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8/26/11

prentice hall's federal taxation 2014 comprehensive, 27/e thomas r. Pope kenneth e. Anderson solutions manual and test bank

Prentice Hall's Federal Taxation 2014 Comprehensive Plus NEW MyAccountingLab with Pearson eText -- Access Card Package, 27/E solutions manual and test bank

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  1. Instructor's Resource Manual for Prentice Hall's Federal Taxation 2014 Comprehensive, 27/E
    Rupert, Pope & Anderson
    ISBN-10: 0133450139 • ISBN-13: 9780133450132
    ©2014 • Online • Live
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      For corrections to the textbook and supplements, please see the "Textbook Errata" link at www.pearsonhighered.com/phtax.
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      For corrections to the textbook and supplements, please see the "Textbook Errata" link at www.pearsonhighered.com/phtax.
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    Rupert, Pope & Anderson
    ISBN-10: 0133450155 • ISBN-13: 9780133450156
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  3. Solutions Manual for PH's Federal Taxation 2014 Comprehensive, 27/E
    Rupert, Pope & Anderson
    ISBN-10: 0133450147 • ISBN-13: 9780133450149
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    Rupert, Pope & Anderson
    ISBN-10: 0133450120 • ISBN-13: 9780133450125
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Prentice Hall's Federal Taxation 2014 Corporations, 27e
Chapter C2  Corporate Formations and Capital Structure

1) A sole proprietor is required to use the same reporting period for both business and individual tax information.
Answer:  TRUE
Page Ref.:  C:2-3
Objective:  1

2) S corporations are flow-through entities in which S income is allocated to shareholders.
Answer:  TRUE
Page Ref.:  C:2-6
Objective:  1

3) S corporations must allocate income to shareholders based on their proportionate stock ownership.
Answer:  TRUE
Page Ref.:  C:2-6
Objective:  1

4) The check-the-box regulations permit an LLC to be taxed as a C corporation.
Answer:  TRUE
Page Ref.:  C:2-8
Objective:  2

5) There are no tax consequences of a partnership converting to a C corporation.
Answer:  FALSE
Page Ref.:  C:2-9
Objective:  3
6) Section 351 applies to an exchange if the contributing shareholders own more than 50% of a corporation's stock after the transfer.
Answer:  FALSE
Page Ref.:  C:2-12 and C:2-13
Objective:  4

7) The transferor's basis for any noncash boot property received in a Sec. 351 transaction is the boot's FMV reduced by any unrecognized gain.
Answer:  FALSE
Page Ref.:  C:2-18
Objective:  4

8) A corporation must recognize a loss when transferring noncash boot property that has declined in value and its stock to a transferor as part of a Sec. 351 exchange.
Answer:  FALSE
Page Ref.:  C:2-21
Objective:  4



9) If a corporation's total adjusted bases for all properties transferred exceed the total FMV of the properties, the corporation's bases in the property is limited to FMV if no election is made.
Answer:  TRUE
Page Ref.:  C:2-21 and C:2-22
Objective:  4

10) The assignment of income doctrine does not apply if the transferor in a Sec. 351 exchange in which no gain is otherwise recognized transfers substantially all the assets and liabilities of the transferor's trade or business to the controlled corporation.
Answer:  TRUE
Page Ref.:  C:2-27
Objective:  4

11) Any losses on the sale of Section 1244 stock are ordinary.
Answer:  FALSE
Page Ref.:  C:2-32 and C:2-33
Objective:  6

12) Upon formation of a corporation, its assets have the same bases for book and tax purposes.
Answer:  FALSE
Page Ref.:  C:2-36
Objective:  4

13) Business assets of a sole proprietorship are owned by
A) a member.
B) an individual.
C) a partner.
D) a stockholder.
Answer:  B
Page Ref.:  C:2-2
Objective:  1
14) Identify which of the following statements is false.
A) A solely owned corporation is a sole proprietorship.
B) A sole proprietorship is a separate taxable entity.
C) A sole proprietor is considered to be an employee of the business.
D) All of the above are false.
Answer:  D
Page Ref.:  C:2-3
Objective:  1

15) Which of the following is an advantage of a sole proprietorship over other business forms?
A) tax-exempt treatment of fringe benefits
B) the deduction for compensation paid to the owner
C) low tax rates on dividends
D) ease of formation
Answer:  D
Page Ref.:  C:2-3
Objective:  1

16) Which of the following statements about a partnership is true?
A) A partnership is a taxpaying entity.
B) Partners are taxed on distributions from a partnership.
C) Partners are taxed on their allocable share of income whether it is distributed or not.
D) Partners are considered employees of the partnership.
Answer:  C
Page Ref.:  C:2-4
Objective:  1

17) Demarcus is a 50% partner in the DJ partnership. DJ has taxable income for the year of $200,000. Demarcus received a $75,000 distribution from the partnership. What amount of income related to DJ must Demarcus recognize?
A) $200,000
B) $75,000
C) $100,000
D) $37,500
Answer:  C
Page Ref.:  C:2-4; Example C:2-3
Objective:  1

18) Which of the following statements is incorrect?
A) Limited partners' liability for partnership debt is limited to their amount of investment.
B) In a general partnership, all partners have unlimited liability for partnership debts.
C) In a limited partnership, all partners participate in managerial decision making.
D) All of the above are correct.
Answer:  C
Page Ref.:  C:2-4
Objective:  1
19) Identify which of the following statements is true.
A) Regular corporation and C corporation are synonymous terms.
B) Regular corporation and S corporation are synonymous terms.
C) A partner is generally considered to be an employee of the partnership.
D) All of the above are false.
Answer:  A
Page Ref.:  C:2-5
Objective:  1

20) Which of the following statements is correct?
A) An owner of a C corporation is taxed on his or her proportionate share of earnings.
B) S shareholders are only taxed on distributions.
C) S shareholders are taxed on their proportionate share of earnings that are distributed.
D) S shareholders are taxed on their proportionate share of earnings whether or not
distributed.
Answer:  D
Page Ref.:  C:2-6 and C:2-7
Objective:  1



21) Identify which of the following statements is true.
A) C corporation operating losses are deductible by the individual shareholders.
B) If a C corporation does not distribute its income to its shareholders annually, double taxation cannot occur.
C) Capital losses incurred by a C corporation can be used to offset the corporation's ordinary income.
D) All of the above are false.
Answer:  D
Page Ref.:  C:2-6
Objective:  1

22) Bread Corporation is a C corporation with earnings of $100,000. It paid $20,000 in dividends to its sole shareholder, Gerald. Gerald also owns 100% of Butter Corporation, an S corporation. Butter had net taxable income of $80,000 and made a $15,000 distribution to Gerald. What income will Gerald report from Bread and Butter's activities?
A) $35,000
B) $95,000
C) $100,000
D) $180,000
Answer:  C
Explanation:  C) ($80,000 S corporation income + $20,000 dividends)
Page Ref.:  C:2-6
Objective:  1

23) Which of the following statements is incorrect?
A) S corporations must allocate income and expenses to their shareholders based on their proportionate ownership interest.
B) The number of S corporation shareholders is unlimited.
C) S corporation income is taxed to shareholders when earned.
D) S corporation losses can offset shareholder income from other sources.
Answer:  B
Page Ref.:  C:2-6
Objective:  1
24) Which of the following statements is true?
A) Shareholders in a C corporation can use C corporation losses to offset shareholder income from other sources.
B) C corporation losses remain in the C corporation and can offset capital gain income from other years.
C) C corporation shareholders are taxed based on their proportionate share of income.
D) Distributions of C corporation income are not taxable.
Answer:  B
Page Ref.:  C:2-6
Objective:  1



25) Identify which of the following statements is false.
A) The check-the-box regulations permit an LLC to be taxed as a C corporation.
B) Under the check-the-box regulations, an LLC that has only two members (owners) must be taxed as a partnership.
C) A business need not be incorporated under state or federal law to be taxed as a corporation.
D) Once an election is made to change its classification, an entity cannot change again for 60 months.
Answer:  B
Page Ref.:  C:2-8
Objective:  2

26) Identify which of the following statements is true.
A) Under the check-the-box regulations, an LLC that has one member (owner) may be disregarded as an entity separate from its owner.
B) An unincorporated business may not be taxed as a corporation.
C) A new LLC that is owned by four members elects to be taxed under its default classification (as a partnership) in its first year of operations. The entity is prohibited from changing its tax classification at any time in the future.
D) All of the above are false.
Answer:  A
Page Ref.:  C:2-8
Objective:  2

27) Three members form an LLC in the current year. Which of the following statements is incorrect?
A) The LLC's default classification under the check-the-box rules is as a partnership.
B) The LLC can elect to have its default classification ignored.
C) The LLC can elect to be taxed as a C corporation with no special tax consequences.
D) If the LLC elects to use its default classification, it can elect to change its status to being taxed as a C corporation beginning with the third tax year after the initial classification.
Answer:  D
Page Ref.:  C:2-8 and C:2-9
Objective:  2
28) Identify which of the following statements is true.
A) The exchange of stock for services rendered is not a taxable transaction.
B) The repeal of Sec. 351 would result in more existing businesses being incorporated.
C) Section 351 was enacted to allow taxpayers to incorporate without incurring adverse tax consequences.
D) All of the above are false.
Answer:  C
Page Ref.:  C:2-12
Objective:  4

29) Identify which of the following statements is true.
A) Section 351 applies exclusively to the formation of a new corporation.
B) Section 351 applies to property transfers in exchange for stock.
C) Section 351 only applies to individual transferors.
D) All of the above are false.
Answer:  B
Page Ref.:  C:2-12
Objective:  4

30) For Sec. 351 purposes, the term "property" does not include
A) cash.
B) accounts receivable.
C) inventory.
D) services rendered.
Answer:  D
Page Ref.:  C:2-12 and C:2-13
Objective:  4

31) Rose and Wayne form a new corporation. Rose contributes cash for 85% of the stock and Wayne contributes services for 15% of the stock. The tax effect is
A) Rose and Wayne must recognize their realized gains, if any.
B) Wayne must report the FMV of the stock received as capital gain.
C) Rose and Wayne are not required to recognize their realized gains.
D) Wayne must report the FMV of the stock received as ordinary income.
Answer:  D
Page Ref.:  C:2-13; Example C:2-12
Objective:  4

32) Identify which of the following statements is true.
A) A transferor's gain or loss that goes unrecognized when Sec. 351 applies is permanently exempt from taxation.
B) If a taxpayer transfers property and services as part of a transaction meeting the Sec. 351 requirements, all of the stock received is counted in determining whether the property transferors have acquired control.
C) If a taxpayer transfers property and services as part of a transaction meeting the Sec. 351 requirements, the nonrecognition of gain or loss will apply to the services.
D) All of the above are false.
Answer:  B
Page Ref.:  C:2-14
Objective:  4
33) Jermaine owns all 200 shares of Peach Corporation stock valued at $50,000. Kenya, a new shareholder, receives 200 newly issued shares from Peach Corporation in exchange for inventory with an adjusted basis of $40,000 and an FMV of $50,000. Which of the following statements is correct?
A) No gain will be recognized by Kenya.
B) The transaction results in $10,000 of ordinary income for Kenya.
C) The transaction results in $10,000 of capital gain for Kenya.
D) Kenya may defer the recognition of any tax until the stock is sold.
Answer:  B
Page Ref.:  C:2-15; Example C:2-19
Objective:  4



34) Identify which of the following statements is true.
A) To qualify for Sec. 351 treatment, control is defined as more than 50% ownership of the voting stock, and more than 50% of all other classes of stock.
B) If a shareholder receives stock with an FMV greater than the FMV of the property exchanged in a Sec. 351 transaction, the excess FMV may be considered a gift from one shareholder to another shareholder.
C) Only transfers to newly created corporations qualify for Sec. 351 treatment.
D) All of the above are false.
Answer:  B
Page Ref.:  C:2-15
Objective:  4

35) Barry, Dan, and Edith together form a new corporation; Barry and Dan each contribute property in exchange for stock. Within two weeks after the formation, the corporation issues additional stock to Edith in exchange for property. Barry and Dan each hold 10,000 shares and Edith will receive 9,000 shares. Which transactions will qualify for nonrecognition?
A) Only the first transaction will qualify for nonrecognition.
B) Only the second transaction will qualify for nonrecognition.
C) Because of the step transaction doctrine, neither transaction will qualify.
D) Both transactions will qualify under Sec. 351 if they are part of the same plan of incorporation.
Answer:  D
Page Ref.:  C:2-16; Example C:2-22
Objective:  4

36) In accordance with the rules that apply to corporate formation, which one of the following features does not make an issue of preferred stock "nonqualified"?
A) The shareholder can require the corporation to redeem the stock.
B) The dividend rate on the stock may not vary with interest rates, commodity prices, or other similar indices.
C) The corporation is either required to redeem the stock or is likely to exercise a right to redeem the stock.
D) The stock is limited and preferred as to dividends.
Answer:  B
Page Ref.:  C:2-16
Objective:  4
37) Under Sec. 351, corporate stock may include all of the following except
A) voting stock.
B) nonvoting stock.
C) stock warrants.
D) qualified preferred stock.
Answer:  C
Page Ref.:  C:2-16
Objective:  4



38) Matt and Sheila form Krupp Corporation. Matt contributes property with an FMV of $55,000 and a basis of $35,000. Sheila contributes property with an FMV of $75,000 and a basis of $40,000. Matt sells his stock to Paul shortly after the exchange. The transaction will
A) not qualify under Sec. 351.
B) qualify under Sec. 351 if Matt can show that the sale to Paul was not part of a prearranged plan.
C) qualify with respect to Sheila under Sec. 351 whether Matt qualifies or not.
D) qualify under Sec. 351 only if an advance ruling has been obtained.
Answer:  B
Page Ref.:  C:2-16
Objective:  4

39) Brad forms Vott Corporation by contributing equipment, which has a basis of $50,000 and an FMV of $40,000 in exchange for Vott stock. Brad also contributes $5,000 in cash. If the transaction meets the Sec. 351 control and ownership tests, what are the tax consequences to Brad?
A) He recognizes a $5,000 loss.
B) He recognizes a $5,000 gain and a $10,000 loss.
C) He recognizes neither a gain nor a loss.
D) He recognizes a $10,000 loss.
Answer:  C
Explanation:  C) Losses are not recognized in a Sec. 351 transaction.
Page Ref.:  C:2-16 and C:2-17
Objective:  4

40) If an individual transfers an ongoing business to a corporation in a Sec. 351 exchange, the individual must recognize any realized gain
A) only if the adjusted basis of the property transferred is less than the FMV of the stock received.
B) if the transferor receives property other than stock.
C) if the FMV of the property exchanged exceeds the FMV of the stock received.
D) both A and B above
Answer:  B
Page Ref.:  C:2-17
Objective:  4
41) Carmen and Marc form Apple Corporation. Carmen transfers land that is Sec. 1231 property, with an adjusted basis of $18,000 and an FMV of $20,000 in exchange for one-half of the Apple Corporation stock. Marc transfers equipment that originally cost $28,000 on which he has taken $5,000 in depreciation deductions. The equipment has an FMV of $25,000 and he receives one-half of the stock and a $5,000 short-term note. The transaction meets the requirements of Sec. 351. Which statement below is correct?
A) There is no recognized gain or loss.
B) Carmen recognizes a $2,000 Sec. 1231 gain and Marc recognizes $5,000 as ordinary income.
C) Carmen recognizes a $2,000 Sec. 1231 gain and Marc recognizes a $5,000 Sec. 1231 gain.
D) Carmen recognizes no gain and Marc recognizes $2,000 as ordinary income.
Answer:  D
Explanation:  D) Marc has a $2,000 realized gain [($20,000 FMV stock + $5,000 FMV note) - ($28,000 cost - $5,000 depreciation)], all of which is recognized because he received $5,000 of boot in the form of a short-term note. The gain is ordinary income under Sec. 1245.
Page Ref.:  C:2-17
Objective:  4

42) Identify which of the following statements is true.
A) The definition of stock under Sec. 351 includes stock rights and warrants.
B) The receipt of property other than stock by the transferor will trigger the recognition of gain or loss under Sec. 351.
C) The character of the gain recognized by the transferor when boot is received in a Sec. 351 transaction depends on the type of boot received.
D) All of the above are false.
Answer:  D
Page Ref.:  C:2-16 and C:2-17
Objective:  4

43) Identify which of the following statements is true.
A) To determine a shareholder's basis in a single class of stock received in a Sec. 351 exchange, the FMV of the stock received must be known.
B) If more than one asset is transferred by the transferor in a Sec. 351 nonrecognition transaction, the transferor is assumed to have received a proportionate share of the stock, cash, and other boot property for each property transferred based upon the assets' relative FMVs.
C) The transferor's basis for any noncash boot property received in a Sec. 351 transaction is the boot's FMV reduced by any unrecognized gain.
D) All of the above are false.
Answer:  B
Page Ref.:  C:2-17 and C:2-18
Objective:  4
44) Identify which of the following statements is true.
A) If stock and boot property are both received in a Sec. 351 exchange, the transferor must allocate the total basis in the contributed property between the stock and boot property based on the relative FMVs of the stock and the boot property.
B) The adjusted basis of stock received in a Sec. 351 transaction is computed by deducting the deferred loss from the FMV of the stock received.
C) The holding period for stock received in a Sec. 351 transaction in exchange for a capital asset begins on the day after the date of the exchange.
D) All of the above are false.
Answer:  D
Page Ref.:  C:2-18 and C:2-19
Objective:  4



45) Jerry transfers two assets to a corporation as part of a Sec. 351 exchange. The first asset has an adjusted basis of $70,000 and an FMV of $50,000. The second asset has an adjusted basis of $70,000 and an FMV of $150,000. The FMV of the stock received is $180,000, and he also receives $20,000 cash. The realized and recognized gain on the second asset is
A) $80,000 realized; $20,000 recognized.
B) $80,000 realized; $15,000 recognized.
C) $20,000 realized; $10,000 recognized.
D) $10,000 realized; $10,000 recognized.
Answer:  B
Explanation:  B)

1st Asset
2nd Asset
Total
FMV
$50,000
 $150,000 
= $200,000
Minus: adjusted basis
( 70,000)
 ( 70,000)
= ( 140,000)
Realized gain (loss)
($20,000)
$ 80,000
= $ 60,000
Allocation of boot
   $ 5,000a
   $ 15,000b
= $ 20,000
Recognized gain
   $     -0-
$ 15,000
= $ 15,000

a 50/200 × $20,000
b150/200 × $20,000
Page Ref.:  C:2-17 and C:2-18
Objective:  4


46) Max transfers the following properties to a newly created corporation for $90,000 of stock and $10,000 cash in a transaction that qualifies under Sec. 351.


Asset One
Asset Two
Asset Three
FMV
Basis
$30,000 
35,000
$45,000 
40,000
$25,000 
20,000

Max's recognized gain is
A) $3,000.
B) $5,000.
C) $7,000.
D) $10,000.
Answer:  C
Explanation:  C)

Asset One
Asset Two
Asset Three
Total
FMV
$ 30,000
$ 45,000
$ 25,000
= $100,000
Minus: Adj. Basis
 (35,000)
  (40,000)
  (20,000)
=   (95,000)
Realized gain (loss)
($  5,000)
$   5,000
$   5,000
=    $ 5,000
Boot
$   3,000a
$   4,500b
$   2,500c
=   $10,000
Recognized gain (loss)
          -0-
$   4,500
$   2,500
=    $ 7,000 gain

a (30/100 × $10,000)
b (45/100 × $10,000)
c (25/100 × $10,000)
Page Ref.:  C:2-17 and C:2-18
Objective:  4

47) Cherie transfers two assets to a newly-created corporation. The first asset has an adjusted basis of $40,000 and a FMV of $50,000. The second asset has an adjusted basis of $35,000 and a FMV of $25,000. Cherie receives stock with FMV of $66,000 and $9,000 cash. Cherie must recognize a gain of
A) $10,000.
B) $6,000.
C) $5,000.
D) $4,000.
Answer:  B
Explanation:  B)

1st Asset
2nd Asset
Total
FMV
  $50,000
 $ 25,000 
 = $ 75,000
Minus: Adj. basis
  ( 40,000)
 ( 35,000)
 = ( 75,000)
Realized gain (loss)
  ($10,000)
$ 10,000
 = $       -0-
Allocation of boot
     $ 6,000a
   $ 3,000b
= $  9,000
Recognized gain (loss)
  $ 6,000
$       -0-
= $  6,000
 
a (2/3 × $9,000)
b (1/3 × $9,000)
Page Ref.:  C:2-17 and C:2-18
Prentice Hall's Federal Taxation 2014 Individuals, 27e (Rupert)
Chapter I2  Determination of Tax

1) Gross income is income from whatever source derived less exclusions.
Answer:  TRUE
Page Ref.:  I:2-3
Objective:  1

2) Although exclusions are usually not reported on an individual's income tax return, interest income on state and local government bonds must be reported on the tax return.
Answer:  TRUE
Explanation:  See Additional Comment, p. I:2-3.
Page Ref.:  I:2-3
Objective:  1

3) Generally, deductions for (not from) adjusted gross income are personal expenses specifically allowed by tax law.
Answer:  FALSE
Explanation:  Personal expenses, if deductible, are generally from AGI deductions.
Page Ref.:  I:2-4
Objective:  1
4) Generally, itemized deductions are personal expenses specifically allowed by the tax law.
Answer:  TRUE
Page Ref.:  I:2-4
Objective:  1

5) Taxpayers have the choice of claiming either the personal and dependency exemption or the standard deduction.
Answer:  FALSE
Explanation:  Taxpayers claim the greater of itemized deductions or the standard deduction.  In addition, taxpayers will reduce taxable income by personal and dependency exemptions.
Page Ref.:  I:2-5
Objective:  1

6) Refundable tax credits are allowed to reduce or totally eliminate a taxpayer's tax liability but any credits in excess of the tax liability are lost.
Answer:  FALSE
Explanation:  Refundable tax credits may reduce the tax liability to zero and, if some credit still remains, are refundable or paid by the government to the taxpayer.
Page Ref.:  I:2-6
Objective:  1

7) Nonrefundable tax credits are allowed to reduce or totally eliminate a taxpayer's tax liability but any credits in excess of the tax liability are lost.
Answer:  TRUE
Page Ref.:  I:2-6
Objective:  1


8) The standard deduction is the maximum amount of itemized deductions which may be claimed by a taxpayer, and is based on an individual's filing status, age, and vision.
Answer:  FALSE
Explanation:  The standard deduction, set by Congress, is not directly related to itemized deductions.  It is the alternative to itemized deductions.
Page Ref.:  I:2-10
Objective:  2

9) Nonresident aliens are allowed a full standard deduction.
Answer:  FALSE
Explanation:  The standard deduction is not available to nonresident aliens.
Page Ref.:  I:2-12
Objective:  2

10) The standard deduction may not be claimed by one married taxpayer filing a separate return if the other spouse itemizes deductions.
Answer:  TRUE
Page Ref.:  I:2-12
Objective:  2
11) An individual who is claimed as a dependent by another person is not entitled to a personal exemption on his or her own return.
Answer:  TRUE
Page Ref.:  I:2-12
Objective:  2

12) A qualifying child of the taxpayer must meet the gross income test.
Answer:  FALSE
Explanation:  The gross income test only applies to potential dependents who are not a qualifying child of the taxpayer.
Page Ref.:  I:2-13 and I:2-14
Objective:  2

13) For purposes of the dependency exemption, a qualifying child must be under age 19, a full-time student under age 24, or a permanently and totally disabled child.
Answer:  TRUE
Page Ref.:  I:2-14
Objective:  2

14) For purposes of the dependency exemption, a qualifying child may not provide more than one-half of his or her own support during the year.
Answer:  TRUE
Page Ref.:  I:2-14
Objective:  2



15) An individual may not qualify for the dependency exemption as a qualifying child but may still qualify as a dependent.
Answer:  TRUE
Explanation:  A son or daughter, or certain other family members, may exceed the age 19 or age 24 and full-time student status but may still meet the non-qualifying child criteria.
Page Ref.:  I:2-14
Objective:  2

16) One requirement for claiming a dependent other than a qualifying child is that the taxpayer provides more than 50 percent of the dependent's support (assuming it is not a multiple support agreement situation).
Answer:  TRUE
Page Ref.:  I:2-15
Objective:  2

17) When two or more people qualify to claim the same person as a dependent, a taxpayer who is entitled to the exemption through the qualified child rules has priority over a taxpayer who meets the requirements for other relatives.
Answer:  TRUE
Page Ref.:  I:2-16
Objective:  2
18) The person claiming a dependency exemption under a multiple support declaration must provide more than 25% of the dependent's support.
Answer:  FALSE
Explanation:  The minimum support percentage for a person claiming the dependency exemption under the multiple support agreement is 10%.
Page Ref.:  I:2-17
Objective:  2

19) Generally, in the case of a divorced couple, the parent who has physical custody of a child for the greater part of the year is entitled to the dependency exemption.
Answer:  TRUE
Page Ref.:  I:2-16
Objective:  2

20) A child credit is a partially refundable credit.
Answer:  TRUE
Page Ref.:  I:2-20
Objective:  2

21) A married couple need not live together to file a joint return.
Answer:  TRUE
Page Ref.:  I:2-21
Objective:  3



22) A widow or widower may file a joint tax return and claim an exemption for the deceased spouse in the year of the spouse's death as long as the surviving spouse does not remarry before the end of the year.
Answer:  TRUE
Explanation:  A joint return may be filed in the year of death with the deceased spouse getting a full personal exemption.
Page Ref.:  I:2-22
Objective:  3

23) An unmarried taxpayer may file as head of household if he maintains a home for his qualifying child.
Answer:  TRUE
Page Ref.:  I:2-23
Objective:  3

24) For 2013, unearned income in excess of $2,000 of a child under age 18 is generally taxed at the parents' rate.
Answer:  TRUE
Page Ref.:  I:2-25
Objective:  3
25) Kelly is age 23 and a full-time student with interest and dividend income of $2,600 in the current year.  The total cost of her support for the year is $19,000.  She is not subject to the kiddie tax.
Answer:  FALSE
Explanation:  She meets the age and student status to be subject to kiddie tax, and her unearned income exceeds the $2,000 threshold.
Page Ref.:  I:2-25
Objective:  3

26) If a 13-year-old has earned income of $500 and unearned income of $2,500, all of the income can be reported on the parent's return.
Answer:  FALSE
Explanation:  To be eligible, the child's income must come solely from interest and dividends.
Page Ref.:  I:2-26
Objective:  3

27) Suri, age 8, is a dependent of her parents and has unearned income of $6,000.  She must file her own tax return.
Answer:  FALSE
Explanation:  A dependent earning solely unearned income not exceeding $9,500 may report unearned income on the parents' return.
Page Ref.:  I:2-26
Objective:  3

28) The only business entity that pays income taxes is the C corporation.
Answer:  TRUE
Explanation:  S corporations and partnerships are both flow-through entities.
Page Ref.:  I:2-27 through I:2-29
Objective:  4



29) A $10,000 gain earned on stock held 13 months is taxed in a more favorable manner than a $10,000 gain earned on stock held 11 months.
Answer:  TRUE
Explanation:  Lower tax rates apply to long-term capital gains.
Page Ref.:  I:2-30
Objective:  5

30) A married couple in the top tax bracket has a new baby.  Due to the birth of the baby their taxable income will be reduced in 2013 by $3,900.
Answer:  FALSE
Explanation:  Taxpayers in the top tax bracket will have AGIs exceeding $300,000 so the personal and dependency exemption phaseout will apply.
Page Ref.:  I:2-31
Objective:  6
31) Mia is a single taxpayer with projected AGI of $245,000 in 2013.  She is considering selling a long-term investment before year-end.  She expects to realize a gain of $25,000.  If Mia sells the investment by December 31, her 2013 taxable income will increase by $25,000.
Answer:  FALSE
Explanation:  The recognition of the gain will cause Mia's AGI to exceed the threshold for both the personal exemption and itemized deduction phaseouts so her taxable income will increase by more than $25,000.
Page Ref.:  I:2-31 and I:2-32
Objective:  6

32) Generally, when a married couple files a joint return, each spouse is liable for one-half of the entire tax and any penalties incurred.
Answer:  FALSE
Explanation:  Joint liability applies for the full tax.
Page Ref.:  I:2-33
Objective:  7

33) A taxpayer is able to change his filing status from married filing jointly to married filing separately by filing amended return.
Answer:  FALSE
Explanation:  Taxpayers are not able to change their status from filing a joint return to separate returns although they can change their status from separate returns to a joint return by filing an amended return.
Page Ref.:  I:2-34
Objective:  7

34) Tax returns from individual and corporate taxpayers are due on the 15th day of the third month following the close of the tax year.
Answer:  FALSE
Explanation:  Individual returns are due on the 15th day of the fourth month following the close of the tax year.
Page Ref.:  I:2-35 and I:2-36
Objective:  8



35) Taxable income for an individual is defined as
A) AGI reduced by itemized deductions.
B) AGI reduced by personal and dependency exemptions.
C) total income reduced by the standard deduction.
D) AGI reduced by deductions from AGI and personal and dependency exemptions.
Answer:  D
Page Ref.:  I:2-2; Table I:2-1
Objective:  1

36) All of the following items are generally excluded from income except
A) child support payments.
B) interest on corporate bonds.
C) interest on state and local government bonds.
D) life insurance proceeds paid by reason of death.
Answer:  B
Explanation:  B) Interest on corporate bonds is taxable.
Page Ref.:  I:2-3; Table I:2-2
Objective:  1
37) All of the following items are included in gross income except
A) alimony received.
B) rent income.
C) interest earned on a bank account.
D) child support payments received.
Answer:  D
Explanation:  D) Child support is not taxable.
Page Ref.:  I:2-3 and I:2-4, Table I:2-3
Objective:  1

38) All of the following items are deductions for adjusted gross income except
A) alimony paid.
B) trade or business expenses.
C) rent and royalty expenses.
D) state and local income taxes.
Answer:  D
Explanation:  D) State and local income taxes are itemized deductions.
Page Ref.:  I:2-5; Table I:2-4
Objective:  1

39) All of the following items are deductions for (not from) adjusted gross income except
A) moving expenses.
B) unreimbursed employee business expenses.
C) qualifying contributions to individual retirement accounts.
D) one-half of self-employment taxes paid.
Answer:  B
Explanation:  B) Unreimbursed employee business expenses are miscellaneous itemized deductions.
Page Ref.:  I:2-5; Table I:2-4
Objective:  1



40) Which of the following credits is considered a refundable credit?
A) child and dependent care credit
B) earned income credit
C) adoption expense credit
D) lifetime learning credit
Answer:  B
Explanation:  B) The earned income credit is a refundable credit.
Page Ref.:  I:2-6; Table I:2-5
Objective:  1
41) A single taxpayer provided the following information for 2013:

Salary
$80,000
Interest on local government bonds
(qualifies as a tax exclusion)
4,000
Allowable itemized deductions
13,000

What is taxable income?
A) $57,100
B) $63,100
C) $67,000
D) $67,100
Answer:  B
Explanation:  B) ($63,100 = $80,000 - $13,000 itemized deductions - $3,900 personal exemption)
Page Ref.:  I:2-6; Example I:2-1
Objective:  1

42) Which of the following types of itemized deductions are included in the category of miscellaneous expenses that are deductible only if the aggregate amount of such expenses exceeds 2% of the taxpayer's adjusted gross income?
A) unreimbursed employee business expenses
B) charitable contributions
C) medical expenses
D) home mortgage interest expense
Answer:  A
Page Ref.:  I:2-7; Table I:2-6
Objective:  2

43) In 2013 the standard deduction for a married taxpayer filing a joint return and who is 67 years old with a spouse who is 65 years old is
A) $12,200.
B) $13,400.
C) $14,600.
D) $15,200.
Answer:  C
Explanation:  C) ($14,600 = $12,200 + $1,200 +$1,200)
Page Ref.:  I:2-10 and I:2-11
Objective:  2

44) In 2013 Brett and Lashana (both 50 years old) file a joint tax return claiming as a dependent their son who is blind. Their standard deduction is
A) $12,200.
B) $13,400.
C) $13,700.
D) $11,700.
Answer:  A
Explanation:  A) Blindness of a dependent does not increase the standard deduction of the taxpayers.
Page Ref.:  I:2-10 and I:2-11
Objective:  2
45) Annisa, who is 28 and single, has adjusted gross income of $55,000 and itemized deductions of $5,000. In 2013, Annisa will have taxable income of
A) $45,000.
B) $48,900.
C) $51,100.
D) $42,150.
Answer:  A
Explanation:  A)
Adjusted gross income
$55,000
Minus: Standard deduction
( 6,100)
Exemption
( 3,900)
Taxable income
$45,000
Page Ref.:  I:2-11; Example I:2-4
Objective:  2

46) On June 1, 2013, Ellen turned 65. Ellen has been a widow for five years and has no dependents. Her standard deduction is
A) $3,900.
B) $6,100.
C) $7,600.
D) $12,200.
Answer:  C
Explanation:  C) $6,100 + $1,500 = $7,600
Page Ref.:  I:2-10 and I:2-11
Objective:  2



47) The regular standard deduction is available to which one of the following taxpayers?
A) married taxpayer filing a separate return where the other spouse itemizes
B) a person who has only unearned income and is a dependent of another
C) an individual filing a return for a period of less than 12 months because of a change in accounting period
D) an abandoned spouse
Answer:  D
Explanation:  D) A person who is a dependent of another has a limited standard deduction. Married individuals filing separate returns when the other spouse itemizes and an individual filing a short period return may not take the standard deduction. There is nothing in the law that precludes an abandoned spouse from taking the standard deduction.
Page Ref.:  I:2-12 and I:2-23 through I:2-24
Objective:  2
48) Husband and wife, who live in a common law state, are eligible to file a joint return for 2013, but elect to file separately. They do not have dependents. Wife has adjusted gross income of $25,000 and has $2,200 of expenditures which qualify as itemized deductions. She is entitled to one exemption. Husband deducts itemized deductions of $11,200. What is the taxable income for the wife?
A) $15,000
B) $18,900
C) $12,150
D) $22,800
Answer:  B
Explanation:  B) If one spouse on married filing separately returns itemizes deductions, the other spouse must also do so.

Income of wife
$25,000
Minus: Itemized deductions
( 2,200)
Personal exemption
( 3,900)
Taxable Income
$18,900
Page Ref.:  I:2-12; Example I:2-5
Objective:  2

49) Lewis, who is single, is claimed as a dependent on his parents' tax return. He received $2,000 during the year in dividends, which was his only income. What is his standard deduction?
A) $1,000
B) $2,000
C) $2,350
D) $6,100
Answer:  A
Explanation:  A) For a dependent, the standard deduction is the greater of earned income plus $350 or $1,000. Dividends are unearned income.
Page Ref.:  I:2-12; Example I:2-6
Objective:  2



50) Charlie is claimed as a dependent on his parents' tax return in 2013. He received $8,000 during the year from a part-time acting job, which was his only income. What is his standard deduction?
A) $1,000
B) $6,100
C) $8,000
D) $8,350
Answer:  B
Explanation:  B) For a dependent, the standard deduction is the greater of earned income plus $350 or $1,000, but no more than the current year regular standard deduction amount.  For 2013, the maximum standard deduction for a single person is $6,100.
Page Ref.:  I:2-12; Example I:2-7
Objective:  2
51) Deborah, who is single, is claimed as a dependent on her parents' tax return. She had a part-time job during 2013 and earned $850 during the year, which was her only income. What is her standard deduction?
A) $850
B) $1,000
C) $1,200
D) $6,100
Answer:  C
Explanation:  C) For a dependent, the standard deduction is the greater of earned income plus $350 ($850 + 350 = $2,000) or $1,000.
Page Ref.:  I:2-12; Example I:2-7
Objective:  2

52) Cheryl is claimed as a dependent on her parents' tax return. She had a part-time job during 2013 and earned $4,900 during the year, in addition to $600 of interest income. What is her standard deduction?
A) $1,000
B) $4,900
C) $5,200
D) $6,100
Answer:  C
Explanation:  C) $4,900 + 350 = $5,250. For a dependent, the standard deduction is the greater of earned income plus $350 or $1,000 up to a maximum of the regular standard deduction.
Page Ref.:  I:2-12; Example I:2-7
Objective:  2



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