Question 1. The taxpayer incorrectly took a $5,000 deduction (e.g., incorre

1. The taxpayer incorrectly took a $5,000 deduction (e.g., incorrectly calculated depreciation) in 2014 and as a result his taxable income was reduced by $5,000. The taxpayer discovered his error in2015. The taxpayer must add $5,000 to his 2015 gross income in accordance with the tax benefit rule to correct for the 2014 error.

a. True

b. False

2. Mia participated in a qualified state tuition program for the benefit of her son Michael. She contributed $15,000. When Michael entered college, the balance in the fund satisfied the tuition charge of $20,000. When the funds were withdrawn to pay the college tuition for Michael, neither Mia nor Michael must include $5,000 ($20,000 – $15,000) in gross income.

a. True

b. False

3. The earnings from a qualified state tuition program account are deferred from taxation until they are used for qualified higher education expenses. At that time, the amount taken from the fund must be included in the gross income of the person who contributed to the account.

a. True

b. False

4. Benny loaned $100,000 to his controlled corporation. When it became apparent the corporation would not be able to repay the loan in the near future, Benny canceled the debt. The corporation should treat the cancellation as a nontaxable contribution to capital.

a. True

b. False

5. Zork Corporation was very profitable and had accumulated excess cash. The company decided to repurchase some of its bonds that had been issued for $1,000,000. Because of an increase in market interest rates, Zork was able to retire the bonds for $900,000. The company is not required to recognize $100,000 of income from the discharge of its indebtedness but must reduce the basis in its assets.

a. True

b. False

6. Amber Machinery Company purchased a building from Ted for $250,000 cash and a mortgage of $750,000. One year after the transaction, the mortgage had been reduced to $725,000 by principal payments by Amber, but it was apparent that Amber would notbe able to continue to make the monthly payments on the mortgage. Ted reduced the amount owed by Amber to $600,000. This reduced the monthly payments to a level that Amber could pay. Amber must recognize $125,000 income from the reduction in the debt by Ted.

a. True

b. False

7. The taxpayer’s marginal tax bracket is 25%. Which would the taxpayer prefer?

a. $1.00 taxable income rather than $1.25 tax-exempt income.

b. $1.00 taxable income rather than $.75 tax-exempt income.

c. $1.25 taxable income rather than $1.00 tax-exempt income.

d. $1.40 taxable income rather than $1.00 tax-exempt income.

e. None of the above.

8. Cash received by an employee from an employer:

a. Is notincluded in gross income if it was not earned.

b. Is nottaxable unless the payor is legally obligated to make the payment.

c. Must always be included in gross income.

d. May be included in gross income although the payor is notlegally obligated to make the payment.

e. None of the above.

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