Matilda works for a company with 1,000 employees

1. As an executive of Cherry, Inc., Ollie receives a fringe benefit in the form of annual tuition scholarships of $10,000 to each of his three children. The scholarships are paid by the company on behalf of the children of key employees directly to each child's educational institution and are payable only if the student maintains a B average.
a. The tuition payments of $30,000 may be excluded from Ollie's gross income as a scholarship.
b. The tuition payments of $10,000 each must be included in the child's gross income.
c. The tuition payments of $30,000 may be excluded from Ollie's gross income because the payments are for the academic achievements of the children.
d. The tuition payments of $30,000 must be included in Ollie's gross income.
e. None of these.

2. Theresa sued her former employer for age, race, and gender discrimination. She claimed $200,000 in damages for loss of income, $300,000 for emotional harm, and $500,000 in punitive damages. She settled the claim for $700,000. As a result of the settlement, Theresa must include in gross income:
a. $700,000.
b. $500,000.
c. $490,000 [($700,000/$1,000,000) × $700,000].
d. $0.
e. None of these.

3. Jack received a court award in a civil libel and slander suit against National Gossip. He received $120,000 for damages to his professional reputation, $100,000 for damages to his personal reputation, and $50,000 in punitive damages. Jack must include in his gross income as a damage award:
a. $0.
b. $100,000.
c. $120,000.
d. $270,000.
e. None of these.

4. Julie was suffering from a viral infection that caused her to miss work for 90 days. During the first 30 days of her absence, she received her regular salary of $8,000 from her employer. For the next 60 days, she received $12,000 under an accident and health insurance policy purchased by her employer. The premiums on the health insurance policy were excluded from her gross income. During the last 30 days, Julie received $6,000 on an income replacement policy she had purchased. Of the $26,000 she received, Julie must include in gross income:
a. $0.
b. $6,000.
c. $8,000.
d. $14,000.
e. $20,000.

5. Matilda works for a company with 1,000 employees. The company has a hospitalization insurance plan that covers all employees. However, the employee must pay the first $3,000 of his or her medical expenses each year. Each year, the employer contributes $1,500 to each employee's health savings account (HSA). Matilda's employer made the contributions in 2015 and 2016, and the account earned $100 interest in 2016. At the end of 2016, Matilda withdrew $3,100 from the account to pay the deductible portion of her medical expenses for the year and other medical expenses not covered by the hospitalization insurance policy. As a result, Matilda must include in her 2016 gross income:
a. $0.
b. $100.
c. $1,600.
d. $3,100.
e. None of these.

6. James, a cash basis taxpayer, received the following compensation and fringe benefits in the current year:
Salary $66,000
Disability income protection premiums 3,000
Long-term care insurance premiums 4,000
His actual salary was $72,000. He received only $66,000 because his salary was garnished and the employer paid $6,000 on James's credit card debt he owed. The wage continuation insurance is available to all employees and pays the employee three-fourths of the regular salary if the employee is sick or disabled. The long-term care insurance is available to all employees and pays $150 per day towards a nursing home or similar facility. What is James's gross income from the above?
a. $66,000.
b. $72,000.
c. $73,000.
d. $75,000.
e. None of these.

7. The First Chance Casino has gambling facilities, a bar, a restaurant, and a hotel. All employees are allowed to obtain food from the restaurant at no charge during working hours. In the case of the employees who operate the gambling facilities, bar, and restaurant, 60% of all of Casino's employees, the meals are provided for the convenience of the Casino. However, the hotel workers, demanded equal treatment and therefore were also allowed to eat in the restaurant at no charge while they are at work. Which of the following is correct?
a. All the employees are required to include the value of the meals in their gross income.
b. Only the restaurant employees may exclude the value of their meals from gross income.
c. Only the employees who work in gambling, the bar, and the restaurant may exclude the meals from gross income.
d. All of the employees may exclude the value of the meals from gross income.
e. None of these.

8. Ridge is the manager of a motel. As a condition of his employment, Ridge is required to live in a room on the premises so that he would be there in case of emergencies. Ridge considered this a fringe benefit, since he would otherwise be required to pay $800 per month rent. The room that Ridge occupied normally rented for $70 per night, or $2,100 per month. On the average, 90% of the motel rooms were occupied. As a result of this rent-free use of a room, Ridge is required to include in gross income.
a. $0.
b. $800 per month.
c. $2,100 per month.
d. $1,890 ($2,100 × .90).
e. None of these.

9. Heather's interest and gains on investments for the current year are as follows:

Interest on Madison County school bonds $600
Interest on U.S. government bonds 700
Interest on a Federal income tax refund 200
Gain on the sale of Madison County school bonds 500
Heather's gross income from the above is:
a. $2,000.
b. $1,800.
c. $1,400.
d. $1,300.
e. None of these.

10. George, an unmarried cash basis taxpayer, received the following amounts during 2015:

Interest on savings accounts $2,000
Interest on a State tax refund 600
Interest on City of Salem school bonds 350
Interest portion of proceeds of a 5% bank certificate of deposit purchased on July 1, 2014, and matured on June 30, 2015 250
Dividends on USG common stock 300
What amount should George report as gross income from dividends and interest for 2014?
a. $2,300.
b. $2,550.
c. $3,150.
d. $3,500.
e. None of these.

11. Tonya is a cash basis taxpayer. In 2015, she paid state income taxes of $8,000. In early 2016, she filed her 2015 state income tax return and received a $900 refund.
a. If Tonya itemized her deductions in 2015 on her Federal income tax return, she should amend her 2015 return and reduce her itemized deductions by $900.
b. If Tonya itemized her deductions in 2015 on her Federal income tax return and her itemized deductions exceeded the standard deduction by at least $900, the refund will not affect her 2016 tax return.
c. If Tonya itemized her deductions in 2015 on her Federal income tax return, she must amend her 2015 Federal income tax return and use the standard deduction.
d. If Tonya itemized her deductions in 2015 on her Federal income tax return and her itemized deductions exceeded the standard deduction by more than $900, she must recognize $900 income in 2016 under the tax benefit rule.
e. None of these.

12. Flora Company owed $95,000, a debt incurred to purchase land that serves as security for the debt.
a. If Flora had borrowed the funds from a bank, the bank accepts $85,000 in full payment of the debt, and Flora is solvent after the transfer, Flora does not recognize income, but the company must reduce the cost of the land by $10,000.
b. If Flora had borrowed the funds from a bank, and the bank accepts $85,000 in full payment of the debt, when the value of the property is $80,000, Flora can deduct a loss.
c. If Flora transfers to the bank other property, with a basis of $90,000 and a fair market value of $95,000, in full payment of the debt, Flora can recognize a $5,000 loss.
d. If the $95,000 is owed to the person who sold the property to Flora, and the creditor accepts $85,000 in full payment for the debt, Flora does not recognize gain but must reduce its basis in the land.
e. None of these.

13.Marsha is single, had gross income of $50,000, and incurred the following expenses:
Charitable contribution $2,000
Taxes and interest on home 7,000
Legal fees incurred in a tax dispute 1,000
Medical expenses 3,000
Penalty on early withdrawal of savings 250
Her AGI is:
a. $39,750.
b. $49,750.
c. $40,000.
d. $39,750.
e. None of these.

14.During 2014, the first year of operations, Silver, Inc., pays salaries of $175,000. At the end of the year, employees have earned salaries of $20,000, which are not paid by Silver until early in 2014. What is the amount of the deduction for salary expense?
a. If Silver uses the cash method, $175,000 in 2013 and $0 in 2014.
b. If Silver uses the cash method, $0 in 2013 and $195,000 in 2014.
c. If Silver uses the accrual method, $175,000 in 2013 and $20,000 in 2014.
d. If Silver uses the accrual method, $195,000 in 2013 and $0 in 2014.
e. None of these is correct.

15.Benita incurred a business expense on December 10, 2014, which she charged on her bank credit card. She paid the credit card statement which included the charge on January 5, 2015. Which of the following is correct?
a. If Benita is a cash method taxpayer, she cannot deduct the expense until 2015.
b. If Benita is an accrual method taxpayer, she can deduct the expense in 2014.
c. If Benita uses the accrual method, she can choose to deduct the expense in either 2014 or 2015.
d. Only b. and c. are correct.
e. a., b., and c. are correct.

16. Petal, Inc. is an accrual basis taxpayer. Petal uses the aging approach to calculate the reserve for bad debts. During 2015, the following occur associated with bad debts.

Credit sales $400,000
Collections on credit sales 250,000
Amount added to the reserve 10,000
Beginning balance in the reserve -0-
Identifiable bad debts during 2014 12,000
The amount of the deduction for bad debt expense for Petal for 2014 is: a. $10,000.
b. $12,000.
c. $22,000.
d. $140,000.
e. None of these.

18. Rex, a cash basis calendar year taxpayer, runs a bingo operation which is illegal under state law. During 2015, a bill designated H.R. 9 is introduced into the state legislature which, if enacted, would legitimize bingo games. In 2015, Rex had the following expenses:

Operating expenses in conducting bingo games $247,000
Payoff money to state and local police 24,000
Newspaper ads supporting H.R. 9 3,000
Political contributions to legislators who support H.R. 9 8,000
Of these expenditures, Rex may deduct:
a. $247,000.
b. $250,000.
c. $258,000.
d. $282,000.
e. None of these.

19. Andrew, who operates a laundry business, incurred the following expenses during the year.

• Parking ticket of $250 for one of his delivery vans that parked illegally.
• Parking ticket of $75 when he parked illegally while attending a rock concert in Tulsa.
• DUI ticket of $500 while returning from the rock concert.
• Attorney's fee of $600 associated with the DUI ticket.

What amount can Andrew deduct for these expenses?
a. $0.
b. $250.
c. $600.
d. $1,425.
e. None of these.

20. Terry and Jim are both involved in operating illegal businesses. Terry operates a gambling business and Jim operates a drug running business. Both businesses have gross revenues of $500,000. The businesses incur the following expenses.

Terry Jim
Employee salaries $200,000 $200,000
Bribes to police 25,000 25,000
Rent and utilities 50,000 50,000
Cost of goods sold -0- 125,000
Which of the following statements is correct?
a. Neither Terry nor Jim can deduct any of the above items in calculating the business profit.
b. Terry should report profit from his business of $250,000.
c. Jim should report profit from his business of $500,000.
d. Jim should report profit from his business of $250,000.
e. None of these.

20. Iris, a calendar year cash basis taxpayer, owns and operates several TV rental outlets in Florida, and wants to expand to other states. During 2015, she spends $14,000 to investigate TV rental stores in South Carolina and $9,000 to investigate TV rental stores in Georgia. She acquires the South Carolina operations, but not the outlets in Georgia. As to these expenses, Iris should:
a. Capitalize $14,000 and not deduct $9,000.
b. Expense $23,000 for 2015.
c. Expense $9,000 for 2015 and capitalize $14,000.
d. Capitalize $23,000.
e. None of these.

21. Priscella pursued a hobby of making bedspreads in her spare time. Her AGI before considering the hobby is $40,000. During the year she sold the bedspreads for $10,000. She incurred expenses as follows:

Supplies $4,000
Interest on loan to get business started 500
Advertising 6,500
Assuming that the activity is deemed a hobby, how should she report these items on her tax return?
a. Include $10,000 in income and deduct $11,000 for AGI.
b. Ignore both income and expenses since hobby losses are disallowed.
c. Include $10,000 in income, deduct nothing for AGI, and claim $11,000 of the expenses as itemized deductions.

22. Cory incurred and paid the following expenses:

Tax return preparation fee $ 600
Moving expenses 2,000
Investment expenses 500
Expenses associated with rental property 1,500
Interest expense associated with loan to finance tax-exempt bonds 400
Calculate the amount that Cory can deduct (before any percentage limitations).

a. $5,000.
b. $4,600.
c. $3,000.
d. $1,500.
e. None of these.

23. Robyn rents her beach house for 60 days and uses it for personal use for 30 days during the year. The rental income is $6,000 and the expenses are as follows:

Mortgage interest $9,000
Real estate taxes 3,000
Utilities 2,000
Maintenance 1,000
Insurance 500
Depreciation (rental part) 4,000

Using the IRS approach, total expenses that Robyn can deduct on her tax return associated with the beach house are:
a. $0.
b. $6,000.
c. $8,000.
d. $12,000.
e. None of these.

24. Melba incurred the following expenses for her dependent daughter during the current year:

Payment of principal on daughter's automobile loan $3,600
Payment of interest on above loan 2,900
Payment of daughter's property taxes 1,800
Payment of principal on daughter's personal residence loan 2,800
Payment of interest on daughter's personal residence loan 7,000
How much may Melba deduct in computing her itemized deductions?

a. $0.
b. $8,800.
c. $11,700.
d. $18,100.
e. None of these.

25. Velma and Bud divorced. Velma's attorney fee of $5,000 is allocated as follows:

General representation in obtaining the divorce $1,500
Services in obtaining custody of the child 900
Services in settlement of martial property 600
Determining the tax consequences of: Dependency deduction for child 700
Property settlement 1,300

Of the $5,000 Velma pays to her attorney, the amount she may deduct as an itemized deduction is:
a. $0.
b. $700.
c. $2,000.
d. $5,000.
e. None of these.

26. In January, Lance sold stock with a cost basis of $26,000 to his brother, James, for $24,000, the fair market value of the stock on the date of sale. Five months later, James sold the same stock through his broker for $27,000. What is the tax effect of these transactions?
a. Disallowed loss to James of $2,000; gain to Lance of $1,000.
b. Disallowed loss to Lance of $2,000; gain to James of $3,000.
c. Deductible loss to Lance of $2,000; gain to James of $3,000.
d. Disallowed loss to Lance of $2,000; gain to James of $1,000.
e. None of these.

27.Mary incurred a $20,000 nonbusiness bad debt last year. She also had an $8,000 long-term capital gain last year. Her taxable income for last year was an NOL of $15,000. During the current year, she unexpectedly collected $12,000 on the debt. How should Mary account for the collection?
a. $0 income
b. $8,000 income
c. $11,000 income
d. $12,000 income
e. None of these

28. Five years ago, Tom loaned his son John $20,000 to start a business. A note was executed with an interest rate of 8%, which is the Federal rate. The note required monthly payments of the interest with the $20,000 due at the end of ten years. John always made the interest payments until last year. During the current year, John notified his father that he was bankrupt and would not be able to repay the $20,000 or the accrued interest of $1,800. Tom is an accrual basis taxpayer whose only income is salary and interest income. The proper treatment for the nonpayment of the note is:
a. No deduction.
b. $3,000 deduction.
c. $20,000 deduction.
d. $21,800 deduction.
e. None of these.

29. On September 3, 2014, Able, a single individual, purchased § 1244 stock in Red Corporation from his friend Al for $60,000. On December 31, 2014, the stock was worth $85,000. On August 15, 2015, Able was notified that the stock was worthless. How should Able report this item on his 2015 tax return?
a. $85,000 capital loss.
b. $85,000 ordinary loss.
c. $50,000 ordinary loss and $35,000 capital loss.
d. $60,000 ordinary loss.
e. None of these.

30. John files a return as a single taxpayer. In 2015, he had the following items:
• Salary of $40,000.
• Loss of $65,000 on the sale of § 1244 stock acquired two years ago.
• Interest income of $6,000.
Determine John's AGI for 2014.
a. ($5,000).
b. $0.
c. $45,000.
d. $51,000.
e. None of these.

31. Bruce, who is single, had the following items for the current year:
• Salary of $80,000.
• Gain of $20,000 on the sale of § 1244 stock acquired two years earlier.
• Loss of $75,000 on the sale of § 1244 stock acquired three years earlier.
• Worthless stock of $15,000. The stock was acquired on February 1 of the prior year and became worthless on January 15 of the current year.
Determine Bruce's AGI for the current year.
a. $27,000
b. $38,000
c. $42,000
d. $47,000
e. None of these

32. In 2015, Wally had the following insured personal casualty losses (arising from one casualty). Wally also had
$42,000 AGI for the year before considering the casualty.

Fair Market Value
Asset	Adjusted Basis	Before	After	Insurance Recovery
A	$ 9,200	$ 8,000	$ 1,000	$ 2,000
B	3,000	4,000	0	4,000
C	3,700	1,700	0	900

Wally's casualty loss deduction is:
a. $1,500.
b. $1,600.
c. $4,800.
d. $58,000.
e. None of these.

33. In 2015, Morley, a single taxpayer, had an AGI of $30,000 before considering the following items:

Loss from damage to rental property ($6,000)
Loss from theft of bonds (3,000)
Personal casualty gain 4,000
Personal casualty loss (after $100 floor) (9,000)

Determine the amount of Morley's itemized deduction from the losses.
a. $0
b. $2,900
c. $5,120
d. $5,600
e. None of these

34.Wu, who is single, has the following items for 2015:

Salary $25,000
Interest income 8,000
Itemized deductions ($27,000 attributable to casualty loss) (32,000)
What is Wu's NOL for 2015?
a. $0
b. $1,000
c. $2,000
d. $25,000
e. None of these

35. Janice, single, had the following items for the year 2015:

Salary $30,000
Dividend income 8,000
Loss on § 1244 small business stock held for three years (45,000)
Total itemized deductions (5,000)

Determine Janice's net operating loss for the year 2015.

a. $0
b. $5,000
c. $15,000
d. $20,000
e. None of these

36. Stella, age 38, is single with no dependents. The following information was obtained from her personal records for the 2015 year.

Salary $30,000
Interest income 7,000
Alimony received 12,000
Individual retirement account contribution 2,000
Home mortgage interest expense 4,000
Property taxes 2,000
Personal casualty loss (after the $100 floor) 38,000
Stolen investment property 16,000
Unreimbursed employee business loss 3,000

Based on the above information, what is Stella's net operating loss for 2015?
a. $0
b. ($9,000)
c. ($10,360)
d. ($11,200)
e. None of these

37. The Maroon & Orange Gym, Inc., uses the accrual method of accounting. The corporation sells memberships that entitle the member to use the facilities at any time. A one-year membership costs $480 ($480/12 = $40 per month); a two-year membership costs $720 ($720/24 = $30 per month). Cash payment is required at the beginning of the membership period. On July 1, 2015, the company sold a one-year membership and a two-year membership. The company should report as gross income from the two contracts:
a. $1,200 in 2015.
b. $960 in 2015.
c. $180 in 2017.
d. $780 in 2016.
e. None of these.

38. Under the terms of a divorce agreement, Ron is to pay his former wife Jill $10,000 per month. The payments are to be reduced to $7,000 per month when their 15 year-old child reaches age 18. During the current year, Ron paid $120,000 under the agreement. Assuming all of the other conditions for alimony are satisfied, Ron can deduct from gross income (and Jill must include in gross income) as alimony:
a. $120,000.
b. $84,000.
c. $36,000.
d. $0.
e. None of these is correct.

39. Jay, a single taxpayer, retired from his job as a public school teacher in 2015. He is to receive a retirement annuity of $1,200 each month and his life expectancy is 180 months. He contributed $36,000 to the pension plan during his 35-year career; so his adjusted basis is $36,000. Jay collected 192 payments before he died. What is the correct method for reporting the pension income?
a. Since Jay is no longer working, none of the pension payments must be included in his gross income.
b. The first $36,000 received is a nontaxable recovery of capital, and all subsequent annuity payments are taxable.
c. The first $180,000 he receives is taxable and the last $36,000 is a nontaxable recovery of capital.
d. All of the last 12 payments he received ($14,400) are taxable.
e. None of these.

40. In 2015 Todd purchased an annuity for $150,000. The annuity is to pay him $2,500 per month for the rest of his life. His life expectancy is 100 months. Which of the following is correct?
a. Todd is not required to recognize any income until he has collected 60 payments (60 × $2,500 = $150,000).
b. If Todd collects 20 payments and then dies in 2016, Todd's estate should amend his tax returns for 2015 and 2016 and eliminate all of the reported income from the annuity for those years.
c. For each $2,500 payment received in the first year, Todd must include $1,000 in gross income.
d. For each $2,500 payment received in the first year, Todd must include $1,500 in gross income.
e. None of these.

41. Green, Inc., provides group term life insurance for all of its employees. The coverage equals twice the employee's annual salary. Sam, a vice-president, worked all year for Green, Inc., and received $200,000 of coverage for the year at a cost to Green of $1,500. The Uniform Premiums (based on Sam's age) are $.25 per month for $1,000 of protection. How much must Sam include in gross income this year?
a. $0.
b. $375.
c. $450.
d. $600.
e. None of these.