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Instant Download PDF South-Western Federal Taxation 2017 Individual Income Taxes 40th Edition Hoffman Test Bank Full Chapter
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Chapter 07: Deductions and Losses Certain Business Expenses and Losses
True / False
1. James is in the business of debt collection. He purchased a $20,000 account receivable from Green Corporation for
$15,000. During the year, James collected $17,000 in final settlement of the account. James can take a $2,000 bad debt
deduction in the current year.
a. True
b. False
ANSWER: False
RATIONALE: James has a basis of $15,000 in the account receivable and hence, he has income of
$2,000.
POINTS: 1
DIFFICULTY: Easy
LEARNING OBJECTIVES: IITX.SWFT.LO: 7-01 - LO: 7-01
NATIONAL STANDARDS: United States - BUSPORG: Analytic
STATE STANDARDS: United States - AK - AICPA: FN-Measurement -
AICPA: FN-Measurement
KEYWORDS: Bloom's: Application
OTHER: Time: 2 min.
2. If a business debt previously deducted as partially worthless becomes totally worthless this year, only the amount not
previously deducted can be deducted this year.
a. True
b. False
ANSWER: True
POINTS: 1
DIFFICULTY: Easy
LEARNING OBJECTIVES: IITX.SWFT.LO: 7-01 - LO: 7-01
NATIONAL STANDARDS: United States - BUSPORG: Analytic
STATE STANDARDS: United States - AK - AICPA: FN-Measurement -
AICPA: FN-Measurement
KEYWORDS: Bloom's: Comprehension
OTHER: Time: 2 min.
3. Last year, taxpayer had a $10,000 nonbusiness bad debt. Taxpayer also had an $8,000 short-term capital gain and
taxable income of $35,000. If taxpayer collects the entire $10,000 during the current year, $8,000 needs to be included in
gross income.
a. True
b. False
ANSWER: False
RATIONALE: The taxpayer must include the $10,000 in gross income to the extent of the tax benefit
received last year. The entire $10,000 deduction provided a tax benefit; $8,000 offset by the
short-term capital gain and $2,000 offset against ordinary income.
POINTS: 1
DIFFICULTY: Easy
LEARNING OBJECTIVES: IITX.SWFT.LO: 7-01 - LO: 7-01
NATIONAL STANDARDS: United States - BUSPORG: Analytic
© 2017 Cengage Learning®. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Page 1
Chapter 07: Deductions and Losses Certain Business Expenses and Losses
STATE STANDARDS: United States - AK - AICPA: FN-Measurement -
AICPA: FN-Measurement
KEYWORDS: Bloom's: Application
OTHER: Time: 5 min.
4. A cash basis taxpayer must include as income the proceeds from the sale of an account receivable to a collection
agency.
a. True
b. False
ANSWER: True
POINTS: 1
DIFFICULTY: Easy
LEARNING OBJECTIVES: IITX.SWFT.LO: 7-01 - LO: 7-01
NATIONAL STANDARDS: United States - BUSPORG: Analytic
STATE STANDARDS: United States - AK - AICPA: FN-Reporting
KEYWORDS: Bloom's: Comprehension
OTHER: Time: 2 min.
5. If an account receivable written off during a prior year is subsequently collected during the current year, the amount
collected must be included in the gross income of the current year to the extent it created a tax benefit in the prior year.
a. True
b. False
ANSWER: True
POINTS: 1
DIFFICULTY: Easy
LEARNING OBJECTIVES: IITX.SWFT.LO: 7-01 - LO: 7-01
NATIONAL STANDARDS: United States - BUSPORG: Analytic
STATE STANDARDS: United States - AK - AICPA: FN-Reporting
KEYWORDS: Bloom's: Comprehension
OTHER: Time: 2 min.
6. A nonbusiness bad debt deduction can be taken any year after the debt becomes totally worthless.
a. True
b. False
ANSWER: False
RATIONALE: The deduction can only be taken in the year the debt becomes totally worthless.
POINTS: 1
DIFFICULTY: Easy
LEARNING OBJECTIVES: IITX.SWFT.LO: 7-01 - LO: 7-01
NATIONAL STANDARDS: United States - BUSPORG: Analytic
STATE STANDARDS: United States - AK - AICPA: FN-Reporting
KEYWORDS: Bloom's: Comprehension
OTHER: Time: 2 min.
7. A business bad debt is a debt unrelated to the taxpayer’s trade or business either when it was created or when it became
© 2017 Cengage Learning®. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Page 2
Chapter 07: Deductions and Losses Certain Business Expenses and Losses
worthless.
a. True
b. False
ANSWER: False
POINTS: 1
DIFFICULTY: Easy
LEARNING OBJECTIVES: IITX.SWFT.LO: 7-01 - LO: 7-01
NATIONAL STANDARDS: United States - BUSPORG: Analytic
STATE STANDARDS: United States - AK - AICPA: FN-Reporting
KEYWORDS: Bloom's: Comprehension
OTHER: Time: 2 min.
8. In determining whether a debt is a business or nonbusiness bad debt, the debtor’s use of the borrowed funds is
important.
a. True
b. False
ANSWER: False
RATIONALE: The use of the funds by the debtor is of no consequence in making the determination. The
determination is made at the creditor level.
POINTS: 1
DIFFICULTY: Easy
LEARNING OBJECTIVES: IITX.SWFT.LO: 7-01 - LO: 7-01
NATIONAL STANDARDS: United States - BUSPORG: Analytic
STATE STANDARDS: United States - AK - AICPA: FN-Reporting
KEYWORDS: Bloom's: Knowledge
OTHER: Time: 2 min.
9. A corporation which makes a loan to a shareholder can have a nonbusiness bad debt deduction.
a. True
b. False
ANSWER: False
RATIONALE: The nonbusiness bad debt provisions do not apply to corporations.
POINTS: 1
DIFFICULTY: Easy
LEARNING OBJECTIVES: IITX.SWFT.LO: 7-01 - LO: 7-01
NATIONAL STANDARDS: United States - BUSPORG: Analytic
STATE STANDARDS: United States - AK - AICPA: FN-Reporting
KEYWORDS: Bloom's: Knowledge
OTHER: Time: 2 min.
10. A nonbusiness bad debt can offset an unlimited amount of long-term capital gain.
a. True
b. False
ANSWER: True
POINTS: 1
© 2017 Cengage Learning®. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Page 3
Chapter 07: Deductions and Losses Certain Business Expenses and Losses
DIFFICULTY: Easy
LEARNING OBJECTIVES: IITX.SWFT.LO: 7-01 - LO: 7-01
NATIONAL STANDARDS: United States - BUSPORG: Analytic
STATE STANDARDS: United States - AK - AICPA: FN-Reporting
KEYWORDS: Bloom's: Knowledge
OTHER: Time: 2 min.
11. The amount of partial worthlessness on a nonbusiness bad debt is deducted in the year partial worthlessness is
determined.
a. True
b. False
ANSWER: False
RATIONALE: A taxpayer is entitled to deduct the net amount of the loss only upon final settlement of the
debt.
POINTS: 1
DIFFICULTY: Easy
LEARNING OBJECTIVES: IITX.SWFT.LO: 7-01 - LO: 7-01
NATIONAL STANDARDS: United States - BUSPORG: Analytic
STATE STANDARDS: United States - AK - AICPA: FN-Reporting
KEYWORDS: Bloom's: Knowledge
OTHER: Time: 2 min.
12. A bona fide debt cannot arise on a loan between father and son.
a. True
b. False
ANSWER: False
RATIONALE: A bona fide debt arises from a debtor-creditor relationship based on a valid and enforceable
obligation to pay a fixed sum of money regardless of the relationship of the parties.
POINTS: 1
DIFFICULTY: Easy
LEARNING OBJECTIVES: IITX.SWFT.LO: 7-01 - LO: 7-01
NATIONAL STANDARDS: United States - BUSPORG: Analytic
STATE STANDARDS: United States - AK - AICPA: FN-Reporting
KEYWORDS: Bloom's: Knowledge
OTHER: Time: 2 min.
13. A bond held by an investor that is uncollectible will be treated as a worthless security and hence, produce a capital
loss.
a. True
b. False
ANSWER: True
POINTS: 1
DIFFICULTY: Easy
LEARNING OBJECTIVES: IITX.SWFT.LO: 7-01 - LO: 7-01
IITX.SWFT.LO: 7-02 - LO: 7-02
© 2017 Cengage Learning®. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Page 4
Chapter 07: Deductions and Losses Certain Business Expenses and Losses
NATIONAL STANDARDS: United States - BUSPORG: Analytic
STATE STANDARDS: United States - AK - AICPA: FN-Reporting
KEYWORDS: Bloom's: Knowledge
OTHER: Time: 2 min.
14. A loss from a worthless security is always treated as a short-term capital loss.
a. True
b. False
ANSWER: False
RATIONALE: The last day treatment increases the likelihood that the capital loss will be classified as long
term, but is not automatic. So the capital loss could be either short term or long term.
POINTS: 1
DIFFICULTY: Easy
LEARNING OBJECTIVES: IITX.SWFT.LO: 7-02 - LO: 7-02
NATIONAL STANDARDS: United States - BUSPORG: Analytic
STATE STANDARDS: United States - AK - AICPA: FN-Reporting
KEYWORDS: Bloom's: Knowledge
OTHER: Time: 2 min.
16. Several years ago, John purchased 2,000 shares of Red Corporation § 1244 stock from Mark for $40,000. Last year,
John sold one-half of his Red Corporation stock to Mike for $12,000. During the current year, John sold the remaining
Red Corporation stock for $3,000. John has a $17,000 ($3,000 – $20,000) ordinary loss for the current year.
a. True
b. False
ANSWER: False
RATIONALE: John did not buy the stock from Red Corporation, and therefore, it is not § 1244 stock to him.
John has a $17,000 long-term capital loss.
POINTS: 1
DIFFICULTY: Easy
LEARNING OBJECTIVES: IITX.SWFT.LO: 7-02 - LO: 7-02
NATIONAL STANDARDS: United States - BUSPORG: Analytic
STATE STANDARDS: United States - AK - AICPA: FN-Reporting
© 2017 Cengage Learning®. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Page 5
Chapter 07: Deductions and Losses Certain Business Expenses and Losses
KEYWORDS: Bloom's: Application
OTHER: Time: 2 min.
17. If a taxpayer sells their § 1244 stock at a loss, all of the loss will be ordinary loss.
a. True
b. False
ANSWER: False
RATIONALE: Ordinary loss treatment is limited to $50,000 per year for single taxpayers and $100,000 per
year for married filing jointly taxpayers.
POINTS: 1
DIFFICULTY: Easy
LEARNING OBJECTIVES: IITX.SWFT.LO: 7-02 - LO: 7-02
NATIONAL STANDARDS: United States - BUSPORG: Analytic
STATE STANDARDS: United States - AK - AICPA: FN-Reporting
KEYWORDS: Bloom's: Comprehension
OTHER: Time: 2 min.
18. Al, who is single, has a gain of $40,000 on the sale of § 1244 stock (small business stock) and a loss of $80,000 on the
sale of § 1244 stock. As a result, Al has a $40,000 ordinary loss.
a. True
b. False
ANSWER: False
RATIONALE: The $40,000 gain on the sale of the § 1244 stock is classified as a capital gain. The $80,000
loss on the sale of the § 1244 stock is classified as an ordinary loss to the extent of $50,000.
The balance of the § 1244 stock loss of $30,000 is classified as a capital loss. Therefore, Al
has capital gain net income of $10,000 ($40,000 – $30,000).
POINTS: 1
DIFFICULTY: Easy
LEARNING OBJECTIVES: IITX.SWFT.LO: 7-02 - LO: 7-02
NATIONAL STANDARDS: United States - BUSPORG: Analytic
STATE STANDARDS: United States - AK - AICPA: FN-Measurement -
AICPA: FN-Measurement
KEYWORDS: Bloom's: Application
OTHER: Time: 5 min.
19. An individual may deduct a loss on rental property even if it does not meet the definition of a casualty loss.
a. True
b. False
ANSWER: True
RATIONALE: Only an individual’s loss on personal use property must meet the definition of a casualty to be
deductible.
POINTS: 1
DIFFICULTY: Easy
LEARNING OBJECTIVES: IITX.SWFT.LO: 7-03 - LO: 7-03
IITX.SWFT.LO: 7-04 - LO: 7-04
NATIONAL STANDARDS: United States - BUSPORG: Analytic
© 2017 Cengage Learning®. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Page 6
Chapter 07: Deductions and Losses Certain Business Expenses and Losses
STATE STANDARDS: United States - AK - AICPA: FN-Reporting
KEYWORDS: Bloom's: Knowledge
OTHER: Time: 2 min.
20. “Other casualty” means casualties similar to those associated with fires, storms, or shipwrecks.
a. True
b. False
ANSWER: True
POINTS: 1
DIFFICULTY: Easy
LEARNING OBJECTIVES: IITX.SWFT.LO: 7-03 - LO: 7-03
IITX.SWFT.LO: 7-04 - LO: 7-04
NATIONAL STANDARDS: United States - BUSPORG: Analytic
STATE STANDARDS: United States - AK - AICPA: FN-Reporting
KEYWORDS: Bloom's: Knowledge
OTHER: Time: 2 min.
21. A father cannot claim a loss on his daughter’s rental use property.
a. True
b. False
ANSWER: True
POINTS: 1
DIFFICULTY: Easy
LEARNING OBJECTIVES: IITX.SWFT.LO: 7-04 - LO: 7-04
NATIONAL STANDARDS: United States - BUSPORG: Analytic
STATE STANDARDS: United States - AK - AICPA: FN-Reporting
KEYWORDS: Bloom's: Knowledge
OTHER: Time: 2 min.
22. The current position of the IRS is that a personal casualty loss deduction is not allowed for losses resulting from
termites.
a. True
b. False
ANSWER: True
POINTS: 1
DIFFICULTY: Easy
LEARNING OBJECTIVES: IITX.SWFT.LO: 7-04 - LO: 7-04
NATIONAL STANDARDS: United States - BUSPORG: Analytic
STATE STANDARDS: United States - AK - AICPA: FN-Reporting
KEYWORDS: Bloom's: Knowledge
OTHER: Time: 2 min.
23. If the amount of the insurance recovery for a theft of business property is greater than the asset’s fair market value but
less than it’s adjusted basis, a gain is recognized.
a. True
© 2017 Cengage Learning®. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Page 7
Chapter 07: Deductions and Losses Certain Business Expenses and Losses
b. False
ANSWER: False
RATIONALE: Loss is recognized if the amount of the insurance recovery is less than the asset’s adjusted
basis.
POINTS: 1
DIFFICULTY: Easy
LEARNING OBJECTIVES: IITX.SWFT.LO: 7-04 - LO: 7-04
NATIONAL STANDARDS: United States - BUSPORG: Analytic
STATE STANDARDS: United States - AK - AICPA: FN-Reporting
KEYWORDS: Bloom's: Comprehension
OTHER: Time: 2 min.
25. Last year, Amos had AGI of $50,000. Amos also had a diamond ring stolen which cost $20,000 and was worth
$17,000 at the time of the theft. He itemized deductions on last year’s tax return. In the current year, Amos recovered
$17,000 from the insurance company. Therefore, he must include $11,900 in gross income on the tax return for the current
year.
a. True
b. False
ANSWER: True
RATIONALE: The reimbursement need only be included to the extent the previous deduction resulted in a
tax benefit. The benefit was $11,900 [$17,000 – $100 – (10% × $50,000)].
POINTS: 1
DIFFICULTY: Easy
LEARNING OBJECTIVES: IITX.SWFT.LO: 7-04 - LO: 7-04
NATIONAL STANDARDS: United States - BUSPORG: Analytic
STATE STANDARDS: United States - AK - AICPA: FN-Reporting
KEYWORDS: Bloom's: Application
OTHER: Time: 2 min.
26. If investment property is stolen, the amount of the loss is the adjusted basis of the property at the time of the theft
reduced by $100 and 10% of AGI.
a. True
© 2017 Cengage Learning®. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Page 8
Chapter 07: Deductions and Losses Certain Business Expenses and Losses
b. False
ANSWER: False
RATIONALE: The amount of the loss is not subject to the $100 and 10%-of-AGI limitations.
POINTS: 1
DIFFICULTY: Easy
LEARNING OBJECTIVES: IITX.SWFT.LO: 7-04 - LO: 7-04
NATIONAL STANDARDS: United States - BUSPORG: Analytic
STATE STANDARDS: United States - AK - AICPA: FN-Measurement -
AICPA: FN-Measurement
KEYWORDS: Bloom's: Knowledge
OTHER: Time: 2 min.
27. The cost of repairs to damaged property is not an acceptable measure of the loss in value of the property.
a. True
b. False
ANSWER: False
RATIONALE: Under certain circumstances, the cost of repairs to damaged property may be an acceptable
measure of the loss in value of the property.
POINTS: 1
DIFFICULTY: Easy
LEARNING OBJECTIVES: IITX.SWFT.LO: 7-04 - LO: 7-04
NATIONAL STANDARDS: United States - BUSPORG: Analytic
STATE STANDARDS: United States - AK - AICPA: FN-Measurement -
AICPA: FN-Measurement
KEYWORDS: Bloom's: Knowledge
OTHER: Time: 2 min.
28. Taxpayer’s home was destroyed by a storm in the current year and the area was declared a disaster area. If the
taxpayer elects to treat the loss as having occurred in the prior year, it will be subject to the 10%-of-AGI reduction based
on the AGI of the current year.
a. True
b. False
ANSWER: False
RATIONALE: The loss will be subject to the 10%-of-AGI reduction based on the AGI of the prior year.
POINTS: 1
DIFFICULTY: Easy
LEARNING OBJECTIVES: IITX.SWFT.LO: 7-04 - LO: 7-04
NATIONAL STANDARDS: United States - BUSPORG: Analytic
STATE STANDARDS: United States - AK - AICPA: FN-Measurement -
AICPA: FN-Measurement
KEYWORDS: Bloom's: Comprehension
OTHER: Time: 2 min.
29. The amount of loss for partial destruction of business property is the decline in fair market value of the business
property.
© 2017 Cengage Learning®. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Page 9
Chapter 07: Deductions and Losses Certain Business Expenses and Losses
a. True
b. False
ANSWER: False
RATIONALE: The amount of the loss is the lesser of the adjusted basis or the decline in fair market value
of the property.
POINTS: 1
DIFFICULTY: Easy
LEARNING OBJECTIVES: IITX.SWFT.LO: 7-04 - LO: 7-04
NATIONAL STANDARDS: United States - BUSPORG: Analytic
STATE STANDARDS: United States - AK - AICPA: FN-Measurement -
AICPA: FN-Measurement
KEYWORDS: Bloom's: Comprehension
OTHER: Time: 2 min.
30. If personal casualty gains exceed personal casualty losses (after deducting the $100 floor), there is no itemized
deduction.
a. True
b. False
ANSWER: True
POINTS: 1
DIFFICULTY: Easy
LEARNING OBJECTIVES: IITX.SWFT.LO: 7-04 - LO: 7-04
NATIONAL STANDARDS: United States - BUSPORG: Analytic
STATE STANDARDS: United States - AK - AICPA: FN-Measurement -
AICPA: FN-Measurement
KEYWORDS: Bloom's: Comprehension
OTHER: Time: 2 min.
31. The amount of a loss on insured personal use property is reduced by the insurance coverage if no claim is made
against the insurer.
a. True
b. False
ANSWER: True
POINTS: 1
DIFFICULTY: Easy
LEARNING OBJECTIVES: IITX.SWFT.LO: 7-04 - LO: 7-04
NATIONAL STANDARDS: United States - BUSPORG: Analytic
STATE STANDARDS: United States - AK - AICPA: FN-Reporting
KEYWORDS: Bloom's: Knowledge
OTHER: Time: 2 min.
33. When a nonbusiness casualty loss is spread between two taxable years, the loss in the second year is reduced by 10%
of adjusted gross income for the first year.
a. True
b. False
ANSWER: False
RATIONALE: The loss in the second year is reduced by 10% of AGI for the second year.
POINTS: 1
DIFFICULTY: Easy
LEARNING OBJECTIVES: IITX.SWFT.LO: 7-04 - LO: 7-04
NATIONAL STANDARDS: United States - BUSPORG: Analytic
STATE STANDARDS: United States - AK - AICPA: FN-Measurement -
AICPA: FN-Measurement
KEYWORDS: Bloom's: Knowledge
OTHER: Time: 2 min.
34. A theft loss of investment property is an itemized deduction not subject to the 2%-of-AGI floor.
a. True
b. False
ANSWER: True
RATIONALE: A theft loss is a separately stated item on Schedule A of Form 1040. It is not subject to the
2%-of-AGI floor.
POINTS: 1
DIFFICULTY: Easy
LEARNING OBJECTIVES: IITX.SWFT.LO: 7-04 - LO: 7-04
NATIONAL STANDARDS: United States - BUSPORG: Analytic
STATE STANDARDS: United States - AK - AICPA: FN-Reporting
KEYWORDS: Bloom's: Knowledge
OTHER: Time: 2 min.
35. Research and experimental expenditures do not include the cost of consumer surveys.
a. True
b. False
ANSWER: True
POINTS: 1
DIFFICULTY: Easy
LEARNING OBJECTIVES: IITX.SWFT.LO: 7-05 - LO: 7-05
NATIONAL STANDARDS: United States - BUSPORG: Analytic
© 2017 Cengage Learning®. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Page 11
Chapter 07: Deductions and Losses Certain Business Expenses and Losses
STATE STANDARDS: United States - AK - AICPA: FN-Reporting
KEYWORDS: Bloom's: Knowledge
OTHER: Time: 2 min.
36. The cost of depreciable property is not a research and experimental expenditure.
a. True
b. False
ANSWER: True
POINTS: 1
DIFFICULTY: Easy
LEARNING OBJECTIVES: IITX.SWFT.LO: 7-05 - LO: 7-05
NATIONAL STANDARDS: United States - BUSPORG: Analytic
STATE STANDARDS: United States - AK - AICPA: FN-Reporting
KEYWORDS: Bloom's: Knowledge
OTHER: Time: 2 min.
37. If an election is made to defer deduction of research expenditures, the amortization period is based on the expected life
of the research project if less than 60 months.
a. True
b. False
ANSWER: False
RATIONALE: The amortization period is not less than 60 months regardless of the life of the research
project.
POINTS: 1
DIFFICULTY: Easy
LEARNING OBJECTIVES: IITX.SWFT.LO: 7-05 - LO: 7-05
NATIONAL STANDARDS: United States - BUSPORG: Analytic
STATE STANDARDS: United States - AK - AICPA: FN-Measurement -
AICPA: FN-Measurement
KEYWORDS: Bloom's: Knowledge
OTHER: Time: 2 min.
38. The domestic production activities deduction (DPAD) for a sole proprietor is calculated by multiplying a percentage
rate (currently 9%) times adjusted gross income.
a. True
b. False
ANSWER: False
RATIONALE: For a sole proprietor, modified adjusted gross income is used for the DPAD calculation.
POINTS: 1
DIFFICULTY: Easy
LEARNING OBJECTIVES: IITX.SWFT.LO: 7-06 - LO: 7-06
NATIONAL STANDARDS: United States - BUSPORG: Analytic
STATE STANDARDS: United States - AK - AICPA: FN-Measurement -
AICPA: FN-Measurement
KEYWORDS: Bloom's: Knowledge
© 2017 Cengage Learning®. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Page 12
Chapter 07: Deductions and Losses Certain Business Expenses and Losses
OTHER: Time: 5 min.
39. If qualified production activities income (QPAI) cannot be used in the calculation of the domestic production activities
deduction because of the taxable income limitation, the product of the amount not allowed multiplied by the DPAD
percentage rate (currently 9%) can be carried over for 5 years.
a. True
b. False
ANSWER: False
RATIONALE: In this case, any amount not allowed is lost forever.
POINTS: 1
DIFFICULTY: Easy
LEARNING OBJECTIVES: IITX.SWFT.LO: 7-06 - LO: 7-06
NATIONAL STANDARDS: United States - BUSPORG: Analytic
STATE STANDARDS: United States - AK - AICPA: FN-Reporting
KEYWORDS: Bloom's: Knowledge
OTHER: Time: 5 min.
40. The limit for the domestic production activities deduction (DPAD) uses all W-2 wages paid to employees by the
taxpayer during the tax year.
a. True
b. False
ANSWER: False
RATIONALE: The 50% limit is for W-2 wages paid only to employees engaged in qualified domestic
production activities.
POINTS: 1
DIFFICULTY: Easy
LEARNING OBJECTIVES: IITX.SWFT.LO: 7-06 - LO: 7-06
NATIONAL STANDARDS: United States - BUSPORG: Analytic
STATE STANDARDS: United States - AK - AICPA: FN-Measurement -
AICPA: FN-Measurement
KEYWORDS: Bloom's: Knowledge
OTHER: Time: 2 min.
41. A reimbursed employee business expense cannot create an NOL for an individual.
a. True
b. False
ANSWER: True
POINTS: 1
DIFFICULTY: Easy
LEARNING OBJECTIVES: IITX.SWFT.LO: 7-07 - LO: 7-07
NATIONAL STANDARDS: United States - BUSPORG: Analytic
STATE STANDARDS: United States - AK - AICPA: FN-Measurement -
AICPA: FN-Measurement
KEYWORDS: Bloom's: Knowledge
OTHER: Time: 2 min.
© 2017 Cengage Learning®. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Page 13
Chapter 07: Deductions and Losses Certain Business Expenses and Losses
42. A taxpayer can carry any NOL incurred forward up to 20 years.
a. True
b. False
ANSWER: True
RATIONALE: A taxpayer can elect to forgo the carryback period and only carry the NOL forward.
POINTS: 1
DIFFICULTY: Easy
LEARNING OBJECTIVES: IITX.SWFT.LO: 7-07 - LO: 7-07
NATIONAL STANDARDS: United States - BUSPORG: Analytic
STATE STANDARDS: United States - AK - AICPA: FN-Reporting
KEYWORDS: Bloom's: Knowledge
OTHER: Time: 2 min.
44. The amount of a farming loss cannot exceed the amount of the taxpayer’s NOL for the taxable year.
a. True
b. False
ANSWER: True
POINTS: 1
DIFFICULTY: Easy
LEARNING OBJECTIVES: IITX.SWFT.LO: 7-07 - LO: 7-07
NATIONAL STANDARDS: United States - BUSPORG: Analytic
STATE STANDARDS: United States - AK - AICPA: FN-Measurement -
AICPA: FN-Measurement
KEYWORDS: Bloom's: Knowledge
OTHER: Time: 2 min.
45. Nonbusiness income for net operating loss purposes includes dividends received.
a. True
b. False
ANSWER: True
POINTS: 1
© 2017 Cengage Learning®. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Page 14
Chapter 07: Deductions and Losses Certain Business Expenses and Losses
DIFFICULTY: Easy
LEARNING OBJECTIVES: IITX.SWFT.LO: 7-07 - LO: 7-07
NATIONAL STANDARDS: United States - BUSPORG: Analytic
STATE STANDARDS: United States - AK - AICPA: FN-Reporting
KEYWORDS: Bloom's: Knowledge
OTHER: Time: 2 min.
46. A theft of investment property can create or increase a net operating loss for an individual.
a. True
b. False
ANSWER: True
POINTS: 1
DIFFICULTY: Easy
LEARNING OBJECTIVES: IITX.SWFT.LO: 7-07 - LO: 7-07
NATIONAL STANDARDS: United States - BUSPORG: Analytic
STATE STANDARDS: United States - AK - AICPA: FN-Measurement -
AICPA: FN-Measurement
KEYWORDS: Bloom's: Knowledge
OTHER: Time: 2 min.
47. An NOL carryforward is used in determining the current year’s charitable contribution deduction.
a. True
b. False
ANSWER: True
POINTS: 1
DIFFICULTY: Easy
LEARNING OBJECTIVES: IITX.SWFT.LO: 7-07 - LO: 7-07
NATIONAL STANDARDS: United States - BUSPORG: Analytic
STATE STANDARDS: United States - AK - AICPA: FN-Measurement -
AICPA: FN-Measurement
KEYWORDS: Bloom's: Knowledge
OTHER: Time: 2 min.
48. The excess of nonbusiness capital gains over nonbusiness capital losses must be added to taxable income to compute
the net operating loss of an individual.
a. True
b. False
ANSWER: False
RATIONALE: The net nonbusiness capital gains must be added to the nonbusiness income.
POINTS: 1
DIFFICULTY: Easy
LEARNING OBJECTIVES: IITX.SWFT.LO: 7-07 - LO: 7-07
NATIONAL STANDARDS: United States - BUSPORG: Analytic
STATE STANDARDS: United States - AK - AICPA: FN-Reporting
© 2017 Cengage Learning®. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Page 15
Chapter 07: Deductions and Losses Certain Business Expenses and Losses
KEYWORDS: Bloom's: Knowledge
OTHER: Time: 2 min.
49. An individual taxpayer who does not itemize deductions uses the standard deduction to compute the excess of
nonbusiness deductions over the sum of nonbusiness income and net nonbusiness capital gains for purposes of computing
net operating loss.
a. True
b. False
ANSWER: True
POINTS: 1
DIFFICULTY: Easy
LEARNING OBJECTIVES: IITX.SWFT.LO: 7-07 - LO: 7-07
NATIONAL STANDARDS: United States - BUSPORG: Analytic
STATE STANDARDS: United States - AK - AICPA: FN-Measurement -
AICPA: FN-Measurement
KEYWORDS: Bloom's: Knowledge
OTHER: Time: 2 min.
50. When a net operating loss is carried back to a non-loss year, the net operating loss can affect the medical expense
deduction of the carryback year.
a. True
b. False
ANSWER: True
POINTS: 1
DIFFICULTY: Easy
LEARNING OBJECTIVES: IITX.SWFT.LO: 7-07 - LO: 7-07
NATIONAL STANDARDS: United States - BUSPORG: Analytic
STATE STANDARDS: United States - AK - AICPA: FN-Reporting
KEYWORDS: Bloom's: Knowledge
OTHER: Time: 2 min.
Multiple Choice
51. Peggy is in the business of factoring accounts receivable. Last year, she purchased a $30,000 account receivable for
$25,000. This year, the account was settled for $25,000. How much loss can Peggy deduct and in which year?
a. $5,000 for the current year.
b. $5,000 for the prior year and $5,000 for the current year.
c. $5,000 for the prior year.
d. $10,000 for the current year.
e. None of the above.
ANSWER: e
RATIONALE: Peggy’s basis in the debt is $25,000. Therefore, her loss for the current year is $0 ($25,000 –
$25,000).
POINTS: 1
DIFFICULTY: Easy
© 2017 Cengage Learning®. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Page 16
Chapter 07: Deductions and Losses Certain Business Expenses and Losses
LEARNING OBJECTIVES: IITX.SWFT.LO: 7-01 - LO: 7-01
NATIONAL STANDARDS: United States - BUSPORG: Analytic
STATE STANDARDS: United States - AK - AICPA: FN-Measurement -
AICPA: FN-Measurement
KEYWORDS: Bloom's: Application
OTHER: Time: 5 min.
52. Jed is an electrician. Jed and his wife are accrual basis taxpayers and file a joint return. Jed wired a new house for
Alison and billed her $15,000. Alison paid Jed $10,000 and refused to pay the remainder of the bill, claiming the fee to be
exorbitant. Jed took Alison to Small Claims Court for the unpaid amount and was awarded a $2,000 judgement. Jed was
able to collect the judgement but not the remainder of the bill from Alison. What amount of loss may Jed deduct in the
current year?
a. $0
b. $2,000
c. $3,000
d. $5,000
e. None of the above
ANSWER: c
RATIONALE: Jed is an accrual basis taxpayer and therefore, has a basis in the $3,000 not collected.
POINTS: 1
DIFFICULTY: Easy
LEARNING OBJECTIVES: IITX.SWFT.LO: 7-01 - LO: 7-01
NATIONAL STANDARDS: United States - BUSPORG: Analytic
STATE STANDARDS: United States - AK - AICPA: FN-Measurement -
AICPA: FN-Measurement
KEYWORDS: Bloom's: Application
OTHER: Time: 5 min.
53. On June 2, 2015, Fred’s TV Sales sold Mark a large HD TV, on account, for $12,000. Fred’s TV Sales uses the
accrual method. In 2016, when the balance on the account was $8,000, Mark filed for bankruptcy. Fred was notified that
he could not expect to receive any of the amount owed to him. In 2017, final settlement was made and Fred received
$1,000. How much bad debt loss can Fred deduct in 2017?
a. $0
b. $7,000
c. $8,000
d. $12,000
e. None of the above
ANSWER: a
RATIONALE: This debt is a business debt. Therefore, partial worthlessness can be recognized in 2016. The
loss in 2016 would be $8,000. In 2017, the account has been written down to zero and hence,
the collection of $1,000 would produce a $1,000 ($1,000 – $0) gain rather than a loss.
POINTS: 1
DIFFICULTY: Easy
LEARNING OBJECTIVES: IITX.SWFT.LO: 7-01 - LO: 7-01
NATIONAL STANDARDS: United States - BUSPORG: Analytic
STATE STANDARDS: United States - AK - AICPA: FN-Measurement -
© 2017 Cengage Learning®. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Page 17
Chapter 07: Deductions and Losses Certain Business Expenses and Losses
AICPA: FN-Measurement
KEYWORDS: Bloom's: Application
OTHER: Time: 5 min.
54. Mary incurred a $20,000 nonbusiness bad debt last year. She also had an $8,000 long-term capital gain last year. Her
taxable income for last year was an NOL of $15,000. During the current year, she unexpectedly collected $12,000 on the
debt. How should Mary account for the collection?
a. $0 income
b. $8,000 income
c. $11,000 income
d. $12,000 income
e. None of the above
ANSWER: b
RATIONALE: Nonbusiness bad debts are treated as short-term capital losses. Hence, the $20,000 bad
debt can offset the $8,000 of long-term capital gains. Because Mary has an NOL, she cannot
use $3,000 of the remaining loss to offset any ordinary income. Therefore, the tax benefit
was only $8,000 and $8,000 would be recognized as income.
POINTS: 1
DIFFICULTY: Easy
LEARNING OBJECTIVES: IITX.SWFT.LO: 7-01 - LO: 7-01
NATIONAL STANDARDS: United States - BUSPORG: Analytic
STATE STANDARDS: United States - AK - AICPA: FN-Measurement -
AICPA: FN-Measurement
KEYWORDS: Bloom's: Application
OTHER: Time: 5 min.
55. Last year, Lucy purchased a $100,000 account receivable for $90,000. During the current year, Lucy collected
$97,000 on the account. What are the tax consequences to Lucy associated with the collection of the account receivable?
No subsequent collections are expected.
a. $0
b. $2,000 gain
c. $3,000 loss
d. $13,000 loss
e. None of the above
ANSWER: e
RATIONALE: The amount collected is $7,000 ($97,000 – $90,000) more than Lucy’s basis in the
receivable.
POINTS: 1
DIFFICULTY: Easy
LEARNING OBJECTIVES: IITX.SWFT.LO: 7-01 - LO: 7-01
NATIONAL STANDARDS: United States - BUSPORG: Analytic
STATE STANDARDS: United States - AK - AICPA: FN-Measurement -
AICPA: FN-Measurement
KEYWORDS: Bloom's: Application
OTHER: Time: 5 min.
© 2017 Cengage Learning®. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Page 18
Chapter 07: Deductions and Losses Certain Business Expenses and Losses
56. Two years ago, Gina loaned Tom $50,000. Tom signed a note the terms of which called for monthly payments of
$2,000 plus 6% interest on the outstanding balance. Last year, when the balance owing on the loan was $18,000, Tom
defaulted on the note. As of the end of last year, there appeared to be no reasonable prospect of Gina recovering the
$18,000. As a consequence, Gina claimed the $18,000 as a nonbusiness bad debt. Last year, Gina had AGI of a negative
$6,000 which included $5,000 net long-term capital gains and $4,000 of qualified dividends. Gina did not itemize her
deductions. During the current year, Tom paid Gina $13,000 in final settlement of the loan. How should Gina account for
the payment in the current year?
a. File an amended tax return for last year.
b. Report no income for the current year.
c. Report $8,000 of income for the current year.
d. Report $12,000 of income for the current year.
e. None of the above.
ANSWER: e
RATIONALE: Income should be reported based on the tax benefit rule. The tax benefit was $5,000.
POINTS: 1
DIFFICULTY: Moderate
LEARNING OBJECTIVES: IITX.SWFT.LO: 7-01 - LO: 7-01
NATIONAL STANDARDS: United States - BUSPORG: Analytic
STATE STANDARDS: United States - AK - AICPA: FN-Measurement -
AICPA: FN-Measurement
KEYWORDS: Bloom's: Application
OTHER: Time: 10 min.
57. Five years ago, Tom loaned his son John $20,000 to start a business. A note was executed with an interest rate of 8%,
which is the Federal rate. The note required monthly payments of the interest with the $20,000 due at the end of ten years.
John always made the interest payments until last year. During the current year, John notified his father that he was
bankrupt and would not be able to repay the $20,000 or the accrued interest of $1,800. Tom is an accrual basis taxpayer
whose only income is salary and interest income. The proper treatment for the nonpayment of the note is:
a. No deduction.
b. $3,000 deduction.
c. $20,000 deduction.
d. $21,800 deduction.
e. None of the above.
ANSWER: b
RATIONALE: This is a bona fide loan to his son; therefore, Tom is entitled to a bad debt of $21,800
($20,000 + $1,800; a deduction is allowed for the $1,800 of accrued interest receivable
because Tom is an accrual basis taxpayer). The deduction for the current year is limited to
$3,000, since the bad debt is classified as a short-term capital loss.
POINTS: 1
DIFFICULTY: Easy
LEARNING OBJECTIVES: IITX.SWFT.LO: 7-01 - LO: 7-01
NATIONAL STANDARDS: United States - BUSPORG: Analytic
STATE STANDARDS: United States - AK - AICPA: FN-Measurement -
AICPA: FN-Measurement
KEYWORDS: Bloom's: Application
OTHER: Time: 5 min.
© 2017 Cengage Learning®. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Page 19
Chapter 07: Deductions and Losses Certain Business Expenses and Losses
58. Three years ago, Sharon loaned her sister $30,000 to buy a car. A note was issued for the loan with the provision for
monthly payments of principal and interest. Last year, Sharon purchased a car from the same dealer, Hank’s Auto. As
partial payment for the car, the dealer accepted the note from Sharon’s sister. At the time Sharon purchased the car, the
note had a balance of $18,000. During the current year, Sharon’s sister died. Hank’s Auto was notified that no further
payments on the note would be received. At the time of the notification, the note had a balance due of $15,500. What is
the amount of loss, with respect to the note, that Hank’s Auto may claim on the current year tax return?
a. $0
b. $3,000
c. $15,500
d. $18,000
e. None of the above
ANSWER: c
RATIONALE: This is a business bad debt for Hank’s Auto and therefore, the loss is $15,500.
POINTS: 1
DIFFICULTY: Easy
LEARNING OBJECTIVES: IITX.SWFT.LO: 7-01 - LO: 7-01
NATIONAL STANDARDS: United States - BUSPORG: Analytic
STATE STANDARDS: United States - AK - AICPA: FN-Measurement -
AICPA: FN-Measurement
KEYWORDS: Bloom's: Application
OTHER: Time: 5 min.
59. On September 3, 2015, Able, a single individual, purchased § 1244 stock in Red Corporation from his friend Al for
$60,000. On December 31, 2015, the stock was worth $85,000. On August 15, 2016, Able was notified that the stock was
worthless. How should Able report this item on his 2016 tax return?
a. $85,000 capital loss.
b. $85,000 ordinary loss.
c. $50,000 ordinary loss and $35,000 capital loss.
d. $60,000 ordinary loss.
e. None of the above.
ANSWER: e
RATIONALE: The loss of $60,000 is classified as a $60,000 capital loss because the stock is not § 1244
stock to Able.
POINTS: 1
DIFFICULTY: Easy
LEARNING OBJECTIVES: IITX.SWFT.LO: 7-02 - LO: 7-02
NATIONAL STANDARDS: United States - BUSPORG: Analytic
STATE STANDARDS: United States - AK - AICPA: FN-Measurement -
AICPA: FN-Measurement
KEYWORDS: Bloom's: Application
OTHER: Time: 5 min.
60. On February 20, 2015, Bill purchased stock in Pink Corporation (the stock is not small business stock) for $1,000. On
May 1, 2016, the stock became worthless. During 2016, Bill also had an $8,000 loss on § 1244 small business stock
purchased two years ago, a $9,000 loss on a nonbusiness bad debt, and a $5,000 long-term capital gain. How should Bill
treat these items on his 2016 tax return?
© 2017 Cengage Learning®. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Page 20
Chapter 07: Deductions and Losses Certain Business Expenses and Losses
a. $4,000 long-term capital loss and $9,000 short-term capital loss.
b. $4,000 long-term capital loss and $3,000 short-term capital loss.
c. $8,000 ordinary loss and $3,000 short-term capital loss.
d. $8,000 ordinary loss and $5,000 short-term capital loss.
e. $8,000 long-term capital loss and $6,000 short-term capital loss.
ANSWER: c
RATIONALE: Ordinary loss (small business stock) ($8,000)
61. John files a return as a single taxpayer. In 2016, he had the following items:
∙ Salary of $40,000.
∙ Loss of $65,000 on the sale of § 1244 stock acquired two years ago.
∙ Interest income of $6,000.
62. Bruce, who is single, had the following items for the current year:
∙ Salary of $80,000.
∙ Gain of $20,000 on the sale of § 1244 stock acquired two years earlier.
∙ Loss of $75,000 on the sale of § 1244 stock acquired three years earlier.
∙ Worthless stock of $15,000. The stock was acquired on February 1 of the prior year and
became worthless on January 15 of the current year.
Determine Bruce’s AGI for the current year.
a. $27,000
b. $38,000
c. $42,000
d. $47,000
e. None of the above
ANSWER: a
RATIONALE: Salary $80,000
§ 1244 ordinary loss (50,000)
Long-term capital gain $20,000
Long-term capital loss
Excess § 1244 loss ($75,000 – $50,000) $25,000
Worthless security 15,000 (40,000)
Net long-term capital loss (limited to $3,000) (3,000)
Adjusted gross income $27,000
POINTS: 1
DIFFICULTY: Moderate
LEARNING OBJECTIVES: IITX.SWFT.LO: 7-02 - LO: 7-02
NATIONAL STANDARDS: United States - BUSPORG: Analytic
STATE STANDARDS: United States - AK - AICPA: FN-Measurement -
AICPA: FN-Measurement
KEYWORDS: Bloom's: Application
OTHER: Time: 10 min.
63. On July 20, 2015, Matt (who files a joint return) purchased 3,000 shares of Orange Corporation stock (the stock is §
1244 small business stock) for $24,000. On November 10, 2015, Matt purchased an additional 1,000 shares of Orange
Corporation stock from a friend for $150,000. On September 15, 2016, Matt sold the 4,000 shares of stock for $120,000.
How should Matt treat the sale of the stock on his 2016 return?
a. $54,000 ordinary loss.
b. $100,000 ordinary loss; $46,000 net capital gain.
c. $100,000 ordinary loss; $20,000 STCL.
d. $130,000 ordinary loss; $66,000 LTCG.
e. None of the above.
ANSWER: e
© 2017 Cengage Learning®. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Page 22
Chapter 07: Deductions and Losses Certain Business Expenses and Losses
RATIONALE: Amount realized (1,000 shares × $30 per share) $ 30,000
Less: basis (150,000)
Recognized loss ($120,000)
STCL ($120,000)
The stock is not § 1244 stock because it was not purchased from the corporation.
65. In 2016, Wally had the following insured personal casualty losses (arising from one casualty). Wally also had $42,000
AGI for the year before considering the casualty.
POINTS: 1
DIFFICULTY: Moderate
LEARNING OBJECTIVES: IITX.SWFT.LO: 7-04 - LO: 7-04
NATIONAL STANDARDS: United States - BUSPORG: Analytic
STATE STANDARDS: United States - AK - AICPA: FN-Measurement -
AICPA: FN-Measurement
KEYWORDS: Bloom's: Application
OTHER: Time: 10 min.
66. Jim had a car accident in 2016 in which his car was completely destroyed. At the time of the accident, the car had a
fair market value of $30,000 and an adjusted basis of $40,000. Jim used the car 100% of the time for business use. Jim
received an insurance recovery of 70% of the value of the car at the time of the accident. If Jim’s AGI for the year is
$60,000, determine his deductible loss on the car.
a. $900
b. $2,900
c. $3,000
d. $9,000
e. None of the above
ANSWER: e
RATIONALE: The car is used for business use and hence, the amount of the loss is $40,000 (adjusted
basis) reduced by the insurance recovery ($21,000). The $19,000 loss is not subject to the
$100 floor per event and the 10%-of-AGI limitation. So the loss is $19,000.
POINTS: 1
DIFFICULTY: Easy
LEARNING OBJECTIVES: IITX.SWFT.LO: 7-04 - LO: 7-04
NATIONAL STANDARDS: United States - BUSPORG: Analytic
© 2017 Cengage Learning®. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Page 24
Chapter 07: Deductions and Losses Certain Business Expenses and Losses
STATE STANDARDS: United States - AK - AICPA: FN-Measurement -
AICPA: FN-Measurement
KEYWORDS: Bloom's: Application
OTHER: Time: 5 min.
67. Norm’s car, which he uses 100% for personal purposes, was completely destroyed in an accident in 2016. The car’s
adjusted basis at the time of the accident was $13,000. Its fair market value was $10,000. The car was covered by a $2,000
deductible insurance policy. Norm did not file a claim against the insurance policy because of a fear that reporting the
accident would result in a substantial increase in his insurance rates. His adjusted gross income was $14,000 (before
considering the loss). What is Norm’s deductible loss?
a. $0
b. $100
c. $500
d. $9,500
e. None of the above
ANSWER: c
RATIONALE: Amount (lesser of adjusted basis or FMV decline) $10,000
Less: Insurance recovery as if the claim had been filed (8,000)
Statutory floor (100)
AGI limitation (10% × $14,000) (1,400)
Deductible loss $ 500
The loss is permitted for the uninsured portion of the casualty.
POINTS: 1
DIFFICULTY: Easy
LEARNING OBJECTIVES: IITX.SWFT.LO: 7-04 - LO: 7-04
NATIONAL STANDARDS: United States - BUSPORG: Analytic
STATE STANDARDS: United States - AK - AICPA: FN-Measurement -
AICPA: FN-Measurement
KEYWORDS: Bloom's: Application
OTHER: Time: 5 min.
68. In 2016, Grant’s personal residence was completely destroyed by fire. Grant was insured for 100% of his actual loss,
and he received the insurance settlement. Grant had adjusted gross income, before considering the casualty item, of
$30,000. Pertinent data with respect to the residence follows:
69. John had adjusted gross income of $60,000. During the year his personal use summer home was damaged by a fire.
Pertinent data with respect to the home follows:
Cost basis $260,000
Value before the fire 400,000
Value after the fire 100,000
Insurance recovery 270,000
John had an accident with his personal use car. As a result of the accident, John was cited with reckless driving and willful
negligence. Pertinent data with respect to the car follows:
Cost basis $80,000
Value before the accident 56,000
Value after the accident 20,000
Insurance recovery 18,000
What is John’s itemized casualty loss deduction?
a. $0
b. $2,000
c. $17,000
d. $18,000
e. None of the above
ANSWER: a
RATIONALE: Gain on home ($260,000 – $250,000) = $10,000.
John has no itemized casualty loss deduction because casualty gains exceed casualty
losses. There is no casualty loss on the car because the accident was the result of willful
negligence.
POINTS: 1
DIFFICULTY: Easy
LEARNING OBJECTIVES: IITX.SWFT.LO: 7-04 - LO: 7-04
NATIONAL STANDARDS: United States - BUSPORG: Analytic
STATE STANDARDS: United States - AK - AICPA: FN-Measurement -
AICPA: FN-Measurement
KEYWORDS: Bloom's: Application
OTHER: Time: 10 min.
Salary $30,000
© 2017 Cengage Learning®. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Page 26
Chapter 07: Deductions and Losses Certain Business Expenses and Losses
Personal use casualty gain 10,000
Personal use casualty loss (after $100 floor) 17,000
Other itemized deductions 4,000
Assuming that Mary files as head of household (has one dependent child), determine her taxable income for 2016.
a. $12,600
b. $12,900
c. $13,900
d. $21,900
e. None of the above
ANSWER: a
RATIONALE: Salary $30,000
Personal use casualty gains in excess of personal use casualty losses ($10,000 – –0–
$10,000)
Adjusted gross $30,000
income
Less: Deductions
Itemized deductions
Casualty loss ($17,000 – $10,000) $7,000
AGI floor (10% × $30,000) (3,000)
Deductible casualty loss $4,000
Other itemized deductions 4,000
Total itemized deductions $8,000
Standard deduction (larger than itemized (9,300)
deductions)
Personal exemption ($4,050 × 2) (8,100)
Taxable income $12,600
POINTS: 1
DIFFICULTY: Moderate
LEARNING OBJECTIVES: IITX.SWFT.LO: 7-04 - LO: 7-04
NATIONAL STANDARDS: United States - BUSPORG: Analytic
STATE STANDARDS: United States - AK - AICPA: FN-Measurement -
AICPA: FN-Measurement
KEYWORDS: Bloom's: Application
OTHER: Time: 10 min.
71. In 2016, Morley, a single taxpayer, had an AGI of $30,000 before considering the following items:
72. In 2016, Theo, an employee, had a salary of $30,000 and experienced the following losses:
© 2017 Cengage Learning®. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Page 28
Chapter 07: Deductions and Losses Certain Business Expenses and Losses
The loss on the theft of the business computer is a miscellaneous itemized deduction which is
subject to the 2%-of-AGI floor.
Loss on theft [$5,000 – (2% × $20,000)] $4,600
Casualty loss in excess of casualty gain ($9,000 – $4,000) $5,000
Less: 10% × $20,000 (AGI) (2,000) 3,000
Total itemized deduction $ 7,600
POINTS: 1
DIFFICULTY: Moderate
LEARNING OBJECTIVES: IITX.SWFT.LO: 7-04 - LO: 7-04
NATIONAL STANDARDS: United States - BUSPORG: Analytic
STATE STANDARDS: United States - AK - AICPA: FN-Measurement -
AICPA: FN-Measurement
KEYWORDS: Bloom's: Application
OTHER: Time: 10 min.
73. Alicia was involved in an automobile accident in 2016. Her car was used 60% for business and 40% for personal use.
The car had originally cost $40,000. At the time of the accident, the car was worth $20,000 and Alicia had taken $8,000 of
depreciation. The car was totally destroyed and Alicia had let her car insurance expire. If Alicia’s AGI is $50,000 (before
considering the loss), determine her itemized deduction for the casualty loss.
a. $4,500
b. $6,100
c. $8,000
d. $24,000
e. None of the above
ANSWER: a
RATIONALE: Business Use Personal Use
Cost $24,000 $16,000
Less: depreciation (8,000) –0–
Basis $16,000 $16,000
Fair market value $12,000 $ 8,000
Loss $16,000 $ 8,000
AGI before casualty loss $50,000
Less: Business loss (16,000)
AGI $34,000
© 2017 Cengage Learning®. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Page 29
Chapter 07: Deductions and Losses Certain Business Expenses and Losses
LEARNING OBJECTIVES: IITX.SWFT.LO: 7-04 - LO: 7-04
NATIONAL STANDARDS: United States - BUSPORG: Analytic
STATE STANDARDS: United States - AK - AICPA: FN-Measurement -
AICPA: FN-Measurement
KEYWORDS: Bloom's: Application
OTHER: Time: 15 min.
74. In 2015, Sarah (who files as single) had silverware worth $10,000 (basis $6,000) stolen from her home. Sarah’s
insurance company told her that her policy did not cover the theft. Sarah’s other itemized deductions last year were
$2,000. She had AGI of $30,000 last year. In August of 2016, Sarah’s insurance company decided that Sarah’s policy did
cover the theft of the silverware and they paid Sarah $5,000. Determine the tax treatment of the $5,000 received by Sarah
during 2016.
a. None of the $5,000 should be included in gross income.
b. $2,900 should be included in gross income.
c. $5,000 should be included in gross income.
d. Last year’s return should be amended to include the $5,000.
e. None of the above.
ANSWER: a
RATIONALE: Sarah would have taken a casualty loss of $2,900 ($6,000 – $100 – $3,000) in 2015.
Therefore, the total itemized deductions would be $4,900 ($2,900 + $2,000). Because this is
less than the 2015 standard deduction of $6,300 for single taxpayers, Sarah would have taken
the standard deduction. Hence, none of the $5,000 would be included in gross income under
the tax benefit rule.
POINTS: 1
DIFFICULTY: Moderate
LEARNING OBJECTIVES: IITX.SWFT.LO: 7-04 - LO: 7-04
NATIONAL STANDARDS: United States - BUSPORG: Analytic
STATE STANDARDS: United States - AK - AICPA: FN-Measurement -
AICPA: FN-Measurement
KEYWORDS: Bloom's: Application
OTHER: Time: 5 min.
75. Alma is in the business of dairy farming. During the year, one of her barns was completely destroyed by fire. The
adjusted basis of the barn was $90,000. The fair market value of the barn before the fire was $75,000. The barn was
insured for 95% of its fair market value, and Alma recovered this amount under the insurance policy. Alma has adjusted
gross income for the year of $40,000 (before considering the casualty). Determine the amount of loss she can deduct on
her tax return for the current year.
a. $3,750
b. $14,650
c. $14,750
d. $18,750
e. None of the above
ANSWER: d
RATIONALE: Amount of loss (adjusted basis for business property that is completely
$90,000
destroyed)
Less: Insurance proceeds received ($75,000 × 95%) (71,250)
Business loss $18,750
© 2017 Cengage Learning®. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Page 30
Chapter 07: Deductions and Losses Certain Business Expenses and Losses
76. In the current year, Juan’s home was burglarized. Juan had the following items stolen:
∙ Securities worth $25,000. Juan purchased the securities four years ago for $20,000.
∙ New tools which Juan had purchased two weeks earlier for $8,000. Juan uses the tools in
making repairs at an apartment house that he owns and manages.
∙ An antique worth $15,000. Juan inherited the antique (a family keepsake) when the property
was worth $11,000.
Juan’s homeowner’s policy had a $50,000 deductible clause for thefts. If Juan’s salary for the year is $50,000, determine
the amount of his itemized deductions as a result of the theft.
a. $3,100
b. $6,000
c. $26,100
d. $26,500
e. None of the above
ANSWER: e
RATIONALE: Salary $50,000
Less: Loss on theft of tools (8,000)
AGI $42,000
77. Regarding research and experimental expenditures, which of the following are not qualified expenditures?
a. Costs of ordinary testing of materials.
© 2017 Cengage Learning®. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Page 31
Chapter 07: Deductions and Losses Certain Business Expenses and Losses
b. Costs to develop a plant process.
c. Costs of developing a formula.
d. Depreciation on a building used for research.
e. All of the above are qualified expenditures.
ANSWER: a
POINTS: 1
DIFFICULTY: Easy
LEARNING OBJECTIVES: IITX.SWFT.LO: 7-05 - LO: 7-05
NATIONAL STANDARDS: United States - BUSPORG: Analytic
STATE STANDARDS: United States - AK - AICPA: FN-Reporting
KEYWORDS: Bloom's: Comprehension
OTHER: Time: 5 min.
78. Blue Corporation incurred the following expenses in connection with the development of a new product:
Salaries $100,000
Utilities 18,000
Materials 25,000
Advertising 5,000
Market survey 3,000
Depreciation on machine 9,000
Blue expects to begin selling the product next year. If Blue elects to amortize research and experimental expenditures over
60 months, determine the amount of the deduction for research and experimental expenditures for the current year.
a. $0
b. $118,000
c. $143,000
d. $152,000
e. $160,000
ANSWER: a
RATIONALE: The qualified research expenditures are $152,000 ($100,000 + $18,000 + $25,000 + $9,000).
Under the election to amortize, the monthly amortization is $2,533 ($152,000 ÷ 60 months).
However, since sales will not start until next year, there is no deduction for the current year.
POINTS: 1
DIFFICULTY: Easy
LEARNING OBJECTIVES: IITX.SWFT.LO: 7-05 - LO: 7-05
NATIONAL STANDARDS: United States - BUSPORG: Analytic
STATE STANDARDS: United States - AK - AICPA: FN-Measurement -
AICPA: FN-Measurement
KEYWORDS: Bloom's: Application
OTHER: Time: 5 min.
79. Last year, Green Corporation incurred the following expenditures in the development of a new plant process:
Salaries $250,000
Materials 90,000
Utilities 20,000
Quality control testing costs 40,000
© 2017 Cengage Learning®. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Page 32
Chapter 07: Deductions and Losses Certain Business Expenses and Losses
Management study costs 5,000
Depreciation of equipment 18,000
During the current year, benefits from the project began being realized in May. If Green Corporation elects a 60 month
deferral and amortization period, determine the amount of the deduction for the current year.
a. $48,000
b. $50,400
c. $54,667
d. $57,067
e. None of the above
ANSWER: b
RATIONALE: Salary $250,000
Materials 90,000
Utilities 20,000
Depreciation 18,000
Research and experimental costs $378,000
Current deduction $50,400 [($378,000 ÷ 60) × 8 months] Neither the quality control testing
costs nor the management study costs are research and experimental expenditures.
POINTS: 1
DIFFICULTY: Moderate
LEARNING OBJECTIVES: IITX.SWFT.LO: 7-05 - LO: 7-05
NATIONAL STANDARDS: United States - BUSPORG: Analytic
STATE STANDARDS: United States - AK - AICPA: FN-Measurement -
AICPA: FN-Measurement
KEYWORDS: Bloom's: Application
OTHER: Time: 10 min.
80. Ivory, Inc., has taxable income of $600,000 and qualified production activities income (QPAI) of $700,000 in the
current year. Ivory’s domestic production activities deduction is:
a. $36,000.
b. $42,000.
c. $54,000.
d. $63,000.
e. None of the above.
ANSWER: c
RATIONALE: DPAD is calculated for Ivory as the lesser of the following:
∙ $700,000 × 9% = $63,000
∙ $600,000 × 9% = $54,000
© 2017 Cengage Learning®. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Page 33
Chapter 07: Deductions and Losses Certain Business Expenses and Losses
STATE STANDARDS: United States - AK - AICPA: FN-Measurement -
AICPA: FN-Measurement
KEYWORDS: Bloom's: Application
OTHER: Time: 5 min.
81. In the current year, Amber Corporation has taxable income of $880,000, alternative minimum taxable income of
$600,000, and qualified production activities income (QPAI) of $640,000. The total W-2 wages paid to employees
engaged in qualified domestic production activities are $116,000. Amber’s DPAD for the current year is:
a. $54,000.
b. $57,600.
c. $58,000.
d. $79,200.
e. None of the above.
ANSWER: a
RATIONALE: Amber’s DPAD is limited to 9% of alternative minimum taxable income of $600,000.
$600,000 × 9% = $54,000.
POINTS: 1
DIFFICULTY: Easy
LEARNING OBJECTIVES: IITX.SWFT.LO: 7-06 - LO: 7-06
NATIONAL STANDARDS: United States - BUSPORG: Analytic
STATE STANDARDS: United States - AK - AICPA: FN-Measurement -
AICPA: FN-Measurement
KEYWORDS: Bloom's: Application
OTHER: Time: 5 min.
82. Cream, Inc.’s taxable income for the current year before any deduction for an NOL carryforward of $30,000 is
$70,000. Cream’s qualified production activities income (QPAI) is $60,000. What is the amount of Cream’s domestic
production activities deduction (DPAD) for the current year?
a. $1,200
b. $1,800
c. $2,400
d. $3,600
e. None of the above
ANSWER: d
RATIONALE: Taxable income for purposes of calculating the DPAD is reduced by any NOL carryforward.
Thus, the amount of the DPAD is $3,600 [($70,000 – $30,000) × 9%].
POINTS: 1
DIFFICULTY: Easy
LEARNING OBJECTIVES: IITX.SWFT.LO: 7-06 - LO: 7-06
NATIONAL STANDARDS: United States - BUSPORG: Analytic
STATE STANDARDS: United States - AK - AICPA: FN-Measurement -
AICPA: FN-Measurement
KEYWORDS: Bloom's: Application
OTHER: Time: 5 min.
83. In the computation of a net operating loss, which of the following items is not added to the negative taxable income?
© 2017 Cengage Learning®. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Page 34
Chapter 07: Deductions and Losses Certain Business Expenses and Losses
a. Losses incurred in a transaction entered into for profit.
b. Deductible alimony payments.
c. Personal theft loss.
d. Losses from theft of securities.
e. None of the above.
ANSWER: b
POINTS: 1
DIFFICULTY: Easy
LEARNING OBJECTIVES: IITX.SWFT.LO: 7-07 - LO: 7-07
NATIONAL STANDARDS: United States - BUSPORG: Analytic
STATE STANDARDS: United States - AK - AICPA: FN-Measurement -
AICPA: FN-Measurement
KEYWORDS: Bloom's: Comprehension
OTHER: Time: 5 min.
84. If a taxpayer has a net operating loss (NOL) in 2016 of $20,000, of which $8,000 is attributable to a theft of rental use
property, the taxpayer may:
a. Carry all of the NOL of $20,000 back 5 years.
b. Carry all of the NOL of $20,000 back 3 years.
c. Carry $8,000 of the NOL back 3 years and the remainder of the NOL of $12,000 back 2 years.
d. All of the above.
e. None of the above.
ANSWER: c
RATIONALE: The $8,000 NOL attributable to the theft can be carried back 3 years. The remainder of the
NOL of $12,000 can be carried back 2 years.
POINTS: 1
DIFFICULTY: Easy
LEARNING OBJECTIVES: IITX.SWFT.LO: 7-07 - LO: 7-07
NATIONAL STANDARDS: United States - BUSPORG: Analytic
STATE STANDARDS: United States - AK - AICPA: FN-Reporting
KEYWORDS: Bloom's: Application
OTHER: Time: 5 min.
85. Wu, who is single, has the following items for 2016:
Salary $25,000
Interest income 8,000
Itemized deductions ($27,000 attributable to casualty loss) (32,000)
86. Khalid, who is single, had the following items for 2016:
Salary $40,000
Interest income on U.S. Treasury bonds 8,000
Loss on theft of securities (60,000)
Interest income on New York state bonds 12,000
The loss on the theft of securities is treated as attributable to a trade or business. Therefore, it
can create an NOL. The interest of $12,000 on the New York state bonds is tax-exempt.
POINTS: 1
DIFFICULTY: Moderate
LEARNING OBJECTIVES: IITX.SWFT.LO: 7-07 - LO: 7-07
NATIONAL STANDARDS: United States - BUSPORG: Analytic
STATE STANDARDS: United States - AK - AICPA: FN-Measurement -
AICPA: FN-Measurement
KEYWORDS: Bloom's: Application
OTHER: Time: 10 min.
87. Janice, single, had the following items for the year 2016:
Salary $30,000
Dividend income 8,000
Loss on § 1244 small business stock held for three years (45,000)
Total itemized deductions (5,000)
88. Bill, age 40, is married with two dependents. Bill had the following items for the 2016 year:
Based on the above information, what is the net operating loss for Bill and his spouse for the 2016 year?
a. $0
b. ($5,000)
c. ($7,000)
d. ($12,000)
e. None of the above
ANSWER: c
RATIONALE: Business loss ($40,000)
Salary 50,000
Personal casualty gains in excess of casualty losses ($5,000 –0–
– $5,000)
Adjusted gross income $10,000
Less: Itemized deductions
Casualty loss [$18,000 – (10% $17,000
× $10,000)]
Other itemized deductions 15,000
Total itemized deductions (32,000)
Personal and dependency (16,200)
exemptions (4 × $4,050)
Taxable income ($38,200)
89. Jack, age 30 and married with no dependents, is a self-employed individual. For 2016, his self-employed business
sustained a net loss from operations of $10,000. The following additional information was obtained from his personal
records for the year:
Based on the above information, what is Jack’s net operating loss for 2016 if he and his spouse file a joint return?
a. ($2,000)
b. ($8,000)
c. ($10,000)
d. ($11,000)
e. ($14,000)
ANSWER: c
RATIONALE: Operating loss ($10,000)
Nonbusiness long-term capital gain 2,000
Interest income 6,000
Adjusted gross ($ 2,000)
income
Itemized (12,000)
Less:
deductions
Personal (8,100)
exemptions (2 ×
$4,050)
Taxable income ($22,100)
90. Stella, age 38, is single with no dependents. The following information was obtained from her personal records for the
2016 year.
Salary $30,000
Interest income 7,000
Alimony received 12,000
Individual retirement account contribution 2,000
Home mortgage interest expense 4,000
Property taxes 2,000
Personal casualty loss (after the $100 floor) 38,000
Stolen investment property 16,000
Unreimbursed employee business loss 3,000
Based on the above information, what is Stella’s net operating loss for 2016?
a. $0
b. ($9,000)
c. ($10,360)
d. ($11,200)
e. None of the above
ANSWER: c
RATIONALE: Salary $30,000
Interest income 7,000
Alimony received 12,000
Individual retirement account contribution ( 2,000)
Adjusted gross income $47,000
Less: Home mortgage interest (4,000)
Property taxes (2,000)
Personal casualty loss $38,000
Less: 10% × $47,000 (AGI) (4,700) (33,300)
Unreimbursed employee business loss (2,060)
[$3,000 – (2% × $47,000)]
Stolen investment property (16,000)
Personal exemption (4,050)
Taxable income ($14,410)
91. Ralph is single and has the following items for the current year:
Nonbusiness capital gains $ 9,000
Nonbusiness capital losses (3,000)
Interest income 6,000
Itemized deductions (none of the amount resulted from a casualty loss) (10,000)
In calculating Ralph’s net operating loss, and with respect to the above amounts only, what amount must be added back to
taxable income (loss)?
a. $0
b. $2,000
c. $3,000
d. $4,000
e. None of the above
ANSWER: a
RATIONALE: $10,000 – [$6,000 + ($9,000 – $3,000)] = ($2,000). Therefore, nothing is added back.
POINTS: 1
DIFFICULTY: Easy
LEARNING OBJECTIVES: IITX.SWFT.LO: 7-07 - LO: 7-07
NATIONAL STANDARDS: United States - BUSPORG: Analytic
STATE STANDARDS: United States - AK - AICPA: FN-Measurement -
AICPA: FN-Measurement
KEYWORDS: Bloom's: Application
OTHER: Time: 5 min.
92. Elizabeth has the following items for the current year:
Nonbusiness capital gains $ 5,000
Nonbusiness capital losses (3,000)
© 2017 Cengage Learning®. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Page 41
Chapter 07: Deductions and Losses Certain Business Expenses and Losses
Interest income 3,000
Itemized deductions (including a $20,000 casualty loss) (27,000)
In calculating Elizabeth’s net operating loss, and with respect to the above amounts only, what amount must be added
back to taxable income (loss)?
a. $0
b. $1,000
c. $2,000
d. $20,000
e. None of the above
ANSWER: c
RATIONALE: ($27,000 – $20,000) – [$3,000 + ($5,000 – $3,000)] = $2,000.
POINTS: 1
DIFFICULTY: Easy
LEARNING OBJECTIVES: IITX.SWFT.LO: 7-07 - LO: 7-07
NATIONAL STANDARDS: United States - BUSPORG: Analytic
STATE STANDARDS: United States - AK - AICPA: FN-Measurement -
AICPA: FN-Measurement
KEYWORDS: Bloom's: Application
OTHER: Time: 5 min.
93. Steve and Holly have the following items for the current year:
Dividend income $8,000
Interest income 7,000
Itemized deductions (none of the amount resulted from a casualty loss) (13,000)
Business capital gains 1,000
Business capital losses (5,000)
In calculating their net operating loss, and with respect to the above amounts only, what amount must be added back to
taxable income (loss)?
a. $0
b. $1,300
c. $2,000
d. $3,000
e. None of the above
ANSWER: c
RATIONALE: $5,000 – [$1,000 + ($15,000 – $13,000)] = $2,000.
POINTS: 1
DIFFICULTY: Easy
LEARNING OBJECTIVES: IITX.SWFT.LO: 7-07 - LO: 7-07
NATIONAL STANDARDS: United States - BUSPORG: Analytic
STATE STANDARDS: United States - AK - AICPA: FN-Measurement -
AICPA: FN-Measurement
KEYWORDS: Bloom's: Application
OTHER: Time: 5 min.
© 2017 Cengage Learning®. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Page 42
Chapter 07: Deductions and Losses Certain Business Expenses and Losses
94. Which of the following is not a requirement for an alimony deduction?
a. The payments must be in cash.
b. The payments must cease upon the death of the payee.
c. The payments must extend over at least three years.
d. The payor and payee must not live in the same household at the time of the payments.
e. All of these are requirements for an alimony deduction.
ANSWER: c
POINTS: 1
DIFFICULTY: Easy
LEARNING OBJECTIVES: IITX.SWFT.LO: 4-04 - LO: 4-04
NATIONAL STANDARDS: United States - BUSPORG: Analytic
STATE STANDARDS: United States - AK - AICPA: FN-Reporting
KEYWORDS: Bloom's: Comprehension
OTHER: Time: 5 min.
Salary $40,000
Short-term capital gain 12,000
Nonbusiness bad debt (25,000)
Long-term capital gain 8,000
For the current year, Tonya had the following items:
Salary $45,000
Collection of last year’s bad debt 25,000
Determine Tonya’s adjusted gross income for the current year.
ANSWER: Salary $45,000
Income under tax benefit rule 23,000
Long-term capital loss carryover (2,000)
AGI $66,000
© 2017 Cengage Learning®. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Page 43
Chapter 07: Deductions and Losses Certain Business Expenses and Losses
96. Maria, who is single, had the following items for 2016:
Salary $80,000
Loss on sale of § 1244 small business stock acquired 3 years ago (60,000)
Stock acquired 2 years ago became worthless during the year (5,000)
Long-term capital gain 25,000
Nonbusiness bad debt (15,000)
Casualty loss on property held 6 months (6,000)
Casualty gain on property held 4 years 4,000
Determine Maria’s adjusted gross income for 2016.
ANSWER: Salary $80,000
Ordinary loss from § 1244 stock (50,000)
Capital gains and losses
Long-term capital gain ($25,000 + $4,000) $29,000
Less: Long-term capital loss
[($60,000 – $50,000) + $5,000] (15,000)
Net long-term capital gain $14,000
Less: Short-term capital loss ($15,000 + $4,000*) (19,000)
Net capital loss (limited to $3,000) (5,000) (3,000)
Adjusted gross income $27,000
*Casualty losses to the extent of casualty gains.
POINTS: 1
DIFFICULTY: Moderate
LEARNING OBJECTIVES: IITX.SWFT.LO: 7-01 - LO: 7-01
IITX.SWFT.LO: 7-02 - LO: 7-02
IITX.SWFT.LO: 7-03 - LO: 7-03
IITX.SWFT.LO: 7-04 - LO: 7-04
NATIONAL STANDARDS: United States - BUSPORG: Analytic
STATE STANDARDS: United States - AK - AICPA: FN-Measurement -
AICPA: FN-Measurement
KEYWORDS: Bloom's: Application
OTHER: Time: 10 min.
97. Mike, single, age 31, had the following items for 2016:
Salary $50,000
Nonbusiness bad debt (6,000)
Casualties—independent events
Asset A (personal use property held for two years)—gain 3,000
Securities (stolen)—loss (8,000)
Dividends 2,000
Interest expense on personal residence 10,000
© 2017 Cengage Learning®. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Page 44
Chapter 07: Deductions and Losses Certain Business Expenses and Losses
Casualty gain (long-term capital gain) $3,000
Nonbusiness bad debt (short-term capital loss) (6,000)
Net short-term capital (3,000)
loss
Adjusted gross $49,000
income
Less: Interest expense on personal residence (10,000)
Miscellaneous itemized deduction: (8,000)
casualty loss
Personal exemption (4,050)
Taxable income $26,950
POINTS: 1
DIFFICULTY: Moderate
LEARNING OBJECTIVES: IITX.SWFT.LO: 7-01 - LO: 7-01
IITX.SWFT.LO: 7-04 - LO: 7-04
NATIONAL STANDARDS: United States - BUSPORG: Analytic
STATE STANDARDS: United States - AK - AICPA: FN-Measurement -
AICPA: FN-Measurement
KEYWORDS: Bloom's: Application
OTHER: Time: 15 min.
Salary $44,000
§ 1244 loss on stock acquired 3 years ago (70,000)
§ 1244 gain on stock acquired 10 months ago 26,000
Worthless security purchased in June of last year (4,000)
Nonbusiness bad debt (7,000)
Interest income 8,000
Compute Jose’s adjusted gross income for 2016.
99. Julie, who is single, has the following items for 2016:
∙ Salary—$100,000.
A hurricane completely destroyed Julie’s duplex during the current year. Julie lived in
∙ one-half of the duplex and rented out the other half. Julie paid $400,000 for the duplex
and has taken $80,000 of cost recovery on the rental portion of the duplex. The duplex
was worth $420,000 at the time of the destruction. Julie’s insurance policy paid her 90%
of the fair market value of the duplex.
∙ Household items destroyed in the hurricane had a basis of $15,000 and a fair market
value of $8,500. There was no insurance recovery on the household items.
Julie purchased a painting three years ago for $4,000. At the time of the hurricane, the
painting was worth $10,000. Julie purchased the painting as an investment with the
∙ intent that she would sell it when its value exceeded $12,000. There was no insurance
recovery on the painting.
Julie had an automobile accident in the current year. Julie used the car 100% for
∙
personal purposes. The car cost $37,000 and had a decline in FMV as a result of the
accident of $5,000. The car was insured, but the policy had a $2,000 deductible clause.
Julie chose not to file a claim for the damage.
Julie owned a computer that she used 100% for business. The computer was also
∙
completely destroyed in the hurricane. It had a basis of $6,000 and a FMV of $4,000 at
the time it was destroyed. Julie was not reimbursed by her employer for the loss on the
computer.
© 2017 Cengage Learning®. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Page 47
Chapter 07: Deductions and Losses Certain Business Expenses and Losses
OTHER: Time: 15 min.
100. Juanita, single and age 43, had the following items for 2016:
Salary $60,000
Interest income 6,000
Casualty loss on business property (15,000)
Casualty loss on rental property (5,000)
Loss on theft of securities (8,000)
Personal casualty gains 9,000
Personal casualty loss (after $100 floor) (13,000)
Other itemized deductions (9,000)
101. While Susan was on vacation during the current year, someone broke into her home and stole the following items:
∙ A computer used 60% in connection with Susan’s employment as an employee and 40%
for her personal use. The cost of the computer was $8,000. Depreciation of $3,000 had
been taken on the computer and it had a fair market value of $4,000 at the time of the
theft.
∙ A painting, which Susan purchased as an investment for $10,000, had a fair market value
of $17,000.
∙ Silverware purchased for $3,000 had a fair market value of $5,000.
© 2017 Cengage Learning®. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Page 48
Chapter 07: Deductions and Losses Certain Business Expenses and Losses
∙ Cash of $30,000.
Susan’s adjusted gross income, before considering any of the above items, is $60,000.
Determine the total amount of Susan’s itemized deductions resulting from the theft.
ANSWER:
Painting loss (investment property) $10,000
Casualty loss
Computer ($4,000 × 40%) $ 1,600
Silverware 3,000
Cash 30,000
Total $34,600
Less: $100 floor (100)
10% × $60,000 (AGI) (6,000) 28,500
Lesser of:
(1) Cost ($8,000 × 60%) $4,800
Depreciation (3,000)
Adjusted basis $1,800
(2) Fair market value $2,400
($4,000 × 60%)
Loss $1,800
Less: 2% × $60,000 (AGI) (1,200) 600
Total itemized deductions $39,100
POINTS: 1
DIFFICULTY: Challenging
LEARNING OBJECTIVES: IITX.SWFT.LO: 7-04 - LO: 7-04
NATIONAL STANDARDS: United States - BUSPORG: Analytic
STATE STANDARDS: United States - AK - AICPA: FN-Measurement -
AICPA: FN-Measurement
KEYWORDS: Bloom's: Application
OTHER: Time: 15 min.
102. Neal, single and age 37, has the following items for 2016:
Salary $50,000
Casualty loss on business property (8,000)
Casualty loss on rental property (5,000)
Personal casualty gains 3,000
Personal casualty losses (after $100 floor) (12,000)
Interest expense on personal residence (7,000)
Determine Neal’s taxable income for 2016.
ANSWER: Salary $50,000
Casualty loss (8,000)
© 2017 Cengage Learning®. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Page 49
Chapter 07: Deductions and Losses Certain Business Expenses and Losses
on business
property
Casualty loss (5,000)
on rental
property
Personal $3,000
casualty gains
Personal (3,000) –0–
casualty losses
AGI $37,000
Itemized
Less:
deductions
Casualty loss $9,000
($12,000 –
$3,000)
Less: 10% × (3,700)
$37,000 (AGI)
Casualty loss $5,300
deduction
Interest 7,000 (12,300)
expense
Personal (4,050)
exemption
Taxable $20,650
income
POINTS: 1
DIFFICULTY: Challenging
LEARNING OBJECTI IITX.SWFT.LO: 7-04 - LO: 7-04
VES:
NATIONAL STANDA United States - BUSPORG: Analytic
RDS:
STATE STANDARDS: United States - AK - AICPA: FN-Measurement -
AICPA: FN-Measurement
KEYWORDS: Bloom's: Application
OTHER: Time: 10 min.
103. Gary, who is an employee of Red Corporation, has the following items for 2016:
Salary $80,000
Personal casualty gain 7,000
Personal casualty loss from one event (before the $100 floor) 15,000
Loss on rental property 6,000
Theft of bonds 18,000
Unreimbursed loss from theft of a computer used 100% for business 4,000
Determine Gary’s AGI and total amount of itemized deductions for 2016.
ANSWER:
Salary $80,000
© 2017 Cengage Learning®. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Page 50
Chapter 07: Deductions and Losses Certain Business Expenses and Losses
Loss on rental property (6,000)
Personal casualty gain 7,000
Personal casualty loss (7,000)
Adjusted gross income $74,000
POINTS: 1
DIFFICULTY: Moderate
LEARNING OBJECTIVES: IITX.SWFT.LO: 7-04 - LO: 7-04
NATIONAL STANDARDS: United States - BUSPORG: Analytic
STATE STANDARDS: United States - AK - AICPA: FN-Measurement -
AICPA: FN-Measurement
KEYWORDS: Bloom's: Application
OTHER: Time: 10 min.
∙ Loss on rental property caused by termites—$110,000. Insurance covered 80% of the loss.
∙ Loss on personal use automobile—$10,000. The insurance policy does not cover the first $3,000 of loss. Susan decided
not to file a claim for the loss.
∙ Loss on a painting stolen from Susan’s house. Susan purchased the painting three years ago as an investment. She paid
$40,000 for the painting and it was worth $35,000 at the time of the theft. The painting was insured for the fair market
value.
∙ Salary—$40,000.
Determine Susan’s AGI and total amount of itemized deductions for 2016.
ANSWER:
Salary $40,000
Loss on rental property [(80% × $110,000) – $110,000] (22,000)
Adjusted gross income $18,000
Casualty loss (limited to $3,000 not subject to insurance) $3,000
Less: $100 floor (100)
10% × $18,000 (AGI) (1,800)
Casualty loss deduction $1,100
Loss on stolen painting ($40,000 – $35,000) 5,000
Total itemized deductions $6,100
POINTS: 1
DIFFICULTY: Challenging
LEARNING OBJECTIVES: IITX.SWFT.LO: 7-04 - LO: 7-04
NATIONAL STANDARDS: United States - BUSPORG: Analytic
STATE STANDARDS: United States - AK - AICPA: FN-Measurement -
AICPA: FN-Measurement
© 2017 Cengage Learning®. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Page 51
Chapter 07: Deductions and Losses Certain Business Expenses and Losses
KEYWORDS: Bloom's: Application
OTHER: Time: 15 min.
105. Roger, an individual, owns a proprietorship called Green Thing. For the year 2016, Roger has the following items:
∙ Business income—$200,000.
∙ Business expense—$150,000.
∙ Loss on a completely destroyed business machine. The machine had an adjusted basis of $25,000 and a fair market value
of $20,000.
∙ Loss on a business truck. The truck had an adjusted basis of $8,000. The repairs to fix the truck cost $10,000.
Determine Roger’s adjusted gross income for 2016.
ANSWER: Business income $200,000
Business expense (150,000)
Loss on business machine (25,000)
Loss on business truck (8,000)
Adjusted gross income $ 17,000
POINTS: 1
DIFFICULTY: Easy
LEARNING OBJECTIVES: IITX.SWFT.LO: 7-04 - LO: 7-04
NATIONAL STANDARDS: United States - BUSPORG: Analytic
STATE STANDARDS: United States - AK - AICPA: FN-Measurement -
AICPA: FN-Measurement
KEYWORDS: Bloom's: Application
OTHER: Time: 5 min.
106. In 2015, Robin Corporation incurred the following expenditures in connection with the development of a new
product:
Salaries $100,000
Supplies 40,000
Market survey 10,000
Depreciation 25,000
In 2016, Robin incurred the following additional expenditures in connection with the development of the product:
Salaries $125,000
Supplies 50,000
Depreciation 30,000
Advertising 10,000
In October 2016, Robin began receiving benefits from the project. If Robin elects to expense research and experimental
expenditures, determine the amount and year of the deduction.
ANSWER: Deductibility of research and experimental expenditures is permitted in the year of
incurrence.
2015
Salaries $100,000
Supplies 40,000
Depreciation 25,000
© 2017 Cengage Learning®. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Page 52
Chapter 07: Deductions and Losses Certain Business Expenses and Losses
Deductible expenses $165,000
107. In 2016, Tan Corporation incurred the following expenditures in connection with the development of a new product:
Salaries $ 60,000
Supplies 20,000
Depreciation on research equipment 10,000
Testing for quality control 5,000
Advertising 8,000
Overhead allocated to research 2,000
Tan began selling the product in November 2016. If Tan elects to amortize research and experimental expenditures,
determine Tan’s deduction for 2016.
ANSWER: Salaries $60,000
Supplies 20,000
Depreciation 10,000
Overhead allocated to research 2,000
Total qualifying research expenditures $92,000
[($92,000/60 months) × 2 months] = $3,067
POINTS: 1
DIFFICULTY: Easy
LEARNING OBJECTIVES: IITX.SWFT.LO: 7-05 - LO: 7-05
NATIONAL STANDARDS: United States - BUSPORG: Analytic
STATE STANDARDS: United States - AK - AICPA: FN-Measurement -
AICPA: FN-Measurement
KEYWORDS: Bloom's: Application
OTHER: Time: 10 min.
108. Green, Inc., manufactures and sells widgets. During the current year, an examination of the company records showed
© 2017 Cengage Learning®. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Page 53
Chapter 07: Deductions and Losses Certain Business Expenses and Losses
the following items:
POINTS: 1
DIFFICULTY: Challenging
LEARNING OBJECTIVES: IITX.SWFT.LO: 7-06 - LO: 7-06
NATIONAL STANDARDS: United States - BUSPORG: Analytic
STATE STANDARDS: United States - AK - AICPA: FN-Measurement -
AICPA: FN-Measurement
KEYWORDS: Bloom's: Application
OTHER: Time: 10 min.
109. Red Company is a proprietorship owned by Sally, a single individual. Red manufactures and sells widgets. An
examination of Red’s records shows the following items for the current year:
Determine Sally’s domestic production activities deduction for the current year.
ANSWER: Gross receipts $2,500,000
Less: Cost of goods sold (600,000)
Expenses directly related (280,000)
Other allocated and nonallocated expenses ($100,000 +
(130,000)
$30,000)
Wages (320,000)
Dividends received 20,000
Interest received 10,000
Modified adjusted gross income $1,200,000
110. Nora, single, had the following income and deductions for 2016:
Sales $ 50,000
Business expenses (100,000)
Alimony received 30,000
Interest income 1,000
Dividends 2,000
Nonbusiness capital gains 4,000
§ 1244 stock loss (18,000)
Itemized deductions (4,000)
Business capital loss (2,000)
© 2017 Cengage Learning®. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Page 55
Chapter 07: Deductions and Losses Certain Business Expenses and Losses
Business capital gain 1,000
POINTS: 1
DIFFICULTY: Challenging
LEARNING OBJECTIVES: IITX.SWFT.LO: 7-03 - LO: 7-03
IITX.SWFT.LO: 7-07 - LO: 7-07
NATIONAL STANDARDS: United States - BUSPORG: Analytic
STATE STANDARDS: United States - AK - AICPA: FN-Measurement -
AICPA: FN-Measurement
© 2017 Cengage Learning®. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Page 56
Chapter 07: Deductions and Losses Certain Business Expenses and Losses
KEYWORDS: Bloom's: Application
OTHER: Time: 20 min.
111. Juan, married and filing jointly, had the following income and deductions for 2016:
Sales $600,000
Business expenses (650,000)
Interest income 3,000
Dividends 4,000
Personal casualty loss (after deducting the $100 floor) (25,000)
Taxes paid on personal residence (7,000)
Interest paid on personal residence (9,000)
Alimony paid (18,000)
Juan has three dependent children. Calculate the net operating loss for 2016.
ANSWER: Sales $600,000
Business expense (650,000)
Interest income 3,000
Dividends 4,000
Alimony paid (18,000)
Adjusted gross income ($ 61,000)
Less:
Itemized deductions
Casualty loss [$25,000 – (10% × $0)] $25,000
Taxes on personal residence 7,000
Interest on personal residence 9,000 (41,000)
Personal and dependency exemptions (5 × $4,050) (20,250)
Taxable income ($122,250)
© 2017 Cengage Learning®. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Page 57
Chapter 07: Deductions and Losses Certain Business Expenses and Losses
AICPA: FN-Measurement
KEYWORDS: Bloom's: Application
OTHER: Time: 20 min.
112. Jason, married and filing jointly, had the following income for 2016:
Salary $ 70,000
Loss on the sale of § 1244 stock held for 5 years (110,000)
Dividends 25,000
Interest income 10,000
Itemized deductions (no casualty losses) (12,000)
Jason has four dependent children. Calculate the net operating loss for 2016.
ANSWER: Salary $ 70,000
Ordinary loss (§ 1244 stock) (100,000)
Long-term capital loss [($110,000 – $100,000) = $10,000] limited to (3,000)
Dividends 25,000
Interest income 10,000
AGI $ 2,000
Itemized deductions (12,000)
Personal exemptions (6 × $4,050) (24,300)
Taxable income ($ 34,300)
113. Ruth, age 66, sustains a net operating loss (NOL) of $15,000 for 2016. Because Ruth had no taxable income in 2014,
the loss is carried back to 2015. For 2015, the joint income tax return of Ruth and her husband was as follows:
Salary $20,000
Interest income 5,000
Net short-term capital loss (2,000)
AGI $23,000
© 2017 Cengage Learning®. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Page 58
Chapter 07: Deductions and Losses Certain Business Expenses and Losses
Itemized deductions
Charitable contributions $4,000
Medical expenses [$2,575 – ($23,000 × 10%)] 275
Interest 5,000
Taxes 2,500 (11,775)
Personal exemptions (2 × $4,000) (8,000)
Taxable income $ 3,225
Calculate Ruth’s remaining 2016 NOL to be carried to 2017.
ANSWER:
Salary $20,000
Interest income 5,000
Net short-term capital loss (not permitted) (–0–)
Adjusted gross income $25,000
Itemized deductions
Charitable contributions $4,000
Medical expenses [$2,575 – ($25,000 ×10%)] 75
Interest 5,000
Taxes 2,500 (11,575)
Personal exemptions (–0–)
Modified taxable income $13,425
POINTS: 1
DIFFICULTY: Challenging
LEARNING OBJECTIVES: IITX.SWFT.LO: 7-07 - LO: 7-07
NATIONAL STANDARDS: United States - BUSPORG: Analytic
STATE STANDARDS: United States - AK - AICPA: FN-Measurement -
AICPA: FN-Measurement
KEYWORDS: Bloom's: Application
OTHER: Time: 15 min.
114. Milt, married and filing jointly, had the following items for 2016:
Sales $200,000
Business expenses 210,000
Interest income 3,000
Dividends 5,000
Salary 20,000
Alimony received 8,000
Nonbusiness long-term capital gains 5,000
Nonbusiness short-term capital losses 7,000
© 2017 Cengage Learning®. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Page 59
Chapter 07: Deductions and Losses Certain Business Expenses and Losses
Business short-term capital losses 4,000
Business long-term capital gains 2,000
IRA contributions 5,000
Charitable contributions 9,000
Medical expenses 8,450
Property taxes 7,000
Casualty loss on personal property (after the $100 floor) 35,000
Loss on stolen bonds 5,000
Unreimbursed employee business expenses 8,000
Milt has two dependent children. If Milt and his wife file a joint return, compute their net operating loss for 2016.
ANSWER:
Sales $200,000
Less: business expenses (210,000)
Net business loss (10,000)
Interest income 3,000
Dividends 5,000
Salary 20,000
Alimony received 8,000
Long-term capital gains ($5,000 + $2,000) $ 7,000
Short-term capital losses ($7,000 + $4,000) (11,000)
Net short-term capital losses ($ 4,000)
Limit (3,000)
IRA contributions (5,000)
Adjusted gross income (AGI) $ 18,000
Less: Itemized deductions
Charitable contributions $ 9,000
Medical expenses [$8,450 – ($18,000 × .10)] 6,650
Property taxes 7,000
Casualty loss [$35,000 – ($18,000 × .10)] 33,200
Theft loss on stolen bonds 5,000
Nonreimbursed business expenses [$8,000 – ($18,000 7,640 (68,490)
× .02)]
Personal and dependency exemption deduction
(4 × $4,050) (16,200)
Taxable income ($66,690)
Personal exemptions and dependency 16,200
deductions
Nonbusiness capital losses in excess of 2,000
nonbusiness capital gains ($7,000 – $5,000)
Nonbusiness deductions in excess of nonbusiness income
IRA $ 5,000
Itemized deductions $68,490
Less: Casualty loss (33,200)
Bonds theft loss (5,000)
Employee business expenses (7,640) 22,650
Total nonbusiness deductions $27,650
Nonbusiness income
Interest $3,000
Dividends 5,000
Alimony received 8,000 (16,000) 11,650
© 2017 Cengage Learning®. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Page 60
Chapter 07: Deductions and Losses Certain Business Expenses and Losses
Business capital losses in excess of business
capital gains ($4,000 – $2,000) limited to 1,000
$1,000
Net operating loss (NOL) ($35,840)
POINTS: 1
DIFFICULTY: Challenging
LEARNING OBJECTIVES: IITX.SWFT.LO: 7-07 - LO: 7-07
NATIONAL STANDARDS: United States - BUSPORG: Analytic
STATE STANDARDS: United States - AK - AICPA: FN-Measurement -
AICPA: FN-Measurement
KEYWORDS: Bloom's: Application
OTHER: Time: 20 min.
Essay
115. Identify the factors that should be considered in determining whether a transaction is a business bad debt or a
nonbusiness bad debt.
ANSWER: Factors to be considered in determining whether a transaction is a business bad debt or a
nonbusiness bad debt are as follows:
∙ Was the debt related to the taxpayer’s business when it was created?
∙ Was the debt related to the taxpayer’s business when it became worthless?
∙ Was there a proximate relationship between the creation of the debt and the lender’s
business?
POINTS: 1
DIFFICULTY: Easy
LEARNING OBJECTIVES: IITX.SWFT.LO: 7-01 - LO: 7-01
NATIONAL STANDARDS: United States - BUSPORG: Analytic
STATE STANDARDS: United States - AK - AICPA: FN-Reporting
KEYWORDS: Bloom's: Comprehension
OTHER: Time: 5 min.
116. Discuss the tax treatment of non-reimbursed losses of an employee in connection with a trade or business.
ANSWER: The loss is deductible from adjusted gross income as a miscellaneous itemized deduction
subject to the 2 percent-of-AGI limitation.
POINTS: 1
DIFFICULTY: Easy
LEARNING OBJECTIVES: IITX.SWFT.LO: 7-01 - LO: 7-01
NATIONAL STANDARDS: United States - BUSPORG: Analytic
STATE STANDARDS: United States - AK - AICPA: FN-Reporting
KEYWORDS: Bloom's: Comprehension
OTHER: Time: 5 min.
© 2017 Cengage Learning®. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Page 61
Chapter 07: Deductions and Losses Certain Business Expenses and Losses
117. A taxpayer who sustains a casualty loss in an area designated by the President of the United States as a disaster area
may take the loss in the year in which the loss occurred or elect to take the loss in the previous year. Identify factors that
should be considered in deciding in which year to take the loss.
ANSWER: Factors that should be considered include:
POINTS: 1
DIFFICULTY: Easy
LEARNING OBJECTIVES: IITX.SWFT.LO: 7-04 - LO: 7-04
NATIONAL STANDARDS: United States - BUSPORG: Analytic
STATE STANDARDS: United States - AK - AICPA: FN-Reporting
KEYWORDS: Bloom's: Comprehension
OTHER: Time: 5 min.
118. Discuss the treatment, including the carryback and carryforward periods, of casualty losses incurred with personal
use property.
ANSWER: These losses are subject to the $100 per event floor and the 10% of AGI limitations. The
losses are itemized deductions. Casualty losses on personal use property can have a three-
year carryback. The carryover period is 20 years.
POINTS: 1
DIFFICULTY: Easy
LEARNING OBJECTIVES: IITX.SWFT.LO: 7-04 - LO: 7-04
NATIONAL STANDARDS: United States - BUSPORG: Analytic
STATE STANDARDS: United States - AK - AICPA: FN-Reporting
KEYWORDS: Bloom's: Comprehension
OTHER: Time: 5 min.
119. What are the three methods of handling research and experimental expenditures incurred in a trade or business?
Under what circumstances would you choose each?
ANSWER: The following methods are permitted:
∙ The expense method, where the expenditures are written off immediately, is attractive
where the taxpayer is currently in a high tax bracket and has sufficient other income to
offset the deductions.
∙ Deferral and amortization of expenditures over a period of not less than 60 months is
generally chosen when the total deduction is not wanted immediately because future
income is expected to be available to offset the deduction.
∙ The capitalization method allows no deduction until the project is abandoned or becomes
worthless. Usually taxpayers do not choose this method, since the tax benefit is deferred
© 2017 Cengage Learning®. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Page 62
Chapter 07: Deductions and Losses Certain Business Expenses and Losses
for an indefinite period.
POINTS: 1
DIFFICULTY: Easy
LEARNING OBJECTIVES: IITX.SWFT.LO: 7-05 - LO: 7-05
NATIONAL STANDARDS: United States - BUSPORG: Analytic
STATE STANDARDS: United States - AK - AICPA: FN-Reporting
KEYWORDS: Bloom's: Comprehension
OTHER: Time: 10 min.
120. Why was the domestic production activities deduction (DPAD) enacted by Congress?
ANSWER: The DPAD was enacted to replace certain tax provisions that our world trading partners
regarded as allowing unfair advantage to U.S. exports. Note, however, in no way is the
DPAD limited to exports.
POINTS: 1
DIFFICULTY: Easy
LEARNING OBJECTIVES: IITX.SWFT.LO: 7-06 - LO: 7-06
NATIONAL STANDARDS: United States - BUSPORG: Analytic
STATE STANDARDS: United States - AK - AICPA: FN-Reporting
KEYWORDS: Bloom's: Comprehension
OTHER: Time: 5 min.
The ratable portion of deductions, expenses, and losses not directly allocable to such
∙
receipts or another class of income.
POINTS: 1
DIFFICULTY: Easy
LEARNING OBJECTIVES: IITX.SWFT.LO: 7-06 - LO: 7-06
NATIONAL STANDARDS: United States - BUSPORG: Analytic
STATE STANDARDS: United States - AK - AICPA: FN-Measurement -
AICPA: FN-Measurement
KEYWORDS: Bloom's: Comprehension
OTHER: Time: 5 min.
122. Sally is an employee of Blue Corporation. Last year, she purchased a very expensive computer with her own funds.
She used the computer 100% for business purposes. During the current year, the computer was completely destroyed in a
© 2017 Cengage Learning®. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Page 63
Chapter 07: Deductions and Losses Certain Business Expenses and Losses
fire. Blue Corporation did not reimburse her for her loss. Discuss whether Sally’s loss will create or increase Sally’s net
operating loss.
ANSWER: The loss is incurred in connection with Sally’s trade or business. However, because Sally is
an employee and the loss is not reimbursed, it is an itemized deduction which is a deduction
from adjusted gross income. The loss is not incurred in a transaction entered into for profit
nor is the loss a casualty loss on personal use property. However, the loss is connected with
Sally’s trade or business and therefore, even though it is an itemized deduction and subject to
the 2%-of-AGI floor, it can create an NOL.
POINTS: 1
DIFFICULTY: Easy
LEARNING OBJECTIVES: IITX.SWFT.LO: 7-03 - LO: 7-03
IITX.SWFT.LO: 7-07 - LO: 7-07
NATIONAL STANDARDS: United States - BUSPORG: Analytic
STATE STANDARDS: United States - AK - AICPA: FN-Reporting
KEYWORDS: Bloom's: Comprehension
OTHER: Time: 5 min.
123. Discuss the treatment of alimony paid and deductible individual retirement account contributions in computing an
individual’s net operating loss.
ANSWER: Alimony paid and deductible individual retirement account contributions are treated as
nonbusiness deductions in computing a net operating loss. Hence, neither item can create or
increase a net operating loss.
POINTS: 1
DIFFICULTY: Easy
LEARNING OBJECTIVES: IITX.SWFT.LO: 7-07 - LO: 7-07
NATIONAL STANDARDS: United States - BUSPORG: Analytic
STATE STANDARDS: United States - AK - AICPA: FN-Measurement -
AICPA: FN-Measurement
KEYWORDS: Bloom's: Comprehension
OTHER: Time: 5 min.
124. Discuss the computation of NOL remaining to be carried forward after the NOL has been applied in a carryback
year.
ANSWER: The NOL amount to be carried forward is the excess of the NOL over the taxable income of
the year to which the NOL is being applied. However, the taxable income of the year to
which the NOL is being applied must be computed with the following modifications:
∙ No deduction is allowed for the excess of capital losses over capital gains.
∙ No deduction is allowed for the NOL that is being carried back. However, deductions
are allowed for NOLs occurring before the loss year.
∙ Any deductions claimed that are based on or limited by AGI must be determined after
making the preceding adjustments. However, charitable contributions do not take into
account any NOL carryback.
POINTS: 1
© 2017 Cengage Learning®. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Page 64
Chapter 07: Deductions and Losses Certain Business Expenses and Losses
DIFFICULTY: Moderate
LEARNING OBJECTIVES: IITX.SWFT.LO: 7-07 - LO: 7-07
NATIONAL STANDARDS: United States - BUSPORG: Analytic
STATE STANDARDS: United States - AK - AICPA: FN-Measurement -
AICPA: FN-Measurement
KEYWORDS: Bloom's: Comprehension
OTHER: Time: 10 min.
© 2017 Cengage Learning®. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Page 65
Another random document with
no related content on Scribd:
secretly passed all his available troops to Fuente la Higuera, on his
extreme right flank, leaving only a trifling screen in front of Murray’s
army, and on April 10th marched in two columns against the allied
left. One consisting of six battalions of Harispe’s division and two
cavalry regiments aimed at the isolated Murcian division at Yecla, the
other and larger column four battalions of Habert’s division, and
seven of Musnier’s (under Robert during the absence of its proper
chief), with his cuirassier regiment, marched by Caudete on Villena,
to cut in between the Spaniards and Murray, and intercept any aid
which the latter might send from Castalla towards the Spaniards.
The blow was unexpected and delivered with great vigour:
Harispe surprised General Mijares’ Murcians at Yecla at dawn; they
were hopelessly outnumbered, only four battalions being present-the
fifth unit of the division was at Villena. And there was but a single
squadron with them, Elio’s cavalry being in its cantonments thirty
miles away in the Albacete-Chinchilla country. Mijares, on finding
himself assailed by superior numbers, tried to march off towards
Jumilla and the mountains. Harispe pursued, and seeing the
Spaniards likely to get away, for the retreat was rapid and in good
order, flung his hussars and dragoons at them. The Spaniards turned
up on to a hillside, and tried a running fight. The two leading
battalions of the column made good their escape—the two rear
battalions were cut off: they formed square, beat back two charges
with resolution, but were broken by the third, and absolutely
exterminated: 400 were cut down, about 1,000 captured. Of these
two unlucky regiments, 1st of Burgos and Cadiz, hardly a man got
away—the other two, Jaen and Cuenca, took little harm[411]. The
French lost only 18 killed and 61 wounded, mostly in the two cavalry
regiments, for Harispe’s infantry were but slightly engaged.
Ill news flies quickly—the fighting had been in the early dawn, by
noon mounted fugitives had brought the tidings to Villena, fifteen
miles away. Here there chanced to be present both Elio and Sir John
Murray, who had ridden over to consult with his colleague on a
rumour that Suchet was concentrating at Fuente la Higuera. He had
brought with him the ‘light brigade,’ under Colonel Adam, which he
had recently organized[412], and 400 horse[413]. The Generals soon
learned that beside the force which had cut up Mijares, there was a
larger column marching on their own position. They were in no
condition to offer battle, Elio having with him only a single battalion,
Murray about 2,500 men of all arms. They agreed that they must quit
Villena and concentrate their troops for a defensive action. Elio sent
orders to his cavalry to come in from the North and join the wrecks of
Mijares’ division, and for the reserves which he had got in the
neighbourhood of Murcia to march up to the front[414]. But it would
obviously take some days to collect these scattered items.
Meanwhile he threw the single battalion that he had with him (Velez
Malaga) into the castle of Villena, which had been patched up and
put into a state of defence, promising that it should be relieved when
his army was concentrated.
Murray, on the other hand, retired towards his main body at
Castalla, but ordered Adam’s ‘light brigade’ to defend the pass of
Biar for as long as prudence permitted, so as to allow the rest of the
army to get into position. Whittingham was directed to fall back from
Alcoy, Roche to come up from the rear, and by the next evening the
whole Alicante army would be concentrated, in a position which had
been partly entrenched during the last three weeks, and was very
strong even without fortification. Murray refused (very wisely) to send
back Adam to pick up the Spanish battalion left in Villena, which Elio
(seized with doubts when it was too late) now wished to withdraw.
Suchet reached Villena on the evening of the 11th, and got in
touch with the cavalry screen covering Adam’s retreat. Finding the
castle held, he started to bombard it with his field artillery, and on the
morning of the 12th blew in its gates and offered to storm. He sent in
a parlementaire to summon the garrison, and to his surprise it
capitulated without firing a shot—a mutiny having broken out among
the men[415], who considered that they had been deserted by their
General. Suchet now intended to fall on Murray at Castalla,
reckoning that Elio’s concentration had been prevented by the blows
at Yecla and Villena, and that he would have the Alicante army alone
to deal with. He ordered the troops that were with him to drive in
without delay Adam’s light brigade, which his cavalry had discovered
holding the village of Biar and the pass above it. His other column,
that of Harispe, was not far off, being on the march from Yecla.
Finding that it was gone, Mijares cautiously reoccupied that place
with his two surviving battalions.
The combat of Biar, which filled the midday hours of April 12th,
was one of the most creditable rearguard actions fought during the
whole Peninsular War. Colonel Adam had only one British and two
Italian battalions, with two German Legion rifle companies, four
mountain guns, and one squadron of the ‘Foreign Hussars’—about
2,200 men in all. He had prepared a series of positions on which he
intended to fall back in succession, as each was forced. At the
commencement of the action he occupied Biar village with the
Calabrese Free Corps, flanked by the light companies of the 2/27th
and 3rd K.G.L. The rest of the brigade was above, on the hills
flanking the pass, with the guns on the high road. The leading
French battalion assaulted the barricaded village, and was repulsed
with heavy loss. Then, as was expected, the enemy turned Biar on
both flanks: its garrison retired unharmed, but the turning columns
came under the accurate fire of the troops on the slopes above, and
the attack was again checked. Suchet, angered at the waste of time,
then threw in no less than nine battalions[416] intending to sweep
away all opposition, and turning Adam’s left flank with swarms of
voltigeurs. The Light Brigade had, of course, to retire; but Adam
conducted his retreat with great deliberation and in perfect order,
fending off the turning attack with his German and British light
companies, and making the column on the high road pay very dearly
for each furlong gained. His four mountain guns, on the crest of the
pass, were worked with good effect to the last moment—two which
had each lost a wheel were abandoned on the ground. When the
crest had been passed, Suchet sent a squadron of cuirassiers to
charge down the road on the retreating infantry. Foreseeing this,
when the cavalry had been noted on the ascent, Adam had hidden
three companies of the 2/27th in rocks where the road made a sharp
angle: the cuirassiers, as they trotted past, received a flank volley at
ten paces distance, which knocked over many, and sent the rest
reeling back in disorder on to their own infantry. After this the pursuit
slackened; ‘the enemy seemed glad to be rid of us,’ and after five
hours’ fighting the Light Brigade marched back in perfect order to the
position beside Castalla which had been assigned to it[417]. Its final
retirement was covered by three battalions which Murray had sent
out to meet it, at the exit from the pass[418].
So ended a very pretty fight. Whittingham, who had witnessed
the later phases of it from the hill on the left of Castalla, describes it
as ‘a beautiful field-day, by alternate battalions: the volleys were
admirable, and the successive passage of several ravines conducted
with perfect order and steadiness. From the heights occupied by my
troops it was one of the most delightful panoramas that I ever
beheld.’ The allied loss was about 300[419], including Colonel Adam
wounded in the arm, yet not so much hurt but that he kept the
command and gave directions to the end. On the ground evacuated
41 ‘missing’ and two disabled mountain guns were left in the
enemy’s hands. The French must have suffered much the same
casualties—Suchet gives no estimate, but Martinien’s invaluable lists
show two officers killed and twelve wounded, which at the usual rate
between officers and men implies about 300 rank and file hit.
On emerging from the pass of Biar in the late afternoon Suchet
could see Murray’s army occupying a long front of high ground as far
as the town of Castalla, but could descry neither its encampment,
behind the heights, nor the end of its right wing, which was thrown
back and hidden by the high conical hill on which the castle and
church of Castalla stand. Seeing the enemy ready, and apparently
resolved to fight, the Marshal put off serious operations to the next
day. He had to wait for Harispe’s column, which was still coming up
many miles in his rear.
Murray had long surveyed his ground, and had (as we have
seen) thrown up barricades and entrenchments on the hill of Castalla
and the ground immediately to its right and left. He had very nearly
every available man of his army in hand, only a minimum garrison
having been left in Alicante[420]. The total cannot have been less than
18,000 men; he had divided his own troops into the Light Brigade of
Adam, and the two divisions of Mackenzie and Clinton. The first
named had three and a quarter battalions—not quite 2,000 men after
its losses at Biar on the previous afternoon[421]. Mackenzie seems to
have had one British, two German Legion, and two Sicilian
battalions[422]: Clinton three British, one composite Foreign, and one
Italian battalion[423]. Whittingham had six Spanish battalions with
him[424]—Roche only five[425]. The cavalry consisted of three
squadrons of the 20th Light Dragoons, two of Sicilian cavalry, one of
‘Foreign Hussars,’ and about 400 of Whittingham’s Spanish
horse[426], under 1,000 sabres in all. There were two British, two
Portuguese, and a Sicilian battery on the ground.
The sierra on the left, known as the heights of Guerra, was held
by Whittingham’s Spaniards for a mile, next them came Adam’s
brigade, above a jutting spur which projects from the sierra towards
the plain, then Mackenzie’s division, which extended as far as the hill
on which the castle of Castalla stands: this was occupied by the
1/58th of Clinton’s division, and two batteries had been thrown up on
the slope. With this hill the sierra ends suddenly; but a depression
and stream running southward furnished a good protection for
Murray’s right, which was held by the rest of Clinton’s division. The
stream had been dammed up, and formed a broad morass covering
a considerable portion of the front. Behind it Clinton’s troops were
deployed, with three of Roche’s battalions as a reserve in their rear:
two batteries were placed on commanding knolls in this part of the
line, which was so far thrown back en potence that it was almost at
right angles to the front occupied by Mackenzie, Adam, and
Whittingham. The Spanish and Sicilian cavalry was thrown out as a
screen in front of Castalla, with two of Roche’s battalions in support.
The 20th Light Dragoons were in reserve behind the town. The east
end of the sierra, near Castalla, was covered by vineyards in step-
cultivation, each enclosure a few feet higher than the next below it.
Farther west there was only rough hillside, below Whittingham’s
front. The whole position was excellent—yet Murray is said by his
Quartermaster-General, Donkin, to have felt so uncomfortable that
he thrice contemplated issuing orders for a retreat, though he could
see the whole French army, and judge that its strength was much
less than his own[427]. But he distrusted both himself and many
battalions of his miscellaneous army.
Suchet, contrary to his wont, was slow to act. It is said that he
disliked the look of the position, and doubted the wisdom of
attacking, but was over-persuaded by some of his generals, who
urged that the enemy was a mixed multitude, and that the Spaniards
and Sicilians would never stand against a resolute attack. It was not
till noon that the French army moved—the first manœuvre was that
the whole of the cavalry rode out eastward, took position opposite
the angle en potence of Murray’s position, and sent exploring parties
towards Clinton’s front. Evidently the report was that it was
inaccessible. While this was happening the infantry deployed, and
Habert’s and Robert’s division advanced and occupied a low ridge,
called the Cerro del Doncel, in the plain facing Murray’s left and left-
centre. Harispe’s division, minus a detachment left behind the pass
of Biar to watch for any possible appearance of Elio’s troops on the
road from Sax, formed in reserve. The whole of Suchet’s infantry
was only 18 battalions, individually weaker than Murray’s 24; he was
outnumbered in guns also—24 to 30 apparently—but his 1,250
cavalry were superior in numbers and quality to Murray’s. He had
certainly not more than 13,000 men on the ground to the Allies’
18,000.
His game was to leave Clinton’s division and Castalla alone,
watched only by his cavalry; to contain Mackenzie by
demonstrations, which were not to be pushed home; but to strike
heavily with Robert’s division at the Spaniards on the left. If he could
break down Whittingham’s defence, and drive him off the sierra, he
would attack the allied centre from flank and front alike—but
meanwhile it was not to be pressed. When, therefore, Habert faced
Mackenzie nothing serious happened, the French sent out swarms
of tirailleurs, brought up eight guns and shelled the position with
grape. Mackenzie’s light companies and guns replied, ‘but there was
nothing more than a skirmish: the columns shifted their ground
indeed more than once, but they did not deploy, and their officers
took good care not to bring them under the fire of our line[428].’
On the left, however, there was hard fighting. Suchet first sent out
five light companies to endeavour to turn the extreme western end of
Whittingham’s line, and, when they were far up the slope, delivered a
frontal attack on the heights of Guerra with six battalions of Robert’s
division: the 3rd Léger and 114th and 121st Line[429]: of these the left-
hand battalions (belonging to the 121st) came up the projecting spur
mentioned above, and faced the 2/27th on the left of Adam’s
brigade. The other four were opposed to the Spaniards.
Whittingham was caught in a rather dangerous position, for a little
while before the attack developed, he had received an order from
head-quarters bidding him execute against Robert’s division
precisely the same manœuvre that Suchet was trying against
himself, viz. to send troops to outflank the extreme French right. He
was told by the bearer of the orders, a Sicilian colonel, that this was
preliminary to a general attack downhill upon the French line, which
Murray was intending to carry out. The Spanish division was to turn
its flank, while Adam and Mackenzie went straight at its front. There
is some mystery here—Murray afterwards denied to Whittingham
that he had given any such order[430], and Donkin, his Chief of the
Staff, maintained that his general was thinking of a retreat all that
morning rather than of an attack. Yet Colonel Catanelli was a
respectable officer, who was thanked in dispatches both by Murray
and Whittingham for his services! Three hypotheses suggest
themselves: (1) that Murray at one moment meditated an attack,
because he saw Suchet holding back, and then (with his usual
infirmity of purpose) dropped the idea, and denied having made any
such plan to Whittingham, whose position had been gravely
imperilled by its execution. This is quite in accordance with his
mentality, and he often tampered with the truth—as we shall see
when telling the tale of Tarragona. (2) That Donkin and the head-
quarters staff, enraged with Murray’s timidity, were resolved to
commit him to a fight, and gave unauthorized orders which must
bring it on. (3) That Catanelli, from lack of a good command of
English, misunderstood the General’s language, and gave complete
misdirections to Whittingham. I must confess that I incline to the first
solution[431].
Whatever the source of these orders may have been,
Whittingham began to carry them out, though they seemed to him
very ill-advised. But noting that if he completely evacuated the
heights of Guerra there would be a broad gap in the allied line, he
left his picquets in position and two battalions on the crest of the
hill[432], with another in support behind[433], while with the remaining
three[434] he moved off to the left. The march was executed, out of
sight of the enemy, by a mountain path which ran along the rear of
the heights.
Whittingham had been moving for some half an hour, and slowly,
for the path was steep and narrow, when the sound of musketry on
the other side of the crest reached his ears, and soon after a
message that the enemy was attacking the whole of the front of his
old position. On its left the voltigeur companies had got very near the
top of the hill—farther east the assault was only developing. It was
lucky that the marching column had not gone far—Whittingham was
able to send his hindmost battalion straight up the hill against the
voltigeurs, to strengthen his flank—with the other two he counter-
marched to the rear of the heights of Guerra, and fed the fighting line
which he had left there, as each point needed succour.
The contest all along the heights was protracted and fierce. At
several points the French reached the crest, but were never able to
maintain themselves there, as Whittingham had always a reserve of
a few companies ready for a counter-stroke. The troops of the Army
of Aragon had never before met with such opposition from
Spaniards, and for a long time refused to own themselves beaten.
There was still one regiment of Robert’s division in reserve[435], but
evidently Suchet shrank from committing the last fraction of his right
wing to the attack, which was obviously not making any decisive
headway.
Meanwhile the easternmost column of the French advance
suffered a complete defeat: this body, composed of two battalions of
the 121st regiment, had mounted the heights, not at their steepest,
but at the point where a long projecting spur falls down from them
into the plain. But even so there was a sudden rise in the last stage
of the ascent, before the crest was reached. On coming to it the
French colonel (Millet by name) began to deploy his leading
companies, which found themselves opposite the 2/27th, on the left
of Adam’s brigade. This manœuvre had always failed when tried
against British infantry—notably at Albuera, for deployment at close
quarters under the deadly fire of a British line was impracticable, and
always led to confusion. There was a pause[436], many casualties,
and much wavering; then, seeing the enemy stationary and
discouraged, Colonel Reeves flung his battalion at them in a downhill
bayonet charge—like Craufurd at Bussaco. The effect was
instantaneous and conclusive—the French column broke and raced
headlong down the slopes, arriving in the valley as a disorganized
mob. It had lost 19 officers and probably 350 men in five minutes.
Either in consequence of this rout, or by mere chance at the
same moment[437], the columns which had been assailing
Whittingham so long and ineffectively, also recoiled in disorder
before a charge of the last four companies of the Spanish reserve.
The whole of the French right wing had suffered complete and
disastrous defeat. The left division, Habert’s, was still intact and had
never committed itself to any serious approach to Mackenzie’s front.
But six of the eighteen French battalions in the field were in absolute
rout at half-past four o’clock, and Suchet’s right wing was completely
exposed—his cavalry were two miles away to the left, and out of
reach for the moment. All eye-witnesses agree that if Murray had
ordered an immediate general advance of the line from Castalla
westward, the Marshal would have been lost, and cut off from his
sole line of retreat on the pass of Biar. Murray, however, refused to
move till he had brought up his unengaged right wing to act as a
reserve, and only when they had filed up through the streets of
Castalla, gave the order for the whole army to descend from the
heights and push forward.
It was far too late: Suchet had retreated from the Cerro del
Doncel the moment that he saw his attack repulsed, Habert’s
division and the guns covering Robert’s routed wing. The cavalry
came galloping back from the east, and long before Murray was
deployed, Suchet took up a new and narrow front covering the entry
of the pass of Biar. The only touch with his retreating force was kept
by Mackenzie, who (contrary to Murray’s intention) pushed forward
with four of his battalions in front of the main body, and got engaged
with Suchet’s rearguard. He might probably have beaten it in upon
the disordered troops behind, if he had not received stringent orders
to draw back and fall in to the general front of advance. By the time
that the whole allied army was deployed, the French, save a long
line of guns across the mouth of the pass, with infantry on the slopes
on each side, had got off. Thereupon, after making a feeble
demonstration with some light companies against the enemy’s left
flank, Murray halted for the night. The enemy used the hours of
darkness to make a forced march for Fuente la Higuera, and were
invisible next day.
Suchet declared that he had lost no more than 800 men in the
three combats of Yecla, Biar, and Castalla, an incredible statement,
as the French casualty rolls show 65 officers killed and wounded on
the 11th-12th-13th of April; and such a loss implies 1,300 rank and
file hit—possibly more, certainly not many less. It is certain that his
800 casualties will not suffice even for Castalla alone, where with 47
officers hors de combat he must have lost more probably 950 than
800 men. But the 14 officer-casualties at Biar imply another 280 at
the least, and we know from his own narrative that he lost 4 officers
and 80 men in destroying Mijares’ unfortunate battalions at Yecla[438].
Murray, writing a most magniloquent and insincere dispatch for
Wellington’s eye, declared that Suchet had lost 2,500 or even 3,000
men, and that he had buried 800 French corpses. But Murray had
apparently been taking lessons in the school of Soult and Masséna,
those great manipulators of casualty lists! His dispatch was so
absurd that Wellington refused to be impressed, and sent on the
document to Lord Bathurst with the most formal request that the
attention of the Prince Regent should be drawn to the conduct of the
General and his troops, but no word of praise of his own[439]. The
allied loss, indeed, was so moderate that Murray’s 2,500 French
casualties appeared incredible to every one. After we have deducted
the heavy losses to Adam’s brigade at Biar on the preceding day, we
find that Whittingham’s Spaniards had 233 casualties, Mackenzie’s
division 47, Clinton’s about 20, Adam’s brigade perhaps 70, the
cavalry and artillery 10 altogether—the total making some 400 in
all[440].
Having discovered that the Alicante army was formidable, if its
general was not, Suchet was in some fear that he might find himself
pursued and attacked, for the enemy seemed to be concentrating
against him. Murray advanced once more to Alcoy, Elio brought up
his reserve division and his cavalry to join the wrecks of Mijares’
column, and extended himself on Murray’s left. Villacampa, called
down from the hills, appeared on the Upper Guadalaviar on the side
of Requeña. But all this meant nothing—Murray was well satisfied to
have won a success capable of being well ‘written up’ at Castalla,
and covered his want of initiative by complaining that he was short of
transport, and weakened in numbers—for after the battle he had
sent off the 6th K.G.L. to Sicily, in belated obedience to Bentinck’s
old orders. He asked Wellington for more men and more guns, and
was given both, for he was told that he might draw the 2/67th from
the garrison of Cartagena[441], and was sent a field battery from
Portugal. But his true purpose was now to wait for the arrival of the
promised ‘plan of campaign’ from Freneda, and thereby to shirk all
personal responsibility. Anything was better than to risk a check—or
a reprimand from the caustic pen of the Commander-in-Chief.
Suchet, then, drew down Pannetier’s brigade from Aragon to
strengthen his position on the Xucar, and waited, not altogether
confidently, for the next move on the part of the enemy. But for a
month no such move came. He had time to recover his equanimity,
and to write dispatches to Paris which described his late campaign
as a successful attempt to check the enemy’s initiative, which had
brought him 2,000 Spanish prisoners at Yecla and Villena, and two
British guns at the pass of Biar. Castalla was represented as a partial
attack by light troops, which had been discontinued when the
enemy’s full strength had been discovered, and the losses there
were unscrupulously minimized. And, above all, good cause had
been shown that the Army of Aragon and Valencia could not spare
one man to help King Joseph in the North.
But the ‘plan of campaign’ was on its way, and we shall see how,
even in Murray’s incompetent hands, it gave the Marshal Duke of
Albufera full employment for May and June.
SECTION XXXVI
THE MARCH TO VITTORIA
CHAPTER I
WELLINGTON’S PLAN OF CAMPAIGN