Federal Income Tax

  1. A high DIF score indicates which of the following?
  2. The taxpayer is likely to get a refund
  3. The taxpayer’s chances of audit are substantially less than 2%
  4. IRS will automatically grant an extension of time to appeal
  5. The taxpayer’s chances of audit are fairly high
  6. Eduardo filed his 2013 tax return on March 15, 2014. Eduardo accidentally omitted $10,000 of income from his individual tax return. The total gross income shown on the tax return was $35,000. When will the statute of limitations expire for Eduardo’s 2013 tax return?
  7. March 15, 2017
  8. March 15, 2020
  9. April 15, 2017
  10. April 15, 2020
  11. Which of the following is not a requirement to qualify for innocent spouse relief?
  12. The individual electing innocent spouse relief must have been abandoned by her spouse for more than 6 months.
  13. The individual establishes that she did not know and had no reason to know that there was an understatement
  14. It would be inequitable to hold the individual liable for the deficiency attributable to the understatement when all facts and circumstances are considered
  15. The individual elects innocent spouse relief within the time period that the statute of limitation is open for collection activities.
  16. Which of the following explain why it is important to determine the period in which income is recognized?
  17. Marginal tax rates may be different in different periods.
  18. Tax laws may change
  19. The time value of money
  20. All of the above are explanations
  21. a. and b. only are explanations
  22. All of the following are allowable tax years except:
  23. The last Friday of July
  24. December 31
  25. The Sunday closest to March 1
  26. August 31

6 Abdo Corporation received permission to change its tax year-end from December 31 to August 31 in 2013. Its income from January 1 through August 31 is $278,000. What is Abdo’s tax liability for its year ended August 2013?

  1. $91,670
  2. $94,520
  3. $108,420
  4. $141,780
  5. Wilma is CEO of and owns 100 percent of WT Enterprises, a cash-basis, calendar-year corporation. The company has always been profitable but over the last five years Wilma’s salary has increased from over $400,000 per year to over $1,000,000 and it has failed to pay dividends. Which of the following will not occur if the IRS determines that $500,000 of her salary is unreasonable?
  6. Wilma will pay an additional tax on the $500,000 recharacterized as dividend.
  7. Wilma will be eligible for a refund of Medicare taxes.
  8. WT will lose a deduction for the $500,000 re characterized as a dividend.
  9. WT will be eligible for a refund of a portion of FICA taxes it paid.
  10. James owns a sole proprietorship. James pays his son Albert, age 17, $8,000 and his daughter Chloe, age 19, $11,000 for their work in the business. Both wages are reasonable for the work they perform. How much FICA tax must the sole proprietorship pay on the wages?
  11. 0
  12. $612
  13. $842
  14. $1,454
  15. Carol owns a small curio shop that is incorporated as an S corporation. Her three children, Sara, age 16, Mark, age 19, and Corey, age 22, all help in the shop. Which of the children’s wages are subject to FICA taxes?
  16. None of the wages are subject to FICA taxes.
  17. Corey’s wages only
  18. Mark and Corey’s wages only.
  19. All their wages are subject to FICA taxes.
  20. How much may Chico Corporation, a calendar-year accrual-basis corporation, deduct if it paid $3,000 on April 1 for an insurance policy for the next three years, prepaid six months interest of $450 on November 1, and paid $2,000 rent for December and January on December 1.
  21. $1,900
  22. $2,450
  23. $2,600
  24. $5,450
  25. Cleo spent $4,000 on organization costs for her business and $13,000 training staff. If the business is a calendar-year cash-basis business that starts operations on June 1, what is the current year’s deduction for these expenses?
  26. $17,000
  27. $9,311
  28. $9,000
  29. $611
  30. Waldo bought two tickets for a Packers game on Ebay for $400. The tickets had a face value of $50 each. He took a client to the game and they had a dinner afterwards where they discussed business. The cost of the dinner was $70. What is Waldo’s deduction for these expenses?
  31. $470
  32. $235
  33. $170
  34. $85
  35. During the year, Garbin Corporation (a calendar-year corporation that manufactures furniture) purchased the following assets:
Date Asset Cost
February 15 Tools $40,000
March 3 Machines 50,000
October 6 Office Building 110,000

In computing depreciation of these assets, which of the following averaging conventions will be used?

  1. Half-year and mid-month
  2. Mid-quarter and mid-month
  3. Half-year, mid-quarter, and mid-month
  4. Mid-quarter only
  5. In May 2013, Stephen acquired a used automobile for $12,000 and used the automobile 75% for business. No Sec. 179 election was made. In 2014, Stephen’s business use of the automobile decreases to 45%. As a result of this change in business use:
  6. The change does not affect the way Stephen computes his 2014 depreciation
  7. Stephen’s depreciation in 2014 is $2,250.
  8. Stephen must recapture $900 as ordinary income in 2014
  9. Stephen must amend the 2014 tax return and recompute depreciation.
  10. Zachary purchased a new car on August 1, 2014 for $14,500. His records indicate that he uses the car 45 percent for business and 55 percent for personal use. What are his cost recovery deductions for 2014 and 2015?
  11. $653; $1,305
  12. $1,377; $2,205
  13. $1,305; $2,088
  14. $798; $1,595
  15. Edna had $20,000 of ordinary income. In addition, she had a $1,500 short-term capital gain on one stock and a $4,900 long-term capital loss on another. What is her adjusted gross income before deductions?
  16. $21,500
  17. $17,000
  18. $16,600
  19. $15,100
  20. Coley Corporation has an $800 net short-term capital loss and a $6,000 net long-term capital gain in the current year. It also has an $8,000 long-term capital loss carryover from the prior year. What is Coley’s capital loss carryover to the next year?
  21. $0
  22. $2,000
  23. $2,800
  24. $8,800
  25. Vero Corporation owns $200,000 of equipment used for its business and the building that the business is located in that is valued at $175,000. The business is successful and has investments in marketable securities valued at $45,000. What is the value of its capital assets?
  26. $45,000
  27. $75,000
  28. $275,000
  29. $320,000
  30. Sam’s land was condemned for a sewage treatment plant. He received $600,000 for the land that had a basis of $650,000. What is his realized and recognized gain or loss, respectively, on this involuntary conversion?
  31. ($50,000), ($50,000)
  32. ($50,000), 0
  33. $50,000, $50,000
  34. 0, 0
  35. None of the above
  36. Wally’s investment real estate was condemned on November 14, 2014. On February 14, 2015, he received $250,000 for the property that had a basis of $210,000. What is the last date that Wally can acquire replacement property to avoid gain recognition?
  37. November 14, 2017
  38. February 14, 2018
  39. December 31, 2017
  40. December 31, 2018
  41. None of the above
  42. Which of the following is not a characteristic of involuntary conversions?
  43. Gain only is deferred
  44. The taxpayer can receive cash to invest in qualifying replacement property
  45. The provision applies to both realty and personalty
  46. All of these are characteristics
  47. None of these are characteristics
  48. What is JJ Corporation’s balance in accumulated earnings and profits at the beginning of year 2 if in year 1 it made a $40,000 distribution to its shareholders, its current earnings and profits was $35,000, and its accumulated earnings and profits was $25,000 at the beginning of year 1?
  49. $65,000
  50. $30,000
  51. $25,000
  52. $20,000
  53. A sole shareholder receives a piece of land from a corporation as a dividend distribution. The land has a basis of $40,000 and a fair market value of $80,000; the shareholder’s basis in his stock is $20,000, and this distribution is the only corporate activity for the year except for paying any tax owed on the distribution. At the beginning of the year, the corporation had only $5,000 in accumulated earnings and profits. How will this distribution be treated for tax purposes by the shareholder?
  54. $80,000 dividend
  55. $39,000 dividend; $41,000 capital gain
  56. $39,000 dividend; $20,000 return of capital; $21,000 capital gain
  57. $60,000 dividend; $20,000 return of capital
  58. None of the above
  59. Soledad received one stock right for every two shares of stock she owned. She owned 100 shares that she purchased two years ago for $1,000. Each of the 50 rights that she received allows her to purchase one share of stock for $15. The stock is currently selling for $22 per share. What is her basis in the 50 stock rights?
  60. $0
  61. $137.25
  62. $159.09
  63. $274.51
  64. None of the above
  65. Corbin has a $15,000 basis in his 50 percent ownership in an S corporation and lent the corporation $5,000 last year. The corporation has $30,000 of other debt. This year the corporation reported a $100,000 loss. How much of this loss may Corbin deduct?
  66. $15,000
  67. $20,000
  68. $35,000
  69. $50,000
  70. Which of the following does not affect the basis of S corporation stock?
  71. Tax-exempt income
  72. Nondeductible expenses
  73. Charitable contributions
  74. Capital gains
  75. All affect stock basis
  76. The accumulated adjustment account
  77. is a shareholder account.
  78. can be reduced below zero by an excess distribution.
  79. determines when there is a tax-free distribution during the post-termination period.
  80. is important in applying loss limitation rules.
  81. What is the difference in tax savings between a $1,000 tax credit and a $1,000 tax deduction for a single taxpayer with $45,000 in taxable income?
  82. 0
  83. $850
  84. $750
  85. $300
  86. $250
  87. Maurice and Judy (both age 32) have one natural daughter, age 4, and adopted twin boys, age 8. Their adjusted gross income on their joint return is $120,000. If they take the standard deduction, what is their tax liability after any allowable tax credits in 2014?
  88. $14,375
  89. $11,575
  90. $11,175
  91. $11,375
  92. Stephanie and Cal have three dependent children in college. Sally is a freshman and Teri is a sophomore at a small private college in their town where their expenses are $6,500 per year for each student; Lexi is in her third year of medical school in Wisconsin and her related expenses are $12,500 per year. What is the maximum education credit allowed Stephanie and Cal on their joint tax return if their AGI is $118,000 in 2014?
  93. $5,000
  94. $6,000
  95. $7,000
  96. $7,500

Short Answer Questions

  1. William has decided to purchase a large apartment complex. He pays $100,000 cash, obtains a loan on the property for $500,000, and assumes the first mortgage balance of $250,000. He also gives the sellers $100,000 of marketable securities that he purchased three years ago for $125,000 and paid a finder’s fee of $5,000, legal fees of $6,000, and transfer taxes of $12,000. What is William’s acquisition basis for the building? Does he have any other tax consequences as a result of this purchase?
  2. Continental Corporation has $1,000,000 in common stock and $1,000,000 in 7 percent 10-year bonds in its capital structure. How much does Continental save in taxes in current dollars over the 10 years the bonds are outstanding by having these bonds instead of an all-equity capital structure? Assume Continental has a 34 percent marginal tax rate in all years.


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