Federal Tax Exam 1 GWU Gleim

Which of the following should not be included in Mr. W’s gross income for the current year?

life insurance proceeds of $10,000 received as a beneficiary as a result of the death of Mr. W’s brother who owned the policy

In the current year, Emil Gow won $5,000 in a state lottery and spent $400 for the purchase of lottery tickets. Emil elected the standard deduction on his current-year income tax return. The amount of lottery winnings that should be included in Emil’s current-year gross income is

$5,000

Optimistic borrowed $20,000 to buy a machine for his printing business. Shortly thereafter, the economy went into a deep recession, and he was not insolvent. In the current year, the creditor reduced the debt by $10,000 so Optimistic could afford to pay it. The creditor was not the seller of the machine. As a result of this reduction of debt,

Optimistic has $10,000 of income

Photo Gray worked as an employee in a camera store and made $15,000 each year. Photo also had a 1/3 interest in a calendar-year partnership. The partnership had $9,000 ordinary income for the year, none of which was distributed to the partners. Photo was also one of two beneficiaries of a simple trust set up by her rich uncle. The trust earned $4,000 of income, and it was all distributed in Photo during the year. Photo’s gross income for the year is

$22,000

Big Bucks owns corporate bonds with detachable interest coupons. Interest of $1,000 is payable each January 1 and July 1. On December 31 of Year 1, Big Buckets gave his son the coupons for the interest payments due on January 1 and July 1 of Year 2. When the interest is received by his son in Year 2, how is it taxed?

$2,000 to Big Bucks

Carter obtained a new job in Washington DC in which she was to receive a substantially larger salary than before. Carter decided to give ½ of this salary to her spouse, and they executed a legal document under which Carter’s spouse was required to receive ½ of her salary. This document was given to Carter’s employer with directions to issue two checks each pay period, one to Carter and one to Carter’s spouse. Carter’s salary for the year is $100,000. What are the tax consequences of this transaction?

Carter must include $100,000 in gross income

Ivan Turner, a truck driver, was injured in an accident in the course of his employment in the current year. As a result of injuries sustained, he received the following payments in the current year:

Damages for back injuries $5,000

Workers’ compensation 500

Reimbursement from his employer’s accident and health plan for medical expenses paid by Turner in the current year (the employer’s contribution to the plan was $475 in the current year) 750

The amount to be included in Turner’s gross income for the current year should be

$5,000

Employee Y, who is 55 years old, is provided with $120,000 of nondiscriminatory group term life insurance by his employer. Based on the IRS uniform premium cost table, the total annual cost of a policy of this type is $9 per $1,000 of coverage. Y’s required contribution to the cost of the policy is $2 per $1,000 of coverage per year. Y was covered for the entire year. How much of the cost must Y include in his income?

$390

With regard to the inclusion of Social Security benefits in gross income for the current year, which of the following statements is true?

85% of the Social Security benefits is the maximum amount of benefits to be included in gross income.

Scholarships and fellowships awarded to degree candidates are not taxable unless they are used for

room and board

In Year 1, Lee was beginning his undergraduate education. In January of Year 1, Lee was awarded a scholarship of $500 per month from a tax-exempt educational foundation to continue as long as Lee was a full-time student until he received his degree. Lee remained a full-time student and graduated at the end of August of Year 5. Lee received the scholarship each month from January of Year 5 through August of Year 5 and spent $2,400 for tuition, fees, books, and supplies. How much must Lee include in gross income from the scholarship in Year 5?

$1,600

Sally became a contestant on a daytime television game show. Sally was lucky and won a fur coat with a retail price of $3,000 and a television with a fair market value of $400. Sally lived in Florida, so she sold the fur coat the next day but received only $2,500 for it. One month later, the television broke, and Sally discovered there was no warranty on it. How much must Sally include in gross income for the year?

$2,900

Mr. R is a self-employed over-the-road trucker who uses the cash method of accounting. Which one of the following expenses paid during the current year would be deductible on Mr. R’s Schedule C?

penalty for late delivery of cargo paid to Corporation V

The Saturn Titans of the Planetary Football League have a team spaceship. The spaceship developed a leak between the power source and living area causing dangerous fumes to enter occasionally. This was fixed at a cost of $100,000. The power source also needed an overhaul, which was done at a cost of $500,000. As a result of the overhaul, the useful life of the spaceship was not changed, but it can now make the trip to the players’ home in the United States on Earth in half the former time and at a substantial fuel savings. How should these expenditures be treated?

the repair of the leak should be deducted, while the overhaul should be capitalized

Shirley, a single taxpayer, has taxable income of $190,000. She has qualified business income (QBI) of $50,000 and no qualified property. The qualified business paid a total of $15,000 in wages. Under Sec. 199A, what is Shirley’s deductible amount for the qualified business?

$10,000

Forrest, a single taxpayer, has taxable income of $325,000. He considers investing in some entities to earn extra income. In which of the following entities should Forrest invest so that he may be able to claim the Sec. 199A deduction?

an S corporation that performs architecture services

Kevin, a single taxpayer, has a taxable income of $325,000. His share of the income from a law firm LLC is $50,000, and his share of W-2 wages is $70,000. Under Sec. 199A, what is Kevin’s deductible amount for the law firm LLC?

$0

Which of the following is not a requirement for stock to be qualified as “small business stock” (Sec. 1244)?

the stock must be voting common stock

A, B, and C formed a calendar-year partnership. Profits and losses are to be shared equally. A contributed a building to be used in the business that had an adjusted basis to A of $100,000 and a fair market value of $130,000. The partnership also assumed A’s $60,000 mortgage on the building. B and C each contributed $40,000 in cash to the partnership’s capital. What is the partnership’s basis for determining depreciation on the building?

$100,000

The holding period of property acquired by a partnership as a contribution to the contributing partner’s capital account

includes the period during which the property was held by the contributing partner

Which one of the following statements regarding a partnership’s tax year is true?

A partnership may elect to have a tax year other than the generally required tax year if the deferral period for the tax year elected does not exceed 3 months

The partnership (rather than the partner) must make elections as to the tax treatment of all the following items except

deduction or credit of foreign taxes paid

A partner’s taxable income arising from the partner’s interest in a partnership includes

The partner’s share of partnership income, whether or not distributed to the partner during the year.

Which of the following is most likely to qualify as a guaranteed payment under Sec. 707(c)?

A and B contribute cash to their partnership as a capital contribution and agree that the partnership will pay them an 8% annual payment for the use of their capital. The partnership pays the annual amount.

What is the maximum number of shareholders allowable for eligibility as an S corporation in the current year?

100

Which one of the following conditions would prevent a corporation from qualifying as an S corporation in the current year?

a corporation that has nonresidential aliens as shareholders

What is the nonseparately stated income amount of an accrual-basis, calendar-year S corporation with the following items?

Gross receipts $200,000

Interest income 12,000

Rental income 25,000

Cost of goods sold and commissions 127,000

Net long-term capital gain 17,000

Compensation paid to shareholder 10,000

$63,000

Which of the following will prevent a corporation from qualifying as an S corporation in the current year?

Having a partnership as a shareholder.

All of the following events will cause the termination of an S corporation’s S election except

Sale of stock to a resident alien.

Which of the following statements about the termination or revocation of an election to be taxed as an S corporation is true?

Having passive investment income of more than 25% of gross receipts in its initial year will not result in the termination of a corporation’s status as an S corporation.

A cash-basis taxpayer should report gross income

For the year in which income is either actually or constructively received, whether in cash or in property.

Dowd, a cash-basis engineering consultant, wanted to defer income to next year. A client who was in Dowd’s office on December 31 of the current year offered to pay his $2,000 bill immediately, but Dowd told him to pay in January. A check for $5,000 from another client arrived in the mail on December 29, and Dowd told his office manager not to deposit it until January. Dowd also told his office manager not to send a client a bill for $3,000 for services performed in the current year until January of next year. How much income from these transactions should Dowd report in the current year?

$7,000

Peter is an auto mechanic. On November 25, Year 1, he made some major auto repairs on Harry’s Mercedes. Harry is an attorney. In exchange for the service, Harry is going to draft Peter’s will and represent him when he settles on his new house. Harry will perform all of these services in Year 2. The repair bill for the Mercedes came to $1,200. Both Peter and Harry are cash-basis taxpayers. How do they report this income?

Harry reports $1,200 in Year 1, and Peter reports $1,200 in Year 2.

For a cash-basis taxpayer, gain or loss on a year-end sale of listed stock arises on the

trade date

Perry Refrigerators, an accrual-basis, calendar-year company for both tax and financial reporting, received a $600 payment from the sale of a $1,000 refrigerator in September of Year 1. The cost of the refrigerator to Perry was $550, and the refrigerator was in stock on December 31, Year 1. The refrigerator was shipped to the customer in March of Year 2 after the remaining $400 was paid. Perry reports the sale for financial purposes in Year 2. When is Perry required to report income from the sale of the refrigerator?

$1,000 in Year 2

During the current year, Mr. C sold property that had an adjusted basis to him of $19,000. The buyer assumed C’s existing mortgage of $15,000 and agreed to pay an additional $10,000 consisting of a cash down payment of $5,000, and payments of $1,000, plus interest, per year for the next 5 years. Mr. C paid selling expenses totaling $1,000. What is C’s gross profit percentage?

50%

Which of the following is the most important principle in valuing inventories?

clear reflection of income

All of the following tax years are acceptable tax years except

A fiscal year (other than a 52- to 53-week tax year) that ends on any day of the month other than the last day.