Ch 1, 4, & 8, Ch 2, Ch 5, Ch 6, Practice Midterm

Porter was unemployed for part of the year. Porter received $35,000 of wages, $6,400 from a state unemployment compensation plan, and $2,000 from his former employer's company-paid supplemental unemployment benefit plan. What is the amount of Porter's

$43,400

Klein, a master's degree candidate at Blair University, was awarded a $12,000 scholarship from Blair in Year 8. The scholarship was used to pay Klein's Year 8 university tuition and fees. Also in Year 8, Klein received $5,000 for teaching two courses at a nearby college. What amount is includable in Klein's Year 8 gross income?

$5,000

Frank and Mary Wood have 2 children, Becky, age 10, and Matt, age 14. The Woods incur expenses of $4,000 for after-school care for each child. Their only income is from wages. Frank's wages are $60,000, and Mary's wages are $2,500. What amount of Child and Dependent Care Credit may the Woods claim on their joint tax return?

$500 First of all we need to determine the eligible expenses. Only expenses for Becky will qualify because Matt is not under 13 years of age. So of the $8,000 spent, only $4,000 will qualify. The maximum eligible for one dependent, though, is $3,000. Then it is further limited because it is limited to the lowest earned income of either spouse. That would be Mary's $2,500. Due to their combined income level, they are in the 20% credit range. The credit is 20% of $2,500, or $500

Perle, a dentist, billed Wood $600 for dental services. Wood paid Perle $200 cash and built a bookcase for Perle's office in full settlement of the bill. Wood sells comparable bookcases for $350. What amount should Perle include in taxable income as a result of this transaction?

$550

Veronica and Manny Dunn, married taxpayers, obtained a mortgage in the amount of $550,000 in January of 2021 when they purchased their house in Chatsworth. In December of the same year, Veronica and Manny took out a home equity loan for $80,000. They used the funds to pay for a year long around the world trip to celebrate their 50th anniversary. What is the maximum loan amount on which the Dunns can deduct interest?

$550,000 Veronica and Manny can deduct all of the interest on the first mortgage since it is a purchase loan. The interest on the $80,000 home equity loan is not deductible since it was not used for improvement of the taxpayer's principal residence.

In the current year Jensen had the following items: Salary $50,000 Inheritance 25,000 Alimony from ex-spouse (divorce agreement finalized in 2015) 12,000 Child support from ex-spouse 9,000 Capital loss on investment stock sale (6,000) What is Jensen's AGI for the current year?

$59,000 Salary, alimony, capital loss (max 3000)

Clem is married and is a skilled carpenter. Clem's wife, Wanda, works part-time as a substitute grade school teacher. Clem paid self-employment tax of $15,300 (the employer portion is $7,650) and Wanda had $3,000 of Social Security taxes withheld from her pay. Determine the amount of Clem's expenses that are deductible for AGI this year (if any).

$7,650

In which of the following states could a taxpayer appeal the decision of a U.S. District Court to the Ninth Circuit Court of Appeals?

Alaska

Which of the following amounts represents an adjustment to adjusted gross income (AGI) for the current tax year?

Alimony paid to a former spouse pursuant to a divorce agreement executed in 2014

Jay received a court award for damages to his personal reputation by the National Gossip. He also received punitive damages. Which of the following statements is true?

All of the damages are taxable

How may taxes paid by an individual to a foreign country be treated?

As a credit against federal income taxes due

Is the Medicare component of FICA a proportional or a progressive tax?

As the Medicare tax component of the FICA tax rate is constant (1.45%), the tax is proportional. However, starting in 2013, the rate became progressive as an additional .9% was added to individuals making $200,000 or more ($250,000 for individuals filing MFJ).

Hall, a divorced person and custodian of her 12-year-old child, filed her current year federal income tax return as head of a household. She submitted the following information to the CPA who prepared her return: The divorce agreement, executed in 2017, provides for Hall to receive $3,000 per month, of which $600 is designated as child support. After the child reaches 18, the monthly payments are to be reduced to $2,400 and are to continue until remarriage or death. However, for the current year, Hall received a total of only $5,000 from her former husband. Hall paid an attorney $2,000 in the current year in a suit to collect the alimony owed. In June of the current year, Hall's mother gifted her 100 shares of a listed stock. The donor's basis for this stock, which she bought 20 years ago, was $4,000, and market value on the date of the gift was $3,000. Hall sold this stock in July of the current year for $3,500. The donor paid no gift tax. During the year, Hall spent a total of $1,000 for state lottery tickets, and her lottery winnings totaled $200. Hall earned a salary of $25,000 in the current year. Hall was not covered by any type of retirement plan, but contributed $2,000 to an IRA this year. During the year, Hall sold an antique that she bought 10 years ago to display in her home. Hall paid $800 for the antique and sold it for $1,400, using the proceeds to pay a court-ordered judgment. Hall paid the following expenses in the current year pertaining to the home that she owns: realty taxes, $3,400; mortgage interest, $7,000; casualty insurance, $490; assessment by city for construction of a sewer system, $910; interest of $1,000 on a personal, unsecured bank loan, the proceeds of which were used for home improvements. Hall does not rent out any portion of the home. What amount should be reported in Hall's current year tax return as alimony income?

$0 Alimony income exists if actual receipt > child support Monthly child support $600 Actual Receipt: $5,000 $600 x 12 = $7,200

Krete, an unmarried taxpayer with income exclusively from wages, filed her initial income tax return for Year 8. By December 31, Year 8, Krete's employer had withheld $16,000 in federal income taxes and Krete had made no estimated tax payments. On April 15, Year 9, Krete timely filed an extension request to file her individual tax return and paid $300 of additional taxes. Krete's Year 8 income tax liability was $16,500 when she timely filed her return on April 30, Year 9, and paid the remaining income tax liability balance. What amount would be subject to the penalty for the underpayment of estimated taxes?

$0 Provided the taxes due after withholdings were not over $1,000, there is no penalty for underpayment of estimated taxes. Note that there would be a failure to pay penalty on the $200 that was not paid until April 30, but this is a separate penalty

Roger, age 19, is a full-time student at State College and a candidate for a bachelor's degree. During the year, he received the following payments: State scholarship for ten months (tuition and books) $3,000 Loan from college financial aid office 1,500 Cash support from parents 3,000 Cash dividends 700 Cash prize awarded in a contest 500 What is Roger's adjusted gross income for the year?

$1,200

Charles and Marcia are married cash-basis taxpayers. In Year 8, they had interest income as follows: $500 interest on federal income tax refund $600 interest on state income tax refund $800 interest on federal government obligations $1,000 interest on state government obligations What amount of interest income is taxable on Charles and Marcia's Year 8 joint income tax return?

$1,900 The $500 interest on federal income tax refund, the $600 interest on state income tax refund, and the $800 interest on federal government obligations are taxable, for a total of $1,900. The $1,000 interest on state government obligations is normally not taxable. Recall that to determine whether or not a state tax refund is taxable for federal tax purposes, we must know if the taxpayer took the standard deduction in the prior year or itemized deductions. This is not the case for interest on a tax refund. Interest on a federal or state income tax refund is included in taxable income.

Lionel is an unmarried law student at State University Law School, a qualified educational institution. This year Lionel borrowed $24,000 from County Bank and paid interest of $1,440. Lionel used the loan proceeds to pay his law school tuition. Calculate the amounts Lionel can deduct for interest on higher education loans assuming Lionel's AGI before deducting interest on higher education loans is $50,000.

$1440. Max is $2500, must choose the lesser of $2500 or actual interest paid. $70,000 is below cap AGI of 65k

Rick owed Dennis $20,000. In payment of this debt, Rick transferred to Dennis a life insurance policy on Rick. Dennis paid Rick $10,000 to acquire ownership of the life policy. The face value of the policy is $200,000. Dennis names himself as the beneficiary of the policy and continues to make the premium payments. After Dennis has paid $25,000 in premiums, Rick dies and Dennis collects $200,000. Is any of the $200,000 Dennis received taxable?

$145k I.R.C. §101(a)(2) When proceeds are paid under the policy, they are taxable to the extent they exceed the amount of consideration given for the policy ($10,000 cash, plus $20,000 note receivable) and any premiums paid on the policy ($25,000).

This year Jack intends to file a married-joint return. Jack received $172,500 of salary, and paid $5,000 of interest on loans used to pay qualified tuition costs for his dependent daughter, Deb. This year Jack has also paid moving expenses of $4,300 and $28,300 of alimony to his ex-wife, Diane, who divorced him in 2012. Suppose that Jack also reported income of $8,800 from a half share of profits from a partnership. Disregard any potential self-employment taxes on this income. What AGI would Jack report under these circumstances?

$151,583 172,500+8,800-28,300= 153,000 2500 - (2500 x (2500/30000 (GAP))*(153000 (MAGI) - 140000 (limit))=1417 153,000-1417 = $151,583 *MAGI phaseout limit for student loan is $140k-170K

Under a $150,000 insurance policy on her deceased father's life, May Green is to receive $12,000 per year for 15 years. Of the $12,000 received in the current year, the amount subject to income tax is:

$2,000 $12k - ($150k/15yrs) = $2k

During the current year, Adler had the following cash receipts: Wages $18,000 Interest income from investments in municipal bonds 400 Unemployment compensation 3,900 What is the total amount that must be included in gross income on Adler's current year income tax return?

$21,900

Kim was seriously injured at her job. As a result of her injury, she received the following payments: $5,000 reimbursement from employer-provided health insurance for medical expenses paid by Kim. The premiums this year paid by Kim's employer totaled $6,000. $15,000 disability pay. Kim has disability insurance provided by her employer as a nontaxable fringe benefit. Kim's employer paid $6,000 in disability premiums this year on behalf of Kim. $10,000 received for damages for personal physical injury. $200,000 for punitive damages. What amount is taxable to Kim?

$215,000

During the year Kay received interest income as follows: On U.S. Treasury certificates 4,000 On refund of prior year's federal income tax 500 The total amount of interest subject to tax in Kay's current year tax return is:

$4,500

Interpret each of the following citation. Specifically, which court issued the decision and where is the decision published? 1) 54 T.C. 1514 (1970) 2) 408 F.2d 117 (CA-2, 1969) 3) 69-1 USTC ¶ 9319 (CA-2, 1969) 4) 293 F.Supp. 1129 (D.Ct.Miss., 1967) 5) 67-1 USTC ¶ 9253 (D.Ct.Miss., 1967) 6) 56 S.Ct. 289 (1935) 7) 36-1 USTC ¶ 9020 (USSC, 1935)

1) Tax Court, Tax Court of the United States Reports 2) US Second Circuit of Appeals, Federal Reporter, Second Series 3) US Second Circuit of Appeals, US Tax Cases 4) US District Court of Mississippi, Federal Supplement Series 5) US District Court of Mississippi, US Tax Cases 6) United States Supreme Court, Supreme Court Reporter 7) United States Supreme Court, US Tax Cases

Dan has AGI of $50,000 and paid the following taxes during this tax year. Calculate the amount of taxes Dan may include in his itemized deductions for the year. State income tax withholding $ 1,400 State income tax estimated payments 750 Federal income tax withholding 3,000 Social Security tax withheld from wages 2,100 State excise tax on liquor 400 Automobile license (based on the car's weight) 300 State sales tax paid 475

1,400 + 750 = $2,150

During Year 9, Ash had the following cash receipts: Wages 13,000 Interest income from U.S. Treasury bonds 350 Workers' compensation following a job-related injury 8,500 What is the total amount that must be included in gross income on Ash's Year 9 income tax return

13,350

How much property can Bruce Jackman, a widower, give to his four married children, their spouses, and eight grandchildren over a period of 10 years without making a taxable gift?

16 donees X $15,000 (annual exclusion) X 10= $2,400,000 Problem 4:

Jill is a single individual. In 2021, she has total income of $175,000, non-refundable tax credits of $20,000, exclusions of $20,000, deductions for AGI of $40,000, itemized deductions of $20,000 (assume no AGI limitations are applicable), and estimated tax payments of $3,000. What is her tax due?

175,000 - 20,000 - 40,000 = 115,000 115,000 - 20,000 (itemized deduction>standard (12,200)) = 95,000 14751 + .24(95,000 - 86,375) = 16,821 16,821 - 20,000 = -3,179 (nonrefundable) Tax Refund = 3,000

Parker, whose spouse died during the preceding year, has not remarried. Parker maintains a home for a dependent child. What is Parker's most advantageous filing status?

A qualifying widow(er) with dependent child

Which one of the following will result in an accruable expense for an accrual-basis taxpayer?

A repair completed prior to year end but not invoiced.

The US Tax Court is

A specialized trial court that hears only Federal tax cases. The trials are by judge and not by a jury.

Following an audit of Mary Anderson's individual income tax return, the IRS revenue agent determined additional taxes were due. Mary disagreed. The IRS revenue agent and Mary were not able to reach an agreement at the revenue agent level. Mary received a copy of the revenue agent's report and would like to challenge the findings. Which of the following statements is INCORRECT regarding the appeals process?

A taxpayer has 60 days to file an appeal in the federal court system upon receipt of a notice of deficiency. Not true, 90 days

This year Randy paid $28,000 of interest (Randy borrowed $450,000 to buy his residence, and it is currently worth $500,000). Randy also paid $2,500 of interest on his car loan and $4,200 of margin interest to his stockbroker (investment interest expense). How much of this interest expense can Randy deduct as an itemized deduction under the following circumstances? A) Randy received $2,200 of interest this year and no other investment income or expenses. His AGI is $75,000. B) Randy had no investment income this year, and his AGI is $75,000.

A) 28000 + 2,200 (cap) = 30,200 The interest on the car loan is nondeductible personal interest but Randy may deduct all $28,000 of his interest on the home loan as an itemized deduction because the loan is less than the limit of $750,000 on acquisition indebtedness. The $4,200 of margin interest is likely investment interest, and this itemized deduction is limited to net investment income. Because the $2,200 of interest income qualifies as investment income and Randy has no deductible investment expenses, the investment interest expense would be limited to his $2,200 in net investment income. Randy would carry forward $2,000 to next year B) 28,000

Don and Eve Jaffe are married and jointly have AGI of $100,000 in 2021. They have two dependent children and file a joint return. During the year, they paid $3,000 for medical insurance, $12,000 in doctor bills and hospital expenses, and $2,000 for prescribed medicine and drugs. A) In December 2021, the Jaffe received an insurance reimbursement of $2,000 for hospitalization expenses. Determine the deduction allowable for medical expenses paid during the year. B) Assume instead that the Jaffe received the $2,000 insurance reimbursement in February 2022. Determine the deduction allowable for medical expenses incurred in 2021. Should that reimbursement be included in their gross income for 2022?

A) 3,000 + 12,000 + 2,000 - 2,000 = 15,000 - (100,000 x 10%) = 5,000 B) 3,000 + 12,000 + 2,000 = 17,000 - (100,000 x 10%) = 7,000. If itemized in 2021, the reimbursement would be taxable income for 2022. If not itemized in 2021, not included in gross income

Determine the taxpayer's gross income for tax purposes in each of the following situations: a. Dana, a cash basis taxpayer, sold a corporate bond with accrued interest of $200 for $10,500. Dana's cost of the bond was $10,000. b. Dana needed $10,000 to make a down payment on her house. She instructed her broker to sell some stock to raise the $10,000. Dana's cost for the stock is $3,000. Based on her broker's advice, instead of selling the stock, she borrowed the $10,000 using the stock as collateral for the debt. c. Dana owns a vacant lot that has been zoned for residential housing. She spends $900 in attorney fees to get the property rezoned as commercial. The property's value increases by $10,000 as a result of the rezoning.

A) Dana has $200 of interest income and a recognized gain of $300 ($10,500-$200-$10,000) B) Dana does not recognize income from using the stock as collateral for the debt. Her assets and liabilities increased by the same amount and she continued to own the stock. Thus, there is no realized gain C) Mere increases in value of an asset are not included in gross income. The attorneys fee should be added to Dana's cost of the property in calculating her basis for the

Debra Kim sued her former boss and recovered the following awards: - Damage to her car the boss caused when Debra broke up with him- $3,000 - Physical damage caused by her boss when he punched her- $4,000 - Loss of income while her face was healing - $9,000 - Punitive damages- $20,000 A) What effect do these recoveries have on Debra's gross income? B) Assume that Debra also collected $60,000 of damages for libel arising out of her former boss's written defamatory statement published on the company's intranet. Is that amount included in Debra's gross income?

A) Debra must include in gross income the punitive damages of $20,000. The other amounts ($4,000 and $9,000) may be excluded as arising out of the physical injury. The $3,000 amount received for damage to her automobile is excluded because this amount is a nontaxable recovery of capital (i.e., it reduces her basis for the automobile by $3,000) B) The $60,000 is included in Debra's gross income because it did not arise out of a physical personal injury.

In assessing the validity of a prior court decision, discuss the significance of the following on the taxpayer's issue: A) The decision was rendered by the U.S. District Court of Wyoming. Taxpayer lives in Wyoming. B) The decision was rendered by the Court of Federal Claims. Taxpayer lives in Wyoming. C) The decision was rendered by the Second Circuit Court of Appeals. Taxpayer lives in California. D) The decision was rendered by the Supreme Court.

A) If the taxpayer chooses a U.S. District Court as the trial court for litigation, the U.S. District Court of Wyoming would be the forum to hear the case. Unless the prior decision has been reversed on appeal, one would expect the same court to follow its earlier holding. B) If the taxpayer choose the U.S. Court of Federal Claims as the trial court for litigation, the decision that previously was rendered by this Court should have a direct bearing on the outcome. If the taxpayer selects a different trial court (i.e., the appropriate U.S. District Court or the U.S. Tax Court), the decision that was rendered by the U.S Court of Federal Claims would be persuasive, but not controlling. It is, of course, assumed that the result that was reached by the U.S. Court of Federal Claims was not reversed on appeal C) The decision of a U.S. Circuit Court of Appeals will carry more weight than will any case that was rendered by a trial court. Since the taxpayer lives in California, however, any appeal from a U.S. District Court or the U.S. Tax Court would go to the 9th Circuit Court of Appeals. Although the 9th Circuit might be influenced by what the 2nd Circuit Court of Appeals had decided, it is not compelled to follow such holding. D) In that the U.S. Supreme Court is the highest appellate court, one can place complete reliance upon its decisions. Nevertheless, one should investigate any decision to see whether the Code has been modified with respect to the result that was reached. There also exists the rare possibility that the Court may have changed its position in a later decision.

Mingfang and Kiren are partners in a law firm. The partners have entered into an arm's length agreement requiring Mingfang to purchase Kiren's partnership interest from Kiren's estate if she dies before him. The price is set at 125% of the book value of Kiren's partnership interest at the time of her death. Mingfang purchased an insurance policy on Kiren's life to fund this agreement. After Mingfang had paid $20,000 in premiums, Kiren died due to lung cancer, and Mingfang collected one million dollars of life insurance proceeds. Mingfang used the life insurance proceeds to purchase Kiren's partnership interest. A) What amount should Mingfang include in his gross income from receiving the life insurance proceeds? B) The insurance company paid $10,000 interest on the life insurance proceeds during the period Kiren's estate was in administration. During this period, Mingfang had left the insurance proceeds with the insurance company. Is this interest taxable? C) When Mingfang purchased Kiren's partnership interest for one million dollars, as determined by the agreement, the fair market value of Kiren's interest was $1.5 million. How much should Mingfang include in his gross income from this bargain purchase?

A) Mingfang is the beneficiary of the life insurance policy and can exclude the proceeds of one million dollars from his gross income B) The $10,000 of interest earned on the life insurance proceeds left with the insurance company is included in Mingfang's gross income C) Mingfang did not recognize a gain on the bargain purchase. Mingfang simply got a good price on the purchase under an arm's length contract.

Smithers is a self-employed individual who earns $30,000 per year in self-employment income. Smithers pays $2,200 in annual health insurance premiums (not through an exchange) for his own medical care. In each of the following situations, determine the amount of the deductible health insurance premium for Smithers before any AGI limitation. A) Smithers is single, and the self-employment income is his only source of income. B) Smithers is single, but besides being self-employed, Smithers is also employed part-time by SF Power Corporation. This year Smithers elected not to participate in SF's health plan. C) Smithers is self-employed, and he is also married. Smithers's spouse, Samantha, is employed full-time by SF Power Corporation and is covered by SF's health plan. D) Smithers is not eligible to participate in SF's health plan. Smithers is self-employed, and he is also married. Smithers's spouse, Samantha, is employed full-time by SF Power Corporation and is covered by SF's health plan. Smithers elected not to participate in SF's health plan.

A) Smithers can deduct $2,200 either as a deduction for AGI or claim $2,200 as an itemized medical expense B) Smithers can claim only $2,200 as an itemized medical expense. Even though he is self-employed, he is not eligible to deduct the health insurance premiums as a for AGI deduction because he is eligible to participate in his employer's plan (even though he did not actually participate) C) Smithers can deduct $2,200 either as a deduction for AGI or claim $2,200 as an itemized medical expense D) Smithers can claim only $2,200 as an itemized medical expense. Even though he is self-employed, he is not eligible to deduct the health insurance premiums as a for AGI deduction because he is eligible to participate in his spouse's employer's plan (even though he did not actually participate in her plan).

Determine the taxable life insurance proceeds in the following cases: When Jared died, his wife, who was the beneficiary, collected $50,000 on a group term insurance policy purchased by Jared's employer. Jared had never included the premiums in gross income. The Matador Software Company purchased an insurance policy on the life of one of its officers. After his passing, the company, which already previously paid $50,000 in premiums, collected $750,000 of insurance proceeds.

A) The life insurance proceeds of $50,000 were paid to the beneficiary as the result of the death of the insured, and therefore, are excludable from the gross income of Jared's wife B) The proceeds of $750,000 were paid to the beneficiary upon the death of the insured. Therefore, Matador can exclude the insurance proceeds from its gross income.

Donavan & Rex Landscaping is a Limited Liability Company (LLC). How does the tax benefit rule apply to Donavan & Rex in the following transactions: A) In 2021, Donovan & Rex paid Liz $5,000 for referring a client. The deal fell through, and in 2022, Liz refunded the $5,000 to the LLC B) In 2021, Donovan and Rex paid a title company $400 for services in connection with a title search. Because the title company was negligent, the LLC incurred some additional costs in acquiring the building. In 2022, the title company refunded the $400 fee to Donovan and Rex.

A) The receipt of the $5,000 represents a possible recovery of a deduction taken in prior years. If White and Swan had sufficient income to utilize the deduction in the previous year, the $5,000 recovery must be included in gross income B) The receipt of the $400 is not taxable. The amount paid the title company was not deductible in the previous year because it was a capital expenditure for land. The recovery will reduce the cost of the building.

For each of the following, determine the amount that should be included in gross income: A) Tim Sternberg was selected as the most valuable player of the NBA. In recognition of this, he was awarded $100,000 in cash. B) Cynthia West was selected as Ms. California in its annual beauty contest and received a sports car valued at $40,000 from the sponsor of the event. As a condition of the award, Ms. West is required to exhibit with the sports car during the next 12 months. C) Dr. Warshel was awarded the Nobel Prize in Chemistry. He directed the Nobel Committee to pay the $1.4 million prize to a homeless shelter foundation.

A) Yes B) Yes C) No, awards for scientific, literary, or charitable achievement are excluded from gross income, but only if (1) the recipient was selected without any action on his part to enter the contest or proceeding, (2) the recipient is not required to render substantial future services as a condition to receive the prize or award, and (3) the payor of the prize or award transfers the prize or award to a federal, state, or local governmental unit or qualified charity such as a church, school, or charitable organization designated by the taxpayer

Michael is the president of the T Corporation. He and other members of his family control the corporation. Michael has a temporary need for $45,000, and the corporation has excess cash. He could borrow the money from a bank at 9%, and T Corporation is earning 6% on its temporary investments. The federal published lending rate is 8%. T Corporation has made loans to other employees on several occasions. Therefore, Michael is considering borrowing $45,000 from the corporation. He will repay the loan principal in two years plus interest at 5%. Is the corporation required to impute interest income on the loan to Michael? Is Michael required to recognize income from the loan proceeds? Is Michael required to recognize income with respect to the favorable interest rate?

A) Yes, since the loan is below market rate. The interest income imputed should be based on the difference between rate offered by the federal government and published by the IRS and 5%. (i.e., 3%) B) No, receipt of a loan is a liability, not income generating event. C) Yes, if he obtained the loan in his capacity as an employee, then he has to recognize compensation earnings. If he received it in his shareholder capacity, then it would be recognized as dividend income. Would Michael prefer to regard it as dividends or compensation? - Accepting it as dividends would be less beneficial for the corporation because it would not be deductible. However, dividends distribution would be taxed at a lower rate for him as an individual as compared to regular compensation.

James has just been audited by the IRS and, as a result, has been assessed a substantial deficiency (which he has not yet paid) in additional income taxes. In preparing his defense, James advances the following possibilities. Are any of them viable? A) Although a resident of Texas, James plans to sue in a District Court in Oregon that appears to be more favorably inclined toward taxpayers. B) If (a) is not possible, James plans to take his case to a Texas state court as he is more familiar with the practices there. C) If he loses at the trial court level, James plans to appeal to either the Federal Circuit or the 11th Circuit Court of Appeals because he has relatives in both Washington D.C., and Atlanta. Staying with these relatives could save James lodging expense while his appeal is being heard by the court. D) Even if he does not win at the trial court or appeal court level, James feels certain of success on an appeal to the Supreme Court.

A. James must sue in the U.S. District Court of his locality, Texas, and not in any other U.S. District Court B. James has four choices of courts with respect to his federal tax question and a state court is not one of the choices. He may go to the U.S. Tax Court, Small Cases Division of the U.S. Tax Court, U.S. Tax Court, District Court, Court of Federal Claims. C. The U.S. Court of Federal Claims is a trial court and James cannot appeal from a U.S. District Court to the U.S. Court of Federal Claims. Any appeal from his U.S. District Court would be to the Fifth Court of Appeals, and not to the 11th Circuit D. Few tax decisions reach the U.S. Supreme Court. The U.S. Supreme Court must agree to hear a court case.

Which one or more of the following would be considered advantages of the Small Cases Divisions of the Tax Court? Why? A) Appeal to the Tax Court is possible. B) A hearing of a deficiency of $65,000 is considered on a timely basis. C) Taxpayer can handle the litigation without using a lawyer or CPA D) Taxpayer can use Small Cases Division decisions for precedential value E) The actual hearing is conducted informally

A. No, there is no appeal from the Small Claim Division B. No. Deficiency cannot exceed $50,000 C. Yes D. No, decisions are not published E. Yes.

A taxpayer lives in Michigan. In a controversy with the IRS, the taxpayer loses at the trial court level. Describe the appeal procedure for each of the following trial courts. A) Small Cases Division of the Tax Court B) Tax Court C) Federal District Court D)Court of Federal Claims

A. There is no appeal by either the taxpayer of the IRS from a decision of the Small Cases Division of the U.S. Tax Court. B. The first appeal would be to the Sixth Circuit Court of Appeals. Further appeals would be the U.S. Supreme Court C. Same as above D. The appeal would be to the Federal Circuit Court of Appeals and then to the U.S. Supreme Court.

An IRS agent has sent a 30-day letter reflecting a proposed adjustment to increase a client's taxable income in three prior years. The CPA and the client have reviewed the proposed changes and agree with the proposed adjustment. What would be the CPA's most appropriate recommendation to the client?

Accept the proposed IRS changes and pay any deficiency

DAC Foundation awarded Kent $75,000 in recognition of lifelong literary achievement. Kent was not required to render future services as a condition to receive the $75,000. What condition(s) must have been met for the award to be excluded from Kent's gross income? I. Kent was selected for the award by DAC without any action on Kent's part. II. Pursuant to Kent's designation, DAC paid the amount of the award either to a governmental unit or to a charitable organization.

Both I and II

Which of the following conditions must be present in a divorce agreement executed on or before December 31, 2018, for a payment to qualify as deductible alimony? I. Payments must be in cash or its equivalent. II. The payments must end at the recipient's death

Both I and II

Explain the following abbreviations: CA-2 Fed. Cl. aff'd. rev'd. rem'd. Cert. denied F.3d F.Supp USSC S.Ct. D.Ct.

CA-2- U.S. Second Circuit Court of Appeals Fed. Cl.- Federal Claims Reporter and Federal Claims Court aff'd. - affirmed rev'd. -reversed rem'd. -remanded Cert. denied - the write of certiorari has been denied by the U.S. Supreme Ct F.3d - Federal Reporter (decisions of the U.S. court of appeals) F.Supp- Federal Supplement (decisions of the federal district courts) USSC- U.S. Supreme Court S.Ct.- Supreme Court Reporter D.Ct.- U.S. District Court Decision

Charles visits Reno, Nevada, once each year to gamble. This year his gambling loss was $15,000. He commented to you, "At least I did not have to pay for my airfare and hotel room. The casino paid that because I am such a good customer. That was worth at least $2,500." What are the relevant tax issues for Charles?

Charles received something of value from the casino. Under the broad concept of income, the airfare and hotel accommodations would be considered income. However, Charles could argue that the income should be matched with his $15,000 in gambling losses on the trip

Vicki's mother lives with her. Vicki purchased clothing for her mother costing $800, and provided her with a room that Vicki estimates she could have rented for $2,800. Vicki spent $2,500 for groceries she shared with her mother. In addition, Vicki purchased a television for $750 that she placed in the living room. Vicki and her mother both used the television. What is the amount of Vicki's support for her mother?

Clothing: $800; rental value of the room: $2,800 (in the case support is provided in a non-cash form, such as lodging, the amount of support equals the FMV); food: $1,250. Capital expenditures for items such as television is included in support test if the item, does in fact constitute support, but here the fact that the mother used the television set probably would not be sufficient to cause its cost to be viewed as support. On the other hand, if the television set was a gift to the mother, was placed in her room, and was used exclusively by her, the cost probably would qualify as support

David is a CPA and enjoys playing the lottery. This year, David won $10,000 in lottery scratch-off tickets. He spent $200 purchasing the tickets. Which statement is true regarding David's winnings?

David must include the $10,000 in gross income and can deduct $200 as an itemized deduction.

Rank the following items from the highest authority to the lowest in the federal tax law system:

Internal Revenue Code Regulation Revenue Ruling Private Letter Ruling Proposed Regulation

Derek is a cash basis taxpayer. He sold 100 shares of Zinc Inc., stock for $20,000. The cost to him was $1,000. Shortly before Derek sold the stock, Zinc Inc. decided to distribute unneeded assets to its shareholders. Therefore, Zinc Inc. declared a large dividend. Derek would have been entitled to a $10,000 dividend, but he sold his shares after the dividend declaration date and before the record date. What are the effects of the stock sale and the dividends on Derek's gross income?

Derek has a recognized gain of $19,000 ($20,000 amount realized -$1,000 adjusted basis) from the sale of his stock. The $10,000 dividend is taxable to the new owner, who was the owner on the record date.

Donald, a resident of California (which imposes a general sales tax), goes to Oregon (which does not impose a general sales tax) to purchase a minivan. Will Donald successfully avoid the California sales tax?

Donald probably will be required to pay the California use tax, if, and when, he applies for California license plate. In this case, the use tax probably is the same amount as the California sales tax.

With regard to the inclusion of Social Security benefits in gross income, for the Year 8 tax year, which of the following statements is correct?

Eighty-five percent of the Social Security benefits is the maximum amount of benefits to be included in gross income.

A cash basis taxpayer should report gross income:

For the year in which income is either actually or constructively received, whether in cash or in property.

Sarah and Todd Kim are married and have two children age 6. Sarah and Todd both work and earn annual salaries of $85,000 (Sarah) and $4,000 (Todd). To care for their children while they work, they pay Sarah's sister (20 years old) $6,500. Assuming that a joint return is filed, what if any is their credit for child and dependent care expenses?

For two children, the maximum expenses for purposes of the credit for child and dependent care expenses is $6,000. However, since the qualifying expenditures are limited to the earnings of the lesser paid spouse (i.e., $4,000), this amount is used in calculating the credit. Using the combined AGI of $89,000, the applicable rate for the credit is 20%. Thus, the credit is $800 (20%X4,000). The fact that the care was provided by Tod's sister is of no consequence

City of Bowling Green has decided to sell a parcel of unimproved land that it owns. The highest bid received is $1 million from a group that wants to build a church on the property. The second highest bid is $900,000 and is submitted by an automobile dealership. Why might it be more beneficial for the city to accept the $900,000 bid?

Generally, charitable organizations are exempt from property taxes (i.e., the church). This would not be the case with a for profit commercial enterprise (i.e., automobile dealership). Over a period of time, the $100,000 differential in the two bids could be more than offset through the collection of property taxes.

George's father received Social Security benefits of $6,000 of which $1,800 were deposited into a saving account. He spent the remaining $4,200 on food, clothing, and lodging. George spent $5,600 to support his father. Does George meet the support test for purposes of determining dependency exemption?

George meets the support test because the amount saved is not counted in the support test

When Gull Company constructs a climate-controlled warehouse, it is very careful to keep as many of the components as portable as possible. Thus, the sprinkler system is detachable, window units provide air conditioning and heating, and the interior walls can be removed. What is Gull trying to accomplish?

Gull Company is trying to minimize the value of the real estate. This can be done by keeping personal property from becoming fixture. The jurisdiction where the building is situated probably imposed tax on reality that is higher than that imposed on personal property.

In evaluating the hierarchy of authority in tax law, which of the following carries the greatest authoritative value for tax planning of transactions?

Internal Revenue Code

Jackie is 21 years old and is a full-time student at the local community college. She is married to Bill and they have no children. Jackie and Bill live in Jackie's parents' basement while they both finish college. Bill is 25 years old and is also a full-time student. Jackie's parents pay more than half of Jackie and Bill's support. Jackie has no gross income and Bill has $2,000 from a part-time job. Bill and Jackie file a joint return and received a refund because their tax liability is zero. Can Jackie's parents claim Jackie and Bill as dependents on their tax return?

Jackie's parents can claim both Jackie and Bill as dependents. Jackie qualifies as her parent's qualifying child (CARES). Bill qualifies as Jackie's parents' qualifying relative (SUPORT). Even though Jackie and Bill file a joint return, they can still be considered dependents because they receive a refund and their tax liability is zero.

Molly Morris is 15 years old. Molly's parents (James and Beth) divorced in May of the current tax year. Molly lived with both parents until the divorce. Molly does not provide more than half of her own support. After the divorce, Molly's mother has custody of Molly, but Molly lives equal time with both parents. James' AGI is $40,000 and Beth's AGI is $35,000. Molly's parents cannot decide who can claim Molly as a dependent for tax purposes. Assuming neither parent waives their right to claim Molly as a dependent, which statement is true?

James may claim Molly as a dependent because his AGI is higher. The parent with custody of the child for the greater part of the year may claim the child as a dependent (determined by time, not the divorce decree). Because Molly's parents have equal custody during the year, the parent with the higher AGI would be eligible to claim Molly as a dependent, which in this case would be James. However, James could waive the right to claim Molly as a dependent.

Jane is 20 years old and is a sophomore at Lake University. She is a full-time student and does not have any gross income. Jane spends the holidays and summers t home with her parents. her total support for the current tax year is $30,000, including a scholarship for $5,000 to cover tuition. Jane used $12,000 of her savings and her grandparents $13,000.

Jane's grandparents cannot claim her as a dependent because Jane provided more than half of her own support With respect to her grandparents, Jane's scholarship is treated as support and thus Jane provides more than half of her own support ($12,000 savings + $5,000 scholarship = $17,000; $17,000/$30,000 = 0.57 = 57%). Jane does qualify as a dependent of her parents because she is under 24, a full-time student, and the scholarship does not count as support with respect to her parents. She also meets all other tests of qualifying child for her parents.

Jonathan Jones is a 19-year-old full-time college student at the local community college. He lives in an apartment near campus during the school year and returns home for the summer break and holidays. Jonathan earned $5,000 this year working at the campus bookstore. His parents gave him $20,000 and his grandparents gave him $10,000 this year in support. Which of the following statements is true?

Jonathan's parents can claim him as a dependent Jonathan is a qualifying child of his parents. He meets all requirements (CARES): CARES Test (Qualifying Child) Close Relative Age Limit Residency and Filing Requirements Eliminate Gross Income Test

Which of the following is/are among the requirements to enable a taxpayer to be classified as a "qualifying widow(er)"? I. A dependent has lived with the taxpayer for six months II. Taxpayer has maintained the cost of the principal residence for six months

Neither I nor II The requirements that enable a taxpayer to be classified as a "qualifying widow(er)" are: The taxpayer's spouse died in one of the two previous years and the taxpayer did not remarry in the current tax year; The taxpayer has a child who can be claimed as a dependent; This child lived in the taxpayer's home for all of the current tax year; The taxpayer paid over half the cost of keeping up a home for the child; and The taxpayer could have filed a joint return in the year the spouse died

In the current tax year, Blake Smith provided more than half of the support for his cousin, niece, and a close family friend. Blake lives alone and sends a monthly support check to each person. None of the individuals whom Blake supports has any income or files a tax return. All three individuals are US citizens. Which of the three people that Blake supports can he claim as a dependent on his tax return

Niece The niece meets the SUPORT test for qualifying relative status. The cousin and family friend do not meet the "R" (relative) or "T" (taxpayer lives with individual) tests. All three people whom Blake supports fail the residency test for a qualifying child.

A taxpayer received a notice of deficiency from the IRS. If the tax underpayment is not the result of the taxpayer's mathematical or clerical error, how long does the taxpayer have to file a petition with the Tax Court for a redetermination of the deficiency?

Ninety days from the mailing date of the notice if the notice is not addressed to a taxpayer outside of the United States.

Monica Lee, who is single, listed her townhouse in Brentwood for sale with a realtor at a price of $750,000. She purchased it ten years earlier for $650,000. She ended up selling the property for $745,000 and incurred the following expenses and payments as part of the closing: real estate agent commission $29,000; appraisal fee $500; recording fees $500; payment to Bank of America on account of the mortgage $680,000. Monica then purchased another residence for $710,000.

Recognized Gain: $0 745k - 29k - 500 - 500 = 715k - 650k = 65k - 250k (max exclusion) = -195k => $0 Adjusted Basis of NEW home: $710k Recognized Gain if 1.23 million: $300k 1.23m - 29k - 500 - 500 = 1.2m - 650k = 550k - 250k (max exclusion) = 300k

Gail and Mark James contributed to the support of their two children, Jack and Jill, as well as Mark's mother, Betty. Jack is a 19-year-old full time student who earned $5,000 this year working at a coffee shop on campus. Jill is 24 years old and worked full-time as a librarian and earned $25,000. Jack comes home during the summer and holidays. Jill lives at home year-round. Betty lives in an apartment in town and received $2,000 in municipal bond interest, $6,000 in dividend income, and $4,000 in nontaxable Social Security benefits. Jack, Jill, and Betty are U.S. citizens and unmarried. Gail and Mark provided more than half of the support for Jack, Jill, and Betty. How many people qualify as dependents on Gail and Mark's tax return?

One Jack meets the CARES test for a qualifying child. Jill does not meet the CARES test for a qualifying child because she is 24 and not a full-time student. She fails the age limit test of CARES. Jill also does not meet the SUPORT test because she earns more taxable income than the gross income threshold amount ("U" for under that amount). Betty does not meet the CARES test because she fails the close relative and age limit tests. (The CARES test is for a qualifying child, not a qualifying relative.) Betty also fails the SUPORT test because her taxable income ($6,000) is not under the gross income threshold amount.

Mr. and Mrs. Williams decided during the tax year to purchase their first new home. The fair market value of the home was $275,000, and a 20 percent down payment was required to secure a mortgage in the amount of $220,000 at 5 percent for 30 years. The Williams' decided to utilize $10,000 that was kept in an Individual Retirement Account owned by Mrs. Williams. This amount was withdrawn on June 12 and used to fund the down payment on July 1. These amounts had been previously deducted as an adjustment by her on an individual tax return in the year of contribution. The remaining $12,000 for the down payment was drawn from a savings account. How much of the distribution from the Individual Retirement Account is subject to the premature distribution penalty tax, and how much must be included in the Williams' joint tax return in the year of distribution as gross income?

Penalty Tax: 0 Gross Income: 10k Generally, a premature distribution (prior to retirement or other allowable age) from an individual retirement account is subject to a 10 percent penalty tax. Certain exceptions to this tax are available and are contained in the mnemonic "HIM DEAD." Home buyer (1st time) $10,000 max if used toward first home Insurance (medical) Medical expenses in excess of percentage of AGI floor Disability Education Adoption or birth of child made within one year from the date of birth or adoption ($5,000 maximum exclusion) Death

A statutory notice of deficiency explains that the taxpayer has 90 days to either pay the deficiency or else to file a

Petition with the US Tax Court

Which of the following exempt organizations must file annual information returns

Private foundations Section 509 private foundations require an annual information return which discloses substantial contributors and amounts of contributions received

A taxpayer contemplates entering into a complex transaction. The taxpayer wants assurance that there will be no adverse tax effects from the transaction. The taxpayer should apply for which of the following?

Private letter ruling

When a taxpayer needs guidance with a specific tax issue related to a proposed transaction, the taxpayer can ask the IRS for:

Private letter ruling

Which of the following is not a refundable tax credit? Retirement savings contribution credit Earned income credit Child tax credit Excess social security paid.

Retirement savings contribution credit

Heather is single and has one son, Rhett, who is 19 years old. Rhett lived at home for four months of the current tax year before moving away to take a full-time job in another city. Heather provided more than half of Rhett's support for the taxable year. Rhett earned $20,000 in gross income and is unmarried. Which of the following statements regarding the dependency rules for Rhett is true?

Rhett fails the age limit test for a qualifying child Rhett fails both the age limit and residency test for qualifying child status.

Which of the following statements regarding the self-employment tax is true?

Self-employment income is subject to both federal income tax and self-employment tax.

When Lili, a forklift operator working for the state govenment, was injured on the job, she was allowed under her contract with the state to choose between a $1,000 weekly sick-pay distribution or a $800 weekly workers' compensation payment. Assume Lili is in the 28% tax bracket and that she elected to receive the $1,000 weekly pay. Are these payments taxable?

Sick pay is taxable as salary whereas workers compensation is excludable from income. Therefore, Lili made a poor choice because her sick pay is taxable in full and her net receipt of proceeds is only $720. She would have been able to keep $800 had she selected the workers' compensation option. Reg. 1.104-1(b).

In 2012, David makes a taxable gift of $250,000 upon which he pays a federal gift tax of $70,800. In 2021, David makes another taxable gift of $250,000. Will the 2021 taxable gift result in the same gift tax as the 2012 gift? Please review the Unified Transfer Tax Table found in Chapter 25 in your textbook under Exhibit 25-1.

Since the gift tax is cumulative in effect, the 2012 taxable gift must be added to the 2021 taxable gift. As the tax rates are progressive, the tax on $500,000 is $155,800. From this amount is subtracted the amount on the 2012 gift. Thus, $85,000 ($155,800-$70,800) is the amount of tax due on the 2021 gift.

Susie, John, Luke, and Will provide support for their 80-year-old mother, Joyce. Joyce lives by herself in an apartment in Miami, Florida. Joyce earned $5,000 this year working at her church. Joyce provides 5% of her own support. Susie provides 30% of Joyce's support, John provides 10% of Joyce's support, Luke provides 15% of Joyce's support, and Will provides 40% of Joyce's support. Under a multiple support agreement, who may claim Joyce as a dependent?

Susan, Luke and Will Under a multiple support agreement, Susie, Luke, and Will are eligible to claim Joyce as a dependent because they contributed more than 10% of Joyce's support. Choice "1" is incorrect. John did not provide more than 10% of Joyce's support. Therefore, he is not eligible to claim Joyce as a dependent under a multiple support agreement.

In which of the following situations may taxpayers file as married filing jointly?

Taxpayers who were married but lived apart during the year

A tax return preparer is researching authorities to support a position of deferral of gain taken on the disposal of an asset. Which of the following will provide the highest authority for this position?

Temporary regulation issued by the Treasury Department

Ania received a $400 state income tax refund this year. Ania deducted $1,000 of state income taxes paid in the prior year as part of her itemized deductions. Which of the following statements regarding the taxability of Ania's refund is true?

The $400 is taxable if Ania's itemized deductions in the prior year exceeded the standard deduction by $400

Ted lives in San Francisco, which is in the 9th circuit. He is litigating a case in the Tax Court that involves the issue of whether a particular item can be excluded from his income for tax purposes. In several earlier Tax Court cases the court ruled that this type of item is not excludable. Two taxpayers appealed the decision of the Tax Court. On appeal the 7th Circuit affirmed the Tax Court decision in one of the cases, but in the other case the 9th Circuit reversed and held that the item is excluded from gross income. In Ted's case will the Tax Court apply the prior Tax Court precedent (as approved by the 7th Circuit) or the 9th Circuit precedent?

The Tax Court will follow the 9th Circuit precedent because Ted resides in the 9th Circuit. What would have been the outcome had Ted filed the action in the Federal Claims court? - The court would follow the precedent from the Court of Appeals from the Federal Circuit.

Which of the following is a list of courts that are referred to as courts of original jurisdiction, or trial courts, for tax matters?

The Tax Court, the U.S. District Court, and the U.S. Court of Federal Claims

Which of the following statements is correct for the judicial process when a taxpayer and the Internal Revenue Service cannot reach agreement on a tax issue using the administrative appeals process?

The U.S. Court of Federal Claims has jurisdiction over most claims for money damages against the United States.

What is the Supreme Court's policy on hearing tax cases?

The U.S. Supreme Court decides whether to hear any case, tax or otherwise, by requiring an affirmative vote of at least four judges. The court accepts jurisdiction by granting a writ or denies jurisdiction (cert denied). The Supreme Court rarely hears tax cases. It does so only when needed to resolve a conflict among the Courts of Appeals or where the tax issue is extremely important.

John Harper's individual income tax return was audited by the IRS. The IRS revenue agent determined John owed additional taxes on his previously filed return. John disagrees with the agent's additional assessment and the matter was not agreed upon at the IRS administrative appeals conference. John has decided to initiate resolution of the disputed tax in the Federal Court System.

The U.S. Tax Court is the only forum in which the taxpayer may have a claim heard without first paying the disputed tax liability in full.

Which of the following statements is correct concerning an IRS Field Audit examination?

The audit is conducted by an IRS representative, at the taxpayer's home or office, or at the taxpayer's representative's place of business.

Which of the following statements about the child and dependent care credit is correct?

The credit is nonrefundable

Darr, an employee of Sorce C Corporation, is not a shareholder. Which of the following would be included in a taxpayer's gross income?

The dividend income on shares of stock that the taxpayer received for services rendered

An employee who has had Social Security tax withheld in an amount greater than the maximum for a particular year may claim

The excess as a credit against income tax, if that excess resulted from correct withholding by two or more employers.

Which of the following disqualifies an individual from the earned income credit The taxpayer's qualifying child is a 17-year-old grandchild. The taxpayer has earned income of $5,000. The taxpayer's five-year-old child lived in the taxpayer's home for only eight months. The taxpayer has a filing status of married filing separately.

The taxpayer has filing status of married filing separately

A taxpayer received a 90-day letter proposing a deficiency of $28,000. The taxpayer's CPA told the taxpayer that a client with similar circumstances successfully sustained such a position in the Small Claims Division of the U.S. Tax Court. If the taxpayer decides to file a petition with the U.S. Tax Court, what is the significance of the success of the CPA's other client in sustaining the position in the Small Claims Division?

There is little significance since decisions in the Small Claims Division of the U.S. Tax Court lack precedential value

Dave and Pam Stevens contributed to the support of their three children, Lisa, Tanya, and Hannah, and Pam's divorced mother, Ellen. For the current year, Lisa, a 26-year-old sales clerk, earned $27,000. Tanya, a 23-year-old, full-time college graduate student in accounting, earned $35,000 working for a CPA firm. Hannah, a 20-year old artist, earned nothing during the year, but is still aspiring to sell her first piece and has signed on with an art studio. Ellen received $10,000 in nontaxable social security benefits and $2,000 in dividend income. All are U.S. citizens and are over half supported by Dave and Pam. How many dependents do Dave and Pam Stevens have under the qualifying child and qualifying relative rules?

Three Lisa: NO. Lisa fails the age limit for QC and exceeds the gross income limitation for QR. Tanya: YES. Tanya meets all tests of QC. She is a full-time student under the age of 24 so she meets the age test. Hannah: YES. Hannah meets all criteria for QR. She fails the age limit test for QC. Ellen: YES. Ellen meets the gross income limitation for QR because the Social Security income is nontaxable and not included for the gross income test. Tanya, Hannah, and Ellen all meet dependency requirements.

Dewey Cheatam, Esq. is a leading candidate for the next open seat on the U.S. Supreme Court. He recently addressed the graduating class at The University of Texas Law School on the subject of the judicial process for tax issues. Which of the following statements in his address was correct?

U.S. District Court cases are heard before one judge, not a panel of judges.

The Welles family has three children. Which of the children listed below would be subject to the "kiddie tax"? Willy: 20 years old, not a college student, supports himself fully Walker: 25 years old, full-time college student, supports himself fully Wilson: 20 years old, full-time college student, fully supported by his parents None of these

Wilson