Fedreal taxation exam 2015

1.Allison and Ronald, ages 35 and 34, are married and file a joint return. In addition to having TWO dependent children, Allison and Ronald have adjusted gross income (“AGI”) of $80,000 and itemized deductions of $19,000. What is their taxable income for 2014?

a. $80,000

b. $68,000

c. $53,100

d. $45,200

2. In 2014, Alix, age 16, had $1,000 of interest from a certificate of deposit and $3,000 from working as a waiter. Assume Alix is claimed by his parents as a dependent. What is Alix’s standard deduction?

a. $0

b. $3,000

c. $3,350

d. $6,200

3. What is Myrlande’s Taxable Income for 2014? Assume she is 29 years old and is single and has no dependents. Assume further that Myrlande’s AGI is $55,000 and that she made a charitable contribution of $500 (which would be her only itemized deduction).

a. $55,000

b. $50,550

c. $48,800

d. $44,850

What is Lydia’s taxable income for 2014? Assume she is single and claimed THREE dependent children. Assume further that Lydia’s AGI is $50,000 and that her itemized deductions are $10,000.

a. $50,000

b. $40,000

c. $28,150

d. $24,200

5. A few years ago, Yania and Anh formed a partnership called “YA!.” Which of the following is most likely TRUE regarding the U.S. income taxation of Yania, Anh and YA!?

a. The YA! entity is NOT required to file an informational tax return

b. Anh and Yania will be required to pay taxes on their respective shares of YA!’s income, even if YA! does NOT actually distribute the earnings to them

c. The YA! entity will most likely be taxed like a corporation

d. The YA! entity is required to pay federal income taxes

6. Which doctrine will most likely prevent Aileen from reducing her tax liability by voluntarily assigning her income to another taxpayer?

a.The fruit-of-the-tree doctrine

b. The constructive receipt doctrine

c. The economic benefit doctrine

d. None of the above

7. During 2014, Ryan was supported by his three wealthy CPA daughters, in the following percentages:

? Melissa: 25.0%

? Myrlande: 8.0%

? Lydia: 31.0%

Which daughter is UNABLE to claim Ryan as a dependent, even if a multiple support agreement is in place and the other daughters agree NOT to claim Ryan as a dependent?

a. Melissa

b. Myrlande

c. Lydia

d. Each daughter would be eligible to claim Ryan as a dependent

On January 1, 2014, Isabel signed a TWO year lease to rent office space from Yania. The lease commenced immediately on January 1, 2014. During 2014, Isabel paid Yania, $36,000 for the first year’s rent, $3,000 for the last month’s rent, and $3,000 as a security deposit. Isabel and Yania agree that the security deposit will be returned by Yania at the end of the lease. How much gross income should Yania report for 2014 as a result of these items?

a. $36,000

b. $39,000

c. $42,000

d. $108,000

9. What is SANAS taxable income for 2014? Assume SANA is 42 years old and is single and has no dependents. Assume further that SANA’s 2014 AGI is $35,000 and that SANA has no itemized deductions.

a. $24,850

b. $28,800

c. $31,050

d. $35,000

10. Ronald, a single taxpayer, had 2014wagesof $70,000 from his job at Big Company, Inc. What is Ronald’s AGI if he has the following (and only the following) additional items in 2014?

? Itemized deductions of $10,000

? Exemption amount of $3,950

? Alimony of $12,000receivedby Ronald (fromhis former spouse, Lydia)

? Businessincomeof $15,000 from Ronald’s sole proprietorship

Ignore any deduction that may relate to self-employment taxes.

a. $70,000

b. $82,000

c. $85,000

d. $97,000

11. Assume the same facts as in the previous question (again, ignore any deduction that may relate to self-employment taxes). Ronald’s Taxable Income for 2014 is:

a. $60,000

b. $71,050

c. $72,000

d. $83,050

12. Don and Yania are married taxpayers who file a joint return. In 2012, they had AGI of $500,000 and theirpreliminaryitemized deductions totaled $30,000. In 2014, they will also have AGI of $500,000 andpreliminaryitemized deductions of $30,000. In 2012 and 2014 their itemized deductions include mortgage interest. Which of the following is TRUE?

a. When comparing their 2012 and 2014 returns, they will deduct the same amount of itemized deductions on each return

b. When comparing their 2012 and 2014 returns, they will deduct more itemized deductions on their 2012 return

c. When comparing their 2012 and 2014 returns, they will deduct more itemized deductions on their 2014 return

d. They will not deduct any itemized deductions on either their 2012 return or their 2014 return

13. Which of the following statements is TRUE?

a. The U.S. government always “breaks-even” with regards to alimony payments (i.e., because the reduction in taxes for the spouse paying the alimony will always equal the increase in taxes for the spouse receiving the alimony)

b. Taxpayers often prefer deductions FROM AGI to deductions FOR AGI

c. A dependent’s earned income amount could never impact the size/amount of his/her standard deduction amount

d. The amount of tax-exempt interest received by a taxpayer could impact the amount of his/her Social Security benefits that are subject to taxation

14. Assume that Melissa received some unique payments in 2014. Which of the following items may Melissaexcludefrom gross income?

a. $57,000 of punitive damages received from a lawsuit against Dangerous Co.

b. $2,000 received from Fantasy Football league winnings

c. $10,000 received as a gift from a friend

d. All of the above

15. In early 2014, Lydia received a gift of a home valued at $500,000 (from Lydia’s relative, Alix). Alix also gave Lydia a $10,000 cash gift. During 2014, Lydia rented the home to Allison. As a result of the lease with Allison, Lydia earned net rental income of $12,000 (for 2014). What amount of income should Lydia’s 2014 tax return include from these transactions?

a. $0

b. $12,000

c. $22,000

d. $524,000

16. CONSIDER THE impact of the Tax Increase Prevention Act we discussed in Chat. In 2014, Andrew, a calendar-year taxpayer, purchased business equipment (5-year property) for $2,200,000. The property was placed in service in January 2014 (and is being used exclusively in Andrew’s extremely profitable business). No other personal property is purchased by Andrew in 2014. What is the most that Andrew may deduct in 2014 under Section 179 of the Code (ignore any potential deductions resulting from bonus deprecation or MACRS)?

a. $200,000

b. $300,000

c. $500,000

d. $2,000,000

17. CONSIDER THE Tax Increase Prevention Act we discussed in Chat and assume the same facts as in the previous question. However, for this question, assume that Andrew purchased the business equipment for $150,000 (instead of $2,200,000). What is the most that may be deducted in 2014 under Section 179 of the Code (ignore any potential deductions resulting from bonus deprecation or MACRS)?

a. $150,000

b. $200,000

c. $500,000

d. $2,000,000

18. Which of the following is most likely deductible FOR AGI (i.e., PRE-AGI)?

a. Amounts paid for qualified moving expenses

b. Amounts paid for interest on a mortgage

c. Amounts paid for an employee’s unreimbursed travel expenses (i.e., the travel was related to taxpayer’s fulltime position at a large corporation)

d. Each of the above items would be deducted FROM AGI (i.e., POST-AGI)

19. Isabel has AGI of $100,000 in 2014. During 2014, Isabel also had an uninsuredpersonalcasualty loss of $12,000 (afterthe $100 reduction). The personal casualty loss related to an accident that Isabel had with Myrlande. Isabel carried no collision insurance and Myrlande was also an uninsured motorist. Assume Isabel itemizes deductions in 2014. What is the casualty loss amount that Isabel may actually deduct?

a. $0

b. $2,000

c. $10,000

d. $12,000

20. Refer to the facts in the previous question. However, for purposes of this question assume that Isabel takes thestandarddeduction in 2014. What is the casualty loss amount that Isabel may deduct?

a. $0

b. $2,000

c. $10,000

d. $12,000

21. If Melissa is insolvent with assets of $30,000 and liabilities of $40,000 and one of Melissa’s creditors then cancels a debt of $25,000, what amount must Melissa recognize as income?

a. $0

b. $10,000

c. $15,000

d. $25,000

22. TXX5761 Inc. paid all of the premiums for an $850,000 group-term life insurance policy on its 66-year-old President, Jeff. Assume that pursuant to the applicable table, the cost per $1,000 of protection for a 1-month period is $1.27 (for a person aged 65 to 69). What amount relating to the policy (if any) must be included in Jeff’s Gross Income for the year (assume Jeff was covered for all twelve months)?

a. $0

b. $12,192

c. $800,000

d. $850,000

23. On January 1, 2014, Yania purchased a 20-year annuity for $80,000 from MARIA MUTUAL (an established insurance company). Under the annuity, Yania will receive payments of $740 for each month of annuity’s life. What amount of the annuity payments may be excluded from Yania’s Gross Income for 2014 (assume all 12 monthly payments are made in 2014)?

a. $8,880

b. $4,880

c. $4,000

d. $0

24. Assuming the same facts as in the previous problem, what amount of the annuity payments from MARIA MUTUAL must be included in Yania’s Gross Income for 2014?

a.$8,880

b.$4,880

c.$4,000

d.$0

25. In March 2014, Ryan, a calendar-year taxpayer, purchased new 7-year property for $700,000. The property was immediately placed into service (and is still being used exclusively in Ryan’s extremely profitable business). No other personal property was purchased by Ryan in 2014. Compute the largest tax deduction possible in 2014 for the equipment (Consider the Section 179 election, Bonus Depreciation, and MACRS, if applicable. Also, consider the Tax Increase Prevention Act we discussed in Chat):

a. $0

b. $500,000

c. $614,290

d. $700,000

26. During 2014, 3-year MACRS property was placed in service by Anh, a calendar-year taxpayer. Assume that Anh does NOT make a Section 179 election. The property will most likely be depreciated over:

a. Six calendar years

b. Four calendar years

c. Three calendar years

d. One calendar year

27. Myrlande is a cash-basis taxpayer. Which doctrine will most likely limit Myrlande’s ability to choose the year in which to recognize income?

a. The constructive receipt doctrine

b. The economic benefit doctrine

c. The fruit-of-the-tree doctrine

d. None of the above

28. Aileen contributed some inventory from Aileen’s sole proprietorship to a public charity for its use. On the date of the contribution, Aileen’s basis in the inventory was $7,000 and the fair market value was $13,000. What is the amount of charitable contribution allowed (before considering any potential percentage limitation)?

a. $6,000

b. $7,000

c. $13,000

d. $20,000

29. Which of the following items most resembles an interest freeloanfrom the U.S. government?

a. Student loan interest being deducted

b. Travel expenses being deducted

c. Bonus depreciation being deducted

d. Unreimbursed employee business expenses being deducted

30. Which of the following statements is TRUE about LIBA s hobby activity?

a. A loss from LIBS hobby activity cannot be used to offset wages from his full-time employment

b. A loss from LIBA s hobby activity may be used to offset his dividend income

c. When compared to LIBAS business, LIABA’s hobby activity is subject to exactly the same tax laws

d. Expenses relating to LIBA’s hobby activity may NEVER be deductible

31. What was Allison’s Taxable Income for 2014? Assume Allison is single and has THREE dependent children. Assume further that Allison’s 2014 AGI is $75,000 and that Allison had itemized deductions of $10,000.

a. $49,200

b. $53,150

c. $65,000

d. $75,000

a. $29,950

b. $23,000

c. $12,000

d. $0

33. Jeff incurred the following expenses during 2014. Which expense is Jeff LEAST likely to deduct as a medical expense (assume Jeff itemizes and that Jeff’s medical expenses will exceed 10.0% of Jeff AGI)?

a. Uninsured expenses relating to back surgery

b. Medical insurance premiums (purchased by Jeff with Jeff’s after-tax dollars)

c. Travel expenses to obtain treatment at a clinic in Georgia (assume that the potentially lifesaving procedure to be performed can only be performed at that particular clinic)

d. Cosmetic surgery (to make Jeff’s ears look more appealing)

34. Jeff contributes some common stock that Jeff held long-term to a public charity. On the date of the contribution, Jeff’s basis in the common stock was $5,000 and the fair market value was $11,000. What is the amount of charitable contribution allowed (before considering any potential percentage limitation)?

a. $11,000

b. $6,000

c. $5,000

d. $0

35. Lydia sold stock Lydia owned in a small business that was formed as a corporation. Lydia sold the stock to Ryan. Which Section of the U.S. Tax Code might allow Lydia to convert what would otherwise be a capital loss into an ordinary loss?

a. Section 1202

b. Section 1221

c. Section 1244

d. None of the above

36. Ronald’s business incurred a casualty loss in

36. Ronald’s business incurred a casualty loss in 2014. Immediatelybeforethe casualty, Ronald’s business truck had an adjusted basis of $40,000 and a fair market value of $20,000. Immediatelyafterthe casualty, the truck had a fair market value of $10,000. Because of the truck damage, Ronald’s insurance company provided $5,000 as a reimbursement in 2014. What was Ronald’s 2014 casualty loss deduction?

a. $5,000

b. $10,000

c. $40,000

d. Unknown (because we must know Ronald's AGI)

37. In 2006, Aileen (a single taxpayer) loaned $15,000 to her friend JOHN. In 2014, JOHN declared bankruptcy, with the result that the debt became totally worthless. How should Aileen treat the loss relating to this debt (assume that the debt is a nonbusiness debt that is a bona fide debt that arose from a debtor-creditor relationship)?

a. As an itemized deduction

b. As a long-term capital loss

c. As a short-term capital loss

d. Aileen may not take any deduction relating to the debt (it is a nonbusiness debt)

38. Assume the facts stated in the prior question. Assume further that Aileen has no other capital gains or losses in 2014 (or any prior years). What is the maximum amount (related to the bad debt) that Aileen can deduct in 2014?

a. $0

b. $3,000

c. $12,000

d. $15,000

39. Assume the facts stated in the prior two questions. Assume further that for 2014 Aileen will offset her wages (with any deduction related to the debt) to the maximum extent permitted by law. What is the amount of Aileen’s capital loss carryover to 2015?

a. $0

b. $3,000

c. $12,000

d. $15,000

40. Which of the following is most likely deductible FOR AGI (i.e., PRE-AGI)?

a. Amounts paid for federal income taxes

b. Amounts paid for property taxes

c. Amounts paid for student loan interest

d. Each of the above items would be deducted FROM AGI

41. Yania’s boss gave her two tickets to the Katie Pairee concert because she met her sales quota. At the time Yania received the two tickets, they had a face value of $50 each and were selling on eBay for $200 each (which equaled the fair market value of the tickets on that day). On the date of the concert, the tickets were selling for $300 each. Yania and her daughter attended the concert. How much gross income should Yania report as a result of the tickets?

a. $600

b. $400

c. $100

d. $0

42. JOHN was a professional basketball player before a career-ending injury caused by a reckless driver. JOHN sued the driver and collected $2 million as compensation for lost estimated future income and $1 million for punitive damages. How much gross income should JOHN report as a result of the damages received?

a. $3 million

b. $2 million

c. $1 million

d. $0

Which of the following is a deduction FROM AGI?

a. Anh paid alimony to a former spouse

b. Allison paid real estate taxes levied by the county on her personal residence

c. Jeff paid property taxes levied by the county on his car used exclusively for business

d. Alix invested $2,000 in a Roth IRA

$0

b. $55,000

c. $70,000

d. N/A (we need to know Melissa’s AGI to answer this question)

45. Ryan Corporation acquired new computer equipment on February 4, 2014, for $50,000. Ryan did NOT elect immediate expensing under Section 179 or any bonus depreciation. Determine Ryan’s cost recovery for 2014.

a. $50,000

b. $10,000

c. $5,000

d. $0

46. On August 5, 2014, Lydia purchased a new office building for $2 million. On October 3, 2014, she began to rent out office space in the building. What is Lydia’s cost recovery for 2014?

a. $2,000,000

b. $51,280

c. $10,700

d. $0

47. Assume the same facts as in the previous problem. Assume further that Lydia sells the office building on July 12, 2018. What is Lydia’s cost recovery for 2018?

a. $51,280

b. $27,777

c. $10,700

d. $0

48 Jeff performs services for Nova Inc. In determining whether Jeff is an employee or an independent contractor, which factor is MOST likely to suggest that Jeff is an employee?

a. Jeff only works for Nova Inc.

b. Jeff uses his own tools

c. Jeff performs the services from his home

d. Jeff determines the details of HOW he performs the applicable work

BACKGROUND INFORMATION FOR QUESTIONS 49-50

lala and Ronald recently formed a corporation named R&R Inc. (or “R&R”). On December 31, 2013, R&R issued 800,000 shares of common stock to Ronald and 800,000 shares of common stock to lala

Ronald and lala each paid $0.01 per share for their stock ($0.01 equaled the per share fair market value on December 31, 2013).

Their stock is subject to a 4-year “repurchase option” (at cost) in favor of R&R. Each R&R repurchase option will “lapse” over time so that on December 31 (of 2014, 2015, 2016 and 2017), 200,000 shares will be released from the repurchase option. For example, if Ronald quits R&R before December 31, 2017, R&R can repurchase Ronald’s “unvested shares” for $0.01 per share (no matter what the fair market value is on that date).

QUESTION 49

Assume that john DID NOT file a timely “83(b) election.” On December 31, 2014, JOHN is still working at R&R and thus 200,000 of john’s 800,000 shares are “released” from the R&R repurchase option (i.e., 200,000 of JOHN shares “vest” on December 31, 2014).

On that same day, the fair market value of the R&R stock equals $10.01 per share.What 2014 income, if any, must JOHN report as a result of these events?

a. $0

b. $2,000,000

c. $2,002,000

d. $8,000,000

QUESTION 50

Assume that Ronald DID file a timely “83(b) election.” On December 31, 2014, Ronald is also still working at R&R and thus 200,000 of Ronald’s 800,000 shares are also “released” from the R&R repurchase option (i.e., 200,000 of Ronald’s shares “vest” on December 31, 2014). On that same day, the fair market value of the R&R stock equals $10.01 per share.What 2014 income, if any, must Ronald report as a result of these events?

a. $0

b. $2,000,000

c. $2,002,000

d. 8,000,000