Partnership Taxation
Final Exam Questions
Course Introduction
Partnership Taxation examines the federal income tax rules and principles that govern the formation, operation, dissolution, and liquidation of partnerships. The course covers topics such as allocation of income, gains, losses, and deductions among partners; the effects of contributions and distributions of property; transactions between partners and partnerships; basis calculations; and special issues including disguised sales and partnership anti-abuse rules. Students will gain practical skills in identifying tax implications for partners and partnerships, interpreting relevant sections of the Internal Revenue Code, and applying current case law and IRS guidance to real-world partnership tax scenarios.
Recommended Textbook
McGraw Hills Taxation of Individuals and Business Entities 6th Edition by Spilker
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Chapter 1: An Introduction to Tax
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Q1) What is Leonardo and Theresa's effective tax rate for year 2014 (rounded)?
A) 15.00%
B) 18.63%
C) 21.28%
D) 28.00%
E) None of these
Answer: E
Q2) Relative to explicit taxes, implicit taxes are much easier to estimate.
A)True
B)False Answer: False
Q3) The largest federal tax, in terms of revenue collected, is the social security tax.
A)True
B)False
Answer: False
Q4) Excise taxes are typically levied on the value of a good purchased.
A)True
B)False Answer: False
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Chapter 2: Tax Compliance, the Irs, and Tax Authorities
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Q1) Princess, who resides in the 2nd Circuit, recently found a circuit court case that is favorable to her research question. Which of the following circuits would she prefer to have issued the opinion?
A) 2nd Circuit
B) Federal Circuit
C) 1st Circuit
D) 2nd Circuit or the Federal Circuit
E) None of these
Answer: D
Q2) If Paula requests an extension to file her tax return, the latest she could file her return without penalty is:
A) September 15th.
B) October 15th.
C) August 15th.
D) November 15th.
E) None of these.
Answer: B
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Page 4
Chapter 3: Tax Planning Strategies and Related Limitations
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Q1) The constructive receipt doctrine:
A) is particularly restrictive for accrual basis taxpayers
B) causes income to be recognized before it is actually received
C) causes income to be recognized after it is actually received
D) applies equally to income and expenses
E) None of these
Answer: B
Q2) If Thomas has a 40% tax rate and a 6% after-tax rate of return, $50,000 of income in five years will cost him how much tax in today's dollars (rounded)?
A) $50,000
B) $20,000
C) $37,350
D) $14,940
E) None of these
Answer: D
Q3) Tax savings generated from deductions are considered cash inflows.
A)True
B)False
Answer: True
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Page 5
Chapter 4: Individual Income Tax Overview, Exemptions, and Filing Status
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Q1) In certain circumstances, a taxpayer who provides less than half the support of another may still be able to claim a dependency exemption for that person as a qualifying relative.
A)True
B)False
Q2) To be considered a qualifying child of a taxpayer, the individual must be the son or daughter of the taxpayer.
A)True
B)False
Q3) If an unmarried taxpayer is able to claim a dependency exemption for another individual, the taxpayer is automatically eligible for the head of household filing status.
A)True
B)False
Q4) Itemized deductions and the standard deduction are deductions from AGI but deductions for personal and dependency exemptions are deductions for AGI.
A)True
B)False
Q5) What is the couple's gross income?
Page 6
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Chapter 5: Gross Income and Exclusions
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Q1) Anna received $15,000 from life insurance paid upon the death of her grandmother. Anna can exclude the entire amount of the life insurance from her gross income.
A)True
B)False
Q2) This year Henry realized a gain on the sale of an antique car that he inherited from his uncle. The buyer has promised to pay Henry in installment payments over the next few years. Identify the principle that will determine when Henry should be taxed on the gain from the sale:
A) Assignment of income
B) Constructive receipt
C) Return of capital principle
D) Wherewithal to pay
E) All of these
Q3) Constructive receipt represents the principle that cash basis taxpayers should be taxed on income when it is made available to them without substantial restrictions.
A)True
B)False
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Chapter 6: Individual Deductions
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Q1) Which of the following is a true statement?
A) For purposes of the deduction for educational interest, an educational loan must be used to pay tuition to any type of school.
B) The maximum deduction for educational interest is $5,000 for married taxpayers filing jointly.
C) Self-employed taxpayers are not allowed to deduct health care premiums if the taxpayer is eligible to participate in their spouse's employer-provided health plan.
D) Self-employment taxes paid by self-employed taxpayers are deductible as business expenses.
E) All of these are true.
Q2) Taxpayers traveling for the primary purpose of receiving essential and deductible medical care may deduct the cost of travel.
A)True
B)False
Q3) This year Tiffanie files as a single taxpayer. Tiffanie received $62,700 of salary and paid $3,200 of qualified educational interest. This year Tiffanie has also paid deductible moving expenses of $2,200 and received $12,000 of alimony. What is Tiffanie's AGI?
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Page 8
Chapter 7: Individual Income Tax Computation and Tax Credits
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Q1) Which of the following statements regarding the child and dependent care credit is false?
A) Taxpayers may claim a credit for only a portion of qualifying dependent care expenditures.
B) If a taxpayer's income is too high, she will be ineligible to claim any child and dependent care credit.
C) A single taxpayer must have earned income to claim any child and dependent care credit.
D) A taxpayer is not eligible to claim the dependent care credit if any dependent relative provides the care.
Q2) Baker earned $225,000 of salary as an employee in 2014. How much should his employer have withheld from his paycheck for FICA taxes (rounded to the nearest whole dollar amount)?
A) $10,742
B) $10,517
C) $7,254
D) $17,213
Q3) Jackson earned a salary of $254,000 in 2014. What amount of FICA taxes should Jackson's employer withhold from his paycheck?
Page 9
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Chapter 8: Business Income, Deductions, and Accounting Methods
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Q1) Rock Island Corporation generated taxable income (before the domestic production activities deduction) of $10 million this year. The total income included $4,500,000 of qualified production activities income. The company paid $500,000 in W-2 wages to generate the qualified production activity income. What is Rock Island's domestic production activities deduction for the year?
Q2) David purchased a deli shop on February 1st of last year and began to operate it as a sole proprietorship. David reports his personal taxes using the cash method over a calendar year, and he wants to use the cash method and fiscal year for his sole proprietorship. He has summarized his receipts and expenses through January 31st of this year as follows: \(\begin{array}{llcc} & \underline{\text { Receipts }} & \underline{\text {Expenses } }\\
\text { February thru December } &\$112,000&\$84,500\\ \text { January } &10,400&6,200\\
\end{array}\)
What income should David report from his sole proprietorship?
Q3) A fiscal tax year can end on the last day of any month other than December. A)True B)False
Page 10
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Chapter 9: Property Acquisition and Cost Recovery
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Q1) Beth's business purchased only one asset during the current year. Beth placed in service machinery (7-year property) on December 1 with a basis of $50,000. Calculate the maximum depreciation expense (ignoring §179 and bonus depreciation):
A) $1,785
B) $2,500
C) $7,145
D) $10,000
E) None of these
Q2) Olney LLC placed in service on July 19, 2014 machinery and equipment (7-year property) with a basis of $850,000. Assume that Olney has sufficient income to avoid any limitations. Calculate the maximum depreciation expense including §179 expensing, rounded to the nearest whole number (but ignoring bonus expensing). Assume the 2013 §179 limits are extended to 2014.
Q3) The MACRS recovery period for automobiles and computers is:
A) 3 years
B) 5 years
C) 7 years
D) 10 years
E) None of these
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Page 11
Chapter 10: Property Dispositions
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Q1) Brandon, an individual, began business four years ago and has never sold a §1231 asset. Brandon owned each of the assets for several years. In the current year, Brandon sold the following business assets: \[\begin{array} { | l | r | r | r | }
\hline { \text { Asset } } & \text { Original Cost } & \begin{array} { r }
\text { Accumulated } \\
\text { Depreciation }
\end{array} & \text { Gain/Loss } \\
\hline \text { Machinery } & \$ 30,000 & \$ 7,000 & \$ 10,000 \\
\hline \text { Computers } & 10,000 & 6,000 & ( 2,000 ) \\
\hline \text { Building } & 90,000 & 20,000 & ( 2,000 ) \\
\hline
\end{array}\] Assuming Brandon's marginal ordinary income tax rate is 35 percent, what effect do the gains and losses have on Brandon's tax liability?
A) $7,000 ordinary income, $1,000 §1231 loss and $2,100 tax liability.
B) $6,000 ordinary income and $2,100 tax liability.
C) $7,000 §1231 gain and $2,450 tax liability.
D) $7,000 §1231 gain and $1,050 tax liability.
E) None of these.
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Chapter 11: Investments
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Q1) Which taxpayer would not be considered a material participant of an activity?
A) taxpayer materially participated in the activity for any five of the preceding ten years
B) taxpayer participated on a regular, continuous, and substantial basis last year
C) taxpayer participated 95 hours last year and participation is not less than any other participants for the year
D) taxpayer participated in the activity for 995 hours last year
E) None of these
Q2) Unused investment interest expense:
A) expires after the current year
B) is carried back two years
C) is carried forward twenty years
D) is carried forward indefinitely
E) None of these
Q3) Nondeductible investment expenses (other than investment interest expenses) are carried forward indefinitely.
A)True B)False
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Chapter 12: Compensation
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Q1) Which of the following isn't done by Form W-2?
A) Summarizes the employee's taxable salary and wages.
B) Provides annual Federal and state withholding information.
C) Indicates whether an employee had more than one employer during the year.
D) Generated by an employer annually.
Q2) Which of the following is true regarding stock options?
A) A loss is realized when stock options lapse.
B) There is typically no tax effect on the grant date.
C) Income recognized on the exercise date is greater for incentive stock options than nonqualified options.
D) The bargain element on a nonqualified option is taxed to employees at capital gain rates.
Q3) Current compensation is usually comprised of salary, wages, and bonuses. A)True B)False
Q4) Brandy graduated from Vanderbilt with her bachelor's degree recently. She works for Walton & Company CPAs. The firm pays her tuition ($8,000 per year) for her so that she can receive her MBA. How much of the $8,000 tuition benefit does Brandy need to include in her income?
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Chapter 13: Retirement Savings and Deferred Compensation
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Q1) On December 1, 2014 Irene turned 71 years old. She is still working for her employer and she participates in her employer's 401(k) plan. Irene is not required to receive a minimum distribution for 2014 from her 401(k) account because she has not yet retired.
A)True B)False
Q2) Amy files as a head of household. She determined her 2014 adjusted gross income was $70,000. During the year, she contributed $2,500 to a Roth IRA. What is the maximum saver's credit she may claim for 2014?
A) $1,000
B) $2,000
C) $2,500
D) $1,250
E) $0
Q3) Employees who are at least 50 years old at the end of the year are allowed to contribute more to their 401(k) accounts than employees who are not 50 years old by year end.
A)True B)False
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Chapter 14: Tax Consequences of Home Ownership
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Q1) When determining the number of days a taxpayer has rented a home during the year, any day when the home is available for rent but not actually rented out counts as a day of rental use.
A)True
B)False
Q2) Robin purchased a home on July 1, 2009 for $300,000. She paid $200,000 down and financed the remaining $100,000. On January 1, 2014 when the outstanding balance of her mortgage was $85,000 and her home was valued at $300,000, she refinanced her home for $250,000. With the $250,000 loan, she paid off the remaining $85,000 balance of her original mortgage, she used $70,000 to substantially improve her home and she used the remaining $95,000 for purposes unrelated to her home. During 2014, Robin made interest only payments of $12,500 on the loan. What amount of the $12,500 interest expense is Robin allowed to deduct in 2014?
Q3) When a taxpayer finances her personal residence, in general, she may not deduct points paid for loan origination fees, but she may deduct points paid as prepaid interest.
A)True
B)False
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Page 16
Chapter 15: Entities Overview
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Q1) Which of the following legal entities file documents with the state to be formally recognized by the state?
A) Limited Liability Company
B) General Partnership
C) Sole Proprietorship
D) None of these
Q2) David would like to organize HOS as either an LLC or as a corporation generating a 12 percent annual before-tax return on a $300,000 investment. Individual and corporate tax rates are both 30 percent and individual capital gains and dividend tax rates are 15 percent. HOS will pay out its after-tax earnings every year to either its members or its shareholders.
a. Ignoring self-employment taxes, how much would David keep after taxes if HOS is organized as either an LLC or a corporation?
b. Ignoring self-employment taxes, what are the overall tax rates (combined owner and entity level) if HOS is organized as either an LLC or a corporation?
Q3) A single-member LLC is taxed as a partnership.
A)True
B)False
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Chapter 16: Corporate Operations
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Q1) It is important to distinguish between temporary and permanent book-tax differences for which of the following reasons?
A) Temporary book-tax differences will reverse in future years whereas permanent differences will not.
B) Certain corporations are required to disclose book-tax differences as permanent or temporary on their tax returns.
C) Temporary book-tax differences will reverse in future years whereas permanent differences will not, and certain corporations are required to disclose book-tax differences as permanent or temporary on their tax returns.
D) Neither temporary nor permanent book-tax differences will reverse in future years nor are certain corporations required to disclose book-tax differences as permanent or temporary on their tax returns.
Q2) Minimum tax credits generated by the corporate AMT can be carried forward indefinitely.
A)True
B)False
Q3) Netgate Corporation's gross regular tax liability for 2014 was $95,375. What was its taxable income?
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18
Chapter 17: Accounting for Income Taxes
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Q1) Potter, Inc. reported pretax book income of $5,000,000. During the current year, the reserve for bad debts increased by $100,000. In addition, tax depreciation exceeded book depreciation by $300,000. Potter sold a fixed asset and reported book gain of $60,000 and tax gain of $80,000. Finally, the company received $50,000 of tax-exempt municipal bond interest. Using a tax rate of 34%, compute Potter's deferred income tax expense or benefit.
Q2) Abbot Corporation reported pretax book income of $500,000. During the current year, the reserve for bad debts increased by $5,000. In addition, tax depreciation exceeded book depreciation by $40,000. Finally, Abbot received $3,000 of tax-exempt life insurance proceeds from the death of one of its officers. Using a tax rate of 34%, Abbot's current income tax expense or benefit would be:
A) $186,320
B) $170,000
C) $157,080
D) $153,680
Q3) Tax-exempt interest from municipal bonds is an example of a permanent difference. A)True
B)False
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19
Chapter 18: Corporate Taxation: Nonliquidating
Distributions
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Q1) Which of the following statements best describes current earnings and profits?
A) Current earnings and profits is another name for a corporation's retained earnings on its balance sheet.
B) Current earnings and profits is a precisely defined tax term in the Internal Revenue Code and represents a corporation's economic income.
C) Current earnings and profits is an ill-defined tax concept in the Internal Revenue Code and represents a corporation's economic income.
D) Current earnings and profits is a conceptual tax concept with no definition in the Internal Revenue Code.
Q2) Beltway Company is owned equally by George, his brother Thomas, and a partnership owned 50 percent by George and his father Abe. Each of the three shareholders holds 100 shares in the company. Under the §318 stock attribution rules, how many shares of Beltway stock is George deemed to own?
A) 100
B) 150
C) 200
D) 300
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Chapter 19: Corporate Formation, Reorganization, and Liquidation
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Q1) Simon transferred 100 percent of his stock in Idol Company to Bobcat Corporation in a Type A merger. In exchange he received stock in Bobcat with a fair market value of $2,000,000 plus $500,000 in cash. Simon's tax basis in the Idol stock was $1,500,000. What amount of gain does Simon recognize in the exchange and what is his basis in the Bobcat stock he receives?
Q2) Please answer the following questions about the tax consequences of the transaction to Ken.
a) What amount of gain or loss does Ken realize on the formation of the corporation? b) What amount of gain or loss, if any, does he recognize?
c) What is Ken's tax basis in the stock he receives in return for his contribution of property to the corporation?
Q3) In December 2011, Jill incurred a $50,000 loss on the sale of Crown Corporation stock that she purchased in 2005. The stock satisfied all of the §1244 stock requirements at the time of issue. Jill is married to Jack and together they file a joint tax return. How much of the loss can Jack and Jill deduct in 2011, assuming they do not have capital gains in the current or prior years, and what is the character of the loss?
Q4) What amount of gain or loss does Amelia recognize in the complete liquidation?
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Chapter 20: Forming and Operating Partnerships
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Q1) If a taxpayer sells a passive activity with suspended passive activity losses from prior years, what type of income can be offset by the suspended passive losses in the year of sale?
A) Passive activity income
B) Portfolio income
C) Active business income
D) Any of these types of income can be offset.
E) None of these. The suspended losses disappear when the passive activity is sold.
Q2) Gerald received a 33% capital and profit (loss) interest in XYZ Limited Partnership (LP). In exchange for this interest, Gerald contributed a building with a FMV of $30,000. His adjusted basis in the building was $15,000. In addition, the building was encumbered with a $9,000 nonrecourse mortgage that XYZ, LP assumed at the time the property was contributed. What is Gerald's outside basis immediately after his contribution?
A) $6,000
B) $9,000
C) $21,000
D) $24,000
Q3) What is the difference between a partner's tax basis and at-risk amount?
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Chapter 21: Dispositions of Partnership Interests and Partnership Distributions
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Q1) Riley is a 50% partner in the RF Partnership and has an outside basis of $56,000 at the end of the year prior to any distributions. On December 31, Riley receives a proportionate operating distribution of $6,000 cash and a parcel of land with a $14,000 fair value and an $8,000 basis to RF. What is Riley's basis in the distributed property?
A) Cash $6,000, land $0
B) Cash $6,000, land $8,000
C) Cash $6,000, land $14,000
D) Cash $6,000, land $22,000
Q2) In the sale of a partnership interest, a selling partner will recognize ordinary income (rather than capital gain) when the partnership assets include cash and land held for 5 years as an investment.
A)True B)False
Q3) A partner recognizes a loss when he receives cash and other property with inside bases greater than his outside basis in a liquidating distribution.
A)True B)False
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Page 23
Chapter 22: S Corporations
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Q1) S corporations are treated in part like C corporations and in part like partnerships with respect to tax deductions for qualifying employee fringe benefits.
A)True
B)False
Q2) S corporations have considerable flexibility in making special profit and loss allocations.
A)True
B)False
Q3) The S corporation rules are less complex for S corporations that have earnings and profits from prior C corporation years than for S corporations that do not have earnings and profits from prior C corporation years.
A)True
B)False
Q4) Bobby T (95% owner) would like to elect S corporation status for DJ, Inc. Dallas (5% owner) does not want to elect S corporation status. Bobby T cannot elect S status for DJ, Inc. without Dallas' consent.
A)True
B)False
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Chapter 23: State and Local Taxes
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Q1) A gross receipts tax is subject to Public Law 86-272.
A)True
B)False
Q2) Separate return states require each member of a consolidated group with nexus to file their own state tax return.
A)True
B)False
Q3) Tennis Pro has the following sales, payroll and property factors: \[\begin{array} { l r r }
& \text { Virginia } & \text { Maryland } \\
\text { Sales } & 40 \% & 20 \% \\
\text { Payroll } & 70 \% & 5 \% \\
\text { Property } & 90 \% & 5 \%
\end{array}\] What is Tennis Pro's Virginia and Maryland apportionment factors if both states use an equally-weighted three-factor formula?
Q4) State tax law is comprised solely of legislative authority.
A)True
B)False
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25
Chapter 24: The US Taxation of Multinational Transactions
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Q1) Which of the following tax rules applies to an excess foreign tax credit (FTC) that arises in 2014?
A) The excess FTC is first carried back to 2013 and any excess is carried forward for 10 years.
B) The excess FTC is first carried back to 2012, then 2013, and any excess is carried forward for 20 years.
C) The excess FTC is first carried back to 2011, then 2012, then 2013, and any excess is carried forward for 5 years.
D) The excess FTC is carried forward 10 years, with no carryback allowed.
Q2) Provo Corporation received a dividend of $350,000 from its 100 percent owned German subsidiary. A deemed paid credit of $150,000 was available on the dividend. No withholding tax was imposed on the dividend. What are the U.S. tax consequences to Provo on receipt of the dividend, assuming the foreign tax credit limitation is not binding and the company breaks even on its U.S. operations? Assume a U.S. tax rate of 34 percent.
A) Taxable income of $350,000 and a net U.S. tax liability of $0
B) Taxable income of $350,000 and a net U.S. tax liability of $20,000
C) Taxable income of $500,000 and a net U.S. tax liability of $170,000
D) Taxable income of $500,000 and a net U.S. tax liability of $20,000
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Chapter 25: Transfer Taxes and Wealth Planning of the Cfa Institute
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Q1) A future interest is a right to receive income or property in the future.
A)True
B)False
Q2) A bypass provision in a will requires a decedent to have a taxable estate in order to use a unified credit to reduce total estate taxes on a married couple.
A)True
B)False
Q3) The debts of the decedent at the time of death are deducted in calculating the taxable estate.
A)True
B)False
Q4) The testamentary transfer of property to a qualified charity is deductible in calculating the taxable estate without any ceiling limitation.
A)True
B)False
Q5) Grace transferred $800,000 into trust with the income to be paid annually to her spouse, Isaiah, for life and the remainder to Taylor. Calculate the amount of the taxable gifts from the transfers.
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