Archive for October 2017

What statement is not true with respect to Temporary Regulations?

What statement is not true with respect to Temporary Regulations?




a. May not be cited as precedent.
b. Issued as Proposed Regulations.
c. Automatically expire within three years after the date of issuance.
d. Found in the Federal Register.
e. All of these statements are true.




Answer: A

Which item may not be cited as a precedent?

Which item may not be cited as a precedent?




a. Regulations
b. Temporary Regulations
c. Technical Advice Memoranda
d. U.S. District Court decision
e. None of these




Answer: C

In addressing the importance of a Regulation, an IRS agent must:

In addressing the importance of a Regulation, an IRS agent must:



a. Give equal weight to the Code and the Regulations.
b. Give more weight to the Code rather than to a Regulation.
c. Give more weight to the Regulation rather than to the Code.
d. Give less weight to the Code rather than to a Regulation.
e. None of these.




Answer: A

Which statement is not true with respect to a Regulation that interprets the tax law?

Which statement is not true with respect to a Regulation that interprets the tax law?




a. Issued by the U.S. Congress.
b. Issued by the U.S. Treasury Department.
c. Designed to provide an interpretation of the tax law.
d. Carries more legal force than a Revenue Ruling.
e. All of these statements are true.




Answer: A

Which of the following is not an administrative source of tax law?

Which of the following is not an administrative source of tax law?




a. Field Service Advice
b. Revenue Procedure
c. Technical Advice Memoranda
d. General Counsel Memorandum
e. All of these are administrative sources.


Answer: E

In § 212(1), the number (1) stands for the:

In § 212(1), the number (1) stands for the:




a. Section number.
b. Subsection number.
c. Paragraph designation.
d. Subparagraph designation.
e. None of these.




Answer: C

Federal tax legislation generally originates in what body?

Federal tax legislation generally originates in what body?




a. Internal Revenue Service
b. Senate Finance Committee
c. House Ways and Means Committee
d. Senate Floor
e. None of these



Answer: C

A landlord leases property upon which the tenant makes improvements. The improvements are significant and are not made in lieu of rent. At the end of the lease, the value of the improvements are not income to the landlord. This rule is an example of:

A landlord leases property upon which the tenant makes improvements. The improvements are significant and are not made in lieu of rent. At the end of the lease, the value of the improvements are not income to the landlord. This rule is an example of:



a. A clear reflection of income result.
b. The tax benefit rule.
c. The arm's length concept.
d. The wherewithal to pay concept.
e. None of these.




Answer: D

Which, if any, of the following provisions of the tax law cannot be justified as promoting administrative feasibility (simplifying the task of the IRS)?

Which, if any, of the following provisions of the tax law cannot be justified as promoting administrative feasibility (simplifying the task of the IRS)?




a. Penalties are imposed for failure to file a return or pay a tax on time.
b. Prepaid income is taxed in the year received and not in the year earned.
c. Annual adjustments for indexation increases the amount of the standard deduction allowed.
d. Casualty losses must exceed 10% of AGI to be deductible.
e. A deduction is allowed for charitable contributions.




Answer: E

Which, if any, of the following provisions cannot be justified as mitigating the effect of the annual accounting period concept?

Which, if any, of the following provisions cannot be justified as mitigating the effect of the annual accounting period concept?


a. Nonrecognition of gain allowed for involuntary conversions.
b. Net operating loss carryback and carryover provisions.
c. Carry over of excess charitable contributions.
d. Use of the installment method to recognize gain.
e. Carry over of excess capital losses.




Answer: A

Social considerations can be used to justify:

Social considerations can be used to justify:



a. Allowance of a credit for child care expenses.
b. Allowing excess capital losses to be carried over to other years.
c. Allowing accelerated amortization for the cost of installing pollution control facilities.
d. Allowing a Federal income tax deduction for state and local sales taxes.
e. None of these.




Answer: A

Both economic and social considerations can be used to justify:

Both economic and social considerations can be used to justify:




a. Favorable tax treatment for accident and health plans provided for employees and financed by employers.
b. Disallowance of any deduction for expenditures deemed to be contrary to public policy (e.g., fines, penalties, illegal kickbacks, bribes to government officials).
c. Various tax credits, deductions, and exclusions that are designed to encourage taxpayers to obtain additional education.
d. Allowance of a deduction for state and local income taxes paid.
e. None of these.



Answer: C

Regarding proper ethical guidelines, which (if any) of the following is correct?

Regarding proper ethical guidelines, which (if any) of the following is correct?




a. The use of client estimates in preparing a return may be acceptable.
b. Under no circumstances should a question on a tax return be left unanswered.
c. If a client has made a mistake in a prior year's return and refuses to correct it, you should withdraw from the engagement.
d. If the exact amount of a deduction is not certain (e.g., around mid-$600s), it should be recorded as an odd amount (i.e., $649) so as to increase the appearance of greater certainty.
e. None of these.




Answer: A

A characteristic of the fraud penalties is:

A characteristic of the fraud penalties is:



a. When negligence and civil fraud apply to a deficiency, the negligence penalty predominates.
b. Criminal fraud can result in a fine and a prison sentence.
c. The criminal fraud penalty is 75% of the deficiency attributable to the fraud.
d. The IRS has the same burden of proof in the case of criminal fraud than with civil fraud.
e. None of these.





Answer: B

David files his tax return 45 days after the due date. Along with the return, David remits a check for $40,000 which is the balance of the tax owed. Disregarding the interest element, David's total failure to file and to pay penalties are:

David files his tax return 45 days after the due date. Along with the return, David remits a check for $40,000 which is the balance of the tax owed. Disregarding the interest element, David's total failure to file and to pay penalties are:



a. $400.
b. $3,600.
c. $4,000.
d. $4,400.
e. None of these.





Answer: C

Which of the following is a characteristic of the audit process?

Which of the following is a characteristic of the audit process?




a. Most taxpayer audits involve "special" agents.
b. Self-employed taxpayers are less likely to be selected for audit than employed taxpayers.
c. Less important issues are handled by means of a correspondence audit.
d. If a taxpayer disagrees with the IRS auditor's finding, the only resort is to the courts.
e. None of these.




Answer: C

In terms of probability, which of the following taxpayers would be least likely to be audited by the IRS?

In terms of probability, which of the following taxpayers would be least likely to be audited by the IRS?




a. Taxpayer owns and operates a check-cashing service.
b. Taxpayer is an employed electrician.
c. Taxpayer just received a $3 million personal injury award as a result of a lawsuit.
d. Taxpayer just won a $1 million slot machine jackpot at a Las Vegas casino.
e. Taxpayer has been audited several times before.



Answer: B

Characteristics of the "Fair Tax" (i.e., national sales tax) include which, if any, of the following:

Characteristics of the "Fair Tax" (i.e., national sales tax) include which, if any, of the following:




a. Abolition of the Federal individual (but not the corporate) income tax.
b. Abolition of all Federal income taxes but retention of payroll taxes (including the self-employment tax).
c. Abolition of all Federal income taxes and payroll taxes but retention of the Federal estate and gift taxes.
d. Abolition of all Federal income and payroll taxes as well as the Federal estate and gift taxes.
e. None of these.



Answer: D

A VAT (value added tax):

A VAT (value added tax):



a. Is regressive in its effect.
b. Has not proved popular outside of the U.S.
c. Is not a tax on consumption.
d. Is used exclusively by third world (less developed) countries.
e. None of these.



Answer: A

The proposed flat tax:

The proposed flat tax:



a. Would eliminate the income tax.
b. Would simplify the income tax.
c. Would tax the increment in value as goods move through the production and manufacturing stages to the marketplace.
d. Is a tax on consumption.
e. None of these.




Answer: B

A characteristic of FUTA is that:

A characteristic of FUTA is that:



a. It is imposed on both employer and employee.
b. It is imposed solely on the employee.
c. Compliance requires following guidelines issued by both state and Federal regulatory authorities.
d. It is applicable to spouses of employees but not to any children under age 18.
e. None of these.





Answer: C

A characteristic of FICA is that:

A characteristic of FICA is that:




a. It does not apply when one spouse works for the other spouse.
b. It is imposed only on the employer.
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 these.



Answer: E

State income taxes generally can be characterized by:

State income taxes generally can be characterized by:



a. The same date for filing as the Federal income tax.
b. No provision for withholding procedures.
c. Allowance of a deduction for Federal income taxes paid.
d. Applying only to individuals and not applying to corporations.
e. None of these.





Answer: A

Indicate which, if any, statement is incorrect. State income taxes:

Indicate which, if any, statement is incorrect. State income taxes:





a. Can piggyback to the Federal version.
b. Cannot apply to visiting nonresidents.
c. Can decouple from the Federal version.
d. Can provide occasional amnesty programs.
e. None of these.




Answer: B

Property can be transferred within the family group by gift or at death. One motivation for preferring the gift approach is:

Property can be transferred within the family group by gift or at death. One motivation for preferring the gift approach is:




a. To take advantage of the higher unified transfer tax credit available under the gift tax.
b. To avoid a future decline in value of the property transferred.
c. To take advantage of the per donee annual exclusion.
d. To shift income to higher bracket donees.
e. None of these.




Answer: C

Burt and Lisa are married and live in a common law state. Burt wants to make gifts to their four children in 2014. What is the maximum amount of the annual exclusion they will be allowed for these gifts?

Burt and Lisa are married and live in a common law state. Burt wants to make gifts to their four children in 2014. What is the maximum amount of the annual exclusion they will be allowed for these gifts?




a. $14,000.
b. $28,000.
c. $56,000.
d. $112,000.
e. None of these.




Answer: D

A use tax is imposed by:

A use tax is imposed by:




a. The Federal government and all states.
b. The Federal government and a majority of the states.
c. All states and not the Federal government.
d. Most of the states and not the Federal government.
e. None of these.





Answer: D

Taxes levied by all states include:

Taxes levied by all states include:




a. Tobacco excise tax.
b. Individual income tax.
c. Inheritance tax.
d. General sales tax.
e. None of these.




Answer: A

Taxes not imposed by the Federal government include:

Taxes not imposed by the Federal government include:




a. Tobacco excise tax.
b. Customs duties (tariffs on imports).
c. Tax on rent cars.
d. Gas guzzler tax.
e. None of these.




Answer: C

Federal excise taxes that are no longer imposed include:

Federal excise taxes that are no longer imposed include:




a. Tax on air travel.
b. Tax on wagering.
c. Tax on the manufacture of sporting equipment.
d. Tax on alcohol.
e. None of these.




Answer: E

Which, if any, of the following is a typical characteristic of an ad valorem tax on personalty?

Which, if any, of the following is a typical characteristic of an ad valorem tax on personalty?




a. Taxpayer compliance is greater for personal use property than for business use property.
b. The tax on automobiles sometimes considers the age of the vehicle.
c. Most states impose a tax on intangibles.
d. The tax on intangibles generates considerable revenue since it is difficult for taxpayers to avoid.
e. None of these.




Answer: B

Which, if any, of the following transactions will decrease a taxing jurisdiction's ad valorem tax revenue imposed on real estate?

Which, if any, of the following transactions will decrease a taxing jurisdiction's ad valorem tax revenue imposed on real estate?




a. A tax holiday is granted to an out-of-state business that is searching for a new factory site.
b. An abandoned church is converted to a restaurant.
c. A public school is razed and turned into a city park.
d. A local university sells a dormitory that will be converted for use as an apartment building.
e. None of these.




Answer: A

Which, if any, of the following transactions will increase a taxing jurisdiction's revenue from the ad valorem tax imposed on real estate?

Which, if any, of the following transactions will increase a taxing jurisdiction's revenue from the ad valorem tax imposed on real estate?





a. A resident dies and leaves his farm to his church.
b. A large property owner issues a conservation easement as to some of her land.
c. A tax holiday issued 10 years ago has expired.
d. A bankrupt motel is acquired by the Red Cross and is to be used to provide housing for homeless persons.
e. None of these.



Answer: C

Which, if any, of the following statements best describes the history of the Federal income tax?

Which, if any, of the following statements best describes the history of the Federal income tax?



a. It did not exist during the Civil War.
b. The Federal income tax on corporations was held by the U.S. Supreme Court to be allowable under the U.S. Constitution.
c. The Federal income tax on individuals was held by the U.S. Supreme Court to be allowable under the U.S. Constitution.
d. Both the Federal income tax on individuals and on corporations was held by the U.S. Supreme Court to be contrary to the U.S. Constitution.
e. None of these.




Answer: B

Bob, an employee of Modern Corp., receives a fringe benefit (in lieu of a salary increase) of $100. Bob is in a 33% tax bracket. The fringe benefit is nontaxable to Bob and is not deductible as an itemized deduction. Bob's after-tax savings from receiving the tax-free benefit is

Bob, an employee of Modern Corp., receives a fringe benefit (in lieu of a salary increase) of $100. Bob is in a 33% tax bracket. The fringe benefit is nontaxable to Bob and is not deductible as an itemized deduction. Bob's after-tax savings from receiving the tax-free benefit is




A) $0.
B) $33.
C) $67.
D) $100.



Answer: B

In September of 2011, Michelle sold shares of qualified small business stock for $1,000,000 that had a basis of $200,000. She had held the stock for 7 months. Forty-five days after the sale she purchased other qualified small business stock for $1,100,000. What is the basis in the new stock she purchased?

In September of 2011, Michelle sold shares of qualified small business stock for $1,000,000 that had a basis of $200,000. She had held the stock for 7 months. Forty-five days after the sale she purchased other qualified small business stock for $1,100,000. What is the basis in the new stock she purchased?



A) $200,000
B) $300,000
C) $800,000
D) $1,100,000



Answer: B

In September of 2011, Michelle sold shares of qualified small business stock for $1,000,000 that had a basis of $200,000. She had held the stock for 7 months. Forty-five days after the sale she purchased other qualified small business stock for $1,100,000. How much of the gain will she recognize?

In September of 2011, Michelle sold shares of qualified small business stock for $1,000,000 that had a basis of $200,000. She had held the stock for 7 months. Forty-five days after the sale she purchased other qualified small business stock for $1,100,000. How much of the gain will she recognize?




A) $ -0-
B) $100,000
C) $800,000
D) $900,000



Answer: A

The discharge of certain student loans is excluded from income if all of the following are present except for

The discharge of certain student loans is excluded from income if all of the following are present except for



A) the loan must have been made by governmental, educational, or charitable organizations.
B) the loan proceeds must have been used to pay the cost of attending an education institution or used to refinance outstanding student loans.
C) the loan forgiveness must be contingent upon the individual's working for a specified period of time in certain professions.
D) the loan forgiveness is based on age.



Answer: D

Connor owes $4 million and has assets of only $1 million. He declares and files personal and business bankruptcy and his creditors approve a payment plan of $.25 per dollar. Connor has a net operating loss carryover of $2 million. The remaining 75 percent of his debt will be canceled. Connor must recognize income of

Connor owes $4 million and has assets of only $1 million. He declares and files personal and business bankruptcy and his creditors approve a payment plan of $.25 per dollar. Connor has a net operating loss carryover of $2 million. The remaining 75 percent of his debt will be canceled. Connor must recognize income of



A) $0.
B) $1 million.
C) $2 million.
D) $3 million.


Answer: A

In 2010 Bronwyn loaned her son, Juan, $10,000 to help him buy a new computer. In 2011, before he repaid the $10,000, Bronwyn told Juan that she was "tearing up" the $10,000 note as a graduation present. How should Juan treat the amount forgiven?

In 2010 Bronwyn loaned her son, Juan, $10,000 to help him buy a new computer. In 2011, before he repaid the $10,000, Bronwyn told Juan that she was "tearing up" the $10,000 note as a graduation present. How should Juan treat the amount forgiven?




A) taxable income in year of loan
B) taxable income in year of forgiveness
C) excludable gift in year of loan
D) excludable gift in year of forgiveness



Answer: D

Melanie, a U.S. citizen living in Paris, France, for the last three years earns a salary of $110,000 in 2011. Melanie's housing costs are $24,000 per year, which is reasonable. How much can Melanie exclude from income?

Melanie, a U.S. citizen living in Paris, France, for the last three years earns a salary of $110,000 in 2011. Melanie's housing costs are $24,000 per year, which is reasonable. How much can Melanie exclude from income?




A) $24,000
B) $92,900
C) $102,036
D) $134,000



Answer: C

Jeremy, an American citizen, earned $200,000 during 2011 while employed in Saudi Arabia. Jeremy is entitled to the maximum foreign-earned income exclusion. Jeremy also incurred $40,000 of deductible expenses attributable to the foreign-earned income. Jeremy may deduct how much in expenses?

Jeremy, an American citizen, earned $200,000 during 2011 while employed in Saudi Arabia. Jeremy is entitled to the maximum foreign-earned income exclusion. Jeremy also incurred $40,000 of deductible expenses attributable to the foreign-earned income. Jeremy may deduct how much in expenses?



A) $0
B) $18,580
C) $21,420
D) $40,000


Answer: C

Jan has been assigned to the Rome office of ABC Corporation. She arrives in Rome on November 1, 2009 and does not return to the U.S. until March 5, 2012. During her stay in Rome, Jan earned $102,000 in 2011. Jan may exclude

Jan has been assigned to the Rome office of ABC Corporation. She arrives in Rome on November 1, 2009 and does not return to the U.S. until March 5, 2012. During her stay in Rome, Jan earned $102,000 in 2011. Jan may exclude




A) $0.
B) $41,000.
C) $82,000.
D) $92,900.



Answer: D

Tim earns a salary of $40,000. This year, Tim's employer establishes a cafeteria plan under which Tim signed a salary reduction of $2,500 for which $1,500 is to cover his health insurance premiums and $1,000 is available to reimburse medical expenses. During the year, he is reimbursed $900 for medical expenses. What is the total taxable to Tim this year?

Tim earns a salary of $40,000. This year, Tim's employer establishes a cafeteria plan under which Tim signed a salary reduction of $2,500 for which $1,500 is to cover his health insurance premiums and $1,000 is available to reimburse medical expenses. During the year, he is reimbursed $900 for medical expenses. What is the total taxable to Tim this year?




A) $37,500
B) $37,600
C) $38,400
D) $40,000



Answer: A

Carl filed his tax return, properly claiming the head of household filing status. Carl's employer paid or provided the following to Carl:

Carl filed his tax return, properly claiming the head of household filing status. Carl's employer paid or provided the following to Carl:


Wages $65,000
Fair market value of qualified dependent care services 4,000
Premiums for $50,000 qualified group term life insurance 500
Medical insurance premiums 600

How much of this income should Carl report?


A) $65,000
B) $69,000
C) $69,500
D) $70,100



Answer: A

Fatima's employer provides a child care center where her two children stay while she works. She pays nothing for this service. If Fatima paid for comparable child care, it would cost $7,200 a year. How much of the child care benefits are taxable to Fatima?

Fatima's employer provides a child care center where her two children stay while she works. She pays nothing for this service. If Fatima paid for comparable child care, it would cost $7,200 a year. How much of the child care benefits are taxable to Fatima?




A) $0
B) $2,200
C) $5,000
D) $7,200



Answer: B

Lindsay Corporation made the following payments to the family of Luke Marshall, an employee who died during the year.

Lindsay Corporation made the following payments to the family of Luke Marshall, an employee who died during the year.


$5,000 for Luke's final paycheck that he failed to collect
$10,000 for accrued vacation days as required by the employment contract
$25,000 for in admiration of Luke's outstanding service to the community

What is the total amount that Luke's family must include in income?


A) $0
B) $5,000
C) $15,000
D) $40,000



Answer: C

Which of the following item(s) must be included in the income of the respective employees?

Which of the following item(s) must be included in the income of the respective employees?




A) ABC Hospital Corporation provides free meals in the hospital cafeteria to employees while on duty in order that they be available for emergency calls.
B) The state of California highway patrol organization provides its officers with a daily meal allowance to compensate them for meals eaten at any location while they are on duty.
C) IBX Corporation requires its employees to work overtime three evenings each year when the company takes inventory. The corporation pays to provide catered dinners on its premises on these evenings.
D) More than one, but not all, of the amounts must be included in income.



Answer: B

Healthwise Ambulance requires its employees to be on 24-hour call and consequently gives them $800 per month housing allowance and a $200 per month food allowance. Ron, an employee of Healthwise, receives a salary of $40,000 per year (this does not include the allowances). Ron will be taxed each year on

Healthwise Ambulance requires its employees to be on 24-hour call and consequently gives them $800 per month housing allowance and a $200 per month food allowance. Ron, an employee of Healthwise, receives a salary of $40,000 per year (this does not include the allowances). Ron will be taxed each year on



A) $40,000.
B) $42,400.
C) $49,600.
D) $52,000.


Answer: D

All of the following fringe benefits paid for by the employer may be excluded from an employee's gross income except

All of the following fringe benefits paid for by the employer may be excluded from an employee's gross income except




A) discounts on services of 25 percent.
B) subscriptions to professional publications.
C) recreational facilities on employer's premises.
D) unused airline seats for airline employees where the employee is required to fly "standby."



Answer: A

Michael is an employee of StayHere Hotels, Inc. in Washington, DC. On his vacation, Michael travels to San Francisco and stays at a StayHere Hotel for six nights free of charge. The regular rate for a hotel room at StayHere in San Francisco is $300 a night. His ability to stay in the hotel without charge is based on the availability of empty rooms. How much income must Michael report due to the use of the San Francisco hotel room?

Michael is an employee of StayHere Hotels, Inc. in Washington, DC. On his vacation, Michael travels to San Francisco and stays at a StayHere Hotel for six nights free of charge. The regular rate for a hotel room at StayHere in San Francisco is $300 a night. His ability to stay in the hotel without charge is based on the availability of empty rooms. How much income must Michael report due to the use of the San Francisco hotel room?




A) $0
B) $300
C) $360
D) $1,800



Answer: A

A department store sold a stereo to an employee for $300, even though the retail price was $500. The gross profit percentage is 40%. Such discounts are available to all employees. How much income should be recognized by the employee from these transactions?

A department store sold a stereo to an employee for $300, even though the retail price was $500. The gross profit percentage is 40%. Such discounts are available to all employees. How much income should be recognized by the employee from these transactions?




A) $0
B) $100
C) $120
D) $200



Answer: A

All of the following items are excluded from gross income except

All of the following items are excluded from gross income except




A) working condition benefits.
B) de minimis benefits.
C) no additional cost benefits for employees.
D) disability income from an employer-financed policy.



Answer: D

Miranda is not a key employee of AB Corporation. AB provides Miranda with group term life insurance coverage of $140,000. The premiums attributable to the excess coverage are $1,300. The uniform one-month group-term premium is one dollar per $1,000 of coverage. How much must Miranda include in income?

Miranda is not a key employee of AB Corporation. AB provides Miranda with group term life insurance coverage of $140,000. The premiums attributable to the excess coverage are $1,300. The uniform one-month group-term premium is one dollar per $1,000 of coverage. How much must Miranda include in income?




A) $0
B) $1,080
C) $1,300
D) $1,680



Answer: B

Richard is a key employee of Winn Corporation. The corporation provides Richard with $120,000 of group-term life insurance coverage (which is discriminatory). The premium attributable to the coverage is $1,600. The uniform one-month group-term premium is one dollar per $1,000 of coverage. How much must Richard include in income due to the policy?

Richard is a key employee of Winn Corporation. The corporation provides Richard with $120,000 of group-term life insurance coverage (which is discriminatory). The premium attributable to the coverage is $1,600. The uniform one-month group-term premium is one dollar per $1,000 of coverage. How much must Richard include in income due to the policy?



A) $0
B) $840
C) $1,440
D) $1,600



Answer: D

Joe Black, a police officer, was injured in the line of duty. He received the following during the current year:

Joe Black, a police officer, was injured in the line of duty. He received the following during the current year:


Salary $50,000
Workers' compensation 5,000
Compensatory damages for physical injury 18,000
Punitive damages for physical injury 14,000
Cash reward for preventing a break-in 2,000

What is the amount that is taxable?


A) $57,000
B) $66,000
C) $71,000
D) $84,000



Answer: B

Nelda suffered a serious stroke and was admitted to a nursing home for 140 days. Nursing home charges, including physician fees and other related expenses were $33,000. Under Nelda's long-term care insurance contract, she received reimbursements of $36,000. How much of the $36,000 reimbursement must be included in Nelda's gross income in 2011?

Nelda suffered a serious stroke and was admitted to a nursing home for 140 days. Nursing home charges, including physician fees and other related expenses were $33,000. Under Nelda's long-term care insurance contract, she received reimbursements of $36,000. How much of the $36,000 reimbursement must be included in Nelda's gross income in 2011?




A) $0
B) $1,000
C) $2,000
D) $3,000



Answer: A

Liza's employer purchased a disability income policy from an insurance company on behalf of all of its employees. The employer paid for two-thirds of the premiums, and the employees paid for the other one-third. Subsequently, Liza received $3,000 per month for 6 months she was unable to work. Liza will be taxed on

Liza's employer purchased a disability income policy from an insurance company on behalf of all of its employees. The employer paid for two-thirds of the premiums, and the employees paid for the other one-third. Subsequently, Liza received $3,000 per month for 6 months she was unable to work. Liza will be taxed on



A) $0.
B) $6,000.
C) $12,000.
D) $18,000.


Answer: C

John is injured and receives $16,000 of income from a disability policy. John's employer paid 75% of the disability policy premiums and John paid the remainder. In addition, John's employer has paid all the $3,000 of premiums on a health policy that paid John's doctor bills of $10,000. How much of the benefits must John include in income?

John is injured and receives $16,000 of income from a disability policy. John's employer paid 75% of the disability policy premiums and John paid the remainder. In addition, John's employer has paid all the $3,000 of premiums on a health policy that paid John's doctor bills of $10,000. How much of the benefits must John include in income?



A) $3,000
B) $10,000
C) $12,000
D) $16,000



Answer: C

Linda was injured in an automobile accident caused by another driver. Her son, Matthew, was in the automobile but not physically injured. The other driver's insurance company was required by a court to pay Linda $75,000 to cover medical bills relating to her injuries, $30,000 to compensate her for emotional distress attributable to the injuries and $40,000 of punitive damages. Matthew was paid $15,000 to compensate him for emotional distress attributable to his witnessing his mother's injuries. What is the amount taxable to Linda?

Linda was injured in an automobile accident caused by another driver. Her son, Matthew, was in the automobile but not physically injured. The other driver's insurance company was required by a court to pay Linda $75,000 to cover medical bills relating to her injuries, $30,000 to compensate her for emotional distress attributable to the injuries and $40,000 of punitive damages. Matthew was paid $15,000 to compensate him for emotional distress attributable to his witnessing his mother's injuries. What is the amount taxable to Linda?




A) $30,000
B) $40,000
C) $105,000
D) $145,000



Answer: B

Derrick was in an automobile accident while he was going to work. The doctor advised him to stay home for eight months due to his physical injuries. The resulting lawsuit was settled and Derrick received the following amounts:

Derrick was in an automobile accident while he was going to work. The doctor advised him to stay home for eight months due to his physical injuries. The resulting lawsuit was settled and Derrick received the following amounts:


Compensatory damages for physical injury $80,000
Punitive damages 95,000

How much of the settlement must Derrick include in ordinary income on his tax return?


A) $-0-
B) $80,000
C) $95,000
D) $175,000



Answer: C

Elisa sued her former employer for discrimination. She was awarded $200,000 for lost wages, $30,000 for medical expenses related to emotional distress resulting from the discrimination, and $300,000 in punitive damages. The amount taxable is

Elisa sued her former employer for discrimination. She was awarded $200,000 for lost wages, $30,000 for medical expenses related to emotional distress resulting from the discrimination, and $300,000 in punitive damages. The amount taxable is



A) $0.
B) $200,000.
C) $500,000.
D) $530,000.



Answer: C

Amanda, who lost her modeling job, sued her employer for age discrimination. She was awarded $75,000 in lost wages, $25,000 for emotional distress, and $150,000 punitive damages. The amount taxable is

Amanda, who lost her modeling job, sued her employer for age discrimination. She was awarded $75,000 in lost wages, $25,000 for emotional distress, and $150,000 punitive damages. The amount taxable is



A) $-0-.
B) $150,000.
C) $225,000.
D) $250,000.



Answer: D

Which of the following statements regarding qualified tuition programs is incorrect?

Which of the following statements regarding qualified tuition programs is incorrect?



A) Distributions from income earned by a qualified tuition program are tax-free if used for qualified higher education expenses.
B) Distributions of income are taxed to the donor if the proceeds are not used for higher education expenses.
C) A qualified tuition program may be established by parents or grandparents.
D) Contributions to a qualified tuition program are distributed tax-free.



Answer: B

Sarah receives a $15,000 scholarship from City University. The university specifies that $8,000 is for tuition, books, supplies, and equipment for classes. The other $7,000 is for room and board. Sarah works ten hours per week as a grader, for which she is paid $7,500 for the year. Of the total amount received, Sarah must include the following amount in gross income

Sarah receives a $15,000 scholarship from City University. The university specifies that $8,000 is for tuition, books, supplies, and equipment for classes. The other $7,000 is for room and board. Sarah works ten hours per week as a grader, for which she is paid $7,500 for the year. Of the total amount received, Sarah must include the following amount in gross income



A) $7,000.
B) $7,500.
C) $14,500.
D) $22,500.



Answer: C

Hope receives an $18,500 scholarship from State University. The university specifies that $8,500 is for tuition, books, supplies, and equipment, while $10,000 is for room and board. In addition, Hope works part-time at the campus library and earns $5,000. Hope's gross income is

Hope receives an $18,500 scholarship from State University. The university specifies that $8,500 is for tuition, books, supplies, and equipment, while $10,000 is for room and board. In addition, Hope works part-time at the campus library and earns $5,000. Hope's gross income is



A) $5,000.
B) $15,000.
C) $18,500.
D) $23,500.



Answer: B

Tim and Theresa, a married couple, receive adoption assistance payments of $10,000 from their employer's qualified plan. They had spent $5,000 in connection with the adoption of a special-needs child. If their modified AGI is $175,000 how much may be excluded from income?

Tim and Theresa, a married couple, receive adoption assistance payments of $10,000 from their employer's qualified plan. They had spent $5,000 in connection with the adoption of a special-needs child. If their modified AGI is $175,000 how much may be excluded from income?



A) $0
B) $5,000
C) $10,000
D) $13,360



Answer: C

Luke and Paige, a married couple, receive adoption assistance payments of $13,000 from their employer's qualified plan. They had spent $15,000 in connection with the adoption. The child does not have special needs. If their modified AGI is $195,000 how much may be excluded from income?

Luke and Paige, a married couple, receive adoption assistance payments of $13,000 from their employer's qualified plan. They had spent $15,000 in connection with the adoption. The child does not have special needs. If their modified AGI is $195,000 how much may be excluded from income?




A) $3,269.86
B) $10,090.14
C) $13,000.00
D) $15,000.00


Answer: B

Benjamin and Jennifer are married and have AGI of $150,000. In 2011 they adopted a child who does not have special needs, while taking advantage of their employer's written adoption assistance program. The adoption cost $9,500, all of which was paid by the employer in accordance with the adoption plan. How much of the employer paid adoption costs may be excluded from their income?

Benjamin and Jennifer are married and have AGI of $150,000. In 2011 they adopted a child who does not have special needs, while taking advantage of their employer's written adoption assistance program. The adoption cost $9,500, all of which was paid by the employer in accordance with the adoption plan. How much of the employer paid adoption costs may be excluded from their income?




A) $0
B) $3,650
C) $9,500
D) $13,360



Answer: C

Benjamin and Jennifer are married and have AGI of $85,000 in 2011. They adopted a child during 2011 who does not have special needs while taking advantage of their employer's written adoption assistance program. They spent $15,000 in connection with the adoption, all of which was paid by the employer in accordance with the adoption plan. How much of the employer paid adoption costs must be included in their income?

Benjamin and Jennifer are married and have AGI of $85,000 in 2011. They adopted a child during 2011 who does not have special needs while taking advantage of their employer's written adoption assistance program. They spent $15,000 in connection with the adoption, all of which was paid by the employer in accordance with the adoption plan. How much of the employer paid adoption costs must be included in their income?



A) $0
B) $1,640
C) $13,360
D) $15,000


Answer: B

Bret carries a $200,000 insurance policy on his life and has paid premiums of $10,000 over the years. Dividends on the policy have totaled $8,500. Each year Bret has left the dividends with the insurance company. In the current year, the insurance company credited $800 of interest on the accumulated dividends to Bret's account. In addition, $600 of dividends was added by the insurance company. In the current year, Bret must report income of

Bret carries a $200,000 insurance policy on his life and has paid premiums of $10,000 over the years. Dividends on the policy have totaled $8,500. Each year Bret has left the dividends with the insurance company. In the current year, the insurance company credited $800 of interest on the accumulated dividends to Bret's account. In addition, $600 of dividends was added by the insurance company. In the current year, Bret must report income of



A) $0.
B) $600.
C) $800.
D) $1,400.


Answer: C

Julia suffered a severe stroke and has been admitted to a private hospital where she is expected to remain for the rest of her life. She is certified by a licensed health care practitioner as being a "chronically ill individual." Her hospital expenses amount to $280 per day. She will receive $270 per day from a $500,000 life insurance policy as an accelerated death benefit. In 2011, she was in the hospital for 10 days and received $2,700. How much of this amount is taxable?

Julia suffered a severe stroke and has been admitted to a private hospital where she is expected to remain for the rest of her life. She is certified by a licensed health care practitioner as being a "chronically ill individual." Her hospital expenses amount to $280 per day. She will receive $270 per day from a $500,000 life insurance policy as an accelerated death benefit. In 2011, she was in the hospital for 10 days and received $2,700. How much of this amount is taxable?



A) $0
B) $250
C) $2,000
D) $2,250



Answer: A

David has been diagnosed with cancer and is expected to live less than 18 months. David is covered by a life insurance policy with a $400,000 face amount. David cashes in the policy early under a special option and receives 80% of the face amount or $320,000. In the year of collection, David will report

David has been diagnosed with cancer and is expected to live less than 18 months. David is covered by a life insurance policy with a $400,000 face amount. David cashes in the policy early under a special option and receives 80% of the face amount or $320,000. In the year of collection, David will report



A) no income.
B) $80,000.
C) $320,000.
D) $400,000.


Answer: A

Alana paid $65,000 in premiums on an endowment life insurance policy with a face value of $100,000. Upon reaching 65, Alana collected the face value of the policy. In the year of collection, Alana will report

Alana paid $65,000 in premiums on an endowment life insurance policy with a face value of $100,000. Upon reaching 65, Alana collected the face value of the policy. In the year of collection, Alana will report



A) no income.
B) $35,000 of taxable income.
C) $65,000 of taxable income.
D) $100,000 of taxable income.


Answer: B

Bella transfers a $150,000 life insurance policy on her life to a partnership in which she is a partner. Subsequent to Bella's transfer, the partnership pays $10,000 of premiums before Bella's death. How much of the insurance proceeds of $150,000 is includible in income?

Bella transfers a $150,000 life insurance policy on her life to a partnership in which she is a partner. Subsequent to Bella's transfer, the partnership pays $10,000 of premiums before Bella's death. How much of the insurance proceeds of $150,000 is includible in income?



A) $-0-
B) $75,000
C) $140,000
D) $150,000



Answer: A

Greg is the beneficiary of a $100,000 policy on the life of his mother. Greg gives the policy to his brother, Don. Don subsequently pays premiums of $40,000. Upon his mother's death, how much of the insurance proceeds must Don include in income?

Greg is the beneficiary of a $100,000 policy on the life of his mother. Greg gives the policy to his brother, Don. Don subsequently pays premiums of $40,000. Upon his mother's death, how much of the insurance proceeds must Don include in income?



A) $0
B) $40,000
C) $60,000
D) $100,000



Answer: A

Cameron is the beneficiary of a $300,000 policy on the life of his mother. Cameron sells the policy to his brother, Parker, for $100,000. Parker subsequently pays premiums of $55,000. Upon his mother's death, how much of the insurance proceeds must Parker include in income?

Cameron is the beneficiary of a $300,000 policy on the life of his mother. Cameron sells the policy to his brother, Parker, for $100,000. Parker subsequently pays premiums of $55,000. Upon his mother's death, how much of the insurance proceeds must Parker include in income?




A) $0
B) $55,000
C) $145,000
D) $300,000



Answer: C

Britney is beneficiary of an $150,000 insurance policy on her father's life. Upon his death, she may elect to receive the proceeds in five yearly installments of $32,000 or may take the $150,000 lump sum. She elects to take the lump sum payment. What are the tax consequences in year one?

Britney is beneficiary of an $150,000 insurance policy on her father's life. Upon his death, she may elect to receive the proceeds in five yearly installments of $32,000 or may take the $150,000 lump sum. She elects to take the lump sum payment. What are the tax consequences in year one?




A) All $32,000 each year is taxable.
B) $10,000 interest is taxable in the first year.
C) There is no taxable income.
D) The lump sum payment is taxable.



Answer: C

Rebecca is the beneficiary of a $500,000 insurance policy on her husband's life. She elects to receive $52,000 per year for 10 years rather than receive the entire amount in a lump sum. Of the amount received each year

Rebecca is the beneficiary of a $500,000 insurance policy on her husband's life. She elects to receive $52,000 per year for 10 years rather than receive the entire amount in a lump sum. Of the amount received each year



A) $2,000 is taxable income.
B) $50,000 is taxable income.
C) $52,000 is taxable income.
D) $5,000 per year is tax free as a death benefit.


Answer: A

Mae Li is beneficiary of a $70,000 insurance policy on her father's life. Upon his death, she elects to receive the proceeds in installments from the insurance company that carries the policy. She will receive $16,000 per year for five years. What are the tax consequences each year?

Mae Li is beneficiary of a $70,000 insurance policy on her father's life. Upon his death, she elects to receive the proceeds in installments from the insurance company that carries the policy. She will receive $16,000 per year for five years. What are the tax consequences each year?



A) All $16,000 each year is taxable.
B) $10,000 interest is taxable in the first year.
C) There is no taxable income.
D) $2,000 of the $16,000 payment is taxable each year.


Answer: D

During the year, Cathy received the following:

During the year, Cathy received the following:

• Dividends of $4,000 from Lindsay Corporation. Cathy's father owned the stock and directed the corporation to send the dividends to Cathy.
• A car worth $30,000 for being the 100th customer at a car dealership.
• $5,500 cash gift from her uncle.
• $10,000 inheritance from her grandmother.

What amount must Cathy include in gross income?


A) $30,000
B) $34,000
C) $39,500
D) $49,500



Answer: A

John, an employee of a manufacturing company, suffered a heart attack and was unable to work for six months. He received $1,500 per month of disability benefits as a result of an employer-provided group policy. The benefits are includible in John's gross income.

John, an employee of a manufacturing company, suffered a heart attack and was unable to work for six months. He received $1,500 per month of disability benefits as a result of an employer-provided group policy. The benefits are includible in John's gross income.



Answer: TRUE

Katie, a self-employed CPA, purchased an accident & disability insurance policy. As the result of an auto accident, Katie was unable to work and received $500 of disability benefits per month for seven months. The benefits were based on her estimated monthly income and should be reported as gross income.

Katie, a self-employed CPA, purchased an accident & disability insurance policy. As the result of an auto accident, Katie was unable to work and received $500 of disability benefits per month for seven months. The benefits were based on her estimated monthly income and should be reported as gross income.



Answer: FALSE

Amounts withdrawn from Qualified Tuition Plans are tax-free if the amounts are used for qualified higher education expenses including tuition, fees, books, and room and board for students attending on at least a half-time basis.

Amounts withdrawn from Qualified Tuition Plans are tax-free if the amounts are used for qualified higher education expenses including tuition, fees, books, and room and board for students attending on at least a half-time basis.



Answer: TRUE
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