Question 1

Mary sells to her father, Robert, her shares in AA Corp for $55,000.The shares cost Mary $80,000.How much loss may Mary claim from the sale?
A)$0
B)$25,000
C)$55,000
D)$80,000
E)None of the above is correct

Accepted Answer

Mary cannot claim a loss on the sale of shares to a related party, such as her father, according to tax regulations.

Question 2

Salary earned by minors may be included on the parents' tax return.

Accepted Answer

Minors who earn income from a job may be required to file their own tax return, separate from their parents, depending on the amount they earn and other factors. Parents cannot include their child's earnings on their own tax return.

Question 3

Beverly is the sole owner of Bev & Associates, an accrual basis corporation.In 2018, Bev & Associates has an unprofitable year and Beverly lends the corporation $50,000 to meet expenses.The corporation accrues interest expense of $5,000 on the loan from Beverly, but does not pay the interest to her in cash.​How much of the $5,000 in accrued interest expense can Bev & Associates deduct on its 2018 corporate tax return? Explain.

Accepted Answer

The answer of Beverly is the sole owner of Bev...

Question 4

Jerry and Julie are brother and sister.Jerry sold stock to Julie for $5,000, its fair market value.The stock cost Jerry $10,000 5 years ago.Also, Jerry sold Carol (an unrelated party)stock for $2,000 that cost $10,000 3 years ago.What is Jerry's recognized loss before the $3,000 capital loss limitation?
A)$0
B)$8,000
C)$5,000
D)$13,000
E)$14,000

Accepted Answer

Jerry recognized a $5,000 loss on the sale to Julie and an $8,000 loss on the sale to Carol, for a total of $13,000.

Question 5

Assume Karen is 12 years old and her only income is $5,500 of interest income from a bank account with money her parents have given her to save for college.If Karen does not elect to include her income on her parents' return, what is her income tax liability?
A)$550
B)$445
C)$564
D)$963

Accepted Answer

The answer of Assume Karen is 12 years old and...

Question 6

Which of the following is true with respect to the related party rules?
A)Bill sells stock to his sister for a $3,000 loss.Bill can deduct the loss on his tax return.
B)A taxpayer's uncle is a related party for purposes of Section 267.
C)A disallowed loss on a related party transaction can be used to offset any future gain when the property is sold to an unrelated party.
D)Under the constructive ownership rules of Section 267, a shareholder owns 10 percent of the stock owned by a corporation in which he or she is a shareholder.
E)None of the above are true.

Accepted Answer

A disallowed loss on a related party transaction can be used to offset any future gain when the property is sold to an unrelated party.

Question 7

Assume Alan's parents make gifts of $10,000 to him every year starting at age one, Alan's parents are in the 35 percent income tax bracket, and Alan is now 15 years old and has $11,700 of interest income for 2018.​
a.Calculate the tax on Alan's interest income if his income is not included on his parents' return.
b.Explain why the "kiddie tax" rules are in the law.

Accepted Answer

The answer of Assume Alan's parents make gifts of $10,000...

Question 8

ABC Corporation is owned 30 percent by Andy, 30 percent by Barry, 20 percent by Charlie, and 20 percent by Uptown Corporation.Uptown Corporation is owned 90 percent by Charlie and 10 percent by an unrelated party.Barry and Charlie are brothers.Answer each of the following questions about ABC under the constructive ownership rules of Section 267:​
a.What is Andy's constructive ownership percentage under Section 267?
b.What is Barry's constructive ownership percentage under Section 267?
c.What is Charlie's constructive ownership percentage under Section 267?
d.​If Andy sells property to ABC for a $6,000 loss, what amount of that loss can be recognized for tax purposes (before any annual limitations)?​

Accepted Answer

The answer of ABC Corporation is owned 30 percent by...

Question 9

If a loss from sale or exchange of property between related parties is disallowed and the property is subsequently sold to an unrelated party,
A)An amended return may be filed to claim the loss previously disallowed.
B)The unrelated party may claim the loss previously disallowed.
C)The disallowed loss may be used to offset gain on the subsequent sale.
D)The disallowed loss may be used if there is a further loss on the subsequent sale.
E)The disallowed loss is lost forever.

Accepted Answer

The disallowed loss may be used to offset gain on the subsequent sale. This is because the disallowed loss is carried over and can be used against any gain on the subsequent sale of the property to an unrelated party. However, options A, B, D, and E are incorrect. Option A is incorrect because an amended return cannot be filed to claim a loss previously disallowed due to related party rules. Option B is incorrect because the unrelated party cannot claim a loss previously disallowed. Option D is incorrect because the disallowed loss can only be used to offset gain, not further losses. Option E is incorrect because the loss is not lost forever, but rather carried over to future years until it can be used.

Question 10

If the net unearned income of a minor child is to be taxed at trust and estate rates, the parents may elect, under certain conditions, to include the child's gross income on their tax return.

Accepted Answer

This is true according to IRS regulations. Parents can choose to include their child's gross income on their tax return in order to take advantage of lower tax rates. However, certain conditions must be met in order for this election to be valid.

Question 11

Tom, age 13, is claimed as a dependent by his parents.Tom has unearned income of $3,400 and $300 of income from mowing lawns in the neighborhood.If the first $2,550 of Tom's net unearned income is taxed at 10%, what is Tom's 2018 income tax liability?
A)$0
B)$265
C)$459
D)$370
E)None of the above

Accepted Answer

The answer of Tom, age 13, is claimed as a...

Question 12

Net unearned income of certain minor children is taxed at their parents' tax rates.

Accepted Answer

The answer of Net unearned income of certain minor children...

Question 13

A parent may elect to include a child's income in the parent's return if:
A)No estimated tax has been paid in the name of the child and the child is not subject to backup withholding.
B)The child's income is only from interest and dividend distributions.
C)The child's gross income is more than $1,050 and less than $10,500.
D)All of the above must be met for a parent to elect to include a child's income in the parent's return.

Accepted Answer

All of the given options must be met for a parent to elect to include a child's income in the parent's return. The child's income must be below $10,500, only from interest and dividend distributions, and no estimated tax has been paid in the name of the child and the child is not subject to backup withholding.

Question 14

Countryside Acres Apartment Complex had the following transactions during the year:​ Rental income collected for Apts A-F
12 months prepaid rental from new tenant in Apt $\mathrm { G }$ who moved in on November 1
Operating expenses (except for interest)
Prepaid interest on bank loan, paid in December, for 6 months (including December) Using the accrual method, calculate the net income:​ Rental income Apts A-F
Rental income from new tenant
Total income
Operating expenses (except for interest)
Prepaid interest
Total expenses
Total net income

Accepted Answer

The answer of Countryside Acres Apartment Complex had the following...

Question 15

In 2018, which of the following children would have income taxed at trust and estate rates?
A)A 13-year-old child with salary income of $12,000
B)A 12-year-old child with net unearned income of $3,200
C)A nonstudent, 19-year-old child with net unearned income of $12,000
D)A 9-year-old child with salary income of $1,000
E)All of the above

Accepted Answer

Under the Kiddie Tax rules, children with unearned income over $2,100 will have their income taxed at trust and estate rates. Therefore, in 2018, only option B, a 12-year-old child with net unearned income of $3,200, would have income taxed at trust and estate rates. The other children listed would not meet the criteria for the Kiddie Tax.

Question 16

Unearned income of a 16-year-old child may be taxed at trust and estate rates.

Accepted Answer

Unearned income of a 16-year-old child may be taxed at trust and estate rates if it exceeds certain thresholds. This is known as the "kiddie tax" and is designed to prevent high-income parents from shifting their income to their children to take advantage of lower tax rates. As of 2020, unearned income over $2,200 is subject to trust and estate tax rates for children under 19 and full-time students under 24 years old.

Question 17

BOND Corporation is owned 25 percent by Brian, 30 percent by Orville, 20 percent by Nate, and 25 percent by Dart Corporation.Dart Corporation is owned 80 percent by Brian and 20 percent by Nate.Brian and Orville are brothers.Answer each of the following questions about BOND Corporation under the constructive ownership rules of Section 267:
a.What is Brian's constructive ownership percentage for Section 267 purposes?
b.​If Nate sells property to BOND Corporation for a $7,500 loss, what amount of that loss can be recognized for tax purposes (before any annual limitations)?

Accepted Answer

The answer of BOND Corporation is owned 25 percent by...

Question 18

Which of the following types of income is not subject to the "kiddie tax"?
A)Interest income
B)Dividend income
C)Salary income
D)Capital gains on stock sales
E)All of the above are subject to the "kiddie tax"

Accepted Answer

Salary income is earned income, meaning it is generated from personal effort and not from investments. The "kiddie tax" only applies to unearned income, such as interest, dividends, and capital gains. Therefore, salary income is not subject to the "kiddie tax."

Question 19

If a cash basis business owner pays 18 months of rent expense in advance during the last month of the tax year, how is this treated on the tax return? What is the reason tax law requires this treatment?

Accepted Answer

The answer of If a cash basis business owner pays...

Question 20

Sales of property at a gain may be restricted under the related party rules of the Internal Revenue Code.

Accepted Answer

The answer of Sales of property at a gain may...

Quiz 6: Accounting Methods and Taxes

Mary sells to her father, Robert, her shares in AA Corp for $55,000.The shares cost Mary $80,000.How much loss may Mary claim from the sale?

Salary earned by minors may be included on the parents' tax return.

Assume Karen is 12 years old and her only income is $5,500 of interest income from a bank account with money her parents have given her to save for college.If Karen does not elect to include her income on her parents' return, what is her income tax liability?

Which of the following is true with respect to the related party rules?

If a loss from sale or exchange of property between related parties is disallowed and the property is subsequently sold to an unrelated party,

If the net unearned income of a minor child is to be taxed at trust and estate rates, the parents may elect, under certain conditions, to include the child's gross income on their tax return.

Tom, age 13, is claimed as a dependent by his parents.Tom has unearned income of $3,400 and $300 of income from mowing lawns in the neighborhood.If the first $2,550 of Tom's net unearned income is taxed at 10%, what is Tom's 2018 income tax liability?

Net unearned income of certain minor children is taxed at their parents' tax rates.

A parent may elect to include a child's income in the parent's return if:

In 2018, which of the following children would have income taxed at trust and estate rates?

Unearned income of a 16-year-old child may be taxed at trust and estate rates.

Which of the following types of income is not subject to the "kiddie tax"?

If a cash basis business owner pays 18 months of rent expense in advance during the last month of the tax year, how is this treated on the tax return? What is the reason tax law requires this treatment?

Sales of property at a gain may be restricted under the related party rules of the Internal Revenue Code.