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Prentice
Hall's Federal Taxation 2014 Corporations, 27e
Chapter
C2 Corporate Formations and Capital
Structure
1) A sole proprietor is required to use
the same reporting period for both business and individual tax information.
Answer:
TRUE
Page Ref.: C:2-3
Objective: 1
2) S corporations are flow-through
entities in which S income is allocated to shareholders.
Answer:
TRUE
Page Ref.: C:2-6
Objective: 1
3) S corporations must allocate income to
shareholders based on their proportionate stock ownership.
Answer:
TRUE
Page Ref.: C:2-6
Objective: 1
4) The check-the-box regulations permit an
LLC to be taxed as a C corporation.
Answer:
TRUE
Page Ref.: C:2-8
Objective: 2
5) There are no tax consequences of a
partnership converting to a C corporation.
Answer:
FALSE
Page Ref.: C:2-9
Objective: 3
6) Section 351 applies to an exchange if
the contributing shareholders own more than 50% of a corporation's stock after
the transfer.
Answer:
FALSE
Page Ref.: C:2-12 and C:2-13
Objective: 4
7) The transferor's basis for any noncash
boot property received in a Sec. 351 transaction is the boot's FMV reduced by
any unrecognized gain.
Answer:
FALSE
Page Ref.: C:2-18
Objective: 4
8) A corporation must recognize a loss
when transferring noncash boot property that has declined in value and its
stock to a transferor as part of a Sec. 351 exchange.
Answer:
FALSE
Page Ref.: C:2-21
Objective: 4
9) If a corporation's total adjusted bases
for all properties transferred exceed the total FMV of the properties, the
corporation's bases in the property is limited to FMV if no election is made.
Answer:
TRUE
Page Ref.: C:2-21 and C:2-22
Objective: 4
10) The assignment of income doctrine does
not apply if the transferor in a Sec. 351 exchange in which no gain is otherwise
recognized transfers substantially all the assets and liabilities of the
transferor's trade or business to the controlled corporation.
Answer:
TRUE
Page Ref.: C:2-27
Objective: 4
11) Any losses on the sale of Section 1244
stock are ordinary.
Answer:
FALSE
Page Ref.: C:2-32 and C:2-33
Objective: 6
12) Upon formation of a corporation, its
assets have the same bases for book and tax purposes.
Answer:
FALSE
Page Ref.: C:2-36
Objective: 4
13) Business assets of a sole
proprietorship are owned by
A) a member.
B) an individual.
C) a partner.
D) a stockholder.
Answer:
B
Page Ref.: C:2-2
Objective: 1
14) Identify which of the following
statements is false.
A) A solely owned corporation is a sole
proprietorship.
B) A sole proprietorship is a separate
taxable entity.
C) A sole proprietor is considered to be
an employee of the business.
D) All of the above are false.
Answer:
D
Page Ref.: C:2-3
Objective: 1
15) Which of the following is an advantage
of a sole proprietorship over other business forms?
A) tax-exempt treatment of fringe benefits
B) the deduction for compensation paid to
the owner
C) low tax rates on dividends
D) ease of formation
Answer:
D
Page Ref.: C:2-3
Objective: 1
16) Which of the following statements
about a partnership is true?
A) A partnership is a taxpaying entity.
B) Partners are taxed on distributions
from a partnership.
C) Partners are taxed on their allocable
share of income whether it is distributed or not.
D) Partners are considered employees of
the partnership.
Answer:
C
Page Ref.: C:2-4
Objective: 1
17) Demarcus is a 50% partner in the DJ
partnership. DJ has taxable income for the year of $200,000. Demarcus received
a $75,000 distribution from the partnership. What amount of income related to
DJ must Demarcus recognize?
A) $200,000
B) $75,000
C) $100,000
D) $37,500
Answer:
C
Page Ref.: C:2-4; Example C:2-3
Objective: 1
18) Which of the following statements is incorrect?
A) Limited partners' liability for
partnership debt is limited to their amount of investment.
B) In a general partnership, all partners
have unlimited liability for partnership debts.
C) In a limited partnership, all partners
participate in managerial decision making.
D) All of the above are correct.
Answer:
C
Page Ref.: C:2-4
Objective: 1
19) Identify which of the following
statements is true.
A) Regular corporation and C corporation
are synonymous terms.
B) Regular corporation and S corporation
are synonymous terms.
C) A partner is generally considered to be
an employee of the partnership.
D) All of the above are false.
Answer:
A
Page Ref.: C:2-5
Objective: 1
20) Which of the following statements is
correct?
A) An owner of a C corporation is taxed on
his or her proportionate share of earnings.
B) S shareholders are only taxed on distributions.
C) S shareholders are taxed on their
proportionate share of earnings that are distributed.
D) S shareholders are taxed on their
proportionate share of earnings whether or not
distributed.
Answer:
D
Page Ref.: C:2-6 and C:2-7
Objective: 1
21) Identify which of the following
statements is true.
A) C corporation operating losses are
deductible by the individual shareholders.
B) If a C corporation does not distribute
its income to its shareholders annually, double taxation cannot occur.
C) Capital losses incurred by a C
corporation can be used to offset the corporation's ordinary income.
D) All of the above are false.
Answer:
D
Page Ref.: C:2-6
Objective: 1
22) Bread Corporation is a C corporation
with earnings of $100,000. It paid $20,000 in dividends to its sole
shareholder, Gerald. Gerald also owns 100% of Butter Corporation, an S
corporation. Butter had net taxable income of $80,000 and made a $15,000
distribution to Gerald. What income will Gerald report from Bread and Butter's
activities?
A) $35,000
B) $95,000
C) $100,000
D) $180,000
Answer:
C
Explanation: C) ($80,000 S corporation income + $20,000
dividends)
Page Ref.: C:2-6
Objective: 1
23) Which of the following statements is incorrect?
A) S corporations must allocate income and
expenses to their shareholders based on their proportionate ownership interest.
B) The number of S corporation
shareholders is unlimited.
C) S corporation income is taxed to
shareholders when earned.
D) S corporation losses can offset
shareholder income from other sources.
Answer:
B
Page Ref.: C:2-6
Objective: 1
24) Which of the following statements is
true?
A) Shareholders in a C corporation can use
C corporation losses to offset shareholder income from other sources.
B) C corporation losses remain in the C
corporation and can offset capital gain income from other years.
C) C corporation shareholders are taxed
based on their proportionate share of income.
D) Distributions of C corporation income
are not taxable.
Answer:
B
Page Ref.: C:2-6
Objective: 1
25) Identify which of the following
statements is false.
A) The check-the-box regulations permit an
LLC to be taxed as a C corporation.
B) Under the check-the-box regulations, an
LLC that has only two members (owners) must be taxed as a partnership.
C) A business need not be incorporated
under state or federal law to be taxed as a corporation.
D) Once an election is made to change its
classification, an entity cannot change again for 60 months.
Answer:
B
Page Ref.: C:2-8
Objective: 2
26) Identify which of the following
statements is true.
A) Under the check-the-box regulations, an
LLC that has one member (owner) may be disregarded as an entity separate from
its owner.
B) An unincorporated business may not be
taxed as a corporation.
C) A new LLC that is owned by four members
elects to be taxed under its default classification (as a partnership) in its
first year of operations. The entity is prohibited from changing its tax
classification at any time in the future.
D) All of the above are false.
Answer:
A
Page Ref.: C:2-8
Objective: 2
27) Three members form an LLC in the
current year. Which of the following statements is incorrect?
A) The LLC's default classification under
the check-the-box rules is as a partnership.
B) The LLC can elect to have its default
classification ignored.
C) The LLC can elect to be taxed as a C
corporation with no special tax consequences.
D) If the LLC elects to use its default
classification, it can elect to change its status to being taxed as a C
corporation beginning with the third tax year after the initial classification.
Answer:
D
Page Ref.: C:2-8 and C:2-9
Objective: 2
28) Identify which of the following
statements is true.
A) The exchange of stock for services
rendered is not a taxable transaction.
B) The repeal of Sec. 351 would result in
more existing businesses being incorporated.
C) Section 351 was enacted to allow
taxpayers to incorporate without incurring adverse tax consequences.
D) All of the above are false.
Answer:
C
Page Ref.: C:2-12
Objective: 4
29) Identify which of the following
statements is true.
A) Section 351 applies exclusively to the
formation of a new corporation.
B) Section 351 applies to property
transfers in exchange for stock.
C) Section 351 only applies to individual
transferors.
D) All of the above are false.
Answer:
B
Page Ref.: C:2-12
Objective: 4
30) For Sec. 351 purposes, the term
"property" does not include
A) cash.
B) accounts receivable.
C) inventory.
D) services rendered.
Answer:
D
Page Ref.: C:2-12 and C:2-13
Objective: 4
31) Rose and Wayne form a new corporation.
Rose contributes cash for 85% of the stock and Wayne contributes services for
15% of the stock. The tax effect is
A) Rose and Wayne must recognize their
realized gains, if any.
B) Wayne must report the FMV of the stock
received as capital gain.
C) Rose and Wayne are not required to
recognize their realized gains.
D) Wayne must report the FMV of the stock
received as ordinary income.
Answer:
D
Page Ref.: C:2-13; Example C:2-12
Objective: 4
32) Identify which of the following
statements is true.
A) A transferor's gain or loss that goes
unrecognized when Sec. 351 applies is permanently exempt from taxation.
B) If a taxpayer transfers property and
services as part of a transaction meeting the Sec. 351 requirements, all of the
stock received is counted in determining whether the property transferors have
acquired control.
C) If a taxpayer transfers property and
services as part of a transaction meeting the Sec. 351 requirements, the
nonrecognition of gain or loss will apply to the services.
D) All of the above are false.
Answer:
B
Page Ref.: C:2-14
Objective: 4
33) Jermaine owns all 200 shares of Peach
Corporation stock valued at $50,000. Kenya, a new shareholder, receives 200
newly issued shares from Peach Corporation in exchange for inventory with an
adjusted basis of $40,000 and an FMV of $50,000. Which of the following
statements is correct?
A) No gain will be recognized by Kenya.
B) The transaction results in $10,000 of
ordinary income for Kenya.
C) The transaction results in $10,000 of
capital gain for Kenya.
D) Kenya may defer the recognition of any
tax until the stock is sold.
Answer:
B
Page Ref.: C:2-15; Example C:2-19
Objective: 4
34) Identify which of the following
statements is true.
A) To qualify for Sec. 351 treatment,
control is defined as more than 50% ownership of the voting stock, and more
than 50% of all other classes of stock.
B) If a shareholder receives stock with an
FMV greater than the FMV of the property exchanged in a Sec. 351 transaction,
the excess FMV may be considered a gift from one shareholder to another
shareholder.
C) Only transfers to newly created
corporations qualify for Sec. 351 treatment.
D) All of the above are false.
Answer:
B
Page Ref.: C:2-15
Objective: 4
35) Barry, Dan, and Edith together form a
new corporation; Barry and Dan each contribute property in exchange for stock.
Within two weeks after the formation, the corporation issues additional stock
to Edith in exchange for property. Barry and Dan each hold 10,000 shares and
Edith will receive 9,000 shares. Which transactions will qualify for
nonrecognition?
A) Only the first transaction will qualify
for nonrecognition.
B) Only the second transaction will
qualify for nonrecognition.
C) Because of the step transaction doctrine,
neither transaction will qualify.
D) Both transactions will qualify under
Sec. 351 if they are part of the same plan of incorporation.
Answer:
D
Page Ref.: C:2-16; Example C:2-22
Objective: 4
36) In accordance with the rules that
apply to corporate formation, which one of the following features does not
make an issue of preferred stock "nonqualified"?
A) The shareholder can require the
corporation to redeem the stock.
B) The dividend rate on the stock may not
vary with interest rates, commodity prices, or other similar indices.
C) The corporation is either required to
redeem the stock or is likely to exercise a right to redeem the stock.
D) The stock is limited and preferred as
to dividends.
Answer:
B
Page Ref.: C:2-16
Objective: 4
37) Under Sec. 351, corporate stock may
include all of the following except
A) voting stock.
B) nonvoting stock.
C) stock warrants.
D) qualified preferred stock.
Answer:
C
Page Ref.: C:2-16
Objective: 4
38) Matt and Sheila form Krupp
Corporation. Matt contributes property with an FMV of $55,000 and a basis of
$35,000. Sheila contributes property with an FMV of $75,000 and a basis of
$40,000. Matt sells his stock to Paul shortly after the exchange. The
transaction will
A) not qualify under Sec. 351.
B) qualify under Sec. 351 if Matt can show
that the sale to Paul was not part of a prearranged plan.
C) qualify with respect to Sheila under
Sec. 351 whether Matt qualifies or not.
D) qualify under Sec. 351 only if an
advance ruling has been obtained.
Answer:
B
Page Ref.: C:2-16
Objective: 4
39) Brad forms Vott Corporation by
contributing equipment, which has a basis of $50,000 and an FMV of $40,000 in
exchange for Vott stock. Brad also contributes $5,000 in cash. If the
transaction meets the Sec. 351 control and ownership tests, what are the tax
consequences to Brad?
A) He recognizes a $5,000 loss.
B) He recognizes a $5,000 gain and a
$10,000 loss.
C) He recognizes neither a gain nor a
loss.
D) He recognizes a $10,000 loss.
Answer:
C
Explanation: C) Losses are not recognized in a Sec. 351
transaction.
Page Ref.: C:2-16 and C:2-17
Objective: 4
40) If an individual transfers an ongoing
business to a corporation in a Sec. 351 exchange, the individual must recognize
any realized gain
A) only if the adjusted basis of the
property transferred is less than the FMV of the stock received.
B) if the transferor receives property
other than stock.
C) if the FMV of the property exchanged
exceeds the FMV of the stock received.
D) both A and B above
Answer:
B
Page Ref.: C:2-17
Objective: 4
41) Carmen and Marc form Apple
Corporation. Carmen transfers land that is Sec. 1231 property, with an adjusted
basis of $18,000 and an FMV of $20,000 in exchange for one-half of the Apple
Corporation stock. Marc transfers equipment that originally cost $28,000 on
which he has taken $5,000 in depreciation deductions. The equipment has an FMV
of $25,000 and he receives one-half of the stock and a $5,000 short-term note.
The transaction meets the requirements of Sec. 351. Which statement below is
correct?
A) There is no recognized gain or loss.
B) Carmen recognizes a $2,000 Sec. 1231
gain and Marc recognizes $5,000 as ordinary income.
C) Carmen recognizes a $2,000 Sec. 1231
gain and Marc recognizes a $5,000 Sec. 1231 gain.
D) Carmen recognizes no gain and Marc
recognizes $2,000 as ordinary income.
Answer:
D
Explanation: D) Marc has a $2,000 realized gain [($20,000
FMV stock + $5,000 FMV note) - ($28,000 cost - $5,000 depreciation)], all of
which is recognized because he received $5,000 of boot in the form of a
short-term note. The gain is ordinary income under Sec. 1245.
Page Ref.: C:2-17
Objective: 4
42) Identify which of the following
statements is true.
A) The definition of stock under Sec. 351
includes stock rights and warrants.
B) The receipt of property other than
stock by the transferor will trigger the recognition of gain or loss
under Sec. 351.
C) The character of the gain recognized by
the transferor when boot is received in a Sec. 351 transaction depends on the
type of boot received.
D) All of the above are false.
Answer:
D
Page Ref.: C:2-16 and C:2-17
Objective: 4
43) Identify which of the following
statements is true.
A) To determine a shareholder's basis in a
single class of stock received in a Sec. 351 exchange, the FMV of the stock
received must be known.
B) If more than one asset is transferred
by the transferor in a Sec. 351 nonrecognition transaction, the transferor is
assumed to have received a proportionate share of the stock, cash, and other
boot property for each property transferred based upon the assets' relative
FMVs.
C) The transferor's basis for any noncash
boot property received in a Sec. 351 transaction is the boot's FMV reduced by
any unrecognized gain.
D) All of the above are false.
Answer:
B
Page Ref.: C:2-17 and C:2-18
Objective: 4
44) Identify which of the following
statements is true.
A) If stock and boot property are both
received in a Sec. 351 exchange, the transferor must allocate the total basis
in the contributed property between the stock and boot property based on the
relative FMVs of the stock and the boot property.
B) The adjusted basis of stock received in
a Sec. 351 transaction is computed by deducting the deferred loss from the FMV
of the stock received.
C) The holding period for stock received in
a Sec. 351 transaction in exchange for a capital asset begins on the day after
the date of the exchange.
D) All of the above are false.
Answer:
D
Page Ref.: C:2-18 and C:2-19
Objective: 4
45) Jerry transfers two assets to a
corporation as part of a Sec. 351 exchange. The first asset has an adjusted
basis of $70,000 and an FMV of $50,000. The second asset has an adjusted basis
of $70,000 and an FMV of $150,000. The FMV of the stock received is $180,000,
and he also receives $20,000 cash. The realized and recognized gain on the
second asset is
A) $80,000 realized; $20,000 recognized.
B) $80,000 realized; $15,000 recognized.
C) $20,000 realized; $10,000 recognized.
D) $10,000 realized; $10,000 recognized.
Answer:
B
Explanation: B)
1st Asset
|
2nd Asset
|
Total
|
|
FMV
|
$50,000
|
$150,000
|
=
$200,000
|
Minus: adjusted basis
|
(
70,000)
|
( 70,000)
|
=
( 140,000)
|
Realized gain (loss)
|
($20,000)
|
$ 80,000
|
=
$ 60,000
|
Allocation of boot
|
$ 5,000a
|
$ 15,000b
|
=
$ 20,000
|
Recognized gain
|
$ -0-
|
$ 15,000
|
=
$ 15,000
|
a 50/200 × $20,000
b150/200 × $20,000
Page Ref.: C:2-17 and C:2-18
Objective: 4
46) Max transfers the following properties
to a newly created corporation for $90,000 of stock and $10,000 cash in a
transaction that qualifies under Sec. 351.
Asset One
|
Asset Two
|
Asset Three
|
|
FMV
Basis
|
$30,000
35,000
|
$45,000
40,000
|
$25,000
20,000
|
Max's recognized gain is
A) $3,000.
B) $5,000.
C) $7,000.
D) $10,000.
Answer:
C
Explanation: C)
Asset One
|
Asset Two
|
Asset Three
|
Total
|
|
FMV
|
$
30,000
|
$
45,000
|
$
25,000
|
= $100,000
|
Minus: Adj. Basis
|
(35,000)
|
(40,000)
|
(20,000)
|
=
(95,000)
|
Realized gain (loss)
|
($ 5,000)
|
$ 5,000
|
$ 5,000
|
=
$ 5,000
|
Boot
|
$ 3,000a
|
$ 4,500b
|
$ 2,500c
|
=
$10,000
|
Recognized gain (loss)
|
-0-
|
$ 4,500
|
$ 2,500
|
= $ 7,000
gain
|
a (30/100 × $10,000)
b (45/100 × $10,000)
c (25/100 × $10,000)
Page Ref.: C:2-17 and C:2-18
Objective: 4
47) Cherie transfers two assets to a
newly-created corporation. The first asset has an adjusted basis of $40,000 and
a FMV of $50,000. The second asset has an adjusted basis of $35,000 and a FMV
of $25,000. Cherie receives stock with FMV of $66,000 and $9,000 cash. Cherie
must recognize a gain of
A) $10,000.
B) $6,000.
C) $5,000.
D) $4,000.
Answer:
B
Explanation: B)
1st Asset
|
2nd Asset
|
Total
|
|
FMV
|
$50,000
|
$ 25,000
|
= $ 75,000
|
Minus: Adj. basis
|
( 40,000)
|
( 35,000)
|
= ( 75,000)
|
Realized gain (loss)
|
($10,000)
|
$ 10,000
|
= $ -0-
|
Allocation of boot
|
$ 6,000a
|
$ 3,000b
|
=
$
9,000
|
Recognized gain (loss)
|
$ 6,000
|
$ -0-
|
=
$
6,000
|
a (2/3 × $9,000)
b (1/3 × $9,000)
Page Ref.: C:2-17 and C:2-18
Prentice
Hall's Federal Taxation 2014 Individuals, 27e (Rupert)
Chapter
I2 Determination of Tax
1) Gross income is income from whatever
source derived less exclusions.
Answer:
TRUE
Page Ref.: I:2-3
Objective: 1
2)
Although exclusions are usually not reported on an individual's income tax
return, interest income on state and local government bonds must be reported on
the tax return.
Answer:
TRUE
Explanation: See Additional Comment, p. I:2-3.
Page Ref.: I:2-3
Objective: 1
3) Generally, deductions for (not
from) adjusted gross income are personal expenses specifically allowed by tax
law.
Answer:
FALSE
Explanation: Personal expenses, if deductible, are
generally from AGI deductions.
Page Ref.: I:2-4
Objective: 1
4) Generally, itemized deductions are
personal expenses specifically allowed by the tax law.
Answer:
TRUE
Page Ref.: I:2-4
Objective: 1
5) Taxpayers have the choice of claiming
either the personal and dependency exemption or the standard deduction.
Answer:
FALSE
Explanation: Taxpayers claim the greater of itemized
deductions or the standard deduction. In
addition, taxpayers will reduce taxable income by personal and dependency
exemptions.
Page Ref.: I:2-5
Objective: 1
6) Refundable tax credits are allowed to
reduce or totally eliminate a taxpayer's tax liability but any credits in
excess of the tax liability are lost.
Answer:
FALSE
Explanation: Refundable tax credits may reduce the tax
liability to zero and, if some credit still remains, are refundable or paid by
the government to the taxpayer.
Page Ref.: I:2-6
Objective: 1
7) Nonrefundable tax credits are allowed
to reduce or totally eliminate a taxpayer's tax liability but any credits in
excess of the tax liability are lost.
Answer:
TRUE
Page Ref.: I:2-6
Objective: 1
8) The standard deduction is the maximum amount of itemized deductions which may be claimed by a taxpayer, and is based on an individual's filing status, age, and vision.
Answer:
FALSE
Explanation: The standard deduction, set by Congress, is
not directly related to itemized deductions.
It is the alternative to itemized deductions.
Page Ref.: I:2-10
Objective: 2
9) Nonresident aliens are allowed a full
standard deduction.
Answer:
FALSE
Explanation: The standard deduction is not available to
nonresident aliens.
Page Ref.: I:2-12
Objective: 2
10) The standard deduction may not be
claimed by one married taxpayer filing a separate return if the other spouse
itemizes deductions.
Answer:
TRUE
Page Ref.: I:2-12
Objective: 2
11) An individual who is claimed as a
dependent by another person is not entitled to a personal exemption on his or
her own return.
Answer:
TRUE
Page Ref.: I:2-12
Objective: 2
12) A qualifying child of the taxpayer
must meet the gross income test.
Answer:
FALSE
Explanation: The gross income test only applies to
potential dependents who are not a qualifying child of the taxpayer.
Page Ref.: I:2-13 and I:2-14
Objective: 2
13) For purposes of the dependency
exemption, a qualifying child must be under age 19, a full-time student under
age 24, or a permanently and totally disabled child.
Answer:
TRUE
Page Ref.: I:2-14
Objective: 2
14) For purposes of the dependency
exemption, a qualifying child may not provide more than one-half of his or her
own support during the year.
Answer:
TRUE
Page Ref.: I:2-14
Objective: 2
15) An individual may not qualify for the
dependency exemption as a qualifying child but may still qualify as a
dependent.
Answer:
TRUE
Explanation: A son or daughter, or certain other family
members, may exceed the age 19 or age 24 and full-time student status but may
still meet the non-qualifying child criteria.
Page Ref.: I:2-14
Objective: 2
16) One requirement for claiming a
dependent other than a qualifying child is that the taxpayer provides more than
50 percent of the dependent's support (assuming it is not a multiple support
agreement situation).
Answer:
TRUE
Page Ref.: I:2-15
Objective: 2
17) When two or more people qualify to
claim the same person as a dependent, a taxpayer who is entitled to the exemption
through the qualified child rules has priority over a taxpayer who meets the
requirements for other relatives.
Answer:
TRUE
Page Ref.: I:2-16
Objective: 2
18) The person claiming a dependency
exemption under a multiple support declaration must provide more than 25% of
the dependent's support.
Answer:
FALSE
Explanation: The minimum support percentage for a person
claiming the dependency exemption under the multiple support agreement is 10%.
Page Ref.: I:2-17
Objective: 2
19) Generally, in the case of a divorced
couple, the parent who has physical custody of a child for the greater part of
the year is entitled to the dependency exemption.
Answer:
TRUE
Page Ref.: I:2-16
Objective: 2
20) A child credit is a partially
refundable credit.
Answer: TRUE
Page Ref.: I:2-20
Objective: 2
21) A married couple need not live
together to file a joint return.
Answer:
TRUE
Page Ref.: I:2-21
Objective: 3
22) A widow or widower may file a joint
tax return and claim an exemption for the deceased spouse in the year of the
spouse's death as long as the surviving spouse does not remarry before the end
of the year.
Answer:
TRUE
Explanation: A joint return may be filed in the year of
death with the deceased spouse getting a full personal exemption.
Page Ref.: I:2-22
Objective: 3
23) An unmarried taxpayer may file as head
of household if he maintains a home for his qualifying child.
Answer:
TRUE
Page Ref.: I:2-23
Objective: 3
24) For 2013, unearned income in excess of
$2,000 of a child under age 18 is generally taxed at the parents' rate.
Answer:
TRUE
Page Ref.: I:2-25
Objective: 3
25) Kelly is age 23 and a full-time
student with interest and dividend income of $2,600 in the current year. The total cost of her support for the year is
$19,000. She is not subject to the
kiddie tax.
Answer:
FALSE
Explanation: She meets the age and student status to be
subject to kiddie tax, and her unearned income exceeds the $2,000 threshold.
Page Ref.: I:2-25
Objective: 3
26) If a 13-year-old has earned income of
$500 and unearned income of $2,500, all of the income can be reported on the
parent's return.
Answer:
FALSE
Explanation: To be eligible, the child's income must come
solely from interest and dividends.
Page Ref.: I:2-26
Objective: 3
27) Suri, age 8, is a dependent of her
parents and has unearned income of $6,000.
She must file her own tax return.
Answer:
FALSE
Explanation: A dependent earning solely unearned income
not exceeding $9,500 may report unearned income on the parents' return.
Page Ref.: I:2-26
Objective: 3
28) The only business entity that pays
income taxes is the C corporation.
Answer:
TRUE
Explanation: S corporations and partnerships are both
flow-through entities.
Page Ref.: I:2-27 through I:2-29
Objective: 4
29) A $10,000 gain earned on stock held 13
months is taxed in a more favorable manner than a $10,000 gain earned on stock
held 11 months.
Answer:
TRUE
Explanation: Lower tax rates apply to long-term capital
gains.
Page Ref.: I:2-30
Objective: 5
30) A married couple in the top tax
bracket has a new baby. Due to the birth
of the baby their taxable income will be reduced in 2013 by $3,900.
Answer:
FALSE
Explanation: Taxpayers in the top tax bracket will have
AGIs exceeding $300,000 so the personal and dependency exemption phaseout will
apply.
Page Ref.: I:2-31
Objective: 6
31) Mia is a single taxpayer with
projected AGI of $245,000 in 2013. She
is considering selling a long-term investment before year-end. She expects to realize a gain of $25,000. If Mia sells the investment by December 31,
her 2013 taxable income will increase by $25,000.
Answer:
FALSE
Explanation: The recognition of the gain will cause Mia's
AGI to exceed the threshold for both the personal exemption and itemized
deduction phaseouts so her taxable income will increase by more than $25,000.
Page Ref.: I:2-31 and I:2-32
Objective: 6
32) Generally, when a married couple files
a joint return, each spouse is liable for one-half of the entire tax and any
penalties incurred.
Answer:
FALSE
Explanation: Joint liability applies for the full tax.
Page Ref.: I:2-33
Objective: 7
33) A taxpayer is able to change his
filing status from married filing jointly to married filing separately by
filing amended return.
Answer:
FALSE
Explanation: Taxpayers are not able to change their status
from filing a joint return to separate returns although they can change their
status from separate returns to a joint return by filing an amended return.
Page Ref.: I:2-34
Objective: 7
34) Tax returns from individual and corporate
taxpayers are due on the 15th day of the third month following the close of the
tax year.
Answer:
FALSE
Explanation: Individual returns are due on the 15th day of
the fourth month following the close of the tax year.
Page Ref.: I:2-35 and I:2-36
Objective: 8
35) Taxable income for an individual is
defined as
A) AGI reduced by itemized deductions.
B) AGI reduced by personal and dependency
exemptions.
C) total income reduced by the standard
deduction.
D) AGI reduced by deductions from AGI and personal
and dependency exemptions.
Answer:
D
Page Ref.: I:2-2; Table I:2-1
Objective: 1
36) All of the following items are
generally excluded from income except
A) child support payments.
B) interest on corporate bonds.
C) interest on state and local government
bonds.
D) life insurance proceeds paid by reason
of death.
Answer:
B
Explanation: B) Interest on corporate bonds is taxable.
Page Ref.: I:2-3; Table I:2-2
Objective: 1
37) All of the following items are
included in gross income except
A) alimony received.
B) rent income.
C) interest earned on a bank account.
D) child support payments received.
Answer:
D
Explanation: D) Child support is not taxable.
Page Ref.: I:2-3 and I:2-4, Table I:2-3
Objective: 1
38) All of the following items are deductions
for adjusted gross income except
A) alimony paid.
B) trade or business expenses.
C) rent and royalty expenses.
D) state and local income taxes.
Answer:
D
Explanation: D) State and local income taxes are itemized
deductions.
Page Ref.: I:2-5; Table I:2-4
Objective: 1
39) All of the following items are
deductions for (not from) adjusted gross income except
A) moving expenses.
B) unreimbursed employee business
expenses.
C) qualifying contributions to individual
retirement accounts.
D) one-half of self-employment taxes paid.
Answer:
B
Explanation: B) Unreimbursed employee business expenses
are miscellaneous itemized deductions.
Page Ref.: I:2-5; Table I:2-4
Objective: 1
40) Which of the following credits is
considered a refundable credit?
A) child and dependent care credit
B) earned income credit
C) adoption expense credit
D) lifetime learning credit
Answer:
B
Explanation: B) The earned income credit is a refundable
credit.
Page Ref.: I:2-6; Table I:2-5
Objective: 1
41) A single taxpayer provided the
following information for 2013:
Salary
|
$80,000
|
Interest on local government bonds
(qualifies as a tax exclusion)
|
4,000
|
Allowable itemized deductions
|
13,000
|
What is taxable income?
A) $57,100
B) $63,100
C) $67,000
D) $67,100
Answer:
B
Explanation: B) ($63,100 = $80,000 - $13,000 itemized
deductions - $3,900 personal exemption)
Page Ref.: I:2-6; Example I:2-1
Objective: 1
42) Which of the following types of
itemized deductions are included in the category of miscellaneous expenses that
are deductible only if the aggregate amount of such expenses exceeds 2% of the
taxpayer's adjusted gross income?
A) unreimbursed employee business expenses
B) charitable contributions
C) medical expenses
D) home mortgage interest expense
Answer:
A
Page Ref.: I:2-7; Table I:2-6
Objective: 2
43) In 2013 the standard deduction for a
married taxpayer filing a joint return and who is 67 years old with a spouse
who is 65 years old is
A) $12,200.
B) $13,400.
C) $14,600.
D) $15,200.
Answer:
C
Explanation: C) ($14,600 = $12,200 + $1,200 +$1,200)
Page Ref.: I:2-10 and I:2-11
Objective: 2
44) In 2013 Brett and Lashana (both 50
years old) file a joint tax return claiming as a dependent their son who is
blind. Their standard deduction is
A) $12,200.
B) $13,400.
C) $13,700.
D) $11,700.
Answer:
A
Explanation: A) Blindness of a dependent does not increase
the standard deduction of the taxpayers.
Page Ref.: I:2-10 and I:2-11
Objective: 2
45) Annisa, who is 28 and single, has
adjusted gross income of $55,000 and itemized deductions of $5,000. In 2013,
Annisa will have taxable income of
A) $45,000.
B) $48,900.
C) $51,100.
D) $42,150.
Answer:
A
Explanation: A)
Adjusted gross income
|
$55,000
|
Minus: Standard deduction
|
(
6,100)
|
Exemption
|
(
3,900)
|
Taxable income
|
$45,000
|
Page Ref.: I:2-11; Example I:2-4
Objective: 2
46) On June 1, 2013, Ellen turned 65.
Ellen has been a widow for five years and has no dependents. Her standard
deduction is
A) $3,900.
B) $6,100.
C) $7,600.
D) $12,200.
Answer:
C
Explanation: C) $6,100 + $1,500 = $7,600
Page Ref.: I:2-10 and I:2-11
Objective: 2
47) The regular standard deduction is
available to which one of the following taxpayers?
A) married taxpayer filing a separate
return where the other spouse itemizes
B) a person who has only unearned income
and is a dependent of another
C) an individual filing a return for a
period of less than 12 months because of a change in accounting period
D) an abandoned spouse
Answer:
D
Explanation: D) A person who is a dependent of another has
a limited standard deduction. Married individuals filing separate returns when
the other spouse itemizes and an individual filing a short period return may
not take the standard deduction. There is nothing in the law that precludes an
abandoned spouse from taking the standard deduction.
Page Ref.: I:2-12 and I:2-23 through I:2-24
Objective: 2
48) Husband and wife, who live in a common
law state, are eligible to file a joint return for 2013, but elect to file
separately. They do not have dependents. Wife has adjusted gross income of
$25,000 and has $2,200 of expenditures which qualify as itemized deductions.
She is entitled to one exemption. Husband deducts itemized deductions of
$11,200. What is the taxable income for the wife?
A) $15,000
B) $18,900
C) $12,150
D) $22,800
Answer:
B
Explanation: B) If one spouse on married filing separately
returns itemizes deductions, the other spouse must also do so.
Income of wife
|
$25,000
|
Minus: Itemized deductions
|
(
2,200)
|
Personal exemption
|
(
3,900)
|
Taxable Income
|
$18,900
|
Page Ref.: I:2-12; Example I:2-5
Objective: 2
49) Lewis, who is single, is claimed as a
dependent on his parents' tax return. He received $2,000 during the year in
dividends, which was his only income. What is his standard deduction?
A) $1,000
B) $2,000
C) $2,350
D) $6,100
Answer:
A
Explanation: A) For a dependent, the standard deduction is
the greater of earned income plus $350 or $1,000. Dividends are unearned
income.
Page Ref.: I:2-12; Example I:2-6
Objective: 2
50) Charlie is claimed as a dependent on
his parents' tax return in 2013. He received $8,000 during the year from a
part-time acting job, which was his only income. What is his standard
deduction?
A) $1,000
B) $6,100
C) $8,000
D) $8,350
Answer:
B
Explanation: B) For a dependent, the standard deduction is
the greater of earned income plus $350 or $1,000, but no more than the current
year regular standard deduction amount.
For 2013, the maximum standard deduction for a single person is $6,100.
Page Ref.: I:2-12; Example I:2-7
Objective: 2
51) Deborah, who is single, is claimed as
a dependent on her parents' tax return. She had a part-time job during 2013 and
earned $850 during the year, which was her only income. What is her standard
deduction?
A) $850
B) $1,000
C) $1,200
D) $6,100
Answer:
C
Explanation: C) For a dependent, the standard deduction is
the greater of earned income plus $350 ($850 + 350 = $2,000) or $1,000.
Page Ref.: I:2-12; Example I:2-7
Objective: 2
52) Cheryl is claimed as a dependent on
her parents' tax return. She had a part-time job during 2013 and earned $4,900
during the year, in addition to $600 of interest income. What is her standard
deduction?
A) $1,000
B) $4,900
C) $5,200
D) $6,100
Answer:
C
Explanation: C) $4,900 + 350 = $5,250. For a dependent, the
standard deduction is the greater of earned income plus $350 or $1,000 up to a
maximum of the regular standard deduction.
Page Ref.: I:2-12; Example I:2-7
Objective: 2
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