AC 402 Quiz Questions
A child who has unearned income of $2,200 or less may still be subject to the kiddie tax. True False
False
Accessing tax documents through electronic means offers no advantages over a strictly paper-based approach. True False
False
Alex, an accrual basis taxpayer, collects the rent for December 2020 and January 2021 on December 1, 2020. Alex must include the December 2020 rent but not the January 2021 rent in his 2020 gross income. True False
False
Because deferred taxes must be paid in full eventually, tax deferral is not a strategically valuable goal of tax planning. True False
False
Christy, who is single, received $9,000 of Social Security benefits. She also received $30,000 from dividends, interest, and her employer's pension plan. If Christy sells a capital asset that produces a $1,000 recognized loss, Christy's taxable income will decrease by less than $1,000.
False
Determination letters are issued by the National Office of the IRS. True False
False
In 2020, Todd's house burned down due to a Presidentially declared natural disaster and all contents were lost. He received $350,000, although his house was worth only $125,000 and the contents were worth another $125,000. He will have to include the difference in his gross income. True False
False
Most small businesses use the hybrid method of accounting. True False
False
Once a child reaches age 19, the kiddie tax will no longer apply. True False
False
T/F: Butch and Minerva divorced in December 2020. Since they were married for more than one-half of the year, they are considered as married for 2020.
False
T/F: Claude's deductions from AGI exceed the standard deduction allowed for the current year. Under these circumstances, Claude cannot claim the standard deduction.
False
T/F: Julius, a married taxpayer, makes gifts to each of his six children. A maximum of twelve annual exclusions could not be allowed as to these gifts.
False
T/F: Under the Federal income tax formula for individuals, a choice must be made between claiming deductions for AGI and itemized deductions.
False
T/F: Under the Federal income tax formula for individuals, the determination of adjusted gross income (AGI) is subsequent to (after) that of taxable income (TI).
False
T/F: Under the income tax formula, a taxpayer must choose between deductions for AGI and the standard deduction.
False
Tax-exempt state and local government bonds are usually avoided as investments for high-income taxpayers. True False
False
The Federal estate and gift taxes are examples of regressive taxes. True False
False
Two types of exemptions have been allowed: personal exemptions and community exemptions. True False
False
Alimony and separate maintenance payments made under a divorce agreement executed after 2018 are neither taxable to the recipient nor deductible by the payor. True False
True
Deductions for exemptions no longer are allowed under the Federal income tax law. True False
True
In preparing an income tax return, the use of a client's estimates is permitted. True False
True
In terms of timing as to any one year, the Tax Tables are available after the Tax Rate Schedules. True False
True
Most individual taxpayers use the cash receipts and disbursements method of accounting. True False
True
Section 139, Disaster Relief Payment, was enacted by Congress in 2001 to ensure that victims of a qualified disaster would not be required to include in gross income payments received for funeral expenses resulting from a terrorist attack. True False
True
Sections 101 through 140 provide the authority for excluding specific items from gross income. True False
True
T/F: For dependents who have income (could be earned and/or unearned income), special filing requirements apply.
True
T/F: The filing status of a taxpayer (e.g., single, head of household) must be identified before the applicable standard deduction is determined.
True
The § 111 tax benefit rule provides that no income is recognized upon the recovery of a deduction, or the portion of a deduction, that did not yield a tax benefit in the year it was taken. True False
True
Tax bills are handled by which committee in the U.S. House of Representatives?
Ways and Means Committee
Harvey purchased a corporate bond at its face amount of $20,000 on January 1, 2020. The bond pays 5% interest on each December 31. On April 30, 2020, Harvey sold the bond for $21,000. How much interest income in 2020 must Harvey recognize on the bond? a. $333.33 b. $20,000 c. $250 d. $666.67 e. $1,000
a. $333.33
Nancy, a widow, elected to receive the proceeds of a $100,000 life insurance policy on the life of her deceased husband in 10 installments of $15,000 each. Her husband had paid premiums of $75,000 on the policy. In the first year, Nancy collected $15,000 from the insurance company. She must include in gross income: a. $5,000. b. $0. c. $100,000. d. $10,000. e. $15,000.
a. $5,000
The order in the standard pattern for judicial citations includes: a. Case name, volume number, reporter series. b. Reporter series, case name, year of decision. c. Reporter series, case name, volume number. d. Court, year of decision, paragraph. e. Year of decision, case name, volume number.
a. Case name, volume number, reporter series
Michelle provides more than half the support of her son, Andrew, who does not live with her. Andrew is 26 and is a full-time student in graduate school. He earns $2,000 per year from his first part-time job and $500 from a second part-time job while receiving a scholarship of $10,000 to cover tuition. He also receives nontaxable interest from city bonds in the amount of $6,000. What is Andrew's gross income, and is he considered Michelle's dependent? a. Gross income is $2,500, and he meets the dependency test. b. Gross income is $2,500, but he does not meet the dependency test. c. Gross income is $16,000, and he does not meet the dependency test. d. Gross income is $6,000, and he meets the dependency test. e. Gross income is $18,500, and he does not meet the dependency test.
a. Gross income is $2,500, and he meets the dependency test
Molly operates a gym. She sells memberships that entitle the member to use the facilities at any time. A one-year membership costs $360 ($360/12 = $30 per month); a two-year membership costs $600 ($600/24 = $25 per month). Cash payment is required at the beginning of the membership period. On July 1, 2020, Molly sold a one-year membership and a two-year membership. I. If Molly is a cash basis taxpayer, her 2020 gross income from the contracts is $960 ($360 + $600). II. If Molly is an accrual basis taxpayer, her 2020 gross income from the contracts is $330 [(6/12 × $360) + (6/24 × $600)]. III. If Molly is an accrual basis taxpayer, her 2021 gross income from the contracts is $630 [(6/12 × $360) + $450]. a. I, II, and III are true. b. Only I is true. c. Only II and III are true. d. Neither I, II, nor III is true. e. Only I and II are true.
a. I, II, and III are true
Regarding proper ethical guidelines, which of the following statements is false? a. If a client has made a mistake in a prior year's return which effects the current year and refuses to correct it, you should withdraw from the engagement. b. Questionable positions should not be taken on a client's tax return in the hope the return will not be selected for audit by the IRS. c. In no event should an estimate be given the appearance of greater accuracy than is the case (e.g., an estimate of $1,000 should not be deducted on a return as $999). d. The use of client estimates in preparing a return is acceptable. e. A question on a tax return can be left unanswered if the answer is unavailable.
a. If a client has made a mistake in a prior year's return which effects the current year and refuses to correct it, you should withdraw from the engagement
All employees of Basic Company are covered by a group hospitalization insurance plan, but the employees must pay the premiums ($8,000 for each employee). None of the employees has sufficient medical expenses to deduct the premiums. Instead of giving raises next year, Basic is considering paying the employee's hospitalization insurance premiums. If the change is made, the employee's after-tax and insurance pay will: a. Increase more for the highly paid employees (32% marginal tax bracket). b. Increase more for the low-income (12% and 22% marginal tax brackets) employees. c. Increase by the same amount for all employees. d. Decrease more for the highly paid employees (32% marginal tax bracket). e. Decrease by the same amount for all employees.
a. Increase more for the highly paid employees (32% marginal tax bracket)
The imputed interest rules apply to all of the following types of loans, except: a. Loans made between two objective parties at the market rate of interest. b. Compensation-related loans. c. Gift loans made out of love or affection. d. Corporation-shareholder loans. e. Loans from an employer to an employee.
a. Loans made between two objective parties at the market rate of interest
On January 5, 2020, Louise purchased a bond paying interest at 6% for $30,000. On September 30, 2020, she gave the bond to Gerard. The bond pays $1,800 interest on December 31. Louise and Gerard are cash basis taxpayers. When Gerard collects the interest in December 2020: a. Louise reports $1,350 of interest income in 2020, and Gerard reports $450 of interest income in 2020. b. Gerard must include all the interest in his gross income. c. Louise must include all the interest in her gross income. d. Neither Louise nor Gerard has taxable income from this transaction. e. Louise reports $450 of interest income in 2020, and Gerard reports $1,350 of interest income in 2020.
a. Louise reports $1,350 of interest income in 2020, and Gerard reports $450 of interest income in 2020
Tax law has historically favored certain industries. Which of the following are examples of favored activities? a. Railroad and banking b. Service industries and technology companies c. Agriculture and aerospace d. Manufacturing and aerospace e. Airlines and shipbuilding
a. Railroad and banking
A qualifying relative must meet which of the following tests? a. Relationship, gross income, and support tests b. Relationship, gross income, and exemption tests c. Support, exemption, and residency tests d. Gross income, exemption, and residency tests e. Age and residence tests
a. Relationship, gross income, and support tests
The ratification of which amendment to the U.S. Constitution sanctioned both the Federal individual and corporate income taxes? a. Sixteenth b. Twentieth c. Eighteenth d. Twelfth e. Fourteenth
a. Sixteenth
Which of the following statements regarding reporting a child's unearned income on the parent's return is false? a. The child's gross income must be more than $1,100 but less than $12,000. b. The child's gross income must be from interest and dividends only. c. No estimated tax has been paid in the name and Social Security number of the child. d. A parent may elect to report the child's unearned income that exceeds $2,200 on the parent's own tax return if the child meets three requirements. e. The child is not subject to backup withholding.
a. The child's gross income must be more than $1,100 but less than $12,000
Shane, a cash basis taxpayer, gave 1,000 shares of Iris Company common stock to his daughter on September 29, 2020. Iris Company is a publicly held company that has declared a $1.00 per share dividend on September 30 every year for the last 20 years. Just as Shane had expected, Iris Company declared a $1.00 per share dividend on September 30, payable on October 15, to stockholders of record as of October 10. The daughter received the $1,000 dividend on October 18, 2020. Which of the following statements is true? a. The daughter must recognize the income because she owned the stock when the dividend was declared and she received the $1,000. b. Shane must recognize $750 of the dividend because he owned the stock for three-fourths of the year. c. Shane must recognize the $1,000 dividend as his income because he knew the dividend would be paid. d. Neither Shane nor his daughter must recognize income. e. Shane must recognize the income of $1,000 because he constructively received the $1,000.
a. The daughter must recognize the income because she owned the stock when the dividend was declared and she received the $1,000
Tracey made a $60,000 interest-free loan to her son, Teddy, who used the money to start a new business. Teddy's only sources of income were $25,000 from the business and $490 of interest on his checking account. The relevant Federal interest rate was 5%. Based on the above information: a. Tracey does not recognize any imputed interest income and Teddy does not recognize any imputed interest expense. b. Tracey must recognize $3,000 (0.05 × $60,000) of imputed interest income on the below- market loan. c. Teddy's business net profit will be reduced by $3,000 (0.05 × $60,000) of interest expense. d. Tracey and Teddy both recognize imputed interest income and imputed interest expense. e. Teddy's gross income must be increased by the $3,000 (0.05 × $60,000) imputed interest income on the below-market loan.
a. Tracey does not recognize any imputed interest income and Teddy does not recognize any imputed interest expense
Jacob is a farmer, and the state condemns land that belongs to him. The condemned land cost $150,000, but the state pays him $160,000. His farm as a whole is worth $300,000. Shortly after receiving the $160,000, Jacob buys more land for $160,000. The tax rate is 10%. What is Jacob's tax on this transaction? a. $10,000 b. $0 c. $300,000 d. $150,000 e. $160,000
b. $0
Abigail is an executive for Oak Furniture Manufacturing Company. Abigail purchased furniture from the company for $7,000. The price Oak ordinarily charges a wholesaler is $8,500. The retail price of the furniture was $12,000, and Oak's cost was $8,000. The company also paid for Abigail's parking space in a garage near the office. The parking fee was $1,200 for the year. All employees are allowed to buy furniture at a discounted price comparable to that charged to Abigail. However, the company does not pay other employees' parking fees. Abigail's gross income is: a. $0. b. $1,000. c. $7,000. d. $6,200. e. $5,000.
b. $1,000
An accrual basis calendar year corporation sells $4,800 worth of 12-month contracts on June 1, 2020. Assuming the corporation performs services for its customers every month, how much income can it defer to 2021? a. $2,800 b. $2,000 c. $0 d. $4,800 e. $2,400
b. $2,000
Erica sells her husband's baseball card collection, valued at $3,000 for $4,500. She also sells her 2002 Chevy Tahoe, valued at $1,500 for $2,250. From these two transactions, how much is subject to taxes due to realized gains? a. $6,750 b. $2,250 c. $750 d. $1,500 e. $1,250
b. $2,250
James and Judy have one dependent child, John, who is 12. In 2020, John received $3,500 of interest income and has no earned income. John's taxable income is: a. $3,500. b. $2,400. c. $0. d. $1,400. e. $2,450.
b. $2,400
In 2020, Ramon owns 120 shares of Duke Company common stock with a cost of $19,000 and a fair market value of $25,000. If Ramon sells the stock for $25,000 this year when he has a marginal tax rate of 15%, how much will he net in cash after he pays tax on the gain? a. $6,000 b. $24,100 c. $25,000 d. $900 e. $19,000
b. $24,100
Mason did not file for an extension and files his tax return on August 9. The balance of his tax owed is $3,000. Disregarding the interest element, for how much should he write a check to cover what he owes? a. $3,600 b. $3,540 c. $2,460 d. $3,000 e. $3,660
b. $3,540
Borrowing to cover a deficit is also a revenue source. In recent years, borrowing has made up approximately how much of total government revenues? a. 50% b. 10 to 40% c. 5 to 6% d. 1 to 4% e. 50 to 60%
b. 10 to 40%
The maximum tax rate of long-term gains on depreciable property used in a trade or business and held for more than one year is: a. 20%. b. 25%. c. 39.6%. d. 28%. e. 30%.
b. 25%
Because no tax is due until a gain has been recognized, the law favors investments that yield: a. Dividends rather than interest. b. Appreciation rather than annual income. c. Cash dividends rather than stock dividends. d. Interest rather than dividends. e. Annual income rather than appreciation.
b. Appreciation rather than annual income
In December 2020, Edward, a cash basis taxpayer, paid $3,200 property insurance for the calendar year 2021 on a building he used in his business. Edward deducted the $3,200 insurance premiums on his 2020 tax return. He had $250,000 of taxable income that year. On June 30, 2021, he sold the building and, as a result, received a $1,600 refund on his property insurance premiums. Which of the following statements is true? a. Edward should include the $1,600 in 2020 gross income in accordance with the claim of right doctrine. b. Edward should include the $1,600 in 2020 gross income in accordance with the tax benefit rule. c. Edward should exclude the $1,600 in 2020 gross income in accordance with the tax benefit rule. d. Edward should add the $1,600 to his sales proceeds from the building. e. Edward should amend his 2020 return and claim $1,600 less insurance expense.
b. Edward should include the $1,600 in 2020 gross income in accordance with the tax benefit rule
The definition of a qualifying child applies to all of the following, except the: a. Head-of-household filing status. b. Income exclusion. c. Child tax credit. d. Earned income tax credit. e. Credit for child and dependent care expenses.
b. Income exclusion
The AICPA guideline regarding a minimum tax gap refers to structuring a tax to minimize: a. The effect of tax rules on taxpayer decision making. b. Noncompliance. c. The collection of taxes. d. Ambiguity. e. Taxes due.
b. Noncompliance
Roughly a third of the current Federal tax revenues come from: a. Individual income taxes. b. Payroll taxes. c. FUTA taxes. d. Excise taxes. e. Corporate income taxes.
b. Payroll taxes
Majestic Vehicle Company manufactures automobiles. Employees of the company can buy a new automobile for Majestic's cost plus 2%. The automobiles are sold to dealers at cost plus 20%. Generally, employees of Regional Dealer, Inc., are allowed to buy a new automobile from the company at the dealer's cost. Officers of Regional Dealer are allowed to use a company vehicle (for personal use) at no cost. Which of the following statements is true? a. None of the employees who take advantage of the fringe benefits described above are required to recognize income. b. Regional Dealer officers must recognize gross income from the personal use of the company vehicles. c. Employees of Majestic are required to recognize as gross income 18% (20% - 2%) of the cost of the automobile purchased. d. Neither Regional Dealer officers nor Majestic employees must recognize gross income from the personal use of the company vehicles. e. Employees of Regional Dealer are required to recognize as gross income the gross profit Regional Dealer loses as a result of the sale to the employees.
b. Regional Dealer officers must recognize gross income from the personal use of the company vehicles
A married person can be claimed as a dependent only if: a. That individual files a joint return with his or her spouse. b. That individual does not file a joint return with his or her spouse. c. He or she was a dependent in the year immediately prior to the current tax year. d. That individual has no capital gains for the year. e. He or she has a dependent child.
b. That individual does not file a joint return with his or her spouse
Which of the following statements regarding reporting a child's unearned income on the parent's return is false? a. A parent may elect to report the child's unearned income that exceeds $2,200 on the parent's own tax return if the child meets three requirements. b. The child's gross income must be from interest only. c. No estimated tax has been paid in the name and Social Security number of the child. d. The child's gross income must be more than $1,100 but less than $11,000. e. The child is not subject to backup withholding.
b. The child's gross income must be from interest only
Which of the following is a reason why the IRS might have decided not to tax the value of frequent flier miles earned on airline tickets purchased for business use? a. Doing so would unduly hurt airlines. b. The income is too difficult to measure. c. Frequent flier miles are not income. d. Doing so would constitute double taxation. e. The income falls under the exemption for wherewithal to pay.
b. The income is too difficult to measure
For the year 2020, the additional standard deduction for a single individual 65 or older is: a. $1,050. b. $1,250. c. $1,650. d. $1,300. e. $1,125.
c. $1,650
Harriet and Arthur were divorced on April 16, 2017. The couple had a joint brokerage account that included stocks with a basis of $600,000 and a fair market value of $1,000,000. Under the terms of the divorce agreement, Arthur would receive the stocks and he would pay Harriet $100,000 each year for six years, or until Harriet's death, whichever should occur first. Harriet and Arthur lived apart when the payments were made by Arthur. Arthur paid the $600,000 to Harriet over the six-year period. The divorce agreement did not contain the word alimony. Then, Arthur sold the stocks for $1,300,000. Arthur's recognized gain from the sale is: a. $1,000,000 ($1,300,000 - $300,000). b. The basis of $600,000. c. $700,000 ($1,300,000 - $600,000). d. $0. e. $300,000 ($1,300,000 - $1,000,000).
c. $700,000 ($1,300,000 - $600,000)
For failure to file a tax return by the due date, a penalty of _____ per month up to a maximum of _____ is imposed on the amount of tax shown as due on the return. Any fraction of a month counts as a full month. a. 4.5%; 13.5% b. 7%; 35% c. 5%; 25% d. 1%; 5% e. 2.5%; 10%
c. 5%; 25%
Jarvis, a single taxpayer, retired from his job as a public school teacher in 2020. He is to receive a retirement annuity of $1,000 each month and his life expectancy is 150 months. He contributed $30,000 to the pension plan during his 35-year career, so his adjusted basis is $30,000. Which of the following is the correct method for reporting the pension income? a. The first $30,000 received is a nontaxable recovery of capital, and all subsequent annuity payments are taxable. b. Since Jarvis is no longer working, none of the pension must be included in his gross income. c. For the first 150 months, 20% ($30,000/$150,000) of the amount received is a nontaxable recovery of capital and the balance is included in gross income. d. The first $120,000 he receives is taxable, and the last $30,000 is a nontaxable recovery of capital. e. For the first 150 months, 80% of the amount received is a nontaxable recovery of capital that must be included in gross income.
c. For the first 150 months, 20% ($30,000/$150,000) of the amount received is a nontaxable recovery of capital and the balance is included in gross income
Staci's spouse passed away in June 2020, and she is the executor of his estate. She will take the standard deduction. How much will her standard deduction be and why? a. Her standard deduction will be $12,400 because her spouse passed away before July 1, and she must file as single. b. Her standard deduction will be $18,650 because she is the head of household. c. Her standard deduction will be $24,800 because she will file as a surviving spouse. d. Her standard deduction will be $12,400 because she will file married, filing separately. e. Her standard deduction will be $24,800 because she will file married, filing jointly.
c. Her standard deduction will be $24,800, because she will file as a surviving spouse
Neal and Ella were divorced on January 23, 2020. Their only marital property was a personal residence with a value of $100,000 and cost of $40,000. Under the terms of the divorce agreement, Ella would receive the house and she would pay Neal $10,000 each year for five years, or until Neal's death, whichever should occur first. Neal and Ella lived apart when the payments were made to Neal. The divorce agreement did not contain the word alimony. Which of the following statements is true? a. Ella is not allowed any alimony deductions. b. Ella is allowed to deduct $10,000 each year for alimony paid. c. Neither Neil nor Ella must recognize income or gain, and neither can deduct for alimony payments. d. Neal does not recognize any income from the above transactions. e. Neal must recognize a $30,000 [$50,000 - 1/2($40,000)] gain on the sale of his interest in the house.
c. Neither Neal nor Ella must recognize income or gain, and neither can deduct for alimony payments
The AICPA guidelines suggest that tax policy should follow the neutrality principle. This means that: a. Taxes should be due at the same intervals of time each calendar year. b. The collection of taxes should offset revenues so that the budget is balanced, or neutral. c. The effect of tax rules on taxpayer decision making should be kept to a minimum. d. The tax affects similarly situated taxpayers in a similar manner. e. Taxpayers should have certainty rather than ambiguity as to when and how a tax is paid.
c. The effect of tax rules on taxpayer decision making should be kept to a minimum
Which of the following is not a deductible expense? a. Real estate taxes b. Personal property taxes c. Unreimbursed employee business expenses d. Interest on student loans e. Charitable contributions
c. Unreimbursed employee business expenses
A strategy taxpayers can use to maximize the use of the standard deduction is to: a. Spread charitable contributions across several years. b. Purchase stock in a child's name. c. Use the cash method to concentrate multiple years' deductions, such as charitable contributions, in a single year. d. Employ a child in a business. e. Reduce the amount of charitable contributions made in the year.
c. Use the cash method to concentrate multiple years' deductions, such as charitable contributions, in a single year
Which, if any, of the following is a deduction for AGI? a) State and local sales taxes b) Interest on home mortgage c) Charitable contributions d) Sole Proprietor's business expenses e) None of these
d) Sole Proprietor's business expenses
Edna sued her former employer for a back injury she suffered on the job in 2019. As a result of the injury, she was partially disabled. In 2020, she received $250,000 for her loss of future income, $150,000 in punitive damages because of the employer's flagrant disregard for the employee's safety, and $10,000 for medical expenses. Edna took the standard deduction in 2019 and 2020. Edna's 2020 gross income is: a. $410,000. b. $400,000. c. $0. d. $150,000. e. $250,000.
d. $150,000
Renee is a full-time student at State University and is claimed by her parents as a dependent. Her only source of income is an $8,000 scholarship ($800 for books, $3,800 tuition, $200 student activity fee, and $3,200 room and board). Renee's gross income for the year is: a. $200. b. $0. c. $8,000. d. $3,200. e. $3,400.
d. $3,200
In the case of civil fraud, the penalty is _____ of the underpayment attributable to fraud. a. 100% b. 125% c. 50% d. 75% e. 150%
d. 75%
Economic considerations can be used to justify: a. Allowing excess capital losses to be carried over to other years. b. Allowing a Federal income tax deduction for state and local sales taxes. c. The tax treatment differences between a corporation and a partnership of equal size. d. Allowing accelerated tax depreciation to encourage additional investments in depreciable property acquired for business use. e. Allowance of a credit for child care expenses.
d. Allowing accelerated tax depreciation to encourage additional investments in depreciable property acquired for business use
Which of the following is a good suggestion when conducting tax research using an electronic (online) tax service? a. Always check case law and judicial decisions in a search. b. Ignore tables of content and/or indexes because they are not helpful. c. Do not worry about the choice of keywords. d. Be selective in choosing the data to search. e. Use keywords that are as broad as possible.
d. Be selective in choosing the data to search
Which of the following is not considered an exclusion from gross income? a. Inheritance b. Welfare payment c. Military allowance d. Bonus e. Life insurance paid upon death
d. Bonus
Diamond Company was experiencing financial difficulties but was not bankrupt or insolvent. American Bank, which held a mortgage on real estate owned by Diamond, reduced the principal from $110,000 to $85,000. The bank had made the loan to Diamond when it purchased the real estate from Aquamarine, Inc. Indigo, Inc., the holder of a mortgage on Diamond's building, agreed to accept $40,000 in full payment of the $55,000 due. Indigo had sold the building to Diamond for $150,000 that was to be paid in installments over eight years. As a result of the above, Diamond must: a. Reduce the basis in its assets by $40,000. b. Include $40,000 in gross income. c. Include $25,000 in gross income and increase the basis in its assets by $15,000. d. Include $25,000 in gross income and reduce the basis in its assets by $15,000. e. Include $15,000 in gross income and reduce the basis in the building by $25,000.
d. Include $25,000 in gross income and reduce the basis in its assets by $15,000
Nicholas bought land from Meredith for $150,000. Nicholas paid $50,000 cash and gave Meredith an 8% note for $100,000. The note was to be paid over a five-year period. When the balance on the note was $80,000, Meredith began having financial difficulties. To accelerate her cash inflows, Meredith agreed to accept $60,000 cash from Nicholas in final payment of the note principal. Which of the following statements is true? a. Nicholas is required to recognize gross income and must reduce his cost basis for the land to $130,000. b. Nicholas must recognize $20,000 ($80,000 - $60,000) of gross income. c. Nicholas is not required to recognize gross income, since he paid the debt before it was due. d. Nicholas is not required to recognize gross income but must reduce his cost basis in the land to $130,000. e. Meredith must recognize gross income of $20,000 ($80,000 - $60,000) from discharge of the debt.
d. Nicholas is not required to recognize gross income but must reduce his cost basis in the land to $130,000.
A tax rate that remains constant for any given income level is called: a. Dynamic. b. Equitable. c. Progressive. d. Proportional. e. Static.
d. Proportional
Which of the following statements regarding the ways tax legislation may be designed to help encourage businesses is true? a. Tax legislation does not allow a shareholder in a small business corporation to take an ordinary deduction for any loss recognized on the stock investment. b. Shareholders of small business corporations are not allowed to make a special election that allows profits of the corporation to flow through to its shareholders. c. Shareholders of small business corporations are not allowed to make a special election that allows losses of the corporation to flow through to its shareholders. d. Shareholders of small business corporations are allowed to make a special election that allows profits and losses of the corporation to flow through to its shareholders, avoiding the corporate income tax. e. Tax legislation is never designed to encourage small businesses.
d. Shareholders of small business corporations are allowed to make a special election that allows profits and losses of the corporation to flow through to its shareholders, avoiding the corporate income tax
Which of the following taxpayers may not use the Tax Table method? a. Taxpayers with taxable income between $75,000 and $95,000 b. Taxpayers with taxable income below $20,000 c. Taxpayers with taxable income between $25,000 and $75,000 d. Taxpayers with taxable income above $100,000 e. Taxpayers with taxable income above $95,000
d. Taxpayers with taxable income above $100,000
The timing of income from services can often be controlled through the use of: a. U.S. GAAP accounting. b. IFRS accounting. c. Service accounting. d. The cash method of accounting. e. The accrual method of accounting.
d. The cash method of accounting
Jesse, age 19, is a full-time graduate student at City University. During 2020, he received the following payments: State scholarship for 10 months (tuition and books) $4,000 Loan from college financial aid office 2,000 Cash support from parents 2,500 Cash award for being the outstanding resident adviser 1,000 $9,500 Jesse served as a resident advisor in a dormitory; therefore, the university waived the $2,500 charge for the room he occupied. What is Jesse's adjusted gross income for 2020? a. $5,000 b. $9,500 c. $3,500 d. $12,000 e. $1,000
e. $1,000
Jordan is single and had taxable income of $168,000 in 2020. Her tax is: a. $7,275.00. b. $40,320.00. c. $32,748.50. d. $53,760.00. e. $34,775.50.
e. $34,775.50
Geoff underpaid his taxes in the amount of $2,500, of which $2,000 is attributable to negligence. Geoff's negligence penalty is: a. $500. b. $2,500. c. $2,000. d. $100. e. $400.
e. $400
By borrowing on a life insurance policy's _____ value, the owner can receive the policy's increase in value in cash without recognizing income. a. Final maturity b. Accrued dividend c. Accrued capital d. Net equity e. Cash surrender
e. Cash surrender
Three broad areas of consideration regarding the impact and structure of the tax system include: a. Economic considerations, social considerations, and retirement considerations. b. Agricultural considerations, social considerations, and equity considerations. c. Finance industry considerations, social considerations, and equity considerations. d. Economic considerations, social considerations, and agricultural considerations. e. Economic considerations, social considerations, and equity considerations.
e. Economic considerations, social considerations, and equity considerations
Federal tax law is controlled by which branch(es) of the Federal government? a. Judicial and legislative branches b. Executive branch only c. Executive and judicial branches d. Legislative branch only e. Executive, judicial, and legislative branches
e. Executive, judicial, and legislative branches
Jackie is a cash basis taxpayer. In 2019, she paid state income taxes of $15,000. In early 2020, she filed her 2019 state income tax return and received a $1,500 refund. Which of the following statements is true? a. If Jackie itemized her deductions in 2019 on her Federal income tax return and her itemized deductions exceeded the standard deduction by at least $1,500, she must include the $1,500 in her 2020 Federal gross income. b. If Jackie itemized her deductions in 2019, she must amend her 2019 Federal income tax return to reduce her itemized deductions. c. If Jackie itemized deductions on her 2019 tax return, she must take the standard deduction in 2020. d. If Jackie took the standard deduction on her 2019 Federal income tax return, she must include the $1,500 in her 2020 Federal gross income. e. If Jackie itemized her deductions on her 2019 Federal income tax return, she does not need to include the $1,500 refund on her 2019 tax return.
e. If Jackie itemized her deductions on her 2019 Federal income tax return, she does not need to include the $1,500 refund on her 2019 tax return
The plant union is negotiating with Eagle Company, which is on the verge of bankruptcy. Eagle has offered to pay for the employees' hospitalization insurance in exchange for a wage reduction. The employees each currently pay premiums of $4,000 a year for their insurance. Which of the following statements is false? a. If an employee's wages are reduced by $4,000 and the employee is in the 15% marginal tax bracket, the employee would benefit from the offer. b. If an employee's wages are reduced by $5,000 and the employee is in the 28% marginal tax bracket, the employee would benefit from the offer. c. An important consideration is that the reduction in after-tax pay for employees may be less than the $4,000 per year premiums for the insurance. d. If an employee's wages are reduced by $6,000 and the employee is in the 35% marginal tax bracket, the employee would benefit from the offer. e. If an employee's wages are reduced by $7,000 and the employee is in the 35% marginal tax bracket, the employee would benefit from the offer.
e. If an employee's wages are reduced by $7,000 and the employee is in the 35% marginal tax bracket, the employee would benefit from the offer
Some regulations rephrase or elaborate what Congress stated in the Committee Reports that were issued when the tax legislation was enacted. These are called _____ Regulations. a. Congressional b. Judicial c. Procedural d. Legislative e. Interpretive
e. Interpretive
Which of the following citations refers to a U.S. Tax Court decision? a. Portland Manufacturing Co. v. Comm., 35 AFTR2d 1439 (CA-9, 1975) b. Grayson Inc. v. Comm., 933 F.3d 1095 (CA-2, 1992) c. Apollo Computer, Inc. v. U.S., 95-1 USTC ¶50,015 (Fed.Cl., 1994) d. Bausch & Lomb, Inc. v. Comm., 933 F.2d 1084 (CA-2, 1991) e. Nick R. Hughes, 97 TCM 1488
e. Nick R. Hughes, 97 TCM 1488
On October 1, 2020, Bradley, a cash basis taxpayer, gave Ralph common stock that paid a dividend of $1,000 on December 15, 2020. On November 15, 2020, the corporation declared the dividend payable to shareholders of record as of November 22, 2020. The corporation has paid the $1,000 dividend once each year for the past 10 years, during which Bradley owned the stock. When Ralph collects the dividend on December 15, 2020: a. Bradley must include all the dividend in his gross income. b. Bradley must report $750 of dividend income, and Ralph must report $250 of dividend income. c. Neither Bradley nor Ralph must report dividend income. d. Bradley must report $250 of dividend income, and Ralph must report $750 of dividend income. e. Ralph must include all the dividend in his gross income.
e. Ralph must include all the dividend in his gross income
Which of the following is not a requirement for alimony under pre-2019 agreements? a. The agreement or decree does not specify that the payments are not alimony. b. The payments are in cash. c. There is no liability to make the payments for any period after the death of the payee. d. The payor and payee are not members of the same household at the time the payments are made. e. The payments must be made before the divorce decree is final.
e. The payments must be made before the divorce decree is final
Which of the following statements regarding annuities is false? a. No income is recognized by the annuitant at the time the cash value of the annuity increases. b. The income earned increases the cash value of the annuity. c. Annuity contracts generally require the purchaser to pay a fixed amount for the right to receive future payment streams. d. The insurance company invests the amounts received from the annuitant. e. The tax accounting problem associated with receiving periodic payments under an annuity contract is one of apportioning the amounts received between recovery of capital and deductible expenses.
e. The tax accounting problem associated with receiving periodic payments under an annuity contract is one of apportioning the amounts received between recovery of capital and deductible expenses
In general, the IRS may assess an additional tax liability against a taxpayer within how many years of the filing of the income tax return? a. Seven b. Thirteen c. Ten d. One e. Three
e. Three
All of the following are reasons an item might be excluded from gross income, except: a. To provide tax relief. b. To prevent taxation on payments received for restoring damage to one's body. c. To encourage and support certain activities, like higher education. d. To respond to specific events, such as qualified disasters. e. To protect small businesses.
e. To protect small businesses
What kind of tax is imposed on the value added by each party in a production cycle? a. FUTA b. FICA c. Franchise d. Severance e. VAT
e. VAT
