Partnership Taxation
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Course Introduction
Partnership Taxation explores the federal income tax rules and principles that govern the formation, operation, and dissolution of partnerships, including limited liability companies (LLCs) taxed as partnerships. The course examines key concepts such as partnership income, allocations of profits and losses, partner contributions and distributions, basis calculations, transaction structuring, and the tax consequences for both the partnership entity and its individual partners. Students will analyze relevant provisions of the Internal Revenue Code, Treasury Regulations, and current case law, developing practical skills for handling common partnership tax issues in legal and accounting practice.
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South Western Federal Taxation 2013 Corporations Partnerships Estates and Trusts 36th Edition
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Chapter 1: Understanding and Working With the Federal Tax Law
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Q1) Which,if any,of the provisions in the tax law below do not mitigate the effects of the annual accounting period concept?
A)Post year-end contribution to retirement plans for a self-employed person.
B)Carrybacks of net operating losses.
C)Installment sales treatment.
D)Carryovers of excess charitable contributions.
E)The arm's length concept.
Answer: E
Q2) What is the overall objective of the write-off of research and development expenditures?
A)Encouragement of certain activities.
B)Control of economy.
C)Encouragement of certain industries.
D)None of the above.
Answer: A
Q3) Temporary Regulations have the same authoritative value as Finalized Regulations for 3 years.
A)True
B)False
Answer: True
Page 3
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Chapter 2: Corporations: Introduction and Operating Rules
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Q1) Jake,the sole shareholder of Peach Corporation,a C corporation,has the corporation pay him $100,000.For tax purposes,Jake would prefer to have the payment treated as salary instead of dividend.
A)True
B)False
Answer: False
Q2) Hippo,Inc. ,a calendar year C corporation,manufactures golf gloves.For 2012,Hippo had taxable income (before DPAD)of $900,000,qualified domestic production activities income of $750,000,and W-2 wages related to qualified production activities income of $140,000.Hippo's domestic production activities deduction for 2012 is:
A)$0.
B)$12,600.
C)$67,500.
D)$70,000.
E)None of the above.
Answer: C
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4
Chapter 3: Corporations: Special Situations
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Sample Questions
Q1) Which of the following has no effect in arriving at ACE?
A)Tax-exempt income (net of expenses).
B)Excess charitable contributions.
C)Key employee insurance proceeds.
D)Deferred gain on installment sales.
E)Premiums paid on key employee insurance.
Answer: B
Q2) If mining exploration and development costs are capitalized and written off over 10 years,no adjustment is necessary for AMT purposes.
A)True
B)False
Answer: True
Q3) A company with a NOL carryforward for a tax year is ineligible for the DPAD if the carryforward eliminates current income.
A)True
B)False Answer: True
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Chapter 4: Corporations: Organization and Capital Structure
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Sample Questions
Q1) Five years ago,Joe,a single taxpayer,acquired stock in a corporation that qualified as a small business corporation under § 1244,at a cost of $55,000.Joe wants to give his son,Jake,$15,000 to help finance Jake's college education.The stock is currently worth $15,000.Joe is considering selling the stock in the current year for $15,000 and giving the cash to Jake.As an alternative,Joe could give the stock to Jake and let Jake sell it for $15,000.Which alternative should Joe choose?
Q2) Similar to like-kind exchanges,the receipt of "boot" under § 351 can cause gain to be recognized.
A)True
B)False
Q3) Penny,Miesha,and Sabrina transfer property to Owl Corporation for 75% of its stock.Nancy,their attorney,receives 25% of the stock in Owl for legal services rendered in incorporating the business.What are the tax consequences of these transactions? How should this transaction have been handled?
Q4) The use of § 351 is not limited to the initial formation of a corporation,and it can apply to later transfers as well.
A)True
B)False
Page 6
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Chapter 5: Corporations: Earnings Profits and Dividend
Distributions
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Q1) Cash distributions received from a corporation with a positive balance in accumulated E & P at the beginning of the year will be taxed as dividend income.
A)True
B)False
Q2) Distributions that are not dividends are a return of capital and decrease the shareholder's basis.Once basis is reduced to zero,any excess is taxed as a capital gain. A)True
B)False
Q3) Nondeductible meal and entertainment expenses must be subtracted from taxable income to determine current E & P.
A)True
B)False
Q4) How does the payment of a property dividend affect E & P?
Q5) Dividends paid to shareholders who hold both long and short positions do not qualify for the reduced tax rate available to individuals in certain years. A)True
B)False
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Chapter 6: Corporations: Redemptions and Liquidations
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Q1) In a not essentially equivalent redemption [§ 302(b)(1)],the meaningful reduction test is an objective safe harbor rule that taxpayers can rely upon for sale or exchange treatment.
A)True
B)False
Q2) Puffin Corporation's 2,000 shares outstanding are owned as follows: Paul,800 shares;Sandra (Paul's sister),800 shares;and Greta (Paul's granddaughter),400 shares.During the current year,Puffin (E & P of $1 million)redeemed 600 shares of Paul's stock for $100,000.If Paul had acquired the 600 shares five years ago for $30,000,he will have a long-term capital gain of $70,000 from the redemption.
Q3) A corporation generally will recognize gain or loss on a liquidating distribution of installment notes to its shareholders.
A)True
B)False
Q4) The text discusses four different limitations on loss recognition by liquidating corporations.Provide a brief description of each of these loss limitations.
Q5) When is a redemption to pay death taxes under § 303 most advantageous?
Q6) 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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Sample Questions
Q1) Winner Corporation acquires all of Loser Corporation on January 1 of this year for $1 million when the Federal long-term tax-exempt rate was 4%.Two of the tax attributes that Winner found appealing are Loser's NOL of $100,000 and its negative E & P of $150,000.Before applying any of Loser's tax benefits,Winner has taxable income of $75,000 and E & P of $50,000.Winner pays a dividend of $100,000 to its shareholders.Assuming that taxable income is equal to the current year's E & P,how much of this dividend is taxable?
A)$100,000 is taxable.
B)$85,000 is taxable.
C)$50,000 is taxable.
D)None is taxable.
E)None of the above.
Q2) Which of the following is not a requirement for receiving tax-free treatment for a corporate reorganization?
A)The step transaction doctrine should apply.
B)The continuity of business enterprise test must be met.
C)There must be a sound business purpose for the restructuring.
D)There must be a plan of reorganization.
E)All of the above are requirements.
Q3) 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) In computing consolidated taxable income,compensation amounts are removed from the taxable incomes of the group members and determined on a group basis.
A)True B)False
Q2) In computing consolidated taxable income,the profit/loss from a sale between Subsidiary and Parent is an example of a(n)____________________ item.
Q3) A tax-exempt hospital cannot join in a consolidated return.
A)True
B)False
Q4) A joint venture,taxed like a partnership,can join in a consolidated Federal income tax return.
A)True B)False
Q5) A consolidated Federal income tax return may be the product of a merger of the affiliates,or of some other tax-favored reorganization.
A)True B)False
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Chapter 9: Taxation of International Transactions
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Q1) OutCo,a controlled foreign corporation in Meena,earns $600,000 in net interest and dividend income from investments in the bonds and stock of unrelated companies.All of the dividend payors are located in Meena.OutCo's Subpart F income for the year is:
A)$0.
B)$0 only if OutCo is engaged in a trade or business in Meena.
C)$600,000.
D)$600,000 only if OutCo is engaged in a trade or business in Meena.
Q2) GlobalCo,a foreign corporation not engaged in a U.S.trade or business,receives $80,000 in interest income from deposits with the foreign branch of a U.S.bank.The U.S.bank earns 24% of its income from foreign sources.How much of GlobalCo's interest income is U.S.source?
A)$0.
B)$19,200.
C)$60,800.
D)$80,000.
Q3) Discuss the primary purposes of income tax treaties.
Q4) Subpart F income includes portfolio income like dividends and interest.
A)True
B)False
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Chapter 10: Partnerships: Formation, operation, and Basis
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Q1) The "outside basis" is defined as a partner's basis in the partnership interest.
A)True
B)False
Q2) An example of the "entity concept" underlying partnership taxation is the fact that the partners (rather than the partnership)pay tax on partnership income.
A)True
B)False
Q3) The taxable income of a partnership flows through to the partners,who report the income on their tax returns.
A)True
B)False
Q4) The primary purpose of the partnership agreement is to document the various tax elections made by the partners regarding depreciation methods,treatment of research and experimental costs,calculation of the § 199 deduction,and the § 754 election.
A)True
B)False
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Chapter 11: Partnerships: Distributions, transfer of Interests, and Terminations
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Q1) Partner Jordan received a distribution of $90,000 cash from the JKL Partnership in complete liquidation of his partnership interest.If Jordan's outside basis immediately before the distribution was $80,000,and if the partnership has made (and not revoked)a § 754 election in a prior year,which of the following statements is true? (Assume the partnership owns no "hot assets.")
A)The partnership will step-down the basis of its assets by $10,000.
B)The partnership will step-up the basis of its assets by $10,000.
C)Jordan will recognize a $10,000 capital gain on the distribution.
D)Both a.and c.are true.
E)Both b.and c.are true.
Q2) Bob received a proportionate nonliquidating distribution of land from the BZ Partnership.The land had a fair market value of $15,000 and a basis to the partnership of $10,000.The land was held for investment purposes by the partnership.Bob's basis in his partnership interest immediately before the distribution was $6,000.If the partnership has a § 754 election in effect,it will record a $4,000 step-down in the basis of remaining assets,and the step-down will be attributed to all partners in the partnership.
A)True
B)False
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Chapter 12: S: Corporations
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Q1) An S corporation does not recognize a loss when distributing assets that are worth less than their basis.
A)True
B)False
Q2) An S corporation's separately stated items generally are identical to those separately stated by _________________________.
Q3) All tax preference items flow through the S corporation,to be included in the shareholders' AMT calculations.
A)True
B)False
Q4) An S corporation's LIFO recapture amount equals the excess of the inventory's value under ____________________ over the ____________________ value.
Q5) Distributions of which assets during an S corporation's post-termination period receive favorable income tax treatment?
A)Cash.
B)Investment portfolio.
C)Real estate.
D)Notes receivable.
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Chapter 13: Comparative Forms of Doing Business
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Q1) Candace,who is in the 33% tax bracket,is establishing a business which could have potential environmental liability problems.Therefore,she is trying to decide between the C corporation form and the S corporation form.She projects that the business will generate earnings of about $75,000 each year.Advise Candace on the tax consequences of each tax form.
Q2) Pelican,Inc. ,a C corporation,distributes $275,000 to its shareholder,Jean,and land worth $275,000 (adjusted basis of $185,000)to its shareholder,Pam.Pelican has earnings and profits of $900,000.Determine the tax consequences to Pelican,Jean,and Pam.
Q3) A corporation can avoid the accumulated earnings tax by demonstrating that it has plans to distribute earnings at a later date.
A)True
B)False
Q4) Roger owns 40% of the stock of Gold,Inc.(adjusted basis of $800,000).Silver redeems 60% of Roger's shares for $900,000.If the stock redemption qualifies for return of capital treatment,Roger's recognized gain is $100,000.
A)True
B)False
Q5) Why are S corporations not subject to the accumulated earnings tax?
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Chapter 14: Taxes on the Financial Statements
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Q1) "Temporary differences" are book-tax income differences that eventually appear in both the financial statements and the income tax return,but not in the same reporting period.
A)True
B)False
Q2) Cold,Inc. ,reported a $100,000 total tax expense for financial statement purposes in 2012.This total expense consisted of $150,000 in current tax expense and a deferred tax benefit of $50,000.The deferred tax benefit consisted of $90,000 in deferred tax assets reduced by a valuation allowance of $40,000.In 2013,Cold reports $600,000 in book net income before tax.Cold records no other permanent or temporary book-tax differences.At the end of 2013,Cold's auditors determine that the existing valuation allowance of $40,000 should be reduced to zero.What is Cold's total tax expense for 2013?
A)$250,000.
B)$210,000.
C)$170,000.
D)$40,000.
Q3) You are the tax adviser to a publicly traded U.S.corporation.How might you use a "benchmarking" analysis to begin your review of the entity's tax situation and planning opportunities?
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Chapter 15: Exempt Entities
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Q1) The Dispensary is a pharmacy that is part of a § 501(c)(3)hospital.Its primary mission is to dispense medicines for hospital patients.In addition,the pharmacy dispenses medicines to former hospital patients for a period of up to 30 days after discharge from the hospital.It does this for the dual purpose of convenience to the former patients (i.e. ,the closest pharmacy is 6 miles away),and to ensure that the former patients receive the medicines that have been prescribed for them.
Q2) Which of the following statements is correct?
A)A private foundation is,in general,exempt from Federal income tax.
B)A private foundation may be subject to certain types of Federal income tax.
C)If a broad public support test is satisfied,an exempt organization that otherwise would be classified as a private foundation is not classified as a private foundation.
D)Only b.and c.are correct.
E)a. ,b. ,and c.are correct.
Q3) Are organizations that qualify for exempt organization status completely exempt from Federal income taxation?
Q4) What are the common characteristics of organizations that receive exempt status?
Q5) Why are some organizations exempt from Federal income tax?
Q6) Identify the components of the tax model for unrelated business taxable income.
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Chapter 16: Multistate Corporate Taxation
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Q1) A state sales tax usually falls upon:
A)The sale of a used dinette set sold at a rummage sale.
B)The sale of a dinette set by the manufacturer to a furniture retailer.
C)The sale of a case of Bibles by the publisher to a church bookstore.
D)The sale of a Bible to a member of the church.
E)All of the above are exempt transactions.
Q2) Under Public Law 86-272,a state is prohibited from taxing a business if the only connection with the state is the _____________________ of orders for sales of tangible personal property that are sent outside the state for approval or rejection and,if approved,are filled and shipped by the business from a point outside of the state.
Q3) A number of court cases in the last several decades have involved the application of a state's nexus rules concerning a business taxpayer.What is the significance of the term nexus when discussing state income taxation?
Q4) S corporations flow-through income amounts to its shareholders,and most states require a withholding of shareholder taxes on the allocated amounts.
A)True
B)False
Q5) An ad valorem property tax is based on the asset's current
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Chapter 17: Tax Practice and Ethics
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Q1) After a tax audit,the taxpayer receives the Revenue Agent's Report as part of the "30-day letter."
A)True
B)False
Q2) Circular 230 allows a tax preparer to:
A)Take a position on a tax return that is contrary to a decision of the U.S.Supreme Court.
B)Operate the "Tax Nerd's Blog" on the Internet.
C)Charge a $5,000 fee to prepare a Form 1040EZ.
D)Avoid signing a tax return that is likely to be audited.
Q3) The government can appeal a decision of the Tax Court Small Cases Division,but the taxpayer cannot.
A)True
B)False
Q4) The tax ____________________ workpapers are not privileged communications that can be kept confidential from an IRS subpoena.
Q5) The IRS can waive the penalty for understating a tax liability if the taxpayer shows ____________________ for the position taken on the tax return.
Q6) To file for a tax refund,an individual generally uses Form ____________________.
Page 19
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Chapter 18: The Federal Gift and Estate Taxes
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Q1) The use of the election to split gifts under § 2513 is not necessary for spouses who live in community property states.
A)True
B)False
Q2) In most cases,the gross estate of a decedent is larger than the probate estate.
A)True
B)False
Q3) At the time of his death,Hal owned 10 cemetery lots worth $40,000 ($4,000 each)for use by himself and his family.These lots are not included in Hal's gross estate and no deduction is allowed the estate.
A)True
B)False
Q4) Which of the following is not a characteristic of both the Federal gift tax and the Federal estate tax?
A)A deduction for state death taxes may be available.
B)A charitable deduction is available.
C)A marital deduction is available.
D)An exclusion amount is available in computing the tax.
E)None of the above.
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Chapter 19: Family Tax Planning
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Q1) In a typical "estate freeze" involving stock:
A)The owner makes a gift of both common and preferred stock.
B)The preferred stock is subject to the gift tax but not to the estate tax.
C)The common stock is subject to the gift tax but not to the estate tax.
D)The common stock is subject to both the gift tax and the estate tax.
E)None of the above.
Q2) One of the advantages of an estate freeze is that the common stock is not included in the gross estate of the donor.
A)True
B)False
Q3) Brad and Heather are husband and wife and live in New Mexico.Under Brad's will,his share of the community property passes to the children.Upon Brad's prior death,there will be a change in Heather's income tax basis in her half of the community property.
A)True
B)False
Q4) Commercial annuity contracts should be valued using the tables issued by the IRS.
A)True
B)False
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Page 21
Chapter 20: Income Taxation of Trusts and Estates
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Q1) Dexter established a divorce trust to benefit his ex-wife Jena.The accounting income of the trust is distributed to Jena,in satisfaction of the year's alimony obligation.Under Subchapter J rules,____________________,and not the trust,is taxed on the amount of the distribution.
Q2) List at least three non-tax reasons that you might suggest to your client Connie that she should consider shifting some income and assets to a trust.
Q3) A fiduciary entity computes its alternative minimum tax in a manner similar to that used for a(n)____________________.
Q4) Harry,the sole income beneficiary,received a $40,000 distribution from the Lucy Trust,in a year when the trust's distributable net income was $50,000.Harry's AGI can increase by as much as $40,000.
A)True B)False
Q5) Harry,the sole income beneficiary,received a $40,000 distribution from the Lucy Trust,in a year when the trust's distributable net income was $30,000.Harry's AGI can increase by as much as $40,000.
A)True B)False
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