Incorrect Questions 2 Flashcards

Question

The National Football League has a rule that bars players from entering the league, unless they have been out of high school for at least three years. Maurice, a running back from Big State University who is tired of going to class and wants to start earning as a professional sportsman, challenges the rule. Which of the following is true? A. Maurice has a strong claim under the ADEA. B. Maurice's ADEA claim will probably fail because the ADEA does not protect against reverse age discrimination. C. Maurice's ADEA claim will probably fail, because the ADEA does not apply to organizations such as the NFL. D. B and C.

Answer 1

B. Maurice's ADEA claim will probably fail because the ADEA does not protect against reverse age discrimination. Because the ADEA protects older people and not youngsters from discrimination, this is the best answer.

Answer 2

B. Mary will probably lose, because she has not established an intimidating, hostile, or offensive working environment. It would be rare that a single comment, no matter how thoughtless, rude, or sexist, could produce an actionable "hostile environment."

Answer 3

C. Sholanke has a strong claim for national-origin discrimination. National-origin discrimination claims are often based on discrimination owing to employees' accents. Because Sholanke exceeds quotas, he cannot have been fired for cause. The supervisor admits the discrimination against Sholanke.

Answer 4

C. A and B.

Answer 5

B. In order to be eligible for benefits, Massey must be prevented from working for a year or more. The disability must be sufficiently serious to prevent the applicant from working for at least a year, so this answer is accurate.

Answer 6

D. A and B only.

Answer 7

D. Medicaid payments.

Answer 8

Failure to supply taxpayer identification numbers. Yes Failure to make timely FICA deposits. Yes Employers must both supply taxpayer ID numbers and regularly make required deposits to comply with the Act, which provides retirement and disability insurance.

Answer 9

A. Deductible by Syl as additional compensation that may be included in the employees' taxable income. The IRS does not let workers escape tax liability that easily. Employees are required under FICA to contribute around 7.5% of their earnings. If this amount is paid for them, it is a very real increase in their "pay," and is therefore treated as income. Syl, then, may deduct these amounts as paid income.

Answer 10

B. Musgrove remains primarily liable for Tower's share of FICA taxes if it fails to withhold and pay the taxes on Tower's wages. Ignore all of the information about the relationship, because the question tells us the important thing: Tower is an employee. An employer must either deduct FICA taxes or pay them for ALL employees. So long as a person is not classified as an independent contractor, these taxes are due one way or the other.

Answer 11

D. None of the above.

Answer 12

C. A vehicle received as a productivity award. Social security is set up to help retirees with their loss of earned income. Generally, to be subject to FICA taxes, the income must be earned in the course of employment. This does not mean that only traditional wages are taxed. A car earned as a bonus is still very much a benefit realized in the course of employment, and so the value of the car will be the basis for FICA taxes.

Answer 13

C. $50,000. The maximum wage base for FICA is reduced by the amount Jill paid through other means. She and MaximumEd both paid their share on the $50,000 that she made working for MaximumEd. Therefore, Jill should have to pay taxes under SECA on only $50,000, so this is the correct answer.

Answer 14

B. Randolph need not pay tax under SECA on the $250,000 because it is not "income." Gifts are "passive" income and not covered by SECA.

Answer 15

D. Deductible by the employer as a business expense for federal income-tax purposes. An employer pays for all obligations under FUTA and the employees do not contribute out of their paychecks. These taxes are fully deductible by the employer when the employer calculates federal income taxes.

Answer 16

B. Ral must file a 2005 FUTA return because it had at least one employee during at least 20 weeks of 2005. A return must be filed under FUTA if there are ANY employees during a substantial portion of the year. If a full OR part-time employee is around for over 20 weeks in a given year, a return must be filed.

Answer 17

C. 5.4% The key is that the overall payments made by the employer should not exceed the overall federal unemployment tax rate of 6.2%. Therefore, all 5.4% of the state's standard unemployment tax rate may be credited against the federal percentage.

Answer 18

A. Some workers may be included within the minimum-wage provisions, but exempt from the overtime provisions.

Answer 19

Hourly Yes Weekly Yes Monthly Yes The FLSA does not prohibit any of these pay periods. It ensures that a worker's total compensation is not below a certain level, but wages may be paid on an hourly, weekly, or monthly basis.

Answer 20

B. All of the funds are provided by the employer. If an employee puts wages or other compensation into a pension plan, it is called a "contribution." Non-contributory plans are funded entirely by the employer, and not at all by the employees. Such plans are increasingly rare.

Answer 21

C. Dan will have to pay all the premiums himself. COBRA strikes a balance between the former employee's need for coverage and the former employer's desire not to be saddled with the expense.

Answer 22

D. None of the above.

Answer 23

D. ERISA applies to government pension plans. This answer is correct, because coverage of government pension plans is not a feature or ERISA.

Answer 24

A. It broadly pre-empts state regulation of pension funds.

Answer 25

A. Its purpose is to balance the needs of an employee's workplace with the needs of the employee's family. The FMLA is a social program, following the Scandinavian model, for balancing these competing interests.

Answer 26

B. Employees must request FMLA leave in order to be entitled to it. The FMLA puts the onus on employees to request FMLA leave, rather than upon the employer to offer it.

Answer 27

C. $ 60,000 The gain recognized from the sale is: Amount realized $200,000 Adjusted basis ($160,000 - $60,000) 100,000 Recognized gain $100,000 Personalty is subject to the Section 1245 depreciation recapture rules which indicate that gain will be taxed as ordinary income up to the amount of depreciation claimed on the property. Since there was $60,000 of depreciation on the equipment, $60,000 of the gain is taxed as ordinary income and the remaining $40,000 is taxed as Section 1231 gain.

Answer 28

D. $290,000 Section 1231 loss. All of the assets sold are assets that have been used in a business and are therefore Section 1231 losses. Thus, all of the losses are Section 1231 losses and total $290,000.

Answer 29

C. $300 ordinary income. Tangible assets that are used in a trade or business and owned for one year or less are ordinary assets. Since the computer was owned for slightly more than four months, the gain is classified as ordinary income.

Answer 30

C. Straight-line, 75%. A computer qualifies as listed property, and MACRS accelerated depreciation can be claimed for listed property only if the business use of the asset exceeds 50% of the total use. Since Kaitlin's business use is 45%, she does not meet the 50% test and must use straight-line (ADS) depreciation. However, she can depreciate both the business and investment use of the asset, so 75% of the asset's basis qualifies to be depreciated.

Answer 31

B. Salvage value is ignored for the purposes of computing the MACRS deduction. Under MACRS, the property's depreciable basis as determined by Code Section 162 is used to compute the depreciation deductions, except that salvage values are considered to be zero. Hence, the salvage value is ignored for computing the MACRS depreciation deduction and, therefore, this response is correct.

Answer 32

C. $450,000 Land is not depreciable. Section 179 can be elected to expense the $450,000 of business assets since it does not exceed the maximum Section 179 limit of $500,000 as given in the problem.

Answer 33

C. $15,000 Property purchased for use in active trade or business is considered Code-Section 1245 property. Code-Section 1245 property is eligible for the Code-Section 179 election. Under this election, taxpayers may expense a statutory amount of the cost of property used by the taxpayers in active trade or business. The statutory amount is $25,000 for 2015. Since Browne purchases the equipment for use in business, the property is eligible for the Code-Section 179 deduction. Browne's income could limit the amount of the deduction, because the statutory amount, $25,000, is more than Browne's business income of $15,000. Hence, Browne may elect under Code Section 179 to deduct $15,000. The remaining $5,000 of the cost of $20,000 can be carried over to future years.

Answer 34

C. 15 years. The statutory amortization period for a covenant not to compete that is related to a business acquisition is 15 years.

Answer 35

D. $2,250 Under MACRS, the office building is considered non-residential real property. Land cannot be depreciated. Its class life is 39 years. MACRS requires that the straight-line method be used to compute the depreciation of 39-year class life property. Therefore, the office building would be depreciated at a rate of $6,000 per year ([$264,000 building cost, less $30,000 cost of land]/39 years). However, the mid-month convention applies to 39-year class life property. Therefore, for August 2015 (the first month of service), Graham could deduct $250 (= $6,000/12 months x one-half of a month). For the period of September 2015 to December 2015 (the remainder of the tax year), Graham could deduct $2,000 (= $6,000 x 4/12 months). Hence, Graham's MACRS deduction for the office building in 2015 would be $2,250, the sum of the two periods.

Answer 36

B. $3,000 ``` This is a qualified like-kind exchange because a machine was exchanged for equipment and Hogan's use for each is for business purposes. Amount Realized: Equipment received $80,000 Cash 1,000 Debt relief 2,000 Total $ 83,000 Adjusted Basis: Cost $100,000 Depreciation (30,000) (70,000) Realized Gain $13,000 Debt relief and the cash received are both considered to be boot received, which is a total of $3,000. The recognized gain is the lower of the realized gain, $13,000, or boot received, $3,000. ```

Answer 37

C. $50,000 When a taxpayer exchanges property for "like-kind" property, no gain or loss is generally recognized. However, if boot is received, gain is recognized to the extent of boot received in the exchange. The exchanges of real estate for "like-kind" real estate qualify for non-recognition under the "like-kind" exchange rules. Reed gave up real estate with an adjusted basis of $300,000. Reed received real estate with a fair market value of $450,000 and $50,000 in cash. Hence, Reed realized a gain of $200,000. However, this gain is only recognized to the extent of the boot that Reed received, $50,000.

Answer 38

D. $36,000 Aviary's basis in the building is $420,000 ($500,000 cost - $80,000 depreciation). Aviary's gain on the sale of the building is $180,000 ($600,000 amount realized - $420,000 basis). On the installment basis, the $180,000 gain is reported pro-rata as payments are received. In the year of sale, 20% ($120,000/$600,000) of the total payments of $600,000 are received. Thus, 20% of the gain is recognized, or $36,000 ($180,000 x 20%).

Answer 39

C. $1,000 loss. Sand's basis per share is $180 ($18,000/100 shares). Sand's realized loss on the 50 shares sold is $2,000 ($7,000 amount realized - $9,000 basis ($180 x 50 shares). This loss is not recognized under the wash sale rule if the same stock is repurchased within 30 days. Since only 25 shares were repurchased during the 30 day period, 50% (25 shares/50 shares) of the loss is not recognized. Therefore, $1,000 of the realized loss is recognized.

Answer 40

C. $165,000 The gross profit on the sale is the amount realized less the property's adjusted basis. The amount realized is $200,000 + $50,000 debt relief - $10,000 selling expenses, or $240,000. The $240,000 is reduced by the basis of $75,000 to produce the gross profit of $165,000.

Answer 41

A. $0 A taxpayer acquiring property through purchase or exchange from a person who sustained a loss on the transaction that was disallowed owing to related taxpayer rules realizes a gain on the sale or other disposition of the property only to the extent that the gain exceeds the amount of the disallowed loss. Alice acquired the Zinco stock from her father, who sustained a disallowed loss of $10,000 ($20,000 selling price, less $30,000 purchase price). Hence, Alice would have to realize a gain of more than $10,000 for her to recognize a gain, since she now has a right of offset of $10,000. Alice purchased the stock from her father for $20,000 and sold the stock for $25,000 - realizing a gain of $5,000. Since Alice's realized gain is less than her father's right of offset, Alice does not recognize any gain on the sale of the stock.

Answer 42

2014 2015 $0 $0 Under wash-sale rules, taxpayers may not recognize losses attributable to the sale of stock or securities if substantially identical stock or securities are purchased 30 days before or after the sale giving rise to the loss. Wash-sale rules do not prevent the recognition of gains from these sales. Smith sold 100 shares of Core Co. common stock on January 3, 2015 for $13,000. As the stock was purchased for $15,000, Smith sustained a loss of $2,000 on the transaction. However, Smith may not recognize this loss because Smith purchased an additional 100 shares for $13,000 on December 30, 2014, which was within 30 days before or after the January 3, 2015 sale. Thus, Smith may not recognize a loss in either 2014 or 2015.

Answer 43

C. Both I and II. Taxpayers may elect to amortize taxable bonds purchased at a premium. Non-taxable bonds purchased at a premium generally are required to be amortized. The amortized bond premium is based on the constant yield to maturity. The amount amortized usually reduces the taxpayer's basis in the bonds and, for taxable bonds, results in an offsetting deduction for interest received from the bond.

Answer 44

C. The bond's basis is reduced by the amortization.

Answer 45

C. $1,900 Refunds and recoveries attributable to a prior tax year are excluded from income to the extent that the amount does not reduce the amount of tax imposed for the earlier year. However, interest received on these refunds and recoveries is taxable interest income. Thus, Charles and Marcia should include the interest received on the state and federal income tax refunds as interest income on their income tax return. In addition, Charles and Marcia should include the interest received on federal government obligations as taxable interest income on their income tax return because interest on these obligations is taxable. However, interest on state government obligations is tax-exempt income and, as a result, Charles and Marcia should not include interest income from these obligations on their income tax return.

Answer 46

B. The $1,000 difference is includible in Stewart's income tax return. Under the accrual method of accounting, income is reported once all events to establish a taxpayer's right to receive the income have occurred and the amount can be determined with reasonable accuracy. If an amount of income has been accrued on the basis of a reasonable estimate with the exact amount to be determined at a later date, any difference between the estimate and exact amount is to be included in income or deducted in the year when the exact amount can be determined.

Answer 47

B. $10 Federal and state income tax refunds are excluded from a taxpayer's taxable income to the extent that the refund did not reduce the amount of tax for the earlier year. However, any interest earned on these refunds is considered taxable income. Thus, Clark's state income tax refund is excluded from taxable income. However, the $10 in interest income from the refund is taxable income and, therefore, included on Clark's 2015 federal income tax return.

Answer 48

C. $550 The amount of income realized by a taxpayer from a sale or disposition of property equals the sum of the amount of cash received and the fair market value of any property received. Despite billing Wood $600 for the dental services, Perle only received $200 of cash and $350 of property from the transaction. Thus, $550 of taxable income, the sum of the cash received and the fair market value of any property received should be included on Perle's income tax return.

Answer 49

A. Fair market value. A corporation may deduct the fair market value of the contributed property but must add the same amount to its gross income for the receipt of the gift. Since Lyle Corp. deducted the fair market value of the donated drugs as a charitable contribution, it must add the same amount to its gross income.

Answer 50

C. $32,000 All of the items received are included in gross income except for the state income tax refund. Since Randolph always uses the standard deduction, no tax benefit is received when the state income taxes are paid. Therefore, the refund is not taxable.

Answer 51

B. $8,000 Alimony received by a taxpayer is included in that taxpayer's gross income and alimony paid by a taxpayer is deductible from that taxpayer's gross income. To be considered alimony, the payments must be made under a divorce or separation agreement. Payments to third parties (such as tuition, rent and mortgage) by the spouse paying alimony for the spouse receiving alimony receive the same treatment as cash payments. John and Mary have a divorce decree stipulating $10,000 per year payments from John to Mary, but the amount decreases to $8,000 when their child reaches the age of 18 years. Due to this decrease, $2,000 of the $10,000 payment would be considered child support and, as a result, would not be reported by Mary as income. The remaining $8,000 would be considered alimony and, therefore, reported as income by Mary.

Answer 52

D. $41,000 Wages are included in gross income for the year in which they are received. Unemployment compensation is also included in gross income since it replaces income that would have been received if working. Therefore, the total amount included in gross income is $41,000.

Answer 53

B. $135,000 Decker's cost basis is the $25,000 he paid for the policy plus the $40,000 he paid in premiums. $200,000 less $65,000 = $135,000.

Answer 54

B. $1,260 ``` PI = AGI + tax-exempt interest + 50% (SSB) PI = $60,000 + $1,000 + 50% (8,400) = $65,200. ``` Since PI ($65,200) exceeds Base Amount 2 ($34,000), then the taxable amount of SSB is the lesser of: .85 x SSB ($8,400) = $7,140, or .85 x [PI - BA2; $65,200 - $34,000) = $26,520, plus the lesser of amount included based on the 50% formula (50% x $8,400) = $4,200, or $4,500 (unless married filing joint, then $6,000), which provides $26,520 + $4,200 = $30,720 for part b of the formula. Thus, the amount included in income is the lower of $7,140 or $30,720, so the amount excluded is $1,260 ($8,400 - $7,140).

Answer 55

D. $10,000 Joan meets all of the requirements to exclude the gift from income, except that she accepted the award and received payment. Therefore, the FMV of the award, $10,000, is included in her income.

Answer 56

Accounts receivable for services rendered No Year-end merchandise inventories Yes Unless the IRS consents to a change of method, taxpayers are to use the accrual method of accounting for purchases and sales if inventories are used. Accounts receivable for services rendered does not trigger the required use of the accrual method.

Answer 57

A. Off-site storage. Off-site storage costs must be capitalized as part of the inventory cost for tax purposes.

Answer 58

D. Annualize income and calculate the tax on annualized income, then multiply the computed tax by the number of months in the short period divided by 12. If a corporation filed a short-year return for 3 month, the income for that period is first multiplied by 4 (12 months/3 months) to annualize the income for 12 months. The corporate tax liability is then computed on this amount for the full 12 months. That amount is the multiplied by 3/12 to prorate for the short tax year.

Answer 59

C. An international accounting firm organized as a partnership. Partnerships can use the cash method regardless of the amount of gross receipts as long as none of the partners are C corporations.

Answer 60

D. $10,000,000 The Uniform Capitalization Rules do not apply to small personal property dealers. Small personal property dealers are defined as those with $10 million or less in gross receipts during the preceding three years.

Answer 61

D. $27,000 For accrual based taxpayers, items generally are included in gross income for the year in which the income is earned. However, for tax purposes, income is earned when 1) all the events have occurred to attach the taxpayer's right to receive the income and 2) the amount of income can be determined with reasonable accuracy. Cash based taxpayers report income when it is actually received or constructively received (i.e., in the taxpayer's control). Since all the events have occurred to attach Ral Corp.'s right to receive the income and the amount of income can be determined with reasonable accuracy, the corporation must report $27,000 in rental revenue for 2015. It is irrelevant that the rental revenue covers the following years.

Answer 62

A. Is made on the initial tax return by using the chosen method. Accounting methods for a new corporation are made on the initial tax return.

Answer 63

D. $65,000 Ace Corp. would report rent revenue of $65,000. Of this amount, $55,000 (the sum of $50,000 in rental payments and $5,000 in nonrefundable rent deposits) would be cash receipts. Ace Corp. is an accrual based taxpayer. Therefore, for tax purposes, income is earned when 1) all the events have occurred to attach the taxpayer's right to receive the income and 2) the amount of income can be determined with reasonable accuracy. With respect to rent receivable, the income must have been earned to record it as a receivable. Hence, in calculating rent revenue, the $10,000 increase in rent receivable from 2014 to 2015 would have to be added to the corporation's cash receipts.

Answer 64

B. A qualified personal service corporation Taxable income shall not be computed under the cash receipts and disbursements method of accounting by: Corporations, unless a qualified personal service corporation with gross receipts of not more than $5,000,000. Partnership which has a C corporation as a partner, or A tax shelter

Answer 65

A. Research Taxpayers subject to the uniform capitalization rules must capitalize all direct costs and certain indirect costs properly allocable to real property and tangible personal property produced by the taxpayer, except for research and experimental expenditures.

Answer 66

C. Dart must use the accrual method of accounting. C corporations cannot use the cash method of accounting unless their average annual gross receipts for the previous three years do not exceed $5,000,000. Once the $5,000,000 test is failed the accrual method must be used for all future tax years. Since Dart has had revenues of more than $20 million for the last three years it must use the accrual method of accounting.

Answer 67

D. $4,800 Since this is not an accountable plan, all reimbursements are included in the employee's income ($400 x 12 months = $4,800) and all employee deductions will be 2% miscellaneous itemized deductions.

Answer 68

C. $100,414 The first $50,000 of group-term life insurance provided by an employer is a tax-free fringe benefit. Johnson receives $200,000 of group-term life insurance, so $150,000 of this coverage is taxable. There are 150 units of $1,000 each of excess coverage, included in income at $2.76 for each unit. The income from the insurance coverage is $414 ($2.76 × $150). When the $414 is included with the $100,000 salary, gross income is $100,414.

Answer 69

D. $350,000 John does not have any basis in his retirement account. He did not receive basis for his contributions because they were made from earnings that were not taxed. He did not receive basis for his employer's contributions since they were made from employer funds. Therefore, the entire $350,000 distribution is included in John's gross income.

Answer 70

B. $5,250 Mr. Kitten's expected return is 120 months × $1,000, or $120,000. His basis in the annuity is $50,000, so his exclusion ratio is 41.67% ($50,000/$120,000). He received nine payments totaling $9,000 in 2015, and $3,750 is excluded from income. Therefore, $5,250 is included in income ($9,000 − $3,750).

Answer 71

B. April 15 | IRA contributions must be made by the original due date of the return (April 15) even if the return is extended.

Answer 72

A. Wages of $20 per week to his 14 year-old daughter who cleans the restaurant on Saturdays. It is an ordinary and necessary expense to have the restaurant cleaned and the $20 is reasonable.

Answer 73

D. The salaries, rent expense, and interest expense are all deductible. The ordinary, necessary, and reasonable expenses of operating illegal businesses (other than illegal drug activity) are permitted (as long as the expense itself is not against public policy). All of these expenses are deductible against the revenue earned from the activities, so this response is incorrect.

Answer 74

C. $4,000 A taxpayer may not deduct life insurance premiums in which the taxpayer is directly or indirectly the beneficiary. Hence, Ral Corp. may not deduct the $3,000 in keyman insurance premiums that it paid on Budd's life because the corporation is the beneficiary. However, a taxpayer may deduct the group term life insurance premiums if the insured employee or his/her beneficiaries would get the insurance proceeds. Thus, Ral Corp. may deduct the $4,000 in group term insurance premiums paid on the $10,000 life insurance policies for each of Ral Corp.'s four employees.

Answer 75

A. I only No deduction or credit shall be allowed for any amount paid or incurred during the taxable year in carrying on any trade or business if such trade or business (or the activities which comprise such trade or business) consists of trafficking in controlled substances (within the meaning of schedule I and II of the Controlled Substances Act) which is prohibited by Federal law or the law of any State in which such trade or business is conducted. However, a deduction is allowed for the cost of merchandise purchased.

Answer 76

B. $2,600 The unreimbursed employee business expenses and charitable contribution are itemized deductions, so these do not affect the computation of adjusted gross income. AGI equals the $3,000 of wages less student loan interest of $400, or $2,600.

Answer 77

A. $100 Qualified moving expenses are limited to the expenses for moving the household goods ($2,000) and lodging ($100). Meals are not deductible during a move and temporary living expenses are never deductible. The $2,100 of qualified expenses is reduced by the $2,000 reimbursement from the employer.

Answer 78

A. $0 If an employee or a self-employed individual moves his/her residence due to a change of his/her principal place of work, reasonable expenses resulting from moving household goods and personal effects from the old residence to the new residence and from traveling from the old residence to the new residence may be deducted. To qualify for the deduction, the new job site must be at least 50 miles further away from the old residence than was the old principal job. If the taxpayer was unemployed before the move, the job site must be at least 50 miles away from his/her old residence. In addition, the taxpayer must be employed full-time in the area of the new principal place of work for at least 39 weeks during the 12 month period following the move, or if self-employed, for at least 78 weeks in the 24 month period following the move with at least 39 of the 78 weeks in the 12 month period following the move. Neither the $500 fee for breaking the lease on the prior apartment residence nor the $900 for the security deposit placed on the apartment at the new location may be deducted as moving expenses. They are not qualified expenses nor was the move work related or more than 50 miles. Also note that the question asks to determine the moving expenses that are deducted on Schedule A. Moving expenses are deducted on Form 1040 - they are not itemized deductions.

Answer 79

C. Limited to the taxpayer's 2015 net investment income. A noncorporate taxpayer's deduction for interest on investment indebtedness is limited to the taxpayer's net investment income. Interest on investment indebtedness is interest paid or accrued that is allocable to property held for investment.

Answer 80

B. A medical expense deduction is allowed for payments made in the current year for medical services received in earlier years. Medical expenses paid by an individual are deductible in the year paid.

Answer 81

B. $2,000 Investment interest expense is deductible to the extent of net investment income. Net investment income is defined as investment income ($10,000) less noninterest investment expenses ($8,000), or $2,000. So, $2,000 of the $5,000 of investment interest expense is deductible as an itemized deduction. The remaining $3,000 is carried over, indefinitely, and deducted in a year that has sufficient net investment income.

Answer 82

B. $10,000 Total allowable medical expenses is $20,000. Only medical expenses in excess of 10% of AGI are allowable as a deduction. Carrol's AGI is $100,000 x .010 = $10,000. Total expenses of $20,000 - $10,000 = $10,000 deductible expenses.

Answer 83

D. $6,800 Taxpayers may deduct the qualified medical expenses incurred for both their treatment and the treatment of spouses and dependents. These medical expenses only may be claimed in the year the expenses were paid. If the medical expenses were paid with borrowed funds, as credit cards are considered, the deduction still is taken the year the medical expenses were paid, not in the year the borrowed funds were repaid. Scott may deduct his son's $4,000 of medical expenses in 2015 because his son was his dependent and the medical expenses were paid with borrowed funds in 2015. Scott also may deduct the $2,800 of medical expenses for his wife in 2015 because he paid the expenses in cash during 2015. Therefore, Scott may claim $6,800 in his 2015 income tax return for medical expenses.

Answer 84

D. Not deductible in 2015. Assessments for public improvements, that tend to increase the value of the taxpayer's property (whether or not the value actually increases), generally, are not deductible. However, assessments may be deducted to the extent that the taxpayer can prove the assessment is allocable to maintenance. Since Hall cannot prove that any of the assessment for the sewer system is allocable to maintenance, the assessment is not deductible.

Answer 85

C. $60 When individual taxpayers make charitable contributions in connection with admission to an entertainment event, the individual taxpayer only may deduct the difference between amount paid for admission and the fair value of admission.

Answer 86

B. $1,500 $1,500 is correct. The $2,000 cash donated to a needy family is not deductible because the needy family is not a qualified charitable organization. The stock was purchased for $1,500 and not held for one year to be capital gain property, therefore the deduction for the stock is the fair market value of the stock ($3,000) less the short-term capital gain ($1,500) if the stock had been sold ($3,000 − basis of $1,500) = $1,500.

Answer 87

D. Not deductible in 2015.

Answer 88

$200 $0 $200 Individual taxpayers must report gambling winnings as other income on their income tax returns. The taxpayer's gambling losses may be deducted, but only to the extent of the taxpayer's gambling winnings and only as an itemized deduction not subject to the 2 percent adjusted gross income floor.

Answer 89

C. $325 ``` The deduction for business gifts is limited to $25 per individual/customer who receives a gift. The total deduction is computed as follows: 5 x $15 = $ 75 9 x $25 = $225 1 x $25 = $ 25 Total $325 ```

Answer 90

B. $365 ``` The deduction for business gifts is limited to $25 per donee per year. The deduction is computed as follows: 4 at $ 10 $ 40 4 at $ 25 100 4 at $ 50 limited to $25 100 5 at $ 100 limited to $25 125 Total $365 ```

Answer 91

B. $1,200 When traveling outside the U.S. primarily for vacation (4 weeks total versus 1 week seminar), the cost of the trip is a nondeductible personal expense. Baker can deduct the registration fees for the business seminar and deduct the out of pocket expenses for the time that was directly related to the business seminar (1 week). 5 days x $100 per day plus $700 registration = $1200 of deductible education expense.

Answer 92

B. $ 10,000 The $100,000 NOL would first be carried back to 2013 and offset $50,000 of income. It would then be carried to 2014 and offset $40,000 of income. This would leave $10,000 of NOL ($100,000 - $50,000 - $40,000) to carryforward to 2016.

Answer 93

A. $0 Since Budd reports on the cash basis he did not recognize income when the client was billed. Therefore, he has no basis in the receivable to deduct when it becomes uncollectible.

Answer 94

A. The losses qualify as casualty or theft losses. An individual's losses on transactions entered into for personal purposes are only deductible if the losses qualify as casualty or theft losses. If the losses originated due to a trade or business, individuals also may deduct losses originating from transactions entered into for profit.

Answer 95

A. $0 Passive activity losses normally only may be used to offset passive activity income. Therefore, Cobb may not use any of his loss attributable to the rental real estate to offset against income from nonpassive sources.

Answer 96

B. $15,000 Lane has $160,000 in active income, $15,000 of passive income, and $35,000 of passive losses. Note that the exception that allows deduction for up to $25,000 of rental real estate losses does not apply since Lane's modified AGI exceeds $150,000. The passive losses can only be deducted to the extent of passive income, so $15,000 is correct.

Answer 97

C. $29,000 Wages, interest, dividends, and Schedule C income are all taxable for a total of $54,000. $25,000 of the rental loss is allowed since Bearing actively participates in the rental real estate activity and his modified AGI does not exceed $100,000. However, the $5,000 passive loss from the partnership cannot reduce other income. Therefore, AGI is $29,000.

Answer 98

B. Suspended losses can be carried forward, but not back, until utilized. Suspended passive losses can be carried forward indefinitely, but they cannot be carried back.

Answer 99

C. 2 For a taxpayer to claim an individual as an exemption on his tax return, the individual must be a dependent of the taxpayer. Exempt income such as social security is not included in the individual's income for testing whether or not an individual's income exceeds the exemption amount.

Answer 100

C. Ben Ben has provided over 10% of Sara's support and all of the qualifying relative tests are met (gross income, joint return, citizen) except for the support test, but it is met through the multiple support agreement. The individuals as a group have provided over 50% of Sara's support.

Answer 101

B. Three For a taxpayer to claim an individual as an exemption on his tax return, the individual must be a qualifying child or qualifying relative. Kim is not a qualifying child or a qualifying relative because she provides over 50% of her own support. Therefore, no one can claim her as a dependent. Dale is a qualifying child and can therefore be claimed as a dependent. He meets the relationship, age, residence (lives at home for more than half the year; time at college counts as home), joint return, and citizen test. Grant does not qualify as a qualifying relative because he fails the gross income test. His gross income exceeds the personal exemption amount for 2015 of $4,000. Hence, Jim and Kay may take an exemption for Dale and, including themselves, take a total of three personal exemptions.

Answer 102

A. Taxpayers who were married but lived apart during the year. Whether taxpayers live together does not impact filing status. Marital status is determined on the last day of the tax year. Since the taxpayers were married as of the end of the tax year they may file married filing joint (note that they could also file married filing separately).

Answer 103

Food consumed in the home Yes Value of services rendered in the home by the taxpayer No For head of household filing status, the following costs are considered in determining whether the taxpayer has contributed more than one-half the cost of maintaining the household: rent; mortgage interest; taxes; insurance on the home; repairs; utilities; and food eaten in the home. The following costs may not be considered: clothing; education; medical treatment; vacations; life insurance; transportation; rental value of home owned by taxpayer; and the value of services provided by the taxpayer or a member of the taxpayer's household. This response correctly indicates that the food consumed may be considered in determining whether the taxpayer has contributed more than one-half the cost of maintaining the household and that value of services provided by the taxpayer may not be considered.

Answer 104

C. $35,000 The following amounts are added back to taxable income to compute AMT income: Interest because proceeds were not used for principal residence $15,000 Taxes 18,000 Medical expenses (no adjustment since 10% of AGI threshold applies for regular tax also) -0- 2% miscellaneous itemized deductions (deducted $5,000 - (2% x $150,000) for regular tax) 2,000 Total add-back $35,000

Answer 105

C. The excess as a credit against income tax, if that excess resulted from correct withholding by two or more employers. An employee who has social security tax withheld in an amount greater than the maximum for a particular year, may claim the excess as a credit against income tax, if that excess resulted from correct withholding by two or more employers. An employee who had excess social security tax withheld from one employer should be reimbursed by the employer.

Answer 106

C. $77,000 The alternative minimum tax ensures that all taxpayers share the tax burden fairly by preventing taxpayers with substantial income from avoiding significant tax liability. The alternative minimum tax equals the excess (if any) of the tentative minimum tax over the regular tax. In computing a taxpayer's alternative minimum taxable income, several adjustments and preferences are made to a taxpayer's taxable income before personal exemptions. Adjustments are a substitution of an amount used in computing alternative minimum tax for an amount used computing regular tax. Preferences involve the addition of the difference between alternative minimum tax and regular tax treatments. Included in the preferences are those stipulating that state and local income taxes and miscellaneous itemized deductions are not deductible for alternative minimum tax purposes. Home mortgage interest on loan to acquire residence is deductible under both the regular tax and the alternative minimum tax. Thus, Mills must add back his state and local income taxes of $5,000 and miscellaneous deductions that exceed 2% of adjusted gross income of $2,000 to his $70,000 of taxable income before personal exemptions, putting his alternative minimum taxable income at $77,000.

Answer 107

B. Excess of the tentative AMT over the regular tax. The alternative minimum tax (AMT) ensures that all taxpayers share the tax burden fairly by preventing taxpayers with substantial income from avoiding significant tax liability. The AMT equals the excess of the tentative AMT tax over the regular tax.

Answer 108

D. $281,750 Baum's self-employment tax of $29,750 is not a deduction on Schedule C but a deduction in arriving at AGI.

Answer 109

``` Have an adjusted gross income of $15,000 or less No Be gainfully employed/looking for work or a student when related expenses are incurred Yes ``` Individual taxpayers with adjusted gross income of $15,000 or less may claim a child care credit for 35 percent of employment related expenses. The credit is reduced by one percent of the expenses for each $2,000 of adjusted gross income over $15,000, but is not reduced to less than 20 percent of the expenses. This response correctly indicates at least one spouse does not need to earn $15,000 or less to claim the credit. Earning more than $15,000 does not make a taxpayer ineligible for the credit, it reduces the amount of the credit by decreasing the percentage of the expenses that may be claimed. This response also correctly indicates that at least one spouse must be gainfully employed or looking for work to claim the credit.

Answer 110

B. The credit percentage begins at 35% and phases out once AGI exceeds a certain threshold. As income increases the credit percentage is eventually reduced to zero. The credit percentage begins at 35% if AGI is less than $15,000, and is reduced by 1% for each $2,000 increment (or part) in AGI above $15,000. The minimum dependent care credit is 20%. Therefore, this statement is false.

Answer 111

D. The work opportunity tax credit is calculated on the amount of wages paid per eligible employee during the first year of employment. The maximum credit is $2,400 per eligible employee. The work opportunity tax credit is 40% of the first $6,000 of wages per employee, so the maximum credit is $2,400.

Answer 112

C. $38,400 The foreign tax credit is the lower of: 1) foreign tax paid ($39,000), or 2) U.S. tax x foreign taxable income / worldwide taxable income $96,000 x $120,000 / $300,000 = $38,400

Answer 113

A. May be claimed either as a deduction or as a credit, at the option of the corporation.

Answer 114

B. $5,500 When property is contributed to a corporation in exchange for stock, the corporation takes the same basis in the property that the shareholder had, increased by any gain recognized by the shareholder. Ames had a cost basis in the balls of $500 and Roth had a basis of $5,000 in the bats, so the total basis for Homerun is $5,500.

Answer 115

B. $30,500 When a shareholder transfers property to a corporation, the corporation takes the shareholders basis in the property. Stone's basis of the property transferred into the corporation was $30,500, the adjusted basis of the computer equipment ($30,000) plus the cash ($500). Hence, the corporation's basis in the property also would be $30,500.

Answer 116

D. $0 The transaction would qualify as a tax-free event for Carr because it would be considered to be a Section 351 transfer. Under Section 351, no gain or loss is recognized if the property is transferred solely for the exchange of stock of the corporation, if immediately after the transfer the transferring taxpayer or taxpayers have control over the corporation. Control is defined as owning at least 80 percent of corporation's voting stock and at least 80 percent of the corporation's other classes of stock. Since Beck and Carr together own 90 percent of the corporation immediately after the transfer, the transaction would be a tax-free event for both taxpayers.

Answer 117

C. $60,000 X Corp's basis in the land is B's basis in the land ($40,000) plus any gain recognized by B. B's recognized gain is the lower of 1) the realized gain, or 2) the boot received. The realized gain is $30,000 ($70,000 - $40,000). The boot received is the cash of $20,000. Thus, the gain recognized is $20,000. X Corp's basis in the land is $60,000 ($40,000 + $20,000). B's amount realized is computed as follows: The corporation received cash of $50,000 and land of $70,000 for a total of $120,000. But it also gave $20,000 cash back to B as part of the formation. This is subtracted from above - - so the net value of what the corporation received is $100,000. $100,000 x 50% = $50,000, so that is the value of the stock received by B. His amount realized is $50,000 + cash received of $20,000 = $70,000.

Answer 118

B. Be deducted on Axis' 2015 tax return. The liability to pay the deferred compensation becomes fixed when: 1) all events have occurred to establish the liability to pay the compensation; 2) economic performance has occurred with respect to the liability; and 3) the amount can be determined with reasonable accuracy. In addition, accrual based taxpayers must pay the deferred compensation within the first 2 1/2 months of a tax year to deduct the compensation in the preceding year.

Answer 119

B. $610,000 In addition, accrual based taxpayers must pay the deferred compensation within the first 2 1/2 months of a tax year to deduct the compensation in the preceding year.

Answer 120

Interest incurred on loan to carry U.S. obligations No | Provision for state corporation income tax No

Answer 121

C. $345,000 Since Kelly Corp. is not affiliated with the corporation paying the dividends, it owns less than 20 percent of the corporation paying the dividends and, as a result, may take a 70 percent (or $35,000) dividend received deduction. Bad debts are deductible with no percentage limitation. However, Kelly Corp. cannot take a deduction for its bad debt expense because no bad debt was actually incurred. Instead, the expense represents an increase in allowances for doubtful accounts. The corporation's bad debt expense must be added back to net income. Hence, Kelly Corp.'s taxable income is $345,000 - net income of $300,000 minus dividend received deduction of $35,000 and plus the bad debts expense of $80,000.

Answer 122

C. $336,800 The purpose of Schedule M-1 of Form 1120, U.S. Corporation Income Tax Return is to reconcile book income (loss) with income per the return. Federal income tax is not deductible for tax purposes so it must be added back to book income, giving $349,300 ($239,200 + $110,100). The goodwill is amortized over 15 years for tax purposes, or $20,000 per year ($300,000/15 years). Thus, the book goodwill amortization is added back and the tax good will is deducted. This results in taxable income of $336,800 ($349,300 + $7,500 - $20,000).

Answer 123

D. Year 1, Yes; Year 2, NO; Year 3, NO; Year 4, NO In the first year of a corporation's existence it is automatically exempt from the AMT (Yes). Widget's first testing window to determine if it is subject to the AMT in Year 2 is just Year 1 gross receipts of $6,000,000. Since this exceeds the $5,000,000 threshold for the first three-year testing window (or portion thereof), Widget is NOT exempt from the AMT in Year 2. Once the small corporation exemption test is failed, then the corporation is NOT exempt for all future tax years, so the answer is NO for Years 3 and 4 also.

Answer 124

D. $305,000 A corporation must pay the alternative minimum tax (AMT) to the extent that the tentative minimum tax liability exceeds the regular tax liability. Therefore, Tan must pay an AMT of $30,000 ($240,000 − $210,000) in addition to the regular tax liability of $210,000. The personal holding company tax is an excise tax that penalizes companies who have excess investment income. The $65,000 PHC tax is in addition to the regular tax. The total tax liability is $305,000 ($210,000 + $30,000 + $65,000).

Answer 125

C. $27,500 When computing alternative minimum taxable income, corporations may take an exemption of $40,000 minus 25 percent of alternative minimum taxable income exceeding $150,000. Thus, this exemption is equal to zero when alternative minimum taxable income is equal to or exceeds $310,000. Rona Corp.'s exempt portion of its 2015 alternative minimum taxable income was $27,500 = $40,000 − [25 percent * ($200,000 − $150,000)].

Answer 126

A. Regardless of the number of stockholders of a corporation. The accumulated earnings tax is a tax imposed on corporations that accumulate earnings beyond reasonable amount. This tax was imposed to prevent corporations from accumulating earnings and profits with the purpose of avoiding income tax on its shareholders. Any corporation accumulating earnings beyond the point of reasonable needs of the business is considered to have accumulated the earnings for the tax benefit of its shareholders, unless a preponderance of the evidence indicates otherwise. Only the shareholders of closely-held corporations would tend to have the power to retain corporate earnings for their benefit. As a result, the accumulated earnings tax tends to be applied more often to closely-held corporations. However, the number of shareholders in a corporation is not a determining factor in imposing the tax. Hence, the accumulated earnings tax may be applied regardless of the number of shareholders in a corporation.

Answer 127

C. $50,000 The accumulated earnings tax is a penalty tax imposed on corporations that accumulates earnings and profits for the purpose of avoiding income tax for its shareholders. The accumulated earnings tax is equivalent to 20 percent of the corporation's accumulated taxable income. Accumulated taxable income is composed of taxable income adjusted downward for federal income and excess profits taxes, charitable deduction in excess of the ceiling, net capital gains and losses, and taxes of foreign countries and U.S. possessions and upward for certain corporate deductions, net operating loss deduction and capital loss carryback or carryover. When calculating the accumulated earnings tax, corporations are given a credit, the accumulated earnings credit, of $250,000 ($150,000 for certain service corporations) plus dividends paid within the first 2 1/2 months of the corporation's tax year less accumulated earnings and profits at the end of the preceding tax year. Hence, the maximum amount of accumulated taxable income that may be subject to the accumulated earnings tax for 2015 if Kari Corp. takes only the minimum accumulated earnings credit is $50,000. This amount is composed of $400,000 in taxable income less both a downward adjustment of $100,000 for federal income taxes and the $250,000 accumulated earnings credit.

Answer 128

Federal income taxes Yes Net long-term capital gain less related federal income taxes Yes Personal holding companies are required to pay taxes on their undistributed personal holding company income. Personal holding company income and undistributed personal holding company income differ. Undistributed personal holding company income is computed by adjusting taxable income, then subtracting the dividends paid deduction. Deductions are made from taxable income for federal and foreign taxes; charitable contributions (based on a higher percentage limitation than the 10 percent of income limitation imposed on corporations); and excess capital gains (i.e., any excess net long-term capital gain over net short-term capital loss for the tax year). Corporate deductions for dividends received and any net operating loss deduction must be added back, and business expenses and depreciation exceeding rental income may have to be added back. Hence, both the federal income taxes and the net long-term capital gain should be deducted from taxable income by Kane in determining undistributed personal holding company income prior to the dividend-paid deduction.

Answer 129

D. 80% To be permitted to file a consolidated return, the parent and its subsidiaries must be members of an affiliated group. Corporations qualify as members of an affiliated group by having a common parent that directly owns at least 80 percent of the total voting stock and at least 80 percent of the total value of the stock in at least one other includible corporation. In addition, a minimum of one of the other includible corporations must own at least 80 percent in each of the remaining includible corporations.

Answer 130

D. A and C may file as a group, but B and D may not file as a group. A and C are an affiliated group because A owns at least 80% of C and A is the parent company. B and D may not file a consolidated return because S corporations are not eligible to be in an affiliated group.

Answer 131

A. Deductible in full by the dissolved corporation. Filing, professional fees (accounting and legal) and other expenditures incurred in connection with liquidations and dissolutions are fully deductible for the dissolving corporation.

Answer 132

A. $ 0 If stock of a subsidiary is liquidated by its parent company, any realized gain on the transaction is, in general, not recognized. The realized gain to parent is $150 ($250 property received - $100 basis). The recognized gain is zero.

Answer 133

B. The transaction is a reorganization. The 80% control test is met since 90% of ABC's voting stock is being acquired. XYZ is using its voting stock as required for B reorganizations.

Answer 134

C. Both of the above are correct. A Type B reorganization must be stock for stock, and only voting stock of the acquiring firm, or its parent, is permitted. Acquiring must also control target after the acquisition.

Answer 135

D. $0. If taxpayer receives stocks or securities under a plan of reorganization from a corporation included in the reorganization, the taxpayer does not recognize a gain or loss from the transaction. However, if the taxpayer receives boot, the transaction is taxable up to the amount of the boot. Since Gow received the Rook Corp. stock solely in exchange for his Lad Corp. stock under a plan of reorganization and did not receive any boot, the transaction would be tax-free for Gow.

Answer 136

Shareholders Yes Corporation Yes Corporate reorganizations generally are tax-free for both shareholders and the corporation. In this case, the reorganization would be viewed as a Type A: Merger or Consolidation, which qualifies for tax-free treatment for both shareholders and the corporation. This response correctly indicates that the transaction would be tax-free for both shareholders and the corporation and, therefore, it is correct.

Answer 137

C. Both of the above are transferred. Tax attributes of the subsidiary transfer to the parent after a tax-free liquidation of the subsidiary into the parent.

Answer 138

C. Clock, Lamp, and Table. Only affiliated corporations that have Nexus with State M will be included in the state consolidated income tax return for State M.

Answer 139

B. 20% $10,000/($10,000 + $40,000) = 20%.

Answer 140

A. $257,000. ``` The starting point for computing state taxable income is $250,000. Adjustments are: State income taxes + $15,000 Municipal interest income + $10,000 Excess federal depreciation + $ 7,000 U.S. Treasury interest income -$25,000 State taxable income $257,000 ```

Answer 141

D. Foreign currency exchange gains and losses resulting from the normal course of business operations are capital. They are actually ordinary.

Answer 142

B. $ 4,000 Since the $90,000 earned income was excludable from U.S. income the $18,000 in Spanish taxes is not eligible for the foreign tax credit. The $4,000 related to the interest income is eligible.

Answer 143

B. $105,888. The $90,000 of salary is completely excluded. Foreign-earned income from personal services is limited to $100,800 in 2015.The housing is excludable to the extent it exceeds 16% × $100,800, or $16,128. This excess is $23,872 ($40,000 − $16,128). However, the housing exclusion may never exceed $14,112 in 2015, so the includible housing income is $25,888 ($40,000 − $14,112). The interest income is fully includible as is the U.S. source earned income of $60,000. Therefore, includible income is $25,888 + $20,000 + $60,000, or $105,888.