Partnership Taxation Exam
Bank
Course Introduction
Partnership Taxation explores the federal income tax treatment of entities classified as partnerships and their partners. The course covers the formation, operation, and liquidation of partnerships, including the allocation of income, deductions, and credits among partners. It examines special rules on contributed property, distributions, sales and exchanges of partnership interests, liabilities, and the effects of partnership agreements on tax outcomes. Real-world examples and case studies illustrate key concepts, equipping students with the knowledge to navigate the complex tax rules that affect partnerships in both planning and compliance contexts.
Recommended Textbook
South Western Federal Taxation 2012 Corporations Partnerships Estates and Trusts Professional
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Page 2
Chapter 1: Understanding and Working With the Federal Tax Law
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Q1) The Golsen doctrine applies to which court?
A) U.S. Tax Court.
B) U.S. District Court.
C) U.S. Court of Federal Claims.
D) U.S. Supreme Court.
E) Some other court.
Answer: A
Q2) The Supreme Court must hear all cases appealed from the U.S. Court of Appeals for the Federal Circuit.
A)True
B)False
Answer: False
Q3) In a U.S. District Court, a jury can decide both questions of fact and questions of law.
A)True
B)False
Answer: False
Q4) What are the key components of tax planning?
Answer: 11ea8545_ae9e_50e5_9aec_4da30f95ffb2_TB4127_00
Page 3
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Chapter 2: Corporations: Introduction and Operating Rules
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Q1) In the current year, Zircon Corporation donated scientific property worth $300,000 to City University (a qualified charitable organization) to be used in research. The basis of the property was $140,000, and Zircon had held it for ten months as inventory. Zircon Corporation may deduct $220,000 as a charitable contribution (ignoring the taxable income limitation).
A)True
B)False
Answer: True
Q2) Thrush Corporation files Form 1120, which reports taxable income of $110,000. The corporation's tax is $26,150.
A)True
B)False
Answer: True
Q3) For purposes of the estimated tax payment rules, a "large corporation" is defined as a corporation that had an average taxable income of $1 million or more over the preceding three-year period.
A)True
B)False
Answer: False
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Page 4
Chapter 3: Corporations: Special Situations
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Q1) Lemon, Inc., has taxable income of $15 million in 2011. What is the maximum DPAD tax savings for this C corporation?
A) $132,600.
B) $265,200.
C) $273,000.
D) $472,500.
E) None of the above.
Answer: D
Q2) What amount of accumulated earnings of a manufacturing corporation is considered within the reasonable needs of a business without the corporation having to show a bona fide business reason for the accumulation?
A) $150,000 or less.
B) $200,000 or less.
C) $250,000 or less.
D) $300,000 or less.
E) None of the above.
Answer: C
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Chapter 4: Corporations: Organization and Capital Structure
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Q1) If a shareholder owns stock received as a gift from her mother, it cannot be § 1244 stock.
A)True
B)False
Q2) Sarah and Emily form Red Corporation with the following investments: Sarah transfers computers worth $200,000 (basis of $80,000), while Emily transfers real estate worth $180,000 (basis of $40,000) and services (worth $20,000) rendered in organizing the corporation. Each is issued 600 shares in Red Corporation. With respect to the transfers:
A) Sarah has no recognized gain; Emily recognizes income/gain of $160,000.
B) Neither Sarah nor Emily recognizes gain or income.
C) Red Corporation has a basis of $60,000 in the real estate.
D) Emily has a basis of $60,000 in the shares of Red Corporation.
E) None of the above.
Q3) Rosa, the sole shareholder of Robin Corporation, contributes land (basis of $40,000 and fair market value of $100,000) to the corporation but does not receive additional stock. Neither Rosa nor Robin Corporation will have to recognize gain as a result of this transfer.
A)True B)False
Page 6
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Chapter 5: Corporations: Earnings Profits and Dividend
Distributions
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Q1) During the current year, Goose Corporation sold equipment for $500,000 (adjusted basis of $260,000). The equipment was purchased a few years ago for $560,000 and $300,000 in MACRS deductions have been claimed. ADS depreciation would have been $200,000. As a result of the sale, the adjustment to taxable income needed to determine current E & P is:
A) No adjustment is required.
B) Subtract $100,000.
C) Add $100,000.
D) Add $80,000.
E) None of the above.
Q2) If a stock dividend is taxable, the shareholder's basis in the newly received shares is equal to the fair market value of the shares received in the distribution.
Q3) If a distribution of stock rights is taxable and their fair market value is less than 15 percent of the value of the old stock, then either a zero basis or a portion of the old stock basis may be assigned to the rights, at the shareholder's option.
A)True
B)False
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Page 7
Chapter 6: Corporations: Redemptions and Liquidations
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Q1) As a general rule, a liquidating corporation recognizes gains and losses on the distribution of property in complete liquidation.
A)True
B)False
Q2) In 2008, Floyd carried out a successful complete termination redemption of his stock in Gray Corporation. Floyd was able to qualify the transaction as a complete termination redemption only by use of the family attribution waiver. In 2011, Floyd receives stock in Gray Corporation as a gift from his father. Floyd has acquired a prohibited interest within the 10-year postredemption period and, as a result, the 2008 redemption no longer qualifies as a complete termination redemption.
A)True
B)False
Q3) To qualify a partial liquidation under the termination of a business test, the distribution must consist of the proceeds from the sale of a qualified trade or business.
A)True
B)False
Q4) When is a redemption to pay death taxes under § 303 most advantageous?
Q5) Describe the requirements for and tax consequences of a § 338 election.
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Page 8
Chapter 7: Corporations: Reorganizations
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Q1) In a divisive "Type D" reorganization, the distributing corporation obtains control of the new target by exchanging some of its assets for at least 80% of the new target's outstanding stock.
A)True
B)False
Q2) Which of the following is not a requirement for receiving tax-free treatment for a corporate reorganization?
A) The step transaction doctrine should apply.
B) The continuity of business enterprise test must be met.
C) There must be a sound business purpose for the restructuring.
D) There must be a plan of reorganization.
E) All of the above are requirements.
Q3) For a corporate restructuring to qualify as a tax-free reorganization, the transaction must have a sound business purpose.
Q4) The ____________________ provides a restriction on the amount of tax attributes that can be carried over from the target to the acquiring corporation after an ownership shift occurs.
Q5) A ____________________ reorganization is a recapitalization of a single corporation.
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Chapter 8: Consolidated Tax Returns
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Q1) Which of the following is not a requirement that must be met before a group files a consolidated return?
A) None of the corporations can be ineligible under the Code to file on a consolidated basis with the others.
B) All of the corporations must be members of an affiliated group.
C) None of the group members can use the LIFO method of accounting for inventories.
D) The group members must share a common tax year end.
Q2) A Federal consolidated group reports a net operating loss for the year. How is this amount allocated to the various group members? Why is this allocation important?
Q3) An example of an intercompany transaction is the use of the financial accounting software of the parent corporation by a subsidiary for an arm's length management fee. A)True B)False
Q4) When a consolidated NOL is generated, each affiliate is allocated a share of the loss. A)True B)False
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Chapter 9: Taxation of International Transactions
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Q1) In all cases, the "residence of seller" rule is used in determining the sourcing of income.
A)True
B)False
Q2) Discuss the primary purposes of income tax treaties.
Q3) USCo, a domestic corporation, has worldwide taxable income of $1,500,000, including a $300,000 dividend from ForCo, a wholly-owned foreign corporation. ForCo's post-1986 undistributed earnings and profits are $16 million and it has paid $10 million of foreign income taxes attributable to these earnings. What is USCo's deemed paid foreign tax credit related to the dividend received (before consideration of any limitation)?
A) $10 million.
B) $16 million.
C) $187,500.
D) $487,500.
Q4) A U.S. business conducts international communications activities between the U.S. and Spain. The resulting income is sourced 100% in the United States.
A)True
B)False
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Page 11
Chapter 10: Partnerships: Formation, Operation, and Basis
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Q1) Julie owns property that is treated as a capital asset in her hands. She contributed a parcel of land (basis $60,000; fair market value $58,000) to a real estate partnership, which will hold it as inventory. After three years, the partnership sells the land for $56,000. The partnership will recognize a $4,000 ordinary loss on sale of the property.
A)True B)False
Q2) A partner has a profit-sharing percent, a loss-sharing percent, and a capital-sharing ownership percent. Depending on the provisions in the partnership agreement, these amounts may or may not be the same for a given partner.
A)True B)False
Q3) Julie and Kate form an equal partnership during the current year. Julie contributes cash of $160,000, and Kate contributes property (adjusted basis of $90,000, fair market value of $260,000) subject to a nonrecourse liability of $100,000. As a result of these transactions, Kate has a basis in her partnership interest of $40,000.
A)True B)False
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Page 12
Chapter 11: Partnerships: Distributions, Transfer of Interests, and Terminations
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Q1) If a partnership incorporates, it is always deemed to first distribute all of its assets and liabilities to the partners in complete liquidation. Then the partners are deemed to contribute those assets to the new corporation (with the corporation assuming the related liabilities) in a transaction that qualifies under § 351.
A)True
B)False
Q2) For purposes of determining gain on a current distribution to a partner, a distribution of cash includes relief of a partner's share of partnership liabilities and certain distributions of marketable securities.
A)True
B)False
Q3) 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.
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Chapter 12: S: Corporations
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Q1) Consent to an S election must be in ____________________, and it must be generally filed by the election ____________________. or
Q2) A distribution of cash or other property by an S corporation to shareholders that does not exceed the balance of AAA during a one-year period following an S election termination receives special capital gain treatment.
A)True
B)False
Q3) Which transaction affects the Other Adjustments Account on an S corporation's Schedule M-2?
A) Charitable contributions.
B) Unreasonable compensation.
C) Payroll tax penalty assessed.
D) Domestic production activities deduction.
E) None of the above.
Q4) The alternative minimum tax may apply to an S corporation. A)True
B)False
Q5) List some of the separately stated items listed on Schedule K of the Form 1120S.
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Chapter 13: Comparative Forms of Doing Business
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Q1) The AMT statutory rate for C corporations and for S corporation shareholders on the AMT base is 20%.
A)True
B)False
Q2) Brown, Inc., has accumulated earnings and profits at the end of the year of $600,000. Brown pays a salary and bonus of $175,000 to Alice, its CEO. Brown's taxable income before the salary and bonus is $200,000. The IRS classifies $75,000 of the salary and bonus as unreasonable. Calculate Brown's taxable income after the reclassification.
A) $21,250.
B) $25,000.
C) $77,750.
D) $100,000.
E) None of the above.
Q3) Nontax factors that affect the choice of business entity include:
A) Ease of capital formation.
B) Limited liability.
C) Single versus double taxation.
D) Only a. and b.
E) a., b., and c.
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Page 15
Chapter 14: Taxes on the Financial Statements
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Q1) "Permanent differences" include items that appear in the Federal income tax return as income or deduction, and in the GAAP financial statements as revenue or expense, but in different reporting periods.
A)True
B)False
Q2) How are deferred tax liabilities and assets categorized on the balance sheet?
A) Capital and ordinary.
B) Domestic and foreign.
C) Current and non-current.
D) Positive and negative.
Q3) Under GAAP, a corporation can defer a disclosure of the future U.S. tax expense related to the earnings of foreign subsidiaries, by taking into account its repatriation plans for these earnings.
A)True
B)False
Q4) The valuation allowance can reduce either a deferred tax asset or a deferred tax liability.
A)True
B)False
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Chapter 15: Exempt Entities
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Q1) The excise tax that is imposed on private foundations for making jeopardizing investments is imposed because the foundation has made speculative investments that put the foundation's income at risk.
A)True
B)False
Q2) Personal property rental income is subject to and real property rental income is not subject to the unrelated business income tax.
A)True
B)False
Q3) All bona-fide churches generally are exempt from Federal income tax. A)True
B)False
Q4) Watch, Inc., a § 501(c)(3) exempt organization, solicits contributions through a mail campaign. An executive, who recently completed an executive MBA degree program, recommends that personal address labels be included as an additional way to motivate the potential donor to contribute. The value of these labels is $9.00 per potential donor. What is the effect of the inclusion of the address labels on Watch's unrelated business income?
Q5) Define average acquisition indebtedness with respect to debt-financed property.
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Chapter 16: Multistate Corporate Taxation
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Q1) Most states begin the computation of taxable income with an amount from the Federal income tax return.
A)True
B)False
Q2) Almost all of the states assess some form of consumer-level sales/use tax.
A)True
B)False
Q3) The use tax is designed to complement the sales tax. A use tax typically covers purchases made out of state and brought into the jurisdiction.
A)True
B)False
Q4) Although apportionment formulas vary among jurisdictions, most states use a three-factor formula. The factors are ____________________, ____________________, and ____________________. or or
Q5) In most states, medical services are exempt from the sales/use tax base. A)True
B)False
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Chapter 17: Tax Practice and Ethics
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Q1) The tax professional can do more than just tax compliance work. He or she can work with the client in consultation over the strategy and tactics of dealing with a Federal tax audit.
A)True
B)False
Q2) Troy Center Ltd. withheld from its employees' paychecks $200,000 in Federal income and Social Security taxes for the Monday, June 30 payroll. It then spent the $200,000 on equipment upgrades, missing altogether the August 2 due date for the tax remittances. How much does Troy now owe the government in taxes and penalties? Ignore interest accruals, and assume that the Treasury can prove that Troy's redirecting of the tax withholdings was willful.
Q3) In the case of bad debts and worthless securities, the statute of limitations on claims for refund is seven years.
A)True
B)False
Q4) The IRS is one of the largest Federal agencies, employing at least ____________________ people throughout the year. or or
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Chapter 18: The Federal Gift and Estate Taxes
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Q1) Tom and Jean are husband and wife and live in California. In 1991, they use $400,000 of community funds to purchase an annuity from an insurance company. Under the terms of the contract, Tom is to receive $40,000 per year for life once he reaches age 65. If Jean outlives Tom, she is to receive $30,000 per year for life. Tom dies first in 2011 (and before reaching age 65). At this time, the value of Jean's interest is $500,000. As to this contract, Tom's gross estate includes:
A) $0.
B) $200,000.
C) $250,000.
D) $500,000.
E) None of the above.
Q2) At the time of her death in 2011, Emma still owed $36,000 on her church pledge for the year. Even if church pledges are not an enforceable obligation in the state where Emma resided, her estate can claim a deduction for the $36,000 it later pays.
A)True
B)False
Q3) Madeline pays for her mother's nursing home expenses. Under what conditions might such payments not be a gift?
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20
Chapter 19: Family Tax Planning
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Q1) What are some of the pitfalls in the use of § 2032A (special use valuation method)?
Q2) At the time of his death, Rex owned an RV. For valuation purposes, the RV should be included in his gross estate at the price a dealer in RVs would pay for the property.
A)True B)False
Q3) At the time of her death in 2011, Lila owns 50% of the stock in Kingfisher Corporation, with the balance of the stock held by family members. Kingfisher Corporation's total profits for the past five years are $3,000,000, and the book value of its stock is $2,000,000. If 8% is an appropriate rate of return and goodwill exists, what is a possible value for the stock to be included in Lila's gross estate?
Q4) The recapture of special use valuation estate tax savings could have income tax implications.
A)True B)False
Q5) Describe the various tax advantages that are available from donating a conservation easement to charity.
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Chapter 20: Income Taxation of Trusts and Estates
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Q1) The Code defines a "simple trust" as which of the following?
A) One which is allowed to file Form 1041-EZ.
B) One which has only one income beneficiary.
C) One which must distribute its accounting income every year.
D) One whose grantor was a living individual.
Q2) Income in respect of a decedent can be subject to both income and estate tax at the Federal level.
A)True
B)False
Q3) The decedent's estate must terminate within four years of the date of death. A)True
B)False
Q4) An estate operates a manufacturing business. It can claim a domestic production activities deduction (DPAD).
A)True B)False
Q5) The Gibson Estate is responsible for the income in respect of a decedent (IRD) of Juanita Gibson, the deceased. Define the term IRD and describe its treatment for Federal tax purposes
Page 22
Q6) The IRS encourages ____________________ filing for Forms 1041.
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