Fall 2007, Test I, Multiple Choice Portion

Fall 2007, Test I, Multiple Choice Portion

Multiple Choice

Identify the choice that best completes the statement or answers the question.

____ 1. Spencer and Ashley are married and live in a common law state. Spencer wants to make gifts to their four children in 2007. What is the maximum amount of the annual exclusion they will be allowed for these gifts?

a.	$48,000.
b.	$96,000.
c.	$1,096,000.
d.	$2,096,000.

____ 2. In terms of probability, which of the following taxpayers would be least likely to be audited by the IRS?

a.	Taxpayer is a wage earner at a General Motors auto assembly plant.
b.	Taxpayer owns and operates a cash discount liquor store.
c.	Taxpayer just received a $2 million jury award against a manufacturer of automobile tires.
d.	Taxpayer owns and operates a used car dealership.
e.	Taxpayer held the winning Powerball ticket.

____ 3. Trent files his tax return 35 days after the due date. Along with the return, Trent remits a check for $8,000 which is the balance of the tax owed. Disregarding the interest element, Trent’s total failure to file and to pay penalties are:

a.	$80.
b.	$720.
c.	$800.
d.	$880.

____ 4. Which of the following sources has the highest tax validity?

a.	Revenue Ruling.
b.	Revenue Procedure.
c.	Regulations.
d.	Internal Revenue Code section.

____ 5. Which of the following types of Regulations has the highest tax validity?

a.	Temporary.
b.	Legislative.
c.	Interpretative.
d.	Procedural.

____ 6. If a taxpayer decides not to pay a tax deficiency, he or she must go to which court?

a.	Appropriate U.S. Circuit Court of Appeals.
b.	U.S. District Court.
c.	U.S. Tax Court.
d.	U.S. Court of Federal Claims.

____ 7. Which is a primary source of tax law?

a.	Serverino R. Nico, Jr., 67 T.C. 647 (1977).
b.	Article by a Federal judge in Tax Notes.
c.	General Counsel Memoranda.
d.	Written determination letter.
e.	All of the above are primary sources.

____ 8. Monica, age 18, is claimed by her parents as a dependent. During 2007, she had interest income from a bank savings account of $1,000 and income from a part-time job of $4,500. Monica’s taxable income is:

a.	$4,500 – $4,800 = $0.
b.	$5,500 – $5,350 = $150.
c.	$5,500 – $4,800 = $700.
d.	$5,500 – $850 – $3,400 = $1,250.

____ 9. Ava is a widow, age 74 and blind, who is claimed as a dependent by her son. During 2007, she received $4,800 in Social Security benefits, $1,200 in bank interest, and $1,800 in cash dividends from stocks. Ava’s taxable income for 2007 is:

a.	$3,000 – $850 – $2,600 = $0.
b.	$3,000 – $2,600 = $400.
c.	$3,000 – $850 – $1,300 = $850.
d.	$7,800 – $850 – $2,600 = $4,350.

____ 10. Elton and Elsie are husband and wife and file a joint return for 2007. Both are under 65 years of age. They provide more than half of the support of their daughter, Kristie (age 25), who is a full-time medical student. Kristie receives a $3,500 scholarship covering her room and board at college. They furnish all of the support of Hattie (Elton’s grandmother), who is age 70 and lives in a nursing home. They also support Meg (age 66), who is a friend of the family and lives with them. How many personal and dependency exemptions may Elton and Elsie claim?

a.	Two.
b.	Three.
c.	Four.
d.	Five.

____ 11. For the qualifying relative rule:

a.	A dependent must reside with the taxpayer.
b.	A dependent must satisfy an age requirement.
c.	The gross income test is not applicable.
d.	A dependent must be related to the taxpayer.
e.	A dependent can be a citizen or resident of Mexico.

____ 12. Which of the following taxpayers may file as a head of household in 2007?

Ron provides all the support for his mother, Betty, who lives by herself in an apartment in Fort Lauderdale. Ron pays the rent and other expenses for the apartment and properly claims his mother as a dependent.

Tammy provides over one-half the support for her 18-year old brother, Dan. Dan earned $4,200 in 2007 working at a fast food restaurant and is saving his money to attend college in 2008. Dan lives in Tammy’s home.

Joe’s wife left him late in December of 2006. No legal action was taken and Joe has not heard from her in 2007. Joe supported his 6-year-old son, who lived with him throughout 2007.

a.	Ron only.
b.	Tammy only.
c.	Joe only.
d.	Ron and Joe only.
e.	Ron, Tammy, and Joe.

____ 13. Wilma is married to Herb, who abandoned her in 2005. She has not seen or communicated with him since June of that year. She maintains a household in which she and her two dependent children live. Which of the following statements about Wilma’s filing status in 2007 is correct?

a.	Wilma can use the rates for single taxpayers.
b.	Wilma can file a joint return with Herb.
c.	Wilma can file as a surviving spouse.
d.	Wilma can file as a head of household.

____ 14. Perry is in the 33% tax bracket. During 2007, he had the following capital asset transactions:

	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

Perry’s tax consequences from these gains are as follows:

a.	(15% ´ $10,000) + (28% ´ $30,000) + (33% ´ $4,000).
b.	(15% ´ $30,000) + (33% ´ $4,000).
c.	(5% ´ $10,000) + (28% ´ $30,000) + (33% ´ $4,000).
d.	(15% ´ $40,000) + (33% ´ $4,000).

____ 15. Home Office, Inc., an accrual basis taxpayer, leased a copying machine to a new customer on December 27, 2007. The machine was to rent for $500 per month for a period of 36 months beginning January 1, 2008. The customer was required to pay the first and last month’s rent at the time the lease was signed. The customer also was required to pay an $800 damage deposit. Home Office must recognize as income from the lease in 2007:

a.	$0.
b.	$500.
c.	$1,000.
d.	$1,800.

____ 16. The Green Company, an accrual basis taxpayer, provides business-consulting services. Clients generally pay a retainer at the beginning of a 12-month period. This entitles the client to no more than 40 hours of services. Once the client has received 40 hours of services, Green charges $400 per hour. Green Company allocates the retainer to income based on the number of hours worked on the contract. At the end of the tax year, the company had $40,000 of unearned revenues from these contracts. The company also had $10,000 in unearned rent income received from excess office space leased to other companies. Based on the above, Green must include in gross income for the current year:

a.	$0.
b.	$10,000.
c.	$40,000.
d.	$50,000.

____ 17. Teal company is an accrual basis taxpayer. On December 1, 2007, a customer paid for an item that was on hand, but the customer wanted the item delivered in early January 2008. Teal delivered the item on January 4, 2008. Teal included the sale in its 2007 income for financial accounting purposes.

a.	Teal must recognize the income in 2007.
b.	Teal must recognize the income in the year title to the goods passed to the customer, as determined under the state laws in which the store is located.
c.	Teal can elect to recognize the income in either 2007 or 2008.
d.	Teal must recognize the income in 2008.

____ 18. Darryl, a cash basis taxpayer, gave 1,000 shares of Copper Company common stock to his daughter on September 29, 2007. Copper Company is a publicly held company that has declared a $1.00 per share dividend on September 30th every year for the last 20 years. Just as Darryl had expected, Copper Company declared a $1.00 per share dividend on September 30th, payable on October 15th, to stockholders of record as of October 10th. The daughter received the $1,000 dividend on October 18, 2007.

a.	Darryl must recognize the $1,000 dividend as his income because he knew the dividend would be paid.
b.	Darryl must recognize $750 of the dividend because he owned the stock for three-fourths of the year.
c.	Darryl must recognize the income of $1,000 because he constructively received the $1,000.
d.	The daughter must recognize the income because she owned the stock when the dividend was declared and she received the $1,000.

____ 19. Ward owns a one-half interest in the capital and profits of Teal Company (a calendar year partnership). For tax year 2007, the partnership earned revenue of $150,000 and had operating expenses of $80,000. During the year, Ward withdrew from the partnership account $2,500 per month (for a total of $30,000). For 2007, Ward:

a.	Must report $70,000 as his share of the partnership’s profits.
b.	Must report $35,000 as his share of the partnership’s profits.
c.	Must report $30,000 as his share of the partnership’s profits.
d.	Must report $5,000 as his share of the partnership’s profits.

____ 20. Which of the following is not a requirement for an alimony deduction?

a.	The payments must be in cash.
b.	The payments must cease upon the death of the payee.
c.	The payee must have a dependent child.
d.	The payer and payee must not live in the same household at the time of the payments.
e.	All of the above are requirements for an alimony deduction.

____ 21. In the case of a below-market loan between family members, if the imputed interest rules apply:

I.	The borrower must recognize interest income.
II.	The lender has interest income.
III.	The lender is deemed to have made a gift.
IV.	The borrower has interest expense.

a.	Only I is true.
b.	II, III, and IV are true but I is false.
c.	I and II are false but III and IV are true.
d.	All of the above are true.
e.	None of the above is true.

____ 22. Gordon, an employee, is provided group term life insurance coverage equal to twice his annual salary of $100,000 per year. According to the IRS Uniform Premium Table (based on Gordon’s age), the amount is $12 per year for $1,000 of protection. The cost of an individual policy would be $15 per year for $1,000 of protection. Since Gordon paid nothing towards the cost of the $200,000 protection, Gordon must include in his 2007 gross income which of the following amounts.

a.	$3,000.
b.	$2,400.
c.	$2,250.
d.	$1,800.

____ 23. The taxable portion of Social Security benefits is dependent upon:

a.	How much the taxpayer has contributed to the Social Security program.
b.	The individual’s age.
c.	The number of quarters the individual worked.
d.	The individual’s adjusted gross income from other sources.

____ 24. The taxpayer’s marginal tax bracket is 40% (combined Federal and state rates). Which would the taxpayer prefer?

a.	$1.41 taxable income rather than $1.00 tax-exempt income.
b.	$.59 tax-exempt income rather than $1.00 taxable income.
c.	$1.75 taxable income rather than $1.00 tax-exempt income.
d.	$1.60 taxable income rather than $1.00 tax-exempt income.

____ 25. Carin, a widow, elected to receive the proceeds of a $100,000 life insurance policy on the life of her deceased husband in 10 installments of $15,000 each. Her husband had paid premiums of $75,000 on the policy. Over the life of the installment contract, Carin must include in gross income:

a.	$0.
b.	$50,000.
c.	$75,000.
d.	$100,000.
e.	None of the above.

____ 26. The exclusion for health insurance premiums paid by the employer applies to:

I.	Present employees.
II.	Retired former employees.
III.	The employee’s spouse and children.

a.	I, II, and III.
b.	Only I and II.
c.	Only I.
d.	Only I and III.

____ 27. Section 119 excludes the value of meals from the employee’s gross income:

a.	Whenever the employer pays for the meal and for the convenience of the employee.
b.	When the meals are provided for the employee on the employer’s premises as a convenience to the employee.
c.	When the meals are provided for the employee on the employer’s premises for the convenience of the employer.
d.	All of the above.
e.	None of the above.

____ 28. Ridge is the manager of a motel. As a condition of his employment, Ridge is required to live in a room on the premises so that he would be there in case of emergencies. Ridge considered this a fringe benefit, since he would otherwise be required to pay $600 per month rent. The room that Ridge occupied normally rented for $60 per night, or $1,500 per month. On the average, 90% of the motel rooms were occupied. As a result of this rent-free use of a room, Ridge is required to include in gross income.

a.	$0.
b.	$600 per month.
c.	$1,500 per month.
d.	$1,350 ($1,500 ´ .90 = $1,350).
e.	None of the above.

____ 29. Peggy is an executive for the Tan Furniture Manufacturing Company. Peggy purchased furniture from the company for $7,000. The price Tan ordinarily charges a wholesaler is $8,500. The retail price of the furniture was $12,000, and Tan’s cost was $8,000. The company also paid for Peggy’s parking space in a garage near the office. The parking fee was $1,200 for the year. All employees are allowed to buy furniture at a discounted price comparable to that charged to Peggy. However, the company does not pay other employees’ parking fees. Peggy’s gross income from the above is:

a.	$0.
b.	$1,000.
c.	$5,000.
d.	$6,200.

____ 30. The president of Silver Corporation is assigned a secretary. When the secretary has completed work on company matters, the secretary is available to do the president’s personal matters (pick up laundry, buy groceries) so long as the privilege is not abused. No other employee has a personal secretary.

a.	The value of the secretary’s services provided to the president may be excluded as no-additional-cost services.
b.	The value of the secretary’s services provided to the president may be excluded because the president did not receive cash.
c.	The value of the secretary’s services provided to the president may be excluded as no-additional-cost services because the services are not available to all employees.
d.	If the value of secretary’s services are considered de minimis, the president may exclude the benefit from gross income even through other employees are not provided the same benefit.
e.	None of the above.

____ 31. Martha participated in a qualified tuition program for the benefit of her son. She invested $5,000 in the fund. Four years later her son withdrew $7,500, the entire balance in the program, to pay his college tuition.

a.	Martha must include the $2,500 ($7,500 – $5,000) in her gross income when the funds are used to pay the tuition.
b.	Martha must include the portion of the $2,500 accumulated each year in her gross income (i.e., interest).
c.	Martha’s son must include the $2,500 ($7,500 – $5,000) in his gross income when the funds are used to pay the tuition.
d.	Martha’s son must include the portion of the $2,500 accumulated each year in his gross income (i.e., interest).
e.	None of the above.

____ 32. Hazel, a solvent individual but a recovering alcoholic, embezzled $5,000 from her employer. In the same year that she embezzled the funds, her employer discovered the theft. Her employer did not fire her and told her she did not have to repay the $5,000 if she would attend Alcoholics Anonymous. Hazel met the conditions and her employer canceled the debt.

a.	Hazel did not realize any income because she obtained the funds illegally.
b.	Hazel is not required to include the $5,000 in gross income because her employer made a gift to her.
c.	Hazel must include $5,000 in gross income from discharge of indebtedness.
d.	Hazel may exclude the $5,000 from gross income because the debt never existed.
e.	None of the above.

____ 33. On January 1, 1997, Yellow corporation issued 6% 25-year bonds at par and used the $10,000,000 proceeds to finance the construction of a new plant. On January 1, 2007, the company acquired the bonds on the open market for $9,500,000. Assuming that Yellow Corporation is neither bankrupt nor insolvent, the acquisition and retirement of the bonds results in which of the following:

a.	The company must recognize a $500,000 gain.
b.	The company can make an election to recognize a $500,000 gain or reduce the company’s basis in the plant by $500,000.
c.	The company must recognize a $500,000 gain and increase the company’s basis in the plant by $500,000.
d.	The company can amortize the $500,000 gain, recognizing income over the remaining life of the bonds.

____ 34. Benita incurred a business expense on December 10, 2007, which she charged on her bank credit card. She paid the credit card statement which included the charge on January 5, 2008. Which of the following is correct?

a.	If Benita is a cash method taxpayer, she cannot deduct the expense until 2008.
b.	If Benita is an accrual method taxpayer, she can deduct the expense in 2007.
c.	If Benita uses the accrual method, she can choose to deduct the expense in either 2007 or 2008.
d.	Only b. and c. are correct.
e.	a., b., and c. are correct.

____ 35. During the first year of operations, Al’s fast food restaurant had cash sales of $200,000. Other relevant information is as follows:

Purchases	$70,000
Salaries	90,000
Other expenses	10,000
Ending inventory	20,000

a.	If Al’s business uses the accrual method, the net profit is $50,000.
b.	If Al’s business uses the accrual method, the net profit is $30,000.
c.	Al’s business is not eligible to use the cash method.
d.	Only a. and c.
e.	Only b. and c.

____ 36. Which of the following legal expenses are deductible for AGI?

a.	Incurred in connection with a trade or business.
b.	Incurred in connection with rental or royalty property held for the production of income.
c.	Incurred for tax advice relative to the preparation of an individual’s income tax return.
d.	Only a. and b. qualify.
e.	a., b., and c. qualify.

____ 37. Rex, a cash basis calendar year taxpayer, runs a bingo operation which is illegal under state law. During 2007, a bill designated H.R. 9 is introduced into the state legislature which, if enacted, would legitimize bingo games. In 2007, Rex had the following expenses:

Operating expenses in conducting bingo games	$247,000
Payoff money to state and local police	24,000
Newspaper ads supporting H.R. 9	2,000
Political contributions to legislators who support H.R. 9	8,000

Of these expenditures, Rex may deduct:

a.	$247,000.
b.	$249,000.
c.	$257,000.
d.	$281,000.
e.	None of the above.

____ 38. For a president of a publicly held corporation, which of the following are not subject to the $1 million limit on executive compensation?

a.	Contribution to medical insurance plan.
b.	Contribution to pension plan.
c.	Premiums on group term life insurance of $50,000.
d.	Only b. and c. are not subject to the limit.
e.	a., b., and c., are not subject to the limit.

____ 39. Which of the following is not a variable in the determination of whether the expenses in investigating a business can be deducted?

a.	The amount of reasonable expenditures.
b.	The nature of the business being investigated.
c.	Whether or not the acquisition actually takes place.
d.	The current business of the taxpayer.

____ 40. Priscella pursued a hobby of making bedspreads in her spare time. Her AGI before considering the hobby is $40,000. During the year she sold the bedspreads for $10,000. She incurred expenses as follows:

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.	Include $10,000 in income and deduct $11,000 for AGI.
b.	Ignore both income and expenses since hobby losses are disallowed.
c.	Include $10,000 in income, deduct nothing for AGI, and claim $10,000 of the expenses as itemized deductions.
d.	Include $10,000 in income and deduct interest of $500 for AGI.

____ 41. Harry divorced Wanda during the year. He incurred the following legal expenses as itemized on the bill from his attorney:

Fees related to property division	$500
Fees related to the determination of dependency exemption	150
General legal fees incident to divorce	900

How much can Harry deduct?

a.	$0.
b.	$150.
c.	$650.
d.	$1,550.

____ 42. Which of the following must be capitalized by a business?

a.	Replacement of an alternator on a truck used in business.
b.	Replacement of a windshield of a business truck which was broken in an accident.
c.	Repair of a roof.
d.	Amount paid for a covenant not to compete.

____ 43. Ace Corporation, an accrual basis taxpayer, sells widgets. Ace sold on account a deluxe widget to Alan, Inc., for $22,000. Ace had a basis in the widget of $12,000. During the current year, after receiving $3,000 from Alan, Ace was notified that Alan was bankrupt and no further payments would be received. What amount of loss may Ace deduct in the current year?

a.	$0.
b.	$7,000.
c.	$9,000.
d.	$10,000.
e.	None of the above.

____ 44. On May 1, 2006, Mary loaned John $20,000. In 2007, John filed for bankruptcy. At that time, it was revealed that John’s creditors could expect to receive 60 cents on the dollar. In March 2008, final settlement was made, and Mary received $5,000. How much loss can Mary deduct and in which year?

a.	2006—$15,000.
b.	2007—zero; 2008—$15,000.
c.	2007—$12,000; 2008—$3,000.
d.	2007—$8,000; 2008—$7,000.
e.	None of the above.

____ 45. Jones Corporation incurred a $10,000 bad debt in the current year. Jones Corporation also had a $6,000 long-term capital gain during the current year. How should Jones report the bad debt deduction on the tax return?

a.	$0 bad debt deduction.
b.	$3,000 bad debt deduction.
c.	$4,000 bad debt deduction.
d.	$10,000 bad debt deduction.
e.	None of the above.

____ 46. Three years ago, Sharon loaned her sister $30,000 to buy a car. A note was issued for the loan with the provision for monthly payments of principal and interest. Last year, Sharon purchased a car from the same dealer, Hank’s Auto. As partial payment for the car, the dealer accepted the note from Sharon’s sister. At the time Sharon purchased the car, the note had a balance of $18,000. During the current year, Sharon’s sister died. Hank’s Auto was notified that no further payments on the note would be received. At the time of the notification, the note had a balance due of $15,500. What is the amount of loss, with respect to the note, that Hank’s Auto may claim on the current year tax return?

a.	$0.
b.	$3,000.
c.	$15,500.
d.	$18,000.
e.	None of the above.

____ 47. John files a return as a single taxpayer. In 2007, he had the following items:

·	Salary of $70,000.
·	Loss of $65,000 on the sale of § 1244 stock acquired two years ago.
·	Interest income of $8,000.

Determine John’s AGI for 2007.

a.	$13,000.
b.	$25,000.
c.	$28,000.
d.	$75,000.

____ 48. During the year, Morley, a single taxpayer, had an AGI of $30,000 before considering the following items:

	Loss from damage to rental property	($6,000)
	Loss from theft of bonds held for investment	(3,000)
	Personal casualty gain	4,000
	Personal casualty loss (after $100 floor)	(9,000)

Determine the amount of Morley’s itemized deduction from the losses.

a.	$0.
b.	$2,900.
c.	$5,120.
d.	$5,600.

____ 49. Ivory, Inc., has taxable income of $300,000 and qualified production activities income (QPAI) of $200,000 in 2007. Ivory’s domestic production activities deduction is:

a.	$6,000.
b.	$9,000.
c.	$12,000.
d.	$18,000.

____ 50. Mavis, age 70, is single with no dependents. The following information was obtained from her personal records for the current year:

	Interest income	$ 7,000
	Loss on sale of § 1244 stock	20,000
	Itemized deductions	4,000

Based on the above information, what is Mavis’s net operating loss for the current year?

a.	$18,000.
b.	$19,650.
c.	$20,000.
d.	$23,000.

Fall 2007, Test I, Multiple Choice Portion

Answer Section

MULTIPLE CHOICE

1. ANS: B

4 (number of donees) ´ $12,000 (annual exclusion) ´ 2 (number of donors) = $96,000. It is assumed that Ashley will make the election to split the gifts.

PTS: 1 REF: p. 1-12 | Example 9

2. ANS: A

Self-employed individuals (choices b. and d.) are more likely to be audited than employees (choice a.). A newspaper account (choices c. and e.) may trigger an audit. Large gambling winnings will be reported to the IRS on Form 1099 (choice e.).

PTS: 1 REF: p. 1-18 | p. 1-19

3. ANS: C

Following the procedure set forth in Example 15, the penalty is determined as follows:

Failure to pay penalty [1/2% ´ $8,000 ´ 2 (two months violation)]			$ 80
Plus:	Failure to file penalty [5% ´ $8,000 ´ 2
	(two months violation)]	$800
	Less: Failure to pay penalty	(80)	720
Total penalties			$800

PTS: 1 REF: Example 15

4. ANS: D PTS: 1 REF: p. 2-2 to 2-11

5. ANS: B PTS: 1 REF: p. 2-8 | p. 2-31 | Exhibit 2-1

6. ANS: C PTS: 1 REF: Concept Summary 2-1

7. ANS: A PTS: 1 REF: p. 2-33

8. ANS: C

Monica’s standard deduction is $4,500 (earned income) + $300 = $4,800. Thus, her taxable income is $700 ($5,500 – $4,800). She is not eligible for a personal exemption.

PTS: 1 REF: p. 3-9

9. ANS: A

Although Ava has no earned income, she is entitled to a minimum regular standard deduction of $850. She also is allowed additional standard deductions for age and blindness of $2,600 ($1,300 + $1,300). At this level of income, the Social Security benefits are a nontaxable exclusion.

PTS: 1 REF: p. 3-9 | Exhibit 3-1 | Table 3-2

10. ANS: C

Four (Elton, Elsie, Hattie, and Meg). Personal exemptions for Elton and Elsie and dependency exemptions for Hattie and Meg. Kristie is not a qualifying child—although a full-time student, she is not under age 24. Also, Kristie does not meet the qualifying relative category due to the gross income test—the type of scholarship aid she receives is taxable. Hattie is not a member of the household but satisfies the relationship test. Meg does not satisfy the relationship test but is a member of the household.

PTS: 1 REF: p. 3-10 | p. 3-11 | p. 3-13

11. ANS: E

If the relationship test is met, a dependent need not reside with the taxpayer (choice a.). No age requirement exists (choice b.). The gross income test is crucial (choice c.). If a member of taxpayer’s household, no relationship is necessary (choice d.). Residency and/or citizenship in Canada or Mexico is permissible (choice e.).

PTS: 1 REF: p. 3-13 | p. 3-17

12. ANS: E

Ron may file as a head of household. His mother is not required to live in his household in order for him to qualify as a head of household.

Tammy can claim Dan as a dependent because Dan is a qualifying child and is not subject to the gross income requirement.

Joe can file as a head of household under the abandoned spouse rules.

PTS: 1 REF: p. 3-30 | p. 3-31

13. ANS: D

Wilma meets the “abandoned spouse” rules. Therefore, she can file as a head of household. Otherwise, her filing status would be married, filing separately.

PTS: 1 REF: p. 3-31

14. ANS: A

Collectibles are taxed at a maximum of 28%, while long-term capital gains are subject to a top rate of 15%. Short-term capital gains are treated the same as ordinary income.

PTS: 1 REF: p. 3-33

15. ANS: C

The company is required to recognize the $1,000 (December and January rent) because prepaid income from rents is ineligible for deferral. The damage deposit is not income.

PTS: 1 REF: p. 4-12 | p. 4-13

16. ANS: B

The prepaid income from services that will be earned in the following year by Green can be deferred under Revenue Procedure 2004-34. However, the prepaid income from rents is not eligible for deferral.

PTS: 1 REF: p. 4-13

17. ANS: A

Teal received the income before the goods were delivered to the customer. Therefore, when Teal recognizes the income for tax purposes depends upon Teal’s financial accounting method.

PTS: 1 REF: p. 4-8 | p. 4-12

18. ANS: D

The gift of the stock is made prior to the declaration date.

PTS: 1 REF: p. 4-16

19. ANS: B

Ward’s share of the income from the partnership is $35,000 [.50($150,000 – $80,000)].

PTS: 1 REF: p. 4-17 | Example 27

20. ANS: C

There is no such requirement for payments to be classified as alimony.

PTS: 1 REF: p. 4-20

21. ANS: B PTS: 1 REF: p. 4-23 to 4-27

22. ANS: D

Gordon must include in gross income the Uniform Premium Table amount for $150,000 ($200,000 coverage less the $50,000 exclusion): 150 ´ $12 = $1,800.

PTS: 1 REF: p. 4-31 | p. 4-32

23. ANS: D

The formula used to calculate the taxable portion of Social Security requires the taxpayer to aggregate the taxpayer’s Social Security benefits and other sources of income and after the total exceeds a base amount, as much as 85% of the benefits can be subject to Federal income tax.

PTS: 1 REF: p. 4-33 | p. 4-34

24. ANS: C

The $1.75 of taxable income is worth $1.05 [(1 – .40)($1.75)] after taxes.

PTS: 1 REF: p. 5-2

25. ANS: B

The interest element of $50,000 ($150,000 – $100,000) is included in Carin’s gross income.

PTS: 1 REF: p. 5-6 to 5-9

26. ANS: A PTS: 1 REF: p. 5-13

27. ANS: C PTS: 1 REF: p. 5-15 to 5-17

28. ANS: A

The room qualifies for the § 119 lodging exclusion.

PTS: 1 REF: p. 5-15 to 5-17

29. ANS: B

The furniture purchases were under a “qualified employee discount” plan, but the exclusion is limited to the employer’s gross profit. Because Peggy purchased the furniture for $7,000 when the employer’s cost was $8,000, she must include $1,000 of the discount in gross income. The parking space is a qualified transportation fringe and is not required to be available to all employees (i.e., can be provided on a discriminatory basis).

PTS: 1 REF: p. 5-19 to 5-24

30. ANS: D

Answers a. and c. are incorrect because the no-additional-cost services must be provided to all employees to qualify for the exclusion. Answer b. is incorrect because the receipt of noncash items (e.g., services, other property) can produce gross income.

PTS: 1 REF: p. 5-19 to 5-24

31. ANS: E

Under a qualified tuition program, neither the beneficiary of the income (the son) nor the owner (Martha) of the property includes the earnings in gross income as long as the funds are used to pay qualified tuition.

PTS: 1 REF: p. 5-30 | p. 5-31

32. ANS: C

Even if the employer had intended that a gift be made, § 102(c) prohibits exclusion treatment. Hazel realized a $5,000 increase in her net worth as a result of the theft and the subsequent cancellation of the debt.

PTS: 1 REF: p. 5-32 | p. 5-33

33. ANS: A PTS: 1 REF: p. 5-32

34. ANS: B

Choice a. is incorrect because charging the expense on a bank credit card is treated as a constructive payment. Thus, as a cash method taxpayer, she can deduct the expense in 2007. If Benita uses the accrual method, she deducts the expense in 2007. In any event, she does not merely choose the year in which to deduct the expense (item c.).

PTS: 1 REF: p. 6-9 | p. 6-10

35. ANS: D

The net profit of Al’s business is calculated as follows:

Sales			$200,000
Less: Expenses
	Salaries	$90,000
	Other expenses	10,000
	Purchases net of ending inventory
	($70,000 – $20,000)	50,000	(150,000)
Net profit			$ 50,000

Since the business has inventory, the accrual method must be used to calculate cost of goods sold.

PTS: 1 REF: p. 6-9 | p. 6-10

36. ANS: D

Expenses incurred for tax advice relative to the preparation of an individual’s income tax return are classified as itemized deductions.

PTS: 1 REF: p. 6-12

37. ANS: A

Rex can deduct only the $247,000 of operating expenses.

PTS: 1 REF: Example 16

38. ANS: E PTS: 1 REF: p. 6-14

39. ANS: A PTS: 1 REF: p. 6-14

40. ANS: C

The itemized deductions of $10,000 must be reduced by 2% of $50,000 or $1,000.

PTS: 1 REF: Example 22

41. ANS: B

Only those separately stated fees that relate solely to tax advice ($150) are deductible.

PTS: 1 REF: p. 6-12 | p. 6-24

42. ANS: D

All of these expenses, except for the covenant, can be deducted in the current tax year. The amortization period for the covenant is 15 years.

PTS: 1 REF: p. 6-24

43. ANS: B

The loss is limited to the amount Ace included in gross income ($10,000) less any recovery ($3,000). This results in a $7,000 loss.

PTS: 1 REF: p. 7-3

44. ANS: B

This debt was not incurred in connection with a trade or business. Therefore, Mary can claim a bad debt deduction in the following years:

2006—zero.

2007—zero.

2008—$15,000 [$20,000 (loan) – $5,000 (proceeds)].

PTS: 1 REF: p. 7-3 to 7-5

45. ANS: D

The entire $10,000 loss on the bad debt is classified as an ordinary loss.

PTS: 1 REF: p. 7-5

46. ANS: C

This is a business bad debt for Hank’s Auto and therefore, the loss is $15,500.

PTS: 1 REF: p. 7-3 to 7-5

47. ANS: B

Salary	$70,000
Interest income	8,000
Ordinary loss (§ 1244 ordinary loss)	(50,000)
Long-term capital loss (limited to $3,000)*	(3,000)
AGI	($25,000)

*$15,000 ($65,000 – $50,000) is long-term capital loss. Of this amount, $3,000 can be used to offset ordinary income. $12,000 ($15,000 – $3,000) will be carried forward.

PTS: 1 REF: p. 7-4 to 7-7

48. ANS: D

AGI before casualties		$30,000
Rental property loss		(6,000)
Personal casualty gain	$4,000
Personal casualty loss	(4,000)	-0-
Adjusted gross income		$24,000
Itemized deductions
Casualty loss [($9,000 – $4,000) – (10% ´ $24,000)]	$2,600
Miscellaneous itemized deductions	3,000
Total itemized deductions		$ 5,600

The bonds are property held for the production of income, but not attributable to rents or royalties. Therefore, the loss is a miscellaneous itemized deduction not subject to the 2%-of-AGI floor.

PTS: 1 REF: p. 7-10 to 7-14

49. ANS: C

DPAD is calculated for Ivory for 2007 as the lesser of the following:

	·	$200,000 ´ 6% = $12,000

	·	$300,000 ´ 6% = $18,000

So the DPAD is $12,000.

PTS: 1 REF: p. 7-17

50. ANS: B

Ordinary loss			($20,000)
Interest income			7,000
AGI			($13,000)
Less:		Standard deduction	(5,350)
		Additional standard deduction	(1,300)
		Personal exemption	(3,400)
Taxable income			($23,050)

Taxable income			($23,050)
Add:	Personal exemption		3,400
	Excess of nonbusiness deductions over nonbusiness income ($6,650 – $7,000)		-0-
Net operating loss			($19,650)

PTS: 1 REF: p. 7-21 | p. 7-22

SIMULATION

Estate- The first $2 million of inheritance is exempt from taxes. The $90,000 is owed by the estate of the aunt. It would get taken out before the rest of the money was turned over to the client.

Sales- Individuals can elect to deduct either state and local income tax or sales/use tax on schedule A of Form 1040. $1250 can be deductible as actual amount of sales tax payment AND the amount from an IRS table, adjusted upward for state and local taxes is deductible.

Excise- The only way that this tax could be deducted is if that travel and gasoline was required by the employer in order for the employee to do their job and the employee is not reimbursed for those expenses or some portion of those expenses. Also, if this vehicle is not just used for business then only the portion used for business is deductible. The forms needed to deduct this tax in this situation are form 2106 and then the deduction must be itemized on 1040, schedule A. If you are self employed then you would use form 1040 schedule C or if you are a farmer form 1040 schedule F.

Employment- Employment tax consisted of Medicare (1.45% X 120000) and FICA (6.2% X 99000ceiling) for a total of $7878 that was collected from the tax payer’s checks.

Unemployment- Only employers pay the unemployment FUTA tax and not deducted from the employee’s wages. Form 940 applies to the information needed for the unemployment tax.

Property- The tax is only deductible by the person on whom the tax was imposed and must be ad valorem. Form 1040 Schedule A applies to the deduction.

LETTER

John Doe, CPA

6300 Ocean Drive

Corpus Christi, TX 78412

October 10, 2007

Ms. Jane Taxpayer

777 Prosperous Blvd

Paradise Hill, Nevada 89445

Dear Ms. Taxpayer:

The purpose of this letter is to inform you of the tax implications of your decision to give your son a new car. My explanation is based on the information you have already provided and the assumption that you have not previously given any taxable gifts. If any of the facts have changed or you have previously given taxable gifts, it may be necessary for me to adjust my conclusions.

You informed me that you paid $35,000 for your son’s new car, plus an additional 6.5% in state sales tax. That means the fair market value of the new car was $35,000 when you gave it to your son. The additional $2,275 in state sales tax does not figure into the value of the gift. You are allowed an annual gift exclusion of $12,000 for your son; therefore, the remaining $23,000 is subject to the federal gift tax.

As the gift donor, you are responsible for the tax. You may choose to defer the gift tax by subtracting the taxable gift ($23,000) from your estate exclusion (currently $2,000,000). As of this year, there is an exclusion amount of $1,000,000 for cumulative taxable gifts, and the unified tax credit for that amount equals $345,800. As long as you do not surpass $1,000,000 in cumulative taxable gifts, the taxable gifts may be subtracted from your estate exclusion. If you choose to pay the gift tax on the $23,000 this year, you may add the amount of the gift tax you pay to your estate’s unified tax credit

In other words, you do not need to pay the gift tax on your son’s new car in the current tax year, and it is possible that it may never need to be paid. However, you will need to file a gift tax return, Form 709, with the Internal Revenue Service for the current year. I would be more than happy to assist you with that.

Finally, congratulations for your son’s success in law school. I’m sure he will appreciate and enjoy his new car. If you would like more information or clarification of my conclusions, please do not hesitate to contact me.

Sincerely,

John Doe, CPA

RESEARCH

The Internal Revenue Code 469(C) describes treatment whereas if an individual was not active in a business, and the business incurred a loss the individual’s shares of the loss is only deductible to the extent of gains from other passive investments.