Partnership Taxation Practice Exam
Course Introduction
Partnership Taxation explores the federal income tax principles applicable to partnerships and their partners. This course examines the formation, operation, and dissolution of partnerships, including contributions of property, allocations of income and loss, distributions, sale or exchange of partnership interests, and the impact of special partnership tax rules. Students will gain an understanding of Subchapter K of the Internal Revenue Code, focusing on tax planning opportunities, compliance requirements, and the economic implications of partnership transactions. The course emphasizes problem-solving and analytical skills through case studies and real-world scenarios relevant to partnership tax issues.
Recommended Textbook
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) Generally, neither a tax law nor a tax treaty takes general precedence over the other.
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) Proposed Regulations are not published in the Federal Register.
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) Schedule M-2 is used to reconcile unappropriated retained earnings at the beginning of the year with unappropriated retained earnings at the end of the year.
A)True
B)False
Answer: True
Q2) In the current year, Amber, Inc., a calendar C corporation, has income from operations of $200,000 and operating deductions of $225,000. Amber also had $30,000 of dividends from a 25% stock ownership in a domestic corporation. Which of the following statements is incorrect with respect to Amber's net operating loss deduction?
A) The NOL is carried back 3 years and forward 10 years by Amber.
B) Amber's NOL is $19,000.
C) A dividends received deduction is allowed in computing Amber's NOL.
D) Amber can elect to forgo the carryback period and only carry forward the NOL.
E) None of the above.
Answer: A
Q3) As a general rule, a personal service corporation (PSC) must use a calendar year as its accounting period.
Answer: TRU E
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Chapter 3: Corporations: Special Situations
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Q1) Which statement is false?
A) The starting point for computing AMTI is taxable income.
B) A tax preference is added to taxable income.
C) The ACE adjustment can be a negative amount.
D) The starting point for computing ACE is taxable income.
E) None of the above.
Answer: D
Q2) Which reason is unlikely to cause a regular corporation to have to pay AMT?
A) A service-type of company with little inventory.
B) A high level of investment in assets such as equipment and structures.
C) Low taxable income due to a cyclical downturn, strong international competition, a low-margin industry, or other factors.
D) Investment at low real interest rates, which increases the company's deductions for depreciation relative to those for interest payments.
E) None of the above.
Answer: A
Q3) What are some of the differences (at least three) between the application of the AMT for individuals and corporations?
Answer: 11ea8545_adca_fbcc_9aec_73a86c0c14ed_TB4127_00
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Chapter 4: Corporations: Organization and Capital Structure
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Q1) When a taxpayer transfers property subject to a mortgage to a controlled corporation in an exchange qualifying under § 351, the transferor shareholder's basis in stock received in the transferee corporation is increased by the amount of the mortgage on the property.
A)True
B)False
Q2) In order to induce Yellow Corporation to build a new manufacturing facility in Knoxville, Tennessee, the city donates land (fair market value of $400,000) and cash of $100,000 to the corporation. Several months after the donation, Yellow Corporation spends $450,000 (which includes the $100,000 received from Knoxville) on the construction of a new plant located on the donated land.
A) Yellow recognizes income of $100,000 as to the donation.
B) Yellow has a zero basis in the land and a basis of $450,000 in the plant.
C) Yellow recognizes income of $500,000 as to the donation.
D) Yellow has a zero basis in the land and a basis of $350,000 in the plant.
E) None of the above.
Q3) Issues relating to basis arise when a taxpayer is involved in a § 351 transaction. Describe the underlying rules, and the purpose they serve.
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Chapter 5: Corporations: Earnings Profits and Dividend
Distributions
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Q1) Regardless of any deficit in current E & P, distributions during the year are taxed as dividends to the extent of accumulated E & P.
A)True
B)False
Q2) Samantha owns stock in Pigeon Corporation (basis of $80,000) as an investment. Pigeon distributes property (fair market value of $300,000; basis of $150,000) to her during the year. Pigeon has current E & P of $20,000 and accumulated E & P of $80,000 and makes no other distributions during the year. What is Samantha's capital gain on the distribution?
A) $0.
B) $80,000.
C) $120,000.
D) $150,000.
E) None of the above.
Q3) The terms "earnings and profits" and "retained earnings" are identical in meaning.
A)True
B)False
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Chapter 6: Corporations: Redemptions and Liquidations
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Q1) Vulture Corporation distributes land (basis of $250,000, fair market value of $475,000) to Bonita, a shareholder, to carry out a qualifying stock redemption. The land is distributed subject to a $300,000 liability. Bonita had a basis of $25,000 in the shares redeemed. With respect to the redemption:
A) Vulture Corporation will recognize a gain of $50,000.
B) Vulture Corporation will recognize a gain of $225,000.
C) Bonita will recognize a gain of $450,000.
D) Bonita will have a basis of $175,000 in land.
E) None of the above.
Q2) A shareholder's holding period of property acquired in a stock redemption begins on the date of the distribution.
A)True
B)False
Q3) Noncorporate shareholders generally prefer a nonqualified stock redemption over a qualifying stock redemption due to the availability of the dividends received deduction.
A)True
B)False
Q4) 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) 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.
Q2) In a ____________________ divisive reorganization the original distributing corporation disappears. In a ____________________ divisive reorganization the shareholders do not give up any of their original corporation stock to receive stock in the new corporation, whereas in a ____________________ stock in the original is exchanged for stock in the new corporation.
Q3) North Corporation acquires 90% of South's assets (basis of $700,000) by exchanging $600,000 of its voting stock and assuming $300,000 of South's liabilities. South distributes North stock, its remaining $100,000 in assets, and associated $40,000 in liabilities to its shareholder in exchange for his South stock (basis of $500,000). South then liquidates. How will this transaction be treated for tax purposes?
A) As a "Type A" reorganization and South recognizes $100,000 of gain.
B) As a "Type A" reorganization and South recognizes $60,000 of gain.
C) As a "Type C" reorganization and the shareholder recognizes $60,000 of gain.
D) As a "Type C" reorganization and the shareholder recognizes $100,000 of gain.
E) As a taxable transaction.
Q4) Discuss the role of letter rulings in corporate reorganizations.
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Chapter 8: Consolidated Tax Returns
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Q1) Keep Corporation joined an affiliated group by merger. The group generated a 2011 consolidated NOL, and Keep's share of the loss was $50,000. Keep's share of the loss is included in the group's NOL carryforward to 2012.
A)True
B)False
Q2) Members of an affiliated group must share one $40,000 ____________________ for the tax year.
Q3) In an affiliated group, the parent must own at least 50 percent of each of the subsidiaries.
A)True
B)False
Q4) The casualty/theft gain/loss of the affiliates is an example of an item that is computed on a ____________________ basis on a Federal corporate income tax consolidated return.
Q5) If the negative adjustments to the stock basis of the subsidiary exceed the positive adjustments plus the subsidiary stock basis at the beginning of the tax year, a(n) ____________________ account is created.
Q6) When both apply, the § 382 NOL limitation rules override the ____________________ limits.
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Chapter 9: Taxation of International Transactions
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Q1) With respect to income generated by non-U.S. persons, does the U.S. apply a "worldwide" or a "territorial" approach. Be specific.
Q2) Peanut, Inc., a domestic corporation, receives $500,000 of foreign-source interest income on which foreign taxes of $5,000 are withheld. Its worldwide taxable income is $900,000, and U.S. tax liability before FTC is $315,000. What is Peanut's foreign tax credit?
A) $500,000.
B) $315,000.
C) $175,000.
D) $5,000.
Q3) Gain or loss on the exchange of foreign currency is considered separately from the underlying transaction (e.g., the purchase or sale of goods).
A)True
B)False
Q4) A nonresident alien is defined as someone who is not a citizen or resident of the U.S. A)True B)False
Q5) Discuss the primary purposes of income tax treaties.
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Chapter 10: Partnerships: Formation, Operation, and Basis
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Q1) 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
Q2) Lexi and Allie formed a partnership. Lexi received a 30% interest in partnership capital and profits in exchange for land with a basis of $50,000 and a fair market value of $90,000. Allie received a 70% interest in partnership capital and profits in exchange for $210,000 of cash. Three years after the contribution date, the land contributed by Lexi is sold by the partnership to a third party for $120,000. How much taxable gain will Lexi recognize from the sale?
A) $21,000.
B) $40,000.
C) $49,000.
D) $70,000.
E) None of the above.
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Chapter 11: Partnerships: Distributions, Transfer of Interests, and
Terminations
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Q1) In a proportionate liquidating distribution, UVW Partnership distributes to partner William cash of $25,000, accounts receivable (basis of $10,000 and fair market value of $8,000), and land (basis of $50,000 and fair market value of $60,000). William's basis was $75,000 before the distribution. On the liquidation, William recognizes no gain or loss, and he takes a basis of $10,000 in the accounts receivable, and $50,000 in the land.
A)True B)False
Q2) For income tax purposes, proportionate and disproportionate distributions from a partnership are treated similarly.
A)True
B)False
Q3) A distribution cannot be "proportionate" if only one partner receives assets from the partnership.
A)True B)False
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Chapter 12: S: Corporations
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Q1) Compare the distribution of property rules for an S corporation with the corresponding partnership rules.
Q2) On January 2, 2010, Tim loans his S corporation $10,000. By the end of 2010, Tim's stock basis is zero, and the basis in his note has been reduced to $8,000. During 2011, the company's operating income is $10,000. The company also makes distributions to Tim of $8,000. Which statement is correct?
A) Loan basis is now $10,000.
B) $8,000 LTCG.
C) Stock basis is $2,000.
D) $2,000 LTCG.
E) None of the above statements is correct.
Q3) The alternative minimum tax may apply to an S corporation. A)True B)False
Q4) The amount of any distribution to an S corporation shareholder is equal to the ____________________ plus the fair market value of any other property distributed..
Q5) For Federal income tax purposes, taxation of S corporations resembles that of a(n)
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Chapter 13: Comparative Forms of Doing Business
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Q1) 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
Q2) A limited partnership can indirectly avoid unlimited liability of the general partner if the general partner is a corporation.
A)True
B)False
Q3) Roger owns 40% of the stock of Silver, Inc. (adjusted basis of $500,000). Silver redeems 75% of his shares for $650,000. If the stock redemption qualifies for return of capital treatment, Roger's recognized gain is $150,000.
A)True
B)False
Q4) An S corporation is not subject to the AMT, but its shareholders are in that the S corporation's AMT adjustments and preferences are passed through to them.
A)True
B)False
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Chapter 14: Taxes on the Financial Statements
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Q1) Collins, Inc., reports an effective tax rate in its income tax footnote of 14%. The only reconciling item with regard to the hypothetical tax at 35% is a valuation allowance reversal of negative 21%. Which of the following statements is true concerning comparing Collins, Inc.'s effective tax rate with its competitors, all of whom have an effective tax rate between 32 and 36%?
A) Collins Inc. is managing its tax burden in a more efficient manner than its competitors. B) Collins Inc. earned more cash profits because of its lower effective tax rate.
C) Collins Inc.'s structural effective tax rate is actually quite close to its competitors. D) Collins Inc. is likely to be engaged in tax shelter activities.
Q2) The major purpose of ASC 740 (SFAS 109) is to build a cushion into currently reported income tax expense in order to insure that the financial statements are conservative. A)True
B)False
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Chapter 15: Exempt Entities
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Q1) An exempt organization that is eligible to elect under § 501(h) to engage in lobbying activities on a limited basis incurs no tax liability from lobbying, if the lobbying expenditures for the tax year do not exceed the lobbying expenditures ceiling.
A)True
B)False
Q2) Which of the following excise taxes are imposed on the private foundation because it engages in prohibited transactions?
A) Tax on investment income.
B) Tax on self-dealing.
C) Tax on failure to distribute income.
D) Only b. and c.
E) a., b., and c.
Q3) A church is required to obtain IRS approval for its exempt status if its annual gross receipts exceed $25,000.
A)True
B)False
Q4) Is the taxation of a feeder organization influenced by the percentage of its earnings that it remits to an exempt organization?
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Chapter 16: Multistate Corporate Taxation
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Q1) Usually a business chooses a location where it will build a new plant based chiefly on tax considerations.
A)True B)False
Q2) Wailes Corporation is subject to a corporate income tax only in State X. The starting point in computing X taxable income is Federal taxable income. Wailes' Federal taxable income is $750,000, which includes a $75,000 deduction for state income taxes. During the year, Wailes received $20,000 interest on Federal obligations. X tax law does not allow a deduction for state income tax payments. Wailes' taxable income for X purposes is:
A) $825,000.
B) $805,000.
C) $750,000.
D) $680,000.
Q3) The property factor includes business assets that the taxpayer owns, but also those merely used under a lease agreement.
A)True B)False
Q4) Summarize the principles of multistate tax planning.
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Chapter 17: Tax Practice and Ethics
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Q1) Concerning a taxpayer's requirement to make quarterly estimated tax payments:
A) An individual must make estimated payments if his or her balance due for the Federal income tax for the year will exceed $1,000.
B) The due dates of the payments for a calendar-year C corporation are March, June, September, and December 15.
C) A C corporation must make estimated payments if its Federal income tax liability for the year will exceed $250.
D) A trust is not required to make estimated payments.
Q2) Henrietta has hired Gracie, a CPA, to complete this year's Form 1040. Henrietta uses software to keep the books for her business. She tells Gracie that a $5,000 amount for business supplies is "close enough" to constitute the deduction. Gracie can use this estimate in completing the Form 1040.
A)True
B)False
Q3) If the auditor comes to the taxpayer's office to review a tax return, the review is called a(n) ____________________ audit.
Q4) 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) Ben and Lynn are married and have two pre-teen grandchildren. They want to contribute to a § 529 plan on behalf of their education. For 2011, what is the maximum amount they can transfer to the plan without making a taxable gift?
Q2) In 1985, Drew creates a trust with $1,000,000 of securities. Under the terms of the trust, Paula (Drew's wife) is granted a life estate with remainder to their children. Drew makes a QTIP election as to the trust. Drew dies in 1992 when the trust is worth $1,500,000, and Paula dies in 2011 when the trust is worth $2,000,000. Which, if any, of the following is a correct statement?
A) The trust is included in Drew's gross estate when he dies in 1992.
B) None of the trust is included in Paula's gross estate when she dies in 2011.
C) Drew gets a marital deduction in 1985.
D) Only $1,000,000 of the value of the trust is included in Paula's gross estate when she dies in 2011.
E) None of the above.
Q3) Interest on state and local bonds is subject to neither the Federal income tax nor the Federal estate tax.
A)True
B)False
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Chapter 19: Family Tax Planning
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Q1) How can a disclaimer by an heir increase the charitable deduction allowed a decedent? Is such a disclaimer always wise? Explain.
Q2) Which, if any, of the following items characterizes § 6166 (i.e., extension of estate tax payments relative to an interest in a closely held business)?
A) No estate tax due need be paid for the first 5 years.
B) No interest needs to be paid for the first 5 years.
C) In satisfying the more-than-35% test for qualification, all interests in closely held businesses can be aggregated.
D) The 2% rate of interest applies to the total amount of estate tax value.
E) None of the above.
Q3) Neither the transfer by gift or by death avoids the recognition (for income tax purposes) of any deferred interest on U.S. savings bonds.
A)True
B)False
Q4) Describe the various tax advantages that are available from donating a conservation easement to charity.
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Page 21
Chapter 20: Income Taxation of Trusts and Estates
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Q1) Income is taxed to the creator of a(n) ____________________ trust, instead of to the entity.
Q2) A grantor trust results when the donor of the entity's corpus retains "too much" control over the trust income and assets. Name at least three powers that can trigger grantor trust status.
Q3) The Griffin Trust makes a gift to a qualifying charity. Griffin's entity-level deduction is allowed only to the extent of 50% of distributable net income.
A)True
B)False
Q4) This year, the Huang Trust distributed all of its accounting income and $1,000 from corpus. Huang's taxable income for the year is:
A) $0.
B) ($100).
C) ($300).
D) ($1,000).
Q5) How is entity accounting income computed? What role does it play in Subchapter J?
Q6) The IRS encourages ____________________ filing for Forms 1041.
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