50 Taxation Questions

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? Unless a question states otherwise, assume that (i) the TAX YEAR in question is 2013 and (ii) our South-Western Federal Taxation text -Individual Income Taxes 2014ed. By William H. Hoffman, Jr. & James E. Smith (the “Class Text” ) is current and good law.
o Thus, for example, unless a question states otherwise, use the 2013 amounts in the Class Text to solve the questions (instead of potentially more recent and/or more accurate government published amounts).
? The questions cover chap 11-17 (90%) , chap 1-10 (10%)

1. In 2013, Justin invested $20,000 in a cattle-feeding partnership that used nonrecourse notes to purchase $100,000 of feed, which was used to feed the cattle and expensed. If Justin’s share of the expense was $30,000, what is the most that Justin can deduct in 2013?

a. $10,000
b. $20,000
c. $30,000
d. $100,000

2. Joyce, a corporate executive, exercised an incentive stock option (“ISO”) granted by Joyce’s employer to purchase 10,000 shares of the corporation’s stock at the option price of $1 per share (i.e., the exercise price was $1 per share). The stock is freely transferable. At the time the option was exercised, the stock was selling for $6 per share. What is the AMT adjustment that results from Joyce exercising the ISO (assume that Joyce will NOT dispose of any of the stock during the year)?

a. $0
b. $10,000
c. $50,000
d. $60,000

3. Juna, a single parent, lives in an apartment with Juna’s ONE minor children (Jennifer), whom Juna supports. For 2013, Juna will have AGI and earned income of $20,000. Calculate the amount, if any, of Juna’s earned income credit.

a. $3,250
b. $2,855
c. $1,000
d. $0

4. Carlos and Cassandra are married and file a joint return. In 2013, Cassandra worked fulltime and earned $15,000, while Carlos worked fulltime and earned $13,000. Assume their 2013 AGI equaled $28,000. Assume they incurred $9,000 of child care expenses during 2013 for their TWO dependent children, Jacqueline and Porshia (who are 5 years old and 7 years old, respectively). What is their child and dependent care CREDIT amount?

a. $1,680
b. $2,000
c. $6,000
d. $9,000

5. In 2006, Alicia received stock from Batista worth $50,000 at the time of the GIFT. At the time of the gift, Batista’s adjusted basis in the stock was $75,000. What is the gain or loss that Alicia should report for 2013 if she sold the stock to Sandra in 2013 for $100,000 (ignore any gift tax that may have been paid on the transfer from Batista to Alicia)?

a. There is no gain or loss
b. $100,000 gain
c. $50,000 gain
d. $25,000 gain

6. Now, assume that in the previous question Alicia sold the stock to Sandra for $65,000 (instead of $100,000). What is the gain or loss that Alicia should report (again, ignore any gift tax that may have been paid on the transfer from Batista to Alicia)?

a. There is no gain or loss
b. $65,000 gain
c. $15,000 gain
d. $10,000 loss

7. Now, assume that in Question 5 Alicia sold the stock to Sandra for $25,000 (instead of $100,000). What is the gain or loss that Alicia realized on the sale to Sandra (again, ignore any gift tax that may have been paid on the transfer from Batista to Alicia)?

a. There is no gain or loss
b. $25,000 loss
c. $50,000 loss
d. $25,000 gain

8. Anthony traded in office equipment with an adjusted basis of $40,000 (and value of $50,000) for other (like-kind) office equipment then valued at $35,000. Anthony also received $15,000 in cash as part of the deal. What was Anthony’s recognized gain on the exchange, if any?

a. $0
b. $10,000
c. $15,000
d. $50,000

9. Mohammed traded in computer equipment with an adjusted basis of $50,000 (and a value of $50,000) for other (like-kind) computer equipment then valued at $30,000. Mohammed also received $20,000 in cash as part of the deal. What was Mohammed’s realized gain on the exchange, if any?

a. $0
b. $20,000
c. $30,000
d. $50,000

10. In 2013, Ann and Kevin sold a house to Pharlande for $1,600,000. Prior the 2013 sale, neither Ann nor Kevin had ever excluded a gain from the sale of a personal residence. Ann and Kevin had lived in the house for the last five years and used it exclusively for personal purposes. Ann and Kevin had purchased the house for $300,000. Ann and Kevin started living in the house immediately after purchasing it and never made any capital improvements to the house or took any depreciation (or other deductions) against it. Assume there were no selling expenses. How much of a gain did Ann and Kevin realize on the sale to Pharlande (assume that Ann and Kevin are married and file a joint return)?

a. $1,300,000
b. $800,000
c. $500,000
d. $0

11. Assume the facts stated in the previous question. How much of a gain must Ann and Kevin recognize on the sale to Pharlande?

a. $1,300,000
b. $800,000
c. $500,000
d. $0

12. In 2013, Abena will have taxable income of approximately $80,000. In 2013, Abena will also have a long-term capital loss of $12,000. Abena has no other capital gains or losses (in 2013 or prior years). For 2013, what is the maximum capital loss amount that Abena may use to offset her other income?

a. $0
b. $3,000
c. $9,000
d. $12,000

13. Assume the facts stated in the prior question. Assume further that for 2013 Abena offset her wages (with her capital loss) to the maximum extent permitted by law. What is the amount of Abena’s capital loss carryover to 2014?

a. $0
b. $3,000
c. $9,000
d. $12,000

14. Carlita is a single taxpayer in the 15% tax bracket. Carlita wants to minimize her 2013 tax liability. Which of the following provides the LARGEST tax benefit to Carlita (assume that she may legally take advantage of each item in its entirety for 2013)?

a. A $5,000 exclusion from gross income.
b. A $5,000 deduction from gross income.
c. A $1,500 tax credit.
d. Options “a” and “b” would provide the largest tax benefits.

15. What was the MAXIMUM EARNED INCOME CREDIT amount that Chase and Daenne could possibly take for 2013? Assume they are U.S. taxpayers filing a joint return with TWO qualifying children.

a. $6,000
b. $5,372
c. $2,100
d. $2,000

16. Which item MOST resembles an interest free loan from the U.S. government?

a. The earned income credit
b. The American Opportunity tax credit
c. The child tax credit
d. First-time homebuyer credit for a closing that occurred in June of 2008

17. In early 2013, Ami sold her personal residence to Alan for $200,000. At the time of the sale, Ami’s adjusted basis was $100,000. Within three months of the sale, Ami moved into a new residence she purchased for $650,000. What is Ami’s basis in her new residence?

a. $650,000
b. $550,000
c. $400,000
d. $300,000

18. Which of the following is TRUE?

a. When compared to exclusions, deferrals are more temporary in nature
b. When compared to deferrals, exclusions are more temporary in nature
c. Section 1031 provides for an elective deferral upon certain exchanges
d. All of the above

19. Kristine’s business property (located in Rewal Town USA) was condemned by the proper local authorities. Immediately before the condemnation, the property had a fair market value of $500,000 and Kristine’s adjusted basis in the property was $200,000. The local authorities replaced Kristine’s condemned property with similar Rewal Town property having a fair market value of $400,000. What is Kristine’s realized gain or loss relating to these matters?

a. Loss of $100,000
b. Gain of $200,000
c. Gain of $400,000
d. $0

20. Assume the facts stated in the prior question. What is Kristine’s recognized gain or loss relating to such matters?

a. Loss of $100,000
b. Gain of $200,000
c. Gain of $400,000
d. $0

21. Assume the facts stated in the prior two questions. What is Kristine’s basis in the Rewal Town property she received as a result of the condemnation (i.e., what is Kristine’s basis in the newly acquired property)?

a. $500,000
b. $400,000
c. $200,000
d. $0

22. In 2013, Janice and Greg sold a house to Femi for $400,000. Janice and Greg had purchased the house for $1,000,000 in 2004 (during the real estate boom). Janice and Greg started living in the house immediately after purchasing it and never made any capital improvements to it or took any depreciation (or other deductions) against it. Assume there were no selling expenses. How much of a LOSS may Janice and Greg recognize on the sale to Femi (assume that Janice and Greg are married and file a joint return and itemize deductions)?

a. $600,000
b. $600,000 less 10% of their AGI
c. $400,000 less 10% of their AGI
d. $0

23. Juliana purchased land for $200,000 in 1989. The land was valued at $500,000 on July 1, 2013, when Juliana died. Juliana’s son Jason inherited the land. What basis would Jason have in the land as a result of the inheritance?
a. $0
b. $200,000
c. $500,000
d. Juliana’s adjusted basis on July 1, 2013 (if different than $200,000)

24. Assume the same facts stated in the previous question. Which of the following is most likely TRUE, if Jason sold the land in October 2013 for $600,000?

a. Jason’s 2013 gain is long-term
b. Jason’s 2013 gain is short-term
c. In 2013, Jason should “recapture” any depreciation previously taken by Juliana on the land
d. In 2013, Jason will be taxed on the appreciation that occurred while Juliana held the land (provided that such appreciation was previously not taxed)

25. Which of the following statements is most likely TRUE for Charles (a typical individual taxpayer in the 35% tax bracket)?

a. Charles usually prefers ordinary losses to capital losses
b. Charles usually prefers ordinary income to long-term capital gains
c. Charles usually prefers a $1,500 deduction to a $1,250 credit
d. All of the above

26. Holman, who owns and operates an ICE CREAM SHOP as a sole proprietor, has the following property:

• STOCKS held for Holman’s investment
• Elaborate ice cream making EQUIPMENT that was inherited from Lakesha (Holman’s grandmother) (it is used exclusively in the ICE CREAM SHOP)
• CHAIRS that are used exclusively in Holman’s home
• a COMPUTER used exclusively in the ICE CREAM SHOP

Considering the above items, which option below lists the capital asset(s) under Section 1221?

a. Only the STOCKS
b. Only the STOCKS & CHAIRS
c. Only the EQUIPMENT, CHAIRS & COMPUTER
d. Each of the above assets is a capital asset under Section 1221

27. Jonathan recently purchased a piece of land, a building and a truck for a lump sum of $500,000. The fair market value of the land was $190,000, the fair market value of the building was $400,000, and the fair market value of the truck was $10,000. What is Jonathan’s basis in the TRUCK?

a. $0
b. $8,333
c. $10,000
d. $166,667

28. On September 5, 2007, Fernando paid $5,500 for 100 shares of TXX-5761 Inc. common stock. On June 13, 2013, Fernando received a nontaxable 10% common stock dividend (i.e., 10 additional shares of identical common stock). On June 13, 2013, TXX-5761 Inc. the common stock was trading on the market for $60 a share. On November 15, 2013, Fernando sold the 10 shares he received on June 13, 2013 to Yuri. What is the basis of the 10 shares Fernando sold to Yuri?

a. $0
b. $500 ($50 x 10)
c. $550 ($55 x 10)
d. $600 ($60 x 10)

29. Refer to the facts stated in the prior question. The gain or loss resulting from the November 15, 2013 sale to Yuri will most likely be:

a. Short-term
b. Long-term
c. Both short-term and long-term.
d. Neither short-term nor long-term

30. In 2013, Lakesha sold a piece of equipment from Lakesha’s business for $200,000. The equipment was purchased in 2009 for $120,000. It had a useful life of five years and was depreciated on a straight-line basis. Assume total of $84,000 depreciation was taken (prior to the sale). What is Lakesha’s recognized gain on the sale?

a. $200,000
b. $164,000
c. $84,000
d. $80,000

31. Refer to the facts stated in the prior question. What amount of the gain will be recaptured at Lakesha’s ordinary income rate?

a. $200,000
b. $164,000
c. $84,000
d. $80,000

32. Refer to the facts stated in the prior two questions. What amount of the gain will be treated as Section 1231 gain and (possibly) taxed at the long-term capital gain rate?

a. $200,000
b. $164,000
c. $84,000
d. $80,000

33. Which of the following is most likely Section 1231 property (assume that each item has been held long-term and is used in a trade or business)?

a. Section 1245 property
b. Section 1250 property
c. Land
d. Each of the above items is Section 1231 property

34. Which of the following is most likely Section 1245 property (assume that each item has been held long-term and is used in a trade or business)?

a. Inventory
b. Office building
c. Office equipment
d. Land

35. Which of the following would MOST LIKELY require an adjustment for the alternative minimum tax?

a. A casualty loss deduction
b. A deduction for state income taxes
c. A charitable contribution deduction
d. Each of the above items requires an adjustment for the alternative minimum tax

36. Mustufa was at risk for $25,000 in Partnership X and $25,000 in Partnership Z on January 1, 2013. Both partnerships are passive activities to Mustufa (these are Mustufa’s only passive activities). Mustufa’s share of net income from Partnership X during 2013 is $10,000. Mustufa’s share of losses from Partnership Z during 2013 is $40,000. How much is Mustufa at risk for Partnership X on January 1, 2014?

a. $35,000
b. $25,000
c. $10,000
d. $0

37. Refer to the facts in the previous question. How much is Mustufa at risk for Partnership Z on January 1, 2014

a. $65,000
b. $40,000
c. $15,000
d. $0

38. Refer to the facts in the previous questions. What is Mustufa’s carryover under the at-risk rules for Partnership Z in 2013?

a. $65,000
b. $40,000
c. $15,000
d. $0

39. Refer to the facts in the previous question. What is Mustufa’s deductible loss for Partnership Z in 2013?

a. $40,000
b. $25,000
c. $10,000
d. $0

40. Refer to the facts in the previous question. What is Mustufa’s suspended loss under the passive loss rules for Partnership Z in 2013?

a. $40,000
b. $25,000
c. $15,000
d. $0

41. In 2013, Dennis invested in the BERNARDO Limited Partnership (“BERNARDO L.P.”) by paying $75,000 cash and contributing additional assets worth $50,000 (and having a basis equal to $25,000 on the date of the contribution). What amount did Dennis have at risk in BERNARDO L.P. as of January 1, 2014, if BERNARDO L.P. broke even in 2013 (i.e., if BERNARDO L.P. had no income or loss in 2013)?

a. $150,000
b. $125,000
c. $100,000
d. $75,000

42. Refer to the facts stated in the prior question. But, for this question, assume that BERNARDO L.P. allocated to Dennis net income of $20,000 from operations in 2013. What amount does Dennis have at risk in BERNARDO L.P. as of January 1, 2014?

a. $170,000
b. $145,000
c. $120,000
d. $95,000

43. In 2013, Kristine and Jason (who file a joint return) had an interest expense of $10,000 on a loan that was used to purchase a variety of stock and bonds (all producing taxable income). Assume further that, in 2013, Kristine and Jason had net investment income of $4,000. Assume they itemize deductions, what is their maximum interest expense deduction in 2013?

a. $10,000
b. $6,000
c. $4,000
d. $0

44. Assume that Jason and Joyce file a joint return and have the following items for 2013:

Taxable income: $75,000
Positive adjustments: $40,000
Preferences: $35,000
Regular tax ability: $10,608

What was their 2013 AMT?

a. $17,992
b. $10,608
c. $7,384
d. $0

45. Assume that a couple that filed a joint return had 2013 AMTI of $300,000. What was the amount of their actual 2013 exemption for the AMT?

a. $0
b. $7,800 (i.e., $3,900 x 2)
c. $44,275
d. $80,800

46. Holman is negotiating to buy land from Carlita. What will Holman’s basis be in the land, if Holman gives Carlita $20,000 and Holman assumes Carlita’s mortgage on the land of $70,000?

a. $90,000
b. $70,000
c. $50,000
d. $20,000

47. Which of the following is LEAST likely to qualify as a like-kind exchange under Section 1031 (assume all of the assets are used for business)?

a. Improved real estate for unimproved real estate
b. Improved real estate for office equipment
c. Office building for a warehouse
d. Office furniture for office equipment

48. Johnathan exchanges undeveloped real estate for developed real estate on August 2, 2013. On August 2, 2013, the fair market value of each property is $700,000. Johnathan had purchased the undeveloped real estate on February 14, 2009, for $350,000. Both properties are considered investment property for Johnathan. Which of the following is TRUE?

a. Johnathan’s basis in the developed real estate is $700,000
b. Johnathan’s basis in the undeveloped real estate was $700,000
c. Johnathan’s holding period begins on February 14, 2009 for the developed real estate
d. Johnathan’s holding period begins on August 2, 2013 for the developed real estate

49. In October 2013, Cassandra purchased a playground set at a garage sale for $100. Cassandra is not in the business of buying and selling anything. Cassandra researched the playground set online and discovered it was worth $500. In December 2013, Cassandra sold the playground set through an auction website for that amount (i.e., $500). Which of the following is TRUE considering these transactions?

a. Cassandra does not have any income
b. Had Cassandra sold the playground set for $50, Cassandra could have deducted a $50 ordinary loss
c. Cassandra has a $400 long-term capital gain
d. Cassandra has a $400 short-term capital gain

50. Carlos had the following net Section 1231 results for each of the years shown.

Tax Year Net Section 1231 LOSS Net Section 1231 GAIN
2008 $0 $0
2009 $0 $0
2010 $0 $0
2011 $5,000
2012 $7,000
2013 $30,000

Which of the following is TRUE regarding the net Section 1231 gain in 2013?

a. All $30,000 will all be taxed at Carlos’s ordinary income rate
b. All $30,000 will all be taxed at Carlos’s long-term capital gain rate
c. $12,000 of the $30,000 will be taxed at Carlos’s ordinary income rate