Partnership Taxation
Chapter Exam Questions
Course Introduction
Partnership Taxation explores the federal income tax rules that apply to partnerships and their partners, focusing on the formation, operation, and dissolution of partnerships. The course covers the mechanics of partnership income and loss allocations, contributions and distributions of property, tax consequences of transfers of partnership interests, and special tax considerations such as partnership liabilities and disguised sales. Students will learn how to apply relevant sections of the Internal Revenue Code, Treasury regulations, and case law to real-world scenarios, preparing them to identify and resolve key tax issues faced by partnerships in both planning and compliance contexts.
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South Western Federal Taxation 2012 Corporations Partnerships Estates and Trusts Professional
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Chapter 1: Understanding and Working With the Federal Tax Law
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Q1) Regulations are issued by the Treasury Department.
A)True
B)False
Answer: True
Q2) If these citations appeared after a trial court decision, which one means that the decision was viewed favorably?
A) Aff'd 633 F. 2d 512 (CA-7, 1980).
B) Rem'd 399 F. 2d 800 (CA-5, 1968).
C) Rev'd 914 F. 2d 396 (CA-3, 1990).
D) Rev'd 935 F. 2d 203 (CA-5, 1991).
E) None of the above.
Answer: A
Q3) Interpret the following citation: 64-1 USTC ¶ 9618, aff'd in 344 F. 2d 966.
A) A U.S. Tax Court Small Cases Division decision that was affirmed on appeal.
B) A U.S. Tax Court decision that was affirmed on appeal.
C) A U.S. District Court decision that was affirmed on appeal.
D) A U.S. Circuit Court of Appeals decision that was affirmed on appeal.
E) None of the above.
Answer: C
Page 3
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Chapter 2: Corporations: Introduction and Operating Rules
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Q1) An expense that is deducted in computing net income per books but not deductible in computing taxable income is an addition item on Schedule M-1.
A)True
B)False
Answer: True
Q2) A corporation may elect to amortize startup expenditures over the 60-month period beginning with the month in which the corporation begins business.
A)True
B)False
Answer: False
Q3) Generally, corporations with no taxable income must file a Form 1120.
A)True
B)False
Answer: True
Q4) Compare the taxation of C corporations with that of individual taxpayers. Provide several examples of similarities and differences in your discussion.
Answer: Differences:
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Chapter 3: Corporations: Special Situations
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Q1) In the case of an individual, modified AGI is substituted for QPAI in the DPAD formula.
A)True
B)False
Answer: False
Q2) Emerald, Inc. engages in production activities that generate QPAI of $560,000 and taxable income (without taking into account the DPAD and NOL) of $700,000 in 2011. The company also has an NOL carryover to 2011 of $600,000 and qualified W-2 wages of $350,000. Calculate any DPAD.
Answer: $9,000. Multiply 9% by the lesser of QPAI ($560,000) and taxable income ($700,000 - $600,000), or 9% ´ $100,000 = $9,000. The deduction is not limited by the wage limitation of $175,000 (50% ´ $350,000).
Q3) DPGR cannot include the cost of an embedded service that is part of in the sale of a manufactured product.
A)True
B)False
Answer: False
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Chapter 4: Corporations: Organization and Capital Structure
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Q1) Three individuals form Skylark Corporation with the following contributions: Cliff, cash of $50,000 for 50 shares; Brad, land (fair market value of $20,000) for 20 shares; and Ron, cattle (fair market value of $9,000) for 9 shares and services (fair market value of $21,000) for 21 shares. Section 351 will not apply in this situation because the control requirement has not been satisfied.
A)True
B)False
Q2) Kim, a real estate dealer, and others form Eagle Corporation under § 351. Kim contributes inventory (land held for resale) in return for Eagle stock. The holding period for the stock includes the holding period of the inventory.
A)True
B)False
Q3) Similar to like-kind exchanges, the receipt of "boot" under § 351 can cause loss to be recognized.
A)True
B)False
Q4) Issues relating to basis arise when a taxpayer is involved in a § 351 transaction. Describe the underlying rules, and the purpose they serve.
Page 6
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Chapter 5: Corporations: Earnings Profits and Dividend
Distributions
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Q1) A distribution from a corporation will be taxable to the recipient shareholders only to the extent of the corporation's E & P.
A)True
B)False
Q2) On January 1, Gull Corporation (a calendar year taxpayer) has accumulated E & P of $200,000. During the year, Gull incurs a net loss of $280,000 from operations that accrues ratably. On June 30, Gull distributes $120,000 to Sharon, its sole shareholder, who has a basis in her stock of $75,000. How much of the $120,000 is a dividend to Sharon?
A) $0.
B) $60,000.
C) $75,000.
D) $120,000.
E) None of the above.
Q3) When current E & P is positive and accumulated E & P has a deficit balance, the two accounts are netted for dividend determination purposes.
A)True
B)False
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Chapter 6: Corporations: Redemptions and Liquidations
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Q1) Indigo has a basis of $1 million in the stock of Owl Corporation, a subsidiary in which it owns 100% of all classes of stock. Indigo purchased the stock in Owl 10 years ago. In the current year, Indigo liquidates Owl and acquires assets worth $1.2 million. At the time of its liquidation, Owl Corporation had a basis of $800,000 in the assets and E & P of $500,000. Which of the following statements is correct with respect to the liquidation?
A) Owl recognizes a gain of $400,000.
B) Indigo has a $1 million basis in the assets.
C) Owl's E & P of $500,000 is eliminated.
D) Indigo recognizes a gain of $200,000.
E) None of the above.
Q2) Brown Corporation purchased 85% of the stock of Green Corporation five years ago for $850,000. In the current year, Brown Corporation liquidates Green Corporation and acquires assets with a basis to Green Corporation of $700,000 (fair market value of $1.1 million). Brown Corporation will have a basis in the assets of $700,000, the same as Green's basis in the assets.
A)True
B)False
Q3) Explain the stock attribution rules that apply in the case of stock redemptions.
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Chapter 7: Corporations: Reorganizations
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Q1) Present Value Tables needed for this question. Sugar Corporation would like to acquire Salt Corporation on January 1 of the current year in a tax-free reorganization. Salt is particularly appealing to Sugar because Salt has a $250,000 capital loss that can carry over for five years. Sugar expects large capital gains for the next several years in addition to its expected $2.5 million net income. At the time of the restructuring, Salt has assets valued at $2 million (basis of $1.4 million). Sugar is proposing exchanging 45% of its stock for all of Salt's assets. The Federal long-term tax-exempt rate is 2% and Sugar's discount rate for investment decisions both currently 7%. What is the maximum present value of the capital loss to Sugar?
Q2) For corporate reorganizations, the tax laws should be considered while planning the structure of the reorganization.
A)True
B)False
Q3) Corporate reorganizations can meet the requirements to qualify as like-kind exchanges if there is no boot involved.
A)True
B)False
Q4) Compare an acquisitive "Type D" reorganization with the "Type C" reorganization.
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Chapter 8: Consolidated Tax Returns
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Q1) An affiliated group exists where there is ____________________ percent ownership of all of the affiliates within the group, and there is an identifiable ____________________ corporation. or
Q2) The rules for computing Federal consolidated taxable income can differ a significant way from those governing financial reporting for conglomerates. A)True B)False
Q3) In terms of the consolidated return rules, Akron Manufacturing LLC is a(n) ____________________ entity.
Q4) Members of an affiliated group must share one $40,000 ____________________ for the tax year.
Q5) What tax accounting period is used by the members of a Federal consolidated group?
Q6) The consolidated return rules combine the members' transactions involving ____________________ items when computing consolidated taxable income.
Q7) How many consolidated tax returns are filed annually? What types of taxpayer do they represent?
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Chapter 9: Taxation of International Transactions
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Q1) Which of the following statements regarding income sourcing is correct?
A) Everything else equal, larger foreign-source income increases the foreign tax credit limitation for U.S. persons.
B) Everything else equal, larger foreign-source income decreases the foreign tax credit limitation for U.S. persons.
C) Everything else equal, changing foreign-source income has no impact on the foreign tax credit limitation for U.S. persons.
D) Everything else equal, larger U.S.-source income increases the foreign tax credit limitation for U.S. persons.
Q2) Amber, Inc., a domestic corporation receives a $150,000 cash dividend from Starke, Ltd. Amber owns 15% of Starke. Starke's post-1986 E & P is $2 million and it has paid foreign taxes of $1 million attributable to that E & P. What is Amber's foreign tax credit related to the Starke dividend?
A) $200,000.
B) $150,000.
C) $100,000.
D) $75,000.
Q3) Discuss the primary purposes of income tax treaties.
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Chapter 10: Partnerships: Formation, Operation, and Basis
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Q1) Sharon and Sara are equal partners in the S&S Partnership. On January 1 of the current year, each partner's adjusted basis in S&S was $50,000 (including each partner's $15,000 share of the partnership's $30,000 of liabilities). During the current year, S&S repaid the $30,000 of liabilities and borrowed $20,000 for which Sharon and Sara are equally liable. In the current year ended December 31, S&S also sustained a net operating loss of $25,000 and earned $5,000 of interest income from investments. If liabilities are shared equally by the partners, on January 1 of the next year how much is each partner's basis in her interest in S&S?
Q2) ABC, LLC is equally-owned by three corporations. Two corporations have June 30 fiscal year ends, the third is a calendar-year taxpayer. ABC will use a June 30 year end under the majority partners' tax year rule because more than 50% of the partnership's capital and profits is owned by partners with the same taxable year.
A)True
B)False
Q3) The taxable income of a partnership flows through to the partners, who report the income on their tax returns.
A)True
B)False
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Chapter 11: Partnerships: Distributions, Transfer of Interests, and Terminations
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Q1) Jared owns a 40% interest in the capital and profits of the JAJ Partnership. Immediately before he receives a proportionate nonliquidating distribution from JAJ, the basis of his partnership interest is $60,000. The distribution consists of $40,000 in cash and land with a fair market value of $25,000. JAJ's adjusted basis in the land immediately before the distribution is $30,000. As a result of the distribution, Jared recognizes no gain or loss and his basis in the land is $20,000.
A)True
B)False
Q2) Cindy, a 20% general partner in the CDE Partnership, wants to retire and has approached the other partners about having the partnership buy her out. The partnership is a cash basis, service oriented partnership in which Cindy is an active partner. The partnership assets consist primarily of unrealized receivables and cash. The partnership also has substantial going concern value (goodwill) which is probably its most valuable asset. The other partners in the partnership are also active in the business and are not related to Cindy.
Q3) A property distribution from a partnership to a partner is generally taxable to the partner.
A)True
B)False
Page 13
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Chapter 12: S: Corporations
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Q1) Compensation for services rendered to an S corporation is subject to FICA taxes.
A)True
B)False
Q2) Claude Bergeron sold 1,000 shares of Ditta, Inc., an S corporation located in Concord, North Carolina, for $12,000. He had owned the stock for three years and had a stock basis of $111,000 in the shares. Claude is single, and he is the original owner of the § 1244 stock shares. Calculate the appropriate tax treatment of any gain or loss.
A) No gain or loss.
B) $50,000 LTCL; $49,000 ordinary deduction.
C) $50,000 ordinary deduction; $49,000 LTCL.
D) $99,000 long-term capital loss.
E) None of the above.
Q3) Most Roth IRAs can own S corporation stock.
A)True
B)False
Q4) Discuss the two methods of allocating S items to shareholders.
Q5) A distribution from OAA is taxable.
A)True
B)False
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Chapter 13: Comparative Forms of Doing Business
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Q1) Eagle, Inc., a C corporation, distributes $250,000 to its shareholder, Jean, and land worth $250,000 (adjusted basis of $190,000) to its shareholder, Pam. Eagle has earnings and profits of $700,000. Determine the tax consequences to Eagle, Jean, and Pam.
Q2) Agnes owns a sole proprietorship for which the assets have appreciated in value. If she is going to sell the business to Abner, should she structure the sale as (1) a sale of the individual assets or (2) a sale of the sole proprietorship?
Q3) A benefit of an S corporation when compared with a C corporation is that it is subject to Federal income tax only in limited circumstances.
A)True
B)False
Q4) In the sale of a partnership, does the way the sale is structured (i.e., sale of the partnership interests versus the sale of the assets) produce different tax consequences?
Q5) Only C corporations are subject to the accumulated earnings tax (i.e., S corporations are not).
A)True
B)False
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Chapter 14: Taxes on the Financial Statements
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Q1) One can describe the benefits of ASC 740-30 (APB 23) as "all or nothing." If it is elected, APB 23 applies to the earnings from all foreign subsidiaries, in the current year and thereafter.
A)True
B)False
Q2) ASC 740 (FIN 48) allows companies to choose their own level of certainty in reporting uncertain tax positions in their financial statements.
A)True
B)False
Q3) Yahr, Inc., is a domestic corporation with no subsidiaries. It operates in almost every U.S. state. Yahr records no permanent or temporary book-tax differences this year. Yahr's tax expense on its GAAP financial statements and its tax liability reported on its Federal income tax return are identical.
A)True
B)False
Q4) You are the tax adviser to a publicly traded U.S. corporation. How might you use a "benchmarking" analysis to begin your review of the entity's tax situation and planning opportunities?
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Chapter 15: Exempt Entities
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Q1) Which of the following statements is correct?
A) A private foundation is, in general, exempt from Federal income tax.
B) A private foundation may be subject to certain types of Federal income tax.
C) If a broad public support test is satisfied, an exempt organization that otherwise would be classified as a private foundation is not classified as a private foundation.
D) Only b. and c. are correct.
E) a., b., and c. are correct.
Q2) What is the purpose of the unrelated business income tax?
Q3) An activity is not an unrelated trade or business for purposes of the unrelated business income tax (UBIT) unless it is profitable.
A)True
B)False
Q4) What is the purpose of the "broadly supported" exception for an exempt organization being classified as a private foundation?
Q5) Why are some organizations exempt from Federal income tax?
Q6) If an exempt organization is required to file an annual information return, on what form is it filed?
Q7) What income and activities are not subject to the feeder organization rules?
Page 17
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Chapter 16: Multistate Corporate Taxation
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Q1) State and local politicians tend to apply new and increased taxes to taxpayers who are visitors to the jurisdiction and cannot vote to reelect the lawmaker.
A)True
B)False
Q2) Typical indicators of nexus include the presence of employees based in the state, and the ownership or lease of realty there.
A)True
B)False
Q3) Slattery Corporation sells widgets in two states. State A levies a 9% effective tax rate, and State B levies a 4% rate. A and B have adopted sales-factor-only apportionment formulas. To reduce overall multistate income tax liabilities, Slattery should:
A) Remove all stored inventory from A.
B) Establish a personal training center in A.
C) Move its home office from B to A.
D) Convert to employee status the independent contractors that it uses to sell widgets in A.
Q4) An ad valorem property tax is based on the asset's current
Q5) Summarize the principles of multistate tax planning.
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Chapter 17: Tax Practice and Ethics
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Q1) The Code's scope of privileged communications for a CPA extends only to ____________________ advice given.
Q2) Leo underpaid his taxes by $250,000. Portions of the underpayment were attributable to negligence ($90,000) and to civil fraud ($160,000). Compute the total penalties incurred.
Q3) The basic Treasury document regulating tax preparers is the Regulation known as _________________________.
Q4) One of the four operating divisions of the IRS deals exclusively with manufacturing and exporting businesses.
A)True
B)False
Q5) A taxpayer's return might be selected for audit on the basis of the ____________________ score that the IRS computes.
Q6) An IRS letter ruling might determine that an employee's compensation is unreasonable in amount.
A)True
B)False
Q7) The IRS processes about ____________________ million individual tax returns every year.
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Chapter 18: The Federal Gift and Estate Taxes
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Q1) In 2000, Katelyn inherited considerable property when her father died. When Katelyn dies in 2011, her estate may be able to use § 2013 (credit for tax on prior transfers) as to some of the estate taxes paid by her father's estate.
A)True
B)False
Q2) Ray purchases U.S. savings bonds which he lists as "Ray and Donna" as co-owners. Donna is Ray's daughter. Donna predeceases Ray. No gift or estate tax consequences result from this situation.
A)True
B)False
Q3) A Federal gift tax return may have to be filed even if no gift tax is payable.
A)True
B)False
Q4) Cole purchases land for $500,000 and transfers it by gift to his two daughters, Madison and Paige, as equal joint tenants with the right of survivorship. Ten years later, when the land is worth $2,000,000, Madison predeceases Paige. Madison's executor includes none of the value of the land in her gross estate, as she contributed nothing toward its cost. Do you agree?
Q5) In most cases, the gross estate of a decedent is larger than the probate estate.
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Chapter 19: Family Tax Planning
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Q1) What is the rationale for the deferral and the equalization approaches to the marital deduction?
Q2) Which, if any, of the following statements properly characterize features involving buy-sell agreements?
A) If properly structured, the agreements can control valuation for estate tax purposes.
B) If a stock redemption is proposed, utilize a cross-purchase type.
C) Agreements cannot be used to control disposition of partnership interests.
D) Arrangements work best when the interest to be transferred involves publicly traded securities.
E) None of the above.
Q3) In 2011, Valerie made a gift of stock (basis of $113,000; fair market value of $413,000) to her grandson, Ryan. As a result of the transfer, Valerie paid a gift tax of $20,000. Ryan's income tax basis in the stock is:
A) $118,000 for gain or loss.
B) $128,000 for gain and $113,000 for loss.
C) $128,000 for gain or loss.
D) $133,000 for gain or loss.
E) None of the above.
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Chapter 20: Income Taxation of Trusts and Estates
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Q1) Explain how the Federal income tax law applies to a fiduciary entity like a trust. Is the tax structure similar to that of an individual? A partnership?
Q2) If provided for in the controlling agreement, a trust might terminate when the income beneficiary graduates with a law degree.
A)True
B)False
Q3) A fiduciary's ____________________ deductions are assigned corresponding to the disposition of entity accounting income for the year.
Q4) A ____________________ tier distribution is one that the trust agreement requires to be made by the trustee to the income beneficiary. or
Q5) The Winston Trust is classified as a grantor trust, because the donor can revoke the trust. Consequently, Winston need not file an annual Form 1041, and he reports the trust items on his own Form 1040.
A)True
B)False
Q6) Every ____________________ trust is allowed a $300 personal exemption.
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