TAX 4001 Final Exam with 100% Correct Answers
Pursuant to the exchange, Perry assumed the mortgage on the Dally property, and Dally
assumed the mortgage on the Perry property. Compute Perry's gain recognized on the
exchange and its tax basis in the property received from Dally. - ANSWER No gain recognized;
$440,000 basis in the Dally property. (PERRY'S POV)
Irby Incorporated was incorporated in 2015 and adopted a calendar year. Here is a schedule
of Irby's net Section 1231 gains and (losses) reported on its tax returns through 2020.
2015 2016 2017 2018 2019 2020 $(4,900)$(3,000)$(7,890)$45,600$-0-$1,300
In 2021, Irby recognized a $14,750 gain on the sale of business land. How is this gain
characterized on Irby's tax return? - ANSWER $14,750 Section 1231 gain.
Three years ago, ChaGo Incorporated sold a business asset with a $39,400 adjusted tax basis for
$130,000. The purchaser paid $50,000 cash and gave ChaGo a note for the $80,000 balance of
the price. ChaGo is using the installment sale method to recognize its gain on sale. This year,
ChaGo sold the note to a financial institution for the note's $55,000 face value (ChaGo had
received a total of $25,000 principal payments on the note.) Compute ChaGo's gain recognized
on sale of the installment note. - ANSWER $38,332
,Which of the following statements about the transfer of debt in a like-kind exchange is false? -
ANSWER If both properties in the exchange are subject to debt, both parties will be treated as
receiving boot.
Mr. and Mrs. Johnson and their two children, Alice and Ben, are the four equal partners in JAB
Partnership. This year, JAB generated $40,000 of ordinary income. Compute the tax cost
associated with this income if Mr. and Mrs. Johnson's marginal tax rate is 35%, Alice's marginal
tax rate is 24%, and Ben's marginal tax rate is 32%. - ANSWER $12,600
Sporting Incorporated generated $8,083,000 ordinary business income and recognized a
$73,900 net capital gain on the sale of assets. Which of the following statements is true? -
ANSWER Sporting must pay tax at the regular corporate rate on $8,156,900 taxable income.
Which of the following statements regarding S corporations is true? - ANSWER An S corporation
may have only one class of stock
Ms. Beal recognized a $42,400 net long-term capital gain and a $33,000 net short-term capital
loss this year. What is her current net income tax cost from her capital transactions if her
marginal rate on ordinary income is 37%? - ANSWER $1,880
At the beginning of year 1, Paulina purchased a 25% general partner interest in Gamma
Partnership for $25,000. Paulina's partnership Schedule K-1 for year 1 reported that her share
of Gamma's debt at year-end was $10,000 and her share of ordinary loss was $5,000. On
January 1, year 2, Paulina sold her interest to another partner for $22,000 cash (including
relief of liabilities). Compute Paulina's gain or loss on the sale of her partnership interest. -
ANSWER $2,000 gain
Grantly Seafood is a calendar year taxpayer. In 2021, a hurricane destroyed three of Grantly's
fishing boats with a $784,500 aggregate adjusted tax basis. On October 12, 2021, Grantly
received a $1 million reimbursement from its insurance company. On May 19, 2022, Grantly
purchased a new fishing boat for $750,000. Compute Grantly's recognized gain or loss on the
involuntary conversion and its tax basis in the new boat. - ANSWER $215,500 recognized gain;
$750,000 basis in the boat
,Which of the following statements regarding the personal holding company tax is false? -
ANSWER the personal holding company tax is assessed on a qualifying corporation's
undistributed personal holding company income
Firm F purchased a commercial office building for business use in 2010 for $965,000. This year,
the firm sold the building for $1 million. Accumulated MACRS depreciation through date of
sale was $275,000. Which of the following statements is true? - ANSWER Both if Firm F is a
corporation, it recognizes $55,000 ordinary income and $255,000 Section 1231 gain and if Firm
F is a noncorporate taxpayer, it recognizes $310,000 Section 1231 gain are true.
On January 21, 2010, Andy purchased 350 shares of Baker common stock for $24,500. On
November 13, 2021, he sold the 350 shares for $7,250. On December 1, 2021, Andy purchased
350 shares of Baker common stock for $8,000. What is Andy's basis in these shares? -
ANSWER $25,250
Thieves stole computer equipment owned by Eaton Company and used for three years in its
consulting business. Eaton's adjusted basis in equipment was $23,200, and its replacement
value was $50,000. Eaton's insurance company paid only $15,000 on Eaton's claim for the
theft loss. As a result, Eaton recognizes: - ANSWER $8,200 ordinary loss
Which of the following statements about boot included in a nontaxable exchange is false?
- ANSWER The payment of boot triggers recognition of realized gain to the payer.
G&G Incorporated transferred an old asset with a $110,300 adjusted tax basis plus $20,000
cash in exchange for a new asset worth $150,000. Which of the following statements is false? -
ANSWER The old asset's FMV is $150,000
Mr. and Mrs. Daniels, ages 45, and 42, had the following income items in 2021:
Salaries and wages$ 122,500Interest income6,300Dividends eligible for 15% rate4,000Capital
gain eligible for 15% rate1,900
Mr. and Mrs. Daniels have no dependents and claim the standard deduction. Compute
their income tax liability on a joint return. - ANSWER $15,196
, Mr. and Mrs. Jelk file a joint return. They provide 65% of the financial support for David, the 14-
year old son of a friend who died three years ago. David lives in the home of his aunt Sarah,
who provides 35% of his financial support. Which of the following statements is true? -
ANSWER David is not a qualifying child of the Jelks nor relative
Alex is a partner in a calendar year partnership. His partnership Schedule K-1 for the current tax
year showed the following:
Ordinary business income$ 41,000Short-term capital loss1,500
Alex has a $7,000 loss carryforward from the partnership last year, which he could not deduct
because of the basis limitation. What is his tax basis in his partnership interest at the end of the
current tax year? - ANSWER $32,500
Kuong Incorporated sold a commercial office building used in the corporate business for $1.5
million. Kuong purchased the building in 2002 for a cost of $1.4 million and had deducted
$538,000 MACRS depreciation through date of sale. Kuong should characterize the $638,000 gain
recognized on sale as: - ANSWER $107,600 ordinary gain and $530,400 Section 1231 gain
Several years ago, Y&S Incorporated purchased a patent on a production process for $250,000
and has amortized $91,000 of the cost. Y&S has learned that a rival company recently
developed a new process that renders the patent worthless. Consequently, Y&S made a public
announcement that it would no longer enforce the patent. What is the tax consequence to
Y&S of this unfortunate situation? - ANSWER $159,000 ordinary abandonment loss
George and Martha formed a partnership by each contributing $5,000 cash. The
partnership then borrowed another $60,000 to finance its operations. If George and Martha
are both general partners, compute each partner's basis in his/her partnership interest. -
ANSWER $35,000
Three individuals transferred property to newly formed Triple Incorporated in exchange for
1,000 shares of common stock. Mr. Albert transferred assets with a $50,000 tax basis in
exchange for 820 shares, Mrs. Billig transferred assets with a $9,000 tax basis in exchange for
148 shares, and Mrs. Crisp transferred $4,000 cash for 32 shares. Based on the FMV of the
transferred assets, each Triple share is worth $125. Which of the following is false? -
ANSWER None of these choices are false
Pursuant to the exchange, Perry assumed the mortgage on the Dally property, and Dally
assumed the mortgage on the Perry property. Compute Perry's gain recognized on the
exchange and its tax basis in the property received from Dally. - ANSWER No gain recognized;
$440,000 basis in the Dally property. (PERRY'S POV)
Irby Incorporated was incorporated in 2015 and adopted a calendar year. Here is a schedule
of Irby's net Section 1231 gains and (losses) reported on its tax returns through 2020.
2015 2016 2017 2018 2019 2020 $(4,900)$(3,000)$(7,890)$45,600$-0-$1,300
In 2021, Irby recognized a $14,750 gain on the sale of business land. How is this gain
characterized on Irby's tax return? - ANSWER $14,750 Section 1231 gain.
Three years ago, ChaGo Incorporated sold a business asset with a $39,400 adjusted tax basis for
$130,000. The purchaser paid $50,000 cash and gave ChaGo a note for the $80,000 balance of
the price. ChaGo is using the installment sale method to recognize its gain on sale. This year,
ChaGo sold the note to a financial institution for the note's $55,000 face value (ChaGo had
received a total of $25,000 principal payments on the note.) Compute ChaGo's gain recognized
on sale of the installment note. - ANSWER $38,332
,Which of the following statements about the transfer of debt in a like-kind exchange is false? -
ANSWER If both properties in the exchange are subject to debt, both parties will be treated as
receiving boot.
Mr. and Mrs. Johnson and their two children, Alice and Ben, are the four equal partners in JAB
Partnership. This year, JAB generated $40,000 of ordinary income. Compute the tax cost
associated with this income if Mr. and Mrs. Johnson's marginal tax rate is 35%, Alice's marginal
tax rate is 24%, and Ben's marginal tax rate is 32%. - ANSWER $12,600
Sporting Incorporated generated $8,083,000 ordinary business income and recognized a
$73,900 net capital gain on the sale of assets. Which of the following statements is true? -
ANSWER Sporting must pay tax at the regular corporate rate on $8,156,900 taxable income.
Which of the following statements regarding S corporations is true? - ANSWER An S corporation
may have only one class of stock
Ms. Beal recognized a $42,400 net long-term capital gain and a $33,000 net short-term capital
loss this year. What is her current net income tax cost from her capital transactions if her
marginal rate on ordinary income is 37%? - ANSWER $1,880
At the beginning of year 1, Paulina purchased a 25% general partner interest in Gamma
Partnership for $25,000. Paulina's partnership Schedule K-1 for year 1 reported that her share
of Gamma's debt at year-end was $10,000 and her share of ordinary loss was $5,000. On
January 1, year 2, Paulina sold her interest to another partner for $22,000 cash (including
relief of liabilities). Compute Paulina's gain or loss on the sale of her partnership interest. -
ANSWER $2,000 gain
Grantly Seafood is a calendar year taxpayer. In 2021, a hurricane destroyed three of Grantly's
fishing boats with a $784,500 aggregate adjusted tax basis. On October 12, 2021, Grantly
received a $1 million reimbursement from its insurance company. On May 19, 2022, Grantly
purchased a new fishing boat for $750,000. Compute Grantly's recognized gain or loss on the
involuntary conversion and its tax basis in the new boat. - ANSWER $215,500 recognized gain;
$750,000 basis in the boat
,Which of the following statements regarding the personal holding company tax is false? -
ANSWER the personal holding company tax is assessed on a qualifying corporation's
undistributed personal holding company income
Firm F purchased a commercial office building for business use in 2010 for $965,000. This year,
the firm sold the building for $1 million. Accumulated MACRS depreciation through date of
sale was $275,000. Which of the following statements is true? - ANSWER Both if Firm F is a
corporation, it recognizes $55,000 ordinary income and $255,000 Section 1231 gain and if Firm
F is a noncorporate taxpayer, it recognizes $310,000 Section 1231 gain are true.
On January 21, 2010, Andy purchased 350 shares of Baker common stock for $24,500. On
November 13, 2021, he sold the 350 shares for $7,250. On December 1, 2021, Andy purchased
350 shares of Baker common stock for $8,000. What is Andy's basis in these shares? -
ANSWER $25,250
Thieves stole computer equipment owned by Eaton Company and used for three years in its
consulting business. Eaton's adjusted basis in equipment was $23,200, and its replacement
value was $50,000. Eaton's insurance company paid only $15,000 on Eaton's claim for the
theft loss. As a result, Eaton recognizes: - ANSWER $8,200 ordinary loss
Which of the following statements about boot included in a nontaxable exchange is false?
- ANSWER The payment of boot triggers recognition of realized gain to the payer.
G&G Incorporated transferred an old asset with a $110,300 adjusted tax basis plus $20,000
cash in exchange for a new asset worth $150,000. Which of the following statements is false? -
ANSWER The old asset's FMV is $150,000
Mr. and Mrs. Daniels, ages 45, and 42, had the following income items in 2021:
Salaries and wages$ 122,500Interest income6,300Dividends eligible for 15% rate4,000Capital
gain eligible for 15% rate1,900
Mr. and Mrs. Daniels have no dependents and claim the standard deduction. Compute
their income tax liability on a joint return. - ANSWER $15,196
, Mr. and Mrs. Jelk file a joint return. They provide 65% of the financial support for David, the 14-
year old son of a friend who died three years ago. David lives in the home of his aunt Sarah,
who provides 35% of his financial support. Which of the following statements is true? -
ANSWER David is not a qualifying child of the Jelks nor relative
Alex is a partner in a calendar year partnership. His partnership Schedule K-1 for the current tax
year showed the following:
Ordinary business income$ 41,000Short-term capital loss1,500
Alex has a $7,000 loss carryforward from the partnership last year, which he could not deduct
because of the basis limitation. What is his tax basis in his partnership interest at the end of the
current tax year? - ANSWER $32,500
Kuong Incorporated sold a commercial office building used in the corporate business for $1.5
million. Kuong purchased the building in 2002 for a cost of $1.4 million and had deducted
$538,000 MACRS depreciation through date of sale. Kuong should characterize the $638,000 gain
recognized on sale as: - ANSWER $107,600 ordinary gain and $530,400 Section 1231 gain
Several years ago, Y&S Incorporated purchased a patent on a production process for $250,000
and has amortized $91,000 of the cost. Y&S has learned that a rival company recently
developed a new process that renders the patent worthless. Consequently, Y&S made a public
announcement that it would no longer enforce the patent. What is the tax consequence to
Y&S of this unfortunate situation? - ANSWER $159,000 ordinary abandonment loss
George and Martha formed a partnership by each contributing $5,000 cash. The
partnership then borrowed another $60,000 to finance its operations. If George and Martha
are both general partners, compute each partner's basis in his/her partnership interest. -
ANSWER $35,000
Three individuals transferred property to newly formed Triple Incorporated in exchange for
1,000 shares of common stock. Mr. Albert transferred assets with a $50,000 tax basis in
exchange for 820 shares, Mrs. Billig transferred assets with a $9,000 tax basis in exchange for
148 shares, and Mrs. Crisp transferred $4,000 cash for 32 shares. Based on the FMV of the
transferred assets, each Triple share is worth $125. Which of the following is false? -
ANSWER None of these choices are false
