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Class: Name: A426 Spr2009 6-7:50p TR
Date Due: June 2, 2009
Professor: Michael A. Henry
Intro to Taxation -- Take-Home Midterm Exam #2
EXAM GRADED OUT OF 100 POINTS (110 possible) True/False (1 point each)
Indicate whether the statement is true or false. ____ 1)
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. 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. Hobby activity expenses are deductible from AGI to the extent of hobby income. Such expenses not in excess of hobby income are not subject to the 2% of AGI floor. A bona fide debt arises from a debtor-creditor relationship based on a valid and enforceable obligation to pay a fixed sum of money. 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. Instead of going to the office first, the taxpayer goes directly to the clients location. This is always a nondeductible commuting expense. Once the automatic mileage method is used, a taxpayer cannot for a later year change to the actual cost method. 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. A medical expense does not have to relate to a particular ailment to be deductible. George, a sculptor, has an elevator installed in his house to transport heavy materials to his loft studio because he is concerned that he might strain his back by lifting heavy objects. George may deduct the full cost of the elevator as a medical expense. Fees for automobile inspection, automobile titles and registration, bridge and highway tolls, parking meter deposits, postage, etc., are not deductible if incurred for personal reasons, but they are deductible as deductions for AGI if incurred as a business expense by a self-employed taxpayer. Interest paid or accrued during the tax year on aggregate acquisition indebtedness of $2 million or less ($1 million or less for married persons filing separate returns) is deductible as qualified residence interest. Zack was the beneficiary of a life insurance policy on his wife. Zack had paid $20,000 in premiums on the policy. He collected $50,000 upon the death of his wife. He used the insurance proceeds to purchase a United States Government bond, which paid him $2,000 interest income during the year. Zack is not required to recognize any income from the above transactions. Generally, a U.S. citizen is not required to include in gross income the salary and wages earned while working in a foreign country if the foreign country taxes the income. A refund of 2006 state income taxes received in 2007 by a cash basis taxpayer is included in 2007 gross income if the taxpayer itemized her deductions in 2006.
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Name: ________________________
Multiple Choice (2 points each)
Identify the choice that best completes the statement or answers the question. ____ 16)
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 Her AGI is: A. $21,300. $2,500 9,000 1,000 4,000 200
B.
$28,800.
C.
$32,800.
D.
$35,500.
E.
$37,800.
C.
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A.
Which of the following is a deduction from AGI (itemized deduction)? Contribution to a traditional IRA. B. Roof repairs to a rental home. D. Alimony payment. E. None of the above.
Personal casualty loss.
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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. Which of the following is not a variable in the determination of whether the expenses in investigating a business can be deducted? A. The amount of reasonable expenditures. B. The nature of the business being investigated. C. Whether or not the acquisition actually takes place. D. The current business of the taxpayer. 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.
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Name: ________________________
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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.
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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. 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. 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.
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Name: ________________________
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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.
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$20,000 12,000 8,000 -0-
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$36,000.
E.
None of the above.
During the year, Morley, a single taxpayer, had an AGI of $30,000 before considering the following items: Loss from damage to rental property Loss from theft of bonds Personal casualty gain Personal casualty loss (after $100 floor) Determine the amount of Morleys itemized deduction from the losses. A. $0. B. $2,900. C. $5,120. D. $5,600. E. None of the above. ($6,000) (3,000) 4,000 (9,000)
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Joshua performs services for Abigail. Which, if any, of the following factors would indicate that Joshua is an independent contractor (rather than an employee)? A. Abigail sets the work schedule. B. Joshua furnishes his own tools. C. Abigail provides the workplace. D. Joshua is paid by the hour. E. None of the above. Bill is the regional manager for a national chain of auto-parts stores and is based in Salt Lake City. When the company opens new stores in Boise, Bill is given the task of supervising their initial operation. For three months, he works weekdays in Boise and returns home on weekends. He spends $310 returning to Salt Lake City but would have spent $290 had he stayed in Boise for the weekend. As to the weekend trips, how much, if any, qualifies as a deduction? A. $0, since the trips are personal and not work related. $0, B. since Bills tax home has changed from Salt Lake City to Boise. C. $290. D. $310. E. None of the above.
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Name: ________________________
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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 Shirleys deductible expenses are: A. $3,400. B. $3,000. C. $2,400. $2,000 600 500 300
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$2,000.
E.
None of the above.
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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 Elizabeths deductible moving expense is: A. $4,600. B. $4,750. C. $4,900. D. $9,600. $1,200 300 400 3,000 5,000
E.
None of the above.
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Carolyn is single and has a college degree in finance. She is employed as a loan officer at a bank; her yearly AGI approximates $50,000. During 2006, she enrolled in a weekend MBA program and incurred the following nonreimbursed expenses: $3,900 (tuition), $300 (books), $200 (other school supplies), and $200 (transportation to and from campus). Disregarding the 2%-of-AGI limitation, as to the MBA program, Carolyn has a: A. Deduction for and deduction from AGI of $0. B. Deduction for AGI of $3,900 and deduction from AGI of $700. C. Deduction for AGI of $4,000 and deduction from AGI of $600. D. Deduction for AGI of $4,100 and deduction from AGI of $500. E. None of the above. 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. 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.
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Name: ________________________
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Nancy had an accident while skiing on vacation. She sustained facial injuries that required cosmetic surgery. While having the surgery done to restore her appearance, she had additional surgery done to reshape her nose, which was not injured in the accident. The surgery to restore her appearance cost $12,000 and the surgery to reshape her nose cost $5,000. How much of Nancys surgical fees will qualify as a deductible medical expense (before application of the 7.5% limitation)? A. $0. B. $5,000. C. $12,000. D. $17,000. E. None of the above. Liz, who is single, travels frequently on business. Art, Lizs 84-year-old dependent grandfather, lived with Liz until this year when he moved to Granite Falls Nursing Home because he needs daily medical and nursing care. During the year, Liz made the following payments to Granite Falls on behalf to of Art: Room at Granite Falls Meals for Art Doctor and nurse fees Cable TV service for Arts room Total $36,300 7,260 5,610 660 $49,830
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Granite Falls has medical staff in residence. Disregarding the 7.5% floor, how much, if any, of these expenses qualifies for a medical expense deduction by Liz? A. $5,610. B. $41,910. C. $49,170. D. $49,830. E. None of the above.
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In Shelby County, the real property tax year is the calendar year. The real property tax becomes a personal liability of the owner of real property on January 1 in the current real property tax year, 2006 (which is not a leap year). The tax is payable on June 1, 2006. On May 1, 2006, Julio sells his house to Anita for $340,000. On June 1, 2006, Anita pays the entire real estate tax of $10,950 for the year ending December 31, 2006. How much of the property taxes may Julio deduct? A. $0. B. $3,600. C. $3,611. D. $7,380. E. None of the above. Pedros child attends a school operated by the church the family attends. Pedro made a donation of $500 to the church in lieu of the normal registration fee of $200. In addition, Pedro paid the regular tuition of $8,000 to the school. Based on this information, what is Pedros charitable contribution? A. $0. B. $200. C. $300. D. $8,300. E. $8,500. In 2006, Terry pays $10,000 to become a charter member of Mammoth Universitys Athletic Council. The membership ensures that Terry will receive choice seating at all of Mammoths home basketball games. Also in 2006, Terry pays $1,200 (the regular retail price) for season tickets for himself and his wife. For these items, how much qualifies as a charitable contribution? A. $6,000. B. $6,800. C. $8,000. D. $10,000. E. None of the above. Rosie owned stock in Acme Corporation that she donated to a university (a qualified charitable organization) on September 6, 2006. What is the amount of Rosies charitable contribution deduction assuming that she had purchased the stock for $20,100 on October 22, 2005, and the stock had a value of $28,200 when she made the donation? A. $8,100. B. $20,100. C. $24,150. D. $28,200. E. None of the above. Which of the following items would be an itemized deduction on Schedule A of Form 1040 subject to the 2% of AGI floor? A. Professional dues to membership organizations. B. Work uniforms that cannot be used for normal wear. C. Job-hunting costs. D. Hobby losses up to the amount of hobby income. E. All of the above.
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Name: ________________________
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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. 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. 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. 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. Assuming a taxpayer qualifies for the exclusion treatment, the interest income on educational savings bonds: A. Is gross income to the person who purchased the bond in the year the interest is earned. B. Is gross income to the student in the year the interest is earned. C. Is included in the students gross income in the year the savings bonds are sold or redeemed to pay educational expenses. D. Is not included in anyones gross income if the proceeds are used to pay college tuition. E. None of the above.
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Name: ________________________
Problem (10 points each)
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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
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Name: ________________________
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Teresa had the following items for last year: Salary Short-term capital gain Nonbusiness bad debt For the current year, Teresa had the following items: Salary Nonbusiness bad debt Collection of last years bad debt Determine Teresas adjusted gross income for the current year. $45,000 (1,000) 10,000 $40,000 3,000 (10,000)
Essay (5 points each)
48)
Describe the circumstances under which a taxpayer can receive rent income from a personal residence, but does not have to report it as gross income.
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Name: ________________________
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If a business retains someone to provide services, that person may either be an employee or be self-employed (i.e., independent contractor). a. What are the tax advantages to the business of having the service provider classified as self-employed? What are the advantages and disadvantages to the service provider of self-employed status?
b.
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Travel status requires that the taxpayer be away from home overnight. a. b. What does away from home overnight mean? What tax advantages result from being in travel status?
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