Partnership Taxation
Study Guide Questions
Course Introduction
Partnership Taxation examines the federal income tax rules and principles governing the formation, operation, and dissolution of partnerships and other pass-through entities. The course analyzes the allocation of income, deductions, and credits among partners, the tax consequences of contributions and distributions, the sale or exchange of partnership interests, and the taxation of special partnership arrangements. Students will gain a comprehensive understanding of Subchapter K of the Internal Revenue Code and explore both theoretical and practical applications through examples and case studies, preparing them for legal practice or advanced study in tax law.
Recommended Textbook Principles of Taxation for Business and Investment Planning 2019 22nd Edition by Sally Jones
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Page 2
Chapter 1: Taxes and Taxing Jurisdictions
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Q1) Revenue rulings and revenue procedures are written by:
A) The Internal Revenue Service
B) The Department of the Treasury
C) The United States Congress
D) The Supreme Court
Answer: A
Q2) What is the major difference between a sales tax and an excise tax?
A) Sales taxes are levied by state governments, while excise taxes are levied only by the federal government.
B) Sales taxes are imposed on the purchase of a wide variety of items, while excise taxes are imposed on the purchase of a few specific items.
C) Sales taxes must be collected by the seller, while excise taxes must be paid directly by the purchaser.
D) Sales taxes are imposed on the purchase of tangible goods, while excise taxes are imposed on the purchase of services.
Answer: B
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3
Chapter 2: Policy Standards for a Good Tax
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Q1) If State H increases its sales tax rate by 1%, its sales tax revenue must also increase by 1%.
A)True
B)False
Answer: False
Q2) Congress recently amended the tax law to make it easier for individuals to file their income tax returns electronically (online). Which of the following statements is true?
A) The amendment is intended to improve the efficiency of the tax.
B) The amendment is intended to improve the equity of the tax.
C) The amendment is intended to improve the simplicity of the tax.
D) The amendment is intended to improve the convenience of the tax.
Answer: D
Q3) A tax meets the standard of efficiency if it generates enough revenue to pay for the public goods and services provided by the government.
A)True
B)False
Answer: False
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Chapter 3: Taxes as Transaction Costs
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Q1) XYT Company engaged in a transaction that generated $50,000 cash deposited in the company bank account and required the company to pay $12,000 out of that account. XYT's marginal tax rate is 30%. Which of the following statements is false?
A) If the deposit is taxable income and the payment is deductible, the transaction generated $26,600 after-tax cash flow.
B) If the deposit is taxable income but the payment is nondeductible, the transaction generated $35,000 after-tax cash flow.
C) If the deposit is not taxable income and the payment is nondeductible, the transaction generated $38,000 after-tax cash flow.
D) None of the above is false.
Answer: B
Q2) A cash flow consisting of a constant dollar amount to be received for a specific number of future periods is called an annuity.
A)True
B)False
Answer: True
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Chapter 4: Maxims of Income Tax Planning
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Q1) The after-tax cost of a dollar of deductible expense to a high-tax entity is less than the after-tax cost to a low-tax entity.
A)True
B)False
Q2) Which of the following statements about the jurisdiction variable is true?
A) Most businesses are subject to the taxing jurisdiction of more than one government.
B) For federal purposes, state income taxes are deductible in the computation of taxable income.
C) Businesses can often minimize total tax burden by conducting business in jurisdictions with favorable tax climates.
D) All of the above statements are true.
Q3) The assignment of income doctrine constrains tax deferral strategies.
A)True
B)False
Q4) The 15% preferential tax rate on capital gains has the same value to every individual taxpayer.
A)True
B)False
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6
Chapter 5: Tax Research
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Sample Questions
Q1) Revenue rulings are an example of administrative authority.
A)True
B)False
Q2) Effective tax research often omits the first two steps of the tax research process.
A)True
B)False
Q3) Which of the following is not a secondary authority?
A) Tax Court Memorandum decision
B) BNA Tax Management Portfolio
C) United States Tax Reporter
D) All of the above are secondary authorities
Q4) Private letter rulings and technical advice memoranda are primary authority for those taxpayers to whom they were issued.
A)True
B)False
Q5) In the citation Rev. Proc. 2002-32, 2002-1 C.B. 959, the abbreviation C.B. refers to Congressional Bulletin.
A)True
B)False
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Chapter 6: Taxable Income from Business Operations
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Sample Questions
Q1) Pozzi Company, a cash basis business, received $16,930 cash as payment on a loan Pozzi made to a business associate two years ago. The payment consisted of a $15,000 principal payment and $1,930 interest. On receipt of the cash, Pozzi recognizes:
A) No taxable income.
B) $1,930 taxable income.
C) $15,000 taxable income.
D) $16,930 taxable income.
Q2) Mr John Carre owns 67% of the stock of JC Inc. and is employed as the corporation's CEO. The corporation is a calendar year, accrual basis taxpayer. On December 14, 2018, the board of directors authorized a $45,000 year-end bonus for Mr Carre, which was paid to him on February 1, 2019. In which year can JC Inc. deduct the bonus?
A) 2018
B) 2019
C) JC Inc. can deduct only $14,850 (33%) of the bonus in 2018.
D) The related party accrued expense is deductible in the year Mr. Carre includes the bonus payment in gross incomeJC Inc. can never deduct the bonus.
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Chapter 7: Property Acquisitions and Cost Recovery
Deductions
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Sample Questions
Q1) Poole Company made a $100,000 cash expenditure this year. Which of the following statements is false?
A) Poole must capitalize the expenditure if it creates a new asset that the company can use for the next four years.
B) Poole must capitalize the expenditure if it extends the estimated useful life of an existing asset by three years.
C) Poole must capitalize the expenditure if it results in a long-term economic benefit to the company.
D) None of the above is false.
Q2) Follen Company is a calendar year taxpayer. On September 1, Follen signed a 24-month lease on 3,800 square feet of commercial office space. Follen paid a $2,580 fee to the real estate agent who located the space and negotiated the lease. It also paid $10,925 to rewire the space to conform to its computing and other electrical requirements. The rewiring qualifies as five-year recovery property. Compute Follen's first-year cost recovery deductions relating to the lease space.
Q3) Purchased goodwill is amortizable both for book and tax accounting purposes.
A)True B)False
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Chapter 8: Property Dispositions
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Q1) Netelli Inc. owned a tract of land with a $175,000 basis that was subject to a $228,500 nonrecourse mortgage. Netelli defaulted on the mortgage, and the creditor foreclosed on the land. Netelli must recognize a $53,500 gain on the disposition of the land.
A)True
B)False
Q2) Gupta Company made the following sales of capital assets this year. What is the effect of the three sales on Gupta's taxable income?
A) $700 increase
B) $12,900 increase
C) No effect
D) None of the choices are correct
Q3) Gain or loss realized on the disposition of property is recognized unless the tax law provides a nonrecognition exception.
A)True
B)False
Q4) A corporation can use the installment sale method of accounting for both book and tax purposes.
A)True
B)False
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Chapter 9: Nontaxable Exchanges
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Q1) Which of the following statements is false?
A) IPM's 600 shares of stock are worth $675,000.
B) Zeta's gain realized on the exchange is $392,000.
C) The exchange of stock for assets is nontaxable to IPeta.
D) None of the above is false.
Q2) A taxpayer who realizes a loss on the sale of marketable securities and reacquires substantially the same securities within the 30 day period before the sale cannot recognize the loss.
A)True
B)False
Q3) Which of the following statements is true?
A) The FMV of Rhea's 180 shares is $180,000.
B) Rhea's exchange of assets for stock is taxable because Rhea is not in control of LooNR immediately after the exchange.
C) LooNR recognizes a $105,000 gain on the exchange of its stock for Rhea's assets.
D) None of the above is true.
Q4) The wash sale rule can result in the nonrecognition of both gains and losses.
A)True
B)False
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Chapter 10: Sole Proprietorships
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Sample Questions
Q1) On June 1, Jefferson had a basis in his partnership interest of $75,000. On June 2, he received a cash distribution from the partnership of $28,000. All of the cash distribution is taxable.
A)True
B)False
Q2) At the beginning of year 1, Paulina purchased a 25% general partner interest in Gamma Partnership for $25,000. Paulina's partnership Schedule K-1 for year 1 reported that her share of Gamma's debt at year-end was $10,000 and her share of ordinary loss was $5,000. On January 1, year 2, Paulina sold her interest to another partner for $22,000 cash (including relief of liabilities). Compute Paulina's gain or loss on the sale of her partnership interest.
A) $3,000 loss
B) $8,000 loss
C) $2,000 gain
D) $0 gain or loss
Q3) A shareholder in an S corporation can include only his or her own loans to the corporation in tax basis.
A)True
B)False
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Page 12
Chapter 11: The Corporate Taxpayer
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Q1) The dividends-received deduction is equal to 65% of any dividends-received by a corporate taxpayer.
A)True
B)False
Q2) Airfreight Corporation has book income of $370,000. Book income includes a $25,000 gain realized on a like-kind nontaxable exchange of realty. Based only on these items, compute Airfreight's taxable income.
A) $370,000
B) $395,000
C) $345,000
D) $420,000
Q3) Which of the following statements regarding the rehabilitation credit is false?
A) After 2017, the credit is available only for costs incurred to rehabilitate certified historic structures.
B) The credit is intended to encourage businesses to undertake urban renewal projects.
C) The credit is claimed only in the year in which the rehabilitated property is placed in service.
D) The credit equals 20 percent of qualified rehabilitation costs.
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Chapter 12: The Choice of Business Entity
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Q1) The accumulated earnings tax is imposed on a partnership formed for or availed of for the purpose of avoiding the income tax with respect to its owners by permitting earnings and profits to accumulate instead of being divided or distributed.
A)True
B)False
Q2) Which of the following is NOT one of the characteristics of a constructive dividend?
A) Payment between a corporation and a shareholder
B) Original payment treated as deductible by the corporation
C) Original payment treated as made to the shareholder in some capacity other than as an owner of the corporation
D) All of the above are common characteristics of constructive dividends.
Q3) During a recent IRS audit, the revenue agent decided that the Emig family used their closely held corporation, Gamekeeper, to avoid shareholder tax by accumulating earnings beyond the reasonable needs of the business. Gamekeeper's taxable income was $800,000, it paid no dividends, and it had no business need to retain any income. Compute Gamekeeper's accumulated earnings tax assuming that it had accumulated $2 million of after-tax income in prior years.
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Page 14
Chapter 13: Jurisdictional Issues in Business Taxation
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Sample Questions
Q1) Compute its U.S. income tax liability.
A) $840,000
B) $737,625
C) $567,000
D) $170,625
Q2) The UDITPA formula for state income tax apportionment consists of three factors: sales, payroll, and profit.
A)True
B)False
Q3) Tri-State's income for the current year is $250,000. Approximately how much will be taxed by Kansas?
A) $83,000
B) $95,000
C) $32,000
D) $170,000
Q4) If a corporation with a 21% marginal federal income tax rate pays $20,000 state income tax, the after-tax cost of the state tax is $15,800.
A)True
B)False
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Chapter 14: The Individual Tax Formula
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Q1) Mr and Mrs Luang reported $1,417,900 ordinary taxable income for regular tax purposes and had $139,100 positive AMT adjustments and preferences. Compute their tentative minimum tax.
A) $432,204
B) $435,960
C) $404,820
D) None of the above
Q2) Eileen, a single individual, had $125,000 taxable income. Compute her income tax assuming that:
a. Taxable income includes no capital gains.
b. Taxable income includes $14,000 capital gain eligible for the 15% preferential rate.
Q3) Because a Section 199A deduction affects AGI, it may impact the ability to claim a deduction for unreimbursed medical expenses.
A)True
B)False
Q4) The Section 199A deduction always has the impact of lowering taxable income.
A)True
B)False
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Chapter 15: Compensation and Retirement Planning
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Q1) The value of a nontaxable fringe benefit is different for each employee because employees have different financial needs and consumption preferences.
A)True
B)False
Q2) What is the maximum IRA contribution that Mr Higgins can make under each of the following assumptions?
a. He is age 22 and single. His only income is $14,000 of interest and dividends from a trust fund.
b. He is age 30 and single. His only income is a $35,000 distributive share of ordinary business income from a partnership.
c. He is age 60 and single. His only income is $44,000 wages from his job.
d. He is 45 and files a joint return with his wife. His sole proprietorship generates an $8,200 loss, and his wife's salary is $50,000.
Q3) Both traditional IRAs and Roth IRAs are tax-exempt accounts.
A)True
B)False
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Chapter 16: Investment and Personal Financial Planning
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Sample Questions
Q1) Investment expenses are an itemized deduction.
A)True
B)False
Q2) Qualified dividend income earned by individual taxpayers is taxed at a maximum income tax rate of 20%.
A)True
B)False
Q3) At the beginning of the year, Calvin paid $5,000 for 60 shares of Eddington stock. In June, he received a $300 cash distribution with respect to the stock. His Form 1099-DIV reported that $170 was an ordinary dividend and $130 was nontaxable. Compute Calvin's tax basis in his 60 shares at year-end.
A) $4,870
B) $4,700
C) $4,830
D) $5,000
Q4) A beneficiary's basis of inherited property equals the decedent's adjusted basis immediately prior to death.
A)True
B)False
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Chapter 17: Tax Consequences of Personal Activities
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Q1) A nondeductible charitable contribution may be carried forward five years.
A)True
B)False
Q2) Losses realized on the sale of personal use assets are deductible.
A)True
B)False
Q3) Which of the following donations doesn't qualify as a charitable contribution for federal tax purposes?
A) $50 cash given to a homeless panhandler
B) Used furniture valued at $300 given to the Salvation Army
C) $3,000 cash given to the University of Georgia
D) $600 cash given to the Boy Scouts of America
Q4) Any gain recognized on the sale of a personal residence is excluded from the seller's gross income.
A)True B)False
Q5) If alimony is paid under a 2015 divorce decree, the payments are included in the recipient's gross income.
A)True
B)False
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Chapter 18: The Tax Compliance Process
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Q1) Mr and Mrs Dint filed their 2017 Form 1040 on January 28, 2018. Assuming that the return does not contain any significant errors, what is the latest date that the IRS can assess any additional 2017 tax?
A) December 31, 2020
B) January 28, 2021
C) April 17, 2021
D) December 31, 2021
Q2) Which of the following should increase the likelihood that Ms. Piper's Form 1040 will be selected for audit by the IRS?
A) Ms. Piper files as head of household because she maintains a home for her 89-year old mother who has Alzheimer's disease.
B) Ms. Piper's AGI is $58,400, and she deducted $27,590 of charitable contributions on her Schedule A.
C) Ms. Piper reported $10,200 alimony income from her former spouse.
D) None of the above should increase the likelihood of audit.
Q3) Only the government may appeal a tax case to the U.S. Supreme Court.
A)True
B)False
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