C239 EXAMINATION QUESTIONS AND VERIFIED
ANSWERS
Under the Federal income tax formula for individuals, a choice must be made between claiming
deductions for AGI and itemized deductions.
True
False - F
Even though a taxpayer chooses to itemize, deductions for AGI can be claimed.
A cash basis taxpayer purchased a certificate of deposit for $1,000 on July 1, 2019 that will pay
$1,100 upon its maturity on June 30, 2021. The taxpayer must recognize a portion of the
income in 2019.
True
False - T
The difference between the issue price of $1,000 and the amount due at maturity of $1,100 is
"original issue discount" that must be amortized. The amortized amount is added to gross
income for each year the certificate is held.
Jackson gives both his supervisor and his spouse a $30 box of chocolates at Christmas. Jackson
may claim only $25 as a deduction.
True
False - F
Because gifts to supervisors and spouses are not deductible, Jackson has no deduction.
In January 2021, Jake's spouse dies and he does not remarry. For tax year 2021, Jake may not be
able to use the filing status available to married persons filing joint returns.
,True
False - T
If the executor of his spouse's estate does not agree to filing a joint return, Jake's only option is
to file using married, filing separate status.
The First Chance Casino has gambling facilities, a bar, a rest., and a hotel. All employees are
allowed to obtain food from the restaurant at no charge during working hours. In the case of
the employees who operate the gambling facilities, bar, and restaurant (60% of all of Casino's
employees), the meals are provided for the convenience of the Casino. However, the hotel
workers demanded equal treatment and therefore were also allowed to eat in the restaurant at
no charge while they are at work. Which of the following is correct?
a. All the employees are required to include the value of the meals in their gross income.
b. Only the employees who work in gambling, the bar, and the restaurant may exclude the
meals from gross income.
c. Only the restaurant employees may exclude the value of their meals from gross income.
d. All of the employees may exclude the value of the meals from gross income. - D
For more than 50% of the employees, the meals are furnished for the convenience of the
employer; therefore, all of the meals are excludible.
What are the effects of a below-market loan for $100,000 made by a corporation to its chief
executive officer as an enticement to get him to remain with the company?
a. The corporation has imputed interest income and the employee is deemed to have received a
gift.
b. The employee has imputed compensation income and the corporation has imputed interest
income.
c. The corporation has imputed interest income and dividends paid.
d. The employee has no income unless the funds are invested and produce investment income
for the year. - B
,The corporation made a compensation related loan. It has imputed interest income and
compensation expense. The employee has imputed interest expense and compensation income.
Since the loan is for $100,000, the $10,000 exception does not apply.
A self-employed taxpayer who lives and works in Kansas City travels to Chicago on an eight-day
business trip. While in Chicago, the taxpayer uses the hotel valet service to have some laundry
done. The valet charge is a nondeductible personal travel expense.
True
False - F
Valet service (an "incidental" expense) is part of the travel expense deduction.
During the current year, Eleanor earns $120,000 in wages as an employee of an accounting firm.
She also earns $13,000 in gross income from a consulting service she operates. Deductible
expenses paid in connection with the consulting work amount to $3,000. Eleanor also incurs a
recognized long-term capital gain of $1,000 from the sale of a stock investment. She must pay a
self-employment tax on:
a. $14,000.
b. $0.
c. $10,000.
d. $13,000. - C
Eleanor is subject to the self-employment tax to the extent of the $10,000 ($13,000 - $3,000) of
net earnings from self-employment.
Tommy, a senior at State College, receives free room and board as full compensation for
working as a resident adviser at the university dormitory. The regular housing contract is $2,000
a year in total, $1,200 for lodging, and $800 for meals in the dormitory. He had the option of
receiving the meals or $800 in cash and accepted the meals. What must Tommy include in gross
income from working as a resident adviser?
a. The meals may be excluded because he did not receive cash.
, b. The lodging must be included in gross income because it was compensation for services.
c. All items can be excluded from gross income as a scholarship.
d. The meals must be included in gross income. - D
Because Tommy had the option to receive meals or cash, the meals were not provided for the
convenience of the employer and, therefore, the value of the meals must be included in gross
income. The housing on the employer's premises is received as a condition of employment and,
therefore, can be excluded from gross income [Treasury Regulation § 1.119-1(e)].
Dan and Donna are married and file separate returns for the year. If Dan itemizes his deductions
from AGI, Donna cannot claim the standard deduction.
True
False - T
If Dan itemizes, Donna must itemize.
The filing status of a taxpayer (e.g., single, head of household) must be identified before the
applicable standard deduction is determined.
True
False - T
The filing status is relevant in determining the amount of the standard deduction available.
Doug and Manuel received the following interest income in the current year:
Savings account opened at Greenbacks Bank $4,000
U.S.Treasury bonds 250
Interest on State of Iowa bonds 200
Interest on Federal tax refund 150
Interest on state income tax refund 75
ANSWERS
Under the Federal income tax formula for individuals, a choice must be made between claiming
deductions for AGI and itemized deductions.
True
False - F
Even though a taxpayer chooses to itemize, deductions for AGI can be claimed.
A cash basis taxpayer purchased a certificate of deposit for $1,000 on July 1, 2019 that will pay
$1,100 upon its maturity on June 30, 2021. The taxpayer must recognize a portion of the
income in 2019.
True
False - T
The difference between the issue price of $1,000 and the amount due at maturity of $1,100 is
"original issue discount" that must be amortized. The amortized amount is added to gross
income for each year the certificate is held.
Jackson gives both his supervisor and his spouse a $30 box of chocolates at Christmas. Jackson
may claim only $25 as a deduction.
True
False - F
Because gifts to supervisors and spouses are not deductible, Jackson has no deduction.
In January 2021, Jake's spouse dies and he does not remarry. For tax year 2021, Jake may not be
able to use the filing status available to married persons filing joint returns.
,True
False - T
If the executor of his spouse's estate does not agree to filing a joint return, Jake's only option is
to file using married, filing separate status.
The First Chance Casino has gambling facilities, a bar, a rest., and a hotel. All employees are
allowed to obtain food from the restaurant at no charge during working hours. In the case of
the employees who operate the gambling facilities, bar, and restaurant (60% of all of Casino's
employees), the meals are provided for the convenience of the Casino. However, the hotel
workers demanded equal treatment and therefore were also allowed to eat in the restaurant at
no charge while they are at work. Which of the following is correct?
a. All the employees are required to include the value of the meals in their gross income.
b. Only the employees who work in gambling, the bar, and the restaurant may exclude the
meals from gross income.
c. Only the restaurant employees may exclude the value of their meals from gross income.
d. All of the employees may exclude the value of the meals from gross income. - D
For more than 50% of the employees, the meals are furnished for the convenience of the
employer; therefore, all of the meals are excludible.
What are the effects of a below-market loan for $100,000 made by a corporation to its chief
executive officer as an enticement to get him to remain with the company?
a. The corporation has imputed interest income and the employee is deemed to have received a
gift.
b. The employee has imputed compensation income and the corporation has imputed interest
income.
c. The corporation has imputed interest income and dividends paid.
d. The employee has no income unless the funds are invested and produce investment income
for the year. - B
,The corporation made a compensation related loan. It has imputed interest income and
compensation expense. The employee has imputed interest expense and compensation income.
Since the loan is for $100,000, the $10,000 exception does not apply.
A self-employed taxpayer who lives and works in Kansas City travels to Chicago on an eight-day
business trip. While in Chicago, the taxpayer uses the hotel valet service to have some laundry
done. The valet charge is a nondeductible personal travel expense.
True
False - F
Valet service (an "incidental" expense) is part of the travel expense deduction.
During the current year, Eleanor earns $120,000 in wages as an employee of an accounting firm.
She also earns $13,000 in gross income from a consulting service she operates. Deductible
expenses paid in connection with the consulting work amount to $3,000. Eleanor also incurs a
recognized long-term capital gain of $1,000 from the sale of a stock investment. She must pay a
self-employment tax on:
a. $14,000.
b. $0.
c. $10,000.
d. $13,000. - C
Eleanor is subject to the self-employment tax to the extent of the $10,000 ($13,000 - $3,000) of
net earnings from self-employment.
Tommy, a senior at State College, receives free room and board as full compensation for
working as a resident adviser at the university dormitory. The regular housing contract is $2,000
a year in total, $1,200 for lodging, and $800 for meals in the dormitory. He had the option of
receiving the meals or $800 in cash and accepted the meals. What must Tommy include in gross
income from working as a resident adviser?
a. The meals may be excluded because he did not receive cash.
, b. The lodging must be included in gross income because it was compensation for services.
c. All items can be excluded from gross income as a scholarship.
d. The meals must be included in gross income. - D
Because Tommy had the option to receive meals or cash, the meals were not provided for the
convenience of the employer and, therefore, the value of the meals must be included in gross
income. The housing on the employer's premises is received as a condition of employment and,
therefore, can be excluded from gross income [Treasury Regulation § 1.119-1(e)].
Dan and Donna are married and file separate returns for the year. If Dan itemizes his deductions
from AGI, Donna cannot claim the standard deduction.
True
False - T
If Dan itemizes, Donna must itemize.
The filing status of a taxpayer (e.g., single, head of household) must be identified before the
applicable standard deduction is determined.
True
False - T
The filing status is relevant in determining the amount of the standard deduction available.
Doug and Manuel received the following interest income in the current year:
Savings account opened at Greenbacks Bank $4,000
U.S.Treasury bonds 250
Interest on State of Iowa bonds 200
Interest on Federal tax refund 150
Interest on state income tax refund 75
