Reg ME 2 - WMC
What are some examples of adjustments to arrive at adjusted gross income?
-Educator expenses -IRA -Student loan interest expenses -Tuition & fee deduction -Health savings account -Moving expenses -One-half self-employment FICA -Self-employed health insurance -Self-employed retirement -Interest withdrawal penalty -Alimony paid -Attorney fees paid in certain discrimination and whistleblower cases -Domestic production activities deduction
What are some medical expenses that are deductible on an individuals schedule A?
-Medical insurance premiums paid -Deductible paid for medical insurance -Hospital costs for emergency room visit -Prescription eyeglasses -Visits to the doctor and dentist -Insurance co-pays for prescription drugs -Transportation to doctors office for required medical care -insurance reimbursement for hospital visit (negative)
What are some necessary things in order to have a security interest attach?
-Value must be given by the creditor -Either the creditor must take possession of the collateral or the debtor must sign a security agreement that describes the collateral -The debtor must have rights in the collateral
What are some medical expenses that are not deductible on an individuals schedule A?
-Vitamins for general health -Health club dues for general health -Mandatory Medicare A payments
Albert and Carol Dutton were divorced in January of the current year. In accordance with the divorce decree, Albert transferred title in their home to Carol during the year. The home, which had a fair market value of 450,000, was subject to a mortgage of 300,000 that had more than 25 years remaining in the amortization schedule. Monthly mortgage payments amount to 2,200. Under the terms of the settlement, Albert is obligated to make the mortgage payments on the home for the full remaining 25-year term of the indebtedness, regardless of how long Carol lives. Albert made 12 mortgage payments during the current year. What amount is taxable as alimony on Carols' current year tax return?
0 Payments that are required to be paid, even if the recipient dies, are not considered to be payments for support (alimony), and are considered to be amounts owed to the payee as part of the divorce settlement (i.e., property settlements).
Reid, Welsh, and May are equal partners in the RWM partnership. Reid's basis in the partnership interest is 60,000. Reid receives a liquidating distribution of 61,000 cash and land with a fair market value of 14,000 and an adjusted basis of 12,000. What gain must Reid recognize upon the liquidation of his partnership interest?
1,000 With a liquidating distribution, the partner's basis for the distributed property is the same as the adjusted basis of his partnership interest, first reduced by any monies received. The partner will recognize gain only to the extent that money received exceeds the partner's basis in the partnership.
During the year, Radon Corporation contributed 120,000 to a qualified charitable organization. Radon had taxable income before any charitable contribution deduction of 1,400,000 for the year. Also a dividends-received deduction of 100,000 was reflected in the total amount of taxable income. Radon had carryover contributions of 25,000 from the prior year. For the current year, what is the maximum amount Radon may deduct as charitable contributions?
145,000 1,400,000 + 100,000 = 1,500,000 1,500,000*10% = 150,000 120,000+25,000 = 145,000 145<150
Skipper Family trust, a simple trust, reported the following items of income and expenses during the year: Ordinary income from rental properties (gross) = 5,000 Taxable dividend income = 1,500 Interest income from corporate bonds = 1,000 Interest income from tax-exempt municipal bonds = 500 Rental expenses = 2,500 Trustee fees allocable to income = 1,000 Trustee fees allocable to corpus = 500 What is Skipper Family Trust's distributable net income (DNI) for the year?
4,000 Distributable net income is calculated using the following formula: Trust gross income = Rental income + Dividend income + Interest income from corp. bonds = 5,000 + 1,500 + 1,000 = 7,500 Less: Trust deductions allocable to income = Rental expenses + Trustee fees allocable to income = (2,500) + (1,000) = (3,500) Adjusted total income = Trust gross income - Trust deductions allocable to income = 7,500 - 3,500 = 4,000 Plus: Adjusted tax-exempt interest = 500 Less: Capital gains allocable to corpus = 0 Less: Trustee fees allocable to corpus = (500) Distributable net income = 4,000 + 500 - 0 - 500 = 4,000
Ted, who is single, owns a personal residence in the city. He also owns a condo near the ocean. He uses the condo as a vacation home. In March of the current year, he borrowed 50,000 on a home equity loan (secured by his city residence) and used the proceeds to acquire a luxury automobile. During the year, he paid the following amounts of interest: On his personal residence = 15,500 On the condo = 6,200 On the home equity loan = 4,800 On credit card obligations = 1,700 What amount, if any, must Ted recognize as an AMT adjustment for the year?
4,800 The $4,800 interest paid on the home equity loan is an adjustment (add-back) for AMT purposes because the taxpayer did not use the mortgage loan proceeds to buy, build, or improve his/her principal residence and/or one other residence. The interest on the condo (2nd home) is an allowable deduction for AMT purposes and is not an add-back. The $4,800 interest paid on the home equity loan is an adjustment (add-back) for AMT purposes because the taxpayer did not use the mortgage loan proceeds to buy, build, or improve his/her principal residence and/or one other residence.
Marin Trust, a simple trust without any special provisions regarding pass-through of capital gains, reported the following items of income and expenses during the year: Taxable dividend income = 12,000 Interest income on corporate bonds = 16,000 Interest income on municipal bonds = 20,000 Capital gains = 10,000 Trustee fees = (5,000) What is Marin's current year distributable net income (DNI)?
43,000 Taxable dividend income + interest on corporate bonds + capital gains + trustee fees - tax-exempt interest - capital gains = 43,000
On June 1, Year 3, Baxter Corp adopted a plan of complete liquidation. On December 1, Year 3, Baxter distributed to its stockholders installment notes receiveable that Baxter had acquired in connection with the sale of land in Year 2. The following information pertains to these notes: Baxter's basis = 85,000 FMV = 150,000 Face amount = 180,000 How much gain must Baxter recognize in Year 3 as a result of this distribution?
65,000 Distributions in complete liquidation of the corporation are subject to two levels of taxation. First, the corporation must recognize gain or loss as if it sold the assets for the fair market value. The gain on the sale would be the fair market value of $150,000 less $85,000 basis for a gain of $65,000. Second, the shareholders would report gain or loss determined by the difference between the fair market value of the assets received and the shareholders' adjusted basis of the stock.
Which of the following is a security exempt from the registration requirements of the Securities Act of 1933? -A class of stock issued in exchange for another class by the issuer to its existing shareholders without payment of a commission -convertible, subordinated debentures issued by a manufacturing company -common stock with a par value of less than $1.00 -Warrants to purchase preferred stock
A class of stock issued in exchange for another class by the issuer to its existing shareholders without payment of a commission The 1933 Act provides an exemption from registration when an issuer exchanges securities with its existing holders and no commission is paid.
Marcus incurred 750 of expenses for business meals and entertainment in his position as an employee of Alexander Corporation. Marcus' expenses were not reimbursed. This expenditure is:
A deduction from adjusted gross income, subject to a 2% AGI floor Employee's business expenses are deductible as a miscellaneous itemized deduction (from AGI) subject to a 2% AGI floor. Meals and entertainment expenses are also limited to a 50% deduction before being subject to the 2% floor.
Paul paid the real estate taxes on his rental apartment building. Are the real estate taxes deductible? And if so, to or from AGI?
A deduction to arrive at adjusted gross income Rental property expenses are reported on Schedule E (for AGI), and, subject to the passive activity loss provisions, the net number appears on Page 1 of the Form 1040 in arriving at AGI.
Mo receives as a gift a draft given to her by her sister, Tracy. Mo has no notice that the draft has been dishonored or is overdue. Is Mo a holder or a holder in due course or neither?
A holder only If a person rightfully gains possession of commercial paper, the person is a holder (i.e., a person with a right to enforce the paper).
Jay received a court award for damages to his personal retribution by the National Gossip. He also received punitive damages. What damages are and are not taxable?
All of the damages are taxable Personal reputation awards and punitive damage awards are both included in taxable income.
What is the gain on a sale of a partnership interest?
Sales price - adjusted basis = total profit Total profit - (accounts receivable*partnership share) = Capital gain Adjusted basis is capital account + share of liabilities
Greed Co telephoned Stieb Co and ordered 30 tables at 100 each. Greed agreed to pay 15% immediately and the balance within thirty days after receipt of the entire shipment. Greed forwarded a check for 450 an Stieb shipped 15 tables the next day, intending to ship the balance by the end of the week. Greed decided that the contract was a bad bargain and repudiated it, asserting the statute of frauds. Stieb sued Greed. Which of the following will allow Stieb to enforce the contract in its entirety despite the statute of frauds?
Greed admitted in court that it made the contract in questions However, if any of the following exceptions apply, an oral contract will be enforceable even without a sufficient writing: *S*pecially manufactured goods *W*ritten confirmation *A*dmitted in court *P*erformed (enforceable to the extent of the performance of the party sought to be held liable)
Which of the following is not considered a primary authoritative source when conducting tax research? -Tax court cases -IRS publications -Treasury regulations -Internal Revenue Code
IRS publications
In March of the current year, Star Corporation, a calendar year corporation, purchased and placed into service a building costing 400,000 and land costing 150,000. Later that year, on November 15, the corporation purchased and placed into service office equipment costing 80,000. No other equipment or real estate was placed into service during the year. Under the MACRS depreciation system, what convention must Star Corporation use?
Mid-quarter convention for the equipment and mid-month convention for the building
Must there be a proper filing to have a security interest attach?
No
Sand orally promised Frost a 10,000 bonus, in addition to a monthly salary, if Frost would work two years for Sand. If Frost works for the two years, will the Statue of Frauds be a defense if Sand refuses to pay Frost the bonus?
No, because Frost fully performed There is an exception if one party has fully performed his/her part of the contract. In such a case, the contract can be enforced despite the lack of a sufficient writing if the aggrieved party can convince the court that the oral term was indeed part of the contract.
Does the penalty for failure to file information returns apply for a failure that is due to reasonable cause and not due to willful neglect? (with respect to tax preparers)
No, there is no penalty when due to reasonable cause and not due to willful neglect
Feline Incorporated, a calendar year S corporation since its formation in YEar 1, has three equal shareholders, Carlin, Radon, and Helix. During Year 4, Carlin received distributions form Feline Corporation of 50,000. At December 31, Year 4, after all adjustments to basis (except for distributions) had been made, Carlin's absis in Feline's stock was 20,000. For Year 4, Carlin will treat the 50,000 as:
Nontaxable return of capital of 20,000 and long-term capital gain of 30,000 The distribution over the reduction is basis is a long-term capital gain (can be short-term in other situations)
Riley purchased Series EE US Savings Bonds in 1998. Redemption proceeds will be used for payment of the college tuition for Riley's dependent child. One of the conditions that must be met for the tax exemption of accumulated interest on these bonds is that the:
Purchaser of the bonds must be the sole owner of the bonds (or joint owner with his or her spouse)
Which of the following can be claimed as an adjustment to arrive at adjusted gross income? -State income taxes paid -Roth IRA contribution -Charitable contributions -Qualified moving expenses
Qualified moving expenses
The Franklin Trust, a complex trust, had gross rental income of 100,000 and taxable interest income of 30,000 in the current tax year. The trust also incurred a deductible trustee fee of 15,000 and rent expense of 20,000. The trust plans to make a 70,000 distribution to its beneficiaries during the current year. What are the taxable income and income distribution deduction for the year?
Taxable income = 24,900 Income distribution deduction = 70,000 100 + 30 - 15 - 20 = 95 - .1 - 70 = 24.9 $100 exemption allowed for a complex trust
Which of the following types of entities is entitled to the net operating loss deduction? -not-for-profit organizations -trusts and estates -s corporations -partnerships
Trusts and estates Trusts and estates can be taxable entities, even though, at times, they may also have pass-through effects.
Tom, age 66 paid the medical expenses of his mother in law, age 86. Although Tom provided more than half the support, she does not qualify as Tom's dependent because she had gross income of 5,000. Is this expenditure deductible? Is so, to or from AGI?
a deduction from agjusted gross income, subject to a 10% AGI floor Medical expenses are itemized deductions (from AGI), subject to a 10% AGI floor. Note: The definition of "dependent" for purposes of taking the medical expenses for that person as an itemized deduction does not consider the dependent's gross income. Thus, there is no limitation to a dependent's gross income when it relates to medical or dental expenses. The remaining dependency tests apply and Tom's mother-in-law meets those tests.
Which of the following are not allowable deductions from the gross estate to arrive at the taxable estate? -medical expenses of the decedent paid 13 months after death -gift taxes paid on gifts made after 1976 -unlimited transfers to the decedent's spouse -funeral costs
gift taxes paid on gifts made after 1976 Gift taxes paid (on gifts made after 1976) are a credit against the gross estate tax, not a deduction to arrive at the taxable estate
A CPA prepared a tax return that involved a tax shelter transaction that was disclosed on the return. In which of the following situations would a tax return preparer penalty not be applicable? -there was a reasonable possibility of success for the position -there was substantial authority for the position -it is reasonable to believe that the position would more likely than not be upheld -there was a reasonable basis for this position
it is reasonable to believe that the position would more likely than not be upheld With regards to a tax shelter, a penalty for understatement of taxpayer liability could apply to a CPA unless it is reasonable to believe that the position would more likely than not be upheld on its merits. This is more stringent than a reasonable basis for the position, a reasonable possibility of success for the position, and substantial authority for the position.
Which of the following is the best definition of real property? -real property is only land -real property is land and intangible property in realized form -real property is all tangible property including land -real property is land and everything permanently attached to it
real property is land and everything permanently attached to it
Which of the following statements is true regarding liability of a CPA firm to a purchaser under the liability provision of Section 11 of the Securities Act of 1933 for certifying materially misstated financial statements included in the security's registration statement? -the CPA firm will be liable unless the purchaser did not rely on the financial statements -the purchaser must prove that the CPA firm knew of the material misstatements -the purchaser must prove that the CPA firm was negligent -the CPA firms will not be liable if it had reasonable grounds to believe the financial statements were accurate
the CPA firms will not be liable if it had reasonable grounds to believe the financial statements were accurate
