chapter 15 and 16 module review

John is subject to a 15% marginal tax rate on ordinary income. This year, he received two dividend distributions, $1,200 from Highpoint, Inc. and $2,000 from Lowmark, Inc. The Form 1099 indicates the dividend from Highpoint is a qualified dividend. John's tax liability on the dividend income is _blank​_.

$300 Reason: The Highpoint dividend (qualified) is subject to a 0% preferential rate, while the $2,000 dividend from Lowmark (not qualified) is subject to a 15% rate ($300 tax).

Keith transferred property with a tax basis of $50,000 in exchange for corporate stock with a fair market value of $110,000. Immediately after the transaction, Keith owns 20 percent of the corporation's stock. How much gain does Keith recognize on the exchange?

$60,000

Jose transferred property with a tax basis of $67,000 and a fair market value of $100,000 in exchange for a 25 percent interest in Delta Partnership. What is Delta's tax basis in the property acquired from Jose?

$67,000

William sold stock with a tax basis of $100,000 for $85,000. Ten days later, William repurchased identical shares for $80,000. What is William's tax basis in the repurchased shares?

$95,000

Phillip recognized the following capital gains and losses this year:Short-term capital gain: $12,000 Short-term capital loss: ($6,000) Long-term capital gain: $43,000 Long-term capital loss: (60,000) If AGI before consideration of these gains and losses is $140,000, Phillip will report AGI of $_______ on his Form 1040 and will carry forward a capital loss of $______

137,000;8,000 12,000 + 43,000 = 55,000 6,000 + 60,000 = 66,000 = -11,000 140,000-3000=137000 -11,000+3000=-8000

Ms. Barrett purchased 1,000 shares of Tillman stock for a price of $14,000 ($14/share). The fees associated with the transaction were $60. The following year, Ms. Barrett sold this investment for $12,600 and incurred additional fees of $70 on the sale. Ms.Barrett's basis in the investment is $______, and she realized a _______ ______ (gain/loss) on the sale

14,060 1,530 loss 14060-12600+70

In 2013, Diego Company granted Danny Duval a non qualified option to purchase 1,000 shares of Diego stock at an exercise price of $20 per share, which reflected the stock price on the date of grant. In 2016, Danny exercised those options when the stock price was $30. In 2021, Danny sold those shares for $35 per share. The tax consequences to Danny are:

2013: no tax consequence; 2016: $10,000 ordinary income; 2021: $5,000 capital gain Reason: 2013: no tax consequence; 2016: $10,000 ordinary income for bargain element ($30 - 20) × 1,000 shares; 2021: $5,000 capital gain for additional appreciation since exercise ($35-30) × 1,000 shares.

In 2013, Frazier Company granted Ella Brock an incentive stock option to purchase 1,000 shares of Frazier stock at an exercise price of $20 per share, which reflected the stock price on the date of grant. In 2016, Ella exercised those options when the stock price was $30. In 2021, Ella sold those shares for $35 per share. The tax consequences to Ella are _blank​_.

2013: no tax consequence; 2016: no tax consequence; 2021: $15,000 capital gain Reason: 2013: no tax consequence; 2016: no tax consequence; 2021: $15,000 capital gain calculated as ($35-20) × 1,000 shares.

Ms. Meade reports the following income: Salary: $210,000 Interest and qualified dividend income: $5,000 Suspended passive loss from previous years: $6,000 Passive income from rental activities: $4,200 Ms Meade's AGI is $_______and she has a suspended passive loss of $_______

215,000;1,800 210000+5000=215000 -6000+4200=-1800

ABC exchanges property with an adjusted basis of $50,000 for qualifying property valued at $75,000 in a nontaxable exchange. Under the substituted basis rule, the tax basis of the qualifying property received is $

50000

Charter Company provides an employer sponsored medical insurance plan for its employees. Elise is an employee of Charter earning $75,000. Charter also pays $1,100 in medical insurance premiums on Elise's behalf. With respect to these two compensation elements, Elise reports $_____ of taxable income and Charter is permitted a $_______ deduction

75,000 76,100

Riley, an unmarried taxpayer, reports $220,000 of AGI which includes his salary of $180,000, $22,000 in dividend income, and $18,000 in capital gains. He has no related investment activities. His Medicare contribution tax is $

760 220,000 - 200,000= 20,000 20,000 x 3.8%= 760

Which of the following statements is false regarding capital assets?

All long-term capital assets are taxed at a 28% tax rate. Reason: Only a subcategory of long-term gains from capital assets are taxed at 28%. These include gains from the sale of collectibles and qualified business stocks.

Which of the following statements about the computation of gain or loss on the sale of shares of stock is true?

Amount realized from the sale includes cash and any noncash assets received.

Several years ago, Juan began purchasing shares in Pet Products, Inc. each month. This month, Juan sold half of his investment in Pet Products, Inc. Which of the following statements accurately describes the method Juan is permitted for tracking the basis in his investment in Pet Products?

Because Juan purchased shares over many months and cannot identify the basis of each share, he may use average cost or FIFO for tracking basis.

Which of the following statements about financial assets is true?

Because taxation occurs upon disposal of an invested asset, investors are able to defer taxation on wealth increases from appreciation.

Which of the following dispositions is considered an involuntary conversion? (Select all that apply.)

Condemnation of property by the government Destruction of property in a flood Theft of business assets

On May 1, 2022, ABC's warehouse was destroyed in a fire. ABC received a large insurance settlement and realized a gain on the involuntary conversion. ABC is a calendar-year taxpayer. By what date must ABC replace the warehouse in order to defer recognition of the realized gain?

December 31, 2024

Eli is self-employed and operates as a sole proprietor. Eli has a medical insurance policy to cover himself and his family. Which of the following statements is true regarding the premiums Eli pays for this policy?

Eli may deduct the premiums as an above-the-line deduction.

Which of the following statements is false regarding the tax consequences of wages?

Employees may elect whether or not to have their employers withhold federal income taxes from their wages.

Which of the following statements concerning compensation for high ranking executives is false?

From an employee perspective, efficient tax planning always involves negotiating more before-tax compensation. Reason: Efficient tax planning focuses on after-tax income.

In a nontaxable exchange transaction, Beta Company transferred property with an adjusted tax basis of $35,000 in exchange for qualifying property with a value of $50,000 plus $10,000 of cash. Calculate Beta's gain realized and recognized on this transaction.

Gain realized, $25,000; gain recognized, $10,000 Reason: Gain realized equals $25,000 ($60,000 total value received minus $35,000 basis of surrendered property). Gain recognized is $10,000 due to boot received.

Which of the following expenses relating to the acquisition and management of investment property may be deductible?

Investment interest expense

Which of the following statements is true regarding the deductibility of investment interest expense?

Investment interest expense is deductible only to the extent of net investment income.

Jenny owns property with a tax basis of $40,000 and a value of $120,000. Mark owns property with a tax basis of $50,000 and a value of $125,000. If Jenny and Mark wish to exchange assets, how much boot should be given by which party in order for the exchange to be economically rational?

Jenny must give $5,000 of boot to Mark. Reason: Since Jenny's property has a $5,000 lower value than Mark's, she must contribute $5,000 of boot.

Which of the following situations does not reflect a passive ownership interest?

Jim and Jerry own a management company. Owners hire them to manage their rental property.

For the current year, John reports the following information: Salary (from W-2): $95,000 Rent received from lease of rental home: $24,000 Maintenance cost for rental home: $10,000 Property tax on rental home: $2,000 Purchase of new air conditioning unit for rental home: $6,000 Depreciation expense on air conditioning unit: $1,200 Which of the following statement is True?

John will report $10,800 net profit from rental activities in AGI. Reason: Rent of $24,000 less deductible expenses of $13,200 for a profit of $10,800. Deductible expenses include maintenance ($10,000), property taxes ($2,000), and depreciation ($1,200).

Which of the following types of income are taxed at a preferential rate? (Select all that apply.)

Long-term capital gains Qualified dividend income

In a nontaxable exchange transaction, Beta Company transferred property with an adjusted tax basis of $75,000 in exchange for qualifying property with a value of $50,000 plus $10,000 of cash. Calculate Beta's gain or loss realized and recognized on this transaction.

Loss realized, $(15,000); loss recognized, $0 Reason: If loss is realized, no gain exists to be recognized.

In 2008, Mike Walters purchased a life insurance policy that would pay a $250,000 death benefit to his beneficiary, his daughter Lana. Since he established the policy, Mike has paid $44,000 in premiums. This year, Mike liquidated the policy for the $52,000 cash surrender value. Which of the following statements is true?

Mike recognizes $8,000 of ordinary income upon liquidation. Reason: Mike recognizes $8,000 of ordinary income upon liquidation -- the $52,000 cash surrender value in excess of the $44,000 in premiums paid.

Ms. Tebow paid $4,200 in interest expense on a mortgage related to her investment in undeveloped land and $2,000 in property taxes. Her AGI is $120,000 which includes $3,200 of interest income. Which of the following statements is false?

Ms. Tebow may currently report $4,200 of investment interest expense. Reason: Investment interest expense is limited to $1,200 representing the net investment income ($3,200 interest income less $2,000 in property taxes).

James Company's office building was destroyed by a tornado. The building was fully insured, and James realized a gain on this involuntary conversion. If James wishes to defer recognition of this gain, which of the following replacement properties is most likely to qualify?

New office building in another town 30 miles away.

Which of the following statements regarding the value to taxpayers of qualifying a transaction as a nontaxable exchange is false?

Nontaxable exchange provisions allow taxpayers to defer gain recognition while currently recognizing realized losses.

John operates his business as a sole proprietor. Last year, he hired the following two individuals: Melissa who keeps financial records and manages his billings and collections. Evan who cares for John's three-year-old son during the day and performs various personal errands that John cannot do because of his work load. Which of the following statements are accurate with respect to the tax consequences to John for these two employees? (Select all that apply.)

Only Melissa's wages are deductible. Both Melissa's and Evan's wages are subject to payroll tax. Reason: Evan's wages are not deductible because they represent a personal expense. Reason: While Evan's wages are not deductible because they represent a personal expense, they are subject to payroll taxes.

Which of the following is not a form of equity-based compensation?

Performance-based cash bonus

Which of the following statements about dividend income is false?

Preferential rates are available to both individuals and corporations receiving qualified dividends. Reason: Preferential rates on qualified dividends are available only to individual investors.

Which of the following are requirements for nontaxable exchange treatment of a transfer of property in exchange for corporate stock? (Select all that apply.)

Property transferred solely in exchange for stock. Transferors in control of the corporation immediately after the exchange.

Seven years ago, Bella Corporation granted Rob Rhodes an incentive stock option to purchase 1,000 shares of Bella stock at an exercise price of $70 per share, the stock price on the date of grant. This year Rob exercised those options when the stock price was $90. If Rob sells those shares in five years for $100 per share, _blank​_.

Rob will recognize a $30,000 capital gain and there will be no tax consequence to Bella Reason: Rob will recognize a $30,000 capital gain (($100 - $70) × 1000 shares) and there will be no tax consequence to Bella.

Which of the following statements is false regarding bonds issued by state and local governments?

The bond will likely offer a higher rate of interest than corporate bonds with the same degree of risk. Reason: The bond will likely offer a lower rate of interest as corporate bonds with the same degree of risk.

Which of the following statements regarding nontaxable exchange book/tax differences is false?

The book/tax difference resulting from a nontaxable exchange is permanent in nature.

Ms. Clark paid $62,000 for 25,000 shares of Acme, Inc. stock. This year Acme declared bankruptcy, and the shareholders were notified that their stock has no value. Which of the following statements is false?

The character of any recognized loss is ordinary. Reason: The character of the recognized loss is capital.

Which of the following generally does not describe a restricted stock award?

The employee may sell the stock at any time after the award has been made by the employer. Reason: Restricted stock generally requires a vesting period during which the employee may not sell the shares.

Which of the following is true regarding investment income?

The primary source of investment income is invested capital.

Which of the following are characteristic of most nontaxable exchanges? (Select all that apply.)

The substituted basis rule determines the basis of the property acquired. Gain or loss realized on the exchange is deferred. The exchange must involve qualifying property.

Which of the following exchanges would not qualify as a like-kind exchange?

Warehouse for corporate stock

Which of the following statements regarding business-related wages is false?

With respect to compensation level, the IRS can objectively evaluate if it is "reasonable" and, therefore, deductible. Reason: This is a subjective determination because, for example, job responsibilities vary across companies as do employee qualifications.

Wyatt Corporation needs an additional worker on a multi-year project. Wyatt could hire an employee for a $40,000 annual salary. A second option would be to hire an independent contractor for a $45,000 annual fee. Which of the following is true?

Wyatt withholds income taxes only in the case of the employee relationship. Reason: In the case of an independent contractor, the withholding rules do not apply. The independent contractor must instead make quarterly estimated tax payments.

The control requirement for nontaxability of a transfer of property to a corporation in exchange for corporate stock requires _blank​_.

all transferors in the aggregate to own 80 percent or more of the corporation's outstanding stock immediately after the exchange

The substituted basis rule _blank​_. (Select all that apply.)

causes unrecognized gain or loss on a nontaxable exchange to be embedded in the basis of qualifying property received triggers deferred gain or loss from a nontaxable exchange on disposition of the qualifying property received

Which of the following investment options are examples for investments in financial assets referred to as securities? (Choose all that apply.)

certificates of deposit purchase of bonds

Suppose Adam has been hired to maintain the landscape of Northwest Academy. Adam works five days a week, from 8:00 am until 3:30 pm. He mows lawns on Monday and Tuesday. Wednesday through Friday he maintains the gardens and trees according to the schedule provided him each morning. Northwest Academy provides the mowers and necessary equipment. The structure of Adam's relationship with Northwest Academy can best be described as an _blank​_.

employee-employer

For tax purposes, the determination that compensation is reasonable is _blank​_.

evaluated against the compensation level expected in an arm's-length transaction

A fringe benefit that is exempted from income tax is _blank​_.

exempted from payroll tax Reason: A fringe benefit that is exempted from income tax is exempted from payroll tax regardless of whether it is a cash benefit.

A transfer of property in exchange for a partnership interest _blank​_. (Select all that apply.)

is a nontaxable exchange for both the partners and the partnership gives the partner a basis in the partnership interest equal to the basis of the property transferred

A preferential rate on capital gains:

is sometimes argued as offsetting the effects of inflation on the historical basis of an asset.

When a transferor is relieved of liability for a debt as part of a like-kind exchange, the debt relief _blank​_. (Select all that apply.)

is treated as boot paid by the party assuming liability is treated as boot received by the party relieved of liability

A taxpayer with suspended passive losses could invest in a _______ ________ ____________ (PIG) to allow her to deduct the losses.

passive income generator

Nontaxable exchange treatment applies only to the disposition and receipt of _______ property

qualifying

In a nontaxable exchange transaction, _blank​_. (Select all that apply.)

realized gain or loss is not currently recognized a taxpayer relinquishes ownership of one or more assets in exchange for one or more different assets

When property subject to a mortgage is transferred in a like-kind exchange, relief of liability for the debt is treated as boot _______ by the party relieved of liability and boot ________ by the party assuming the liability.

received paid

A typical characteristic of a nontaxable exchange is that the basis of qualifying property received is computed using the _______ basis rule

substituted

Municipal bond interest is _blank​_.

tax exempt for U.S. income tax purposes

Ms. Frost, a cash basis taxpayer, owns shares of XYZ, Inc. in her investment portfolio and participates in a dividend reinvestment program. Therefore, her share of the 4th quarter 2022 dividend paid by XYZ was reinvested in additional shares of XYZ. The dividend is _blank​_.

taxable to Ms. Frost in 2022 Reason: Ms. Frost is in constructive receipt of the dividend in 2022. Therefore, the dividend is taxable in 2022

The inclusion of boot in an otherwise nontaxable exchange causes _blank​_.

the party receiving the boot to recognize gain equal to the lesser of the gain realized or the value of the boot

The foreign earned income exclusion was implemented _blank​_.

to increase the ability for multinational U.S. companies to compete globally and to hire U.S. citizens for their foreign operations

Zeta Company realized, but did not recognize, a $(20,000) loss on the acquisition of land in a nontaxable exchange. As a result of this (favorable or unfavorable?) _________ book/tax difference, Zeta's taxable income will be __________than its book income.

unfavorable more

Nontaxable exchange treatment for corporate and partnership formations _blank​_.

was enacted by Congress to encourage the formation of new business entities