REG 9

Question 1

During 2015, Matt Johnson was assessed a deficiency on his 2013 federal income tax return.  As a result of this assessment he was required to pay $970, determined as follows:
Additional tax $600 
Late filing penalty 50 
Negligence penalty 200 
Interest 120 
What portion of the $970 would qualify as itemized deductions for 2015?
$0 
$  30 
$250 
$370

Answer 1

None of the items listed relating to the tax deficiency for 2013 are deductible. The interest on the tax deficiency is considered personal interest and is not deductible. The additional federal income tax, the late filing penalty, and the negligence penalty are also not deductible.

Question 2

Which one of the following statements concerning the American Opportunity Credit (modified Hope scholarship credit) is correct?
A taxpayer may claim the American Opportunity credit in addition to the lifetime learning credit for one dependent.
The credit is available for the first four years of a postsecondary education program.
The credit is available on a per taxpayer basis.
Expenses incurred for room, board, and books qualify for the credit.

Answer 2

The American Opportunity credit provides for a maximum credit of $2,500 per year (100% of the first $2,000, plus 25% of the next $2,000 of tuition expenses) for the first four years of postsecondary education. The credit is available on a per student basis and covers tuition for the taxpayer, spouse, and dependents. To be eligible, the student must be enrolled on at least a half-time basis for one academic period during the year. The American Opportunity credit is available for an individual only if the lifetime learning credit is not claimed for that individual during the same tax year.

Question 3

Which expense, both incurred and paid during the current year, can be claimed as an itemized deduction subject to the 2% of adjusted gross income floor?
Employee’s unreimbursed business auto expense.
One-half of the self-employment tax.
Employee’s unreimbursed moving expense.
Self-employed health insurance.

Answer 3

An employee’s unreimbursed business expenses are included in the category of miscellaneous itemized deductions subject to the 2% of adjusted gross income floor.

Question 4

Aqua, Inc., a Florida corporation, entered into a contract for $30,000 with Sing, Inc., to perform plumbing services in a complex owned by Sing in Virginia. After the work was satisfactorily completed, Sing discovered that Aqua violated Virginia’s licensing law by failing to obtain a plumbing license. Virginia’s licensing statute was regulatory in nature, serving to protect the public against unskilled and dishonest plumbers. Upon Sing’s request, independent appraisals of Aqua’s work were performed, which indicated that the complex was benefited to the extent of $25,000. Sing refuses to pay Aqua. If Aqua brings suit it may recover

$30,000.
$25,000.
Nothing.
An amount sufficient to cover its out-of-pocket costs.

Answer 4

This answer is correct because if a contract violates a regulatory licensing statute, it will be unenforceable by either party. The main function of a regulatory licensing statute is to protect the public against unskilled or dishonest persons. Another type of licensing statute is a revenue-seeking statute. The purpose of these types of statutes generally is to gain revenue for the governmental unit issuing the license. A contract that violates a revenue-seeking statute is enforceable. In this case, the facts stipulate that a regulatory licensing statute is violated. Consequently, Aqua may not enforce the agreement.

Question 5

Bud Ace, a self-employed carpenter, reports his income on the cash basis. During the current year he completed a job for a customer and sent him a bill for $3,000. The customer was not satisfied with the work and indicated that he would only pay $1,500. Ace agreed to reduce the bill to $2,000 but before payment was made the customer died. Ace could not collect from the customer’s estate and should treat this loss as
An ordinary business deduction of $3,000.
An ordinary business deduction of $2,000.
A short-term capital loss of $1,500.
A nondeductible loss as no income was reported.

Answer 5

Accounts receivable for services rendered by a cash-basis taxpayer have no basis for tax purposes. Since a cash-basis taxpayer does not include accounts receivable in income until payment is received, failure to collect accounts receivable results in a nondeductible loss.

Question 6

Hall, a divorced person and custodian of her 12-year-old child, filed her 2014 federal income tax return as head of a household. Hall earned a salary of $75,000 in 2014. Hall was not covered by any type of retirement plan, but contributed $5,500 to an IRA in 2014. Hall’s $5,500 contribution to an IRA should be treated as
A deduction from income in arriving at adjusted gross income.
A deduction from adjusted gross income subject to the 2% of adjusted gross income floor.
A deduction from adjusted gross income not subject to the 2% of adjusted gross income floor.
Nondeductible, with the interest income on the $5,500 to be deferred until withdrawal.

Answer 6

Since Hall was not a participant in a qualified pension plan, there is no phase-out of the $5,500 maximum IRA deduction. Therefore, Hall’s maximum contribution and deduction to an IRA would be limited to the lesser of (1) $5,500, or (2) 100% of her compensation. Since Hall earned a salary of $75,000, Hall’s maximum deduction for contributions to an IRA is $5,500. If IRA contributions are deductible, they are always deductible from gross income in arriving at adjusted gross income.

Question 7

For the current year, Atkinson, Inc. had gross business income of $160,000 and dividend income of $100,000 from unaffiliated domestic corporations that are 20%-owned.  Business deductions for the current year amounted to $170,000.  What is Atkinson’s dividends-received deduction for the current year?
$0 
$72,000 
$80,000 
$90,000

Answer 7

72'000 This answer is correct.  The DRD (normally 80% of dividends from unaffiliated corporations 20%-owned) may be limited to 80% of TI before the DRD, except when the full 80% DRD creates or increases a net operating loss.
Gross business income $ 160,000  
Dividend income 100,000  
  $ 260,000  
Less business deductions (170,000) 
Taxable income before DRD $90,000  
DRD ($90,000 × 80%) (72,000) 
Taxable income $18,000  
Since the full deduction (80% × $100,000 = $80,000) would not create a NOL, the limitation applies.

Question 8

Frey Corp. has 1,000 shares of issued and outstanding common stock. Frey’s articles of incorporation permit a stockholder who owns 5% or more of the outstanding stock or who has owned the stock for longer than six months to inspect Frey’s books and records. Ace, who has owned 25 shares of Frey stock for four months, wants to inspect the books and records. Under the Revised Model Business Corporation Act, which of the following statements is correct regarding Ace’s right to inspect the books and records?
Ace must wait two months before being allowed to inspect the books and records.
Ace must purchase an additional 25 shares of Frey stock before being allowed to inspect the books and records.
Ace may, after giving five days’ written notice, inspect the books and records to determine the value of Frey stock.
Ace may, after giving five days’ written notice, inspect the books and records to provide a list of Frey stockholders to Ace’s broker.

Answer 8

Under the Revised Model Business Corporation Act a stockholder has the right to inspect the books and records with 5 days’ notice.

Question 9

How may income taxes paid by an individual to a foreign country be treated?
As an itemized deduction subject to the 2% floor.
As a credit against federal income taxes due.
As an adjustment to gross income.
As a nondeductible

Answer 9

Foreign income taxes paid by an individual may be deducted as an itemized deduction (not subject to the 2% floor), or may be subtracted as a credit against federal income taxes due.

Question 10

Barkley owns a vacation cabin that was rented to unrelated parties for 10 days during the year for $2,500. The cabin was used personally by Barkley for three months and left vacant for the rest of the year. Expenses for the cabin were as follows.
Real estate taxes $1,000 
Maintenance and utilities $2,000 
How much rental income (loss) is included in Barkley’s adjusted gross income?
$0 
$     500 
$   (500) 
$(1,500)

Answer 10

0. The treatment of rental income and expenses for a dwelling unit that is also used for personal purposes depends on whether the taxpayer uses it as a home. A dwelling unit is used as a home if personal use exceeds the greater of 14 days, or 10% of the number of days rented. If a dwelling unit is used as a home and it is rented for less than 15 days during the tax year, rental income is excluded from gross income and expenses are not deductible as rental expenses. Here, since the cabin was used as a home and was rented for only 10 days, the rental income is excluded from Barkley’s gross income, and the real estate taxes and maintenance and utilities are not deductible as rental expenses. Of course the real estate taxes will be deductible as an itemized deduction from AGI if Barkley itemizes deductions.

Question 11

Bishop Corporation reported taxable income of $700,000 on its federal income tax return for calendar year 2014. Selected information for 2014 is available from Bishop’s records as follows:
Provision for federal income tax per books $238,000
Depreciation claimed on the tax return 130,000
Depreciation recorded in the books 75,000
Life insurance proceeds on death of corporate officer 100,000
Bishop reported net income per books for 2014 of
$897,000
$637,000
$617,000
$517,000

Answer 11

This answer is correct. The provision for federal income tax is not deductible in computing taxable income but would be deducted in computing book income. The life insurance proceeds are tax-exempt, but are included in book income. The calculation of net income per books is as follows:
Taxable income $700,000
Less provision for federal income tax (238,000)
Add life insurance proceeds 100,000
Add depreciation on tax return 130,000
Less depreciation per books (75,000)
Net income per books $617,000

Question 12

Axel Corp. was incorporated and began business in 2012.  In computing its alternative minimum tax for 2013, it determined that it had adjusted current earnings (ACE) of $500,000 and alternative minimum taxable income (prior to the ACE adjustment) of $450,000. For 2014, it had adjusted current earnings of $200,000 and alternative minimum taxable income (prior to the ACE adjustment) of $300,000.  What is the amount of Axel Corp.’s adjustment for adjusted current earnings that will be used in calculating its alternative minimum tax for 2014?
$( 37,500) 
$( 50,000) 
$( 75,000) 
$(100,000)

Answer 12

The requirement is to determine the adjustment for adjusted current earnings (ACE) that will be used in the computation of Axel Corp.’s alternative minimum tax for 2014. The ACE adjustment is equal to 75% of the difference between ACE and pre-ACE alternative minimum taxable income (AMTI). The ACE adjustment can be positive or negative, but a negative ACE adjustment is limited in amount to prior years’ net positive ACE adjustments. For 2013, Axel had a positive ACE adjustment of ($500,000 − $450,000) × 75% = $37,500. For 2014, Axel’s ACE is less than its pre-ACE AMTI, leading to a tentative negative ACE adjustment of ($200,000 − $300,000) × 75% = ($75,000). However, this negative ACE adjustment is allowed only to the extent of $37,500, the amount of Axel’s net positive adjustment for prior years.

Question 13

Viking Corp. manufactures action figures for children. During 2014, Viking purchased $2,300,000 of used production machinery to be used in its business. For 2014, Viking’s taxable income before any Sec. 179 expense deduction was $140,000. What is the maximum amount of Sec. 179 expense election Viking will be allowed to deduct for 2014 and the maximum amount of Sec. 179 expense election that can carry over to 2015?
Expense of $140,000 and carryover of $60,000.
Expense of $140,000 and carryover of $360,000.
Expense of $200,000 and carryover of $300,000.
Expense of $500,000 and carryover of $0.

Answer 13

Sec. 179 permits a taxpayer to treat up to $500,000 of the cost of qualifying depreciable personal property as an expense rather than as a capital expenditure. However, the $500,000 maximum is reduced dollar-for-dollar by the cost of qualifying property placed in service during the taxable year that exceeds $2 million. Here, the maximum amount that can be expensed is $500,000 − ($2,300,000 − $2,000,000) = $200,000 for 2014. However, this amount is further limited as a deduction for 2014 to Viking’s taxable income of $140,000 before the Sec. 179 expense deduction. The remainder ($200,000 − $140,000 = $60,000) that is not currently deductible because of the taxable income limitation can be carried over and will be deductible subject to the taxable income limitation in 2015.

Question 14

On July 1, 2015, in connection with a recapitalization of Yorktown Corporation, Robert Moore exchanged 1,000 shares of stock which cost him $95,000 for 1,000 shares of new stock worth $108,000 and bonds in the principal amount of $10,000 with a fair market value of $10,500.  What is the amount of Moore’s recognized gain during 2015?
$0 
$10,500 
$23,000 
$23,500

Answer 14

Since a recapitalization is a reorganization, a realized gain is recognized only to the extent that consideration other than stock or securities is received, including the FMV of an excess of the principal amount of securities received over the principal amount of securities surrendered. Since no securities were surrendered, the excess principal amount of securities received is $10,000, and Moore’s realized gain of $23,500 [($108,000 + $10,500) — $95,000] is recognized to the extent of the $10,500 FMV of the excess principal amount of securities received.

Question 15

An employee who has had social security tax withheld in an amount greater than the maximum for a particular year, may claim
Such excess as either a credit or an itemized deduction, at the election of the employee, if that excess resulted from correct withholding by two or more employers.
Reimbursement of such excess from his employers, if that excess resulted from correct withholding by two or more employers.
The excess as a credit against income tax, if that excess resulted from correct withholding by two or more employers.
The excess as a credit against income tax, if that excess was withheld by one employer.

Answer 15

If an individual works for more than one employer, and combined wages exceed the maximum used for FICA purposes, too much FICA tax will be withheld. In such case, since the excess results from correct withholding by two or more employers, the excess should be claimed as a credit against income tax.

Question 16

Which of the following statements is correct regarding a limited liability company’s operating agreement?
It must be filed with a central state agency.
It must be in writing.
It is designed to forestall and resolve disputes among the owners.
It is necessary for a limited liability company to exist.

Answer 16

One of the main purposes of an operational agreement for any business entity is to anticipate and diffuse problems before they occur.

Question 17

For the year ended December 31, 2014, Elmer Shaw earned $3,000 interest at Prestige Savings Bank, on a time savings account scheduled to mature in 2017. In March 2015, before filing his 2014 income tax return, Shaw incurred an interest forfeiture penalty of $1,500 for premature withdrawal of the funds from his account. Shaw should treat this $1,500 forfeiture penalty as a

Penalty not deductible for tax purposes.
Deduction from gross income in arriving at 2015 adjusted gross income.
Deduction from 2015 adjusted gross income, deductible only if Shaw itemizes his deductions for 2015.
Reduction of interest earned in 2014, so that only $1,500 of such interest is taxable on Shaw’s 2014 return.

Answer 17

An interest forfeiture penalty for making a premature withdrawal from a time savings account should be deducted from gross income in arriving at adjusted gross income in the year in which the penalty is incurred.

Question 18

Parker, whose spouse died during the preceding year, has not remarried. Parker maintains a home for her dependent child. What is Parker’s most advantageous filing status?

Single.
Head of household.
Married filing separately.
Qualifying widow(er) with dependent child.

Answer 18

Parker should file as a “Qualifying widow(er) with dependent child” since it will enable her to use the joint return standard deduction and joint return tax rate schedule. This filing status is available for the two taxable years following the year of a spouse’s death if (1) the surviving spouse was eligible to file a joint return in the year of the spouse’s death, (2) does not remarry before the end of the current tax year, and (3) the surviving spouse pays over 50% of the cost of maintaining a household that is the principal home for the entire year of the surviving spouse’s dependent child.

Question 19

A 33-year-old taxpayer withdrew $30,000 (pretax) from a traditional IRA.  The taxpayer has a 33% effective tax rate and a 35% marginal tax rate.  What is the total tax liability associated with the withdrawal?
$10,000 
$10,500 
$13,000 
$13,500

Answer 19

If an individual never made a nondeductible contribution to a traditional IRA, then any distributions from the IRA are fully taxable as ordinary income. Also, if the individual is under age 59 1/2, the distribution is generally subject to the 10% penalty tax for early distributions. Here, the $30,000 distribution would be taxed at the taxpayer’s marginal rate of 35% resulting in a tax of $10,500. Additionally, there will be a penalty tax of 10% × $30,000 = $3,000, because of having received the distribution before age 59 1/2, resulting in a total tax liability of $13,500

Question 20

Boone Corporation, which is not exempt from the alternative minimum tax, reported adjusted current earnings (ACE) of $500,000 for 2014.  Its alternative minimum taxable income (before the alternative minimum tax NOL deduction and ACE adjustment) was $200,000.  Boone Corporation’s alternative minimum taxable income (after exemption) for 2014 was
$237,500 
$372,500 
$425,000 
$500,000

Answer 20

Boone’s pre-ACE AMTI of $200,000 would be increased by an ACE adjustment of [($500,000 − $200,000) × 75%] = $225,000, resulting in an alternative minimum taxable income of $425,000. No AMT exemption would be available because Boone’s $40,000 exemption would be reduced (to zero) by 25% of AMTI in excess of $150,000.

Question 21

Nelson Harris had adjusted gross income in 2014 of $60,000. During the year his personal summer home was completely destroyed by a hurricane.  Pertinent data with respect to the home follows:
Cost basis $39,000 
Value before casualty 45,000 
Value after casualty 3,000 
Harris was partially insured for his loss and in 2014 he received a $15,000 insurance settlement.  What is Harris’ allowable casualty loss deduction for 2014?
$17,900 
$18,000 
$26,900 
$27,000

Answer 21

This answer is correct. The deduction for a nonbusiness casualty loss is computed as the lesser of (1) the adjusted basis of property, or (2) the decline in FMV; reduced by any insurance recovery, a $100 floor, and 10% of the taxpayer’s AGI.
Lesser of:
1) Adjusted basis $39,000 or
2) Decline in FMV ($45,000 − $3,000) = $42,000 $39,000
Decreased by:
Insurance recovery (15,000)
$100 floor (100)
10% of $60,000 (6,000)
Casualty loss deduction $17,900

Question 22

Roger Burrows, age 19, is a full-time student at Marshall College and a candidate for a bachelor’s degree. During the current year he received the following payments:
State scholarship covering tuition for 10 months $ 3,600
Loan from college financial aid office 5,500
Cash support from parents 8,000
Cash dividends on qualified investments 700
Cash prize awarded in contest 5,000
$22,800
What is Burrows’ gross income for the current year?

$ 700
$ 5,700
$13,700
$17,300

Answer 22

Roger Burrows’ gross income is $5,700, consisting of $700 of dividends and the $5,000 prize. Scholarships awarded for tuition to candidates for a degree are excluded from gross income unless provided as compensation for services. Loans and cash support from parents are also excluded from gross income.

Question 23

Which of the following items should be included on the Schedule M-1, Reconciliation of Income (Loss) per Books with Income per Return, of Form 1120, US Corporation Income Tax Return to reconcile book income to taxable income?
Cash distributions to shareholders.
Premiums paid on key-person life insurance policy.
Corporate bond interest.
Ending balance of retained earnings.

Answer 23

The requirement is to determine which item should be included on Schedule M-1 of Form 1120 to reconcile a corporation’s book income to taxable income. Generally, Schedule M-1 includes items whose treatment for computing book income differs from their treatment in computing taxable income. This answer is correct since the premiums paid on a key-person life insurance policy would be deducted per books, but would not be deductible for tax purposes because it is an expense of producing tax-exempt income (i.e., the life insurance proceeds if the person dies). The amount of premium would be added back to book income in order to arrive at taxable income on Schedule M-1.

Question 24

In 2014, Joe Buron, a single taxpayer, had $80,000 in taxable income before personal exemptions. Buron had no tax preferences, and his itemized deductions were as follows:
Real property taxes $4,000
Home mortgage interest on loan to purchase residence 6,000
Miscellaneous deductions in excess of 2% of adjusted gross income 2,000
What amount must Buron report as alternative minimum taxable income before the AMT exemption for 2014?
$84,000
$86,000
$88,000
$92,000

Answer 24

Certain itemized deductions are not deductible in computing an individual’s AMTI. Specifically, no AMT deduction is allowed for state, local, and foreign income taxes, real and personal property taxes, and miscellaneous itemized deductions subject to the 2% of AGI floor. Here, Buron’s $4,000 of real property taxes and $2,000 of miscellaneous itemized deductions must be added back to his $80,000 of regular taxable income before personal exemption to arrive at Buron’s AMTI before AMT exemption of ($80,000 + $4,000 + $2,000) = $86,000.

Question 25

Parr is the vice president of research of Lynx, Inc. When hired, Parr signed an employment contract prohibiting Parr from competing with Lynx during and after employment. While employed, Parr acquired knowledge of many of Lynx’s trade secrets. If Parr wishes to compete with Lynx and Lynx refuses to give Parr permission, which of the following statements is correct? Parr has the right to compete with Lynx upon resigning from Lynx. Parr has the right to compete with Lynx only if fired from Lynx. In determining whether Parr may compete with Lynx, the court should not consider Parr’s ability to obtain other employment. In determining whether Parr may compete with Lynx, the court should consider, among other factors, whether the agreement is necessary to protect Lynx’s legitimate business interests.

Answer 25

This answer is correct because for a covenant not to compete to be enforceable, the agreement must be necessary to protect Lynx’s legitimate interests. In deciding the issue, the court will balance Parr’s ability to obtain other employment against Lynx’s right to protect its business.

Question 26

Lark Corp. and its wholly owned subsidiary, Day Corp., both operated on a calendar year. In January 2015 Day adopted a plan of complete liquidation. Two months later, Day paid all of its liabilities and distributed its remaining assets to Lark. These assets consisted of the following: Cash $50,000 Land (at cost) 10,000 ``` Fair market value of the land was $30,000. Upon distribution of Day’s assets to Lark, all of Day’s capital stock was cancelled. Lark’s basis for the Day stock was $7,000. Lark’s recognized gain in 2015 on receipt of Day’s assets in liquidation was $0 $50,000 $53,000 $73,000 ```

Answer 26

No gain or loss will be recognized by a parent corporation (Lark Corp.) on the receipt of property in complete liquidation of an 80% or more owned subsidiary (Day Corp.).

Question 27

``` On June 30, 2015, Ral Corporation had retained earnings of $100,000. On that date, it sold a plot of land to a noncorporate stockholder for $50,000. Ral had paid $40,000 for the land in 2010, and it had a fair market value of $80,000 when the stockholder bought it. The amount of dividend income taxable to the stockholder in 2015 is $0 $10,000 $20,000 $30,000 ```

Answer 27

If a corporation sells property to a shareholder for less than fair market value, the shareholder is considered to have received a constructive dividend to the extent of the difference between the fair market value of the property and the price paid. Thus, the shareholder’s dividend income is $30,000 ($80,000 FMV — $50,000 purchase price).

Question 28

``` Mr. and Mrs. Donald Curry’s real property tax year is on a calendar-year basis, with payments due annually on August 1. The realty taxes on their home amounted to $1,200 in 2014, but the Currys did not pay any portion of that amount since they sold the house on April 1, 2014, four months before payment was due. However, realty taxes were prorated on the closing statement. Assuming that they owned no other real property during the year, how much can the Currys deduct on Schedule A of Form 1040 for real estate taxes in 2014? $0 $296 $800 $1,200 ```

Answer 28

This answer is correct. When real estate is sold, the real estate tax deduction is apportioned between the seller and the buyer according to the number of days in the real property tax year that each holds the property. Since Curry sold his home on April 1, 2012, the deduction allocated to Curry would be 90/365 × $1,200 = $296

Question 29

``` In 2015, Dr. Ernest Griffiths, a cash-basis taxpayer, incorporated his medical practice. No liabilities were transferred. The following assets were transferred to the corporation: Cash $20,000 Equipment: Adjusted basis $140,000 Fair market value $180,000 ``` Immediately after the transfer, Griffiths owned 100% of the corporation’s stock. The corporation’s total basis for the transferred assets is $140,000 $160,000 $180,000 $200,000

Answer 29

The cash and equipment were transferred by Griffiths in a nontaxable, Sec. 351 transfer to a controlled corporation. The corporation’s basis for the assets would be the same as Griffiths’ basis, increased by any gain recognized by Griffiths. Since Griffiths did not receive any boot, no gain was recognized by him. Thus, the corporation’s total basis for the assets transferred is $160,000 ($20,000 + $140,000).

Question 30

Barton Corporation and Clagg Corporation have decided to combine their separate companies pursuant to the provisions of their state corporation laws. After much discussion and negotiation, they decided that a consolidation was the appropriate procedure to be followed. Which of the following is an incorrect statement with respect to the contemplated statutory consolidation? A statutory consolidation pursuant to state law is recognized by the Internal Revenue Code as a type of tax-free reorganization. The larger of the two corporations will emerge as the surviving corporation. Creditors of Barton and Clagg will have their claims protected despite the consolidation. The shareholders of both Barton and Clagg must approve the plan of consolidation.

Answer 30

The larger of the two corporations will emerge as the surviving corporation. This answer is correct because the statement is false. A consolidation is the unifying of two or more corporations into one new corporation, extinguishing both existing corporations.

Question 31

Sec. 1244 stock permits shareholders to deduct an ordinary loss on sale or worthlessness of stock. Which of the following is correct with respect to qualifying for Sec. 1244 ordinary loss treatment? The shareholder must be the original holder of stock, and an individual or corporation. The stock can be common or preferred, voting or nonvoting. The amount of ordinary loss is limited to $100,000 ($200,000 on joint return); any excess is treated as a capital loss. The corporation during the 3-year period before the year of loss received more than 50% of its total gross receipts from royalties, rents, dividends, interest, annuities, and gains from sales or exchanges of stock or securities.

Answer 31

In order to deduct an ordinary loss on sale or worthlessness of stock under Sec. 1244, (1) the shareholder must be the original holder of stock, and an individual or partnership; (2) the stock can be common or preferred, voting or nonvoting; (3) the amount of ordinary loss is limited to $50,000 ($100,000 on joint return); (4) the corporation during the 5-year period before the year of loss received less than 50% of its total gross receipts from royalties, rents, dividends, interest, annuities, and gains from sales or exchanges of stock or securities; and (5) the corporation’s aggregate amount of money and adjusted basis of other property received for stock as a contribution to capital and paid-in surplus does not exceed $1,000,000.

Question 32

``` Chris, age five, has $3,000 of interest income and no earned income this year. Assume the current applicable standard deduction is $1,000; how much of Chris’s income will be taxed at Chris’s parents’ maximum tax rate? $0 $1,000 $1,100 $3,000 ```

Answer 32

The earned income of a child of any age and the unearned income of a child 18 years or older as of the end of the tax year is taxed at the child’s own tax rates. However, the unearned income of a child under age 18 in excess of a threshold amount is generally taxed at the rates of the child’s parents. The threshold amount is subject to change because it is indexed for inflation, but it is normally twice the amount of the applicable standard deduction for a dependent who has only unearned income. Since the multiple-choice item assumes the applicable standard deduction for the child is $1,000, the applicable threshold would be $1,000 × 2 = $2,000. As a result, $3,000 interest income ? $2,000 threshold = $1,000 of the child’s interest income would be taxed using the rates of the child’s parents.

Question 33

How does a noncorporate shareholder treat the gain on a redemption of stock that qualifies as a partial liquidation of the distributing corporation? As a tax-free transaction. Partly as capital gain and partly as a dividend. Entirely as a dividend. Entirely as capital gain.

Answer 33

The requirement is to determine how the gain resulting from a stock redemption should be treated by a noncorporate shareholder if the redemption qualifies as a partial liquidation of the distributing corporation. A corporate stock redemption is treated as an exchange, generally resulting in capital gain or loss treatment to a shareholder if the redemption meets any one of five tests. Redemptions qualifying for exchange treatment include (1) a redemption that is not essentially equivalent to a dividend, (2) a redemption that is substantially disproportionate, (3) a redemption that completely terminates a shareholder’s interest, (4) a redemption of a noncorporate shareholder in a partial liquidation, and (5) a redemption to pay death taxes. If none of the above five tests are met, the redemption proceeds are generally treated as a dividend.

Question 34

``` Fox, the sole shareholder in Fall, a C corporation, has a tax basis of $60,000. Fall has $40,000 of accumulated positive earnings and profits at the beginning of the year and $10,000 of current positive earnings and profits for the current year. At year-end, Fall distributed land with an adjusted basis of $30,000 and a fair market value (FMV) of $38,000 to Fox. The land has an outstanding mortgage of $3,000 that Fox must assume. What is Fox’s tax basis in the land? $38,000 $35,000 $30,000 $27,000 ```

Answer 34

The requirement is to determine Fox’s tax basis for the land received in a corporate distribution. A shareholder’s tax basis for property received in a corporate distribution will be the property’s fair market value, which in this case is $38,000. Note that the shareholder’s tax basis is unaffected by the mortgage assumed. That is, the shareholder will be taxed on a dividend of $38,000 ? $3,000 = $35,000, but will have a tax basis for the land of $38,000.

Question 35

Grill deals in the repair and sale of new and used clocks. West brought a clock to Grill to be repaired. One of Grill’s clerks mistakenly sold West’s clock to Hone, another customer. Under the Sales Article of the UCC, will West win a suit against Hone for the return of the clock? No, because the clerk was not aware that the clock belonged to West. No, because Grill is a merchant to whom goods had been entrusted. Yes, because Grill could not convey good title to the clock. Yes, because the clerk was negligent in selling the clock. This answer is correct because if a person entrusts possession of goods to a merchant, or to his/her agent, who deals in those goods, a good-faith purchaser for value obtains title to those goods unless s/he knew the merchant or agent did not own the goods.

Answer 35

This answer is correct because if a person entrusts possession of goods to a merchant, or to his/her agent, who deals in those goods, a good-faith purchaser for value obtains title to those goods unless s/he knew the merchant or agent did not own the goods.

Question 36

To be a holder in due course, the holder must fulfill certain requirements. Which of the following does not fulfill the value requirement? The holder exchanges the negotiable instrument for another negotiable instrument. The holder promises in writing to perform specified services within 6 months. The holder gives $980 for a promissory note with a face amount of $1,000. The holder takes possession of the negotiable instrument as collateral of another debt.

Answer 36

Even though this would be valid consideration under contract law, this does not meet the value requirement under the law of negotiable instruments until the services are actually completed.

Question 37

An employee who has had social security tax withheld in an amount greater than the maximum for a particular year, may claim Such excess as either a credit or an itemized deduction, at the election of the employee, if that excess resulted from correct withholding by two or more employers. Reimbursement of such excess from his employers, if that excess resulted from correct withholding by two or more employers. The excess as a credit against income tax, if that excess resulted from correct withholding by two or more employers. The excess as a credit against income tax, if that excess was withheld by one employer.

Answer 37

If an individual works for more than one employer, and combined wages exceed the maximum used for FICA purposes, too much FICA tax will be withheld. In such case, since the excess results from correct withholding by two or more employers, the excess should be claimed as a credit against income tax.

Question 38

One exception to the trustee’s power to avoid preferential transfers? On April 5, Knox was involuntarily petitioned into bankruptcy under the liquidation provisions of the Bankruptcy Code. On April 20, a trustee in bankruptcy was appointed and an order for relief was entered. Claim by Noll Co. for the delivery of stereos to Knox on credit. The stereos were delivered on April 4 and a financing statement was properly filed on April 5. These stereos were sold by the trustee with Noll's consent for $7,500, their fair market value.

Answer 38

One exception to the trustee’s power to avoid preferential transfers is when a security interest is given by the debtor to acquire property that is perfected within 10 days after such security interest attaches. This is called an enabling loan. Consequently, Noll’s transaction with Knox qualifies as an enabling loan and cannot be set aside by the trustee.

Question 39

Moreno Company contracted with a common carrier to have goods transported that she had sold to a customer FOB destination. The contract between the common carrier and Moreno specified in clear terms that liability of the common carrier is limited to $100 per shipment unless a higher limit is chosen by paying more. Moreno did not select a higher limit. The goods, worth $900, were destroyed in transit. Which of the following is not true? If the cause of the loss was a flood, the common carrier is not liable for any damages. The clause limiting liability to a $100 limit is invalid as against public policy. If the goods were damaged because Moreno improperly packaged the goods, the common carrier is not liable for any damages. The common carrier is liable for $100 at most but may be liable for no damages.

Answer 39

The clause limiting liability to a $100 limit is invalid as against public policy.Common carriers are allowed to limit liability to a dollar amount specified in the contract

Question 40

Which of the following can be an advantage of a limited liability company over an S corporation? Double taxation of profits is avoided. Owners receive limited liability protection. Appreciated property can be distributed tax-free to an owner. Incentive stock options can be used to compensate owners.

Answer 40

Appreciated property can be distributed tax-free to an owner.LLC follows partnership rules so it may distribute appreciated property tax-free. S-Corporation must recognize the gain on the appreciated property distributed to a shareholder.

Question 41

``` Which one of the following types of deductions is included in the category of unreimbursed expenses that is deductible only if the aggregate amount of such expenses exceeds 2% of the taxpayer’s adjusted gross income? Employee moving expenses. Tax return preparation fees. Medical expenses. Interest expense. ```

Answer 41

Tax return preparation fees are deductible only as miscellaneous itemized deductions to the extent that the aggregate amount of expenses in that category exceeds 2% of the taxpayer’s adjusted gross income. Employee moving expenses are deductible for AGI, while medical expenses and interest expense are deductible as separate categories of itemized deductions.

Question 42

Under which of the following circumstances is trust property with an independent trustee includible in the grantor’s gross estate? The trust is revocable. The trust is established for a minor. The trustee has the power to distribute trust income. The income beneficiary disclaims the property, which then passes to the remainderman, the grantor’s friend.

Answer 42

A decedent’s gross estate generally includes all property in which the decedent had an ownership interest at time of death, including the value of revocable transfers, as well as all transfers over which the decedent had, at the time of death, the power to change the enjoyment of what was transferred by altering, amending, revoking, or terminating an interest. Thus, a decedent’s gross estate would include the value of a revocable trust at its date-of-death or alternate valuation date value.

Question 43

Smith buys a TV set from the ABC Appliance Store and pays for the set with a check. Later in the day Smith finds a better model for the same price at another store. Smith immediately calls ABC trying to cancel the sale. ABC tells Smith that they are holding him to the sale and have negotiated the check to their wholesaler, Glenn Company, as a partial payment on inventory purchases. Smith telephones his bank, the Union Trust Bank, and orders the bank to stop payment on the check. Which of the following statements is correct? If Glenn can prove it is a holder in due course, the drawee bank, Union Trust, must honor Smith’s check. Union Trust is not bound or liable for Smith’s stop payment order unless the order is placed in writing. If Union Trust mistakenly pays Smith’s check 2 days after receiving the stop order, the bank will not be liable. Glenn cannot hold Smith liable on the check.

Answer 43

If Union Trust mistakenly pays Smith’s check 2 days after receiving the stop order, the bank will not be liable. This answer is correct because the bank is only liable to the drawer if failure to obey stop payment order caused the drawer a loss. Since Smith has no grounds for rescinding the sale, the Union Trust Bank has no liability.

Question 44

Which of the following actions between a debtor and its creditors will generally cause the debtor’s release from its debts? Composition of creditors Assignment for the benefit of creditors

Answer 44

A composition of creditors occurs when creditors make an agreement with each other to accept less than the full debts as full satisfaction of those debts. Once the debtor performs under the agreement, the debts are discharged, so this generally causes a release of the debtor from its debts. However, an assignment for the benefit of creditors does not generally cause the release of the debtor from it debts. In this case the creditors do not have to agree to the assignment. The debtor assigns its assets to a trustee who sells the assets for cash. The cash is then paid out to creditors who agree to accept a stipulated amount to release their claims. The assignment itself, however, does not cause the claims to be released because at that point the creditors have not agreed to do so.

Question 45

``` Edan Corp. made a pro rata distribution of marketable securities in redemption of its stock in a complete liquidation during the current year. These securities, which had been purchased in 2011 for $80,000, had a fair market value of $40,000 when distributed. What loss does Edan Corp. recognize as a result of the distribution? $0 $40,000 long-term capital loss. $40,000 Section 1231 loss. $40,000 ordinary loss. ```

Answer 45

The requirement is to determine the amount of Edan Corp.’s recognized loss resulting from the distribution of marketable securities in complete liquidation. Generally, a corporation will recognize gain or loss on the distribution of its property in complete liquidation just as if the property were sold to the distributee for its fair market value. Since the marketable securities were a capital asset and held for more than one year, the distribution results in a long-term capital loss of $80,000 ? $40,000 = $40,000.

Question 46

Under the UCC Secured Transactions Article, for a security interest to attach, the Debtor must agree to the creation of the security interest. Creditor must properly file a financing statement. Debtor must be denied all rights in the collateral. Creditor must take and hold the collateral.

Answer 46

In order for a security interest to attach, there must be a security agreement. It may be oral if the secured party obtains possession or control of the collateral. In either case, the debtor must have agreed to the security interest. The secured party must also give value and the debtor must have rights in the collateral.

Question 47

Which one of the following statements concerning the eligibility requirements for S corporations is not correct? A partnership is not permitted to be a shareholder of an S corporation. An S corporation is permitted to own 75% of the stock of another S corporation. An S corporation is permitted to be a partner in a partnership. An S corporation is permitted to own 100% of the stock of a C corporation.

Answer 47

The eligibility requirements restrict S corporation shareholders to individuals (other than nonresident aliens), estates, and certain trusts. Partnerships and C corporations are not permitted to own stock in an S corporation. However, an S corporation is permitted to be a partner in a partnership, and may own any percentage of stock of a C corporation, as well as own 100% of the stock of a qualified subchapter S subsidiary.

Question 48

The basis of property (other than money) distributed by a partnership to a partner, in complete liquidation of the partner’s interest, shall be an amount equal to the Adjusted basis of such partner’s interest in the partnership, increased by any money distributed in the same transaction. Adjusted basis of such partner’s interest in the partnership, reduced by any money distributed in the same transaction. Fair market value of the property. Book value of the property.

Answer 48

In a complete liquidation of a partner’s interest in a partnership, the property distributed will have a basis equal to the adjusted basis of the partner’s partnership interest reduced by any money received in the same distribution. Generally, in a liquidating distribution, the basis for a partnership interest is (1) first reduced by the amount of money received; (2) then reduced by the partnership’s basis for any unrealized receivables and inventory received; (3) with any remaining basis for the partnership interest allocated to other property received in the distribution.

Question 49

``` Murd Corporation, a domestic corporation, acquired a 90% interest in the Drum Company in 2013 for $30,000. During 2015, the stock of Drum was declared worthless. What type and amount of deduction should Murd take for 2015? Long-term capital loss of $3,000. Long-term capital loss of $15,000. Ordinary loss of $30,000. Long-term capital loss of $30,000. ```

Answer 49

Ordinary loss of $30,000. This answer is correct because worthless securities generally receive capital loss treatment. However, if the loss is incurred by a corporation on its investment in an affiliated subsidiary corporation (80% or more ownership), the loss is generally treated as an ordinary loss.

Question 50

Which of the following payments would require the donor to file a gift tax return? $30,000 to a university for a spouse’s tuition. $40,000 to a university for a cousin’s room and board. $50,000 to a hospital for a parent’s medical expenses. $80,000 to a physician for a friend’s surgery.

Answer 50

$40,000 to a university for a cousin’s room and board.. Generally, a gift tax return must be filed by a donor if the donor makes a taxable gift (e.g., a gift of a future interest, or a gift of a present interest that exceeds the amount of annual exclusion [$14,000 for 2014]). In determining the amount of taxable gifts, there is an unlimited exclusion that is available for amounts paid on behalf of a donee to an educational organization for tuition, as well as for amounts paid on behalf of a donee to medical care providers for medical services. Thus, the $30,000 to a university for a spouse’s tuition, $50,000 to a hospital for a parent’s medical expenses and $80,000 to a physician for a friend’s surgery would be fully excluded and would not require the filing of a gift tax return. In contrast, the gift of $40,000 to a university for a cousin’s room and board would require the donor to file a gift tax return. That is because the $40,000 payment is a gift of a present interest in excess of the annual exclusion, and does not qualify for the unlimited exclusion because it is not a payment of tuition.

Question 51

``` Under the Secured Transactions Article of the UCC, for which of the following types of collateral must a financing statement be filed in order to perfect a purchase money security interest? Stock certificates. Promissory notes. Personal jewelry. Inventory. ```

Answer 51

A financing statement must be filed to perfect an interest in inventory

Question 52

``` Under the Revised Model Business Corporation Act, which of the following dividends is not defined as a distribution? Cash dividends. Property dividends. Liquidating dividends. Stock dividends. ```

Answer 52

A stock dividend is not defined as a distribution under the Revised Model Business Corporation Act.

Question 53

Ivor, Queen, and Lear own a building as joint tenants with the right of survivorship. Ivor donated his interest in the building to Day Charity by executing and delivering a deed to Day. Both Queen and Lear refused to consent to Ivor’s transfer to Day. Subsequently, Queen and Lear died. After their deaths, Day’s interest in the building consisted of Total ownership due to the deaths of Queen and Lear. No interest because Queen and Lear refused to consent to the transfer. A 1/3 interest as a joint tenant. A 1/3 interest as a tenant in common.

Answer 53

When rights in property held in joint tenancy are conveyed without the consent of the other joint tenants, the new owner becomes a tenant in common with the remaining joint tenants.

Question 54

``` On July 1, 2014, Daniel Wright owned stock (held for investment) purchased 2 years earlier at a cost of $10,000 and having a fair market value of $7,000. On this date he sold the stock to his son, William, for $7,000. William sold the stock for $6,000 to an unrelated person on November 1, 2014. How should William report the stock sale on his 2014 tax return? As a short-term capital loss of $1,000. As a long-term capital loss of $1,000. As a short-term capital loss of $4,000. As a long-term capital loss of $4,000. ```

Answer 54

As a short-term capital loss of $1,000. This answer is correct because losses are disallowed on sales between related taxpayers, including family members. Thus, Daniel’s loss of $3,000 is disallowed on the sale of stock to his son, William. William’s basis for the stock is his $7,000 cost. Since William’s stock basis is determined by his cost (not by reference to Daniel’s cost), there is no "tack-on" of Daniel’s holding period. Thus, a later sale of the stock for $6,000 on November 1 generates a $1,000 short-term capital loss for William. Note that if William had sold the stock at a gain, Daniel’s disallowed loss would have been used to reduce the recognized gain.

Question 55

Dole, the sole owner of Enson Corp., transferred a building to Enson. The building had an adjusted tax basis of $35,000 and a fair market value of $100,000. In exchange for the building, Dole received $40,000 cash and Enson common stock with a fair market value of $60,000. What amount of gain did Dole recognize? $0 $ 5,000 $40,000 $65,000

Answer 55

The requirement is to determine the amount of gain recognized by Dole on the transfer of a building with a basis of $35,000 to his solely owned corporation in exchange for $40,000 cash and stock with a value of $60,000. No gain or loss is recognized if property is transferred to a corporation solely in exchange for stock if the transferor is in control of the corporation immediately after the exchange. If consideration other than stock is received, a realized gain must be recognized to the extent of the boot received. Here, Dole realized a gain of ($40,000 + $60,000 stock) ? $35,000 basis = $65,000 on the transfer of the building, and must recognize the gain to the extent of the $40,000 of cash received.

Question 56

``` In 2011, Edwin Ryan bought 100 shares of a listed stock for $5,000. In June 2014, when the stock’s fair market value was $7,000, Edwin gave this stock to his sister, Lynn. No gift tax was paid. Lynn died in October 2014, bequeathing this stock to Edwin, when the stock’s fair market value was $9,000. Lynn’s executor did not elect the alternate valuation. What is Edwin’s basis for this stock after he inherits it from Lynn’s estate? $0 $5,000 $7,000 $9,000 ```

Answer 56

A special rule applies if a decedent (Lynn) acquires appreciated property as a gift within 1 year of death and this property passes back to the donor (Edwin) or the donor’s spouse. When this occurs, the beneficiary’s basis is the basis of the property in the hands of the decedent before death, rather than fair market value at date of death. Since Lynn had received the stock as a gift, her basis before death was $5,000, which then becomes the basis of the stock to Edwin.

Question 57

``` Bailey contributed land with a fair market value of $75,000 and an adjusted basis of $25,000 to the ABC Partnership in exchange for a 30% interest. The partnership assumed Bailey’s $10,000 recourse mortgage on the land. What is Bailey’s basis for his partnership interest? $15,000 $18,000 $65,000 $75,000 ```

Answer 57

Generally, no gain or loss is recognized on the contribution of property in exchange for a partnership interest. As a result, Bailey’s basis for the partnership interest received consists of the $25,000 adjusted basis of the land contributed to the partnership, less the net reduction in Bailey’s individual liability resulting from the partnership’s assumption of the $10,000 mortgage. Since Bailey received a 30% partnership interest, the net reduction in Bailey’s individual liability is $10,000 × 70% = $7,000. As a result, Bailey’s basis for the partnership interest is $25,000 ? $7,000 = $18,000.

Question 58

``` On August 20, 2014, Roger Carlson paid $60,000 for 250 shares of Hewlett Corp. common stock. Roger received a nontaxable stock dividend of 50 new common shares in July 2015. On September 30, 2015, Roger sold the 50 new shares for $13,000. What is Roger’s reportable gain on the sale of the 50 new shares? $ 3,000 short-term capital gain. $ 3,000 long-term capital gain. $13,000 short-term capital gain. $13,000 long-term capital gain. ```

Answer 58

This answer is correct. After the stock dividend, the basis of each share would be determined as follows: $60,000 /250 + 50 = $200 per share Since the holding period of the new shares includes the holding period of the old shares, the sale of the 50 new shares for $13,000 results in a LTCG of $3,000 [$13,000 ? (50 shares × $200)].

Question 59

Unreimbursed airfares : Amount reportable on Schedule A ?

Answer 59

Unreimbursed business airfares are deductible.

Question 60

Dry cleaning costs for business suits worn at dealership : Amount reportable on Schedule A ?

Answer 60

Although cleaning and dry cleaning costs would be deductible if the taxpayer was in a travel status, they are a nondeductible personal expense here because the suits were only worn at the dealership.

Question 61

Cost of meals during which business was discussed with potential customers : Amount reportable on Schedule A ?

Answer 61

50% of the cost of unreimbursed business meals is deductible

Question 62

Entertainment for clients, immediately after a business discussion : Amount reportable on Schedule A ?

Answer 62

To be deductible, an entertainment expense must be either directly related or associated with the active conduct of the taxpayer's trade or business. It will be directly related if a substantial business discussion takes place during the entertainment, or will be associated if the entertainment directly precedes or follows a substantial business discussion. Here, since the entertainment immediately follows a business discussion, 50% of the cost of unreimbursed entertainment expenses are deductible

Question 63

Purchase of tuxedo to wear to trade show functions : Amount reportable on Schedule A ?

Answer 63

The cost of clothing can be deducted if wearing the clothing is a condition of employment and the clothes are not suitable to everyday wear. Here, even though the tuxedo was purchased to be worn at trade show functions, it can be worn for nonbusiness functions as well and therefore is not deductible.

Question 64

Cost of a business gift to a client : Amount reportable on Schedule A ?

Answer 64

The deduction for business gifts is subject to an annual ceiling limitation of $25 per donee. Amounts in excess of the $25 limit per donee are not deductible.

Question 65

Which of the following is subject to the Uniform Capitalization Rules of Code Sec. 263A? Editorial costs incurred by a freelance writer. Research and experimental expenditures. Mine development and exploration costs. Warehousing costs incurred by a manufacturing company with $12 million in annual gross receipts.

Answer 65

Warehousing costs incurred by a manufacturing company with $12 million in annual gross receipts. Uniform capitalization (UNICAP) rules generally require that all costs incurred in manufacturing or constructing real or personal property, or in purchasing or holding property for sale, must be capitalized as part of the cost of the property. Among the costs that are excepted from the UNICAP rules are research and experimental expenditures, mine development and exploration costs, and the costs incurred by a freelance writer, photographer, or artist whose personal efforts create the product. Also excepted from the UNICAP rules are the costs of small retailers and wholesalers who acquire personal property for resale if the retailer’s or wholesaler’s average gross receipts for the preceding three tax years do not exceed $10 million. However, the warehousing costs incurred by a manufacturing company with $12 million in annual gross receipts do not fall within any of the exceptions and are subject to the UNICAP rules.

Question 66

Elrod is attempting to introduce oral evidence in court to explain or modify a written contract he made with Weaver. Weaver has pleaded the parol evidence rule. In which of the following circumstances will Elrod not be able to introduce the oral evidence?

Answer 66

The contract indicates that it was intended as the "entire contract" between the parties, and the point is covered in detail. This answer is correct because the parol evidence rule states that once an agreement is reduced to a writing intended as the complete contract, the parties may not introduce oral or written evidence in an attempt to alter or contradict the terms of the agreement. Thus, Elrod would not be able to introduce the evidence if the contract indicates that it was intended as the entire contract, and the disputed point is covered in detail in the agreement.

Question 67

A CPA’s adjusted gross income (AGI) for the preceding twelve-month tax year exceeds $150,000. Which of the following methods is(are) available to the CPA to compute the required annual payment of estimated tax for the current year in order to make timely estimated tax payments and avoid the underpayment of estimated tax penalty? I. The annualization method. II. The seasonal method.

Answer 67

This answer is correct. An individual whose tax liability is not sufficiently covered by withholding must pay estimated tax in quarterly installments or be subject to penalty. Generally, there will be no underpayment penalty if amounts withheld plus estimated payments are at least equal to the lesser of 90% of the individual’s current year’s tax (determined on the basis of actual income or annualized income), or 100% of the preceding year’s tax. An individual whose AGI for the preceding year exceeds $150,000 must use 110% (instead of 100%) if s/he wishes to base his or her current year’s estimated tax payments on the preceding year’s tax liability. The use of the adjusted seasonal installment method is available to corporations, but is not available for individuals.

Question 68

``` n January 2014, Martin and Louis formed a partnership with each contributing $75,000 cash. The partnership agreement provided that Martin would receive a guaranteed payment of $20,000 and that partnership profits and losses (computed after deducting Martin’s guaranteed payment) would be shared equally. For the year ended December 31, 2014, the partnership’s operations resulted in a loss of $18,000 after deducting the $20,000 guaranteed payment made to Martin. The partnership had no outstanding liabilities as of December 31, 2014. What is the amount of Martin’s basis for his partnership interest as of December 31, 2014? $46,000 $66,000 $76,000 $86,000 ```

Answer 68

Generally, a partner’s original basis in the partnership consists of his capital contribution. It is increased by the partner’s distributive share of income, and decreased by distributions from the partnership and the partner’s distributive share of any partnership losses. In this case, Martin’s basis in the partnership is his original contribution of $75,000 less his one-half share of the $18,000 loss. Therefore, his basis is $66,000. The guaranteed payment of $20,000 is already reflected as a deduction in the computation of the partnership’s loss of $18,000, and the receipt of the guaranteed payment must be reported as ordinary income by Martin.

Question 69

When determining his federal income tax, Curt had the following items for 2014: Personal exemption $3,950 Itemized deduction for personal property taxes 2,500 Charitable contribution of capital gain property 1,500 Net long-term capital gain 1,000 Excess of MACRS depreciation on personal property over depreciation computed using the 150% declining-balance method 600 Tax-exempt interest from City of Chicago general obligation bonds 400 What is the total amount of adjustments to taxable income for purposes of computing Curt’s alternative minimum tax for 2014?

Answer 69

This answer is correct because Curt’s adjustments consist of the $600 of excess depreciation, the $3,950 personal exemption and the personal property taxes of $2,500, a total of $7,050.

Question 70

``` Stone’s basis in Ace Partnership was $70,000 at the time he received a nonliquidating distribution of partnership capital assets. These capital assets had an adjusted basis of $65,000 to Ace, and a fair market value of $83,000. Ace had no unrealized receivables, appreciated inventory, or properties which had been contributed by its partners. What was Stone’s recognized gain or loss on the distribution? $18,000 ordinary income. $13,000 capital gain. $ 5,000 capital loss. $0. ```

Answer 70

Gain will be recognized by a distributee partner in a nonliquidating distribution if the amount of money received exceeds the partner’s basis for the partnership interest. Additionally, gain or loss may be recognized by a distributee partner if a nonliquidating distribution is disproportionate with respect to the partner’s interest in partnership property. A distribution is disproportionate if the partner receives more than the partner’s share of unrealized receivables and substantially appreciated inventory, and in return relinquishes a share in other assets, or receives more than the partner’s share in capital and Sec. 1231 assets, and in return, relinquishes an interest in the partnership’s unrealized receivables and substantially appreciated inventory. In this case, the Ace Partnership has no unrealized receivables, appreciated inventory, or properties which had been contributed by its partners, so the distribution received by Stone cannot be disproportionate. Since gain will never be recognized in a proportionate noncash distribution of property, Stone recognizes no gain on the distribution and will have a transferred basis of $65,000 in the capital assets received and a basis of $5,000 for his continuing partnership interest.

Question 71

Which of the following statements is correct with respect to the differences and similarities between a corporation and a limited partnership? Directors owe fiduciary duties to the corporation and limited partners owe such duties to the partnership. A corporation and a limited partnership may be created only pursuant to a state statute and a copy of its organizational document must be filed with the proper state agency. Shareholders may be entitled to vote on corporate matters whereas limited partners are prohibited from voting on any partnership matters. Stock of a corporation may be subject to the federal securities laws registration requirements whereas limited partnership interests are automatically exempt from such requirements.

Answer 71

A corporation and a limited partnership may be created only pursuant to a state statute and a copy of its organizational document must be filed with the proper state agency. Corporations and limited partnerships may only be created pursuant to state statutes. Normally, both the Articles of Incorporation and a Certificate of Limited Partnership must be filed with the Secretary of State.

Question 72

If an individual incurs a loss on a nonbusiness deposit as the result of the insolvency of a bank, credit union, or other financial institution, the individual’s loss on the nonbusiness deposit may be deducted in any one of the following ways except Miscellaneous itemized deduction. Casualty loss. Short-term capital loss. Long-term capital loss.

Answer 72

A loss resulting from a nonbusiness deposit in an insolvent financial institution is generally treated as a nonbusiness bad debt deductible as a short-term capital loss. However, subject to certain limitations, an individual may elect to treat the loss as a casualty loss or as a miscellaneous itemized deduction.

Question 73

Which of the following will not constitute value in determining whether a person is a holder in due course? The taking of a negotiable instrument for a future consideration. The taking of a negotiable instrument as security for a loan. The giving of one’s own negotiable instrument in connection with the purchase of another negotiable instrument. The performance of services rendered the payee of a negotiable instrument who endorses it in payment for services.

Answer 73

This answer is correct because according to Article 3 of the UCC, in order for a holder to achieve holder in due course status, he must give executed value in exchange for the negotiable instrument. Future consideration is not considered to be adequate value in determining whether a person is a holder in due course. The consideration must be performed to qualify as executed value.

Question 74

Cooma Corporation’s book income before income taxes for the year ended December 31, 2014, was $260,000. The company began business during March 2014 and organizational costs of $130,500 were expensed when incurred during 2014 for financial statement purposes. For tax purposes these costs are being written off over the minimum allowable period. For the year ended December 31, 2014, Cooma’s taxable income was $260,000 $368,750 $383,250 $390,500

Answer 74

A corporation’s organizational expenditures can be deducted ratably over the 180-month period beginning with the month in which the corporation begins business. Here, the $130,500 of organizational expenditures expensed per books must be added back to the $260,000 of book income, and then the proper tax amortization deducted ($130,500 × 10/180 = $7,250), resulting in taxable income of $383,250.

Question 75

What would be the alternative minimum tax liability for a corporation that is not exempt from the alternative minimum tax and whose tax return reflects the following for 2014? Alternative minimum taxable income (after exemption) $110,000 AMT foreign tax credit 5,000 Regular federal income tax (net of foreign tax credit) 4,500 $ 9,000 $12,500 $17,000 $17,500

Answer 75

The corporation’s tentative minimum tax ($110,000 × 20%) = $22,000 would be reduced by the $5,000 AMT foreign tax credit and $4,500 of regular federal income tax, resulting in an alternative minimum tax (AMT) liability of $12,500.

Question 76

``` Ed, the sole stockholder of Looney Corp., paid $70,000 for Looney’s stock in 2010. During 2015, Ed contributed a parcel of land to Looney but was not given any additional stock for this contribution. Ed’s basis for the land was $5,000, and its fair market value was $15,000 on the date of the transfer of title. What is Ed’s adjusted basis for his Looney stock following the contribution of the parcel of land? $70,000 $75,000 $80,000 $85,000 ```

Answer 76

The requirement is to determine Ed’s stock basis following the contribution of a parcel of land to his solely owned corporation. When a shareholder makes a contribution to the capital of a corporation, no gain or loss is recognized to the shareholder, the corporation has a transferred (carryover) basis for the property, and the shareholder’s original stock basis is increased by the adjusted basis of the additional property contributed. Here, Ed’s beginning stock basis of $70,000 is increased by the $5,000 basis for the contributed land, resulting in a stock basis of $75,000.

Question 77

For the year 2014 Fred and Wilma Todd reported the following items of income: Fred Wilma Salary $40,000 $ 200 Interest income 1,000 8,800 Cash prize won on TV game show $41,000 $9,000 Neither Fred nor Wilma is a participant in a qualified retirement plan and both established traditional individual retirement accounts during the year. Assuming a joint return will be filed for 2014 and that Fred and Wilma are under age 50, what is the maximum amount of deduction that they will be allowed for contributions to their individual retirement accounts? $5,500 $6,000 $11,000 $12,000

Answer 77

This answer is correct. Because neither Fred nor Wilma is a participant in a qualified retirement plan, they are eligible to make deductible contributions to their IRAs. The Todds may contribute and deduct a total of $11,000 to their individual retirement accounts. Up to $5,500 can be deducted for contributions to the IRA of each spouse (even if one spouse is not working), provided that the combined earned income of both spouses is at least equal to the amounts contributed to the IRAs. In this case, $11,000 is less than 100% of $40,000. The prize won on the TV game show does not qualify Wilma as a working spouse, nor is it compensation for purposes of computing the limit.

Question 78

``` Pursuant to a plan of corporate reorganization adopted in the current year, Myra Eber exchanged 1,000 shares of Faro Corp. common stock that she had purchased for $75,000, for 1,800 shares of Judd Corp. common stock having a fair market value of $86,000. As a result of this exchange, Eber’s recognized gain and her basis in the Judd stock should be Recognized gain /Basis $11,000 /$86,000 $11,000/$75,000 $ 0 /$86,000 $ 0 /$75,000 ```

Answer 78

This answer is correct. No gain or loss is recognized if stock is exchanged solely for stock in a corporation that is a party to the reorganization. Thus, Eber’s basis in the Judd stock received is the same as her basis in the Faro stock transferred, $75,000.

Question 79

Calhoun has in his possession a negotiable instrument which was originally payable to the order of Bannister. It was transferred to Calhoun by a mere delivery by Travis, who took it from Bannister in good faith in satisfaction of an antecedent debt. The back of the instrument read as follows, "Pay to the order of Travis in satisfaction of my prior purchase of a used IBM typewriter, signed Bannister." Which of the following is correct? Travis’ taking the instrument for an antecedent debt prevents him from qualifying as a holder in due course. Calhoun is a holder in due course. Calhoun has the right to assert Travis’ rights, including his standing as a holder in due course and also has the right to obtain Travis’ signature. Bannister’s endorsement was a special endorsement; thus, Travis’ signature was not required in order to negotiate it.

Answer 79

This answer is correct because transfer of an instrument causes the rights which the transferor had to vest with the transferee. Since Travis is a HDC, Calhoun acquires the rights of a HDC. Unless otherwise agreed, any transfer for value of an instrument not then payable to bearer (i.e., "order paper") gives the transferee the specifically enforceable right to have the unqualified endorsement of the transferor.