Finance: 35 multiple choice questions (no writing, choose correct answers only)

QUESTION 1

Which of the following best describes the function of tax conduit direct participation programs?

They provide, in all instances, for certain allocations of income and expenses.

Gains and losses flow through to the taxpayer.

They relieve the taxpayer of the “at-risk” rules.

They magnify the tax impact of losses generated.

10 points

QUESTION 2

In general, tax income is taxed to the grantor in all of the following situations, EXCEPT:

If he or she retained the power to revoke the trust.

If the trust will revert to the grantor upon the death of a lineal descendant under the age of 21.

If he or she retained control over the beneficial enjoyment of the trust property.

If he or she retained the power to administer the estate for his or her own benefit.

10 points

QUESTION 3

Which of the following statements concerning the federal income tax treatment of the payout from a life insurance policy is correct?

The full amount of a lump-sum payment of the policy’s cash surrender value before the insured’s death will be taxable as ordinary income.

If the policy’s cash surrender value is placed under the fixed amount option, each installment payment will be fully taxable as ordinary income.

The lump-sumpayment of the policy’s proceeds to the policy’s beneficiary upon the insured’s death will result in no taxable income for anyone.

A settlement option payout of a life insurance policy’s death proceeds will result in no taxable income for the beneficiary.

10 points

QUESTION 4

All of the following are sources of tax law and tax rules, EXCEPT:

IRS

Congress

U.S. Tax Court

Discriminant Functions SystemProgram

10 points

QUESTION 5

Which of the following is includible in gross income for federal income tax purposes?

Gift from a grandfather to pay tuition

A year-end bonus received by an employee, based on business profits

Excess living expenses received under an insurance contract after a home was damaged by fire

Interest paid on most bonds issued by a state or political subdivision

10 points

QUESTION 6

All of the following statements concerning the nature and characteristics of simple trusts are correct, EXCEPT:

It is a separate entity for federal income tax purposes.

Trust income is taxable to the beneficiaries in the year in which it is distributed.

Trust income may be accumulated, but it is taxable to the beneficiaries in the year in which it is earned.

The grantor conveys to the trustee legal title to the trust property.

10 points

QUESTION 7

Which of the following is a reason to invest in a passive income generator?

The income can be offset by passive losses to increase tax-free cash flow.

Passive income generators are not subject to Treasury authority or tax regulations.

Passive income can be used to offset active income.

Passive income can be used to offset portfolio losses.

10 points

QUESTION 8

An annuitant pays $60,000 for a pure or straight life annuitywhose annual payments are $6,000. The annuitant has a life expectancy of 16 years. How much of the $6,000 annual payment is includible annually in the annuitant’s gross income?

$1,368

$1,750

$2,250

$2,634

10 points

QUESTION 9

The vast majority of large corporations use which of the following accounting methods?

Accrual

Cash

Hybrid

Percentage-of-completion

10 points

QUESTION 10

Charitable gifts may be made in the form of ordinary income property to any qualifying organization. The deduction for such gifts is limited to which of the following?

The lesser of the taxpayer’s basis or the property’s fair market value

The fair market value of the property

The taxpayer’s basis plus 40% of the capital gain

The fair market value reduced by 60% of the capital gain

10 points

QUESTION 11

Bob realizes a net long-term capital gain of $6,000 and a net short-term capital loss of $4,000. Bob’s taxable income is $40,000. What is the amount of net capital gain or loss to be reported on his tax return?

$1,000 loss

$1,600 loss

$1,000 gain

$2,000 gain

10 points

QUESTION 12

Which of the following is LEAST likely to be an audit trigger?

Returns with tax-shelter activity

Returns with hobby losses

Returns with refunds over $1,000

Returns with deductions for home office expenses

10 points

QUESTION 13

Joe Steir owns a ranch in Texas that he would like to exchange. Sylvia Potter is interested in a trade. Which of the following assets could Joe accept from Sylvia to qualify the transaction for like-kind treatment?

Common stock

A 25-year working oil leasehold

Large apartment building in Pittsburgh

Milking equipment

10 points

QUESTION 14

Which of the following statements is correct regarding IRS Private Letter Rulings?

They are only a precedent for the taxpayer to whom they are issued.

They have the full force of law.

They must be followed by the IRS in other similar cases.

They are published by the IRS for other taxpayers to view.

10 points

QUESTION 15

Last year, Roscoe Forest sold securities from his portfolio and realized the following gains and losses: net long-term capital loss of $14,000; net short-term capital gain of $600; and net short-term capital loss of $400. Which of the following amounts is the carryover which Roscoe can use in future years?

$7,000

$7,800

$10,800

$14,000

10 points

QUESTION 16

Which of the following statements best describes the general rule concerning the tax treatment of child support payments?

The payments are taxable to the recipient, the payee.

The payments are deductible to the payor.

The payments are both taxable to the recipient and deductible to the payor.

The payments are nontaxable to the payee and nondeductible by the payor.

10 points

QUESTION 17

Which of the following statements concerning the federal income tax treatment of investment income is (are) correct?

Portfolio income includes both dividends and capital gains.

An individual taxpayer may apply losses frompassive investment activities against portfolio income.

An individual taxpayer may only apply losses from passive investment activities against income fromother passive investment activities.

1 only

1 and 2 only

1 and 3 only

2 and 3 only

10 points

QUESTION 18

Taxable income with respect to an individual taxpayer is defined by which of the following?

All compensation for services, no matter what the form of payment

Adjusted Gross Income (AGI), less the standard or itemized deduction(s), less the personal exemption

Earned income plus investment income

Compensation before payroll tax deductions or any other deductions by an employer

10 points

QUESTION 19

Which of the following statements concerning the characteristics of a valid and enforceable premarital agreement are correct?

It may be orally executed by the parties.

A complete disclosure of the parties’ net worth must be made before the signing of the agreement.

It must be used to determine alimony payments in the event of a divorce.

The agreement must be in writing and signed by both parties.

1 and 2 only

1 and 3 only

2 and 3 only

2 and 4 only

10 points

QUESTION 20

Which of the following statements concerning the income tax implications for the purchaser of a deferred annuity contract bought in August of this year is (are) correct?

Any accumulation of investment income is tax-deferred.

A lump-sum withdrawal after 10 years of only 25% of the purchaser’s initial investment will result in the receipt of no taxable income.

A 10% penaltywill be imposed on the taxable portion of any lump-sum withdrawal that is made at age 60.

1 only

1 and 2 only

1 and 3 only

2 and 3 only

10 points

QUESTION 21

A business activity is presumed to be “engaged in for profit” (and therefore exempt from the hobby loss rules) if it produces a profit for what number of tax years out of the five consecutive years ending with the current year (and not counting the exceptions of horse breeding, trading, showing, and racing)?

One or more years

Two or more years

Three or more years

Four or more years

10 points

QUESTION 22

Which of the following statements concerning the characteristics of a QDRO (Qualified Domestic Relations Order) are correct?

It is an order that relates to the settlement of marital property rights and recognizes the alternate payee’s right to receive the benefits of the participant in the employer’s pension plan.

All divorce decrees concerned with the division of retirement benefits among spouses need not be “qualified” to avoid the problem of improperly assigned benefits.

The planner does not need to concern himself or herself about when the benefit amounts will be awarded to the spouse since they are automatically paid when the “earliest retirement age” occurs.

A QDRO is an order that assigns benefits from a qualified plan to the spouse who participated in the plan.

10 points

QUESTION 23

Which of the following are among the standards which serve to define “active participation” by an owner in real estate rental activities?

Making management decisions, such as approving tenants

Approving the terms of leases

Approving expenditures for major repairs

1 and 2 only

1 and 3 only

2 and 3 only

1, 2, and 3

10 points

QUESTION 24

An audit trigger can best be described by which of the following?

A result of targeted programs

A result of a casualty loss

A divergence from IRS norms

A random screening of returns

10 points

QUESTION 25

George would like to sell or exchange the high-speed office copier he has been using in his business. His neighbor is interested in trading for it. Which of the following assets could George accept in a like-kind transaction?

Small apartment

Office word processor

Vacant office approved for commercial use

Personal-use passenger car

10 points

QUESTION 26

Which of the following statements is (are) true concerning the federal income tax treatment of capital gains realized during 2013?

For taxpayers in the 15% tax bracket, net short-term capital gains are not taxed, due to the 0% tax rate.

Net long-term capital gains can be offset by net short-term capital losses for taxpayers in all brackets.

A short-term capital gain is a gain from a capital asset held for less than 18 months.

For taxpayers in the 15% bracket, net long-term capital gains held for more than one year are not taxed, due to the 0% tax rate.

2 only

1 and 3 only

2 and 4 only

1, 3, and 4 only

10 points

QUESTION 27

The IRS makes use of all of the following audit programs and procedures, EXCEPT:

Discriminant Functions SystemProgram

Targeted programs

Computer verification of every deduction

Ranking of auditworthiness

10 points

QUESTION 28

Which of the following business forms allow for limited liability?

General partnership

Direct ownership

Limited partnership

C corporation

Limited liability company

1 and 2 only

2 and 3 only

3 and 4 only

3, 4, and 5 only

10 points

QUESTION 29

If a divorce decree requires a husband to pay his wife $2,000 per month in alimony and child support, but when the children reach 21, the amount of the payment will be reduced to $800, and only this amount will be taxable and deductible as alimony, how should the $1,200 be treated?

The $1,200 is tied to a contingency affecting the children and is deductible as a child support payment.

After the children reach 21 years of age, the $1,200 will still be a responsibility of the husband.

The $1,200 is tied to a contingency affecting the children and is nondeductible.

The court will determine the disposition of the $1,200.

10 points

QUESTION 30

Which of the following statements concerning the disadvantages of the corporate form of organization is (are) correct?

Corporations are limited in their corporate affairs to acts specifically enumerated in state statutes, the corporate charter, and the corporate bylaws.

Since corporations are state-chartered, they are limited in their ability to cross state lines to conduct business, and the procedures necessary to overcome this disadvantage tend to be both expensive and cumbersome.

Corporations tend to be less flexible than other business forms.

1 only

2 only

3 only

1, 2, and 3

10 points

QUESTION 31

Caroline determined that her regular tax liability is $20,000 and her AMT tax liability is $25,000. What is the total amount of her income tax liability?

$5,000

$20,000

$25,000

$45,000

10 points

QUESTION 32

Susan bought a life policy last month with a single premium. Under these circumstances, which of the following statements is (are) correct?

Susan can borrow the amount of the policy’s investment income, without incurring income tax liability.

If Susan surrenders the policy for its cash surrender value, she is in receipt of taxable income to the extent the policy’s cash surrender value exceeds her cost basis.

If Susan dies after borrowing the policy’s cash surrender value, the designated beneficiary will be in receipt of taxable income.

2 only

1 and 2 only

1 and 3 only

2 and 3 only

10 points

QUESTION 33

According to federal income tax rules concerning the taxation of trust income to a grantor, which of the following statements is correct?

The income of a trust will not be taxed to a grantor who creates an irrevocable trust for his or her spouse for a period of at least five years.

The grantor will be taxed if he or she retains a discretionary power to withhold and accumulate income, even though the income is ultimately payable to the beneficiaries from whom it is withheld.

The power to retain or allocate receipts and disbursements between corpus and income will not subject the grantor to tax.

The grantor will not be subject to tax if the only right he or she retains and exercises is the power to borrow from the trust.

10 points

QUESTION 34

Ben, an individual taxpayer filing a joint return, has $33,000 of investment interest expense and no investment income. What is the amount of investment interest expense disallowed?

$16,500

$23,000

$26,500

$33,000

10 points

QUESTION 35

The vast majority of individual tax returns are filed on the basis of which of the following accounting methods?

Accrual

Cash

Hybrid

Completion-of-contract

10 points

QUESTION 36

George Wood employs his 15-year-old son to do janitorial work in George’s service station/garage in the afternoons after school and sometimes on Saturdays.

All of the following statements concerning payments to his son are correct, EXCEPT:

George’s payments to his son are deductible from current income as a business expense.

George’s payments are earned income for his son and allow him a standard deduction, as well as a personal exemption.

The standard deduction in 2013 for his son is the greater of $1,000 or his son’s earned income plus $300, up to the $6,100 allowance for single individuals.

The payments to the son must be based on work that is economically significant to the business.

10 points

QUESTION 37

Olaf Johnson has self-employment earnings of $52,000 and no other earned income. Which of the following is Olaf’s self-employment tax?

$4,938

$6,368

$7,347

$7,876

10 points

QUESTION 38

Which of the following statements concerning the automatic reinvestment of dividends declared for mutual fund shares is (are) correct?

The dividends are includible in the shareholder’s gross income, even though he or she does not receive the dividends.

The shareholder’s basis for his or her investment in the mutual fund shares is not affected by the declaration and reinvestment of dividends.

1 only

2 only

both 1 and 2

neither 1 nor 2

10 points

QUESTION 39

Use the following information to answer the next two questions

HarryHanover bought a small rental apartment house several years ago for $120,000.

Since then, he has had to put on a new roof, at a cost of $6,000.

Apart from this, Harry has spent $4,000 on maintenance of the property and claimed $8,000 in depreciation.

Which of the following is Harry’s current adjusted basis in the property?

$116,000

$118,000

$120,000

$122,000

10 points

QUESTION 40

Assuming Harry sells the property for a net return of $124,000, which of the following is his realized and recognized gain on the property?

$4,000

$6,000

$8,000

$10,000

10 points

QUESTION 41

Carl Sweet purchased a passive investment. This year, the investment generated no passive income, and he had passive losses of $43,000. How much of this loss is deductible by Carl this year?

$4,300

$6,450

$8,600

10 points

QUESTION 42

Which of the following statements concerning the federal income tax treatment of capital losses is (are) correct?

An individual taxpayer whose taxable income is $30,000 can deduct all of his or her $5,000 net short-term capital loss if he or she has no capital gains.

An individual taxpayer whose taxable income is $30,000 can deduct 50% of his or her $10,000 net long-term capital losses if he or she has no short-term capital gains.

1 only

2 only

both 1 and 2

neither 1 nor 2

10 points

QUESTION 43

A capital asset was acquired on March 15, 2014. To meet the long-term holding requirement, what is the earliest date the asset could be sold to obtain long-term capital gain treatment?

August 16, 2014

December 31, 2014

March 15, 2015

March 16, 2015