Income
Taxation I
Fall 2015
John A. Bogdanski
Douglas K. Newell Faculty Scholar
and Professor of Law
Lewis & Clark Law School
Practice examination
This practice examination is optional. Answers will not be graded. The correct answers, and a brief explanation of each, will be posted later.
In the actual final examination, the first 90 minutes will consist of 36 multiple-choice questions. The last two hours will consist of two essay questions, each of which will be allotted one hour.
For purposes of this practice examination, you should allow 20 minutes for the eight multiple-choice questions and an hour for the essay question.
MULTIPLE-CHOICE QUESTIONS
(In each case, select the best answer to the question posed.)
1. K, a security guard, participates in the employee benefit plan of the hospital at which she works. Among other benefits, K and other employees have the option to take each year $600 worth of group medical insurance, tuition reimbursement, cash, or any combination of the three. In year 1, K takes $250 in medical insurance and $350 in tuition reimbursement. The hospital pays $250 of medical insurance premiums for K, and reimburses K for $350 of her tuition at an undergraduate college. K has no other medical expenses in year 1. How much gross income does K have attributable to the two benefits in year 1?
A. None.
B. $250.
C. $350.
D. $600.
2. In year 1, the elderly M gives her son, S, the family automobile, which has a fair market value of $2,000 at the time of the gift. M’s basis in the car at the time of the gift is $3,000. In year 6, S sells the car, now becoming rare, for $2,500.
M dies in year 2 leaving a family heirloom painting to her daughter, D. For estate tax purposes, the fair market value of the heirloom is determined to be $5,800; M’s basis in the heirloom just before she died was $100. D sells the heirloom for $6,000 the same year.
What results on the sales?
A. S has a $500 gain; D has a $5,900 gain.
B. S has no gain or loss; D has a $5,900 gain.
C. S has a $500 loss; D has a $200 gain.
D. S has no gain or loss; D has a $200 gain.
3. E is an employee of R, a drug company. Over the years, E has become known and loved by the managers of R as an outstanding person. E develops a cure for a previously incurable disease. In recognition of this discovery, R transfers to E an expensive new automobile. E uses the car for personal pleasure driving and for commuting to and from work. What are the tax consequences to E of receipt of the automobile?
A. The answer depends on whether the transfer was motivated primarily by detached and disinterested generosity on the part of R.
B. The answer depends on whether the transfer was in recognition of a civic achievement.
C. On the stated facts, E clearly has no taxable income on account of receipt of the automobile.
D. On the stated facts, E clearly has taxable income on account of
receipt of the automobile.
4. To enable herself to be gainfully employed, Crystal, a widow,
hires a sitter for her 10-year-old son, Jesse, a dependent of Crystal who lives
with
A. Crystal is allowed a $5,000 deduction.
B. Crystal is allowed no deduction and a $1,000 credit.
C. Crystal is allowed no deduction and a $600 credit.
D.
5. H, an individual, is an accountant. In his spare time, he paints. H’s paintings are wonderful, but he gives them away to friends and family rather than selling them. He keeps an inventory of his drawings and paintings in his garage. One night, a burglar steals one of the paintings out of the garage. The fair market value of the stolen painting is $20,000. H’s basis in it immediately before it was stolen was $150, the cost of his materials. H’s insurance does not cover the theft. What are the tax consequences of the theft to H if his adjusted gross income for the year of the theft is $50,000 and he itemizes his deductions?
A. H has a deductible casualty loss of $14,900.
B. H has a deductible casualty loss of $4,900.
C. H has no deductible casualty loss because H cannot establish the identity of the thief.
D. H has no deductible casualty loss because the amount of his loss is
less than the statutory minimum percentage of his adjusted gross income for
casualty losses.
6. In year 1, I, a physician, borrows $100,000 on a nonrecourse basis to finance his purchase of Blackacre for $100,000. In year 5, after taking depreciation deductions totaling $20,000 with respect to improvements on Blackacre, I’s adjusted basis in the property is $80,000. The principal balance outstanding on the loan in year 5 is $85,000 and the property’s fair market value at that time is $75,000. What results to I if he declares bankruptcy in year 5 and abandons Blackacre to the lender?
A. No income, but a reduction of favorable tax attributes, including net operating loss carryovers.
B. $5,000 loss.
C. $5,000 gross income.
D. $20,000 gross income.
7. T,
a large company, has the following income, business deductions, taxable income
and tax liability for the following years:
|
Year |
Gross income |
Business deductions |
Taxable income |
Tax liability |
|
2010 |
$ 200,000,000 |
$ 120,000,000 |
$ 80,000,000 |
$ 22,000,000 |
|
2011 |
$ 200,000,000 |
$ 140,000,000 |
$ 60,000,000 |
$ 16,500,000 |
|
2012 |
$ 200,000,000 |
$ 120,000,000 |
$ 80,000,000 |
$ 22,000,000 |
|
2013 |
$ 200,000,000 |
$ 120,000,000 |
$ 80,000,000 |
$ 22,000,000 |
|
2014 |
$ 200,000,000 |
$ 180,000,000 |
$ 20,000,000 |
$ 5,500,000 |
In 2015, T has income of $50,000,000 and business deductions of $170,000,000 for a net operating loss of $120,000,000. Which of the following is true?
A. T is not entitled to reopen any of the years 2010, 2011, 2012, 2013, or 2014 because of the strict rule of annual accounting.
B. T must wait until 2016 to “carry forward” the loss from 2015.
C. T may reopen the years 2013 and 2014 for refunds.
D. T may reopen the years 2010 through 2014 for refunds.
8. H and W are married to each other; they file a joint income tax return. In 2015, their joint adjusted gross income is $185,000 and their joint taxable income is $155,000. They claim no tax credits. Which of the following statements about H and W is true?
A. Their marginal rate of tax is greater than 27 percent.
B. Their overall effective rate of tax is greater than 10 percent but less than 28 percent.
C. If they had a dependent child, their income would not be too high for them to claim the child care credit under section 21.
D. All of the above.
(End of Part One)
ESSAY QUESTION
(One hour)
Sid, an attorney, owns two parcels of vacant land, Redacre and Whiteacre, both of which he has held for investment for many years. His basis in each parcel is $20,000; he has no debts. Sid is eager to part with both properties.
In June of 2014, Sid is approached by a prospective buyer, Barbara, who offers him $100,000 in immediate cash for each of the two properties. To show Sid how sincere she is about her offers, she writes out a check, payable to Sid, in the amount of $200,000, and places it in an escrow account with her real estate broker. “Just sign over the deeds at my lawyer’s office,” Barbara tells Sid, “and the $200,000 is yours.” Sid says he’ll “think it over.”
After consulting with his tax accountant, Sid rejects Barbara’s offers to buy the two parcels for cash. Instead, on July 10, 2014, Sid and Barbara enter into an installment sale contract for Redacre, and a “three-way exchange agreement” for Whiteacre.
Under the installment sale contract, Sid conveys title in Redacre to Barbara on July 15, 2014, whereupon Barbara immediately pays Sid $50,000 cash as a down payment. She also issues to Sid her promissory note, payable to Sid, in the amount of $50,000. The note calls for semi-annual payments of interest, which accrues at a market rate, and level annual payments of $10,000 principal for five years beginning on July 1, 2015. Barbara grants Sid a first mortgage on Redacre to secure the $50,000 note.
After the closing, Barbara’s real estate broker, at Barbara’s instruction, destroys the $200,000 check Barbara previously put in escrow. However, as a further gesture of good faith to Sid, Barbara places $50,000 in a separate bank account to use for debt service on the note to Sid. The account is at all times subject to the claims of all of Barbara’s creditors.
The “three-way exchange agreement” concerning Whiteacre has as its parties Sid, Barbara and a real estate tycoon named Oscar, who is the tenant under a lease of a small downtown office building. The lease has exactly 30 years to run. Oscar’s interest in the lease has a fair market value of $100,000. Sid wants to acquire the leasehold from Oscar for productive use in Sid’s law practice. Under the “three-way exchange” agreement, consummated on August 1, 2014, the following steps are taken: Sid transfers title in Whiteacre to Oscar; Oscar then transfers title in Whiteacre to Barbara; Barbara writes a check to Sid in the amount of $100,000; Sid writes a check to Oscar in the amount of $100,000; and Oscar transfers the leasehold interest to Sid. The agreement provides that all of these steps “shall be deemed to have taken place simultaneously.”
Answer each of the following questions:
A. What are the federal income tax consequences to Sid of his dealings with Barbara in June and July of 2014 with respect to Redacre? Be sure to include discussion of the significance (if any) of Barbara’s escrow account and bank account, and the effect (if any) of the mortgage on Redacre.
B. What is Barbara’s basis in Redacre immediately after she purchases it from Sid?
C. What are the federal income tax consequences to Sid of the “three-way exchange agreement” concerning Whiteacre? Be sure to include discussion of Sid’s gain or loss and his basis in the leasehold interest. How else could the transaction have been handled to minimize Sid’s taxes?
Discuss.
(End of practice examination)
Created
by: bojack@lclark.edu
Update: 31 Aug 15
Expires: 31 Aug 16