Question 1

The tax consequences of a business activity are generally the same as the tax consequences of an investment activity.

Accepted Answer

A) True 
 B)False

Question 2

Which of the following statements about investment interest expense is true?

Accepted Answer

A) The interest is allowed as an unlimited above-the-line deduction. 
B) The interest is allowed as an unlimited itemized deduction. 
C) Nondeductible interest carries forward into future years. 
D) The interest is deductible to the extent of the individual's AGI. 
A) The interest is allowed as an unlimited above-the-line deduction. 
B) The interest is allowed as an unlimited itemized deduction. 
C) Nondeductible interest carries forward into future years. 
D) The interest is deductible to the extent of the individual's AGI.

Question 3

Ruth Darma is a shareholder who is not involved in the day-to-day activities of an S corporation.Her interest in the business is a passive activity.

Accepted Answer

A) True 
 B)False

Question 4

Which of the following statements about Section 1244 stock is true?

Accepted Answer

A) Some portion of a loss recognized on sale of Section 1244 stock is an ordinary deduction. 
B) Gain recognized on sale of Section 1244 stock is taxed at a 28% maximum rate. 
C) Individuals may purchase Section 1244 stock directly from the issuing corporation or from another shareholder. 
D) Corporations may issue an unlimited amount of Section 1244 stock. 
A) Some portion of a loss recognized on sale of Section 1244 stock is an ordinary deduction. 
B) Gain recognized on sale of Section 1244 stock is taxed at a 28% maximum rate. 
C) Individuals may purchase Section 1244 stock directly from the issuing corporation or from another shareholder. 
D) Corporations may issue an unlimited amount of Section 1244 stock.

Question 5

Three years ago,Mr.Lewis paid $40,000 for a newly issued corporate bond with a $50,000 stated redemption value.This year,he sold the bond for $43,900.Through date of sale,Mr.Lewis recognized $940 of the original issue discount (OID)as accrued interest income.Compute his gain or loss on sale.

Accepted Answer

A) $3,900 long-term capital gain 
B) $3,900 ordinary income 
C) $2,960 ordinary income 
D) $2,960 long-term capital gain 
A) $3,900 long-term capital gain 
B) $3,900 ordinary income 
C) $2,960 ordinary income 
D) $2,960 long-term capital gain

Question 6

Mr.Adams paid $53,500 in premiums on a whole life insurance policy.When he canceled the policy,he received its cash surrender value of $61,600.He must recognize $61,600 income as a result of the cancellation.

Accepted Answer

A) True 
 B)False

Question 7

Brokerage fees paid when stock is purchased are added to the basis of the stock.

Accepted Answer

A) True 
 B)False

Question 8

Mr.Vernon owns stock in two S corporations,Able Corporation and Benson Inc.This year,Mr.Vernon had the following income and loss items.   If Vernon materially participates in Able's business but not in Benson's business,compute his AGI.

Accepted Answer

A) $94,000 
B) $74,000 
C) $61,000 
D) $41,000 
A) $94,000 
B) $74,000 
C) $61,000 
D) $41,000

Question 9

Last year,Mr.Margot purchased a limited interest in a business partnership,which is his only passive activity.Last year,he was allocated $14,900 of the partnership's ordinary business loss.This year,he was allocated $7,700 of the partnership's ordinary business income.Which of the following statements is false?

Accepted Answer

A) Last year,Mr.Margot could not deduct any of his allocated partnership loss. 
B) This year,Mr.Margot can deduct $7,700 of last year's loss. 
C) Mr.Margot has a $7,200 passive activity loss carryforward into next year. 
D) None of the above statements is false. 
A) Last year,Mr.Margot could not deduct any of his allocated partnership loss. 
B) This year,Mr.Margot can deduct $7,700 of last year's loss. 
C) Mr.Margot has a $7,200 passive activity loss carryforward into next year. 
D) None of the above statements is false.

Question 10

Mr.Quinn recognized a $900 net short-term capital gain and a $1,380 long-term capital gain this year.Which of the following statements is false?

Accepted Answer

A) If Mr.Quinn's marginal tax rate on ordinary income is 12%,the total income tax on his capital gains is $108. 
B) If Mr.Quinn's marginal tax rate on ordinary income is 37%,the total income tax on his capital gains is $609. 
C) Only $1,380 of the capital gain is subject to a preferential tax rate. 
D) None of the above is false. 
A) If Mr.Quinn's marginal tax rate on ordinary income is 12%,the total income tax on his capital gains is $108. 
B) If Mr.Quinn's marginal tax rate on ordinary income is 37%,the total income tax on his capital gains is $609. 
C) Only $1,380 of the capital gain is subject to a preferential tax rate. 
D) None of the above is false.

Question 11

Cash basis individuals must accrue market discount on a bond as annual interest income over the life of the bond.

Accepted Answer

A) True 
 B)False

Question 12

Mr.Ricardo exchanged 75 shares of Haslet common stock for 516 shares of Newland common stock pursuant to a reorganization of the two corporations.His basis in the Haslet stock was $49,200,and the fair market value of the Newland stock was $138,000.Which of the following statements about the exchange is true?

Accepted Answer

A) Mr.Ricardo recognizes no gain and takes a $138,000 basis in the Newland stock. 
B) Mr.Ricardo recognizes an $88,800 gain and takes a $138,000 basis in the Newland stock. 
C) Mr.Ricardo recognizes no gain and takes a zero basis in the Newland stock. 
D) Mr.Ricardo recognizes no gain and takes a $49,200 basis in the Newland stock. 
A) Mr.Ricardo recognizes no gain and takes a $138,000 basis in the Newland stock. 
B) Mr.Ricardo recognizes an $88,800 gain and takes a $138,000 basis in the Newland stock. 
C) Mr.Ricardo recognizes no gain and takes a zero basis in the Newland stock. 
D) Mr.Ricardo recognizes no gain and takes a $49,200 basis in the Newland stock.

Question 13

Fifteen years ago,Lenny purchased an insurance policy on his own life.The policy provides a $3 million death benefit.Lenny has paid $682,000 of premiums,and the cash surrender value of the policy is $725,000.He plans to liquidate the policy to generate cash for his business.If Lenny's marginal tax rate is 35%,how much after-tax cash will the liquidation generate?

Accepted Answer

A) $725,000 
B) $709,950 
C) $682,000 
D) $471,250 
A) $725,000 
B) $709,950 
C) $682,000 
D) $471,250

Question 14

Two years ago,James loaned $60,000 to his friend.The debt is now uncollectible.If the loan created a bona fide debt,James recognizes a short-term capital loss.

Accepted Answer

A) True 
 B)False

Question 15

Ms.Mollani owns stock in two S corporations,Aloha and Honu.This year,she had the following income and loss items:
   Compute Ms.Mollani's AGI under each of the following assumptions.
a.She materially participates in Aloha's business but not in Honu's business.
b.She materially participates in Honu's business but not in Aloha's business.
c.She materially participates in both corporate businesses.
d.She does not materially participate in either business.

Accepted Answer

a.$57,000 AGI = $45,000 + $12,000 (no de

Question 16

Bess gave her grandson ten acres of undeveloped land.Bess' tax basis in the land was $35,000,and its fair market value at date of gift was $175,000.Two years after receiving the land,the grandson sold it for $200,000.Compute his recognized gain on sale.

Accepted Answer

A) $0 
B) $25,000 
C) $165,000 
D) $200,000 
A) $0 
B) $25,000 
C) $165,000 
D) $200,000

Question 17

Material participation in a business means that the individual is involved in the day-to-day operations on a regular,continuous,and substantial basis.

Accepted Answer

A) True 
 B)False

Question 18

Which of the following statements about the federal gift tax is false?

Accepted Answer

A) The tax is imposed on the donor. 
B) The tax is based on the fair market value of the gifted property. 
C) An individual can give away $10 million (adjusted annually for inflation)every year without being subject to tax. 
D) The donor's basis in the gifted property carries over to become the donee's basis. 
A) The tax is imposed on the donor. 
B) The tax is based on the fair market value of the gifted property. 
C) An individual can give away $10 million (adjusted annually for inflation)every year without being subject to tax. 
D) The donor's basis in the gifted property carries over to become the donee's basis.

Question 19

Mr.Moyer owns residential rental property.This year,he received $7,000 revenue from the tenants and incurred $14,900 rental expenses.Mr.Moyer must include $7,000 in gross income and is allowed only $7,000 of above-the-line deductions for the expenses.

Accepted Answer

A) True 
 B)False

Question 20

Individual taxpayers are not allowed to deduct capital losses in excess of capital gains.

Accepted Answer

A) True 
 B)False

The tax consequences of a business activity are generally the same as the tax consequences of an investment activity.

Which of the following statements about investment interest expense is true?

Ruth Darma is a shareholder who is not involved in the day-to-day activities of an S corporation.Her interest in the business is a passive activity.

Which of the following statements about Section 1244 stock is true?

Three years ago,Mr.Lewis paid $40,000 for a newly issued corporate bond with a $50,000 stated redemption value.This year,he sold the bond for $43,900.Through date of sale,Mr.Lewis recognized $940 of the original issue discount (OID)as accrued interest income.Compute his gain or loss on sale.

Mr.Adams paid $53,500 in premiums on a whole life insurance policy.When he canceled the policy,he received its cash surrender value of $61,600.He must recognize $61,600 income as a result of the cancellation.

Brokerage fees paid when stock is purchased are added to the basis of the stock.

Mr.Vernon owns stock in two S corporations,Able Corporation and Benson Inc.This year,Mr.Vernon had the following income and loss items. If Vernon materially participates in Able's business but not in Benson's business,compute his AGI.

Mr.Quinn recognized a $900 net short-term capital gain and a $1,380 long-term capital gain this year.Which of the following statements is false?

Cash basis individuals must accrue market discount on a bond as annual interest income over the life of the bond.

Two years ago,James loaned $60,000 to his friend.The debt is now uncollectible.If the loan created a bona fide debt,James recognizes a short-term capital loss.

Bess gave her grandson ten acres of undeveloped land.Bess' tax basis in the land was $35,000,and its fair market value at date of gift was $175,000.Two years after receiving the land,the grandson sold it for $200,000.Compute his recognized gain on sale.

Material participation in a business means that the individual is involved in the day-to-day operations on a regular,continuous,and substantial basis.

Which of the following statements about the federal gift tax is false?

Mr.Moyer owns residential rental property.This year,he received $7,000 revenue from the tenants and incurred $14,900 rental expenses.Mr.Moyer must include $7,000 in gross income and is allowed only $7,000 of above-the-line deductions for the expenses.

Individual taxpayers are not allowed to deduct capital losses in excess of capital gains.

Taxes and Taxing Jurisdictions

Policy Standards for a Good Tax

Taxes As Transaction Costs

Maxims of Income Tax Planning

Tax Research

Taxable Income From Business Operations

Property Acquisitions and Cost Recovery Deductions

Property Dispositions

Nontaxable Exchanges

Sole Proprietorships, partnerships, llcs, and S Corporations

The Corporate Taxpayer

The Choice of Business Entity

Jurisdictional Issues in Business Taxation

The Individual Tax Formula

Compensation and Retirement Planning

Tax Consequences of Personal Activities

The Tax Compliance Process

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Exam 16: Investment and Personal Financial Planning

The tax consequences of a business activity are generally the same as the tax consequences of an investment activity.

Which of the following statements about investment interest expense is true?

Ruth Darma is a shareholder who is not involved in the day-to-day activities of an S corporation.Her interest in the business is a passive activity.

Which of the following statements about Section 1244 stock is true?

Three years ago,Mr.Lewis paid $40,000 for a newly issued corporate bond with a $50,000 stated redemption value.This year,he sold the bond for $43,900.Through date of sale,Mr.Lewis recognized $940 of the original issue discount (OID)as accrued interest income.Compute his gain or loss on sale.

Mr.Adams paid $53,500 in premiums on a whole life insurance policy.When he canceled the policy,he received its cash surrender value of $61,600.He must recognize $61,600 income as a result of the cancellation.

Brokerage fees paid when stock is purchased are added to the basis of the stock.

Mr.Vernon owns stock in two S corporations,Able Corporation and Benson Inc.This year,Mr.Vernon had the following income and loss items. If Vernon materially participates in Able's business but not in Benson's business,compute his AGI.

Mr.Quinn recognized a $900 net short-term capital gain and a $1,380 long-term capital gain this year.Which of the following statements is false?

Cash basis individuals must accrue market discount on a bond as annual interest income over the life of the bond.

Two years ago,James loaned $60,000 to his friend.The debt is now uncollectible.If the loan created a bona fide debt,James recognizes a short-term capital loss.

Bess gave her grandson ten acres of undeveloped land.Bess' tax basis in the land was $35,000,and its fair market value at date of gift was $175,000.Two years after receiving the land,the grandson sold it for $200,000.Compute his recognized gain on sale.

Material participation in a business means that the individual is involved in the day-to-day operations on a regular,continuous,and substantial basis.

Which of the following statements about the federal gift tax is false?

Mr.Moyer owns residential rental property.This year,he received $7,000 revenue from the tenants and incurred $14,900 rental expenses.Mr.Moyer must include $7,000 in gross income and is allowed only $7,000 of above-the-line deductions for the expenses.

Individual taxpayers are not allowed to deduct capital losses in excess of capital gains.

Taxes and Taxing Jurisdictions

Policy Standards for a Good Tax

Taxes As Transaction Costs

Maxims of Income Tax Planning

Tax Research

Taxable Income From Business Operations

Property Acquisitions and Cost Recovery Deductions

Property Dispositions

Nontaxable Exchanges

Sole Proprietorships, partnerships, llcs, and S Corporations

The Corporate Taxpayer

The Choice of Business Entity

Jurisdictional Issues in Business Taxation

The Individual Tax Formula

Compensation and Retirement Planning

Tax Consequences of Personal Activities

The Tax Compliance Process

Filters