| A bat and a ball cost $1.10 in total. The bat costs $1.00 | | | | exclude the amount of the loss Robert was unable to |
| more than the ball. How much does the ball cost? | | | | claim from her gain. Your heart flutters with excitement |
| _____ cents. | | | | as you mark choice A. $500 as your answer and |
| Shane Frederick, an associate professor at Yale | | | | move on with the comfort that you are one correct |
| University's School of Management, published this | | | | answer closer to becoming an enrolled agent. That |
| question as part of a three question Cognitive | | | | enrolled agent course you took definitely paid off...or did |
| Reflection Test in the Journal of Economic | | | | it? |
| Perspectives-Volume 19, Number 4-Fall 2005, pages | | | | Unfortunately, no amount of ea exam review will help |
| 25-42. This test measures your ability to take a more | | | | if you rush through the answer. If you do not take the |
| reflective approach in your answers, and not simply | | | | time to review your response and check what the |
| trusting your instinctive response. If you are like most | | | | question is asking, you are setting yourself up for this |
| people, you intuitively guessed 10 cents as the cost of | | | | classic mistake. It is correct that Jason cannot report |
| the ball. Of course, this cannot be correct, but if 10 | | | | the loss (related party transaction) and Lila can |
| cents is your answer it is very likely you were | | | | exclude the amount of the loss previously disallowed |
| confident with your choice. This occurs because of the | | | | to him, recognizing only $500 of the gain. Unfortunately, |
| instant ability of your brain to draw a conclusion about | | | | that is not what the question asks. In addition to the |
| the question, acting on impulse, and subtracting $1.00 as | | | | related party rules, this question also tests your |
| the cost of the bat from the total spent of $1.10. If you | | | | understanding of the difference between realized and |
| reflect further on the question, you will see that the ball | | | | recognized gains. Lila's realized gain is $7,500. |
| cannot be 10 cents as the difference between $1.00 | | | | Amount realized - The amount realized from a sale or |
| and 10 cents is 90 cents, and not the $1.00 indicated in | | | | trade of property is everything received for the |
| the question. In reality, this is not that difficult of a | | | | property. This includes the money, the fair market |
| question. The cost of the ball is 5 cents and the bat is | | | | value of any property or services, and debt or other |
| $1.05. To figure the correct answer, you must fight the | | | | liabilities assumed by the buyer. |
| tendency we all have to accept our intuition and quickly | | | | Realized gains - The difference between the adjusted |
| move forward. In other words, take the time to reflect | | | | basis and the amount realized in a sale is the realized |
| on the question and the appropriateness of your | | | | gain (or loss) on the transaction. Lila's basis is the |
| answer before moving on. | | | | amount she paid for the stock. |
| The enrolled agent exam will provide your brain with | | | | Amount recognized - The amount of income or loss |
| several opportunities for cognitive missteps. Be careful, | | | | recognized is the amount a taxpayer includes in |
| you just might see a tricky question like this on the ea | | | | taxable income for the tax year. |
| exam: | | | | Sometimes we are just too darn smart for our own |
| SEE Sample Question: | | | | good. You will do better on this exam if you pace |
| Jason sold his Stone Cold Corporation stock to his | | | | yourself and read the questions carefully before |
| sister Lila for $8,000. Jason's cost basis in the stock | | | | moving on. You have three and one-half hours to take |
| was $15,000. Lila later sold this stock to Millis, an | | | | the exam. This amounts to an average time for each |
| unrelated party, for $15,500. What is Lila's realized gain? | | | | question of over two minutes. The test is hard enough |
| A. $500 | | | | without missing questions you would otherwise answer |
| B. $7,000 | | | | correctly. Don't let your brain get in the way. |
| C. $7,500 | | | | IRS Circular 230 Disclosure - Pursuant to the |
| D. $0 | | | | requirements of the Internal Revenue Service Circular |
| This question has many factors that you must | | | | 230, we inform you that, to the extent any advice |
| understand to answer it correctly. While you read the | | | | relating to a Federal tax issue is contained in this |
| question, your brain is forming opinions about the | | | | communication, including in any attachments, it was not |
| answer. The first thing you notice is that Jason has a | | | | written or intended to be used, and cannot be used, for |
| loss on the sale of $7,000, but he sold it to his sister | | | | the purpose of (a) avoiding any tax related penalties |
| Lila. Reading on, you see that Lila later sold the stock | | | | that may be imposed on you or any other person |
| to an unrelated party for a gain of $7,500. Immediately, | | | | under the Internal Revenue Code, or (b) promoting, |
| you recall that Robert cannot recognize a loss | | | | marketing or recommending to another person any |
| because he is related to Lila; therefore, Lila can | | | | transaction or matter addressed in this communication. |