NINJA MCQS

Question 1

Mineral and similar natural resources deposits

Answer 1

are considered to be capital assets when sold in place.

The sale of mineral deposits, which are removed and sold in units, results in ordinary income.

Question 2

Copyrights held by the creator

Answer 2

are not capital assets;

however, purchased copyrights are capital assets.

Question 3

Inventory and land used in a business are

Answer 3

specifically excluded from the definition of capital assets.

Question 4

Home equity indebtedness is limited to the lesser of:

Answer 4

the FMV of the qualified residence, in excess of the acquisition indebtedness with respect to that residence, or
$100,000 ($50,000 if married filing separate).

Question 5

Forms a household employer who owes both FICA and FUTA tax in relation to the employment of his domestic service employees and has withheld income tax and FICA tax from the domestic employees’ wages may file in order to report all applicable federal employment taxes and withheld taxes for his domestic employees

Answer 5

file Schedule H and do not have to file Form 940 or Form 941

Question 6

IRC Section 179

Answer 6

is a business tax provision

requires an active trade or business for eligibility

requires purchase from an unrelated party

cost of new or used
tangible depreciable
personal property

Question 7

when property is contributed in exchange for a partnership interest.

Answer 7

no gain or loss is recognized, either by the partnership or the partner

Question 8

tax on unrelated business taxable income is computed

Answer 8

using regular corporate income tax rates if an exempt organization is a corporation

For charitable trustsUBIT is taxed at trust rates.

Question 9

gain on the sale of a principal residence

Answer 9

exclude $250,000 of gain ($125,000 of the gain since he lived in the residence only one year)

If the residence which was sold has not been occupied for at least two years, the $250,000 exclusion is prorated if the sale is due to a change in place of employment, health, or unforeseen circumstances as provided in the regulations.

Question 10

types of entities is entitled to the net operating loss deduction

Answer 10

Trusts and estates

Not-for-profit organizations are generally denied net-operating-loss deductions except in calculating any unrelated business income tax.

pass-through (partnerships and S corporations) are denied a net operating loss deduction

Question 11

IRC Section 179

Answer 11

is a business tax provision

requires an active trade or business for eligibility

requires purchase from an unrelated party

cost of new or used
tangible depreciable
personal property

expense up to $25,000 of the cost of personal property purchased and used in the active conduct of a trade or business and deduction cannot exceed net income

Excess amounts carry over to future years.

for personal property in excess of $200,000, the $25,000 is reduced dollar for dollar.

Question 12

income and expense items where the partnership must decide on the accounting treatment,

Answer 12

especially where there are choices in the treatment of each item.

These include:
amortization of organization costs,
treatment of involuntary conversions, and
the option of Section 179 expensing of equipment.

The choice of choosing the credit or the use of a deduction for foreign taxes is left to the individual partner.

Question 13

mid-quarter convention

Answer 13

required if more than 40% of assets acquired during a tax year are placed into service in the last quarter of a year

Question 14

“Sales on approval” under Article 2 of the U.C.C.

Answer 14

allows the buyer a trial period in which to sample, temporarily use, and inspect the goods

Upon the passing of such trial period without return of the goods, the buyer takes title to the goods and assumes risk of loss.

Question 15

Consideration

Answer 15

is a required element of a contract

some act of forbearance or detriment incurred, or benefit or promise thereof,

given to and received by the other party

in exchange for an act or promise by the second party

Consideration supports the promise given, causing the promise to be enforceable.

inducement to enter into a contract

need not have a monetary value

must be mutual for a valid contract, need not be equal

Question 16

Consideration is not any of the following:

Answer 16

• Past consideration (consideration given in the past in exchange for a previous promise)
• A preexisting duty (that which the promisor is already legally bound to do by contract or statutory duty)
• Illusory promise (a promise in form but not in substance)
• A moral obligation (something a person feels morally obligated to do but is not legally obligated to do)

Question 17

simple trust

Answer 17

all net income must be distributed on an annual basis

Question 18

complex trust

Answer 18

all income does not have to be distrusted on an annual basis

Question 19

charitable remainder trust

Answer 19

irrevocable trust established by a donor to provide an income stream to the income beneficiary, which the public charity or private foundation receives the remainder value when the trust terminates

Question 20

generation-skipping trust

Answer 20

contributed assets are passed directly to the grantor’s grandchildren, not the grantor’s children

Question 21

Exemptions to workers’ compensation coverage exempted.

Answer 21

vary state by state.

Typical statutory exclusions are:
domestic and agricultural employees, and
employers with less than a designated minimum of employees (which will vary by state).
Temporary employees are also commonly exempted.

Question 22

The percentage depletion rate

Answer 22

coal mined in the United States - 10%

Some types of mining for clay - 5%

gold, silver, copper, and iron ore - 15%

gas and oil (small independent producers only) - 15%

Question 23

Beneficiaries are taxed

Answer 23

on their share of the trusts income distributed to them,

but not more than their share of DNI of the trust

Question 24

In a composition agreement,

Answer 24

a debtor enters into an agreement with his creditors whereby the debtor agrees to pay the creditors some fraction of the amount of the outstanding debt.

Such an agreement discharges the debtor once the debt is actually paid.

Question 25

An assignment for the benefit of creditors

Answer 25

is a transfer by the debtor of all of his assets to a trustee, with the assigned funds to be used to pay off outstanding debts. This does not have the effect of releasing the debtor from the debts.

Question 26

passive activity loss rules are applicable to

Answer 26

``` individuals (including Pship/SCorp s/h), estates, trusts, closely held C corporations, and personal service corporations. ```

Question 27

The passive activity loss rules are not applicable to

Answer 27

partnerships, widely held C corporations, S corporations. For partnerships and S corporations, the passive activity loss rules apply at the partner/shareholder level.

Question 28

requirements for a negotiable instrument:

Answer 28

* in writing. * signed by the maker or the drawer. * unconditional promise or order to pay a fixed amount of money, with or without interest or other charges described in the promise or order. * payable to order or to bearer at the time it is issued or first comes into possession of a holder (unless it is a check). * payable on demand or at a definite time. * does not state any other undertaking or instruction by the person promising or ordering to do any act in addition to the payment of money, but the promise or order may contain (1) an undertaking or promise relative to collateral to secure payment, (2) an authorization for confession of judgment, or (3) a waiver of benefit of any law intended for the advantage or protection of an obligor.

Question 29

A portion of a taxpayer's Social Security benefits may be taxable.

Answer 29

For single taxpayers with provisional income above $34,000, gross income includes the lesser of: 85% of Social Security benefits received or 85% of excess of provisional income (defined as modified AGI + 1/2 Social Security benefit) over $34,000, plus the smaller of: the amount includible under the old law (1/2 of Social Security) or $4,500

Question 30

A person is discharged from a contractual obligation

Answer 30

if the other party has taken action to prevent a performance under the contract. in the case of “accord and satisfaction.” “accord” - agreement of the parties to modify a contract so as to require a different kind of performance than originally expected “satisfaction” = completion of the modified performance, thus discharging the new obligation.

Question 31

Corporate income tax: When a capital loss is carried to another year,

Answer 31

it is treated as a short-term loss (does not retain its original identity) carry back three years, forward five years Capital losses can only offset capital gains.

Question 32

A partner's share of a partnership loss is limited to

Answer 32

the partner's basis in the partnership then by passive activity rules and at-risk rules under IRC Sections 469 and 465 Excess loss over basis is carried forward.

Question 33

Constructive fraud on the part of a CPA

Answer 33

Gross negligence Extreme, flagrant, or reckless departure from the standards of due care and competence in performing or reporting upon professional engagements. There need not be actual intent to deceive (scienter). There is no necessity to identify any third-party users. Ordinary negligence is a lesser offence than gross negligence.

Question 34

If property contributed to a partnership is distributed to a partner other than the contributing partner within seven years of its contribution to the partnership

Answer 34

Contributing partner will be required to recognize the built-in gain or loss at the time of the disqualified distribution. Gain or loss is calculated as if the property was sold for its FMV at the date of distribution. Contributing partner's gain recognized is limited to the gain that would be recognized by the partnership. Basis in the property and partnership interests will be adjusted for the gain or loss recognized.

Question 35

A CPA will be liable to a tax client for damages from:

Answer 35

* failing to timely file a client's return, * failing to advise a client of certain tax deductions, and * neglecting to evaluate the option of preparing joint or separate returns that would have resulted in substantial tax savings for a married client. NOT refusing to sign a client's request for a filing extension.

Question 36

Effect of the 2005 Bankruptcy Reform Act upon “homestead exemptions”

Answer 36

If the debtor was involved in any federal or state securities law violations or certain criminal acts within the past five years, there is no exemption regardless of the residency or domiciliary status of the debtor. The debtor must have lived in or had been domiciled in the state for at least two years (730 days) prior to filing a petition for bankruptcy relief. Using federal bankruptcy law to override state law, the maximum amount ever shielded from creditors is $155,675 (excluding equity from a prior sale of a previous principal residence that is located in the same state, was lived in for at least 3-1/3 years (1,215 days), years, and was rolled into the subject home's equity).

Question 37

Under the Negotiable Instruments Article of the U.C.C., describes the effect of a person indorsing a check “without recourse”?

Answer 37

The person makes no promise or guarantee of payment on dishonor

Question 38

Changes made by the 2005 Bankruptcy Reform Act to Chapter 7 of the Bankruptcy Code include the following:

Answer 38

Cash advances totaling more than $925 from a credit card obtained within 70 days of the order may not be discharged, subject to a rebuttable presumption. An unsecured claim for death resulting from the operation of a motor vehicle while the debtor was under drug or alcohol influence is a newly added item related to unsecured creditors. Consumer debts for more than $650 for luxury goods or services provided within 90 days of the order of relief are nondischargeable. Penalties resulting from federal election law penalties are nondischargeable.

Question 39

Rental income

Answer 39

Any amount received as rent must be included in the year of receipt whether the taxpayer is accrual or cash basis. In general, any payment to or made on the behalf of a landlord of any kind is additional rent income. Any amounts received by a landlord in consideration for cancellation of a lease are additional rent revenue (and not capitalized).

Question 40

Liquidated damages

Answer 40

agreed upon by all parties involved in the contract. per clause in the contract

Question 41

composition agreement,

Answer 41

a debtor enters into an agreement to pay the creditors some fraction of the amount of the outstanding debt. discharges the debtor once paid

Question 42

assignment for the benefit of creditors

Answer 42

transfer by the debtor of all of his assets to a trustee, assigned funds to be used to pay off outstanding debts assignment does not release debtor from debts

Question 43

two tests that must be met to determine if a company is a personal holding company (PHC)

Answer 43

stock ownership test - more than 50% of the stock must be owned by five or fewer individuals a income test - at least 60% of the corporate income must be personal holding company income investments (dividends, interest, rents, royalties) and certain personal service contracts

Question 44

Hobby deductions are limited

Answer 44

to the amount of hobby income of the tax year. taken in a prioritized order Category 1 deductions are those that a taxpayer can take for personal as well as business activities, such as mortgage interest and property taxes, and are allowed in full. Category 2 deductions are those that do not result in a basis adjustment such as advertising, insurance premiums, interest, utilities, and wages. Limited to the amount of income in excess of category 1 deductions. Category 3 deductions are those that are basis adjustments such as depreciation. Limited to the amount of income in excess of categories 1 and 2 deductions.

Question 45

For 2014, a taxpayer that files as Head of Household and is covered by an employer-sponsored qualified retirement plan is able to make tax-deductible contributions to a traditional IRA plan only if

Answer 45

their modified AGI is $60,000 or less. In addition, a partially deductible contribution is permitted to a taxpayer only if their modified AGI is between $60,000 and less than $70,000.

Question 46

The deductibility of student loan interest is limited to

Answer 46

$2,500 in 2014, but it is phased out for a taxpayer with modified AGI between $65,000 and $80,000 (between $130,000 and $160,000 for married filing jointly).

Question 47

Articles of incorporation can only be amended by

Answer 47

shareholders

Question 48

normal duties of a board of directors.

Answer 48

repealing bylaws, declaring dividends, and fixing compensation of directors

Question 49

personal service corporation (PSC)

Answer 49

taxed at a flat rate of 35%. occupations that qualify include: lawyers, accountants, actuaries, podiatrists, architects. subject to the limits on the deductibility of passive activity losses. meets both a function test and an ownership test (percentage of activity performed by the employee-owners)

Question 50

tax avoidance transactions

Answer 50

legal transactions recognized in the Internal Revenue Code employing tax planning strategies reduce tax liability by taking advantage of tax-deductible transactions such as retirement investments, home interest expense, and tax-exempt investments.

Question 51

Tax evasion

Answer 51

illegal nonpayment of taxes in a period

Question 52

Capital assets

Answer 52

investment property and personal-use property

Question 53

business-use assets

Answer 53

Section 1231, 1245, and 1250 assets

Question 54

liquidating distribution by a corporation

Answer 54

general rule recognize gain or loss on the distribution of property in a complete liquidation property is treated as if it were sold at its fair market value BUT cannot be less than the amount of the liability on the property

Question 55

A Crummey trust

Answer 55

a “safe harbor” rule allows the annual gift tax exclusion on gifts to a trust The gift of a future interest provision does not apply to gifts to a Crummey trust if trust assets go to the beneficiaries on or before age 21. Giving the right to the trust income (generally only up to $14,000 per donee, per year) meets the requirement even though the beneficiaries do not actually withdraw the funds.

Question 56

A small corporation is exempt from AMT tax. In general, to be considered a small corporation for this purpose, the corporation must have average annual gross receipts

Answer 56

under $7.5 million for the preceding 3-year period. A special rule applies for the first two years of a corporation: All corporations are exempt from AMT for their first tax year. The second tax (initial test ) year, gross receipts test is $5 million.

Question 57

The Uniform Commercial Code (U.C.C.) Sales Article generally requires that sales contracts in excess of $500

Answer 57

be evidenced by a written document. If both parties are merchants, a document confirming the existence of an oral agreement and signed by the party sending the document satisfies the writing requirement as to the recipient as well as to the sender IF the recipient does not object to the writing within 10 days after receipt.

Question 58

Wages paid for domestic services are subject to federal unemployment tax

Answer 58

if they exceed $1,000 per quarter, aggregating wages paid to all employees. The employer's required payment for federal unemployment (FUTA) tax cannot be withheld from the employee's wages. This must be paid from the employer's own funds.

Question 59

Wages for, and payroll taxes on, domestic wages

Answer 59

in excess of $1,800 must be reported to the taxing authorities. Usually, Social Security and Medicare withholdings are reported on Form 941. Form 1040, Schedule H, may be used to report federal employment taxes on cash wages paid to household employees. Federal employment taxes that may be paid with Schedule H include Social Security, Medicare, withheld federal income, and federal unemployment (FUTA) taxes. Withholding federal income taxes for household employees is required only if requested by the employee and agreed to by the employer. Such withholding would be reported on Schedule H and filed with Form 1040.

Question 60

Section 351 tax-free transaction

Answer 60

No gain or loss is recognized if property is transferred to a corporation by one or more persons solely in exchange for stock in such corporation and immediately after the exchange the persons are in control of the corporation (80% or more) The basis of the stock received is the adjusted basis of the property transferred less any liability the corporation assumed.

Question 61

mechanic's lien

Answer 61

repairs to REAL property PLACED by the creditor

Question 62

artisan's lien

Answer 62

work done on PERSONAL property PLACED by the creditor

Question 63

mortgage lien

Answer 63

security interest in REAL property GIVEN by owner to creditor as security

Question 64

dividends-received deduction is allowed if the underlying stock was held for

Answer 64

at least 46 days during the 91-day period beginning on the date 45 days prior to the ex-dividend date.

Question 65

AMT exclusion item

Answer 65

Exclusion items are those preferences and adjustments which will not reverse in future years. The deductions are permanently denied for AMT purposes. The deduction for personal exemptions is an exclusion item.

Question 66

AMT deferral items

Answer 66

preferences and adjustments which can be expected to reverse in future years. When a taxpayer pays AMT that is due to deferral items, he or she is allowed an AMT credit in succeeding years against his or her regular tax.

Question 67

A buyer has an insurable interest from the time

Answer 67

goods are identified in the contract.

Question 68

A partner may deduct his share of partnership losses subject to three levels of limitations:

Answer 68

* Level 1: Any deductible loss is limited to the adjusted basis of the partner’s interest in the partnership. BASIS * Level 2: If there is enough adjusted basis to deduct a loss, then the partner is only allowed to deduct the amount of loss for which he is at risk. AT-RISK * Level 3: If there is enough adjusted basis and enough at risk, then the partner applies the passive activity limits. PAL

Question 69

Property received by parent corporation from subsidiary corporation

Answer 69

has the same basis in the hands of the parent as the subsidiary ALL carryover rules of IRC Section 381 apply: Net Operating Loss Business Credit Capital Loss Charitable Contribution Earnings and Profits

Question 70

Guaranteed payments

Answer 70

payments to partners for services treated like salary payments to an employee or or use of capital treated like interest payments to a creditor rather than partnership distributions (made without regard to partnership income)

Question 71

Individuals may offset ordinary income with losses from rental real estate activities.

Answer 71

up to $25,000 ($50,000 if married filing jointly) reduced (but not below zero) by 50% of the amount by which the adjusted gross income of the taxpayer for the year exceeds $100,000

Question 72

standard deduction for a trust or an estate

Answer 72

$0/None

Question 73

Personal exemptions for estates and trusts

Answer 73

estate - $600 simple trust - $300 complex trust - $100

Question 74

mid-quarter convention

Answer 74

If more than 40% of the depreciable personal property is acquired in the last quarter of the year, the mid-quarter convention is used for all personal property acquired that year. Normally the half-year convention applies to depreciate personal property placed in service.

Question 75

The “hot assets” of a partnership

Answer 75

include unrealized receivables and inventory. items that would generate ordinary income Section 1231 assets and capital assets generate capital gains. Cash creates neither ordinary income nor capital gains.

Question 76

Actual fraud requires the professional to intentionally misstate a material fact or otherwise mislead the client. Constructive fraud

Answer 76

does not require the CPA (or any professional) to act with fraudulent intent professional acted in a grossly negligent manner. plaintiff justifiably relied on the misrepresentation

Question 77

The new change in Chapter 11 for individuals

Answer 77

they are not discharged until the plan is completed, unless the court orders otherwise. if individuals receive assets after they have filed bankruptcy, they must dedicate those assets to the reorganization plan and use them to that effect. Chapter 11 bankruptcy, while typically used for corporations, may be used for individuals. The court may still use a “cram down” provision, meaning it may confirm a reorganization plan over the objection of creditors if it is shown the plan is equitable.

Question 78

unified transfer tax

Answer 78

rate schedule imposed on taxable gifts made and taxable estates for deaths after 1976. The tax base for estate tax is based on the taxable estate plus all post-1976 taxable gifts. The tax base for determining the gift tax is based on all lifetime taxable gifts. lifetime taxable gifts and transfers at death are taxed on a cumulative basis

Question 79

Losses on the sale of income-producing property to certain related parties

Answer 79

are not recognized disallowed loss may be used by the related purchasing party to offset any gain on a later disposition of the property

Question 80

State tax refunds are not taxable to an individual

Answer 80

who does not itemize deductions as no prior tax benefit was received.

Question 81

If a corporation's charitable contributions exceed the limitation for deductibility in a particular year,

Answer 81

a corporation is permitted to carry over to the five succeeding tax years any contributions that exceed the 10% of its taxable income computed without regard to (1) the deduction for a charitable contribution, (2) the deductions for dividends received/dividends paid on certain preferred public utility stock (3) any net operating loss carryback (4) any capital loss carryback (5) the domestic production deduction.

Question 82

Financial Accounting Standards Board (FASB) structure

Answer 82

independent of all other business and professional organizations part of a larger structure that helps to achieve consistent standards and improve financial accounting standards

Question 83

The federal gift tax does not apply to the following:

Answer 83

* Medical care payments on another's behalf paid directly to medical care provider * Tuition payments made to an educational organization (for example, a university) * Transfers to political organizations

Question 84

Under the Securities Act of 1933, most issuances of securities must first be registered with the SEC. However, this requirement is only applicable to

Answer 84

issuers, underwriters, and dealers “issuer” - individual or business entity that is offering the securities for sale to the public including a “control person,” meaning someone having substantial power to influence the policies of management (such as the president of the company)