Federal Taxation: Basic Principles (2009)

Federal Taxation: Basic Principles (2009)

Title: Federal Taxation: Basic Principles (2009)

Author: Ephraim P. Smith, Philip J. Harmelink, James R. Hasselback

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ACCOUNTING 305 EXAM II REVIEWQUESTIONS True/False Indicate whether the statement is true or false. ____ ____ 1. A gift made by an employer to the employee can be excluded from the employees gross income. 2. Ed died while employed by Violet Company. His wife collected $50,000 on a group-term life insurance policy that Violet provided its employees, and $5,000 of accrued salary Ed had earned prior to his death. Eds...

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305 ACCOUNTING EXAM II REVIEWQUESTIONS True/False Indicate whether the statement is true or false. ____ ____ 1. A gift made by an employer to the employee can be excluded from the employees gross income. 2. Ed died while employed by Violet Company. His wife collected $50,000 on a group-term life insurance policy that Violet provided its employees, and $5,000 of accrued salary Ed had earned prior to his death. Eds wife is not required to recognize any income from the receipt of the $55,000. 3. Amber received an academic scholarship that was to pay her tuition, room and board, and books. Amber is required to recognize gross income from the scholarship proceeds. 4. In December 2006, Tonya, a cash basis taxpayer, received a $3,000 cash scholarship for the Spring semester of 2007. In January 2007, she used the $3,000 to pay her college tuition. Tonya must include the $3,000 in her 2006 gross income, but she is allowed a $3,000 deduction in 2007. 5. Graduate teaching assistantships are generally scholarships and therefore are excluded from gross income. 6. In 2006, Joyce was in an automobile accident and suffered physical injuries. The accident was caused by Ramons negligence. In 2007, Joyce collected from the insurance company. She received $15,000 for loss of income, $5,000 punitive damages, and $8,000 for medical expenses which she had not deducted on her 2006 tax return. As a result of the above, Joyces 2007 gross income is increased by $28,000. 7. Workers compensation benefits are excluded from gross income. 8. Sam received $25,000 of salary, interest, and dividends in 2006. He also received $10,000 as workers compensation benefits. Sam must include either 50% or 85% of the workers compensation benefits in gross income for 2006. 9. Sarahs employer pays the hospitalization insurance premiums for a policy that covers all employees and their family members. The premiums for Sarahs medical coverage can be excluded from her gross income, but the premiums for her family members must be included in her gross income. ____ ____ ____ ____ ____ ____ ____ ____ 10. Megs employer carries insurance on its employees that will pay an employee his or her regular salary while the employee is away from work due to illness. Meg was absent from work for two months as a result of a kidney infection. Megs employers insurance company paid Megs regular salary of $8,000 while she was away from work. Meg is required to include the sick pay in her gross income. ____ 11. Alberta works for a company with only 25 employees. Her employer contributed to her health savings account (HSA). Alberta is not required to include the employers contribution in gross income, but withdrawals to pay medical expenses are taxable. ____ 12. Members of a research team can exclude from gross income the value of their lodging furnished at the research base located at the South Pole. ____ 13. Rogers employer has created a flexible spending account for medical and dental expenses that are not covered by the companys health insurance plan. Roger had his salary reduced by $1,200 during the year for contributions to the flexible spending plan. However, Roger incurred only $1,100 in actual expenses for which he was reimbursed. Roger can receive the remaining $100 without recognition of income. ____ 14. The value of an employees occasional, personal use of the employers copying machine must be included in the employees gross income. ____ 15. Fresh Bakery often has unsold donuts at the end of the day. The bakery allows employees to take the leftovers home. The employees are not required to recognize gross income because the bakery does not incur any additional cost. ____ 16. Kays employer pays her $100 per month towards the cost of parking near a railway station where Kay catches the train to work. The employer also pays the cost of the rail pass, $90 per month. Kay can exclude both of these payments from gross income. ____ 17. Mother participated in a qualified state tuition program for the benefit of her son. She contributed $14,000. When the son entered college, the balance in the fund satisfied the tuition charge of $20,000. When the funds were withdrawn to pay the college tuition for her son, the son must include $6,000 in his gross income. ____ 18. The earnings of a qualified state tuition program are deferred until they are used for qualified higher education expenses. When used, they are included in gross income. ____ 19. A debtor undergoing a reorganization under the bankruptcy laws who receives a reduction or a forgiveness of his or her liabilities can exclude the debt reduction from gross income. ____ 20. Amber Machinery Company purchased a building from Ted for $250,000 cash and a mortgage of $750,000. One year after the transaction, the mortgage had been reduced to $725,000 by principal payments by Amber, but it was apparent that Amber would not be able to continue to make the monthly payments on the mortgage. Ted reduced the amount owed by Amber to $600,000. This reduced the monthly payments to a level that Amber could pay. Amber must reduce its basis in the building by $125,000, but Amber is not required to recognize income from the reduction in the debt by Ted. ____ 21. Expenses incurred in a trade or business are deductible for AGI. ____ 22. All employment related expenses are classified as deductions for AGI. ____ 23. The only 212 expenses that are deductions for AGI are those related to rent and royalty income. ____ 24. A moving expense that is reimbursed by the employer is a deduction for AGI, whereas an unreimbursed moving expense is classified as an itemized deduction. ____ 25. Insurance premiums that are paid to insure against casualty losses of personal use property are deductions for AGI. ____ 26. Ralph, a shareholder-employee of Warbler, Inc., receives a $250,000 salary. The IRS classifies $80,000 of this amount as unreasonable compensation. The effect of this reclassification is to increase Ralphs gross income by $80,000. ____ 27. The porion of a shareholder-employees salary that is classified as unreasonable has no effect on the shareholder-employees gross income, but results in an increase in the taxable income of the corporation. ____ 28. Generally, a closely-held family corporation can take a deduction for a salary paid to a family member. ____ 29. Bonnie sells her personal use SUV for $22,000 (adjusted basis of $38,000). Her realized loss of $16,000 ($22,000 $38,000) can be recognized for income tax purposes. ____ 30. The income of a sole proprietorship are reported on Schedule C (Profit or Loss from Business). ____ 31. The cash method can be used even if inventory and cost of goods sold is involved in the business. ____ 32. Because it has only one owner, any sole proprietorships is permitted to elect the cash method of accounting. ____ 33. Under the one-year rule for the current period deduction of prepaid expenses of cash basis taxpayers, the asset must expire or be consumed by the end of the tax year following the year of payment. ____ 34. The period in which an accrual basis taxpayer can deduct an expense is determined by applying the economic performance test. ____ 35. The amount of the addition to the reserve for bad debts for an accrual method taxpayer is allowed as a deduction for tax purposes. ____ 36. Fines paid in the course of carrying on a trade or business generally are deductible if there is a related business purpose. ____ 37. Susan is a sales representative for a U.S. weapons manufacturer. She makes a $100,000 grease payment to a U.S. government official associated with a weapons purchase by the U.S. Army. She makes a similar payment to a Saudi Arabian government official associated with a similar sale. Neither of these payments is deductible by Susans employer. ____ 38. The cost of legal advice associated with the preparation of an individuals Federal tax return is not deductible because it is a personal expense. ____ 39. A portion of treble damage payments under the antitrust law is deductible. ____ 40. Legal expenses incurred in connection with rental property are deductions for AGI. ____ 41. Clark operates a gambling operation, which is an illegal business under the laws of Texas. Therefore, none of the expenses of the business are deductible. ____ 42. Jacques, who is not a U.S. citizen, makes a contribution to the campaign of a candidate for governor. A contribution by a noncitizen is illegal under state law. Cassie, a U.S. citizen, makes a contribution to the same campaign fund. The contribution by Cassie is deductible, while the contribution by Jacques is not. ____ 43. The expenses incurred to investigate the expansion of ones present business are deductible even if the expansion is not accomplished. ____ 44. In distinguishing between an activity being classified as a business rather than as a hobby, the satisfaction of the presumption rule (i.e., profit in at least 3 out of 5 years) ensures the activity being treated as a business. ____ 45. If an activity involves horses, a profit in at least two of seven consecutive years meets the presumptive rule of 183. ____ 46. A hobby activity can result in all of the hobby income being included in AGI and no deductions being allowed. ____ 47. If an item such as property taxes exceeds the income from a hobby, the excess amount of this item over the hobby income cannot be deducted. ____ 48. Theo owns a vacation home that is classified in the personal use/rental use category. Rent income is $9,000, while property taxes and mortgage interest allocated to the rental use part are $12,000. Only $9,000 of the $12,000 expenses can be deducted. ____ 49. A vacation home rented for 180 days and used personally for 16 days is classified as primarily rental use. ____ 50. Beulahs personal residence has an adjusted basis of $190,000 and a fair market value of $175,000. Beulah converts the property to rental use on December 1, 2006. The vacation home rules that limit the amount of the deduction to the rental income will apply and the adjusted basis for depreciation is $175,000. ____ 51. Ralph wants to give his daughter $1,000 for Christmas. As an alternative, she suggests that he pay the property taxes on her residence. If Ralph pays the property taxes, he cannot deduct them but his daughter can. ____ 52. Marge sells land to her adult son, Jason, for its $20,000 appraised value. Her adjusted basis for the land is $25,000. Marges recognized loss is $0 and Jasons adjusted basis for the land is $25,000 ($20,000 cost + $5,000 disallowed loss of Marge). ____ 53. The nonrepayment of a nonbusiness loan made by a cash basis taxpayer will result in a short-term capital loss. ____ 54. Accrual basis taxpayers can use the reserve method for computing deductions for bad debts. ____ 55. If a bad debt arose from the sale of a product, the bad debt deduction is limited to the sellers basis in the product. ____ 56. A nonbusiness bad debt is a debt unrelated to the taxpayers trade or business either when it was created or when it became worthless. ____ 57. In determining whether a debt is a business or nonbusiness bad debt, the debtors use of the borrowed funds is not important. ____ 58. A business bad debt can offset an unlimited amount of capital gain with any excess nonbusiness bad debt then offsetting ordinary income. ____ 59. An account receivable that is uncollectible will be treated as a worthless security and hence, produce a capital loss. ____ 60. Any taxpayer is eligible to deduct 1244 small business stock losses ($50,000 or $100,000) as an ordinary loss. ____ 61. An individual may deduct a loss incurred in a trade or business even though it is a loss that does not meet the definition of a casualty loss. ____ 62. Other casualty means casualties similar to those associated with fires, storms, or shipwrecks. ____ 63. The term other casualty may include accidental loss of property. ____ 64. If the amount of the insurance recovery for a theft loss is greater than the assets adjusted basis but less than its fair market value, no gain is recognized. ____ 65. If a taxpayer receives reimbursement for a casualty loss sustained and deducted in a previous year, the total reimbursement must be included in gross income on the return for the year in which the reimbursement is received. ____ 66. If rental property is completely destroyed, the amount of the loss is the lesser of the fair market value of the property or the adjusted basis of the property at the time of the destruction. ____ 67. The amount of the loss for property that is completely destroyed is always the fair market value of the property prior to the destruction. ____ 68. If personal casualty losses (after deducting the $100 floor) exceed personal casualty gains, the itemized deduction is always equal to the losses, to the extent they exceed 10% of adjusted gross income. ____ 69. The amount of a casualty loss on insured business use property is not reduced by the insurance coverage if no claim is made against the insurer. ____ 70. A theft loss of investment property is a miscellaneous itemized deduction subject to the 2%-of-AGI floor. ____ 71. An election to expense, rather than capitalize, research and experimental expenditures can be made each year. ____ 72. For tax years beginning in 2006, the production activities deduction (PAD) is calculated by multiplying 3% times the lesser of (1) qualified production activities income (QPAI) or (2) taxable (or modified adjusted gross) income or alternative minimum taxable income. ____ 73. One indicia of independent contractor (rather than employee) status is when the individual performing the services is paid based on tasks performed (rather than time spent). ____ 74. In some cases it may be appropriate for a taxpayer to report work-related expenses by using both Form 2106 and Schedule C. ____ 75. After he finishes working at his main job, Martin returns home, has dinner, then drives to his second job. Martin may deduct the mileage between his first job and the second job. ____ 76. Under the automatic mileage method, depreciation is not taken into account in the mileage rate allowed. ____ 77. In choosing between the actual expense method and the automatic mileage method, a taxpayer should consider the cost of insurance on the automobile. ____ 78. Once the automatic mileage method is used, a taxpayer cannot for a later year change to the actual cost method. ____ 79. The tax law specifically provides that a taxpayer cannot be temporarily away from home for any period of employment that exceeds one year. ____ 80. In determining whether someone is away from their tax home, the key consideration involves the need to duplicate certain living expenses. ____ 81. Horton lives and works in Savannah, GA. He travels to Madrid for a two-day business trip, then spends four days touring Spain. Only one-third of Hortons airfare is deductible. ____ 82. Ashley lives and works in Pittsburgh. She travels to Oslo for an eight-day business meeting, after which she spends two days touring Norway. All of Ashleys airfare is deductible. ____ 83. Daniel just graduated from college. The cost of moving his personal belongings from his parents home to his first job site can qualify for the moving expense deduction. ____ 84. Tired of her 60 mile daily commute, Margaret purchases a condo that is only five miles from her job. Margarets moving expenses to her new condo are allowed and can be claimed by her as a deduction for AGI. ____ 85. In order to save his job, Lucius accepted a transfer from the Dallas office to the Fargo office of his employer. After 38 weeks, Lucius loses his job when his employer declares bankruptcy. Any moving expenses incurred by Lucius are nondeductible due to his failure to satisfy the time test. ____ 86. For the tax year 2005, Rod properly deducted his job-related moving expenses. In June 2006, Rod is fired from his job for assaulting a customer and, as a result, fails to meet the 39-week time test. One of Rods options is to file an amended return for 2005 that does not claim the moving expense deduction. ____ 87. Gavin, an unemployed computer program designer, moves from Sacramento to Philadelphia to accept a job as a chef at a restaurant. Gavins moving expenses are not deductible because his new job is in a different trade or business. ____ 88. Alexis (a CPA and JD) sold her public accounting practice in Des Moines and accepted a job with the Seattle office of a national law firm. Her moving expenses are not deductible because she has changed employment status (i.e., went from self-employed to employee) and changed occupations (i.e., practice of public accounting to practice of law). ____ 89. An education expense deduction is not allowed if the education results in a promotion or pay raise for the employee. ____ 90. The maximum tuition deduction that can be claimed under 222 for qualified tuition expenses is $4,000 for 2006. ____ 91. Penguin Corporation pays for a trip to Bermuda for its five top salespersons. This expense is subject to the cutback adjustment. ____ 92. Every year, Teal Corporation gives each employee a turkey and a bottle of wine at Christmas. These gifts are subject to the cutback adjustment. ____ 93. Ethan, a bachelor with no immediate family, uses the Pine Shadows Country Club exclusively for his business entertaining. Ethans annual dues for his club membership, subject to the cutback adjustment, are deductible. ____ 94. A deduction is not allowed for a $25 gift a taxpayer gives to his supervisor on her birthday. ____ 95. The major advantage of a traditional deductible IRA is that plan distributions (at retirement) will be nontaxable. ____ 96. By itself, credit card receipts will constitute adequate substantiation for travel expenses. ____ 97. Unlike self-employed taxpayers, the unreimbursed travel expenses of employees are subject to the 2%-of-AGI floor. ____ 98. The 222 deduction for qualified tuition and related expenses can be claimed by parents that pay the tuition on behalf of a dependent daughter they enroll in college. ____ 99. Employees who render an adequate accounting to the employer and are fully reimbursed will shift the 50% cutback adjustment to their employer. ____ 100. In certain cases involving married persons, one way to eliminate the 2%-of-AGI floor on miscellaneous itemized deductions is to file separate (rather than joint) returns. Multiple Choice Identify the choice that best completes the statement or answers the question. ____ 101. The taxpayers marginal tax bracket is 40% (combined Federal and state rates). Which would the taxpayer prefer? a. $1.41 taxable income rather than $1.00 tax-exempt income. b. $.59 tax-exempt income rather than $1.00 taxable income. c. $1.75 taxable income rather than $1.00 tax-exempt income. d. $1.60 taxable income rather than $1.00 tax-exempt income. e. None of the above. ____ 102. Carin, a widow, elected to receive the proceeds of a $100,000 life insurance policy on the life of her deceased husband in 10 installments of $15,000 each. Her husband had paid premiums of $75,000 on the policy. Over the life of the installment contract, Carin must include in gross income: a. $0. b. $50,000. c. $75,000. d. $100,000. e. None of the above. ____ 103. Green Company purchased a $1 million life insurance policy on the companys chief executive officer, Howard. After the company had paid $300,000 in premiums, Howard died and the company collected the $1 million face amount of the policy. The company also purchased group-term life insurance on all its employees. Howards widow, Agnes, received the $150,000 proceeds from the group-term life insurance policy. a. Green Company must include $700,000 ($1,000,000 $300,000) in gross income and Agnes must include $150,000 in gross income. b. Green Company can exclude $700,000 ($1,000,000 $300,000) from gross income, but Agnes must include $150,000 in gross income. c. Agnes can exclude the life insurance proceeds of $150,000, but Green Company must ____ 104. ____ 105. ____ 106. ____ 107. include $700,000 ($1,000,000 $300,000) in gross income. d. Green Company and Agnes can exclude the life insurance proceeds of $1,000,000 and $150,000 respectively from gross income. e. None of the above. Swan Finance Company, an accrual method taxpayer, requires all of its customers to carry credit life insurance. If a customer dies, the company receives from the insurance company the balance due on the customers loan. Ali, a customer, died owing the company $1,000. The balance due included $100 accrued interest that Swan had included in income. When Swan collects $1,000 from the insurance company, Swan: a. Does not recognize income because life insurance proceeds are tax-exempt. b. Must recognize $900 income from the life insurance proceeds. c. Must recognize $1,000 income from the life insurance proceeds. d. Does not recognize income from the life insurance because the entire amount is a recovery of capital. e. None of the above. In 2006, Ted was diagnosed with a terminal illness. His physician estimated that Ted would live no more than 18 months. Ted cashed in his life insurance policy to pay some medical bills, after he received the doctors diagnosis. Ted has paid $12,000 in premiums and he collected $25,000, the cash surrender value of the policy. George enjoys excellent health, but he cashed in his life insurance policy to purchase a new home. He had paid premiums of $12,000 and collected $25,000 from the insurance company. a. Neither Ted nor George is required to recognize gross income. b. Both Ted and George must recognize $13,000 ($25,000 $12,000) gross income. c. Ted must recognize $13,000 ($25,000 $12,000) of gross income, but George does not recognize any gross income. d. George must recognize $13,000 ($25,000 $12,000) of gross income, but Ted does not recognize any gross income. e. None of the above. Albert has a terminal illness and will require almost constant nursing care for the remaining two years of his estimated life, according to his doctor. Albert has $25,000 in unpaid medical expenses and a life insurance policy with a face amount of $100,000. Albert has paid $10,000 of premiums on the policy. The insurance company has offered to pay him $75,000 to cancel the policy, although its cash surrender value is only $60,000. Assume Albert takes the $75,000, cancels the policy, and pays the $25,000 in medical expenses. Albert lives another seven years. a. Albert must recognize $40,000 ($75,000 $25,000 $10,000) of gross income. b. Albert must recognize $65,000 ($75,000 $10,000) of gross income. c. Albert is not required to recognize any gross income because of his terminal illness. d. Albert must recognize $100,000 of gross income, but he has $25,000 of deductible medical expenses. e. None of the above. Roger, age 19, is a full-time student at State College and a candidate for a bachelors degree. During 2006, he received the following payments: State scholarship for ten months (tuition and books) Loan from college financial aid office Cash support from parents Interest on CDs Cash prize awarded in contest What is Rogers adjusted gross income for 2006? a. $1,700. $ 3,600 1,500 3,000 1,700 500 $10,300 ____ 108. ____ 109. ____ 110. ____ 111. ____ 112. b. $2,200. c. $5,800. d. $10,300. e. None of the above. Barney, a full-time graduate student, receives a full tuition waiver ($5,500 during the year) and a monthly stipend for 9 months of $500 from State University for performing research for the university as a graduate assistant ($4,500 during the year). In addition, he receives a $2,000 research grant to pursue his own research and studies. Barneys gross income from the above is: a. $0. b. $4,500. c. $10,000. d. $12,000. e. None of the above. As an executive of Cherry, Inc., Ollie receives a fringe benefit in the form of annual tuition scholarships of $10,000 to each of his three children. The scholarships are paid by the company directly to each childs educational institution and are payable only if the student maintains a B average. a. The tuition payments of $30,000 may be excluded from Ollies gross income as a scholarship. b. The tuition payments of $10,000 each must be included in the childs gross income. c. The tuition payments of $30,000 may be excluded from Ollies gross income because the payments are for the academic achievements of the children. d. The tuition payments of $30,000 must be included in Ollies gross income. e. None of the above. In 2006, Khalid was in an automobile accident and suffered physical injuries. The accident was caused by Rashads negligence. In 2007, Khalid collected from the insurance company. He also received $15,000 for loss of income, $5,000 punitive damages, and $8,000 for medical expenses which he had deducted on his 2006 tax return. His other medical expenses exceeded 7.5% of his AGI, and his total itemized deductions were $20,000. As a result of the above, Khalids 2007 gross income is increased by: a. $0. b. $5,000. c. $13,000. d. $20,000. e. $28,000. Sally sued her former employer for a back injury she suffered on the job in 2005. As a result of the injury, she was partially disabled. In 2006, she received $250,000 for her loss of future income, $150,000 in punitive damages because of the employers flagrant disregard for the employees safety, and $10,000 for medical expenses. Sally had deducted $6,000 (the amount in excess of 7.5% of adjusted gross income) in medical expenses in 2005. Sallys 2006 gross income from the above is: a. $410,000. b. $404,000. c. $160,000. d. $150,000. e. None of the above. Jack received a court award for $100,000 for damages to his personal reputation by the National Gossip. He also received $50,000 in punitive damages. Jack must include in his gross income as a damage award: a. $0. b. $50,000. c. $100,000. d. $150,000. e. None of the above. ____ 113. Olaf was injured in an automobile accident and received $25,000 for his physical injury, $10,000 for his loss of income, and $50,000 punitive damages. As a result of the award, the amount Olaf must include in gross income is: a. $10,000. b. $50,000. c. $60,000. d. $85,000. e. None of the above. ____ 114. 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 2005 and 2006, and the account earned $100 interest in 2006. At the end of 2006, Matilda withdrew $2,100 from the account to pay the deductible portion of her medical expenses for the year. As a result, Matilda must include in her 2006 gross income: a. $0. b. $100. c. $1,600. d. $2,100. e. None of the above. ____ 115. All employees of Mauve Company are covered by a group hospitalization insurance policy, but the employees must pay the premiums (which are withheld from the employees wages). None of the employees have sufficient medical expenses to deduct them as an itemized deduction. If the employer reduced each employees pay by the cost of the insurance and the employer paid the premiums: a. All of the employees income after tax and insurance cost would increase. b. Only the high income (35% marginal tax bracket) employees would benefit. c. Only the low income (10% and 15% marginal tax bracket) employees would benefit. d. All of the employees income after tax and insurance cost would remain the same. e. None of the above. ____ 116. James, a cash basis taxpayer, received the following compensation and fringe benefits in 2006: Salary Disability income protection premiums Long-term care insurance premiums $66,000 3,000 4,000 James did not receive in 2006 $6,000 of his $72,000 salary because in December 2005 his employer advanced him $6,000 on his 2006 salary. The employer made the salary advance so that James could pay his sons college tuition that was due in December 2005. 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. $75,000. d. $76,000. e. None of the above. ____ 117. The First Chance Casino has gambling facilities, a bar, a restaurant, and a hotel. All employees are allowed to obtain food from the restaurant at no charge during working hours. In the case of the employees who operate the gambling facilities, bar, and restaurant, 60% of all of Casinos employees, the meals are provided for the convenience of the Casino. However, the hotel workers, demanded equal treatment and therefore were also allowed to eat in the restaurant at no charge while they are at work. Which of the following is correct? ____ 118. ____ 119. ____ 120. ____ 121. ____ 122. a. All the employees are required to include the value of the meals in their gross income. b. Only the restaurant employees may exclude the value of their meals from gross income. c. Only the employees who work in gambling, the bar, and the restaurant may exclude the meals from gross income. d. All of the employees may exclude the value of the meals from gross income. e. None of the above. Section 119 excludes the value of meals from the employees gross income: a. Whenever the employer pays for the meal and for the convenience of the employee. b. When the meals are provided for the employee on the employers premises as a convenience to the employee. c. When the meals are provided for the employee on the employers premises for the convenience of the employer. d. All of the above. e. None of the above. Adam repairs power lines for the Egret Utilities Company. He is generally working on a power line during the lunch hour. He must eat when and where he can and still get his work done. He usually purchases something at a convenience store and eats in his truck. Egret reimburses Adam for the cost of his meals. a. Adam must include the reimbursement in his gross income. b. Adam can exclude the reimbursement from his gross income since the meals are provided for the convenience of the employer. c. Adam can exclude the reimbursement from his gross income because he eats the meals on the employers business premises (the truck). d. Adam may exclude from his gross income the difference between what he paid for the meals and what it would have cost him to eat at home. e. None of the above. Robin, a senior at State University, receives free room and board as full compensation for working as a resident advisor at the university dormitory. The regular housing contract is $1,400 a year total, $800 for lodging and $600 for meals in the dormitory. What is Robins gross income from this employment? a. $0, the entire value of the contract is excluded, assuming the meals are provided for the convenience of the employer. b. $600, the meal contract must be included in gross income. c. $800, the lodging contract must be included in gross income. d. $1,400, the entire value of the contract is compensation. e. None of the above. Carol is a full-time employee of the Drake Company and participates in the companys flexible spending plan that is available to all employees. Which of the following is correct? a. Carol reduces her salary by $1,200, but receives only $1,000 as reimbursement for her medical expenses. Carol can get a refund of the remaining $200, which is nontaxable. b. Carol reduces her salary by $1,200, but receives only $900 as reimbursement for her medical expenses. She can receive her $300 remaining balance and only that amount is taxable. c. Carol reduces her salary by $1,200, but receives only $800 as reimbursement for her medical expenses. She is not refunded the $400. Her gross income is reduced by $1,200. d. Carol reduces her salary by $1,200, but receives only $900 as reimbursement for her medical expenses. She forfeits the $300. Her gross income is reduced by $900. e. None of the above. Employers of the Family Bowling Alley allow their employees to bowl without charge after the employees working hours and when there are adequate idle bowling lanes. Tom bowled 12 games during the month at no charge when the non-employee charge was $3.00 per game. a. Tom must include $36 in gross income. ____ 123. ____ 124. ____ 125. ____ 126. ____ 127. b. Tom must include in gross income the employers marginal cost of providing the bowling lanes and equipment. c. Tom is not required to include anything in gross income because this is a no-additionalcost service fringe benefit. d. Tom is not required to include the $36 in gross income if the arrangement is for the convenience of the employer. e. None of the above. The Perfection Tax Service gives employees $10 as supper money when they are required to work overtime, approximately 20 days each year. The supper money received: a. Must be included in the employees gross income. b. Must be included in the employees gross income if the employee does not spend it for supper. c. May be excluded from the employees gross income as a no-additional cost fringe benefit. d. May be excluded from the employees gross income as a de minimis fringe benefit. e. None of the above. The president of Silver Corporation is assigned a secretary. When the secretary has completed work on company matters, the secretary is available to do the presidents personal matters (pick up laundry, buy groceries) so long as the privilege is not abused. No other employee has a personal secretary. a. The value of the secretarys services provided to the president may be excluded as noadditional-cost services. b. The value of the secretarys services provided to the president may be excluded because the president did not receive cash. c. The value of the secretarys services provided to the president may be excluded as noadditional-cost services because the services are not available to all employees. d. If the value of secretarys services are considered de minimis, the president may exclude the benefit from gross income even through other employees are not provided the same benefit. e. None of the above. In the case of a fringe benefit plan that is discriminatory (e.g., the plan favors officers over other employees), a. All employees must include all benefits received in gross income. b. De minimis fringes may be excluded from gross income. c. The value of a parking space provided (value of $100 per month) must be included in gross income. d. Those who are being discriminated against can exclude a certain portion of their cash compensation from gross income to achieve parity. e. None of the above. Louise works in a foreign branch of her employers business. She earned $5,000 per month throughout the relevant period. a. If Louise worked in the foreign branch from May 1, 2005, until October 31, 2005, she may exclude $30,000 from gross income. b. If Louise worked in the foreign branch from May 1, 2005, until June 30, 2006, she may exclude $30,000 from 2006 gross income. c. If Louise began work in the foreign country on May 1, 2005, she must work through November 30, 2006, to apply the foreign earned income exclusion to 2006 gross income. d. Only a. and b. are correct. e. None of the above. Harriet had the following interest income for the year: Interest on state income tax refund $ 500 Interest on Montgomery County bonds Interest on United States government bonds 2,800 900 In addition, Harriet had a $500 gain from the sale of the Montgomery County bonds. Harriets gross income is: a. $4,700. b. $1,900. c. $1,400. d. $500. e. None of the above. ____ 128. Harry and Wanda received the following interest income in the current year: Savings account United States Treasury bonds Interest on Federal tax refund Interest on State income tax refund $3,000 300 100 50 The bank gave Harry and Wanda a cellular phone (worth $70) for opening their savings account. What amount of interest income should they report on their joint income tax return? a. $3,520. b. $3,220. c. $3,170. d. $3,100. e. None of the above. ____ 129. George, an unmarried cash basis taxpayer, received the following amounts during 2006: Interest on savings accounts Original issue discount on a certificate of deposit purchased on July 1, 2005, and matured on June 30, 2006 Dividends on USG common stock Interest on United States Government bonds Interest on City of Radford school bonds $2,400 1,200 200 300 600 What amount should George report as gross income from dividends and interest for 2006? a. $4,700. b. $4,100. c. $3,800. d. $3,600. e. None of the above. ____ 130. Stuart owns 300 shares of Turquoise Corporation stock and 2,000 shares of Blue Corporation stock. During the year, Stuart received 150 shares of Turquoise as a result of a 1 for 2 stock split. The value of the shares received was $2,400. Stuart also received 100 shares of Blue Corporation stock as a result of a 5% stock dividend. Stuart did not have the option of receiving cash from Blue. The additional shares he received had a value of $3,600. Stuarts gross income from the receipt of the additional Turquoise and Blue shares is: a. $0. b. $2,400. c. $3,600. d. $6,000. e. None of the above. ____ 131. Martha participated in a qualified tuition program for the benefit of her son. She invested $5,000 in the fund. Four years later her son withdrew $7,500, the entire balance in the program, to pay his college tuition. a. Martha must include the $2,500 ($7,500 $5,000) in her gross income when the funds are used to pay the tuition. b. Martha must include the portion of the $2,500 accumulated each year in her gross income (i.e., interest). c. Marthas son must include the $2,500 ($7,500 $5,000) in his gross income when the funds are used to pay the tuition. d. Marthas son must include the portion of the $2,500 accumulated each year in his gross income (i.e., interest). e. None of the above. ____ 132. Todds office building that he used in his accounting practice was destroyed by fire in 2005. In 2006 he collected insurance proceeds that equaled the adjusted basis of the building. Todd had paid $900 for fire insurance in December 2005 and deducted it as a business expense in 2005. In 2006 he received a $500 premium rebate from the cancellation of his fire insurance policy. a. Todd must include $500 in gross income under the tax benefit rule. b. Todd can recognize a $400 ordinary loss on the cancellation of the policy. c. Todd is not required to recognize any gross income under the claim of right doctrine. d. Todd is not required to recognize any gross income because it is insurance proceeds paid to the beneficiary of the policy. e. None of the above. ____ 133. Hazel, a solvent individual but a recovering alcoholic, embezzled $5,000 from her employer. In the same year that she embezzled the funds, her employer discovered the theft. Her employer did not fire her and told her she did not have to repay the $5,000 if she would attend Alcoholics Anonymous. Hazel met the conditions and her employer cancelled the debt. a. Hazel did not realize any income because she obtained the funds illegally. b. Hazel is not required to include the $5,000 in gross income because her employer made a gift to her. c. Hazel must include $5,000 in gross income from discharge of indebtedness. d. Hazel may exclude the $5,000 from gross income because the debt never existed. e. None of the above. ____ 134. Gold Company was experiencing financial difficulties, but was not bankrupt or insolvent. Pink, Inc., the holder of a mortgage on Golds building, agreed to accept $40,000 in full payment of the $50,000 due. Pink had sold the property to Gold for $150,000 five years ago. The National Bank, which held a mortgage on other real estate owned by Gold, reduced the principal from $100,000 to $85,000. The bank had made the loan to Gold when it purchased the real estate from Silver, Inc. As a result of the above, Gold must: a. Include $25,000 in gross income. b. Reduce the basis in its assets by $25,000. c. Include $10,000 in gross income and reduce its basis in its assets by $15,000. d. Include $15,000 in gross income and reduce its basis in the building by $10,000. e. None of the above. ____ 135. On January 1, 1996, Yellow corporation issued 6% 25-year bonds at par and used the $10,000,000 proceeds to finance the construction of a new plant. On January 1, 2006, the company acquired the bonds on the open market for $9,500,000. Assuming that Yellow Corporation is neither bankrupt nor insolvent, the acquisition and retirement of the bonds results in which of the following: a. The company must recognize a $500,000 gain. b. The company can make an election to recognize a $500,000 gain or reduce the companys basis in the plant by $500,000. c. The company must recognize a $500,000 gain and increase the companys basis in the plant by $500,000. d. The company can amortize the $500,000 gain, recognizing income over the remaining life of the bonds. e. None of the above. ____ 136. In the case of income from discharge of indebtedness: I. II. III. If the debt is secured by property sold to the debtor by the creditor, the debtor reduces the basis in the property instead of recognizing income. If the debtor is a business, the discharge usually is considered a gift. If a corporations debt is forgiven by a shareholder in the corporation, the corporation increases paid-in capital and is not required to recognize income. a. I, II and III are true. b. I and II are true, III is false. c. I and III are true, II is false. d. II and III are true, I is false. e. I, II, and III are false. ____ 137. Floral Company owed $100,000 to the National Bank. I. II. III. If Floral transfers land with a cost of $60,000 in payment of the debt, Floral must recognize $40,000 income. If Floral pays the bank $60,000 in settlement of the liability, Floral has $40,000 income from discharge of indebtedness. If Floral pays the bank $60,000 in settlement of the liability and Floral is insolvent, Floral can elect to reduce its basis in assets by $40,000 (in lieu of recognizing $40,000 gain). a. I, II, and III are true. b. I, II, and III are false. c. I and II are true, III is false. d. II and III are true, I is false. e. None of the above. ____ 138. Larry, a calendar year cash basis taxpayer, has the following transactions: Salary from job Alimony paid to ex-wife Medical expenses $60,000 9,000 4,500 Based on this information, Larry has: a. AGI of $46,500. b. AGI of $51,000. c. AGI of $60,000. d. Deduction for medical expenses of $0. e. None of the above. ____ 139. Saul is single, under age 65, and has gross income of $50,000. His deductible expenses are as follows: Alimony Charitable contributions Contribution to a traditional IRA Expenses paid on rental property Interest on home mortgage and property taxes on personal residence State income tax $12,000 2,000 3,000 5,000 7,000 2,200 What is Sauls AGI? a. $19,800. b. $30,000. c. $35,000. d. $38,000. e. $42,000. ____ 140. Janice is single, had gross income of $38,000, and incurred the following expenses: Charitable contribution Taxes and interest on home Legal fees incurred in a tax dispute Medical expenses Penalty on early withdrawal of savings $2,500 9,000 1,000 4,000 200 ____ 141. ____ 142. ____ 143. ____ 144. ____ 145. Her AGI is: a. $21,300. b. $28,800. c. $32,800. d. $35,500. e. $37,800. 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. Which of the following is a deduction from AGI (itemized deduction)? a. Contribution to a traditional IRA. b. Roof repairs to a rental home. c. Personal casualty loss. d. Alimony payment. e. None of the above. Which of the following is correct? a. A charitable contribution is classified as a deduction from AGI. b. Real estate taxes on a taxpayers personal residence are classified as deductions from AGI. c. An expense associated with rental property is classified as a deduction from AGI. d. Only a. and b. are correct. e. a., b., and c., are correct. Which of the following are deductions for AGI? a. Alimony payments. b. Property taxes on a personal residence. c. Charitable contributions. d. Fines and penalties incurred in a trade or business. e. None of the above. Which of the following is incorrect? a. Alimony is a deduction for AGI. b. The expenses associated with royalty property are a deduction for AGI. c. Contributions to a traditional IRA are a deduction from AGI. d. Medical expenses are a deduction from AGI ____ 146. ____ 147. ____ 148. ____ 149. ____ 150. e. All of the above are correct. Which of the following is not a trade or business expense? a. Interest on business indebtedness. b. Property taxes on business property. c. Parking ticket paid on business auto. d. Depreciation on business property. e. All of the above are trade or business expenses. Agnes is the sole shareholder of Violet, Inc. For 2006, she receives from Violet a salary of $200,000 and dividends of $100,000. Violets taxable income for 2006 is $500,000. On audit, the IRS treats $50,000 of Agness salary as unreasonable. Which of the following statements is correct? a. Agness gross income will increase by $50,000 as a result of the IRS adjustment. b. Violets taxable income will not be affected by the IRS adjustment. c. Agness gross income will decrease by $50,000 as a result of the IRS adjustment. d. Violets taxable income will increase by $50,000 as a result of the IRS adjustment. e. None of the above is correct. During 2006, the first year of operations, Silver, Inc., pays salaries of $175,000. At the end of the year, employees have earned salaries of $20,000 which are not paid by Silver until early in 2007. What is the amount of the deduction for salary expense? a. If Silver uses the cash method, $175,000 in 2006 and $0 in 2007. b. If Silver uses the cash method, $0 in 2006 and $195,000 in 2007. c. If Silver uses the accrual method, $175,000 in 2006 and $20,000 in 2007. d. If Silver uses the accrual method, $195,000 in 2006 and $0 in 2007. e. None of the above is correct. Benita incurred a business expense on December 10, 2006, which she charged on her bank credit card. She paid the credit card statement which included the charge on January 5, 2007. Which of the following is correct? a. If Benita is a cash method taxpayer, she cannot deduct the expense until 2007. b. If Benita is an accrual method taxpayer, she can deduct the expense in 2006. c. If Benita uses the accrual method, she can choose to deduct the expense in either 2006 or 2007. d. Only b. and c. are correct. e. a., b., and c. are correct. During the first year of operations, Als fast food restaurant had cash sales of $200,000. Other relevant information is as follows: Purchases Salaries Other expenses Ending inventory $70,000 90,000 10,000 20,000 a. If Als business uses the accrual method, the net profit is $50,000. b. If Als business uses the accrual method, the net profit is $30,000. c. Als business is not eligible to use the cash method. d. Only a. and c. e. Only b. and c. ____ 151. Swan, Inc. is an accrual basis taxpayer. Swan uses the aging approach to calculate the reserve for bad debts. During 2006, the following occur associated with bad debts. Credit sales Collections on credit sales $300,000 260,000 Amount added to the reserve Beginning balance in the reserve Identifiable bad debts during 2006 25,000 -018,000 The amount of the deduction for bad debt expense for Swan for 2006 is: a. $18,000. b. $25,000. c. $40,000. d. $43,000. e. None of the above. ____ 152. Andrew, who operates a laundry business, incurred the following expenses during the year. Parking ticket of $100 for one of his delivery vans that parked illegally. Parking ticket of $50 when he parked illegally while attending a rock concert in Tulsa. DUI ticket of $400 while returning from the rock concert. Attorneys fee of $500 associated with the DUI ticket. What amount can Andrew deduct for these expenses? a. $0. b. $50. c. $150. d. $550. e. $1,050. ____ 153. Terry and Jim are both involved in operating illegal businesses. Terry operates a gambling business and Jim operates a drug running business. Both businesses have gross revenues of $500,000. The businesses incur the following expenses. Employee salaries Bribes to police Rent and utilities Cost of goods sold Terry $200,000 25,000 50,000 -0Jim $200,000 25,000 50,000 125,000 Which of the following statements is correct? a. Neither Terry nor Jim can deduct any of the above items in calculating the business profit. b. Terry should report profit from his business of $250,000. c. Jim should report profit from his business of $500,000. d. Jim should report profit from his business of $250,000. e. None of the above. ____ 154. Tom operates an illegal drug-running operation and incurred the following expenses: Salaries Illegal kickbacks Bribes to border guards Cost of goods sold Rent Interest Insurance on furniture and fixtures Utilities and telephone $ 75,000 20,000 25,000 160,000 8,000 10,000 6,000 20,000 ____ 155. ____ 156. ____ 157. ____ 158. ____ 159. 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. For a president of a publicly held corporation, which of the following are not subject to the $1 million limit on executive compensation? a. Contribution to medical insurance plan. b. Contribution to pension plan. c. Group term life insurance of $50,000. d. Only b. and c. are not subject to the limit. e. a., b., and c., are not subject to the limit. Iris, a calendar year cash basis taxpayer, owns and operates several TV rental outlets in Florida, and wants to expand to other states. During 2006, she spends $14,000 to investigate TV rental stores in South Carolina and $9,000 to investigate TV rental stores in Georgia. She acquires the South Carolina operations, but not the outlets in Georgia. As to these expenses, Iris should: a. Capitalize $14,000 and not deduct $9,000. b. Expense $23,000 for 2006. c. Expense $9,000 for 2006 and capitalize $14,000. d. Capitalize $23,000. e. None of the above. Which of the following statements is correct in connection with the investigation of a business? a. If the taxpayer is not already engaged in the trade or business, the expenses incurred are deductible if the project is abandoned. b. If the business is acquired, the expenses may be deducted immediately by a taxpayer engaged in a similar trade or business. c. That business must be related to the taxpayers present business for any expense ever to be deductible. d. Regardless of whether the taxpayer is already engaged in the trade or business, the expenses must be capitalized and amortized. e. None of the above. Which of the following is not relevant in determining whether an activity is profit-seeking or a hobby? a. Whether the activity is enjoyed by the taxpayer. b. The expertise of the taxpayers or their advisers. c. The time and effort expended. d. The relationship of profits earned to losses incurred. e. All of the above are relevant factors. Paula pursued a hobby of making bedspreads in her spare time. During the year she sold the bedspreads for $6,000. She incurred expenses as follows: Supplies Interest on loan to get business started Advertising $1,900 600 400 Assuming that the activity is deemed a hobby and that she cannot itemize this year, how should she report these items on her tax return? a. Include $6,000 in income and deduct $2,900 for AGI. b. Ignore both income and expenses since hobby losses are disallowed. c. Include $6,000 in income and deduct nothing for AGI since all hobby expenses must be itemized. d. Include $6,000 in income and deduct interest of $600 for AGI. e. None of the above. ____ 160. Cory incurred and paid the following expenses: Tax return preparation fee Moving expenses Investment expenses Expenses associated with rental property Interest expense associated with loan to finance tax-exempt bonds $ 600 2,000 500 1,500 400 Calculate the amount that Cory can deduct (before any percentage limitations). a. $5,000. b. $4,600. c. $3,000. d. $1,500. e. None of the above. ____ 161. If a vacation home is determined to be a personal/rental use residence, which of the following statements is false? a. All income is included in AGI. b. All rental related expenses are deductible from AGI. c. Expenses must be allocated between rental and personal use. d. Some expenses are deductible from AGI. e. None of the above. ____ 162. Bob and April own a house at the beach. The house was rented to unrelated parties for 8 weeks during the year. April and the children used the house 12 days for their vacation during the year. After properly dividing the expenses between rental and personal use, it was determined that a loss was incurred as follows: Gross rental income Less: Mortgage interest and property taxes Other allocated expenses Net rental loss $4,000 $3,500 2,000 (5,500) ($1,500) What is the correct treatment of the rental income and expenses on Bob and Aprils joint income tax return for the current year assuming the IRS approach is used if applicable? a. A $1,500 loss should be reported. b. Only the mortgage interest and property taxes should be deducted. c. Since the house was used more than 10 days personally by Bob and April, the rental expenses (other than mortgage interest and property taxes) are limited to the gross rental income in excess of deductions for interest and taxes allocated to the rental use. d. Since the house was used less than 50% personally by Bob and April, all expenses allocated to personal use may be deducted. e. Bob and April should include none of the income or expenses related to the beach house in their current year income tax return. ____ 163. Harry divorced Wanda during the year. He incurred the following legal expenses as itemized on the bill from his attorney: Fees related to property division Fees related to the determination of dependency exemption General legal fees incident to divorce $500 150 900 How much can Harry deduct? a. $0. b. $150. c. $650. d. $1,550. e. None of the above. ____ 164. Which of the following must be capitalized by a business? a. Replacement of an alternator on a truck used in business. b. Replacement of a windshield of a business truck which was broken in an accident. c. Repair of a roof. d. Amount paid for a covenant not to compete. e. None of the above. ____ 165. In January, Lance sold stock with a cost basis of $26,000 to his brother, James, for $24,000, the fair market value of the stock on the date of sale. Five months later, James sold the same stock through his broker for $27,000. What is the tax effect of these transactions? a. Disallowed loss to James of $2,000; gain to Lance of $1,000. b. Disallowed loss to Lance of $2,000; gain to James of $3,000. c. Deductible loss to Lance of $2,000; gain to James of $3,000. d. Disallowed loss to Lance of $2,000; gain to James of $1,000. e. None of the above. ____ 166. For constructive ownership purposes, which of the following are related parties under 267? I. II. III. IV. Taxpayers cousin. Taxpayers uncle. Taxpayers 65% owned corporation. Taxpayers sister. a. I IV. b. II IV. c. III and IV. d. IV only. e. None of the above are related parties. ____ 167. Ace Corporation, an accrual basis taxpayer, sells widgets. Ace sold on account a deluxe widget to Alan, Inc., for $22,000. Ace had a basis in the widget of $12,000. During the current year, after receiving $3,000 from Alan, Ace was notified that Alan was bankrupt and no further payments would be received. What amount of loss may Ace deduct in the current year? a. $0. b. $7,000. c. $9,000. d. $10,000. e. None of the above. ____ 168. Mary is the sole proprietor of Crow Loan Company. On May 1, 2005, Crow loaned John $20,000. In 2006, John filed for bankruptcy. At that time, it was revealed that Johns creditors could expect to receive 60 cents on the dollar. In March 2007, final settlement was made, and Crow received $5,000. Crows policy is to deduct losses as soon as permitted. How much loss can Crow deduct and in which year? a. 2005$15,000. b. 2006zero; 2007$15,000. c. 2006$12,000; 2007$3,000. d. 2006$8,000; 2007$7,000. ____ 169. ____ 170. ____ 171. ____ 172. ____ 173. e. None of the above. Amos loaned James (a friend) $20,000 in 2004 with the agreement that the loan would be repaid in two years. In 2005, James filed for bankruptcy, and Amos was notified that he could expect $0.40 on the dollar. In 2006, final settlement was made, and Amos received $5,000. In 2006, Amos had AGI of $80,000, including $12,500 of long-term capital gain. Assuming the loan is a nonbusiness bad debt, what is the amount of Amoss bad debt deduction in 2006? a. $3,000. b. $7,000. c. $12,000. d. $15,000. e. None of the above. Last year, Lucy purchased a $100,000 account receivable for $80,000. During the current year, Lucy collected $85,000 on the account. What are the tax consequences to Lucy associated with the collection of the account receivable? a. $0. b. $5,000 gain. c. $10,000 loss. d. $15,000 loss. e. None of the above. Two years ago, Green Corporation, an accrual basis taxpayer, sold merchandise on credit to John, an individual. Greens account receivable from John was $20,000. Last year, John filed for bankruptcy, and Green was notified that it could expect to receive 20 cents on the dollar. Accordingly, Green took a $16,000 bad debt deduction on last years tax return. In June of the current year, Green received a $6,000 payment from John in final settlement of the debt. How should Green account for the payment in the current year? a. File an amended tax return for last year. b. Report no income for the current year. c. Report $2,000 of income for the current year. d. Report $4,000 of income for the current year. e. Report $6,000 of income for the current year. Five years ago, Tom loaned his son John $20,000 to start a business. A note was executed with an interest rate of 8%, which is the Federal rate. The note required monthly payments of the interest with the $20,000 due at the end of ten years. John always made the interest payments until last year. During the current year, John notified his father that he was bankrupt and would not be able to repay the $20,000 or the accrued interest of $1,800. Tom is a cash basis taxpayer whose only income is salary and interest income. The proper treatment for the nonpayment of the note is: a. No deduction. b. $3,000 deduction. c. $20,000 deduction. d. $21,800 deduction. e. None of the above. Three years ago, Sharon loaned her sister $30,000 to buy a car. A note was issued for the loan with the provision for monthly payments of principal and interest. Last year, Sharon purchased a car from the same dealer, Hanks Auto. As partial payment for the car, the dealer accepted the note from Sharons sister. At the time Sharon purchased the car, the note had a balance of $18,000. During the current year, Sharons sister died. Hanks Auto was notified that no further payments on the note would be received. At the time of the notification, the note had a balance due of $15,500. What is the amount of loss, with respect to the note, that Hanks Auto may claim on the current year tax return? a. $0. b. $3,000. c. $15,500. d. $18,000. e. None of the above. ____ 174. On February 20, 2005, Bill purchased stock in Pink Corporation (the stock is not small business stock) for $1,000. On May 1, 2006, the stock became worthless. During 2006, Bill also had an $8,000 loss on 1244 small business stock purchased two years ago, a $9,000 loss on a nonbusiness bad debt, and a $5,000 longterm capital gain. How should Bill treat these items on his 2006 tax return? a. $4,000 long-term capital loss and $9,000 short-term capital loss. b. $4,000 long-term capital loss and $3,000 short-term capital loss. c. $8,000 ordinary loss and $3,000 short-term capital loss. d. $8,000 ordinary loss and $5,000 short-term capital loss. e. $8,000 long-term capital loss and $6,000 short-term capital loss. ____ 175. John and Martha file a joint return. In 2006, they had the following items: Salary of $92,000. Loss of $108,000 on the sale of 1244 stock acquired two years ago. Interest income of $4,000. Determine John and Marthas AGI for 2006. a. $0. b. ($4,000). c. ($7,000). d. ($12,000). e. None of the above. ____ 176. Bruce, who is single, had the following items for the current year: Salary of $90,000. Gain of $30,000 on the sale of 1244 stock acquired two years earlier. Loss of $75,000 on the sale of 1244 stock acquired three years earlier. Worthless stock of $7,000. The stock was acquired on February 1 of the prior year and became worthless on January 15 of the current year. Determine Bruces AGI for the current year. a. $37,000. b. $38,000. c. $42,000. d. $47,000. e. None of the above. ____ 177. On January 10, 2005, Margie, who is single, purchased stock in Orange Corporation (the stock is 1244 small business stock) for $140,000. On October 15, 2006, Margie sold the stock for $20,000. How should Margie treat the loss on the sale of the stock? a. $120,000 ordinary loss. b. $20,000 short-term capital loss; $100,000 ordinary loss. c. $20,000 long-term capital loss; $100,000 ordinary loss. d. $50,000 ordinary loss and $70,000 long-term capital loss. e. None of the above. ____ 178. Which of the following events would produce a deductible loss? a. Erosion of personal use land due to rain or wind. b. Termite infestation of a personal residence over a several year period. c. Damages to personal automobile resulting from a taxpayers willful negligence. d. A stolen diamond ring. e. None of the above. ____ 179. During the year, Rick had the following insured personal casualty losses (arising from one casualty). Rick also had $18,000 AGI for the year. Asset A B C Adjusted Basis $ 500 3,000 700 Fair Market Value Before After $ 700 $300 2,000 -0900 -0Insurance Recovery $100 500 200 Ricks casualty loss deduction is: a. $400. b. $600. c. $1,000. d. $1,400. e. None of the above. ____ 180. Norms car, which he uses 100% for personal purposes, was completely destroyed in an accident. The cars adjusted basis at the time of the accident was $13,000. Its fair market value was $11,500. The car was covered by a $2,000 deductible insurance policy. Norm did not file a claim against the insurance policy because of a fear that reporting the accident would result in a substantial increase in his insurance rates. His adjusted gross income was $14,000 (before considering the loss). What is Norms deductible loss? a. $0. b. $2,000. c. $9,500. d. $8,000. e. None of the above. ____ 181. During the year, Grants personal residence was damaged by fire. Grant was insured for 90% of his actual loss, and he received the insurance settlement. Grant had adjusted gross income, before considering the casualty item, of $30,000. Pertinent data with respect to the residence follows: Cost basis Value before casualty Value after casualty $170,000 250,000 60,000 What is Grants allowable casualty loss deduction? a. $0. b. $15,900. c. $16,000. d. $19,000. e. $37,000. ____ 182. John had adjusted gross income of $40,000. During the year his personal use summer home was damaged by a fire. Pertinent data with respect to the home follows: Cost basis Value before the fire Value after the fire Insurance recovery $110,000 160,000 20,000 90,000 John had an accident with his personal use car. As a result of the accident, the other driver was cited with reckless driving and willful negligence. Pertinent data with respect to the car follows: Cost basis Value before the accident Value after the accident Insurance recovery What is Johns deductible casualty loss? a. $19,800. b. $20,000. c. $35,800. d. $36,000. e. None of the above. ____ 183. During the current year, Ned and Mary had the following items: Salary Personal use casualty gain Personal use casualty loss (after $100 floor) Other itemized deductions $40,000 10,000 17,000 4,000 $20,000 12,000 8,000 -0- Assuming that Ned and Mary file a joint return, determine their taxable income for the current year. a. $23,100. b. $26,400. c. $27,200. d. $30,200. e. None of the above. ____ 184. Alicia was involved in an automobile accident. Her car was used 50% for business and 50% for personal use. The car had originally cost $40,000. At the time of the accident, the car was worth $20,000 and Alicia had taken $8,000 of depreciation. The car was totally destroyed and Alicia had let her car insurance expire. If Alicias AGI is $50,000 (before considering the loss), determine her itemized deduction for the casualty loss. a. $2,100. b. $5,900. c. $6,100. d. $16,900. e. None of the above. ____ 185. Last year Billy had silverware worth $25,000 (basis of $20,000) stolen from his home. Billys insurance company told him that his policy did not cover the theft. Therefore, Billy took a casualty loss on his return last year. His AGI for last year was $40,000. His other itemized deductions last year were $13,000. In July of the current year, Billys insurance company decided that Billys policy did cover the theft of the silverware and they paid Billy $25,000. Determine the tax treatment of the $25,000 received by Billy during the current year. a. $25,000 should be included in gross income. b. $15,900 should be included in gross income. c. Last years return should be amended to include the effect of the $25,000 payment by the insurance company. d. $20,900 should be included in gross income. e. None of the above. ____ 186. During the current year, Juans home was burglarized. Juan had the following items stolen: Securities worth $15,000. Juan purchased the securities four years ago for $20,000. New tools which Juan had purchased two weeks earlier for $6,000. Juan uses the tools in making repairs at an apartment house that he owns and manages. An antique worth $12,000. Juan inherited the antique (a family keepsake) when the property was worth $9,000. Juans homeowners policy had a $50,000 deductible clause for thefts. If Juans salary for the year is $60,000, determine the amount of his itemized deductions as a result of the theft. a. $3,500. b. $6,000. c. $23,500. d. $28,900. e. None of the above. ____ 187. Amber operates her business as a sole proprietorship during 2006. Her production activities deduction (PAD) before any effect of the wage expense limitation is $70,000. The W-2 wages that her sole proprietorship pays for the tax year are $110,000. Ambers PAD for 2006 is: a. $0. b. $35,000. c. $55,000. d. $70,000. e. None of the above. ____ 188. When using the automatic mileage method, which, if any, of the following expenses can also be claimed? a. Tolls and parking charges. b. Tire replacement. c. Expensing under 179. d. Oil changes. e. None of the above. ____ 189. Michael is the city sales manager for Chick-Stick, a national fast food franchise. Every working day, Michael drives his car as follows: Home to office Office to Chick-Stick No. 1 Chick-Stick No. 1 to No. 2 Chick-Stick No. 2 to No. 3 Chick-Stick No. 3 to home Miles 20 15 18 14 30 Michaels deductible mileage is: a. 0 miles. b. 30 miles. c. 47 miles. d. 77 miles. e. None of the above. ____ 190. Felicia works as an auditor for a large major CPA firm. During the months of October and November of each year, she is permanently assigned to the team auditing Teal Corporation. As a result, every day she drives from her home to Teal and returns home after work. Mileage is as follows: Home to office Home to Teal Miles 15 40 Office to Teal 22 For these two months, Felicias deductible mileage for each workday is: a. 0. b. 22. c. 40. d. 80. e. None of the above. ____ 191. Allowing for the cutback adjustment (50% reduction for meals and entertainment), which of the following trips, if any, will qualify for the travel expense deduction? a. Dr. Jones, a general dentist, attends a two-day seminar on dental implants. b. Dr. Brown, a surgeon, attends a two-day seminar on financial planning. c. Paul, a romance language high school teacher, spends summer break in France, Portugal, and Spain improving his language skills. d. Myrna went on a two-week vacation in Boston. While there, she visited her employers home office to have lunch with former co-workers. e. None of the above. ____ 192. During the year, Shirley went from Wilmington to Santiago (Chile) on business. She spent three days on business, two days on travel, and five days on vacation. Disregarding the vacation costs, Shirleys unreimbursed expenses are: Air fare Lodging Meals Entertainment $2,000 600 500 300 Shirleys deductible expenses are: a. $3,400. b. $3,000. c. $2,400. d. $2,000. e. None of the above. ____ 193. During the year, Matthew travels from Boston to Moscow on business. His time was spent as follows: 2 days travel (one day each way), 3 days business, and 3 days personal. His expenses for the trip were as follows (meals and lodging reflect only the business portion): Air fare Lodging Meals and entertainment $3,200 600 1,200 Presuming no reimbursement, deductible expenses are: a. $2,400. b. $3,200. c. $3,800. d. $5,000. e. None of the above. ____ 194. Due to a merger, Elizabeth transfers from New York City to Albuquerque. Under a new job description, she is reclassified from employee to independent contractor status. Her moving expenses, which are not reimbursed, are as follows: Transportation Meals Lodging Cost of moving household goods Penalty for breaking New York City apartment lease $1,200 300 400 3,000 5,000 Elizabeths deductible moving is: expense a. $4,600. b. $4,750. c. $4,900. d. $9,600. e. None of the above. ____ 195. Which, if any, of the following is subject to the cutback adjustment? a. An airline pilot for an executive jet rental company who pays his own travel expenses. b. Meals provided at cost to employees by a cafeteria funded by the employer. c. Fourth of July company picnic for employees. d. Business gifts of $25 (or less). e. None of the above. ____ 196. Dan entertains several of his clients on January 1 of the current year. Expenses paid by Dan are as follows: Cab fare Cover charge at supper club Dinner at club Tips to waiter $ 60 150 330 70 Presuming proper substantiation, Dans deduction is: a. $230. b. $260. c. $305. d. $335. e. None of the above. ____ 197. Emma, the regional sales director for a lingerie company, pays $1,000 to obtain a skybox for an evening production of Icearama 2006. The skybox holds 10 seats and Emma invites 8 clients to the event. Nonluxury seats sell for $40 each. The refreshments served to Emma and her clients cost $300. A substantial business discussion was held before the show and Emma has all necessary substantiation. Emmas deduction is: a. $310. b. $330. c. $350. d. $650. e. None of the above. ____ 198. Bill made the following gifts during the year: To Carl, a key client To Rowena (Carls wife and a homemaker) To Jean, Bills secretary, on her birthday ($3 was for gift wrapping) To Irv, Bills boss, at Christmas Presuming proper substantiation, Bills deduction is: $25 20 30 40 a. $52. b. $53. c. $73. d. $78. e. None of the above. ____ 199. Which of the following expenses, if any, qualify as deductible? a. Contribution to a Roth IRA. b. Costs involved in maintaining an office in the home by a self-employed insurance adjuster. Taxpayers wife also uses the office as a meeting place for her bridge club. c. Cost of moving to first job location. Taxpayer just graduated from college. d. Job hunting expenses of a fishing guide to become an insurance salesman. e. None of the above. ____ 200. Which, if any, of the following expenses are not subject to the 2%-of-AGI floor? a. Safety shoes purchased by a self-employed plumber. b. Unreimbursed employee expenses. c. Reimbursed employee expenses. Taxpayer-employee does not render an adequate accounting to the employer. d. Tax return preparation fee paid by a non-employed retiree. e. None of the above. Problem 201. Sungho is married, files a joint return, and expects to be in the 35% marginal tax bracket for the foreseeable future. All of his income is from salary and all of it is used to maintain the household. He has a paid-up life insurance policy with a cash surrender value of $50,000. He paid $24,000 of premiums on the policy. If he retains the policy, the insurance company will pay him $2,500 (5%) interest each year. Sungho thinks he can earn a higher return if he cashes in the policy and invests the proceeds. a. b. What before-tax rate of return would Sungho be required to earn on the proceeds from cashing in the policy to equal the return earned with the insurance company? Assume Sungho estimates he can earn an 7% before-tax rate of return on the proceeds from cashing in the policy. Assume he can earn an 7% return for the remainder of his life and that he will reinvest all earnings at the same 7% before-tax rate of return. If Sungho expects to live 10 more years, which alternative will yield the greater amount to his beneficiaries upon Sunghos death? (Given: The future value of an annuity in 10 years assuming a 4.55% return is 12.32. The future value of an annuity in 10 years assuming a 3.25% return is 11.60). 202. Beverly died during the current year. At the time of her death, her accrued salary and commissions totaled $2,000 and were paid to her husband. Beverlys spouse collected her interest in the employers qualified profit sharing plan amounting to $30,000. The employer also paid $28,000 which represented an amount equal to Beverlys salary for the year prior to her death. The employer had a policy of making the salary payments to help out the family in the time of its greatest need. As beneficiary of his wifes life insurance policy, Beverlys spouse elected to collect the proceeds in installments. In the year of death, he collected $8,000 which included $1,500 interest income. Which of these items are subject to income tax? 203. Barbara was injured in an automobile accident. She has threatened to file a suit against the other party involved in the accident and has proposed the following settlement: Damages for 25% loss of the use of her right arm $150,000 Medical expenses Loss of wages Punitive damages 30,000 10,000 60,000 $250,000 The defendants insurance company is reluctant to pay punitive damages. Also, the company disputes the amount of her loss of wages amount. Instead, the company offers to pay her $210,000 for damages to her arm and $30,000 medical expenses. Assuming Barbara is in the 35% marginal tax bracket, will her after-tax proceeds from accepting the offer be equal to what she considers to be her actual damages (listed above)? 204. George is employed by the Quality Appliance Company. All the full time employees are allowed to purchase appliances at the companys cost plus 5%. The employee also is given, at no cost, a 1-year service contract on all the goods purchased from the company. George purchased a refrigerator for $420. The companys normal selling price for the refrigerator is $800. George also received a service contract, at no charge, that had a value of $120. During the year, George was required to have his refrigerator serviced once. The cost of the call would have been $50 if he had not had the service contract. Is George required to recognize any income from the purchase of the refrigerator and the receipt of the service contract? 205. Juan, who has about $50,000 in diversified investments, is considering purchasing some tax-exempt bonds for $5,000. He will probably use the bonds to finance his childrens college education. Juan can get the same before-tax interest rate on City of Y bonds that pay interest every six months or City of X bonds that pay the interest every five years. Considering only taxes, which bonds should Juan prefer? 206. Margaret is trying to decide whether to place funds in a qualified tuition program. Her son will be attending college in 4 years. She is in the 35% marginal tax bracket and she believes she can earn an 7% before tax return on alternative investments. Thus, $10,000 will accumulate to $11,948 (after-tax) in 4 years. Margaret expects tuition to increase at the rate of 5% each year to $12,155 in 4 years. Her son will be in the 15% marginal tax bracket in all relevant years. Given these assumptions, should Margaret participate in the qualified tuition program? 207. Gull Corporation was insolvent and undergoing financial reorganization. The shareholders, who had made loans of $200,000 to the corporation, agreed to accept additional stock instead of repayment on the debt. The Old Line Insurance Company, which had a $400,000 mortgage on the building, agreed to reduce the principal to $350,000. A trade creditor with a receivable of $150,000 from the company agreed to accept $125,000 in full payment for the debt incurred to purchase goods that were still on hand. Finally, the company transferred some equipment with an adjusted basis of $50,000 in satisfaction of a liability for $60,000. Compute the corporations gross income and other adjustments necessary as a result of the above transactions. 208. Arnold and Beth file a joint return. Use the following data to calculate their deduction for AGI. Mortgage interest on personal residence Property taxes on personal residence Alimony payments Moving expenses Charitable contributions State income taxes Investment interest ($8,000 of expenses limited to net investment income of $6,000) Unreimbursed employee expenses Sales taxes $ 4,000 2,000 12,000 6,000 1,500 5,000 6,000 2,500 2,600 209. Sandra owns an insurance agency. The following selected data is taken from the agency balance sheet and income statement prepared using the accrual method. Revenue Salaries and commissions Rent Insurance Utilities Accounts receivable, 1/1/2006 Accounts receivable, 12/31/2006 Accounts payable, 1/1/2006 Accounts payable, 12/31/2006 Calculate Sandras net profit using the cash method for 2006. $250,000 100,000 10,000 5,000 6,000 40,000 48,000 12,000 15,000 210. Taylor, a cash basis architect, rents the building in which his office is located for $2,000 per month. He commenced his practice on June 1, 2006. In order to guarantee no rent increases during an 18-month period, he signed an 18-month lease and prepaid the $36,000 on June 1, 2006. How much can Taylor deduct as rent expense for 2006? 211. Roses business sells air conditioners which have a one-year warranty. Based on historical data, the warranty costs amount to 16% of sales. During 2006, air conditioner sales are $200,000. Actual warranty expenses paid in 2006 are $30,500. a. b. Determine the amount of the warranty expense deduction for 2006 if Roses business uses the accrual method. How would your answer change if Rose used the cash method for extended warranties and the purchasers paid $20,000 for the warranties which covered the second and third years of ownership? 212. Kitty runs a brothel (illegal under state law) and has the following items of income and expense. What is the amount that she must include in taxable income from her operation? Income Expenses: Rent Utilities Bribes to police Medical expense Legal fees Depreciation Illegal kickbacks $200,000 8,000 2,000 10,000 5,000 20,000 14,000 15,000 213. Agnes operates a Christmas Shop in Atlantic City, NJ. She makes a weekend trip to Vero Beach, Florida for the purposes of determining the feasibility of opening another shop there. Her travel expenses are $2,000 (includes $500 for meals). In addition, she pays $5,000 to a market research firm in Vero Beach to prepare a feasibility study. a. b. Determine the amount of the expenses that Agnes can deduct if Agnes opens a new shop in Vero Beach. Determine the amount of the expenses that Agnes can deduct if she decides not to open a new shop in Vero Beach. 214. During the year, Rita rented her vacation home for twelve days for $2,400. She used it personally for three months and incurred the following expenses on the home: Property taxes Mortgage interest Utilities and maintenance Depreciation Insurance Calculate her rental gain or loss and itemized deductions. 215. During the year, Larry rented his vacation home for 200 days and lived in it for 20 days. During the remaining days of the year, the vacation home was available for rental use. Income and expenses associated with the vacation home were as follows: Rent income Expenses: Property taxes Mortgage interest Utilities Maintenance and repair Depreciation Insurance a. b. $25,000 3,500 11,000 1,800 2,000 6,000 1,500 $ 2,200 10,800 1,900 5,000 900 Is the vacation home subject to the limitation on the deduction of a personal/rental use vacation home? Calculate the effect of the vacation home rental on Larrys AGI. 216. Bridgetts son, Amos, is $4,500 in arrears on his residential mortgage payments. Of the $4,500, $3,800 represents interest and $700 represents principal. a. b. c. If Bridgett pays the $4,500 to the lender, how much can she deduct? How much can Amos deduct? If Bridgett gives or lends the $4,500 to Amos who pays the lender, how much can he deduct? How much can Bridgett deduct? Advise Bridgett and Amos on how the payment should be made. 217. Mattie and Elmer are separated and are in the process of obtaining a divorce. They incur legal fees for their respective attorneys with the expenses being itemized as follows: For General costs of the divorce Determination of dependency exemptions Property settlement tax consequences Mattie $3,500 1,500 400 $5,400 Elmer $3,000 -01,500 $4,500 Although there is no requirement that he do so, Elmer pays Matties lawyer as a gesture of the positive feelings he still has for her. a. b. Determine the deductions for Mattie and for Elmer. Classify the deductions as for AGI and from AGI. 218. Maria, who is single, had the following items for 2006: Salary Loss on sale of 1244 small business stock acquired 3 years ago Stock acquired 2 years ago became worthless during the year Long-term capital gain Nonbusiness bad debt Casualty gain on property held 4 years Determine Marias adjusted gross income for 2006. 219. Julie, who is single, has the following items for the current year: Salary $140,000. A hurricane completely destroyed Julies duplex during the current year. Julie lived in one-half of the duplex and rented out the other half. Julie paid $400,000 for the duplex and has taken $80,000 of cost recovery on the rental portion of the duplex. The duplex was worth $420,000 at the time of the destruction. Julies insurance policy paid her 90% of the fair market value of the duplex. Household items destroyed in the hurricane had a basis of $15,000 and a fair market value of $8,500. There was no insurance recovery on the household items. Julie purchased a painting three years ago for $4,000. At the time of the hurricane, the painting was worth $10,000. Julie purchased the painting as an investment with the intent that she would sell it when its value exceeded $12,000. There was no insurance recovery on the painting. Home mortgage interest $10,000. $80,000 (60,000) (5,000) 17,000 (8,000) 4,000 Determine the amount of Julies taxable income for the current year. 220. While Ned was on vacation during the current year, someone broke into his home and stole the following items: Computer (used 100% for business) Securities Painting Television Basis $ 7,000 10,000 8,000 4,000 FMV $ 5,400 11,500 20,000 2,700 Neds adjusted gross income, before considering any of the above items, is $55,000. Determine the total amount of Neds itemized deductions resulting from the theft. 221. In 2005, Robin Corporation incurred the following expenditures in connection with the development of a new product: Salaries Supplies Market survey Depreciation $50,000 20,000 10,000 15,000 In 2006, Robin incurred the following additional expenditures in connection with the development of the product: Salaries Supplies Depreciation Advertising $75,000 15,000 17,000 8,000 In October 2006, Robin began receiving benefits from the project. If Robin elects to expense research and experimental expenditures, determine the amount and year of the deduction. 222. Madison holds two jobs and attends graduate school on weekends. Before going to the second job, she returns home for dinner. Relevant mileage is as follows? Home to first job First job to second job Home to second job Home to university How much of the mileage qualifies for deduction purposes? 223. Alexis lives and works in Denver. She is the regional sales manager for a national fast-food chain. Due to unusual developments, she is compelled to work six straight weeks in the Helena area. Instead of spending the weekend there, she flies home every Friday night and returns early Monday morning. The cost of coming home for the weekend approximates $610. Had she stayed in Helena, deductible meals and lodging would have been $580. How much, if any, may Alexis deduct as to each weekend? 224. Emily went to Berlin on business. While there, she spent 80% of the time on business and 20% on vacation. How much of the air fare of $4,000 can Emily deduct based on the following assumptions: a. b. Emily was gone five days (i.e., four business and one personal). Emily was gone five weeks (i.e., four business and one personal). 18 miles 10 miles 14 miles 12 miles 225. After graduating from college, Michael obtained employment in the San Francisco area. In moving from his parents home in New Orleans to San Francisco, Michael incurred the following expenses: Transportation Meals Lodging Cost of moving household goods a. b. How much may Michael deduct as moving expense? Would any deduction be allowed if Michael claimed the standard deduction for the year of the move? Explain. $420 210 180 900 226. Ethan is employed as an assistant manager in the menswear division of a national chain of department stores. He is a recent college graduate with a degree in marketing. During 2006, he enrolls in the evening MBA program of a local university and incurs the following expenses: tuition, $4,200; books and computer supplies, $600; transportation expense to and from the university, $250; and meals while on campus, $300. Ethan is single and his annual AGI is less than $65,000. As to these expenses, what are Ethans: a. b. Deductions for AGI? Deductions from AGI? 227. Amanda takes three key clients to a nightclub and incurs the following costs: $220 limousine rental, $360 cover charge, $720 drinks and dinner, and $150 tips. At the conclusion of the function, Amanda makes a business presentation and gives each client a pen costing $40. The cost includes $4 for engraving of the clients name. Assuming adequate substantiation and a business justification, what is Amandas deduction? 228. Brian makes gifts as follows: Recipient Mr. Brown (a client) Mrs. Brown (Mr. Browns wife) Ms. Smith (Brians receptionist) Mr. Jones (Brians boss) * Includes $2 for engraving Presuming adequate substantiation and no reimbursement, how much may Brian deduct? 229. Rocky has a full-time job as an electrical engineer for the city utility. In his spare time, Rocky repairs TV sets in the basement of his personal residence. Most of his business comes from friends and referrals from former customers, although occasionally he runs an ad in the local suburbia newspaper. Typically, the sets are dropped off at Rockys house and later picked up by the owner when notified that the repairs have been made. The floor space of Rockys residence is 2,500 square feet, and he estimates that 20% of this is devoted exclusively to the repair business. Gross income from the business is $12,000, while expenses (other than home office) are $5,000. Expenses relating to the residence are as follows: Real property taxes Interest on home mortgage Operating expenses of residence Depreciation (based on 20% business use) What is Rockys net income from the repair business? 230. For the current year, Horton was employed as a deputy sheriff of a county. He had AGI of $50,000 and the following unreimbursed employee expenses: Attendance at a law enforcement conference ($900 for travel and $200 for meals) Uniforms (includes $300 for laundry and dry cleaning) Professional dues and journals Contribution to sheriffs reelection campaign (highly recommended by sheriff) $1,100 1,000 400 400 $4,500 8,000 3,000 500 Cost of Gift $27* 15 30 40 How much of these expenses are allowed as deductions from AGI? Matching Match the statements that relate to each other. (Note: Choice L may be used more than once.) a. Must involve the same trade or business b. Must be for the convenience of the employer c. Meals while in route d. Lodging while in route e. Out-of-town job assignment is temporary f. Can include actual cost of gasoline g. Payment for services rendered based on tasks performed h. Excludes use of MACRS depreciation i. Taxpayer is provided with tools and a place to work j. Transportation must be allocated if taxpayer spends two weeks on business and one week sightseeing k. Paralegal obtains a law degree l. Correct match not provided ____ ____ ____ ____ ____ ____ ____ ____ ____ ____ 231. 232. 233. 234. 235. 236. 237. 238. 239. 240. Characteristic of a taxpayer who has the status of an employee Characteristic of a taxpayer who is self-employed Operating cost method of determining auto expense Automatic mileage method Deductible moving expense Nondeductible moving expense Mixed (both business and pleasure) foreign travel Education expense that is not deductible to maintain or improve existing skills Tax home has not changed Deduction by an employee of unreimbursed office-in-the-home expenses Match the statements that relate to each other. (Note: Choice L may be used more than once.) a. Cover charge paid to entertain client at a night club b. Not deductible unless taxpayer takes the new job c. Company picnic sponsored by employer d. Use of Federal per diem allowance to substantiate meals while in travel status e. Does not have to be job related f. Can include cost of car insurance and automobile club dues g. Contribution to plan is not deductible h. Contribution to plan is deductible i. Expatriate (U.S. person who is employed overseas) returns home to retire j. Taxpayer moves to a new residence 55 miles closer to his present job k. Annual Rotary Club membership fee l. Correct match not provided ____ ____ ____ ____ ____ 241. 242. 243. 244. 245. Operating cost method of determining car expense Distance test (for moving expenses) not satisfied Time test (for moving expenses) waived Roth IRAs Keogh (H.R. 10) plans ____ ____ ____ ____ ____ 246. 247. 248. 249. 250. Cutback adjustment applies Cutback adjustment does not apply Deemed substantiation Job hunting expenses Club dues not deductible 305EXAMIIREVIEWQUESTIONS Answer Section TRUE/FALSE 1. Register to View AnswerSection 102(c) provides that gifts made by an employer to an employee do not qualify for exclusion. PTS: 1 REF: p. 5-5 2. Register to View AnswerThe $5,000 accrued salary Ed had earned must be included in his wifes gross income. The life insurance proceeds of $50,000 are excluded. PTS: 1 REF: p. 5-6 | p. 5-7 3. Register to View AnswerThe room and board part does not qualify for exclusion treatment under 117. The amount received for tuition and books is excludible. PTS: 1 REF: p. 5-9 | p. 5-10 4. Register to View AnswerTonya can exclude the $3,000 from her 2006 gross income. Since the $3,000 was used to pay tuition for the Spring semester of 2007, no subsequent accounting is required in 2007. PTS: 1 REF: p. 5-9 | p. 5-10 5. Register to View AnswerSuch payments generally are for services rendered and are included in gross income. PTS: 1 REF: p. 5-9 6. Register to View AnswerOnly the punitive damages of $5,000 must be included in Joyces gross income. PTS: 1 REF: p. 5-11 | p. 5-12 7. Register to View AnswerWorkers compensation is excluded from a recipients gross income. PTS: 1 REF: p. 5-12 8. Register to View AnswerWorkers compensation benefits are excludible from gross income. PTS: 1 REF: p. 5-12 9. Register to View AnswerAll of the medical insurance premiums are excluded from Sarahs gross income. PTS: 1 REF: p. 5-13 10. Register to View AnswerThe insurance premiums paid by the employer may be excluded from gross income, but the benefits received of $8,000 must be included in Megs gross income. PTS: 1 REF: p. 5-13 | p. 5-14 11. Register to View AnswerFor an HSA, the employer contributions, earnings on the account, and withdrawals to pay medical expenses are excluded from Albertas gross income. PTS: 1 REF: p. 5-14 | p. 5-15 12. Register to View AnswerSuch amounts qualify for the meals and lodging exclusion under 119. PTS: 1 REF: p. 5-15 to 5-17 13. Register to View AnswerThe flexible spending plan must provide that the salary reduction cannot be recovered by the employee. For this reason, such plans are often referred to as use or lose plans. PTS: 1 REF: p. 5-19 14. Register to View AnswerThe value can be excluded from the employees gross income as a de minimis fringe benefit. PTS: 1 REF: p. 5-22 15. Register to View AnswerThe no-additional-cost exclusion applies only to services. PTS: 1 REF: p. 5-20 16. Register to View AnswerThe parking and the rail pass are considered qualified transportation fringe benefits and can be excluded from Kays gross income. If the parking were not excludible as a qualified transportation fringe, the amount would be includible in Kays gross income because it is a nondeductible commuting expense. The cost of the rail pass would not be deductible for the same reason. Both of these amounts are below the statutory monthly ceiling. PTS: 1 REF: p. 5-23 17. Register to View AnswerThe earnings of a qualified state tuition program are excluded from gross income provided that the contributions and earnings are used for qualified higher education expenses. PTS: 1 REF: p. 5-30 | p. 5-31 18. Register to View AnswerThe earnings from a qualified tuition program are excluded from gross income of the parents and the student when the funds are withdrawn to pay the educational expenses. So exclusion treatment is provided. PTS: 1 REF: p. 5-30 | p. 5-31 19. Register to View AnswerPTS: 1 REF: p. 5-32 20. Register to View AnswerThe reduction in the debt is being made by the person who sold the property to Amber. Therefore, Amber can reduce its basis in the building by $125,000, rather than recognizing income of $125,000. PTS: 1 REF: p. 5-32 21. Register to View AnswerSuch expenses are deductible for AGI. PTS: 1 REF: p. 6-3 22. Register to View AnswerUnreimbursed employee expenses are classified as deductions from AGI. PTS: 1 REF: Example 1 23. Register to View AnswerExpenses associated with the production of rental or royalty income are classified as deductions for AGI. In addition, expenses paid in connection with the determination, collection, and refund of taxes related to the income of sole proprietorships and farming operations are deductions for AGI. PTS: 1 REF: p. 6-4 24. Register to View AnswerMoving expenses are deductible for AGI. PTS: 1 REF: p. 6-4 25. Register to View AnswerOnly insurance premiums paid in connection with losses of business and investment property are deductible for AGI. Insurance premiums on personal use property are not deductible. PTS: 1 REF: p. 6-5 26. Register to View AnswerWhile Ralphs salary income decreases by $80,000, his dividend income increases by $80,000. Thus, his gross income does not change. PTS: 1 REF: Example 6 27. Register to View AnswerPTS: 1 REF: Example 6 28. Register to View AnswerOnly unreasonable salaries are not deductible. Example 6 and related discussion PTS: 1 REF: Example 6 29. Register to View AnswerA loss on the sale of a personal use asset cannot be deducted. PTS: 1 REF: p. 6-7 30. Register to View AnswerPTS: 1 REF: Figure 6-1 31. Register to View AnswerThe accrual method must be used in these cases. PTS: 1 REF: p. 6-10 32. Register to View AnswerThe accrual method of accounting must be used to account for the sale of inventory and the related cost of goods sold. PTS: 1 REF: p. 6-10 33. Register to View AnswerIf the one-year rule is not satisfied, the prepayment is prorated and deducted over the benefit period. PTS: 1 34. Register to View Answer35. Register to View AnswerREF: p. 6-9 | p. 6-10 PTS: 1 REF: p. 6-10 A reserve for estimated expenses (e.g., bad debt) is not allowed for tax purposes because the economic performance test cannot be satisfied. PTS: 1 REF: Example 12 36. Register to View AnswerFines paid for violation of laws are not deductible. PTS: 1 REF: Example 13 37. Register to View AnswerThe payment to the U.S. official is not deductible. However, unless the payment is illegal under the Foreign Corrupt Practices Act of 1977, the payment to the Saudi official can be deducted. PTS: 1 REF: p. 6-11 38. Register to View AnswerThis deduction is expressly allowed under 212. PTS: 1 REF: p. 6-12 39. Register to View AnswerTwo-thirds of such payments are not deductible. PTS: 1 REF: p. 6-12 40. Register to View AnswerThis is a deduction for AGI. PTS: 1 REF: p. 6-12 41. Register to View AnswerThe usual expenses of operating an illegal business are deductible. Section 162, however, disallows a deduction for fines, bribes to public officials, illegal kickbacks, and other illegal payments. PTS: 1 REF: Example 16 42. Register to View AnswerDeductions are not permitted for political contributions. PTS: 1 REF: p. 6-13 43. Register to View AnswerPTS: 1 REF: Example 18 44. Register to View AnswerThe satisfaction of the presumption rule merely shifts the burden of proof to the IRS. The possibility still exists that the IRS can prove the activity is a hobby. PTS: 1 REF: Example 21 | Example 42 45. Register to View AnswerPTS: 1 REF: p. 6-16 46. Register to View AnswerThe 2%-of-AGI limitation can wipe out any deductible amount. If the taxpayer does not itemize, no deduction will be permitted. PTS: 1 REF: Example 22 47. Register to View AnswerThe excess in this case qualifies as an itemized deduction. PTS: 1 REF: p. 6-17 48. Register to View AnswerThe gross income ceiling on deducting expenses for a vacation home does not apply to expenses that are otherwise deductible (e.g., property taxes and mortgage interest). Thus, the entire $12,000 can be deducted. PTS: 1 REF: p. 6-20 49. Register to View AnswerThe home can have personal use of 18 days (180 days 10%) in this case and be classified as primarily rental use. Therefore, in this case, the use of the home is classified as primarily rental use. PTS: 1 REF: Concept Summary 6-2 50. Register to View AnswerThe adjusted basis for depreciation is $175,000, the lower of Beulahs adjusted basis of $190,000 or the fair market value of $175,000 on the date of the conversion. However, additional data is necessary to determine whether the vacation home gross income ceiling on deductions rule applies. If the qualified rental period exception applies, the gross income limit does not apply. If the qualified rental period exception does not apply, then the gross income limit does apply. PTS: 1 REF: p. 6-21 | p. 6-22 51. Register to View AnswerA taxpayer cannot deduct another taxpayers obligation. Thus, Ralph cannot deduct his daughters property taxes. His daughter is not eligible for a deduction since she did not pay them. PTS: 1 REF: Example 32 52. Register to View AnswerAlthough Marges recognized loss is $0, Jasons adjusted basis for the land is his cost of $20,000. PTS: 1 REF: p. 6-25 53. Register to View AnswerPTS: 1 REF: p. 7-3 | p. 7-4 54. Register to View AnswerTaxpayers can use only the specific charge-off method in accounting for bad debts. The reserve method is not permitted. PTS: 1 REF: p. 7-3 55. Register to View AnswerThe bad debt deduction is limited to the amount included in income from the sale. PTS: 1 REF: p. 7-3 56. Register to View AnswerPTS: 1 REF: p. 7-4 57. Register to View AnswerThe use of the funds by the debtor is of no consequence in making the determination. The determination is made at the creditor level. PTS: 1 REF: p. 7-4 58. Register to View AnswerA business bad debt is classified as an ordinary deduction. PTS: 1 REF: p. 7-4 59. Register to View AnswerAn account receivable is not a security and hence, will produce an ordinary loss. PTS: 1 REF: p. 7-3 | p. 7-5 60. Register to View AnswerOnly individuals are eligible to deduct small business stock losses ($50,000 or $100,000) as an ordinary loss. PTS: 1 REF: p. 7-6 | p. 7-7 61. Register to View AnswerA business loss is deductible. PTS: 1 REF: p. 7-7 62. Register to View AnswerPTS: 1 REF: p. 7-7 63. Register to View AnswerPTS: 1 REF: p. 7-7 64. Register to View AnswerGain is recognized if the amount of the insurance recovery is greater than the assets adjusted basis. PTS: 1 REF: p. 7-9 | p. 7-11 65. Register to View AnswerThe reimbursement need only be included to the extent the previous deduction resulted in a tax benefit. PTS: 1 REF: p. 7-9 66. Register to View AnswerThe amount of the loss is equal to the adjusted basis of the property. PTS: 1 REF: p. 7-10 67. Register to View AnswerThe amount of the loss for business use property or property held for the production of income is the adjusted basis of the property. For personal use property, the amount of the loss is the lesser of the adjusted basis of the property, or the decline in fair market value resulting from the casualty. PTS: 1 REF: p. 7-10 68. Register to View AnswerThe losses are subject to the 10% of adjusted gross income floor only to the extent they exceed the gains. PTS: 1 REF: p. 7-14 69. Register to View AnswerPTS: 1 REF: p. 7-11 70. Register to View AnswerA theft loss is a separately stated item on Schedule A of Form 1040. It is not subject to the 2%-of-AGI floor. PTS: 1 REF: p. 7-13 71. Register to View AnswerOnce an election has been made to expense research and experimental expenditures, a taxpayer must continue to expense these items in subsequent years. PTS: 1 REF: p. 7-15 | p. 7-16 72. Register to View AnswerPTS: 1 REF: p. 7-17 73. Register to View AnswerWhat is described is a criterion for independent contractor classification rather than employee classification. PTS: 1 REF: p. 9-3 74. Register to View AnswerA taxpayer with two jobs may be both an employee (Form 2106) and self-employed (Schedule C). PTS: 1 REF: p. 9-3 75. Register to View AnswerThe deduction is based on the mileage between the first and the second job. PTS: 1 REF: Example 5 76. Register to View AnswerDepreciation is built into the mileage rate allowed under the automatic mileage method. PTS: 1 REF: p. 9-6 | p. 9-7 | Example 9 77. Register to View AnswerIf taxpayer lives and works in a metropolitan area and a significant commute is involved, car insurance premiums could be quite costly. PTS: 1 REF: p. 9-7 | p. 9-29 78. Register to View AnswerA change is permitted if appropriate adjustment for depreciation deemed claimed is made. PTS: 1 79. Register to View AnswerSection 162(a) REF: Example 9 PTS: 1 REF: p. 9-8 80. Register to View AnswerPTS: 1 REF: p. 9-8 81. Register to View AnswerHorton comes under the seven-days-or-less exception and all of his airfare is deductible. PTS: 1 REF: p. 9-10 82. Register to View AnswerAshley meets the less-than-25%-personal-time exception. PTS: 1 REF: Example 23 83. Register to View AnswerThere is no prohibition against claiming moving expenses if the first job is involved. PTS: 1 REF: p. 9-12 84. Register to View AnswerMargaret does not have qualified moving expenses since she did not change jobs. It is true, however, that qualified moving expenses are deductions for AGI. PTS: 1 REF: p. 9-11 85. Register to View AnswerSince the failure was not the fault of Lucius, the time test is suspended. PTS: 1 REF: p. 9-11 86. Register to View AnswerAnother option is for Rod to increase his gross income for 2006 by the amount of the deduction claimed for 2005. PTS: 1 REF: p. 9-12 87. Register to View AnswerFor moving expenses to be deductible, a taxpayer need not remain in the same trade or business. PTS: 1 REF: p. 9-12 88. Register to View AnswerNeither change matters for purposes of the moving expense deduction. PTS: 1 REF: p. 9-11 89. Register to View AnswerThere is no prohibition as to this result in deducting education expenses. PTS: 1 REF: p. 9-14 90. Register to View AnswerThe $4,000 amount applies to tax years 2004-2006. PTS: 1 REF: Table 9-1 91. Register to View AnswerThe cost of the trips to Bermuda are additional compensation to the employees involved. Consequently, they are not subject to the cutback adjustment and are fully deductible by Penguin Corporation. They are also taxed as income to the employees. PTS: 1 REF: Example 31 92. Register to View AnswerPTS: 1 93. Register to View AnswerDues to country clubs are not deductible. REF: Example 33 PTS: 1 REF: Example 36 94. Register to View AnswerGifts to superiors do not qualify for deduction. PTS: 1 REF: p. 9-20 95. Register to View AnswerJust the opposite is the case. Distributions are fully taxed. The advantage is the deduction the participant receives when making a contribution to the plan. PTS: 1 REF: p. 9-23 | p. 9-24 96. Register to View AnswerThe credit card receipts establish the date, place, and amount of the expenditure. Because neither the business relationship nor the business purpose is established, the deduction is disallowed. PTS: 1 REF: p. 9-30 97. Register to View AnswerFor self-employed taxpayers, travel expenses are deductions for adjusted gross income. The 2%-of-AGI floor applies only to certain deductions from AGI, such as unreimbursed employee expenses. PTS: 1 REF: p. 9-27 | p. 9-28 98. Register to View AnswerThe parents can claim the deduction presuming they file a joint return and are within the AGI cut-off limit. PTS: 1 REF: p. 9-16 99. Register to View AnswerPTS: 1 REF: p. 9-31 | Example 29 100. Register to View AnswerThis possibility, discussed on page 9-31 of the text, does not eliminate the 2% floor but can minimize its effect. PTS: 1 MULTIPLE CHOICE 101. Register to View AnswerThe $1.75 of taxable income is worth $1.05 [(1 .40)($1.75)] after taxes. PTS: 1 REF: p. 5-2 102. Register to View AnswerThe interest element of $50,000 ($150,000 $100,000) is included in Carins gross income. PTS: 1 REF: p. 5-6 to 5-9 103. Register to View AnswerAll of the proceeds qualify for the life insurance exclusion because the payments were received as a result of the death of the insured. PTS: 1 REF: p. 5-6 | p. 5-7 104. Register to View AnswerSwan has a basis in the receivable of $1,000, since it is an accrual method taxpayer. PTS: 1 REF: p. 5-7 105. Register to View AnswerThe redemption of the policy by Ted qualifies as an accelerated death benefit. Thus, the realized gain is excluded from his gross income. PTS: 1 REF: p. 5-7 | p. 5-8 106. Register to View AnswerAlbert is chronically ill and, therefore, can qualify for the accelerated death benefit exclusion for his life insurance policy. PTS: 1 REF: p. 5-7 | p. 5-8 107. Register to View Answer$2,200 ($1,700 interest + $500 prize). PTS: 1 REF: Exhibit 5-1 | p. 5-9 108. Register to View AnswerThe tuition waiver of $5,500 and the monthly stipend of $500 (for 9 months = $4,500) for research are taxable compensation. The research grant of $2,000 is to assist him in his education and is not in exchange for services; therefore, the grant is a nontaxable scholarship. PTS: 1 109. Register to View AnswerREF: p. 5-9 REF: p. 9-31 The tuition payments of $30,000 are compensation to Ollie since the awards are only to children of key employees. PTS: 1 REF: p. 5-10 110. Register to View AnswerThe $5,000 of punitive damages and the previously deducted medical expenses of $8,000 are included in Rashads gross income. PTS: 1 REF: p. 5-11 | p. 5-12 | p. 5-31 111. Register to View AnswerSally must include in gross income the $150,000 of punitive damages received and the $6,000 recovery of medical expenses that were deducted in 2005. PTS: 1 REF: p. 5-11 | p. 5-12 | p. 5-31 112. Register to View AnswerThe punitive damages of $50,000 must be included in his gross income. In addition, since the compensatory damages of $100,000 are not for physical personal injury or physical sickness, they must be included in his gross income. PTS: 1 REF: p. 5-11 | p. 5-12 113. Register to View AnswerPunitive damages are never excluded from gross income. PTS: 1 REF: p. 5-11 | p. 5-12 114. Register to View AnswerWith the health savings account (HSA), the employee is not taxed when the money is contributed, as income is earned in the account, nor when amounts are withdrawn to pay medical expenses. PTS: 1 REF: p. 5-14 | p. 5-15 115. Register to View AnswerEach employees income, less taxes and insurance, would increase by the cost of insurance times the employees marginal tax rate. PTS: 1 REF: p. 5-13 to 5-15 116. Register to View AnswerThe $6,000 salary advance was taxed in 2005 when the cash basis taxpayer received it. The disability income protection and long-term care insurance premiums are excluded from gross income. PTS: 1 REF: Exhibit 5-1 | p. 5-13 | p. 5-14 117. Register to View AnswerFor more than 50% of the employees, the meals are furnished for the convenience of the employer; therefore, all of the meals are excludible. PTS: 1 REF: p. 5-15 to 5-17 118. Register to View AnswerPTS: 1 REF: p. 5-15 to 5-17 119. Register to View AnswerThe meals do not qualify for the meals and lodging exclusion because the meals are not furnished by the employer. PTS: 1 REF: p. 5-15 to 5-17 120. Register to View AnswerThe meals and lodging are provided for the convenience of the employer. PTS: 1 REF: p. 5-15 to 5-17 121. Register to View AnswerAnswers a. and b are incorrect because to qualify for exclusion treatment, the employee must either use the funds for the designated purpose or forfeit any unused portion of the salary reduction. Answer d. is incorrect because Carols gross income is reduced by the full $1,200 salary reduction. PTS: 1 REF: p. 5-19 122. Register to View AnswerThe free bowling qualifies as a no-additional-cost service. PTS: 1 REF: p. 5-20 | p. 5-21 123. Register to View AnswerThe House Ways and Means Committee specifically cited occasional supper money because of overtime work as a de minimis fringe. PTS: 1 REF: p. 5-22 | p. 5-23 124. Register to View AnswerAnswers a. and c. are incorrect because the no-additional-cost services must be provided to all employees to qualify for the exclusion. Answer b. is incorrect because the receipt of noncash items (e.g., services, other property) can produce gross income. PTS: 1 REF: p. 5-20 to 5-25 125. Register to View AnswerDe minimis fringe benefits can be excluded, even if discriminatory, because the potential amount of income at issue is small relative to the cost of accounting for those benefits. PTS: 1 REF: p. 5-23 | Concept Summary 5-2 126. Register to View AnswerLouise was in the foreign country for the requisite number of days, at least 330 days out of 365 days. Therefore, the foreign earned income exclusion applies for all of the time she worked in the foreign country. The amount earned is less than the statutory annual ceiling of $80,000. PTS: 1 REF: p. 5-26 | p. 5-27 127. Register to View AnswerInterest on Montgomery County school bonds is excluded under 103. Gross income is $1,900 (i.e., $500 + $900 + $500). PTS: 1 REF: p. 5-27 | p. 5-28 128. Register to View AnswerAll of the amounts ($3,520) represent interest payments and are included in Harry and Wandas gross income. PTS: 1 REF: p. 5-27 | p. 5-28 | Exhibit 5-1 129. Register to View AnswerThe interest on the Radford school bonds of $600 is tax-exempt, but the interest on the United States Government bonds of $300 is taxable. Since the life of the certificate of deposit is only 1 year, the $1,200 is included in gross income in 2006. Thus, the gross income is $4,100 ($2,400 + $1,200 + $200 + $300). PTS: 1 REF: p. 5-27 to 5-29 | Chapter 4 130. Register to View AnswerNeither the stock dividend nor the stock split is taxable. PTS: 1 REF: p. 5-29 131. Register to View AnswerUnder 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: 1 REF: p. 5-30 | p. 5-31 132. Register to View AnswerThe $500 rebate is a recovery of a prior deduction, and is included in gross income, assuming he received a tax benefit for the deduction. PTS: 1 REF: p. 5-31 133. Register to View AnswerEven if the employer had intended that a gift be made, 102(c) prohibits exclusion treatment. Hazel realized a $5,000 increase in her net worth as a result of the theft and the subsequent cancellation of the debt. PTS: 1 REF: p. 5-32 | p. 5-33 134. Register to View AnswerThe $10,000 reduction in the mortgage is an adjustment to the cost of the building. The $15,000 reduction by the bank is includible in gross income. PTS: 1 REF: p. 5-32 | p. 5-33 135. Register to View AnswerPTS: 1 REF: p. 5-32 | p. 5-33 136. Register to View AnswerII is false. Business persons do not ordinarily forgive indebtedness out of unattached generosity. PTS: 1 REF: p. 5-32 | p. 5-33 137. Register to View AnswerPTS: 1 REF: p. 5-31 to 5-33 138. Register to View AnswerLarrys AGI is calculated as follows: Salary Alimony paid AGI Larrys deduction for medical expenses is $675 [$4,500 7.5%($51,000)]. PTS: 1 REF: p. 6-3 | p. 6-4 | Example 2 139. Register to View AnswerSauls AGI is calculated as follows: Gross income Deductions for AGI: Alimony IRA Expenses on rental property AGI $50,000 $12,000 3,000 5,000 $60,000 (9,000) $51,000 (20,000) $30,000 PTS: 1 REF: p. 6-3 | p. 6-4 140. Register to View AnswerJanices AGI is calculated as follows: Gross income Deductions for AGI: Penalty on early withdrawal of savings AGI PTS: 1 REF: p. 6-4 141. Register to View AnswerPTS: 1 142. Register to View Answera., b., and d. are deductions for AGI. 143. 144. 145. 146. 147. $38,000 (200) $37,800 REF: p. 6-4 PTS: 1 REF: p. 6-4 | Concept Summary 6-3 Register to View AnswerPTS: 1 REF: p. 6-4 | p. 6-5 Register to View AnswerPTS: 1 REF: p. 6-4 | p. 6-5 Register to View AnswerPTS: 1 REF: p. 6-4 | p. 6-5 Register to View AnswerPTS: 1 REF: p. 6-5 Register to View AnswerThe $50,000 of salary is reclassified as a dividend. Thus, Violets taxable income increases by $50,000 because dividends are not deductible. Agness gross income remains the same. Her salary income decreases by $50,000, but her dividend income increases by $50,000. PTS: 1 REF: p. 6-6 | p. 6-7 | Example 6 148. Register to View AnswerPTS: 1 REF: p. 6-9 | p. 6-10 149. Register to View AnswerItem a. is incorrect because charging the expense on a bank credit card is treated as a constructive payment. Thus, as a cash method taxpayer, she can deduct the expense in 2006. If Benita uses the accrual method, she deducts the expense in 2006. In any event, she does not merely choose the year in which to deduct the expense (item c.). PTS: 1 REF: p. 6-9 | p. 6-10 150. Register to View AnswerThe net profit of Als business is calculated as follows: Sales Less: Expenses Salaries Other expenses Purchases net of ending inventory ($70,000 $20,000) Net profit $200,000 $90,000 10,000 50,000 (150,000) $ 50,000 Since the business has inventory, the accrual method must be used to calculate cost of goods sold. PTS: 1 151. Register to View AnswerREF: p. 6-9 | p. 6-10 Only 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: 1 REF: p. 6-11 152. Register to View AnswerNone of these expenses are deductible. The $50 parking ticket, the $400 DUI ticket, and the $500 attorney fee are all personal expenses. The $100 parking ticket, although related to his laundry business, is not deductible because it is a violation of public policy. PTS: 1 REF: p. 6-11 | p. 6-12 153. Register to View AnswerTerry and Jim should report net profit from their businesses as follows: Gross revenues Less: Cost of goods sold Gross income Less: Expenses Employee salaries Rent and utilities Bribes to police Net profit Terry $500,000 (-0-) $500,000 (200,000) (50,000) -0$250,000 Jim $500,000 (125,000) $375,000 -0-0-0$375,000 For Terry, the bribes to the police of $25,000 cannot be deducted. None of Jims expenses can be deducted. However, the cost of goods sold is viewed as a negative item in calculating gross income (i.e., gross income = gross profit) rather than as a deduction. PTS: 1 REF: p. 6-12 | p. 6-13 154. Register to View AnswerCost 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: 1 REF: p. 6-13 155. Register to View AnswerPTS: 1 REF: p. 6-14 156. Register to View AnswerSince Iris owns and operates TV rental outlets, all of the investigation expenses can be deducted. PTS: 1 REF: p. 6-14 | Example 18 157. Register to View AnswerPTS: 1 REF: Concept Summary 6-1 158. Register to View AnswerAll of these items are relevant factors in determining whether an activity is profit-seeking or a hobby. PTS: 1 REF: p. 6-16 159. Register to View AnswerPTS: 1 REF: Example 22 160. Register to View AnswerAll of the expenses are deductible either as deductions for ($2,000 + $1,500) or as deductions from ($600 + $500) except for the expenses associated with the tax-exempt bonds ($400). PTS: 1 161. Register to View AnswerREF: Concept Summary 6-3 Any deductible expenses related to the rental use are deductions for AGI. PTS: 1 REF: Example 28 162. Register to View AnswerPTS: 1 REF: Example 25 163. Register to View AnswerOnly those separately stated fees that relate solely to tax advice ($150) are deductible. PTS: 1 REF: p. 6-12 | p. 6-24 164. Register to View AnswerAll of these expenses, except for the covenant, can be deducted in the current tax year. The amortization period for the covenant is 15 years. PTS: 1 REF: p. 6-24 | p. 6-25 165. Register to View AnswerLances realized loss of $2,000 ($24,000 $26,000) is disallowed. James may reduce his realized gain of $3,000 ($27,000 $24,000) by Lances disallowed loss of $2,000. So James recognized gain is $1,000. PTS: 1 REF: Example 35 166. Register to View AnswerTaxpayers cousin and uncle are not related parties under 267. PTS: 1 REF: p. 6-26 167. Register to View AnswerThe loss is limited to the amount Ace included in gross income ($10,000) less any recovery ($3,000). This results in a $7,000 loss. PTS: 1 REF: p. 7-3 168. Register to View AnswerThis debt was incurred in connection with a trade or business. Therefore, Crow can claim a bad debt deduction in the following years: 2005zero. 2006$8,000 [$20,000 (loan) $12,000 (expected settlement)]. 2007$7,000 [$12,000 (balance) $5,000 (proceeds)]. PTS: 1 REF: p. 7-3 to 7-5 169. Register to View AnswerThe amount of the bad debt in 2005 is $15,000 ($20,000 $5,000). Of the $15,000, $12,500 can be used to offset $12,500 of long-term capital gain and $2,500 can be used to offset ordinary income in 2005. PTS: 1 REF: p. 7-4 | p. 7-5 170. Register to View AnswerThe amount collected is $5,000 ($85,000 $80,000) in excess of Lucys basis in the receivable. PTS: 1 REF: p. 7-3 171. Register to View AnswerGreen should report $2,000 ($6,000 $4,000) of income in the current year. PTS: 1 172. Register to View AnswerREF: p. 7-4 This is a bona fide loan to his son; therefore, Tom is entitled to a bad debt of $20,000. The deduction for the current year is limited to $3,000, since the bad debt is classified as a short-term capital loss. No deduction is allowed for the $1,800 of accrued interest receivable because Tom is a cash basis taxpayer. PTS: 1 REF: p. 7-3 to 7-5 173. Register to View AnswerThis is a business bad debt for Hanks Auto and therefore, the loss is $15,500. PTS: 1 REF: p. 7-3 to 7-5 174. Register to View AnswerOrdinary loss (small business stock) Long-term capital gain Less long-term capital loss (worthless securities) Net long-term capital gain Less short-term capital loss (nonbusiness bad debt) Net short-term capital loss Short-term capital loss limited to PTS: 1 175. Register to View AnswerSalary Interest income Ordinary loss* AGI REF: p. 7-4 to 7-7 $ 92,000 4,000 (100,000) ($ 4,000) $5,000 (1,000) $4,000 (9,000) ($5,000) ($3,000) ($8,000) *$8,000 ($108,000 $100,000) long-term capital loss will be carried forward. There is no ordinary income and hence, $3,000 of the capital loss that normally could be deducted against ordinary income cannot be used in the current year. PTS: 1 REF: p. 7-4 to 7-7 176. Register to View AnswerSalary 1244 ordinary loss Long-term capital gain Long-term capital loss Excess 1244 loss ($75,000 $50,000) Worthless security Net long-term capital loss (limited to $3,000) Adjusted gross income $90,000 (50,000) $30,000 $25,000 7,000 (32,000) (2,000) $38,000 PTS: 1 REF: p. 7-5 to 7-7 177. Register to View AnswerSection 1244 ordinary loss treatment applies. Therefore, the $120,000 loss is $50,000 ordinary loss and $70,000 long-term capital loss. PTS: 1 REF: p. 7-6 | p. 7-7 178. Register to View AnswerA loss may be taken for the theft of personal use property (the diamond ring). PTS: 1 179. Register to View AnswerAsset A Asset B Asset C REF: p. 7-7 $ 300 1,500 500 $2,300 (100) (1,800) $ 400 Less: Statutory floor Less: AGI limitation (10% $18,000) Casualty loss deduction PTS: 1 REF: p. 7-10 to 7-13 180. Register to View AnswerAmount (lesser of adjusted basis or FMV decline) Less: Insurance recovery as if the claim had been filed Statutory floor AGI limitation (10% $14,000) Deductible loss $11,500 (9,500) (100) (1,400) $ 500 However no deduction is permitted because a timely insurance claim was not filed. PTS: 1 REF: p. 7-10 to 7-13 181. Register to View AnswerThe proceeds received are $171,000 [($250,000 $60,000) 90%]. The proceeds received are $1,000 ($171,000 $170,000) greater than Grants adjusted basis for his personal residence. Hence, Grant has no casualty loss. PTS: 1 REF: p. 7-10 to 7-13 182. Register to View AnswerLoss on home ($110,000 $90,000 $100) Loss on car ($4,000 $100) Total loss Less: (10% $40,000 AGI) Deductible casualty loss PTS: 1 REF: p. 7-7 to 7-14 183. Register to View AnswerSalary Personal use casualty gains in excess of personal use casualty losses ($10,000 $10,000) Adjusted gross income Less: Deductions Itemized deductions Casualty loss ($17,000 $10,000) AGI floor (10% $40,000) Deductible casualty loss Other itemized deductions Total itemized deductions Standard deduction (larger than itemized deductions) $19,900 3,900 $23,800 (4,000) $19,800 $40,000 -0$40,000 $7,000 (4,000) $3,000 4,000 $7,000 (10,300) Personal exemption ($3,300 2) Taxable income PTS: 1 REF: p. 7-10 to 7-14 Business Use $20,000 (8,000) $12,000 $10,000 $12,000 (6,600) $23,100 184. Register to View AnswerCost Less: depreciation Basis Fair market value Loss AGI Less: Business loss Modified AGI Personal casualty loss Less: $100 floor 10% of AGI (10% $38,000) Itemized deduction Personal Use $20,000 -0$20,000 $10,000 $10,000 $50,000 (12,000) $38,000 $10,000 (100) (3,800) $ 6,100 PTS: 1 REF: p. 7-10 to 7-14 185. Register to View AnswerThe $25,000 should be included in the current years gross income only to the extent that it provided a tax benefit in the prior year. This benefit was $20,900, computed as follows: The casualty transaction was reported last year as follows: Casualty loss (lesser of $20,000 basis and $25,000 FMV). Less: $100 floor 10% of AGI (10% $40,000) Itemized deduction in prior year $20,000 (100) (4,000) $15,900 The transaction would have been reported as follows if the $25,000 had been received last year. Insurance proceeds Adjusted basis Casualty gain Therefore, $20,900 should be included in gross income this year ($15,900 + $5,000). PTS: 1 REF: p. 7-10 to 7-14 186. Register to View AnswerSalary Less: Loss on theft of tools AGI Personal use property theft loss Less: $100 floor 10% of AGI (10% $54,000) Deductile loss $25,000 (20,000) $ 5,000 $60,000 (6,000) $54,000 $ 9,000 (100) (5,400) $ 3,500 Loss on securities Total itemized deductions PTS: 1 REF: p. 7-10 to 7-14 187. Register to View AnswerAmbers PAD is limited to 50% of the W-2 wages that her sole proprietorship pays. 50% $110,000 = $55,000 PTS: 1 REF: p. 7-17 | p. 7-18 188. Register to View AnswerChoices b., c., and d. would be available under the actual expense method. 20,000 $23,500 PTS: 1 REF: p. 9-6 | p. 9-7 189. Register to View Answer15 miles + 18 miles + 14 miles = 47 miles. The mileage for driving from his home to the office (20 miles) and from the last worksite to home (30 miles) is not deducible. PTS: 1 REF: Example 6 190. Register to View AnswerThe round trip from home to Teal (at temporary job site) of 80 miles (40 miles 2) is the mileage that is deductible. PTS: 1 REF: Example 7 191. Register to View AnswerPTS: 1 REF: Example 13 | Example 14 | Example 18 | Example 21 192. Register to View Answer$1,000 [(5 days business/10 day trip) $2,000 (air fare)] + $600 + $400 [50%($500 + $300)] = $2,000. The air fare has to be allocated as Shirley did not meet either the seven days (or less) or less than 25% personal use exceptions for foreign travel. PTS: 1 REF: Example 22 193. Register to View Answer$3,200 + $600 + (50% $1,200) = $4,400. Since the 7-days-or-less exception applies, the full airfare ($3,200) is allowed. In applying the 7-day test, the departure travel date is not counted. PTS: 1 REF: p. 9-10 | Footnote 18 194. Register to View Answer$1,200 (transportation) + $400 (lodging) + $3,000 (moving household goods) = $4,600 (choice a.). Meals are not qualified moving expenses (choices b. and c.) nor are penalties for breaking a lease (choice d.). It is immaterial that Elizabeths status as an employee changed to that of an independent contractor. PTS: 1 REF: p. 9-12 | Example 25 195. Register to View AnswerAlthough a reduced rate is in effect, the cutback adjustment still applies to persons subject to regulation by the U.S. Department of Transportation. PTS: 1 REF: p. 9-17 196. Register to View Answer$60 + [50% ($150 + $330 + $70)] = $335. PTS: 1 REF: Example 30 197. Register to View Answer50% ($400 + $300) = $350. The $400 is calculated by multiplying the 10 seats by $40 per seat. PTS: 1 REF: Example 37 198. Register to View Answer$25 (Carl) + $28 (Jean) = $53 (choice b.). Gift wrapping ($3) can be included with the $25 maximum allowed. Double dipping on the $25 limit is not allowed by including a clients spouse or other family members (choice c.). A gift to a superior (choice d.) is not deductible. PTS: 1 REF: p. 9-20 199. Register to View AnswerContribution to a Roth IRA (choice a.) is not deductible. An office in the home deduction (choice b.) is not allowed because the location is not used exclusively for business. Moving expenses (choice c.) are allowed even in a first-job context. Job hunting expenses (choice d.) are not allowed because a change from fishing guide to insurance salesman is a different trade or business. PTS: 1 REF: p. 9-12 | p. 9-21 | p. 9-23 | p. 9-24 200. Register to View AnswerBeing self-employed, all job-related expenses are deductions for AGI (choice a.). All employee expenses, unless reimbursed pursuant to an adequate accounting, are subject to the 2%-of-AGI floor (choices b. and c.). PTS: 1 PROBLEM 201. Register to View AnswerIf Sungho cashes in the policy, he must recognize a $26,000 gain and pay taxes of $9,100 [.35($50,000 $24,000) = $9,100]. Therefore, he will have only $40,900 to invest ($50,000 $9,100 = $40,900). To earn $2,500, the same as he receives from the insurance company, Sungho must earn a .061125 return on the after-tax policy proceeds ($40,900 .061125 = $2,500). b. The life insurance proceeds will be exempt from income tax. Therefore, if Sungho retains the policy, the beneficiaries receive $50,000 plus the compound amount of (1 .35)($2,500) = $1,625 interest earned each year. The interest will be reinvested at 7% before tax, or (1. .35)(.07) = 4.55% after-tax interest. Given the compound interest factor of 12.32, the annual income will accumulate to 12.32 $1,625 = $20,020. The after-tax policy proceeds are $50,000. Therefore, if Sungho retains the policy, his beneficiaries would expect to receive $70,020 ($50,000 + $20,020). If Sungho cashed in the policy, his beneficiaries will receive the after-tax amount of the policy, as computed in 1., above, of $40,900, plus the compound amount of the earnings on the $40,900, at 4.55% after-tax return. The annual after-tax earnings on $40,900 is $1,861 (.0455 $40,900). This will accumulate to $1,861 12.32 = $22,928 in 10 years. Therefore, his beneficiaries would receive $63,828 ($40,900 + $22,928). Retaining the policy is the better alternative because of the taxes that must be paid if the policy is surrendered. REF: p. 9-3 | p. 9-27 PTS: 1 REF: p. 5-6 to 5-8 | p. 5-33 202. ANS: Salary and commissions Profit sharing plan Interest income Included in gross income $ 2,000 30,000 1,500 $33,500 All nonforfeitable rights to funds are includible in income (salary, commissions) except for the interest in the profit sharing plan (i.e., the entire $30,000 received is subject to taxation). The $28,000 paid by the employer was pursuant to a policy of charity to families of deceased employees, and there is authority for excluding this item as a gift. The IRS will probably challenge the exclusion of the $28,000. The IRS would argue that a policy of making the payment to all families of deceased employees makes the payment appear to be in the nature of compensation for prior services. Life insurance proceeds are tax-exempt. However, all interest paid on life insurance proceeds is includible in income. PTS: 1 REF: p. 5-5 to 5-8 203. ANS: Barbaras claim for punitive damages of $60,000 is the only taxable amount. Therefore, her after-tax proceeds from receiving the $250,000 would be $229,000 [$250,000 .35($60,000)]. None of the offer from the insurance company would be taxable and therefore her after-tax proceeds from the settlement would be $240,000. Thus, both the insurance company and Barbara would benefit from her accepting the insurance companys offer. PTS: 1 REF: p. 5-11 | p. 5-12 204. ANS: George will probably be required to recognize $96 income from the service contract. The company can sell the service contract to an employee at a 20% discount and the employee is not required to recognize income. George received a 100% discount; therefore, $96 (80% $120) must be included in his gross income. However, George can perhaps make a convincing argument that he is merely receiving a no-additional-cost service, and thus would not be required to recognize income. George will not be required to recognize income from the bargain purchase of the refrigerator because he paid more than the employers cost. PTS: 1 REF: p. 5-20 to 5-22 205. ANS: Generally, the bond with the deferred interest payments would be preferable because the accrued interest will compound at before-tax rates. In the case of bonds that pay interest each year, the investor generally must invest the interest in other investments that yield taxable income. The annual interest payments may not be great enough to purchase other tax-exempts. PTS: 1 REF: p. 5-27 | p. 5-28 206. ANS: Margaret can accumulate $11,948 by investing her funds for 4 years, but then she must pay the actual tuition. Alternatively, if she invests the $10,000 in a qualified tuition program, the tuition will be paid in 4 years, regardless of the amount. The amount of the tuition less the $10,000 will not be subject to tax. Thus, the aftertax future value of the qualified tuition fund is $12,155 ($12,155 $0), which is greater than the alternative accumulated value. Therefore, it appears that Margaret should participate. PTS: 1 207. ANS: REF: p. 5-30 | p. 5-31 Gull must recognize $10,000 income ($60,000 $50,000) from transferring the equipment in satisfaction of the debt. The shareholders exchange of debt for stock is treated as a nontaxable contribution to capital. The $50,000 reduction in the mortgage is not taxable because the corporation is insolvent. However, the corporation must reduce its basis in the building by $50,000. Likewise, the trade creditors reduction in the debt does not produce gross income, but the company must reduce its basis in the goods by $25,000. PTS: 1 REF: p. 5-31 to 5-33 208. ANS: Arnold and Beths deduction for AGI is $18,000 and consists of the following items: Alimony payments Moving expenses Deduction for AGI $12,000 6,000 $18,000 All of the other items are itemized deductions. Note that the taxpayer must choose between the state income taxes and the sales taxes. PTS: 1 REF: p. 6-4 209. ANS: Sandras accrual method net profit is calculated as follows: Revenue Less: Expenses Salaries and commissions Rent Insurance Utilities Net profit $250,000 $100,000 10,000 5,000 6,000 (121,000) $129,000 To convert to cash method net profit, the following adjustments must be made. Net profitaccrual method Add: Increase in accounts payable ($15,000 $12,000) Deduct: Increase in accounts receivable ($48,000 $40,000) Net profitcash method $129,000 3,000 (8,000) $124,000 PTS: 1 REF: p. 6-9 | p. 6-10 210. ANS: Taylor is a cash basis taxpayer. Thus, he is eligible to use the one-year rule on prepayments. Since his prepayments of 18-months rent does not extend beyond the end of 2007, he can deduct the $36,000 paid in 2006. PTS: 1 REF: Example 8 211. Register to View AnswerEven though Roses business uses the accrual method, reserves for estimated warranty expenses are not permitted. Therefore, the deduction for warranty expenses is the amount paid of $30,500. Example 12 b. Rose would record gross income in 2006 of $220,000 ($200,000 + $20,000). The deduction for warranty expense would still be $30,500. PTS: 1 212. ANS: Income Expenses: Rent Utilities Medical Legal fees Depreciation REF: Example 12 | p. 6-9 $200,000 $ 8,000 2,000 5,000 20,000 14,000 (49,000) $151,000 The bribes to police of $10,000 and illegal kickbacks of $15,000 are not deductible. PTS: 1 REF: Example 16 213. Register to View AnswerSince Agnes is already in the Christmas Shop business, all of the investigation expenses ($2,000 + $5,000 = $7,000) are deductible regardless of whether or not she opens a shop in Vero Beach. Note, however, that as discussed in Chapter 9, only 50% of the meal cost included in the $2,000 is deductible. b. Same response as in a. PTS: 1 REF: Concept Summary 6-1 214. ANS: Rita would exclude the $2,400 of rental income from gross income because the home is classified as primarily personal. She would deduct the property taxes ($2,200) and mortgage interest ($10,800) as itemized deductions. No other expenses are deductible. PTS: 1 REF: Example 24 215. Register to View AnswerThe vacation home is not subject to the limitations on the deductions of a personal/rental vacation home. It does satisfy the rental part of the classification because it is rented for greater than 14 days. However, the personal use of 20 days does not exceed the greater of (1) 14 days or (2) 10% of the rental days, since 10% of the rental days is 20 (200 rental days 10%) days. Therefore, the appropriate classification is primarily rental use rather than personal/rental use. b. Rent income Expenses: Property taxes ($3,500 90.9%) Mortgage interest ($11,000 90.9%) Utilities ($1,800 90.9%) Maintenance and repairs ($2,000 90.9%) Depreciation ($6,000 90.9%) Insurance ($1,500 90.9%) Increase in Larrys AGI REF: p. 6-19 $25,000 (3,182) (9,999) (1,636) (1,818) (5,454) (1,364) $ 1,547 PTS: 1 216. Register to View AnswerA deduction cannot be taken for paying another taxpayers obligation. So if Bridgett pays the lender, neither Bridgett nor Amos could deduct the $3,800 of mortgage interest expense. b. c. Amos could deduct the $3,800 of mortgage interest expense, and Bridgett would receive no deduction. Bridgett should either loan or give the funds to Amos who then makes the mortgage payments. PTS: 1 REF: p. 6-23 | p. 6-30 217. Register to View AnswerOnly the legal fees associated with the divorce that relate solely to tax advice are deductible. Therefore, Elmer may deduct the following: Property settlement tax consequences If Mattie had paid her attorney, she could have deducted the following: Determination of dependency exemptions Property settlement tax consequences $1,500 400 $1,900 $1,500 However, since Elmer paid Matties lawyer, Mattie is ineligible to take the deduction. Likewise, Elmer is ineligible to take the deduction for this $1,900 since the obligation was that of Mattie. b. Any expenses that are deductible in this situation are classified as itemized deductions (i.e., from AGI). PTS: 1 REF: p. 6-12 | p. 6-24 218. ANS: Salary Ordinary loss from 1244 stock Capital gains and losses Long-term capital gain ($17,000 + $4,000) Less: Long-term capital loss [($60,000 $50,000) + $5,000] Net long-term capital gain Less: Short-term capital loss Net short-term capital loss Adjusted gross income PTS: 1 REF: p. 7-5 to 7-7 219. ANS: Salary Plus: Gain on rental duplex Recovery [($420,000 90%) 50%] Cost (50% 400,000) $80,000 (50,000) $21,000 (15,000) $ 6,000 (8,000) (2,000) $28,000 $140,000 $189,000 $200,000 Less: cost recovery Adjusted basis Casualty gain AGI Less: Itemized deductions Casualty loss Dwelling Basis ($400,000 50%) Recovery Loss Household items Total loss Less: $100 floor 10% $209,000 (80,000) (120,000) 69,000 $209,000 $200,000 (189,000) $ 11,000 8,500 $ 19,500 (100) (20,900) $ -010,000 4,000 (14,000) (3,300) $191,700 Deductible loss Home mortgage interest Other miscellaneous itemized deductionpainting Total itemized deductions Personal exemption Taxable income PTS: 1 REF: p. 7-11 to 7-15 220. ANS: AGI Less: Loss from theft of business computer Adjusted AGI Securities loss Casualty loss: Painting Television Total Less: $100 floor 10% $38,000 Total itemized deductions $55,000 (7,000) $48,000 $10,000 $ 8,000 2,700 $10,700 (100) (4,800) 5,800 $15,800 PTS: 1 REF: p. 7-10 to 7-14 221. ANS: Deductibility of research and experimental expenditures is permitted in the year of incurrence. 2005 Salaries Supplies Depreciation Deductible expenses The market survey is not a research and experimental expenditure. 2006 $50,000 20,000 15,000 $85,000 Salaries Supplies Depreciation Deductible expenses The advertising is not a research and experimental expenditure $ 75,000 15,000 17,000 $107,000 PTS: 1 REF: p. 7-15 | p. 7-16 222. ANS: 34 miles. The mileage from the first job to the second job, 10 miles, qualifies. Also, round trip mileage to the university (24 miles) can be claimed if the education Madison is obtaining is deductible. PTS: 1 REF: p. 9-15 | Example 5 223. ANS: $580 for each weekend, the lesser of the $610 cost of returning home or the $580 cost of staying in Helena. PTS: 1 224. Register to View Answer$4,000. b. $4,000. REF: Example 10 Transportation costs for mixed use (i.e., both business and personal) need not be allocated as long as domestic trips are involved. Such allocation is necessary, however, for foreign trips unless one of two exceptions applies. One exception deals with trips lasting seven days or less and covers part a. (but not part b.) above. The second exception, less than 25% of the time was for personal use, applies to part b. PTS: 1 REF: p. 9-10 | Example 23 225. Register to View Answer$1,500 ($420 + $180 + $900). No deduction is allowed for meals. b. Yes. Moving expenses are deductions for AGI and can be claimed regardless of whether a taxpayer takes the standard deduction or chooses to itemize. PTS: 1 REF: p. 9-12 | Example 25 226. Register to View Answer$4,000. Although the tuition was $4,200, 222 imposes a limitation of $4,000 for tax years 2004 and 2005. Table 9-1 b. $1,050. $200 (excess tuition not allowed under 222) + $600 (books and computer supplies) + $250 (transportation) = $1,050. No deduction is allowed for meals, since Ethan is not in travel status. Further adjustment will be required due to the 2%-of-AGI limitation on certain itemized deductions. Examples 27 and 28 PTS: 1 REF: p. 9-16 | Table 9-1 | Example 28 | Example 28 227. ANS: $922. $220 + [($360 + $720 + $150) 50%] = $835. Also allowed are the gifts of $87 (3 $29). The cost of engraving ($4) can be added to the maximum amount of gift allowed ($25). PTS: 1 REF: p. 9-20 | Example 30 228. ANS: $52 ($27 + $25). The deduction for Mr. Browns gift can include nominal costs for gift-wrapping and engraving. No deduction is allowed for the gift to Mrs. Brown unless she is in a separate business. Otherwise, she falls under the $25 limit applicable to Mr. Brown. The deduction for Ms. Smiths gift is limited to $25. No deduction is allowed for Brians gift to his boss. PTS: 1 REF: p. 9-20 229. ANS: Business income Less: Expenses Net business income before home office expenses Less: Real property taxes ($4,500 20%) Mortgage interest ($8,000 20%) Operating expenses ($3,000 20%) Depreciation Net income from business $12,000 (5,000) $ 7,000 (900) (1,600) (600) (500) $ 3,400 PTS: 1 REF: Example 39 230. ANS: $1,400. $1,000 + $1,000 + $400 = $2,400 (2% $50,000) = $1,400. A cutback adjustment of $100 ($200 50%) is required for the meals obtained during the conference. No deduction is available for the campaign contribution. The discussion of political contributions in Chapter 6 PTS: 1 MATCHING 231. 232. 233. 234. 235. 236. 237. ANS: I PTS: 1 REF: p. 9-3 ANS: G PTS: 1 REF: p. 9-3 Register to View AnswerPTS: 1 REF: p. 9-6 ANS: H PTS: 1 REF: p. 9-6 Register to View AnswerPTS: 1 REF: p. 9-12 Register to View AnswerPTS: 1 REF: p. 9-12 ANS: J PTS: 1 REF: p. 9-10 NOT: Allocation is necessary since the taxpayer meets neither of the two exceptionstrip lasts 7 days or less, or less than 25% of time was for personal purposes. 238. ANS: K PTS: 1 REF: p. 9-14 NOT: According to the IRS, a law degree does not maintain or improve existing skills but leads to the creation of a new skill. 239. Register to View AnswerPTS: 1 REF: Example 10 240. Register to View AnswerPTS: 1 REF: p. 9-20 241. Register to View AnswerPTS: 1 REF: p. 9-7 242. ANS: J PTS: 1 REF: p. 9-11 NOT: Taxpayer did not change jobs, so no moving expense deduction is allowed. 243. ANS: I PTS: 1 REF: p. 9-13 NOT: Global Tax Issues on p. 9-13 244. ANS: G PTS: 1 REF: p. 9-24 NOT: The advantage to a Roth IRA is that withdrawals are nontaxable exclusions. REF: p. 9-8 | p. 9-18 | p. 9-22 | Chapter 6 245. ANS: NOT: 246. ANS: 247. ANS: 248. ANS: 249. ANS: NOT: 250. ANS: H PTS: 1 REF: p. 9-24 However, withdrawals are subject to tax. A PTS: 1 REF: p. 9-18 C PTS: 1 REF: p. 9-18 D PTS: 1 REF: p. 9-25 L PTS: 1 REF: p. 9-23 Taxpayer need not accept any employment offers that result from the job search (see choice B.). L PTS: 1 REF: p. 9-19

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?,L7fl. /L(^.,) C *n*\-I If ak /fo nVq-g,oua-o-.rD k4,,(.owg=-vvR. -"t= l#l c,-,^\I t/6(.'r rr\ -/.n |srbc&rfib x.a??,za/oK+vcrok /ot<{-vaVa-l/.fiakOl\vo=vln(t+*\a?n fb\l+=
USC - EE - 202L
a- ?It O- 1 .tF!3- ,F! '^lDt^tcL. <t)irc),g!-Aii(>- o'trctt=!-i t?^ "t.it ^to^df1 _ i,"cn) -r /r- + i i"c") -Lo") loL1us1 cu"athr-t).at'"e4'-.ndq.-t-"iuc')"ryLt):'@ (t".',.)v + >o.9'r1{1d<bl Tqr l c L t
USC - EE - 202L
Cornell - MISC - 2610
Foundations of Management NBA 570 (Grad Students Only) S. C. Johnson Graduate School of Management January 2009 To Register email Dr. Stepp or the Johnson School Registrar beginning November 1 and send degree area, year of graduation, and student ID
Cornell - MISC - 2610
School of Hotel Administration Cornell University Fall 2008 INTRODUCTION TO WINES (H ADM 4430)EVALUATION OF PRODUCT SAMPLES:PRODUCT SHARING OR EXCESSIVE PORTIONS WILL NOT BE TOLERATED AND WILL RESULT IN YOU BEING ASKED TO LEAVE THE CLASS.WINE G
Cornell - MISC - 2610
Sample themes of prelim 1 questions Topics include: classes 1 through 7 (readings and handouts). The following is a list of study topics which will help you focus on the most important things. This is information which a person who is interested in a
Cornell - MISC - 2610
Last Name Ackerman Adams Adelman Agarwal Agbre Ahipasaoglu Aivadyan Alario Alpaugh Andino Anilesh Anthonypillai Appel Apuzzo Arnaoutakis Arora Arth Auerbach Bae Baek Bailey Bailin Baker Bane Banks Barge Barrera Basu Bauer Baumgartner Begovic Behmoara
University of Texas - EDP - 363
EXAM 1 REVIEW *Phallus -the male symbol of sex and potency -became associated with displays of aggression. *temple prostitutes -Women in many ancient cultures who would have sex with worshippers at pagan temples to provide money for the temple or as
University of Texas - EDP - 363
9/03/08 Anxiety Sexuality is an area rife with anxiety, from performance anxiety to identity anxiety to the glass is too full anxiety (emotions that you are barely managing to keep under control) Social-Biological Theory We transmit genes which b
University of Texas - EDP - 363
Definitionsneededtoknow. PhallusAnythingthatresemblestheshapeofapenisoranothernameforpenis. Templeprostitutesreligiousprostitution,thepracticeofhavingsexual intercoursewithapersonotherthantheonesspouseforreligiousorsacred purposes. Homoeroticsomeonew
University of Texas - EDP - 363
FIRST DAY OF CLASS-8/27 Masturbation Facts Enjoyable Prevents prostate cancer People lie about it Different techniques Portable Can use tools Diminishes horniness Myths Hairy palms Going blind It falls off No girls do itOnanism Onan (old testament
University of Texas - EDP - 363
Notes for Exam #2The highlighted areas are things she mentioned would be on the test in the 11:00 class. She also went over celibacy and oxytocin Celibacy (allows you to have equally deep friendships with both sexes) Different definitions o o o No
University of Texas - EDP - 363
10/1/08 Hijra: male to female transgender in India and Pakistan Sex- biological male or female? Genetic sex: chromosomes (XX female, XY male, etc) hormones (Androgens or Estrogen predominating)Prenatal Sexual Differentiation 1st six weeks, were a
Drexel - CIVE - 310
Solution 3.19 Se = wGs eembankment = 0.16 2.7 = 0.455 0.95Vembankment 1 + e embankment = Vfill 1 + e fill vfill = 200,000 (1 + 1.3) = 316151.2 m 3 1 + 0.455
Drexel - CIVE - 310
Solution 3.6 Md = mass of dry soil = 100 grams Mwe = mass of water of equivalent volume to dry soil = volume of water displaced x density of water (1 gram/cm3) = (537.5 500) x 1 = 37.5 gramsGs Md 100 2.67 M we 37.5
Drexel - CIVE - 310
Solution 3.8 (a) Void Ratio (e) 19.6 d = = = 17.8 kN/ m 3 1+ w 1.1 Gsw 2.7 9.8 ; e = - 1 = 0.49 1+ e 17.8 (b) Degress of Saturation (S) wG s 0.1 2.7 Se = w G s , S = = = 0.55 or 55% e 0.49 (c) % of Air voids Ws 17.8 Vs = = = 0.67m 3 G s w 2.7 9.
Drexel - CIVE - 310
Solution 3.9 Since the soil is saturated S = 1 Find void ratio Se = WG s ; e = 2.7 0.23 = 0.62 Find dry unit weight G 2.7 9.8 d = s w = = 16.3 kN / m 3 1+ e 1.62 Find bulk unit weight = d (1 + w ) = 16.3 (1 + 0.23) = 20.1 kN/ m 3 Find porosity e
Drexel - CIVE - 310
Solution 3.11 Given: w = 0.10, = 18.5 kN/ m 3 , Gs = 2.7, emax = 0.87 (loose state), emin = 0.51 (dense state) (a) Dr = Relative Density (Dr) e max e x 100 e max e minDetermine e by first calculating dd 18.5 16.8 kN / m3 1w 1.1 Gs w G 2.7
Drexel - CIVE - 310
Solution 3.14100Soil APercent Finer by Weight 80 60 40 20 0 10 1 0.1 0.01 Limiting Diameter (mm)Soil B Soil CSoil A: More than 50% of the sample is greater than 0.075 mm (no. 200 sieve) and all of the soil is smaller than 4.75 mm (no. 4 siev
Drexel - CIVE - 310
Solution 3.15 Percent Finer sieve opening(mm) 4.75 2 (No. 10) 0.85 0.425(No. 40) 0.15 0.075(No. 200) Soil A 100.00 89.89 77.03 56.81 47.75 34.13 B 100.00 74.28 63.82 31.64 11.79 0.00 C 100.00 97.00 77.40 59.40 23.00 1.20Step1: % passing No 200 siev
Drexel - CIVE - 310
Solution 3.16 (a)LL = 40%Water content (%) 60 50 40 30 1Determine LL1025100Number of blows(b) Liquidity Index (LI)PI = 0.40 0.23 = 0.17 LI =w w pl Ip = 0.38 0.23 = 0.88 0.17(c) Since LI is within the range 0 < LI < 1, the soil
Drexel - CIVE - 310
Solution 3.18 w(%) 12 13 14 16 19 W 17 18 18.7 19.3 18.9 d (kN/m3) 16.08 16.87 17.38 17.62 16.8221.00 20.00zero air voidsdry unit weight (kN/m3)19.00 18.00 17.00 16.00 15.00 10 12 14 16 18 20 water content (%)Optimum Moisture Content = 15.5%
California Western School of Law - PUAD - 101
Functions of Managers Managers just don't go out and haphazardly perform their responsibilities. Good managers discover how to master five basic functions: planning, organizing, staffing, leading, and controlling * Planning: This step involves mappin
California Western School of Law - PUAD - 101
1. Based on time perspective, the public sector has short time horizons and a definite cut off time while the business sector has no time limit. For duration of effort, the public sector is given 4-8 years and they get up and running right away while
California Western School of Law - PUAD - 101
1. Modernists view organizational environment as an entity that lies outside the boundary of the organization, providing the organization with raw materials and other resources(input) and absorbing its products and services(output). Symbolicinterpret
California Western School of Law - STAT - 601
Formulas and Tablesfor Elementary Statistics, Tenth Edition, by Mario F. Triola Copyright 2006 Pearson Education, Inc.Ch. 3: Descriptive Statisticsx x s s s Sx n Sf Mean Mean (frequency table) Standard deviation Standard deviation (shortcut) S
MIT - 8 - 8.02
Massachusetts Institute of TechnologySpring Term 20058.02X Electricity and MagnetismProblem Set 7Issued: Due:Thu, March 24 Mon, April 4, 4PM <- note Date & Time!Reading suggestions (from Young & Freedman) Mon, 3/28 Magnetic Field, Lorentz
MIT - 8 - 8.02
MIT - 8 - 8.02
Massachusetts Institute of TechnologySpring Term 20058.02X Electricity and MagnetismProblem Set 8Issued: Due: Sat, Apr 2 Fri, Apr 8 , 4PM <- note Date + Time!Note that the exp MF write-up from both lab partners is also due on 4/8 4PM! Reading
MIT - 8 - 8.02
8.02x Problem Set 8 SolutionsProblem 1 (10 points) a) The currents run in the same direction x. The eld created by the rst wire has direction z at the place of the second wire. The electrons in the x second wire move to (opposite the current),
MIT - 8 - 8.02
MIT - 8 - 8.02
Wisconsin - EAS - 100
Push- Pull- There were 5 different groups of Asian immigrants, Chinese, Japanese, Korean, Indian, and Filipino, under different circumstances.1) First, Chinese immigration started in 1850s, the major movement.Whensouthern China was suffering f
Wisconsin - EAS - 100
2. Composition of Asian American today Nations of origin: 31.2 % of total legal immigrants are from Asia, 55.5% allowed under employment preference. 49.9 % of foreign-born that are citizens are Asians. Among foreign born Asian immigrant, 3,502,021 ar
Wisconsin - EAS - 100
1. Des cribe werethe co ntextof pos t 1965 immi gr ati on fr om Asia . Wha t le adin g up to the immigr ati on from Asiathe circums ta ncesdurin g the p eri od? The 1965 immigration Act abolished national origins quotas act from 1924 immigra
Wisconsin - EAS - 100
Compul so ry Q ue st io n1. Political disfranchiseme -ntIn 1790 Naturalization Act limited naturalization to aliens who were free white persons and thus left slaves, free African Americans, and later AsianAmericans.-B.S Thind vs. U.S. shows
Wisconsin - EAS - 100
1. The 1965 immi gr ati on Act abo lis hed nati on al origins quotas act from 1924 immigration law and provided for annual admission of 170,000 Eastern Hemisphere immigrants limited to 20,000 per country per year. There were few contributing factors
Wisconsin - EAS - 100
a) WWII is a watershed event, a crucial dividing line in the history of Asian Americans. The war changed life of asian immigrants especially Filipinos, Koreans, Asian Indians, Chinese and Japanese Americans. This event influenced the immigrants and t