CPA Regulation

RULE: Gross income includes all income unless it is specifically excluded in the tax code.
Choice "d" is correct. Wages and all unemployment compensation are not excluded from being taxable;
therefore, there are included in the taxpayer's gross income for tax purposes.

Choice "a" is incorrect. All forms of unemployment compensation are included as part of gross income.
Choice "b" is incorrect. The $4,000 of state unemployment compensation received is included as part of gross income. Choice "c" is incorrect. The $2,000 of his former employer's company-paid supplemental unemployment benefit plan is included as part of gross income.

Choice "b" is correct. $17,000 is the tax basis in the van.
The basis for like-kind exchanges is computed as follows:

The general rule is the gain is recognized to the extent boot is received. As the transaction results in a loss to Leker (he received an asset worth $10,000 plus $3,000 cash less a $20,000 tax basis equals $7,000 loss) no gain is recognized and the $3,000 received reduces his basis in the new asset.
Choice "a" is incorrect. Basis must be reduced by non-like-kind assets (boot) received.
Choice "c" is incorrect. For non-like-kind exchanges, the basis would be the FMV of the assets received ($10,000 FMV plus $3,000 Boot). However, because both assets have similar use, this is a like-kind exchange, which follows the rule above.
Choice "d" is incorrect. The basis of the old property is used to calculate the basis of the new property, less any boot received.

Choice "a" is correct. One of the conditions that must be met for tax exemption of accumulated interest on the bonds is that the purchaser of the bonds must be the sole owner of the bonds (or joint owner with his or her spouse). Choice "b" is incorrect. The bonds must be bought and put in the name of the owner or co-owner, not in the name of the dependent child.
Choice "c" is incorrect. The owner must be at least 24 years old before the bonds issue date.
Choice "d" is incorrect. There is no requirement that the bonds must be transferred to the college for redemption by the college rather than by the owner of the bonds.

Choice "d" is correct. There is no income tax on the value of inherited property. The gain on the sale is the difference between the sales price of $4,500 and Hall's basis. Hall's basis is the alternate valuation elected by the executor. This is the value 6 months after date of death or date distributed if before 6 months. The property was distributed 4 months after death and the value that day ($4,500) is used for the basis. $4,500
- $4,500 = 0.
Choice "a" is incorrect. There is no income tax on the value of inherited property.
Choice "b" is incorrect. This is the basis of the stock if the alternate date had not been used. Heirs are not taxed on inheritances. The income or loss results when inherited property is sold. Choice "c" is incorrect.
There is no income tax on the value of inherited property. The gain on the sale is the difference between the sales price of $4,500 and Hall's basis. Hall's basis is the alternate valuation elected by the executor.

"A" is correct. $0. Generally, if a taxpayer does not make an election to accrue interest income from Series EE bonds, the interest is taxable at the time the bonds are cashed. However, an exception applies in this case because Tom Moore meets the criteria (assume he was 24 years or older in 1990). Savings bonds is tax-exempt when:

(1) It is used to pay for qualified higher-education expenses for the taxpayer, spouse, or dependents;
(2) There is taxpayer or joint ownership with spouse;
(3) The taxpayer is age 24 (or over) when the bonds are issued; and (4) The bonds are acquired after 1989.

Choice "c" is correct. The rule limiting the allowability of passive activity losses and credits applies to personal service corporations. Choice "a" is incorrect. The passive activity limitations apply to the various partners in the partnership as opposed to the partnership itself. Choice "b" is incorrect. The passive activity limitations apply to the various shareholders in the S corporation as opposed to the corporation itself.
Choice "d" is incorrect. The passive activity rules do not apply to widely-held C corporations.

RULE: An accruable expense is one is which the services have been received/performed but have not been paid for by the end of the reporting period.

Choice "b" is correct. The facts indicate that a repair was completed prior to year end but not yet invoiced.
If it has not yet been invoiced, it is assumed that it has also not yet been paid for. Therefore, this is a situation in which the repair expense would be accrued at year end. Services have been performed, but they have not been paid for, as they have not even been invoiced yet. Choice "a" is incorrect. If the repair was completed after year end, then the expense is not accruable, as the benefit of the services hasn't been received as of year end. The fact that the repair was invoiced prior to year end does not impact the situation.
Choice "c" is incorrect. If a repair was completed and paid for prior to year end, no accrual is appropriate.
On the accrual basis, the expense is taken in the year the repair is completed and the benefit is received.
In this case, the account payable was also paid in the same year, but this has no effect on the expense.
Choice "d" is incorrect. The facts indicate that the work is to be completed at a date later than year end.
Therefore, the expense is not accruable at year end, as the benefit of the repair hasn't been received as of year end. It is reasonable that a signed contract for the repair work exists, but this has no effect on the accrual.

Choice "c" is correct. Wolf's passive loss for 1989 is $5,000 ($100,000 operating loss ?5% interest in partnership).
Choice "a" is incorrect. Wolf did not materially participate in the partnership, so the loss was passive.
Choice "b" is incorrect. Wolf's passive loss of $5,000 could not be reduced by his distributive share of the partnership's "interest income" totaling $1,000. Interest income is considered "portfolio income," and neither the partnership nor a partner can offset it against passive losses.
Choice "d" is incorrect. No items of income or deduction from portfolio income or activities in which the taxpayer materially participates may be combined or offset with passive losses unless the activity generating the loss is completely disposed of in a taxable transaction.

Choice "c" is correct. The general rule for the basis on gifted property is that the donee receives the property with a rollover cost basis (equal to the donor's basis). An exception exists where the fair market value of the property at the time of the gift is less than the donor's basis. That is not the case in this question; thus, the calculation of the gain on the disposition of the property is:

Choice "a" is incorrect. This choice could be correct if the facts of the question met the exception whereby no gain or loss is recognized when a donee sells gifted property for an amount between the donor's basis and the fair market value at the date of the gift.
Choice "b" is incorrect. This choice uses the basis as the fair market value of the property. Fair market value of property at date of death is used as the basis for inherited property, not gifted property.
Choice "d" is incorrect. This choice assumes that Thompson's basis is zero. His basis is $1,200 as indicated above.

Choice "c" is correct. $2,000.