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Question 1

Real property

Answer 1

Real property includes land and all items permanently affixed to the land (e.g., buildings, pav

Question 2

Complete liquidation of partnership

Answer 2

Rule: In a complete liquidation of a partnership, the partner’s basis in the distributed property is the same as the adjusted basis of his partnership interest (the partner is essentially exchanging his partnership interest for assets of the partnership), reduced by any monies received. The partner recognizes gain only to the extent that money received exceeds the partner’s basis in the partnership.

Question 3

Statue of limitations

Answer 3

Unless there is a substantial 25% misstatement of income or fraud, the statue of limitations is generally three years from the later of the due date or filing date of a return. This adjustment is improper because there is no evidence of fraud or substantial misstatement and some of the years are old enough that the three year statute has expired.

Question 4

Gift rules

Answer 4

Rules: Every transfer of money or property, whether real or personal, tangible or intangible, for less than adequate or full consideration is a gift. A donor may exclude the maximum allowable amount of gifts according to the tax law each year made to each donee. In addition, there are four items that qualify for unlimited exclusion from gift tax: (1) payments made directly to an educational institution for a donee’s tuition, (2) payments made directly to a health care provider for medical care, (3) charitable gifts, and (4) marital transfers. Relationship of the donee to the donor is not of consequence.

Question 5

Gift

Answer 5

annual gift exclusion is $15K

Question 6

Capital assets and 1231 assets

Answer 6

Hall’s limousine used in his trade or business is considered a Section 1231 asset. Section 1231 assets are not considered capital assets. Choice “c” is incorrect. Hall’s personal residence and personal furnishings are considered capital assets.

Question 7

Calendar year requirments

Answer 7

rule : An estate may choose the same accounting period as the decedent, or it may choose a calendar year or any fiscal year it wishes, with a few limited exceptions. ule Trusts except taxexempt trusts must adopt a calendar year.

Question 8

Partners basis

Answer 8

Rule: In general, a partner’s basis in his/her partnership interest will be the amount of cash contributed plus the adjusted basis of any property contributed in exchange for the interest.

Question 9

Not elected to be a corporation

Answer 9

This LLC has not elected to be treated as a corporation. Therefore, it will be treated as a partnership by default. Decker’s basis will be the adjusted basis of the property contributed less 50% of the liability, which is assumed by the other partner. $5,000 – $1,500 = $3,500.

Question 10

Depreciable basis

Answer 10

The rules for depreciable basis in tax are generally the same as the AAP rules for capitaliing an asset. The depreciable basis is the cost associated with the purchase of the asset and with getting the asset ready for its intended use. Further improvements are also capitalied, and the basis is reduced for any accumulated depreciation. In this case, the cost of obtaining the equipment and getting the equipment ready for its intended use

Question 11

Principal residence exception

Answer 11

This is a principal residence that the taxpayer has owned and lived in for the last seven years. This exceeds the requirement of at least two of the last five years. Baker may therefore exclude up to $250,000 of gain. The realized gain is $84,000 ($165,000 selling price – $70,000 adjusted basis – $10,000 selling expenses – $1,000 fix-up expenses incurred within 90 days of the sale). All of the realized gain is excluded, and none of it is recognized.

Question 12

Guaranteed payments

Answer 12

ule uaranteed payments are reasonable compensation paid to a partner for serv ices rendered without regard to the partner’s ratio of income. They are allowable ta deductions to the partnership and ordinary income to the partner receiv ing them. ote A guaranteed payment will not increase a partner’s basis in the partnership because the payment has been distributed to the partner.

Question 13

due date of a federal estate tax return (Form 706), for a taxpayer who died and didnt file an extention

Answer 13

unless an extension is filed, Form 706 is due exactly nine months after the decedent’s death

Question 14

Different types of assets

Answer 14

An automobile for personal use is a capital asset. Depreciable business property is a Section 1231 asset, not a capital asset. . Accounts receivable for inventory sold is an ordinary income asset, just like the original inventory. Real property used in a trade or business is a Section 1231 asset, not a capital asset.

Question 15

partnership adj basis

Answer 15

Pert’s adjusted basis in the partnership is equal to the $12,000 adjusted basis of the land he contributed to the partnership less the 50% allocable percentage of the $4,000 mortgage assumed by the other partners.

Question 16

Distributable net income ( DNI)

Answer 16

Distributable netincome is computed as the trusts net income less any expenses allocatable to income.

Question 17

Worthless security

Answer 17

The rule is that a worthless security is treated as being sold or exchanged on the last day of the year it becomes worthless.

Question 18

Contributed assets to a partnership

Answer 18

Rule enerally, no gain or loss is recognied on the contribution of property to a partnership in return for partnership interest. The basis of the partnership interest is the basis of the property in the hands of the partner upon contribution. The partnership takes on the contributor’s basis of the contributed property however, if the fair market value of the property differs from the basis, the amount of the unrealied gain or loss at the date of contribution is specially allocated to the contributing partner upon the sale of that contributed property

Question 19

Partnership termination or complete liquidation

Answer 19

in a complete liquidation to a partnership the partners basis in the property is the same as the adjusted basis of his paternship interest reduced by his any monies received. This is ussually a non taxable event
However if partner receives money that exceeds his basis in his partnership than a gain or loss is recognized

Question 20

llc

Answer 20

Choice “c” is correct. LLCs can select whether to be taxed as a partnership, corporation or sole proprietorship. An LLC with at least two owners is taxed as a partnership unless an election is made to be taxed as a corporation. Choice “b” is incorrect. An LLC cannot become a public company. It must convert to a corporation before issuing an IPO. Choice “d” is incorrect. All LLC members generally have the right to amend the LLC operating agreement, provide input, and manage LLCs. The Dorians may not v iew this “sharing” as a positive feature of their organization. Choice “a” is incorrect. A single-member LLC is considered a disregarded entity for federal income tax purposes and is treated as a sole proprietorship. It appears that both Jane and John Dorian will be “members” and should be able to elect either a partnership or corporation for tax purposes.

Question 21

revokable trust

Answer 21

Choice “d” is correct. If a trust is revocable, then a completed gift has not taken place. Therefore, the assets of the trust are still included in the estate of the grantor. Choice “c” is incorrect. If a trust is revocable, then a completed gift has not taken place. Therefore, the grantor will not be subect to gift taxes on the transfer. Choice “a” is incorrect. Although the trust is revocable, it is still a valid trust for legal purposes. Therefore, the assets are not subect to probate upon the death of the grantor. Choice “b” is incorrect. The trust is revocable. Therefore, the grantor still has the power to control the trust funds.

Question 22

Inherited property

Answer 22

There is no income tax on the value of inherited property. The property was distributed four months after death and the value that day (,) is used for the basis. , - , . Choice “d” is incorrect. There is no income tax on the value of inherited property. heirs are not taxed on inheritances. The income or loss results when inherited property is sold. Choice “c” is incorrect. There is no income tax on the value of inherited property. The gain on the sale is the difference between the sales price of , and all’s basis. all’s basis is the alternate valuation elected by the executor.

Question 23

Types of assets

Answer 23

Assets held for personal use are capital assets. Choice “c” is incorrect. Depreciable personal property used in a trade or business (including fixtures used in a retail store) is not a capital asset. Instead, such property is Section 1231 or Section 1245 property. Choice “a” is incorrect. Trade accounts receivable are not capital assets. Instead, such receivables are ordinary assets. Choice “d” is incorrect. Real property used in a trade or business (including real property used to store business assets) is not a capital asset. Instead, such property is Section 1231 or Section 1250 property.

Question 24

Required tax year for a partnership

Answer 24

Rule: Per IRC Section 0(b), a partnership tax year must have the same taxable year as the common taxable year of the partners that, in the aggregate, have interest greater than 50, which is determined based on the “testing day,” the first day of the partnership’s tax year (not considering the maority interest rule). Note: After a change is made to the “maority-interest” tax year end, the partnership does not have to change to another tax year for two years following the year of change. Exceptions to the rule exist. (1) If there is no “maority-interest” tax year, then the tax year is the tax year of all of the principal partners of the partnership (those owning 5 or more of the income or capital of the partnership). (2) If the partnership is still unable to determine a tax year using the general rule or the first exception, then the tax year that causes the least aggregate deferral of income to the partners must be adopted.

Question 25

Partnership

Answer 25

enerally, no gain or loss is recognied on a contribution of property to a partnership in return for a partnership interest. The partners original basis for a partnership interest acuired by contribution of property is the adusted tax basis of the property (unless the property is subect to excess liability, which is not the case in this uestion).

Question 26

Related party transactions - loss dissallowed

Answer 26

Choice “c” is correct. The parent has a realied loss of $2,000 $,000 sale less $8,000 cost. However, none of this loss is recognied, because it is disallowed under the related party transaction rules. The child has a realied gain of $1,000 $,000 sale less $,000 cost. This gain can be reduced but not below zero by the disallowed loss of the parent. Therefore, the recognied gain to the child is zero.

Question 27

non seperately state income

Answer 27

eenues 20000
alaies 000
uaantee paents 0000
ent expense 2000
epeiation expense 8000
total nonsepaatel state inoe 000

Question 28

Inherited property

Answer 28

unless the executor elects the alternative valuation date the basis to the inheritor is the fair market value at date of death

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Question 29

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Answer 29

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Question 30

annual Section 1 Election to Epense Certain Depreciable Business Assets limit is $108,000

Answer 30

nder the election to epense certain depreciable business assets sec. 1, the tapayer may epense the cost of the depreciable asset up to the limitation, in this eample $108,000. Therefore, only the cost of the depreciable tangible business assets can be epensed $100,000.

Question 31

Capital assets

Answer 31

Investment assets of a taxpayer that are not inventory are capital assets

Question 32

Estate

Answer 32

All income and expenses of a trust are allocated to either income or Corpus i.E principal by the trust document, the income beneficiary will only receive the income and not hte corpus

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Question 33

cost of land

Answer 33

includes purchase of title policy

Question 34

Partnership basis

Answer 34

recourse liabilities increase the cost basis

Question 35

Gifts

Answer 35

If the annual exclusion is , and giftsplitting is elected, then the couple can give up to , per recipient without it being a taxable gift. Both of these gifts are under that amount. ote that this is not the actual current annual exclusion. But the , is an assumption, given in the facts of the uestion

Question 36

Net capital loss

Answer 36

The capital loss deduction is limited to $3,000 per year with the excess carried forward indefinitely. In this case, Lee can deduct $3,000 against his income and carry forward the remaining $5,000.

Question 37

Gift

Answer 37

Rule: Every transfer of money or property, whether real or personal, tangible or intangible, for less than adequate or full consideration is a gift. There are four items that qualify for unlimited exclusion from gift tax and qualify to be excluded from being reported on a gift tax return: (1) payments made directly to an educational institution for a donee’s tuition, (2) payments made directly to a health care prov ider for medical care (3) charitable gifts, and (4) marital transfers. Relationship of the donee to the donor is not of consequence.

Question 38

MACRS

Answer 38

When a taxpayer places 40% or more of its property (other than certain qualifying real property) into serv ice in the last quarter of the taxable year, the corporation must use the mid-quarter convention for MACRS depreciation purposes. With this method the acquisitions are segregated by quarter and treated as if placed in service in the middle of each respective quarter.

Question 39

Parttner basis

Answer 39

When a partner’s share of partnership liabilities increases, that partner’s basis in the partnership increases by his share of the increase. Since the partner has unlimited liability, the partnership liabilities are treated as if the partner personally borrowed the money and then contributed it to the partnership.

Question 40

amounts reported on individual income tax return

Answer 40

The deduction of the ordinary loss is limited to Junior’s basis and any at risk amounts. Junior’s basis is calculated as $40,000 + $12,500 capital gain - $5,000 charitable contributions = $47,500; thus the ordinary loss deducted on his return would be limited to $47,500.

Question 41

Partership basis

Answer 41

The fair market value of property (high or low) is irrelevant in determining Black’s basis in Decorators. The partner’s adusted basis is used. since the mortgage does not exceed Black’s basis, he will not recognie a gain on the contribution of the encumbered property to Decorators.

Question 42

Fiduciary return required if

Answer 42

Rule: A fiduciary must file a return on Form 1041 if the estate has gross income of $600 or more for the tax year and if none of the beneficiaries are nonresident aliens.

Question 43

income distribution

Answer 43

he income distribution deduction is the lesser of the actual distribution to beneficiary or distributable net income (DN). f DN is 14,000 and the distribution to the beneficiary is 0,000, the income distribution deduction is 14,000. his, in effect, shifts the taxation of 14,000 from the trust to the beneficiary.