You are on page 1of 33

University of Wisconsin

Parkside

School of Business and


Technology

Dr. R. Zameeruddin

INDIVIDUAL TAXATION, ACCT 305


CORRECT FINAL EXAM

Name _______________________
MULTIPLE CHOICE:

CHAPTER 10

1. Roger is employed as an actuary. For calendar year 2007, he had AGI of $130,000 and paid
the following medical expenses:

Medical insurance premiums $5,300


Doctor and dentist bills for Derrick and Jane (Roger’s parents) 7,900
Doctor and dentist bills for Roger 5,100
Prescribed medicines for Roger 830
Nonprescribed insulin for Roger 960

Derrick and Jane would qualify as Roger’s dependents except that they file a joint return.
Roger’s medical insurance policy does not cover them. Roger filed a claim for $4,800 of his
own expenses with his insurance company in November 2007 and received the
reimbursement in January 2008. What is Roger’s maximum allowable medical expense
deduction for 2007?
a. $9,750.
b. $10,340.
c. $19,130.
d. $20,090.
e. None of the above.

2. Tom is advised by his family physician that he needs back surgery to correct a problem from
his last back surgery. Since Tom is in a wheel chair, he needs his wife, Jean, to accompany
him on his trip to Rochester, Minnesota, for in-patient treatment at the Mayo Clinic which
specializes in this type of surgery. Tom incurred the following costs:

Round-trip airfare ($350 each) $ 700


Jean’s hotel in Rochester for four nights ($95 per night) 380
Jean’s meals while in Rochester 105
Tom’s medical treatment 3,500
Tom’s prescription medicine 600

Compute Tom’s medical expenses for the trip (subject to the 7.5% floor).
a. $4,000.
b. $5,000.
c. $5,180.
d. $5,285.
e. None of the above.

3. During 2007, Nancy paid the following taxes:

Taxes on residence (for the period from March 1 through August 31, 2007) $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

2
Nancy sold her personal residence on June 30, 2007, 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 2007 for Nancy?
a. $9,180.
b. $9,130.
c. $7,382.
d. $5,382.
e. None of the above.

4. In Lawrence County, the real property tax year is the calendar year. The real property tax
becomes a personal liability of the owner of real property on January 1 in the current real
property tax year, 2007 (which is not a leap year). The tax is payable on June 1, 2007. On
May 1, 2007, Reggie sells his house to Dana for $250,000. On June 1, 2007, Dana pays the
entire real estate tax of $7,950 for the year ending December 31, 2007. How much of the
property taxes may Reggie deduct?
a. $0.
b. $2,614.
c. $2,625.
d. $7,950.
e. None of the above.

5. Cecil incurred $50,100 of interest expense related to his investments in 2007. His
investment income included $29,500 of interest and a $23,500 net capital gain on the sale of
securities. Cecil has asked you to compute the amount of his deduction for investment
interest, taking into consideration any options he might have. What is the maximum amount
of Cecil’s investment interest expense deduction in 2007?
a. $23,500.
b. $29,500.
c. $53,000.
d. $55,100.
e. None of the above.

6. In 2007, Terry pays $8,000 to become a charter member of Mammoth University’s Athletic
Council. The membership ensures that Terry will receive choice seating at all of
Mammoth’s home basketball games. Also in 2007, Terry pays $2,200 (the regular retail
price) for season tickets for himself and his wife. For these items, how much qualifies as a
charitable contribution?
a. $6,200.
b. $6,400.
c. $8,000.
d. $10,200.
e. None of the above.

3
7. Zeke made the following donations to qualified charitable organizations during 2007:

Basis Fair Market Value


Used clothing (all acquired before 2006) of taxpayer $ 2,350 $ 675
and his family
Stock in ABC, Inc., held as an investment for 15,000 12,875
fifteen months
Stock in MNO, Inc., held as an investment for 12,000 20,000
eleven months
Real estate held as an investment for two years 20,000 35,000

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, Zeke’s charitable contribution deduction for 2007 is:
a. $55,225.
b. $60,550.
c. $70,025.
d. $72,130.
e. None of the above.

4
8. During 2007, Ralph made the following contributions to the University of Oregon (a
qualified charitable organization):

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. Ralph’s AGI for 2007 is $189,000. What is Ralph’s charitable contribution
deduction for 2007?
a. $56,700.
b. $63,000.
c. $94,500.
d. $157,500.
e. None of the above.

Cash $63,000
Raptor, Inc., stock [overall limitation of $94,500 (50% of
$189,000 AGI) – $63,000 (cash)] 31,500
$94,500

9. Which of the following items would be an itemized deduction on Schedule A of Form 1040
subject to the 2% of AGI floor?
a. Professional dues to membership organizations.
b. Work uniforms that cannot be used for normal wear.
c. Job-hunting costs.
d. Hobby losses up to the amount of hobby income.
e. All of the above.

10. Jackson, a calendar year married taxpayer, files a joint return for 2007. Information for 2007
includes the following:

AGI $276,400
State income taxes 11,700
State sales tax 3,800
Charitable contributions 18,300
Gambling losses (gambling gains were $13,500) 7,200

Jackson’s allowable itemized deductions for 2007 are:


a. $25,900.
b. $31,600.
c. $34,800.
d. $42,200.
e. None of the above.

5
CHAPTER 13 – PART I

11. Albert purchased a tract of land for $140,000 in 2003 when he heard that a new highway
was going to be constructed through the property and that the land would soon be worth
$200,000. Highway engineers surveyed the property and indicated that he would probably
get $180,000. The highway project was abandoned in 2007 and the value of the land fell to
$100,000. What is the amount of loss Albert can claim in 2007?
a. $40,000.
b. $60,000.
c. $80,000.
d. $100,000.
e. None of the above.

12. Kate sells property for $120,000. The buyer pays $2,000 in property taxes that had accrued
during the year while the property was still legally owned by Kate. In addition, Kate pays
$6,000 in commissions and $2,000 in legal fees in connection with the sale. How much does
Kate realize from the sale of her property?
a. $112,000.
b. $114,000.
c. $116,000.
d. $120,000.
e. None of the above.

13. Alice owns land with an adjusted basis of $305,000, subject to a mortgage of $175,000.
Real estate taxes are $4,500 per calendar year and are payable on December 31. On April 1,
2007, Alice sells her land subject to the mortgage for $325,000 in cash, a note for $300,000,
and property with a fair market value of $60,000. What is the amount realized?
a. $685,000.
b. $686,110.
c. $860,000.
d. $861,110.
e. None of the above.

14. Pedro borrowed $45,000 to purchase a machine. He later borrowed $15,000 using the
machine as collateral. Both notes are nonrecourse. Eight years later, the machine has an
adjusted basis of zero and two outstanding note balances of $30,000 and $6,000. Pedro sells
the machine subject to the two liabilities for $21,000. What is his realized gain or loss?
a. $0.
b. $21,000.
c. $51,000.
d. $57,000.
e. None of the above.

6
15. The bank forecloses on Lisa’s apartment complex. The property had been pledged as
security on a nonrecourse mortgage, whose principal amount at the date of foreclosure is
$750,000. The adjusted basis of the property is $480,000, and the fair market value is
$750,000. What is Lisa’s recognized gain or loss?
a. $270,000.
b. ($750,000).
c. $0.
d. ($480,000).
e. None of the above.

16. Carlton purchases land for $300,000. He incurs legal fees of $5,000 associated with the
purchase. He subsequently incurs additional legal fees of $20,000 in having the land
rezoned from agricultural to residential. He subdivides the land and installs streets and
sewers at a cost of $600,000. What is Carlton’s basis for the land and the improvements?
a. $300,000.
b. $900,000.
c. $905,000.
d. $925,000.
e. None of the above.
17. On December 1, 2007, Evan purchases an office building from Ted for $600,000. Evan pays
$48,000 to replace the roof, and on December 15, he pays the property taxes for 2007 of
$6,000. What is the amount realized by Ted and the adjusted basis of the building (ignore
the effect of depreciation) to Evan?
a. $599,490 and $647,490.
b. $600,000 and $648,000.
c. $600,510 and $648,510.
d. $605,490 and $653,490.
e. None of the above.
18. Alicia buys a beach house for $325,000 which she uses as her personal vacation home. She
builds an additional room on the house for $45,000. She sells the property for $450,000 and
pays $22,000 in commissions and $4,000 in legal fees in connection with the sale. What is
the recognized gain or loss on the sale of the house?
a. $0.
b. $54,000.
c. $80,000.
d. $99,000.
e. None of the above.

7
19. Which of the following decreases adjusted basis?
a. Amortization of bond premium.
b. A corporate distribution to a shareholder treated as a return of capital in which gain is
recognized to the shareholder.
c. Dividends received.
d. Only a. and b.
e. All of the above.
20. Steve purchased his home for $500,000. As a sole proprietor, he operates a certified public
accounting practice in his home. For this business, he uses one room exclusively and
regularly as a home office. In Year 1, $3,042 of depreciation expense on the home office
was deducted on his income tax return. In Year 2, Steve sustained losses in his business;
therefore, no depreciation was taken on the home office. Had he been allowed to deduct
depreciation expense, his depreciation expense would have been $3,175. What is the
adjusted basis in the home?
a. $493,783.
b. $496,825.
c. $496,958.
d. $500,000.
e. None of the above.

CHAPTER 14

21. Which of the statements below is correct concerning capital losses of an individual
taxpayer?
a. A 2007 net capital loss is deductible only up to $3,000 per year.
b. Excess capital losses carry back and may be deducted in a prior year.
c. A net capital loss may exist when capital gains exceed capital losses.
d. Capital gains and losses need not be matched with one another.
e. None of the above.

22. Which of the following is a capital asset?


a. The bicycle of a 10-year old child. The child purchased the bicycle with money
inherited from an aunt.
b. The tools used by a self-employed carpenter.
c. The lots owned by a company that is in the business of buying and reselling residential
building lots.
d. A “mint” set of 1985 coins owned by a coin dealer and that is for sale on his website.
e. None of the above.

8
23. On August 10, 2007, Black, Inc. acquired an office building as a result of a like-kind
exchange. Black had given up a factory building that it had owned for 18 months as part of
the like-kind exchange. Which of the statements below is correct?
a. The holding period of the office building does not include the holding period of the
factory building.
b. The holding period of the factory building starts on August 11, 2007.
c. The holding period of the factory building starts on August 10, 2007.
d. The holding period of the office building includes the holding period of the factory
building.
e. None of the above.
24. Ryan has the following capital gains and losses for 2007: $3,000 STCL, $3,000 28% gain,
$2,000 25% gain, and $6,000 5%/15% gain. Which of the following is correct:
a. The net capital gain is composed of $2,000 25% gain and $6,000 5%/15% gain.
b. The net capital gain is composed of $2,000 28% gain and $6,000 5%/15% gain.
c. The net capital gain is composed of $3,000 28% gain, $2,000 25% gain, and $3,000
5%/15% gain.
d. The net capital gain is composed of $1,000 25% gain and $7,000 5%/15% gain.
e. None of the above.

25. Robin Corporation has ordinary income from operations of $30,000, net long-term capital
gain of $10,000, and net short-term capital loss of $15,000. What is the taxable income for
2007?
a. $25,000.
b. $27,000.
c. $28,500.
d. $30,000.
e. None of the above.

26. Which of the following would be included in the netting of § 1231 gains and losses?
a. Nonpersonal use property net casualty gain.
b. Section 1231 loss.
c. Section 1231 gain.
d. All of the above.
e. b and c

27. Which of the following is correct?


a. Improperly classifying a § 1231 loss as a capital loss might affect adjusted gross
income.
b. Improperly classifying a capital loss as a § 1231 loss might affect adjusted gross
income.
c. Misclassifying a § 1231 gain as a short-term capital gain might affect adjusted gross
income.
d. Misclassifying a short-term capital gain as a § 1231 gain might affect adjusted gross
income.
e. All of the above.

9
28. Which of the following creates potential § 1245 depreciation recapture?
a. Amortization of purchased goodwill.
b. Section 179 immediate expense deduction.
c. An increase in the value of the property.
d. A decrease in the value of the property.
e. a and b

29. Section 1250 rarely applies because:


a. Only the amount of straight-line depreciation is subject to recapture.
b. Only the amount of additional depreciation is subject to recapture.
c. It only applies to depreciation of land.
d. It only applies to depreciation of tangible personal property.
e. None of the above.

30. An individual has the following recognized gains and losses from disposition of § 1231
assets (all the assets were vacant land): $15,000 gain, $10,000 loss, $25,000 gain, and
$2,000 loss. The individual has a $5,500 § 1231 lookback loss. The individual also has a
$16,000 net short-term capital loss from the disposition of stock. Which of the following
statements is correct?
a. The taxpayer has $5,500 ordinary gain and $6,500 net long-term capital gain.
b. The taxpayer has $12,000 net long-term capital gain.
c. The taxpayer has $28,000 ordinary gain and $16,000 net short-term capital loss.
d. The taxpayer has $5,500 ordinary loss and $6,500 net long-term capital gain.
e. None of the above.

10
CHAPTER 13 – PART II

31. Noelle owns an automobile which she uses for personal use. Her adjusted basis is $22,000
(i.e., the original cost). The car is worth $15,000. Which of the following statements is
correct?
a. If Noelle sells the car for $15,000, her realized loss of $7,000 is not recognized.
b. If Noelle exchanges the car for another car worth $15,000, her realized loss of $7,000 is
not recognized.
c. If the car is stolen and it is uninsured, Noelle may be able to recognize part of her
realized loss of $15,000.
d. Only a. and b. are correct.
e. a., b., and c. are correct.

32. Nat is a real estate salesman. His employer, a real estate developer, permits him to purchase
a lot for $75,000. The employer’s adjusted basis for the lot is $45,000, and its normal selling
price is $90,000. What is Nat’s recognized gain and his basis for the lot?

Recognized gain Basis


a. $ -0- $ 75,000
b. $ -0- $ 90,000
c. $15,000 $ 75,000
d. $15,000 $ 90,000
e. $30,000 $105,000

33. Tony owned the following lots of Orange Corporation stock.

Purchase date No. of shares Basis


October 1, 2006 50 $ 4,500
February 8, 2007 50 5,500
September 5, 2007 100 11,000

On October 12, 2007, 100 shares of stock were sold for $14,000. Tony did not specifically
identify the shares of stock sold. What is the recognized gain or loss?
a. $0.
b. $3,000.
c. $3,500.
d. $4,000.
e. None of the above.

34. Nontaxable stock dividends result in:


a. A higher cost per share for all shares than before the stock dividend.
b. A lower cost per share for all shares than before the stock dividend.
c. An increase in the total cost of the old and new stock combined.
d. A decrease in the total cost of the old and new stock combined.
e. None of the above.

11
35. Gift property (disregarding any adjustment for gift tax paid by the donor):
a. Has no basis to the donee because he or she did not pay anything for the property.
b. Has the same basis to the donee as the donor’s adjusted basis if the donee disposes of
the property at a gain.
c. Has the same basis to the donee as the donor’s adjusted basis if the donee disposes of
the property at a loss, and the fair market value on the date of gift was less than the
donor’s adjusted basis.
d. Has no basis to the donee if the fair market value on the date of gift is less than the
donor’s adjusted basis.
e. None of the above.

36. Rob was given a residence in 2007. At the time of the gift, the residence had a fair market
value of $200,000, and its adjusted basis to the donor was $140,000. The donor paid a tax of
$10,000 on the taxable gift of $188,000. What is Rob’s basis for gain?
a. $140,000.
b. $143,200.
c. $150,000.
d. $200,000.
e. None of the above.

37. The holding period of property acquired by gift may begin on:
a. The date the property was acquired by the donor only.
b. The date of gift only.
c. Either the date the property was acquired by the donor or the date of gift.
d. The date six months after the date of gift.
e. c and d are correct.

38. Tobin inherited 100 acres of land on the death of his father in 2007. A Federal estate tax
return was filed and the land was valued at $300,000 (its fair market value at the date of the
death). The father had originally acquired the land in 1964 for $19,000 and prior to his death
had made permanent improvements of $6,000. What is Tobin’s basis in the land?
a. $19,000.
b. $25,000.
c. $300,000.
d. $325,000.
e. None of the above.

39. Martha gives 100 shares of Green, Inc. stock to her niece, Jennifer. Martha’s adjusted basis
for the stock is $3,000 and the fair market value is $7,000. Four months after the gift,
Jennifer is killed in an automobile accident. Martha inherits the stock which then is worth
$9,000. What is the adjusted basis of the inherited stock to Martha?
a. $3,000.
b. $7,000.
c. $9,000.
d. $10,000.
e. None of the above.

12
40. Taylor inherited 100 acres of land on the death of his father in 2007. A Federal estate tax
return was filed and this land was valued therein at $15,000, its fair market value at the date
of the father’s death. The father had originally acquired the land in 1940 for $2,000 and
prior to his death he had expended $1,000 on permanent improvements. Determine Taylor’s
holding period for the land.
a. Will begin with the date his father acquired the property.
b. Will automatically be long-term.
c. Will begin with the date of his father’s death.
d. Will begin with the date the property is distributed to him.
e. None of the above.

13
CHAPTER 15

41. In 2007, Glenn had a $108,000 loss on a passive activity. None of the loss is attributable to
AMT adjustments or preferences. She has no other passive activities. Which of the
following statements is correct?

14
a. In 2007, Glenn can deduct $108,000 for regular income tax purposes and for AMT
purposes.
b. Glenn will have a $108,000 tax preference in 2007 as a result of the passive activity.
c. For regular income tax purposes, none of the loss is allowed in 2007.
d. In 2007, Glenn will have a positive adjustment of $100,000 as a result of the passive
loss.

15
e. None of the above.

16
42. In 2007, Fred has a $75,000 loss on a passive activity for regular income tax purposes. For
AMT purposes, his loss is $65,000. The amount of the AMT adjustment resulting from the
passive activity loss is:

17
a. $0.
b. $10,000 negative adjustment.
c. $10,000 positive adjustment.
d. $65,000.

18
e. None of the above.

19
43. Konrad’s AGI is $220,000. He contributed $180,000 in cash to a public charity. What is
Konrad’s charitable contribution deduction for AMT purposes?

20
a. $22,000.
b. $66,000.
c. $110,000.
d. $180,000.

21
e. None of the above.

22
44. Which of the following are permitted deductions for purposes of the AMT for an individual
taxpayer?

23
a. Medical expenses to the extent that they exceed 7.5% of AGI.
b. Home mortgage interest on a principal residence and two other residences.
c. Charitable contributions to the extent they exceed 10% of AGI.
d. Miscellaneous itemized deductions to the extent they exceed 2% of AGI.

24
e. None of the above.

25
45. Erin owns a mineral property that had a basis of $10,000 at the beginning of the year. The
property qualifies for a 15% depletion rate. Gross income from the property was $120,000
and net income before the percentage depletion deduction was $50,000. What is Erin’s tax
preference for excess depletion?

26
a. $8,000
b. $10,000.
c. $18,000.
d. $0.

27
e. None of the above.

28
46. Which of the following can produce an AMT preference rather than an AMT adjustment?

29
a. Circulation expenditures.
b. Research and experimental expenditures.
c. Percentage depletion.
d. Incentive stock options (ISOs).

30
e. None of the above.

31
47. Sara is single, has no dependents and does not itemize, provides you with the following
information:

32
Short-term capital loss $ 5,000
Long-term capital gain 25,000
Municipal bond interest received on private activity bonds
acquired in 2002 9,000
Dividends from General Motors 1,500
Excess of FMV over cost of incentive stock options (the rights
became freely transferable in the current year) 35,000

What is the amount of Sara’s tax preference items and AMT adjustments for the current
year?
a. $9,000.
b. $44,000.
c. $49,350.
d. $52,750.
e. None of the above.

48. Robin, who is a head of household and age 42, provides you with the following information
from his financial records for 2007.

Regular income tax liability $ 44,005


AMT adjustments 30,000
AMT preferences 20,000
Taxable income 185,000

Calculate his AMT for 2007.


a. $13,457.
b. $14,970.
c. $58,975.
d. $61,100.
e. None of the above.

49. Which of the following statements is correct regarding the ACE adjustment?
a. The ACE adjustment can be either positive or negative.
b. A positive AMT adjustment occurs if the ACE amount exceeds the unadjusted AMTI.
c. A negative AMT adjustment for ACE in the current year is not affected by prior year
ACE adjustments.
d. Only a. and b. are correct.
e. a., b., and c. are correct.

50. Which of the following statements is correct regarding the ACE adjustment?

a. The ACE adjustment can be either positive or negative.


b. A positive AMT adjustment occurs if the ACE amount exceeds the unadjusted AMTI.
c. A negative AMT adjustment for ACE in the current year is not affected by prior year
ACE adjustments.
d. Only a. and b. are correct.
e. a., b., and c. are correct.

33