Johnson worked for ABC Co. and earned a salary of $100,000.

Johnson also received, as a fringe benefit, group term-life insurance at twice Johnson's salary. The
annual IRS-established uniform cost of insurance is $2.76 per $1,000. What amount must Johnson include in gross income?

a. $100,276

b. $100,414

c. $100,000

d. $100,552
Explanation
Choice "b" is correct. The first $50,000 of group term life insurance is a nontaxable fringe benefit. Amounts exceeding this are taxable based on IRS tables. The
total group term life insurance here is $200,000 (twice the salary of $100,000). The amount exceeding $50,000 is $150,000. The cost given here is $2.76 per
$1,000 of insurance. 150 $2.76 = $414. So the total amount included in gross income is $100,414 ($100,000 + $414).
Choice "c" is incorrect. $100,000 does not include any of the taxable amount of group term life insurance.
Choice "a" is incorrect. $100,276 only includes $100,000 of the group term life insurance instead of $150,000.
Choice "d" is incorrect. $100,552 includes the entire $200,000 of the group term life insurance instead of only $150,000.
Lane, a single taxpayer, received $160,000 in salary, $15,000 in income from an S Corporation in which Lane does not materially participate, and a $35,000
passive loss from a real estate rental activity in which Lane materially participated. Lane's modified adjusted gross income was $165,000. What amount of the real
estate rental activity loss was deductible?

a. $0

b. $35,000

c. $15,000

d. $25,000
Explanation
Rule: Passive activity is any activity in which the taxpayer does not materially participate. A net passive activity loss generally may not be deducted against other
types of income (e.g., wages, other ordinary or active income, portfolio income (interest and dividends), or capital gains). In other words, passive losses may
generally only offset passive income for a tax year-the remaining net loss is generally "suspended" and carried forward to a year when it may be used to offset
passive income (or when the final disposition of the property occurs). However, there is an exception (the "mom and pop exception," as we refer to it in the
textbooks) to this general rule. Taxpayers who own more than 10% of the rental activity, have modified AGI under $100,000, and have active participation
(managing the property qualifies), may deduct up to $25,000 annually of net passive losses attributable to real estate. There is a phase-out provision for modified
AGI from $100,000 $150,000, and the deduction is completely phased-out for modified AGI in excess of $150,000.
Choice "c" is correct. Per the above rule, unless an exception exists (and it does not in this case, as Lane's modified adjusted gross income is in excess of
$150,000), passive losses may only offset passive income for a tax year (i.e., no "net loss" may exist). In this case, Lane has a $20,000 net loss from passive
activity [$15,000 S Corporation income (passive, in this case because the facts state Lane does not materially participate) minus the $35,000 rental real estate
loss]. Thus, only $15,000 of the passive loss from real estate rental activity may be used to offset the $15,000 income from the S Corporation. The remaining
$20,000 passive activity loss is carried forward to be used in future years.
Choice "a" is incorrect. Per the above rule, passive losses may generally only offset passive income for a tax year. Lane has passive income of $15,000 in the
year; thus, passive loss up to $15,000 may be deducted from passive income.
Choice "d" is incorrect. This answer option is an attempt to confuse the candidate into using the "mom and pop" exception, which applies when taxpayers who
actively participate, own more than 10% of the rental activity, and have modified AGI under $100,000 are able to deduct up to $25,000 annually of net passive
losses attributable to real estate. There is a phase-out provision for modified AGI from $100,000 $150,000, and the deduction is completely phased-out for
modified AGI in excess of $150,000. In this case, the facts state that Lane's modified adjusted gross income is $165,000; thus, Lane does not qualify to use the
exception.
Choice "b" is incorrect. This answer option assumes that the full amount of the rental real estate loss is deductible against the passive income from the S
Corporation, and, thus, against Lane's other taxable income. As indicated in the rule above, unless an exception applies (it does not in this case), a net passive
activity loss may not be deducted against other types of income (e.g., wages, other ordinary or active income, portfolio income (interest and dividends), or capital
gains). Thus, the full $35,000 rental real estate loss is not deductible in the year by Lane.
During the taxable year, Blake transferred a corporate bond with a face amount and fair market value of $20,000 to a trust for the benefit of her 16-year old child.
Annual interest on this bond is $2,000, which is to be accumulated in the trust and distributed to the child on reaching the age of 21. The bond is then to be
distributed to the donor or her successor-in-interest in liquidation of the trust. Present value of the total interest to be received by the child is $8,710. The amount of
the gift that is excludable from taxable gifts is:

a. $20,000

b. $13,000

c. $8,710

d. $0
Explanation
Choice "d" is correct.
Rule: An amount will not be treated as an excluded gift or bequest if the governing instrument provides that the specific sum is payable only from the "income" of
the estate or trust.
Choices "a", "b", and "c" are incorrect, per the above rule.
Lyon, a cash basis taxpayer, died on January 15, Year 50. The estate executor made the required periodic distribution of $9,000 from estate income to Lyon's sole
heir. The following pertains to the estate's income and disbursements in Year 50:
Estate Income
$20,000 Taxable interest
10,000 Net long-term capital gains allocable to corpus
Estate Disbursements
$5,000 Administrative expenses attributable to taxable income
Lyon's executor does not intend to file an extension request for the estate fiduciary income tax return. By what date must the executor file the Form 1041, U.S.
Fiduciary Income Tax Return, for the estate's Year 50 calendar year?

a. Monday, April 15, Year 51.

b. Friday, September 15, Year 51.

c. Thursday, June 15, Year 51.

d. Wednesday, March 15, Year 51.
Explanation
Choice "a" is correct.
Rule: Form 1041 is due on the 15th day of the fourth month after the close of its taxable year.
Lyon's calendar Year 50 return would be due on April 15, Year 51.
Choices "d", "c", and "b" are incorrect, per the above rule.
Commerce Corp. elects S corporation status as of the beginning of the current year. At the time of Commerce's election, it held a machine with a basis of $20,000
and a fair market value of $30,000. In March of the current year, Commerce sells the machine for $35,000. What would be the amount subject to the built-in gains
tax?

a. $10,000

b. $5,000

c. $15,000

d. $0
Explanation
Choice "a" is correct. The built-in gain for the machine is $10,000, the difference, on the date of the election of S status, between the $20,000 adjusted basis of the
machine to the C corporation and the $30,000 fair market value. That is the amount of the gain that occurred while the corporation was a C corporation, and it is
also the amount that is subject to the built-in gains tax.
Choice "d" is incorrect. The $0 indicates that there is no built-in gain on the machine. There are a number of exceptions to the built-in gains tax, but none of them
apply in this question.
Choice "b" is incorrect. The $5,000 is the amount of the gain recognized on the sale ($35,000 - $20,000 - $10,000) that is not built-in gain. The $5,000 gain
occurred while the corporation was an S corporation and is not subject to the built-in gains tax.
Choice "c" is incorrect. The $15,000 is the total gain recognized on the sale ($35,000 - $20,000), not the amount of gain subject to the built-in gains tax.
To qualify as an exempt organization, the applicant:

a. May be organized and operated for the primary purpose of carrying on a business for profit, provided that all of the organization's net earnings are turned
over to one or more tax exempt organizations.

b. Must not be classified as a social club.

c. Must not be a private foundation organized and operated exclusively to influence legislation pertaining to protection of the environment.

d. Need not be specifically identified as one of the classes upon which exemption is conferred by the Internal Revenue Code, provided that the organization's
purposes and activities are of a non-profit nature.
Explanation
Choice "c" is correct. To qualify as an exempt organization, an applicant must not be a private foundation organized and operated exclusively to influence
legislation.
Choice "a" is incorrect. A "feeder" organization, carrying on a trade or business for profit but distributing 100% of the profits to exempt organizations, is itself not tax
exempt.
Choice "d" is incorrect. The applicant must be of a type specifically identified as one of the classes upon which exemption is conferred by the Code (e.g., organized
for religion, charitable, scientific, etc., purposes).
Choice "b" is incorrect. A social club supported solely by members' dues and service charges does qualify as an exempt organizatio
Smith, a single individual, made the following charitable contributions during the current year. Smiths adjusted gross income is $60,000.
Donation to Smiths church $5,000
Art work donated to the local art museum
(Smith purchased it for $2,000 four months ago and a local art
dealer appraised it for)
3,000
Contribution to a needy family 1,000
What amount should Smith deduct as a charitable contribution?

a. $9,000

b. $8,000

c. $5,000

d. $7,000
Explanation
Choice "d" is correct. This question is asking for the actual deduction and requires the candidate to determine which items are deductible charitable contributions.
The $5,000 donation to the church is allowable. The artwork donated to the local art museum is deductible to its basis, $2,000. Although it is appreciated property,
Smith held the property for only four months, making it short-term capital gain property. Donations of short-term capital gain property are deductible to the donor to
the extent of his/her adjusted basis. The contribution to a needy family is not a deductible contribution, as it was not made to a qualifying organization.
Choice "c" is incorrect. This choice excludes the donation of the artwork to the art museum.
Choice "b" is incorrect. This choice erroneously includes the donation of the artwork at the art's fair market value.
Choice "a" is incorrect. This choice includes all three contributions. It erroneously includes the artwork at its fair market value as well as including the donation to
the needy family, which is not a deductible donation.