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Exam 6: Deductions and Losses: in General

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Question 71

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Which of the following legal expenses are deductible for AGI?

A) Incurred in connection with a trade or business.
B) Incurred in connection with rental or royalty property held for the production of income.
C) Incurred for tax advice relative to the preparation of an individual's income tax return.
D) Only a. and b. qualify.
E) a., b., and c. qualify.

F) A) and B)
G) None of the above

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Question 72

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Mattie and Elmer are separated and are in the process of obtaining a divorce. They incur legal fees for their respective attorneys with the expenses being itemized as follows: $\begin{array}{lrr}\text { For } & \text { Mattie } & \text { Elmer } \\\text { General costs of the divorce } & \$ 3,500 & \$ 3,000 \\\text { Determination of dependency exemptions } & 1,500 & -0- \\\text { Property settlement tax consequences } & {400}&{1,500}\\&\$5,400&\$4,500\end{array}$ Although there is no requirement that he do so, Elmer pays Mattie's lawyer as a gesture of the positive feelings he still has for her. a. Determine the deductions for Mattie and for Elmer. b. Classify the deductions as for AGI and from AGI.

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a. Only the legal fees associated with t...

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Question 73

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The amount of the addition to the reserve for bad debts for an accrual method taxpayer is allowed as a deduction for tax purposes, but is not allowed for a cash method taxpayer.

Nikeya sells land (adjusted basis of $120,000) to her adult son, Shamed, for its appraised value of $95,000. Which of the following statements is correct?

Arnold and Beth file a joint return. Use the following data to calculate their deduction for AGI. $\begin{array}{llr} \text {Mortgage interest on personal residence } &\$6,000\\ \text { Property taxes on personal residence} &2,500\\ \text { Alimony payments } &12,000\\ \text { Moving expenses } &7,000\\ \text {Charitable contributions } &1,500\\ \text { State income taxes } &5,000\\ \text { Investment interest ( \$ 8,000 of expenses limited to net } &\\ \text { investment income of \( \$ 7,500 \) )} &7,500\\ \text {Unreimbursed employee expenses } &2,500\\ \text { Sales taxes } &2,600\\\end{array}$

During 2013, the first year of operations, Silver, Inc., pays salaries of $175,000. At the end of the year, employees have earned salaries of $20,000, which are not paid by Silver until early in 2014. What is the amount of the deduction for salary expense?

Terry and Jim are both involved in operating illegal businesses. Terry operates a gambling business and Jim operates a drug running business. Both businesses have gross revenues of $500,000. The businesses incur the following expenses. $\begin{array}{lrr}& \text { Terry } & \text { Jim } \\\text { Employee salaries } & \$ 200,000 & \$ 200,000 \\\text { Bribes to police } & 25,000 & 25,000 \\\text { Rent and utilities } & 50,000 & 50,000 \\\text { Cost of goods sold } & -0- & 125,000\end{array}$ Which of the following statements is correct?

Investigation of a business unrelated to one's present business never results in a current period deduction of the entire amount if the amount of the investigation expenses exceeds $5,000.

Assuming an activity is deemed to be a hobby, discuss the order and limits in which expenses must be deducted.

The portion of property tax on a vacation home that is attributable to personal use is an itemized deduction.

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

Sammy, a calendar year cash basis taxpayer who is age 66, has the following transactions: $\begin{array}{lr}\text { Salary from job } & \$ 90,000 \\\text { Alimony received from ex-wife } & 10,000 \\\text { Medical expenses } & 8,000\end{array}$ $\text { Based on this information, Sammy has: }$ A)AGI of $\$ 90,000$ . B)AGI of $\$95,000$ . C)AGI of $\$ 99,500$ . D) Deduction for medical expenses of $\$ 0$ . E)None of the above

Which of the following is not a related party for constructive ownership purposes under § 267?

Are all personal expenses disallowed as deductions?

For purposes of the § 267 loss disallowance provision, a taxpayer's aunt is a related party.

Discuss the application of the "one­year rule" on prepayments by a cash basis taxpayer.

If a vacation home is a personal/rental residence, no maintenance and utility expenses can be claimed as a deduction.

In a related party transaction where realized loss is disallowed, when can the disallowed loss be used by the buyer on the subsequent sale of the property? In the case of a related party disallowed loss transaction, can the related party seller's disallowed loss be used by a taxpayer other than the related party buyer?

Max opened his dental practice (a sole proprietorship) in March 2014. At the end of the year, he has unpaid accounts receivable of $62,000 and no unpaid accounts payable. Should Max use the accrual method or the cash method for his dental practice?

Which of the following is not deductible?