1) A family with $45,000 in assets and $22,000 of liabilities would have a net worth of
2) A budget deficit would result when a person’s or family’s
A. assets exceed liabilities
B. net worth decreases
C. actual expenses are greater than planned expenses
D. actual expenses are less than planned expenses
3) The payment items that should be budgeted first are
A. unplanned living expenses
B. fixed expenses
C. investment funds
D. variable expenses
4) Which of the following statements regarding tax credits is true?
A. None of the answer choices are correct.
B. Tax credits reduce taxable income dollar for dollar.
C. Tax credits reduce taxes payable dollar for dollar.
D. Tax credits provide a greater tax benefit the greater the taxpayer’s marginal tax rate.
5) The tax base for an individual tax return is
A. adjusted gross income minus from AGI deductions
B. realized income from whatever source derived
C. adjusted gross income
D. gross income
6) Which of the following statements regarding exemptions is correct?
A. Taxpayers subtract exemption deductions from adjusted gross income to determine taxable income.
B. Personal exemptions are more valuable than dependency exemptions.
C. Exemption amounts are considered to be for AGI deductions.
D. Taxpayers filing a married filing jointly return are limited to two exemptions on their tax returns.
7) Which of the following has the lowest authoritative weight?
A. Interpretive regulation
B. Legislative regulation
C. Revenue ruling
D. Private letter ruling
8) Which of the following has the highest authoritative weight?
A. Tax article
B. Text book
C. Revenue ruling
D. Private letter ruling
9) Jaime recently found a “favorable” trial level court opinion directly on point for her tax question. Which trial level court would he prefer to have issued the opinion?
A. Divorce Court
B. District Court
C. Tax Court
D. Circuit Court
10) Sam saved diligently for his college education by putting part of his pay into U.S. Series EE saving bonds. Sam purchased the bonds for $6,500, and this year he redeemed the bonds for $7,200. He has no other income this year. What amount must Sam include in his gross income?
A. $700 unless Sam uses the proceeds to pay for his college tuition and fees
D. A maximum of $350 if Sam uses the proceeds to pay for his college tuition and fees
11) Jill currently lives in the suburbs and commutes 25 miles to her office in downtown Freeport. She is considering quitting her current job to look for new employment in the downtown. Which of the following statements best describes how Jill can satisfy the distance test for deducting moving expenses if she accepts a new job in downtown Freeport?
A. Jill cannot satisfy the distance test if she accepts a job in downtown Freeport.
B. Jill must move 25 miles east from downtown Freeport.
C. Jill must move at least 25 miles further away from downtown Freeport.
D. Jill need not move her residence because she is starting a new job.
12) Congress allows self-employed taxpayers to deduct the cost of health insurance above the line (for AGI) because
A. health insurance premiums cannot be deducted otherwise
B. self-employed taxpayers need an alternate mechanism for reducing the cost of health care
C. employers are allowed to deduct social security (FICA) taxes as a business expense
D. this deduction provides a measure of equity between employees and the self-employed
13) Jim was in an auto accident this year. Jim paid $2,450 to repair his car after the accident, and his insurance only reimbursed him $400. Jim bought his car several years ago for $15,000. What casualty loss deduction from this accident can Jim combine with his other casualty losses in computing his itemized deductions?
14) Rhianna and Jay are married filing jointly in 2009. They have six children for whom they may claim the child tax credit. Their AGI was $123,440. What amount of child tax credit may they claim on their 2009 tax return?
15) Which of the following is a miscellaneous itemized deduction that is not subject to the 2 percent of AGI floor?
A. Tax preparation fees
B. Fees for investment advice
C. Gambling losses to the extent of gambling winnings
D. Employee business expenses
16) Beth’s business purchased only one asset during the current year. It placed in service machinery (7-year property) on December 1 with a basis of $50,000. Calculate the maximum depreciation expense (ignoring Section 179 or bonus expensing):
17) Bateman Corporation sold an office building that it used in its business for $800,000. Bateman bought the building ten years ago for $600,000 and has claimed $200,000 of depreciation expense. What is the amount and character of Bateman’s gain or loss?
A. $400,000 capital gain
B. $200,000 ordinary and $200,000 Section 1231 gain
C. $40,000 ordinary and $360,000 Section 1231 gain
D. $400,000 ordinary gain
18) Foreaker LLC sold a piece of land that it uses in its business for $52,000. Foreaker bought the land two years ago for $42,500. What is the character of Foreaker’s gain?
A. $9,500 Section 1250
B. $9,500 Section 1231
C. $9,500 Section 1221
D. $9,500 Section 1245
19) Which of the following would be considered passive income?
A. Capital gains from sale of mutual funds
B. Salary for part-time job
C. Rental real estate income
20) Generally, which of the following does not correctly categorize the type of income?
A. Capital losses – passive income/loss
B. Dividends – portfolio income/loss
C. Rental real estate – passive income/loss
D. Salary – active income/loss
21) A taxpayer would not be considered a material participant if he met which one of these tests?
A. Participates in the activity for at least 500 hours a year
B. Participates more than 50 hours a year and participation is not less than any other participants for the year
C. Materially participates in the activity for any five of the preceding ten years
D. Participates on a regular, continuous, and substantial basis
22) What is the correct order of the loss limitation rules?
A. Tax basis, passive loss limits, at-risk amount
B. Passive loss limits, at-risk amount, tax basis
C. Tax basis, at-risk amount, passive loss limits
D. at-risk amount, tax basis, passive loss limits
23) Dan recently purchased a partnership interest in XYZ, Limited Partnership for $6,000. His share of debt in the partnership is $2,500, but he is not personally responsible for paying back the debt if the partnership cannot pay. Dan’s share of XYZ, LP’s loss for the year is $3,000. In addition, Dan reported $5,000 in long-term capital gains from the sale of a stock and $3,000 of income from another real estate partnership. What is Dan’s tax basis in XYZ, LP?
24) What happens when a taxpayer experiences a net loss from a rental home?
A. If the taxpayer is not allowed to deduct the loss due to the passive activity limitations, the loss is suspended and carried forward until the taxpayer generates passive income or until the taxpayer sells the property.
B. If the taxpayer is not an active participant in the rental, the taxpayer may be allowed to deduct the loss even if the taxpayer does not have any sources of passive income.
C. The taxpayer will not be allowed to deduct the loss under any circumstance if the taxpayer does not have passive income from other sources.
D. The loss is fully deductible against the taxpayer’s ordinary income, no matter the circumstances.
25) What document must LLCs file with the state to organize their business?
A. Partnership agreement
B. Articles of organization
C. Articles of incorporation
D. Certificate of LLC
26) What tax year-end must unincorporated entities with only one owner adopt?
A. The entity may adopt any year-end except for a calendar year-end.
B. The entity must adopt a calendar year-end.
C. The entity is free to adopt any tax year-end.
D. The entity must adopt the same year-end as its owner.
27) Which legal entity provides the least flexible legal arrangement for owners?
A. Sole Proprietorship
28) Which of the following requirements do not have to be met in a Section 351 transaction?
A. All transfers of property to a corporation must be made simultaneously to qualify for deferral.
B. Only property transferred to a corporation is eligible for deferral.
C. Each transferor of property must receive stock equal to at least 80 percent of the fair market value of the property transferred.
D. In the aggregate, the transferors of property to the corporation must collectively control the corporation immediately after the transfers.
29) Inez transfers property with a tax basis of $200 and a fair market value of $300 to a corporation in exchange for stock with a fair market value of $250 in a transaction that qualifies for deferral under Section 351. The corporation assumed a liability of $50 on the property transferred. What is the corporation’s tax basis in the property received in the exchange?
30) Camille transfers property with a tax basis of $800 and a fair market value of $1,200 to a corporation in exchange for stock with a fair market value of $850 and $350 in a transaction that qualifies for deferral under Section 351. Camille also incurred selling expenses of $100. What is the amount realized by Camille in the exchange?
31) BTW Corporation has taxable income in the current year that can be offset with an NOL from a previous year. What is the nature of the book-tax difference created by the net operating loss deduction in the current year?
A. Temporary; unfavorable
B. Permanent; favorable
C. Permanent; unfavorable
D. Temporary; favorable
32) A calendar-year corporation has negative current E&P of $(500) and accumulated positive E&P of $1,000. The corporation makes a $600 distribution to its sole shareholder. Which of the following statements is true?
A. Up to $600 of the distribution could be a dividend depending on the balance in accumulated earnings and profits on the date of the distribution.
B. $500 of the distribution will be a dividend because total earnings and profits is $500.
C. $0 of the distribution will be a dividend because current earnings and profits is negative.
D. $600 of the distribution will be a dividend because accumulated earnings and profits is $1,000.
33) Studios reported a net capital loss of $30,000 in year 5. It reported net capital gains of $14,000 in year 4 and $27,000 in year 6. What is the amount and nature of the book-tax difference in year 6 related to the net capital carryover?
A. $16,000 favorable
B. $11,000 unfavorable
C. $11,000 favorable
D. $16,000 unfavorable
34) Tammy owns 100 shares in Star Struck Corporation. The other 100 shares are owned by her husband Tommy. Which of the following statements is true?
A. A stock redemption that completely terminates Tammy’s direct interest in a corporation will be treated as a dividend if Tammy waives the family attribution rules and files a “triple i” agreement with the IRS.
B. A stock redemption that completely terminates Tammy’s direct interest in a corporation will be treated as an exchange for tax purposes.
C. A stock redemption that completely terminates Tammy’s direct interest in a corporation will be treated as a dividend for tax purposes.
D. A stock redemption that completely terminates Tammy’s direct interest in a corporation will be treated as an exchange if Tammy waives the family attribution rules and files a “triple i” agreement with the IRS.
35) El Toro Corporation declared a common stock dividend to all shareholders of record on June 30, 2010. Shareholders will receive 1 share of El Toro stock for each 2 shares of stock they already own. Raoul owns 300 shares of El Toro stock with a tax basis of $60 per share. The fair market value of the El Toro stock was $100 per share on June 30, 2010. What are the tax consequences of the stock dividend to Raoul?
A. $15,000 dividend and a tax basis in the new stock of $100 per share
B. $0 dividend income and a tax basis in the new stock of $100 per share
C. $0 dividend income and a tax basis in the new stock of $60 per share
D. $0 dividend income and a tax basis in the new stock of $20 per share
36) Comet Company is owned equally by Pat and his sister Pam, each of whom hold 100 shares in the company. Pam wants to reduce her ownership in the company, and it was decided that the company will redeem 50 of her shares for $1,000 per share on December 31, 2010. Pam’s income tax basis in each share is $500. Comet has total E&P of $250,000. What are the tax consequences to Pam as a result of the stock redemption?
A. $50,000 dividend and a tax basis in each of her remaining shares of $50
B. $25,000 capital gain and a tax basis in each of her remaining shares of $500
C. $25,000 capital gain and a tax basis in each of her remaining shares of $100
D. $50,000 dividend and a tax basis in each of her remaining shares of $100
37) Under which of the following circumstances will a partner recognize a loss from an operating distribution?
A. A partner will recognize a loss from an operating distribution when the partnership distributes money in an amount that is greater than the partner’s basis in the partnership interest.
B. A partner will never recognize a loss from an operating distribution.
C. A partner will recognize a loss from an operating distribution when the partnership distributes property other than money with an inside basis greater than the partner’s basis in the partnership interest.
D. A partner will recognize a loss from an operating distribution when the partnership distributes money in an amount that is less than the partner’s basis in the partnership interest.
38) Which of the following statements regarding disproportionate distributions is false?
A. Disproportionate distributions will only occur in liquidating distributions.
B. A disproportionate distribution occurs when a partner receives more than his or her proportionate share of the partnership’s hot assets.
C. A disproportionate distribution occurs when a partner receives less than his or her proportionate share of the partnership’s hot assets.
D. The tax provisions related to disproportionate distributions attempt to preserve the partners’ share of ordinary income potential.
39) Tone Loc and 89 of his biggest fans formed an S corporation, 2hit, Inc., as the original ninety shareholders. Tone then transferred some of his stock to his grandfather, four of Tone’s cousins, five of Tone’s children, three of Tone’s grandchildren, and 2 close friends. For the S corporation shareholder limit rules, how many shareholders does 2hit, Inc. have?
40) Clampett, Inc. (an S corporation) previously operated as a C corporation. Distributions from Clampett, Inc. are deemed to be paid in the following order:
A. Shareholder’s remaining stock basis, prior C corporation earnings and profit, the AAA account
B. Prior C corporation earnings and profit, the AAA account, shareholder’s remaining stock basis
C. Shareholder’s remaining stock basis, the AAA account, prior C corporation earnings and profit
D. The AAA account, prior C corporation earnings and profit, shareholder’s remaining stock basis
41) Clampett, Inc. has been an S corporation since its inception. On July 15, 2011, Clampett, Inc. distributed $50,000 to J.D. His basis in his Clampett, Inc. stock on January 1, 2011, was $45,000. For 2011, J.D. was allocated $10,000 of ordinary income from Clampett, Inc. and no separately stated items. What is the amount of income J.D. recognizes related to Clampett, Inc. in 2011?
42) Clampett, Inc. has been an S corporation since its inception. On July 15, 2011, Clampett, Inc. distributed $50,000 to J.D. His basis in his Clampett, Inc. stock on January 1, 2011, was $45,000. For 2011, J.D. was allocated $10,000 of ordinary income from Clampett, Inc. and no separately stated items. What is J.D.’s basis in his Clampett, Inc. stock after all transactions in 2011?
43) Erica and Brett decide to form their new motorcycle business as an LLC. Each will receive an equal profits (loss) interest by contributing cash, property, or both. In addition to the members’ contributions, their LLC will obtain a $50,000 nonrecourse loan from First Bank at the time it is formed. Brett contributes cash of $5,000 and a building he bought as a storefront for the motorcycles. The building has an FMV of $45,000, an adjusted basis of $30,000, and is secured by a $35,000 nonrecourse mortgage that the business LLC will assume. What is Brett’s outside tax basis in his LLC interest?
44) Gerald received a 33% capital and profit (loss) interest in XYZ Limited Partnership (LP). In exchange for this interest, Gerald contributed a building with an FMV of $30,000. His adjusted basis in the building was $15,000. In addition, the building was encumbered with a $9,000 nonrecourse mortgage that XYZ, LP assumed at the time the property was contributed. What is Gerald’s outside basis immediately after his contribution?
45) Sue and Andrew form SA general partnership. Each person receives an equal interest in the newly created partnership. Sue contributes $10,000 of cash and land with a FMV of $55,000. Her basis in the land is $20,000. Andrew contributes equipment with a FMV of $12,000 and a building with a FMV of $33,000. His basis in the equipment is $8,000, and his basis in the building is $20,000. How much gain must the SA general partnership recognize on the transfer of these assets from Sue and Andrew?
46) Vanessa contributed $20,000 of cash and land with a fair market value of $100,000 and an adjusted basis of $40,000 to Cook, Inc. (an S corporation) when it was formed. The land was encumbered by a $30,000 mortgage executed two years before. What is Vanessa’s tax basis in Cook, Inc. after formation?
47) Frank and Bob are equal members in Soxy Socks, LLC. When forming the LLC, Frank contributed $50,000 in cash and $50,000 worth of equipment. Frank’s adjusted basis in the equipment was $35,000. Bob contributed $50,000 in cash and $50,000 worth of land. Bob’s adjusted basis in the land was $30,000. On 3/15/04, Soxy Socks sells the land Bob contributed for $60,000. How much gain (loss) related to this transaction will Bob report on his X4 return?
48) What form does a partnership use when filing an annual informational return?
A. Form 1040
B. Form 1065
C. Form 1041
D. Form 1120
49) At his death, Trevor had a probate estate consisting of $4 million of property. Which of the following is a true statement about Trevor’s estate or estate tax?
A. Trevor must have a taxable estate of at least $4 million.
B. Trevor must have a gross estate of at least $4 million.
C. Trevor must have estate tax base (cumulative taxable transfers) of at least $4 million.
D. Trevor must have an adjusted gross estate of at least $4 million.
50) The estate and gift taxes share several common features. Which of the following characteristics are common to both the estate and gift taxes?
A. A unified credit and a marital deduction
B. A charitable deduction and the amount of the exemption equivalent
C. A gift-skipping election and a deduction for income taxes paid by the fiduciary
D. A charitable deduction and an annual exclusion
51) The estate and gift taxes share several common features. Which of the following characteristics are common to both the estate and gift taxes?
A. The same amount of unified credit
B. A charitable deduction and a marital deduction
C. A gift-skipping election and a charitable deduction
D. An annual exclusion
52) Which of the following is a completed taxable gift?
A. $20,000 in cash contributed to the committee to reelect Senator Cone.
B. $55,000 in cash transferred to a former spouse under a written property settlement shortly after a divorce.
C. $18,000 in cash given to a needy student to pay for college tuition.
D. $15,000 in cash given to Valley Hospital for the care of a neighbor who was in an auto accident.
53) Jonathan transferred $90,000 of cash to a trust this year for the benefit of Hannah, age 10. The trustee has the discretion to distribute income or corpus (principal) for Hannah’s benefit and is required to distribute all assets to Hannah (or her estate) not later than Hannah’s 21st birthday. What is the amount of the taxable gift?
B. Zero – There is no completed gift until the trustee makes a distribution from the trust.
54) This year Don and his son purchased real estate for an investment. The price of the property was $500,000, and the title named Don and his son as joint tenants with the right of survivorship. Don provided $320,000 of the purchase price, and his son provided the remaining $180,000. Has Don made a taxable gift and, if so, in what amount?
A. Don has made a taxable gift of $237,000.
B. Don has made a taxable gift of $57,000.
C. Don has made a taxable gift of $22,000.
D. Don has made a taxable gift of $70,000.