The document contains a series of multiple-choice questions related to various tax scenarios, tax law sources, and tax implications for different financial situations. Each question addresses specific tax concepts such as gift exclusions, income recognition, deductions, and the implications of employment classifications. It serves as a quiz or study guide for understanding U.S. tax regulations and principles.

1. Multiple choice Tax Questions
Peter and Eileen are married and live in a common law state.
Peter wants to make gifts to their five children in 2009. What is
the maximum amount of the annual exclusion they will be
allowed for these gifts?
A) $60,000.
B) $65,000.
C) $120,000.
D) $130,000.
E) None of the above.
2.
Which is a primary source of tax law?
A) J. W. Yarbo v. Comm., 737 F.2d 479 (CA-5, 1984).
B) Article by a Federal judge in Harvard Law Review.

2. C) Technical Advice Memoranda.
D) Letter ruling.
E) All of the above are primary sources.
3.
Jerry purchased a U.S. Series EE savings bond for $279. The
bond has a maturity value in 10 years of $500 and yields 6%
interest. This is the first Series EE bond that Jerry has ever
owned.
A) Jerry must report the interest income each year using the
original issue discount rules.
B) Jerry can report all of the $221 interest income in the year
the bond matures.
C) The interest on the bonds is exempt from Federal income tax.
D) Jerry must report ($500 – $279)/10 = $22.10 interest income
each year he owns the bond.
E) None of the above.
4.

3. Home Office, Inc., leased a copying machine to a new customer
on December 27, 2009. The machine was to rent for $500 per
month for a period of 36 months beginning January 1, 2010. The
customer was required to pay the first and last month’s rent at
the time the lease was signed. The customer also was required
to pay an $800 damage deposit. Home Office must recognize as
income for the lease:
A) $1,000 in 2009, if Home Office is an accrual basis taxpayer.
B) $1,000 in 2010, if Home Office is a cash basis taxpayer.
C) $1,800 in 2009, if Home Office is a cash basis taxpayer.
D) $0 in 2009, if Home Office is an accrual basis taxpayer.
E) None of the above.
5.
Kathy operates a gym. She sells memberships that entitle the
member to use the facilities at any time. A one-year
membership costs $360 ($360/12 = $30 per month); a two-year
membership costs $600 ($600/24 = $25 per month). Cash
payment is required at the beginning of the membership period.
On July 1, 2009, Kathy sold a one-year membership and a two-
year membership.
I.

4. If Kathy is a cash basis taxpayer, her 2009 gross income from
the contracts is $960 ($360 + $600).
II.
If Kathy is an accrual basis taxpayer, her 2009 gross income
III.
If Kathy is an accrual basis taxpayer, her 2010 gross income
from the contracts is $630 [(6/12)($360) + $450].
A) Only I is true.
B) Only I and II are true.
C) Only II and III are true.
D) I, II, and III are true.
E) None of the above.
6.
Ben was diagnosed with a terminal illness. His physician
estimated that Ben would live no more than 18 months.

5. After he received the doctor’s diagnosis, Ben cashed in his life
insurance policy to pay some medical bills.
Ben had paid $12,000 in premiums on the policy, and he
collected $50,000, the cash surrender value of the policy. Henry
enjoys excellent health, but he cashed in his life insurance
policy to purchase a new home. He had paid premiums of
$12,000 and collected $50,000 from the insurance company.
A) Neither Ben nor Henry is required to recognize gross
income.
B) Both Ben and Henry must recognize $38,000 ($50,000 –
$12,000) of gross income.
C) Henry must recognize $38,000 ($50,000 – $12,000) of gross
income, but Ben does not recognize any gross income.
D) Ben must recognize $38,000 ($50,000 – $12,000) of gross
income, but Henry does not recognize any gross income.
E) None of the above.
Roger, age 19, is a full-time graduate student at State College.
During 2009, he received the following payments:
State scholarship for ten months (tuition and books)
$3,600

6. Loan from college financial aid office
1,500
Cash support from parents
3,000
Cash prize awarded in contest
500
$8,600
Roger served as a resident advisor in a dormitory and therefore
the university waived the $2,400 charge for the room he
occupied.
What is Roger’s adjusted gross income for 2009?
A) $11,000.
B) $4,100.
C) $2,900.

7. D) $500.
E) None of the above.
8.
Early in the year, Mike was in an automobile accident during
the course of his employment. As a result of the injuries he
sustained, he received the following payments during the year:
Worker’s compensation benefit
$4,000
Reimbursement of medical expenses from the company’s group
medical
insurance plan
6,000
Regular salary under the company’s sick pay plan
5,000
What is the amount that Mike must include in gross income for
the current year?

8. A) $15,000.
B) $11,000.
C) $9,000.
D) $5,000.
E) None of the above.
9.
Which of the following is a deduction from AGI (itemized
deduction)?
A) Contribution to a traditional IRA.
B) Roof repairs to a rental home.
C) Safe deposit box rental fee in which stock certificates are
stored.
D) Alimony payment.
E) None of the above.

9. 10.
Rex, a cash basis calendar year taxpayer, runs a bingo operation
which is illegal under state law. During 2009, a bill designated
H.R. 9 is introduced into the state legislature which, if enacted,
would legitimize bingo games. In 2009, Rex had the following
expenses:
Operating expenses in conducting bingo games
$247,000
Payoff money to state and local police
24,000
Newspaper ads supporting H.R. 9
3,000
Political contributions to legislators who support H.R. 9
8,000
Of these expenditures, Rex may deduct:
A) $247,000.
B) $250,000.

10. C) $258,000.
D) $282,000.
E) None of the above.
11.
Tommy, an automobile mechanic employed by an auto
dealership, is considering opening a fast food franchise. If
Tommy decides not to acquire the fast food franchise, any
investigation expenses are:
A) A deduction for AGI.
B) A deduction from AGI, subject to the 2 percent floor.
C) A deduction from AGI, not subject to the 2 percent floor.
D) Deductible up to $5,000 in the current year with the balance
being amortized over a 180-month period.
E) Not deductible.
12.
John had adjusted gross income of $60,000. During the year his
personal use summer home was damaged by a fire. Pertinent

11. data with respect to the home follows:
Cost basis
$250,000
Value before the fire
400,000
Value after the fire
100,000
Insurance recovery
270,000
John had an accident with his personal use car. As a result of
the accident, John was cited with reckless driving and willful
negligence. Pertinent data with respect to the car follows:
Cost basis
$80,000
Value before the accident
6,000
Value after the accident

12. 20,000
Insurance recovery
–0–
What is John’s deductible casualty loss?
A) $0.
B) $15,800.
C) $15,900.
D) $35,900.
E) None of the above.
13.
Janice, single with one dependent child, had the following items
for the year 2009:
Salary
$30,000

13. Dividend income
10,000
Loss on § 1244 small business stock held for three years
(45,000)
Total itemized deductions
(5,000)
Determine Janice’s net operating loss for the year 2009.
A) $0.
B) $5,000.
C) $13,350.
D) $20,000.
E) None of the above.
14.
Jack, age 30 and married with no dependents, is a self-employed

14. individual. For 2009, his self-employed business sustained a net
loss from operations of $10,000. The following additional
information was obtained from his personal records for the year:
Nonbusiness long-term capital gain
$
2,000
Interest income
6,000
Itemized deductions—consisting of taxes and interest
(12,000)
Based on the above information, what is Jack’s net operating
loss for the current year if he and his spouse file a joint return?
A) $2,000.
B) $8,000.
C) $10,000.
D) $11,000.

15. E) $16,400.
15.
Tara purchased a machine for $40,000 to be used in her
business. The cost recovery allowed and allowable for the three
years the machine was used are as follows:
Cost Recovery Allowed
Cost Recovery Allowable
Year 1
$16,000
$
8,000
Year 2
9,600
12,800
Year 3
5,760

16. 7,680
If Tara sells the machine after three years for $15,000, how
much gain should she recognize?
A) $3,480.
B) $6,360.
C) $9,240.
D) $11,480.
E) None of the above.
16.
Alice purchased office furniture on September 20, 2009, for
$100,000. On October 10, she purchased business computers for
$80,000. Alice did not elect to expense any of the assets under §
179, nor did she elect straight-line cost recovery.
Alice does elect not to take additional first-year depreciation.
Determine the cost recovery deduction for the business assets

17. for 2009.
A) $6,426.
B) $14,710.
C) $25,722.
D) $30,290.
E) None of the above.
17.
On January 15, 2009, Vern purchased the rights to a mineral
interest for $3,500,000. At that time it was estimated that the
recoverable units would be 500,000. During the year, 40,000
units were mined and 25,000 units were sold for $800,000. Vern
incurred expenses during 2009 of $500,000. The percentage
depletion rate is 22%. Determine Vern’s depletion deduction for
2009.
A) $150,000.
B) $175,000.
C) $176,000.

18. D) $200,000.
E) $250,000.
18.
Corey performs services for Sophie.
Which, if any, of the following factors indicate that Corey is an
independent contractor, rather than an employee?
A) Sophie sets the work schedule.
B) Corey provides his own tools.
C) Corey files a Form 2106 with his Form 1040.
D) Corey is paid by the hour.
E) None of the above.
19.
A worker may prefer to be classified as an employee (rather
than an independent contractor) for which of the following
reasons:
A) To avoid the self-employment tax.

19. B) To claim unreimbursed work-related expenses as a deduction
for AGI.
C) To avoid the cutback adjustment on unreimbursed business
entertainment expenses.
D) To avoid the 2%-of-AGI floor on unreimbursed work-related
expenses.
E) None of the above.
20.
Amy works as an auditor for a large major CPA firm. During
the months of September thru and November of each year, she is
permanently assigned to the team auditing Garnet Corporation.
As a result, every day she drives from her home to Garnet and
returns home after work. Mileage is as follows:
Miles
Home to office
10
Home to Garnet
30

20. Office to Garnet
35
For these three months, Amy’s deductible mileage for each
workday is:
A) 0.
B) 30.
C) 35.
D) 60.
E) None of the above.
21.
Rosita is employed as a systems analyst.
For calendar year 2009, she had AGI of $120,000 and paid the
following medical expenses:
Medical insurance premiums
$3,900

21. Doctor and dentist bills for Jose
and Carmen (Rosita’s parents)
8,250
Doctor and dentist bills for Rosita
6,750
Prescribed medicines for Rosita
300
Nonprescribed insulin for Rosita
825
José and Carmen would qualify as Rosita’s dependents except
that they file a joint return. Rosita’s medical insurance policy
does not cover them.
Rosita filed a claim for $3,150 of her own expenses with her
insurance company in December 2009 and received the
reimbursement in January 2010.
What is Rosita’s maximum allowable medical expense
deduction for 2009?

22. A) $2,775.
B) $11,025.
C) $17,325.
D) $17,775.
E) None of the above.
22.
Sandra is single and does a lot of business entertaining at home.
Because Arthur, Sandra’s 80-year old dependent grandfather
who lived with Sandra, needs medical and nursing care, he
moved to Twilight Nursing Home.
During the year, Sandra made the following payments on behalf
of Arthur:
Room at Twilight
$4,500
Meals for Arthur at Twilight
850
Doctor and nurse fees

23. 700
Cable TV service for Arthur’s room
107
Total
$6,157
Twilight has medical staff in residence.
Disregarding the 7.5% floor, how much, if any, of these
expenses qualify for a medical deduction by Sandra?
A) $6,157.
B) $6,050.
C) $5,200.
D) $1,550.
E) None of the above.
23.

24. Joseph and Sandra, married taxpayers, took out a mortgage on
their home for $350,000 in 1989. In May of this year, when the
home had a fair market value of $450,000 and they owed
$250,000 on the mortgage, they took out a home equity loan for
$220,000. They used the funds to purchase a single engine
airplane to be used for recreational travel purposes. What is the
maximum amount of debt on which they can deduct home equity
interest?
A) $50,000.
B) $100,000.
C) $220,000.
D) $230,000.
E) None of the above.
24.
Tara owns a shoe store and a bookstore. Both businesses are
operated in a mall. She also owns a restaurant across the street
and a jewelry store several blocks away.
A) All four businesses can be treated as a single activity if Tara
elects to do so.

25. B) Only the shoe store and bookstore can be treated as a single
activity, the restaurant must be treated as a separate activity,
and the jewelry store must be treated as a separate activity.
C) The shoe store, bookstore, and restaurant can be treated as a
single activity, and the jewelry store must be treated as a
separate activity.
D) All four businesses must be treated as separate activities.
E) None of the above.
25.
Tess owns a building in which she rents apartments to tenants
and operates a restaurant.
Which of the following statements is incorrect?
A) If 60% of Tess’s gross income is from apartment rentals and
40% is from the restaurant, the rental operation and the
restaurant business must be treated as separate activities.
B) If 95% of Tess’s gross income is from apartment rentals and
5% is from the restaurant, she may treat the rental operation and
the restaurant business as a single activity that is a rental
activity.
C) If 5% of Tess’s gross income is from apartment rentals and
95% is from the restaurant, she may treat the rental operation

26. and the restaurant business as a single activity that is not a
rental activity.
D) If 98% of Tess’s gross income is from apartment rentals and
2% is from the restaurant, the rental operation and the
restaurant business must be treated as a single activity that is
not a rental activity.
E) None of the above.
26.
Tony is married and files a joint tax return. His current
investment interest expense of $95,000 is related to a loan used
to purchase a parcel of unimproved land. Income from
investments [dividends (not qualified) and interest] total
$18,000 and miscellaneous itemized deductions (after
adjustment for the 2%-of-AGI floor) amount to $2,800. In
addition to the $1,400 of investment expenses included in
miscellaneous itemized deductions, Tony paid $3,600 of real
estate taxes on the unimproved land. He also has a $4,500 net
long-term capital gain from the sale of another parcel of
unimproved land. Tony’s maximum investment interest
deduction for the year is:
A) $95,000.
B) $18,000.
C) $17,500.

27. D) $13,000.
E) None of the above.
27.
Prior to the effect of tax credits, Eunice’s regular income tax
liability is $200,000 and her tentative AMT is $190,000. Eunice
has general business credits available of $12,500. Calculate
Eunice’s tax liability after tax credits.
A) $200,000.
B) $190,000.
C) $187,500.
D) $177,500.
E) None of the above.
28.
Which of the following normally produces positive AMT
adjustments?
A) Charitable contributions of property.

28. B) Standard deduction.
C) Personal exemption deduction.
D) Only b. and c. are correct.
E) a., b., and c. are correct.
29.
Factors that can cause the adjusted basis for AMT purposes to
be different from the adjusted basis for regular income tax
purposes include the following:
A) A different amount of depreciation (cost recovery) has been
deducted for AMT purposes and regular income tax purposes.
B) The spread on an incentive stock option (ISO) is recognized
for AMT purposes, but is not recognized for regular income tax
purposes.
C) Two-percent miscellaneous itemized deductions are not
deductible in calculating the AMT.
D) Only a. and b.
E) a., b., and c.

29. 30.
Refundable tax credits include the:
A) Foreign tax credit.
B) Tax credit for rehabilitation expenses.
C) Credit for certain retirement plan contributions.
D) Earned income credit.
E) None of the above.
31.
The components of the general business credit include all of the
following except:
A) Credit for employer-provided child care.
B) Disabled access credit.
C) Research activities credit.
D) Tax credit for rehabilitation expenditures.

30. E) All of the above are components of the general business
credit.
32.
Molly has generated general business credits over the years that
have not been utilized. The amounts generated and not utilized
follow
:
2005
$
5,000
2006
15,000
2007
10,000
2008
8,000
In the current year, 2009, her business generates an additional
$30,000 general business credit. In 2009, based on her tax

31. liability before credits, she can utilize a general business credit
of up to $40,000. After utilizing the carryforwards and the
current year credits, how much of the general business credit
generated in 2009 is available for future years?
A) $0.
B) $2,000.
C) $23,000.
D) $28,000.
E) None of the above.
33.
On December 1, 2009, Evan purchases an office building from
Ted for $600,000. Evan pays $48,000 to replace the roof, and on
December 15, he pays the property taxes for 2009 of $10,000.
What is the amount realized by Ted and the adjusted basis of
the building (ignore the effect of depreciation) to Evan?
A) $599,151 and $638,849.
B) $600,000 and $648,000.
C) $609,151 and $648,849.

32. D) $609,151 and $657,151.
E) None of the above.
34.
Which of the following decreases adjusted basis?
A) Amortization of bond premium.
B) A corporate distribution to a shareholder treated as a return
of capital in which gain is recognized to the shareholder.
C) Dividends received.
D) Only a. and b.
E) All of the above.
35.
Steve purchased his home for $500,000. As a sole proprietor, he
operates a certified public accounting practice in his home. For
this business, he uses one room exclusively and regularly as a
home office. In Year 1, $3,042 of depreciation expense on the
home office was deducted on his income tax return. In Year 2,
Steve sustained losses in his business; therefore, no
depreciation was taken on the home office. Had he been allowed

33. to deduct depreciation expense, his depreciation expense would
have been $3,175. What is the adjusted basis in the home?
A) $493,783.
B) $496,825.
C) $496,958.
D) $500,000.
E) None of the above.
36.
In determining the basis of like-kind property received,
postponed losses are:
A) Added to the basis of the old property.
B) Subtracted from the basis of the old property.
C) Added to the fair market value of the like-kind property
received.
D) Subtracted from the fair market value of the like-kind
property received.

34. E) None of the above.
37.
Rita and Todd exchange real estate in a like-kind exchange.
Rita’s property is subject to a $40,000 mortgage and has a basis
of $75,000 (fair market value of $112,000). She receives real
estate with a fair market value of $72,000 and Todd assumes the
mortgage. What is her recognized gain and adjusted basis for
the real estate received?
A) $0; $75,000.
B) $37,000; $72,000.
C) $37,000; $75,000.
D) $40,000; $115,000.
E) None of the above.
38.
Which of the following qualify as replacement property under §
1033 (nonrecognition of gain from an involuntary conversion)?
1.
An office building occupied by the taxpayer is condemned. The

35. building is to be replaced with a warehouse which is to be used
to store taxpayer’s inventory.
2.
A shopping center leased to various retail tenants is destroyed
by a tornado. The shopping center is to be replaced with a
warehouse which is to be leased to various tenants.
3.
An office building occupied by the taxpayer is destroyed by a
fire. The office building is to be replaced with a warehouse
which is to be leased to various tenants.
A) 1.
B) 2.
C) 3.
D) Only 1 and 2.
E) 1, 2, and 3.
39.
Virgil was leasing an apartment from Mauve, Inc. Mauve paid
Virgil $1,000 to cancel his lease and move out so that Mauve

36. could demolish the building. As a result:
A) Virgil has a $1,000 capital gain.
B) Virgil has a $1,000 capital loss.
C) Mauve has a $1,000 capital loss.
D) Mauve has a $1,000 capital gain.
E) None of the above.
40.
Harry inherited a residence from his mother when she died. The
mother had a tax basis of $566,000 for the residence when she
died and the residence was worth $433,000 at the date of her
death. Which of the statements below is correct?
A) Harry’s holding period for the residence includes his
mother’s holding period for the residence.
B) Harry’s holding period for the residence does not include his
mother’s holding period for the residence.
C) Harry’s holding period for the residence is automatically
long term.

37. D) b and c
E) None of the above.
41.
Sara is filing as head of household and has 2009 taxable income
of $27,000 which includes $13,000 of net long-tem capital gain.
The net long-term capital gain is made up of $10,000 25% gain
and $3,000 0%/15% gain.
What is the tax on her taxable income using the alternative tax
method?
A) $0.
B) $2,345.
C) $3,003.
D) $4,003.
E) None of the above.
42.
Red Company had an involuntary conversion on December 23,
2009. The machinery had been acquired on April 1, 2007, for

38. $49,000 and its adjusted basis was $14,200. The machinery was
completely destroyed by fire and Red received $10,000 of
insurance proceeds for the machine and did not replace it. This
was Red’s only casualty or theft event for the year. As a result
of this event, Red initially has:
A) $10,000 § 1231 loss.
B) $10,000 § 1245 recapture gain.
C) $4,200 casualty loss.
D) $4,200 § 1231 loss.
E) None of the above.
43.
Which of the following statements is correct?
A) When depreciable property is gifted to another individual
taxpayer, the depreciation recapture potential is extinguished.
B) When depreciable property is inherited by a taxpayer, the
depreciation recapture potential is extinguished.
C) When corporate depreciable property is distributed as a
dividend, the depreciation recapture potential is generally not

39. recognized.
D) When depreciable property is contributed to charity, the
depreciation recapture potential has no effect on the amount of
the charitable contribution deduction.
E) All of the above are correct.
4
4.
Business equipment is purchased on March 10, 2008, used in the
business until September 29, 2008, and sold at a $23,000 loss
on October 10, 2008.
The equipment was not suitable for the work the business had
purchased it for.
The loss on the disposition should have been reported in the
2008 Form 4797, Part:
A) I.
B) II.
C) III.
D) IV.

40. E) This transaction would not be reported in the Form 4797.
45.
Which of the following taxpayers is required to use the accrual
method of accounting?
A) A retail business with average annual gross receipts of
$800,000.
B) A medical doctor with average annual gross receipts of $2
million.
C) An insurance agency with average annual gross receipts of
$2 million.
D) All of the above are required to use the accrual method.
E) None of the above is required to use the accrual method.
46.
The accrual method generally must be used to report income:
A) From long-term construction contracts.
B) Earned by an incorporated public accounting firm with gross
receipts in excess of $5 million.

41. C) Earned by partnership that has a partner that is a C
corporation.
D) A grocery store with average annual gross receipts of
$900,000.
E) None of the above.
47.
Which of the following statements regarding the matching
principle is correct?
A) The matching principle is never relevant to tax accounting.
B) The matching principle of financial accounting is an
important component of the cash method of accounting.
C) The matching principle of financial accounting is the
cornerstone of accrual basis tax accounting.
D) The matching principle of financial accounting is sometimes
relevant to timing deductions for an accrual basis taxpayer’s
recurring items.
E) None of the above.
48.

42. Which is not considered to be a type of deferred compensation?
A) § 401(k) plan.
B) Incentive stock option (ISO) plan.
C) Tax-deferred annuities.
D) Company-supplied automobile.
E) All of the above are types of deferred compensation.
49.
Which of the following characteristics does not describe a
defined contribution plan?
A) Includes a money purchase plan.
B) An account for each participant is established.
C) Exempt from funding requirements.
D) Subject to PBGC plan termination insurance rules.

43. E) All of the above describe a defined contribution plan.
50.
Susan is a self-employed accountant with a qualified defined
contribution plan (a Keogh plan). She has the following income
items for the year:
Earned income from self-employment
$50,000
Dividend income
8,000
Interest income
2,000
Net short-term capital gain
12,000
Adjusted gross income
72,000
What is the maximum amount Susan can deduct as a
contribution to her retirement plan in 2009, assuming the self-
employment tax rate is 15.3%?

44. A) $9,235.
B) $12,000.
C) $46,000.
D) $46,468.
E) None of the above.