1. The tax consequences of a business activity

1. The tax consequences of a business activity are generally the same as the tax consequences of an

investment activity.

True False

2. The income generated from an investment activity is primarily attributable to invested capital rather than

the owner’s personal involvement in the activity.

True False

3. Electing to reinvest dividends in additional shares of stock does not defer income recognition.

True False

4. The interest earned on a state or local government bond is exempt from federal taxation.

True False

5. The interest earned on investments in U.S. debt obligations is subject to state taxation.

True False

6. Qualified dividend income earned by an individual taxpayer is taxed at a maximum rate of 15%.

True False

7. Only accrual basis individuals are required to accrue original issue discount on a bond as annual interest

income.

True False

8. Cash basis individuals must accrue market discount on a bond as annual interest income over the life of

the bond.

True False

9. The cash surrender value of a life insurance policy is taxable to the policy beneficiary upon the death of

the insured individual.

True False

10. Mr. Adams paid $53,500 in premiums on a whole life insurance policy. When he canceled the policy,

he received its cash surrender value of $61,600. He must recognize $61,600 of income as a result of the

cancellation.

True False

11. An owner of a life insurance policy that includes an investment element must recognize income equal to

the annual increase in the policy’s cash surrender value.

True False

12. Ms. Martin received $80,000 from a $100,000 life insurance policy as an accelerated death benefit. None

of the $80,000 is taxable to her.

True False

13. Brokerage fees paid when stock is purchased are added to the basis of the stock.

True False

14. If an investor sells some of the securities in a block but can’t identify which ones were sold, she is

presumed to have sold the securities with the latest acquisition date.

True False

15. On April 19, 2011, Sandy learned that her stock investment had become worthless. The stock is deemed

to be worthless on December 31, 2011.

True False

16. Two years ago, James loaned $60,000 to his friend. The debt is now uncollectible. If the loan created a

bona fide debt, James recognizes a short-term capital loss.

True False

17. The tax rate on capital gains is determined solely by reference to the capital asset’s holding period.

True False

18. Individual taxpayers may carry nondeductible capital losses forward indefinitely.

True False

19. An individual with a 15% rate marginal tax rate on ordinary income will pay no tax on long-term capital

gains.

True False

20. Unrecaptured Section 1250 gain is taxed at a maximum rate of 28%.

True False

21. Individual taxpayers are not allowed to deduct capital losses in excess of capital gains.

True False

22. Up to $100,000 of loss recognized on the sale of Section 1244 stock by a married individual filing a joint

return is characterized as ordinary loss.

True False

23. Lana owns 50 shares of stock qualifying as Section 1244 stock. If she sells the stock to George, he can

also treat the stock as Section 1244 stock.

True False

24. Investors must hold qualified small business stock for more than five years in order to exclude a

percentage of the gain on sale of such stock from gross income.

True False

25. Gain on the sale of qualified small business stock is taxed at a maximum rate of 15%.

True False

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