Question 1. Tom operates an illegal drug-running operation and incurred the following expenses:

1. Tom operates an illegal drug-running operation and incurred the following expenses:

2. For a president of a publicly held corporation, which of the following are not subject to the $1 million limit on executive compensation?

a. Contribution to medical insurance plan.

b. Contribution to pension plan.

c. Premiums on group term life insurance of $50,000.

d. Only b. and c. are not subject to the limit.

e. a., b., and c., are not subject to the limit.

3. Tommy, an automobile mechanic employed by an auto dealership, is considering opening a fast food franchise. If Tommy decides notto acquire the fast food franchise, any investigation expenses are:

a. A deduction forAGI.

b. A deduction fromAGI, subject to the 2 percent floor.

c. A deduction fromAGI, notsubject 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.

4. Iris, a calendar year cash basis taxpayer, owns and operates several TV rental outlets in Florida, and wants to expand to other states. During 2014, she spends $14,000 to investigate TV rental stores in South Carolina and $9,000 to investigate TV rental stores in Georgia. She acquires the South Carolina operations, but not the outlets in Georgia. As to these expenses, Iris should:

a. Capitalize $14,000 and not deduct $9,000.

b. Expense $23,000 for 2014.

c. Expense $9,000 for 2014 and capitalize $14,000.

d. Capitalize $23,000.

e. None of the above.

5. Which of the following statements is correct in connection with the investigation of a business?

a. If the taxpayer is not already engaged in the trade or business, the expenses incurred are deductible if the project is abandoned.

b. If the business is acquired, the expenses may be deducted immediately by a taxpayer engaged in a similar trade or business regardless of whether the business being investigated is acquired.

c. That business must be related to the taxpayer’s present business for any expense ever to be deductible.

d. Regardless of whether the taxpayer is already engaged in the trade or business, the expenses must be capitalized and amortized.

e. None of the above.

6. Which of the following is notrelevant in determining whether an activity is profit-seeking or a hobby?

a. Whether the activity is enjoyed by the taxpayer.

b. The expertise of the taxpayers or their advisers.

c. The time and effort expended.

d. The relationship of profits earned and losses incurred.

e. All of the above are relevant factors.

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