Posted: September 18th, 2017
TXX 5761 – FINAL EXAM Important Instructions: Unless a question states otherwise, assume that (i) the TAX YEAR in question is 2014 and (ii) our South-Western Federal Taxation text (the “Class Text”) is current and good law. o Thus, for example, unless a question states otherwise, use the 2014 amounts in the Class Text to solve the questions (instead of potentially more recent and/or more accurate government published amounts). This exam has 50 questions. Each question has 4 choices (a, b, c, or d). Select the best (or closest) answer – there is no penalty for guessing. Do NOT work with anyone else on this exam – YOU MUST DO YOUR OWN WORK! Submit your answers using the ANSWER SHEET that was provided. Check your answers and submit your Answer Sheet (along with your NSU Cover Page) prior to our deadline (a sample NSU Cover Page is provided with the Answer Sheet). GOOD LUCK!
FAILURE TO USE THE PROVIDED ANSWER SHEET WILL RESULT IN A 15% PENALTY. FAILURE TO SUBMIT THE ANSWER SHEET AS A WORD DOCUMENT WILL RESULT IN A 15% PENALTY.
1. In 2014, Alix invested $20,000 in a cattle-feeding partnership that used nonrecourse notes to purchase $30,000 of feed, which was used to feed the cattle and expensed. If Alix’s share of the expense was $25,000, what is the most that Alix can deduct in 2014?
2. Allison, a corporate executive, exercised an incentive stock option (“ISO”) granted by Allison’s employer to purchase 1,000 shares of the corporation’s stock at the option price of $1 per share (i.e., the exercise price was $1 per share). The stock is freely transferable. At the time the option was exercised, the stock was selling for $21 per share. What is the AMT adjustment that results from Allison exercising the ISO (assume that Allison will NOT dispose of any of the stock during the year)?
3. Isabel, a single parent, lives in an apartment with Isabel’s TWO minor children each under age 10, whom Isabel supports. For 2014, Isabel will have AGI and earned income of $24,000. Calculate the amount, if any, of Isabel’s earned income credit.
4. Ryan and Yania are married and file a joint return. In 2014, Yania worked fulltime and earned $20,000, while Ryan worked fulltime and earned $20,000. Assume their 2014 AGI equaled $40,000. Assume they incurred $11,000 of child care expenses during 2014 for their THREE dependent children (who are 2, 4 and 6 years old, respectively). What is their child and dependent care CREDIT amount?
5. In 2007, Aileen received stock from Rizwan worth $15,000 at the time of the GIFT. At the time of the gift, Rizwan’s adjusted basis in the stock was $30,000. What is the gain or loss that Aileen should report for 2014 if she sold the stock to Yania in 2014 for $45,000 (ignore any gift tax that may have been paid on the transfer from Rizwan to Aileen)?
a. There is no gain or loss
b. $15,000 gain
c. $30,000 gain
d. $45,000 gain
6. Now, assume that in the previous question Aileen sold the stock to Yania for $25,000 (instead of $45,000). What is the gain or loss that Aileen should report (again, ignore any gift tax that may have been paid on the transfer from Rizwan to Aileen)?
a. There is no gain or loss
b. $10,000 gain
c. $25,000 gain
d. $5,000 loss
7. Now, assume that in Question 5 Aileen sold the stock to Yania for $5,000 (instead of $45,000). What is the gain or loss that Aileen realized on the sale to Yania (again, ignore any gift tax that may have been paid on the transfer from Rizwan to Aileen)?
a. There is no gain or loss
b. $5,000 gain
c. $10,000 loss
d. $25,000 loss
8. Rizwan traded in office equipment with an adjusted basis of $15,000 (and value of $30,000) for other (like-kind) office equipment then valued at $25,000. Rizwan also received $5,000 in cash as part of the deal. What was Rizwan’s recognized gain on the exchange, if any?
9. Aileen traded in computer equipment with an adjusted basis of $30,000 (and a value of $30,000) for other (like-kind) computer equipment then valued at $20,000. Aileen also received $10,000 in cash as part of the deal. What was Aileen’s realized gain on the exchange, if any?
10. In 2014, Isabel and Ryan sold a house to Jeff for $850,000. Prior the 2014 sale, neither Isabel nor Ryan had ever excluded a gain from the sale of a personal residence. Isabel and Ryan had lived in the house for the last six years and used it exclusively for personal purposes. Isabel and Ryan had purchased the house for $100,000. Isabel and Ryan started living in the house immediately after purchasing it and never made any capital improvements to the house or took any depreciation (or other deductions) against it. Assume there were no selling expenses. How much of a gain did Isabel and Ryan realize on the sale to Jeff (assume that Isabel and Ryan are married and file a joint return)?
11. Assume the facts stated in the previous question. How much of a gain must Isabel and Ryan recognize on the sale to Jeff?
12. In 2014, Allison will have taxable income of approximately $50,000. In 2014, Allison will also have a long-term capital loss of $12,000. Allison has no other capital gains or losses (in 2014 or prior years). For 2014, what is the maximum capital loss amount that Allison may use to offset her other income?
13. Assume the facts stated in the prior question. Assume further that for 2014 Allison offset her wages (with her capital loss) to the maximum extent permitted by law. What is the amount of Allison’s capital loss carryover to 2015?
14. Aileen is a single taxpayer in the 33% tax bracket. Aileen wants to minimize her 2014 tax liability. Which of the following provides the LARGEST tax benefit to Aileen (assume that she may legally take advantage of each item in its entirety for 2014)?
a. A $2,000 deduction from gross income
b. A $2,000 deduction from adjusted gross income
c. A $1,000 tax credit
d. Each of the above options would provide the same amount of tax benefit
15. What was the MAXIMUM EARNED INCOME CREDIT amount that Ryan and Alisson could possibly take for 2014? Assume they are U.S. taxpayers filing a joint return with FOUR qualifying children.
16. Which item MOST resembles an interest free loan from the U.S. government?
a. The American Opportunity tax credit
b. The earned income credit
c. The child tax credit
d. First-time homebuyer credit for a closing that occurred in June of 2008
17. In early 2014, Isabel sold her personal residence to Yania for $400,000. At the time of the sale, Isabel’s adjusted basis was $150,000. Within three months of the sale, Isabel moved into a new residence she purchased for $600,000. What is Isabel’s basis in her new residence?
18. Which of the following is TRUE?
a. When compared to deferrals, exclusions are more temporary in nature
b. Section 1031 provides for a mandatory deferral upon certain exchanges
c. When compared to exclusions, deferrals are more permanent in nature
d. All of the above
19. Allison’s business property (located in Rizwan County USA) was condemned by the proper local authorities. Immediately before the condemnation, the property had a fair market value of $700,000 and Allison’s adjusted basis in the property was $500,000. The local authorities replaced Allison’s condemned property with similar Rizwan County property having a fair market value of $600,000. What is Allison’s realized gain or loss relating to these matters?
a. Gain of $600,000
b. Gain of $100,000
c. Loss of $100,000
20. Assume the facts stated in the prior question. What is Allison’s recognized gain or loss relating to such matters?
a. Gain of $600,000
b. Gain of $100,000
c. Loss of $100,000
21. Assume the facts stated in the prior two questions. What is Allison’s basis in the Rizwan County property she received as a result of the condemnation (i.e., what is Allison’s basis in the newly acquired property)?
22. In 2014, Rizwan sold a house to Melissa for $500,000. Rizwan had purchased the house for $650,000 in 2005 (during the real estate boom). Rizwan started living in the house immediately after purchasing it and never made any capital improvements to it or took any depreciation (or other deductions) against it. Assume there were no selling expenses. How much of a LOSS may Rizwan recognize on the sale to Melissa (assume that Rizwan will itemize deductions)?
b. $150,000 less 10% of Rizwan’s AGI
c. $149,900 less 10% of Rizwan’s AGI
23. Jeff purchased land for $100,000 in 1992. The land was valued at $800,000 on June 1, 2014, when Jeff died. Jeff’s relative Ryan inherited the land. What basis would Ryan have in the land as a result of the inheritance?
c. Jeff’s adjusted basis on June 1, 2014 (if different than $100,000)
24. Assume the same facts stated in the previous question. Which of the following is most likely TRUE, if Ryan sold the land in September 2014 for $900,000?
a. Ryan’s 2014 gain is short-term
b. Ryan’s 2014 gain is long-term
c. In 2014, Ryan should “recapture” any depreciation previously taken by Jeff on the land
d. In 2014, Ryan will be taxed on the appreciation that occurred while Jeff held the land (provided that such appreciation was previously not taxed)
25. Which of the following statements is most likely TRUE for Alix (a typical individual taxpayer in the 35% tax bracket)?
a. Alix usually prefers ordinary losses to capital losses
b. Alix usually prefers ordinary income to long-term capital gains
c. Alix usually prefers a $100 credit to a $1,500 deduction
d. Both “a” and “b” are correct
26. Yania, who owns and operates an ICE CREAM SHOP as a sole proprietor, has the following property:
STOCKS held for Yania’s investment
Elaborate ice cream making EQUIPMENT that was inherited from Mary (Yania’s grandmother) (it is used exclusively in the ICE CREAM SHOP)
CHAIRS that are used exclusively in Yania’s home
a COMPUTER used exclusively in the ICE CREAM SHOP
Considering the above items, which option below lists the capital asset(s) under Section 1221?
a. Only the STOCKS
b. Only the STOCKS & CHAIRS
c. Only the EQUIPMENT, CHAIRS & COMPUTER
d. Each of the above assets is a capital asset under Section 1221
27. Isabel recently purchased a piece of land, a building and a truck for a lump sum of $500,000. The fair market value of the land was $400,000, the fair market value of the building was $140,000, and the fair market value of the truck was $60,000. What is Isabel’s basis in the TRUCK?
28. On September 1, 2001, Allison paid $550 for 100 shares of TXX-5761 Inc. common stock. On August 13, 2014, Allison received a nontaxable 10% common stock dividend (i.e., 10 additional shares of identical common stock). On August 13, 2014, TXX-5761 Inc. the common stock was trading on the market for $100 a share. On October 15, 2014, Allison sold the 10 shares he received on August 13, 2014 to Ryan. What is the basis of the 10 shares Allison sold to Ryan?
29. Refer to the facts stated in the prior question. Any gain resulting from the October 15, 2014 sale to Ryan will most likely be:
b. Both short-term and long-term
c. Neither short-term nor long-term
30. In 2014, Alix sold a piece of equipment from Alix’s business for $400,000. The equipment was purchased in 2010 for $240,000. Assume total of $168,000 depreciation was taken (prior to the sale). What is Alix’s recognized gain on the sale?
31. Refer to the facts stated in the prior question. What amount of the gain (at least) will be recaptured at Alix’s ordinary income rate?
32. Refer to the facts stated in the prior two questions. What amount of the gain will be treated as Section 1231 gain and (possibly) taxed at the long-term capital gain rate?
33. Which of the following is most likely Section 1245 property (assume that each item has been held long-term and is used in a trade or business)?
c. Office Building
d. Office Equipment
34. Which of the following would MOST LIKELY require an adjustment for the alternative minimum tax?
a. A gambling loss
b. A charitable contribution deduction
c. A deduction for state income taxes
d. Each of the above items requires an adjustment for the alternative minimum tax
35. Which of the following is most likely Section 1231 property (assume that each item has been held long-term and is used in a trade or business)?
b. Section 1245 property
c. Section 1250 property
d. Each of the above items is Section 1231 property
36. Ryan was at risk for $15,000 in Partnership X and $25,000 in Partnership Z on January 1, 2014. Both partnerships are passive activities to Ryan (and these are Ryan’s only passive activities). Ryan’s share of net income from Partnership X during 2014 is $5,000. Ryan’s share of losses from Partnership Z during 2014 is $35,000. How much is Ryan at risk for Partnership X on January 1, 2015?
37. Refer to the facts in the previous question. How much is Ryan at risk for Partnership Z on January 1, 2015
38. Refer to the facts in the previous questions. What is Ryan’s carryover under the at-risk rules for Partnership Z in 2014?
39. Refer to the facts in the previous question. What is Ryan’s deductible loss for Partnership Z in 2014?
40. Refer to the facts in the previous question. What is Ryan’s suspended loss under the passive loss rules for Partnership Z in 2014?
41. In 2014, Allison invested in the RIZWAN Limited Partnership (“RIZWAN L.P.”) by paying $20,000 cash and contributing additional assets worth $30,000 (and having a basis equal to $25,000 on the date of the contribution). What amount did Allison have at risk in RIZWAN L.P. as of January 1, 2015, if RIZWAN L.P. broke even in 2014 (i.e., if RIZWAN L.P. had no income or loss in 2014)?
42. Refer to the facts stated in the prior question. But, for this question, assume that RIZWAN L.P. allocated to Allison net income of $10,000 from operations in 2014. What amount does Allison have at risk in RIZWAN L.P. as of January 1, 2015?
43. In 2014, Melissa and Ryan (who file a joint return) had an interest expense of $14,000 on a loan that was used to purchase a variety of stock and bonds (all producing taxable income). Assume further that, in 2014, Melissa and Ryan had net investment income of $8,000. Assume they itemize deductions, what is their maximum interest expense deduction in 2014?
44. Assume that Rizwan and Yania file a joint return and have the following items for 2014:
Taxable income: $75,000
Positive adjustments: $40,000
Regular tax ability: $10,463
What was their 2014 AMT?
45. Assume that a couple that filed a joint return had 2014 AMTI of $350,000. What was the amount of their actual 2014 exemption for the AMT?
b. $7,900 (i.e., $3,950 x 2)
46. Jeff is negotiating to buy land from Lynda. What will Jeff’s basis be in the land, if Jeff gives Lynda $50,000 and Jeff assumes Lynda’s mortgage on the land of $20,000?
47. Which of the following is LEAST likely to qualify as a like-kind exchange under Section 1031 (assume all of the assets are used for business)?
a. Improved real estate for computer equipment
b. Improved real estate for unimproved real estate
c. Office building for a warehouse
d. Office furniture for office equipment
48. Allison exchanges undeveloped real estate for developed real estate on July 30, 2014. On July 30, 2014, the fair market value of each property is $400,000. Allison had purchased the undeveloped real estate on February 14, 2001, for $100,000. Both properties are considered investment property for Allison. Which of the following is FALSE?
a. Allison will realize a gain of $300,000 from the July 30, 2014 transaction
b. Allison’s basis in the developed real estate is $100,000
c. If Allison sells the developed real estate in June of 2016 for a gain, the gain will most likely be treated as a long-term gain
d. Allison will recognize a gain of $300,000 from the July 30, 2014 transaction
49. In October 2011, Alix purchased a playground set at a garage sale for $100. Alix is not in the business of buying and selling anything. Alix researched the playground set online and discovered it was worth $1,000. In November 2014, Alix sold the playground set through an auction website for that amount (i.e., $1,000). Which of the following is TRUE considering these transactions?
a. Alix does not have any income
b. Had Alix sold the playground set for $25, Alix could have deducted a $75 ordinary loss
c. Alix has a $900 short-term capital gain
d. Alix has a $900 long-term capital gain
50. Melissa had the following net Section 1231 results for each of the years shown below.
Tax Year Net Section 1231 LOSS Net Section 1231 GAIN
Which of the following is TRUE regarding the net Section 1231 gain in 2014?
a. Only $30,000 of the $50,000 will be taxed at Melissa’s ordinary income rate
b. Only $20,000 of the $50,000 will be taxed at Melissa’s ordinary income rate
c. All $50,000 will all be taxed at Melissa’s ordinary income rate
d. All $50,000 will all be taxed at Melissa’s long-term capital gain rate
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