NAME____________________________
ACC 460
EXAM 1
SPRING 2010
I.
TRUE/FALSE
10______
II. MULTIPLE CHOICE
30______
III. SHORT PROBLEMS
60______
TOTAL
100_____
I.
TRUE/FALSE. ENTER YOUR ANSWERS AT THE BOTTOM OF THIS PAGE.
1.
Proposed Regulations carry less weight than Temporary Regulations.
2.
For tax planning purposes, the average tax rate is a more important factor than the marginal tax rate.
3.
A Limited Liability Company (LLC) pays income taxes at the same rates as regular (C) corporations.
4.
The maximum tax rate that a regular (C) corporation pays on a long-term capital gain is 15%.
5.
The CCH Federal Tax Consultant is considered to be a primary source of the tax law.
6. Max is the sole shareholder of a corporation. In 2009, the corporation sold a capital asset for a loss of
$15,000. Max can elect to report the capital loss on his individual income tax return for 2009.
7. Sierra is a cash basis attorney. In 2009, she performed services in connection with the formation of a
corporation and received stock with a value of $10,000 for her services. By the end of the year, the value of the
stock had increased to $14,000. She continued to hold the stock. Sierra must recognize $14,000 of gross income
from the stock for 2009.
8. Lonnie owns and actively participates in the operations of an apartment building which produces a $20,000
loss during the year. He has AGI of $500,000 from an active business. He may deduct all of the loss.
9. Mohawk Company purchased a $3 million life insurance policy on the company's chief executive officer,
Maverick. After the company had paid $300,000 in premiums, Maverick died and the company collected the $3
million face amount of the policy. Mohawk Company must include $2,700,000 ($3,000,000 - $300,000) in gross
income.
10. If the IRS issues a nonacquiescence to a Tax Court opinion, it means that the IRS lost the case and agrees not
to contest the issue in the future.
ANSWERS TO TRUE/FALSE QUESTIONS.
PLEASE ENTER “TRUE” OR “FALSE” (rather than “T” or “F”)
1.
2.
3.
4.
5.
6.
7.
8.
9.
10.
II. MULTIPLE CHOICE. Please write the letter corresponding to your answer in the space provided at
the end of the multiple choice questions.
1.
Grizzly Corporation, a regular C corporation, reported the following information for the year:
Gross revenues
$150,000
Business deductions
80,000
Business tax credits
2,000
Dividends paid
10,000
What is Grizzly’s net tax liability for the year?
A. $10,500
B. $12,500
C. $11,250
D. $8,000
2. Uncle Joe has made annual gifts of $25,000 to each of his nephews and nieces for many years. During 2009,
Sally (a niece) received one of these $25,000 gifts. Which of the following statements is true?
A. Uncle Joe is liable for any gift tax on the gift.
B. Sally is liable for any gift tax on the gift.
C. Sally must report the gift as gross income for income tax purposes.
D. No tax of any kind would be due, as the gift is below the annual exclusion amount for 2009.
3.
A.
B.
C.
D.
Which of the following is a tax minimization strategy?
Changing the character of income and expense.
Shifting tax liability across time.
Shifting tax liability between entities.
All of the above are tax minimization strategies.
4.
A.
B.
C.
D.
If these citations appeared after a trial court decision, which one means that the decision was upheld?
Rev’d. 98-1 USTC ¶9861 (CA-8, 1998).
Acq. 98-1 USTC ¶9861 (CA-8, 1998).
Aff’d. 98-1 USTC ¶9861 (CA-8, 1998).
Rem’d. 98-1 USTC ¶9861 (CA-8, 1998).
5. A limited liability company for Federal income tax purposes is tax as a(an):
A. S corporation
B. Partnership
C. C corporation
D. Trust
6. Iris, a widow, elected to receive the proceeds of a $100,000 face value life insurance policy on the life of her
deceased husband in annual installments of $12,500 over the remainder of her life, estimated to be 10 years.
A. None of the payments received are included in gross income because their source is the life insurance
policy.
B. All of the payments are included in Iris’s gross income because she paid nothing for the right to receive the
payments.
C. Iris will not recognize income until the 9th year, after she has recovered her investment.
D. Iris must include $2,500 in gross income each year for the first 10 years she collects on the policy.
7.
A.
B.
C.
D.
Which of the following courts has the highest tax authority?
U.S. Court of Federal Claims.
U.S. District Court.
U.S. Court of Appeals of the 9th Circuit.
U.S. Tax Court.
8.
Kathy’s income from her investments for the current year was as follows:
Gain on the sale of Coconino County school bonds
$3,000
Interest received on Coconino County school bonds
8,000
Interest received on U.S. Treasury notes
4,000
Total
$15,000
Kathy’s gross income from the above is:
A. $15,000
B. $12,000
C. $7,000
D. $3,000
9. 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
10. Bill sold stock with a cost basis of $15,000 to his son, Bob, for $10,000 (the FMV of the stock) in January
2007. In December 2007, Bob sold the same stock to an unrelated party for $17,000. What amounts What are
Bill’s and Bob’s reportable gains (losses) in 2007 with respect to these transactions?
Bill
Bob
A. ($5,000)
$7,000
B. $-0$2,000
C. $2,000
$-0D. $-0$7,000
11. In 2009, Lena invested $80,000 for a 20% partnership interest in an activity in which she is a material
participant. The partnership reported losses of $300,000 in 2009 and $150,000 in 2010. Lena’s share of the
partnership’s losses was $60,000 in 2009 and $30,000 in 2010. How much of the losses from the partnership
can Lena deduct in 2009 and 2010?
2009
2010
A. $60,000
$20,000
B. $60,000
$30,000
C. $ -0$ -0D. $60,000
$ -0-
12. Stan, a computer lab manager, earns a salary of $80,000 and receives $25,000 in dividends and interest
during the year. In addition, he invests $55,000 in a passive activity investment in which he incurs a loss of
$40,000. What is Stan’s adjusted gross income for this year?
A. $65,000
B. $70,000
C. $80,000
D. $105,000
13. In the current year, Blue Company donated some stock it had owned for several years to NAU. Blue
originally purchased the stock for $15,000, and it was worth $25,000 on the contribution date. Blue’s taxable
income for the current year (before considering the contribution) is $220,000. What is the deductible amount of
Blue’s contribution?
A. $15,000.
B. $20,000.
C. $22,000.
D. $25,000.
14. During the current year, Ms. Venture sold her interests in two small business corporations (§1244 stock).
Her loss on Corp. X stock was $60,000, and her loss on Corp. Y stock was $20,000. Ms. Venture files as a single
individual. What are the amount and the character of Ms. Venture’s loss to be reported on her return for the
current year?
A. $80,000 ordinary; $0 capital.
B. $70,000 ordinary; $10,000 capital.
C. $50,000 ordinary; $30,000 capital.
D. $0 ordinary; $80,000 capital.
15. Which of the following would NOT be treated as a passive activity for purposes of the passive activity loss
limitations?
A. Sam is a limited partner in a partnership.
B. Sue is a member in a limited liability company (LLC) and materially participates in the business.
C. Sally is an owner in an S corporation, but does not participate in the business.
D. All of the above are passive activities.
ANSWERS TO MULTIPLE CHOICE QUESTIONS:
1.
2.
3.
4.
5.
6.
7.
8.
9.
10.
11.
12.
13.
14.
15.
SHORT-ANSWER QUESTIONS 1. (6 pts) Joe and Ann are married and file a joint return. They expect to have a taxable income of $180,000 for
the next few years and are contemplating investing $10,000 in either (a) a 9% corporate bond, or (b) a 6%
municipal (tax-exempt) bond. Assuming the bonds are equivalent in all other respects, which should they
choose? Explain your answer with computations.
2. (4 pts.) Jane owns 1,000 shares of KL common stock with a basis of $30,000. During the year, Jane receives a
5% common stock dividend (50 shares) when the fair market value of the stock was $50 per share. (There was
no shareholder election to take cash instead of the stock.)
a.
How much income does Jane recognize from the stock dividend?_______________
b.
What is her per share basis in the 50 new shares?___________________
3. (4 pts.)Kay owns stock in HAL Co. and participates in HAL’s dividend reinvestment plan, under which dividends
are automatically reinvested in additional HAL common stock. In the current year, Kay receives five (5) shares
under the plan, resulting from a $100 dividend reinvestment.
a.
How much income does Jane recognize from the reinvestment plan?_______________
b.
What is her per share basis in the 5 new shares?___________________
4. (9 pts.) Terri has a 50% ownership in a business for which her basis is $500,000. During 2009 the business
earns a profit of $120,000 and makes a cash distribution (none of which relates to compensation) to Terri
amounting to $20,000. How do these transactions affect Terri’s 2009 individual tax return (i.e., how much of the
profit and/or distribution does Terri report as income on her individual tax return), under the following entity
forms:
Entity
C corporation
S corporation
Partnership
Taxable Amount to be Reported by Terri
5. (4 pts) During the year, Alice made the following gifts to her son, Jack:
 October 31, a $10,000 (face amount) corporate bond. Six percent (6%) interest (i.e., $600) was
payable on the bond each December 31.
 November 30, 100 shares of ABC common stock. On November 29, a dividend had been
declared on the stock to be payable on December 10 to stockholders of record as of December
30. (The amount of the dividend is $1,000.)
Required: For each of the three receipts, determine how much income Alice and/or Jack would report
for the year.
ITEM
$600 of interest on the
corporate bond
$1,000 of dividends on the stock
ALICE
JACK
6. (8 pts.)On October 1, 2009, Beta Corporation received $6,000 in prepaid rent for the next 6 months (10/1/09 3/31/10 period), and $36,000 in prepaid services for the next 18 months (10/1/09 - 3/31/11 period). Assuming
that all amounts are earned ratably over the contract period (i.e., $1,000 per month for the rent, and $2,000 per
month for the services), how much gross income does Beta report from these prepayments in 2009 and 2010
under (1) the cash method, and (2) the accrual method?
Cash Method
Type of Income
Rental Income
2009
2010
Accrual Method
2009
2010
Service Income
7. (4 pts.) Flag Corporation began operations in 2005 as a calendar year, accrual-basis C corporation. Flag’s
taxable income (loss) for 2005-2009 are below:
2005
$125,000
2006
125,000
2007
50,000
2008
35,000
2009
(150,000)
Under the 2009 tax act, taxpayers may choose to use the normal NOL carryback provision (2 years), or elect to
carry a 2009 NOL back for either 3, 4, or 5 years. Assuming that Flag’s owners wish to utilize the 2009 NOL
immediately (i.e., will use the carryback provision), should it elect to carryback the 2009 NOL to 2007, 2006, or
2005 (i.e., 2, 3, or 4 year election)? Explain your answer.
8. (8 pts.) Nick is choosing between two alternative investments, each of which will require a $100,000 initial
outlay. Determine the present value of the after-tax cash flows from the two investments described below.
Assume the following in your computations:
 Nick is in the 33% marginal bracket;
 6% discount rate (present value interest factors are provided under the tax schedules);
 All tax payments occur at the end of the year.
Investment A is an annuity that will pay $35,000 at the end of each year for 4 years. (Note that only $10,000 of
each annual payment is considered ordinary interest income.)
Investment B is a stock investment that is expected to be sold at the end of 4 years for $130,000.
9. (13 pts) Jane files as a single individual in 2009. She has wage income of $150,000; long-term capital gains of
$20,000; short-term capital losses of $8,000; credits of $2,500; deductions for AGI (Adjusted Gross Income) of
$10,000; itemized deductions of $16,000; and estimated tax payments and withholding of $25,000; applicable
standard deduction of $5,700; and a personal exemption of $3,650. Using the appropriate tax schedule,
compute her tax due or refund. [Note – for credit, you must show and label all calculations, including the AGI,
Taxable Income, and Tax Liability amounts.]
2009 TAX RATE SCHEDULE - CORPORATIONS
TAXABLE
INCOME OVER:
$0
50,000
75,000
100,000
335,000
10,000,000
15,000,000
18,333,333
BUT NOT OVER:
$50,000
75,000
100,000
335,000
10,000,000
15,000,000
18,333,333
-----
TAX IS
$0
7,500
13,750
22,250
113,900
3,400,000
5,150,000
6,416,667
PLUS THIS %
15%
25%
34%
39%
34%
35%
38%
35%
OF TAXABLE
INCOME OVER:
$0
50,000
75,000
100,000
335,000
10,000,000
15,000,000
18,333,333
2009 TAX RATE SCHEDULES FOR INDIVIDUALS
TAXABLE
INCOME OVER:
$
0
8,350
33,950
82,250
171,550
372,950
TAXABLE
INCOME OVER:
$
0
16,700
67,900
137,050
208,850
372,950
BUT NOT OVER:
$ 8,350
33,950
82,250
171,550
372,950
…………
SINGLE
TAX IS
$
0
835.00
4,675.00
16,750.00
41,754.00
108,216.00
PLUS THIS %
10%
15%
25%
28%
33%
35%
OF TAXABLE INCOME
OVER:
$
0
8,350
33,950
82,250
171,550
372,950
MARRIED FILING JOINTLY / SURVIVING SPOUSE
BUT NOT OVER:
TAX IS
PLUS THIS % OF TAXABLE INCOME
OVER:
$ 16,700
$
0
10%
$
0
67,900
1,670.00
15%
16,700
137,050
9,350.00
25%
67,900
208,850
26,637.50
28%
137,050
372,950
46,741.50
33%
208,850
…………
100,894.50
35%
372,950
Present Value Factors:
6%
N
Single
Ord.
Sum
Annuity
1
0.943
0.943
2
0.890
1.833
3
0.840
2.673
4
0.792
3.465