Partnership Taxation Exam Preparation Guide
Course Introduction
Partnership Taxation examines the federal income tax rules and principles governing the formation, operation, and dissolution of partnerships, including limited liability companies (LLCs) treated as partnerships for tax purposes. The course explores the tax consequences to partners and partnerships in connection with contributions and distributions of property, the allocation of income, losses, deductions, and credits among partners, and transactions between partners and partnerships. Students will analyze the effects of partnership activities on individual tax liability and learn to identify planning opportunities and pitfalls through real-world examples and problem-solving exercises.
Recommended Textbook
South Western Federal Taxation 2011 Comprehensive 34th Edition by William H. Hoffman
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Chapter 1: An Introduction to Taxation and Understanding
the Federal Tax Law
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Q1) On occasion,Congress has to enact legislation that clarifies the tax law in order to change a result reached by the U.S.Supreme Court.
A)True
B)False
Answer: True
Q2) Taxes levied by all states include:
A)Liquor excise tax.
B)Individual income tax.
C)Inheritance tax.
D)General sales tax.
E)None of the above.
Answer: A
Q3) Currently,the Federal income tax is more progressive than it ever has been in the past.
A)True
B)False
Answer: False
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Page 3
Chapter 2: Working With the Tax Law
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Q1) Compare a determination letter with a letter ruling.
Answer: Like letter rulings,determination letters are issued at the request of taxpayers and provide guidance on the tax law.Determination letters differ from letter rulings in that the issuing source of a determination letter is the Area Director rather than the National Office of the IRS.Also,determination letters usually involve completed (as opposed to proposed)transactions.Determination letters are not published and are made known only to the party making the request.
Q2) Before 1943,the U.S.Tax Court was called the Board of Tax Appeals.
A)True
B)False
Answer: True
Q3) The computer-based CPA examination has four sections with true-false,multiple-choice,and case studies (called simulations). A)True
B)False
Answer: False
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Chapter 3: Computing the Tax
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Q1) A qualifying child cannot include:
A)A nonresident alien.
B)A married son who files a joint return.
C)A daughter who is away at college.
D)A grandmother.
E)A brother who is 28 years of age and disabled.
Answer: D
Q2) Kyle and Liza are married and under 65 years of age.During 2010,they furnish more than half of the support of their 19-year old daughter,May,who lives with them.May earns $15,000 from a part-time job,most of which she sets aside for future college expenses.Kyle and Liza also provide more than half of the support of Kyle's cousin who lives with them.Liza's father,who died on January 3,2010,at age 80,has for many years qualified as their dependent.How many personal and dependency exemptions should Kyle and Liza claim?
A)Two.
B)Three.
C)Four.
D)Five.
E)None of the above.
Answer: C
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Page 5
Chapter 4: Gross Income: Concepts and Inclusions
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Q1) Norma's income for 2010 is $27,000 from part-time work and $9,000 of Social Security benefits.Norma is not married.A portion of her Social Security benefits must be included in her gross income.
A)True
B)False
Q2) In all community property states,the income from property that was inherited by a spouse after the marriage is treated as if one-half is earned by each spouse.
A)True
B)False
Q3) After the divorce,Jeff was required to pay $18,000 per year to his former spouse,Darlene,who had custody of their child.Jeff's payments will be reduced to $12,000 per year in the event the child dies or reaches age 21.During the year,Jeff paid the $18,000 required under the divorce agreement.Darlene must include the $12,000 in gross income.
A)True
B)False
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Chapter 5: Gross Income: Exclusions
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Q1) The First Chance Casino has gambling facilities,a bar,a restaurant,and a hotel.All employees are allowed to obtain food from the restaurant at no charge during working hours.In the case of the employees who operate the gambling facilities,bar,and restaurant,60% of all of Casino's employees,the meals are provided for the convenience of the Casino.However,the hotel workers,demanded equal treatment and therefore were also allowed to eat in the restaurant at no charge while they are at work.Which of the following is correct?
A)All the employees are required to include the value of the meals in their gross income. B)Only the restaurant employees may exclude the value of their meals from gross income.
C)Only the employees who work in gambling,the bar,and the restaurant may exclude the meals from gross income.
D)All of the employees may exclude the value of the meals from gross income. E)None of the above.
Q2) Describe a situation under which a company would decide a cafeteria plan would be advantageous for its employees.
Q3) What Federal income tax benefits are provided for college students?
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Page 7
Chapter 6: Deductions and Losses: in General
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Q1) Graham,a CPA,has submitted a proposal to do the annual audit for a municipality.Owen,the city treasurer,tells Graham that for a $1,000 fee,he will use his influence to have the audit awarded to Graham.What factors are relevant in determining if Graham can deduct the $1,000 payment assuming he pays the fee to Owen?
Q2) Beulah's personal residence has an adjusted basis of $250,000 and a fair market value of $230,000.Beulah converts the property to rental use on December 1,2010.The vacation home rules that limit the amount of the deduction to the rental income will apply and the adjusted basis for depreciation is $230,000.
A)True
B)False
Q3) All expenses associated with the production of income are classified as deductions from AGI.
A)True B)False
Q4) Distinguish between deductible bribes and nondeductible bribes.
Q5) For an expense to be deducted as ordinary,it must be recurring in nature.
A)True B)False
Q6) Are there any circumstances under which lobbying expenditures are deductible?
Page 8
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Chapter 7: Deductions and Losses: Certain Business
Expenses and Losses
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Q1) Norm's car,which he uses 100% for personal purposes,was completely destroyed in an accident in 2010.The car's adjusted basis at the time of the accident was $13,000.Its fair market value was $11,500.The car was covered by a $2,000 deductible insurance policy.Norm did not file a claim against the insurance policy because of a fear that reporting the accident would result in a substantial increase in his insurance rates.His adjusted gross income was $14,000 (before considering the loss).What is Norm's deductible loss?
A)$0.
B)$100.
C)$500.
D)$9,500.
E)None of the above.
Q2) Regarding research and experimental expenditures,which of the following are not qualified expenditures?
A)Costs of improving an existing pilot model.
B)Costs to develop a plant process.
C)Costs of developing a formula.
D)Costs of purchasing a building to be used for research.
E)None of the above.
Q3) Why was the domestic production activities deduction (DPAD)enacted by Congress?
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Chapter 8: Depreciation,cost Recovery,amortization,and Depletion
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Q1) Under the MACRS mid-quarter convention,an asset sold on December 10 will be treated as though it were sold on November 15 for a calendar year taxpayer.
A)True
B)False
Q2) If an automobile is placed in service in 2010,the limitation for cost recovery in 2012 will be based on the cost recovery limits for the year 2010.
A)True
B)False
Q3) Intangible drilling costs may be expensed rather than capitalized and written off through depletion.
A)True
B)False
Q4) The cost recovery basis for property converted from personal use to business use is the fair market value of the property at the time of the conversion.
A)True
B)False
Q5) Discuss the reason for the inclusion amount with respect to leased automobiles.
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Chapter 9: Deductions: Employee and
Self-Employed-Related Expenses
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Q1) Which,if any,of the following is subject to the cutback adjustment?
A)An airline pilot for an executive jet rental company who pays his own travel expenses.
B)Meals provided at cost to employees by a cafeteria funded by the employer.
C)Fourth of July company picnic for employees.
D)Business gifts of $25 (or less).
E)None of the above.
Q2) After graduating from college with a degree in chemistry,Alberto obtains a job as a chemist with DuPont.Alberto's job search expenses qualify as deductions.
A)True
B)False
Q3) If an individual is ineligible to make a deductible contribution to a traditional IRA,nondeductible contributions can be made to a traditional IRA.
A)True
B)False
Q4) A traditional IRA may not be rolled over into a Roth IRA.
A)True
B)False
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Chapter 10: Deductions and Losses: Certain Itemized
Deductions
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Q1) Ernie sold his personal residence to Amanda on July 1,2010.He had paid $3,900 in real property taxes on March 1,2010,the due date for property taxes for 2010.Ernie must reduce the amount realized for his property by the portion of the $3,900 allocable to Amanda. A)True B)False
Q2) Grace's sole source of income is from a restaurant that she owns and operates as a proprietorship.Any state income tax Grace pays on the business net income must be deducted as a business expense rather than as an itemized deduction. A)True B)False
Q3) On December 23,2010,Megan used her credit card to make a $750 contribution to the United Way,a qualified charitable organization.She will pay her credit card balance in January 2011.If Megan itemizes,she cannot deduct the $750 in 2010. A)True B)False
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Chapter 11: Investor Losses
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Q1) Dick participates in an activity for 90 hours during the year.He has no employees and there are no other participants.Dick is a material participant.
A)True
B)False
Q2) Rhonda participates for 95 hours during the year in an activity she owns.She has no employees and is the only participant in the activity.The activity is a significant participation activity.
A)True
B)False
Q3) Carl,a physician,earns $200,000 from his medical practice in the current year.He receives $45,000 in dividends and interest during the year as well as $5,000 of income from a passive activity.In addition,he incurs a loss of $50,000 from an investment in a passive activity.What is Carl's AGI for the current year after considering the passive investment?
A)$195,000.
B)$200,000.
C)$240,000.
D)$245,000.
E)None of the above.
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Page 13
Chapter 12: Tax Credits and Payments
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Q1) An employer calculates the amount of income tax withheld from salary or wages based on the information an employee provides on the following form:
A)Form W-2.
B)Form W-3.
C)Form W-4.
D)Form 941.
E)None of the above.
Q2) George and Martha are married and file a joint tax return claiming their two children,ages 10 and 8 as dependents.Assuming their AGI is $123,450,George and Martha's child tax credit is:
A)$0.
B)$750.
C)$1,300.
D)$2,000.
E)None of the above.
Q3) The tax benefits resulting from tax credits and tax deductions are affected by the tax rate bracket of the taxpayer.
A)True
B)False
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Page 14
Chapter 13: Part 1--Property Transactions: Determination of
Gain or Loss,basis Considerations,and Nontaxable Exchanges
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Q1) Maud exchanges a rental house at the beach with an adjusted basis of $350,000 and a fair market value of $325,000 for a rental house at the mountains with a fair market value of $305,000 and cash of $20,000.What is the recognized gain or loss?
A)$0.
B)$20,000.
C)$25,000.
D)($25,000).
E)None of the above.
Q2) Karen owns City of Richmond bonds with a face value of $10,000.She purchased the bonds on January 1,2010,for $11,000.The maturity date is December 31,2019.The annual interest rate is 8%.What is the amount of taxable interest income that Karen should report for 2010,and the adjusted basis for the bonds at the end of 2010,assuming straight-line amortization is appropriate?
A)$0 and $11,000.
B)$0 and $10,900.
C)$100 and $11,000.
D)$100 and $10,900.
E)None of the above.
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Chapter 13: Part 2--Property Transactions: Determination of
Gain or Loss,basis Considerations,and Nontaxable Exchanges
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Q1) Under what circumstance is there recognition of some or all of the realized gain associated with the giving of boot by the taxpayer in a like-kind exchange?
Q2) Mitchell owned an SUV that he had purchased two years ago for $48,000 and which he transfers to his sole proprietorship.How is the sole proprietorship's basis for the SUV calculated? What additional information does Mitchell need?
Q3) Taxpayer's principal residence is destroyed by a tornado.Taxpayer is single and his realized gain is $400,000.Is it possible for the taxpayer's recognized gain to be $0?
Q4) What types of exchanges of insurance contracts are eligible for nonrecognition treatment under § 1035?
Q5) After 5 years of marriage,Dave and Janet decided to get a divorce.As part of the divorce settlement,Janet transfers to Dave the house she purchased prior to their marriage.Janet's adjusted basis for the house is $125,000 and the fair market value is $200,000 on the date of the transfer.What are the tax consequences to Janet and to Dave as a result of the transfer?
Q6) Distinguish between a direct involuntary conversion and an indirect involuntary conversion.
Q7) Define qualified small business stock under § 1045. Page 16
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Chapter 14: Property Transactions: Capital Gains and Losses,1231,and
Recapure Provisions
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Q1) A business machine purchased April 10,2009,for $62,000 was fully depreciated in 2009 using § 179 immediate expensing.On August 15,2010,the sole proprietor who owned the machine gave it to his son.On that date,the machine's fair market value was $57,000.The son did not use the machine in business or hold it as inventory and the machine was sold on November 22,2010,for $53,000.What is the amount and nature of the gain or loss from disposition of the machine? Where is it reported in the son's tax return?
Q2) Section 1231 applies to the sale or exchange of business properties,but not to business casualties.
A)True
B)False
Q3) Monty is in the business of song writing.He writes jingles for television advertisements.He writes a jingle and sells it for a lump sum plus a royalty each time the jingle is played on TV.He has:
A)Sold a capital asset.
B)Sold an ordinary asset.
C)No gain or loss.
D)An ordinary gain.
E)b.and d.
Page 18
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Chapter 15: Alternative Minimum Tax
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Q1) In 2010,Daniel exercised an incentive stock option (ISO),acquiring stock with a fair market value of $210,000 for $165,000.His AMT basis for the stock is $210,000,his regular income tax basis for the stock is $165,000,and his AMT adjustment is $45,000 ($210,000$165,000).
A)True
B)False
Q2) For regular income tax purposes,Yolanda,who is single,is in the 35% tax bracket.Her AMT base is $220,000.Her tentative AMT is:
A)$57,200.
B)$58,100.
C)$61,600.
D)$77,000.
E)None of the above.
Q3) For individual taxpayers,the AMT credit is applicable for the AMT that results from timing differences,but it is not available for the AMT that results from the adjustment for itemized deductions or exclusion preferences.
A)True
B)False
Q4) Why is there a need for a second tax system called the alternative minimum tax?
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Chapter 16: Accounting Periods and Methods
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Q1) When the IRS requires a taxpayer to change accounting methods:
A)The taxpayer may be subject to penalties and interest.
B)The taxpayer generally is required to make the change as of the beginning of the earliest open year.
C)The adjustments due to the change cannot be spread over subsequent years.
D)All of the above are correct.
E)None of the above is correct.
Q2) Charlotte sold her unincorporated business for $360,000 in 2010.The sales contract allocated $150,000 to equipment,$110,000 to land,and $100,000 to goodwill.Charlotte had a $0 basis in the goodwill,the land cost $60,000,and the equipment originally cost $250,000 but it was fully depreciated.What is the amount of the gain eligible for installment sales treatment?
A)$0.
B)$150,000.
C)$145,000.
D)$255,000.
E)None of the above.
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Page 20
Chapter 17: Corporations: Introduction and Operating Rules
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Q1) Which of the following statements is correct regarding the taxation of C corporations?
A)The alternative minimum tax does not apply.
B)A corporation with taxable income of less than $500 need not file a tax return.
C)The due date for a corporate income tax return (ignoring extensions)is the fifteenth day of the third month following the close of the corporation's tax year.
D)In general,the required annual payment for corporate estimated taxes is 90% of the corporation's final tax for the current year.
E)None of the above.
Q2) Ed,an individual,incorporates two separate businesses that he owns by establishing two new corporations.Each corporation generates taxable income of $90,000.Each corporation will have a tax liability of $26,725.
A)True
B)False
Q3) Briefly describe the accounting methods available for adoption by a C corporation.
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Chapter 18: Corporations: Organization and Capital Structure
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Q1) Ann,Irene,and Bob incorporate their respective businesses and form Dove Corporation.Ann exchanges her property (basis of $100,000 and fair market value of $400,000)for 200 shares in Dove Corporation on March 3,2008.Irene exchanges her property (basis of $140,000 and fair market value of $600,000)for 300 shares in Dove Corporation on April 10,2008.Bob transfers his property (basis of $250,000 and fair market value of $1,000,000)for 500 shares in Dove Corporation on May 17,2010.Bob's transfer is not part of a prearranged plan with Ann and Irene to incorporate their businesses.What gain,if any,will Bob recognize on the transfer?
A)$1,000,000.
B)$750,000.
C)$250,000.
D)$0.
E)None of the above.
Q2) Stock in Merlin Corporation is held equally by Jane,Eve,and Fred.Merlin seeks additional capital to buy a valuable tract of land that will cost $6,000,000.Jane,Eve,and Fred propose to loan Merlin $2,000,000 each,taking from Merlin a $2,000,000 ten-year note with interest payable annually at five points above the prime rate.Merlin Corporation has current taxable income of $7,000,000.How are the payments on the notes treated for tax purposes?
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Chapter 19: Corporations: Distributions Not in Complete Liquidation
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Q1) For a stock redemption to qualify for sale or exchange treatment under § 303 (redemption to pay death taxes),it need not satisfy any of the § 302 redemption provisions.
A)True
B)False
Q2) Stacey and Andrew each own one-half of the stock in Parakeet Corporation,a calendar year taxpayer.Cash distributions from Parakeet are: $350,000 to Stacey on April 1 and $150,000 to Andrew on May 1.If Parakeet's current E & P is $60,000,how much is allocated to Andrew's distribution?
A)$5,000.
B)$10,000.
C)$18,000.
D)$30,000.
E)None of the above.
Q3) When computing E & P,an adjustment to taxable income is necessary for any domestic production activities deduction.
A)True
B)False
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Chapter 20: Distributions in Complete Liquidation and an
Overview of Reorganizations
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Q1) Pursuant to a complete liquidation,Oriole Corporation distributes to its shareholders land with a basis of $450,000 and a fair market value of $550,000.The land is subject to a liability of $600,000.What is Oriole's recognized gain or loss on the distribution?
A)$0.
B)$100,000 gain.
C)$150,000 gain.
D)$50,000 loss.
E)None of the above.
Q2) Brown Corporation purchased 85% of the stock of Green Corporation five years ago for $1.2 million.In the current year,Brown Corporation liquidates Green Corporation and acquires assets with a basis to Green Corporation of $800,000 (fair market value of $1.3 million).Brown Corporation will have a basis in the assets of $1.2 million,the same as Brown's basis in the Green stock.
A)True
B)False
Q3) Compare the sale of a corporation's assets with a sale of its stock in terms of problems to the seller.
Q4) Describe the requirements for and tax consequences of a § 338 election.
Page 24
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Chapter 21: Partnerships
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Q1) Simone is a calendar year cash basis taxpayer.She owns a 50% profit and loss interest in a cash basis partnership with a September 30 year-end.The partnership's operating income (after deducting guaranteed payments)was $72,000 ($6,000 per month)and $96,000 ($8,000 per month),respectively,for the partnership tax years ended September 30,2010 and 2011.The partnership paid guaranteed payments to Simone of $1,000 and $2,000 per month during the fiscal years ended September 30,2010 and 2011.How much will Simone's adjusted gross income be increased by these partnership items for her tax year ended December 31,2010?
A)$12,000.
B)$15,000.
C)$48,000.
D)$55,000.
E)None of the above.
Q2) Nina and Sue form an equal partnership during the current year.Nina contributes cash of $130,000,and Sue contributes property (adjusted basis of $100,000,fair market value of $250,000)subject to a nonrecourse liability of $120,000.As a result of these transactions,Sue has a basis in her partnership interest of $50,000.
A)True
B)False
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Chapter 22: S Corporations
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Q1) Which,if any,of the following items has no effect on the stock basis of an S corporation shareholder?
A)Operating income.
B)Long-term capital gain.
C)Cost of goods sold.
D)Short-term capital loss.
E)All of the above affect stock basis.
Q2) As a general rule,S corporation treatment is not advantageous when the individual tax rate far exceeds the applicable corporate tax rate.
A)True
B)False
Q3) A C corporation elects S status.The corporation may be subject to a built-in gains tax on which of the following assets?
A)Securities held for investment.
B)Goodwill.
C)Accounts receivables.
D)Investment land.
E)All of the above.
Q4) S corporations are treated much like ____________________ for tax purposes.
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Chapter 23: Exempt Entities
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Q1) Which of the following statements regarding intermediate sanctions is correct?
A)Intermediate sanctions are self-assessing (i.e. ,calculated and paid by the taxpayer rather than being imposed by the IRS).
B)The tax is imposed on the exempt organization.
C)Both a first-level tax and a second-level tax may apply.
D)The corporate tax rates apply in calculating the amount of the tax liability.
E)None of the above is correct.
Q2) Loyal,Inc. ,is a §501(c)(3)organization that is not classified as a private foundation.During the current year,it is subject to intermediate sanctions.What other options does the IRS have in dealing with an exempt organization engaging in prohibited transactions?
Q3) The excise tax imposed on a private foundation's excess business holdings is in effect an audit fee to defray IRS expenses.
A)True
B)False
Q4) An exempt organization can be subject to the Federal income tax.
A)True
B)False
Q5) Why are some organizations exempt from Federal income tax?
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Chapter 24: Multistate Corporate Taxation
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Q1) Only a few states have adopted an alternative minimum tax,similar to the Federal system.
A)True
B)False
Q2) What is the significance of the term nexus when discussing state income taxation?
Q3) A typical state taxable income addition modification is the income tax paid to the state for the year.
A)True
B)False
Q4) In conducting multistate tax planning,the taxpayer should:
A)Review tax opportunities in light of their effect on the overall business.
B)Consider additional administrative costs generated by the plan.
C)Exploit inconsistencies among the statutes and formulas of the states.
D)Recognize that minimizing state tax costs may not always be prudent.
E)All of the above are true.
Q5) In a few states,a Federal S corporation is exempt from state corporate income tax only if ____________________ of its shareholders are state residents.
Q6) Summarize the principles of multistate tax planning.
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Chapter 25: Taxation of International Transactions
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Sample Questions
Q1) Describe the policy reasons behind treating foreign personal holding company income as Subpart F income to CFCs.Your discussion should include two examples of foreign personal holding company income.
Q2) A nonresident alien realizes a gain on the sale of commercial real estate located in Cleveland,Ohio.The real estate was sold to his cousin who is also a nonresident alien.The seller has foreign-source income from the sale because the seller is a foreign resident.
A)True
B)False
Q3) Income from international communications activities earned by a U.S.person is sourced 100% in the United States.
A)True
B)False
Q4) A "U.S.shareholder" for purposes of CFC classification is any U.S.person who owns directly,indirectly,or constructively at least 10% of the voting power or value of a foreign corporation.
A)True
B)False
Q5) Discuss the primary purposes of income tax treaties.
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Chapter 26: Tax Practice and Ethics
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135 Verified Questions
135 Flashcards
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Sample Questions
Q1) Roger prepared for compensation a Federal income tax return for Joan.Joan's return included an aggressive interpretation of the rules concerning overnight business travel.Roger is not liable for a preparer penalty for taking an unreasonable tax return position if:
A)There was substantial authority for Joan's interpretation of the travel deduction rules.
B)There was a reasonable basis for Joan's interpretation of the travel deduction rules.
C)The tax reduction attributable to the disputed deduction did not exceed $5,000.
D)The IRS found that the travel deduction was frivolous,but Joan disclosed the position in an attachment to the return.
Q2) 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
Q3) A taxpayer can take a dispute to the Small Cases Division of the Tax Court when the disputed amounts do not exceed $____________________.
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Chapter 27: The Federal Gift and Estate Taxes
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Sample Questions
Q1) To make the election to split gifts under § 2513,spouses must file a Form 709 (Federal gift tax return).
A)True
B)False
Q2) As a result of a fatal auto accident,Irene totaled a Bentley worth $95,000.If the insurance company covers $60,000 of the loss,Irene's estate can claim a deduction of $35,000 in arriving at the taxable estate.
A)True
B)False
Q3) Harry and Brenda are husband and wife.Using his funds,Harry purchases real estate which he lists as: "Harry and Brenda,tenants by the entirety with right of survivorship." If Brenda dies first,none of the real estate will be included in her gross estate.
A)True
B)False
Q4) At one point,the tax rates applicable to transfers by gift were lower than those applying to transfers by death.
A)True
B)False
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Page 31
Chapter 28: Income Taxation of Trusts and Estates
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Sample Questions
Q1) List the three major functions of distributable net income (DNI)in determining how the beneficiaries of a trust or estate account for their distributions received for the tax year.
Q2) Tax planning usually dictates that high-income and -wealth individuals be specified as first-tier beneficiaries of a trust arrangement.
A)True
B)False
Q3) In computing distributable net income (DNI)for a trust,one removes any net passive income or loss.
A)True
B)False
Q4) The tax rules regarding the income taxation of trusts and estates are included in which Subchapter of the Internal Revenue Code?
A)C.
B)J.
C)K.
D)S.
Q5) Are estates and trusts taxed like individuals? Corporations? Partnerships? Explain.
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