Advanced Tax Concept 175 Questions

True

A distribution from the other adjustment account (OAA) is not taxable to an S shareholder. a. True b. False

True

A one-person LLC can be a shareholder of an S corporation. a. True b. False

a RATIONALE: None of these expenses is deductible. The $75 parking ticket, the $500 DUI ticket, and the $600 attorney fee are all personal expenses. The $250 parking ticket, although related to his laundry business, is not deductible because it is a violation of public policy.

Andrew, who operates a laundry business, incurred the following expenses during the year. ∙ Parking ticket of $250 for one of his delivery vans that parked illegally. ∙ Parking ticket of $75 when he parked illegally while attending a rock concert in Tulsa. ∙ DUI ticket of $500 while returning from the rock concert. ∙ Attorney's fee of $600 associated with the DUI ticket. What amount can Andrew deduct for these expenses? a. $0. b. $250. c. $600. d. $1,425.

b RATIONALE: 46 miles (15 miles + 18 miles + 13 miles). The mileage for driving from his home to the office (20 miles) and from the last worksite to home (30 miles) is not deductible.

Corey is the city sales manager for RIBS, a national fast food franchise. Every working day, Corey drives his car as follows: Miles Home to office 20 Office to RIBS No. 1 15 RIBS No. 1 to No. 2 18 RIBS No. 2 to No. 3 13 RIBS No. 3 to home 30 Corey renders an adequate accounting to his employer. As a result, Corey's reimburseable mileage is: a. 0 miles. b. 46 miles. c. 66 miles. d. 76 miles.

d

Which item does not appear on Schedule K of Form 1120S? a. Tax-exempt interest income. b. Section 1231 gain. c. Section 179 depreciation deduction. d. Depreciation recapture income.

d

Federal excise taxes that are no longer imposed include: a. Tax on air travel. b. Tax on wagering. c. Tax on alcohol. d. None of these.

False RATIONALE: To be § 1231 assets, cattle and horses must be held 24 months or more and other farm animals must be held for more than 12 months.

A sheep must be held more than 18 months to qualify as a § 1231 asset. a. True b. False

d RATIONALE: Appeals from a U.S. District Court go to the taxpayer's home circuit of the U.S. Circuit Court of Appeals.

A taxpayer who loses in a U.S. District Court may appeal directly to the: a. U.S. Supreme Court. b. U.S. Tax Court. c. U.S. Court of Federal Claims. d. U.S. Circuit Court of Appeals

c RATIONALE: Accounting methods used for determining E & P are generally more conservative than those allowed for calculating income tax. As a consequence, the installment method is not permitted for E & P purposes. Thus, an adjustment is required for the deferred gain from property sales made during the year. All principal payments are treated as having been received in the year of the sale. Cavalier's E & P of $40,000 in the current year is thereby increased by the $45,000 of gain on the sale. Since Cavalier now has $85,000 of E & P ($40,000 of current E & P plus $45,000 of deferred gain), Aaron's entire distribution of $25,000 is a dividend.

Aaron andMichele, equal shareholders in Cavalier Corporation, receive $25,000 each in distributions on December 31 of the current year. During the current year, Cavalier sold an appreciated asset for $60,000 (basis of $15,000). Payment for the sale of the asset will be made as follows: 50% next year and 50% in the following year with interest payable at a rate of 6 percent. Before considering the effect of the asset sale, Cavalier's current-year E & P is $40,000 and it has no accumulated E & P. How much of Aaron's distribution will be taxed as a dividend? a. $0 b. $20,000 c. $25,000 d. $42,500

c

Both economic and social considerations can be used to justify: a. Favorable tax treatment for accident and health plans provided for employees and financed by employers. b. Disallowance of any deduction for expenditures deemed to be contrary to public policy (e.g., fines, penalties, illegal kickbacks, bribes to government officials). c. Various tax credits, deductions, and exclusions that are designed to encourage taxpayers to obtain additional education. d. Allowance of a deduction for state and local income taxes paid.

c RATIONALE: There is an $80,000 corporate gain ($100,000 - $20,000) that passes through to Fred and increases his stock basis to $100,000 ($20,000 + 80,000). Then the distribution reduces his stock basis to zero ($100,000 - $100,000). Fred recognizes a taxable gain of $80,000 and takes a $100,000 basis in the property.

Fred is the sole shareholder of an S corporation in Fort Deposit, Alabama. At a time when his stock basis is $20,000, the corporation distributes appreciated property worth $100,000 (basis of $20,000). Fred's taxable gain is: a. $-0-. b. $10,000. c. $80,000. d. $100,000.

c RATIONALE: The net long-term capital gain is $8,000 ($13,000 0%/15%/20% long-term capital gain - $5,000 shortterm capital loss). The $7,000 qualified dividend income is added to the 0%/15%/20% net long-term capital gain and the $15,000 total is eligible for the 0%/15%/20% alternative tax rate.

In 2021, Satesh has $5,000 short-term capital loss, $13,000 0%/15%/20% long-term capital gain, and $7,000 qualified dividend income. Satesh is single and has other taxable income of $15,000.Which of the following statements is correct? a. No more than $13,000 of Satesh's taxable income is taxed at 0%. b. No more than $7,000 of Satesh's taxable income is taxed at 0%. c. No more than $15,000 of Satesh's taxable income is taxed at 0%. d. None of Satesh's taxable income is taxed at 0%. Page

a

In addressing the importance of a Regulation, an IRS agent must: a. Give equal weight to the Internal Revenue Code and the Regulations. b. Give more weight to the Internal Revenue Code rather than to a Regulation. c. Give more weight to the Regulation rather than to the Internal Revenue Code. d. Give less weight to the Internal Revenue Code rather than to a Regulation.

True RATIONALE: Mixed use (i.e., business and personal) of the home is permitted in daycare situations.

In the case of an office in the home deduction, the exclusive business use test does not apply when the home is used as a daycare center. a. True b. False

d RATIONALE: Tern's business interest deduction limitation is $3,000,000 [$300,000 (business interest income) + $2,700,000 (30% x $9,000,000 adjusted taxable income)]. The $200,000 disallowed by the limit is carried forward to the succeeding year as business interest expense. Tern does not qualify for the small business exception.

In the current year, Tern, Inc., a calendar year C corporation, has $9,000,000 of adjusted taxable income, $300,000 of business interest income, zero floor plan financing interest, and $3,200,000 million of business interest expense. Tern has average gross receipts for the prior three-year period of $45,000,000. Which of the following statements is correct about the treatment of Tern's business interest expense? a. Current year deduction of $3,200,000. b. Current year deduction of $2,790,000, carryforward of $410,000. c. Current year deduction of $2,790,000, carryback of $410,000. d. Current year deduction of $3,000,000, carryforward of $200,000.

c RATIONALE: Under § 357(c), Roberto recognizes gain to the extent that liabilities (mortgage payable of $135,000) exceed the basis of all assets transferred [$130,000 = $120,000 (building) + $10,000 (cash)]. Orange Corporation's basis in the building is $125,000 [$120,000 (Roberto's basis) + $5,000 (gain recognized by Roberto)].

Roberto, a cash basis taxpayer, incorporates his sole proprietorship. He transfers the following items to newly created Orange Corporation. Adjusted Basis Fair Market Value Cash $ 10,000 $ 10,000 Building 120,000 175,000 Mortgage payable (secured by the building and held for 15 years) 135,000 135,000 With respect to this transaction: a. Orange Corporation's basis in the building is $120,000. b. Roberto has no recognized gain. c. Roberto has a recognized gain of $5,000. d. Roberto has a recognized gain of $10,000.

a RATIONALE: In any one year, the Tax Rate Schedules are issued before the Tax Tables (choice a.). Because of the way the Tables are structured, a minor variation in the tax can occur (choice b.). When applicable, the Schedules must be used and taxpayers do not have an election (choice c.). The Tax Tables cannot be used by either an estate or trust (choice d.).

Regarding the Tax Tables related to the Federal income tax, which of the following statements is correct? a. For any one year, the Tax Tables are issued by the IRS after the Tax Rate Schedules. b. The Tax Tables will always yield the same amount of tax as the Tax Rate Schedules. c. Taxpayers can elect as to whether they use the Tax Tables or the Tax Rate Schedules. d. The Tax Tables can be used by an estate but not by a trust

c RATIONALE: Since § 351 applies, no loss can be recognized (choices a. and b.). Yi's basis in the stock is $460,000, determined as follows: $500,000 (basis in the land) - $40,000 (boot received).

Rob and Yi form Bluebird Corporation with the following investments. Adjusted Basis Fair Market Value From Rob— Cash $400,000 $400,000 FromYi— Land 500,000 440,000 Each receives 50% of Bluebird's stock. In addition, Yi receives cash of $40,000. One result of these transfers is that Yi has a: a. Recognized loss of $60,000. b. Recognized loss of $20,000. c. Basis of $460,000 in the Bluebird stock (assuming Bluebird reduces its basis in the land to $440,000). d. Basis of $400,000 in the Bluebird stock (assuming Bluebird reduces its basis in the land to $440,000).

d RATIONALE: Their expenses are for AGI deductions and reported on Schedule C, not as miscellaneous itemized deductions (choice a.). Although subject to Social Security tax, they are not subject to income tax withholdings (choice c.). Statutory employees are not common law employees (choice b.). Expenses are deductions for AGI (choice d.).

Statutory employees: a. Report their expenses as miscellaneous itemized deductions. b. Include common law employees. c. Are subject to income tax withholdings. d. Claim their expenses as deductions for AGI.

c RATIONALE: In her calendar year 2021 tax return, Stephanie reports the guaranteed payment and the share of partnership income she received for the partnership's year-end September 30, 2021. She reports the $24,000 of guaranteed payments she received ($2,000 per month x 12) plus her 50% share of the $120,000 of partnership operating income ($60,000), for a total of $84,000.

Stephanie is a calendar year cash basis taxpayer. She owns a 50% profit and loss interest in a cash basis partnership with a September 30 year-end. The partnership's operating income (after deducting guaranteed payments) was $120,000 ($10,000 per month) and $144,000 ($12,000 per month), respectively, for the partnership tax years ended September 30, 2021 and 2022. The partnership paid guaranteed payments to Stephanie of $2,000 and $3,000 per month during the fiscal years ended September 30, 2021 and 2022. How much will Stephanie's adjusted gross income be increased by these partnership items for her tax year ended December 31, 2021? a. $60,000 b. $72,000 c. $84,000 d. $90,000

a RATIONALE: All states impose a tobacco excise tax (choice a.). Most states impose individual income taxes (choice b.) and general sales taxes (choice d.), and only some states impose inheritance taxes (choice c.).

Taxes levied by all states include: a. Tobacco excise tax. b. Individual income tax. c. Inheritance tax. d. General sales tax.

d RATIONALE: Salvage value is ignored under MACRS.

Under MACRS, which one of the following is not considered in determining depreciation for tax purposes? a. Cost of asset. b. Property recovery class. c. Half-year convention. d. Salvage (or residual) value.

a RATIONALE: The holding period is deemed to be long term. There is no need to determine when the property was acquired.

Under the Internal Revenue Code, the holding period for property acquired by inheritance is always: a. Long term. b. Short term. c. Determined by the date acquired by the individual who died. d. Determined by the date of death.

a RATIONALE: Options b. and d. have no effect on AAA, and option c. increases AAA.

Which of the following items, if any, decreases an S corporation's AAA? a. Section 1231 loss. b. Expenses related to tax-exempt income. c. Depletion in excess of basis. d. Distribution from earnings and profits

d

Which of the following statements best describes the primary purpose of the Subpart F income provisions? a. They allow for a deferral of non-U.S.-source income from U.S. taxation. b. They provide certainty as to the U.S. income tax treatment of cross-border transactions. c. They prevent shifting of income from the United States to high-tax non-U.S. jurisdictions. d. They prevent shifting of income from the United States to low-tax non-U.S. jurisdictions.

False RATIONALE: An increase in AGI increases the allowable charitable contribution that can be claimed due to the 50% ceiling (60% for cash contributions) imposed.

An increase in a taxpayer's AGI could decrease the amount of charitable contribution that can be claimed. a. True b. False

d RATIONALE: MOST employees also must be covered.

Which of the following is not a characteristic of a Keogh plan? a. Used by self-employed individuals. b. Considered to be a qualified retirement plan. c. Contributions to the plan can be made up to the due date of the individual's Form 1040. d. Need not cover the employees of the owner.

d RATIONALE: Property used in a business is a nonpersonal use asset and the gain due to casualty is not subject to § 1250 depreciation recapture since straight-line depreciation was used. The special netting rule for nonpersonal use property casualty gains and losses applies because there is casualty gain of $542,000 ($542,000 insurance proceeds - $0 adjusted basis).

A barn held more than one year and used in a business is destroyed in a tornado. The barn originally cost $356,000 and was fully depreciated using straight-line depreciation. The barn was insured for its $543,000 replacement cost minus a deductible of $1,000.Which of the following statements is correct concerning these facts? a. The barn was a long-term personal use asset. b. There is a casualty loss from disposition of the barn. c. The recognized gain from disposition of the barn is $186,000. d. The recognized gain from disposition of the barn is subject to special netting rules.

False RATIONALE: In general, corporations can receive an automatic extension of six months (seven months for a June 30 year

A calendar year C corporation can receive an automatic 9-month extension to file its corporate return (Form 1120) by timely filing a Form 7004 for the tax year. a. True b. False

False RATIONALE: A limited partnership must have at least one general partner that is liable for the entity's debts; that general partner may be (but is not required to be) a corporation or other entity that is itself protected fromliability.

A limited partnership (LP) offers all partners protection from claims by the LP's creditors. a. True b. False

True

A per-day, per-share allocation of flow-through S corporation items must be used. a. True b. False

c RATIONALE: The maximum unrecaptured § 1250 gain is the $104,000 depreciation taken. That maximum is reduced to the $46,000 gain from the disposition [$342,000 sale price - ($400,000 cost - $104,000 depreciation taken)].

A retail building used in the business of a sole proprietor is sold onMarch 10, 2021, for $342,000. The building was acquired in 2011 for $400,000 and straight-line depreciation of $104,000 had been taken on it.What is the maximum unrecaptured § 1250 gain from the disposition of this building? a. $400,000 b. $322,000 c. $104,000 d. $26,000

c RATIONALE: Choices a., b., and d. reflect independent contractor status.

Aiden performs services for Lucas.Which of the following factors indicates that Aiden is an employee rather than an independent contractor? a. Aiden provides his own support services (e.g., work assistants). b. Aiden obtained his training (i.e., job skills) from his father. c. Aiden is paid based on hours worked. d. Aiden makes his services available to others.

False RATIONALE: Distributions that are a return of capital first cause the shareholder's stock basis to be reduced; once basis is reduced to zero, any remaining distribution is treated (and taxed) as a capital gain.

All distributions that are not dividends are a return of capital and decrease the shareholder's basis. a. True b. False

b RATIONALE: BAM's net loss from operations is $80,000 after deducting the $20,000 consulting fee paid to Brian. Allison's share of this loss is $32,000. Her $100,000 basis is reduced by her $32,000 share of the loss, the $8,000 distribution she received, and the $10,000 decrease in her share of partnership liabilities for an ending basis of $50,000.

Allison is a 40% partner in the BAM Partnership. At the beginning of the tax year, her basis in the partnership interest was $100,000, including her share of partnership liabilities. During the current year, BAM reported an ordinary loss of $60,000 (before the following payments to the partners). In addition, BAM made an ordinary distribution of $8,000 to Allison and paid partner Brian a $20,000 consulting fee. At the end of the year, Allison's share of partnership liabilities decreased by $10,000. Assuming loss limitation rules do not apply, Allison's basis in the partnership interest at the end of the year is: a. $2,000. b. $50,000. c. $58,000. d. $70,000.

d RATIONALE: Real property located in the United States exchanged for non-U.S. real property (and vice versa) does not qualify as like-kind property.

Amir owns investment land located in Tucson, AZ. He exchanges it for other investment land. In which of the following locations may the other investment land be located and enable Amir to qualify for like-kind exchange treatment? a. Mexico City,Mexico. b. Toronto, Canada. c. Paris, France. d. None of these.

False RATIONALE: It is never valid.

An S election made before becoming a corporation is valid only beginning with the first 12-month tax year. a. True b. False

False RATIONALE: Distributions are accounted for before losses.

An S shareholder's stock basis is reduced by flow-through losses before accounting for distributions. a. True b. False

c RATIONALE: The transfer does not qualify under § 351 because Ann has only a 1/3 interest in Brown Corporation. The requirements of § 351 apply to transfers to an existing corporation, as well as to a newly formed corporation.

Ann transferred land worth $200,000 with a tax basis of $40,000 to Brown Corporation, an existing entity, for 100 shares of its stock. Brown Corporation has two other shareholders, Bill and Bob, each of whom holds 100 shares. With respect to the transfer: a. Ann has no recognized gain. b. Brown Corporation has a basis of $160,000 in the land. c. Ann has a basis of $200,000 in her 100 shares in Brown Corporation. d. Ann has a basis of $40,000 in her 100 shares in Brown Corporation

c RATIONALE: The other affiliates bring income tax advantages to the group.

Application of the unitary principle generally works to the taxpayer's benefit when: a. The other affiliates generate net operating losses. b. The other affiliates operate in low-tax states. c. Both a. and b. d. Neither a. nor b.

. c RATIONALE: Cash $ 650,000 Note 600,000 Property 120,000 Mortgage assumed by buyer 350,000 Amount realized

Bayarmaa owns land with an adjusted basis of $610,000 subject to a mortgage of $350,000. On April 1, Bayarmaa sells her land subject to the mortgage for $650,000 in cash, a note for $600,000, and property with a fair market value of $120,000.What is the amount realized? a. $1,250,000 b. $1,370,000 c. $1,720,000 d. $1,820,000

True RATIONALE: Belinda's $30,000 basis is increased by her share of the LLC's liabilities. The $40,000 liability that Belinda guarantees is allocated completely to her. The remaining $100,000 of debt is allocated according to the partners' profit-sharing ratios with $30,000 allocated to Belinda. Belinda's basis, then, is $100,000 ($30,000 basis + $40,000 guaranteed debt + $30,000 share of nonrecourse debt).

Belinda owns a 30% profit and loss interest in the BOWLLC, and her basis in the interest is $30,000 excluding her share of the LLC's liabilities. Belinda guarantees a $40,000 LLC debt. Remaining liabilities (not guaranteed by any of the LLC members) are $100,000. Belinda's basis in the LLC is $100,000. a. True b. False

b RATIONALE: Choice a. is incorrect because charging the expense on a bank credit card is treated as a constructive payment. Thus, as a cash method taxpayer, she can deduct the expense in 2021. If Benita uses the accrual method, she deducts the expense in 2021. In any event, she does not merely choose the year in which to deduct the expense (choice c.).

Benita incurred a business expense on December 10, 2021, which she charged on her bank credit card. She paid the credit card statement that included the charge on January 5, 2022.Which of the following is correct? a. If Benita is a cash method taxpayer, she cannot deduct the expense until 2022. b. If Benita is an accrual method taxpayer, she can deduct the expense in 2021. c. If Benita uses the accrual method, she can choose to deduct the expense in either 2021 or 2022. d. Only b. and c. are correct.

b RATIONALE: Binita is a 20% partner and shares in 20% of the partnership's taxable and tax-exempt income, or $8,000. Her basis is reduced by the cash distribution during the year. Binita's ending basis is calculated as follows: {$40,000 beginning basis + $8,000 [20% × ($30,000 + $10,000)] - $10,000 distribution}.

Binita contributed property with a basis of $40,000 and a value of $50,000 to the BE Partnership in exchange for a 20% interest in partnership capital and profits. During the first year of partnership operations, BE had net taxable income of $30,000 and tax-exempt interest income of $10,000. The partnership distributed $10,000 cash to Binita. Her adjusted basis (outside basis) for her partnership interest at year-end is: a. $36,000. b. $38,000. c. $60,000. d. $70,000.

a RATIONALE: Since the machinery was held more than 12 months and was depreciated, it was a § 1231 asset. Since it was sold at a gain and the selling price did not exceed the original cost, all of the depreciation taken of $34,800 ($69,000 cost - $34,200 adjusted basis) limited to the recognized gain of $10,800 ($45,000 amount realized - $34,200 adjusted basis) is gain recaptured by § 1245.

Blue Company sold machinery for $45,000 on December 23, 2021. The machinery had been acquired on April 1, 2019, for $69,000 and its adjusted basis was $34,200. The § 1231 gain, § 1245 recapture gain, and § 1231 loss from this transaction are: a. $0 § 1231 gain, $10,800 § 1245 recapture gain, $0 § 1231 loss. b. $0 § 1231 gain, $0 § 1245 recapture gain, $14,800 § 1231 loss. c. $0 § 1231 gain, $34,200 § 1245 recapture gain, $0 § 1231 loss. d. $0 § 1231 gain, $10,800 § 1245 recapture gain, $34,200 § 1231 loss.

False RATIONALE: There is no dollar amount limitation on the Medicare component of FICA, but there is a cap on wages and self-employment income subject to FICA tax.

Currently, the tax base for the Social Security component of the FICA is not limited to a dollar amount. a. True b. False

b RATIONALE: Amount realized ($800,000 - $50,000) $750,000 Adjusted basis (200,000) Realized gain $550,000 § 121 exclusion (500,000) Recognized gain $ 50,000 The cost of repairs cannot be deducted and does not affect the adjusted basis of the new residence. Therefore, the adjusted basis of the new residence is its cost of $400,000.

During 2021, Christian and Danielle, a married couple, decided to sell their residence, which had a basis of $200,000. They had owned and occupied the residence for 20 years. To make it more attractive to prospective buyers, they had the inside painted in April at a cost of $5,000 and paid for the work immediately. They sold the house in May for $800,000. Broker's commissions and other selling expenses amounted to $50,000. The couple purchased a new residence in July for $400,000.What is the recognized gain and the adjusted basis of the new residence? a. $45,000 and $400,000. b. $50,000 and $400,000. c. $100,000 and $600,000. d. $550,000 and $800,000.

d RATIONALE: The sale of the Orange stock produces an $8,000 LTCG, which is fully includible in gross income. The real property sale results in a net §1231 loss of $1,800. The real property $1,000 fire loss is treated as an ordinary loss because there are no casualty gains against which it can be netted.

During 2021, an individual had the following gains and losses on property held for the long-term holding period: sale of Orange common stock ($8,000 gain); sale of real property used in the taxpayer's business ($1,800 loss); destruction of real property used in the taxpayer's business by fire ($1,000 loss).Which of the following statements is correct? a. The fire loss would reduce the real property sale loss. b. The fire loss would reduce the stock sale gain. c. The sale of real property loss would be netted against the stock sale gain. d. The sale of real property is a § 1231 loss.

True

Electronic (online) databases are most frequently searched by the keyword approach. a. True b. False

d RATIONALE: In determining E & P, there is no allowance for the amortization of organizational expenses. Any such expense deducted when computing taxable income must be added back to determine E & P. Consequently, Falcon's E & P is $258,000 ($250,000 of current-year E & P + $8,000 of organizational expenses).

Falcon Corporation ended its first year of operations with taxable income of $250,000. At the time of Falcon's formation, it incurred $50,000 of organizational expenses. In calculating its taxable income for the year, Falcon claimed an $8,000 deduction for the organizational expenses.What is Falcon's current E & P? a. $200,000 b. $208,000 c. $250,000 d. $258,000

c

For most taxpayers, which of the traditional apportionment factors yields the greatest opportunities for tax reduction? a. Payroll. b. Property. c. Sales (gross receipts). d. Unitary.

False RATIONALE: An aunt is not a related party for § 267 loss disallowance purposes.

For purposes of the § 267 loss disallowance provision, a taxpayer's aunt is a related party. a. True b. False

b RATIONALE: Choices a. and c. are incorrect because to qualify for exclusion treatment, the employee must either use the funds for the designated purpose or forfeit any unused portion of the salary reduction. Choice d. is incorrect because Heather's gross income is reduced by the full $1,200 salary reduction. Note that under the Consolidated Appropriations Act, 2021 (CAA-21) plans may permit employees to carry over unused FSA benefits up to the full annual amount from 2020 to 2021 and 2021 to 2022.

Heather is a full-time employee of Drake Company and participates in the company's flexible spending plan that is available to all employees.Which of the following is correct? a. Heather reduced her salary by $1,200, actually spent $1,500, and received only $1,200 as reimbursement for her medical expenses. Heather's gross income will be reduced by $1,500. b. Heather reduced her salary by $1,200 and received only $900 as reimbursement for her actual medical expenses. She is not refunded the $300 remaining balance, but her gross income is reduced by $1,200. c. Heather reduced her salary by $1,200 and received only $800 as reimbursement for her medical expenses. She is not refunded the $400. Her gross income is reduced by $800. d. Heather reduced her salary by $1,200 and received only $900 as reimbursement for her medical expenses. She forfeits the $300. Her gross income is reduced by $300.

b RATIONALE: This fact pattern clearly comes within the scope of § 351. As such, Hunter may not recognize the realized loss of $30,000 (choice a.). Although cash was involved, it was given and not received by Warren (choice c.). It is not, therefore, boot within the meaning of the § 351. Tan Corporation will have a basis of $180,000 in the equipment transferred by Hunter ($210,000 carryover basis reduced by the $30,000 built-in loss) and $15,000 in the land (not $45,000 as in choice d.).

Hunter andWarren form Tan Corporation. Hunter transfers equipment (basis of $210,000 and fair market value of $180,000) whileWarren transfers land (basis of $15,000 and fair market value of $150,000) and $30,000 of cash. Each receives 50% of Tan's stock. As a result of these transfers: a. Hunter has a recognized loss of $30,000, andWarren has a recognized gain of $135,000. b. Neither Hunter norWarren has any recognized gain or loss. c. Hunter has no recognized loss, butWarren has a recognized gain of $30,000. d. Tan Corporation will have a basis in the land of $45,000.

False RATIONALE: The amortization period is not less than 60 months regardless of the life of the research project.

If an election is made to defer deduction of research expenditures, the amortization period is based on the expected life of the research project if less than 60 months. a. True b. False

b RATIONALE: The shareholders have dividend income of $230,000 ($120,000 + $110,000) before considering § 243. Warbler Corporation recognizes a gain of $30,000 ($110,000 - $80,000) from the distribution of the inventory but no loss can be recognized from the distribution of Pink stock.

In the current year,Warbler Corporation (E & P of $250,000) made the following property distributions to its shareholders (all corporations): Adjusted Basis Fair Market Value Pink Corporation stock (held for investment) $150,000 $120,000 Non-LIFO inventory 80,000 110,000 Warbler Corporation is not a member of a controlled group. As a result of the distribution: a. The shareholders have dividend income of $200,000. b. The shareholders have dividend income of $230,000. c. Warbler has a recognized gain of $30,000 and a recognized loss of $30,000. d. Warbler has no recognized gain or loss.

False RATIONALE: Because gifts to supervisors and spouses are not deductible, Jackson has no deduction.

Jackson gives both his supervisor and his spouse a $30 box of chocolates at Christmas. Jackson may claim only $25 as a deduction. a. True b. False

c RATIONALE: Sales $1,500,000/$2,500,000 = 60.0% Property $500,000/$500,000 = 100.0% Payroll $2,000,000/$2,000,000 = 100.0% Sum of apportionment factors 260.0% Apportionment factor for State X (260%/3) 86.7% Taxable income × $900,000 Income apportioned to X

José Corporation realized $900,000 taxable income from the sales of its products in States X and Z. José's activities in both states establish nexus for income tax purposes. José's sales, payroll, and property among the states include the following. State X State Z Totals Sales $1,500,000 $1,000,000 $2,500,000 Property 500,000 -0- 500,000 Payroll 2,000,000 -0- 2,000,000 X utilizes an equally weighted three-factor apportionment formula. How much of José's taxable income is apportioned to X? a. $120,000 b. $450,000 c. $780,000 d. $900,000

c RATIONALE: AAA is $15,000 ($9,000 + $6,000) as of the end of the tax year before taking into account the two distributions. The sum of the distributions ($18,000) exceeds Kinney's AAA by $3,000. A portion of the $15,000 AAA balance is allocated to each of the February 1 and September 1 distributions based upon the respective sizes of the distributions as follows. February 1 $12,000 $18,000 × $15,000 = $10,000 September 1 $$168,,000000 × $15,000 = $5,000 Thus, Eric and Maria report dividend income of $1,000 each for the February 1 distribution and $500 each for the September 1 distribution. Assuming that the shareholders have sufficient basis in their stock, both Eric and Maria both receive a $7,500 tax-free distribution from AAA.

Kinney, Inc., an electing S corporation, holds $5,000 of AEP and $9,000 in AAA at the beginning of the calendar tax year. Kinney has two shareholders, Eric and Maria, each of whom owns 500 shares of Kinney's stock. Kinney's taxable income is $6,000 for the year. Kinney distributes $6,000 to each shareholder on February 1, and it distributes another $3,000 to each shareholder on September 1. How is Eric taxed on the distribution? a. $500 dividend income. b. $1,000 dividend income. c. $1,500 dividend income. d. $3,000 dividend income.

a RATIONALE: KKM's net ordinary income is $180,000 ($280,000 ordinary income - $80,000 of office expenses - $20,000 payment to Kaylyn). The cash distributions to Kaylyn and Megan are not deductible. Kristie's 30% share of this income is $54,000. In addition, Kristie reports her $9,000 share of the partnership's charitable contribution.

Kristie is a 30% partner in the KKM Partnership. During the current year, KKM reported gross receipts of $280,000 and a charitable contribution of $30,000. The partnership paid office expenses of $80,000. In addition, KKM distributed $20,000 each to partners Kaylyn and Megan, and paid partner Kaylyn $20,000 for administrative services. Kristie reports the following income from KKM during the current tax year. a. $54,000 ordinary income; $9,000 charitable contribution. b. $60,000 ordinary income; $9,000 charitable contribution. c. $33,000 ordinary income. d. $54,000 ordinary income.

b RATIONALE: For the current year, Luis must report dividend income of $50,000, and Luis's corporation must pay income tax on the $80,000 of profit. Eduardo must report on his individual return the $80,000 profit from his business, but the proprietorship is not a taxable entity. Luis is not required to report income from the corporation until he receives a dividend.

Luis is the sole shareholder of a regular C corporation, and Eduardo owns a proprietorship. In the current year, both businesses make a profit of $80,000 and each owner withdraws $50,000 from his business.With respect to this information, which of the following statements is incorrect? a. Eduardo must report $80,000 of income on his return. b. Luis must report $80,000 of income on his return. c. Eduardo's proprietorship is not required to pay income tax on $80,000. d. Luis's corporation must pay income tax on $80,000

b Current E & P is allocated on a pro rata basis to each distribution made during the year. Cockatoo Corporation made $1,000,000 of distributions and Christopher's distribution represents 25% ($250,000/$1,000,000) of that amount. Consequently, Christopher receives 25% of Cockatoo's current-year E & P, or $75,000 ($300,000 × 25%). Accumulated E & P is applied in chronological order beginning with the earliest distribution. SinceMaria's distribution is made first, how much current and accumulated E & P belong to her? Maria should receive 75% of Cockatoo's current-year E & P because she received 75% of the distributions made during the year ($750,000/$1,000,000). Consequently, $225,000 of current E & P is sourced to Maria ($300,000 × 75%). The remainder of Maria's distribution, $525,000 ($750,000 distribution - $225,000 of current E & P), is made from accumulated E & P, leaving $75,000 of accumulated E & P

Maria and Christopher each own 50% of Cockatoo Corporation, a calendar year taxpayer. Distributions from Cockatoo are $750,000 to Maria on April 1 and $250,000 to Christopher on May 1. Cockatoo's current E & P is $300,000 and its accumulated E & P is $600,000. How much of the accumulated E & P is allocated to Christopher's distribution? a. $0 b. $75,000 c. $150,000 d. $300,000

b RATIONALE: The gain is § 1231 gain. Since straight-line depreciation was used, there is no § 1250 recapture. Also, sinceMaria is an individual, there is no ordinary gain adjustment under § 291. Section 1239 would not apply because there is no reason to conclude that the property would be sold to a related taxpayer.

Maria owns depreciable residential rental real estate that has accumulated depreciation of $65,000 (all from straight-line) . If Maria sold the property, she would have a $53,000 gain. The initial characterization of the gain would be: a. Section 1245 gain. b. Section 1231 gain. c. Section 1250 gain. d. Section 1239 gain

c RATIONALE: Since Owl is a C corporation and the inventory exception is met, one-half of the appreciation on the clothing may be claimed, or $2,500 [50%($15,000 - $10,000)]. Therefore, $12,500 ($10,000 basis + $2,500 appreciation) is the contribution amount for the inventory. The Exxon stock was loss property (fair market value less than basis); therefore, the contribution amount is the stock's fair market value, or $3,000. The land is capital gain property, an appreciated capital asset held more than one year, and the contribution amount is the land's fair market value, or $75,000. Thus, the total amount of contributions for Owl Corporation is $90,500 ($12,500 + $3,000 + $75,000).

Owl Corporation (a C corporation), a retailer of children's apparel, made the following donations to qualified charitable organizations in the current year. Adjusted Basis FairMarket Value Children's clothing held as inventory, to Haven for Hope $10,000 $15,000 Stock in Exxon Corporation acquired two years ago and held as an investment, to City University 5,000 3,000 Land acquired four years ago and held as an investment, to Humane Society 50,000 75,000 How much qualifies for the charitable contribution deduction (ignoring the taxable income limitation)? a. $63,000 b. $65,000 c. $90,500 d. $92,500

d RATIONALE: When a deficit exists in accumulated E & P and a positive balance exists in current E & P, distributions are regarded as dividends to the extent of current E & P ($400,000).

Pheasant Corporation, a calendar year taxpayer, has $400,000 of current E & P and a deficit in accumulated E & P of $180,000. If Pheasant pays a $600,000 distribution to its shareholders on July 1, how much dividend income do the shareholders report? a. $0 b. $20,000 c. $220,000 d. $400,000

True RATIONALE: Similar to partnerships, the net profit or loss of an S corporation flows through to the shareholders to be reported on their individual tax returns. Cardinal's net income of $350,000 is allocated entirely to Rajib as the sole shareholder, and Rajib reports the $350,000 of income on his Federal income tax return regardless of how much of the income was withdrawn from the S corporation.

Rajib is the sole shareholder of Cardinal Corporation, a calendar year S corporation. In the current year, Cardinal generated a net profit of $350,000 ($520,000 gross income - $170,000 operating expenses) and distributed $80,000 to Rajib. Rajib must report the Cardinal Corporation profit of $350,000 on his Federal income tax return. a. True b. False

b RATIONALE: The fact that the stock was not in proportion to the value of the property transferred (choice a.) does not prevent § 351 from applying. Since § 351 applies and no boot was received, Tony does not recognize a gain (choice d.). His basis in the stock is $25,000 plus $15,000, the basis of the stock implicitly gifted by Sarah to Tony (not $50,000 as in choice c.).

Sarah and Tony (mother and son) form Dove Corporation with the following investments: cash by Sarah of $65,000; land by Tony (basis of $25,000 and fair market value of $35,000). Dove Corporation issues 400 shares of stock, 200 each to Sarah and Tony. Thus, each receives stock in Dove worth $50,000. a. Section 351 cannot apply since Sarah should have received 260 shares instead of only 200. b. Section 351 may apply because stock need not be issued to Sarah and Tony in proportion to the value of the property transferred. c. Tony's basis in the stock of Dove Corporation is $50,000. d. As a result of the transfer, Tony recognizes a gain of $10,000

c RATIONALE: The life insurance proceeds would be included in book income but not in taxable income. Therefore, a subtraction is required to reconcile book income to taxable income. The other items are additions on Schedule M-1.

Schedule M-1 of Form 1120 is used to reconcile financial net income with taxable income reported on the corporation's income tax return as follows: net income per books + additions - subtractions = taxable income. Which of the following items is a subtraction on Schedule M-1? a. Book depreciation in excess of tax depreciation. b. Excess of capital losses over capital gains. c. Proceeds on key employee life insurance. d. Income subject to tax but not recorded on the books

b RATIONALE: Section 1239 produces the conversion of the transferor's capital gain into ordinary income if the property is depreciable in the hands of the related transferee.

Section 1239 (relating to the sale of certain property between related taxpayers) does not apply unless the property: a. Was depreciated by the transferor. b. Is depreciable in the hands of the transferee. c. Is a capital asset. d. Is real property.

c RATIONALE: The transaction is treated as a return of a portion of her investment. She is treated as having sold 600 of her shares in Blue [basis of $120,000 (600 shares ÷ 2,000 shares x $400,000)] for $260,000. Therefore, Eleanor's capital gain from the sale or exchange is $140,000 ($260,000 - $120,000).

Seven years ago, Eleanor transferred property she had used in her sole proprietorship to Blue Corporation for 2,000 shares of Blue Corporation in a transaction that qualified under § 351. The assets had a tax basis to her of $400,000 and a fair market value of $700,000 on the date of the transfer. In the current year, Blue Corporation (E & P of $1,000,000) redeems 600 shares from Eleanor for $260,000 in a transaction that qualifies for sale or exchange treatment.With respect to the redemption, Eleanor will have a: a. $140,000 dividend. b. $260,000 dividend. c. $140,000 capital gain. d. $260,000 capital gain.

c RATIONALE: Sales $800,000/$1,500,000 = 53.33% × 2 = 106.67% Payroll $150,000/$300,000 = 50.00% Property $200,000/$600,000 = 33.33% Sum of apportionment factors 190.00% Apportionment factor for State B (190.00%/4) 47.50% Apportionable income × $1,000,000 Income apportioned to State B

Simpkin Corporation owns manufacturing facilities in States A, B, and C. State A uses a three-factor apportionment formula under which the sales, property, and payroll factors are equally weighted. State B uses a three-factor apportionment formula under which sales are double-weighted. State C employs a single-factor apportionment factor, based solely on sales. Simpkin's operations generated $1,000,000 of apportionable income, and its sales and payroll activity and average property owned in each of the three states is as follows. State A State B State C Totals Sales $400,000 $800,000 $300,000 $1,500,000 Payroll 100,000 150,000 50,000 300,000 Property 200,000 200,000 200,000 600,000 Simpkin's apportionable income assigned to State B is: a. $1,000,000 b. $533,333 c. $475,000 d. $0

d RATIONALE: Section 1221 excludes all of the listed items from being capital assets except the investment in the savings account.

Stanley operates a restaurant as a sole proprietorship.Which of the following items are capital assets in his hands? a. The restaurant's tables and chairs. b. A portable sound system used to play theme music for the restaurant. c. The restaurant building that is an asset of the sole proprietorship. d. An interest-bearing savings account used to keep the restaurant's excess cash.

b RATIONALE: Starling Corporation has a deficit in its E & P generated by its operating loss. The $40,000 distribution does not add to the deficit.

Starling Corporation has accumulated E & P of $60,000 on January 1, 2021. In 2021, Starling Corporation had an operating loss of $80,000. It distributed cash of $40,000 to Zoe, its sole shareholder, on December 31, 2021. Starling Corporation's balance in its E & P account as of January 1, 2022, is: a. $60,000 deficit. b. $20,000 deficit. c. $0. d. $60,000.

b RATIONALE: Terry and Jim should report net profit from their businesses as follows: Terry Jim Gross revenues $500,000 $500,000 Less: Cost of goods sold (-0-) (125,000) Gross income $500,000 $375,000 Less: Expenses Employee salaries (200,000) (-0-) Rent and utilities (50,000) (-0-) Bribes to police (-0-) (-0-) Net profit $250,000 $375,000 For Terry, the bribes to the police of $25,000 cannot be deducted. None of Jim's expenses can be deducted. However, the cost of goods sold is viewed as a negative item in calculating gross income (i.e., gross income = gross profit) rather than as a deduction.

Terry and Jim are both involved in operating illegal businesses. Terry operates a gambling business and Jim operates a business selling narcotics. Both businesses have gross revenues of $500,000. The businesses incur the following expenses. Terry Jim Employee salaries $200,000 $200,000 Bribes to police 25,000 25,000 Rent and utilities 50,000 50,000 Cost of goods sold -0- 125,000 Which of the following statements is correct? a. Neither Terry nor Jim can deduct any of these items in calculating the business profit. b. Terry should report profit from his business of $250,000. c. Jim should report profit from his business of $500,000. d. Jim should report profit from his business of $250,000.

True RATIONALE: There usually is a carryover holding period for the like-kind exchange property received. For this carryover holding period rule to apply, the like-kind property surrendered must have been either a capital asset or § 1231 property. Therefore, Terry's holding period begins on August 25, 2015.

Terry exchanges real estate (acquired on August 25, 2015) held for investment for other real estate to be held for investment on September 1, 2021. None of the realized gain of $10,000 is recognized, and Terry's adjusted basis for the new real estate is a carryover basis of $80,000. Consequently, Terry's holding period for the new real estate begins on August 25, 2015. a. True b. False

False RATIONALE: The law now requires the IRS to make letter rulings available for public inspection after identifying details are deleted.

The IRS is not required to make a letter ruling public. a. True b. False

True RATIONALE: Once passed, act provisions are incorporated into the U.S. Code (in this case, the Internal Revenue Code).

The Tax Cuts and Jobs Act of 2017 became part of the Internal Revenue Code of 1986. a. True b. False

c RATIONALE: The short-term holding period is 12 months or less and the long-term holding period is greater than 12 months.

The possible holding periods for capital assets include: a. Short-term = held 14 months or less. b. Long-term = greater than six months. c. Long-term = greater than 12 months. d. Short-term = greater than 12 months

False RATIONALE: The partnership agreement documents the arrangement among the partners regarding formation, operation, and liquidation of the partnership; allocations of profits, losses, and distributions; and other matters. The elections described are not typically covered in the partnership agreement, and such elections are made by the partnership rather than the partners.

The primary purpose of the partnership agreement is to document the various tax elections made by the partners regarding items such as depreciation methods, treatment of research and experimental costs, and the § 754 election. a. True b. False

c RATIONALE: The basis of the property is its fair market value at the date of the death.

Tobin inherited 100 acres of land on the death of his father this year. A Federal estate tax return was filed and the land was valued at $300,000 (its fair market value at the date of the death). Tobin's father originally acquired the land years ago for $19,000 and prior to his death made permanent improvements of $6,000.What is Tobin's basis in the land? a. $19,000 b. $25,000 c. $300,000 d. $325,000

b RATIONALE: Macaw Corporation increased its E & P last year for the entire amount of the deferred gain on the installment sale. Since one-half of the $800,000 gain is included in taxable income in the current year, taxable income should be reduced by this amount to determine current E & P. Therefore, Macaw Corporation's current-year E & P is $600,000 ($1,000,000 taxable income - $400,000 of installment sale gain). Because one-half of the current E & P is allocated to Tracy's distribution, she has a $300,000 dividend.

Tracy and Jerome, equal shareholders in Macaw Corporation, receive $600,000 each in distributions on December 31 of the current year. Macaw's current-year taxable income is $1,000,000 and it has no accumulated E & P. Last year, Macaw sold an appreciated asset for $1,200,000 (basis of $400,000). Payment for one-half of the sale of the asset was made this year. How much of Tracy's distribution will be taxed as a dividend? a. $0 b. $300,000 c. $500,000 d. $600,000

True RATIONALE: This is a major difference between FICA and FUTA.

Unlike FICA, FUTA requires that employers comply with state as well as Federal rules. a. True b. False

b RATIONALE: Wanda is a covered employee for purposes of the deduction limitation on executive compensation. As such, Pink Corporation can deduct $1,250,000 ofWanda's compensation package: $1,000,000 limitation (applicable to the $2,500,000 cash compensation + $150,000 taxable fringe benefits + $2,000,000 bonus) + $250,000 nontaxable fringe benefits.

Wanda is the Chief Executive Officer of Pink corporation, a publicly traded, calendar year C corporation. For the current year,Wanda's compensation package consists of: Cash compensation $ 2,500,000 Nontaxable fringe benefits 250,000 Taxable fringe benefits 150,000 Bonus tied to company performance 2,000,000 How much ofWanda's compensation is deductible by Pink Corporation? a. $1,000,000. b. $1,250,000. c. $3,250,000. d. $4,900,000.

Letter Ruling

What administrative release deals with a proposed transaction rather than a completed transaction? a. Letter Ruling b. Technical AdviceMemorandum c. Determination Letter d. Field Service Advice

True

When a patent is transferred, the most common forms of payment received by the transferor are a lump sum and/or a periodic payment. a. True b. False

b

Which court decision would probably carry more weight? a. Regular U.S. Tax Court decision b. Reviewed U.S. Tax Court decision c. U.S. District Court decision d. Tax Court Memorandum decision

b

Which of the following court decisions carries more weight? a. Federal District Court b. Second Circuit Court of Appeals c. U.S. Tax Court decision d. Small Cases Division of U.S. Tax Court

b RATIONALE: All employee expenses, unless reimbursed pursuant to an adequate accounting, are not deductible (choices a. and c.). Tax preparation fees unless related to a business are not deductible.

Which of the following expenses, if any, are deductible? a. Safety shoes purchased by a plumber employed by a company. b. Bottled water purchased by a gig driver for passengers. c. Unreimbursed employee expenses. d. Tax return preparation fee paid by a nonemployed retiree

a

Which of the following factors, if any, is not a characteristic of independent contractor status? a. Work-related expenses are reported on Schedule A (Form 1040). b. Receipt of a Form 1099 reporting payments received. c. Workplace fringe benefits are not available. d. Services are performed for more than one party.

b RATIONALE: The gain basis for property received by gift is the same as the donor's basis (i.e., assuming no gift tax is paid). The loss basis for property received by gift is the lesser of the donor's adjusted basis or the fair market value on the date of the gift. The basis for inherited property usually is the fair market value on the date of the decedent's death (i.e., primary valuation date and amount).

Which of the following is correct? a. The gain basis for property received by gift is the lesser of the donor's adjusted basis or the fair market value on the date of the gift. b. The gain basis for property received by gift is the same as the donor's basis. c. The gain basis for inherited property is the same as the decedent's basis. d. The loss basis for inherited property is the lesser of the decedent's basis or the fair market value on the date of the decedent's death.

c

Which of the following is not a "trade or business" expense? a. Interest on business indebtedness. b. Property taxes on business property. c. Parking ticket paid on business auto. d. Depreciation on business property.

d RATIONALE: Nonrecourse debt is generally allocated in accordance with the partners' profit-sharing ratios (barring liabilities in excess of basis on contributed property) (choice a. is incorrect). Recourse debt is allocated to the partners that bear economic risk of loss with respect to the debt (using the constructive liquidation scenario; if all allocations are proportionate, this will result in allocations in accordance with loss-sharing ratios) (choice b. is incorrect). An increase in partnership debt results in an increase in the partners' bases in the partnership interest (choice c. is incorrect). Choice d is correct: An increase in partnership debt is treated as a contribution to the partnership and a decrease in partnership debt is treated as a distribution from the partnership to the partners.

Which of the following statements is correct regarding the manner in which partnership liabilities are reflected in the partners' bases in their partnership interests? a. Nonrecourse debt is allocated to the partners based on the partners' economic risk of loss. b. Recourse debt is allocated to the partners according to their profit-sharing ratios. c. An increase in partnership debts results in a decrease in the partners' bases in the partnership interest. d. A decrease in partnership debt is treated as a distribution from the partnership to the partner and reduces the partner's basis in the partnership interest.

d RATIONALE: If boot is received in a like-kind exchange, the recognized gain is the lesser of the realized gain or the boot received. Realized loss, however, cannot be recognized. The giving of boot in a like-kind exchange generally does not result in the recognition of gain, but it can if the fair market value of the boot exceeds its adjusted basis (i.e. appreciated property).

Which of the following statements is correct? a. The receipt of boot in a like-kind exchange can result in the recognition of gain. b. The receipt of boot in a like-kind exchange cannot result in the recognition of loss. c. The giving of boot in a like-kind exchange can result in the recognition of gain. d. Statements a., b., and c.

a RATIONALE: If an LLC with more than one owner does not make an election, the entity is taxed as a partnership. The other statements are correct.

Which of the following statements is incorrect about LLCs and the Check-the-box Regulations? a. If an LLC with more than one owner does not make an election, the entity is taxed as a corporation. b. An entity with more than one owner and formed as a corporation cannot elect to be taxed as a partnership. c. If an LLC with one owner does not make an election, the entity is taxed as a sole proprietorship. d. An LLC with one owner can elect to be taxed as a corporation

c RATIONALE: Receipt of an interest in partnership capital in exchange for services is taxable to the service partner if it is not subject to a substantial risk of forfeiture (choice c. is correct). An interest that will vest in three years is subject to a substantial risk of forfeiture and is not currently taxable (choice a. is incorrect). An interest requiring performance of future services is not currently taxable (although it could be treated as a carried interest if certain conditions applied) (choice b. is incorrect). A partner can contribute a zero-basis intangible property without gain recognition because it falls under the definition of property (rather than services)

Which of the following would be currently taxable as ordinary income to the service partner if received in exchange for services performed for the partnership? (In all cases, assume that the interest is not sold within two years after the time it is granted to the service partner.) a. A 10% interest in the capital of the partnership that will vest if the partner remains in the partnership for three years. b. A 20% interest in the future profits of the partnership received in exchange for future services to be performed for the partnership. c. A 25% interest in the capital of the partnership when there are no restrictions on transferability of the interest. d. A 30% interest in the capital of the partnership when the partner contributes intangible property with a $0 basis that the partner developed.

a RATIONALE: For an office in the home deduction to be available, the exclusive use requirement (choice b.) always has to be met. The method chosen for arriving at the deduction has no relevance as to how it is classified (i.e., deduction for or from AGI), choice c. Either the simplified method or the regular method can be used for rented property (choice d.).

Which of the following, if any, is an advantage of using the simplified method for determining the office in the home deduction? a. No depreciation on the personal residence has to be computed. b. The exclusive use requirement does not have to be met. c. It allows the expense to be classified as a deduction for AGI. d. It can also be used for a residence that is rented (not owned) by the taxpayer.

d

Which of these is not a correct citation to the Internal Revenue Code? a. Section 211 b. Section 1222(1) c. Section 2(a)(1)(A) d. All of these are correct cites.

a

Which publisher offers the United States Tax Reporter? a. Research Institute of America (Thomson Reuters) b. Commerce Clearing House c. LexisNexis d. Tax Analysts

b RATIONALE: Taxpayer compliance is greater with business use property (choice a.). Very few states impose a tax on intangibles (choice c.) because it is easily avoided and does not generate much revenue (choice d.).

Which, if any, of the following is a typical characteristic of an ad valorem tax on personalty? a. Taxpayer compliance is greater for personal use property than for business use property. b. The tax on automobiles sometimes considers the age of the vehicle. c. Most states impose a tax on intangibles. d. The tax on intangibles generates considerable revenue since it is difficult for taxpayers to avoid.

False RATIONALE: Tacking on the old holding period is allowed only when the asset transferred is a capital or § 1231 asset.

Yuna, a real estate dealer, and others form Eagle Corporation under § 351. Yuna contributes inventory (land held for resale) in return for Eagle stock. The holding period for the stock includes the holding period of the inventory. a. True b. False