HS 321 Practice Test - Missed Questions With
Complete Answers
Smith and Jones formed a partnership. Smith contributed a building with an original
cost of $80,000, a fair market value of $100,000, and an adjusted basis of $40,000.
Jones contributed $100,000 cash. Each partner is a material participant in partnership
business. How much can Smith currently deduct if his share of the partnership's
first-year operating loss is $45,000? - ANSWER $40,000.
The answer is (C). The distributive share of a partnership's operating loss that is
deductible by an individual partner is limited to the adjusted basis of his or her
partnership interest. Hence Smith's adjusted basis in his partnership interest is $40,000,
determined by his adjusted basis for the property he has contributed.
Michael and Mary, a married couple filing jointly, sell their home this year for $650,000.
Their basis in the home, including cost and improvements, is $200,000. Mary purchased
the home in her name many years ago and the couple has lived together there since that
time. What amount of gain must Michael and Mary recognize from the sale? - ANSWER
$0.
answer is (A). The couple is eligible for the full $500,000 exclusion under the rules for
married couples. Their realized gain is $450,000 ($650,000 - $200,000). Therefore, no
gain is taxable.
Five years ago John purchased a portfolio of public-purpose municipal bonds for
$85,000. During the current year he received $8,000 interest on these bonds. At the end
of the current year he sold these bonds for $95,000. How much taxable income must
John report for the current year as a consequence of owning and disposing of these
bonds? - ANSWER $10,000.
The answer is (C). Any gain from the sale of tax-exempt securities is subject to federal
income taxation. Since the bonds are public-purpose bonds, the interest is tax exempt.
An employer maintains a group term life insurance plan for its employees. A nonkey
employee, aged 60, is provided with $100,000 worth of coverage. Using the Uniform
Premium Table I, the cost of $1,000 of protection per month in his age bracket is $.66. If
the employee contributes $200 annually toward the cost of the coverage, what amount
will be included in the employee's gross income? - ANSWER $196.
The answer is (B). Premiums for the first $50,000 of coverage are tax free to the
employee. The Table I cost for the excess coverage ($50,000) is taxable to the extent
that it exceeds the employee's contribution. Here, this Table I cost is $396 per year (.66
,× 12 × 50). Therefore $196 is taxable to the employee ($396 - $200).
Faith Forrester has the following selected information concerning her interest expenses
and investment income for this year: Interest income from corporate bonds = $5,000
Dividend income not eligible for the lower maximum tax rates on qualifying dividends =
$10,000 Interest paid to acquire common stock portfolio = $18,000 Interest income from
public-purpose municipal bonds = $4,000 Interest paid to acquire the municipal bonds =
$2,000 Qualified residence interest paid on principal residence = $10,000 Based on the
above information, the total amount of all of Faith's interest deductions for this year is -
ANSWER $25,000.
The answer is (B). Faith can deduct investment interest up to the limit of her net
investment income. However, municipal bond interest income or the interest paid to
acquire municipal bonds does not qualify as investment income or interest. Thus, the
only investment interest that qualifies is the $18,000 paid to acquire the common stocks.
Since Faith has only $15,000 of net investment income, she is limited to a $15,000
investment interest deduction. The $10,000 mortgage interest on the home is fully
deductible. Faith has total interest deductions this year of $25,000.
The Magic Missile Corporation has two shareholders. Past earnings and profits totaled
$100,000. This year the corporation had earnings and profits of $200,000 and
distributed $175,000 to each shareholder. How much of the distribution is taxable as a
dividend to each shareholder? - ANSWER $100,000.
The answer is (C). The distribution to each shareholder is taxed as a dividend to the
extent of the pro rata earnings and profits of the corporation, both accumulated and
current. The combined earnings and profits in this case totaled $300,000. Therefore
$150,000 of the distribution to each of the two shareholders is a dividend.
Sally Snow is the beneficiary of her husband's $120,000 life insurance policy. Sally's
husband died in September 2000. She elected to receive $7,800 annually under a life
income option. Her life expectancy was 20 years when the life income option was
chosen. How much of each annual annuity payment is included in her gross income? -
ANSWER $1,800.
The answer is (A). Under the settlement option chosen, Sally receives $7,800 annually;
$6,000 represents the death benefit that is nontaxable to her. The remaining portion,
$1,800, represents payment of interest, which is taxable as ordinary income.
An executive bought 100 shares of his employer's stock for $2,000 on July 1 of this year.
These shares are nontransferable and he must return them if he leaves the corporation.
However, for each year he remains, 20 shares do not have to be returned. If the fair
market value is $40 per share on July 1 of next year, the executive will have ordinary
income next year of - ANSWER $400.
The answer is (A). The executive has a basis of $20 per share ($2,000 ÷ 100). Their
, value when the restriction lapses is $40 per share. Therefore the executive has income
of $20 per share ($40 - $20), for a total of $400 ($20 × 20 shares).
In which of the following courts may a taxpayer petition for redetermination of an
assessed income tax deficiency and receive a jury trial? - ANSWER U.S. District Court.
The answer is (A). The U.S. District Court is the only court in which a taxpayer can have
a jury trial in a civil tax case.
Which of the following types of income would increase the exposure of an individual
taxpayer to the 3.8 percent tax on net investment income? - ANSWER interest income
from an asset held in a trade or business.
The answer is (C). Capital gains from an asset not held in a trade or business is
specifically included within the meaning of net investment income. The income
described in (A), (B), and (D) is exempted from the meaning of net investment income.
An individual taxpayer received an inheritance of $20,000 in cash, which he donated to a
public charity. His adjusted gross income for the year is $30,000. The maximum
charitable deduction that the taxpayer will be allowed for the current year is - ANSWER
$15,000.
The answer is (C). The current deduction is limited to one-half of adjusted gross income,
or $15,000 in this case.
This year an individual taxpayer (other than a married individual filing a separate return)
has $30,000 of investment interest expense and $1,000 of net investment income. The
maximum amount of investment interest expense this taxpayer may deduct this year is -
ANSWER $30,000.
The answer is (B). The deduction is limited to the taxpayer's net investment income for
the year, or $1,000.
Which of the following statements correctly describes the option available to an
annuitant if, in a given year, the annual payment from a variable annuity is $400 less
than the annuitant's annual excludible amount? - ANSWER The annuitant may
recalculate his excludible amount beginning with payments to be received in the year
following the one in which the above annuity payment was received.
Complete Answers
Smith and Jones formed a partnership. Smith contributed a building with an original
cost of $80,000, a fair market value of $100,000, and an adjusted basis of $40,000.
Jones contributed $100,000 cash. Each partner is a material participant in partnership
business. How much can Smith currently deduct if his share of the partnership's
first-year operating loss is $45,000? - ANSWER $40,000.
The answer is (C). The distributive share of a partnership's operating loss that is
deductible by an individual partner is limited to the adjusted basis of his or her
partnership interest. Hence Smith's adjusted basis in his partnership interest is $40,000,
determined by his adjusted basis for the property he has contributed.
Michael and Mary, a married couple filing jointly, sell their home this year for $650,000.
Their basis in the home, including cost and improvements, is $200,000. Mary purchased
the home in her name many years ago and the couple has lived together there since that
time. What amount of gain must Michael and Mary recognize from the sale? - ANSWER
$0.
answer is (A). The couple is eligible for the full $500,000 exclusion under the rules for
married couples. Their realized gain is $450,000 ($650,000 - $200,000). Therefore, no
gain is taxable.
Five years ago John purchased a portfolio of public-purpose municipal bonds for
$85,000. During the current year he received $8,000 interest on these bonds. At the end
of the current year he sold these bonds for $95,000. How much taxable income must
John report for the current year as a consequence of owning and disposing of these
bonds? - ANSWER $10,000.
The answer is (C). Any gain from the sale of tax-exempt securities is subject to federal
income taxation. Since the bonds are public-purpose bonds, the interest is tax exempt.
An employer maintains a group term life insurance plan for its employees. A nonkey
employee, aged 60, is provided with $100,000 worth of coverage. Using the Uniform
Premium Table I, the cost of $1,000 of protection per month in his age bracket is $.66. If
the employee contributes $200 annually toward the cost of the coverage, what amount
will be included in the employee's gross income? - ANSWER $196.
The answer is (B). Premiums for the first $50,000 of coverage are tax free to the
employee. The Table I cost for the excess coverage ($50,000) is taxable to the extent
that it exceeds the employee's contribution. Here, this Table I cost is $396 per year (.66
,× 12 × 50). Therefore $196 is taxable to the employee ($396 - $200).
Faith Forrester has the following selected information concerning her interest expenses
and investment income for this year: Interest income from corporate bonds = $5,000
Dividend income not eligible for the lower maximum tax rates on qualifying dividends =
$10,000 Interest paid to acquire common stock portfolio = $18,000 Interest income from
public-purpose municipal bonds = $4,000 Interest paid to acquire the municipal bonds =
$2,000 Qualified residence interest paid on principal residence = $10,000 Based on the
above information, the total amount of all of Faith's interest deductions for this year is -
ANSWER $25,000.
The answer is (B). Faith can deduct investment interest up to the limit of her net
investment income. However, municipal bond interest income or the interest paid to
acquire municipal bonds does not qualify as investment income or interest. Thus, the
only investment interest that qualifies is the $18,000 paid to acquire the common stocks.
Since Faith has only $15,000 of net investment income, she is limited to a $15,000
investment interest deduction. The $10,000 mortgage interest on the home is fully
deductible. Faith has total interest deductions this year of $25,000.
The Magic Missile Corporation has two shareholders. Past earnings and profits totaled
$100,000. This year the corporation had earnings and profits of $200,000 and
distributed $175,000 to each shareholder. How much of the distribution is taxable as a
dividend to each shareholder? - ANSWER $100,000.
The answer is (C). The distribution to each shareholder is taxed as a dividend to the
extent of the pro rata earnings and profits of the corporation, both accumulated and
current. The combined earnings and profits in this case totaled $300,000. Therefore
$150,000 of the distribution to each of the two shareholders is a dividend.
Sally Snow is the beneficiary of her husband's $120,000 life insurance policy. Sally's
husband died in September 2000. She elected to receive $7,800 annually under a life
income option. Her life expectancy was 20 years when the life income option was
chosen. How much of each annual annuity payment is included in her gross income? -
ANSWER $1,800.
The answer is (A). Under the settlement option chosen, Sally receives $7,800 annually;
$6,000 represents the death benefit that is nontaxable to her. The remaining portion,
$1,800, represents payment of interest, which is taxable as ordinary income.
An executive bought 100 shares of his employer's stock for $2,000 on July 1 of this year.
These shares are nontransferable and he must return them if he leaves the corporation.
However, for each year he remains, 20 shares do not have to be returned. If the fair
market value is $40 per share on July 1 of next year, the executive will have ordinary
income next year of - ANSWER $400.
The answer is (A). The executive has a basis of $20 per share ($2,000 ÷ 100). Their
, value when the restriction lapses is $40 per share. Therefore the executive has income
of $20 per share ($40 - $20), for a total of $400 ($20 × 20 shares).
In which of the following courts may a taxpayer petition for redetermination of an
assessed income tax deficiency and receive a jury trial? - ANSWER U.S. District Court.
The answer is (A). The U.S. District Court is the only court in which a taxpayer can have
a jury trial in a civil tax case.
Which of the following types of income would increase the exposure of an individual
taxpayer to the 3.8 percent tax on net investment income? - ANSWER interest income
from an asset held in a trade or business.
The answer is (C). Capital gains from an asset not held in a trade or business is
specifically included within the meaning of net investment income. The income
described in (A), (B), and (D) is exempted from the meaning of net investment income.
An individual taxpayer received an inheritance of $20,000 in cash, which he donated to a
public charity. His adjusted gross income for the year is $30,000. The maximum
charitable deduction that the taxpayer will be allowed for the current year is - ANSWER
$15,000.
The answer is (C). The current deduction is limited to one-half of adjusted gross income,
or $15,000 in this case.
This year an individual taxpayer (other than a married individual filing a separate return)
has $30,000 of investment interest expense and $1,000 of net investment income. The
maximum amount of investment interest expense this taxpayer may deduct this year is -
ANSWER $30,000.
The answer is (B). The deduction is limited to the taxpayer's net investment income for
the year, or $1,000.
Which of the following statements correctly describes the option available to an
annuitant if, in a given year, the annual payment from a variable annuity is $400 less
than the annuitant's annual excludible amount? - ANSWER The annuitant may
recalculate his excludible amount beginning with payments to be received in the year
following the one in which the above annuity payment was received.
