Solved by verified expert :711. Iris, a
calendar year cash basis taxpayer, owns and operates several TV rental outlets
in Florida, and wants to expand to other states. During 2011, she spends
$14,000 to investigate TV rental stores in South Carolina and $9,000 to
investigate TV rental stores in Georgia. She acquires the South Carolina
operations, but not the outlets in Georgia. As to these expenses, Iris should:
a.
Capitalize $14,000 and not deduct $9,000.
b. Expense $23,000 for 2011.
c. Expense $9,000 for 2011 and
capitalize $14,000.
d. Capitalize $23,000.
e. None of the above.
712. Which of
the following statements is correct in connection with the investigation of a
business?
a.
If the taxpayer is not already engaged in the trade or business, the expenses
incurred are deductible if the project is abandoned.
b. If the business is acquired, the
expenses may be deducted immediately by a taxpayer engaged in a similar trade
or business.
c. That business must be related to the
taxpayer’s present business for any expense ever to be deductible.
d. Regardless of whether the taxpayer is
already engaged in the trade or business, the expenses must be capitalized and
amortized.
e. None of the above.
713. Which of
the following is relevant in deciding whether an activity is profit-seeking or
a hobby?
a.
The time and effort expended.
b. The expertise of the taxpayers or
their advisers.
c. The history of income or losses from
the activity.
d. The tax benefits of the activity to
the taxpayer.
e. All of the above factors are to be
considered.
714. For an
activity classified as a hobby, the expenses are categorized as follows:
(1) Amounts that affect adjusted
basis and would be deductible under other Code sections if the activity had
been engaged in for profit (e.g., depreciation, amortization, and depletion).
(2) Amounts deductible under other
Code sections without regard to the nature of the activity, such as property
taxes and home mortgage interest.
(3) Amounts deductible under other
Code sections if the activity had been engaged in for profit, but only if those
amounts do not affect adjusted basis (e.g., maintenance, utilities, and
supplies).
If these expenses exceed the gross income from the activity and are thus
limited, the sequence in which they are deductible is:
a.
(1), (2), (3).
b. (1), (3), (2).
c. (2), (3), (1).
d. (2), (1), (3).
e. (3), (2), (1).
715. Priscella
pursued a hobby of making bedspreads in her spare time. Her AGI before
considering the hobby is $40,000. During the year she sold the bedspreads for
$10,000. She incurred expenses as follows:
Supplies
$4,000
Interest on loan to get business started
500
Advertising
6,500
Assuming that the activity is deemed a hobby, how should she report these items
on her tax return?
a.
Include $10,000 in income and deduct $11,000 for AGI.
b. Ignore both income and expenses since
hobby losses are disallowed.
c. Include $10,000 in income, deduct
nothing for AGI, and claim $10,000 of
the expenses as itemized deductions.
d. Include $10,000 in income and deduct
interest of $500 for AGI.
e. None of the above.
716. Cory
incurred and paid the following expenses:
Tax return preparation fee
$ 600
Moving expenses
2,000
Investment expenses
500
Expenses associated with rental property
1,500
Interest expense associated with loan to finance
tax-exempt bonds
400
Calculate the amount that Cory can deduct (before any percentage limitations).
a.
$5,000.
b. $4,600.
c. $3,000.
d. $1,500.
e. None of the above.
717. Which of
the following is not deductible?
a.
Moving expenses in excess of reimbursement.
b. Tax return preparation fees of an
individual.
c. Expenses incurred associated with
investments in stocks and bonds.
d. Allowable hobby expenses in excess of
hobby income.
e. None of the above.
718. Which of
the following statements is correct?
a.
If a personal residence is rented for fewer than 15 days, the rent income is not included in gross income and no expenses can be deducted.
b. If a personal residence is rented for
more than 14 days, the rent income must be included in gross income and all the related expenses can be
deducted.
c. If a personal residence is rented for
more than 14 days and the personal use days exceed 14 days and 10% of the
rental days, the rent income must be included in gross income, but the expense
deductions are limited to the amount of gross income.
d. Only a. and b.
e. Only a. and c.
719. Robyn
rents her beach house for 60 days and uses it for personal use for 30 days
during the year. The rental income is $6,000 and the expenses are as follows:
Mortgage interest
$9,000
Real estate taxes
3,000
Utilities
2,000
Maintenance
1,000
Insurance
500
Depreciation (rental part)
4,000
Using the IRS approach, total
expenses that Robyn can deduct on her tax return associated with the beach
house are:
a.
$0.
b. $6,000.
c. $8,000.
d. $12,000.
e. None of the above.
721. Bob and
April own a house at the beach. The house was rented to unrelated parties for 8
weeks during the year. April and the children used the house 12 days for their
vacation during the year. After properly dividing the expenses between rental
and personal use, it was determined that a loss was incurred as follows:
Gross rental income
$4,000
Less: Mortgage interest and property taxes
$3,500
Other allocated expenses
2,000
(5,500)
Net rental loss
($1,500)
What is the correct treatment of the rental income and expenses on Bob and
April’s joint income tax return for the current year assuming the IRS approach
is used if applicable?
a.
A $1,500 loss should be reported.
b. Only the mortgage interest and
property taxes should be deducted.
c. Since the house was used more than 10
days personally by Bob and April, the rental expenses (other than mortgage
interest and property taxes) are limited to the gross rental income in excess
of deductions for interest and taxes allocated to the rental use.
d. Since the house was used less than
50% personally by Bob and April, all expenses allocated to personal use may be
deducted.
e. Bob and April should include none of
the income or expenses related to the beach house in their current year income
tax return.
722. Because
Scott is three months delinquent on the mortgage payments for his personal
residence, Jeanette (his sister) is going to cover the arrearage. Based on past
experience, she does not expect to be repaid by Scott. Which of the following
statements is correct?
a.
If Scott receives the money from Jeanette and pays the mortgage company,
Jeanette can deduct the interest part.
b. If Jeanette pays the mortgage company
directly, neither Scott nor Jeanette can deduct the interest part.
c. If Jeanette pays the mortgage company
directly, she cannot deduct the interest part.
d. Only b. and c. are correct.
e. a., b., and c. are correct.
723. Melanie
incurred the following expenses for her dependent son during the current year:
Payment of principal on son’s automobile loan
$3,600
Payment of interest on above loan
2,500
Payment of son’s property taxes
1,800
Payment of principal on son’s personal residence
loan
2,800
Payment of interest on son’s personal residence
loan
6,000
How much may Melanie deduct in computing her itemized deductions?
a.
$0.
b. $8,200.
c. $10,300.
d. $16,700.
e. None of the above.
724. Velma and
Josh divorced. Velma’s attorney fee of $4,000 is allocated as follows:
General representation in obtaining the divorce
$1,200
Services in obtaining custody of the child
800
Services in settlement of martial property
900
Determining the tax consequences of:
Dependency deduction for child
600
Property settlement
500
Of the $4,000 Velma pays to her attorney, the amount she may deduct as an
itemized deduction is:
a.
$0.
b. $1,100.
c. $2,800.
d. $4,000.
e. None of the above.
725. Which of
the following must be capitalized by a business?
a.
Replacement of a windshield of a business truck which was broken in an
accident.
b. Replacement of a roof of a building
used in business.
c. Amount paid for a covenant not to compete.
d. Only b. and c. must be capitalized.
e. a., b., and c. can be expensed rather
than capitalized.
726. On
January 2, 2011, Fran acquires a business from Chuck. Among the assets
purchased are the following intangibles: patent with a 7-year remaining life, a
covenant not to compete for 10 years, and goodwill.
Of the purchase price, $140,000 was paid for the patent and $60,000 for the
covenant. The amount of the excess of the purchase price over the identifiable
assets was $100,000. What is the amount of the amortization deduction for 2011?
a.
$10,667.
b. $16,000.
c. $20,000.
d. $32,667.
e. None of the above.
727. In
January, Lance sold stock with a cost basis of $26,000 to his brother, James,
for $24,000, the fair market value of the stock on the date of sale. Five
months later, James sold the same stock through his broker for $27,000. What is
the tax effect of these transactions?
a.
Disallowed loss to James of $2,000; gain to Lance of $1,000.
b. Disallowed loss to Lance of $2,000;
gain to James of $3,000.
c. Deductible loss to Lance of $2,000;
gain to James of $3,000.
d. Disallowed loss to Lance of $2,000;
gain to James of $1,000.
e. None of the above.
728. Nikeya
sells land (adjusted basis of $120,000) to her adult son, Shamed, for its
appraised value of $95,000. Which of the following statements is correct?
a.
Nikeya’s recognized loss is $25,000 ($95,000 amount realized – $120,000
adjusted basis).
b. Shamed’s adjusted basis for the land
is $120,000 ($95,000 cost + $25,000 disallowed loss for Nikeya).
c. If Shamed subsequently sells the land
for $112,000, he has no recognized gain or loss.
d. Only a. and b. are correct.
e. a., b., and c. are correct.
729. Which of
the following is not a related party
for constructive ownership purposes under § 267?
a.
The taxpayer’s cousin.
b. The taxpayer’s brother.
c. The taxpayer’s grandmother.
d. A corporation owned more than 50% by the taxpayer.
e. None of the above.
