Review

Question 1

On January 1, 2017, James Davis was awarded a postdoctorate fellowship grant of $30,000 by a tax-exempt educational organization. Davis is not a candidate for a degree and was awarded the grant to continue his research. The grant was awarded for the period March 1, 2017 through May 31, 2018. On March 1, 2017, Davis elected to receive the full amount of the grant. What amount should be included in his gross income for 2017?

Answer 1

$30000

A degree candidate can exclude scholarships and fellowships that are used for tuition and course-related fees, books, supplies, and equipment. Since Davis is not a candidate for a degree, the entire amount of fellowship grant must be included in gross income in the year received.

Question 2

Pool installation, which qualified as a medical expense and increased the value of the home by $25,000 $100,000
Widening doorways to accommodate Drake’s wheelchair. The improvement did not increase the value of his home 10,000

For regular income tax purposes and without regard to the adjusted gross income percentage threshold limitation, what maximum would be allowable as a medical expense deduction in the current year?

Answer 2

$85,000

The installation of the pool qualifies as a deductible medical expense to the extent that it does not increase the value of the home, $100,000 − $25,000 = $75,000. Additionally, the $10,000 cost of widening doorways to accommodate Drake’s wheelchair is deductible as a medical expense since expenses incurred by a physically handicapped individual for the removal of structural barriers in a residence to accommodate a handicapped condition is deductible as a medical expense.

Question 3

Robbe, a cash-basis single taxpayer, reported $50,000 of adjusted gross income last year and claimed itemized deductions of $7,250, consisting solely of $7,250 of state income taxes paid last year. Robbe’s itemized deduction amount, which exceeded the standard deduction available to single taxpayers for last year by $1,150, was fully deductible and it was not subject to any limitations or phase-outs. In the current year, Robbe received a $1,500 state tax refund relating to the prior year. What is the proper treatment of the state tax refund?

Answer 3

$1150

A state income tax refund must be included in gross income for the current year under the tax benefit rule to the extent that the refunded amount was deducted in a prior year and the deduction provided a benefit by reducing the taxpayer’s federal income tax for the prior year.

Question 4

The Browns borrowed $20,000, secured by their home, to purchase a new automobile. At the time of the loan, the fair market value of their home was $400,000, and it was unencumbered by other debt. The interest on the loan qualifies as

Answer 4

Deductible qualified residence interest.

Question 5

Which of the following is not included in determining the total support of a dependent?

Answer 5

Life insurance premiums paid on behalf of the dependent.

Support includes food, clothing, FMV of lodging, medical, recreational, educational, and certain capital expenditures made on behalf of a dependent. Excluded from support are life insurance premiums, funeral expenses, nontaxable scholarships, and income and Social Security taxes paid from a dependent’s own income.

Question 6

What amount can the Zimmers deduct as taxes in calculating itemized deductions for 2017?

Answer 6

The property taxes on the residence and the land held for appreciation, together with the personal property taxes on the auto are deductible. The special assessment is not deductible, but would be added to the basis of the residence.

Question 7

Which one of the following statements concerning the deduction for interest on qualified education loans is correct?

Answer 7

An individual is allowed to deduct up to $2,500 for interest on qualified education loans in arriving at AGI. The deduction is reduced by adjusted gross income in excess of specified levels and loan proceeds must have been used to pay for the qualified higher education expenses (e.g., tuition, fees, room, board) of the taxpayer, spouse, or a dependent (at the time the debt was incurred). The education expenses must relate to a period when the student was enrolled on at least a half-time basis.

Question 8

How many public company audits per year does a CPA firm that is registered with the Public Company Accounting Oversight Board (PCAOB) have to perform before it receives an annual inspection from the PCAOB?

Answer 8

CPA firms that audit more than 100 issuers must have an annual inspection by the PCAOB.

Question 9

With regard to an agreement for the sale of real estate, the Statute of Frauds

Answer 9

Does not require that the agreement be signed by all parties.

The Statute of Frauds requires only that the written contract be signed by the party to be charged, not by all parties to the contract.

Question 10

Ozgood is a principal and Flood is his agent. Ozgood is totally dissatisfied with the agency relationship and wishes to terminate it. In which of the following situations does Ozgood not have the power to terminate the relationship?

Answer 10

Flood is an agent coupled with an interest.

This answer is correct because normally a principal has the power to terminate an agency relationship even though it would constitute a breach to do so. However, where the agency is an agency coupled with an interest (i.e., where the agent owns part of the subject matter, the principal does not have the power to terminate the relationship).

Question 11

Which one of the following, if present, would support a finding of constructive fraud on the part of a CPA?

Answer 11

Constructive fraud requires the following elements: (1) misrepresentation of a material fact, (2) reckless disregard for the truth, (3) reasonable reliance by the injured party, and (4) injury.

Question 12

Quick Corp. has $270,000 of outstanding accounts receivable. On March 10, Quick assigned a $30,000 account receivable due from Pine, one of Quick’s customers, to Taft Bank for value. On March 30, Pine paid Quick the $30,000. On April 5, Taft notified Pine of the March 10 assignment from Quick to Taft. Taft is entitled to collect $30,000 from

Answer 12

Quick only

A debtor who does not have knowledge of a creditor’s assignment of his/her right to receive payment can extinguish all of his/her liability regarding the debt by paying the assignor. It is the duty of the assignee to notify the debtor of the assignment

Question 13

Kirk Corp. sold Nix an Ajax freezer, Model 24, for $490. The contract required delivery to be made by June 23. On June 12, Kirk delivered an Ajax freezer, Model 52, to Nix. Nix immediately notified Kirk that the wrong freezer had been delivered and indicated that the delivery of a correct freezer would not be acceptable. Kirk wishes to deliver an Ajax freezer, Model 24, on June 23. Which of the following statements is correct?

Answer 13

Kirk may deliver the freezer on June 23 if it first seasonably notifies Nix of its intent to do so.

A seller has the right to “cure” nonconforming performance when there is still time left for performance under the contract. To do so a seller must seasonably notify the buyer of his intention to cure, and must tender conforming goods within the original time specified by the contract.

Question 14

The principle that protects corporate directors from personal liability for acts performed in good faith on behalf of the corporation is known as

Answer 14

The business judgment rule.

Question 15

What term is used to describe a partnership without a specified duration?

Answer 15

A partnership at will.

Question 16

Hart and Ruck formed a limited partnership in which Hart was a general partner and Ruck was a limited partner. A certificate of limited partnership was filed with the secretary of state. Which of the following is correct under the Revised Uniform Limited Partnership Act?

Answer 16

The certificate of limited partnership requires the names of the general partners, but not the limited partners.

Question 17

Would the following expense items be reported on Schedule M-1 of the corporate income tax return (Form 1120) showing the reconciliation of income per books with income per return?
Deduction for a net capital loss
Business meals for executive out-of-town travel

Answer 17

BOTH

Since a net capital loss per books would not be deductible for tax purposes, the net capital loss would be added back to book income on Schedule M-1. Since only 50% of business meals is deductible for tax purposes, 50% of business meals would be added back to book income to arrive at taxable income on Schedule M-1.

Question 18

In a jurisdiction having an accountant-client privilege statute, to whom may a CPA turn over workpapers without a client’s permission?

Answer 18

State CPA society quality control panel.

Question 19

Marglow Supplies, Inc. mailed a letter to Wilson Distributors on September 15, offering a 3-year franchise dealership. The offer stated the terms in detail and at the bottom stated that the offer would not be withdrawn prior to October 1. Which of the following is correct?

Answer 19

The offer cannot be assigned to another party by Wilson if Wilson chooses not to accept.

This answer is correct because offers to contract may only be accepted by the person to whom they were made.

Question 20

Under which of the following circumstances is a shareholder who receives an illegal dividend not obligated to repay the dividend?

Answer 20

The shareholder was not aware the dividend was improper and the corporation was solvent at the time of payment

Question 21

Which of the following partners of a limited liability partnership (LLP) may avoid personal liability when a partner commits a negligent act?

Answer 21

All the partners other than the supervisor of, and the negligent partner.

This answer is correct because partners are fully liable only for their own negligent acts and for wrongful acts of those they supervise or have control over.

Question 22

A typewriter, which was subject to a prior UCC security interest, was delivered to Ed Fogel for repair. Fogel is engaged in the business of repairing typewriters. Fogel repaired the typewriter. However, the owner of the typewriter now refuses to pay for the services performed by Fogel. The state in which Fogel operates his business has a statute which gives Fogel an artisan’s lien on the typewriter. Fogel’s artisan’s lien

Answer 22

Takes priority over a prior perfected security interest unless the statute expressly provides otherwise.

Question 23

The amount of long-term capital loss that Lydia recognized in 2017 on the sale of this stock was

Answer 23

Although gains and losses incurred in sales transactions between a partnership and its partners are generally recognized, a loss is disallowed if incurred in a transaction between a partnership and a partner owning (directly or constructively) more than a 50% capital or profits interest. Since Lydia’s partnership interest does not exceed 50%, she realizes and recognizes a long-term capital loss of $9,000 − $4,000 = $5,000 from the sale of stock.

Question 24

The CSU partnership distributed to each partner cash of $4,000, inventory with a basis of $4,000 and a fair market value (FMV) of $6,000, and land with an adjusted basis of $5,000 and an FMV of $3,000 in a liquidating distribution. Partner Chang had an outside basis in Chang’s partnership interest of $12,000. In the second year after receiving the liquidating distribution, Chang sold the inventory for $5,000 and the land for $3,000. What income must Chang report upon the sale of these assets?

Answer 24

$1,000 ordinary gain and $1000 capital loss.

Question 25

In 2015, Celia Mueller bought a $1,000 bond issued by Disco Corporation for $1,100. Instead of paying off the bondholders in cash, Disco issued 100 shares of preferred stock in 2017 for each bond outstanding. The preferred stock had a fair market value of $15 per share. What is the recognized gain to be reported by Mueller in 2017?

Answer 25

The issuance by Disco Corporation of its preferred stock in exchange for its bonds is a nontaxable "Type E" reorganization (i.e., a recapitalization). Since Mueller did not receive any boot, no part of her $400 realized gain is recognized.

Question 26

Foster offered to sell Lebow his garage for $27,000. The offer was in writing and signed by Foster. Foster gave Lebow 5 days to decide. On the fourth day Foster accepted a better offer from Dilby, who was unaware of the offer to Lebow. Foster subsequently conveyed the property to Dilby. Unaware of the sale to Dilby, Lebow telephoned Foster on the fifth day and unconditionally accepted the offer. Under the circumstances, Lebow

Answer 26

Is entitled to damages. This answer is correct because Lebow’s acceptance created a contract due to the fact Foster had not revoked the offer prior to acceptance. Since the offer did not qualify as a firm offer (i.e., did not involve the sale of goods) or an option (i.e., no consideration was given), Foster had the power to revoke the offer. However, a revocation must be communicated to the offeree to terminate the offer.

Question 27

Under the Bankruptcy Code, one of the elements that must be established in order for the trustee in bankruptcy to void a preferential transfer to a creditor who is not an insider is that

Answer 27

The transferee-creditor received more than he would have received in a liquidation proceeding under the Bankruptcy Code.

Question 28

Macy agreed orally to repaint Rich’s home for $2,000. Rich required that it be done in 16 months although Macy said he might have it done in 10 months. The work actually took 14 months. Does this contract fall within the Statute of Frauds?

Answer 28

No, because the work could have been completed within 1 year.

Question 29

Which of the following corporate shareholder rights is enforceable by means of a derivative suit?

Answer 29

Recovering damages to the corporation from a third party. This is a derivative suit because the shareholder is suing on behalf of the corporation.

Question 30

On May 1, Dix and Wilk entered into an oral agreement by which Dix agreed to purchase a small parcel of land from Wilk for $450. Dix paid Wilk $100 as a deposit. The following day, Wilk received another offer to purchase the land for $650, the fair market value. Wilk immediately notified Dix that Wilk would not sell the land for $450. If Dix sues Wilk for specific performance, Dix will

Answer 30

Lose, because the agreement was not in writing and signed by Wilk. This answer is correct because in order to conform with the Statute of Frauds, and therefore be enforceable, any contract for the sale of an interest in real property (regardless of price) must be in writing and signed by the party to be charged.

Question 31

The registration requirements of the Securities Act of 1933 apply to

Answer 31

The issuance of stock warrants.

Question 32

In deciding whether consideration necessary to form a contract exists, a court must determine whether

Answer 32

There is mutuality of consideration.

Question 33

Rey Corp.’s management intends to solicit proxies relating to its annual meeting at which directors will be elected. Rey is subject to the registration and reporting requirements of the Securities Exchange Act of 1934. As a result, Rey must furnish its shareholders with

Answer 33

An annual report containing its audited balance sheets for the 2 most recent years.

Question 34

If a contract for the sale of goods includes a C&F shipping term and the seller has fulfilled all of its obligations, the

Answer 34

Risk of loss will pass to the buyer upon delivery of the goods to the carrier. This answer is correct because the shipping term "C&F" (cost and freight) means that the purchase price includes both the cost of the goods and the cost of delivering the goods to the shipper. Under such agreements, the risk of loss and title to the goods pass when the seller places the goods in the appropriate carrier’s hands.

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?

Answer 35

No, because Grill is a merchant to whom goods had been entrusted. 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

Haplow engaged Turnbow as his attorney when threatened by several creditors with a bankruptcy proceeding. Haplow’s assets consisted of $85,000 and his debts were $125,000. A petition was subsequently filed and was uncontested. Several of the creditors are concerned that the suspected large legal fees charged by Turnbow will diminish the size of the distributable estate. What are the rules of limitation which apply to such fees?

Answer 36

Turnbow must file with the court a statement of compensation paid or agreed to for review as to its reasonableness.

Question 37

Park purchased from Derek Truck Sales a truck which had serious mechanical problems. Park learned of the defects 6 months after the date of sale. Five years after the date of sale Park commenced an action for breach of warranty against Derek. Derek asserts the statute of limitations as a defense. Which of the following statements made by Derek is correct?

Answer 37

Park was required to bring the action within the statute of limitations as measured from Derek’s tender of delivery. when a warranty explicitly extends to the future performance of the goods, a cause of action for breach of that warranty must be brought within the statute of limitations period as measured from the time the breach was discovered or should have been discovered. If the warranty does not explicitly extend to future performance, a cause of action for breach accrues at tender of delivery. Derek Truck Sales, a merchant, has sold a truck with serious mechanical problems, thereby breaching the implied warranty of merchantability. An implied warranty by definition, is not explicit; and, therefore, Park’s cause of action for breach of the implied warranty of merchantability accrued when delivery of the truck was tendered

Question 38

Which of the following requires consideration in order to be binding on the parties?

Answer 38

Material modification of a contract involving the sale of real estate. This answer is correct because under common law, which applies to the sale of real property, the modification of an existing contract must be supported by consideration. Under the UCC, however, a contract for the sale of goods may be modified either orally or in writing without consideration.

Question 39

Samm, a plumber, entered into a contract for $75,000 with Orr, Inc. to perform certain plumbing services in a building owned by Orr. After Samm had satisfactorily performed the work, Orr discovered that Samm had violated the state licensing statute by failing to obtain a plumbing license. The licensing statute was enacted merely to raise revenue for the state. An independent appraisal of Samm’s work indicated the building’s fair market value increased by $70,000 as a result of Samm’s work. The cost of the materials which Samm supplied was $35,000. If Samm sues Orr, Samm will be entitled to recover

Answer 39

75K In general, an agreement that violates a statute is illegal, making such agreement unenforceable. However, if the statute in question is a revenue-seeking licensing statute (in contrast to a regulatory licensing statute), the agreement would still be enforceable. This is an exception to the general rule. The plumbing licensing statute is a revenue-seeking licensing statute; thus, the contract violating the statute will still be enforceable for its full amount of $75,000.

Question 40

Which of the following is an attribute of a complex trust?

Answer 40

It distributes corpus. A complex trust is one in which the trustee (1) has the discretion whether to distribute or accumulate income, (2) may make charitable contributions, and (3) may distribute trust corpus.

Question 41

In 2017, Roe Corp. purchased and placed in service a used machine to be used in its manufacturing operations. This machine cost $2,230,000. What portion of the cost may Roe elect to treat as an expense rather than as a capital expenditure?

Answer 41

For 2017, Sec. 179 permits a taxpayer to elect to treat up to $510,000 of the cost of qualifying depreciable personal property as an expense rather than as a capital expenditure. However, the $510,000 maximum is reduced dollar for dollar by the cost of qualifying property placed in service during the taxable year that exceeds 2,030,000 million. Here, the maximum amount that can be expensed is [$510,000 – ($2,230,000 – $2,030,000)] = $310,000.

Question 42

Under the federal Bankruptcy Code, which of the following rights or powers does a trustee in bankruptcy not have?

Answer 42

Under the federal Bankruptcy Code, a trustee in bankruptcy may set aside statutory liens that become effective when the bankruptcy petition is filed but may not set aside those that were effective before the bankruptcy petition was filed.

Question 43

Which of the following is allowed in the calculation of the taxable income of a simple trust?

Answer 43

A simple trust is allowed a personal exemption of $300, but is not eligible for a standard deduction. Additionally, a simple trust is not allowed to make charitable contributions, and brokerage commissions for the purchase of tax-exempt bonds would not be deductible because they represent an expense incurred in the production of tax-exempt income.

Question 44

What is Tan’s total tax liability for the year?

Answer 44

Tan’s tax liability is the greater of (1) its regular tax liability, or (2) its tentative minimum tax, increased by its personal holding company tax.

Question 45

Flynn and Bleeker formed a partnership under the Revised Uniform Limited Partnership Act (RULPA). Flynn is the general partner and puts in a capital contribution of $40,000. Bleeker is the limited partner and puts in a capital contribution of $60,000. They do not discuss a profit-sharing plan. During the first year, the partnership earns $50,000 in profit. How do they split the profits between Flynn and Bleeker respectively?

Answer 45

Under RULPA, if the partners fail to agree upon a profit-sharing plan, the profits are split in the proportion of their capital contributions, that is 40% for Flynn and 60% for Bleeker.

Question 46

Under the Secured Transactions Article of the UCC, what secured transaction document must be signed by the debtor?

Answer 46

A security agreement must be signed by the debtor.

Question 47

Which of the following statements regarding personal holding companies is correct?

Answer 47

The personal holding company tax may be avoided by dividend payments sufficient to reduce undistributed personal holding company income to zero.

Question 48

Chicago Corp., a calendar-year C corporation, had accumulated earnings and profits of $100,000 as of January 1, 2017, and had a deficit in its current earnings and profits for the entire 2017 tax year in the amount of $140,000. Chicago Corp. distributed $30,000 cash to its shareholders on December 31, 2017. What would be the balance of Chicago Corp.’s accumulated earnings and profits as of January 1, 2018?

Answer 48

$(40,000) The requirement is to determine the balance of Chicago Corp.’s accumulated earnings and profits (AEP) at January 1, 2018. The AEP beginning balance of $100,000 would be reduced by the 2017 deficit of $140,000, resulting in a deficit of $40,000. Since distributions only pay out a corporation’s positive AEP, the AEP deficit of $40,000 is not affected by the $30,000 distributed to shareholders.

Question 49

On March 1 of the previous year, a parent sold stock with a cost of $8,000 to their child, for $6,000, its fair market value. On September 30 of the current year, the child sold the same stock for $7,000 to Hancock, who is unrelated to the parent and child. What is the proper treatment for these transactions?

Answer 49

Parent has $0 recognized loss and child has $0 recognized gain. Losses are disallowed on the sale of property between related taxpayers, including a parent and their child. Any gain later realized by the related transferee on the subsequent disposition of the property is not recognized to the extent of the transferor's disallowed loss. Here, the parent's realized loss of $6,000 − $8,000 = $2,000 is disallowed because the stock was sold to their child.

Question 50

Kwik Bank loaned Crocker $30,000 to finance the purchase of appliances shipped to it from Cue Company. Crocker used the money from the loan to fully pay for the appliances. Kwik had Crocker sign a security agreement that listed as collateral the entire present and future inventory of Crocker. Kwik meant to file a financing statement but failed to do so. Duncan Company, aware of Kwik's security interest, extended credit to Crocker to purchase office supplies, which Crocker planned to sell at his store. Crocker failed to pay either Kwik or Duncan. Which of the following is correct?

Answer 50

Kwik’s security interest is enforceable against Crocker and does have priority over Duncan. Kwik’s security interest against Crocker was enforceable because attachment took place due to the fact that there was a signed security agreement, Kwik gave value, and Crocker had rights in the collateral. Since Kwik did not perfect the security interest, it is not effective against third parties unless they were aware of it, such as Duncan was in this case.

Question 51

Which one of the following statements concerning an education IRA (Coverdell Education Savings Account) is correct?

Answer 51

Contributions to an education IRA are not deductible, but withdrawals of earnings will be tax-free if used to pay the qualified education expenses of the designated beneficiary. The maximum annual amount that can be contributed to an education IRA is limited to $2,000, but the annual contribution is phased out for single taxpayers with modified AGI between $95,000 and $110,000, and for married taxpayers with modified AGI between $190,000 and $220,000. Contributions cannot be made to an education IRA after the date on which the designated beneficiary reaches age 18.

Question 52

A limited partnership was formed with ten general partners and eight limited partners. In order to admit a new general partner, what approval is needed?

Answer 52

All of the general partners and limited partners.

Question 53

The intent, or scienter, element necessary to establish a cause of action for fraud will be met if the plaintiff can show that the

Answer 53

Intent can be established in one of two ways: A plaintiff may show that the defendant actually knew of the misrepresentation, OR may prove that the defendant acted recklessly. Both amount to intent and may be used to prove that element of a fraud action.

Question 54

A debtor will be denied a discharge in bankruptcy if the debtor

Answer 54

Unjustifiably failed to preserve his books and records which could have been used to ascertain the debtor’s financial condition.

Question 55

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?

Answer 55

Inventory A financing statement must be filed to perfect an interest in inventory. Perfection by possession is not possible because the debtor has possession of the collateral for resale. Automatic perfection can only occur with consumer goods.

Question 56

Under the cash method of reporting, an individual should report gross income

Answer 56

For the year in which income is either actually or constructively received either in cash or in property.

Question 57

Taxes payable under the Federal Unemployment Tax Act (FUTA) are

Answer 57

Deductible by the employer as a business expense for federal income tax purposes.

Question 58

Pine has a security interest in certain goods purchased by Byron on an installment contract. Byron has defaulted on the payments, resulting in Pine’s taking possession of the collateral. Which of the following is correct?

Answer 58

The collateral may be sold by Pine at a private sale and, if the collateral is consumer goods, without notice to other secured parties. However, Pine must notify the debtor before the sale unless the collateral is perishable or threatens to decline in value.

Question 59

Wane Corporation has issued securities that are traded on a national securities exchange. Wane just had a significant change in its assets due to a large acquisition of real property. Which of the following is true?

Answer 59

Wane must file Form 8-K with the SEC within 4 days.

Question 60

The Securities Act of 1933 imposes the requirement that issuers of securities are required to file with the SEC a registration statement before securities are offered or sold to the public. Which of the following statements is correct?

Answer 60

The SEC adopted Forms S-2 and S-3 to reduce the burden of disclosure over Form S-1 which is the standard long form.

Question 61

Able and Baker are two corporations, the shares of which are publicly traded. Baker plans to merge into Able. Which of the following is a requirement of the merger?

Answer 61

The merger of two corporations requires the approval from the boards of directors of both merging corporations. Also, normally a majority of the shareholders of each corporation must approve the merger.

Question 62

In a bankruptcy proceeding, the trustee

Answer 62

Is the representative of the bankrupt’s estate and as such has the capacity to sue and be sued on its behalf.

Question 63

Rivers and Lee want to form a partnership. For the partnership agreement to be enforceable, it must be in writing if

Answer 63

The agreement cannot be completed within one year from the date on which it will be entered into.

Question 64

Charles and Tasha Taylor began the process of adopting 5-year-old Joey in 2016. The Taylors incurred $2,000 in attorney and adoption fees in 2016. The adoption became final in 2017. The Taylors incurred an additional $3,500 in attorney fees and $1,000 in court costs in 2017 that were directly related to the adoption of Joey. Ignoring any AGI limitation, what is the maximum adoption credit that the Taylors can take in 2017?

Answer 64

The credit for adoption expenses is a nonrefundable credit of up to $13,570 (for 2017) for qualified adoption expenses incurred for each eligible child. The Taylors’ qualified adoption expenses will be taken into account in the year the adoption becomes final and include all reasonable and necessary adoption fees, court costs, attorney fees, and other expenses

Question 65

The provisions of the Securities Exchange Act of 1934

Answer 65

Require the distribution of financial statements prior to or concurrent with a proxy solicitation. Any person requested to sign a proxy must be furnished with a proxy statement disclosing material financial information as well as other material information.

Question 66

Able, an individual, is a partner in CD Partnership with an adjusted basis of $30,000 for Able's partnership interest. Able received a nonliquidating distribution of $25,000 cash and property with an adjusted basis of $7,000, and a fair market value of $10,000. What amount of gain should Able recognize?

Answer 66

$0 Generally, gain is recognized on a distribution only if the amount of cash received exceeds the basis for the partner's partnership interest.

Question 67

Brisk Corp. is an accrual-basis, calendar-year C corporation with one individual shareholder. At year-end, Brisk had $600,000 accumulated and current earnings and profits as it prepared to make its only dividend distribution for the year to its shareholder. Brisk could distribute either cash of $200,000 or land with an adjusted tax basis of $75,000 and a fair market value of $200,000. How would the taxable incomes of both Brisk and the shareholder change if land were distributed instead of cash?

Answer 67

If a corporation distributes appreciated property, it must recognize gain to the extent that the property’s fair market value exceeds its basis. No change to SH income

Question 68

Which of the following statements is correct with respect to the differences and similarities between a corporation and a limited partnership?

Answer 68

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.

Question 69

Which of the following documents would most likely contain specific rules for the management of a business corporation?

Answer 69

Bylaws This answer, bylaws, is correct because bylaws are requirements adopted by the board of directors to guide management in performing its duties.

Question 70

Mackenzie is the grantor of a trust over which Mackenzie has retained a discretionary power to receive income. Kelly, Mackenzie’s child, receives all taxable income from the trust unless Mackenzie exercises the discretionary power. To whom is the income earned by the trust taxable?

Answer 70

When the grantor of a trust retains substantial control over the trust, such as the power to revoke the trust or a discretionary power to have trust income distributed to the grantor or grantor's spouse, the income from the trust will be taxed to the grantor.

Question 71

On December 31, after receipt of his share of partnership income, Clark sold his interest in a limited partnership for $30,000 cash and relief of all liabilities. On that date, the adjusted basis of Clark’s partnership interest was $40,000, consisting of his capital account of $15,000 and his share of the partnership liabilities of $25,000. The partnership has no unrealized receivables or substantially appreciated inventory. What is Clark’s gain or loss on the sale of his partnership interest?

Answer 71

A partnership interest is a capital asset and a sale generally results in capital gain or loss, except that ordinary income must be reported to the extent of the selling partner’s share of unrealized receivables and appreciated inventory. Here, Clark realized $55,000 from the sale of his partnership interest ($30,000 cash + relief from his $25,000 share of partnership liabilities). Since the partnership had no unrealized receivables nor appreciated inventory and the basis of Clark’s interest was $40,000, Clark realized a capital gain of $55,000 − $40,000 = $15,000 from the sale.

Question 72

Euclid Corp.’s 2017 alternative minimum taxable income before exemption was $250,000. The exempt portion of Euclid’s 2017 alternative minimum taxable income was

Answer 72

A corporation is allowed an exemption of $40,000 in computing its alternative minimum taxable income (AMTI). However, the $40,000 exemption is reduced by 25% of the corporation’s AMTI in excess of $150,000. Here, the amount of exemption is $40,000 − [($250,000 − $150,000) × 25%] = $15,000.

Question 73

The partnership of Spencer and Rey realized an ordinary loss of $42,000 in 2017. Both the partnership and the two partners are on a calendar-year basis. The partners materially participate in the partnership’s activities and share profits and losses equally. At December 31, 2017, Rey had an adjusted basis of $18,000 for his partnership interest before taking the 2017 loss into consideration. On his individual income tax return for 2017, Rey should deduct

Answer 73

An ordinary loss of $18,000. The amount of partnership loss which may be deducted by a partner is limited to the partner’s basis in the partnership

Question 74

A general business credit in excess of the limitation amount is carried

Answer 74

Back 1 year and forward 20 years.

Question 75

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 2013 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?

Answer 75

$40,000 long-term capital loss 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.

Question 76

During the current year Steve Maslan received a 20% capital interest in Gress Associates, a partnership, in return for services rendered plus a contribution of assets with a basis to Maslan of $15,000 and a fair market value of $20,000. The fair market value of Maslan’s 20% interest was $38,000. How much is Maslan’s basis for his interest in Gress?

Answer 76

33K Since Maslan received a capital interest with a FMV of $38,000 in exchange for property worth $20,000 and services, Maslan must recognize compensation income of $18,000 ($38,000 − $20,000) on the transfer of services for a capital interest. Thus, Maslan’s basis for his partnership interest consists of the $15,000 basis of assets transferred plus the $18,000 of income recognized on the transfer of services, a total of $33,000.

Question 77

Martinsen, a calendar-year individual, files a year 1 tax return on March 31, year 2. Martinsen reports $20,000 of gross income and he inadvertently omits $500 interest income. The IRS may assess additional tax up until which of the following dates?

Answer 77

April 15, year 5. Generally, any tax imposed must be assessed within three years of the filing of the return, or if later, the due date of the return.

Question 78

Which of the following increases the accumulated adjustments account of an S corporation?

Answer 78

Interest and dividends Generally, the AAA represents the cumulative total of an S corporation's income items, less expenses and distributions. The AAA would be increased by interest and dividend income, and would be reduced by charitable contributions and distributions. Capital contributions would have no effect on the AAA.

Question 79

To satisfy the UCC Statute of Frauds, a written agreement for the sale of goods must

Answer 79

Under the UCC Statute of Frauds, a written agreement for the sale of goods is adequate if it indicates a contract for the sale of goods has been made between parties and is signed by the party to be charged. The written agreement may omit material terms (i.e., price, delivery, time for performance) as long as the quantity is stated.

Question 80

Which of the following parties is liable to repay an illegal distribution to a corporation?

Answer 80

A shareholder not knowing of the illegality of the distribution and the corporation is insolvent.

Question 81

To be successful in a civil action under Section 11 of the Securities Act of 1933 concerning liability for a misleading registration statement, the plaintiff must prove

Answer 81

To recover under a civil action under Section 11 of the Securities Act of 1933, the plaintiff must prove that: 1. s/he was a purchaser of a security issued under a registration statement that contains a misleading statement or an omission of a material fact 2. S/he also must prove that s/he suffered an economic loss.

Question 82

Which one of the following is not included in determining the total support of a dependent?

Answer 82

Support includes food, FMV of lodging, medical, recreational, educational, and certain capital expenditures made on behalf of a dependent. Excluded from support is life insurance premiums, funeral expenses, nontaxable scholarships, and income and social security taxes paid from a dependent’s own income.

Question 83

Under Chapter 11 of the Federal Bankruptcy Code, which of the following actions is necessary before the court may confirm a reorganization plan?

Answer 83

Provision for full payment of administration expenses. Under Chapter 11 of the Federal Bankruptcy Code, a business may be allowed to continue its operations and keep its business assets. The court-supervised reorganization plan provides for payment of all or part of the debts over an extended period. The claims are divided into classes of similar claims so that they can be treated equally. For the court to confirm the reorganization plan, it must provide for full payment of administration expenses.

Question 84

Under the Revised Model Business Corporation Act, which of the following dividends is not defined as a distribution?

Answer 84

Stock dividends

Question 85

Sand Corp. sold and delivered a photocopier to Barr for use in Barr’s business. According to their agreement, Barr may return the copier within 30 days. During the 30-day period, if Barr has not returned the copier or indicated acceptance of it, which of the following statements is correct with respect to risk of loss and title?

Answer 85

Risk of loss and title remain with Sand. provided there is no agreement to the contrary and neither party is in breach, both risk of loss and title to goods being purchased on a sale on approval basis remain with the seller until the sale is completed.

Question 86

An agency coupled with an interest will be created by a written agreement which provides that a (n)

Answer 86

Borrower shall pledge securities to a lender which authorizes the lender to sell the securities and apply the proceeds to the loan in the event of default. An agency coupled with an interest will be created any time the agent has either a property interest or a security interest in the subject matter of the agency.

Question 87

Mem Corp., which had earnings and profits of $500,000, made a nonliquidating distribution of property to its stockholders during the current year. This property had an adjusted basis of $10,000 and a fair market value of $15,000 at the date of distribution. The property was subject to a liability of $12,000, which its stockholders assumed. How much gain did Mem have to recognize as a result of this distribution?

Answer 87

5K If a corporation makes a nonliquidating distribution of appreciated property to a shareholder, the corporation must recognize gain just as if the property were sold at its fair market value. Here, Mem must recognize a gain of $15,000 – $10,000 = $5,000. A liability increases the recognized gain only when the amount of liability exceeds fair market value.

Question 88

Grant, Lang, and Harrison formed a partnership several years ago. A client sued the partnership, Grant, and Lang, but not Harrison, for a breach of contract. The partnership does not have sufficient funds to pay for this breach of contract. Which of the following is correct?

Answer 88

In addition to the partnership, the client may recover from Grant and Lang because they have joint and several liability.

Question 89

Seymour Thomas named his wife, Penelope, the beneficiary of a $100,000 (face amount) insurance policy on his life. The policy provided that upon his death, the proceeds would be paid to Penelope with interest over her present life expectancy, which was calculated at 25 years. Seymour died during 2017 and Penelope received a payment of $5,200 from the insurance company. What amount should she include in her gross income for 2017?

Answer 89

$1200 Life insurance proceeds paid by reason of death are excluded from income if paid in a lump sum or in installments. If the payments are received in installments, the principal amount of the policy divided by the number of payments is excluded each year. Therefore, only $1,200 of the $5,200 insurance payment is included in Penelope’s gross income.

Question 90

Nolan designed Timber Partnership’s new building. Nolan received an interest in the partnership for the services. Nolan’s normal billing for these services would be $80,000 and the fair market value of the partnership interest Nolan received is $120,000. What amount of income should Nolan report?

Answer 90

120K A taxpayer must recognize income when a capital interest in a partnership is received as compensation for services rendered. The amount of income to be reported is the fair market value of the partnership interest received, $120,000.

Question 91

Which one of the following statements concerning Roth IRAs is correct?

Answer 91

A distribution from a Roth IRA is treated as first made from contributions (return of capital). A distribution from a Roth IRA is treated as first made from contributions, and to that extent, will be a nontaxable return of capital. An individual, under age 50, can make a contribution to both a traditional IRA and a Roth IRA for the same tax year as long as the total amounts contributed do not exceed an overall maximum of $5,500. Contributions to a Roth IRA must be made by the due date for filing the individual’s tax return for the year (not including extensions).

Question 92

Frank Lyon was held up and robbed of $800 cash in June 2017. One month later, Frank had $2,000 cash stolen from him by his housekeeper. Frank’s adjusted gross income for 2017 was $10,000. How much was deductible by Frank for theft losses in 2017?

Answer 92

1600 Nonbusiness theft losses are deductible to the extent that each loss is in excess of $100, and the taxpayer’s net nonbusiness casualty and theft losses exceed 10% of AGI. Thus, Frank can deduct $1,600 [($800 − $100) + ($2,000 − $100) − (10% × $10,000)].

Question 93

Which of the following principals may normally ratify an unauthorized contract made by an agent?

Answer 93

I and II although fully disclosed and partially disclosed principals may normally ratify the unauthorized contract, the undisclosed principal normally may not because the third party must know that a principal exists at the time the contract was created.

Question 94

The Simone Trust reported distributable net income of $120,000 for the current year. The trustee is required to distribute $60,000 to Kent and $90,000 to Lind each year. If the trustee distributes these amounts, what amount is includible in Lind’s gross income?

Answer 94

72K The maximum amount that is taxable to trust beneficiaries is limited to a trust’s distributable net income (DNI). When distributions to multiple beneficiaries exceed DNI, the trust’s DNI must be prorated to the distributions to determine the portion of each distribution that must be included in gross income

Question 95

For the first taxable year in which a corporation has qualifying research and experimental expenditures, the corporation

Answer 95

Has a choice of either deducting such expenditures as current business expenses, or capitalizing these expenditures.

Question 96

The Internal Revenue Code provisions dealing with tax return preparation

Answer 96

This answer is correct because the Internal Revenue Code provisions dealing with tax return preparation apply to preparers. A preparer is defined as an individual or firm who prepares returns for compensation. The compensation can be implied or explicit.

Question 97

At December 31, 2016, Lincoln and Ebert were equal partners in a partnership with net assets having a tax basis and fair market value of $150,000. On January 2, 2017, Gregory contributed securities with a fair market value of $75,000 (purchased in 2012 at a cost of $51,000) to become an equal partner in the new firm of Lincoln, Ebert, and Gregory. The securities were sold on July 1, 2017, for $78,000. How much of the partnership’s capital gain from the sale of these securities should be allocated to Gregory?

Answer 97

25K Since the securities were sold for more than their fair market value on the date of contribution, the entire pre-contribution gain of $24,000 ($75,000 − $51,000) would be allocated to Gregory. In addition, Gregory would be allocated 1/3 of the post-contribution gain from the securities, which is $1,000 [($78,000 − $75,000) × 1/3]. Gregory should therefore be allocated $25,000 ($24,000 + $1,000) of the partnership’s capital gain.

Question 98

Nancy is asserting rights as a third-party donee beneficiary on a contract made by Johnson and Harding. In order to prevail, Nancy must prove that

Answer 98

The terms of the contract and surrounding circumstances manifest a clear intent to benefit her.

Question 99

On April 1, Roe borrowed $100,000 from Jet to pay Roe’s business expenses. On June 15, Roe gave Jet a signed security agreement and financing statement covering Roe’s inventory. Jet immediately filed the financing statement. On July 1, Roe filed for bankruptcy. Under the federal Bankruptcy Code, can Roe’s trustee in bankruptcy set aside Jet’s security interest in Roe’s inventory?

Answer 99

Yes, because Roe giving the security interest to Jet created a voidable preference. This answer is correct since preferential transfers include those made within the previous ninety days while insolvent and include those made for antecedent debts including a security interest given by a debtor to secure antecedent debts.

Question 100

Under Section 12 of the Securities Exchange Act of 1934, in addition to companies whose securities are traded on a national exchange, what class of companies is subject to the SEC’s continuous disclosure system?

Answer 100

Companies with assets in excess of $10 million and 500 or more shareholders.

Question 101

Donaldson reached the mandatory retirement age as a partner of the Malcomb and Black partnership. Edwards was chosen by the remaining partners to succeed Donaldson. The remaining partners agreed to assume all of Donaldson’s partnership liability and released Donaldson from such liability. Additionally, Edwards expressly assumed full liability for Donaldson’s partnership liability incurred prior to retirement. Which of the following is correct?

Answer 101

A retiring partner is liable to creditors for existing debts of the partnership, but not for those incurred after retirement, as long as creditors had notice of the retirement before extending the credit. Partners may agree not to hold a retiring partner liable among themselves, but they cannot prevent him from being held personally liable by third parties. Therefore, when Donaldson leaves the partnership, she is still individually liable on all past contracts and obligations, unless existing creditors agree to release her and look to the new incoming partner, Edwards (a novation).

Question 102

Which of the following is a prerequisite for the creation of an agency relationship?

Answer 102

The principal must have capacity.

Question 103

How is the depreciation deduction for nonresidential real property, placed in service in 2017, determined for regular tax purposes using MACRS?

Answer 103

Straight-line method over 39 years

Question 104

Cross has an unperfected security interest in the inventory of Safe, Inc. The unperfected security interest

Answer 104

Is subordinate to lien creditors of Safe whose lien interest arose prior to any subsequent perfection by Cross. This answer is correct because lien creditors have priority over any unperfected security interest and any security interest perfected after the lien has attached.