You are on page 1of 42

Directed Independent Adult Learning

COURSE SYLLABUS
FEDERAL INCOME TAXATION

ACC-421-GS
Course Syllabus
FEDERAL INCOME TAXATION
ACC-421-GS
©Thomas Edison State College
January 2008
Course Essentials

Federal Income Taxation is a one-semester course designed to help you


learn the basics of federal income taxation of individuals. The course
covers the basic tax calculations, filing status, gross income inclusions and
exclusions, gain and loss recognition, business and personal deductions,
tax credits, and filing requirements. It also looks briefly at the taxation of
partnerships, as well as that of corporations and special “S corporations.”

Objectives
By successfully completing the learning activities of the course, including
careful study of the textbook, use of chapter self-tests, and problem solving,
you should be able to:
1. Apply all steps in preparing individual taxable income and tax.
2. Indicate which items are included in income and which items are
excluded.
3. Recognize deductible business expenses and nonbusiness deductions.
4. Calculate depreciation, bad debts, and losses.
5. Apply the rules for capital and ordinary gain and loss recognition.
6. Demonstrate conversance with available individual tax credits.
7. Articulate the fundamentals of the taxation of corporations and
partnerships.

Course Syllabus—Course Essentials


S-3
Required Textbook
In addition to the Course Syllabus, which consists of “Course Essentials,”
“Course Calendar,” “Written Assignments,” and two appendixes, you
will need the following text to do the work of the course.

West Federal Taxation: Individual Income Taxes, 2008 Edition, ed. William
H. Hoffman Jr., James E. Smith, and Eugene Willis (Thomson South-
Western, 2008)

Course Structure
Federal Income Taxation is a three-credit, twelve-week course, consisting
of ten written assignments and two examinations.

In the weeks in which you are not scheduled to take an examination, you
will complete a written assignment and submit it to your mentor for
correction and grading. The course requires you to take two examina-
tions, a midterm and a final.

Written Assignments
Federal Income Taxation has ten (10) written assignments that help to
solidify and summarize the tax laws for you. The written assignments
consist of discussion questions and problems from the end of each
assigned chapter in the textbook (from the chapter’s “Problem Materials”
section). The specific problems to solve and send to your mentor are
listed in the “Written Assignments” section of the syllabus. Be sure to
show all computations.

Examinations
Federal Income Taxation requires you to take two examinations, a midterm
and a final. See the “Course Calendar” for the dates for scheduling your
examinations. Refer to the Student Handbook for information on all exam
policies and procedures.

You may take examinations only during the designated exam weeks, at an
approved location, and with an approved proctor. During the first week of
the semester you must submit a “Proctor Request Form” with the necessary
documentation to the Office of Test Administration.

Course Syllabus—Course Essentials


S-4
The midterm and final are both open-book exams, which means you may
bring texts and notes and use a calculator. The midterm examination covers
all chapters assigned in Weeks 1–6. The final examination covers all chapters
assigned in Weeks 8–11. Both exams are three hours long and comprise true-
false questions, multiple-choice questions, and problems with different parts.

Grades
Letter grades in the course are based on the following numerical grades:

A = 93–100 C+ = 78–79
A– = 90–92 C = 73–77
B+ = 88–89 C– = 70–72
B = 83–87 D = 60–69
B– = 80–82 F = Below 60 (no credit)

Assignments and examinations carry the following weights:


Written assignments 50 percent
Midterm examination 30 percent
Final examination 20 percent
To receive credit for the course, you must earn a letter grade of D or
higher on the weighted average of all assigned course work (e.g., exams,
assignments, projects, papers, etc.). You will receive a score of 0 for any
work not submitted.

Strategies for Success


To succeed in this course, consider following these steps and study tips:

1. Read carefully the entire “Course Essentials” section of the syllabus, making
sure that all aspects of the course are clear to you and that you have all the
materials required for the course.
2. Take the time to read the entire Student Handbook section of the course
manual. The handbook answers many questions about how to proceed
through the course, how to schedule exams and arrange for proctors, and
how to get the most from your educational experience at Thomas Edison
State College.

Course Syllabus—Course Essentials


S-5
3. Each week, consult the “Course Calendar” in the syllabus to determine the
specific assignment for that week. The calendar also indicates the due dates
for submitting written assignments and when you should schedule your
examinations. It is essential that you follow the calendar each week to ensure
that you stay on track throughout the course. To fill in the assignment due
dates and exam dates, use the table of week-by-week dates in the General
Course Instructions section of the course manual
4. Study the assigned readings in the textbook carefully. We strongly recom-
mend that after completing each assigned chapter in the textbook, you test
yourself by doing the chapter self-tests in Appendix A of the syllabus and
check your answers using Appendix B.

Course Syllabus—Course Essentials


S-6
Course Calendar

Using the table of week-by-week dates in the General Course Instructions


section of the course manual, write the dates for the current semester in the
second column. In the last column, fill in the actual date for sending each
assignment and taking examinations.

Week Dates Textbook Written Assignment / Due Date/


Chapter(s) Examination Exam Date
1
1 1 Submit by Sunday of
Week 1
2
2 2 and 3 Submit by Sunday of
Week 2
3
3 4 Submit by Sunday of
Week 3
4
4 5 Submit by Sunday of
Week 4
5
5 6 Submit by Sunday of
Week 5
6
6 7 Submit by Sunday of
Week 6
MIDTERM
7 review
EXAMINATION
7
8 8 Submit by Sunday of
Week 8

Course Syllabus—Course Calendar


S-7
Week Dates Textbook Written Assignment / Due Date/
Chapter(s) Examination Exam Date
8
9 9 and 10 Submit by Sunday of
Week 9
9
10 13 and 14 Submit by Sunday of
Week 10
10
11 20 Submit by Sunday of
Week 11
FINAL
12 review
EXAMINATION

Please remember to submit your DIAL Course Evaluation.

Course Syllabus—Course Calendar


S-8
Written Assignments

Complete the written assignments given below, and submit them to your
mentor by the date indicated in the “Course Calendar” and after each
assignment.

Each assignment consists of end-of-chapter discussion questions and


problems from the West Federal Taxation textbook (from the chapter’s
“Problem Materials” section). Show all computations.

Assignment 1 (Chapter 1)

Chapter 1 Problem Materials


Question 35 (flat tax)
Question 40 (IRS audits)
Question 41 (statute of limitations)
Question 45 (statute of limitations)
Question 50 (justification of tax law)

Assignment 1 due Sunday of Week 1 ________

Assignment 2 (Chapters 2 and 3)

Chapter 2 Problem Materials


Question 9 (types of regulations)
Question 10 (reference citations)
Question 11 (ranking priority of authority)

Course Syllabus—Written Assignments


S-9
Question 12 (judicial citations)
Question 20 (judicial alternatives: trial courts)

Chapter 3 Problem Materials


Question 3 (gross income: nontaxable items)
Question 6 (impact of stock sales, IRA, casualty and medical
expenses)

Question 29 (taxable income calculation)


Question 32 (personal and dependency exemptions)
Question 35 (dependency exemptions)
Question 38 (multiple support agreement)
Question 51 (sale of capital assets)

Assignment 2 due Sunday of Week 2 ________

Assignment 3 (Chapter 4)

Chapter 4 Problem Materials


Question 13 (who is the taxpayer?)
Question 31 (accrual versus cash basis)
Question 34 (accrual method and disputed income)
Question 35 (doctrine of constructive receipt)
Question 36 (income recognition)
Question 45 (alimony, child support, and property transfer)
Question 58 (avoiding unexpected tax liability)

Assignment 3 due Sunday of Week 3 ________

Course Syllabus—Written Assignments


S-10
Assignment 4 (Chapter 5)

Chapter 5 Problem Materials


Question 10 (damages)
Question 31 (gifts and fringe benefits)
Question 35 (scholarships)
Question 37 (damages)
Question 43 (meals and lodging)
Question 44 (retirement—decision making)
Question 46 (fringe benefits)
Question 56 (tax benefit rule)
Question 57 (income from discharge of indebtedness)

Assignment 4 due Sunday of Week 4 ________

Assignment 5 (Chapter 6)

Chapter 6 Problem Materials


Question 12 (method of accounting: cash versus accrual)
Question 13 (cash basis and calendar year taxpayer)
Question 24 (AGI computation—sole proprietorship)
Question 34 (deductions for and from AGI)
Question 37 (deductible losses)
Question 38 (cash method versus accrual method)
Question 41 (deductions for and from AGI)
Question 42 (illegal business)
Question 54 (another taxpayer’s obligations)

Assignment 5 due Sunday of Week 5 ________

Course Syllabus—Written Assignments


S-11
Assignment 6 (Chapter 7)

Chapter 7 Problem Materials


Question 1 (bad debt)
Question 5 (bad debt)
Question 7 (loan between related parties)
Question 19 (casualty loss occurrence)
Question 21 (casualty loss)
Question 32 (bad debt: nonbusiness)
Question 34 (bad debt: business)
Question 41 (research and development)
Question 49 (net operating losses)

Assignment 6 due Sunday of Week 6 ________

Assignment 7 (Chapter 8)

Chapter 8 Problem Materials


Question 1 (personalty)
Question 5 (relevant tax issues, capitalization)
Question 19 (section 179)
Question 31 (depreciation allowed or allowable)
Question 40 (cost recovery)
Question 45 (MACRS and section 179 expensing)
Question 50 (listed property: automobile)
Question 51 (listed property: not automobile—GVW)
Question 58 (start-up costs)

Course Syllabus—Written Assignments


S-12
Question 61 (intangible drilling costs)

Assignment 7 due Sunday of Week 8 ________

Assignment 8 (Chapters 9 and 10)

Chapter 9 Problem Materials


Question 3 (employer–employee relationship: key factors)
Question 5 (determining auto expenses: actual cost versus automatic
mileage methods)

Question 15 (education expenses)


Question 19 (application of cutback rule)
Question 39 (moving expenses)
Question 40 (education expense)
Question 46 (partially reimbursed expenses)
Question 47 (partially reimbursed expenses)

Chapter 10 Problem Materials


Question 4 (medical expenses)
Question 7 (medical expenses)
Question 18 (charitable contribution: benefit received)
Question 20 (charitable deductions)
Question 22 (charitable contribution: various)
Question 24 (medical expense deduction and reimbursement)
Question 25 (medical expense)
Question 47 (overall limitation, itemized deductions)
Question 48 (overall limitation, itemized deductions)

Assignment 8 due Sunday of Week 9 ________

Course Syllabus—Written Assignments


S-13
Assignment 9 (Chapters 13 and 14)

Chapter 13 Problem Materials


Question 2 (refundable versus nonrefundable credits)
Question 13 (tax credit for elderly or disabled taxpayers)
Question 17 (child tax credit versus credit for child and dependent
care expenses)

Question 18 (credit for child and dependent care)


Question 20 (education tax credits)
Question 35 (earned income credit)
Question 36 (earned income credit)
Question 39 (foreign tax credit—individual)
Question 40 (foreign tax credit—corporation)

Chapter 14 Problems
Question 15 (sale and personal use assets)
Question 30 (amount realized and basis determination)
Question 35 (bond gain or loss)
Question 36 (sale of personal use assets)
Question 39 (sale of stock and identification)
Question 40 (sale of stock and identification)
Question 45 (gifted property)
Question 57 (property converted from personal use)
Question 58 (property converted from personal use)

Assignment 9 due Sunday of Week 10 ________

Course Syllabus—Written Assignments


S-14
Assignment 10 (Chapter 20)

Chapter 20 Problem Materials


Question 16 (dividends received deduction: general characteristics)
Question 29 (effect on S status)
Question 31 (comparison of formation requirements for partnerships
and corporations)

Question 32 (recognition of income to partner on formation of


partnership)

Question 33 (effect of liabilities on basis to a partner of partnership


interest)

Question 34 (fluctuation of partner’s basis in partnership)


Question 40 (corporation capital gains and losses)
Question 45 (dividends received deduction)
Question 48 (individuals and corporations compared)
Question 54 (tax computation—S corporation)

Assignment 10 due Sunday of Week 11 ________

Course Syllabus—Written Assignments


S-15
Appendix A
Chapter Self-Tests

Chapter 1

True or False
____1. Without the ratification of the Sixteenth Amendment to the U.S.
Constitution, the federal income tax on corporations would not be valid.
____2. State and local general sales taxes are examples of progressive taxes.
____3. Cornelius converts his pleasure boat to a charter fishing boat. This is an
example of personal use personalty becoming business use personalty.
____4. Currently, the tax base for the Medicare component of the FICA is not
limited to a dollar amount.
____5. For omissions from gross income in excess of 25% of that reported, there is
no statute of limitations on additional income tax assessments by the IRS.

Multiple Choice
6. Taxes not imposed by the federal government include:
a. liquor excise tax.
b. customs duties (tariffs on imports).
c. general sales tax.
d. gas guzzler tax.
e. None of the above.

7. Spencer and Ashley are married and live in a common law state. Spencer wants to
make gifts to their four children in 2007. What is the maximum amount of the annual
exclusion they will be allowed for these gifts?
a. $48,000
b. $96,000
c. $1,096,000
d. $2,096,000
e. None of the above.

8. A characteristic of FICA is that:


a. it is imposed only on the employer.
b. it applies when a 19-year-old son works for his parents.
c. it provides a modest source of income in the event of loss of
employment.
d. it is administered by both state and federal governments.
e. None of the above.

Course Syllabus—Appendix A
S-16
9. In terms of probability, which of the following taxpayers would be least likely to be
audited by the IRS?
a. Taxpayer is a wage earner at a General Motors auto assembly plant.
b. Taxpayer owns and operates a cash discount liquor store.
c. Taxpayer just received a $2 million jury award against a manufacturer of
automobile tires.
d. Taxpayer owns and operates a used car dealership.
e. Taxpayer held the winning Powerball ticket.

10. Allowing a domestic production activities deduction for certain manufac-


turing income can be justified:
a. as mitigating the effect of the annual accounting period concept.
b. by economic considerations.
c. as promoting administrative feasibility.
d. based on the wherewithal to pay concept.
e. None of the above.

Chapter 2

True or False
____1. Regulations are arranged in the same sequence as the Code.
____2. A taxpayer must pay any tax deficiency assessed by the IRS and sue for a
refund to bring suit in the U.S. District Court.
____3. The granting of a Writ of Certiorari indicates that at least five members of the
Supreme Court believe that an issue is of sufficient importance to be heard
by the full court.
____4. A nonacquiescence by the IRS means that a particular court decision is of no
value.
____5. The name of the free IRS online newsletter is The Digital Daily.

Multiple Choice
6. Tax bills are handled by which committee in the U.S. House of Representatives?
a. Taxation Committee
b. Ways and Means Committee
c. Finance Committee
d. Budget Committee
e. None of the above.

7. Subchapter K covers which specific area of tax law?


a. tax rates
b. partnerships
c. capital gains and losses
d. corporations
e. None of the above.

Course Syllabus—Appendix A
S-17
8. Which of the following sources has the highest tax validity?
a. Revenue Ruling
b. Revenue Procedure
c. Regulations
d. Internal Revenue Code section
e. None of the above.

9. Which of these citations does not refer to an administrative release?


a. Rev. Rul. 97-8, I.R.B. No. 7, 4
b. Ltr. Rul. 9333032 (May 24, 1993)
c. TAM 9510001 (March 6, 1995)
d. T.C. Summary Opinion, 2005-111
e. All of the above.

10. A taxpayer who loses in a U.S. District Court may appeal directly to the:
a. Supreme Court
b. U.S. Tax Court
c. U.S. Court of Federal Claims
d. U.S. Circuit Court of Appeals
e. All of the above.

Chapter 3

True or False
____1. Kim, a resident of Korea, is a citizen of the United States. Any income Kim
receives from land he owns in Korea is not subject to the U.S. income tax.
____2. Tad claims his 70-year-old mother as a dependent. The mother may not claim
an additional standard deduction for her age.
____3. Derek is a surviving spouse. If he has itemized deductions of $11,000 for
2007, Derek should not claim the standard deduction.
____4. Dan and Donna are husband and wife and file separate returns for the year.
If Dan itemizes his deductions from AGI, Donna cannot claim the standard
deduction.
____5. Darren, age 20 and not disabled, earns $4,500 during 2007. Darren’s parents
cannot claim him as a dependent unless he is a full-time student.

Multiple Choice
6. During 2007, Marie had the following transactions:

Salary $40,000
Bank loan (proceeds used to buy personal auto) 10,000
Alimony received 6,000
Child support received 12,000
Inheritance from deceased aunt 50,000

Course Syllabus—Appendix A
S-18
What is Marie’s AGI?
a. $40,000
b. $46,000
c. $52,000
d. $96,000
e. None of the above.

7. Toby, age 15, is claimed as a dependent by his grandmother. During 2007 Toby had
interest income from City of Omaha bonds of $1,000 and earnings from a part-time
job of $700. What is Toby’s taxable income?
a. $0
b. $1,700 – $700 – $850 = $150
c. $1,700 – $1,000 = $700
d. $1,700 – $850 = $850
e. None of the above.

8. Troy and Edie are married and under 65 years of age. During 2007 they furnish more
than half of the support of their 18-year-old daughter, Jobeth, who lives with them.
Jobeth earns $15,000 from a part-time job, most of which she sets aside for future
college expenses. Troy and Edie also provide more than half of the support of Troy’s
cousin who lives with them. Edie’s father, who died on January 3, 2007, at age 80, has
for many years qualified as their dependent. How many personal and dependency
exemptions should Troy and Edie claim?
a. two
b. three
c. four
d. five
e. None of the above.

9. The Caplins filed a joint return for 2006. They provide more than 50% of the support
of Sophie, Gabe, and Isaiah. Sophie (age 18) is a niece and earns $4,000 from a part-
time job. Gabe (age 25) is their son and is a full-time law student. He received from
the university a $3,800 scholarship for tuition. Isaiah is a brother who is a citizen of
Israel but resides in Canada. Sophie and Gabe live with the Caplins. How many
personal and dependency exemptions can the Caplins claim on their federal income
tax return?
a. two
b. three
c. four
d. five
e. None of the above.

10. During the year, Kim sold the following assets: business auto for a $1,000 loss, stock
investment for a $1,000 loss, and pleasure yacht for a $1,000 loss. Presuming
adequate income, how much of these losses may Kim claim?
a. $0
b. $1,000
c. $2,000
d. $3,000
e. None of the above.

Course Syllabus—Appendix A
S-19
Chapter 4
True or False
____1. Judy is a cash basis attorney. In 2007 she performed services in connection
with the formation of a corporation and received stock with a value of $3,000
for her services. By the end of the year, the value of the stock had decreased
to $1,000. She continued to hold the stock. Judy must recognize $1,000 of
gross income from the stock for 2007.
____2. Ralph purchased his first Series EE bond during the year. He paid $709 for a
10-year bond with a $1,000 maturity value. The yield to maturity on the
bonds was 3.5%. Ralph is not required to recognize the $291 ($1,000 – $709)
original issue discount until the bond matures.
____3. In December 2007, Mary collected the December 2007 and January 2008 rent
from a tenant. Mary is a cash basis taxpayer. The amount collected in
December 2007 for the 2008 rent should be included in her 2008 gross
income.
____4. In 2007 Jimmy, a cash basis taxpayer, was offered $3,000,000 for signing a
professional baseball contract. He rejected the offer in favor of $900,000 per
year for 4 years beginning in 2008. Jimmy must recognize $3,000,000 income
in 2007 because it was constructively received by him.
____5. Rhonda has a 30% interest in the capital and profits of the ABC Partnership.
Her share of the profits for 2007 was $60,000. She withdrew $40,000 from the
partnership in 2007. In January 2008, after her share of the profits for 2007
had been computed, she withdrew her remaining $20,000 share of 2007
profits. As a result, Rhonda must recognize $40,000 of gross income in 2007
and $20,000 in 2008.

Multiple Choice
6. The Blue Utilities Company paid Sue $1,500 for the right to lay an underground
electric cable across her property anytime in the future.
a. Sue must recognize $1,500 gross income in the current year if the company did
not install the cable during the year.
b. Sue must recognize $1,500 gross income in the current year regardless of
whether the company installed the cable during the year.
c. Sue must recognize $1,500 gross income in the current year, and when the cable
is installed she must reduce her cost basis in the land by $1,500.
d. Sue is not required to recognize gross income from the receipt of the funds, but
she must reduce her cost basis in the land by $1,500.
e. None of the above.

7. Kathy operates a gym. She sells memberships that entitle the member to use the
facilities at any time. A one-year membership costs $360 ($360/12 = $30 per month); a
two-year membership costs $600 ($600/24 = $25 per month). Cash payment is
required at the beginning of the membership period. On July 1, 2007, Kathy sold a
one-year membership and a two-year membership.

I. If Kathy is a cash basis taxpayer, her 2007 gross income from the contracts is $960
($360 + $600).

Course Syllabus—Appendix A
S-20
II. If Kathy is an accrual basis taxpayer, her 2007 gross income from the contracts is
$330 [(6/12 × $360) + (6/24 × $600)].
III. If Kathy is an accrual basis taxpayer, her 2008 gross income from the contracts is
$630 [(6/12)($360) + $450].

a. Only I is true.
b. Only I and II are true.
c. Only II and III are true.
d. I, II, and III are true.
e. None of the above.

8. The Green Company, an accrual basis taxpayer, provides business-consulting


services. Clients generally pay a retainer at the beginning of a 12-month period. This
entitles the client to no more than 40 hours of services. Once the client has received
40 hours of services, Green charges $400 per hour. Green Company allocates the
retainer to income based on the number of hours worked on the contract. At the end
of the tax year, the company had $40,000 of unearned revenues from these contracts.
The company also had $10,000 in unearned rent income received from excess office
space leased to other companies. Based on the above, what must Green include in
gross income for the current year?
a. $0
b. $10,000
c. $40,000
d. $50,000
e. None of the above.

9. As a general rule:
I. Income from property is taxed to the person who owns the property.
II. Income from services is taxed to the person who earns the income.
III. The assignee of income from property must pay tax on the income.
IV. The person who receives the benefit of the income must pay the tax on the
income.

a. Only I and II are true.


b. Only III and IV are true.
c. I, II, and III are true, but IV is false.
d. I, II, III, and IV are true.
e. None of the above is true.

10. Under the terms of a divorce agreement, Kim was to pay her husband, Tom, $4,000
per month in alimony and $1,500 per month in child support. For a twelve-month
period, Kim can deduct from gross income (and Tom must include in gross income):
a. $0
b. $18,000
c. $48,000
d. $66,000
e. None of the above.

Course Syllabus—Appendix A
S-21
Chapter 5

True or False
____1. The Red Tire Company had such a good year that the owner decided to give
all of the employees a $500 Christmas bonus. None of the employees had
expected to receive the bonus. The employees may exclude the $500 from
gross income as a gift.
____2. Zack was the beneficiary of a life insurance policy on his wife. Zack had paid
$20,000 in premiums on the policy. He collected $50,000 upon the death of
his wife. He used the insurance proceeds to purchase a United States
Government bond, which paid him $2,000 interest income during the year.
Zack is not required to recognize any income from the above transactions.
____3. Agnes receives a $5,000 scholarship that covers her tuition at Parochial High
School. She may exclude the $5,000 scholarship she received for tuition at the
private high school.
____4. In 2007 Joyce was in an automobile accident and suffered physical injuries.
The accident was caused by Ramon’s negligence. In 2008 Joyce collected
from the insurance company. She received $15,000 for loss of income, $5,000
punitive damages, and $8,000 for medical expenses that she had not
deducted on her 2007 tax return. As a result of the above, Joyce’s 2008 gross
income is increased by $28,000.
____5. Carla is president of the New State University and is provided a house on
campus so that she will be readily accessible in the case of an emergency and
to entertain faculty, students, alumni, and prospective donors. In her
contract, she is required to live in the house. The rental value of the residence
would be $48,000 a year. Carla must include the $48,000 rental value of the
home in her gross income.

Multiple Choice
6. Sharon’s automobile slid into a ditch. A stranger pulled her out. Sharon offered to
pay $25, but the stranger refused. Sharon slipped the $25 in the stranger’s truck when
he was not looking.
a. The $25 is a nontaxable gift received by the stranger because Sharon was not
legally required to pay him.
b. The $25 is a nontaxable gift because the stranger did not ask to receive it.
c. The $25 is taxable compensation for services rendered.
d. The $25 is a nontaxable service award.
e. None of the above.

7. Green Company purchased a $1 million life insurance policy on the company’s chief
executive officer, Howard. After the company had paid $300,000 in premiums,

Course Syllabus—Appendix A
S-22
Howard died and the company collected the $1 million face amount of the policy.
The company also purchased group-term life insurance on all its employees.
Howard’s widow, Agnes, received the $150,000 proceeds from the group-term life
insurance policy.
a. Green Company must include $700,000 ($1,000,000 – $300,000) in gross income
and Agnes must include $150,000 in gross income.
b. Green Company can exclude $700,000 ($1,000,000 – $300,000) from gross
income, but Agnes must include $150,000 in gross income.
c. Agnes can exclude the life insurance proceeds of $150,000, but Green Company
must include $700,000 ($1,000,000 – $300,000) in gross income.
d. Green Company and Agnes can exclude the life insurance proceeds of
$1,000,000 and $150,000 respectively from gross income.
e. None of the above.

8. Roger, age 19, is a full-time student at State College and a candidate for a bachelor’s
degree. During 2007 he received the following payments:

State scholarship for ten months (tuition and books) $ 3,600


Loan from college financial aid office 1,500
Cash support from parents 3,000
Interest on CDs 1,700
Cash prize awarded in contest 500
$10,300

What is Roger’s adjusted gross income for 2007?


a. $1,700
b. $2,200
c. $5,800
d. $10,300
e. None of the above.

9. All employees of Mauve Company are covered by a group hospitalization insurance


policy, but the employees must pay the premiums (which are withheld from the
employee’s wages). None of the employees has sufficient medical expenses to
deduct them as an itemized deduction. If the employer reduced each employee’s
pay by the cost of the insurance and the employer paid the premiums:
a. all of the employees’ income after tax and insurance cost would increase.
b. only the high income (35% marginal tax bracket) employees would benefit.
c. only the low income (10% and 15% marginal tax bracket) employees would
benefit.
d. all of the employees’ income after tax and insurance cost would remain the
same.
e. None of the above.

Course Syllabus—Appendix A
S-23
10. The Royal Motor Company manufactures automobiles. Employees of the company
can buy a new automobile for Royal’s cost plus 2%. The automobiles are sold to
dealers at cost plus 20%. Generally, employees of Local Dealer, Inc., are allowed to
buy a new automobile from the company at the dealer’s cost. Officers of Local Dealer
are allowed to use a company vehicle (for personal use) at no cost.
a. None of the employees who take advantage of the fringe benefits described
above is required to recognize income.
b. Employees of Royal are required to recognize as gross income 18% (20% – 2%)
of the cost of the automobile purchased.
c. Employees of Local Dealer are required to recognize as gross income the gross
profit Local Dealer loses as a result of the sale to the employees.
d. Local Dealer officers must recognize gross income from the personal use of the
company vehicles.
e. None of the above.

Chapter 6

True or False
____1. A taxpayer in the 25% tax bracket may receive a different tax benefit for a
$100 expenditure that is classified as a deduction from AGI than he or she
will receive for a $100 expenditure that is classified as a deduction for AGI.
____2. A moving expense that is reimbursed by the employer is a deduction for
AGI, whereas an unreimbursed moving expense is classified as an itemized
deduction.
____3. Rob, a shareholder-employee of Falcon, Inc., receives a $300,000 salary. The
IRS classifies $100,000 of this amount as unreasonable compensation. The
effect of this reclassification is to decrease Rob’s gross income by $100,000.
____4. Susan is a sales representative for a U.S. weapons manufacturer. She makes a
$100,000 “grease” payment to a U.S. government official associated with a
weapons purchase by the U.S. Army. She makes a similar payment to a
Saudi Arabian government official associated with a similar sale. Neither of
these payments is deductible by Susan’s employer.
____5. Theo owns a vacation home that is classified in the personal use/rental use
category. Rent income is $9,000, while property taxes and mortgage interest
allocated to the rental use part are $12,000. Only $9,000 of the $12,000
expenses can be deducted.

Course Syllabus—Appendix A
S-24
Multiple Choice
6. In preparing his 2007 federal income tax return, Sam, who is not married, incorrectly
claimed alimony payments of $12,000 as an itemized deduction (rather than as a
deduction for AGI). Sam’s AGI is $60,000 and itemized deductions (which consist of
the alimony, property taxes, and mortgage interest) are $20,000. Which of the
following statements is correct?
a. The error will result in taxable income being overstated.
b. The error will result in taxable income being understated.
c. The error could result in either taxable income being overstated or understated.
d. The error will have no effect on taxable income.
e. None of the above.

7. Janice is single, had gross income of $38,000, and incurred the following expenses:

Charitable contribution $2,500


Taxes and interest on home 9,000
Legal fees incurred in a tax dispute 1,000
Medical expenses 4,000
Penalty on early withdrawal of savings 200

What is her AGI?


a. $21,300
b. $28,800
c. $32,800
d. $35,500
e. $37,800

8. During 2007, the first year of operations, Silver, Inc., pays salaries of $175,000. At the
end of the year, employees have earned salaries of $20,000 that are not paid by Silver
until early in 2008. What is the amount of the deduction for salary expense?
a. If Silver uses the cash method, $175,000 in 2007 and $0 in 2008.
b. If Silver uses the cash method, $0 in 2007 and $195,000 in 2008.
c. If Silver uses the accrual method, $175,000 in 2007 and $20,000 in 2008.
d. If Silver uses the accrual method, $195,000 in 2007 and $0 in 2008.
e. None of the above is correct.

Course Syllabus—Appendix A
S-25
9. Angela, a real estate broker, had the following income and expenses in her business:

Commissions income $100,000


Expenses:
Commissions paid to nonbrokers for referrals 20,000
(illegal under state law and subject to
criminal penalties)
Commissions paid to other real estate brokers 10,000
for referrals (not illegal under state law)
Travel and transportation 12,000
Supplies 4,000
Office and phone 5,000
Parking tickets 500

How much net income must Angela report from this business?
a. $48,500
b. $49,000
c. $60,000
d. $68,500
e. $69,000

10. Sarah incurred the following expenses for her dependent son during the current
year:

Payment of principal on son’s automobile loan $5,000


Interest on above loan 2,000
Payment of son’s property taxes 1,200
Payment of principal on son’s personal residence 1,500
loan
Payment of interest on son’s personal residence loan 8,000

How much may Sarah deduct in computing her itemized deductions?


a. $0
b. $9,200
c. $11,200
d. $17,700
e. None of the above.

Chapter 7

True or False
____1. Accrual basis taxpayers can use the reserve method for computing
deductions for bad debts.
____2. The amount of complete worthlessness on a nonbusiness bad debt is
deducted at final settlement.

Course Syllabus—Appendix A
S-26
____3. Al, who is single, has a gain of $30,000 on the sale of §1244 stock (small
business stock) and a loss of $60,000 on the sale of § 1244 stock. As a result,
Al has a $20,000 net capital gain and a $50,000 ordinary loss.
____4. If a storm damages a taxpayer’s residence and car, the loss on the residence
and the loss on the car must each be reduced by $100.
____5. A deduction is not available for research and experimental expenditures
which are capitalized.

Multiple Choice
6. Mable is in the business of factoring accounts receivable. Last year, she purchased a
$20,000 account receivable for $15,000. This year, the account was settled for $18,000.
How much loss can Mable deduct and in which year?
a. $2,000 for the current year
b. $2,000 for the prior year and $3,000 for the current year
c. $3,000 for the current year
d. $5,000 for the current year
e. None of the above.

7. Two years ago, Green Corporation, an accrual basis taxpayer, sold


merchandise on credit to John, an individual. Green’s account receivable
from John was $20,000. Last year, John filed for bankruptcy, and Green was
notified that it could expect to receive 20 cents on the dollar. Accordingly,
Green took a $16,000 bad debt deduction on last year’s tax return. In June of
the current year, Green received a $6,000 payment from John in final
settlement of the debt. How should Green account for the payment in the
current year?
a. File an amended tax return for last year.
b. Report no income for the current year.
c. Report $2,000 of income for the current year.
d. Report $4,000 of income for the current year.
e. Report $6,000 of income for the current year.

8. Jim had a car accident in which his car was completely destroyed. At the time of the
accident, the car had a fair market value of $30,000 and an adjusted basis of $40,000.
Jim used the car 100% of the time in connection with his management of apartment
buildings. Jim received an insurance recovery of 80% of the value of the car at the
time of the accident. If Jim’s AGI for the year is $50,000, determine his deductible loss
on the car.
a. $900
b. $6,000
c. $10,900
d. $30,000
e. None of the above.

Course Syllabus—Appendix A
S-27
9. Swan Corporation incurred the following expenditures in connection with the
development of a new product:

Salaries $40,000
Materials 8,000
Advertising 3,000
Market survey 2,000

If Swan Corporation elects to expense research and experimental expenditures,


determine the amount of the deduction for research and experimental expenditures.
a. $40,000
b. $48,000
c. $50,000
d. $51,000
e. $53,000

10. Cream, Inc.’s taxable income for 2007 before any deduction for an NOL carryforward
of $30,000 is $70,000. Cream’s qualified production activities income (QPAI) is
$60,000. What is the amount of Cream’s domestic production activities deduction
(DPAD) for 2007?
a. $1,200
b. $1,800
c. $2,400
d. $3,600
e. None of the above.

Chapter 8

True or False
____1. The basis of cost recovery property must be reduced by the cost recovery
allowed and by not less than the cost recovery allowable.
____2. Under MACRS, if the mid-quarter convention is applicable, all property is
treated as being placed in service during the fourth quarter.
____3. The § 179 deduction can exceed $112,000 in 2007 if the taxpayer had a § 179
amount that exceeded the taxable income limitation in the prior year.
____4. Once the more-than-50% business usage test is passed for listed property, it
does not matter if the business usage for the property drops to 50% or less
during the recovery period.
____5. Cost depletion is determined by multiplying the depletion cost per unit by
the number of units produced.

Course Syllabus—Appendix A
S-28
Multiple Choice
6. On June 1 of the current year, Tab converted a machine 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?
a. $70,000
b. $90,000
c. $120,000
d. $140,000
e. None of the above.
7. Tan Company acquires a new machine (ten-year property) on January 15, 2007, at a
cost of $200,000. Tan also acquires another new machine (seven-year property) on
November 5, 2007, at a cost of $40,000. No election is made to use the straight-line
method. The company does not make the § 179 election. Determine the total
deductions in calculating taxable income related to the machines for 2007.
a. $24,000
b. $25,716
c. $102,000
d. $132,858
e. None of the above.

8. Doug purchased a new factory building on January 15, 1987, for $4,000,000. On
March 1, 2007, the building was sold. Determine the cost recovery deduction for the
year of the sale assuming he did not use the ACRS straight-line method.
a. $0
b. $15,870
c. $26,450
d. $126,960
e. None of the above.
9. In 2006, Gail had a § 179 deduction carryover of $15,000. In 2007 she elected § 179 for
an asset acquired at a cost of $95,000. Gail’s § 179 business income limitation for 2007
is $120,000. Determine Gail’s § 179 deduction for 2007.
a. $95,000
b. $105,000
c. $108,000
d. $110,000
e. None of the above.
10. Mary purchased a new five-year class asset on March 7, 2007. The asset was listed
property (not an automobile). It was used 60% for business and the rest of the time
for personal use. The asset cost $120,000. Mary made the § 179 election. The income
from the business before the § 179 deduction was $200,000. Determine the total
deductions with respect to the asset for 2007.
a. $18,000
b. $24,000
c. $72,000
d. $102,000
e. None of the above.

Course Syllabus—Appendix A
S-29
Chapter 9

True or False
____1. Janet works at Green Company’s call center. If Janet’s compensation is based
on the number of calls she handles, she is an independent contractor.
____2. Under the automatic mileage method, depreciation is not taken into account
in the mileage rate allowed.
____3. A taxpayer who lives and works in Tulsa travels to Buffalo for five days. If
three days are spent on business and two days are spent on visiting relatives,
only 60% of the airfare is deductible.
____4. Gavin, an unemployed computer program designer, moves from Sacramento
to Philadelphia to accept a job as a chef at a restaurant. Gavin’s moving
expenses are not deductible because his new job is in a different trade or
business.
____5. A taxpayer takes five clients to a Stanley Cup game. If all of the tickets (list
price of $100 each) are purchased on the Internet for $1,500 ($300 each), only
$750 ($1,500 × 50% cutback adjustment) is deductible.

Multiple Choice
6. Michael is the city sales manager for “Chick-Stick,” a national fast food franchise.
Every working day, Michael drives his car as follows:

Miles
Home to office 20
Office to Chick-Stick No. 1 15
Chick-Stick No. 1 to No. 2 18
Chick-Stick No. 2 to No. 3 14
Chick-Stick No. 3 to home 30

What is Michael’s deductible mileage?


a. 0 miles
b. 30 miles
c. 47 miles
d. 77 miles
e. None of the above.

7. During the year, Hugh went from Cleveland to Fairbanks on business. Preceding a
five-day business meeting, he spent four days vacationing at a dude ranch.
Excluding the dude ranch costs, his expenses for the trip are:

Air fare $1,800


Lodging 600
Meals 500
Entertainment 300

Course Syllabus—Appendix A
S-30
Presuming no reimbursement, deductible expenses are:
a. $3,200
b. $3,050
c. $2,800
d. $1,900
e. None of the above.

8. Carolyn is single and has a college degree in finance. She is employed as a loan
officer at a bank; her yearly AGI approximates $50,000. During 2006 she enrolled in a
weekend MBA program and incurred the following nonreimbursed expenses: $3,900
(tuition), $300 (books), $200 (other school supplies), and $200 (transportation to and
from campus). Disregarding the 2%-of-AGI limitation, as to the MBA program,
Carolyn has a:
a. deduction for and deduction from AGI of $0.
b. deduction for AGI of $3,900 and deduction from AGI of $700.
c. deduction for AGI of $4,000 and deduction from AGI of $600.
d. deduction for AGI of $4,100 and deduction from AGI of $500.
e. None of the above.

9. Bill made the following gifts during the year:

To Carl, a key client $25


To Rowena (Carl’s wife and a homemaker) 20
To Jean, Bill’s secretary, on her birthday ($3 was 30
for gift wrapping)
To Irv, Bill’s boss, at Christmas 40

Presuming proper substantiation, what is Bill’s deduction?


a. $52
b. $53
c. $73
d. $78
e. None of the above.

10. Which of the following expenses, if any, qualify as deductible?


a. Contribution to a Roth IRA.
b. Costs involved in maintaining an office in the home by a self-employed
insurance adjuster. Taxpayer’s wife also uses the office as a meeting place for
her bridge club.
c. Cost of moving to first job location. Taxpayer just graduated from college.
d. Job hunting expenses of a fishing guide to become an insurance salesman.
e. None of the above.

Course Syllabus—Appendix A
S-31
Chapter 10

True or False
____1. Erica, Carol’s daughter, has a severe form of autism. Dr. Malone recom-
mends that Carol send Erica to a resident special school for autistic children
when she enters first grade. Erica may include the cost of tuition for the
special school but cannot include the cost of meals or lodging when
computing her medical expense deduction.
____2. In 2007 Brandon, age 72, paid $3,000 for long-term care insurance premiums.
He may include the $3,000 in computing his medical expense deduction for
the year.
____3. Trent sells his personal residence to Chester on July 1, 2007. He had paid
$7,000 in real property taxes on March 1, 2007, the due date for property
taxes for 2007. Trent may not deduct the portion of the taxes he paid for the
period the property was owned by Chester.
____4. In January 2008 Pam, a calendar year cash basis taxpayer, made an estimated
state income tax payment for 2007. The payment is deductible in 2007.
____5. For all of 2007, Aaron (a calendar year taxpayer) allowed the City Men’s
Shelter, a qualified charitable organization, to use a building he owns rent-
free. The building normally rents for $12,000 a year. Aaron must report
$12,000 of rent income and will be allowed a charitable contribution
deduction for 2007 of $12,000.

Multiple Choice
6. Fred and Lucy are married and together have AGI of $120,000 in 2007. They have
four dependents and file a joint return. They pay $5,000 for a high deductible health
insurance policy and contribute $2,600 to a qualified Health Savings Account. During
the year, they paid the following amounts for medical care: $9,200 in doctor and
dentist bills and hospital expenses, and $3,000 for prescribed medicine and drugs. In
October 2007 they received an insurance reimbursement of $4,400 for hospitalization.
They expect to receive an additional reimbursement of $1,000 in January 2008.
Determine the maximum deduction allowable for medical expenses in 2007.
a. $1,100
b. $3,800
c. $9,200
d. $12,800
e. None of the above.

Course Syllabus—Appendix A
S-32
7. During the current year, Hugh, a self-employed individual, paid the following
amounts:

Real estate tax on Iowa residence $3,800


State income tax 1,700
Real estate taxes on land in Puerto Rico (held as 1,100
an investment)
Gift tax paid on gift to daughter 1,200
State sales taxes 1,750
State occupational license fee 300
Property tax on value of his automobile (used 475
100% for business)

What is the maximum amount Hugh can claim as taxes in itemizing deductions from
AGI?
a. $6,600
b. $6,650
c. $7,850
d. $8,625
e. None of the above.

8. Tony is married and files a joint tax return for 2007. He has investment interest
expense of $95,000 for a loan made to him in 2007 to purchase a parcel of
unimproved land. His income from investments [dividends (not qualified) and
interest] totaled $18,000. After reducing his miscellaneous deductions by the
applicable 2% floor, the deductible portion amounted to $2,800. In addition to $1,400
of investment expenses included in miscellaneous deductions, Tony paid $3,600 of
real estate taxes on the unimproved land. Tony also has a $4,500 net long-term capital
gain from the sale of another parcel of unimproved land. Calculate Tony’s maximum
investment interest deduction for 2007.
a. $95,000
b. $18,000
c. $17,500
d. $13,000
e. None of the above.

9. Emily, who lives in Indiana, volunteered to travel to Louisiana in March to work on a


home-building project for Habitat for Humanity (a qualified charitable organization).
She was in Louisiana for three weeks. She normally makes $500 per week as a
carpenter’s assistant and plans to deduct $1,500 as a charitable contribution. In
addition, she incurred the following costs in connection with the trip: $600 for
transportation, $1,200 for lodging, and $400 for meals. What is Emily’s deduction
associated with this charitable activity?
a. $600
b. $1,200
c. $1,800
d. $2,200
e. $3,700

Course Syllabus—Appendix A
S-33
10. Jackson, a calendar year married taxpayer, files a joint return for 2007. Information
for 2007 includes the following:

AGI $276,400
State income taxes 11,700
State sales tax 3,800
Charitable contributions 18,300
Gambling losses (gambling gains were 7,200
$13,500)

What are Jackson’s allowable itemized deductions for 2007?


a. $25,900
b. $31,600
c. $34,800
d. $42,200
e. None of the above.

Chapter 13

True or False
____1. A FIFO method is applied to general business credit carryovers, carrybacks,
and utilization of credits earned during a particular year.
____2. The purpose of the work opportunity tax credit is to encourage employers to
hire individuals from specified target groups traditionally subject to high
rates of unemployment.
____3. The disabled access credit was enacted to encourage small businesses to
make their businesses more accessible to disabled individuals.
____4. Mauve Company incurs $500,000 during the year to construct a facility that
will be used exclusively for the care of its employees’ pre-school age children
during normal working hours. Assuming Mauve claims the credit for
employer-provided child care this year, its basis in the newly constructed
facility is $450,000.
____5. Because current U.S. tax rates are lower than many foreign income tax rates,
the overall limitation yields a higher foreign tax credit than the amount of
foreign taxes actually paid.

Multiple Choice
6. Roger is considering making a $3,000 investment in a venture that its promoter
promises will generate immediate tax benefits for him. Roger, who does not
anticipate itemizing his deductions, is in the 30% marginal income tax bracket. If the

Course Syllabus—Appendix A
S-34
investment is of a type that produces a tax credit of 40% of the amount of the
expenditure, by how much will Roger’s tax liability decline because of the
investment?
a. $0
b. $900
c. $1,100
d. $1,200
e. None of the above.

7. Molly has generated general business credits over the years that have not
been utilized. The amounts generated and not utilized follow:

2003 $ 5,000
2004 15,000
2005 10,000
2006 8,000

In the current year, 2007, her business generates an additional $30,000 general
business credit. In 2007, based on her tax liability before credits, she can utilize a
general business credit of up to $40,000. After utilizing the carryforwards and the
current year credits, how much of the general business credit generated in 2007 is
available for future years?
a. $0
b. $2,000
c. $23,000
d. $28,000
e. None of the above.

8. Red Corporation hires two persons certified to be eligible employees for the
work opportunity tax credit (e.g., food stamp recipients), each of whom is
paid $8,000 during the year. As a result of this event, Red Corporation may
claim a work opportunity credit of:
a. $2,100
b. $4,200
c. $4,800
d. $6,400
e. None of the above.

9. During the year, Purple Corporation (a U.S. Corporation) has U.S.-source


income of $900,000 and foreign income of $300,000. The foreign-source
income generates foreign income taxes of $100,000. The U.S. income tax
before the foreign tax credit is $408,000. Purple Corporation’s foreign tax
credit is:
a. $75,000
b. $100,000
c. $102,000
d. $136,000
e. None of the above.

Course Syllabus—Appendix A
S-35
10. Bob and Sally are married, file a joint tax return, have AGI of $110,000, and have two
children. Del is beginning her freshman year at State College during Fall 2007, and
Owen is beginning his senior year at Southwest University during Fall 2007. Owen
completed his junior year during the spring semester of 2006 (i.e., he took a “leave of
absence” during the 2006–2007 school year). Both Del and Owen are claimed as
dependents on their parents’ tax return. Del’s qualifying tuition expenses and fees
total $4,500 for the fall semester, while Owen’s qualifying tuition expenses were
$4,200 for the fall 2007 semester. Del’s room and board costs were $2,750 for the fall
semester. Owen did not incur room and board costs since he lived with his aunt and
uncle during the year. Full payment is made for the tuition and related expenses for
both children at the beginning of each semester. In addition to the children’s college
expenses, Bob also spent $2,500 on professional education seminars during the year
in order to maintain his license as a practicing dentist. Bob attended the seminars
during July and August 2007. Compute the available education tax credits for Bob
and Sally for 2007.
a. $598
b. $2,392
c. $2,840
d. $2,990
e. None of the above.

Chapter 14

True or False
____1. Realized gain or loss is measured by the difference between the amount
realized from the sale or other disposition of property and the property’s
adjusted basis at the date of disposition.
____2. If the buyer assumes the seller’s liability on the property acquired, the
seller’s amount realized is decreased by the amount of the liability assumed.
____3. Monroe’s delivery truck is damaged in an accident. Monroe’s adjusted basis
for the delivery truck prior to the accident is $20,000. If Monroe receives
insurance proceeds of $21,000 and recognizes a casualty gain of $1,000, his
adjusted basis for the delivery truck after the accident is $21,000.
____4. A realized gain whose recognition is postponed results in the temporary
recovery of less than the taxpayer’s cost or other basis.
____5. The holding period for property acquired by gift can begin either on the date
the donor acquired the property or the date of the gift.

Multiple Choice
6. Alice owns land with an adjusted basis of $305,000, subject to a mortgage of $175,000.
Real estate taxes are $4,500 per calendar year and are payable on December 31. On
April 1, 2007, Alice sells her land subject to the mortgage for $325,000 in cash, a note

Course Syllabus—Appendix A
S-36
for $300,000, and property with a fair market value of $60,000. What is the amount
realized?
a. $685,000
b. $686,110
c. $860,000
d. $861,110
e. None of the above.
7. Sandra’s automobile, which is used exclusively in her trade or business, was
damaged in an accident. The adjusted basis prior to the accident was $11,000. The fair
market value before the accident was $10,000 and the fair market value after the
accident is $6,000. Insurance proceeds of $3,200 are received. What is Sandra’s
adjusted basis for the automobile after the casualty?
a. $0
b. $7,000
c. $7,800
d. $10,200
e. None of the above.
8. A strip along the boundary of Joy’s land is taken 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?
a. Joy must include the $7,500 in gross income.
b. Joy must reduce the basis of the land by $7,500.
c. Joy must include the $7,500 in gross income and increase the basis of the land by
$7,500.
d. Only (a) and (c) are correct.
e. (a), (b), and (c) are correct.
9. Ralph gives his daughter Angela stock (basis of $8,000; fair market value of $6,000).
No gift tax is paid. If Angela subsequently sells the stock for $10,000, what is her
recognized gain or loss?
a. $0
b. $2,000
c. $4,000
d. $10,000
e. None of the above.

10. Lynn purchases a house for $52,000. She converts the property to rental
property when the fair market value is $115,000. After deducting deprecia-
tion (cost recovery) expense of $1,130, she sells the house for $120,000. What
is her recognized gain or loss?
a. $0
b. $6,130
c. $37,630
d. $69,130
e. None of the above.

Course Syllabus—Appendix A
S-37
Chapter 20

True or False
____1. Under the check-the-box Regulations, a one-owner business (i.e., sole
proprietorship) can elect to be taxed as a corporation.
____2. In the case of a corporation, net long-term capital gains can be taxed at a rate
as low as 15%.
____3. Silver Corporation and Rust Corporation each own 1,000 shares of GM
Corporation common stock and each receives the same amount of cash
dividends on their stock investment. The dividends received deduction each
corporation can claim will be the same.
____4. In forming Crimson Corporation in 2007, organizational expenditures are
incurred and paid. These expenditures must be amortized over a period of 60
months.
____5. If the shareholders of a calendar year C corporation elect S status on April 13,
2007, the election is effective for all of 2007.

Multiple Choice
6. Which of the following, if any, correctly characterize the check-the-box Regulations?
a. A one-owner business becomes a sole proprietorship if default (no election is
made) occurs.
b. A one-owner business cannot elect to be taxed as a corporation.
c. If default (no election is made) occurs, a limited liability company is taxed as a
corporation.
d. The check-the-box Regulations apply to all entities that are already incorporated
under state law.
e. None of the above.

7. Swift Corporation is an accrual basis, calendar year taxpayer. In December 2007


Swift’s board of directors authorizes a $60,000 cash donation to the Salvation Army
to help provide food for homeless persons. The donation is paid as follows: $25,000
in February 2008 and $35,000 in early April 2008. Presuming no problem with the
10% of taxable income limitation, Swift Corporation can:
a. deduct $60,000 for 2008.
b. deduct $60,000 for 2007.
c. deduct $30,000 for 2007 and $30,000 for 2008.
d. deduct $35,000 for 2007 and $25,000 for 2008.
e. None of the above.

8. In the current year, Cardinal Corporation (a calendar year taxpayer) has the
following income and expenses:

Gross income from operations $1,000,000


Expenses from operations 1,002,000
Dividends from Dove Corporation 20,000

Course Syllabus—Appendix A
S-38
Cardinal Corporation owns 30% of the stock of Dove Corporation. The
dividends received deduction for the current year is:
a. $12,600
b. $14,000
c. $14,400
d. $16,000
e. None of the above.

9. Two unrelated calendar year C corporations have the following taxable income for
the current year:

Blue Corporation Green Corporation


Taxable income $70,000 $90,000

Blue Corporation is a qualified personal service corporation. Based on these facts,


their corporate income tax liability is:
a. $12,500 for Blue and $18,850 for Green.
b. $24,500 for Blue and $31,500 for Green.
c. $12,500 for Blue and $31,500 for Green.
d. $24,500 for Blue and $18,850 for Green.
e. None of the above.

10. On January 1, 2007, Emerald Corporation (a calendar year S corporation for many
years) became a C corporation. A possible reason for this change in status is:
a. All of the shareholders met on April 3, 2007, and revoked the S election.
b. A partnership became a shareholder on March 1, 2007.
c. The corporation had too much passive investment income for 2007.
d. A majority of the shareholders met on October 4, 2006, and revoked the election.
e. None of the above.

Course Syllabus—Appendix A
S-39
Appendix B
Answers to Chapter Self-Tests

Chapter 1
1. F 6. c
2. F 7. b
3. T 8. b
4. T 9. a
5. F 10. b

Chapter 2
1. T 6. b
2. T 7. b
3. F 8. d
4. F 9. d
5. T 10. d

Chapter 3
1. F 6. b
2. F 7. a
3. T 8. d
4. T 9. d
5. T 10. c

Chapter 4
1. F 6. d
2. T 7. d
3. F 8. b
4. F 9. a
5. F 10. c

Chapter 5
1. F 6. c
2. F 7. d
3. T 8. b
4. F 9. a
5. F 10. d

Course Syllabus—Appendix B
S-40
Chapter 6
1. T 6. d
2. F 7. e
3. F 8. d
4. F 9. e
5. F 10. a

Chapter 7
1. F 6. e
2. T 7. c
3. T 8. e
4. F 9. b
5. F 10. c

Chapter 8
1. T 6. b
2. F 7. b
3. F 8. c
4. F 9. d
5. F 10. c

Chapter 9
1. F 6. c
2. F 7. c
3. F 8. b
4. F 9. b
5. F 10. c

Chapter 10
1. F 6. b
2. T 7. b
3. T 8. c
4. F 9. d
5. F 10. c

Chapter 13
1. T 6. d
2. T 7. d
3. T 8. c
4. F 9. b
5. F 10. a

Course Syllabus—Appendix B
S-41
Chapter 14
1. T 6. d
2. F 7. b
3. F 8. b
4. F 9. b
5. T 10. d

Chapter 20
1. T 6. a
2. T 7. a
3. F 8. c
4. F 9. d
5. F 10. d

Course Syllabus—Appendix B
S-42