Exam 16: Investment and Personal Financial Planning

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?

Ten years ago, Elaine paid $10 per share for 2,000 shares of Lazlo common stock. This year, Elaine learned that Lazlo is in bankruptcy and can pay only 40% of its outstanding debt. What are the tax consequences to Elaine of Lazlo's bankruptcy?

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.

Qualified dividend income earned by individual taxpayers is taxed at a maximum income tax rate of 20%.

Which of the following statements about investment property is false?

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.

Kate recognized a $25,700 net long-term capital gain and a $33,000 net short-term capital loss this year. What is her current net income tax cost or savings from her capital transactions if her marginal rate on ordinary income is 32%?

Cowler owns stock in Serzo Inc., an S corporation, and an interest in OTW Partnership. This year, Ms. Cowler had the following income and loss items. Salary $\quad$$\quad$$\quad$$\quad$$\quad$$\quad$$\quad$$\quad$ $ 66,800 Interest and dividends $\quad$$\quad$$\quad$$\quad$ 1,200 Business loss from Serzo $\quad$$\quad$ $ (19,400 ) Business income from OTW $\quad$ $ 17,000 If Ms. Cowler's interests in Serzo and OTW are passive activities, compute her AGI.

Six years ago, Mr Ahmed loaned $10,000 to a neighbor in exchange for an interest-bearing debt obligation. This year, the neighbor informed Mr Ahmed that he was defaulting on the debt. What are the tax consequences to Mr Ahmed of this bad debt?

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.

Gift tax is based on the donor's adjusted tax basis in the transferred property.

Mr Forest, a single taxpayer, recognized a $252,000 loss on the sale of Section 1244 stock. What is the character of this loss?

An individual with a 10% rate marginal tax rate on ordinary income will pay no tax on long-term capital gains.

Mr Gray recognized a $60,000 loss on sale of his entire interest in a passive activity. He had a $52,000 passive activity loss carryforward from prior years. Mr Gray can deduct the $52,000 loss in the year of sale.

As a general tax planning rule, individuals should sell assets that have declined in value prior to death and keep appreciated property to transfer to their heirs at death.

Mr and Mrs Sturm actively manage an office building that they purchased in January 1997. This year, the office building generated a $68,000 net loss. The couple's income items consisted of $72,300 salary and $14,000 interest and dividend income. How much of the rental loss is deductible this year?

The interest earned on investments in U.S. debt obligations is subject to state taxation.

Gain on sale of qualified small business stock is taxed at a maximum rate of 15%.

Two years ago, Mr Young paid $40,000 to buy a publicly traded corporate bond through his broker. The bond's stated redemption value was $45,000. This year, Mr Young sold the bond for $47,100. Compute and characterize his gain or loss on sale.