Week 1

1.

Question
:

(TCO 1) Which, if any, of the following taxes is progressive (rather than proportional)?

Student Answer:

A city's excise tax on hotel occupancy

Medicare component of FICA and FUTA
Federal gas guzzler tax
Value added taxes
None of the above

Instructor Explanation:
2.

All choices listed (AD) describe taxes that are proportional. Example 2 REF: p. 1-6

Question :

(TCO 1) Taxes levied by ALL states include

Student Answer:

general sales tax.

individual income tax.
gift tax.
gasoline excise tax.
None of the above

Instructor
Explanation:

3.

All states impose a gasoline excise tax (choice D). Most states impose individual income taxes (choice B)
and general sales taxes (choice A), and only a few states impose gift taxes (choice C). REF: p. 1-9, p. 110, p. 1-13, p. 1-14

Question :

(TCO 1) Which statement is FALSE with respect to tax treaties?

Student Answer:

There is a $1,000 penalty per failure to disclose on the tax return where there is a direct
treaty conflict for an individual.
There is a $10,000 penalty per failure to disclose on the tax return where there is a
direct treaty conflict for a corporation.
Treaties override the Code when in conflict.
Treaties may override a Code section when in conflict.

None of the above

Instructor Explanation:

4.

When there is a direct conflict, the most recent item will take precedence. REF: p. 2-18 and
2-19

Question :

(TCO 8) State income taxes generally can be characterized by

Student Answer:

a lack of withholding procedures.

a different date for filing than the federal income tax.
allowance of a deduction for federal income taxes paid.
a deduction (or a credit) for personal and dependency exemptions.
None of the above

Instructor Explanation:
5.

REF: p. 1-15

Question :

(TCO 8) During 20x2, Devon had the following transactions:

Salary: $50,000
Interest income on General Motors Corporation bonds: $1,000
Gift from parents: $40,000
Contribution to traditional IRA: $2,000
Lottery winnings: $4,000
Devon's AGI is

Student Answer:

$55,000.
$54,000.
$53,000.
$52,000.
None of the above

Instructor
Explanation:
6.

$50,000 (salary) + $1,000 (interest on GMC bonds) - $2,000 (IRA contribution) + $4,000 (lottery winnings)
= $53,000. The gift from his parents is a nontaxable exclusion. Exhibit 3-1, Exhibit 3-2, REF: p. 3-5

Question :

(TCO 8) Troy and Edie are married and under 65 years of age. During 20x2, they furnish more than half of
the support of their 18-year-old daughter, Jobeth, who lives with them. Jobeth earns $15,000 from a part-time
job, most of which she sets aside for future college expenses. Troy and Edie also provide more than half of
the support of Troy's cousin who does NOT live with them. Edie's father, who died on January 3, 20x2 at the
age of 80, has for many years qualified as their dependent. How many personal and dependency exemptions

should Troy and Edie claim?

Student
Answer:

Two
Three
Four
Five
None of the above

Instructor
Explanation:

7.

Four (Troy, Edie, Jobeth, and the father). Jobeth can be claimed because as a qualifying child, she is not
subject to the gross income test. Troy's cousin does not meet the relationship test. It is assumed that Edie's
father, as was true in the past, qualified as a dependent up to the point of death. REF: p. 3-10, p. 3-11, p. 315 to 3-17

Question :

(TCO 8) In which, if any, of the following situations may the individual NOT be claimed as a dependent of the
taxpayer?

Student
Answer:

A former spouse who lives with the taxpayer (divorce took place two years ago)
A stepmother who does not live with the taxpayer and is a citizen and resident of Peru
A married daughter who lives with the taxpayer
A half brother who does not live with the taxpayer and is a citizen and resident of Canada
An unrelated party who lives with the taxpayer

Instructor
Except in the year of divorce, a former spouse can qualify under the member of the household test (choice
Explanation: A). The stepmother meets the relationship test but not the citizenship or residence test (choice B). A married

daughter can be claimed as long as she does not violate the joint return test (choice C). In the case of the
half brother, Canada or Mexico can satisfy the residency test (choice D). REF: p. 3-13, p. 3-14
8.

Question :

(TCO 9) Aidan files his tax return 65 days after the due date. Along with the return, Aidan remits a check for
$6,000, which is the balance of the tax owed. Disregarding the interest element, Aidan's total failure to file
and to pay penalties is

Student
Answer:

$90.
$810.
$900.

$990.
None of the above
Instructor
Following the procedure set forth in Example 15, the penalty is determined as follows:
Explanation: Failure to pay penalty [1/2% x $6,000 x 3 (three months violation)]: $90

Plus: Failure to pay penalty [5% x $6,000 x 3 (three months violation)]: $900
Less: Failure to pay penalty ($90): $810
Total penalties: $900
p. 1-24 and 1-25
9.

Question :

(TCO 11) Which item may NOT be cited as a precedent?

Student Answer:

Regulations
Temporary regulations
Technical advice memoranda
U.S. Tax Court decision
None of the above

Instructor Explanation:
10.

Exhibit 2-1 REF: p. 2-6

Question :

(TCO 12) Which of the following is characteristic of the IRS audit procedure?

Student Answer:

The percentage of individual income tax returns that the IRS audits has significantly
increased over the years.
An office audit takes place at the office of the taxpayer.
One of the factors that leads to an audit is the information provided by informants.
Only IRS special agents can conduct field audits.
None of the above

Instructor Explanation: The number of returns audited by the IRS has significantly decreased (choice A). An office audit

takes place at the office of the IRS (choice B). The participation of a special agent occurs when
fraud is suspected--the type of audit involved is immaterial (choice D). REF: p. 1-21, p. 1-22

Week 2
1.

Question :

(TCO 2) The taxpayer's marginal tax bracket is 45% (combined federal and state rates).

Which would the taxpayer prefer?

Student Answer:

$1.45 taxable income rather than $1.00 tax-exempt income

$.54 tax-exempt income rather than $1.00 taxable income
$1.75 taxable income rather than $1.00 tax-exempt income
$1.00 tax-exempt income rather than $1.55 taxable income
None of the above

Instructor Explanation:
2.

(1 - .45)($1.55) = $.85. The $1.55 of taxable income is worth $.85 after taxes. REF: p. 5-2

Question :

(TCO 3) Cash received by an individual:

Student Answer:

may be included in gross income, although the payor is not legally obligated to
make the payment.
is not taxable, unless the payor is legally obligated to make the payment.
must always be included in gross income.
is not included in gross income if it was not earned.
None of the above

Instructor Explanation:
3.

See the discussion on Comm. v Duberstein. REF: p. 5-5

Question :

(TCO 3) Section 119 excludes the value of meals from the employee's gross income:

Student Answer:

whenever the employer pays for the meal and for the convenience of the
employee.
when the meals are provided for the employee on the employer's premises as a
convenience to the employee.
when the meals are provided for the employee on the employer's premises for
the convenience of the employer.
All of the above

None of the above

Instructor Explanation:
4.

REF: p. 5-16 to 5-18

Question :

(TCO 3) Mallard Auto Parts, Inc. has on hand 1,000 fenders for 1953 Studebakers.
Mallard purchased the fenders in 1965 for $30 each, and the selling price is $400
each. Only rarely does Mallard sell a Studebaker fender, and it is highly unlikely that
more than 100 of the remaining fenders will ever be sold. However, Mallard has
ample storage space and feels an obligation to Studebaker owners. Therefore, the
company will NOT salvage the fenders and will continue to sell them for $400 each.
Scrap value of the fenders is $5 each. Under the lower-of-cost-or-market inventory
method:

Student Answer:

Mallard can expense the 900 excess fenders.

Mallard can expense all 1,000 of the fenders because of the unlikelihood that
they will be sold.
the fenders should be valued at $7,500 [(100 x $30) + (900 x $5)].
the fenders should be valued at $5,000 (1,000 x $5).
None of the above

Instructor
Explanation:

5.

Under the lower-of-cost-or-market -inventory method, inventories can only be written down if
the taxpayer reduces the asking price for the goods. Therefore, Mallard Auto Parts, Inc.
should value the fenders at cost. REF p. 18-34.

Question :

(TCO 7) Which of the following statements regarding a 52-53 week tax year is NOT
correct?

Student Answer:

The year-end must be the same day of the week in all years.
Some tax years will include more than 366 calendar days.
Whether the particular tax year includes 52 weeks or 53 weeks is not elective.
All of the above are correct.
None of the above are correct.

Instructor
Explanation:

6.

The tax year-end must be the same day of the week in all years; thus, A is correct. With a 5253 week year, 371 days (53 x 7) may be included in a tax year; thus, B is correct. Whether the
tax year is 52 weeks or is 53 weeks is not elective; thus, C is correct. REF: p. 18-3

Question :

(TCO 7) Generally, deductions for additions to reserves (e.g., an allowance for

estimated warranty costs) are NOT allowed for income tax purposes because
allowing the deduction would:

Student Answer:

result in a mismatching of revenues and expenses.

violate the doctrine of constructive receipt.
reduce the costs of companies selling defective products.
violate the economic performance requirement.
None of the above

Instructor Explanation:

7.

Answer A is incorrect because the reason for creating reserves is to match revenues and
expenses better. REF: p. 18-17

Question :

(TCO 7) The installment method applies to _____ from sales of property where the
seller will receive at least one payment after the year of sale.

Student Answer:

losses
gains
gains and losses
commissions earned
interest income

Instructor Explanation:
8.

REF: p. 18-20, p. 18-21

Question :

(TCO 7) The effect of a related party installment sale of nondepreciable property at a

gain is:

Student Answer:

the buyer's basis is the same as the seller's basis.

the seller's recognized gain is all ordinary income.
the seller cannot use the installment method to report the gain.
the seller may be required to recognize installment sale gain when the related
buyer sells the property.

None of the above

Instructor
Explanation:

9.

The related parties are treated like one entity. Thus, when the second seller sells the property,
the transaction is treated as though the first seller collected on the sale. The related parties
together have the liquidity to pay the tax. There is a two-year window on this deemed payment
treatment. REF: p. 18-24

Question :

(TCO 7) The installment method CANNOT be applied to the following:

Student Answer:

Gains on property held for sale in the ordinary course of business

Depreciation recapture under Section 1245 or Section 1250
Gains on stocks or securities traded on an established market
All of the above
None of the above

Instructor Explanation:
10.

REF: p. 18-20 to p. 18-21

Question :

(TCO 2) Which of the following is an exclusion from wage and salary taxable
income?

Student Answer:

Working condition and de minimis fringes

Certain tuition deductions
Rental value of parsonages
Health savings account
All of the above

Instructor Explanation:
1.

REF: Exhibit 5-1, p. 5-4

Question :

(TCO 2) Saul is single, under age 65, and has gross income of $50,000. His bona
fide deductible expenses are as follows:

Alimony
Charitable contributions
Contribution to a traditional IRA
Expenses paid on rental property
Interest and taxes on personal residence
State income tax

$12,000
$2,000
$3,000
$5,000
$7,000
$1,200

50,000
What is Saul's AGI?

-12,000
Student Answer:

$19,800

-3,000

$30,000

-5,000

$35,000
$38,000
$42,000

2.

Question :

(TCO 2) On February 20, 20x1, Bill purchased stock in Pink Corporation (The stock
is not small business stock.) for $1,000. On May 1, 20x2, the stock became
worthless. During 20x2, Bill also had an $8,000 loss on 1244 small business stock
purchased two years ago, a $9,000 loss on a nonbusiness bad debt, and a $5,000
long-term capital gain. How should Bill treat these items on his 20x2 tax return?

Student Answer:

$4,000 long-term capital loss and $9,000 short-term capital loss

$4,000 long-term capital loss and $3,000 short-term capital loss
$8,000 ordinary loss and $3,000 short-term capital loss
$8,000 ordinary loss and $5,000 short-term capital loss
$8,000 long-term capital loss and $6,000 short-term capital loss

3.

Question :

(TCO 3) During the current year, Chuck's home was burglarized. Chuck had the
following items stolen:

Securities worth $20,000: Chuck purchased the securities 3 years ago for
$8,000.

A painting worth $10,000: Chuck purchased the painting 2 years ago for
$12,000.

An antique vase worth $800: Chuck purchased the vase 5 years ago for
$500.

Chuck's homeowner's insurance policy had a $50,000 deductible clause for thefts. If
Chuck's salary for the year was $40,000, determine the amount of Chuck's itemized
deduction as a result of the theft.
Student Answer:

$6,400

$7,200
$13,600
$14,400
None of the above

4.

Question :

(TCO 10) Benita incurred a business expense on December 10, 20x2, which she
charged on her bank credit card. She paid the credit card statement, which included
the charge on January 5, 20x3. Which of the following is correct?

Student Answer:

If Benita is a cash method taxpayer, then she cannot deduct the expense until
20x3.
If Benita is an accrual method taxpayer, then she can deduct the expense in
20x2.
If Benita uses the accrual method, then she can choose to deduct the expense
in either 20x2 or 20x3.
Only B and C are correct.
A, B, and C are correct.

5.

Question :

(TCO 10) Andrew, who operates a laundry business, incurred the following expenses
during the year:

Parking ticket of $100 for one of his delivery vans that parked illegally

Parking ticket of $50 when he parked illegally while attending a rock concert
in Tulsa

DUI ticket of $400 while returning from the rock concert

Attorney's fee of $500 associated with the DUI ticket

What amount can Andrew deduct for these expenses?

Student Answer:

$0
$50
$150

$550
$1,050

6.

Question :

(TCO 10) Jim loaned his friend Sam $8,000 several years ago. During the current
year, Sam declared bankruptcy and Jim was paid $1,000. For the current year, Jim
has a salary of $80,000 and a long-term capital gain of $15,000. What amount of net
loss may Jim deduct for the current year?

Student Answer:

$0
$3,000
$6,000
$7,000
None of the above

7.

Question :

(TCO 10) Swan Corporation incurred the following expenditures in connection with
the development of a new product:

Salaries
Materials
Advertising
Market survey

$40,000
$8,000
$3,000
$2,000

If Swan Corporation elects to expense research and experimental expenditures,

determine the amount of the deduction for research and experimental expenditures.

Student Answer:

$40,000
$48,000
$50,000
$51,000
$53,000

8.

Question :

(TCO 10) Tan Company acquires a new machine (10-year property) on January 15,

20x2 at a cost of $200,000. Tan also acquires another new machine (7-year
property) on November 5, 20x2 at a cost of $40,000. No election is made to use the
straight-line method. The company does NOT make the 179 election. Determine
the total deductions in calculating taxable income related to the machines for 20x2.

Student Answer:

$24,000
$25,716
$102,000
$132,858
None of the above

9.

Question :

(TCO 10) Alice purchased an office condominium on September 20, 20x2 for
$200,000. On October 10, she purchased business assets (7-year property) for
$80,000. Alice did NOT elect to expense any of the assets under 179, and she did
NOT elect straight-line cost recovery. Determine the cost recovery deduction for the
business assets for the current year.

Student Answer:

$2,856
$25,999
$32,002
$41,428
None of the above

10.

Question :

(TCO 2) If business property or property held for the production of income is

completely destroyed, then the loss is equal to

Student Answer:

fair value at the time of destruction.

adjusted basis at the time of destruction.
amount of insurance reimbursement.
difference between fair value of the property before and after the loss.

None of the above

Week 5
1. (TCO 4) Richard is considering making a $5,000 investment during 20x2 in a venture that its promoter promises will generate

immediate tax benefits for him. Richard, who does not anticipate itemizing his deductions, is in the 33% marginal income tax
bracket. If the investment is of a type that produces a tax credit of 30% of the amount of the expenditure, by how much will
Richard's tax liability decline because of the investment? (Points : 2)
$0

$1,500

$1,650

$3,350

None of the above

2. (TCO 4) Which, if any, of the following correctly describes the research activities credit? (Points : 2)

The research activities credit is the greater of the incremental research credit or the basic research credit.

If the research activities credit is claimed, no deduction is allowed for research and experimentation expenditures.

The credit is not available for research conducted outside of the United States.

All corporations qualify for the basic research credit.

None of the above

3. (TCO 4) Harry and Wilma are married and file a joint income tax return. On their tax return, they report $44,000 of adjusted

gross income ($20,000 salary earned by Harry and $24,000 salary earned by Wilma) and claim two exemptions for their
dependent children. During the year, they pay the following amounts to care for their 4-year-old son and 6-year-old daughter while
they work:
ABC Day Care Center
$3,200
Blue Ridge Housekeeping Services $2,000
Mrs. Mason (Harry's mother)
$1,000
Harry and Wilma may claim a credit for child and dependent care expenses of: (Points : 2)

$840.

$1,040.

$1,200.

$1,240.

None of the above

4. (TCO 4) Realizing that providing for a comfortable retirement is up to them, Jim and Julie commit to making regular

contributions to their IRAs, beginning this year. Consequently, they each make a $2,000 contribution to a traditional IRA. If their
AGI is $35,000 on their joint return, what is the amount of their credit for certain retirement plan contributions? (Points : 2)
$2,000

$800

$400

$200

None of the above

5. (TCO 4) Pat generated self-employment income in 20x2 of $65,000. The self-employment tax is: (Points : 2)

$0.

$4,972.50.

$9,184.21.

$9,945.00.

None of the above

6. (TCO 5) Which of the following statements is correct? (Points : 2)

A corporation classified as a small corporation is eligible to have the AMT calculated using the AMT provisions for

individuals.
A corporation classified as a small corporation is not subject to the AMT.

A corporation classified as a small corporation is subject to the AMT only on its adjusted current earnings.

Only A and B are correct.

A, B, and C are correct.

7. (TCO 5) In 20x2, Fred has a $75,000 loss on a passive activity for regular income tax purposes. For AMT purposes, his loss is
$65,000. The amount of the AMT adjustment resulting from the passive activity loss is: (Points : 2)

$0.

$10,000 positive adjustment.

$65,000.

None of the above

8. (TCO 5) Which of the following can produce an AMT preference rather than an AMT adjustment? (Points : 2)

Circulation expenditures

Research and experimental expenditures

Percentage depletion

Incentive stock options (ISOs)

None of the above

9. (TCO 4) Refundable tax credits include: (Points : 2)

child tax credit.

jobs credit.

educational tax credits.

earned income credit.

None of the above

10. (TCO 4) The maximum amount of the disabled access credit is: (Points : 2)

$2,000.

$3,000.

$4,000.

$5,000.

There is no maximum amount.