Final Set

D.Owner-employee includes it in income. Answer (D) is correct. A payment made to the owner-employee is only deductible by the personal services corporation for the year the owner-employee includes it in income. This prevents the deduction by the corporation in the current year and the tax on the income charged to the owner-employee from being deferred to the following year.

A personal services corporation may deduct payments made to owner-employees only in the year in which the A.Corporation is formed. B.Expense is accrued on the books and records of the corporation. C.Corporation makes a valid S election. D.Owner-employee includes it in income.

D. The plaintiff acquired the securities in question. Section 12(a)(1) of the Securities Act of 1933 permits a civil action by an acquirer of securities if (1) the required registration was not made, (2) a registered security was sold but a prospectus was not delivered, (3) a security was sold using a prospectus that was not current, or (4) an offer to sell was made before a required registration. Section 11 allows an acquirer to sue for misstatements or omissions of material facts in the registration statement.

A requirement of a private action to recover damages for violation of the registration requirements of the Securities Act of 1933 is that A) The securities were purchased from an underwriter. B) A registration statement was filed. C) The issuer or other defendants committed either negligence or fraud in the sale of the securities. D) The plaintiff acquired the securities in question.

B.Both I and II. Answer (B) is correct. Guaranteed payments are considered as ordinary and necessary business expenses, like salary expenses, so they are deductible by the partnership and reported on line 10 of Form 1065. The recipient partner also includes the full guaranteed payment, reported on line 4 of Schedule K-1, as ordinary income.

Guaranteed payments made by a partnership to partners for services rendered to the partnership that are deductible business expenses under the Internal Revenue Code are I.Deductible expenses on the U.S. Partnership Return of Income, Form 1065, in order to arrive at partnership income (loss). II. Included on Schedule K-1 to be taxed as ordinary income to the partners. A.Neither I nor II. B.Both I and II. C.II only. D.I only.

$14,000 The distributee's basis in (noncash) property received in a liquidating distribution is any excess of his or her AB in the partnership interest immediately before distribution over any amount of money received. Therefore, Gulde's basis in the land is $14,000 ($26,000 basis - $12,000 cash received in distribution).

Gulde's tax basis in Chyme Partnership was $26,000 at the time Gulde received a liquidating distribution of $12,000 cash and land with an adjusted basis to Chyme of $10,000 and a fair market value of $30,000. Chyme did not have unrealized receivables, appreciated inventory, or properties that had been contributed by its partners. What was the amount of Gulde's basis in the land? $30,000 $0 $10,000 $14,000

A.$64,800 Answer (A) is correct. The amount of 2018 NOL carryover that may be deducted on the 2019 return is limited to 80% of 2019's taxable income. Given 2019's taxable income of $81,000, the amount of net operating loss that may be deducted in 2019 is $64,800 ($81,000 × 80%).

How much of Corporation A's 2018 net operating loss of $100,000 may be deducted in 2019 if Corporation A's taxable income before the net operating loss deduction is $81,000? A.$64,800 B.$80,000 C.$81,000 D.$100,000

(a) $5,000 or (b) 75% of the income to be derived

If a tax return preparer causes an understatement of the tax liability of a client due to willful or reckless conduct, the IRS may impose a fine equal to the greater of...

tender offer

made directly to the shareholders of a corporation to purchase their shares. Its advantage is that it permits a business combination without the approval of the board of the target entity.

$13,500 IRA distributions made before age 59 1/2 are subject to taxation as well as a 10% penalty. Each amount is calculated based on the distribution. No penalty is applied if it is for reason of death or disability, use of medical expenses in excess of 10% limitation, or up to $10,000 use of purchase of a first home. None of these circumstances are applicable; therefore, tax and penalty apply to the entire $30,000. The applicable tax rate is 35% for a tax liability of $10,500 ($30,000 × 35%), which is added to the penalty of $3,000 ($30,000 × 10%), for a total of $13,500.

A 33-year-old taxpayer withdrew $30,000 (pretax) from a traditional IRA. The taxpayer has a 28% effective tax rate and a 35% marginal tax rate. What is the total tax liability associated with the withdrawal?

$40,000 The estimated tax payments for the year are limited to the lesser of 100% of the prior year's tax ($40,000) or 100% of the current year's tax ($48,000). Thus, the lowest amount that must have been paid as estimated taxes for the current year is $40,000.

A C corporation had a federal income tax liability of $40,000 for each of the last five years, each covering a 12-month period. The tax for the current year is $48,000. What is the lowest amount that must have been paid as estimated taxes for the current year so that nopenalty for underpayment is applicable?

$8,000 Intangible assets make up the majority of amortizable assets and are recovered over the asset's useful life or, in the case of Sec. 197 intangibles, 15 years. The intangibles are worth a total of $240,000 ($100,000 customer list + $50,000 trade name + $90,000 goodwill). The yearly amortization expense is $16,000 ($240,000 ÷ 15 years). Because the assets were purchased on July 1, only 6 months worth of amortization should be taken this year. The amortization deduction for the current year equals $8,000 [$16,000 × (6 months ÷ 12 months)].

A calendar-year taxpayer purchases a new business on July 1. The contract provides the following price allocation: customer list, $100,000; trade name, $50,000; goodwill, $90,000. What is the amortization deduction for the current year? $6,000 $16,000 $3,000 $8,000

A.Permits accumulation of current income, provides for charitable contributions, or distributes principal during the taxable year. Answer (A) is correct. Complex trusts can accumulate income, provide for charitable contributions, or distribute amounts other than income. These characteristics distinguish a complex trust from a simple trust.

A complex trust is a trust that A.Permits accumulation of current income, provides for charitable contributions, or distributes principal during the taxable year. B.Must distribute income currently but is prohibited from distributing principal during the taxable year. C.Invests only in corporate securities and is prohibited from engaging in short-term transactions. D.Is exempt from payment of income tax since the tax is paid by the beneficiaries.

The election is invalid because all shareholders must give their written consent. An eligible corporation must make the election for S corporation status by filing Form 2553. All shareholders at the time the election is made must file a consent. Each person who was a shareholder at any time during the part of the tax year before the election is made must also consent. If any former shareholders do not consent, the election is considered made for the following year.

A corporation elected S corporation status. All shareholders gave their written consent, except for a missing shareholder who owns 1% of the outstanding stock. Which of the following statements about this situation is correct?

It is either a disproportionate distribution, or a distribution instead of money or other property. Answer (A) is correct. Usually, a shareholder does not include a distribution of stock or rights to acquire stock in gross income unless it is (1) a distribution in lieu of money, (2) a disproportionate distribution, (3) a distribution on preferred stock, (4) a distribution of convertible preferred stock, or (5) a distribution of common and preferred stock, resulting in receipt of preferred stock by some shareholders and common stock by other shareholders.

A distribution of stock or rights to acquire stock in the distributing corporation is not included in the recipient's gross income unless A.It is either a disproportionate distribution, or a distribution instead of money or other property. B.The distribution of stock or rights is greater than 15% of the value of the stock or rights with respect to which the rights were distributed. C.It is a distribution instead of money or other property. D.It is a disproportionate distribution.

A.Proportionate distribution.Answer (A) is correct. A proportionate distribution of stock or stock rights would not be considered a dividend under Sec. 305(a) and would not be included in the gross income of the distributee.

A distribution of stock or stock rights is generally considered a taxable dividend (to the extent of E&P) unless it is which of the following?

$35,000 The partner's basis is cash contributed, plus adjusted basis on property contributed, plus gain recognized on services rendered. Thus, the partner's basis is $35,000 ($20,000 + $10,000 + $5,000).

A partner received a partnership interest with a fair market value (FMV) of $55,000 in exchange for the following items: Basis FMV Cash $20,000 $20,000 Property 10,000 30,000 Services rendered 0 5,000 What is the partner's basis in the partnership interest?

$29,000 Since the loss from the limited partnership interest is passive and there is no passive income, no loss deduction is permitted. Additionally, real estate losses for active participants are limited to $25,000 per year. Therefore, AGI is $29,000 ($18,000 wages + $4,000 taxable interest and qualifying dividends + $32,000 Schedule C net income - $25,000 rental loss).

A review of Bearing's Year 2 records disclosed the following tax information: Wages $18,000 Taxable interest and qualifying dividends 4,000 Schedule C trucking business net income 32,000 Rental (loss) from residential property (35,000) Limited partnership (loss) (5,000) Bearing actively participated in the rental property and was a limited partner in the partnership. Bearing had sufficient amounts at risk for the rental property and the partnership. What is Bearing's Year 2 adjusted gross income? $19,000 $54,000 $29,000 $14,000

B.Vote on major management changes.

All of the following are legal rights of shareholders in U.S. publicly traded companies except the right to A.Vote on charter and bylaw changes. B.Vote on major management changes. C.Receive dividends if declared. D.Vote on major mergers and acquisitions.

$0 Health insurance coverage paid for an employee by an employer is a fringe benefit not included in the employee's income. Shareholder A owns less than 2% of the S corporation's outstanding stock and is therefore considered an employee, not an owner, of the company.

An S corporation has two shareholders who are also employees of the corporation. Shareholder A owns 20 shares and shareholder B owns 90 shares. The total number of shares issued and outstanding is 2,000. The corporation pays the health insurance premiums for all its employees and families. The cost of family coverage is $5,300. The corporation pays for family coverage for both shareholders. Because the company paid for health insurance, which of the following amounts would be reported to Shareholder A as his income?

$10,250 .Deductions from the gross estate include administration and funeral expenses ($3,500 attorney fee + $1,000 burial lot), state taxes ($5,000), and claims against the estate ($750 credit card debt).

An executor paid the following on behalf of an estate: $3,500 for attorney's fees, $1,000 for a burial lot, $5,000 of state estate tax, and a $750 credit card debt of the decedent. What amount can be deducted from the gross estate? $3,500 $4,250 $5,250

$5,000 The amount of $5,000 is calculated as the deductible losses of $13,000 ($9,000 loss on municipal bonds + $4,000 loss on investment) - $5,000 gain from the sale of securities - $3,000 allowable deduction. An individual may deduct a net capital loss in the current year up to the lesser of $3,000 ($1,500 if married filing separately) or ordinary income.

An individual with gross income of $78,000 had the following gains and losses from capital transactions during the current year: Loss of $11,000 on the sale of principal residence held for 5 years; Gain of $5,000 from the sale of securities held for 4 years; Loss of $9,000 on the sale of municipal bonds held for 7 months; Loss of $4,000 on the sale of a painting held for investment for 15 years. What amount of the capital loss should the individual carry forward? $16,000 $19,000 $8,000 $5,000

150,000 A corporation may use capital losses to offset capital gains each year. A corporation must carry the excess capital loss back 3 years and forward 5 years. Aqua Corp.'s taxable income for the current year is $150,000 [$500,000 - $350,000 + $30,000 - $30,000 (of the total $50,000 capital losses offset against the $30,000 capital gains)]. A short-term capital loss in the amount of $20,000 should be carried back 3 years and forward 5 years as applicable.

Aqua Corp. had an operating income of $500,000 and operating expenses of $350,000 in the current year. Aqua had a long-term capital gain of $30,000 and a $50,000 short-term capital loss. What is Aqua's taxable income for the current year?

Bartlet participates in the business for more than 500 hours during a year. A passive activity is either rental activity or a trade or business in which the person does not materially participate. A taxpayer materially participates in an activity during a tax year if participation is more than 500 hours.

Bartlet owns a manufacturing business and participates in the business. Which of the following conditions would cause the business to be considered a nonpassive activity for Bartlet?

$260,196 The net profit or (loss) from self-employment is the gross business receipts reduced by the business expenses. The net profit or (loss) therefore should be $281,750 ($350,000 gross business receipts - $35,000 cost of goods sold - $28,000 rent expense - $5,250 liability insurance premium). Line 4 on Schedule SE requires the tax preparer to multiply the net profit or (loss) by 0.9235 ($281,750 × 0.9235 = $260,196) to determine the net earnings from self-employment [also calculated as NI from self-employment - (0.0765 × NI from self-employment)]. The net earnings from self-employment should be $260,196.

Baum, an unmarried optometrist and sole proprietor of Optics, buys and maintains a supply of eyeglasses and frames to sell in the ordinary course of business. In 2019, Optics had $350,000 in gross business receipts and its year-end inventory was not subject to the uniform capitalization rules. Baum's 2019 adjusted gross income was $90,000 and Baum qualified to itemize deductions. During 2019, Baum recorded the following information: Business expenses: Optics cost of goods sold $35,000 Optics rent expense 28,000 Liability insurance premium on Optics 5,250 Other expenditures: Baum's self-employment tax 29,750 Baum's self-employment health insurance 8,750 Insurance premium on personal residence. In 2019, Baum's home was totally destroyed by fire. The furniture had an adjusted basis of $14,000 and a fair market value of $11,000. During 2019, Baum collected $3,000 in insurance reimbursement and had no casualty gains during the year. 2,625 Qualified 2019 mortgage interest on a loan to acquire a personal residence 52,500 Annual interest on a $70,000 5-year home equity loan. The loan was secured by Baum's home, obtained on January 2, 2019. The fair market value of the home exceeded the mortgage and the home equity loan by a substantial amount. The proceeds were used to purchase a car for personal use. 3,500 Points prepaid on January 2, 2019, to acquire the home equity loan 1,400 Real estate taxes on personal residence 2,200 Estimated payments of 2019 federal income taxes 13,500 Local property taxes on the car value, used exclusively for personal use 300 What amount should Baum report as 2019 net earnings from self-employment? $243,250 $252,000 $273,000 $260,196

D.Medical bills for dialysis treatments. Answer (D) is correct. Medical debt is a nonpriority unsecured debt that can be discharged in a bankruptcy liquidation. But a Chapter 7 discharge does not cover certain debts. These remain binding on the debtor. Examples include (1) most taxes; (2) debts from fraud, embezzlement, or breach of fiduciary duty; (3) alimony or child support; and (4) certain educational loans.

Carlotta, an individual debtor who has filed for bankruptcy under Chapter 7, received a discharge from the court for most of her unpaid debts. However, some debts were not discharged. Of the following, which is most likely to be discharged? A.Federal income tax for the prior year. B.College educational loan, funded by the government. C.Delinquent alimony payments. D.Medical bills for dialysis treatments.

Carried forward 5 years

Charitable contributions subject to the 50% limit that are not fully deductible in the year made may be

Chrisp received a dividend check on January 4 of the following year. The dividends were declared payable on December 30 of the current year. Taxpayers are required to include in gross income any item of income actually or constructively received during the tax year. If there are actual restrictions on the access to the income, then the income is not considered constructively received. Although dividends were declared on December 30, Chrisp did not have access to the income until he actually received the dividend check on January 4, requiring recognition in the following year.

Chrisp, a freelance photographer, uses the cash method for business. The tax year ends on December 31. Which of the following should not be included in the determination of Chrisp's gross income for the current year?

D.$226,600 Answer (D) is correct. Calculation of earnings and profits begins with taxable income according to the tax return. Tax-exempt income is added to the taxable income, and nondeductible expenditures are subtracted, e.g., federal income taxes, charitable contributions in excess of the 10% limitation, and interest paid for tax-exempt bonds. Also, earnings and profits are calculated based upon straight-line depreciation using the alternative depreciation system, so excess MACRS depreciation must be added back. E&P at December 31, Year 1 $ 95,000 Taxable income for Year 2 185,000 Add: Tax-exempt interest 3,000 Excess depreciation 1,500 Deduct: Excess contributions (1,500) Interest paid on tax-exempt bonds (1,000) Federal income taxes (55,400) E&P at December 31, Year 2 $226,600

Corporation W, which uses the accrual method of accounting, had earnings and profits of $95,000 on December 31, Year 1. Based on the following information, compute earnings and profits as of December 31, Year 2:Taxable income per return$185,000 Contributions in excess of 10% limitation 1,500 Interest paid for tax-exempt bonds 1,000 Tax-exempt interest received 3,000 Federal income taxes 55,400 MACRS depreciation in excess of straight-line alternative depreciation system 1,500 A.$228,600 B.$282,000 C.$220,600 D.$226,600

D.Increases David's partnership basis by $300,000. Answer (D) is correct. A partner's basis is increased by his or her share of partnership liabilities. Nonrecourse liabilities are shared based on partnership profit interests. Recourse liabilities, on the other hand, are shared based on economic losses. Since David bears all of the partnership's economic risk of loss, his basis in his partnership interest will be increased by $300,000.

David and Mark both contributed $100,000 on January 1, 2019, to form DM Limited Partnership. David is a general partner, and Mark is a limited partner. The partnership agreement provided that David would bear any risk of loss and profits would be shared equally. Shortly after the formation, DM Limited Partnership purchased land with a $500,000 fair market value and a $300,000 recourse mortgage. DM's liability A.Increases David's partnership basis by $500,000. B.Has no effect on David's partnership basis. C.Increases David's partnership basis by $150,000. D.Increases David's partnership basis by $300,000.

$60,000 The amount of gain realized is Sales Price$200,000Less: Adjusted BasisCost$160,000Less: Depreciation(60,000)(100,000)Amount Realized$100,000Under Sec. 1245, gain on the disposition is ordinary income to the extent of the lesser of all depreciation taken or gain realized. Of the gain realized, $60,000 is reported as ordinary income under Sec. 1245.

Decker sold equipment for $200,000. The equipment was purchased for $160,000 and had accumulated depreciation of $60,000. What amount is reported as ordinary income under Sec. 1245?

S corporation Eagle has a basis of $70,000. He received $40,000 of basis from his contribution, and then his basis was increased $30,000 by his pro rata share of income. Because his basis was not increased by $5,000 for the debt, the possibility that the entity is a partnership or LLC is eliminated, as partners and members receive basis for the debt of the entity. Therefore, the entity must be an S corporation.

Dove and Eagle formed a business entity in which they are equal owners. Dove contributed cash of $100,000, and Eagle contributed land with a basis of $40,000 and fair market value of $100,000. For its first year of operations, the entity had taxable income of $60,000 and made no distributions. At year end it had outstanding recourse liabilities to third parties of $10,000. Eagle had a basis of $70,000 in the entity at the end of the first year of operations. What type of entity was formed?

$1,730 A deduction from gross income is allowed for all ordinary and necessary expenses paid or incurred during a tax year in carrying on a trade or business. Dr. Merry's deductible business expenses include work uniforms, subscriptions for medical periodicals related to the trade or business, and the dental education seminar. Thus, total deductible expenses on Schedule C equal $1,730 ($320 + $110 + $1,300).

Dr. Merry, a self-employed dentist, incurred the following expenses: Investment expenses $ 700 Custodial fees related to Dr. Merry's Keogh plan 40 Work uniforms for Dr. Merry and Dr. Merry's employees 320 Subscriptions for medical periodicals used in the waiting room 110 Dental education seminar 1,300 What is the amount of expenses the doctor can deduct as business expenses on Schedule C,Profit or Loss from Business?

C.$101,000 Answer (C) is correct. A partnership's ordinary income is the balance of the taxable income of a partnership that is not required to be separately stated. Deductible guaranteed payments are not separately stated. Charitable contributions are separately stated. Book income$100,000Plus charitable contributions1,000Partnership ordinary income$101,000

Dunn and Shaw are partners who share profits and losses equally. In the computation of the partnership's 2019 book income of $100,000, guaranteed payments to partners totaling $60,000 and charitable contributions totaling $1,000 were treated as expenses. What amount should be reported as ordinary income on the partnership's 2019 return? A.$100,000 B.$161,000 C.$101,000 D.$160,000

D.Damages measured by the price paid plus the difference between the contract price and the cost of buying substitute goods.

Eli contracted to buy 600 bales of No. 1 quality cotton from Whitney. The contract provided that Eli would make payment prior to inspection. The 600 bales were shipped, and Eli paid Whitney. Upon inspection, however, Eli discovered that the cotton was No. 2 quality. Eli returned the cotton to Whitney and demanded return of the payment. Whitney refused on the ground that there is no difference between No. 1 quality cotton and No. 2 quality cotton. What is Eli's remedy for the nonconforming cotton? A.Damages measured by the difference between the value of the goods delivered and the value of conforming goods. B.None. Eli waived any remedies by agreeing to pay before inspection. C.Specific performance D.Damages measured by the price paid plus the difference between the contract price and the cost of buying substitute goods.

B.Lawsuits by Master's creditors will be stayed by the Federal Bankruptcy Code.

Fact Pattern: On February 28, Year 1, Master, Inc., had total assets with a fair value of $1.2 million and total liabilities of $990,000. On January 15, Year 1, Master made a monthly installment note payment to Acme Distributors Corp., a creditor holding a properly perfected security interest in equipment having a fair value greater than the balance due on the note. On June 15, Year 1, Master voluntarily filed a petition in bankruptcy under the liquidation provisions of Chapter 7 of the Federal Bankruptcy Code. One year later, the equipment was sold for less than the balance due on the note to Acme. If Master's voluntary petition is filed properly,A. A trustee must be appointed by the creditors. B.Lawsuits by Master's creditors will be stayed by the Federal Bankruptcy Code. C.The unsecured creditors must elect a creditors' committee of 3 to 11 members to consult with the trustee. D.Master will be entitled to conduct its business as a debtor-in-possession unless the U.S. Trustee appoints a trustee.

$10,000 increase in taxable income. The deductibility of bad debts is limited to the direct write-off method. Under the allowance method for bad debts, Filler-Up recorded $15,000 in bad debt expenses for accounts estimated to be uncollectible. For income tax purpose, Filler-Up is allowed to deduct a $5,000 write-off as bad debt expenses. Thus, Filler-Up must add $10,000 back to the taxable income, which results in an increase of $10,000 in taxable income.

Filler-Up is an accrual-basis calendar-year C corporation. Filler-Up uses an allowance method for accounting for bad debts. The allowance for bad debts was $20,000 at the beginning of the year and $30,000 at the end of the year. During the year, Filler-Up wrote off $5,000 of uncollectible receivables and accrued an additional $15,000 of expenses for accounts estimated to be uncollectible. What is the Schedule M-1 adjustment on Filler-Up's federal income tax return?

B.$34,000 Answer (B) is correct. The Foreign Tax Credit is allowed under Secs. 27 and 901 for foreign income taxes paid or accrued during the year and is limited by Sec. 904(a). The limitation is the proportion of the taxpayer's tentative U.S. income tax (before the Foreign Tax Credit) that the taxpayer's foreign source taxable income bears to his or her worldwide taxable income for the year. The following calculation should be made:Foreign source taxable income×U.S. income tax=Foreign tax credit limitationWorldwide taxable income$100,000×$170,000=$34,000$500,000The unused credit of $11,000 ($45,000 - $34,000) may be carried back 1 preceding year and then forward to the following 10 taxable years [Sec. 904(c)].

For the current year, Gannon Corporation has U.S. taxable income of $500,000, which includes $100,000 from a foreign division. Gannon paid $45,000 of foreign income taxes on the income of the foreign division. Assuming Gannon's U.S. income tax for the current year before credits is $170,000, its maximum Foreign Tax Credit for the current year is A.$45,000 B.$34,000 C.$40,500 D.$20,250

B. She may be petitioned into bankruptcy by her creditors. Answer (B) is correct. An involuntary petition by creditors contested by the debtor is granted if (1) the debtor is not paying undisputed debts as they come due or (2) during the 120 days before the filing of the petition, a custodian (e.g., trustee or receiver) was appointed or took possession of the debtor's property. For this reason, Di may not be able to avoid bankruptcy.

Fran Di, doing business as Di Fashions, is hopelessly insolvent. As a means of staving off her aggressive creditors and avoiding bankruptcy, Di has decided to make a general assignment for the benefit of her creditors. Consequently, she transferred all her nonexempt property to a trustee for equitable distribution to her creditors. What are the legal consequences of Di's actions? A.Upon distribution of all her assigned property to the participating creditors, she is discharged from all liability. B.She may be petitioned into bankruptcy by her creditors. C.All creditors must participate in the assignment and distribution of property if a majority in number and amount participate. D.A debtor may not make an assignment for the benefit of creditors if she has been adjudicated a bankrupt and discharged within the preceding 8 years.

Their share of the individual gains reduced by the taxes paid by the S corporation that are attributable to such gains. Answer (B) is correct. The built-in gain of an S corporation is only the excess of the fair market value over the basis that existed on the first day of the first taxable year for which the corporation was an S corporation. Any additional appreciation after the effective date of the S election is not a built-in gain but is treated as ordinary or capital gain of the S corporation. Shareholders must include in their own gross income their share of these gains of the corporation. In addition, a shareholder must include his or her share of the built-in gain, but the amount of built-in gain is reduced by any taxes paid by the S corporation [Sec. 1366(f)(2)].

If an S corporation recognizes a built-in gain and pays tax on it, the shareholders report A.Their share of the entire gain in their own taxable income and obtain a credit for their share of taxes paid by the S corporation. B.Their share of the individual gains reduced by the taxes paid by the S corporation that are attributable to such gains. C.Only gain from the transaction that is in excess of the built-in gain, i.e., on appreciation accruing after the first day of the first taxable year for which the corporation was an S corporation. D.No gain from the transaction.

2,716 The minimum tax is the excess of the tentative minimum tax over the regular tax [Sec. 55(a)]. The McCoys' alternative minimum tax for 2019 is computed as follows:Adjusted gross income$185,000Plus: Tax preferences:Tax-exempt interest25,000Excess GDS depreciation over ADS3,000Less: Itemized deductions:Interest(20,000)Medical expenses [$19,000 - ($185,000 AGI × 10%)](500)Alternative minimum taxable income$192,500Exemption amount(111,700)Alternative minimum tax base$ 80,800Alternative minimum tax rate× .26Total tentative tax$ 21,008Less: Regular tax(18,292)Alternative minimum tax$ 2,716

In 2019, Dr. and Mrs. McCoy had four dependent children, filed jointly, and had $185,000 of adjusted gross income and $25,000 of tax-exempt interest on private activity bonds issued in 1994. They took a depreciation deduction of $9,000 for a vacation home placed in service in 1992 (alternative depreciation system would have been $6,000). They also had deductible residence interest of $20,000, property taxes of $4,000, and medical expenses of $19,000. Their regular tax is $18,292. The McCoys' alternative minimum tax for 2019 is $0 $21,008 $2,716 $18,292

$1000 This answer is correct.The $4,000 loss on the sale by mother to son (related parties) is disallowed. Martin took a cost basis of $11,000. The $5,000 ($16,000 - $11,000) gain realized on the subsequent sale to an unrelated party is recognized only to the extent it exceeds the previously disallowed loss of $4,000.

In Year 4, Fay sold 100 shares of Gym Co. stock to her son, Martin, for $11,000. Fay had paid $15,000 for the stock in Year 1. Subsequently in Year 4, Martin sold the stock to an unrelated third party for $16,000. What amount of gain from the sale of the stock to the third party should Martin report on his Year 4 income tax return? $0 $1,000 $5,000 $4,000

D.$10,000 Answer (D) is correct. Treatment of a distribution is determined by reference to accumulated E&P only after any current E&P have been accounted for. To the extent current E&P are sufficient to cover a distribution, the distribution is treated as a taxable dividend, even if there is a deficit in the accumulated E&P. Thus, the current E&P of $10,000 results in ordinary dividend income to Kee's shareholders of $10,000.

On January 1, Year 1, Kee Corp., a C corporation, had a $50,000 deficit in E&P. For Year 1, Kee had current E&P of $10,000 and made a $30,000 cash distribution to its shareholders. What amount of the distribution is taxable as dividend income to Kee's shareholders?A.$20,000 B.$30,000 C.$0 D.$10,000

C.The declining balance rate. Answer (C) is correct. The percentage tables are based on the depreciation method, recovery period, and convention. An applicable percentage is determined each year by matching the year of the recovery period with the placed-in-service date. The percentages in the tables are applied to the unadjusted basis of the property each year to determine the MACRS deduction. Any declining balance rate is built into the tables.

In order to determine the MACRS deduction using the percentage tables, all of the following must be determined (i.e., known in order to use the table) except A.The basis of the property. B.The recovery period. C.The declining balance rate. D.The placed-in-service date.

A.$90,000 Answer (A) is correct. The first $40,000 that Jamie personally invested is at risk since this is money that he contributed to the activity. A taxpayer is also considered at risk for amounts borrowed for use in the activity if personally liable on the debt. However, a taxpayer is generally not considered at risk for nonrecourse debt secured by property used in the activity. As a result, Jamie is considered at risk for his cash contributed and his share of recourse debt, totaling $90,000 [$40,000 + (50% × $100,000)].

Jamie purchased a 50% general partnership interest in Partnership M for $40,000 in Year 1. To finance operations, Partnership M entered into a recourse debt agreement for $100,000 of which each partner is personally liable for half. Partnership M also entered into a nonrecourse debt agreement for $22,000, which is secured by partnership equipment. Jamie's at-risk limitation on losses is A.$90,000 B.$62,000 C.$112,000 D.$40,000

1 Kim does not qualify as a dependent because she had gross income in excess of $4,200 in 2019. Although a parent can also qualify as a dependent, Grant has gross income in excess of $4,200 and therefore cannot be claimed. The gross income test does not apply to a person such as Dale, who is a child of the claimant, under age 24, and a full-time student. Jim and Kay cannot claim themselves. Thus, only Dale qualifies.

Jim and Kay Ross contributed to the support of their two children, Dale and Kim, and Jim's widowed parent, Grant. For 2019, Dale, a 19-year-old, full-time college student, earned $6,350 as a bookkeeper. Kim, a 23-year-old bank teller, earned $13,850. Grant received $8,025 in dividend income and $7,025 in nontaxable Social Security benefits. Grant, Dale, and Kim are U.S. citizens and were over one-half supported by Jim and Kay. How many dependents can Jim and Kay claim on their 2019 joint income tax return?

Two dependents. This answer is correct.John's sister does not qualify as a dependent because she had gross income in excess of $4,200 in 2019. John can claim as a dependent each of his two children under the qualifying children rules. The family employees cannot be claimed as dependents. Thus, John and his wife are entitled to two dependents: one for each qualifying child.

John earned $500,000 in his business during the current year, and his wife received investment income of $15,000. John provides more than half of the support of his widowed sister, who lives with John and earned $45,000 in salary. John also provides full support for his two children, an 18-year-old daughter and a 20-year-old son, who is a full-time college student. The family employs a live-in housekeeper and a live-in butler to assist them with their residence. What is the maximum number of dependents that John and his wife are eligible to claim?

$12,250 Rent is income from an investment. Gross income includes the value received by a landlord for modifying a lease, rent payments, lessee improvements made to the property in lieu of rent, prepaid rent regardless of the method of accounting used, and a bonus received by a landlord for granting a lease. Thus, the amount to be reported by Johnson as taxable income is $12,250 ($50 + $10,000 + $1,500 + $500 + $200). A lessee's refundable deposit intended to secure performance under the lease is not income to the lessor.

Johnson, an accrual-method landlord, receives the following receipts during the current year associated with his rental of apartments: Lessees' refundable deposits $ 2,000 Payment for modifying a lease 50 Rent 10,000 Lessee improvements made in lieu of rent 1,500 Prepaid rent 500 Bonus for granting a lease 200 What amount should Johnson report as taxable income from his rental investment?

B.The risk of loss for the computer was on Lazur during shipment. Answer (B) is correct. FOB (free on board) means the seller bears both the risk and the expense of getting the goods to the point named. If the shipping term is FOB place of shipment, the seller has the risk and expense of delivering the goods to the carrier. Expenses and risk after delivery to the carrier are borne by the buyer in a shipment contract. Accordingly, without a contrary agreement, Lazur (the buyer) bears the risk of loss. But it may be able to recover from the carrier or a third party.

Lazur Corp. entered into a contract with Baker Suppliers, Inc., to purchase a used computer from Baker. Lazur is engaged in the business of selling new and used computers to the general public. The contract required Baker to ship the goods to Lazur by common carrier pursuant to the following provision: "FOB Baker Suppliers, Inc. loading dock." During shipment to Lazur, the computer was seriously damaged when the carrier's truck was involved in an accident. When the carrier attempted to deliver the computer, Lazur rejected it and has refused to pay Baker the purchase price. Under Article 2 of the UCC, A.Lazur rightfully rejected the damaged computer. B.The risk of loss for the computer was on Lazur during shipment. C.Lazur will not be liable to Baker for the purchase price of the computer because of the FOB provision in the contract. D.At the time of the accident, risk of loss for the computer was on Baker because title to the computer had not yet passed to Lazur.

$26,000 Computers and delivery trucks are MACRS 5-year property. Buildings are real property and are depreciated using the straight-line method and the mid-month convention. Office furniture and computer desks are the only items listed that are MACRS 7-year property. The cost basis is $26,000 ($22,000 computer desks + $4,000 office furniture).

Lobster, Inc. purchased the following assets during Year 1: Computers $ 35,000 Computer desks 22,000 Office furniture 4,000 Delivery trucks 25,000 Building 425,000 What should be reported as the cost basis for a MACRS 7-year property?

$88,000 Income reported should include all amounts provided as compensation. First, the $60,000 is included as the base salary. Next, the bonus of publicly-traded stock is taken at the fair market value of $13,000. Finally, the nonqualified stock option will result in compensation equal to the difference between the FMV of the stock and the exercise price, or $15,000 [($25 FMV - $10 exercise price) × 1,000 shares]. This is a total of $88,000 ($60,000 + $13,000 + $15,000).

Logan, an employee of Argon Industries, earned a salary of $60,000 in Year 2. In addition, the following two transactions between Logan and Argon occurred in Year 2: Logan received a bonus of 100 shares of publicly-traded stock worth $13,000 with a basis to Argon of $8,000, and Logan purchased 1,000 shares of unrestricted Argon stock pursuant to a nonqualifying stock option plan for $10 per share when stock was valued at $25 per share. What amount of compensation should Argon report in Logan's Form W-2 for Year 2? $88,000 $93,000 $73,000 $60,000

A.A partner without actual authority is liable for partnership debts after dissolution. Answer (A) is correct. A partner's actual authority to act for the partnership is terminated by dissolution except as needed for winding up. However, a partner's liability for the partnership's obligations continues after dissolution. Most fiduciary duties of the partners also remain in effect.

Mary is a general partner in Goldilock Bookstore, a brick and mortar store. Due to a decline in business, Mary and her partners have decided to close the bookstore and dissolve the partnership. Which of the following statements is true? A.A partner without actual authority is liable for partnership debts after dissolution. B.The partners' liability for partnership debts will be discharged in bankruptcy. C.The partnership is liable for a negative balance in a partner's account. D.A statement of dissociation may be filed only by a dissociated partner.

D.$20,000 Answer (D) is correct. Except as otherwise provided, the taxable income of an estate is computed in the same manner as that of individuals. The dividends are income to the estate if earned, but not collected, by the decedent before death. Life insurance proceeds are included in the gross estate, but not taxable income. The estate's basis in the land is its fair market value at the date of death. The sale of the land produces a capital gain of $10,000 ($100,000 selling price - $90,000 basis). Therefore, the total taxable income of the estate before deducting the personal exemption is $20,000 ($10,000 + $10,000).

Max died in 2019. His estate elected a December 31 tax year. His estate received the following amounts in 2019: $10,000 in dividends from ABC Corp.; $50,000 in life insurance on the life of Max; and $100,000 in proceeds on the sale of vacant land. Max had purchased the land a number of years earlier for $20,000. The $100,000 sales price was $10,000 more than the $90,000 fair market value claimed by the estate on its estate tax return. The estate did not elect alternate valuation on its estate tax return. What is the amount of taxable income that should be reported by the estate for 2019? A.$70,000 B.$140,000 C.$90,000 D.$20,000

A.$16,000 Answer (A) is correct. Although the partnership usually does not adjust its basis for its retained property when it distributes other property to a partner, under Sec. 754, the partnership may elect to increase basis if the basis to the partnership of the distributed property exceeds the basis at which the distributee may take that property. In this case, the $1,000 that is "unused" in the basis of the distributed property may be added to the basis of Property #2 retained by the partnership. Thus, the basis of Property #2 is $16,000.

Mr. Gorda, in liquidation of his interest, receives Property #1. Mr. Gorda has a basis of $10,000 for his one-third interest in a partnership. The partnership assets are cash of $4,000, Property #1 with a basis of $11,000 and fair market value of $11,000, and Property #2 with a basis of $15,000 and fair market value of $18,000. The distributed property takes Mr. Gorda's basis of $10,000 in his hands. If the partnership elects Sec. 754 optional basis adjustment, what is the basis of Property #2 retained by the partnership?A.$16,000B.$14,000C.$19,000D.$15,000

$45,000 Both cash- and accrual-basis taxpayers must include amounts in gross income upon actual or constructive receipt if the taxpayer has an unrestricted claim to such amounts. Since Nare has an unrestricted claim to the $5,000 of rent paid in advance, it is included in his rental income. The amounts received by a lessee to cancel a lease are treated as an amount realized on a disposition of property. However, value received by a lessor to cancel a lease is gross income from rent as if received in lieu of rent.

Nare, an accrual-basis taxpayer, owns a building which was rented to Mott under a 10-year lease expiring August 31, Year 4. On January 2, Year 1, Mott paid $30,000 as consideration for canceling the lease. On November 1, Year 1, Nare leased the building to Pine under a 5-year lease. Pine paid Nare $10,000 rent for the 2 months of November and December, and an additional $5,000 for the last month's rent. What amount of rental income should Nare report in its Year 1 income tax return? $10,000 $15,000 $40,000 $45,000

C.$15,000 Answer (C) is correct. According to Sec. 311(b), when a corporation distributes appreciated property (FMV exceeds adjusted basis), the gain should be recognized as if a sale has occurred. Therefore, Oak Corporation should recognize a $15,000 gain ($150,000 FMV - $135,000 adjusted basis).

Oak Corporation had earnings and profits of $500,000 before distributions. Due to economic conditions, Oak, in partial liquidation, distributed land having an adjusted basis of $135,000 and a fair market value of $150,000 to Mr. Brown for his 35% interest in Oak Corporation. Mr. Brown's adjusted basis in the stock at the time of the distribution was $180,000. What is the amount of Oak Corporation's recognized gain (or loss)? A.$0 B.$(45,000) C.$15,000 D.$(30,000)

No Yes Answer (B) is correct. Section 11 is the most frequently invoked basis for suit under the Securities Act of 1933. Under Section 11, the investor need prove only that (s)he suffered losses in a transaction involving the particular securities covered by the registration statement and that the registration statement contained a false statement or an omission of a material fact for which the CPAs were responsible, e.g., in the audited financial statements. Thus, under Section 11, Sharp need not prove reliance or negligence and will prevail if Ocean fails to prove due diligence. Sharp is unlikely to prevail under the antifraud provisions of the Securities Exchange Act of 1934 because of the absence of scienter. Scienter is the intent to deceive, manipulate, or defraud. (However, reliance might be assumed based on the fraud-on-the-market theory. This approach substitutes proof that the price of the security was affected for proof of direct reliance.)

Ocean and Associates, CPAs, audited the financial statements of Drain Corporation. As a result of Ocean's negligence in conducting the audit, the financial statements included material misstatements. Ocean was unaware of this fact. The financial statements and Ocean's unmodified opinion were included in a registration statement and prospectus for an original public offering of stock by Drain. Sharp purchased shares in the offering. Sharp received a copy of the prospectus prior to the purchase but did not read it. The shares declined in value as a result of the misstatements in Drain's financial statements becoming known. Under which of the following acts is Sharp most likely to prevail in a lawsuit against Ocean? Securities Exchange Act of 1934,Securities Act Section 10(b),of 1933, Rule 10b-5Section 11 A.No No B.No Yes C.Yes Yes D.Yes No

C.$11,000 Answer (C) is correct. A partner's adjusted basis is increased by his or her distributive share of partnership income and decreased by cash distributions from the partnership. The nonrecourse liability is shared according to the profit ratio since there is no minimum gain. Harvey's adjusted basis at the time of sale is $19,000. Adjusted basis at contribution of cash$12,000 Plus: 20% of the partnership liabilities10,000 Less: Cash distribution(15,000)Plus: Distributive income share ($60,000 × 20%)12,000 Adjusted basis 1/2/Yr 2$19,000 The capital gain is $11,000 and is calculated as follows:Cash proceeds$20,000 Liabilities assumed by the purchaser10,000 Amount realized$30,000 Less: Adjusted basis(19,000)Capital gain$11,000

On January 2, Year 1, Harvey contributed $12,000 cash to Partnership K, a calendar-year partnership, for a one-fifth interest. On February 1, Year 1, the partnership borrowed $50,000 from a local bank. Neither Harvey, the other partners, nor the partnership has assumed personal liability for the debt. There is no minimum gain and the partners have no loss limitation agreements. The partnership has no other liabilities and has no unrealized receivables or inventory items. On November 1, Year 1, Harvey received a $15,000 cash distribution from the partnership. For Year 1, K reported ordinary income of $60,000 and the partners reported their distributive shares on their individual income tax returns. On January 2, Year 2, Harvey sold his interest in K for $20,000 cash. What is the amount of Harvey's capital gain or (loss)? A.$(1,000) B.$8,000 C.$11,000 D.$1,000

B.Lace's revocation was ineffective because the offer could not be revoked before June 1. Answer (B) is correct. A firm offer is an assurance, in writing and signed by a merchant, that the offer will remain open. A firm offer remains open during the time stated, even if it is not supported by consideration. If no time is stated, the time is a reasonable time. But in no event may the period of irrevocability exceed 3 months.

On May 2, Lace Corp., an appliance wholesaler, offered to sell appliances worth $3,000 to Parco, Inc., a household appliances retailer. The offer was signed by Lace's president and provided that it would not be withdrawn before June 1. On May 29, Parco mailed an acceptance of Lace's offer. Lace received the acceptance June 2. Which of the following statements is true if Lace sent Parco a telegram revoking its offer, and Parco received the telegram on May 25? A.No contract was formed because Lace received Parco's acceptance after June 1. B.Lace's revocation was ineffective because the offer could not be revoked before June 1. C.Lace's revocation effectively terminated its offer on May 25. D.A contract was formed on May 2.

Contract is breached. Answer (B) is correct. The statute of limitations is a time period during which a party may commence litigation against another party. The statute of limitations period for breach of contract commences on the later of the date when the contract is breached or the date when the breach should have been discovered. Statutes of limitations vary from state to state, but the common limitation for bringing a contract action is either 4 or 5 years.

Ordinarily, in an action for breach of a construction contract, the statute of limitations time period would be computed from the date the A.Construction is begun. B.Contract is breached. C.Contract is signed. D.Contract is negotiated.

Ordinary dividends 100%. Answer (C) is correct. A corporate distribution is a dividend and is included in the recipient's income to the extent it comes from accumulated or current E&P. A distribution is considered made from the most recently accumulated E&P. Orson's distribution comes entirely from the $80,000 in current E&P even though there is a deficit in accumulated E&P. Note that E&P are not the same as net income; however, if there is $80,000 of net income, there will likely be sufficient E&P for the dividend. The distribution is, therefore, entirely ordinary dividend income to the shareholders.

Orson Corp. had an E&P deficit of $160,000 at December 31, 2018. Its net income per books was $80,000 for 2019. Cash dividends on common stock totaling $40,000 were paid in December 2019. Orson should report the distribution to its shareholders as A.Return of capital 100%. B.Ordinary dividends 50%; return of capital 50%. C.Ordinary dividends 100%. D.Ordinary dividends 25%; return of capital 75%.

$5,000 The dividend received by Company X must be eliminated. This increases Company X's net loss to $130,000. Company Y receives a 50% dividends-received deduction because the dividends come from less than 20% owned stock. Therefore, Company Y has taxable income of $125,000 [$140,000 - (50% × $30,000)]. When these amounts are combined, the total tax loss is $5,000 ($125,000 - $130,000).

Parent company X and subsidiary company Y file a calendar year consolidated federal income tax return. Company X reported a $120,000 tax loss, which included a $10,000 dividend from Y. Company Y reported $140,000 of taxable income, which included $30,000 of dividends received from less than 20% owned stock investments. Neither company took into account any applicable dividends received deduction. What is the group's consolidated tax loss for the year?

A.$75,000 Answer (A) is correct. In 2019, an individual is allowed a $15,000 annual exclusion for gifts of present interests made to each donee during the calendar year. Section 2523 permits a marital deduction when a donor transfers property during the calendar year by gift to a donee who, at the time of the gift, is the donee's spouse. Section 2524 states that the deductible marital deduction amount may not exceed the includible gift, that is, the amount of the gift in excess of the annual exclusion. The fair market value of the necklace does not qualify for the marital deduction because Nina was not Jim's spouse at the time she received the necklace. Though $15,000 of the value of the necklace does qualify for the annual exclusion, it is not a marital deduction. The $75,000 Jim gave Nina to open her own bank account qualifies for the marital deduction because Jim and Nina were married when the gift was made, and the annual exclusion had been exhausted with the gift of the necklace.

Question: 4When Jim and Nina became engaged in April of this year, Jim gave Nina a necklace that had a fair market value of $50,000. After their wedding in July of the same year, Jim gave Nina $75,000 in cash so that Nina could have her own bank account. Both Jim and Nina are U.S. citizens. What was the amount of Jim's current-year gift tax marital deduction? A.$75,000 B.$110,000 C.$125,000 D.$0

$14,500 Deductions for charitable contributions are limited to 10% of taxable income before any charitable contributions and any dividends-received deduction. The charitable contribution deduction is computed as follows: Revenues $200,000 Dividend revenue 20,000 Less: Operating expenses (75,000) Income before dividend-received deduction and charitable contribution $145,000 × 10% Maximum allowed charitable deduction $ 14,500 The excess charitable contribution over the taxable income limit is deductible during the succeeding 5 tax years.

Robin, a C corporation, had revenues of $200,000 and operating expenses of $75,000. Robin also received a $20,000 dividend from a domestic corporation and is entitled to a $10,000 dividend-received deduction. Robin donated $15,000 to a qualified charitable organization in the current year. What is Robin's contribution deduction?

The purpose of the agency was contrary to public policy. Agency is an express or implied consensual relationship. Both the principal and agent must manifest consent to the grant of authority. The purpose and subject matter of the agency must be for a legal purpose. Smith and Jones formed an agency for an illegal purpose, the sale of fraudulent identification cards, which automatically voids the agency by operation of law.

Smith entered an oral agreement hiring and authorizing Jones to sell fraudulent identification cards produced by Smith. Smith and Jones orally agreed to share the proceeds from their enterprise. Later, Jones claimed that no enforceable agency relationship was created. Jones is correct because

B.$0 Answer (B) is correct. Passive investment income includes gross receipts from royalties, rents, dividends, interest, and annuities. If an S corporation has pre-S corporation E&P (from the period it was a C corporation) at the end of a tax year and its passive investment income is more than 25% of its gross receipts, the S corporation may be subject to a tax on excess net passive income. Here, the passive investment income of $72,000 ($60,000 rental income + $7,000 interest income + $5,000 royalties) is less than 25% of gross receipts ($75,000). Therefore, there is no tax on net passive income.

Spartan Corporation was incorporated as a C corporation in 2001. As of December 31, 2017, Spartan had earnings and profits (E&P) of $222,000. On January 1, 2018, Spartan became an S corporation. For 2019, Spartan's books and records reflected the following:Gross receipts$300,000Cost of goods sold100,000Rental income (services not provided)60,000Interest income7,000Royalties5,000Operating expenses100,000On what amount would Spartan have to pay the 21% tax on excessive net passive income?A.$28,000 B.$0 C.$88,000 D.$72,000

A.Is affected by a requirement that the investor corporation must own the investee's stock for a specified minimum holding period. Answer (A) is correct. The distributee corporation must own the distributing corporation's stock for more than 46 days (91 days for dividends more than a year in arrears received on preferred stock) to qualify for the dividends-received deduction.

The corporate dividends-received deduction A.Is affected by a requirement that the investor corporation must own the investee's stock for a specified minimum holding period. B.May be claimed by S corporations. C.Must exceed the applicable percentage of the recipient shareholder's taxable income. D.Is unaffected by the percentage of the investee's stock owned by the investor corporation.

D.$85,000 Answer (D) is correct. Under Sec. 722, the basis of a partner's interest in a partnership is the partner's adjusted basis in the contributed property. When the partnership assumes a mortgage or takes the property subject to a mortgage, the contributing partner is deemed to have received a distribution of cash to the extent of the relieved liability [Sec. 752(b)]. This deemed distribution reduces the partner's basis. Adjusted basis of land contributed $100,000 Less: Share of mortgage assumed by the other partners ($30,000 × 50%) (15,000) Basis $ 85,000

The following information pertains to land contributed by Pink for a 50% interest in a new partnership: Adjusted basis to Pink$100,000Fair market value300,000Mortgage assumed by partnership30,000The partnership has no other liabilities. The basis for Pink's partnership interest is A.$100,000 B.$70,000 C.$300,000 D.$85,000

Includes the period during which the property was held by the contributing partner. Answer (A) is correct. The partnership's holding period for contributed property includes the period of time the property was held by the contributing partner. The holding period of the partner "tacks on" because the partnership receives a carryover basis in the contributed property. This is true even if the contributing partner recognizes a gain or loss (due to being relieved of debt in excess of basis).

The holding period of property acquired by a partnership as a contribution to the contributing partner's capital account A.Includes the period during which the property was held by the contributing partner. B.Begins with the date of contribution to the partnership. C.Is equal to the contributing partner's holding period prior to contribution to the partnership. D.Depends on the character of the property transferred.

$9,200 The $5,000 that Beck gave to his nephew, the $3,000 relief of indebtedness, and $1,200 gifted municipal bonds are all includible gifts. Because donations to a political party or candidate are not subject to gift tax, the $1,500 donation is not included in Beck's gifts. Therefore, the amount of gifts before the gift tax annual exclusion equals $9,200 ($5,000 + $3,000 + $1,200).

This year, Beck gave $5,000 cash to a nephew, canceled $3,000 of the same nephew's indebtedness, donated $1,500 to a political party, and gave $1,200 of municipal bonds to a parent. What is the amount of Beck's gifts before considering the gift tax annual exclusion?

C.Indicate that a contract for sale has been made. Answer (C) is correct. A writing must suffice to indicate that a contract for sale has been made between the parties and signed by the party sought to be bound or his or her authorized agent or broker. A writing is not insufficient because it omits or misstates a term agreed upon, but it will not be enforceable beyond the quantity of goods shown.

To satisfy the UCC statute of frauds, a written agreement for the sale of goods must A.Contain payment terms. B.Refer to the time and place of delivery. C.Indicate that a contract for sale has been made. D.Be signed by both buyer and seller.

Prove the existence of a contemporaneous oral agreement that modifies the contract.Answer (D) is correct. The parol evidence rule excludes any prior agreement or an oral agreement made at the time of the final writing that would tend to vary or contradict the terms of a written agreement intended to be complete. If the parties meant their written agreement to be entire, only terms incorporated directly or by reference are part of the contract as it existed at the time it was set forth in writing and signed.

Two individuals signed a written contract that was intended to be their entire agreement. The parol evidence rule will prevent the admission of evidence that is offered to A.Explain the meaning of an ambiguity in the written contract. B.Prove the existence of a subsequent oral agreement that modifies the contract. C.Establish that fraud had been committed in formation of the contract. D.Prove the existence of a contemporaneous oral agreement that modifies the contract.

A.Whether UCC Article 2 is applicable does not depend on the price of the goods involved. Answer (A) is correct. Article 2 applies to transactions in goods. Goods are things movable other than the money in which the price is to be paid, investment securities, and things in action. Applicability of Article 2 does not depend on the dollar amount involved. Article 2 applies to both merchants and nonmerchants, but special rules are provided for certain aspects of transactions between or with merchants.

Under Article 2 of the UCC, which of the following statements is true concerning a contract involving a merchant seller and a nonmerchant buyer? A.Whether UCC Article 2 is applicable does not depend on the price of the goods involved. B.The contract may not involve the sale of personal property with a price of $500 or more. C.Only the seller is obligated to perform the contract in good faith. D.The contract will be either a sale or return or a sale on approval contract.

II only. A partner's transferable interest consists of a partner's share of partnership profits and losses and the right to receive distributions. Partners may sell or otherwise transfer (assign) their interests to the partnership, another partner, or a third party without loss of the rights and duties of a partner (except the interest transferred). Moreover, unless all the other partners agree to accept the assignee as a new partner, the assignee does not become a partner in the firm. Without partnership status, the assignee has no obligation for partnership debts.

Under the Revised Uniform Partnership Act, which of the following statements, if any, are correct regarding the effect of the assignment of an interest in a general partnership? The assignee is personally responsible for the assigning partner's share of past and future partnership debts. The assignee is entitled to the assigning partner's interest in partnership profits and surplus on dissolution of the partnership. Both I and II. I only. II only. Neither I nor II

Neither I nor II. Filing as a surviving spouse or qualifying widow(er) requires the individual's spouse to have died during one of the previous 2 tax years. In addition, the survivor must maintain a household that is the principal place of residence for a dependent child. "Maintain" means the spouse furnishes over 50% of the costs of the household for the entire year.

Which of the following, if any, are among the requirements to enable a taxpayer to be classified as a "qualifying widow(er)"? A dependent has lived with the taxpayer for 6 months. The taxpayer has maintained the cost of the principal residence for 6 months.

C.Not affect the assigning partner's liability to third parties for obligations existing at the time of the assignment. Answer (C) is correct. The RUPA allows the transfer of a partner's transferable interest without the dissolution of the partnership or dissociation of the partner. The assignee is entitled to receive the assignor's profits, but the assignee does not replace the assigning partner in the partnership. The assigning partner's liability to third parties as a partner also is not affected by the assignment.

Unless otherwise provided for in the partnership agreement, the assignment of a partner's interest in a general partnership will A.Transfer the assigning partner's right to bind the partnership to contracts to the assignee. B.Result in the termination of the partnership. C.Not affect the assigning partner's liability to third parties for obligations existing at the time of the assignment. D.Transfer the assigning partner's rights in specific partnership property to the assignee.

$0 Unlike individuals, a corporation is not permitted to offset ordinary income with net short-term capital losses. Instead, they are suspended and carried back 3 years and forward 5 years.

What is the maximum amount of capital losses in excess of capital gains that a C corporation may deduct in a year?

B.Twenty-seven months .Answer (B) is correct. To establish exemption, a charitable organization must file a written application with the key director for the district in which the principal place of business or principal office of the organization is located. If filed within 27 months of organization, retroactive treatment is available.

What is the maximum amount of time allowed from the creation of a charitable organization for submission of exemption if the status is to be effective from the date of organization? A.Nine months. B.Twenty-seven months. C.Twelve months. D.Six months.

C.Not recognize gain or loss on the liquidating distribution(s). Answer (C) is correct. When a subsidiary corporation is liquidated into the parent corporation in a Sec. 332 transaction, no gain or loss is recognized on the liquidation.

When a parent corporation completely liquidates its 80%-owned subsidiary, the parent (as shareholder) will ordinarily A.Be subject to capital gains tax on 80% of the long-term gain. B.Be subject to capital gains tax on 100% of the long-term gain C.Not recognize gain or loss on the liquidating distribution(s). D.Have to report any gain on liquidation as ordinary income.

Quality Control

Which expense listed below would be subject to the Uniform Capitalization Rules of Code Sec. 263A? Advertising. Quality control. Selling. Research and development.

Committee reports. Congressional Committee Reports reflect Congress' intent behind certain tax laws and help examiners apply the law properly.

Which of the following are useful tools in determining Congressional intent behind certain tax laws and helping examiners apply the law properly?

D.Feeder organization, not qualified for exempt status. Answer (D) is correct. An organization must independently qualify for exempt status. It is not enough that all of its profits are paid to exempt organizations. The organization described in the question stem is a feeder organization because it "feeds" its profits to another organization. Relying on the limited information provided, it is not known if the organization is disqualified for exempt status; however, it is known that the organization is not qualified for exempt status simply because all profits are paid to exempt organizations.

Which of the following best describes a for-profit organization that pays all profits to exempt organizations? A.Private foundation, not qualified for exempt status. B.Feeder organization, qualified for exempt status. C.Private foundation, qualified for exempt status. D.Feeder organization, not qualified for exempt status.

A state board of accountancy. A valid license is a prerequisite to the practice of public accounting. State boards of accountancy are the governmental agencies that license CPAs. Revocation or suspension of a CPA's license may be made only by the issuing board.

Which of the following bodies ordinarily would have the authority to suspend or revoke a CPA's license to practice public accounting? A state board of accountancy. The AICPA. A state CPA society. The SEC.

C.The right to be insured under a liability insurance policy. Answer (C) is correct. A right cannot be assigned without consent if the assignment would result in an increase or alteration of the duties or risks of the obligor. Assigning the right to insurance coverage could put the insurer at greater risk. Thus, it may not be assigned without permission.

Which of the following contractual assignments is prohibited?A.The rights under an option contract.B.The right to receive installment payments.C.The right to be insured under a liability insurance policy.D.The right to receive royalties.

A corporation must recognize gain when it distributes appreciated property as though the property had been sold for its FMV immediately before distribution, and for gain recognition purposes, a property's fair market value is at least equal to any liability to which the property is subject or that the shareholder assumes in connection with the distribution. Answer (A) is correct. Section 311(b) requires that gain on the distribution of appreciated property be recognized as if the property had been sold; gain is recognized to the extent that the FMV of the property distributed exceeds the adjusted basis of such property. Further, if liabilities exceed basis, FMV is treated as not less than the liabilities assumed or acquired by the shareholder [Sec. 311(b)(2)]. The corporation's earnings and profits are increased by any gain recognized. The corporation's earnings and profits are reduced by the amount of the distribution. The amount of the distribution is the adjusted basis of the property to the distributing corporation plus any gain that must be recognized on the distribution.

Which of the following is applicable regarding the proper treatment of a distribution of appreciated property by a corporation?

B.Mere change in place of organization of one corporation. Answer (B) is correct. A mere change in place of organization of one corporation qualifies as a corporate reorganization. Unless a transaction fits one of the reorganization types as defined in the IRC, the tax-free treatment of exchanges in reorganization does not apply.

Which one of the following is a corporate reorganization as defined in the Internal Revenue Code? A.Change in inventory costing method from FIFO to LIFO. B.Mere change in place of organization of one corporation. C.Change in depreciation method from accelerated to straight-line. D.Stock redemption.

A. Compensating an employee for personal services. Answer (A) is correct. Certain employee trusts lose exempt status if they engage in prohibited transactions, e.g., lending without adequate security or reasonable interest, or paying unreasonable compensation for personal services. Reasonable compensation is permissible.

Which transaction will not always cause an employee trust to lose exempt status? A.Compensating an employee for personal services. B.Lending without security. C.Lending with some, but not adequate, security. D.Lending at below market rates.

D.Carol wrote a will in May 1986 that established a generation-skipping trust. She made no changes in her will before her June 2019 death. Answer (D) is correct. Generally, the GSTT imposed by Sec. 2601 applies only to a generation-skipping transfer made after October 22, 1986. There are three exceptions: (1) The tax is not imposed on a generation-skipping transfer under a trust that was irrevocable on September 25, 1985, to the extent that the transfer is not made out of corpus added to the trust after September 25, 1985; (2) the tax is also not imposed on a transfer under a will executed before October 22, 1986, if the decedent dies before 1987; and (3) the tax is not imposed on the generation-skipping transfer of a decedent who was mentally incompetent on October 22, 1986, and remains such so as not to be able to change the disposition before death. Since Carol died in 2019, and the corpus was placed in the trust at that time, none of the exceptions apply, and her testamentary generation-skipping trust is subject to the GSTT.

Which of the following is subject to the generation-skipping transfer tax? A.Margaret wrote her will in 1985 establishing a generation-skipping trust. Her will was unchanged when she died in November 2019. B.Carlisle established in 1983 a generation-skipping trust by gift for the benefit of his descendants. The irrevocable trust was unchanged and no corpus was added prior to his death in 2019. C.Sam wrote his will in 1960 but amended it in 1985 to add a generation-skipping trust. Sam was mentally incompetent from January 1986 until his death in February 2019. D.Carol wrote a will in May 1986 that established a generation-skipping trust. She made no changes in her will before her June 2019 death.

A) Lack of scienter. Fraud consists of a material misrepresentation made with scienter and an intent to induce reliance. The misrepresentation also must have caused damage to a defendant who reasonably relied upon it. Scienter exists when the defendant makes a false representation with knowledge of its falsity or with reckless disregard as to its truth. The CPA firm's best defense is that the plaintiff failed to prove an element of the fraud claim, i.e., scienter.

Which of the following is the best defense a CPA firm can assert in a suit for common law fraud resulting from preparation of a tax return? A) Lack of scienter. B) Contributory negligence on the part of the client. C) A disclaimer contained in the engagement letter. D) Lack of privity.

Personal exemption. Normally a personal exemption deduction is not considered when calculating distributable net income of a trust, including simple trusts. The deduction for taxable income is added back, i.e., its effect reversed, making it not part of DNI. DNI is taxable income of the fiduciary (trust or estate) adjusted by the following items: Taxable income (TI) of fiduciary (before the distribution deduction)+Personal exemption deduction ($600 estate, $300 simple trust, $100 complex trust)+Tax-exempt interest minus any related expenses+Capital losses allocated to principal-Capital gains allocated to principal-Taxable stock dividends allocated to principal-Extraordinary dividends allocated to principal=Distributable net income

Which of the following items is not normally taken into account in determining distributable net income of a simple trust?

Ron died after furnishing tax return information to his tax return preparer. Ron's tax return preparer disclosed the information to Jerry, Ron's nephew, who is not the fiduciary of Ron's estate. Section 6713 imposes a $250 penalty on an income tax return preparer who discloses information furnished in connection with preparation of any return or uses the information for any purpose other than to prepare, or assist in preparation of, the return. This answer is such a disclosure described in Sec. 6713 to which no exception applies. Section 7216 imposes criminal penalties for knowingly or recklessly making such disclosure.

Which of the following situations describes a disclosure of tax information by an income tax preparer that would subject the preparer to a penalty?

Tax return preparers are required to maintain a complete copy of each return or claim for refund they have filed for 3 years after the return period, or are required to maintain a list of the names, identification numbers, and tax years for whom returns are prepared and to keep this list for 3 years after the return period

Which of the following statements is true regarding records required to be maintained by return preparers?

B.The new partner elects to adjust the basis of its assets. Answer (B) is correct. A partnership generally does not adjust the basis of partnership assets to reflect the distribution of property or the transfer of a partnership interest to a new partner. However, Sec. 754 allows a partnership to elect to adjust the basis of the assets of the partnership with respect to a partner that acquires an interest in the partnership from another partner by sale or exchange or by inheritance and to reflect alterations in value. Note that the partnership, not the new partner, makes the election to adjust the basis of its assets

Which of the following statements regarding a Sec. 754 optional basis adjustment election is false? A.An automatic 12-month extension of time to make the election is available. B.The new partner elects to adjust the basis of its assets. C.The application for revocation of the election must be made not later than 30 days after the close of the tax year of the partnership with respect to which the revocation is intended to take effect. D.The basis adjustment election may be revoked by the partnership subject to certain limitations.

A.The election may be revoked with the consent of shareholders who, at the time the revocation is made, hold more than 50% of the number of issued and outstanding shares. Answer (A) is correct. Upon the occurrence of a terminating event, an S corporation becomes a C corporation. An S corporation election is terminated if shareholders collectively holding more than 50% of the outstanding shares of stock on the day of the revocation (voting and nonvoting) consent, any eligibility requirement not being satisfied on any day, and/or a passive income investment income (PII) termination.

Which of the following statements regarding the termination of an S corporation election is true? A.The election may be revoked with the consent of shareholders who, at the time the revocation is made, hold more than 50% of the number of issued and outstanding shares. B.The election may be revoked by the board of directors of the corporation only if they are not shareholders. C.The election may be revoked by the Internal Revenue Service if there is a history of 10 years of operating losses. D.The election terminates automatically if the corporation derives more than 25% of its gross receipts from passive investment income during the year.

Payments must terminate at the death of the payee spouse. Only amounts that are required to be included as gross income of the recipient as alimony are deductible by the payor in calculating AGI. A component of the alimony definition is that the payor has no liability to make the payment for any period after the death of the payee spouse.

With regard to tax recognition of alimony paid in 2019 per a 2018 divorce, which one of the following statements is true? Payments must terminate at the death of the payee spouse. The divorced couple may be members of the same household when payments are made. If the payor spouse pays premiums for insurance on his life as a requirement under the divorce agreement, the premiums are alimony if the payor spouse owns the policy. Payments may be made in cash or property.

An agency for the forthcoming calendar year entered into in mid-December of the prior year.Answer (C) is correct. The statute of frauds requires a contract that cannot be completed within 1 year from its making to be in writing. An agency relationship for the forthcoming calendar year entered into in mid-December cannot be completed for approximately 1 year and 1/2 month from the time the contract was formed. An applicable state statute most likely applies the equal dignity rule. Thus, the agency must be in writing if the agent is to enter into a contract required to be in writing, such as a contract that cannot be completed within 1 year.

Wok Corp. has decided to expand the scope of its business. In this connection, it contemplates engaging several agents. Which of the following agency relationships is within the statute of frauds and thus should be contained in a signed writing? A.A sales agency. B.An agency of indefinite duration but terminable upon 1 month's notice. C.An agency for the forthcoming calendar year entered into in mid-December of the prior year. D.An irrevocable agency.