Final Exam

Jaime is the sole proprietor of a small business. In 2010, the business sold a capital asset
for a loss of $20,000. Jaime is allowed to report the capital loss on his individual income
tax return for 2010.

1. True
False

correct answer: true

A loss incurred by a proprietorship may be deductible by the owner. See page 1-17
Which trial court is appealed to the U.S. Court of Appeals (Regional Circuit)?

a. U.S. Supreme Court

b. U.S. Tax Court

c. U.S. Court of Federal Claims

2.
d. U.S. District Court

e. None of the above

correct answer: d

Of those listed, only a U.S. District Court decision is appealed to the U.S. Court of Appeals
(Regional Circuit). See Figure 2.3
3. Which of the following is considered a secondary source of the tax law?

a. U.S. Constitution

b. Legal opinions

c. Treasury Regulations

d. Judicial decisions

e. None of the above

correct answer: b

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 All of the sources listed are primary sources of the tax law except b. Legal Opinions. See
page 2-24
Any 80% or more owned domestic subsidiaries may be included in the parent
corporation's consolidated tax return.

True
4.
False

correct answer: true

Such domestic subsidiaries may be included by taxpayer election. See Example 2

Jordan is a cash basis attorney. In 2010, she performed services in connection with the
formation of a corporation and received stock with a value of $10,000 for her services. By
the end of the year, the value of the stock had decreased to $8,000. She continued to hold
the stock. Jordan must recognize $8,000 of gross income from the stock for 2010.

5.
True
False

correct answer: false

Common Grounds, Inc., an accrual basis taxpayer, leased an Expresso machine to a new
customer on December 27, 2010. The machine was to rent for $200 per month for a
period of 36 months beginning January 1, 2011. The customer was required to pay the
first and last month's rent at the time the lease was signed. The customer also was
required to pay a $300 damage deposit. Common Grounds must recognize as income
from the lease in 2010:

a. $0.

b. $200.
6.
c. $400.

d. $700.

e. None of the above.

correct answer: c

The company is required to recognize the $400 (January and December rent) because
prepaid income from rents is ineligible for deferral. The damage deposit is not income.
See page 4-12

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 On July 1, 2010, Victor leases and places in service a passenger automobile. The lease
will run for five years and the payments are $400 per month. During 2010, he uses his car
60% for business and 30% for personal activities. Assuming the dollar amount from the
IRS table is $220, determine Victor's inclusion amount.

a. $220

b. $132
7.
c. $110

d. $66

e. None of the above

correct answer: d

$220 X (6/12) X 60% = $66. See page 5-35

Craig, who is single, has a gain of $30,000 on the sale of §1244 stock (small business
stock) and a loss of $70,000 on the sale of § 1244 stock. As a result, Craig has a $40,000
ordinary loss.

8.
True
False

correct answer: false

9. Beau has three passive activities and has at-risk amounts in excess of $200,000 for each.
During the year, the activities produced the following income (losses):

Beau's suspended losses are as follows:

a. $50,000 is allocated to A; $25,000 to B.

b. $7,000 is allocated to A; $14,000 to B.

c. $14,000 is allocated to A; $7,000 to B.

d. $7,000 is allocated to A, B, and C.

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 e. None of the above.

correct answer: c

$50,000/$75,000 X $21,000 = $14,000 allocated to Activity A

$25,000/$75,000 X $21,000 = $7,000 allocated to Activity B

See page 6-20 and Example 25

Phoebe exchanges land held as an investment for land and a building owned by Frank,
her father, which she will use in her business. The realized gain of $200,000 that she has
can be postponed even though Phoebe and Frank are related parties.

True

10. False

correct answer: true

Like-kind exchanges can occur between related parties. Thus, at the date of the exchange
between Phoebe and Frank, none of Phoebe's realized gain is recognized. However, if
Frank should dispose of the land he received within the following two-year period, any of
Phoebe's postponed gain must be recognized. See page 7-23
On July 1, 2010, Justin purchased an option to buy 500 shares of Meadow, Inc. at $20 per
share. He purchased the option for $400. It was to remain in effect for five months. The
market experienced a decline during the latter part of the year, so Justin decided to let the
option lapse as of December 1, 2010. On his 2010 income tax return, what should Justin
report?

a. A $400 long-term capital loss.

b. A $400 short-term capital loss.

11.
c. A $400 § 1231 loss.

d. A $400 ordinary loss.

e. None of the above.

correct answer: b

The lapse of the option is treated as a sale or exchange by § 1234(a)(2). Therefore, a

short-term capital loss of $400 is recognized. See pages 8-9, 8-10, and Concept Summary
8.1
12. Section 1231 property generally includes unharvested crops.

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 True
False

correct answer: true

See page 8-25

When a taxpayer incorporates her business, she transfers several liabilities to the
corporation. If one of the liabilities is personal in origin, all liabilities will be treated as boot.

True
13. False

correct answer: true

One dollar of tainted liabilities causes all liabilities to be treated as boot under § 357(b).
See Example 23
A corporation borrows money to purchase State of Minnesota bonds. The interest
expense on the loan reduces taxable income but has no effect on current E & P.

14. True
False

correct answer: false

A loss realized on a sale between related parties decreases E & P.

True

15. False
status: incorrect
score: 0.0
correct answer: true
your answer: false
rejoinder: Incorrect. The loss reduces current E & P. See page 10-4 and Example 3
Tanika is a real estate developer and owns property that is treated as inventory (not a
capital asset) in her business. She contributed a parcel of this land (basis $20,000; fair
market value $24,000) to a partnership, which will also hold it as inventory. After three
years, the partnership sells the land for $30,000. The partnership will recognize a $10,000
capital gain on sale of the property.
16.
True
False

correct answer: false

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 An S corporation does not recognize gains on a distribution of property to shareholders.

True
17.
False

correct answer: false

Beatrice has been the sole shareholder of a calendar year S corporation since 1980. At
the end of 2010, Beatrice's stock basis is $22,500, and she receives a distribution of
$24,000. Corporate level accounts are computed as follows:

How much capital gain, if any, will Beatrice have?

a. $600

b. $900

c. $6,400

18. d. $7,000

e. None of the above

correct answer: b

See Concept Summary 12.1

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 State D has adopted the principles of UDITPA. Given the following transactions for the
year, determine Comp Corporation's State D payroll factor denominator.

a. $300,000

b. $500,000
19.
c. $600,000

d. $700,000

e. $800,000

correct answer: b

The payroll factor denominator is the compensation of the sales force. The denominator
does not include compensation paid to independent contractors or managers of
nonbusiness rental property. See pages 13-26 and 13-27
The ACE adjustment can not be a negative amount.

True
20. False

correct answer: false

See page 14-25

Regular tax depreciation lives may be used for AMT purposes.

True
21.
False

correct answer: true

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 Rebecca owns all of the stock of a C corporation which owns the following assets:

Her adjusted basis for her stock is $470,000. Calculate Rebecca's recognized gain or loss
and classify it as capital or ordinary if she sells her stock for $770,000.

22.
a. $300,000 ordinary income.

b. $300,000 capital gain.

c. $200,000 ordinary income and $100,000 capital gain.

d. $190,000 ordinary income and $110,000 capital gain.

e. None of the above.

correct answer: b

The sale of the stock is treated as the sale of a capital asset. Thus, Rebecca has a
recognized gain of $300,000 ($770,000 - $470,000) which is classified as a capital gain.
See page 15-24 and Example 19
23. In 2010, Ricky had the following transactions:

Ricky's AGI is:

a. $53,000.

b. $60,000.

c. $69,000.

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 d. $72,000.

e. None of the above.

correct answer: b

$70,000 (salary) - $3,000 (allowable loss on stock investment) - $7,000 (alimony

payments) = $60,000. The unused loss of $7,000 from the stock investment sale can be
carried over to 2010. The loan repayment of $10,000 is a return of capital and has no
effect on gross income. Home mortgage interest paid on a personal residence is a
deduction from AGI and has no impact on the determination of AGI. See pages 16-5, 16-
6, and Example 3
Adam was injured in an automobile accident and received $200,000 for his physical injury,
$20,000 for his loss of income, and $50,000 punitive damages. As a result of the award,
the amount Adam must include in gross income is:

a. $20,000.

b. $50,000.
24.
c. $70,000.

d. $250,000.

e. None of the above.

correct answer: b

Punitive damages are never excluded from gross income. See pages 16-33 and 16-34
25. During the year, Robert is transferred by his employer from Boston to Seattle. His
moving expenses are not reimbursed and are as follows:

His qualified moving expenses are:

a. $10,200.

b. $9,400.

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 c. $7,400.

d. $6,000.

e. None of the above.

correct answer: b

$6,000 + $2,000 + $1,400 = $9,400. No deduction is permitted for meals. See

pages 17-25, 17-26 and Example 32

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