FINAL EXAM - FEDERAL INCOME TAXES 60.431-011

Multiple ChoiceIdentify the choice that best completes the statement or answers the question.

____1.With respect to income from services, which of the following is true?a.The income is always amortized over the period the services will be rendered by an accrual basis taxpayer.b.A cash basis taxpayer can spread the income from a 24-month service contract over the contract period.c.If an accrual basis taxpayer sells a 36-month service contract on July 1, 2012 for $3,600, the taxpayers 2013 gross income from the contract is $3,000.d.If an accrual basis taxpayer sells a 12-month service contract on July 1, 2012, all of the income is recognized in 2012.e.None of the above.

____2.The Green Company, an accrual basis taxpayer, provides business-consulting services. Clients generally pay a retainer at the beginning of a 12-month period. This entitles the client to no more than 40 hours of services. Once the client has received 40 hours of services, Green charges $500 per hour. Green Company allocates the retainer to income based on the number of hours worked on the contract. At the end of the tax year, the company had $50,000 of unearned revenues from these contracts. The company also had $10,000 in unearned rent income received from excess office space leased to other companies. Based on the above, Green must include in gross income for the current year:a.$60,000.b.$50,000.c.$10,000.d.$0.e.None of the above.

____3.Jim and Nora, residents of a community property state, were married in early 2010. Late in 2010 they separated, and in 2012 they were divorced. Each earned a salary, and they received income from community owned investments in all relevant years. They filed separate returns in 2010 and 2011.a.In 2011, Nora must report only her salary and one-half of the income from community property on her separate return.b.In 2011, Nora must report on her separate return one-half of the Jim and Nora salary and one-half of the community property income.c.In 2012, Nora must report on her separate return one-half of the Jim and Nora salary for the period they were married as well as one-half of the community property income and her income earned after the divorce.d.In 2012, Nora must report only her salary on her separate return.e.None of the above.

____4.The alimony rules:a.Are based on the principle that the person who earns the income should pay the tax.b.Permit tax deductions for property divisions.c.Look to state law to determine the definition of alimony.d.Distinguish child support payments from alimony.e.None of the above.

____5.Under the terms of a divorce agreement, Kim was to pay her husband Tom $3,000 per month in alimony and $2,000 per month in child support. For a twelve-month period, Kim can deduct from gross income (and Tom must include in gross income):a.$60,000.b.$36,000.c.$24,000.d.$0.e.None of the above.

____6.Cash received by an individual:a.Is not included in gross income if it was not earned.b.Is not taxable unless the payor is legally obligated to make the payment.c.Must always be included in gross income.d.May be included in gross income although the payor is not legally obligated to make the payment.e.None of the above.

____7.Matilda works for a company with 1,000 employees. The company has a hospitalization insurance plan that covers all employees. However, the employee must pay the first $3,000 of his or her medical expenses each year. Each year, the employer contributes $1,500 to each employees health savings account (HSA). Matildas employer made the contributions in 2011 and 2012, and the account earned $100 interest in 2012. At the end of 2012, Matilda withdrew $3,100 from the account to pay the deductible portion of her medical expenses for the year and other medical expenses not covered by the hospitalization insurance policy. As a result, Matilda must include in her 2012 gross income:a.$0.b.$100.c.$1,600.d.$3,100.e.None of the above.

____8.James, a cash basis taxpayer, received the following compensation and fringe benefits in 2012:

Salary$66,000Disability income protection premiums3,000Long-term care insurance premiums4,000

His actual salary was $72,000. He received only $66,000 because his salary was garnished and the employer paid $6,000 on Jamess credit card debt he owed. The wage continuation insurance is available to all employees and pays the employee three-fourths of the regular salary if the employee is sick or disabled. The long-term care insurance is available to all employees and pays $150 per day towards a nursing home or similar facility. What is Jamess gross income from the above?a.$66,000.b.$72,000.c.$73,000.d.$75,000.e.None of the above.

____9.Ridge is the manager of a motel. As a condition of his employment, Ridge is required to live in a room on the premises so that he would be there in case of emergencies. Ridge considered this a fringe benefit, since he would otherwise be required to pay $800 per month rent. The room that Ridge occupied normally rented for $70 per night, or $2,100 per month. On the average, 90% of the motel rooms were occupied. As a result of this rent-free use of a room, Ridge is required to include in gross income.a.$0.b.$800 per month.c.$2,100 per month.d.$1,890 ($2,100 .90).e.None of the above.

____10.Peggy is an executive for the Tan Furniture Manufacturing Company. Peggy purchased furniture from the company for $9,500, the price Tan ordinarily would charge a wholesaler for the same items. The retail price of the furniture was $12,500, and Tans cost was $9,000. The company also paid for Peggys parking space in a garage near the office. The parking fee was $600 for the year. All employees are allowed to buy furniture at a discounted price comparable to that charged to Peggy. However, the company does not pay other employees parking fees. Peggys gross income from the above is:a.$0.b.$600.c.$3,500.d.$4,100.e.None of the above.

____11.Martha participated in a qualified tuition program for the benefit of her son. She invested $6,000 in the fund. Four years later her son withdrew $8,000, the entire balance in the program, to pay his college tuition.a.Martha must include the $2,000 ($8,000 $6,000) in her gross income when the funds are used to pay the tuition.b.Martha must include the portion of the $2,000 accumulated each year in her gross income (i.e., interest).c.Marthas son must include the $2,000 ($8,000 $6,000) in his gross income when the funds are used to pay the tuition.d.Neither Martha nor her son must include the $2,000 in gross income.e.None of the above.

____12.Harold bought land from Jewel for $150,000. Harold paid $50,000 cash and gave Jewel an 8% note for $100,000. The note was to be paid over a five-year period. When the balance on the note was $80,000, Jewel began having financial difficulties. To accelerate her cash inflows, Jewel agreed to accept $60,000 cash from Harold in final payment of the note principal.a.Harold must recognize $20,000 ($80,000 $60,000) of gross income.b.Harold is not required to recognize gross income, but must reduce his cost basis in the land to $130,000.c.Harold is not required to recognize gross income, since he paid the debt before it was due.d.Jewel must recognize gross income of $20,000 ($80,000 $60,000) from discharge of the debt.e.None of the above.

____13.Which of the following can be claimed as a deduction for AGI?a.Personal casualty losses.b.Investment interest expenses.c.Moving expenses.d.Property taxes on personal use real estate.e.None of the above.

____14.Which of the following cannot be deducted as a 162 business expense?a.Expenses of investing in rental property.b.Charitable contributions made by a sole proprietorship.c.Fines and penalties.d.Only a. and c. cannot.e.a., b., and c. cannot.

____15.Petal, Inc. is an accrual basis taxpayer. Petal uses the aging approach to calculate the reserve for bad debts. During 2012, the following occur associated with bad debts.

Credit sales$325,000Collections on credit sales290,000Amount added to the reserve13,000Beginning balance in the reserve0Identifiable bad debts during 201214,000

The amount of the deduction for bad debt expense for Petal for 2012 is:a.$13,000.b.$14,000.c.$27,000.d.$35,000.e.None of the above.

____16.Rex, a cash basis calendar year taxpayer, runs a bingo operation which is illegal under state law. During 2012, a bill designated H.R. 9 is introduced into the state legislature which, if enacted, would legitimize bingo games. In 2012, Rex had the following expenses:

Operating expenses in conducting bingo games$247,000Payoff money to state and local police24,000Newspaper ads supporting H.R. 93,000Political contributions to legislators who support H.R. 98,000

Of these expenditures, Rex may deduct:a.$247,000.b.$250,000.c.$258,000.d.$282,000.e.None of the above.

____17.Tom operates an illegal drug-running operation and incurred the following expenses:

Salaries$ 75,000Illegal kickbacks20,000Bribes to border guards25,000Cost of goods sold160,000Rent8,000Interest10,000Insurance on furniture and fixtures6,000Utilities and telephone20,000

Which of the above amounts reduces his taxable income?a.$0.b.$160,000.c.$279,000.d.$324,000.e.None of the above.

____18.Tommy, an automobile mechanic employed by an auto dealership, is considering opening a fast food franchise. If Tommy decides not to acquire the fast food franchise, any investigation expenses are:a.A deduction for AGI.b.A deduction from AGI, subject to the 2 percent floor.c.A deduction from AGI, not subject to the 2 percent floor.d.Deductible up to $5,000 in the current year with the balance being amortized over a 180-month period.e.Not deductible.

____19.Priscella pursued a hobby of making bedspreads in her spare time. Her AGI before considering the hobby is $40,000. During the year she sold the bedspreads for $10,000. She incurred expenses as follows:

Supplies$4,000Interest on loan to get business started500Advertising6,500

Assuming that the activity is deemed a hobby, how should she report these items on her tax return?a.Include $10,000 in income and deduct $11,000 for AGI.b.Ignore both income and expenses since hobby losses are disallowed.c.Include $10,000 in income, deduct nothing for AGI, and claim $10,000 of the expenses as itemized deductions.d.Include $10,000 in income and deduct interest of $500 for AGI.e.None of the above.

____20.If a vacation home is determined to be a personal/rental use residence, which of the following statements is correct?a.All rental income is included in gross income.b.All rental related expenses that are deductible are classified as deductions for AGI.c.Expenses must be allocated between rental and personal use.d.Only a. and b. are correct.e.a., b., and c. are correct.

____21.Grape Corporation purchased a machine in December of the current year. This was the only asset purchased during the current year. The machine was placed in service in January of the following year. No assets were purchased in the following year. Grape Corporations cost recovery would begin:a.In the current year using a mid-quarter convention.b.In the current year using a half-year convention.c.In the following year using a mid-quarter convention.d.In the following year using a half-year convention.e.None of the above.

____22.James purchased a new business asset (three-year personalty) on July 23, 2012, at a cost of $40,000. James takes additional first-year depreciation Determine the cost recovery deduction for 2012.a.$8,333.b.$26,666.c.$33,333.d.$41,665.e.None of the above.

____23.On June 1, 2012, Norm leases a taxi and places it in service. The lease payments are $1,000 per month. Assuming the dollar amount from the IRS table is $241, determine Norms inclusion amount.a.$0.b.$241.c.$907.d.$1,687.e.None of the above.

____24.Fred and Lucy are married and together have AGI of $120,000 in 2012. They have four dependents and file a joint return. They pay $5,000 for a high deductible health insurance policy and contribute $2,600 to a qualified Health Savings Account. During the year, they paid the following amounts for medical care: $9,200 in doctor and dentist bills and hospital expenses, and $3,000 for prescribed medicine and drugs. In October 2012, they received an insurance reimbursement of $4,400 for the hospitalization. They expect to receive an additional reimbursement of $1,000 in January 2013. Determine the maximum deduction allowable for medical expenses in 2012.a.$1,100.b.$3,800.c.$9,200.d.$12,800.e.None of the above.

____25.Your friend Scotty informs you that he received a tax-free reimbursement in 2012 of some medical expenses he paid in 2011. Which of the following statements best explains why Scotty is not required to report the reimbursement in gross income?a.Scotty itemized deductions in 2011.b.Scotty did not itemize deductions in 2011.c.Scotty itemized deductions in 2012.d.Scotty did not itemize deductions in 2012.e.Scotty itemized deductions in 2012 but not in 2011.

____26.David, a single taxpayer, took out a mortgage on his home for $300,000 nine years ago. In August of this year, when the home had a fair market value of $550,000 and he owed $225,000 on the mortgage, he took out a home equity loan for $350,000. David used the funds to purchase a yacht to be used for recreational purposes. What is the maximum amount of debt on which he can deduct home equity interest?a.$50,000.b.$100,000.c.$325,000.d.$350,000.e.None of the above.

____27.In 2012, Roseann makes the following donations to qualified charitable organizations:

BasisFair Market ValueInventory held for resale in Roseanns business (a sole proprietorship)

$4,000

$ 3,600Stock in ABC, Inc. held as an investment (acquired two years ago)

8,000

20,000Comic book collection held as an investment (acquired six years ago)

2,000

10,000

The ABC stock and the inventory were given to Roseanns church, and the comic book collection was given to the United Way. Both donees promptly sold the property for the stated fair market value. Disregarding percentage limitations, Roseanns charitable contribution deduction for 2012 is:a.$14,000.b.$25,600.c.$26,000.d.$33,600.e.None of the above.

____28.Zeke made the following donations to qualified charitable organizations during 2012:

BasisFair Market ValueUsed clothing (all acquired before 2011) of taxpayer and his family

$ 1,350

$ 375Stock in ABC, Inc., held as an investment for fifteen months

12,000

10,875Stock in MNO, Inc., held as an investment for eleven months

15,000

18,000Real estate held as an investment for two years15,000 30,000

The used clothing was donated to the Salvation Army; the other items of property were donated to Eastern State University. Both are qualified charitable organizations. Disregarding percentage limitations, Zekes charitable contribution deduction for 2012 is:a.$43,350.b.$56,250.c.$59,250.d.$60,375.e.None of the above.

____29.In 2012, Arnold invests $80,000 for a 20% interest in a partnership in which he is a material participant. The partnership incurs a loss with $100,000 being Arnolds share. Which of the following statements is incorrect?a.Since Arnold has only $80,000 of capital at risk, he cannot deduct any more than this amount against his other income.b.Arnolds nondeductible loss of $20,000 can be carried over and used in future years (subject to the at-risk provisions).c.If Arnold has taxable income of $40,000 from the partnership in 2013 and there are no other transactions that affect his at-risk amount, he can use all of the $20,000 loss carried over from 2012.d.Arnolds $100,000 loss is nondeductible in 2012 and 2013 under the passive loss provisions.e.All of the statements are correct.

____30.Vics at-risk amount in a passive activity is $200,000 at the beginning of the current year. His current loss from the activity is $80,000. Vic had no passive activity income during the year. At the end of the current year:a.Vic has an at-risk amount in the activity of $120,000 and a suspended passive loss of $80,000.b.Vic has an at-risk amount in the activity of $200,000 and a suspended passive loss of $80,000.c.Vic has an at-risk amount in the activity of $120,000 and no suspended passive loss.d.Vic has an at-risk amount in the activity of $200,000 and no suspended passive loss.e.None of the above.

____31.Samantha gives her son, Steve, stock (basis of $72,000; fair market value of $68,000) and no gift tax results. When Steve subsequently sells the stock for $69,000, his recognized gain or loss is:a.$0.b.($3,000).c.$1,000.d.$69,000.e.None of the above.

____32.Rob was given a residence in 2012. At the time of the gift, the residence had a fair market value of $200,000, and its adjusted basis to the donor was $140,000. The donor paid a gift tax of $10,000 on the taxable gift of $187,000. What is Robs basis for gain?a.$140,000.b.$143,209.c.$150,000.d.$200,000.e.None of the above.

____33.Melba gives her niece a drill press to use in her business with a fair market value of $36,000 and a basis in Melbas hands of $41,000. No gift tax was paid. What is the nieces basis for depreciation (cost recovery)?a.$0.b.$5,000.c.$36,000.d.$41,000.e.None of the above.

____34.Latisha owns a warehouse with an adjusted basis of $112,000. She exchanges it for a strip mall building worth $150,000. Which of the following statements is correct?a.If the warehouse was used in Latishas business to store inventory and the strip mall building is to be rented to tenants, her recognized gain is $38,000 and her basis for the strip mall building is $150,000.b.If the warehouse was used in Latishas business to store inventory and the strip mall building is to be used as a retail outlet for her business, her recognized gain is $0 and her basis for the strip mall building is $112,000.c.If the warehouse is used by Latisha to store personal use items such as excess furniture and the strip mall building is to be rented to tenants, her recognized gain is $38,000 and her basis for the strip mall building is $150,000.d.Only b. and c. are correct.e.a., b., and c. are correct.

____35.Nancy and Tonya exchanged assets. Nancy gave Tonya her personal residence with an adjusted basis of $280,000 and a fair market value of $560,000. The house has a mortgage of $200,000 which is assumed by Tonya. Tonya gave Nancy a yacht used in her business with an adjusted basis of $250,000 and a fair market value of $360,000. What is Tonyas realized and recognized gain?a.$310,000 realized and $310,000 recognized gain.b.$310,000 realized and $0 recognized gain.c.$110,000 realized and $110,000 recognized gain.d.$110,000 realized and $0 recognized gain.e.None of the above.

____36.Which of the following statements is incorrect for a 1033 involuntary conversion?a.An election can be made to postpone gain on a 1033 involuntary conversion only if the proceeds received are reinvested in qualifying property no later than two years after the date of the involuntary conversion.b.The postponement of realized gain in a 1033 involuntary conversion is elective.c.The functional use test is satisfied if a business warehouse is replaced with another business warehouse.d.The taxpayer use test is satisfied if a shopping mall rented to tenants is replaced with an office building to be rented to tenants.e.All of the above are correct.

____37.Fran was transferred from Phoenix to Atlanta. She sold her Phoenix residence (adjusted basis of $250,000) for a realized loss of $50,000 and purchased a new residence in Atlanta for $375,000. Fran had owned and lived in the Phoenix residence for 6 years. What is Frans recognized gain or loss on the sale of the Phoenix residence and her basis for the residence in Atlanta?a.$0 and $375,000.b.$0 and $425,000.c.($50,000) and $325,000.d.($50,000) and $375,000.e.None of the above.

____38.Which of the following is correct?a.The deferral of realized gain on a 1031 like-kind exchange is mandatory.b.The deferral of realized gain on a direct (into qualified property) 1033 involuntary conversion is mandatory.c.The taxpayer can elect to forgo the exclusion of realized gain on a 121 sale of residence.d.Only b. and c. are correct.e.a., b., and c. are correct.

____39.A business taxpayer sells inventory for $40,000. The adjusted basis of the property is $58,000 at the time of the sale and the inventory had been held more than one year. The taxpayer has:a.No gain or loss.b.Sold a long-term capital asset.c.Sold a short-term capital asset.d.An ordinary loss.e.None of the above.

____40.Ramon is in the business of buying and selling securities. Which of the following is a capital asset for Ramon?a.The securities he buys and sells each day in the normal course of his business.b.The securities he designates as held for investment at the end of the day of acquisition.c.The securities he holds more than 12 months.d.All the securities he owns.e.b., c., and d.

____41.Cason is filing as single and has 2012 taxable income of $38,000 which includes $36,000 of 0%/15% net long-term capital gain. What is his tax on taxable income using the alternative tax method?a.$0.b.$598.c.$5,530.d.$5,600.e.None of the above.

____42.Which of the following comparisons is correct?a.Corporations may carryback capital losses; individuals may not.b.Both corporation and individual long-term capital losses carryover as short-term capital losses.c.Corporations may carryforward capital losses indefinitely; individuals may only carryforward capital losses for five years.d.Both corporations and individuals may use an alternative tax rate on net capital gains.e.None of the above.

____43.For regular income tax purposes, Yolanda, who is single, is in the 35% tax bracket. Her AMT base is $220,000. Her tentative AMT is:a.$57,200.b.$58,100.c.$61,600.d.$77,000.e.None of the above.

____44.Eula owns a mineral property that had a basis of $23,000 at the beginning of the year. Cost depletion is $19,000. The property qualifies for a 15% depletion rate. Gross income from the property was $200,000 and net income before the percentage depletion deduction was $50,000. What is Eulas tax preference for excess depletion?a.$15,000.b.$23,000.c.$25,000.d.$0.e.None of the above.

____45.Celia and Amos, who are married filing jointly, have one dependent and do not itemize deductions. They have taxable income of $82,000 and tax preferences of $53,000 in 2012. What is their AMT base for 2012?a.$0.b.$85,925.c.$94,450.d.$158,300.e.None of the above.

____46.Kathleen transferred the following assets to Mockingbird Corporation.

AdjustedFair Market

Basis Value Cash$100,000$100,000Equipment48,00036,000Land108,000144,000

In exchange, Kathleen received 40% of Mockingbird Corporations only class of stock outstanding. The stock has no established value. However, all parties sincerely believe that the value of the stock Kathleen received is the equivalent of the value of the assets she transferred. The only other shareholder, Rick, formed Mockingbird Corporation five years ago.a.Kathleen has no gain or loss on the transfer.b.Mockingbird Corporation has a basis of $48,000 in the equipment and $108,000 in the land.c.Kathleen has a basis of $256,000 in the stock of Mockingbird Corporation.d.Mockingbird Corporation has a basis of $36,000 in the equipment and $144,000 in the land. e.None of the above.

____47.Dawn, a sole proprietor, was engaged in a service business and reported her income on a cash basis. Later, she incorporates her business and transfers the assets of the business to the corporation in return for all the stock in the corporation plus the corporations assumption of the liabilities of her proprietorship. All the receivables and the unpaid trade payables are transferred to the newly formed corporation. The assets of the proprietorship had a basis of $105,000 and fair market value of $300,000. The trade accounts payable totaled $25,000. There was a note payable to the bank in the amount of $95,000 that the corporation assumes. The note was issued for the purchase of computers and other business equipment.a.Dawn has a gain on the transfer of $15,000.b.The basis of the assets to the corporation is $300,000.c.Dawn has a basis of $10,000 in the stock she receives.d.Dawn has a zero basis in the stock she receives.e.None of the above.

____48.Wren Corporation (a minority shareholder in Lark Corporation) has made loans to Lark Corporation that become worthless in the current year.a.Wren Corporation is not permitted a deduction for the loans.b.The loans result in a nonbusiness bad debt deduction to Wren Corporation.c.The loans provide Wren Corporation with a business bad debt deduction.d.Wren claims a capital loss due to the uncollectible loans.e.None of the above.

____49.Gordon, an employee, is provided group term life insurance coverage equal to twice his annual salary of $125,000 per year. According to the IRS Uniform Premium Table (based on Gordons age), the amount is $12 per year for $1,000 of protection. The cost of an individual policy would be $15 per year for $1,000 of protection. Since Gordon paid nothing towards the cost of the $250,000 protection, Gordon must include in his 2012 gross income which of the following amounts?a.$1,350.b.$2,400.c.$3,000.d.$3,750.e.None of the above.

____50.The taxpayer is a Ph.D. student in accounting at City University. The student is paid $1,500 per month for teaching two classes. The total amount received for the year is $13,500.a.The $13,500 is excludible if the money is used to pay for tuition and books.b.The $13,500 is taxable compensation.c.The $13,500 is considered a scholarship and, therefore, is excluded.d.The $13,500 is excluded because the total amount received for the year is less than her standard deduction and personal exemption.e.None of the above.FINAL EXAM - FEDERAL INCOME TAXES 60.431-011Answer Section

MULTIPLE CHOICE

1.ANS:CAnswer b. is incorrect because Revenue Procedure 2004-34 does not apply to cash basis taxpayers. Answers a. and d. are incorrect because they are not in accordance with Revenue Procedure 2004-34.

PTS:1DIF:Difficulty: ModerateREF:p. 4-15OBJ:LO: 4-2NAT:BUSPROG: AnalyticSTA:AICPA: FN-MeasurementKEY:Bloom's: ApplicationMSC:Time: 10 min.

2.ANS:CThe prepaid income from services that will be earned in the following year by Green can be deferred under Revenue Procedure 2004-34. However, the prepaid income from rents is not eligible for deferral.

PTS:1DIF:Difficulty: ModerateREF:p. 4-14 | p. 4-15OBJ:LO: 4-2NAT:BUSPROG: AnalyticSTA:AICPA: FN-MeasurementKEY:Bloom's: ApplicationMSC:Time: 10 min.

3.ANS:ABecause Jim and Nora lived apart for the entire year, she does not have to report one-half of Jims salary on her separate return. She is required to report her share of the income from the community owned investments.

PTS:1DIF:Difficulty: EasyREF:p. 4-20 to 4-22OBJ:LO: 4-3NAT:BUSPROG: AnalyticSTA:AICPA: FN-ReportingKEY:Bloom's: ComprehensionMSC:Time: 5 min.

4.ANS:DPTS:1DIF:Difficulty: EasyREF:p. 4-22 to 4-25OBJ:LO: 4-4NAT:BUSPROG: AnalyticSTA:AICPA: FN-ReportingKEY:Bloom's: ApplicationMSC:Time: 5 min.

5.ANS:BThe $2,000 per month ($24,000) for child support is not deductible by Kim. The alimony of $3,000 per month ($36,000) is deductible by Kim.

PTS:1DIF:Difficulty: EasyREF:p. 4-22 | p. 4-25 | Example 36 | Concept Summary 4.1OBJ:LO: 4-4NAT:BUSPROG: AnalyticSTA:AICPA: FN-MeasurementKEY:Bloom's: ApplicationMSC:Time: 5 min.

6.ANS:DSee the discussion of Comm. v. Duberstein.

PTS:1DIF:Difficulty: EasyREF:p. 5-5OBJ:LO: 5-2NAT:BUSPROG: AnalyticSTA:AICPA: FN-ReportingKEY:Bloom's: ComprehensionMSC:Time: 5 min.

7.ANS:AWith a health savings account (HSA), the employee is not taxed when the money is contributed, as income is earned in the account, or when amounts are withdrawn to pay for medical expenses.

PTS:1DIF:Difficulty: EasyREF:p. 5-15OBJ:LO: 5-2NAT:BUSPROG: AnalyticSTA:AICPA: FN-MeasurementKEY:Bloom's: ApplicationMSC:Time: 5 min.

8.ANS:BThe $6,000 paid to the creditor is income to James as it was used to pay his debt. The disability income protection premiums and long-term care insurance premiums are excluded from gross income.

PTS:1DIF:Difficulty: EasyREF:p. 5-13 | p. 5-14 | p. 5-16 | Exhibit 5.1OBJ:LO: 5-2NAT:BUSPROG: AnalyticSTA:AICPA: FN-MeasurementKEY:Bloom's: ApplicationMSC:Time: 5 min.

9.ANS:AThe room qualifies for the 119 lodging exclusion.

PTS:1DIF:Difficulty: EasyREF:p. 5-17 | p. 5-18OBJ:LO: 5-2NAT:BUSPROG: AnalyticSTA:AICPA: FN-MeasurementKEY:Bloom's: ApplicationMSC:Time: 5 min.

10.ANS:AThe furniture purchases were under a qualified employee discount plan, but the exclusion is limited to the employers gross profit. Because Peggy purchased the furniture for $9,500 when the employers cost was $9,000, she is not required to include anything in gross income as a result of the purchase. The parking space with a value of $600 is a qualified transportation fringe and is not required to be available to all employees (i.e., can be provided on a discriminatory basis).

PTS:1DIF:Difficulty: EasyREF:p. 5-21 to 5-26OBJ:LO: 5-2NAT:BUSPROG: AnalyticSTA:AICPA: FN-MeasurementKEY:Bloom's: ApplicationMSC:Time: 10 min.

11.ANS:DUnder a qualified tuition program, neither the beneficiary of the income (the son) nor the owner (Martha) of the property includes the earnings in gross income as long as the funds are used to pay qualified tuition.

PTS:1DIF:Difficulty: EasyREF:p. 5-33OBJ:LO: 5-2NAT:BUSPROG: AnalyticSTA:AICPA: FN-MeasurementKEY:Bloom's: ApplicationMSC:Time: 5 min.

12.ANS:BThe debt reduction of $20,000 is treated as an adjustment to the cost of the land because the debt was owed to the seller of the property.

PTS:1DIF:Difficulty: EasyREF:p. 5-35OBJ:LO: 5-4NAT:BUSPROG: AnalyticSTA:AICPA: FN-ReportingKEY:Bloom's: ApplicationMSC:Time: 5 min.

13.ANS:CPTS:1DIF:Difficulty: EasyREF:p. 6-4 | p. 6-5OBJ:LO: 6-1NAT:BUSPROG: AnalyticSTA:AICPA: FN-ReportingKEY:Bloom's: KnowledgeMSC:Time: 2 min.

14.ANS:ENone of the listed items can be deducted as a 162 business expense. Choice a. is a deduction for AGI, but it is a 212 production of income expense rather than a 162 trade or business expense. Choice b. is an itemized deduction. Choice c. cannot be deducted.

PTS:1DIF:Difficulty: EasyREF:p. 6-4 to 6-6OBJ:LO: 6-1NAT:BUSPROG: AnalyticSTA:AICPA: FN-ReportingKEY:Bloom's: KnowledgeMSC:Time: 5 min.

15.ANS:BOnly the specific charge-off method can be used. Reserves for estimated expenses are not allowed for tax purposes because the economic performance test cannot be satisfied.

PTS:1DIF:Difficulty: EasyREF:p. 6-10OBJ:LO: 6-2NAT:BUSPROG: AnalyticSTA:AICPA: FN-MeasurementKEY:Bloom's: ApplicationMSC:Time: 5 min.

16.ANS:ARex can deduct only the $247,000 of operating expenses.

PTS:1DIF:Difficulty: EasyREF:Example 16OBJ:LO: 6-3NAT:BUSPROG: AnalyticSTA:AICPA: FN-MeasurementKEY:Bloom's: ApplicationMSC:Time: 5 min.

17.ANS:BCost of goods sold of $160,000 is treated as a negative item in calculating gross income rather than as a deduction. For a drug dealer, all deductions are disallowed.

PTS:1DIF:Difficulty: EasyREF:p. 6-13OBJ:LO: 6-3NAT:BUSPROG: AnalyticSTA:AICPA: FN-MeasurementKEY:Bloom's: ApplicationMSC:Time: 5 min.

18.ANS:ESince Tommy is not in a business that is the same as or similar to the one being investigated and did not acquire the new business, his investigation expenses cannot be deducted.

PTS:1DIF:Difficulty: EasyREF:p. 6-15OBJ:LO: 6-3NAT:BUSPROG: AnalyticSTA:AICPA: FN-ReportingKEY:Bloom's: ComprehensionMSC:Time: 5 min.

19.ANS:CThe itemized deductions of $10,000 must be reduced by 2% of $50,000 or $1,000.

PTS:1DIF:Difficulty: EasyREF:p. 6-18 | p. 6-19OBJ:LO: 6-3NAT:BUSPROG: AnalyticSTA:AICPA: FN-ReportingKEY:Bloom's: ApplicationMSC:Time: 5 min.

20.ANS:EPTS:1DIF:Difficulty: EasyREF:Example 28OBJ:LO: 6-3NAT:BUSPROG: AnalyticSTA:AICPA: FN-ReportingKEY:Bloom's: ComprehensionMSC:Time: 5 min.

21.ANS:DPTS:1DIF:Difficulty: EasyREF:p. 8-3 | p. 8-4 | p. 8-7 | p. 8-9OBJ:LO: 8-1 | LO: 8-2NAT:BUSPROG: AnalyticSTA:AICPA: FN-MeasurementKEY:Bloom's: ApplicationMSC:Time: 5 min.

22.ANS:BAdditional first-year depreciation ($40,000 .50)$20,000MACRS cost recovery ($20,000 .3333) 6,666Total cost recovery$26,666

PTS:1DIF:Difficulty: EasyREF:p. 8-3 to 8-8 | Table 8.1OBJ:LO: 8-2NAT:BUSPROG: AnalyticSTA:AICPA: FN-MeasurementKEY:Bloom's: ApplicationMSC:Time: 5 min.

23.ANS:AA taxi is not a passenger automobile. Thus, it is not subject to the lease inclusion amount provision.

PTS:1DIF:Difficulty: EasyREF:p. 8-16 | p. 8-20OBJ:LO: 8-4NAT:BUSPROG: AnalyticSTA:AICPA: FN-MeasurementKEY:Bloom's: ApplicationMSC:Time: 5 min.

24.ANS:BFred and Lucy can claim a medical expense deduction for the current year of $3,800, determined as follows:

Physician bills, dentist bills, and hospital expenses$ 9,200 Less: Reimbursement (4,400)Unreimbursed expenses$ 4,800 Health insurance premiums5,000 Prescribed medicines and drugs 3,000 Total medical expenses$12,800 Less: 7.5% of $120,000 (AGI) (9,000)Deductible medical expenses$ 3,800

The contribution of $2,600 to the HSA is a deduction for AGI, and is not included in the medical expense calculation.

PTS:1DIF:Difficulty: ModerateREF:p. 10-3 | p. 10-4 | p. 10-6 to 10-10 | Example 12 | Example 15OBJ:LO: 10-2NAT:BUSPROG: AnalyticSTA:AICPA: FN-MeasurementKEY:Bloom's: ApplicationMSC:Time: 10 min.

25.ANS:BIf Scotty did not itemize in 2011, he can exclude the reimbursement from gross income in 2012. If Scotty itemized deductions in 2011, he must report the reimbursement as gross income in 2012 to the extent he received a tax benefit from deducting medical expenses in 2011. Whether he itemized in 2012 will have no impact on the treatment of the reimbursement.

PTS:1DIF:Difficulty: EasyREF:Example 12OBJ:LO: 10-2NAT:BUSPROG: AnalyticSTA:AICPA: FN-MeasurementKEY:Bloom's: ApplicationMSC:Time: 5 min.

26.ANS:BInterest is deductible only on the portion of the $350,000 home equity loan that does not exceed the lesser of:

The fair market value of the residence, reduced by the acquisition indebtedness ($550,000 FMV $225,000 acquisition indebtedness = $325,000).

$100,000 ($50,000 for married persons filing separate returns).

Of the $350,000 home equity loan, interest on $100,000 is deductible as home equity interest.

PTS:1DIF:Difficulty: EasyREF:p. 10-15 | Example 24OBJ:LO: 10-5NAT:BUSPROG: AnalyticSTA:AICPA: FN-MeasurementKEY:Bloom's: ApplicationMSC:Time: 5 min.

27.ANS:BInventory is ordinary income property, but the fair market value ($3,600) must be used if lower than the basis ($4,000). Stock is intangible property and is not subject to the tangible personalty rules. Since a sale of the ABC stock would have yielded a long-term capital gain, the full fair market value qualifies for the deduction ($20,000). The comic book collection comes under the exception relating to tangible property put to an unrelated use, and the adjusted basis ($2,000) must be used. Thus, $3,600 + $20,000 + $2,000 = $25,600.

PTS:1DIF:Difficulty: ModerateREF:p. 10-25 | p. 10-26 | Example 32OBJ:LO: 10-6NAT:BUSPROG: AnalyticSTA:AICPA: FN-MeasurementKEY:Bloom's: ApplicationMSC:Time: 10 min.

28.ANS:BFor the used clothing and the ABC stock, fair market value controls in determining the amount of the deduction. The ABC stock was held long term, but it was not appreciated property. The MNO stock would not yield a long-term capital gain if sold because of the holding period. Consequently, it is ordinary income property for charitable contribution purposes and the appreciation cannot be claimed. The real estate meets the definition of capital gain property. Thus, $375 + $10,875 + $15,000 + $30,000 = $56,250.

PTS:1DIF:Difficulty: ModerateREF:p. 10-25 | p. 10-26OBJ:LO: 10-6NAT:BUSPROG: AnalyticSTA:AICPA: FN-MeasurementKEY:Bloom's: ApplicationMSC:Time: 10 min.

29.ANS:DStatements a., b., and c. are correct. The passive loss provisions do not apply because Arnold is a material participant.

PTS:1DIF:Difficulty: ModerateREF:Example 4 | Example 5OBJ:LO: 11-1 | LO: 11-2 | LO: 11-3NAT:BUSPROG: AnalyticSTA:AICPA: FN-MeasurementKEY:Bloom's: ApplicationMSC:Time: 5 min.

30.ANS:AThe $80,000 passive loss reduces the at-risk amount to $120,000. The passive loss is suspended because Vic has no passive income.

PTS:1DIF:Difficulty: EasyREF:Example 36 to 39OBJ:LO: 11-7NAT:BUSPROG: AnalyticSTA:AICPA: FN-MeasurementKEY:Bloom's: ApplicationMSC:Time: 5 min.

31.ANS:ASteves gain basis is $72,000, while his loss basis is $68,000. Since his selling price is between the gain basis and the loss basis, no recognized gain or loss results.

PTS:1DIF:Difficulty: EasyREF:p. 13-13OBJ:LO: 13-4NAT:BUSPROG: AnalyticSTA:AICPA: FN-MeasurementKEY:Bloom's: ApplicationMSC:Time: 5 min.

32.ANS:BRobs basis is calculated as follows:

*Fraction rounded to 32%.**$200,000 $13,000 = $187,000.

PTS:1DIF:Difficulty: EasyREF:Example 21OBJ:LO: 13-4NAT:BUSPROG: AnalyticSTA:AICPA: FN-MeasurementKEY:Bloom's: ApplicationMSC:Time: 10 min.

33.ANS:DThe basis for depreciation (cost recovery) for gift property is the gain basis of $41,000.

PTS:1DIF:Difficulty: EasyREF:Example 24OBJ:LO: 13-4NAT:BUSPROG: AnalyticSTA:AICPA: FN-MeasurementKEY:Bloom's: ApplicationMSC:Time: 5 min.

34.ANS:DBoth a. and b. describe like-kind exchanges.

PTS:1DIF:Difficulty: EasyREF:p. 13-27 | p. 13-28OBJ:LO: 13-7NAT:BUSPROG: AnalyticSTA:AICPA: FN-MeasurementKEY:Bloom's: ApplicationMSC:Time: 5 min.

35.ANS:CAmount realized by Tonya:

Residence (FMV)

$560,000 Amount given by Tonya:

Yacht: adjusted basis$250,000

Assumption of Nancys mortgage 200,000 (450,000)Realized gain

$110,000

Recognized gain

$110,000

This exchange does not qualify as a nontaxable exchange under 1031.

PTS:1DIF:Difficulty: ModerateREF:p. 13-27OBJ:LO: 13-7NAT:BUSPROG: AnalyticSTA:AICPA: FN-MeasurementKEY:Bloom's: ApplicationMSC:Time: 10 min.

36.ANS:AChoice a. is incorrect because the latest date for the replacement is two years after the end of the taxable year in which the conversion occurred. Also, for the condemnation of real property used in a trade or business or held for investment, a three-year period is substituted for the normal two-year period.

PTS:1DIF:Difficulty: EasyREF:p. 13-33 to 13-37OBJ:LO: 13-8NAT:BUSPROG: AnalyticSTA:AICPA: FN-ReportingKEY:Bloom's: ApplicationMSC:Time: 5 min.

37.ANS:AThe realized loss of $50,000 on the sale of the Phoenix residence is disallowed. The basis for the new Atlanta residence is the purchase price of $375,000.

PTS:1DIF:Difficulty: EasyREF:p. 13-39OBJ:LO: 13-9NAT:BUSPROG: AnalyticSTA:AICPA: FN-MeasurementKEY:Bloom's: ApplicationMSC:Time: 5 min.

38.ANS:ERealized gain can be recognized if the election to forgo the 121 exclusion is made.

PTS:1DIF:Difficulty: EasyREF:p. 13-27 | p. 13-37 | p. 13-53OBJ:LO: 13-7 | LO: 13-8 | LO: 13-9NAT:BUSPROG: AnalyticSTA:AICPA: FN-ReportingKEY:Bloom's: ComprehensionMSC:Time: 5 min.

39.ANS:DInventory is an ordinary asset and, therefore, the loss from its sale is an ordinary loss.

PTS:1DIF:Difficulty: EasyREF:p. 14-4OBJ:LO: 14-2NAT:BUSPROG: AnalyticSTA:AICPA: FN-ReportingKEY:Bloom's: ComprehensionMSC:Time: 5 min.

40.ANS:BThe securities he acquires in the normal course of his business are inventory and, therefore, ordinary assets. However, if at the end of the business day of acquisition he designates a security as held for investment, that security is a capital asset. His holding period for the securities is irrelevant as to whether they are capital assets.

PTS:1DIF:Difficulty: EasyREF:p. 14-6 | p. 14-7OBJ:LO: 14-2NAT:BUSPROG: AnalyticSTA:AICPA: FN-ReportingKEY:Bloom's: ApplicationMSC:Time: 5 min.

41.ANS:BSince Casons taxable income takes him out of the 15% bracket, some of the $36,000 net long-term capital gain is taxed at 0% and some is taxed at 15%. The total tax is $598 ($200 tax on $2,000 regular taxable income + $0 tax on $33,350 of long-term capital gain + $398 tax on the remaining $2,650 of long-term capital gain).

PTS:1DIF:Difficulty: ModerateREF:p. 14-25OBJ:LO: 14-5NAT:BUSPROG: AnalyticSTA:AICPA: FN-MeasurementKEY:Bloom's: ApplicationMSC:Time: 5 min.

42.ANS:ACorporations may carryback capital losses; individuals may not (a.). Individual long-term capital losses carryover as long-term, not short-term. Corporations have a five-year carryforward limit; individuals may carryforward capital losses indefinitely. Corporations alternative tax rate on long-term capital gains is 35%, not 20%.

PTS:1DIF:Difficulty: ModerateREF:p. 14-27 | p. 14-29OBJ:LO: 14-5 | LO: 14-6NAT:BUSPROG: AnalyticSTA:AICPA: FN-ReportingKEY:Bloom's: KnowledgeMSC:Time: 5 min.

43.ANS:BThe AMT rate for the first $175,000 of the AMT base is 26% and is 28% for the AMT base in excess of $175,000. Yolandas tentative AMT is calculated as follows:

$175,000 26% =$45,500$45,000 28% = 12,600

$58,100

PTS:1DIF:Difficulty: EasyREF:p. 15-8 | Figure 15.2OBJ:LO: 15-2NAT:BUSPROG: AnalyticSTA:AICPA: FN-MeasurementKEY:Bloom's: ApplicationMSC:Time: 5 min.

44.ANS:EEulas percentage depletion deduction for regular income tax purposes is $30,000 ($200,000 15%) prior to the application of the 50% limit which is $25,000 ($50,000 50%). So the amount for percentage depletion is limited to $25,000. Since this amount is greater than the cost depletion of $19,000, the depletion deduction is $25,000. The tax preference is the excess of the $25,000 deduction over the $23,000 basis for the mineral property. This results in a preference of $2,000 ($25,000 percentage depletion $23,000 basis at beginning of year).

PTS:1DIF:Difficulty: EasyREF:Example 23OBJ:LO: 15-4NAT:BUSPROG: AnalyticSTA:AICPA: FN-MeasurementKEY:Bloom's: ApplicationMSC:Time: 5 min.

45.ANS:BTaxable income

$ 82,000 + AMT adjustments

Standard deduction$11,900

Personal exemption/dependency deduction 11,40023,300 + Tax preferences

53,000 = AMTI

$158,300 AMT exemption [$74,450 (25% $8,300)]

(72,375)= AMT base

$ 85,925

PTS:1DIF:Difficulty: ModerateREF:p. 15-7 | Figure 15.2OBJ:LO: 15-2 | LO: 15-3NAT:BUSPROG: AnalyticSTA:AICPA: FN-MeasurementKEY:Bloom's: ApplicationMSC:Time: 5 min.

46.ANS:DThis is a taxable exchange because Kathleen did not meet the 80% control requirement of 351. Thus, Mockingbird Corporation will have a basis of $180,000 in the equipment and land; Kathleen has a recognized loss of $12,000 on the equipment and a recognized gain of $36,000 on the land; and she has a basis of $280,000 in the Mockingbird Corporation stock she receives.

PTS:1DIF:Difficulty: ModerateREF:p. 18-8 | p. 18-12OBJ:LO: 18-1 | LO: 18-3NAT:BUSPROG: AnalyticSTA:AICPA: FN-MeasurementKEY:Bloom's: ApplicationMSC:Time: 10 min.

47.ANS:CDawn has a basis of $10,000 in the stock in the newly formed corporation [$105,000 (basis in the assets transferred to the corporation) $95,000 (liabilities assumed by the corporation)]. Because the trade accounts payable give rise to a deduction, they are not considered to be liabilities for purposes of 357(c); thus, liabilities do not exceed basis. In addition, the cash basis payables are not considered in the computation of Dawns stock basis. Dawn has no gain on the transfer, and the basis of the assets to the corporation is $105,000.

PTS:1DIF:Difficulty: ChallengingREF:p. 18-10 | p. 18-11OBJ:LO: 18-1 | LO: 18-2 | LO: 18-3NAT:BUSPROG: AnalyticSTA:AICPA: FN-MeasurementKEY:Bloom's: ApplicationMSC:Time: 10 min.

48.ANS:CCorporate shareholders can only have business bad debts.

PTS:1DIF:Difficulty: EasyREF:p. 18-21OBJ:LO: 18-6NAT:BUSPROG: AnalyticSTA:AICPA: FN-ReportingKEY:Bloom's: ComprehensionMSC:Time: 5 min.

49.ANS:BGordon must include in gross income the Uniform Premium Table amount for $200,000 ($250,000 coverage less the $50,000 exclusion): 200 $12 = $2,400.

PTS:1DIF:Difficulty: EasyREF:p. 4-34 | p. 4-35OBJ:LO: 4-4NAT:BUSPROG: AnalyticSTA:AICPA: FN-MeasurementKEY:Bloom's: ApplicationMSC:Time: 10 min.

50.ANS:BThe $13,500 represents compensation for services rendered and must be included in the students gross income.

PTS:1DIF:Difficulty: EasyREF:p. 5-11OBJ:LO: 5-2NAT:BUSPROG: AnalyticSTA:AICPA: FN-ReportingKEY:Bloom's: ApplicationMSC:Time: 5 min.