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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
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
© 2017 Cengage Learning®. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Page 1
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
STATE STANDARDS: United States - AK - AICPA: FN-Reporting
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
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
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
worthless.
a. True
b. False
ANSWER: False
POINTS: 1
DIFFICULTY: Easy
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
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
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
DIFFICULTY: Easy
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
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
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
IITX.SWFT.LO: 7-02 - LO: 7-02
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
OTHER: Time: 2 min.
15. A loss is not allowed for a security that declines in value.

a. True
b. False
ANSWER: True
RATIONALE: A loss is allowed for securities that become completely worthless during the tax year.
POINTS: 1
DIFFICULTY: Easy
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
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
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
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
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
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
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
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
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
OTHER: Time: 2 min.
24. A theft loss is taken in the year of the theft.

a. True
b. False
ANSWER: False
RATIONALE: A theft loss is taken in the year of discovery.
POINTS: 1
DIFFICULTY: Easy
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
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
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
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
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
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.
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
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
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
OTHER: Time: 2 min.
32. Losses on rental property are classified as deductions for AGI.

a. True
b. False
ANSWER: True
POINTS: 1
DIFFICULTY: Easy
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
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
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
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
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
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
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
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
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
OTHER: Time: 2 min.
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
OTHER: Time: 2 min.
43. A farming NOL may be carried back 2 years.

a. True
b. False
ANSWER: True
RATIONALE: A taxpayer can elect to waive the 5-year carryback period for a farming NOL and then the
general 2-year carryback period is applicable.
POINTS: 1
DIFFICULTY: Easy
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
OTHER: Time: 2 min.
45. Nonbusiness income for net operating loss purposes includes dividends received.
a. True
b. False
ANSWER: True
POINTS: 1
DIFFICULTY: Easy
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
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
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
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
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
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
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
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
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
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
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
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
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
OTHER: Time: 5 min.
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.
ANSWER: e
RATIONALE: Income should be reported based on the tax benefit rule. The tax benefit was $5,000.
POINTS: 1
DIFFICULTY: Moderate
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.
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
OTHER: Time: 5 min.
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
ANSWER: c
RATIONALE: This is a business bad debt for Hank’s Auto and therefore, the loss is $15,500.
POINTS: 1
DIFFICULTY: Easy
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.
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
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?
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)
Long-term capital gain $5,000

Less long-term capital loss (worthless securities) (1,000)
Net long-term capital gain $4,000
Less short-term capital loss (nonbusiness bad debt) (9,000)
Net short-term capital loss ($5,000)
Short-term capital loss limited to ($3,000)
POINTS: 1
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.
Determine John’s AGI for 2016.

a. ($5,000).
b. $0.
c. $45,000.
d. $51,000.
ANSWER: b
RATIONALE: Salary $40,000
Interest income 6,000
Ordinary loss (§ 1244 ordinary loss) (50,000)
AGI $ –0–
$15,000 ($65,000 – $50,000) is long-term capital loss. Of this amount, no loss can be used
because there is no ordinary income. $15,000 will be carried forward.
POINTS: 1
DIFFICULTY: Easy
OTHER: Time: 5 min.
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
ANSWER: a
§ 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
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.
ANSWER: e
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.
Amount realized (3,000 shares × $30 per share) $ 90,000

Less: basis (24,000)
Recognized gain (LTCG) $ 66,000
Hence, Matt has a $54,000 STCL ($120,000 – $66,000).
POINTS: 1
64. Which of the following events would produce a deductible loss?

a. Erosion of personal use land due to rain or wind.
b. Termite infestation of a personal residence over a several year period.
c. Damages to personal automobile resulting from a taxpayer’s willful negligence.
d. A misplaced diamond ring.
ANSWER: e
RATIONALE: A "theft" does not include misplaced or lost items.
POINTS: 1
DIFFICULTY: Easy
OTHER: Time: 5 min.
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.
Fair Market Value

Asset Adjusted Basis Before After Insurance Recovery
A $9,200 $8,000 $1,000 $2,000
B 3,000 4,000 -0- 4,000
C 3,700 1,700 -0- 900
Wally’s casualty loss deduction is:
a. $1,500.
b. $1,600.
c. $4,800.
d. $58,000.
ANSWER: e
RATIONALE: Asset A $5,000 loss
Asset B $1,000 gain
Asset C 800 loss
Total $5,800 loss $1,000 gain
AGI before casualty $42,000

Ordinary gain 1,000
Ordinary loss (1,000)
AGI after casualty $42,000
Casualty loss ($5,800 – $1,000) $4,800

Less: Statutory floor (100)
Less: AGI limitation (10% ×
(4,200)
$42,000)
Casualty loss deduction $ 500
POINTS: 1
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
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
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
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
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:
Cost basis $280,000

Value before casualty 250,000
Value after casualty –0–
What is Grant’s allowable casualty loss deduction?
a. $0
b. $6,500
c. $6,900
d. $10,000
e. $80,000
ANSWER: a
RATIONALE: The proceeds received are $250,000. Therefore, Grant has no casualty gain or a casualty
loss.
POINTS: 1
DIFFICULTY: Easy
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
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
70. In 2016, Mary had the following items:
Salary $30,000
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
ANSWER: a
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
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
71. In 2016, Morley, a single taxpayer, had an AGI of $30,000 before considering the following items:
Loss from damage to rental property ($6,000)

Loss from theft of bonds (3,000)
Personal casualty gain 4,000
Personal casualty loss (after $100 floor) (9,000)
Determine the amount of Morley’s itemized deduction from the losses.

a. $0
b. $2,900
c. $5,120
d. $5,600
ANSWER: d
RATIONALE: AGI before casualties $30,000
Rental property loss (6,000)
Personal casualty gain $4,000
Personal casualty loss (4,000) –0–
Itemized deductions
Casualty loss [($9,000 – $4,000) – (10% × $24,000)] $2,600
Miscellaneous itemized deductions 3,000
Total itemized deductions $ 5,600
The bonds are property held for the production of income, but not attributable to rents or
royalties. Therefore, the loss is a miscellaneous itemized deduction not subject to the 2%-of-
AGI floor.
POINTS: 1
72. In 2016, Theo, an employee, had a salary of $30,000 and experienced the following losses:
Loss from damage to rental property ($10,000)

Unreimbursed loss from theft of business computer (5,000)
Determine the amount of Theo’s itemized deduction from these losses.

a. $0
b. $2,800
c. $2,900
d. $4,580
ANSWER: e
Rental loss (10,000)
Personal casualty gain $4,000
AGI $20,000
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
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
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
Personal casualty loss $ 8,000

Less: $100 floor (100)
10% of AGI (10% × $34,000) (3,400)
Itemized deduction $ 4,500
POINTS: 1
DIFFICULTY: Challenging
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.
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
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
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
A business casualty loss is classified as an ordinary loss.

POINTS: 1
DIFFICULTY: Easy
OTHER: Time: 5 min.
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
ANSWER: e
Less: Loss on theft of tools (8,000)
AGI $42,000
Personal use property theft loss $11,000

10% of AGI (10% × $42,000) (4,200)
Deductible loss $ 6,700
Loss on securities 20,000
POINTS: 1
77. Regarding research and experimental expenditures, which of the following are not qualified expenditures?
a. Costs of ordinary testing of materials.
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
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
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
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
ANSWER: b
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
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.
ANSWER: c
RATIONALE: DPAD is calculated for Ivory as the lesser of the following:
∙ $700,000 × 9% = $63,000
∙ $600,000 × 9% = $54,000
So the DPAD is $54,000.

POINTS: 1
DIFFICULTY: Easy
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.
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
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
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
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?
a. Losses incurred in a transaction entered into for profit.
b. Deductible alimony payments.
c. Personal theft loss.
d. Losses from theft of securities.
ANSWER: b
POINTS: 1
DIFFICULTY: Easy
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.
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
OTHER: Time: 5 min.
85. Wu, who is single, has the following items for 2016:
Salary $25,000
Itemized deductions ($27,000 attributable to casualty loss) (32,000)
What is Wu’s net operating loss for 2016?

a. $0
b. ($1,000)
c. ($2,000)
d. ($7,000)
ANSWER: a
Itemized deductions (32,000)
Personal exemption (4,050)
Taxable income ($3,050)
Taxable income ($ 3,050)

Personal exemption 4,050
Excess of nonbusiness deductions ($32,000 – $27,000 = –0–
$5,000) over nonbusiness income ($8,000)
No NOL $ 1,000
POINTS: 1
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
What is Khalid’s NOL for 2016?

a. ($10,000)
b. ($12,000)
c. ($16,100)
d. ($24,050)
ANSWER: b
AGI $48,000
Less: Itemized deductions (60,000)
Net operating loss ($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
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)
Determine Janice’s net operating loss for the year 2016.

a. ($12,000)
b. ($15,000)
c. ($17,350)
d. ($20,000)
ANSWER: e
Dividend income 8,000
Small business stock ordinary loss (45,000)
Adjusted gross income ($ 7,000)
Less: Standard deduction (single) (6,300)
Personal exemption (1 × $4,050) (4,050)

Excess of nonbusiness deductions over nonbusiness income
($6,300 – $8,000) –0–
POINTS: 1
88. Bill, age 40, is married with two dependents. Bill had the following items for the 2016 year:
Bill’s business loss ($40,000)

Bill’s salary 50,000
Personal casualty gains 5,000
Other itemized deductions (15,000)
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)
ANSWER: c
RATIONALE: Business loss ($40,000)
Salary 50,000
Personal casualty gains in excess of casualty losses ($5,000 –0–
– $5,000)
Less: Itemized deductions
Casualty loss [$18,000 – (10% $17,000
× $10,000)]
Personal and dependency (16,200)
exemptions (4 × $4,050)

Nonbusiness deductions in excess of nonbusiness income
($32,000 – $17,000) 15,000
Personal and dependency exemptions 16,200
Net operating loss ($ 7,000)
POINTS: 1
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:
Nonbusiness long-term capital gain $ 2,000

Itemized deductions—consisting of taxes and interest (12,000)
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 ($10,000)
Nonbusiness long-term capital gain 2,000
Adjusted gross ($ 2,000)
income
Itemized (12,000)
Less:
deductions
Personal (8,100)
exemptions (2 ×
$4,050)

Personal 8,100
exemptions
Excess of nonbusiness deductions
over nonbusiness income
Itemized
$12,000
deductions
Nonbusiness (2,000)
long-term capital
gain
Interest income (6,000) 4,000
POINTS: 1
LEARNING OBJECTIVE IITX.SWFT.LO: 7-07 - LO: 7-07
S:
NATIONAL STANDARD United States - BUSPORG: Analytic
S:
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
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)
ANSWER: c
Individual retirement account contribution ( 2,000)
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)

Add: Personal exemption 4,050
Excess of nonbusiness deductions
over nonbusiness income
Home mortgage interest $ 4,000
IRA contribution 2,000
Total nonbusiness deduction $ 8,000
Interest income (7,000)
Alimony received (12,000) –0–
POINTS: 1
91. Ralph is single and has the following items for the current year:
Nonbusiness capital gains $ 9,000
Nonbusiness capital losses (3,000)
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
ANSWER: a
RATIONALE: $10,000 – [$6,000 + ($9,000 – $3,000)] = ($2,000). Therefore, nothing is added back.
POINTS: 1
DIFFICULTY: Easy
OTHER: Time: 5 min.
92. Elizabeth has the following items for the current year:
Nonbusiness capital gains $ 5,000
Nonbusiness capital losses (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
ANSWER: c
RATIONALE: ($27,000 – $20,000) – [$3,000 + ($5,000 – $3,000)] = $2,000.
POINTS: 1
DIFFICULTY: Easy
OTHER: Time: 5 min.
93. Steve and Holly have the following items for the current year:
Dividend income $8,000
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
ANSWER: c
RATIONALE: $5,000 – [$1,000 + ($15,000 – $13,000)] = $2,000.
POINTS: 1
DIFFICULTY: Easy
OTHER: Time: 5 min.
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
OTHER: Time: 5 min.
Subjective Short Answer
95. Tonya had the following items for last year:
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
Income on collection of nonbusiness bad debt (classified as

STCL) to the extent of tax benefit in the prior year ($20,000 $23,000
offset against capital gain and $3,000 offset against ordinary
income).
POINTS: 1
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
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.
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)
*Casualty losses to the extent of casualty gains.
POINTS: 1
97. Mike, single, age 31, had the following items for 2016:
Salary $50,000
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
Compute Mike’s taxable income for 2016.

Dividends 2,000
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
POINTS: 1
98. Jose, single, had the following items for 2016:
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)
Compute Jose’s adjusted gross income for 2016.

Ordinary loss from § 1244 stock (50,000)
Short-term capital gain $26,000
Short-term capital loss (7,000)
Net short-term capital gain $19,000
Long-term loss from § 1244 stock
($70,000 – $50,000) ($20,000)
Worthless security (4,000) (24,000)
Net long-term capital loss ($ 5,000)
Limit (only $2,000 is needed to reduce
(2,000)
AGI to zero)
Adjusted gross income $ –0–
POINTS: 1
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.
∙ Home mortgage interest—$10,000.
Determine the amount of Julie’s taxable income for 2016.

Plus: Gain on rental duplex
Recovery $189,000
[($420,000 × 90%)
× 50%]
Cost (50% × $200,000
400,000)
Less: cost recovery (80,000)
Adjusted basis (120,000)
Casualty gain 69,000
AGI $169,000
Casualty loss
Dwelling
Basis ($400,000 × $200,000
50%)
Recovery (189,000)
Loss $ 11,000
Household items 8,500
Total loss $ 19,500
Less: $100 floor (100) $ 19,400
Automobile
Loss $ 5,000
Recovery if claim (3,000)
filed
Loss $ 2,000
Less: $100 floor (100) 1,900
Total loss $ 21,300
Less: 10% × (16,900)
$169,000 (AGI)
Deductible casualty $ 4,400
loss
Home mortgage 10,000
interest
Other miscellaneous 4,000
itemized
deduction—
painting
Computer loss 2,620
[$6,000 – (2% ×
$169,000)]
POINTS: 1
LEARNING O IITX.SWFT.LO: 7-03 - LO: 7-03

BJECTIVES: IITX.SWFT.LO: 7-04 - LO: 7-04
NATIONAL ST United States - BUSPORG: Analytic
ANDARDS:
STATE STAND United States - AK - AICPA: FN-Measurement -
ARDS: AICPA: FN-Measurement
100. Juanita, single and age 43, had the following items for 2016:
Salary $60,000
Casualty loss on business property (15,000)
Casualty loss on rental property (5,000)
Loss on theft of securities (8,000)
Compute Juanita’s taxable income for 2016.

Personal casualty gains $9,000
AGI $46,000
Less:
Itemized deductions
Casualty loss [($13,000 – $9,000) – (10% × $46,000)] (–0–)
Theft of securities (8,000)
POINTS: 1
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.
∙ 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
10% × $60,000 (AGI) (6,000) 28,500
Loss on nonreimbursed employee business expense—computer
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
POINTS: 1
102. Neal, single and age 37, has the following items for 2016:
Salary $50,000
Personal casualty losses (after $100 floor) (12,000)
Interest expense on personal residence (7,000)
Determine Neal’s taxable income for 2016.
Casualty loss (8,000)
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
LEARNING OBJECTI IITX.SWFT.LO: 7-04 - LO: 7-04
VES:
NATIONAL STANDA United States - BUSPORG: Analytic
RDS:
103. Gary, who is an employee of Red Corporation, has the following items for 2016:
Salary $80,000
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
Loss on rental property (6,000)
Personal casualty loss (7,000)
Personal casualty loss ($15,000 – $7,000) $ 8,000

10% × $74,000 (AGI) (7,400)
$ 500
Theft of bonds 18,000
Theft of computer [$4,000 – (.02 × $74,000)] 2,520
POINTS: 1
104. Susan has the following items for 2016:
∙ 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)
Casualty loss (limited to $3,000 not subject to insurance) $3,000
10% × $18,000 (AGI) (1,800)
Casualty loss deduction $1,100
Loss on stolen painting ($40,000 – $35,000) 5,000
POINTS: 1
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
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
Deductible expenses $165,000
The market survey is not a research and experimental expenditure.

2016
Salaries $125,000
Supplies 50,000
Depreciation 30,000
Deductible expenses $205,000
The advertising is not a research and experimental expenditure

POINTS: 1
DIFFICULTY: Easy
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
108. Green, Inc., manufactures and sells widgets. During the current year, an examination of the company records showed
the following items:
Domestic production gross receipts $3,000,000

Cost of goods sold for domestic products 750,000
Expenses directly related to domestic production gross
300,000
receipts (other than wages)
W-2 wages paid to employees engaged in qualified domestic
300,000
production activities
Ratable portion of other expenses 100,000
Total W-2 wages 325,000
Taxable income 1,600,000
Determine Green’s domestic production activities deduction for the current year.
ANSWER: Domestic production gross receipts $3,000,000
Less: Cost of goods sold (750,000)
Direct expenses (300,000)
W-2 wages directly related (300,000)
Allocated expenses (100,000)
Qualified production activities income (QPAI) $1,550,000
Domestic production activities deduction

(1) QPAI × 9% ($1,550,000 × 9% = $139,500)
Lesser of: (2) Taxable income × 9% ($1,600,000 × 9% =
$ 139,500
$144,000)
Limited to 50% of related W-2 wages (50% × $300,000) [no
$ 150,000
limit]
POINTS: 1
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:

Cost of goods sold for domestic products 600,000
Expenses directly related to domestic production gross
receipts (other than wages) 280,000
Ratable portion of other expenses 100,000
Other expenses not allocated to domestic production gross receipts 30,000
W-2 wages paid to employees engaged in qualified domestic
production activities 270,000
Total W-2 wages 320,000
Sally also had the following additional items:

Dividends received $ 20,000
Determine Sally’s domestic production activities deduction for the current year.
ANSWER: Gross receipts $2,500,000
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

Direct expenses (280,000)
Allocated expenses (100,000)
W-2 wages directly related (270,000)
Qualified production activities income (QPAI) $1,250,000
Lesser of: QPAI × 9% ($1,250,000) = $112,500

Modified AGI × 9% ($1,200,000) = $108,000
Not to exceed 50% × $270,000 = $135,000
Sally’s QPAD = $108,000
POINTS: 1
110. Nora, single, had the following income and deductions for 2016:
Sales $ 50,000
Business expenses (100,000)
Dividends 2,000
Nonbusiness capital gains 4,000
§ 1244 stock loss (18,000)
Business capital loss (2,000)
Business capital gain 1,000
Compute Nora’s net operating loss for 2016.

ANSWER:
Sales $ 50,000
Dividends 2,000
§ 1244 stock (18,000)
(ordinary loss)
Capital gains ($4,000 $5,000
+ $1,000)
Less: Capital losses (2,000)
Net capital gains 3,000
Adjusted gross ($ 32,000)
income
Standard deduction
(single) (6,300)
(1 × $4,000)

Excess of nonbusiness capital losses over nonbusiness capital gains –0–
Excess of nonbusiness deductions over sum of nonbusiness income
and net nonbusiness capital gains
Standard deduction $6,300
Interest (1,000)
Dividends (2,000)
Alimony received (30,000)
Nonbusiness capital gains (4,000) –0–
Excess of business capital losses over the sum of business
capital gains and the excess of nonbusiness capital gains
over nonbusiness deductions {$2,000 – [$1,000 + ($1,000
+ $2,000 + $30,000 + $4,050 – $6,300)]} –0–
POINTS: 1
111. Juan, married and filing jointly, had the following income and deductions for 2016:
Sales $600,000
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 $600,000
Business expense (650,000)
Dividends 4,000
Alimony paid (18,000)
Adjusted gross income ($ 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)

Personal and dependency exemptions 20,250
Excess of nonbusiness deductions over nonbusiness income:
Itemized deductions ($41,000 – $25,000) $16,000
Alimony paid 18,000
Total nonbusiness deductions $34,000
Interest income (3,000)
Dividends (4,000) 27,000
POINTS: 1
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
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
AGI $ 2,000
Personal exemptions (6 × $4,050) (24,300)

Excess of nonbusiness deductions over nonbusiness income
[$12,000 – ($25,000 + $10,000 – $3,000)] –0–
Personal exemptions (6 × $4,050) 24,300
POINTS: 1
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
Net short-term capital loss (2,000)
AGI $23,000
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
Net short-term capital loss (not permitted) (–0–)
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
NOL for 2016 ($15,000)

Modified taxable income 13,425
NOL to carry forward ($ 1,575)
POINTS: 1
114. Milt, married and filing jointly, had the following items for 2016:
Sales $200,000
Business expenses 210,000
Dividends 5,000
Salary 20,000
Nonbusiness long-term capital gains 5,000
Nonbusiness short-term capital losses 7,000
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
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)
Dividends 5,000
Salary 20,000
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
Charitable contributions $ 9,000
Medical expenses [$8,450 – ($18,000 × .10)] 6,650
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)
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
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
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 the lender engaged in the business of lending money?
∙ Was there a proximate relationship between the creation of the debt and the lender’s
business?
POINTS: 1
DIFFICULTY: Easy
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
OTHER: Time: 5 min.
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:
∙ The marginal tax rates of the two different years.
∙ The adjusted gross incomes of the two different years.
∙ Other casualty losses in the two different years.
∙ The benefits of a faster refund (or reduction of tax).
POINTS: 1
DIFFICULTY: Easy
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
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
for an indefinite period.
POINTS: 1
DIFFICULTY: Easy
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
OTHER: Time: 5 min.
121. How is qualified production activities income (QPAI) calculated?

ANSWER: QPAI is calculated as follows:
The excess of domestic production gross receipts (DPGR) over the sum of:
Cost of goods sold allocated to such receipts.

∙
Other deductions, expenses, or losses directly allocated to such receipts.

∙
The ratable portion of deductions, expenses, and losses not directly allocable to such
∙
receipts or another class of income.
POINTS: 1
DIFFICULTY: Easy
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
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
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
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.
∙ No deduction is allowed for personal or dependency exemptions.
POINTS: 1
125. Discuss the effect of alimony in computing a net operating loss.

ANSWER: Alimony received is treated as nonbusiness income. Alimony paid is treated as a nonbusiness
deduction.
POINTS: 1
DIFFICULTY: Easy
OTHER: Time: 5 min.
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secretly passed all his available troops to Fuente la Higuera, on his
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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
Good generals are very properly averse to putting on paper,

even for the benefit of premiers or war ministers, the plan of their
next campaign. Points of leakage are so inscrutable, and so hard to
detect, that the less that is written the better is it for the projected
enterprise. And Wellington was the most reticent of men—even
going to the length of hiding from his own responsible subordinates
intentions that they much desired to learn, and of giving orders that
seemed eccentric while the secret reason for them was kept
concealed. He never wrote autobiographical memoirs—the idea was
repulsive to him—nor consented to open up (even to William Napier,
who much desired it) his full confidence. For the genesis of the plan
of the Vittoria Campaign we are compelled to rely mainly on the
careful collection of hints from his contemporary dispatches,
supplemented by certain rare confidential letters, and some obiter
dicta of his later years, which may or may not have been reproduced
with perfect accuracy by admirers like Croker or Lord Stanhope.
One thing is clear—he was conscious of the mistakes of 1812,
and was not going to see them repeated in 1813. When the Burgos
campaign was just over he wrote two short comments[442] on it, for
the benefit of persons whom he judged capable of appreciating his
difficulties. He owned up to his errors—he acknowledged four. The
first was that he had tried to take Burgos by irregular means, without
a proper battering train: the second that he had under-estimated the
strength of the united French armies of Portugal and the North: the
third that he had kept his army in two equal halves over-long—Hill
should have been called in from Madrid to join the main body much
sooner than he actually was: the fourth and most notable was that he
had entrusted a crucial part of his plan of campaign to a Spanish
general, over whom he had no formal authority—Ballasteros, who
should have advanced from Andalusia to distract and hinder Soult. ‘If
the game had been well played it would have answered my purpose.
Had I any reason to suppose that it would be well played? Certainly
not. I have never yet known the Spaniards do anything, much less
do anything well.... But I played a game which might succeed (the
only one that could succeed) and pushed it to the last. The parts
having failed—as I admit was to be expected—I at least made a
handsome retreat to the Agueda, with some labour and
inconvenience but without material loss.’
The interest of these confessions is that we find Wellington in his
next campaign making a clear effort to avoid precisely these four
mistakes. He made elaborate preparations long beforehand for
getting up a battering train: he rather over- than under-estimated his
adversary’s numbers by way of caution: he never divided his army at
all during his great advance of May-June 1813; after the first six days
it marched in close parallel columns all in one mass, till Vittoria had
been reached: and, last but not least, he entrusted no important part
of the scheme to any Spanish general, and indeed used a much
smaller proportion of Spanish troops than he need have done,
although he had now become Generalissimo of all the allied armies,
and could command where he could formerly only give advice.
Immediately after the termination of the Burgos retreat
Wellington’s views for the future do not seem to have been very
optimistic. He wrote to the Prime Minister that at present he could do
nothing against an enemy whose numbers had proved too great for
him to contend with[443]. Next spring he hoped to take the field with a
larger force than he had ever had before, but unless the Spaniards
could display a discipline and efficiency which it seemed impossible
to teach them, he saw no prospect of ever obliging the French to quit
the Peninsula by force of arms. To Lord Bathurst he wrote in much
the same terms—the French, he thought, would canton their army in
Old Castile and wait for the arrival of fresh reinforcements from
France.
But the whole aspect of affairs was changed when the news of
Napoleon’s Russian débâcle came to hand. It soon became clear
that so far from any French reinforcements coming to Spain, it would
be King Joseph who would be asked to send reinforcements to
Germany. Lord Liverpool’s letter, enclosing the 29th Bulletin, reached
Wellington at Lisbon on January 18th, and put him in a more cheerful
mood. Moreover, he thought that his visit to Cadiz to accept the
position of Generalissimo had been a success, and that he would get
more help out of the Spaniards now that he had the formal power of
issuing orders to their generals, ‘though I am not sanguine enough to
hope that we shall derive much advantage from Spanish troops early
in the campaign.’ But he intended to start betimes, ‘and at least to
put myself in Fortune’s way[444].’ The French would be compelled to
stand on the defensive; if they continued to hold the immense line
that they were still occupying in January, they must be weak
somewhere, and it was impossible that they should be reinforced.
It is on February 10th[445] that we get the first hint that Wellington’s
scheme for the campaign of 1813 was going to be a very ambitious
one—aiming not at local successes in Castile, or on recovering
Madrid, but at driving the French right up to the Pyrenees. On that
day he wrote to Lord Bathurst to say that ‘the events of the next
campaign may render it necessary for the army to undertake one or
more sieges in the North of Spain,’ wherefore he wished certain
heavy guns and munitions to be sent by sea to Corunna, to be at his
disposal, as soon as might be convenient, and twice the quantity of
each to be prepared in England to be shipped when asked for.
The mention of ‘one or more sieges in the North of Spain’ for
which guns had better be sent by sea to Corunna, can only mean
that Wellington was thinking of Burgos and St. Sebastian—perhaps
also of Santoña and Pampeluna. There were no other fortresses
needing the attention of a heavy battering train in that direction. It is
clear that, even in February, Wellington’s mind was travelling far
afield; and on June 26th, Vittoria having been now won, he wrote to
remind Lord Bathurst of his demand, and to point out that his
forecast had come true[446].
In March, as was shown in an earlier chapter, Wellington began
to get the news which proved that the French were making large
drafts from Spain for the new Army of Germany, and that Soult,
Caffarelli, and other generals were summoned to Paris. He knew, a
few days later, that the enemy was evacuating La Mancha, and that
the King was moving his head-quarters from Madrid to Valladolid.
Everything indicated conscious weakness on the part of the enemy
—it would be well to take instant advantage of it: Wellington wrote to
his brother on March 28 that he hoped to start out in force on May
1st[447]—giving no hint where that force would be employed. At the
same time he expressed his doubt as to whether any of the Spanish
corps which were to join him could be ready by that date. But he was
depending so much on the sole exertions of the Anglo-Portuguese
army, that the tardiness of the Spaniards would not put a complete
stop to his projected operations. Two other practical hindrances were
a late spring, which made green forage for the horses harder to
procure than it normally was in April, and accidents from bad roads
and bad weather to his pontoon train, which he was secretly bringing
up from the Tagus to the Douro, as it was to play a most essential
part in the commencement of the campaign[448]. These mishaps
appear mere matters of detail, but (as we shall see) there were
immense consequences depending upon them—the presence of a
large pontoon train on the Esla and the Douro, when its normal
habitat was on the lower Tagus, was one of the first surprises in the
wonderful campaign of May-June 1813. Starting from Abrantes in the
end of April, it did not reach Miranda de Douro till the 20th of May[449].
The first definite revelation as to what Wellington’s plan was to
be, is contained in a letter to Beresford of April 24th. ‘I propose to put
the troops in motion in the first days of May: my intention is to make
them cross the Douro, in general within the Portuguese frontier,
covering the movement of the left by that of the right of the Army
toward the Tormes, which right shall then cross the Douro, over the
pontoons, in such situation as may be convenient. I then propose to
seize Zamora and Toro, which will make all future operations easy to
us[450].’
Here the first half of the great movement is accurately set forth,
just as it was executed, though owing to the delays spoken of above,
the general orders for the marching out of all the allied divisions were
issued on May 13th instead of on May 1st-2nd. But in all other
respects we have the exact analysis of the scheme: the ‘Left’—
Graham with the equivalent of six divisions—crossed the Douro far
inside Portugal at various points, and was in and about Braganza
and Miranda by May 21st-24th: meanwhile the ‘Right’—Hill with
three divisions—moved forward from the Agueda to the Tormes,
attracting the main attention of the French between the 20th and the
26th, till it reached Salamanca, from whence it swerved off to the left,
and joined Graham’s wing by the bridge of Toro, thus establishing
the whole army in one mass north of the Douro, and completely
turning the western flank of the entire French front of defence. On
May 12 only, three weeks after he had communicated the secret to
Beresford, did Wellington divulge it to the Ministers at home:
evidently he dreaded leakage somewhere in London, such as he had
discovered in the preceding autumn[451]. For Lord Bathurst’s benefit
he descends a little more into detail:
‘I propose to commence our operations by turning the enemy’s
position on the Douro, by passing the left of our army over that river
within the Portuguese frontier. I should cross the Right in the same
manner, only that I have been obliged to throw the Right very
forward during the winter, in order to cover and connect our
cantonments, and I could not well draw them back without exposing
a good deal of country, and risking a counter-movement on the part
of the enemy. I therefore propose to strengthen the Right, and move
with it myself across the Tormes, and to establish a bridge on the
Douro below Zamora. The two wings of the army will thus be
connected, and the enemy’s position on the Douro will be turned.
The Spanish Army of Galicia will be on the Esla, to the left of our
army, at the same time that our army reaches that river.
‘Having turned the enemy’s position on the Douro, and
established our communications across it, our next operation will
depend on circumstances. I do not know whether I am now stronger
than the enemy, even including the Army of Galicia. But of this I am
very certain, that I shall never be stronger throughout the campaign,
or more efficient, than I am now: and the enemy will never be
weaker. I cannot have a better opportunity for trying the fate of a
battle, which if the enemy should be unsuccessful, must oblige him
to withdraw entirely. We have been sadly delayed by the pontoon
bridge, without which it is obvious we can do nothing[452].’
Neither in the letter to Beresford nor in that to Bathurst does
Wellington make a forecast beyond the first stage of his advance—
obviously it would be impossible to do so till it was seen how the
French would act. If they should be tempted to fight—say in front of
Valladolid—when their flank was turned, in order to keep their hold
on Castile, Wellington would welcome the decisive engagement. But
of course they might refuse to fight, as indeed did they. They retired
on Burgos, as we shall see, without taking any risks.
But that Wellington already foresaw the possibility of a victorious
march to the Pyrenees is, I think, proved not only by his letter of
February 10th concerning the siege of fortresses in Northern Spain,
quoted above, but by similar hints on May 6 concerning the absolute
necessity for naval co-operation in the North. He asks Lord Bathurst
to insist on the presence of a squadron under an admiral in the Bay
of Biscay, and for careful supervision of the whole coast from
Bayonne to Corunna, which must absolutely stop French enterprise
at sea, and ‘simplify arrangements for convoy and naval operations
in concert with the army during the ensuing campaign[453].’ Taking
this in conjunction with the letter of February 10, it seems certain that
Wellington was thinking of stores to be landed at Santander, and a
battering train to destroy San Sebastian—which was to look forward
some way! There was, however, a secondary reason for requiring
more naval supervision in the Bay of Biscay: American privateers
had been putting in an appearance in these waters, and had
captured several small transports.
A plan of campaign that contemplated the driving back of the
French to the Pyrenees must, of course, embrace a good deal more
than the mere reorganization of the Anglo-Portuguese army for a
great push north of the Douro. There were many minor factors to be
taken into consideration and utilized. First and foremost came the
question as to how far the position of Generalissimo of the Spanish
Armies could be turned to account. After his experiences in 1812
Wellington was determined to entrust to his Allies no crucial part of
the operations, whose failure could wreck the whole scheme. With
his own striking-force he intended to take only one Spanish army,
that which was under the sole Spanish general whom he could trust
for willing co-operation, even though he knew him to be no great
military genius. Castaños had, by his influence at Cadiz, been
nominated as Captain-General alike in Galicia, Castile, and
Estremadura, and all the troops in those provinces now formed part
of the new ‘4th Army.’ They included Morillo’s division, now cantoned
about Caçeres, Carlos de España’s in the mountains between
Ciudad Rodrigo and the pass of Perales, the lancers of Julian
Sanchez—now counted a brigade of regular cavalry and not a
partida—on the front between the Agueda and the Douro, and the
two Galician divisions of Losada and Barcena, with their weak
attendant cavalry brigade: to bring this up to strength two extra
regiments[454] had filed up the Portuguese frontier during the winter
from Estremadura. All these were in touch with the Anglo-
Portuguese army, and were intended to move with it. They made up
18,000 foot and 3,000 horse. In addition there were many other
troops theoretically belonging to the 4th Army, but at present cut off
from it by the intervening zone of French occupation—viz. Porlier’s
division in the Eastern Asturias, and Mendizabal’s irregular forces in
Biscay and Cantabria—the troops of Longa and the Biscayan
volunteers with other smaller bands. These scattered units, which
could only come under Wellington’s real control when he should
have beaten the French back to the Ebro, might make up 10,000 or
12,000 men. But they could not be counted upon for the first month
of the campaign.
In addition, Castaños had a number of immovable troops—the
garrisons of Rodrigo and Badajoz, a dépôt of unhorsed cavalry in
Estremadura, and a sedentary unit called the ‘Army of Reserve of
Galicia,’ consisting of all the most depleted corps of the old Galician
army: its six battalions only made up 2,000 men, and it stopped at
Vigo or Corunna all through the year 1813. Two other Galician
battalions[455] had been sent round by sea during the winter, to join
the much-tried Army of Catalonia. This small transference of troops
had reached the knowledge of the French in an exaggerated shape,
and caused much speculation at Madrid.
Beside the 21,000 men of the 4th Army, who marched in the
Anglo-Portuguese line under Castaños’s nephew General Giron[456],
there was only one other Spanish force which Wellington intended to
employ in his own operations. This was the so-called ‘Army of
Reserve of Andalusia,’ which had to come up all the way from
Seville, and was far too late to join in the campaign of Vittoria: it did
not get to the front till July: even later than the Generalissimo
expected. The origin of this corps was that, when Soult evacuated
Andalusia in September 1812, the best-equipped of the Cadiz
garrison troops joined the field-army of Ballasteros, and advanced
with him to Granada. This body was in April 1813 known as the
‘Third Army’ and was now commanded by the Duque del Parque, the
successor of the cashiered Ballasteros. But the remainder of the
Cadiz garrison, which had not gone to the front, was organized
during the winter into a separate unit, under Henry O’Donnell, the
Conde d’Abispal. It was rather a miscellaneous assembly—seven of
its fourteen battalions having been regiments which did not march in
October 1812 because they were low in numbers or equipment, and
three more newly-raised units, formed to replace in the Army List old
regiments which had perished in previous campaigns. However, they
were filled up with recruits, re-clothed and re-equipped, and
Wellington intended to use them with his own army, as étape and
blockade troops. He preferred to take them with him rather than the
3rd Army, which was suspected of having many officers who had
been devoted to Ballasteros, and who had resented the appointment
of the new British generalissimo[457]. Moreover, O’Donnell was in
every way a better officer than Del Parque, and had a good fighting
reputation, though he was noted as impetuous and quarrelsome.
The Army of Reserve of Andalusia was 14,000 strong, in two infantry
divisions under Generals Echevari and Creagh and a weak cavalry
brigade under Freire—late second in command of the Murcian army.
The slow equipment of this corps, its late start, and its frequent halts
for want of provisions, formed a perpetual source of dispute between
Wellington and the Minister of War at Cadiz. But as it was not
destined to form part of the original striking-force at the opening of
the campaign, or to discharge any essential duty in the general
scheme, its absence was not much felt. When it did appear, after
Vittoria, it was usefully employed in blockading Pampeluna.
But in the summer campaign of 1813 it must be remembered that
Wellington employed no Spanish troops save the original 21,000
Galicians and Estremadurans under Giron, and Longa’s 4,000
Cantabrians, who joined in from the North ten days before Vittoria,
and took a creditable share in that battle.
It remains to be explained how Wellington intended to get an
indirect profit out of the existence of the other Spanish corps—the re-
named First, Second, and Third Armies, as well as out of the Anglo-
Sicilian expeditionary force at Alicante, whose conduct had given
him so many just causes of complaint during the autumn of 1812.
As to the ‘First Army,’ now commanded by General Copons (the
defender of Tarifa), this gallant remnant of the old Catalan levies
could not take the field 10,000 strong, was almost destitute of
cavalry and artillery, and had no large town or secure fortress in its
possession[458]. It held, in a rather precarious fashion, a considerable
portion of the mountainous inland of Catalonia—the head-quarters
were usually at Vich—but had no safe communications with the sea,
or certainty of receiving succours, though it was intermittently in
touch with Captain Codrington’s cruising squadron. Copons, who
took over command in March 1813, though less disliked than his
arbitrary and ill-tempered predecessor Lacy, was not popular with
the Catalans. They would have liked to see their local hero, the
Baron de Eroles, who had been in charge of the principality for some
months after Lacy’s departure, made captain-general[459]. Weak in
numbers as it was, the Army of Catalonia could obviously do no
more than detain and keep employed General Decaen’s French
army of occupation, which had more than double its strength. The
garrisons of Barcelona, Tarragona, Figueras, Lerida, and Tortosa
absorbed 13,000 of Decaen’s men. But he had 15,000 more
available for field service, and his flying columns often put Copons in
danger, for the Catalan army had to scatter its cantonments far and
wide in order to live, and a sudden hostile concentration might easily
cut off some fraction of it, when one part was as far north as the
Ampurdam and the passes into France, and another as far east as

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15. A loss is not allowed for a security that declines in value.

24. A theft loss is taken in the year of the theft.

32. Losses on rental property are classified as deductions for AGI.

43. A farming NOL may be carried back 2 years.

Long-term capital gain $5,000

Determine John’s AGI for 2016.

Amount realized (3,000 shares × $30 per share) $ 90,000

64. Which of the following events would produce a deductible loss?

Fair Market Value

AGI before casualty $42,000

Casualty loss ($5,800 – $1,000) $4,800

Cost basis $280,000

70. In 2016, Mary had the following items:

Loss from damage to rental property ($6,000)

Determine the amount of Morley’s itemized deduction from the losses.

Loss from damage to rental property ($10,000)

Determine the amount of Theo’s itemized deduction from these losses.

Personal casualty loss $ 8,000

A business casualty loss is classified as an ordinary loss.

Personal use property theft loss $11,000

So the DPAD is $54,000.

What is Wu’s net operating loss for 2016?

Taxable income ($ 3,050)

What is Khalid’s NOL for 2016?

Determine Janice’s net operating loss for the year 2016.

Taxable income ($17,350)

Bill’s business loss ($40,000)

Taxable income ($38,200)

Nonbusiness long-term capital gain $ 2,000

Taxable income ($22,100)

Taxable income ($14,410)

Subjective Short Answer

95. Tonya had the following items for last year:

Income on collection of nonbusiness bad debt (classified as

Compute Mike’s taxable income for 2016.

98. Jose, single, had the following items for 2016:

ANSWER: Salary $44,000

∙ Home mortgage interest—$10,000.

Determine the amount of Julie’s taxable income for 2016.

ANSWER: Salary $100,000

LEARNING O IITX.SWFT.LO: 7-03 - LO: 7-03

Compute Juanita’s taxable income for 2016.

Loss on nonreimbursed employee business expense—computer

Personal casualty loss ($15,000 – $7,000) $ 8,000

104. Susan has the following items for 2016:

The market survey is not a research and experimental expenditure.

The advertising is not a research and experimental expenditure

Domestic production gross receipts $3,000,000

Domestic production activities deduction

Domestic production gross receipts $2,500,000

Sally also had the following additional items:

Domestic production gross receipts $2,500,000

Lesser of: QPAI × 9% ($1,250,000) = $112,500