Incorrect Questions 3 Flashcards
(95 cards)
1
Q
The organizational test to qualify a public service charitable entity as tax exempt requires the articles of organization to
I. Limit the purpose of the entity to the charitable purpose.
II. State that an information return should be filed annually with the Internal Revenue Service.
A. I only. B. II only. C. Both I and II. D. Neither I nor II.
A
A. I only.
The charitable entity must affirm that its activities will be limited to its charitable purposes.
Even though an information return does have to be filed annually by many charitable entities, it is not required for all.
2
Q
The private foundation status of an exempt organization will terminate if it
A. Becomes a public charity.
B. Is a foreign corporation.
C. Does not distribute all of its net assets to one or more public charities.
D. Is governed by a charter that limits the organization’s exempt purposes.
A
A. Becomes a public charity.
A private foundation is a tax-exempt organization which receives less than one-third of its annual support from its members and the general public. Therefore, public charities that solicit broad public support do not meet this definition.
3
Q
What is the tax treatment of net losses in excess of the at-risk amount for an activity?
A. Any loss in excess of the at-risk amount is suspended and is deductible in the year in which the activity is disposed of in full.
B. Any losses in excess of the at-risk amount are suspended and carried forward without expiration and are deductible against income in future years from that activity.
C. Any losses in excess of the at-risk amount are deducted currently against income from other activities; the remaining loss, if any, is carried forward without expiration.
D. Any losses in excess of the at-risk amount are carried back two years against activities with income and then carried forward for 20 years.
A
B. Any losses in excess of the at-risk amount are suspended and carried forward without expiration and are deductible against income in future years from that activity.
4
Q
PDK, LLC had three members with equal ownership percentages. PDK elected to be treated as a partnership. For the tax year ending December 31, year 1, PDK had the following income and expense items: Revenues $120,000 Interest income 6,000 Gain on sale of securities 8,000 Salaries 36,000 Guaranteed payments 10,000 Rent expense 21,000 Depreciation expense 18,000 Charitable contributions 3,000 What would PDK report as nonseparately stated income for year 1 tax purposes?
A. $30,000 B. $35,000 C. $43,000 D. $51,000
A
B. $35,000
Non-separately stated income is the ordinary business income of the LLC, computed as follows: Revenues $120,000 Salaries (36,000) Guaranteed payments (10,000) Rent expense (21,000) Depreciation expense (18,000) Ordinary income $35,000
5
Q
Dale’s distributive share of income from the calendar-year partnership of Dale & Eck was $50,000 in 2015. On December 15, 2015, Dale, who is a cash-basis taxpayer, received a $27,000 distribution of the partnership’s 2015 income, with the $23,000 balance paid to Dale in May 2016.
In addition, Dale received a $10,000 interest-free loan from the partnership in 2015.
This $10,000 is to be offset against Dale’s share of 2015 partnership income.
What total amount of partnership income is taxable to Dale in 2015?
A. $23,000 B. $37,000 C. $50,000 D. $60,000
A
C. $50,000
Partners must report their share of the partnership’s income, deductions and other items on the partner’s income tax return in the calendar year in which the partnership’s tax year ends. Dale’s share of Dale and Eck’s 2015 income was $50,000. Thus, Dale must report $50,000 of partnership income in 2015.
6
Q
Abe, Betsy, and Dan decide to form the equal ABD partnership at the beginning of Year One. Abe contributed depreciable assets that he has owned for five years that have a basis of $15,000 and a value of $20,000. Betsy contributed $20,000 cash. Dan contributed $12,000 in cash and land with a basis of $5,000 and a value of $8,000. How much income is allocated to Abe if the partnership sells the assets contributed by Abe for $18,000? A. $0 B. $1,000 C. $3,000 D. $5,000
A
C. $3,000
The realized gain on the sale of the assets is $3,000 ($18,000 – $15,000 basis in assets). Abe’s built in gain on the contribution is $5,000. The amount of gain allocated to Abe is the lower of the realized gain or built-in gain, so $3,000 is the allocation.
7
Q
Under the Internal Revenue Code sections pertaining to partnerships, guaranteed payments are payments to partners for
A. Payments of principal on secured notes honored at maturity.
B. Timely payments of periodic interest on bona fide loans that are not treated as partners’ capital.
C. Services or the use of capital without regard to partnership income.
D. Sales of partners’ assets to the partnership at guaranteed amounts regardless of market values.
A
C. Services or the use of capital without regard to partnership income.
8
Q
Guaranteed payments made by a partnership to partners for services rendered to the partnership, that are deductible business expenses under the Internal Revenue Code, are
I. Deductible expenses on the U.S. Partnership Return of Income, Form 1065, in order to arrive at partnership income (loss).
II. Included on schedules K-1 to be taxed as ordinary income to the partners.
A. I only. B. II only. C. Both I and II. D. Neither I nor II.
A
C. Both I and II.
9
Q
Evan, a 25% partner in Vista Partnership, received a $20,000 guaranteed payment in 2015 for deductible services rendered to the partnership. Guaranteed payments were not made to any other partner. Vista’s 2015 partnership income consisted of:
Net business income before guaranteed payments $80,000
Net long-term capital gains 10,000
What amount of income should Evan report from Vista Partnership on her 2015 tax return?
A. $37,500 B. $27,500 C. $22,500 D. $20,000
A
A. $37,500
Guaranteed payments from a partnership for the services of a partner are treated as salary payments and, as a result, are made without regard to the partner’s share of the partnership’s income. Thus, Evan would treat the $20,000 payment from the partnership for services rendered as income on her 2015 tax return. She also must report her share of the partnership’s net income. Since the guaranteed payments qualify as a deductible expense, Vista’s partnership income may be reduced by the amount of the expense. Hence, the partnership’s income would be $70,000; $80,000 in net business income before guaranteed payments plus the $10,000 net long-term capital gain less the $20,000 guaranteed payment. Evan’s 25 percent share of the partnership’s income would be $17,500 (25 percent × $70,000). Thus, Evan would report $37,500 in income from the Vista Partnership on her 2015 tax return − the sum of the guaranteed payment ($20,000) and her share of the partnership’s income ($17,500).
10
Q
Which of the following is an eligibility requirement in 2015 to file a valid election to be taxed as an S corporation?
A. Must have no more than 75 shareholders, and a husband and wife who each own stock are counted as two shareholders. B. Must have no more than 100 shareholders, and a husband and wife who each own stock are counted as two shareholders. C. Must have no more than 100 shareholders, and a husband and wife who each own stock are counted as one shareholder. D. Must have no more 75 shareholders, and a husband and wife who each own stock are counted as one shareholder.
A
C. Must have no more than 100 shareholders, and a husband and wife who each own stock are counted as one shareholder.
The shareholder limit is 100 and members of the same family count as one shareholder.
11
Q
Bristol Corp. was formed as a C corporation on January 1, 1980, and elected S corporation status on January 1, 1987. At the time of the election, Bristol had accumulated C corporation earnings and profits which have not been distributed. Bristol has had the same 25 shareholders throughout its existence.
In 2015 Bristol’s S election will terminate if it
A. Increases the number of shareholders to 75. B. Adds a decedent's estate as a shareholder to the existing shareholders. C. Takes a charitable contribution deduction. D. Has passive investment income exceeding 90% of gross receipts in each of the three consecutive years ending December 31, 2014.
A
D. Has passive investment income exceeding 90% of gross receipts in each of the three consecutive years ending December 31, 2014.
12
Q
Village Corp., a calendar year corporation, began business in 2002. Village made a valid S Corporation election on December 5, 2014, with the unanimous consent of its shareholders. The eligibility requirements for S status continued to be met throughout 2014 and 2015.
On what date did Village’s S status become effective?
A. January 1, 2014 B. January 1, 2015. C. December 5, 2014. D. December 5, 2015.
A
B. January 1, 2015.
An S Corporation election is effective for the current tax year, if made by the 15th day of the third month of the tax year. Since the election is after to March 15, 2014 it is effective for 2015.
13
Q
An S Corporation has 30,000 shares of voting common stock and 20,000 shares of non-voting common stock issued and outstanding. The S election can be revoked voluntarily with the consent of the shareholders holding, on the day of the revocation,
Shares of voting stock Shares of nonvoting stock
0 20,000
7,500 5,000
10,000 16,000
20,000 0
A
Shares of voting stock 10,000
Shares of nonvoting stock 16,000
A corporation’s S election may be revoked voluntarily with the consent of the shareholders holding a majority of the corporation’s issued and outstanding stock, including non-voting stock.
Since, in this case, the S corporation has 30,000 shares of voting common stock and 20,000 shares of non-voting common stock issued and outstanding, shareholders holding at least 25,001 shares of stock would be needed to have a majority and, as a result, the ability to revoke the corporation’s S election.
This response correctly indicates that shareholders controlling 26,000 shares of stock (10,000 shares of voting and 16,000 shares of non-voting) would have the ability to voluntarily revoke the corporation’s S election despite their not having a majority of the voting shares.
14
Q
After a corporation's status as an S corporation is revoked or terminated, how many years is the corporation required to wait before making a new S election, in the absence of IRS consent to an earlier election? A. 1 B. 3 C. 5 D. 10
A
C. 5
Once a corporation’s S status is revoked or terminated, the corporation must wait five years before making a new S election, in the absence of IRS consent to an earlier election.
15
Q
Stone and Frazier decided to terminate the Woodwest Partnership as of December 31. On that date, Woodwest’s balance sheet was as follows:
Cash $2,000
Equipment (adjusted basis) 2,000
Capital - Stone 3,000
Capital - Frazier 1,000
The fair market value of the equipment was $3,000. Frazier’s outside basis in the partnership was $1,200. Upon liquidation, Frazier received $1,500 in cash. What gain should Frazier recognize?
A. $0 B. $250 C. $300 D. $500
A
C. $300
Fraizer received cash of $1,500 less his basis in the partnership of $1,200 = gain of $300.
16
Q
The basis to a partner of property distributed “in kind” in complete liquidation of the partner’s interest is the
A. Adjusted basis of the partner’s interest increased by any cash distributed to the partner in the same transaction.
B. Adjusted basis of the partner’s interest reduced by any cash distributed to the partner in the same transaction.
C. Adjusted basis of the property to the partnership.
D. Fair market value of the property.
A
B. Adjusted basis of the partner’s interest reduced by any cash distributed to the partner in the same transaction.
17
Q
In the current year, when Hoben’s tax basis in Lynz Partnership interest was $10,000, Hoben received a liquidating distribution as follows:
Adjusted tax basis Fair market value
Marketable securities $ 5,000 $ 5,000
Land 25,000 27,000
Lynz had no appreciated inventory, unrealized receivables, or properties that had been contributed by its partners. What was Hoben’s recognized gain on the distribution?
A. $0 B. $15,000 C. $22,000 D. $23,000
A
A. $0
Gain is recognized on a partnership distribution ONLY if the cash distributed exceeds the basis in the partnership interest. In this case there was no cash distributed, so no gain is recognized.
18
Q
As a general partner in Greenland Associates, an individual's share of partnership income for the current tax year is $25,000 ordinary business income and a $10,000 guaranteed payment. The individual also received $5,000 in cash distributions from the partnership. What income should the individual report from the interest in Greenland? A. $5,000 B. $25,000 C. $35,000 D. $40,000
A
C. $35,000
The partner must report $25,000 of ordinary income and the $10,000 guaranteed payment. The distribution does not generate additional income since the partner has sufficient basis to absorb it.
19
Q
Hart’s adjusted basis in Best Partnership was $9,000 at the time he received the following nonliquidating distributions of partnership property:
Cash $ 5,000 Land Adjusted basis 7,000 Fair market value 10,000 What was the amount of Hart's basis in the land?
A. $0 B. $4,000 C. $7,000 D. $10,000
A
B. $4,000
A partner’s basis in property received in a nonliquidating distribution is the same as the partnership’s basis immediately before the distribution. However, the partner’s basis in the property may not exceed his/her basis in the partnership less any cash received in the distribution.
Hart received property with a basis of $12,000 ($5,000 in cash plus the partnership’s basis in the land of $7,000). However, his basis in the partnership interest is $9,000, so the basis in the property distributed must be limited to this amount. Since the distribution included $5,000 in cash, Hart’s basis in the land is $4,000 ($9,000 - 5,000).
20
Q
On June 30, 2015, Berk retired from his partnership.
At that time, his capital account was $50,000 and his share of the partnership’s liabilities was $30,000. Berk’s retirement payments consisted of being relieved of his share of the partnership liabilities and receipt of cash payments of $5,000 per month for 18 months, commencing July 1, 2015.
Assuming Berk makes no election with regard to the recognition of gain from the retirement payments, he should report income therefrom of
2015 2016 $13,333 $26,667 $20,000 $20,000 $40,000 - - $40,000
A
2015 2016
- $40,000
21
Q
Gulde's tax basis in Chyme Partnership was $26,000 at the time Gulde received a liquidating distribution of $12,000 cash and land with an adjusted basis to Chyme of $10,000 and a fair market value of $30,000. Chyme did not have unrealized receivables, appreciated inventory, or properties that had been contributed by its partners. What was the amount of Gulde's basis in the land? A. $0 B. $10,000 C. $14,000 D. $30,000
A
C. $14,000
The basis in the partnership interest is first reduced to $14,000 for the cash distribution of $12,000 ($26,000 − $12,000 = $14,000). Generally, the $14,000 basis is then reduced by the basis that the land has to the partnership ($10,000). However, since this is a liquidating distribution the ending basis in the partnership interest must be zero. Therefore, the basis in the partnership interest is reduced by $14,000, and this becomes Gulde’s basis in the land.
22
Q
On December 31, 2015, after receipt of his share of partnership income, Clark sold his interest in a limited partnership for $30,000 cash and relief of all liabilities.
On that date, the adjusted basis of Clark’s partnership interest was $40,000, consisting of his capital account of $15,000 and his share of the partnership liabilities of $25,000. The partnership has no unrealized receivables or substantially appreciated inventory.
What is Clark’s gain or loss on the sale of his partnership interest?
A. Ordinary loss of $10,000. B. Ordinary gain of $15,000. C. Capital loss of $10,000. D. Capital gain of $15,000.
A
D. Capital gain of $15,000.
If a partner sells his/her interest in the partnership, the partner recognizes a capital gain equal to the amount that the payment exceeds the partner’s adjusted basis in the partnership.
Clark’s adjusted basis in the partnership is $40,000 immediately before the sale. The assumption of Clark’s share of the partnership’s liabilities is viewed as a distribution to Clark. Thus, Clark’s adjusted basis must be reduced by the assumption of his share of the partnership’s liabilities, putting his adjusted basis at $15,000. The payment of $30,000 received by Clark exceeds his adjusted basis of $15,000 by the amount of $15,000. Hence, Clark must recognize a capital gain of $15,000.
23
Q
On January 3, 2015, the partners’ interests in the capital, profits, and losses of Able Partnership were:
% of capital, profits and losses
Dean 25%
Poe 30%
Ritt 45%
On February 4, 2015, Poe sold her entire interest to an unrelated party. Dean sold his 25% interest in Able to another unrelated party on December 20, 2015. No other transactions took place in 2014. For tax purposes, which of the following statements is correct with respect to Able?
A. Able terminated as of February 4, 2015. B. Able terminated as of December 20, 2015. C. Able terminated as of December 31, 2015. D. Able did not terminate.
A
B. Able terminated as of December 20, 2015.
Able Partnership terminated for tax purposes on December 20, 2015, the date that over 50 percent of the partnership’s interest had been exchanged in past twelve months.
24
Q
The personal service partnership of Allen, Baker & Carr had the following cash basis balance sheet at December 31, 2014: Assets Adjusted basis per book Market value Cash $102,000 $102,000 Unrealized accounts receivable -- 420,000 \_\_\_\_\_\_\_ \_\_\_\_\_\_\_ Totals $102,000 $522,000 Liability and Capital Note payable $ 60,000 $ 60,000 Capital accounts: Allen 14,000 154,000 Baker 14,000 154,000 Carr 14,000 154,000 \_\_\_\_\_\_\_ \_\_\_\_\_\_\_ $102,000 $522,000 Carr, an equal partner, sold his partnership interest to Dole, an outsider, for $154,000 cash on January 1, 2015. In addition, Dole assumed Carr's share of the partnerships liability. What amount of ordinary income should Carr report in his 2015 income tax return on the sale of his partnership interest?
A. $0 B. $20,000 C. $34,000 D. $140,000
A
D. $140,000
If a partner sells or exchanges his/her partnership interest and the partnership has either unrealized receivables or substantially appreciated inventory, the partner recognizes an ordinary gain to the extent that the amount realized by the partner due to the unrealized receivables or substantially appreciated inventory is greater than the partner’s basis in the items.
When Carr sold his partnership interest in Allen, Baker and Carr, the partnership had unrealized receivables. The amount realized by Carr due to the unrealized receivables was $140,000, the partnership’s total unrealized receivables of $420,000 multiplied by Carr’s one-third ownership interest.
Carr does not have any basis in the unrealized receivables (indicating that none of the receivables have been collected). Hence, Carr must report an ordinary gain of $140,000, the $140,000 realized by Carr due to the unrealized receivables less Carr’s basis in the receivables, which is zero.
25
A shareholder's basis in the stock of an S corporation is increased by the shareholder's pro rata share of income from
Tax-exempt interest Taxable interest
No No
No Yes
Yes No
Yes Yes
Tax-exempt interest Yes Taxable interest Yes
Income for an S corporation includes taxable and tax-exempt interest. All income of an S corporation is passed through to the shareholder and results in an increase in the shareholder's basis in the stock of the corporation. The shareholder is responsible for any taxes that may or may not apply to the S corporation's income.
26
An S corporation engaged in manufacturing has a year end of June 30. Revenue consistently has been more than $10 million under both cash and accrual basis of accounting. The stockholders would like to change the tax status of the corporation to a C corporation using the cash basis with the same year end. Which of the following statements is correct if it changes to a C corporation?
A. The year end will be December 31, using the cash basis of accounting.
B. The year end will be December 31, using the accrual basis of accounting.
C. The year end will be June 30, using the accrual basis of accounting.
D. The year end will be June 30, using the cash basis of accounting.
C. The year end will be June 30, using the accrual basis of accounting.
Once the S corporation completes the steps necessary to become a C corporation, it will be allowed to retain its June 30 year-end since C corporations are not subject to the tax-year limitations to which partnerships and S corporations are.
However, C corporations cannot use the cash method of accounting unless their average annual gross receipts for the previous three years do not exceed $5,000,000. Once the $5,000,000 test is failed the accrual method must be used for all future tax years. Since this corporation has had revenues of more than $10 million it must use the accrual method of accounting.
27
Which of the following items must be separately stated on Form 1120S, U.S. Income Tax Return for a Corporation, Schedule K-1?
A. Mark-to-market income.
B. Unearned revenue.
C. Section 1245 Gain.
D. Gain or loss from the sale of collectibles.
D. Gain or loss from the sale of collectibles.
Collectible gain is taxed at a maximum rate of 28% and can be offset with collectible losses, so it needs to be separately stated.
28
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B Corporation has been a calendar-year S electing corporation since its inception. S1 and S2 each own half of the stock with a basis of $12 and $9, respectively. This year B reported ordinary income of $81 and $10 of tax-exempt income. B also made a $51 cash distribution to each shareholder at year end. What is S1's basis after the distribution?
A. $ 1.5
B. $ 6.5
C. $52.5
D. $57.5
```
B. $ 6.5
S1's beginning basis is $12. It is increased by 50% of the taxable and tax-exempt income (($81 + $10) * 50% = $45.50) and decreased by the $51 distribution.
$12 + $45.50 - $51 = $6.50
29
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Carson owned 40% of the outstanding stock of a C corporation. During a tax year, the corporation reported $400,000 in taxable income and distributed a total of $70,000 in cash dividends to its shareholders. Carson accurately reported $28,000 in gross income on Carson's individual tax return. If the corporation had been an S corporation and the distributions to the owners had been proportionate, how much income would Carson have reported on Carson's individual return?
A. $28,000
B. $132,000
C. $160,000
D. $188,000
```
C. $160,000
The distributive share to Carson would be $400,000 × 40% = $160,000.
No reduction for dividends received.
30
If an S corporation has no accumulated earnings and profits, the amount distributed to a shareholder
A. Must be returned to the S corporation.
B. Increases the shareholder's basis for the stock.
C. Decreases the shareholder's basis for the stock.
D. Has no effect on the shareholder's basis for the stock.
C. Decreases the shareholder's basis for the stock.
A distribution from an S corporation that has no accumulated earnings and profits reduces the basis of a shareholder's stock. If the payment exceeds the shareholder's basis in the stock, it is viewed as a payment in exchange for stock.
31
Baker, an individual, owned 100% of Alpha, an S corporation. At the beginning of the year, Baker's basis in Alpha Corp. was $25,000. Alpha realized ordinary income during the year in the amount of $1,000 and a long-term capital loss in the amount of $3,000 for this year. Alpha distributed $30,000 in cash to Baker during the year.
What amount of the $30,000 cash distribution is taxable to Baker?
A. $0
B. $7,000
C. $4,000
D. $30,000
C. $4,000
Calculate basis in an S corporation as follows: The current basis of $25,000 is increased by the $1,000 of income to $26,000, then reduced for the distribution of $30,000 which would reduce the basis to $0 and produce a $4,000 gain. The $3,000 loss is suspended until there is more basis in the future.
If the amount of the distribution exceeds the adjusted basis of the stock, such excess shall be treated as gain from the sale or exchange of property.
32
A sole proprietorship incorporated on January 1 and elected S corporation status. The owner contributed the following assets to the S corporation:
Basis Fair market value
Machinery $ 7,000 $ 8,000
Building 11,000 100,000
Cash 1,000 1,000
Two years later, the corporation sold the machinery for $4,000 and the building for $110,000. The machinery had accumulated depreciation of $2,000, and the building had accumulated depreciation of $1,000. What is the built-in gain recognized on the sale?
A. $100,000
B. $ 99,000
C. $ 6,000
D. $0
D. $0
The built in gains tax applies only when an existing C corporation makes an S corporation election. The built in gains tax does not apply when a sole proprietorship makes an S election, so the correct answer is $0.
33
Prail Corporation is a C corporation that on February 1, 2015 elected to be taxed as a calendar-year S corporation. On June 15, 2015, Prail sold land with a basis of $100,000 for $200,000 cash. The fair market value of the land on February 1, 2015 was $150,000. Prail had no other income or loss for the year and no carryovers from prior years.
What is Prail's tax?
A. $7,500
B. $17,500
C. $22,250
D. $35,000
B. $17,500
A C corporation that makes an S election and has unrealized built-in gains in its assets as of the election day must pay a built-in gains tax on this appreciation if it is recognized within the next 10 years.
When Prail makes the S election it has appreciation in the land of $50,000 ($150,000 - $100,000). Since the land was sold within 10 years of the election day, the first $50,000 of gain is taxed to the corporation at the rate of 35%.
Therefore, Prail must pay a tax of $17,500 ($50,000 * 35%).
34
Lyon, a cash basis taxpayer, died on January 15, 2015. In 2015, the estate executor made the required periodic distribution of $9,000 from estate income to Lyon's sole heir.
The following pertains to the estate's income and disbursements in 2015:
2015 Estate Income
$20,000 Taxable interest
10,000 Net long-term capital gains allocable to corpus
2015 Estate Disbursements
$ 5,000
Administrative expenses attributable to taxable income
For the 2015 calendar year, what was the estate's distributable net income (DNI)?
A. $15,000
B. $20,000
C. $25,000
D. $30,000
A. $15,000
Since the $10,000 of net long-term capital gains is allocable to corpus and not required to be distributed to the beneficiary, it is excluded from distributable net income in this case. Thus, the estate's distributable net income is $15,000, $20,000 of taxable income less $5,000 of administrative expenses attributable to taxable income.
35
Which of the following is(are) deductible on the fiduciary income tax return for a decedent's estate?
I. Expenses of administering and settling the estate.
II. State inheritance or estate tax.
A. I only.
B. II only.
C. Both I and II.
D. Neither I nor II.
A. I only.
36
Ordinary and necessary administration expenses paid by the fiduciary of an estate are deductible
A. Only on the fiduciary income tax return (Form 1041) and never on the federal estate tax return (Form 706).
B. Only on the federal estate tax return and never on the fiduciary income tax return.
C. On the fiduciary income tax return only if the estate tax deduction is waived for these expenses.
D. On both the fiduciary income tax return and on the estate tax return by adding a tax computed on the proportionate rates attributable to both returns.
C. On the fiduciary income tax return only if the estate tax deduction is waived for these expenses.
37
Jay properly created an inter vivos trust naming Kroll as trustee. The trust's sole asset is a fully rented office building. Rental receipts exceed expenditures. The trust instrument is silent about the allocation of items between principal and income.
Among the items to be allocated by Kroll during the year are insurance proceeds received as a result of fire damage to the building and the mortgage interest payments made during the year.
Which of the following items is(are) properly allocable to principal?
```
Insurance proceeds on building Current mortgage interest payments
No No
No Yes
Yes No
Yes Yes
```
Insurance proceeds on building Yes
Current mortgage interest payments No
Only extraordinary items are allocated to principal; that is, payments that are made irregularly. Regular payments are allocated to interest.
The insurance proceeds are unusual and were made only once. They are allocated to principal. The interest payments are made at regular intervals and so are allocated to interest.
38
The Simone Trust reported distributable net income of $120,000 for the current year. The trustee is required to distribute $60,000 to Kent and $90,000 to Lind each year. If the trustee distributes these amounts, what amount is includible in Lind's gross income?
A. $0
B. $60,000
C. $72,000
D. $90,000
C. $72,000
The amount of income recognized by the beneficiaries is the lower of the amount distributed ($150,000) or distributable net income ($120,000). Thus, Kent and Lind will recognize income of $120,000. Since they received total distributions of $150,000, the income recognized is 80% ($120,000/$150,000) of the amount received. Thus, Lind's income is 80% x $90,000, or $72,000.
39
The charitable contribution deduction on an estate's fiduciary income tax return is allowable
A. If the decedent died intestate.
B. To the extent of the same adjusted gross income limitation as that on an individual income tax return.
C. Only if the decedent's will specifically provides for the contribution.
D. Subject to the 2% threshold on miscellaneous itemized deductions.
C. Only if the decedent's will specifically provides for the contribution.
40
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A trust has distributable net income of $14,000 and distributes $20,000 to the sole beneficiary. What amounts are taxable to the trust and to the beneficiary?
Trust Beneficiary
$14,000 $0
$0 $14,000
$14,000 $20,000
$0 $20,000
```
Trust Beneficiary
$0 $14,000
DNI is the maximum amount of income taxable to the beneficiaries. Since all of the income was distributed, the beneficiary is taxed on $14,000 and the trust has no taxable income.
41
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Which of the following is NOT considered a primary authoritative source when conducting tax research?
A. Internal Revenue Code.
B. Tax Court cases.
C. IRS publications.
D. Treasury regulations.
```
C. IRS publications.
IRS Publications are a secondary source of the tax law.
42
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All of the following are administrative sources of the tax law except:
A. Private letter rulings.
B. Technical advice memoranda.
C. Revenue rulings.
D. Committee reports.
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D. Committee reports.
Committee reports are legislative sources of authority which provide insight into the intention of the House Ways & Means Committee, Senate Finance Committee, and Joint Conference Committee.
43
```
Which of the following type of regulations cannot be cited as authority to support a tax position?
A. Legislative regulations.
B. Interpretive regulations.
C. Procedural regulations.
D. Proposed regulations.
```
D. Proposed regulations.
44
A calendar-year taxpayer files an individual tax return for 2014 on March 20, 2015.
The taxpayer neither committed fraud nor omitted amounts in excess of 25% of gross income on the tax return.
What is the latest date that the Internal Revenue Service can assess tax and assert a notice of deficiency?
A. March 20, 2018.
B. March 20, 2017.
C. April 15, 2018.
D. April 15, 2017.
C. April 15, 2018.
The Internal Revenue Service (IRS) is required to assess taxes within the assessment period. After the end of the assessment period, the IRS usually may not collect taxes. The assessment period begins on the day that the return is considered filed and last for three years after that date. Returns are considered filed on the last day of the filing period, even for returns filed early.
Hence, for a calendar-year taxpayer who filed an individual tax return for 2014 on March 20, 2015, the assessment period will end on April 15, 2018.
45
An IRS agent has just completed an examination of a corporation and issued a "no change" report. Which of the following statements about that situation is correct?
A. The taxpayer may not amend the tax return for that taxable year.
B. The IRS generally does not reopen the examination except in cases involving fraud or other similar misrepresentation.
C. The IRS may not reopen the examination.
D. The IRS may not examine any other tax return of the corporation for a period of one year.
B. The IRS generally does not reopen the examination except in cases involving fraud or other similar misrepresentation.
After a "no change" report the IRS cannot reopen the examination unless the corporation has committed fraud.
46
If a taxpayer receives a 30-day letter from the Internal Revenue Service, the taxpayer:
A. Must pay the tax deficiency or respond to the issues raised through written correspondence to the IRS within 30 days of the date of the letter.
B. May ignore the letter and take no action.
C. Must pay the tax deficiency or file a petition with the Tax Court within 30 days of the date of the letter.
D. Must pay the tax deficiency and file a petition with the District Court within 30 days of the date of the letter.
B. May ignore the letter and take no action.
The taxpayer is not required to respond to a 30-day letter, although if there is no response the IRS will follow with a 90-day letter.
47
A corporation's tax year can be reopened after all statutes of limitations have expired if
I. The tax return has a 50% nonfraudulent omission from gross income.
II. The corporation prevails in a determination allowing a deduction in an open tax year that was taken erroneously in a closed tax year.
A. I only.
B. II only.
C. Both I and II.
D. Neither I nor II.
B. II only.
The 50 percent nonfraudulent omission from gross income from a tax return could not lead to the reopening of a corporation's tax year after the statute of limitations because it does involve a determination for an open year.
However, a corporation prevailing in a determination allowing a deduction in an open tax year that was taken erroneously in a closed tax year would meet the requirements for reopening its tax year after the expiration of the statute of limitations.
48
```
Ms. Planner is in the 25% tax bracket and itemizes on her tax return. She plans to make a charitable contribution of $12,000 to her alma mater this year. The net cost of this contribution to T is:
A. $0
B. $3,000
C. $9,000
D. $12,000
```
C. $9,000
Her tax savings is $3,000 ($12,000 x 25%) since the contribution is deductible. Therefore, her net cost is $9,000 ($12,000 - $9,000). .
49
Orleans has owned land as an investment for five years. His basis in the land is $70,000 and the land's current fair market value is $50,000. Which of the following statements is correct with regard to this land?
A. If Orleans sells the land to his father he can deduct the $20,000 loss in the land.
B. If Orleans gives the property to an unrelated friend he can deduct the $20,000 loss in the land.
C. Orleans should sell the land, recognize the $20,000 capital loss, and then gift the $50,000 cash from the sale to his friend.
D. If the land is sold to an unrelated party, the $20,000 loss cannot be recognized since the land is not depreciable.
C. Orleans should sell the land, recognize the $20,000 capital loss, and then gift the $50,000 cash from the sale to his friend.
If Orleans gives the property to his friend, the $20,000 loss disappears since the friend's loss basis in the land will be its fair market value of $50,000. Therefore, Orleans should sell the land so he can recognize the loss. He can then contribute the cash from the sale to his friend.
50
```
For which of the following entities is the owner's basis increased by the owner's share of profits and decreased by the owner's share of losses but is NOT affected by the entity's bank loan increases or decreases?
A. S corporation.
B. C corporation.
C. Partnership.
D. Limited liability company.
```
A. S corporation.
The owner's basis is increased for her distributive share of profits and losses for S corporations, partnerships, and limited liability companies. However, owner's basis is not affected by the debt of S corporations, while it is for partnerships and limited liability companies.
51
Which of the following statements concerning S corporations is False?
A. S corporations must be incorporated under state law in the same fashion as C corporations.
B. S corporation shareholders are not liable for the debt of the corporation.
C. An S corporation can issue both voting and non-voting common stock.
D. S corporations are subject to the alternative minimum tax.
D. S corporations are subject to the alternative minimum tax.
This statement is false. Since S corporation income flows directly to the shareholders, the corporation is not subject to the AMT.
52
```
The rule limiting the allowability of passive activity losses and credits applies to
A. Partnerships.
B. S corporations.
C. Personal service corporations.
D. Widely-held C corporations.
```
C. Personal service corporations.
Passive activity limits are applied to the following entities: individuals, estates, trust, personal service corporations and closely-held personal service corporations.
53
```
Lane Inc., an S corporation, pays single coverage health insurance premiums of $4,800 per year and additional premiums of $7,200 per year for family coverage. Mill is a ten percent shareholder-employee in Lane. On Mill's behalf, Lane pays Mill's family coverage under the health insurance plan. What amount of insurance premiums is includible in Mill's gross income?
A. $0
B. $4,800
C. $7,200
D. $12,000
```
D. $12,000
The cost of health and accident insurance premiums paid on behalf of the greater than 2% S corporation shareholder-employee (hereafter referred to as "shareholder") is deductible by the S corporation and reportable as additional compensation to the shareholder. Note that the problem indicates that "additional" premium for family coverage is $7,200, so this must be added to the $4,800 to get the total premium of $12,000.
54
```
Which of the following types of entities is entitled to the net operating loss deduction?
A. Partnerships.
B. S corporations.
C. Trusts and estates.
D. Not-for-profit organizations.
```
C. Trusts and estates.
Trusts and estates can carryback or carryforward a net operating loss.
55
Bass Corp., a calendar year C corporation, made qualifying 2015 estimated tax deposits based on its actual 2014 tax liability.
On March 15, 2016, Bass filed a timely automatic extension request for its 2015 corporate income tax return. Estimated tax deposits and the extension payment totaled $7,600. This amount was 95% of the total tax shown on Bass' final 2015 corporate income tax return. Bass paid $400 additional tax on the final 2015 corporate income tax return filed before the extended due date. For the 2015 calendar year, Bass was subject to pay
I. Interest on the $400 tax payment made in 2016.
II. A tax delinquency penalty.
A. I only.
B. II only.
C. Both I and II.
D. Neither I nor II.
A. I only.
Bass Corp. based its estimated payments on its 2014 tax liability, indicating that the corporation used the preceding year method. This method requires that the estimated payments to be equal to the corporation's tax liability during the preceding year. However, interest is required to be paid on any portion of the corporation's tax liability exceeding the amount of the estimated payments.
This response is, therefore, correct in stating that Bass Corp. would be required to pay interest on the $400 tax payment made in 2016. The tax delinquency penalty is imposed if the taxpayer fails to promptly file a tax return with a tax liability. As Bass Corp. filed an automatic extension on the original due date of its return, the corporation qualifies for a six month extension and is not viewed as being filed late.
Hence, this response is correct in implying that Bass Corp. would not be subject to the tax delinquency penalty.
56
```
Sam's year 2 taxable income was $175,000 with a corresponding tax liability of $30,000. For year 3, Sam expects taxable income of $250,000 and a tax liability of $50,000. In order to avoid a penalty for underpayment of estimated tax, what is the minimum amount of year 3 estimated tax payments that Sam can make?
A. $30,000
B. $33,000
C. $45,000
D. $50,000
```
B. $33,000
No penalty is imposed if the tax payments during the year are at least 90% of current year taxes or 100% of last year's taxes. If the taxpayer's AGI exceeds $150,000, then tax payments during the year must be at least 110% of last year's taxes. $30,000 x 110% = $33,000.
57
```
Blink Corp., an accrual basis calendar year corporation, carried back a net operating loss for the tax year ended December 31, 2014 Blink's gross revenues have been under $500,000 since inception. Blink expects to have profits for the tax year ending December 31, 2015.
Which method(s) of estimated tax payment can Blink use for its quarterly payments during the 2015 tax year to avoid underpayment of federal estimated taxes?
```
I. 100% of the preceding tax year method
II. Annualized income method
A. I only.
B. Both I and II.
C. II only.
D. Neither I nor II.
C. II only.
Corporations owing $500 or more in income tax for the tax year are required to make estimated tax payments or be subject to an interest penalty. The payments must be equal to the lesser of 100 percent of the tax liability for the current year (i.e., the annualized income method) or the preceding year (i.e., the preceding year method). The payments cannot be based on the preceding year if:
1) the corporation did not file a return showing a tax liability for that year (e.g., the corporation experienced a net operating loss);
2) the preceding year was less than 12 months; or
3) the corporation had taxable income of over $1,000,000.
Hence, Blink Corp. could not use the preceding year method for calculating its estimated tax payments because it sustained a net operating loss for that year. Blink Corp. must use the annualized income method.
This response correctly states that Blink Corp. could use only the annualized method.
58
Chris Baker's adjusted gross income on her 2015 tax return was $160,000. The amount covered a 12-month period. For the 2015 tax year, Baker may avoid the penalty for the underpayment of estimated tax if the timely estimated tax payments equal the required annual amount of
I. 90% of the tax on the return for the current year paid in four equal installments.
II. 100% of prior year's tax liability paid in four equal installments.
A. I only.
B. II only.
C. Both I and II.
D. Neither I nor II.
A. I only.
The required annual amount is usually the lower of 90 percent of the tax shown on the taxpayer's current year return or 100 percent of the tax shown on the taxpayer's prior year return.
If the taxpayer's adjusted gross income exceeded $150,000 in the prior year and the taxpayer elects to base his/her required annual amount on the prior year, then the taxpayer would have to use 110 percent of the prior year's return.
Thus, Baker must base his required annual amount on 90 percent of the current year's tax liability or, since his adjusted gross income exceeded $150,000, 110 percent of the prior year's liability.
59
```
An individual paid taxes 27 months ago, but did not file a tax return for that year. Now the individual wants to file a claim for refund of federal income taxes that were paid at that time. The individual must file the claim for refund within which of the following time periods after those taxes were paid?
A. One year.
B. Two years.
C. Three years.
D. Four years.
```
B. Two years.
The deadline for filing a claim for refund (on form 1040X) is the later of:
1. Two years from the payment of tax, or
2. Three years from the date the return was filed (or April 15 if filed before the original due date).
60
Vee Corp. retained Water, CPA, to prepare its 2015 income tax return. During the engagement, Water discovered that Vee had failed to file its 2012 income tax return.
Water should:
A. Prepare Vee's 2012 income tax return and submit it to the IRS.
B. Advise Vee that the 2012 income tax return has not been filed and recommend that Vee ignore filing its 2012 return since the statute of limitations has passed.
C. Advise the IRS that Vee's 2012 income tax return has not been filed.
D. Consider withdrawing from preparation of Vee's 2014 income tax return until the error is corrected.
D. Consider withdrawing from preparation of Vee's 2014 income tax return until the error is corrected.
61
Jan, an unmarried individual, gave the following outright gifts in 2015:
Donee Amount Use by Donee
Jones $15,000 Down payment on house
Craig 14,000 College tuition
Kande 5,000 Vacation trip
Jan's 2015 exclusions for gift tax purposes should total
A. $34,000
B. $33,000
C. $28,000
D. $9,000
B. $33,000
For gift tax purposes, donors may exclude the first $14,000 of gifts to each donee for each calendar year from the amount of taxable gifts.
Hence, Jan could exclude $14,000 of her $15,000 gift to Jones and, similarly, $14,000 of her $14,000 gift to Craig. Jan could exclude her entire $5,000 gift to Kande because the gift was less than $14,000. Therefore, Jan's 2015 exclusions for gift tax purposes should total $33,000.
This response is, therefore, correct.
62
Which of the following payments would require the donor to file a gift tax return?
A. $30,000 to a university for a spouse's tuition.
B. $40,000 to a university for a cousin's room and board.
C. $50,000 to a hospital for a parent's medical expenses.
D. $80,000 to a physician for a friend's surgery.
B. $40,000 to a university for a cousin's room and board.
63
Under the unified rate schedule,
A. Lifetime taxable gifts are taxed on a noncumulative basis.
B. Transfers at death are taxed on a noncumulative basis.
C. Lifetime taxable gifts and transfers at death are taxed on a cumulative basis.
D. The gift tax rates are 5% higher than the estate tax rates.
C. Lifetime taxable gifts and transfers at death are taxed on a cumulative basis.
Under the unified rate schedule, lifetime taxable gifts and transfers at death are taxed on a cumulative basis through reducing the amount of the unified credit by the sum of all amounts credited in preceding periods.
64
Which of the following credits may be offset against the gross estate tax to determine the net estate tax of a U.S. citizen?
Unified credit Credit for gift taxes paid on gifts made after 1976
Yes Yes
No No
No Yes
Yes No
Unified credit Yes Credit for gift taxes paid on gifts made after 1976 No
Certain credits may be offset against the gross estate tax to determine the net estate tax of a U.S. citizen. These credits are the unified credit, foreign death taxes, prior transfers and gift taxes paid on pre-1977 gifts.
65
Under which of the following circumstances is trust property with an independent trustee includible in the grantor's gross estate?
A. The trust is revocable.
B. The trust is established for a minor.
C. The trustee has the power to distribute trust income.
D. The income beneficiary disclaims the property, which then passes to the remainderman, the grantor's friend.
A. The trust is revocable.
66
```
Within how many months after the date of a decedent's death is the federal estate tax return (Form 706) due if no extension of time for filing is granted?
A. 9
B. 6
C. 4 1/2
D. 3 1/2
```
A. 9
If a decedent's estate exceeds $5,430,000 (2015), the executor of a decedent's estate is required to file Form 706, the federal estate tax return, within nine months of the date of death.
67
Fred and Amy Kehl, both U.S. citizens, are married. All of their real and personal property is owned by them as tenants by the entirety or as joint tenants with right of survivorship. The gross estate of the first spouse to die
A. Includes 50% of the value of all property owned by the couple, regardless of which spouse furnished the original consideration.
B. Includes only the property that had been acquired with the funds of the deceased spouse.
C. Is governed by the federal statutory provisions relating to jointly held property, rather than by the decedent's interest in community property vested by state law, if the Kehls reside in a community property state.
D. Includes one-third of the value of all real estate owned by the Kehls, as the dower right in the case of the wife or curtsey right in the case of the husband.
A. Includes 50% of the value of all property owned by the couple, regardless of which spouse furnished the original consideration.
68
In connection with a "buy-sell" agreement funded by a cross-purchase insurance arrangement, business associate Adam bought a policy on Burr's life to finance the purchase of Burr's interest. Adam, the beneficiary, paid the premiums and retained all incidents of ownership.
On the death of Burr, the insurance proceeds will be
A. Includible in Burr's gross estate, if Burr owns 50% or more of the stock of the corporation.
B. Includible in Burr's gross estate only if Burr had purchased a similar policy on Adam's life at the same time and for the same purpose.
C. Includible in Burr's gross estate, if Adam has the right to veto Burr's power to borrow on the policy that Burr owns on Adam's life.
D. Excludable from Burr's gross estate.
D. Excludable from Burr's gross estate.
"Buy-sell" agreements are excludable from a decedent's estate provided the agreement:
1) is a bona fide business agreement;
2) is not a device to transfer property to the decedents family for less than full and adequate consideration; and
3) has terms similar to those entered into by persons in arm's length transactions.
As the "buy-sell" in this case meets the requirements for being excludable from the decedent's estate, the insurance proceeds will be excluded from Burr's estate upon Burr's death.
69
The federal estate tax may not be reduced by a credit of
A. Foreign death taxes.
B. Credit for estate tax paid on a prior transfer of the same property within ten years of the death of the decedent.
C. Gift taxes paid on pre-1977 gifts.
D. State death taxes paid.
D. State death taxes paid.
An estate tax credit is not allowed for death taxes paid to states.
70
Which of the following items of property would be included in the gross estate of a decedent who died in 2015?
Clothes and jewelry of the decedent.
Cash of $400,000 given to decedent's friend in 2013. No gift tax was paid on the transfer.
Land purchased by decedent and held as joint tenants with rights of survivor-ship with decedent's brother.
A. 1, 2, and 3
B. 1 and 3
C. 1 and 2
D. 2 and 3
B. 1 and 3
All assets owned by the decedent as of the date of death are included in the gross estate. Even though the land was owned jointly, since it is held with a right of survivorship 100% of the value of the land is included in the estate of the first co-owner to die.
The only exception to this rule is if the other co-owner had paid for a percentage of the land when originally purchased. In that case the percentage purchased by this co-owner would be excluded from the gross estate.
The cash is excluded since it was not owned as of the date of death.
71
```
If the executor of a decedent's estate elects the alternate valuation date and none of the property included in the gross estate has been sold or distributed, the estate assets must be valued as of how many months after the decedent's death?
A. 3
B. 6
C. 9
D. 12
```
B. 6
For estate tax purposes, a decedent's gross estate is the all property owned by the decedent at death valued at its fair market value.
However, if the executor of the decedent's estate elects the alternative valuation date, the property is valued six months after the date of the decedent's death or, if earlier, the date the property is distributed or sold.
72
```
Campbell acquired a 10% interest in Vogue Partnership by contributing a building with an adjusted basis of $40,000 and a fair market value of $90,000. The building was subject to a $60,000 mortgage that was assumed by Vogue. The other partners contributed cash only. The basis of Campbell's partnership interest in Vogue is
A. $84,000
B. $34,000
C. $30,000
D. $0
```
D. $0
Basis in the partnership is computed as follows:
Adjusted basis of building contributed $ 40,000
Less: Debt assumed by partnership (60,000)
Plus: Campbell's 10% share of debt 6,000
($ 14,000)
Gain recognized 14,000
Ending basis -0
The computation above reflects that Campbell transferred 90% of the debt to other partners. The $14,000 of gain is recognized because basis cannot be negative. Therefore, ending basis is zero.
73
Under Section 444 of the Internal Revenue Code, certain partnerships can elect to use a tax year different from their required tax year. One of the conditions for eligibility to make a Section 444 election is that the partnership must
A. Be a limited partnership.
B. Be a member of a tiered structure.
C. Choose a tax year where the deferral period is no longer than three months.
D. Have less than 35 partners.
C. Choose a tax year where the deferral period is no longer than three months.
Under Code Section 444, partnerships, S corporations and personal service companies may elect to have a tax year that differs from their required tax year, provided the tax year chosen does not have a deferral period of longer than three months.
Partnerships and S corporations making the election must approximate the amount of tax to partners and S corporations that is attributable to income earned in the short period and make required payments of that amount.
74
The method used to depreciate partnership property is an election made by
A. The partnership and must be the same method used by the "principal partner."
B. The partnership and may be any method approved by the IRS.
C. The "principal partner."
D. Each individual partner.
B. The partnership and may be any method approved by the IRS.
The partnership elects the method used to depreciate partnership property with the results passed through to the partners. This method may be any type approved by the IRS.
If any of the partners do not use the same treatment as the partnership and do not notify the IRS of the different treatment, the IRS may adjust the partner's return to conform to the return of the partnership with the additional tax being assessed.
75
Juan contributed land with a basis of $10,000 and a fair market value of $15,000 to the Sounds Partnership. He also contributed services with a value of $25,000. In return, he received a partnership interest in Sounds with a value of $40,000.
What is Juan's basis in his partnership interest?
A. $0
B. $10,000
C. $35,000
D. $40,000
C. $35,000
Juan receives basis in his partnership interest equal to the basis of the property contributed. He also must recognize $25,000 of wage income for receiving a portion of the partnership interest in return for services rendered. Therefore, he also receives $25,000 of basis for this income recognition. Thus, his total basis is $10,000 + $25,000, or $35,000.
76
```
In return for a 20% partnership interest, Skinner contributed $5,000 cash and land with a $12,000 basis and a $20,000 fair market value to the partnership. The land was subject to a $10,000 mortgage that the partnership assumed. In addition, the partnership had $20,000 in recourse liabilities that would be shared by partners according to their partnership interests. What amount represents Skinner's basis in the partnership interest?
A. $27,000
B. $21,000
C. $19,000
D. $13,000
```
D. $13,000
```
Basis is determined as follows:
Cash $ 5,000
Basis of land 12,000
Mortgage assumed by partnership (10,000)
Skinner's share of mortgage (20%) 2,000
4,000
```
77
At the beginning of 2016, Paul owned a 25% interest in Associates partnership.
During the year, a new partner was admitted and Paul's interest was reduced to 20%.
The partnership liabilities at January 1, 2016, were $150,000, but decreased to $100,000 at December 31, 2016. Paul's and the other partners' capital accounts are in proportion to their respective interests.
Disregarding any income, loss or drawings for 2016, the basis of Paul's partnership interest at December 31, 2016, compared to the basis of his interest at January 1, 2016 was
A. Decreased by $37,500.
B. Increased by $20,000.
C. Decreased by $17,500.
D. Decreased by $5,000.
C. Decreased by $17,500.
At January 1, 2016, Paul owned a 25 percent interest in Associates partnership and partnership's liabilities were $150,000, putting the value of Paul's interest at $37,500. During the year, a new partner was admitted and Paul's interest was reduced to 20%. The partnership's liabilities also were reduced, decreasing to $100,000. Paul's 20 percent interest puts his basis in the partnership interest on December 31, 2016 at $20,000.
Thus, the basis of Paul's partnership interest at December 31, 2016, compared to the basis of his interest at January 1, 2016, decreased by $17,500.
78
Eng contributed the following assets to a partnership in exchange for a 50% interest in the partnership's capital and profits:
```
Cash $50,000
Equipment:
Fair market value 35,000
Carrying amount (adjusted basis) 25,000
The basis for Eng's interest in the partnership is
```
A. $37,500
B. $42,500
C. $75,000
D. $85,000
C. $75,000
A partner's initial basis in a partnership equals the amount of cash and the basis of any property contributed by the partner to the partnership. If the contributed property is subject any liabilities, the partner's basis is reduced by the amount of liabilities assumed by the other partners.
Eng contributed $50,000 in cash and property with an adjusted basis of $25,000, putting Eng's basis in the partnership at $75,000.
79
```
Able and Baker are equal members in Apple, an LLC. Apple has elected not to be treated as a corporation. Able contributes $7,000 cash and Baker contributes a machine with a basis of $5,000 and a fair market value of $10,000, subject to a liability of $3,000. What is Apple's basis for the machine?
A. $ 2,000
B. $ 5,000
C. $ 8,000
D. $ 10,000
```
B. $ 5,000
Upon a partnership formation the partnership's basis in the assets received from the contributing partners is the basis in the hands of the partner. Thus, Apple's basis is $5,000.
80
On June 1, 2016, Kelly received a 10% interest in Rock Co., a partnership, for services contributed to the partnership. Rock's net assets at that date had a basis of $70,000 and a fair market value of $100,000.
In Kelly's 2016 income tax return, what amount must Kelly include as income from transfer of partnership interest?
A. $7,000 ordinary income.
B. $7,000 capital gain.
C. $10,000 ordinary income.
D. $10,000 capital gain.
C. $10,000 ordinary income.
When an individual contributes services to a partnership for a capital interest in the partnership, the individual reports taxable income equal to the fair market value of the transferred capital interest.
Capital interests received are treated as guaranteed payments, which means the capital interest is viewed a salary payment and, as such, reported as ordinary income by the partner.
Since the fair market value of the partnership's net assets is $100,000 and Kelly contributed services for a 10 percent interest in the partnership, Kelly must recognize $10,000 of ordinary income.
81
For an individual business owner, which of the following would typically be classified as a capital asset for federal income tax purposes?
A. Accounts receivable.
B. Marketable securities.
C. Machinery and equipment used in a business.
D. Inventory.
B. Marketable securities.
Marketable securities are an investment that qualifies as a capital asset.
82
Bluff purchases equipment for business use for $35,000 and makes $1,000 of improvements to the equipment. After deducting depreciation of $5,000, Bluff gives the equipment to Russett for business use. At the time the gift is made, the equipment has a fair market value of $32,000. Ignoring gift-tax consequences, what is Russett's basis in the equipment?
A. $31,000
B. $32,000
C. $35,000
D. $36,000
A. $31,000
Bluff's adjusted basis in the equipment before the gift is $31,000 (cost basis of $35,000 + $1,000 capital improvement - $5,000 cost recovery). When property is gifted, the donee has two bases in the gifted property: the gain basis is the donor's adjusted basis of $31,000 and the loss basis (also $31,000) is the lower of the adjusted basis ($31,000) and fair market value ($32,000). Therefore, Russett's gain and loss bases are both $31,000.
83
Hall, a divorced person and custodian of her 12-year-old child, files her 2016 federal income-tax return as head of a household. She submits the following information to the CPA, who prepares her 2016 return:
The divorce agreement, executed in 2014 provides for Hall to receive $3,000 per month, of which $600 is designated as child support. After the child reaches 18, the monthly payments are to be reduced to $2,400 and are to be continued until remarriage or death. However, for the year 2016, Hall receives a total of only $5,000 from her former husband. Hall pays an attorney $2,000 in 2016 in a suit to collect the alimony owed.
In June 2016, Hall's mother gifts her 100 shares of a listed stock. The donor's basis for this stock, which she bought in 1985, was $4,000, and market value on the date of the gift was $3,000. Hall sells her stock in July 2016 for $3,500. The donor pays no gift tax.
During 2016, Hall spends a total of $1,000 on state lottery tickets. Her lottery winnings in 2016 totaled $200.
Hall earns a salary of $25,000 in 2016. Hall is not covered by any type of retirement plan, but contributes $2,000 to an IRA in 2016.
In 2016, Hall sells an antique that she bought in 1995 to display in her home. Hall pays $800 for the antique and sells it for $1,400, using the proceeds to pay a court-ordered judgment.
Hall pays the following expenses in 2016 pertaining to the home that she owns: realty taxes, $3,400; mortgage interest, $7,000; casualty insurance, $490; assessment by city for construction of a sewer system, $910; and interest of $1,000 on a personal, unsecured bank loan, the proceeds of which were used for home improvements. Hall does not rent out any portion of the home.
The $600 gain that Hall realizes on the sale of the antique should be treated as
A. Ordinary income.
B. Long-term capital gain.
C. An involuntary conversion.
D. A non-taxable antiquities transaction.
B. Long-term capital gain.
84
Carter purchased 100 shares of stock for $50 per share. Ten years later, Carter died on February 1 and bequeathed the 100 shares of stock to a relative, Boone, when the stock had a market price of $100 per share. One year later, on April 1, the stock split 2 for 1.
Boone gave 100 shares of the stock to another of Carter's relatives, Dixon, on June 1 that same year, when the market value of the stock was $150 per share.
What was Dixon's basis in the 100 shares of stock when acquired on June 1?
A. $5,000
B. $5,100
C. $10,000
D. $15,000
A. $5,000
When the shares are bequeathed to Boone, his basis in the shares is the fair market value at the date of death, which is $100 per share. When the stock splits 2 for 1, Boone then owns 200 shares of stock with a basis of $50 each. When the shares are gifted to Dixon, she takes the basis in the stock that Boone had, or $50. Therefore, Boone's total basis is $5,000 (100 shares x $50 per share).
85
Joe Hall owns a limousine for use in his personal service business of transporting passengers to airports. The limousine's adjusted basis is $40,000.
In addition, Hall owns his personal residence and furnishings that together cost him $280,000.
Hall's capital assets amount to
A. $320,000
B. $280,000
C. $40,000
D. $0
B. $280,000
Capital assets are defined as all those assets held by the taxpayer, except for those listed in Code Section 1221. Those assets listed in Code Section 1221 include inventory, accounts receivable and depreciable property or real estate used in business.
Hall's limousine does not qualify as a capital asset, because it is depreciable property used in business. However, Hall's personal residence and furnishings qualify as capital assets, as they are not inventory, accounts receivable and depreciable property or real estate used in business.
Therefore, Hall's capital assets amount to $280,000.
86
Jackson, a single individual, inherits Bean Corp. common stock from his parents. Bean is a qualified small business corporation under Code Section 1244.
The stock costs Jackson's parents $20,000 and has a fair market value of $25,000 at the parents' date of death. During the year, Bean declares bankruptcy and Jackson is informed that the stock is worthless.
What amount may Jackson deduct as an ordinary loss in the current year?
A. $0
B. $3,000
C. $20,000
D. $25,000
A. $0
To quality for ordinary treatment, 1244 stock must be issued to the taxpayer for money or other property transferred by the taxpayer to the corporation.
87
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A taxpayer lived in an apartment building and had a two-year lease that began 16 months ago. The taxpayer's landlord wanted to sell the building and offered the taxpayer $10,000 to vacate the apartment immediately. The taxpayer's lease on the apartment was a capital asset but had no tax basis. If the taxpayer accepted the landlord's offer, the gain or loss would be which of the following?
A. An ordinary gain.
B. A short-term capital loss.
C. A long-term capital gain.
D. A short-term capital gain.
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C. A long-term capital gain.
Since the lease is a capital asset the gain is capital in nature. The gain is long-term since the lease is more than one year.
88
In the current year, Fitz, a single taxpayer, sustained a $48,000 loss on Code Sec. 1244 stock in JJJ Corp., a qualifying small business corporation, and a $20,000 loss on Code Sec. 1244 stock in MMM Corp., another qualifying small business corporation. What is the maximum amount of loss that Fitz can deduct for the current year?
A. $50,000 capital loss.
B. $68,000 capital loss.
C. $18,000 ordinary loss and $50,000 capital loss.
D. $50,000 ordinary loss and $18,000 capital loss.
D. $50,000 ordinary loss and $18,000 capital loss.
If Section 1244 stock is sold at a loss the loss is treated as an ordinary loss up to the applicable limit. The limit applies per calendar year and is $50,000 for single taxpayers and $100,000 for those filing as married-joint. Fitz's total Section 1244 losses are $68,000 but only $50,000 of the loss is characterized as ordinary. The remaining $18,000 is treated as a capital loss since investments are a capital asset.
89
Individual Lark's year 2 brokerage account statement listed the following capital gains and losses from the sale of stock investments:
Short-term capital gain $ 6,000
Long-term capital gain 14,000
Short-term capital loss 4,000
Long-term capital loss 8,000
In addition, two stock investments became worthless in year 2. Public Company X stock was purchased in December, year 1, for $5,000, and formal notification was received by Lark on July, year 2, that it was worthless. Private company Section 1244 stock was issued to Lark for $10,000 in January, year 1, and was determined to be worthless in December, year 2. What is Lark's year 2 net capital gain or loss before any capital loss limitation?
A. $3,000 short-term capital gain.
B. $2,000 short-term capital gain and $1,000 long-term capital gain.
D. $2,000 short-term capital gain and $6,000 long-term capital gain.
B. $2,000 short-term capital gain and $1,000 long-term capital gain.
The Section 1244 loss is an ordinary loss so it is not included in the computation of the net capital gain or loss. The worthless stock of Company X results in a $5,000 long-term capital loss because worthless securities are deemed to become worthless on the last day of the tax year (December 31, Year 2).
Lark has a net short-term capital gain of $2,000 ($6,000 STCG − $4,000 STCL). There is a net long-term capital gain of $1,000 ($14,000 LTCG − $8.000 LTCL − $5,000 LTCL).
90
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Summer, a single individual, had a net operating loss of $20,000 three years ago. A Code Sec. 1244 stock loss made up three-fourths of that loss. Summer had no taxable income from that year until the current year. In the current year, Summer has gross income of $80,000 and sustains another loss of $50,000 on Code Sec. 1244 stock. Assuming that Summer can carry the entire $20,000 net operating loss to the current year, what is the amount and character of the Code Sec. 1244 loss that Summer can deduct for the current year?
A. $35,000 ordinary loss.
B. $35,000 capital loss.
C. $50,000 ordinary loss.
D. $50,000 capital loss.
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C. $50,000 ordinary loss.
Even though the NOL includes $15,000 ($20,000 × 3/4) of Section 1244 loss that can be combined with the current Section 1244 loss of $50,000, the maximum deduction for a given tax year is $50,000 for a Section 1244 loss ($100,000 if married filing jointly).
91
This year ABC corporation, a calendar-year, accrual-basis corporation, made a nonliquidating cash distribution to its shareholders of $1,000,000 with respect to its stock. At that time ABC's current and accumulated E&P totaled $750,000 and its total paid-in capital for tax purposes was $10,000,000. Since ABC had no corporate shareholders, the distribution:
A. was taxable as $750,000 in dividend income to its shareholders.
B. reduces its shareholders' adjusted basis in the ABC stock by $250,000.
C. Both of the above are correct.
D. None of the above are correct.
C. Both of the above are correct.
The $1,000,000 distribution is taxable as dividend income to the extent of ABC's earnings and profits of $750,000. The remaining $250,000 of the distribution reduces the shareholders' bases in their stock (which is substantial since there is $10,000,000 of paid-in-capital).
92
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On January 1, 2016, Kee Corp., a C corporation, had a $50,000 deficit in earnings and profits. For 2016 Kee had current earnings and profits of $10,000 and made a $30,000 cash distribution to its stockholders. What amount of the distribution is taxable as dividend income to Kee's stockholders?
A. $30,000
B. $20,000
C. $10,000
D. $0
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C. $10,000
Corporate distributions to shareholders are taxable to the shareholder as dividend income to the extent earnings and profits, current and accumulated. Distributions in excess of earnings and profits are treated as returns of capital that are nontaxable except to the extent that the distribution exceeds the shareholders basis in the property.
Since Kee Corp. had current earnings of $10,000, the shareholders would be viewed as receiving $10,000 in dividend income. The remaining $20,000 of the distribution would be treated as a return of capital. Distributions are deemed to be paid from current earnings and profits and then from accumulated earnings and profits.
93
Nyle Corp. owned 100 shares of Beta Corp. stock that it bought in 1993 for $9 per share. In 2016, when the fair market value of the Beta stock was $20 per share, Nyle distributed this stock to a noncorporate shareholder.
Nyle's recognized gain on this distribution was
A. $2,000
B. $1,100
C. $900
D. $0
B. $1,100
Corporations recognize taxable gains but not losses from nonliquidating distribution of appreciable property to their shareholders. The transaction is viewed as if the corporation sold the property to its shareholders at its fair market value on the day of the distribution.
Hence, Nyle Corp. would recognize a gain of $1,100, the fair market value of the Beta stock (100 shares multiplied by $20 per share) less its basis in the stock (100 shares multiplied by $9 per share).
94
Brisk Corp. is an accrual-basis, calendar-year C corporation with one individual shareholder. At year end, Brisk had $600,000 accumulated and current earnings and profits as it prepared to make its only dividend distribution for the year to its shareholder. Brisk could distribute either cash of $200,000 or land with an adjusted tax basis of $75,000 and a fair market value of $200,000. How would the taxable incomes of both Brisk and the shareholder change if land were distributed instead of cash?
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Brisk's taxable income Shareholder's taxable income
No change No change
Increase No change
No change Decrease
Increase Decrease
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Brisk's taxable income Increase
Shareholder's taxable income No change
If Brisk distributes $200,000 cash the shareholder will have $200,000 of dividend income (since sufficient earnings and profits exist). It the land is distributed, the amount of the distribution is the land's fair market value of $200,000 so the shareholder would still have $200,000 of dividend income. Thus, there is no change for the shareholder's taxable income.
If Brisk distributes appreciated property as a dividend, it must recognize the appreciation in the property as income ($200,000 − $75,000 = $125,000). Therefore, Brisk would have higher taxable income if the land was distributed in comparison to the cash.
95
Dahl Corp. was organized and commenced operations in 1930. At December 31, 2016, Dahl had accumulated earnings and profits of $9,000 before dividend declaration and distribution.
On December 31, 2016 Dahl distributed cash of $9,000 and a vacant parcel of land to Green, Dahl's only stockholder. At the date of distribution, the land had a basis of $5,000 and a fair market value of $40,000.
What was Green's taxable dividend income in 2016 from these distributions?
A. $9,000
B. $14,000
C. $44,000
D. $49,000
C. $44,000
Corporate distributions to shareholders are taxed to shareholders as dividend income to the extent that the distribution does not exceed current and accumulated earnings and profits. Distributions in excess of current and accumulated earnings and profits are treated as returns of capital. The distribution of appreciated property increases a corporation's earnings and profits increase by the amount of the difference between the distributed property's fair market value and the corporation's adjusted basis in the distributed property.
Thus, while Dahl Corp. had earnings and profits totaling $9,000 before the dividend declaration and distribution, the corporation's earnings and profits increased by $35,000, the land's $40,000 fair market value less its adjusted basis of $5,000, to $44,000 due to the distribution of the land.
Green received $49,000 of property in the distribution - $9,000 in cash and land with a fair market value of $40,000. The amount of the distribution classified as dividend income is limited to the corporation's earnings and profits. Thus, Green would report $44,000 of dividend income from the distribution.
