Reference no: EM132455188

Question 1 - For federal tax purposes, passive income is income derived from a(n):

Ordinary course of a business.

Passive activity.

Activity with material participation.

None of the above

Question 2 - How does the code define a capital asset?

As inventory carried by the taxpayer's business

As property used by the taxpayer in his or her business, which is depreciable

As intangible property owned by the taxpayer, regardless of whether used in his or her business or not

The code does not define what a capital asset is, only what it is not.

Question 3 - Gary and Tracy file a joint return for the 2012 tax year. Their adjusted gross income is $65,000. They had net investment income of $9,000. In 2012, they had the following interest expenses.

Personal credit card interest: $3,000

Home mortgage interest: $8,000

Interest paid on qualified education loans: $2,000

Investment interest (on loans used to buy stocks): $10,000

What is the interest deduction for Gary and Tracy for the 2012 tax year?

$19,000

$8,000

$12,000

$18,000

Question 4 - Unreimbursed expenses of employees are considered to be deductions:

For AGI.

From AGI.

For or from AGI, depending on the type of expense.

None of the above

Question 5 - Which of the following expenditures is always an itemized deduction for individual taxpayers?

Charitable contributions

State and local income taxes

Moving expenses

All of the above

Question 6 - Josh sold a piece of business equipment that had an adjusted basis to him of $50,000. In return for the equipment, Josh received $60,000 cash and a painting with a fair market value of $20,000 from the buyer. The buyer also assumed Josh's $25,000 loan on the equipment. Josh paid $5,000 in selling expenses. What is the amount of Josh's gain on the sale?

$50,000

$105,000

$75,000

$60,000

Question 7 - Under the cash method of tax accounting, income is generally recognized when:

Cash is received.

The liability arises.

There is net income to absorb the expense.

Revenue is earned.

Question 8 - Sean, a calendar year taxpayer, purchased stock on October 18, 2011 for $7,000. The stock became worthless on March 10, 2012. What is Sean's loss in 2012?

$7,000 long-term capital loss

$7,000 short-term capital loss

No loss

$7,000 itemized deduction for investments

Question 9 - Which of the following is a primary source of tax authority?

Revenue ruling

Tax court case

Temporary regulation

All of the above

Question 10 - Trade or business expenses are only deductible if they are:

Necessary and ordinary.

Reasonable in amount.

Not capital in nature.

All of the above

Question 11 - The IRS levies penalties for which of the following?

Bouncing checks

Fraud

Late filing

All of the above

Question 12 - In return for $1,000, Mr. Hand cancels Mr. Sandwich's debt of $4,000. The cancellation is not a gift, and Mr. Sandwich is neither insolvent nor bankrupt. Which of the following statements is correct?

Mr. Hand has $1,000 taxable income.

Mr. Sandwich has $3,000 of taxable income.

Mr. Sandwich has $4,000 of taxable income.

Neither Mr. Hand nor Mr. Sandwich has any taxable income from this transaction.

Question 13 - Mark Mayer, a cash basis taxpayer, leased property on June 1, 2012 to Perry Purly at $325 a month. Perry paid Mark $325 as a security deposit, which will be returned at the end of the lease. In addition, Perry paid $650 in advance rent, which is to be applied as rent to the last two months in the lease term. The lease is to run for a two-year period. What is Mark's rental income for 2012?

$1,950

$2,275

$2,600

$2,925

Question 14 - On February 10, 2012, Rose was in an automobile accident while she was going to work. The doctor advised her to stay home for six months due to her injuries. On February 25, 2012, she filed a lawsuit. On July 20, 2012, Rose returned to work. On December 15, 2012, the lawsuit was settled and she received the following amounts.

$0

$25,000

$40,000

$65,000

Question 15 - Hobby expenditures are deductible to the extent of:

Total individual gross income.

Hobby gross income.

Trade or business gross income.

Nonbusiness gross income.

Question 16 - Betty Brewster received the following interest.

Luggage gift for purchasing a four-year certificate of deposit (fair market value): $50

Interest on passbook savings account: $15

Interest on certificate of deposit: $200

Dividends on share account savings in credit union: $150

Interest on State of Mississippi bonds issued to finance state highway construction: $300

What is the amount of interest income to be included in income?

Question 17 - Are any of the following items deductible on an individual's income tax return? If so, would the item be deductible for or from AGI? Explain each item.

(a) Loss on sale of car used for personal purposes

(b) Payment of a speeding fine relating to personal activity

(c) Uninsured storm damage on personal residence.

Question 18 - Paul and Paula Parker purchased a home in Washington, D.C. for $340,000 on November 4, 2011. Paul obtained a job in Roanoke, Virginia, and on December 4, 2012, the Parkers sold their home in Washington for $570,000.

(a) How much gain can the Parkers exclude, and how much is recognized?

(b) Assume that the Parkers, instead, sold their home on December 4, 2012 for $760,000. How much gain can the Parkers exclude, and how much is recognized?

Question 19 - Bob Smith, a professional basketball player, raises Black Angus cattle under circumstances that would indicate that the activity is a hobby. His adjusted gross income for the year is $80,000, and he has $1,000 of other miscellaneous itemized deductions, all of which are subject to the 2% floor. During the taxable year, the feed for the cattle costs $3,000. The income from the sale of cattle was $2,800.

(a) Under the hobby loss rule, to what extent is the expense of $3,000 deductible?

(b) Under the 2%-of-adjusted-gross-income limitation, how much is the overall deductible amount of his itemized deductions?

Question 20 - Jake, a single individual with a salary of $40,000, paid the following expenses during the year.

Alimony: $8,000

Charitable contributions: $2,000

Casualty loss (after $100 floor): $1,000

Mortgage interest on personal residence: $3,000

Moving expenses: $1,500

Student loan interest: $1,000

Contribution to a traditional IRA: $2,000

Analyze the above expenses, and determine which ones are deductible for AGI. Please support your position.

Question 21 - A review of Bearing's Year 2 records disclosed the following tax information.

Wages $18,000

Taxable interest and qualifying dividends 4,000

Schedule C trucking business net income 32,000

Rental (loss) from residential property (35,000)

Limited partnership (loss) (5,000)

Bearing actively participated in the rental property and was a limited partner in the partnership. Bearing had sufficient amounts at risk for the rental property and the partnership. What is Bearing's Year 2 adjusted gross income?

Question 22 - Smith has an adjusted gross income (AGI) of $130,000 without taking into consideration $40,000 of losses from rental real estate activities. Smith actively participates in the rental real estate activities. What amount of the rental losses may Smith deduct in determining taxable income?

Question 23 - For the year ended December 31, Year 6, Taylor Corp. had a net operating loss of $200,000. Taxable income for the earlier years of corporate existence, computed without reference to the net operating loss, was as follows.

Taxable income:

Year 1 $5,000

Year 2 10,000

Year 3 20,000

Year 4 30,000

Year 5 40,000

What amount of net operating loss will be available to Taylor for the year ended December 31, Year 7?

Question 24 - Randolph is a single individual who always claims the standard deduction. Randolph received the following in the current year.

Wages $25,000

Unemployment compensation 6,000

Pension distribution (100% taxable) 4,000

A state tax refund from the previous year 425

What is Randolph's gross income?

Question 25 - Bob Smith purchased 30 shares of XYZ stock on April 30, 2010 for $210, and on September 1, 2010, he purchased 90 additional shares for $900. On November 8, 2010, he sold 48 shares, which could not be specifically identified, for $576, and on December 15, 2010, he sold another 25 shares for $50. What is his recognized gain or loss?