Question 1

Sixteen years ago, Ms. Herbert purchased an annuity for $96,000. Beginning in September of this year, the annuity began paying Ms. Herbert $4,000 per month for the rest of her life. Based on her age, Ms. Herbert's expected return is $300,000. How much of the $16,000 that she received this year is included in taxable income?

Accepted Answer

A)  $0 
B)  $5,120 
C)  $10,880 
D)  None of the above.

Question 2

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 these statements is true.

Question 3

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

Accepted Answer

A) True 
 B)False

Question 4

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 5

Ms. 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.  If Ms. Cowler's interests in Serzo and OTW are passive activities, compute her AGI.

Accepted Answer

A)  $68,000 
B)  $65,600 
C)  $85,000 
D)  $66,800

Question 6

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.

Accepted Answer

A) True 
 B)False

Question 7

Ms. Poppe, a single taxpayer, made three gifts this year: $6,300 cash to her niece; $50,000 cash to Yale University; and 5,000 acres of land to her brother. Ms. Poppe's tax basis in the land was $400,000, and its fair market value of date of gift was $615,000. Compute Ms. Poppe's taxable gifts for the year.

Accepted Answer

A)  $386,000 
B)  $601,000 
C)  $593,300 
D)  $637,000

Question 8

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?

Accepted Answer

A)  $20,000 long-term capital loss 
B)  $12,000 long-term capital loss 
C)  $20,000 ordinary loss 
D)  No gain or loss

Question 9

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.

Question 10

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

Question 11

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 12

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?

Accepted Answer

A)  $25,000 
B)  $14,000 
C)  $0 
D)  $68,000

Question 13

Which of the following statements about an investment in undeveloped land is false?

Accepted Answer

A)  An investor can elect to capitalize interest expense on a mortgage incurred to purchase the undeveloped land. 
B)  An investor can elect to capitalize property taxes on undeveloped land. 
C)  An investment in undeveloped land is considered a liquid asset. 
D)  Gain recognized on the sale of undeveloped land held as an investment is capital gain.

Question 14

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

Accepted Answer

A) True 
 B)False

Question 15

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 16

In 2001, Mrs. Qualley, contributed $100,000 in exchange for 1,000 shares of Little Corporation, which is a qualified small business. This year, Mrs. Qualley's only capital transaction was the sale of the 1,000 shares of Little qualified small business stock for $180,000. Compute Mrs. Qualley's income tax on her capital gain from this sale.

Accepted Answer

A)  $6,000 
B)  $11,200 
C)  $22,400 
D)  None of the above.

Question 17

If an investor sells some of the securities in a block but can't identify which ones were sold, she is presumed to have sold the securities with the latest acquisition date.

Accepted Answer

A) True 
 B)False

Question 18

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

Accepted Answer

A) True 
 B)False

Question 19

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

Accepted Answer

A) True 
 B)False

Question 20

Frederick Tims, a single individual, sold the following investment assets this year.  If Frederick's marginal tax rate on ordinary income is 33%, compute his tax attributable to the above sales.

Accepted Answer

A)  $5,250 
B)  $3,450 
C)  $2,850 
D)  $0

Exam 16: Investment and Personal Financial Planning

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

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

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.

Ms. 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. If Ms. Cowler's interests in Serzo and OTW are passive activities, compute her AGI.

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.

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.

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 an investment in undeveloped land is false?

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

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

If an investor sells some of the securities in a block but can't identify which ones were sold, she is presumed to have sold the securities with the latest acquisition date.

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

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

Frederick Tims, a single individual, sold the following investment assets this year. If Frederick's marginal tax rate on ordinary income is 33%, compute his tax attributable to the above sales.