Ac551 final exam – federal taxes and decisions


Keller Graduate School of Management


AC551 Federal Taxes and Decisions


Final Exam








1. Terry Trumbull purchased a tract of land. In order to have city water, he had to pay the water company $5,000 to extend the water line to his property. The $5,000 cost is an addition to the basis of the land. 




2. When property that is subject to an existing debt is purchased, the basis of the property is the amount of cash paid initially plus the unpaid debt to which the property is subject. 




3. The basis for nonbusiness property changed to business use is the greater of the adjusted basis of the property or its fair market value on the date it is converted to business use. 




4. During 2011, Carl Crofts received a gift of property having a fair market value of $25,000 at the time of the gift. The donor’s adjusted basis in the property at the time of the gift was $21,000. The donor paid a gift tax of $700 on the property. Carl’s basis in the property is $21,700




5. In 2011, Tom Turner received a gift of property that had a fair market value of $10,000 at the time of the gift. The donor’s adjusted basis in the property at the time of the gift was $12,000. Tom’s basis for computing depreciation is $12,000. 








36. Leonard Lambert’s commercial building, which had an adjusted basis of $500,000, was partially destroyed by fire. The fair market value was $800,000 just before the fi re and $600,000 immediately after. Leonard received $150,000 insurance proceeds and deducted a $50,000 casualty loss. What is Leonard’s basis in the building before any repairs are made?


a. $300,000


b. $350,000


c. $450,000


d. $500,000


e. $600,000




37. Lem Lumberjack sells 100 shares (basis of $5,000) of Redwood Corporation common stock on March 8, 2011, for $4,000. On March 29, 2011, Lem purchases 50 shares of Redwood Corporation common stock for $2,500. Lem’s recognized loss on the sale is:


a. $1,000


b. $500


c. $1,500


d. $0




38. In 2011, Allen Anders sold an asset which cost $70,000. Allen incorrectly claimed $40,000 depreciation over a five-year period. He should have claimed $50,000 depreciation. What was the adjusted basis when sold?


a. $0


b. $20,000


c. $30,000


d. $50,000


e. $70,000




39. Which of the following items is not a reduction to the basis of an asset?


a. Depreciation


b. Assessments for maintenance of sidewalks


c. Cash rebate from manufacturer


d. Casualty losses




40. In 2011, Bob Brown’s aunt Barbara gave him a house. At the time of the gift, the house had a fair market value of $193,000, the taxable gift was $180,000, and his aunt’s adjusted basis was $73,000. His aunt paid a gift tax of $30,000 on the house. What is Bob’s basis in the house for purposes of determining gain?


a. $73,000


b. $93,000


c. $180,000


d. $193,000




41. In May 2011, Automatic, Inc. sold land with a basis to Automatic of $100,000, to Jack Jones, its 60%


shareholder, for $80,000. In July, Jack sold the land to an unrelated party for $110,000. What is the amount of Jack’s recognized gain?


a. $0


b. $10,000


c. $20,000


d. $30,000




80. On April 18, 2011, Jim Jenkins sold 300 shares of Redwood Corporation common stock for $8,400. Jim acquired the stock in 2007 at a cost of $10,000. On May 9, 2011, he repurchased 150 shares of Redwood Corporation common stock for $3,600 and held them until August 25, 2011, when he sold them for $6,000. How should Jim report the above transactions for 2011?




81. Norman Nelson owns 1,000 shares of Newton Corp. common stock which he purchased for $60,000 and later receives a nontaxable preferred stock dividend of 300 shares of Newton preferred stock when the FMV of the preferred was $100 per share and the FMV of the common was $90 per share. What is the basis of the common and preferred shares after the dividend?




82. Ronald Rankin owns 1,000 shares of Royal Corp. common stock with a basis of $30,000. He receives a 10 percent taxable stock dividend when the FMV of each share of stock is $15. How much income does he have? What is the basis in the new shares? When does the holding period of the new shares begin? What is the basis in the old stock?






41. Ed Edmonds exchanged a business truck with an adjusted basis of $320,000 for another business truck with a fair market value of $20,000, a boat with a fair market value of $6,000, and $2,000 cash. What is the basis of the new truck?


a. $18,000


b. $20,000


c. $24,000


d. $30,000


e. $32,000




42. A fire destroyed Carl Cramer’s business automobile. Carl originally paid $24,000 for the automobile and up to the time of the fi re had been allowed $15,000 in depreciation. Within three months the insurance company replaced the old automobile with a new one which was worth $21,000. What is the basis of the new automobile for purposes of computing depreciation?


a. $3,000


b. $9,000


c. $15,000


d. $21,000


e. $24,000














43. Which of the following statements are correct?


(1.) A sale is generally a transfer of property for money only or for a promise to pay money.


(2.) An exchange is a transfer of property in return for other property or services.


(3.) Recognized gain is always the excess of the amount realized over the adjusted basis of the property.


(4.) Realized loss is always the excess of the adjusted basis of the property over the amount realized.


(5.) The adjusted basis of the property is always the original cost adjusted for such items as casualty losses, improvements, and depreciation.


a. 1, 2, and 3


b. 1, 2, and 4


c. 1, 3, and 4


d. 1, 4, and 5


e. 2, 3, and 4




44. Which of the following is not an example of a nontaxable like-kind exchange?


a. Improved real estate for unimproved real estate.


b. A printer for a computer.


c. Common stock of one company exchanged for common stock of another.


d. The trade of an apartment building for a store building.


e. Real estate for a ranch.




45. Tom Tanner traded in a printing press with an adjusted basis of $20,000 for a smaller press valued at $12,000. In addition to the smaller press, Tom received $3,000 in cash and was relieved of the existing liability on the old press of $5,000. What is Tom’s recognized gain?


a. $0


b. $3,000


c. $4,800


d. $5,000


e. $8,000




46. Greg Grotto exchanged an eight-unit apartment building for a four-unit apartment building. His adjusted basis for the eight-unit building was $320,000 and the fair market value was $400,000. The fair market value of the four-unit building, which was subject to a $40,000 mortgage, was $440,000 on the date of the transaction. What is Greg’s taxable gain?


a. $120,000


b. $80,000


c. $48,000


d. $40,000


e. $0








1. Alfred Ahern sold a truck with an adjusted basis of $6,000 for $1,500 to a salvage yard. He purchased a


replacement truck two months later for $24,000. Alfred’s basis in the new truck is $28,500




2. Ed Evans traded in a large lathe used in his business with an adjusted basis of $7,000 for a smaller lathe


valued at $8,000. In addition to the smaller lathe, Ed received $2,000 cash. Ed’s recognized gain is $3,000.




3. Leonard Longstreet owns a rental building with an adjusted basis of $300,000 and a fair market value of $280,000. In July 2011, the state condemned the property for a highway project and paid him $280,000, which he immediately reinvested in a similar rental property. Leonard may recognize a loss.  




4. Melvin Monroe reads in the newspaper that the state highway department has decided to take his property for public use. He verifies the news by phoning an official of the highway department who is involved in the project acquiring this property. This is a threat of condemnation.




5. Ray Rambler’s office building with a basis of $75,000 was condemned by the county which paid him


$120,000 as compensation. He purchased a new office one year later for $105,000. Ray is entitled to


postpone all of the $45,000 realized gain. 








1. For purposes of determining the holding period for property, the holding period begins on the day the property is acquired and ends on the day before the sale of the property. 




2. On receipt of a gift of property purchased by the donor in 2006 the basis is determined by the donor’s basis. The holding period begins on the day the gift is received.  




3. Fully depreciated property used in a trade or business is a capital asset. 




4. Some examples of capital assets are stocks and bonds held in a personal account, a personal residence, and household furnishings. 




5. Real property used in a trade or business is a capital asset. 










57. Which of the following is a capital asset?


a. Property held primarily for sale to customers


b. Accounts or notes receivable acquired in the ordinary course of business


c. Machinery and equipment used in a trade or business


d. Temporary investment of idle business cash in marketable corporate securities


e. Real property used in a trade or business




58. For 2011, Greg Grammer had a short-term capital loss of $4,000, a short- term capital gain of $1,900, a short term  capital loss carryover from 2010 of $700, a long-term capital gain of $800, and a long-term capital loss of $1,000. What is Greg’s deductible loss in 2011?


a. $0


b. $2,560


c. $2,800


d. $2,900


e. $3,000








59. Becky Best received a long-term capital gain distribution of $350 from her stock in MXM Corporation.  She also had a $4,000 short-term capital gain, a $3,000 long-term capital loss and a short-term capital loss carryover from 2010 of $1,200. What is Becky’s net capital gain or (loss)?


a. $150


b. $4,000


c. ($3,000)


d. ($4,200)




60. For 2011, Steven Sutton had taxable income of $40,000. His stock transactions in 2011 were as follows:


Stock Purchased Sold Adjusted Basis Selling Price


A 8/29/82 1/7/11 $4,000 $6,800


B 6/28/89 8/25/11 3,200 200


C 1/14/11 7/14/11 6,000 4,500


D 2/18/11 12/20/11 7,000 3,000


What is Steve’s net capital loss for 2011 and his carryover to 2012?


a. Deduction: $3,000; carryover: $2,700


b. Deduction: $3,000; carryover: $3,000


c. Deduction: $5,700; carryover: $3,000


d. Deduction: $5,700; carryover: $2,700




61. Oscar Orsen is an officer of Atlas Company. He loaned the company $10,000 but was unable to collect it because the company went bankrupt a year after the loan was made. Oscar did not own any stock in the company and the loan was not a condition of employment. How should Oscar report this loss?


a. Nondeductible gift


b. Short-term capital loss


c. Long-term capital loss


d. Miscellaneous itemized deduction


e. Business bad debt




64. Ralph Rodgers, a calendar year taxpayer, purchased stock on June 18, 2010, for $8,000. The stock became worthless on June 4, 2011. What is Ralph’s loss in 2011?


a. $8,000 short-term capital loss


b. $8,000 long-term capital loss


c. No loss


d. $8,000 itemized deduction




65. Sam Shoeman, a calendar year taxpayer, purchased stock in Eaton Corporation on July 12, 2011, for $2,500.


On December 12, 2011, Eaton went bankrupt. What is Sam’s 2011 loss?


a. $2,500 long-term capital loss


b. $2,500 ordinary loss


c. $2,500 short-term capital loss


d. No loss






1. An S corporation is permitted to adopt a Keogh plan or a SEP IRA for its employees. 




2. A deduction to a Keogh plan for the prior year is allowed as long as the plan is established and the contribution made by the due date of the return (including extensions). 




3. A deductible IRA would convert tax-exempt municipal bond interest into fully taxable ordinary income. 


4. IRA distributions may be made with no penalties prior to age 59 ½ if:


(1.) Made to a spouse age 59 ½ or more, or


(2.) If actual retirement occurred.




5. Contributions to defined contribution plans are capped at $220,000




6. If a qualified pension plan is contributory, the annuitant may use either the “exclusion ratio” or the “cost recovery” methods of reporting. 








24. Moira Sweeney, age 68 and retired, receives a $5,000 partial distribution from her 401(k) plan. The plan does not pay out an annuity. Immediately before the distribution, her account balance is $100,000, including $20,000 in nondeductible contributions. How much of the $5,000 distribution must Moira include in gross income?


a. $0


b. $1,000


c. $4,000


d. $5,000




25. Generally, a qualified plan must cover a broad spectrum of employees on a nondiscriminatory basis.


Specifically, the plan may qualify if it covers at a minimum:


a. All full-time employees who are age 25 and over


b. 70 percent of all nonhighly compensated employees


c. All full-time employees over age 21 with at least three years of service


d. All full-time employees earning in excess of the FICA limit




26. The following statements on vesting are all true, except:


a. Vesting means that the employee has a present nonforfeitable right to enjoy a future benefit.


b. Employees are immediately vested in their own contributions.


c. Once a pension plan is 100 percent vested, the account balance will be paid to a named beneficiary if the employee dies prior to normal retirement.


d. Normally, if an employee who is fully vested in a pension plan leaves employment for any reason, he


receives no benefits until normal retirement, perhaps decades later.




27. United Mechanics, Inc. established a qualified 401(k) plan. Scott Meadows, the head mechanic, was paid a flat salary of $40,000. The maximum employer contribution deduction allowable with respect to Scott’s account in one year is:


a. $10,500


b. $15,500


c. $40,000


d. $10,000








28. For eligible individuals under age 50 the annual deduction to an IRA is limited to the following maximum:


a. $5,000, or 100 percent of compensation, whichever is less.


b. $2,000, or 25 percent of earned income (net of IRA contribution), whichever is less.


c. The first $2,250 of earned income.


d. The lesser of $2,000 or 100 percent of taxable income attributable to earned income.






29. Cathy Lyons has been receiving a $100 monthly annuity from her qualified plan account over several years. At the end of the current year, her account balance is $100,000, including a $20,000 cost basis. In order to satisfy a personal obligation, she withdraws an extra $5,000 from her account in the current year. The withdrawal does not affect the amount of her subsequent annuity payments. How much of the $5,000 distribution is taxable?


a. $0


b. $1,000


c. $4,000


d. $5,000








1. Gift taxes paid on post-1976 gifts are generally allowed as a credit against the tentative estate tax.




2. For 2011 the first $5,000,000 of the taxable estate is generally tax-free due to the allowance of a $1,730,800 tax credit.




3. The estate tax is not levied on tax-exempt municipal bonds.




4. Nine months before he died Donald Drucker gave $501,000 to his son. The gift is includible in his gross estate.




5. If the spouse of the transferor under the Uniform Transfers to Minors Act is the custodian, the property is includible in the spouse’s estate.   




33. Which of the following retained powers is not an “incident of ownership” in a life insurance policy?


a. A power to use the policy as collateral for loans not to exceed one-half its cash value.


b. A power to select a settlement option spelled out in the policy.


c. The power to cancel a group policy indirectly by resigning a position.


d. A power to veto a change of benefi ciary after the transfer of the policy to the current beneficiary.




34. All the following items are includible in the gross estate of the decedent, John Palmer, except:


a. Gift tax paid on a gift made by John two years before his death


b. The proceeds of life insurance on John’s life where all incidents of ownership were transferred to an


irrevocable trust 18 months prior to his death


c. The present value of a joint and survivorship annuity purchased by John’s wife, Frieda


d. Property subject to John’s testamentary general power of appointment












35. Which of the following items is not includible in the decedent’s gross estate?


a. A lump-sum distribution from a qualified profit-sharing plan to decedent’s daughter who elects fi ve-year forward averaging


b. A gift of life insurance two years prior to death to decedent’s son


c. Unpaid dividends when death occurred prior to the record date


d. The widow’s statutory share of the estate under the State Probate Act (in lieu of dower)




36. The following is a partial list of relevant items available when fi ling Wilma Pott’s estate tax return:


(1.) Two years before she died, Wilma sold stocks, now worth $90,000, then $65,000, for $30,000, to her


son. (2.) Wilma owned a summer house, worth $50,000, in joint tenancy with her sister, Betsy, who paid for it. (3.) Wilma’s home was held in a tenancy by the entirety with her husband, Wilbur, who paid for it, and is worth $150,000. (4.) Wilma’s clothes and shoes are worth $800.


From the above, Wilma’s gross estate includes:


a. $75,800


b. $100,800


c. $160,800


d. $800




37. A number of deductions are allowable from the gross estate. Which of the following expenditures is




a. Postmortem interest on decedent’s mortgage


b. A casualty loss sustained by a beneficiary with respect to property distributed from the estate


c. Estimated commissions on the planned sale of land owned by the decedent


d. Funeral expenses




38. Which of the following taxes are not deductible from the gross estate as a claim against the estate?


a. Unpaid gift taxes on gifts made by the decedent


b. Unpaid state income tax on decedent’s income


c. Assessed property taxes on hunting lodge jointly held with decedent’s brother, who purchased it


d. Assessed, but unpaid, income taxes relating to one of the decedent’s previous federal tax returns



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