Professional Documents
Culture Documents
(Updated)
1. (TCOs 7, 8, and 9) In 2010, Bridget sold land to her son Caleb for $150,000 cash and an
installment note for $600,000. Bridgets adjusted basis was $550,000. In 2012, after paying
$10,000 interest but nothing on the principal, Caleb sold the land for $850,000 cash. As a
result of the second disposition, what gain must Bridget recognize in 2012?
(Points : 5)
$600,000
$200,000
$160,000
$40,000
None of the above
Question 2.2. (TCOs 2, 8, and 9) Trigger Inc. provides group-term life insurance only to the
officers of the corporation. Carlota, a vice president, received $250,000 of coverage for the
year at a cost to Trigger Inc. of $1,600. The uniform premiums (based on Carlotas age) are
$6 a year for $1,000 of protection (i.e., $1,500 for Carlota). How much must Carlota include
in gross income this year?
(Points : 5)
$0
$1,200
$1,500
$1,600
None of the above
Question 3.3. (TCOs 2, 8, and 9) If a vacation home is used primarily for personal use
(rented for fewer than 15 days per year), which of the following is true?
(Points : 5)
All expenses are deductible from AGI.
Expenses must be allocated between rental and personal use.
Depreciation is allowed as a deduction.
All rental income is excluded from AGI.
None of the above
Question 4.4. (TCOs 2 and 11) Judy, a calendar-year cash-basis taxpayer, owns and
operates several TV rental outlets in North Carolina and wants to expand into the TV rental
business in South Carolina and Georgia. During 2012, she spends $30,000 to investigate
TV rental businesses in South Carolina and $15,000 to investigate TV rental businesses in
Georgia. She acquires the South Carolina operations, but not the outlets in Georgia. As to
these expenses, Judy should _____. (Points : 5)
amortize $30,000 over 60 months and capitalize $15,000
expense $45,000 for 2012
expense $15,000 for 2012 and capitalize $30,000
capitalize $45,000
None of the above
Question 5.5. (TCOs 2 and 11) Kelsey, a stock broker, owns a separate business in which
he participates in the current year. He has one employee who works part-time in the
business. Which of the following statements is correct?
(Points : 5)
If Kelsey participates for 300 hours and the employee participates for 300 hours during the
year, then Kelsey does not qualify as a material participant.
If Kelsey participates for 50 hours and the employee participates for 2 hours during the year,
then Kelsey probably does not qualify as a material participant.
If Kelsey participates for 501 hours and the employee participates for 2,000 hours during
the year, then Kelsey does not qualify as a material participant.
Kelsey will automatically be a material participant in an activity in the current year if he was
a material participant in a personal service activity for the 3 prior years.
All of the above
Question 6.6. (TCOs 2 and 11) During the year, Clara took a trip from Chicago to Rome.
She was away from home for 20 days. She spent 6 days vacationing and 14 days on
business (including the 3 travel days). Her expenses are as follows.
Airfare $1,600
Lodging (20 days x $70) $1,400
Meals (20 days x $120) $2,400
Valet service (cleaning of laundry) $160
Chriss deduction is _____.
(Points : 5)
$3,100
$4,360
$5,080
$5,560
None of the above
Question 7.7. (TCOs 2 and 11) Nicholas loaned Lyle (a friend) $30,000 in 2011 with the
agreement that the loan would be repaid in 2 years. In 2012, Lyle filed for bankruptcy and
Nicholas learned that he could expect to receive $0.50 on the dollar. In 2012, final
settlement was made and Nicholas received $16,000. Assuming the loan is a nonbusiness
bad debt, how should Nicholas account for the bad debt?
(Points : 5)
$14,000 ordinary loss in 2012
$15,000 ordinary loss in 2010, and $9,000 ordinary loss in 2012
$14,000 short-term capital loss in 2012
$15,000 short-term capital loss in 2010, and $9,000 short-term capital loss in 2012
None of the above
Question 8.8. (TCO 1) The federal income tax applicable to corporations _____.
(Points : 5)
requires the determination of adjusted gross income
allows a deduction for dependency exemptions
allows a deduction for personal exemptions
allows a deduction for the standard deduction
None of the above
Question 9.9. (TCOs 2, 3, 6, 8, 9, and 10) On January 10, 2011, Sparrow Corporation
purchased stock in Macaw Corporation (the stock is 1244 small business stock) for
$275,000. On October 15, 2012, Sparrow sold the stock for $150,000. How should Sparrow
treat the loss on the sale of the stock?
(Points : 5)
$125,000 ordinary loss
$125,000 short-term capital loss
$125,000 long-term capital loss
$50,000 ordinary loss and $75,000 long-term capital loss
None of the above
Question 10.10. (TCOs 2, 3, 6, 8, 9, and 10) Kirk had an adjusted gross income of $60,000.
During the year, his personal use summer home was partially destroyed by a fire. Pertinent
data with respect to the home follows.
4. (TCOs 1, 2, 3, and 11) Individuals who receive substantial Social Security benefits are
usually not eligible for the tax credit for the elderly or disabled because these benefits
effectively eliminate the base upon which the credit is computed. Explain. (Points : 10)
Ans) The credit computation is reduced by the qualifying income base amount. Those who
receive Social Security benefits or have a high AGI can have the credit base reduced to
zero. That being said, this credit is nonrefundable which means the allowable credit is not
supposed to exceed the tax liability.
3. (TCOs 1, 2, 3, and 11) Travel status requires that the taxpayer be away from home
overnight. (1) What does away from home overnight mean? (2) What tax advantages result
from being in travel status? (Points : 10)
1) What does away from home overnight mean?
Ans) To deduct the costs of lodging and meals (and incidentals-see below) you must
generally stay somewhere overnight. In other words, away from your regular place of
business longer than an ordinary days work and you need to sleep or rest to meet the
demands of your work while away from home. Otherwise, your costs are considered local
transportation costs and the costs of lodging and meals are not deductible.
2) What tax advantages result from being in travel status?
Ans) If travel status exists, many otherwise nondeductible expenses (e.g., meals, lodging,
transportation) become deductible.
2. (TCOs 2, 3, and 11) When a taxpayer disposes of a passive activity by gift, what happens
to any unused passive losses? (Points : 15)
Ans) Special rule for gifts:
In the case of a disposition of any interest in a passive activity by gift
(A) the basis of such interest immediately before the transfer shall be increased by the
amount of any passive activity losses allocable to such interest with respect to which a
deduction has not been allowed by reason of subsection (a), and
(B) such losses shall not be allowable as a deduction for any taxable year.
3. (TCOs 9 and 12) In connection with facilitating the function of the IRS in the
administration of the tax laws, comment on the utility of the following: (1) the power to make
adjustments to properly reflect a taxpayers income, and (2) the availability of interest and
penalties for taxpayer noncompliance. (Points : 15)
Ans)
1) This power is particularly useful to prevent taxpayers from manipulating accounting
procedures.
2) The imposition of extra penalties, in addition to the tax owed, definitely deters taxpayer
noncompliance
2. (TCOs 1, 3, and 10) In 2012, Walter had the following transactions.
Salary $80,000
Capital loss from a stock investment ($4,000)
Moving expense to change jobs ($10,000)
Received repayment of $10,000 loan he made to his brother in 2007 (includes interest of
$1,000) $11,000
Property taxes on personal residence $2,000
Based on the information given above, determine Walters AGI. Be sure to show your work.
(Points : 15)
Ans) 80,000 (salary) $3,000 (allowable loss on stock investment) $10,000 (moving
expenses) + $1,000 (interest on loan) = $68,000 .
-The unused loss of $1,000 from the stock investment sale can be carried over to 2013.
-The loan repayment of $10,000 is a return of capital and has no effect on gross income.
-Property taxes paid on a personal residence is a deduction from AGI and has no impact on
the determination of AGI
1. (TCOs 1, 2, 4, and 7) Caroline and Clint are married, have no dependents, and file a joint
return in 2013. Use the following selected data to calculate their federal income tax liability.
AMTI $325,000
Regular income tax liability $61,001
AMT tax preferences $107,000
Ans) The Alternative Minimum Tax exemption amount for tax year 2013 is $51,900
($80,800, for married couples filing jointly), set by the American Taxpayer Relief Act of 2012,
which indexes future amounts for inflation. The 2012 exemption amount was $50,600
($78,750 for married couples filing jointly).
AMTI $325,000
Regular income tax liability 61,001
AMT tax preferences 107,000
ANSWER: The AMT is calculated as follows:
AMTI $325,000
AMT exemption [$80,800 25%($325,000 $156,500)] (38,675)
AMT base $235,025
$182,500 26% =
$ 47,450
$52,525 28% = 14,707
Tentative AMT $ 62,157
Regular income tax liability (42,066)
AMT $ 20,091
4. (TCOs 1 and 5) Joe is 50 years old, unmarried, and without children. He has earnings
during 2012 of $8,000. He is not claimed as a dependent on another taxpayers return.
Does he qualify for the earned income credit? If so, calculate the amount of credit that is
available to him. (Points : 20)
Ans) Ans) Earned income of $8,000 (but subject to ceiling of $5,970) $5,970
Rate 7.65%
Tentative credit $475
Less:
Credit phase-out
Earned income $8,000
Base for phase-out (7,470)
Excess $530
Phase-out rate 7.65% (117)
Available earned income credit $340