1Which statement is correct?
Distributions of appreciated property are taxable to the S corporation.
S corporations are treated as corporations under state law.
2Bayarmaa owns land with an adjusted basis of \$610,000 subject to a mortgage of \$350,000. On April 1, Bayarmaa sells her land subject to the mortgage for \$650,000 in cash, a note for \$600,000, and property with a fair market value (FMV) of \$120,000.
What is the amount realized?
\$1,720,000
3How is a taxpayer’s business income generally taxed to states?
Business income is apportioned
4Fred is the sole shareholder of an S corporation in Fort Deposit, Alabama. At a time when his stock basis is \$20,000, the corporation distributes appreciated property worth \$100,000 (basis of \$20,000). Fred’s taxable gain is:
\$80,000
There is an \$80,000 corporate gain (\$100,000 – \$20,000) that passes through to Fred and increases his stock basis to \$100,000 (\$20,000 + 80,000). Then the distribution reduces his stock basis to zero (\$100,000 – \$100,000). Fred recognizes a taxable gain of \$80,000 and takes a \$100,000 basis in the property.
5Which of the following would be included in the netting of § 1231 gains and losses?
Section 1231 loss and gain
6At the beginning of the year, Ryan’s capital account balance in the RUS Partnership (in which he owned a 40% interest) was \$200,000. During the year, Ryan contributed cash (\$40,000) and property (basis = \$20,000, fair market value = \$30,000). RUS reported ordinary income of \$100,000 and tax-exempt income of \$6,000. At the end of the year, the partnership distributed \$6,000 of cash to Ryan. On the Schedule K-1, the partnership shows that Ryan had a \$50,000 share of nonrecourse LLC debt at the end of the year. Using the tax basis method, how much is Ryan’s ending capital account balance?
\$296,400
Ryan’s beginning capital account balance of \$200,000 is rolled forward by adding the contributed cash (\$40,000) plus the basis of the property he contributed (\$20,000). It is also increased by Ryan’s share of partnership income (\$40,000) and tax-exempt interest income (\$2,400). It is reduced by the distribution to Ryan (\$6,000). Liabilities are not included in the partner’s capital account.
7Regarding the tax formula and its relationship to Form 1040, which of the following statements, if any, is correct?
A “Schedule 1 deduction” refers to a deduction for AGI.
Most exclusions are not reported on Form 1040, but those that are reported appear on page 1 of Form 1040 or Schedule 1 of Form 1040 (choice a.). A “Schedule 1 deduction” as well as an abovethe-line deduction are deductions for AGI (choices b. and c.). The computation of taxable income (including AGI) appears on page 1 of Form 1040 (choice d.).
8Wade is a salesman for a real estate development company. Because he is the “salesperson of the year,” he is permitted to purchase a lot from the developer for \$90,000. The fair market value of the lot is \$150,000 and the developer’s adjusted basis is \$100,000.
False
Wade must recognize a gain of \$10,000 (\$100,000 developer’s adjusted basis – \$90,000 cost to Wade), and his adjusted basis for the lot is \$100,000 (\$90,000 cost + \$10,000 recognized gain).
9An investment analyst would prefer to see that an entity’s effective tax rate is:
Sustainable over time and Less than that of competitors.
Effective tax rates can indicate the effectiveness of the entity’s long-term tax planning.
10As an executive of Cherry, Inc., Ollie receives a fringe benefit in the form of annual tuition scholarships of \$10,000 to each of his three children. The scholarships are paid by the company on behalf of the children of key employees directly to each child's educational institution and are payable only if the student maintains a B average.
The tuition payments of \$30,000 must be included in Ollie's gross income.
11In which of the following situations, if any, may the individual not be claimed as a dependent of the taxpayer?
A half-brother who does not live with the taxpayer and is a citizen and resident of Honduras.
Except in the year of divorce, a former spouse can qualify under the member of the household test (choice a.). The stepmother meets the relationship 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, being only a citizen or resident of the United States can satisfy the residency test (choice d.).
12During 2021, Sandeep had the following transactions:
Salary \$ 80,000
Interest income on City of Baltimore bonds 1,000
Damages for personal injury (car accident) 100,000
Punitive damages (same car accident) 200,000
Cash dividends from Chevron Corporation stock 7,000
Sandeep's AGI is:
\$287,000
\$287,000 [\$80,000 (salary) + \$200,000 (punitive damages) + \$7,000 (cash dividends)]. The damages from personal injury and the municipal bond interest are nontaxable exclusions.
13A strip along the boundary of Joy's land is condemned for a utility easement. She receives a payment of \$7,500 from the utility company. Her basis in the land is \$80,000. Which of the following is correct?
Joy must reduce the basis of the land by \$7,500.
Because Joy reduces the basis of her land by \$7,500, she does not include anything in gross income
14Without the foreign tax credit, double taxation would result when:
The United States and a foreign country both tax the foreign-source income of a U.S. resident.
Double taxation would not result due to taxation of the U.S.-source income (a.) because it would not be subject to foreign taxation, to the foreign-source income of a nonresident alien because it would not be subject to U.S. taxation (b.), or in the case where the treaty prevented the foreign country from taxing the income (d.).
15Alice and Jose are going to form a business entity. Alice will contribute cash of \$200,000 for a 40% ownership interest and Jose will contribute land worth \$300,000 (basis of \$180,000) for a 60% ownership interest. Which of the following statements is correct?
If the entity is an S corporation, Alice has \$0 recognized gain and a basis for her stock of \$200,000, and Jose has \$0 recognized gain and a basis for his stock of \$180,000.
Regardless of whether the entity is a C corporation, an S corporation, or a partnership, Alice has a \$0 recognized gain and a basis for her ownership interest of \$200,000. Jose has a \$0 recognized gain and a basis for his ownership interest of \$180,000.
16Which of the following statements is true regarding the education tax credits?
The American Opportunity credit is calculated per eligible student and the lifetime learning credit is available per taxpayer.
Choice a. is incorrect. The lifetime learning credit is available for individuals who are beyond the first two years of postsecondary education. Choice b. reflects the computation of the lifetime learning credit, not the American Opportunity credit. Choice d. is incorrect; some continuing education expenses can qualify for the lifetime learning credit.
17Jane transfers property (basis of \$180,000 and fair market value of \$500,000) to Green Corporation for 80% of its stock (worth \$425,000) and a long-term note (worth \$75,000) executed by Green Corporation and made payable to Jane. As a result of the transfer:
Jane recognizes a gain of \$75,000.
A long-term note is treated as "boot." Thus, Jane is taxed on the value of the note received because the boot is less than the realized gain on the exchange.
18Carlos, age 19, is a full-time graduate student at City University. During 2021, he received the following payments:
Cash award for being the outstanding resident adviser \$ 1,500
Resident adviser housing 2,500
State scholarship for ten months (tuition and books) 6,000
State scholarship (meals allowance) 2,400
Loan from college financial aid office 3,000
Cash support from parents 2,000
\$17,400
Carlos served as a resident adviser in a dormitory and, therefore, the university waived the \$2,500 charge for the room he occupied. What is Carlos's adjusted gross income for 2021?
\$3,900
The \$1,500 award for being the outstanding resident adviser is included in Carlos's gross income. The \$2,400 meal allowance must also be included in Carlos's gross income. The \$2,500 waiver for housing is not included in Carlos's gross income because the housing is provided for the convenience of his employer. The \$6,000 scholarship for tuition and books is excluded from his gross income. The loan of \$3,000 is not income
19Verway, Inc., has a 2021 net § 1231 gain of \$55,000 and had a \$62,000 net § 1231 loss in 2020. For 2021, Verway’s net § 1231 gain is treated as:
\$55,000 ordinary gain.
Since the 2021 \$55,000 net § 1231 gain is less than the \$62,000 2020 § 1231 lookback loss, the entire \$55,000 is treated as ordinary gain.
20During 2021, Jack and LaTonya, a married couple, decided to sell their residence. The residence has a basis of \$162,000 and has been owned and occupied by them for 11 years. The house was sold in May for \$395,000 with broker's commissions and other selling expenses totaling \$24,000. They purchased a new residence in June for \$400,000. What is the adjusted basis of the new residence?
\$400,000
21Mitchell and Powell form Green Corporation. Mitchell transfers property (basis of \$105,000 and fair market value of \$90,000) while Powell transfers land (basis of \$8,000 and fair market value of \$75,000) and \$15,000 of cash. Each receives 50% of Green Corporation's stock (total value of \$180,000). As a result of these transfers:
Neither Mitchell nor Powell has any recognized gain or loss.
As § 351 applies, Mitchell cannot recognize the realized loss of \$15,000 ("Mitchell has a recognized loss of \$15,000, and Powell has a recognized gain of \$67,000"). Although cash was involved, it was given, not received by Powell ("Mitchell has no recognized loss, but Powell has a recognized gain of \$15,000"). Therefore, it is not boot within the meaning of § 351(b). Green Corporation will have a basis of \$105,000 in the property transferred by Mitchell and \$8,000 in the land (not \$23,000 as in "Green Corporation will have a basis in the land of \$23,000").
22Which statement is incorrect?
S corporations are treated as partnerships for Federal income tax purposes.
23Which of the following events causes the purchaser of an option to add its cost to the basis of the property to which the option relates?
The option is exercised.
If the option is exercised, its cost becomes part of the basis of the property. Otherwise, the lapse of the option is treated as a sale or exchange.
24A painting that is not of investment quality is acquired by an individual for use in his home. It is later sold at a loss of \$45. What is true of this painting?
The loss on the painting is a deductible capital loss.
25Paula is the sole shareholder of Violet, Inc. For 2021, she receives from Violet a salary of \$300,000 and dividends of \$100,000. Violet's taxable income for 2021 is \$500,000. On audit, the IRS treats \$100,000 of Paula's salary as unreasonable. Which of the following statements is correct?
Violet's taxable income will increase by \$100,000 as a result of the IRS adjustment.
\$100,000 of salary is reclassified as a dividend. Thus, Violet's taxable income increases by \$100,000 because dividends are not deductible. Paula's gross income remains the same. Her salary income decreases by \$100,000, but her dividend income increases by \$100,000.
26Sarah and Tony (mother and son) form Dove Corporation with the following investments: cash by Sarah of \$65,000; land by Tony (basis of \$25,000 and fair market value of \$35,000). Dove Corporation issues 400
shares of stock, 200 each to Sarah and Tony. Thus, each receives stock in Dove worth \$50,000.
Section 351 may apply because stock need not be issued to Sarah and Tony in proportion to the value of the
property transferred.
The fact that the stock was not in proportion to the value of the property transferred (choice a.) does not prevent § 351 from applying. Since §351 applies and no boot was received, Tony does not recognize a gain (choice d.). His basis in the stock is \$25,000 plus \$15,000, the basis of the stock implicitly gifted by Sarah to Tony (not \$50,000 as in choice c.).
27Leah transfers equipment (basis of \$400,000 and fair market value of \$500,000) for additional stock in Crow Corporation. After the transfer, Leah owns 80% of Crow’s stock. Associated with the equipment is §1245 depreciation recapture potential of \$70,000. As a result of the transfer:
The § 1245 depreciation recapture potential carries over to Crow Corporation.
Section 351 protects Leah from the recognition of any gain (choices a. and d.). The depreciation recapture potential does not disappear (choice c.) but carries over to Crow Corporation (choice b.).
28Marvin, the vice president of Lavender, Inc., exercises a stock option to purchase 100 shares of stock in March 2021. The stock options are incentive stock options (ISOs). Their exercise price is \$20 and the fair market value on the date of exercise is \$28. The options were granted in March 2017 and all restrictions on the free transferability had lapsed by the exercise date.
If Marvin sells the stock in December 2021 for \$3,000, his AMT adjustment in that year is \$0.
If Marvin sells the stock in December 2021, his AMT adjustment is \$0 because the exercise date and the sales date occur in the same tax year. If Marvin sells the stock in December 2022, his AMT adjustment in 2021 is a positive \$800 (\$2,800 fair market value – \$2,000 exercise price), and his AMT adjustment in 2022 is a negative \$800 (\$1,000 recognized gain for regular tax purposes – \$200 recognized gain for AMT purposes).
29Salary \$50,000
Bank loan (proceeds used to buy personal auto) 10,000
Alimony paid (divorce was finalized in 2010). 12,000
Child support paid 6,000
Gift from aunt 20,000
Hiroto's AGI is:
\$38,000
\$38,000 [\$50,000 (salary) – \$12,000 (alimony)]. Alimony related to a pre-2018 divorce is a for AGI deduction. The gift is an exclusion while the child support is nondeductible. Amounts borrowed are not income.
30Theresa sued her former employer for age, race, and gender discrimination. She claimed \$200,000 in damages for loss of income, \$300,000 for emotional harm, and \$500,000 in punitive damages. She settled the claim for \$700,000. As a result of the settlement, Theresa must include in gross income:
\$700,000
The damages did not arise out of a physical personal injury; therefore, none of the amount received can be excluded from gross income.
31Albert transfers land (basis of \$140,000 and fair market value of \$320,000) to Gold Corporation for 80% of its stock and a note payable in the amount of \$80,000. Gold assumes Albert's mortgage on the land of \$200,000.
Albert has a recognized gain on the transfer of \$140,000
32On September 3, 2018, Aaron, a single individual, purchased § 1244 stock in Red Corporation from his friend Peter for \$60,000. On December 31, 2018, the stock was worth \$85,000. On August 15, 2021, Aaron was notified that the stock was worthless. How should Aaron report this item on his 2021 tax return?
\$60,000 capital loss
The loss of \$60,000 is classified as a \$60,000 capital loss. Although the stock was § 1244 stock in Peter's hands, the stock loses this status when Peter sells the stock to Aaron (the stock must be issued by the corporation to a shareholder).
33Which transaction by itself would create nexus with a state under PL 86-272?
Executing a sales campaign using an advertising agency acting as an independent contractor for the taxpayer.
34Jared, a fiscal year taxpayer with a August 31 year-end, owns an office building (adjusted basis of \$800,000) that was destroyed by fire on December 24, 2021. If the insurance settlement was \$950,000 (received March 1, 2022), what is the latest date that Jared can replace the office building to qualify for nonrecognition of gain under the involuntary conversion rules?
August 31, 2024
Gain of \$150,000 (\$950,000 amount received – \$800,000 adjusted basis) is realized on March 1, 2022. Because Jared has two years from the close of that tax year (August 31, 2022) to replace the property, the latest replacement date is August 31, 2024.
35Which citation refers to a U.S. Tax Court decision?
Westreco, Inc., T.C. Memo. 1992-561 (1992)
T.C. Memo refers to a Tax Court decision. The other citations refer to Court of Appeals decisions (c. and d.) or Court of Federal Claims decisions (a.).
A. Apollo Computer, Inc. v. U.S., 95-1 (USTC ¶50,015 (Fed.Cl., 1994)
C. Bausch & Lomb, Inc. v. Comm., 933 F.2d 1084 (CA-2, 1991).
36Regarding research and experimental expenditures, which of the following are not qualified expenditures?
Costs of ordinary testing of materials.
37Which of the following is not a required test for the deduction of a business expense?
Unavoidable
Business expenses must be ordinary and necessary to be deductible. In addition, they must be reasonable in amount. Unavoidable is not a requirement.
38Nancy Smith is the sole shareholder and employee of White Corporation, a calendar year C corporation that is engaged exclusively in accounting services. During the current year, White has operating income of \$320,000 and operating expenses (excluding salary) of \$150,000. Further, White Corporation pays Nancy a salary of \$100,000. The salary is reasonable in amount and Nancy is in the 32% marginal tax bracket regardless of any income from White. Assuming that White Corporation distributes all after-tax income as dividends, how much total combined income tax do White and Nancy pay in the current year? (Ignore any employment tax considerations.)
\$54,995
39Which of the following, if any, is NOT eligible shareholders of an S corporation?
Partnership
Non-US Corporation
Roth IRA
40Robin Corporation distributes furniture (basis of \$40,000; fair market value of \$50,000) as a property dividend to its shareholders. The furniture is subject to a liability of \$55,000. Robin Corporation recognizes gain of
\$15,000
If distributed property is subject to a liability in excess of basis or the shareholder assumes such a liability, the fair market value of the property for purposes of determining gain on the distribution is treated as not being less than the amount of the liability. Thus, gain is \$15,000 [\$55,000 (liability on the furniture) – \$40,000 (basis of the furniture)].
41Early in the year, Marlon was in an automobile accident during the course of his employment. As a result of the physical injuries he sustained, he received the following payments during the year:
Reimbursement of medical expenses Marlon paid by a medical
insurance policy he purchased \$10,000
Damage settlement to replace his lost salary 15,000
What is the amount that Marlon must include in gross income for the current year?
\$0
The medical expenses of \$10,000 that were reimbursed by Marlon’s medical insurance policy can be excluded from gross income. The \$15,000 Marlon received for the physical personal injury damage settlement can be excluded from gross income even though the payment replaces his salary.
42Gabriele and Lisa are married and live in a common law state. They want to make gifts to their four children in 2021. What is the maximum amount of the annual exclusion they will be allowed for these gifts?
\$120,000.
4 (number of donees) × \$15,000 (annual exclusion) × 2 (number of donors) = \$120,000. It is assumed that Lisa will make the election to split the gifts.
43Cristiano performs services for Ryan. Which of the following factors, if any, indicates that Cristiano is an independent contractor rather than an employee?
Cristiano is paid based on tasks performed.
"Ryan sets the work schedule", "Ryan provides the tools used", and "Cristiano follows a specific set of instructions from Ryan to complete tasks" reflect employee status.
44AmCo and BamCo form the AB General Partnership at the start of the current year with a land contribution by BamCo and a cash contribution by AmCo. BamCo’s contributed property is subject to a recourse mortgage assumed by the partnership. BamCo has an 80% interest in AB’s profits and losses. The land has been held by BamCo for the past 6 years as an investment. It will be used by AB as an operating asset in its parking lot business. Which of the following statements is correct?
Immediately after formation, AmCo’s basis in the partnership equals the cash that it contributed plus AmCo's share of the recourse debt contributed by BamCo.
Choice a. is incorrect because the debt on the land contributed by BamCo will increase AmCo ’s interest in AB. Choice c. is incorrect because recourse debt is allocated to general partners regardless of whether the partners guarantee the debt. Choice d. is incorrect because the basis of the land to AB equals its basis to BamCo immediately before the contribution date.
45The best estimate of the income tax reflected on a corporation's current-year tax returns is the:
Current tax expense
46Earl and Mary form Crow Corporation. Earl transfers property, basis of \$200,000 and value of \$1,600,000, for 50 shares in Crow Corporation. Mary transfers property, basis of \$80,000 and value of \$1,480,000, and agrees to serve as manager of Crow for one year; in return Mary receives 50 shares of Crow. The value of Mary's services is \$120,000. With respect to the transfers:
Crow will have a business deduction of \$120,000 for the value of the services Mary will render.
Earl will not recognize gain on the transfer. Mary will have income of \$120,000, the value of the services she will render to Crow. Crow will have a business deduction of \$120,000.
47Section 1239 (relating to the sale of certain property between related taxpayers) does not apply unless the property:
Is depreciable in the hands of the transferee.
Section 1239 produces the conversion of the transferor’s capital gain into ordinary income if the property is depreciable in the hands of the related transferee.
48Benita incurred a business expense on December 10, 2021, which she charged on her bank credit card. She paid the credit card statement that included the charge on January 5, 2022. Which of the following is correct?
If Benita is an accrual method taxpayer, she can deduct the expense in 2021.
49Kyle and Liza are married and under 65 years of age. During 2021, they furnish more than half of the support of their 19-year old daughter, Kendra, who lives with them. She graduated from high school in May 2020. Kendra earns \$15,000 from a part-time job, most of which she sets aside for future college expenses. Kyle and Liza also provide more than half of the support of Kyle’s cousin who lives with them. Liza’s father, who died on January 3, 2021, at age 90, has for many years qualified as their dependent. How many dependents can Kyle and Liza claim?
Two
Two (Kyle's cousin, and Liza's father). Kendra cannot be claimed because she is not a qualifying child and is subject to the gross income test. Kyle’s cousin does not meet the relationship test but is a member of their household. It is assumed that Liza’s father, as was true in the past, qualified as a dependent up to the point of death.
50Which of the following statements is incorrect with respect to determining current E & P?
Dividends received deductions should be subtracted from taxable income.
51What are the effects of a below-market loan for \$100,000 made by a corporation to its chief executive officer as an enticement to get him to remain with the company?
The employee has imputed compensation income and the corporation has imputed interest income.
The corporation made a compensation related loan. It has imputed interest income and compensation expense. The employee has imputed interest expense and compensation income. Since the loan is for \$100,000, the \$10,000 exception does not apply.
52During the current year, Sparrow Corporation, a calendar year C corporation, had operating income of \$425,000, operating expenses of \$280,000, a short-term capital loss of \$10,000, and a long-term capital gain of \$25,000. How much is Sparrow’s income tax liability for the year?
\$33,600
Sparrow’s taxable income is \$160,000 [\$425,000 operating income – \$280,000 operating expenses + \$15,000 net capital gain (\$25,000 long-term capital gain – \$10,000 short-term capital loss)]. Corporate income tax on taxable income of \$160,000 is \$33,600 (\$160,000 x 21%). Corporations do not receive a preferential tax rate on long-term capital gains.
53Rust Corporation distributes property to its sole shareholder, Andre. The property has a fair market value of \$350,000, an adjusted basis of \$205,000, and is subject to a liability of \$220,000. Current E & P is \$500,000. With respect to the distribution, which of the following statements is correct?
Rust has a gain of \$145,000 and Andre has dividend income of \$130,000.
The dividend income received by Andre equals the fair market value of the property received (\$350,000) reduced by any liabilities transferred to him (\$220,000). Thus, Andre has received dividend income of \$130,000. His basis in the property is equal to its fair market value, or \$350,000. The corporation’s gain on the distribution equals the excess of fair market value over the adjusted basis of the property, or \$145,000 (\$350,000 – \$205,000).
54OldTown, Inc. took \$100,000 of rehabilitation credits on its prior year tax return. There was sufficient tax authority to take the credits. However, due to uncertainty regarding the eligibility of some of the expenditures, OldTown only recognized \$70,000 of the benefits in its prior year financial statements. Upon the audit of its tax return in the current year, the IRS challenged the eligibility of some of the expenditures and OldTown agreed to pay \$45,000 additional tax to settle the dispute. By how much does the settlement impact OldTown’s current-year book tax expense?
\$15,000
OldTown established a \$30,000 liability for the tax position in the prior year. Only the \$15,000 of mthe payment that was not previously recorded as an unrecognized tax benefit is recognized as a current-year expense.
55Vertigo, Inc., has a 2021 net § 1231 loss of \$64,000 and had a \$32,000 net § 1231 gain in 2020. For 2021, Vertigo’s net § 1231 loss is treated as:
Ordinary loss
56Pheasant Corporation, a calendar year taxpayer, has \$400,000 of current E & P and a deficit in accumulated E & P of \$180,000. If Pheasant pays a \$600,000 distribution to its shareholders on July 1, how much dividend income do the shareholders report?
\$400,000
When a deficit exists in accumulated E & P and a positive balance exists in current E & P, distributions are regarded as dividends to the extent of current E & P (\$400,000)
57The taxpayer’s marginal federal and state tax rate is 25%. Which would the taxpayer prefer?
\$1.40 taxable income rather than \$1.00 tax-exempt income.
58In which of the following plans is this statement true: A deduction is allowed for contributions to the plan, and noincome tax consequences result from distributions to the participant at retirement.
None of the above.
A deduction is allowed for contributions to traditional IRAs and Keogh (H.R. 10) plans (choices b. and c.) but not to Roth IRAs (choice a.). Distributions are free of income tax in the case of Roth IRAs (choice a.) but not for traditional IRAs and Keogh (H.R. 10) plans (choices b. and c.) Thus, the combination of a deduction and tax-free distributions does not exist (choice d.).
A. Roth IRAs
B.Traditional IRAs
C. Keogh (H.R. 10) plans
59What is a characteristic of a limited liability company (LLC)?
It is usually taxed as a corporation.
60Robert and Diane, husband and wife, live in Pennsylvania, a common law state. They purchased land as joint tenants in 2017 for \$300,000. In 2021, Diane dies and bequeaths her share of the land to Robert. The land has a fair market value of \$450,000. What is Robert’s adjusted basis for the land?
\$375,000
Robert’s original basis (\$300,000 × 50%) \$150,000
Basis for inherited share (\$450,000 × 50%) 225,000
Robert’s adjusted basis \$375,000
61Salary \$70,000
Interest income on Xerox bonds 2,000
Inheritance from uncle 40,000
Contribution to traditional IRA 5,500
Capital losses 2,500
Enrique's AGI is:
\$64,000
\$64,000 [\$70,000 (salary) + \$2,000 (interest) – \$5,500 (IRA contribution) – \$2,500 (capital losses)]. The inheritance is a nontaxable exclusion. The capital losses are deductible.
62Abby sells real property for \$300,000. The buyer pays \$5,000 in property taxes that had accrued during the year while the property was still legally owned by Abby. In addition, Abby pays \$15,000 in commissions and \$3,000 in legal fees in connection with the sale. How much does Abby realize (the amount realized) from the sale of her property?
\$287,000
Sales price \$300,000
Taxes paid by buyer on behalf of seller 5,000
Less: Commissions (15,000)
Legal fees (3,000)
Amount realized \$287,000
63Gabriele and Lisa are married and live in a common law state. They want to make gifts to their four children in 2021. What is the maximum amount of the annual exclusion they will be allowed for these gifts?
\$120,000.
4 (number of donees) × \$15,000 (annual exclusion) × 2 (number of donors) = \$120,000. It is assumed that Lisa will make the election to split the gifts.
64On June 1 of the current year, Tab converted a machine from personal use to rental property. At the time of the conversion, the machine was worth \$90,000. Five years ago, Tab purchased the machine for \$120,000. The machine is still encumbered by a \$50,000 mortgage. What is the basis of the machine for cost recovery?
\$90,000
The basis is \$90,000, the lower of the adjusted basis (\$120,000) or fair market value (\$90,000) at the date of conversion. The mortgage of \$50,000 does not affect adjusted basis.
65Which of the following, if any, is a deduction for AGI?
Contributions to a traditional Individual Retirement Account.
66Mitchell and Powell form a corporation. Mitchell transfers property (basis of \$105,000 and fair market value of \$90,000), while Powell transfers land (basis of \$8,000 and fair market value of \$75,000) and \$15,000 of cash. Each receives 50% of a corporation’s stock (total value of \$180,000). What is the result of these transfers?
Neither Mitchell nor Powell has any recognized gain or loss.
67South, Inc., earns book net income before tax of \$400,000 in year 1. It acquires a depreciable asset in year 1, and its first-year tax depreciation exceeds book depreciation by \$50,000. In year 2, South earns \$500,000 book net income before tax, and its book depreciation exceeds tax depreciation by \$20,000. South records no other temporary or permanent book-tax differences. Assuming that the applicable tax rate is 21% in both years, what is South's current income tax expense reported on its GAAP financial statements for year 2?
\$109,200