a. Mar i a cannot deduct t he $80, 000 l oss f r omt he r est aur ant
because she i s not a mat er i al par t i ci pant .
*b. Mar i a can of f set t he $80, 000 l oss agai nst t he $150, 000 of
i ncome f r omt he r et ai l st or e.
c. Mar i a wi l l not be abl e t o deduct any l osses f r omt he
r est aur ant unt i l she has been r et i r ed f or at l east t hr ee year s.
d. Assumi ng Mar i a cont i nues t o hol d t he i nt er est i n t he
r est aur ant , she wi l l al ways t r eat t he l osses as act i ve.
e. None of t he above.


1345. Lei gh, who owns a 50%i nt er est i n a spor t i ng goods st or e, was a
mat er i al par t i ci pant i n t he act i vi t y f or t he l ast f i f t een year s. She
r et i r ed f r omt he spor t i ng goods st or e at t he end of l ast year and wi l l
not par t i ci pat e i n t he act i vi t y i n t he f ut ur e. However , she cont i nues
t o be a mat er i al par t i ci pant i n an of f i ce suppl y st or e i n whi ch she i s
a 50%par t ner . The oper at i ons of t he spor t i ng goods st or e r esul t ed i n a
l oss f or t he cur r ent year and Lei gh s shar e of t he l oss i s $40, 000.
Lei gh s shar e of t he i ncome f r omt he of f i ce suppl y st or e i s $75, 000.
She does not own i nt er est s i n any ot her act i vi t i es.

a. Lei gh cannot deduct t he $40, 000 l oss f r omt he spor t i ng goods
st or e because she i s not a mat er i al par t i ci pant .
*b. Lei gh can of f set t he $40, 000 l oss f r omt he spor t i ng goods
st or e agai nst t he $75, 000 of i ncome f r omt he of f i ce suppl y st or e.
c. Lei gh wi l l not be abl e t o deduct any l osses f r omt he spor t i ng
goods st or e unt i l f ut ur e year s.
d. Lei gh wi l l not be abl e t o deduct any l osses f r omt he spor t i ng
goods st or e unt i l she has been r et i r ed f or at l east f our year s.
e. None of t he above.


1346. J ed spends 32 hour s a week, 50 weeks a year , oper at i ng a DVD
r ent al st or e t hat he owns. He al so owns a musi c st or e i n anot her ci t y
t hat i s oper at ed by a f ul l - t i me empl oyee. He el ect s not t o gr oup t hem
t oget her as a si ngl e act i vi t y under t he appr opr i at e economi c uni t
st andar d. J ed spends 40 hour s per year wor ki ng at t he musi c st or e.

a. Nei t her st or e i s a passi ve act i vi t y.
b. Bot h st or es ar e passi ve act i vi t i es.
c. Onl y t he DVD r ent al st or e i s a passi ve act i vi t y.
*d. Onl y t he musi c st or e i s a passi ve act i vi t y.
e. None of t he above.


1347. J enny spends 32 hour s a week, 50 weeks a year , oper at i ng a DVD
r ent al st or e t hat she owns. She al so owns a musi c st or e i n anot her ci t y
t hat i s oper at ed by a f ul l - t i me empl oyee. J enny spends 140 hour s per
year wor ki ng at t he musi c st or e. She el ect s not t o gr oup t hemt oget her
as a si ngl e act i vi t y under t he appr opr i at e economi c uni t st andar d.

*a. Nei t her st or e i s a passi ve act i vi t y.
b. Bot h st or es ar e passi ve act i vi t i es.
c. Onl y t he DVD r ent al st or e i s a passi ve act i vi t y.
d. Onl y t he musi c st or e i s a passi ve act i vi t y.
e. None of t he above.


1348. Skeet er i nvest s i n vacant l and f or t he pur pose of r eal i zi ng a
pr of i t on i t s appr eci at i on. He l eases t he l and dur i ng t he per i od he
hol ds i t . The unadj ust ed basi s of t he pr oper t y i s $75, 000 and i t s f ai r
mar ket val ue i s $105, 000. The l ease payment s ar e $1, 200 per year .

a. The l easi ng act i vi t y wi l l be t r eat ed as a r ent al act i vi t y and
wi l l be t r eat ed as a passi ve act i vi t y r egar dl ess of how many
hour s Skeet er par t i ci pat es.
b. The l easi ng act i vi t y wi l l be t r eat ed as a r ent al act i vi t y and
wi l l not be t r eat ed as a passi ve act i vi t y i f Skeet er qual i f i es as
a r eal est at e pr of essi onal .
*c. The l easi ng act i vi t y wi l l not be t r eat ed as a r ent al act i vi t y.
d. The l easi ng act i vi t y wi l l be t r eat ed as a r ent al act i vi t y and
wi l l not be t r eat ed as a passi ve act i vi t y i f Skeet er devot es mor e
t han 500 hour s t o t he act i vi t y.
e. None of t he above.


1349. J osh has i nvest ment s i n t wo passi ve act i vi t i es. Act i vi t y A,
acqui r ed t hr ee year s ago, pr oduces i ncome i n t he cur r ent year of
$60, 000. Act i vi t y B, acqui r ed l ast year , pr oduces a l oss of $100, 000 i n
t he cur r ent year . At t he begi nni ng of t hi s year , J osh s at - r i sk amount s
i n Act i vi t i es A and B ar e $10, 000 and $100, 000, r espect i vel y. What i s
t he amount of J osh s suspended passi ve l oss wi t h r espect t o t hese
act i vi t i es at t he end of t he cur r ent year ?

a. $0.
b. $36, 000.
*c. $40, 000.
d. $100, 000.
e. None of t he above.


1350. Sandr a acqui r ed a passi ve act i vi t y t hr ee year s ago. Unt i l l ast
year , t he act i vi t y was pr of i t abl e and her at - r i sk amount was $300, 000.
Last year , t he act i vi t y pr oduced a l oss of $100, 000, and i n t he cur r ent
year , t he l oss i s $50, 000. Assumi ng Sandr a has r ecei ved no passi ve
i ncome i n t he cur r ent or pr i or year s, her suspended passi ve l oss f r om
t he act i vi t y i s:

a. $90, 000 f r oml ast year and $50, 000 f r omt he cur r ent year .
*b. $100, 000 f r oml ast year and $50, 000 f r omt he cur r ent year .
c. $0 f r oml ast year and $0 f r omt he cur r ent year .
d. $50, 000 f r omt he cur r ent year .
e. None of t he above.


1351. Ri t a ear ns a sal ar y of $150, 000, and i nvest s $40, 000 f or a 20%
i nt er est i n a passi ve act i vi t y. Oper at i ons of t he act i vi t y r esul t i n a
l oss of $250, 000, of whi ch Ri t a s shar e i s $50, 000. How i s her l oss
char act er i zed?

*a. $40, 000 i s suspended under t he passi ve l oss r ul es and $10, 000
i s suspended under t he at - r i sk r ul es.
b. $40, 000 i s suspended under t he at - r i sk r ul es and $10, 000 i s
suspended under t he passi ve l oss r ul es.
c. $50, 000 i s suspended under t he passi ve l oss r ul es.
d. $50, 000 i s suspended under t he at - r i sk r ul es.
e. None of t he above.


1352. Ar t s at - r i sk amount i n a passi ve act i vi t y was $60, 000 at t he
begi nni ng of 2012. Hi s l oss f r omt he act i vi t y i n 2012 i s $80, 000, and
he had no passi ve act i vi t y i ncome dur i ng t he year . Ar t had $20, 000 of
passi ve i ncome f r omt he act i vi t y i n 2013. Under t he passi ve l oss r ul es,
Ar t s suspended l oss at t he end of 2013 i s:

a. $15, 000.
b. $20, 000.
c. $45, 000.
*d. $60, 000.
e. None of t he above.


1353. Vi c s at - r i sk amount i n a passi ve act i vi t y i s $200, 000 at t he
begi nni ng of t he cur r ent year . Hi s cur r ent l oss f r omt he act i vi t y i s
$80, 000. Vi c had no passi ve act i vi t y i ncome dur i ng t he year . At t he end
of t he cur r ent year :

*a. Vi c has an at - r i sk amount i n t he act i vi t y of $120, 000 and a
suspended passi ve l oss of $80, 000.
b. Vi c has an at - r i sk amount i n t he act i vi t y of $200, 000 and a
suspended passi ve l oss of $80, 000.
c. Vi c has an at - r i sk amount i n t he act i vi t y of $120, 000 and no
suspended passi ve l oss.
d. Vi c has an at - r i sk amount i n t he act i vi t y of $200, 000 and no
suspended passi ve l oss.
e. None of t he above.


1354. Wes s at - r i sk amount i n a passi ve act i vi t y i s $25, 000 at t he
begi nni ng of t he cur r ent year . Hi s cur r ent l oss f r omt he act i vi t y i s
$35, 000 and he has no passi ve act i vi t y i ncome. At t he end of t he
cur r ent year , whi ch of t he f ol l owi ng st at ement s i s incorrect?

a. Wes has a l oss of $25, 000 suspended under t he passi ve l oss
r ul es.
b. Wes has an at - r i sk amount i n t he act i vi t y of $0.
c. Wes has a l oss of $10, 000 suspended under t he at - r i sk r ul es.
*d. Wes has a l oss of $35, 000 suspended under t he passi ve l oss
r ul es.
e. None of t he above i s i ncor r ect .


1355. J on owns an apar t ment bui l di ng i n whi ch he i s a mat er i al
par t i ci pant and a comput er consul t i ng busi ness. Of t he 2, 000 hour s he
spends on t hese act i vi t i es dur i ng t he year , 55%of t he t i me i s spent
oper at i ng t he apar t ment bui l di ng and 45%of t he t i me i s spent i n t he
comput er consul t i ng busi ness.

a. The comput er consul t i ng busi ness i s a passi ve act i vi t y but t he
apar t ment bui l di ng i s not .
b. The apar t ment bui l di ng i s a passi ve act i vi t y but t he comput er
consul t i ng busi ness i s not .
c. Bot h t he apar t ment bui l di ng and t he comput er consul t i ng
busi ness ar e passi ve act i vi t i es.
*d. Nei t her t he apar t ment bui l di ng nor t he comput er consul t i ng
busi ness i s a passi ve act i vi t y.
e. None of t he above.


1356. Consi der t he f ol l owi ng t hr ee st at ement s:

(1) Tad invests in vacant land for the purpose of
realizing a profit on its appreciation. He
leases the land during the period he holds
it. The unadjusted basis of the property is
$25,000 and its fair market value is $35,000.
The lease payments are $400 per year.

(2) A farmer owns land with an unadjusted basis
of $25,000 and a fair market value of
$35,000. He used it for farming purposes in
the two prior years. In the current year, he
leases the land to another farmer for $400.

(3) At City Hospital, each inpatient is provided
a private room while medical care is
provided.


In which of the three cases above could the rental activity automatically
be considered a passive activity?

a. Case 1 onl y.
b. Case 2 onl y.
c. Case 3 onl y.
d. Cases 1, 2, and 3.
*e. None of t he above.


1357. Pabl o, who i s si ngl e, has $95, 000 of sal ar y, $10, 000 of i ncome
f r oma l i mi t ed par t ner shi p, and a $27, 000 passi ve l oss f r oma r eal
est at e r ent al act i vi t y i n whi ch he act i vel y par t i ci pat es. Hi s modi f i ed
adj ust ed gr oss i ncome i s $95, 000. Of t he $27, 000 l oss, how much i s
deduct i bl e?

a. $0.
b. $10, 000.
c. $25, 000.
*d. $27, 000.
e. None of t he above.


1358. J osi e, an unmar r i ed t axpayer , has $155, 000 i n sal ar y, $10, 000 i n
i ncome f r oma l i mi t ed par t ner shi p, and a $26, 000 passi ve l oss f r oma
r eal est at e r ent al act i vi t y i n whi ch she act i vel y par t i ci pat es. I f her
modi f i ed adj ust ed gr oss i ncome i s $155, 000, how much of t he $26, 000
l oss i s deduct i bl e?

a. $0.
*b. $10, 000.
c. $25, 000.
d. $26, 000.
e. None of t he above.


1359. Kat e di es owni ng a passi ve act i vi t y wi t h an adj ust ed basi s of
$100, 000. I t s f ai r mar ket val ue at t hat dat e i s $130, 000. Suspended
l osses r el at i ng t o t he pr oper t y wer e $45, 000.

*a. The hei r s adj ust ed basi s i s $130, 000, and Kat e s f i nal
deduct i on i s $15, 000.
b. The hei r s adj ust ed basi s i s $130, 000, and Kat e s f i nal
deduct i on i s $45, 000.
c. The hei r s adj ust ed basi s i s $100, 000, and Kat e s f i nal
deduct i on i s $45, 000.
d. The hei r s adj ust ed basi s i s $175, 000, and Kat e has no f i nal
deduct i on.
e. None of t he above.


1360. Car oyl made a gi f t t o Ti mof a passi ve act i vi t y ( adj ust ed basi s
of $50, 000, suspended l osses of $20, 000, and a f ai r mar ket val ue of
$80, 000) . No gi f t t ax r esul t ed f r omt he t r ansf er .

a. Ti m s adj ust ed basi s i s $80, 000, and Ti mcan deduct t he
$20, 000 of suspended l osses i n t he f ut ur e.
b. Ti m s adj ust ed basi s i s $80, 000.
c. Ti m s adj ust ed basi s i s $50, 000, and t he suspended l osses ar e
l ost .
d. Ti m s adj ust ed basi s i s $50, 000, and Ti mcan deduct t he
$20, 000 of suspended l osses i n t he f ut ur e.
*e. None of t he above.


1361. I dent i f y f r omt he l i st bel ow t he t ype of di sposi t i on of a passi ve
act i vi t y wher e t he t axpayer keeps t he suspended l osses of t he di sposed
act i vi t y and ut i l i zes t hemon a subsequent t axabl e di sposi t i on.

a. Di sposi t i on of a passi ve act i vi t y by gi f t .
*b. Nont axabl e exchange of a passi ve act i vi t y.
c. Di sposi t i on of a passi ve act i vi t y at deat h.
d. I nst al l ment sal e of a passi ve act i vi t y.
e. None of t he above.


1362. Raul i s mar r i ed and f i l es a j oi nt t ax r et ur n. Hi s cur r ent
i nvest ment i nt er est expense of $95, 000 i s r el at ed t o a l oan used t o
pur chase a par cel of uni mpr oved l and. I ncome f r omi nvest ment s
[ di vi dends ( not qual i f i ed) and i nt er est ] t ot al $18, 000 and
mi scel l aneous i t emi zed deduct i ons ( af t er adj ust ment f or t he 2%- of - AGI
f l oor ) amount t o $2, 800. I n addi t i on t o t he $1, 400 of i nvest ment
expenses i ncl uded i n mi scel l aneous i t emi zed deduct i ons, Raul pai d
$3, 600 of r eal est at e t axes on t he uni mpr oved l and. He al so has a
$4, 500 net l ong- t er mcapi t al gai n f r omt he sal e of anot her par cel of
uni mpr oved l and. Raul s maximum i nvest ment i nt er est deduct i on f or t he
year i s:

a. $95, 000.
b. $18, 000.
*c. $17, 500.
d. $13, 000.
e. None of t he above.


1363. J udy i ncur r ed $58, 500 of i nt er est expense t hi s year r el at ed t o
her i nvest ment s. Her i nvest ment i ncome i ncl udes $15, 000 of i nt er est ,
$9, 000 of qual i f i ed di vi dends, and a $22, 500 net capi t al gai n on t he
sal e of secur i t i es. The maximum amount of J udy s i nvest ment i nt er est
expense deduct i on f or t he year i s:

a. $15, 000.
b. $24, 000.
c. $37, 500.
*d. $46, 500.
e. None of t he above.


1364. Match the term with the correct response. More than one response
may be correct.Si gni f i cant par t i ci pat i on act i vi t y. At - r i sk
amount . Mat er i al par t i ci pat i on. Ext r aor di nar y per sonal ser vi ces. Act i ve
par t i ci pat i on. One i n whi ch t he i ndi vi dual s par t i ci pat i on equal s mor e
t han 100 hour s dur i ng t he year . No cor r ect choi ce i s gi ven. Taxpayer
devot es t i me aggr egat i ng mor e t han 500 hour s i n al l si gni f i cant
par t i ci pat i on act i vi t i es dur i ng t he year . The use of pr oper t y i s
i nci dent al t o t he r ecei pt of ser vi ces. Par t i ci pat es i n maki ng
management deci si ons i n a si gni f i cant and bonaf i de sense. Taxpayer
devot es t i me i n t he act i vi t y whi ch const i t ut es subst ant i al l y al l of t he
par t i ci pat i on i n t he act i vi t y of al l i ndi vi dual s.

[ a] 1. Si gni f i cant par t i ci pat i on act i vi t y.
[ b] 2. At - r i sk amount .
[ c] 3. Mat er i al par t i ci pat i on.
[ d] 4. Ext r aor di nar y per sonal ser vi ces.
[ e] 5. Act i ve par t i ci pat i on.

a. One i n whi ch t he i ndi vi dual s par t i ci pat i on equal s mor e
t han 100 hour s dur i ng t he year .
b. No cor r ect choi ce i s gi ven.
c. Taxpayer devot es t i me aggr egat i ng mor e t han 500 hour s i n
al l si gni f i cant par t i ci pat i on act i vi t i es dur i ng t he year .
d. The use of pr oper t y i s i nci dent al t o t he r ecei pt of
ser vi ces.
e. Par t i ci pat es i n maki ng management deci si ons i n a
si gni f i cant and bonaf i de sense.
f . Taxpayer devot es t i me i n t he act i vi t y whi ch const i t ut es
subst ant i al l y al l of t he par t i ci pat i on i n t he act i vi t y of al l
i ndi vi dual s.


1365. Match the treatment for the following types of
transactions.Tr eat ment of a di sposi t i on of a passi ve act i vi t y by
gi f t . Tr eat ment of a di sposi t i on of a passi ve act i vi t y at
deat h. Tr eat ment of an i nst al l ment sal e of a passi ve act i vi t y. Tr eat ment
of a nont axabl e exchange of a passi ve act i vi t y. Tr eat ment of a sal e of a
passi ve act i vi t y wher e al l of t he r eal i zed gai n or l oss i s r ecogni zed
cur r ent l y. Tr eat ment of suspended cr edi t s when passi ve act i vi t y i s sol d
at a l oss. The suspended l osses ar e added t o t he basi s of t he pr oper t y.
Suspended l osses ar e al l owed t o t he t axpayer t o t he ext ent t hey exceed
t he amount , i f any, of t he st ep- up i n basi s al l owed. The l osses ar e
al l owed i n t he year s i n whi ch gai n i s r ecogni zed. The t axpayer keeps
t he suspended l osses. Any suspended l osses may be used i n t he cur r ent
year . No cor r ect choi ce i s gi ven. Suspended l osses ar e al l owed t o
of f set t he i ncome f r omt he act i vi t y, ot her passi ve act i vi t i es, or
act i ve i ncome.

[ a] 1. Tr eat ment of a di sposi t i on of a passi ve act i vi t y by
gi f t .
[ b] 2. Tr eat ment of a di sposi t i on of a passi ve act i vi t y at
deat h.
[ c] 3. Tr eat ment of an i nst al l ment sal e of a passi ve act i vi t y.
[ d] 4. Tr eat ment of a nont axabl e exchange of a passi ve
act i vi t y.
[ e] 5. Tr eat ment of a sal e of a passi ve act i vi t y wher e al l of
t he r eal i zed gai n or l oss i s r ecogni zed cur r ent l y.
[ f ] 6. Tr eat ment of suspended cr edi t s when passi ve act i vi t y i s
sol d at a l oss.

a. The suspended l osses ar e added t o t he basi s of t he pr oper t y.
b. Suspended l osses ar e al l owed t o t he t axpayer t o t he ext ent
t hey exceed t he amount , i f any, of t he st ep- up i n basi s al l owed.
c. The l osses ar e al l owed i n t he year s i n whi ch gai n i s
r ecogni zed.
d. The t axpayer keeps t he suspended l osses.
e. Any suspended l osses may be used i n t he cur r ent year .
f . No cor r ect choi ce i s gi ven.
g. Suspended l osses ar e al l owed t o of f set t he i ncome f r omt he
act i vi t y, ot her passi ve act i vi t i es, or act i ve i ncome.


1366. Sar ah pur chased f or $100, 000 a 10%i nt er est i n a busi ness vent ur e
t hat i s not subj ect t o t he passi ve act i vi t y r ul es. Dur i ng t he f i r st
year , her shar e of t he ent i t y s l oss was $120, 000. At t he begi nni ng of
t he second year , t he ent i t y obt ai ned $800, 000 of r ecour se f i nanci ng.
Dur i ng t he second year , Sar ah wi t hdr ew cash of $20, 000, and her shar e
of t he ent i t y s l oss was $25, 000. Cal cul at e t he amount of l oss t hat
Sar ah may cl ai mi n each of t he t wo year s and det er mi ne her at - r i sk
amount at t he end of each year .

Cor r ect Answer :
Initial at-risk
amount
$100,000
Subtract: Deductibl
e first year loss of
$120,000, limited to
at-risk amount of
(100,000)
$100,000
At-risk amount at the
end of first year

$
0
Suspended loss at the
end of first year
$ 20,000

At-risk amount at the
beginning of the
second year
$
0
Add: Share of
recourse debt
80,000
Subtract: Withdrawa
l
(20,000)
Deductible $25,000
second year loss +
$20,000 loss
suspended from prior
year
(45,000)
At-risk amount at the
end of second year
$ 15,000

Suspended loss at the
end of second year
$
0




1367. I n 2013, Emi l y i nvest s $120, 000 i n a l i mi t ed par t ner shi p t hat i s
not a passi ve act i vi t y. Dur i ng 2013, her shar e of t he par t ner shi p l oss
i s $90, 000. I n 2014, her shar e of t he par t ner shi p l oss i s $50, 000. How
much can Emi l y deduct i n 2013 and 2014?

Cor r ect Answer :
Al t hough t he passi ve l oss r ul es do not appl y, t he at - r i sk r ul es l i mi t
Emi l y s deduct i ons. She can deduct $90, 000 i n 2013 and her at - r i sk
amount wi l l be r educed t o $30, 000 ( $120, 000 $90, 000 deduct ed) . She
wi l l be l i mi t ed t o a $30, 000 deduct i on i n 2014 unl ess she i ncr eases her
amount at r i sk. For exampl e, i f Emi l y i nvest s an addi t i onal $20, 000 i n
2014, her at - r i sk amount woul d be $50, 000 ( $30, 000 bal ance + $20, 000
addi t i onal i nvest ment ) , and she woul d be abl e t o deduct t he ent i r e
$50, 000 l oss i n 2014.


1368. I n 2012, Kel l y ear ns a sal ar y of $200, 000 and i nvest s $40, 000 f or
a 20%i nt er est i n a par t ner shi p not subj ect t o t he passi ve l oss
r ul es. Thr ough t he use of $800, 000 of nonr ecour se f i nanci ng, t he
par t ner shi p acqui r es asset s wor t h $1 mi l l i on. The act i vi t y pr oduces a
l oss of $150, 000, of whi ch Kel l y s shar e i s $30, 000. I n 2013, Kel l y s
shar e of t he l oss f r omt he par t ner shi p i s $15, 000. How much of t he
l oss f r omt he par t ner shi p can Kel l y deduct ?

Cor r ect Answer :
Kel l y has $40, 000 at r i sk at t he end of 2012 and can deduct t he $30, 000
l oss i n t hat year . Thi s decr eases hi s at - r i sk