Partnership Taxation
Chapter Exam Questions
Course Introduction
Partnership Taxation explores the federal income tax rules and concepts applicable to partnerships and their partners, including the formation, operation, distribution, and termination phases of the partnership life cycle. The course examines the allocation of income, gain, loss, and deduction among partners, the basis rules for partnership interests and partnership property, and the tax consequences of contributions and distributions. Students will analyze statutory provisions, Treasury regulations, and key judicial decisions, developing a foundational understanding of Subchapter K of the Internal Revenue Code and its impact on real-world partnership transactions.
Recommended Textbook
South Western Federal Taxation 2009 Corporations Partnerships Estates and Trusts 32nd Edition
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Chapter 1: Understanding and Working With the Federal Tax Law
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Q1) There are three Courts of Federal Claims.
A)True
B)False
Answer: False
Q2) How does a treaty with a foreign country impact a section in the Internal Revenue Code?
Answer: The United States enters into tax treaties (sometimes called tax conventions)with foreign countries to render mutual assistance in tax enforcement and to avoid double taxation.Neither a tax law or tax treaty takes precedence.When there is a conflict,the most recently enacted item will take precedence.
Q3) A taxpayer may select the District Court that will hear his or her tax dispute.
A)True
B)False
Answer: False
Q4) When the Senate version of a tax bill differs from that passed by the House,a Joint Conference Committee drafts a compromise tax bill.
A)True
B)False
Answer: True
Page 3
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Chapter 2: Corporations: Introduction and Operating Rules
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Q1) A cash basis corporation that incurs (but does not pay)qualifying organizational expenditures in its first year of operations may include such expenses in the 180-month amortization period.
A)True
B)False Answer: True
Q2) Which of the following statements is incorrect regarding the taxation of C corporations?
A)The highest corporate marginal tax rate is 39%.
B)Taxable income of a personal service corporation is taxed at a flat rate of 35%.
C)A tax return must be filed whether or not the corporation has taxable income.
D)Similar to individuals, the marginal tax rate brackets for corporations are adjusted for inflation.
E)None of the above.
Answer: D
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Chapter 3: Corporations: Special Situations
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Q1) Passive activity losses of certain closely held corporations and personal service corporations may be an AMT adjustment.
A)True
B)False
Answer: True
Q2) Swan Corporation has gross receipts of $3 million of which $1 million are non-DPGR.CGS identified with DPGR is $1.3 million,while overall selling and administrative expenses are $600,000.Under the simplified deduction method,determine Swan's QPAI. Answer: $300,000.Amount of overall expenses allocated to DPGR is $400,000 ($2 million/$3 million * $600,000).Thus,QPAI is: ($2 million - $1.3 million - $400,000)= $300,000.
Q3) A large NOL carryover from a prior year when combined with large QPAI for the current year will substantially increase a corporation's DPAD for the current year.
A)True
B)False
Answer: False
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Chapter 4: Corporations: Organization and Capital Structure
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Q1) A shareholder lends money to his corporation in his capacity as an investor.If the loans become worthless,a business bad debt results.
A)True
B)False
Q2) When a taxpayer transfers property subject to a mortgage to a controlled corporation in an exchange qualifying under § 351,the transferor shareholder's basis in stock received in the transferee corporation is increased by the amount of the mortgage on the property.
A)True
B)False
Q3) Tina incorporates her sole proprietorship with assets having a fair market value of $100,000 and an adjusted basis of $110,000.Even though § 351 applies,Tina may recognize her realized loss of $10,000.
A)True
B)False
Q4) For transfers falling under § 351,what are the holding period rules for stock received by the shareholder and for the assets transferred to the corporation?
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Chapter 5: Corporations: Earnings and Profits and Dividend
Distributions
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Q1) Nondeductible meal and entertainment expenses must be subtracted from taxable income to determine current E & P.
A)True
B)False
Q2) Section 179 expenses in year of election.
Q3) On January 1,Tanager Corporation (a calendar year taxpayer)has accumulated E & P of $190,000.During the year,Tanager incurs a net loss of $240,000 from operations that accrues ratably.On June 30,Tanager distributes $100,000 to Sharisa,its sole shareholder,who has a basis in her stock of $40,000.How much of the $100,000 is a dividend to Sharisa?
A)$0.
B)$70,000.
C)$60,000.
D)$50,000.
E)None of the above.
Q4) A distribution from a corporation will be taxable to the recipient shareholders only to the extent of the corporation's E & P and any excess over the basis in the stock investment.
A)True B)False
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Chapter 6: Corporations: Redemptions and Liquidations
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Q1) Carol,Bonnie,and Ann,sisters,own 400 shares,400 shares,and 200 shares,respectively,in Teal Corporation (E & P of $800,000).Teal Corporation redeems all of Ann's stock for $120,000.Ann paid $50 a share for the stock five years ago.Ann continued to serve as president of Teal after the redemption.With respect to the redemption:
A)Ann has a long-term capital gain of $120,000.
B)Ann has a long-term capital gain of $110,000.
C)Ann has dividend income of $120,000.
D)Ann has dividend income of $110,000.
E)None of the above.
Q2) The stock in Black Corporation is owned by Sam and Susan,who are unrelated.Sam owns 70% and Susan owns 30% of the stock in Black Corporation.The following assets are to be distributed in complete liquidation of Black Corporation:
a.What gain or loss would Black Corporation recognize if it distributes the cash, inventory, and equipment to Sam and the land to Susan?
b.What gain or loss would Black Corporation recognize if it distributes the cash, inventory, and land to Sam and the equipment to Susan?
Q3) Discuss when stock is treated as § 306 stock.
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Chapter 7: Corporations: Reorganizations
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Q1) Gravity Corporation creates Earth Corporation.It transfers most of its assets (net value $900,000)to Earth.At approximately the same time,Magnet Corporation also transfers all of its assets (net value $90,000)to Earth.Gravity liquidates by transferring its remaining assets,$100,000 cash and 1,000 shares of Earth,to its sole shareholder,Zia,in exchange for all of her Gravity stock.Zia's basis in her Gravity stock was $300,000.Magnet liquidates by transferring 100 shares of Earth to its sole shareholder,Amos,in exchange for all of his Magnet stock.Amos's basis in his Magnet stock was $150,000.How will this transaction be treated for tax purposes?
A)This is a taxable transaction. Zia recognizes $700,000 gain and Amos recognizes $60,000 loss.
B)This qualifies as a "Type D" reorganization. Neither Zia nor Amos recognizes a gain or loss.
C)This qualifies as a "Type C" reorganization. Zia recognizes $100,000 gain, Gravity also recognizes $100,000 gain, but Amos will not recognize his loss.
D)This qualifies as a "Type A" reorganization. Zia recognizes $100,000 gain, but Amos will not recognize any loss.
E)None of the above.
Q2) The "Type G" reorganization was created by ____________________ legislation.
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Chapter 8: Consolidated Tax Returns
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Q1) All affiliates joining in a newly formed consolidated return must consent to the election on Form 1122,as attached to the tax return for the group.
A)True B)False
Q2) A penalty can be assessed by the IRS if the parent corporation does not keep good records to support the computation of a subsidiary's stock basis.
A)True B)False
Q3) How do the requirements differ in identifying an affiliated group rather than a parent-subsidiary controlled group?
Q4) Lacking elections to the contrary,consolidated NOLs are carried back two years and then forward twenty years.
A)True B)False
Q5) Interest income received from U.S.Treasury bills
Q6) Consolidated group members each can use a different tax year end.
A)True B)False
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Chapter 9: Taxation of International Transactions
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Q1) History,Inc.,a domestic corporation,owns 60% of the stock of Past,Inc.,a foreign corporation.For the current year,History receives a dividend of $50,000 from Past.Past's post-'86 E & P (after taxes)and foreign taxes are $4,000,000 and $300,000,respectively.What is History's total gross income from receipt of this dividend if it elects to claim the FTC for deemed-paid foreign taxes?
Q2) Wallack,Inc.,a U.S.corporation,owns 100% of Orion,Ltd.,a foreign corporation.Orion earns only general limitation income.During the current year,Orion paid Wallack a $5,000 dividend. The § 902 credit associated with this dividend is $3,000.The foreign jurisdiction requires a withholding tax of 10%,so Wallack received only $4,500 in cash as a result of the dividend.What is Wallack's total U.S.gross income reported as a result of the $4,500 cash dividend received?
A)$0.
B)$4,000.
C)$4,500.
D)$8,000.
E)None of the above
Q3) Type of entity that removes deferral benefit other than a controlled foreign corporation.
Q4) Discuss the primary purpose of income tax treaties.
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Chapter 10: Partnerships: Formation, operation, and Basis
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Q1) Monroe,a 1/3 partner with a basis in the interest of $60,000 at the beginning of the year,received a guaranteed payment in the current year of $40,000.Partnership income before consideration of the guaranteed payment was $25,000.Monroe must report a $5,000 ordinary loss from partnership operations,and the $40,000 guaranteed payment as ordinary income.
A)True
B)False
Q2) Business purpose
Q3) Disguised sale
Q4) Meagan purchased her partnership interest from Lisa on the first day of the current year for $30,000 cash.She received a $15,000 cash distribution from the partnership during the year,and her share of partnership income is $12,000.If her share of partnership liabilities on the last day of the partnership year is $10,000,her outside basis for her partnership interest at the end of the year is $27,000.
A)True
B)False
Q5) Cost versus percentage depletion decision
Q6) Profits interest
Q7) Aggregate concept
Page 12
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Chapter 11: Partnerships: Distributions, transfer of Interests, and Terminations
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Q1) Wendy receives a proportionate nonliquidating distribution from the WXY Partnership.The distribution consists of $75,000 cash and property with an adjusted basis to the partnership of $20,000 and a fair market value of $25,000.Immediately before the distribution,Wendy's adjusted basis for her partnership interest is $90,000.Wendy's basis in the noncash property received is:
A)$0.
B)$15,000.
C)$20,000.
D)$25,000.
E)None of the above.
Q2) Service providing partnership
Q3) Milton contributed property to the MDB Partnership in 2006.At the time of the contribution,the basis in the property was $10,000 and its value was $15,000.In 2008,MDB distributed that property to partner Dana.Milton may be required to recognize gain on the distribution to Dana.
A)True
B)False
Q4) Land held by the partnership for investment purposes.
Q5) Limited partner
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Chapter 12: S Corporations
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Q1) Any excess of S corporation losses or deductions over the shareholder's combined stock and debt basis is suspended until there is a subsequent stock or debt basis.
A)True
B)False
Q2) An S corporation's AAA cannot have a negative balance.
A)True
B)False
Q3) The carryover period for the NOLs of a C corporation continues to run during S corporation years.
A)True
B)False
Q4) Post-termination distributions that are charged against OAA get tax-free treatment. A)True
B)False
Q5) Where the S corporation rules are silent,C corporation provisions apply. A)True
B)False
Q6) _________________ taxation rules do not apply to an S corporation.
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Chapter 13: Comparative Forms of Doing Business
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Q1) Walter wants to sell his wholly-owned C corporation,Cream,Inc.The fair market value of his stock exceeds the corporation's adjusted basis for the assets.Should Walter sell his stock or have Cream sell its assets and make a liquidating distribution to him?
Q2) Terry has a 20% ownership interest in a business for which his basis is $100,000.During the year,the entity earns profits of $90,000 and makes cash distributions to the owners of $50,000.How do these transactions affect Terry's basis if:
a.The entity is a C corporation?
b.The entity is a general partnership?
Q3) A limited liability company (LLC)is a hybrid business form that combines the corporate characteristic of limited liability for the owners with the tax characteristics of a partnership.
A)True
B)False
Q4) Normally a C corporation shareholder would prefer to receive a return of capital distribution (e.g.,stock redemption)rather than a dividend distribution.Provide an example of where the opposite is true.
Q5) Charitable contributions.
Q6) Sole proprietorship.
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Chapter 14: Exempt Entities
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Q1) What characteristics must be present for an exempt organization to be subject to the unrelated business income tax (UBIT)?
Q2) Pearl,Inc.,a tax-exempt organization,leases a building and machinery to White Partnership.The rental income from the building is $100,000,with related expenses of $40,000.The rental income from the machinery is $9,000,with related expenses of $3,000.What adjustment must be made to net unrelated business income?
Q3) Form 4720
Q4) Tax on excess business holdings
Q5) If an organization qualifies for exempt status for Federal income tax purposes,it is exempt from all Federal income taxes.
A)True B)False
Q6) Robin,Inc.,an exempt organization,acquired a building for $400,000 which it will lease to XYZ,Inc.,for $40,000 annually.To finance the acquisition of the building,Robin secures a mortgage on it of $250,000.Advise Robin as to whether it has any unrelated debt-financed income or deductions.
Q7) Not an exempt organization
Q8) Private foundation
Page 16
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Chapter 15: Multistate Corporate Taxation
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Q1) How does a passive investment company reduce a multistate taxpayer's overall state tax liability?
Q2) Under common terminology,a unitary group files a ____________________ state income tax return.
Q3) An LLC apportions and allocates its annual taxable income in the same manner used by any other business operating in the state.
A)True
B)False
Q4) Typically exempt from the sales/use tax base is the purchase by a church of printed music for its choir.
A)True
B)False
Q5) Training administrative personnel
Q6) P.L.86-272 ____________________ (does/does not)create nexus when the seller provides its sales personnel with a company-owned computer and Blackberry for order submission.
Q7) Identify several transactions by business taxpayers where state and local tax issues are important.
Q8) Textbook purchased by a State University student
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Chapter 16: Tax Practice and Ethics
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Q1) If a taxpayer is audited by the IRS and is unwilling to accept the findings of the agent,how does the taxpayer's audit strategy change when the dispute is taken to the IRS Appeals Division? Hint: What are the "hazards of litigation?"
Q2) The AICPA's Statements on Standards for Tax Services are advisory,not mandatory,on its members.
A)True
B)False
Q3) Negligence in filing a return
Q4) Negligence
Q5) A CPA cannot take a tax return position for a client that is contrary to current IRS interpretations of the law.
A)True
B)False
Q6) Failure by a tax preparer to sign the return
Q7) Orville,a cash basis,calendar year taxpayer,filed his income tax return 100 days after the due date.Orville never extended his return,and he paid the taxes that were due.What penalty will Orville incur,and how much will he have to pay if his additional tax is $3,000? Disregard the interest he must pay.
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Chapter 17: The Federal Gift and Estate Taxes
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Q1) The deemed paid adjustment compels a taxpayer to claim as a credit for a past gift the tax that would have been paid under current rates rather than the tax that was actually paid.
a.What is the justification for this rule?
b.Does the application of the rule always operate in favor of a taxpayer?
Q2) Van takes out an insurance policy on Myrna's life and designates himself as the beneficiary.Myrna is Van's wife.Two years later,Myrna dies,and Van collects the insurance proceeds.
Q3) Rachel owns an insurance policy on the life of Albert with Belle as the designated beneficiary.Upon Rachel's prior death,nothing regarding this policy is included in her gross estate.
A)True
B)False
Q4) Tenancy by the entirety
Q5) The purpose of the marital deduction is to place married decedents in common law states on par with those in community property jurisdictions.
A)True
B)False
Q6) Interest on municipal bonds accrued prior to death.
Page 19
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Chapter 18: Family Tax Planning
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Q1) Purchase out-of-state realty.
Q2) In arriving at the valuation of assets for estate tax purposes,the geographic location of the property is to be disregarded.
A)True
B)False
Q3) For the IRS to grant a discretionary extension of time to pay estate taxes (under § 6161),the executor must show that the estate would otherwise undergo undue hardship.
A)True
B)False
Q4) Created a living trust.
Q5) Which,if any,of the following items characterizes § 6166 (i.e.,extension of estate tax payments relative to an interest in a closely held business)?
A)No estate tax due need be paid for the first 5 years.
B)No interest needs to be paid for the first 5 years.
C)In satisfying the more-than-35% test for qualification, all interests in closely held businesses can be aggregated.
D)The 2% rate of interest applies to the total amount of estate tax value.
E)None of the above.
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Chapter 19: Income Taxation of Trusts and Estates
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Q1) The regular due date for a calendar-year trust to file its Form 1041 is April 15.
A)True
B)False
Q2) A casualty loss of a trust usually is allocable to ____________________.
Q3) The entity is entitled to a personal exemption of $300.
Q4) The grantor of a trust generally designates both ____________________ and ____________________ beneficiaries under the controlling agreement.
Q5) For a calendar-year entity,the Form 1041 has an unextended due date of April 15.
Q6) With respect to a trust,the terms creator,donor,and grantor are synonyms.
A)True
B)False
Q7) By____________________ various items to entity accounting income,the will or trust determines the size of the distribution to the income beneficiaries.
Q8) Like a partnership,the fiduciary is a tax-reporting,but not a separate tax-paying entity.
A)True
B)False
Q9) What is a simple trust? A complex trust?
Page 21
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