AICPA AICPA Certifications CPA-TEST Questions & Answers

• Question 21:

  Hall, a divorced person and custodian of her 12-year old child, filed her 1990 federal income tax return as head of a household. She submitted the following information to the CPA who prepared her 1990 return:

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  The divorce agreement, executed in 1983, provides for Hall to receive $3,000 per month, of which $600 is designated as child support. After the child reaches 18, the monthly payments are to be reduced to $2,400 and are to continue until remarriage or death. However, for the year 1990, Hall received a total of only $5,000 from her former husband. Hall paid an attorney $2,000 in 1990 in a suit to collect the alimony owed.

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  In June 1990, Hall's mother gifted her 100 shares of a listed stock. The donor's basis for this stock, which she bought in 1970, was $4,000, and market value on the date of the gift was $3,000. Hall sold this stock in July 1990 for $3,500. The donor paid no gift tax.

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  During 1990, Hall spent a total of $1,000 for state lottery tickets. Her lottery winnings in 1990 totaled $200.

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  Hall earned a salary of $25,000 in 1990. Hall was not covered by any type of retirement plan, but contributed $2,000 to an IRA in 1990.

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  In 1990, Hall sold an antique that she bought in 1980 to display in her home. Hall paid $800 for the antique and sold it for $1,400, using the proceeds to pay a court-ordered judgment.

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  Hall paid the following expenses in 1990 pertaining to the home that she owns: realty taxes, $3,400; mortgage interest, $7,000; casualty insurance, $490; assessment by city for construction of a sewer system, $910; interest of $1,000 on a personal, unsecured bank loan, the proceeds of which were used for home improvements. Hall does not rent out any portion of the home.

  What amount should be reported in Hall's 1990 return as alimony income?

  A. $36,000

  B. $28,800

  C. $5,000

  D. $0

  Correct Answer: D

  Explanation:

  Choice "d" is correct. None of the payments received should be considered alimony income. Hall would

  only claim alimony income if total receipts from her former spouse exceeded $7,200 (the required child

  support).

  Rule: In the event of payments consisting of both child support and alimony, child support obligations will

  be satisfied first.

  

• Question 22:

  The rule limiting the allowability of passive activity losses and credits applies to:

  A. Partnerships.

  B. S corporations.

  C. Personal service corporations.

  D. Widely-held C corporations.

  Correct Answer: C

  Explanation:

  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.

• Question 23:

  Clark bought Series EE U.S. Savings Bonds after 1989. Redemption proceeds will be used for payment of college tuition for Clark's dependent child. One of the conditions that must be met for tax exemption of accumulated interest on these bonds is that the:

  A. Purchaser of the bonds must be the sole owner of the bonds (or joint owner with his or her spouse).

  B. Bonds must be bought by a parent (or both parents) and put in the name of the dependent child.

  C. Bonds must be bought by the owner of the bonds before the owner reaches the age of 24.

  D. Bonds must be transferred to the college for redemption by the college rather than by the owner of the bonds.

  Correct Answer: A

  Explanation:

  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.

• Question 24:

  Dale received $1,000 in 1990 for jury duty. In exchange for regular compensation from her employer during the period of jury service, Dale was required to remit the entire $1,000 to her employer in 1990. In Dale's 1990 income tax return, the $1,000 jury duty fee should be:

  A. Claimed in full as an itemized deduction.

  B. Claimed as an itemized deduction to the extent exceeding 2% of adjusted gross income.

  C. Deducted from gross income in arriving at adjusted gross income.

  D. Included in taxable income without a corresponding offset against other income.

  Correct Answer: C

  Explanation:

  Choice "c" is correct. The $1,000 jury duty fee that was required to be remitted to the employer may be

  deducted from gross income in arriving at adjusted gross income. This, in effect, washes out the $1,000

  income she will have to report as part of gross income for the jury duty fees paid to her.

  Choices "a" and "b" are incorrect. The amount remitted is allowed as an adjustment in arriving at AGI, not

  as an itemized deduction.

  Choice "d" is incorrect. A corresponding offset is allowed against other income as an adjustment in arriving

  at AGI.

• Question 25:

  Cobb, an unmarried individual, had an adjusted gross income of $200,000 in 1990 before any IRA deduction, taxable social security benefits, or passive activity losses. Cobb incurred a loss of $30,000 in 1990 from rental real estate in which he actively participated. What amount of loss attributable to this rental real estate can be used in 1990 as an offset against income from nonpassive sources?

  A. $0

  B. $12,500

  C. $25,000

  D. $30,000

  Correct Answer: A

  Explanation: Choice "a" is correct. Cobb may not use any of the loss attributable to his rental real estate as an offset against income from nonpassive sources in 1990 because he does not qualify for the "Mom and Pop" exception. Under this exception, up to $25,000 of passive losses and the deduction equivalent of tax credits that are attributable to rental real estate may be used as an offset against income from nonpassive sources. This $25,000 allowance is reduced, but not below zero, by 50% of the amount by which the individual's modified AGI exceeds $100,000. The $25,000 is therefore completely phased out when modified AGI reaches $150,000. Because Cobb's AGI was $200,000, he did not qualify for the exception. Choices "b", "c", and "d" are incorrect. Rental activities are passive activities and generally are not allowed to use any of the loss attributable to the rental activity to offset any income produced from nonpassive sources. There is a limited exception in the case of losses from rental real estate in which the taxpayer actively participates, but Cobb did not qualify for it.

• Question 26:

  Which one of the following statements is correct with regard to an individual taxpayer who has elected to amortize the premium on a bond that yields taxable interest?

  A. The amortization is treated as an itemized deduction.

  B. The amortization is not treated as a reduction of taxable income.

  C. The bond's basis is reduced by the amortization.

  D. The bond's basis is increased by the amortization.

  Correct Answer: C

  Explanation:

  Choice "c" is correct. The bond's basis is reduced by the amortization of the premium.

  Choice "a" is incorrect. For bonds acquired after 12/31/87, the amortization of the premium is an offset to

  interest income on the bond rather than a separate interest deduction.

  Choice "b" is incorrect. The amortization of the premium will reduce taxable income.

  Choice "d" is incorrect. The bond's basis will be decreased by the amortization.

• Question 27:

  Under a $150,000 insurance policy on her deceased father's life, May Green is to receive $12,000 per year for 15 years. Of the $12,000 received in 1987, the amount subject to income tax is:

  A. $0

  B. $1,000

  C. $2,000

  D. $12,000

  Correct Answer: C

  Explanation:

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

  

• Question 28:

  Don Wolf became a general partner in ABC Associates on January 1, 1989, with a 5% interest in ABC's profits, losses, and capital. ABC is a distributor of auto parts. Wolf does not materially participate in the partnership business. For the year ended December 31, 1989, ABC had an operating loss of $100,000. In addition, ABC earned interest of $20,000 on a temporary investment. ABC has kept the principal temporarily invested while awaiting delivery of equipment that is presently on order. The principal will be used to pay for this equipment. Wolf's passive loss for 1989 is:

  A. $0

  B. $4,000

  C. $5,000

  D. $6,000

  Correct Answer: C

  Explanation:

  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.

• Question 29:

  An individual had the following capital gains and losses for the year: What will be the net gain (loss) reported by the individual and at what applicable tax rate(s)?

  

  A. Long-term gain of $16,000 at the 15% rate.

  B. Short-term loss of $3,000 at the ordinary rate and long-term capital gain of $86,000 at the 15% rate.

  C. Long-term capital gain of $3,000 at the 15% rate, collectibles gain of $10,000 at the 28% rate, and Section 1250 gain of $56,000 at the 25% rate.

  D. Short-term loss of $3,000 at the ordinary rate, long-term capital gain of $10,000 at the 15% rate, collectibles gain of $10,000 at the 28% rate, and Section 1250 gain of $56,000 at the 25% rate.

  Correct Answer: A

  Explanation:

  Choice "a" is correct. Specific netting procedures for capital gains and losses are outlined in the Internal

  Revenue Code for non-corporate taxpayers.

  Gains and losses are netted within each tax rate group (e.g., the 15% rate group). The facts of this

• Question 30:

  Gibson purchased stock with a fair market value of $14,000 from Gibson's adult child for $12,000. The child's cost basis in the stock at the date of sale was $16,000. Gibson sold the same stock to an unrelated party for $18,000. What is Gibson's recognized gain from the sale?

  A. $0

  B. $2,000

  C. $4,000

  D. $6,000

  Correct Answer: B

  Explanation: Choice "b" is correct. Losses are disallowed on most related party sales transactions even if they were made at an arm's length (FMV) price. The basis (and related gain or loss) of the (second) buying relative depends on whether the second relative's resale price is higher, lower, or between the first relative's basis and the lower selling price to the second relative. In this case, the $4,000 capital loss on the sale by Gibson's adult child to Gibson [$12,000 SP - $16,000 Basis] is disallowed. Gibson's basis is determined by his selling price to a third party. In this case, the selling price is $18,000, which is HIGHER than the original basis of Gibson's adult child. Gibson's basis in the stock is, therefore, his adult child's basis of $16,000. Gibson's recognized basis is calculated as follows:

  

  Choice "a" is incorrect. There would be a zero gain or loss if the selling price were between the adult child's basis and Gibson's purchase price, but this is not the case in the facts. Choice "c" is incorrect. This answer option uses the fair market value of the stock at the date of purchase as the basis. As is discussed above, the rules do not provide for this treatment. [$18,000 SP - $14,000 FMV = $4,000] Choice "d" is incorrect. This would be the answer if the basis were Gibson's purchase price of $12,000; however, because the stock sold for more than Gibson's child's basis and the child had a disallowed loss on the sale to Gibson, Gibson is allowed to use his child's original basis of $16,000 as his basis for the stock on the date of the second sale. [$18,000 SP - $12,000 PP = $6,000]