Question 1

Mr Vernon owns stock in two S corporations, Able Corporation and Benson Inc. This year, Mr Vernon had the following income and loss items.
Salary $\quad$$\quad$$\quad$$\quad$$\quad$$\quad$$\quad$$\quad$$\quad$$\quad$$ 74,000
Business income from Able $\quad$$\quad$$\quad$$ 20,000
Business loss from Benson $\quad$$\quad$$\quad$ $ (33,000 )
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

Question 2

Investment expenses are an itemized deduction.

Accepted Answer

A) True 
 B)False

Question 3

Plant owns and actively manages an apartment complex. This year, the complex generated a $32,790 net loss. If Ms. Plant's AGI before considering this loss is $196,100 and she owns no other passive activities, how much of the loss is deductible this year?

Accepted Answer

A)  $0 
B)  $25,000 
C)  $32,790 
D)  None of the above

Question 4

Martin received $80,000 from a $100,000 life insurance policy as an accelerated death benefit. None of the $80,000 is taxable to her.

Accepted Answer

A) True 
 B)False

Question 5

The federal taxable estate of a decedent can exceed the value of the probate estate.

Accepted Answer

A) True 
 B)False

Question 6

This year, Mr and Mrs Lebold paid $3,100 investment interest expense. They earned $4,750 investment income consisting of $1,900 interest and $2,850 qualified dividends. Which of the following statements is true?

Accepted Answer

A)  If the Lebolds elect to treat $1,200 of the qualified dividends as ordinary income not taxed at a preferential rate, they can deduct $3,100 investment interest expense. 
B)  The Lebolds can deduct $3,100 investment interest expense only if they elect to treat the $4,750 qualified dividends as ordinary income not taxed at a preferential rate. 
C)  The Lebolds can deduct $3,100 investment interest expense because their investment income exceeds $3,100. 
D)  The Lebolds' deduction for investment interest expense is limited to $1,900.

Question 7

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.

Question 8

Jane, a cash basis individual, purchased a publicly traded bond at a $6,000 market discount. Which of the following statements is true?

Accepted Answer

A)  Jane must accrue the market discount as interest income over the life of the bond. 
B)  If Jane holds the bond to maturity, she will recognize a $6,000 capital gain. 
C)  If Jane holds the bond to maturity, she will recognize $6,000 ordinary income. 
D)  None of the statements is true.

Question 9

Mr and Mrs Golding own 13,850 shares in PTJ mutual fund. This year, they received a $6,390 cash distribution from PTJ. Which of the following statements is false?

Accepted Answer

A)  Some or all of the distribution may be a capital gain distribution. 
B)  Some or all of the distribution may be a qualified dividend. 
C)  Some or all of the distribution may be ordinary income. 
D)  None of the above is false.

Question 10

Mr Johnson borrowed money to buy Chicago municipal bonds. This year, he paid $2,000 interest on his loan and earned $3,500 interest income from the bonds. None of the interest expense is deductible.

Accepted Answer

A) True 
 B)False

Question 11

This year, Mr Chester gave $50,000 to an old friend who has no legal obligation to repay the money. The entire $50,000 is a taxable gift.

Accepted Answer

A) True 
 B)False

Question 12

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.

Question 13

In 2016, Mrs Owens paid $50,000 for 3,000 shares of a mutual fund and elected to reinvest year-end dividends in additional shares. In 2016 and 2017, she received Form 1099s reporting the following.
If Mrs Owens sells her 3,390 shares in 2018 for $22 per share, compute her recognized gain.

Accepted Answer

A)  $24,580 
B)  $19,780 
C)  $16,630 
D)  $0

Question 14

Twenty years ago, Mrs Cole purchased an insurance policy on her own life. Mrs Cole died this year, and the policy paid the $300,000 death benefit to her son Jeffrey. During her life, Mrs Cole paid total premiums of $71,200 on the policy. Which of the following statements is true?

Accepted Answer

A)  Jeffrey must recognize the $300,000 payment as ordinary income. 
B)  Jeffrey must recognize $228,800 of the $300,000 payment as capital gain. 
C)  Jeffrey can exclude the $300,000 payment from gross income. 
D)  Jeffrey must recognize $228,800 of the $300,000 payment as ordinary income.

Question 15

Which of the following statements about the individual capital gains and losses is false?

Accepted Answer

A)  Gain on sale of Section 1231 depreciable real property is taxed at a 25% maximum rate. 
B)  Short-term capital gains are taxed as ordinary income. 
C)  Capital losses are deductible only against capital gains. 
D)  Nondeductible capital losses are carried forward for deduction against future capital gains.

Question 16

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 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 17

Up to $100,000 of loss recognized on the sale of Section 1244 stock by a married individual filing a joint return is characterized as ordinary loss.

Accepted Answer

A) True 
 B)False

Question 18

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

Accepted Answer

A) True 
 B)False

Question 19

Life insurance proceeds are includible in the taxable estate of the decedent if the decedent was the owner of the policy.

Accepted Answer

A) True 
 B)False

Question 20

Mollani owns stock in two S corporations, Aloha and Honu. This year, she had the following income and loss items: 
Salary $ 45,000 
Business income from Aloha $ 12,000 
Business loss from Honu $ (17,000 )
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

The answer of Mollani owns stock in two S corporations,...

Exam 16: Investment and Personal Financial Planning

Investment expenses are an itemized deduction.

Plant owns and actively manages an apartment complex. This year, the complex generated a $32,790 net loss. If Ms. Plant's AGI before considering this loss is $196,100 and she owns no other passive activities, how much of the loss is deductible this year?

Martin received $80,000 from a $100,000 life insurance policy as an accelerated death benefit. None of the $80,000 is taxable to her.

The federal taxable estate of a decedent can exceed the value of the probate estate.

This year, Mr and Mrs Lebold paid $3,100 investment interest expense. They earned $4,750 investment income consisting of $1,900 interest and $2,850 qualified dividends. Which of the following statements is true?

Jane, a cash basis individual, purchased a publicly traded bond at a $6,000 market discount. Which of the following statements is true?

Mr and Mrs Golding own 13,850 shares in PTJ mutual fund. This year, they received a $6,390 cash distribution from PTJ. Which of the following statements is false?

Mr Johnson borrowed money to buy Chicago municipal bonds. This year, he paid $2,000 interest on his loan and earned $3,500 interest income from the bonds. None of the interest expense is deductible.

This year, Mr Chester gave $50,000 to an old friend who has no legal obligation to repay the money. The entire $50,000 is a taxable gift.

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

In 2016, Mrs Owens paid $50,000 for 3,000 shares of a mutual fund and elected to reinvest year-end dividends in additional shares. In 2016 and 2017, she received Form 1099s reporting the following. If Mrs Owens sells her 3,390 shares in 2018 for $22 per share, compute her recognized gain.

Twenty years ago, Mrs Cole purchased an insurance policy on her own life. Mrs Cole died this year, and the policy paid the $300,000 death benefit to her son Jeffrey. During her life, Mrs Cole paid total premiums of $71,200 on the policy. Which of the following statements is true?

Which of the following statements about the individual capital gains and losses is false?

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

Up to $100,000 of loss recognized on the sale of Section 1244 stock by a married individual filing a joint return is characterized as ordinary loss.

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

Life insurance proceeds are includible in the taxable estate of the decedent if the decedent was the owner of the policy.