James TAx

Next 2 questions are based on the following hypothetical: Christina purchased residential property for $500,000. In purchasing the home, she used $100,000 of her own funds and borrowed the other $400,000 of the purchase price from Lubbock National Bank. After having reduced the mortgage balance to $300,000, Christina refinanced the property to secure a lower interest rate and to take advantage of the significant equity she had in the home as a result of an increase in property values. As part of the refinancing of the home, Christina borrowed an additional $200,000 from Lubbock National. Christina used $50,000 of the refinancing proceeds to remodel the home; she used $100,000 to purchase a tract of land she will hold for investment. She used the other $50,000 of loan proceeds to pay for a European vacation for her family. Two years after remodeling the home, Christina sold it to Craig in an arm's length sale. Craig paid Christina $350,000 in cash and assumed the balance of $450,000 which Christina then owed on the mortgage encumbering the home. (a) It is true that: a. Christina realized a gain of $250,000 on the sale because she had initially borrowed only $400,000 to purchase the home b. Christina realized a gain of $250,000 on the sale because she used only $50,000 of the refinancing proceeds for remodeling the home. c. Christina realized a gain of $150,000 on the sale because the tract of land cost $100,000. d. Christina realized a gain of $100,000 because she took out a $200,000 home equity loan from Lubbock National Bank. (b) It is also true that: a. Craig's basis in the home is $800,000 because that was how much he paid for it. b. Craig's basis in the home is $800,000 because that was the fair market value of the home. c. Craig's basis in the home is $800,000 because Christina had remodeled the home. d. Craig's basis in the home is $800,000 because that was how much Christina paid for it.

Correct Answer (a) : B, Christina realized a gain of $250,000 on the sale because she used only $50,000 of the refinancing proceeds for remodeling the home. Correct Answer (b) : A, Craig's basis in the home is $800,000 because that was how much he paid for it. Notes on (a): Amount realized as 250K. A and B are both technically correct, but A's reasoning does not matter. A was a trap $500,000 purchase price $100,000 own funds $400,000 mortgage $200,000 additional loan $50,000 remodel $100,000 land $50,000 vacation Craig $350,000 cash $450,000 balance of mortgage Basis Amount Realized $500,000 $350,000 $50,000 $450,000 $550,000 $850,000 Gain $250,000 Notes on (b): $350,000 +450,000 = $800,000 cash: 350K and assumed 450K mortgage. Add the 2 to get his basis. 800K is basis. Section 1012 minus basis= cost. if this had been taxable exchange, not a sale, right answer would have been B

Questions (a), (b), (c), and (d) are based on the following hypothetical: Richard Nixon is employed as a lawyer in the corporate headquarters of American Airlines in Fort Worth, Texas. American employees and their families (defined by American as spouse or domestic partner, children, and parents of employees) receive free travel on a standby basis on American flights and 50% discounts on reserved seats. American employees also receive 50% discounts on personal lodging at the Chatwal, a 5-star hotel in New York City owned by American Airlines. On a vacation trip to New York, Mr. Nixon and his wife, Pat, flew without charge on a standby basis; their married adult daughter, Tricia, received a 50% discount on her reserved seat. All seats on the flight normally cost $860. (a) As regards the cost of the airline tickets from DFW to New York, it is true that: A. The cost of Mr. Nixon's ticket is excludable from his gross income because the free flight constituted a "no additional cost service" fringe benefit. B. The cost of Mr. Nixon's ticket is excludable from his gross income because the free flight constituted a "working condition" fringe benefit. C. The cost of Mr. Nixon's ticket is includable in his gross income because he is a lawyer and not a pilot or air steward. D. The cost of Mr. Nixon's ticket is includable in his gross income because he is a highly compensated employee of American Airlines. (b) As regards the cost of the airline ticket, it is also true that the value of the 50% discount Tricia received on the cost of her ticket is: A. Includable in her gross income because she is not Mr. Nixon's dependent child. B. Includable in Mr. Nixon's gross income because Tricia is not his dependent child. C. Excludable from Mr. Nixon's gross income because it constitutes an "employee discount" fringe benefit. D. Excludable from Mr. Nixon's gross income because it constitutes a "no-additional cost service" fringe benefit. (c) Assume that the 50% employee discount at the Chatwal also applies to purchases in the hotel gift shop, also owned by American Airlines. Mr. Nixon bought a gold bracelet in the gift shop for $1,000 as a gift for his mother, Mrs. Hannah Nixon. The cost of the bracelet to the gift shop was $1,000, and without the discount, the bracelet would have been sold for $2,000. If Mr. Nixon maintains that the $1,000 cost of the bracelet to him was the result of his skills at obtaining a bargain purchase, it would be true that: A. He would realize no income at the time of the purchase, and his basis in the bracelet would be $1,000. B. He would realize no income at the time of the purchase, and his basis in the bracelet would be $2,000. C. He would realize $1,000 of income at the time of the purchase, and his basis in the bracelet would be $1,000. D. He would realize $1,000 of income at the time of the purchase, and his basis in the bracelet would be $2,000. (d) Assuming all the facts of Question 7, it would also be true that: A. At the time she receives the gold bracelet, Hannah Nixon's basis in it would be $2,000 because, without the discount, the bracelet would have sold for $2,000. B. At the time she receives the gold bracelet, Hannah Nixon's basis would be $2,000 because that was the bracelet's fair market value at the time Mr. Nixon purchased it. C. At the time she receives the gold bracelet, Hannah Nixon's basis in it would be $1,000 because Mr. Nixon paid $1,000 for it. D. At the time she receives the gold bracelet, Hannah Nixon would not know her basis in it because she would not yet know whether she would sell it for a gain or for a loss.

Correct Answer (a): A, The cost of Mr. Nixon's ticket is excludable from his gross income because the free flight constituted a "no additional cost service" fringe benefit. Correct Answer (b): B, Includable in Mr. Nixon's gross income because Tricia is not his dependent child. Correct Answer (c): A, He would realize no income at the time of the purchase, and his basis in the bracelet would be $1,000. Correct Answer (d): C, At the time she receives the gold bracelet, Hannah Nixon's basis in it would be $1,000 because Mr. Nixon paid $1,000 for it. Notes on (a): because he was flying standby Notes on (b): assuming daughter is independent child, cost of ticket will be income to Ron. Daughter is in reserved seat, so it is not "no additional cost" under § 132(a)(1). It is reserved so it is additional cost. If a dependent, she falls under the QED, and Ron will only get taxed on 80% of the deduction ($250) not the full 100% of the $250. Because, under QED, up to 20% (of the $250) is excludable. 2. So, 50% savings is taxable to Ron. The tickets for Ron and wife are non taxable. Notes on (c): If a bargain purchase, there's no income. And if bargain purchase, his basis will be what he paid. Notes on (d): with gifts, different basis depending on gain or loss. If it's a gain, it's basis in the hands of the last purchases. Here, that would be Mr. Nixon for 1,000. She takes his basis. D is wrong because at the time she sells, might be adjusted. But not yet

Next 2 questions are based on the following fact pattern: Leroy Daley is a famous cricketer living in Camden, New Jersey. Mr. Daley was recently selected to play for the United States Cricket Team in the Americas Cup, His brother-in-law, Glenn Turner, asked him to spend two weeks coaching the Huffman Practitioners, a cricket team based in Brooklyn, New York. Mr. Daley coached the team, but notwithstanding Mr. Turner's efforts, Mr. Daley refused to accept any payment. Determined to repay Mr. Daley for his act of kindness, Mr. Turner constructed a small greenhouse worth $2,500 on Mr. Daley's property. He informed the bewildered Mr. Daley that this was his way of thanking him for the cricket coaching he had done. Accordingly, Mr. Turner did not charge for either his labor or the cost of the materials he purchased to construct the greenhouse. (a) If the "transaction" between Mr. Daley and his brother-in-law is deemed a barter arrangement, the ultimate issue that will need to decided is: a. How much of the $2,500 value of the greenhouse is allocable to the cost of the materials Mr. Turner purchased to construct the greenhouse. b. How much of the $2,500 is allocable to the cost of the labor Mr. Turner expended in constructing the greenhouse. c. How much of the $2,500 is allocable to the true cost of constructing the greenhouse, and how much is goodwill. d. How much of the $2,500 should be reported as income. (b) If Mr. Daley wants to treat the construction of the greenhouse as a gift and not as compensation for his cricket coaching duties, his best argument would be that: a. Mr. Turner constructed the greenhouse to thank Mr. Daley for having coached the Huffman Practitioners. b. Mr. Daley never requested anything in return for his having coached the Huffman Practitioners. c. Mr. Turner is his brother-in-law. d. Mr. Daley does not need the greenhouse.

Correct Answer (a): D, How much of the $2,500 should be reported as income by Mr. Daley. Correct Answer (b): B, Mr. Daley never requested anything in return for his having coached the Huffman Practitioners. Notes on (a) Notes on (b) "this is my way of thanking you."--> that's why A is not correct. It was like compensation. not simply charitable intent

Dan works for Carpet Tech. He received a salary of $40,000 last year. Dan also received a $10,000 bon us for obtaining several new customer accounts. His take-home pay was only $34,000 after withholding for federal income taxes, Social Security, and Medicare taxes and health insurance. How much must Dan include in gross income for last year? A. $50,000 B. $40,000 C. $34,000 D. $24,000

Correct Answer: A, $50,000 Notes: because 40K salary and 10K bonus, not gift

Brian Lara purchased a vacant lot for $20,000. Three years later, the lot increased in value to $50,000. Gaetan Seaman, a local developer, offered Mr. Lara $50,000 for the lot, but the latter refused. The following year, when the lot was worth approximately the same, Mr. Lara deeded it to his daughter, Paula. Mr. Lara believes that: (i). He recognizes no income on account of the transfer. (ii). At the time of the transfer to Paula, Mr. Lara's basis in the lot was $50,000. (iii). Paula Recognizes no income on account of the transfer. (iv). If Paula eventually sells the lot at a gain, her basis in the lot will be $20,000. Which of Mr. Lara's assumptions are correct: A. (i),(iii), and (iv) only. B. (i), (ii) and (iii) only. C. (i) and (ii) only. D. (iii) and (iv) only.

Correct Answer: A, (i), (iii), and (iv) only Notes: he didn't recognize income on the trasnfer, so that's true. (ii) is false because his basis is 20K

Bjorn Borg borrowed $5,000 three years ago from his brother, Viktor, to assist his daughter, Kimberly Moreno, who had incurred significant legal fees in a divorce battle. After repaying $3,000 of the loan, Bjorn was forced to resign from his job for health reasons and, although he was not technically insolvent, Bjorn was unable to continue to make payments on the loan. Under the circumstances, Viktor forgave the balance of the loan. On account of the loan forgiveness: A. Bjorn had zero gross income because of the familial relationship between him and his brother, Viktor. B. Bjorn had zero gross income because he had used the money to assist his daughter, Kimberly. C. Bjorn had $200,000 gross income because he was not insolvent at the time Viktor forgave the debt. D. Bjorn had $2,000 gross income because he had an undeniable accession to wealth over which he had unfettered control.

Correct Answer: A, Bjorn had zero gross income because of the familial relationship between him and his brother, Viktor. Notes: there's a familial relationship and remember it trumps everything

Leone McCann was an employee of Security Industrial Insurance Company ("Security") of Shreveport Louisiana. Having exceeded her sales goals one year, Mrs. McCann and her husband joined 40 other Security insurance sales agents and their spouses for a "seminar" in Las Vegas. The "seminar" actually consisted of a three-day party where the participants were accommodated at a hotel and ate, drank, went sightseeing and enjoyed various shows, all at Security's expense. When they timely filed their federal income tax return for the year in question, the McCanns did not account for their trip to Las Vegas. The IRS audited their return and asserted a deficiency, claiming that the cost of the Las Vegas trip to Security was income to the McCanns. The IRS is: a. Correct because the economic benefit the McCanns received from the trip to Las Vegas was a reward for Mrs. McCann's good work in increasing exceeding her sales goals. b. Correct because the economic benefit the McCanns received from the trip to Las Vegas was available to only a small group of Security's employees. c. Correct because Mr. McCann accompanied his wife on the trip at no additional cost to the family although he was not a Security employee. d. Correct because no work was done throughout the three-day sojourn in Las Vegas.

Correct Answer: A, Correct because the economic benefit the McCanns received from the trip to Las Vegas was a reward for Mrs. McCann's good work in increasing exceeding her sales goals

Desiree receives a distribution of $20,000 from her deductible IRA. Prior to the distribution, Desiree's balance in the IRA was $100,000, consisting of her contributions over the years, totaling $60,000, and the earnings thereon, totaling $40,000. The distribution is from Desiree's only IRA. Her balance at the end of the year is $80,000. As regards the distribution: A. Desiree incurs tax liability on the entire amount because all of her contributions to the IRA are from "pre-tax dollars." B. Desiree incurs tax liability on the entire amount because her IRA balance at the end of the year is $80,000. C. Desiree incurs zero tax liability because prior to the distribution, her contributions to the IRA totaled $60,000, $40,000 more than she received in the distribution. D. Desiree incurs zero tax liability because after the distribution, her total contributions to the IRA exceeded her total earnings.

Correct Answer: A, Desiree incurs tax liability on the entire amount because all of her contributions to the IRA are from "pre-tax dollars." Notes: "Easy one" i. Put in pre-tax dollars from gross income that is deductible from gross income as it has already been taxed. iii. Investment Income accrues while the account exists, but is not taxed until it is distributed, when you pull it out.—Distributions are included in gross income

Edward, a professional artist, owes Kathryn $10,000 in legal fees. Kathryn has agreed to accept one of Edward's paintings as partial payment on his account. Edward would normally sell a painting of the size and quality selected by Kathryn for between $5,000 and $6,000. Edward and Kathryn agree that the painting should be valued at $5,500 for purposes of satisfying a portion of the fees owed by Edward to Kathryn. Edward's account balance is therefore reduced to $4,500. It is true that: A. Edward has an "amount realized" of $5,500 because his bill is reduced by that amount. B. Edward has an "amount realized" of zero because he painted the painting. C. Kathryn's cost basis in the painting is $10,000, the original amount owed her by Edward. D. Kathryn's cost basis in the painting is $4,500, the amount still owed her by Edward.

Correct Answer: A, Edward has an "amount realized" of $5,500 because his bill is reduced by that amount. Notes:

Maria owns and runs a bakery and catering business. To help support her elderly mother, Maria provides her with $500 in cash each month. Because Maria's mother has only limited income, she is in the lowest tax bracket for a single person. In order to tax advantage of this fact, Maria has one of her regular clients who typically pays Maria $500 a month for catering services to make out the check to Maria's mother directly rather than Maria. The $500 is taxable to: A. Maria, because she actually performed the services for which the payment was made. B. Maria, because the purpose of having the client pay Maria's mother directly was to take advantage of her mother's lower tax bracket. C. Maria's mother, because she actually received the payment. D. Maria's mother, provided Maria made arrangements with the client to make the payment directly to her mother prior to the time that Maria rendered the catering services.

Correct Answer: A, Maria, because she actually performed the services for which the payment was made. Notes: she did the work so she gets the check. Nice trick but the IRS won't accept it

Ray Charles is one of two legal assistants employed by Megan Flores, a lawyer. The legal assistants work directly with Megan and with Natalie Cole and Luz Martinez, the two lawyers Megan employs as associates in her law office. This year at the annual Easter Sunday office party, Ray received substantial cash presents from Megan, from Natalie and Luz, and from Ashley Acosta, one of Megan's clients. William Defoe, the other legal assistant (who has not worked at the office as long as Ray), received cash presents of lesser amounts from Megan, Natalie, and Luz. Of all the cash presents Ray receives, the strongest case for exclusion from gross income can be made for: A. The cash present from Ashley Acosta. B. The cash presents from Mega. C. The cash presents from Natalie and Luz. D. None of the cash presents are excludable from gross income.

Correct Answer: A, The cash presents from Ashley Acosta Notes: he is not his ER

Now, suppose that instead of receiving the car as a gift, Mike received it as a bequest under his late uncle's Last Will and Testament. At the time of his uncle's death, the car was worth $23,000. In addition, Mike received stock worth $10,000 that his uncle had purchased five years earlier for $6,000. Under the terms of the Will, Mike received the stock as compensation for services he had performed for his uncle in the final years of his uncle's like. How much must Mike include in his gross income? A. $4,000 B. $10,000 C. $23,000 D. $33,000

Correct Answer: B, $10,000 Notes: first part is 0 because it's a gift, so the issue is the stock. 10K is the transfer basis. He would get stepped-up basis if it was a gift, but it's compensation. So how much is he getting paid? Appreciation has nothing to do with it. 10K is the FMV. the date of death - basis. because it as income, that's why he has to pay tax immediately. Were it a gift, wouldn't have to worry about income tax

Carol, an executive with a major insurance company, recently sold the house she had purchased only eighteen months ago. She bought the house for $1,350,000, and sold it for $1,650,000. She sold the house because she is being transferred by her employer from Virginia to California. Carol is not married. How much, if any, of the gain that Carol realized on the sale of the house must she include in gross income? A. $50,000, because Carol can exclude up to $250,000 of the gain from her gross income because she is being relocated. B. $112,500, because Carol can exclude up to $187,500 of the gain from her gross income because she is being relocated. C. $225,000, because Carol can exclude three-fourths of the gain from her gross income because she is being relocated. D. $300,000, because Carol did not own and use the property as her principal residence for at least two years during the prior five-year period.

Correct Answer: B, $112,500, because Carol can exclude up to $187,500 of the gain from her gross income because she is being relocated. Notes: the issue is the safe harbor provision of section 121. no full amount exclusion because only 18 months, not 24. So she just gets to exclude a fraction of the normal 250,000. 18/24 times 250,000= 187,500. 112,500 = (1,650,00 minus 1,350,000) minus 187,500

Jacques Chirac purchased a summer home for $200,000. In purchasing the home, he used $50,000 of his own funds and borrowed the other $150,000 of the purchase price from Wells Fargo Bank. After having reduced the mortgage to $125,000, Jacques refinanced the property to secure a lower interest rate and to take advantage of the significant equity he had in the home as a result of an increase in property values. As part of the refinancing of the home, Jacques borrowed an additional $50,000 from Wells Fargo, thus increasing his mortgage to $175,000. Jacques used $40,000 of the refinancing proceeds to remodel the summer home; he used the other $10,000 to purchase a new piano. After the refinancing, Jacques' basis in the summer home is: a. $250,000 b. $240,000 c. $225,000 d. $175,000

Correct Answer: B, $240,000 Notes: the 50K home equity loan, but used only 40K on the house $200,000 +$40,000 = $240,000

Sarah Palin, a self-employed landscape architect, was injured last year in an accident in which a car driven by a very drunk Mary Poppins struck her pickup truck. Sarah filed a negligence suit against Mary and Mary's insurance company seeking over $2 million in compensatory and punitive damages. This year, the parties in the action settled the suit out of court for $900,000, which the parties agreed to allocate as follows: Payment for Pain and Suffering: $500,000 Reimbursed medical expenses: $100,000 Future Medical expenses: $50,000 Lost Income: $80,000 Punitive Damages: $150,000 Damages to Sarah's pickup truck: $20,000 Sarah paid $10,000 of the reimbursed medical expenses last year from her own funds and was allowed a medical expense deduction of $6,000 under IRC § 213. Sarah's health insurance company paid the remaining $90,000 in reimbursed medical expenses. It is true that: A. The entire $100,000 Sarah receives for reimbursed medical expenses is excludable from her gross income because the money is not hers to keep but must be used to pay her medical bills. B. $94,000 of the amount Sarah receives for reimbursed medical expenses is excludable from her gross income because she received a $6,000 medical expense deduction last year. C. Sarah must include in her gross income the entire $100,000 she receives for reimbursed medical expenses because her health insurance company has already paid her medical expenses. D. Sarah must include in her gross income $96,000 of the amount she receives for reimbursed medical expenses because her health insurance company paid $90,000 of the expenses and she was allowed a $6,000 medical expense deduction on account of her having paid the remaining $10,000.

Correct Answer: B, $94,000 of the amount Sarah receives for reimbursed medical expenses is excludable from her gross income because she received a $6,000 medical expense deduction last year. Notes: for reimbursed medical expenses, can only exclude what you havent already.

In honor of her twentieth anniversary of teaching high school mathematics, the Cooper Independent School District gave Emily a computer worth $1,200, which cost the district $1,000. This is the only award the District made in 2016. On account of this award, it is true that: A. Emily will not have to report any income because the award is a gift excludable from gross income pursuant to IRC § 102. B. If the Cooper Independent School District has a "qualified plan" for employee achievement awards, Emily will report no gross income. C. If the Cooper independent School District does not have a "qualified plan" for employee achievement awards, Emily will have to report $1,200 of gross income. D. Regardless of whether the Cooper Independent School District has a "qualified plan" for employee achievement awards, Emily will have to report $1,200 of gross income.

Correct Answer: B, If the Cooper Independent School District has a "qualified plan" for employee achievement awards, Emily will report no gross income. Notes: qualified vs. non-qualified. Remember the limits for Qualified (1,600) and non-qualified (400) b. Employers may deduct up to $400/year/employee for employment achievement awards. Anything more than $400 is income i. Unless it is a "qualified plan award," then the deduction limit is $1,600. ii. § 274(j)(2)(B)- Qualified plan award- employee achievement awarded as part of an established written plan or program of the taxpayer which does not discriminate in favor of highly compensated employees, under § 414(q), as to eligibility or benefits.

The Poughkeepsie Journal in Poughkeepsie, New York, gave Kaitlyn a free one-month subscription to the newspaper. After receiving The Poughkeepsie Journal for the month, Kaitlyn was under no obligation to subscribe. If she did subscribe, however, The Poughkeepsie Journal offered to give her 50% off the normal annual subscription rate of $500. Kaitlyn enjoyed reading the paper, and after the one-month free subscription expired, she took advantage of the one-year subscription rate. As regards the free one-month subscription and special one-year subscription rate, it is true that: A. Kaitlyn realized no income because the free one-month subscription and special one-year subscription rate are gifts from The Poughkeepsie Journal. B. Kaitlyn realized no income because The Poughkeepsie Journal merely gave her free samples and the newspapers actions were guided by a clear business purpose. C. Kaitlyn realized income equal to the value of the discount on her one-year subscription to The Poughkeepsie Journal because the discount is not available to the public. D. Kaitlyn realized income equal to the value of both the free one-month subscription and the special one-year subscription rate because she is not an employee of The Poughkeepsie Journal and thus, cannot receive fringe benefits.

Correct Answer: B, Kaitlyn realized no income because The Poughkeepsie Journal merely gave her free samples and the newspapers actions were guided by a clear business purpose.

Kareem purchased stock in Eisner, Inc. on January 15, 2012, for $1,000. On December 31, 2012, the stock was worth $1,500. On July 14, 2013, when the stock was worth $2,000, Gabby offered to buy the stock for $2,000. Kareem declined the offer. On April 4, 2014, when the stock was worth $2,500, Kareem borrowed $2,000 from Citizens Bank, pledging the stock as security for the loan. On May 12, 2015, Kareem repaid the $2,000 he had borrowed. On September 21, 2015, when the stock was worth $3,000, a fire in Kareem's house destroyed the stock certificates. Eisner, Inc. issued new certificates to Kareem. On June 26, 2016, when the stock was worth $3,500, Kareem gave it to Macomber, Inc. to satisfy a $3,500 debt he owed that corporation. As a result of his giving the stock Macomber, it is true that for 2016: a. Kareem had gross income of $500 because, at the time of the fire that destroyed the stock certificates, the stock was worth $3,000. b. Kareem had gross income of $2,500 because he had purchased the stock for $1,000. c. Kareem had gross income of $3,500 because, at the time of the transfer, the stock was worth $3,500. d. Kareem had gross income of $3,500 because he no longer had an obligation to repay that amount to Macomber, Inc.

Correct Answer: B, Kareem had gross income of $2,500 because he had purchased the stock for $1,000.

On January 1, 2017, Daniel Longman's 55th birthday, Mr. Longman paid $50,000 to Beals Life Insurance Company. Beals Life agreed to pay Mr. Longman (or his estate) $10,000 a year for ten years. The first payment is due to Mr. Longman on January 1, 2018. As regards this first payment: A. Mr. Longman will incur potential income tax liability on the entire $10,000. B. Mr. Longman will incur potential income tax liability on $5,000. C. Mr. Longman will incur potential income tax liability on $1,000. D. Mr. Longman will incur no income tax liability.

Correct Answer: B, Mr. Longman will incur potential income tax liability on $5,000. Notes: He just plugged it into the exclusion formula 50,000 (investment)/ 100,000 (expected return) =.5 (the exclusion ratio). Then multiply 10,000 (the distribution) by .5 (the exclusion ratio).

Frank borrowed $75,000 from Tracy and later, when Frank was insolvent, Tracy accepted a tract of undeveloped land from him in satisfaction of the debt. The land, which Frank had purchased as an investment for $20,000, had an appraised fair market value of $60,000 at the time Tracy received it. Immediately prior to the transaction, Frank's liabilities included the $75,000 debt to Tracy and $50,000 of indebtedness to other parties. In addition, however, Frank had guaranteed repayment of a $25,000 bank loan his son had taken out. The loan comes due in the near future, and the son estimates there is a "50/50 chance" he can repay it. Other than the tract of land Frank transferred to Tracy, his only assets are his personal property, including his cars and household furnishings, which have a total value of $55,000. As a result of Tracy's acceptance of the land in satisfaction of the debt, these items of personal property are not Frank's only assets. He continues to owe $50,000 to third parties and to be guarantor of his son's $25,000 loan. In determining how much discharge of indebtedness income he must report as a result of the settlement of the debt to Tracy, Frank: A. Should not include his $25,000 guaranty of his son's education loan among his liabilities because education loans are guaranteed by the federal government. B. Should not include his $25,000 guaranty of his son's education loan among his liabilities because it is not more likely than not that he will have to repay his son's debt. C. Should include his $25,000 guaranty of his son's education loan among his liabilities because if his son fails to pay the loan, it will become Frank's responsibility to pay it. D. Should include his $25,000 guaranty of his son's education loan among his liabilities because Frank has a legal obligation to pay for the education of his children.

Correct Answer: B, Should not include his $25,000 guaranty of his son's education loan among his liabilities because it is not more likely than not that he will have to repay his son's debt. Notes: rule is that it must be more likely than not that he'll have to pay. if that were the case, he would have to include

Matthew owns an executive placement agency that he operates as a sole proprietorship. Earlier this year, Matthew hired his son, Tyler, as a placement advisor. Tyler who recently earned his MBA is one of three placement advisors working for Matthew; the other two placement advisors (Madison and Joseph) have college degrees but neither has an MBA. Matthew hired Tyler at a salary equal to that he paid Madison and Joseph, even though they had far more experience. Given the profitability of his agency, Matthew gave each of the three placement advisors a substantial bonus at the end of the year. Tyler received a bonus of $15,000; Madison and Joseph each received a bonus of $5,000. Matthew has retained Kathryn Almond, CPA, to prepare his federal tax return. In determining whether the salary and bonus Matthew paid to Tyler is deductible, the primary issue Kathryn must resolve is: A. Whether the compensation is a gift from a father to his son. B. Whether the compensation is "reasonable" C. Whether the compensation is "necessary" D. Whether the compensation is "ordinary"

Correct Answer: B, Whether the compensation is "reasonable" Notes: when it comes to salaries, we look at reasonableness.

Robert is a teller with City Bank of Texas. Because the Bank tellers are extremely busy from approximately 11:30 in the morning until 2:00 in the afternoon, the bank requires that the tellers remain in the bank throughout this period. To allow the tellers to eat during this time, but to ensure that they do not spend more than time is necessary to do so, City Bank provides the tellers with a free lunch in the staff lounge. If Robert had to pay for the lunches that City Bank provides, he would have to spend $8.00 each day. Because this is a it expensive on a Teller's salary, Robert would probably bring his lunch from home. This would cost him maybe $3.00 each day. Because his employer provides him with a "free lunch" Robert must include in his gross income: A. $0, because the lunch is a de minimis fringe benefit. B. $0, because the bank provides the lunch to enable tellers to perform their jobs as the bank desires. C. $5.00 each day, the difference between the amount he would have to pay to purchase the lunch provided by City Bank and the cost of the lunch that he would otherwise provide for himself. D. $8.00 each day, the amount he would have to pay to purchase the lunch provided by the bank.

Correct Answer: B. $0, because the bank provides the lunch to enable tellers to perform their jobs as the bank desires. Notes: It's for the employer's convenience

In 2013, Penelope received a gift of stock from her grandmother. At the time of the gift, the stock was worth $40,000. Penelope's grandmother had a basis in the stock of $25,000. Penelope's grandmother died on July 20, 2016, when the stock was worth $55,000. Penelope sold the stock on December 1, 2016, for $60,000 in cash. Penelope's gain on her sale of the stock on December 1, 2016, was: A. $5,000 B. $20,000 C. $35,000 D. $50,000

Correct Answer: C, $35,000 Notes: her basis in the stock was 25K because it's an intervivos gift, and she therefore takes grandma's basis rule: basis for gain = basis in hands of grantor. Basis for loss= FMV at the time of gift. Here, she had a gain, so use grandma's 25K basis.

In Year 1, Peter acquired My Lord Valley Golf Course for $25,000. In Year 6 when My Lord Valley Golf Course had increased in value to $60,000, Peter borrowed $45,000 from Texas Tech Federal Credit Union on a recourse basis. Peter used $10,000 of the loan proceeds to construct improvements on the golf course and the remainder he spent on a vacation and the purchase of a boat. The loan was secured by My Lord Valley Golf Course and required annual payments of principal and interest. The loan was to be repaid in full at the end of Year 16. By Year 10, the value of My Lord Valley Golf Course had increased to $75,000. At the end of Year 10, Peter sold the property to Mary for $35,000 in cash and Mary agreed to make the loan payments on the outstanding $40,000 balance of the loan. Peter's gain on the sale of My Lord Valley Golf Course is: A. $0 B. $10,000 C. $40,000 D. $50,000

Correct Answer: C, $40,000 Notes: 25,000 plus 10,000 = 35,000. 35,000 plus 40,000 = 75,000

Martha owns and runs a small winder in Lubbock, Texas. She recently returned from her college reunion in Hunstville, Texas, and was very impressed by the faculty and students she met there. To show her support for the school, Martha sent the school a donation of $5,000. As a result of Martha's $5,000 contribution, the college announced that it would be affixing a plaque bearing her name to a chair in the reading room of the library. Martha also contributed three cases of wine to a student organization at the school that was holding an auction to raise money for its activities. The retail price of each case of wine is $150; it cost Martha $60 to produce each case. How much, if any, of a charitable contribution is Martha permitted? A. $180. B. $450. C. $5,180. D. $5,450.

Correct Answer: C, $5,180. Notes: It's the the cost of production. not FMV Issues are principals of gifts and basis. the cost of prod the real test: is it quid pro quo? was she donating with the plaque in mind?

When she was 30 years old, Arlette Williams purchased an ordinary life insurance policy in the face amount of $40,000, naming her husband, Andy, as beneficiary. Arlette paid an annual premium of $1,200 on the policy. Arlette was killed in a car accident at a time when the policy had a cash surrender value of $14,000. The insurance company paid Andy the $40,000 face amount. Arlette had paid a total of $18,000 in premiums prior to her death. Had Arlette purchased $40,000 of term insurance rather than whole life insurance, her total premium payments over the same period would have amounted to $6,000. Upon receipt of the insurance proceeds: A. Andy will be liable for federal income taxes on $40,000, the full amount of the insurance proceeds. B. Andy will be liable for federal income taxes on $22,000, the difference between the insurance proceeds and the premiums paid by Arlette. C. Andy will have no federal income tax liability because he received the proceeds as a result of Arlette's death. D. Andy will have no federal income tax liability because his receipt of the insurance proceeds was supported by adequate and valuable consideration.

Correct Answer: C, Andy will have no federal income tax liability because he received the proceeds as a result of Arlette's death. Notes: the last sentence is simply there to mess with you

Irving Shillingford is a self-employed certified financial planner in Palm Desert, California. Mr. Shillingford paid $20,000 per year to an agency that provides chauffeur service. Under his contract with the agency, Mr. Shillingford is entitled to up to 20 hours of chauffer service per week. Mr. Shillingford usually takes advantage of this service a couple of times each business day when he makes house calls to some of his wealthy clients. Last week, Mr. Shillingford told his tax attorney: "The chauffer service enables me to forget the problems of the world while I ride in luxury. My clients are impressed when they see me arrive in a chauffeured limousine. They assume that I must know what I am doing." Mr. Shillingford's $20,000 annual payment to the agency is MOST LIKELY: A. Not deductible because Mr. Shillingford could use a less expensive means of transportation to visit his clients. B. Not deductible because the expense is not ordinary and necessary in Mr. Shillingford's line of business. C. Deductible because having the chauffer service helps Mr. Shillingford impress his clients, leading them to hold his financial planning business in high regard. D. Deductible because whether he uses the chauffer service or some other mode of transportation, Mr. Shillingford would incur travel expenses when he visits his clients.

Correct Answer: C, Deductible because having the chauffer service helps Mr. Shillingford impress his clients, leading them to hold his financial planning business in high regard. Notes: The Palo Alto case--> guy had plane on stand by. Cost was deductible because even though he didn't use it that often, there were times that he really had to

In Year 1, Amanda acquired a $150,000 life insurance policy on her life requiring annual premiums of $1,000. Of the entire premium, $200 represented payment toward the risk element of the insurance policy, and $800 represented payment toward the savings element of the policy. In Year 15, Amanda sold the policy to her son, Francis, for its then cash value of $17,500. Francis made the premium payments in Years 16 through 20. Amanda died in Year 20. In Year 20, the insurance company paid Francis $150,000 as the beneficiary under the policy. It is true that: A. Francis can exclude $17,000 of the payment from his gross income for Year 20. B. Francis can exclude $20,000 of the payment from his gross income for Year 20. C. Francis can exclude $22,500 of the payment from his gross income for Year 20. D. Francis can exclude the entire $150,000 of the payment from his gross income for Year 20.

Correct Answer: C, Francis can exclude $22,500 of the payment from his gross income for Year 20. Notes: so he paid 17,5000 then paid premiums of 5,000. so he paid 22,500 total, making C correct

Ryan purchased real property for $60,000. Three years later, the property had increased in value to $150,000. The following year, the real property market dipped and the property's value fell to $45,000. Ryan deeded the property to his brother, Hunter, as a gift. A year later, Jason sold the property for $55,000. As a result of the sale: A. Hunter recognized a loss of $5,000 because his basis in the property was $60,000. B. Hunter recognized a gain of $10,000 because his basis in the property was $45,000. C. Hunter recognized neither a loss nor a gain because he received the property by gift. D. Hunter recognized neither a loss nor a gain because Ryan had purchased the property for $60,000.

Correct Answer: C, Hunter recognized neither a loss nor a gain because he received the property by gift. Notes: D is not totally wrong, but just not as correct. He received property by gift, meaning he has no loss or gain. Rule for gifts: when there's a gain, you use the basis of the property in the hands of the last purchaser. When there's a loss, you use the FMV of the property. Here, the FMV was probably 55, so no gain or loss

The building in which Phoebe conducted her travel agency was destroyed in a fire resulting from a Fourth of July fireworks display sponsored by a nearby shopping mall. In the negligence action she brought against both the shopping mall owners and the company they hired to produce the fireworks display, Phoebe recovered $350,000 for the destruction of her building and $150,000 in lost profits. Phoebe had an adjusted basis of $200,000 in the building; the building had a fair market value of $350,000. In determining the tax consequences of these events to Phoebe, the primary question one must answer is: A. Had Phoebe owned and used the building for two of the five years leading up to the date of the fire? B. Had Phoebe owned and used the building for two of the five years leading up to the date on which she received the $350,000 payment from the shopping mall owners and the company that had produced the fireworks display? C. In lieu of what was the damages awarded? D. Was the fire "an act of God"?

Correct Answer: C, In lieu of what was the damages awarded? Notes:

Bill has had a difficult financial year and has been forced to declare bankruptcy. At the time Bill declared bankruptcy, he owed First National Bank $20,000. As a result of the bankruptcy judgment, Bill is no longer liable to First National Bank for any portion of the debt. In filing his federal income tax return, Bill must: A. Include in his gross income the full $20,000 of discharge of indebtedness income. B. Include up to $20,000 in discharge of indebtedness income in his gross income, to the extent of any net assets that he holds following the bankruptcy. C. Include no portion of the $20,000 in discharge of indebtedness income in his gross income. D. Seek more information to determine whether he can exclude any portion of the discharge of indebtedness income from his gross income.

Correct Answer: C, Include no portion of the $20,000 in discharge of indebtedness income in his gross income. Notes: bankruptcy blows everything away

Daren Sammy is a cash method, calendar year taxpayer. On December 1, 2016, Mr. Sammy received an annual royalty check for $25,000 from Aspen Publishing Co. On February 1, 2017, before Mr. Sammy had filed his 2016 federal income tax return, Aspen informed him that its accounting department had made a mistake in calculating his 2016 royalties. Rather than $25,000, the royalties should have been $20,000. Mr. Sammy promptly returned $5,000 to Apsen. As an honest and law-abiding citizen, Mr. Sammy should: a. File a Form 1040X to amend his 2016 income tax return to reflect the receipt of only $20,000 in royalty income. b. File a Form 1040X to amend his 2017 income tax return to reflect a $5,000 deduction. c. Report $25,000 in royalty income for 2016. d. Enter a $5,000 above-the-line deduction on his 2016 income tax return.

Correct Answer: C, Report $25,000 in royalty income for 2016. Reasoning: the question really is: what is income and what is the significance of an obligation to repay. He recieved 25K and had control of it, making it income. And on December 31st, he could still have done anything with it. Therefore, the law requires he report it. The "above-the-line" thing is a red herring.

Caroline Castor, the curator of a small museum in San Francisco, California, leased a condo in the hills around Sausalito in 2010 and made the condominium her principal residence. After leasing the condominium for almost five years, Ms. Castor finally purchased it on December 1, 2014, for $600,000. Subsequent to purchasing the condo, Ms. Castor met Gibbs Serrant and the two were married on July 1, 2015. Because Mr. Serrant owned a larger and more centrally located home in San Francisco, the newly-weds decided to make Mr. Serrant's home their principal residence and to use Mrs. Serrant's condominium on weekends when they wanted a change of pace. Thus as of July 1, 2015, Mr. Serrant's home became the former Ms. Castor's principal residence. Ultimately, because they did not use the condo as often as they had anticipated, they decided to sell it. On December 15, 2016, Mrs. Serrant sold the condominium for $750,000. Title to the condominium was in her name only. Assuming the former Caroline Castor had never before taken advantage of IRC §121 and now wanted to do so, it is true that: A. Should would be able to exclude $500,000 of the gain on the sale of the condominium because she is now married. B. She would be able to exclude $250,000 of the gain on the sale of the condominium because, although she is married, she held title to the property in her name only. C. She would be able to exclude $150,000 of the gain on the sale of the condominium because she satisfied both the ownership and use tests of IRC § 121. D. She would not be able to exclude any of the gain on the sale of the condominium because she had rented - and not owned - the property from 2010 to November 30, 2014

Correct Answer: C, She would be able to exclude $150,000 of the gain on the sale of the condominium because she satisfied both the ownership and use tests of IRC § 121. Notes: leased for 5 years and finally purchased then. Lived in it for 2 years, then sold for 600,000. Got married in meantime. BUT you can lease your principal residence. BUTTT 121(a) says own and use. She owned it for 2 years so she could exclude up to 250,000 ordinarily but she only had a 150,000 gain.

Patricia is a criminal defense attorney who has represented a number of high-profile criminal defendants. Last year, an investigative report in the local newspaper claimed that she was involved with several clients in criminal activities. As a result of the accusations, Patricia's legal practice suffered, she experienced emotional distress that manifested itself in physical symptoms, including insomnia and headaches, requiring medical treatment. Patricia sued the newspaper for libel, and, during the trial, the sources upon which the newspaper reporters relied were shown to have provided the reporters with false information that the reporters could have determined was false with some additional investigation. The jury returned a verdict in Patricia's favor, awarding her damages for lost income, emotional distress, and medical expenses. In addition, the jury awarded punitive damages. As regards Patricia damages award, it is true that: A. None of the damages is includable in Patricia's gross income. B. Only the punitive damages are includable in Patricia's gross income. C. The entire damage award except for medical expenses is includable in Patricia's gross income. D. The entire damages award is includable in Patricia's gross income.

Correct Answer: C, The entire damage award except for medical expenses is includable in Patricia's gross income. Notes: she had medical expenses, but remember there's exceptions in the law for medical expenses stemming from suits based on libel, discrimination, slander, etc. We can deduct medical expenses when there's bad acts. So she gets to exclude the medical expenses, and everything else is includable.

Benjamin is an attorney in a solo practice. Working with him is an office manager, legal secretary, and a part-time law clerk. This year, Benjamin paid the office manager salary of $35,000, the secretary an hourly wage that totaled $15,000, and the law clerk, $3,500. Benjamin also incurred additional expenditures in the amount of $18,000 for office rent, $5,000 for office supplies, and $5,000 for insurance. He also spent $15,000 for a new computer system and office furniture. The following expenditures are currently deductible as business expenses: A. The salaries and wages. B. The salaries and wages, office rent, and office supplies. C. The salaries and wages, office rent, office supplies, and insurance. D. The salaries and wages, office rent, office supplies, insurance, computer system, and office furniture.

Correct Answer: C, The salaries and wages, office rent, office supplies, and insurance. Notes: capital expenditures get depreciated and start-up costs are amoratized. the computer system and office furniture depreciate over time. the rest is immediately deducitble

Amanda Wilde owns a number of rental properties that she rents to Texas Tech University students. Ms. Wilde requires that the students pay a security deposit equal to one month's rent. The rental agreement she uses specifically provides that security deposits will be applied (a) to compensate Ms. Wilde for any property damage or (b) to cover any unpaid rent. If the tenant complies with all the terms of the agreement, the agreement requires Ms. Wilde to return the security deposit to the tenant. Ms. Wilde neither maintains a separate account for, nor pays interest to the students on, the security deposits. Whenever a tenant damages the property, Ms. Wilde bills the client for the full amount of damages without deducting the amount from the security deposit. Typically, Ms. Wilde's tenants either ask that the security deposit be applied to the last month's rent or they simply fail to pay the last month's rent. In any event, it is rare that Ms. Wilde ever actually returns a security deposit to a tenant. It is true that: a. The security deposits Ms. Wilde receives from her tenants constitute deposits that are not immediately includable in her gross income because she must refund the deposits if the tenants demand that she does so. b. The security deposits Ms. Wilde receives from her tenants constitute deposits that are not immediately includable in her gross income because the funds are to be used to compensate her for any property damage and to cover any unpaid rent. c. The security deposits Ms. Wilde receives from her tenants constitute prepaid rent that is includable in her gross income because most tenants either ask her to apply the funds to the last month's rent or simply do not pay the last month's rent. d. The security deposits Ms. Wilde receives from her tenants constitute prepaid rent that is includable in her gross income because even when tenants damage property, Ms. Wilde does not deduct the costs thereof from the security deposits.

Correct Answer: C, The security deposits Ms. Wilde receives from her tenants constitute prepaid rent that is includable in her gross income because most tenants either ask her to apply the funds to the last month's rent or simply do not pay the last month's rent. Reasoning: Deposits are supposed to be held in escrow and usually pay interest on it. so A & B are laughable What D is incorrect: it's a fine line between C and D. C the tenant is in charge. D, Ms. WIlde take some action

The tuition at Oklahoma State University School of Law ("OSU-LAW") is $10,000 for state residents and $30,000 per year for non-residents. OSU-LAW waives the out of state differential for Kurt, a non-resident, who is serving as an unpaid research assistant to Professor Horn on preparation of a new book. Kurt will work about 200 hours for Professor Horn, and will receive 3 hours of academic credit for his research work. All students must study legal research, either by taking the regular classroom course or by arranging an individual program with one of the professors. In addition, a number of students also do paid research work with professors for $10 an hour. As regards his situation: A. Kurt must report the $20,000 tuition differential as compensation under IRC § 61 because he provides services to OSU-LAW in exchange for the differential. B. Kurt must report the $20,000 tuition differential as compensation under IRC § 61 because all students must study legal research. C. The tuition differential is not income to Kurt because the tuition waiver is not conditioned upon his performing services for OSU-LAW. D. The tuition differential is not income to Kurt because the $20,000 tuition differential does not exceed the dollar limitations imposed by IRC § 117(c).

Correct Answer: C, The tuition differential is not income to Kurt because the tuition waiver is not conditioned upon his performing services for OSU-LAW. notes: it's like instate tuition, but he is still paying for it.

Harrison is a flight attendant with Northeast Airlines. One of the benefits in working for Northeast is that employees and the members of their immediate family fly free of charge on Northeast Airlines flights within the continental United States. The only requirement is that eligible individuals book the tickets at least eight weeks in advance and the total value of tickets booked by an employee not exceed $10,000 in any 12-month period. Harrison and his family took flights to Orlando, Florida, Taos. New Mexico, and Seattle, Washington for vacations over the past year. Had Harrison been required to purchase the airline tickets, he would have spent approximately $7,500. How much, if any, must Harrison include in gross income? A. No portion of the value of the tickets is includable in Harrison's gross income. B. The value of the tickets used by Harrison's family members is includable in his gross income; only the value of the thickets for Harrison's personal use is excludable from gross income. C. 80% of the value of the tickets is includable in Harrison's gross income. D. The entire value of the tickets is includable in Harrison's gross income.

Correct Answer: C. 80% of the value of the tickets is includable in Harrison's gross income. Notes: the exludable amount of discounts is %20.

Edward lives in Amarillo, Texas. In 2011, he purchased a home that he uses as his principal residence. He paid $70,000 down and took a loan out from Happy State Bank for $280,000. The loan is secured by a mortgage on the house. In 2016, Edward paid interest of $18,900 on the loan. He also paid property taxes on the house of $3,500. Finally, he determined that he paid sales taxes of $2,750 on purchases of household goods. How much, if any, of the expenses related to Edward's house are deductible? A. $3,000, the property taxes paid on the house. B. $18,900, the interest on the loan. C. $22,400, the property taxes paid on the house and the interest on the loan. D. $25,150, the property taxes paid on the house, the sales taxes paid on the household goods, and the interest on the loan

Correct Answer: D, $25,150, the property taxes paid on the house, the sales taxes paid on the household goods, and the interest on the loan Notes: Rules: mortgage interest is deductible; property taxes are deductible; so here, either state interest taxes or sales taxes are deductible. In Texas, no state income tax, so we know he will deduct sales tax. So you just add up everything, and the correct answer is D

Andrew works as an insurance agent for Mutual of Omaha Insurance Company. Because of the number of the new policies that he sold over the course of the past year, the company selected him as "Agent of the Year." The recognition as Agent of the Year comes with a $5,000 bonus. Andrew subsequently gave $1,000 of the bonus money to the local public hospital. How much, if any, of the bonus must Andrew include in gross income as a result of his selection as Agent of the Year? A. $0, because prizes and awards are excludable from gross income. B. $0, because this is an employee achievement award excludable from gross income. C. $4,000, because the value of a prize is not includable in gross income to the extent that the recipient contributed the prize to a charitable organization. D. $5,000, because all prizes and awards are generally includable in gross income.

Correct Answer: D, $5,000, because all prizes and awards are generally includable in gross income. Notes: A & B are obviously incorrect. Look to section 74(b)(3)--> they're testing your understanding of net vs. gross income. Net income = 4,000. Gross income = 5,000

Carissa decided to join a health club and visited one of the clubs near her place of work to inquire about membership. The club manager gave Carissa a pass to the club enabling her to use the facilities free of charge for one week. After using the club for a week, Carissa opted not to join. Carissa does not intend to include the value of the one week pass to the club in her gross income for the year. She believes she can support her belief by citing one of the the following theories: (i.) the one-week pass was a gift from the health club. (ii.) the one-week pass was a free sample handed out by the health club (iii.) her use of the health club was primarily for the benefit of the club owners who hoped she would purchase a membership at the end of the week (iv.) the widespread use of promotional gimmicks makes it impractical, if not impossible, for the IRS to administer a rule requiring inclusion of benefits such as this in gross income. Carissa's BEST argument(s) for the exclusion would be: A. (i) only B. (ii) only C. (i), (iii), and (iv) only D. (ii), (iii), and (iv) only

Correct Answer: D, (ii), (iii), and (iv) only Notes: (i) not a good answer because of the Dubelstein case--> A gift in the statutory sense proceeds from a detached and disinterested generosity, out of affection, respect, admiration, charity or like impulses." The most critical consideration is the transferor's intention.

Mushtaq Mohammad was injured in an accident and lost sight in one eye. He incurred $30,000 in medical expenses. He had an accident and health policy he had purchased that paid him $15,000 for medical expenses, $10,000 for lost wages, and $25,000 for the loss of sight. Another accident and health policy provided by his employer paid $20,000 for medical expenses, $12,000 for lost wages, and $20,000 for loss of sight. It is true that: A. As a result of his receipt of these funds, Mushtaq has gross income of $22,000, the total amount he received from both policies for lost wages. B. As a result of his receipt of these funds, Mushtaq has gross income of $5,000, the amount by which his total receipts for medical expenses exceeded the amount he incurred for medical expenses. C. All proceeds Mushtaq received from the accident and health policy provided by his employer are includable in his gross income. D. All proceeds Mushtaq received from the accident and health policy he purchased are excludable from his gross income.

Correct Answer: D, All proceeds Mushtaq received from the accident and health policy he purchased are excludable from his gross income. Notes: not all of his expenses were medical. And if his ER had provided his insurance policy, it'd be income. He used after ta dollars to buy it, so he shouldn't be taxed on it twice.

Lucia Blaize (age 52) and Merrill Matthew (age 48), husband and wife, had an adjusted gross income for 2016, for IRA purposes on filing a joint tax return, of $155,000. Ms. Blaize, an active participant in a pension plan, had gross income from compensation of $80,000; Mr. Matthew's gross income from compensation was $70,000. Mr. Matthew was not an active participant in a pension plan. Assuming the couple files a joint tax return for 2016, disregarding any inflation adjustments to the IRA contribution amounts, it is true that for the year 2016: A. Ms. Blaize may contribute $5,000 to a nondeductible IRA because, in 2016, she earned more than half of the couple's compensation income. B. Ms. Blaize may contribute $5,000 to a nondeductible IRA because she is over 50 years of age. C. Mr. Matthew may contribute $5,000 to a nondeductible IRA because that type of IRA has no contribution limits. D. Mr. Matthew may contribute $5,000 to a nondeductible IRA because he is not yet 50 years old.

Correct Answer: D, Mr. Matthew may contribute $5,000 to a nondeductible IRA because he is not yet 50 years old. Notes: i. Taxpayer can contribute tax-free up to $5,000 per year. ii. A taxpayer over the age of 50 may contribute tax-free an additional $1,000, making the tax-free contribution $6,000.

Michelle Jackson, who graduated from law school a year ago, is finishing a one-year judicial clerkship with a federal judge in California. She is now looking for a position as an associate in a good law firm. Steven, her husband, is finishing a two-year MBA program at the Metropolitan University's Graduate School of Management. He entered the MBA program immediately following graduation from college and has worked with various corporations during the past several summers. Steven is now seeking a management trainee position in a large corporation. Michelle and Steven travel to New York at their own expense to hunt for jobs. Each incurs airfare expenses of $500, hotel charges of $600, and resume and writing sample preparation costs of $100. After three days of interviewing and sight seeing, they returned home. Michelle receives and accepts a job offer as an associate with a New York City law firm. Steven is still looking. Steven's employment-seeking expenses for the trip are: A. Deductible because he incurred the expenses while accompanying his wife on an employment-seeking trip. B. Deductible because prior to the trip, he had worked with various corporations during the past summers. C. Not deductible because employment-seeking expenses are never deductible. D. Not deductible because, prior to the trip, he had not been engaged in a trade or business.

Correct Answer: D, Not deductible because, prior to the trip, he had not been engaged in a trade or business. Notes: Steve was not employed by anyone, just seeking employment as a student. For businesss deductions, it must be related to business. But Steve wasn't doing anything

Amber, a recent law school graduate from Syracuse, New York, is an associate at Dennis, Deutschendorf & Devine, a large firm in Tyler, Texas. Amber has no family members in Texas. Accordingly, she puts in long hours at the office. On November 30, 2016, the last day of the firm's fiscal year, Clinton Dennis, the firm's managing partner, handed Amber a $5,000 bonus check. The following weekend, Amber deposited the check into her savings account at Prosperity Bank. As regards the 2016 filing year for federal income tax purposes, it is true that: a. The $5,000 bonus check does not constitute income to Amber because it is a gift. b. The $5,000 bonus check does not constitute income to Amber because she received it at the end of the fiscal year. c. The $5,000 bonus check is income to Amber because she earned it. d. The $5,000 bonus check is income to Amber because she received it from her employer

Correct Answer: D, The $5,000 bonus check is income to Amber because she received it from her employer Notes: 11/30/2016 = end of firm's fiscal year, but Amber = individual - follows calendar year 12/31/2016 end of year for individuals Any transfer from employer to employee without familial relationship is income (why C is not the best answer. it would have been right if the ER was the father, for example)

Brad is a professional baseball player who plays for the Texas Rangers. For a variety of reasons, some of which are tax-related, Brad organized a corporation in which he is the sole shareholder. The corporation has a three-person board of directions composed of Brad, Brad's spouse, and Brad's brother. As the sole shareholder, Brad can unilaterally replace any member of the board of directors at any time. Brad has a contract with the corporation to perform services only on behalf of the corporation. The Texas Rangers and several athletic apparel manufactures whose products Brad endorses have entered into contracts with the corporation for Brad's services. The corporation receives payments from the Texas Rangers and the manufacturers. Brad receives a salary from the corporation. The payments made to the corporation are taxable to: A. Brad, because he actually performed the services for which payment was made. B. Brad, because he controls the corporate board of directors. C. Brad, with respect to the payment from the Texas Rangers, only because the team, not the corporation, controls Brad while he is playing baseball. D. The corporation, because it is a separate legal entity and Brad is not a party to any of the corporation's contracts with the team or the manufacturers.

Correct Answer: D, The corporation, because it is a separate legal entity and Brad is not a party to any of the corporation's contracts with the team or the manufacturers. A is wrong because it's a corporation. Corporations are separate legal entities for tax purposes.

On his 60th birthday, Jeffery Grandjean paid the Travis Hanson Insurance Company $15,000, and Travis Hanson Insurance Company agreed to pay $1,000 a year to Jeffery and his wife, Rebekah, or the survivor, for as long as either of them is living. Rebekah, whose birthday was the day before Jeffery's, is 53 years old. It is true that: A. The proceeds of this variable life insurance policy will never be taxed. B. The proceeds of this joint and survivor annuity will never be taxed. C. The proceeds of the variable life insurance policy will be taxed to the extent such proceeds exceed the amount covered by the exclusion ratio. D. The proceeds of this joint and survivor annuity will be taxed to the extent such proceeds exceed the amount covered by the exclusion ratio.

Correct Answer: D, The proceeds of this joint and survivor annuity will be taxed to the extent such proceeds exceed the amount covered by the exclusion ratio. Notes: immediately notice it's a joint and survivor annuity, so look in answers for joint and survivor annuity. Narrows it down to B & D, and B is wrong

Ashton is an accountant who lives and works in Sugarland, Texas. A client recently asked Ashton to undertake a major project that will require him temporarily move to the client's home office in Fargo, North Dakota. The project will likely take eight months to complete. Ashton decided to undertake the project, provided that he can return to Sugarland every two weeks to see his family. Ashton rented an apartment, furniture, and a car for the eight months he spent in Fargo. In addition, he traveled to and from Sugarland sixteen times over her eight-month stay. How much, if any, of Ashton's expenses while in Fargo are deductible? A. None of the costs are deductible because Ashton's decision that her family remain in Sugarland was a personal, not a business decision. B. Only the costs of transportation and 50 percent of the costs of meals for the initial trip to Fargo and the final trip to Sugarland are deductible; the remaining costs are all nondeductible personal expenditures. C. All of the costs (subject to the 50 percent limitation on the cost of meals) except for the costs of trips to Sugarland and back are deductible; the cost of trips to Sugarland and back are personal expenses to see his family. D. All of the costs (subject to the 50 percent limitation on the cost of meals) are deductible because Ashton is away from home in pursuit of his trade or business.

Correct Answer: D. All of the costs (subject to the 50 percent limitation on the cost of meals) are deductible because Ashton is away from home in pursuit of his trade or business. Notes: his home base is in Sugar land and the expenses were incurred going home.

Jenee is an artist who has long operated her own gallery through which she sells her own work along with that of other artists. She recently decided to open a coffee shop in a location not far from her gallery in which she plans to display some of the artwork that she sells in her gallery. It has taken approximately eight months to find the location for the coffee shop, negotiate the lease for the space, obtain the necessary municipal permits, hire and train her staff, and equip the coffee shop with the necessary equipment. In addition, she has taken out advertising in the local newspaper announcing the opening of the coffee shop. In accounting for the costs incurred in opening her coffee shop, Jenee must note that: A. None of the costs she has incurred are deductible because she is not yet engaged in the coffee shop business. B. All of the costs, except those for any capital expenditures, are deductible because the coffee shop is just an expansion of Jenee's gallery business. C. All of the costs must be costs must be capitalized and amortized over not less than five years once the coffee shop business gets underway. D. All of the costs, except those for any capital expenditures, must be capitalized and amortized over not less than five years once the coffee shop business is underway.

Correct Answer: D. All of the costs, except those for any capital expenditures, must be capitalized and amortized over not less than five years once the coffee shop business is underway. notes: the issue is start-up costs vs. capital expenditures.

Allison is an au pair for Mark and Emilie Thompson, a professional couple. Typically, Allison works five-and-a-half days each week, looking after the Thompson's two small children from approximately 7:00 in the morning until 8:00 at night during the week, then on Saturday mornings. In addition to a small salary, the Thompsons provide her with living quarters (a bedroom, bathroom, and small siting room) off the children's rooms and three meals each day. The value of Allison's room and board is: A. Includable in her gross income because the room and board represents compensation for her services. B. Not includable in her gross income because the room and board is a working condition fringe. C. Not includable in her gross income because the room and board is a no-additional-cost service fringe benefit. D. Not includable in her gross income because the room and board is provided for the convenience of the employer.

Correct Answer: D. Not includable in her gross income because the room and board is provided for the convenience of the employer.

Questions (a) and (b) are based on the following hypothetical: Seven years ago, Alfonso purchased a downtown condominium for $750,000. Throughout the years, he used the condo as his primary residence. He financed the condo with a loan of $600,000. This year, he sold the condo for $1,100,000, using $540,000 of the proceeds to pay off the outstanding balance of the loan, $260,000 as a down-payment on the purchase of a new $1,300,000 house in the suburbs, and $300,000 to invest in the stock market. Alfonso has not owned any other property that he has used as a residence since buying the condominium. (a) How much, if any, of the gain that Alfonso realized on the sale of the condominium must he include in gross income? A. $0, because the purchase price of the new house exceeds the sale price of the condominium. B. $90,000, because he used only $260,000 of the $350,000 gain on the sale of the condominium to purchase the new home. C. $100,000, because he can exclude only $250,000 of the $350,000 gain on the sale from his gross income. D. $350,000, because the entire gain on the sale of the condominium is includable in gross income. (b) Now assume that Alfonso married Annette six months ago, but that he and Annette lived together in the condominium for two years prior to the wedding. In the year of the sale, Alfonso and Annette filed a joint tax return. How much, if any, of the fain that Alfonso realized on the sale of the condo must they include in gross income? A. $0, because Alfonso and Annette can exclude up to $500,000 of the gain from their gross income because they are filing a joint return in the year of the sale. B. $0, because Alfsonso and Annette can exclude up to $500,000 of the gain from their gross income because both Alfonso and Annette used the property as their principal residence for at least two years during the prior five-year period and Alfonso owned the property during this period. C. $100,000, because Annette and Alfonso were not married for more than a two-year period during which Annnette used the property as her principal residence. D. $100,000, because Annette did not own the property at the time of the sale.

Correct answer for (a): C, $100,000, because he can exclude only $250,000 of the $350,000 gain on the sale from his gross income. Correct answer for (b): B, $0, because Alfsonso and Annette can exclude up to $500,000 of the gain from their gross income because both Alfonso and Annette used the property as their principal residence for at least two years during the prior five-year period and Alfonso owned the property during this period Notes on (a): Bought for 750K, used a 600K loan. SOld for 1,100,000. Used 540K to pay off the loan. Used 260K as down payment purchase. Principal residence for 7 years, so it satisfies the use, time, and no other transaction tests. And he is single. Notes on (b): C & D were laughably wrong. Not A because getting married and filing joint return isn't all. there are other requirements you must satisfy.

When Mike graduated from college, his uncle bought him a new car as a graduation present. Mile would have had to pay $25,000 had he purchased the car from a car dealer. Mike's uncle actually paid only $20,000 for the car because he was a friend of the dealer. Mike could probably have sold the car at the time he received it for $23,000 as a used car. What are the income implications for Mike when receives the car? A. $0 B. $20,000H C. $23,000 D. $25,000

Correct answer: A, $0 Notes: it's a bequest/gift. it gives you numbers to trip you up, but it's a gift so income is 0. gifts are not realization events

Tommy Lee Jones won a computer programming competition for high school students. The competition was sponsored by Best Buy, which awarded computers to Tommy and his teacher, Tori Glazner. Best Buy, which purchased the computers for $900 each, lists such computers for sale at $2,000, although it occasionally sells them at reduced prices as low as $1,600. Tori had a comparable computer already, so she promptly sold the computer she received to Stefanie Gonzalez, a fellow teacher. Tori makes the following assumptions: (i). She has received income in the amount of the value of the computer she received from Best Buy. (ii). The value of the computer in her hands will be the same as the computer's fair market value. (iii). The fair market value of the computer is $2,000, the price at which Best Buy lists such computers for sale. (iv). Upon the sale of the computer to Stefanie, Tori may find herself reporting more as gross income than she ultimately sold the computer for. Which of Tori Glazner's assumptions are correct: A. (i), (ii) and (iv) only. B. (i), (ii) and (iii) only. C. (i), (iii) and (iv) only. D. All of Tori Glazner's assumptions are correct

Correct answer: A, (i), (ii) and (iv) only Notes: (iii) is not correct

Brandon and LaFonda Rogers, husband and wife, purchased a home in Seattle in 2008 for $350,000 and held title to the home as joint tenants with right of survivorship. The home was their principal residence until May 2015 when they moved to a town in northern Idaho, where they purchased a home for $250,000. In January of 2016, the couple finally sold their Seattle home. Robert Session, the purchaser, paid Mr. and Mrs. Rogers $600,000 in cash and assumed a $250,000 mortgage encumbering the property. The Rogers, who had added an additional room to the Seattle home, had an adjusted basis in that home of $400,000. The Rogers, who had never before taken advantage of the IRC §121 exclusion, filed a joint tax return for the year 2016. On account of the sale of their Seattle home, for tax year 2016 Brandon and LaFonda Rogers: A. Will have taxable gain of zero because they qualify for the IRC §121 exclusion. B. Will have taxable gain of $200,000 because they qualify for the IRC § 121 exclusion. C. Will have taxable gain of $450,000 because they do not qualify for the IRC § 121 exclusion. D. Will have taxable gain of $150,000 because they do not qualify for the IRC § 121 exclusion.

Correct answer: A, Will have taxable gain of zero because they qualify for the IRC §121 exclusion. Notes: The exclusion for joint filers is 500K and if it's not joint, it's 250k. And they did qualify. James ran through the elements.

When Christina Gayle bought her home, she purchased a term insurance policy on her life in the face amount of the home mortgage, $100,000. The insurance policy was a decreasing term insurance policy. Accordingly, the amount of the insurance protection decreased as the balance owing on the mortgage decreased. Ms. Gayle died ten years after purchasing the home and after she had paid $5,000 in insurance premiums. She devised the home to her half-sister, Charlene Smith. The insurance proceeds amounted to $85,000 and were payable to Ms. Smith who used the proceeds to prepay the mortgage on the home. It is true that: A. Ms. Smith must include the $85,000 of insurance proceeds in gross income because she has an undeniable accession to wealth. B. Ms. Smith must include the $85,000 of insurance proceeds in gross income because she used the proceeds to prepay the mortgage on the home. C. Ms. Smith is not required to include the $85,000 of insurance proceeds in gross income because she received the proceeds by reason of Ms. Gayle's death. D. Ms. Smith is not required to include the $85,000 of insurance proceeds in gross income because she received the proceeds as an inheritance.

Correct answer: C, Ms. Smith is not required to include the $85,000 of insurance proceeds in gross income because she received the proceeds by reason of Ms. Gayle's death. Notes: remember, life insurance policies are often used to cover a mortgage. Smith doesn't have income, so can take A and B off right away. C is right because Smith recieved it because Gayle Died

Margaret is employed as a software engineer. Margaret received a salary of $75,000 in 2016. Because of the labor shortage for engineers like Margaret, her employer allows her to live in an employer-provided apartment free of charge. The fair market value of renting the apartment for one year is $18,000. In addition, Margaret received a car from her employer with a fair market value of $20,000, but that was worth only $12,000 to Margaret. How much must Margaret include in her gross income for 2016? A. $75,000 B. $92,000 C. $105,000 D. $113,000

Correct answer: D, $113,000 Notes: salary is $75,000; Apartment is $18,000, Car is $20,000 (FMV)/ $12,0000 (worth to her). We use the objective.

The next three questions are based on the following hypothetical: John purchased Greenacre, a parcel of unimproved real property, for $10,000 in 2016. At the end of 2016, Greenacre had appreciated in value to $15,000. On March 31, 2017, John sold Greenacre to Mary for $15,000 in cash. (a) In preparing his federal income tax return for 2017, John must take into consideration as a result of his sale of Greenacre to Mary he had: A. $15,000 of gain realized. B. $10,000 of gain realized. C. $5,000 of gain realized. D. No gain realized. (b) What would be the tax implications for John if, instead of selling the property for $15,000 in 2017, John transferred Greenacre to Chris in exchange for Blackacre, which was also worth $15,000? A. $15,000 of gain realized. B. $10,000 of gain realized. C. $5,000 of gain realized. D. No gain realized. (c) Assume that Blackacre had a value of $20,000 when John received Blackacre in exchange for Greenacre on March 31, 2017. What will be the basis of Blackacre in John's hands following the exchange? A. $0 B. $10,000 C. $15,000 D. $20,000

correct answer for (a): C, $5,000 of gain realized. correct answer for (b): C, $5,000 of gain recognized. correct answer for (c): D, $20,000 Notes on (b): need to break this down into 2 transactions--Basis in GreenAcre was 10K. FMV of black acre was 15K. His amount realized was 15K. Basis was 10K, so gain is 5K. Notes on (c): because it is the value of what he got