Partnership Taxation
Question Bank
Course Introduction
Partnership Taxation focuses on the federal income tax rules and principles applicable to partnerships and their partners. The course examines the formation, operation, and dissolution of partnerships, as well as the allocation of income, loss, and credits among partners. Students will analyze the tax consequences of contributions and distributions of property, the treatment of partner liabilities, and the effects of transactions between partners and the partnership. Through case studies and problem-solving, the course emphasizes practical application of Subchapter K of the Internal Revenue Code and its related regulations, preparing students to handle complex partnership tax issues in practice.
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) The adoption tax credit can be explained by social considerations. A)True
B)False Answer: True
Q2) Many states have balanced budgets because laws or constitutional amendments preclude deficit spending. A)True
B)False Answer: True
Q3) Revenue Rulings carry the same legal force and effect as Regulations. A)True
B)False Answer: False
Q4) Subchapter K refers to the "Partners and Partnerships" section of the Code. A)True
B)False Answer: True
Q5) What are the key components of tax planning? Answer: 11ea8545_ae9e_50e5_9aec_4da30f95ffb2_TB4127_00
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Chapter 2: Corporations: Introduction and Operating Rules
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Q1) Unlike individual taxpayers, corporate taxpayers do not receive a preferential tax rate with respect to long-term capital gains.
A)True
B)False
Answer: True
Q2) Red Corporation, a C corporation that has two equal shareholders, earned $450,000 during 2011. Orange Company, a partnership that has two equal partners, earned $450,000 during the year. Red did not make any distributions to its shareholders, and Orange's partners did not make any withdrawals. Contrast the tax treatment of the shareholders of Red Corporation and the partners of Orange Company. Answer: A C corporation is a separate taxable entity, so its taxable income has no effect on the shareholders until such time a dividend is paid. When dividends are paid, shareholders must report dividend income on their tax returns. Thus, Red Corporation will be taxed on $450,000 and the shareholders have no tax consequences. On the other hand, the income of a partnership is passed through to and reported by the partners on their tax returns. Thus, each partner will receive a passthrough of $225,000 of income from Orange Company ($450,000/ 2 partners).
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Chapter 3: Corporations: Special Situations
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Q1) Lee, Inc., an S corporation, has taxable income of $15 million in 2011. Assume there are two shareholders, each in the top individual tax bracket. What is the maximum total DPAD tax savings for the S corporation shareholders?
A) None.
B) $294,000.
C) $472,500.
D) $1,260,000.
E) None of the above.
Answer: C
Q2) DPGR cannot include the cost of an embedded service that is part of in the sale of a manufactured product.
A)True
B)False
Answer: False
Q3) Tax-exempt interest on state and local private activity bonds (issued in 2010) is a tax preference item.
A)True
B)False
Answer: False
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Chapter 4: Corporations: Organization and Capital Structure
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Q1) The receipt of securities (i.e., long-term debt) in exchange for the transfer of appreciated property to a controlled corporation results in recognition of realized gain to the transferor.
A)True
B)False
Q2) Mary transfers a building (adjusted basis of $15,000 and fair market value of $90,000) to White Corporation. In return, Mary receives 80% of White Corporation's stock (worth $65,000) and an automobile (fair market value of $5,000). In addition, there is an outstanding mortgage of $20,000 (taken out 15 years ago) on the building, which White Corporation assumes. With respect to this transaction:
A) Mary's recognized gain is $10,000.
B) Mary's recognized gain is $5,000.
C) Mary has no recognized gain.
D) White Corporation's basis in the building is $15,000.
E) None of the above.
Q3) The definition of property for purposes of § 351 includes unrealized receivables transferred by a cash basis taxpayer.
A)True
B)False
Page 6
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Chapter 5: Corporations: Earnings Profits and Dividend
Distributions
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Q1) When computing E & P, taxable income is not adjusted for additional first-year depreciation.
A)True
B)False
Q2) Tracy and Lance, equal shareholders in Macaw Corporation, receive $600,000 each in distributions on December 31 of the current year. Macaw's current year taxable income is $1 million and it has no accumulated E & P. Last year, Macaw sold an appreciated asset for $1,200,000 (basis of $400,000). Payment for one-half of the sale of the asset was made this year. How much of Tracy's distribution will be taxed as a dividend?
A) $0.
B) $300,000.
C) $500,000.
D) $600,000.
E) None of the above.
Q3) Federal income tax paid in the current year must be subtracted from taxable income to determine E & P.
A)True B)False
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Chapter 6: Corporations: Redemptions and Liquidations
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Q1) The text discusses four different limitations on loss recognition by liquidating corporations. Provide a brief description of each of these loss limitations.
Q2) Two years ago, Emily, the sole shareholder of Tan Corporation (E & P of $600,000), received a nontaxable stock dividend of 100 shares of preferred stock (fair market value of $100,000) from Tan. As a result of the stock dividend, Emily properly allocated $30,000 of her common stock basis to the preferred stock. One year ago, Emily made a gift of the preferred stock in Tan Corporation to her son, Matt. In the current year, Matt sells one-half of the shares of preferred stock to Betty, an unrelated party, for $50,000. With respect to the sale of the preferred stock by Matt:
A) Matt will recognize ordinary income of $0.
B) Matt will recognize ordinary income of $35,000.
C) Matt will recognize ordinary income of $50,000.
D) Matt will recognize a capital gain of $35,000.
E) None of the above.
Q3) A shareholder's basis in property received in a stock redemption is the property's fair market value.
A)True
B)False
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Chapter 7: Corporations: Reorganizations
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Q1) The gains shareholders recognize as a part of a corporate reorganization may be treated a dividend to the extent of the corporation's earnings and profits.
A)True
B)False
Q2) In which type of divisive corporate reorganization do the shareholders receive stock in another corporation without relinquishing any of their stock in the original corporation?
A) "Type A" consolidation reorganization.
B) "Type D" split-up reorganization.
C) "Type D" split-off reorganization.
D) "Type D" spin-up reorganization.
E) Some other type of reorganization.
Q3) The "Type A" corporate reorganization can run afoul of the continuity of interest doctrine more easily than a "Type C," because with a "Type A" the Code does not require that the target shareholders receive common stock of the acquiring corporation in exchange for their ownership of the target.
A)True
B)False
Q4) Compare an acquisitive "Type D" reorganization with the "Type C" reorganization.
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Chapter 8: Consolidated Tax Returns
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Q1) All affiliates joining in a newly formed consolidated return must consent to the election on Form 1122, as attached to the tax return for the group.
A)True
B)False
Q2) Consolidated group members each are jointly and severally liable for the entire consolidated income tax liability.
A)True
B)False
Q3) After a takeover, the parent takes a fair market value cost basis in the subsidiary, for both book and tax purposes.
A)True
B)False
Q4) Outline the major advantages and disadvantages of filing Federal corporate income tax returns on a consolidated basis. Limit your comments to the income tax effects of the election.
Q5) In the year that the group terminates its consolidation election, a consolidated group's deferred gain from an intercompany asset sale between affiliates is recognized in full, under the ____________________ rule.
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Chapter 9: Taxation of International Transactions
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Q1) WorldCo, a foreign corporation not engaged in a U.S. trade or business, receives $50,000 in interest income from deposits with the foreign branch of a U.S. bank. The U.S. bank earns 78% of its income from foreign sources. How much of WorldCo's interest income is U.S. source?
A) $0.
B) $11,000.
C) $39,000.
D) $50,000.
Q2) All of an NRA's U.S.-source income that is not effectively connected with a U.S. trade or business is subject to a flat U.S. income tax rate of 30%, unless the tax rate is modified by a treaty.
A)True
B)False
Q3) Scott, Inc., a domestic corporation, receives a dividend of $700,000 from a non-CFC foreign corporation. Deemed-paid foreign taxes attributable to the dividend are $120,000. If Scott elects the FTC, its gross income attributable to this dividend is $700,000.
A)True
B)False
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Chapter 10: Partnerships: Formation, Operation, and Basis
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Q1) Fern, Inc., Ivy Inc., and Jason formed a general partnership. Fern owns a 50% interest and Ivy and Jason each own 25% interests. Fern, Inc. files its tax return on a July 1 - June 30 fiscal year; Ivy Inc. files on a September 1 - August 31 fiscal year; and Jason is a calendar year taxpayer. Which of the following statements is true regarding the taxable year the partnership can choose?
A) The partnership must choose the calendar year because it has no principal partners.
B) The partnership must choose a June 30 year-end because Fern, Inc. is a majority partner.
C) The partnership can request permission from the IRS to use a January 31 fiscal year if it can establish that is a natural business year.
D) The partnership cannot use the "least aggregate deferral" method to determine its taxable year.
E) None of the above.
Q2) A limited liability company offers all "members" protection from claims by the LLC's creditors.
A)True
B)False
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Chapter 11: Partnerships: Distributions, Transfer of Interests, and
Terminations
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Q1) Martin has a basis in a partnership interest of $100,000. At the end of the current year, the partnership distributed to Martin, in a proportionate nonliquidating distribution, cash of $10,000, inventory (basis to the partnership of $6,000 and fair market value of $12,000), and land (basis to the partnership of $20,000 and fair market value of $15,000). In addition, Martin's share of partnership debt decreased by $10,000 during the year. What basis does Martin take in the inventory and land and in the partnership interest following the distribution?
A) $6,000 basis in inventory; $15,000 basis in land, $59,000 basis in partnership.
B) $6,000 basis in inventory; $20,000 basis in land, $54,000 basis in partnership.
C) $12,000 basis in inventory; $15,000 basis in land, $53,000 basis in partnership.
D) $12,000 basis in inventory; $20,000 basis in land, $53,000 basis in partnership.
E) $12,000 basis in inventory; $20,000 basis in land, $48,000 basis in partnership.
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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) What method is automatically used to allocate income or losses (unless an election is made)?
A) Short-year method.
B) Long-year method.
C) Per-day allocation.
D) FIFO method.
E) LIFO method.
Q3) A distribution from OAA is taxable.
A)True
B)False
Q4) Which item does not appear in an S corporation's nonseparately computed income?
A) Net sales.
B) Tax-exempt income.
C) Cost of goods sold.
D) Depreciation recapture.
E) All of the above appear.
Q5) Depreciation recapture income is a ____________________ computed amount.
Page 14
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Chapter 13: Comparative Forms of Doing Business
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Q1) Which of the following statements is correct?
A) The AMT applies to both the individual taxpayer and the C corporation.
B) The individual AMT rates are 26% and 28%.
C) The C corporation AMT rate is 20%.
D) Only a. and b. are correct.
E) a., b., and c. are correct.
Q2) A business organized as a C corporation will always encounter lower tax rates than a business organized as a sole proprietorship or as a partnership.
A)True
B)False
Q3) A major benefit of the S corporation election is the general avoidance of double taxation.
A)True
B)False
Q4) Each of the following can pass profits and losses through to the owners: general partnership, limited partnership, S corporation, and limited liability company.
A)True
B)False
Q5) Do the § 465 at-risk rules apply to partnerships, LLCs, and S corporations?
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Chapter 14: Taxes on the Financial Statements
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Q1) If a corporation has no subsidiaries outside the U.S., its book and taxable income are identical.
A)True
B)False
Q2) "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
Q3) The taxpayer should use the technique of ASC 740-30 (APB 23) income deferral only when the tax rates that apply to the subsidiary are less than those of the applicable U.S. income tax rate.
A)True
B)False
Q4) How does an auditor determine whether a valuation allowance is needed against an entity's deferred tax asset? List some of the factors than an auditor will consider in this regard.
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Chapter 15: Exempt Entities
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Q1) Define a qualified corporate sponsorship payment.
Q2) A feeder organization is exempt from Federal income taxation because it carries on a trade or business for the benefit of an exempt organization and remits its profits to the exempt entity.
A)True
B)False
Q3) Which of the following is not an example of an exempt organization?
A) Religious, charitable, or educational organization.
B) Voluntary employees' beneficiary association.
C) Labor, agricultural, or horticultural organization.
D) American Federation of Teachers (a teachers' union).
E) All of the above can be exempt from tax.
Q4) Why are some organizations exempt from Federal income tax?
Q5) If an organization qualifies for exempt status for Federal income tax purposes, it is exempt from all Federal income taxes.
A)True
B)False
Q6) What is the purpose of the unrelated business income tax?
Q7) What income and activities are not subject to the feeder organization rules?
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Q8) What are the common characteristics of organizations that receive exempt status?
Chapter 16: Multistate Corporate Taxation
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Q1) When the taxpayer operates in one or more unitary states:
A) Apportionment factors are computed on a group-wide basis.
B) The tax incentive of creating nexus in a low-tax state is enhanced.
C) The tax benefit of a passive investment subsidiary holding company is neutralized.
D) The use of a water's edge election should be considered.
E) All of the above are true.
Q2) A capital stock tax usually is structured as an excise tax imposed on a corporation's "net worth," using financial statement data to compute the tax.
A)True
B)False
Q3) Almost all of the states treat a general partnership as a ____________________ entity for income tax purposes. or
Q4) Under P.L. 86-272, the taxpayer is exempt from state taxes on income resulting from the mere solicitation of orders for the sale of in-state realty.
A)True
B)False
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Chapter 17: Tax Practice and Ethics
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Q1) In a criminal fraud case, the burden is on the taxpayer to show that he or she was innocent "beyond the shadow of any reasonable doubt."
A)True
B)False
Q2) A taxpayer's return might be selected for audit on the basis of the ____________________ score that the IRS computes.
Q3) Juanita, who is subject to a 45% marginal gift tax rate, made a gift of a sculpture to Bianca, valuing the property at $150,000. The IRS later valued the gift at $300,000. The applicable undervaluation penalty is:
A) $27,000.
B) $13,500.
C) $10,000 (maximum penalty).
D) $0.
Q4) The taxpayer might secure a(n) ____________________ to assure that a homeless shelter qualifies for tax exempt treatment.
Q5) The ____________________, a presidential appointee, is the "IRS attorney."
Q6) If the taxpayer refuses to pay an assessed tax, the IRS can seize taxpayer property under the ____________________ process.
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Chapter 18: The Federal Gift and Estate Taxes
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Q1) Cole purchases land for $500,000 and transfers it by gift to his two daughters, Madison and Paige, as equal joint tenants with the right of survivorship. Ten years later, when the land is worth $2,000,000, Madison predeceases Paige. Madison's executor includes none of the value of the land in her gross estate, as she contributed nothing toward its cost. Do you agree?
Q2) Daniel's will provides that all of his property passes to a trust, life estate to his wife, remainder to charity. If Daniel's executor does not make a QTIP election, the use of the alternate valuation date is possible.
A)True
B)False
Q3) The IRS does not consider property settlements in consideration of marriage as being transfers for valuable consideration. Consequently, such prenuptial settlements are subject to the Federal gift tax. Why, then, are property settlements incident to divorce exempt from the gift tax?
Q4) A transfer in trust in which the trustee has the power to accumulate income is not a gift of a future interest if the trustee never exercises the power.
A)True
B)False
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Chapter 19: Family Tax Planning
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Q1) Ramon sells a parcel of land (basis of $100,000; fair market value of $300,000) to his church. As long as the selling price does not exceed $100,000, Ramon recognizes no gain on the sale.
A)True
B)False
Q2) At the time of his death, Harvey was a shareholder in Grebe Corporation. In valuing the Grebe stock included in Harvey's gross estate, the IRS contends that the corporation possessed considerable goodwill. In disputing this contention, which of the following point(s) is/are relevant?
A) To provide financing, Grebe has been obtaining its working capital from the shareholders at a below market rate of interest.
B) The rate of return used by the IRS for the type of business involved is too high.
C) Average net profit figures do not include large losses from unrelated investments.
D) Harvey was not an employee of Grebe but was merely a passive investor.
E) None of the above.
Q3) What is the rationale for the deferral and the equalization approaches to the marital deduction?
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Chapter 20: Income Taxation of Trusts and Estates
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Q1) A fiduciary entity computes its alternative minimum tax in a manner similar to that used for a(n) ____________________.
Q2) This year, the Nano Trust reported $50,000 entity accounting income and $40,000 distributable net income (DNI). Nano distributed $60,000 cash to Horatio, its sole income beneficiary. Nano is a simple trust. Nano's distribution deduction is:
A) $60,000.
B) $50,000.
C) $40,000.
D) $0.
Q3) Which, if any, of the following statements relates to the tax treatment of both estates and trusts?
A) The entity is required to distribute all of its income currently to its beneficiaries.
B) The entity must use the same tax year as its creator (i.e., grantor, decedent).
C) In the year of its termination, the entity's net operating loss carryovers are passed through to its beneficiaries.
D) The termination date of the entity is specified in the controlling document.
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