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Week 7 : Unit 7 - Exam 1 Time Remaining: 02:18:46 Save Answers Submit for Grading 1. Essay: On September 8, 1998, when Mark McGwire hit his 62nd home run of the year, a Busch Stadium grounds keeper, Tim Forneris, retrieved the ball. Before the big event, a collector had offered $1,000,000 for the home run ball. Immediately after the game, Forneris gave the ball to McGwire. Mr. Forneris' new possession raised some interesting tax issues. Do you believe Forneris has taxable income upon the retrieval of the ball (all-inclusive concept, found treasure)? Did he have a completed gift when he returned the ball to McGwire? Explain your responses. (Points : 15) Spellchecker 2. When a revenue ruling conflicts with a revenue procedure, which of the two tax authorities has precedence? A) Revenue ruling B) The one established first C) Revenue procedure D) The most recently established (Points : 2) A B C D 3. Your client, a Texas resident, is litigating an issue with the IRS. In similar cases, the Federal Circuit and the Fourth Circuit Court of Appeals found in favor of the government while the Fifth Circuit Court of Appeals found in favor of the taxpayer. The disputed issue is highly technical. Where should your client file his case? A) U.S. Tax Court B) U.S. District Court C) U.S. Court of Federal Claims D) U.S. Supreme Court (Points : 2) A B C D 4. The medicare tax is a: A) Progressive Tax B) Proportional Tax C) Regressive Tax D) Flat Tax (Points : 2) A B C D 5. Ryan contributes $20,000 to a church. His marginal tax rate is 30%, average tax rate is 28% and effective tax rate is 24%. After considering his tax savings, Ryan's contribution costs: A) 5,600 B) 6,000 C) 14,000 D) 14,400 (Points : 2) A B C D 6. Matt and Steve form MS partnership as equal partners. Matt contributes $50,000 while Steve contributes land with a fair market value of $50,000. During the current year, MS made distributions of $75,000 to each partner. The partnership earned net income of $300,000. What amount should Matt report on his individual tax return? A) $0 B) $50,000 C) $75,000 D) $150,000 (Points : 2) A B C D 7. Christopher, who is single and 30, maintains a home in which he, his 13-year old brother and his 21-year-old niece live. Christopher provides the majority of the support for his brother, his niece and his cousin, age 18, who is enrolled full-time at a university and lives in an apartment. While the niece and cousin have no income, his brother has a part-time job and earns $4,000 pear year. How many personal and dependency exemptions may Christopher claim? A) 1 B) 2 C) 3 D) 4 (Points : 2) A B C D 8. Which of the following is included in determining the total support of a dependent who is a qualifying relative? A) Fair rental value of lodging provided. B) Allocable portion of mortgage payment on lodging facility. C) Social Security benefits added to savings account. D) Life insurance premiums (Points : 2) A B C D 9. In 2011 Pat and Tricia (both 45 years old) file a joint tax return claiming their blind son as a dependent. Their standard deduction is: A) $11,600 B) $12,750 C) $13,050 D) $13,600 (Points : 2) A B C D 10. Anita's husband died in Year 1. She has not remarried and has maintained a home for herself and her dependent son, whose personal exemption she can claim. In the summer of Year 3, the son was killed in an automobile accident. What is Anita's filing status for Year 3? A) Single B) Married filing separate return C) Qualifying widow D) Head of Household (Points : 2) A B C D 11. In 2011, if an individual with a marginal tax rate of 15% has a long-term capital gain, it is taxed at: A) 0% B) 5% C) 10% D) 15% (Points : 2) A B C D 12. During the prior year, Andy paid $750 of estimated state income tax payments. Andy took the standard deduction in the prior year. Early in the current year, Andy received a refund of $400 of the state tax payments. Andy immediately placed an illegal bet and won an additional $1,600. Later in the year, Andy was short on money and robbed a liquor store of $5,000. What amount should Andy include in his income for the current year? A) $0 B) $1,600 C) $6,600 D) $7,000 (Points : 2) A B C D 13. Brian owns 400 shares of common stock of K Corporation. During the current year, K gives its shareholders the choice of receiving cash of $4 per share or one additional share of K common stock for each 10 shares of stock owned. The stock has a fair market value of $40 per share. Brian chooses to take the additional shares of stock. How much income does Brian have from the stock dividend? A) $0 B) $800 C) $1,600 D) $16,000 (Points : 2) A B C D 14. Pete, age 57, purchases an annuity for $33,600. Pete will receive $400 per month for the rest of his life. The expected return multiple is 20.0. At age 88, the amount that Pete must include in income is: A) $0 B) $1,680 C) $3,120 D) $4,800 (Points : 2) A B C D 15. Madison is the beneficiary of a $250,000 insurance policy on her father's life. Upon his death, she may elect to receive the proceeds in ten yearly installments of $28,000 or may take the $250,000 lump sum. She elects to take the installments. In year one, how much income does Madison recognize if she receives 12 payments? A) $0 B) $3,000 C) $25,000 D) $28,000 (Points : 2) A B C D 16. Richy 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, Richy 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? A) $1,000 to Richy and $1,000 to his son B) $2,000 to his son C) $2,000 to Richy D) None, since $2,000 was taxed to Richy in Year 1. (Points : 2) A B C D 17. Mr. Bing, a factory assembly line worker, received the following benefits from his employer: Medical insurance plan policy - $250 Christmas bonus - $125 Reimbursement for college undergraduate physics course beginning January 10, 2011, under a nondiscriminatory written plan - $450 $40,000 nondiscriminatory group term life insurance policy - $475 Membership in a local health club - $550 How much is includible in Mr. Bing's income for the current year? A) $675 B) $925 C) $1,050 D) $1,125 (Points : 2) A B C D 18. Healthsmart Ambulance requires its employees to be on 24-hour call and consequently gives them $600 per month housing allowance and a $200 per month food allowance. Ron, an employee of Healthsmart, receives a salary of $40,000 per year (this does not include the allowances). Ron will be taxed each year on A) $40,000 B) $42,400 C) $49,600 D) $52,000 (Points : 2) A B C D 19. On January 1, 2011, Gary, a vice-president of DNB, was transferred to France to work in a French subsidiary of DNB. Gary has qualified as a bona fide foreign resident of France since his arrival in the country. During 2011, Gary was paid a salary of $74,500 and had interest income of $24,000 from U.S. savings accounts. Gary's U.S. gross income for the year is: A) $0 B) $24,000 C) $74,500 D) $92,900 (Points : 2) A B C D 20. Mike exchanged land with an adjusted basis of $65,000 subject to a liability of $22,000 for $50,000 (FMV) of stock owned by Harry. Harry takes the land subject to the liability. Mike incurs $500 of selling expenses. What is the amount of Mike's realized gain on the exchange? A) ($14,000) loss B) ($14,500) loss C) $6,500 gain D) $7,000 gain (Points : 2) A B C D 21. Kerry received land as a gift from her grandfather. At the time of the gift, the land had a FMV of $65,000 and an adjusted basis of $90,000 to Kerry's grandfather. One year later, Kerry sold the land for $80,000. What was her gain or (loss) on this transaction? A) No gain or loss B) ($10,000) C) $15,000 D) $80,000 (Points : 2) A B C D 22. Jim owns 200 shares of XYZ Corp common stock with a basis of $3,500 and a FMV of $12,000. Jim receives 10 stock rights with a total FMV of $2,000 as a nontaxable distribution. Jim elects to allocate basis to the stock rights. With each stock right, Jim may acquire one share of stock for $63. Jim allows the rights to expire unused. Jim's basis in the XYZ Corp common stock after the expiration of the rights is: A) $0 B) $500 C) $3,000 D) $3,500 (Points : 2) A B C D 23. James is single and has taxable income of $19,000 without considering the sale of a capital asset in June for $17,000. The asset was purchased three years ago for $3,000. The tax liability applicable to only the capital gain is: A) $0 B) $2,100 C) $2,550 D) $3,450 (Points : 2) A B C D 24. To be tax deductible, an expense must be all of the following except: A) Ordinary and necessary B) Paid in cash C) Reasonable in amount D) An expense of the taxpayer (Points : 2) A B C D 25. Kevin owns a clothing store in New York. He is considering opening a pizza parlor in Chicago. After spending $8,600 on September 1 investigating the possibility, Kevin decides not to open the store. The maximum amount he can deduct attributable to these expenditures is: A) $0 B) $5,000 C) $5,080 D) $8,600 A B C D 26. Which one of the following expenses does not qualify as a deductible medical expense? A) Cost of long-term care for a developmentally disabled person in a relative's home B) Special school for a deaf child to learn lip reading C) Cost of elevator installed for individual who had heart bypass surgery (in excess of increase in value of individual's home) D) Cost and care of guide dogs used by a blind person (Points : 2) A B C D 27. During 2011, Anne sold several shares of stock held for investment. The following is a summary of her capital transactions for the year. What is the amount of Abby's net capital gain or loss for the year and what is the character of the gain or loss Acquired 2/15/11 6/25/09 9/25/11 Sold 7/15/11 8/2/11 12/15/11 Selling Price $2,100 $3,500 $800 Cost $1,400 $2,300 $1,000 12/28/08 6/15/11 $600 $900 (Points : 3) Spellchecker 28. In 2009, Rosemary purchased 200 shares of common stock in Nova Corp for $8,210. In 2010, Nova declared a stock dividend of one share of its common stock for each 10 shares held. This year, 2011, Nova's common stock split 2 for 1 at a time when the FMV was $90 a share. What is Rosemary's basis in each of her shares of the Nova Corporation stock if both distributions were tax-free? (Points : 3) Spellchecker 29. During 2010, Ryan and Stacy had $2,600 withheld from their pay for state income taxes. They file a joint return for 2010 and claimed the $2,600 taxes withheld as an itemized deduction on their federal tax return. Their itemized deductions total $12,200 on their 2010 tax return. Their 2011 state income tax was only $1,000 and they received a refund of $1,600 when they field their state income tax return in 2011. As a result, what amount should Ryan and Stacy include in their 2012 gross income? (Points : 3) Spellchecker 30. Ashley Corporation, an accrual-basis taxpayer that uses the calendar years as its tax year, sells memberships under contracts that range from three months to two years. Assume that Ashley Corporation sold three contracts in July 2011: one for six months costing $300, one for one year costing $500 and one for two years costing $800. What amount of income must be recognized in 2011 and 2012? (Points : 3) Spellchecker 31. Based on the following information, how much should Joe include in income on his federal tax return? $10,000 in compensatory damages and $5,000 in punitive damages awarded by a jury related to an injury from an accident. $3,500 in kickbacks received on the sale of goods $10,000 loan from the bank $2,500 increase in the value of his stock portfolio $45,000 partnership income $20,000 prize from a game show $10,000 inheritance from his grandmother (Points : 3) Spellchecker 32. In 2011, Adam made gifts of $50,000 to each of four of his friends. What is the amount of Adam's taxable gifts? (Points : 3) Spellchecker 33. John, a single 67 year old taxpayer, had the following income and deductions during 2011: Salary Interest on bank account Interest on city of Denver bond Qualified dividends Alimony paid to ex-wife Itemized Deductions Taxes withheld Calculate John's tax liability due or refund for 2011. (Points : 6) Spellchecker $60,000 $400 $500 $1,500 $2,000 $5,400 $8,000 34. Bob failed to file his 2010 tax return on a timely basis. He filed his return on September 30, 2011 and paid the amount due at that time. The return was due on April 15, 2011. He failed to make a timely extension. His 2010 return showed $150,000 of taxable income, total tax liability $31,113 and total tax withheld from his salary of $28,500. Bob sent a check for the payment of his remaining liability for 2010. Assuming the applicable interest rate is 5.5%, what is Bob's remaining obligation to the federal government? (Points : 3) Spellchecker 35. During the current year, Linus, who has a sole proprietorship, pays legal and accounting fees for the following: Services performed to resolve a business contract - $5,000 Services rendered in resolving a federal tax deficiency relating to her business - $2,000 Tax return preparation fees allocable to Schedule C - $1,800 Tax return preparation fees allocable to Schedule E - $800 Tax return preparation fees allocable to remainder of Form 1040 - $900 Legal fees incident to her divorce (no tax advice) - $2,000 What amount is deductible for AGI? (Points : 3) Spellchecker 36. During 2011 Melanie and Brian, who are married and have two dependent children, have the following income and expenses: Income Salary - $150,000 Bank account interest earned - $10,000 Short-term capital gains - $3,000 Long-term capital gains - $7,00 Expenses Doctors bills - $7,500 Hospital bill - $10,000 Prescriptions - $750 Over the counter medications - $500 Plastic surgery bill for Melanie's face lift - $8,000 Estimated state tax payments during 2011 - $2,000 Balance due on 2011 state tax return paid in April 2012 - $500 State tax withholding - $4,000 Sales tax paid - $3,700 Gift tax paid - $2,500 Property taxes on home - $8,300 Interest paid on mortgage for qualified residence - $11,000 Investment interest expense - $15,000 Cash charitable contributions - $10,000 Contribution of artwork to the local art museum for display. The adjusted basis of the art is $5,000 and the FMV is $9,500. Tax return preparation fees - $4,200 Unreimbursed employee business expenses - $5,200 Investment publications - $500 They do not make any elections regarding reclassification of items. Compute Melanie and Brian's 2011 total itemized deductions. (Points : 5) Spellchecker Time Remaining: 02:18:46 Save Answers Submit for Grading