Taxation of Flow-Through Entities Study Guide Questions
Course Introduction
This course explores the taxation principles and rules applicable to flow-through entities, such as partnerships, S corporations, and limited liability companies (LLCs). Students will examine the formation, operation, and dissolution of these entities with a focus on federal income tax consequences to both the entities and their owners. Key topics include the determination of taxable income, allocation of income, losses, deductions, and credits among owners, basis calculations, distributions, sales of interests, and compliance requirements. The course emphasizes the practical application of current tax laws and regulations, as well as planning strategies used to optimize tax outcomes for flow-through entity structures.
Recommended Textbook
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) Appeals from the Court of Federal Claims go to the U.S.Supreme Court.
A)True
B)False
Answer: False
Q2) Revenue Procedures are published semiannually in the:
A)Cumulative Bulletin.
B)Federal Revenue Bulletin.
C)Internal Revenue Bulletin.
D)I.R.S.Digest.
E)None of the above.
Answer: A
Q3) What value is a tax citator to a tax researcher?
Answer: The use of manual citators or a computer citator search is invaluable to tax research.A citator provides the history of a case including the authority relied on (e.g. ,other judicial decisions)in reaching the result.Reviewing the references listed in the citator discloses whether the decision was appealed and,if so,with what result (e.g. ,affirmed,reversed,and remanded).It also reveals other cases with the same or similar issues and how they were decided.Thus,a citator reflects on the validity of a case and may lead to other relevant judicial material.
Page 3
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Chapter 2: Corporations: Introduction and Operating Rules
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Q1) Thrush Corporation files Form 1120,which reports taxable income of $200,000.The corporation's tax is $56,250.
A)True
B)False
Answer: False
Q2) Which of the following statements is incorrect with respect to the treatment of net operating losses by corporations?
A)A corporation may elect to forgo the carryback period and just carryforward an NOL.
B)A corporation may claim a dividends received deduction in computing an NOL.
C)An NOL is generally carried back 2 years and forward 20 years.
D)Unlike individuals,corporations do not adjust their NOLs for net capital losses or nonbusiness deductions.
E)None of the above.
Answer: E
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Chapter 3: Corporations: Special Situations
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Q1) Maper,a real estate developer,pays Alan,a general contractor,to construct a housing project.Alan has no DPGR since he does not own the property.
A)True
B)False
Answer: False
Q2) Reasonable needs for purposes of the accumulated earnings tax include loans to suppliers and customers.
A)True
B)False
Answer: True
Q3) Which of the following is always personal holding company income?
A)Gas royalties.
B)Rent income.
C)Dividends
D)Personal service contract income.
E)All of the above.
Answer: C
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Chapter 4: Corporations: Organization and Capital Structure
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Q1) Lark City donates land worth $300,000 and cash of $100,000 to Orange Corporation as an inducement to locate in the city.Four months later,Orange purchases additional land and a building at a cost of $500,000 and moves its operations to Lark City.Ann,the sole shareholder,contributes equipment (basis of $70,000 and fair market value of $200,000)to help Orange in its new operations.What are the tax consequences of these transfers to Orange Corporation?
Q2) Tara incorporates her sole proprietorship,transferring it to newly formed Black Corporation.The assets transferred have an adjusted basis of $240,000 and a fair market value of $300,000.Also transferred was $10,000 in liabilities,$1,000 of which was personal and the balance of $9,000 being business related.In return for these transfers,Tara receives all of the stock in Black Corporation.
A)Black Corporation has a basis of $241,000 in the property.
B)Black Corporation has a basis of $240,000 in the property.
C)Tara's basis in the Black Corporation stock is $241,000.
D)Tara's basis in the Black Corporation stock is $249,000.
E)None of the above.
Q3) For transfers falling under § 351,what are the holding period rules for stock received by the shareholder and for the assets transferred to the corporation?
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Chapter 5: Corporations: Earnings Profits and Dividend
Distributions
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Q1) The tax treatment of corporate distributions at the shareholder level does not depend on:
A)The character of the property being distributed.
B)The earnings and profits of the corporation.
C)The basis of stock in the hands of the shareholder.
D)Whether the distributed property is received by an individual or a corporation.
E)None of the above.
Q2) 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
Q3) When current E & P has a deficit and accumulated E & P is positive,the two accounts are netted at the date of the distribution.If a positive balance results,the distribution is a dividend to the extent of the balance.
A)True
B)False
Q4) How does the definition of accumulated E & P differ from the definition of current E & P?
Page 7
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Chapter 6: Corporations: Redemptions and Liquidations
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Q1) Legal dissolution under state law is required for a liquidation to be complete for tax purposes.
A)True
B)False
Q2) Egret Corporation has manufactured recreational vehicles for 8 years.In addition,for the last 3 years,Egret has operated a separate division that sells bicycle equipment.Francis,an individual,and Loon Corporation each acquired 500 shares of stock in Egret (basis of $2,000 per share)10 years ago.In the current year,the bicycle equipment division is entirely destroyed by fire.Egret Corporation decides to discontinue the business and distributes pro rata all of the $5 million of insurance proceeds collected as a result of the fire to Francis and Loon Corporation in redemption of 200 shares of stock from each shareholder.Determine the tax consequences of the stock redemption to Egret Corporation (E & P of $6 million),to Francis,and to Loon Corporation.
Q3) A corporation generally will recognize gain or loss on a liquidating distribution of installment notes to its shareholders.
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) Liabilities generally are not considered boot in corporate reorganizations except in an acquisitive "Type D" when cash or other property is also used in the transaction.
A)True
B)False
Q2) Dirty Corporation has owned two chemical manufacturing facilities for the last 20 years.One facility is located in Oklahoma while the other is in Oregon.There have been some environmental investigations at the Oregon facility.Therefore,Dirty creates a new corporation,called Clean,and places the assets of the Oregon plant into Clean in exchange for all of Clean's stock.Dirty distributes this stock proportionately to its shareholders in exchange for 40% of their Dirty stock.How will this transaction be treated for tax purposes?
A)As a split-up "Type D" reorganization.
B)As a split-off "Type D" reorganization.
C)As a spin-off "Type D" reorganization.
D)This transaction does not qualify as a reorganization,because Dirty does not have two active lines of business.
E)None of the above.
Q3) Discuss the role of letter rulings in corporate reorganizations.
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Chapter 8: Consolidated Tax Returns
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Q1) Assume that all of the affiliates in a Federal consolidated group conduct allowable manufacturing activities.Is a domestic production activities deduction (DPAD)available? Who can claim it? How is each member's DPAD,if any,computed?
Q2) How are the members of a Federal consolidated group affected by computations related to E & P?
A)E & P is computed solely on a consolidated basis.
B)Each member keeps its own E & P account.
C)Members' E & P balances are frozen as long as the consolidation election is in place.
D)Consolidated E & P is computed as the sum of the E & P balances of each of the group members.
Q3) The starting point in computing consolidated taxable income is the separate Federal taxable income amounts of the affiliated group members.
A)True
B)False
Q4) When an affiliated group elects to file Federal consolidated income tax returns,it gives up the ability to claim a ____________________ deduction for distributions of profits paid to other members.
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Chapter 9: Taxation of International Transactions
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Q1) "Inbound" and "offshore" asset transfers by a U.S.business can be subject to immediate Federal income taxation under § 367.
A)True
B)False
Q2) Nico lives in California.She was born in Peru but holds a green card.Nico is a nonresident alien (NRA).
A)True
B)False
Q3) The purpose of the transfer pricing rules is to ensure that taxpayers have ultimate flexibility in shifting profits between related entities.
A)True
B)False
Q4) Gains on the sale of U.S.real property held directly or indirectly through U.S.stock ownership by NRAs and foreign corporations are subject to taxation under FIRPTA.
A)True
B)False
Q5) Describe and diagram the timeline that most businesses use to enter the international markets.
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Chapter 10: Partnerships: Formation, operation, and Basis
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Q1) Binita contributed property with a basis of $40,000 and a value of $50,000 to the BE Partnership in exchange for a 20% interest in partnership capital and profits.During the first year of partnership operations,BE had net taxable income of $30,000 and tax-exempt interest income of $10,000.The partnership distributed $10,000 cash to Binita.Binita's adjusted basis (outside basis)for her partnership interest at year-end is:
A)$36,000.
B)$38,000.
C)$60,000.
D)$70,000.
E)None of the above.
Q2) Which of the following is not a specific adjustment to the partners' basis in the partnership interest?
A)Increased by contributions the partner made to the partnership.
B)Decreased by the amount of guaranteed payments the partner received from the partnership.
C)Increased by the partner's share of tax-exempt income.
D)Decreased by any decrease in the partner's share of partnership liabilities.
E)Increased by the partner's share of separately stated income items.
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Chapter 11: Partnerships: Distributions, transfer of Interests, and Terminations
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Q1) Lori,a partner in the JKL partnership,received a proportionate nonliquidating distribution of $10,000 cash,unrealized receivables with a basis of $0 and a fair market value of $15,000,and land with a basis of $6,000 and a fair market value of $10,000.Her basis in the partnership interest immediately before the distributions was $14,000.She will recognize $0 gain on the distribution,and her basis in the receivables and land will be $0 and $4,000 respectively.
A)True
B)False
Q2) Aaron owns a 30% interest in a continuing partnership.The partnership distributes a $35,000 year-end cash payment to all the partners.In a proportionate nonliquidating distribution,the partnership also distributed property (basis of $15,000,fair market value of $20,000)to Aaron.Immediately before the distribution,Aaron's basis in the partnership interest was $50,000.As a result of the distribution,Aaron recognizes:
A)No gain or loss.
B)Ordinary loss of $5,000.
C)Capital loss of $5,000.
D)Ordinary gain of $5,000.
E)Capital gain of $5,000.
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Chapter 12: S: Corporations
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Q1) Which item has no effect on an S corporation's AAA?
A)Stock purchase by a shareholder.
B)Interest expense.
C)Cost of goods sold.
D)Capital loss.
E)All of the above modify AAA.
Q2) Any distribution made by an S corporation during a tax year is taken into account before accounting for the year's losses.
A)True
B)False
Q3) An S corporation may not have a ____________________ alien shareholder.
Q4) To make a valid S election,the entity must file a properly completed Form ____________________.
Q5) If an S corporation excludes cancellation of debt (COD)income from gross income,the excluded amount is applied to _________________ S corporation tax attributes.
Q6) Charitable contributions are subject to a 10% limitation at the S corporation level.
A)True
B)False
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Chapter 13: Comparative Forms of Doing Business
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Q1) Brenda contributes appreciated property to her business entity in a transaction which qualifies for nonrecognition of gain.Brenda's ownership interest is 60%.The business entity later sells the appreciated property for $110,000.The property is not depreciable.Which of the following statement(s)is correct?
A)If the entity is a partnership,Brenda's gross income is increased by $41,000 [($35,000 ´ 100%)+ ($10,000 ´ 60%)] in the year of the sale of the property by the partnership.
B)If the entity is a C corporation,the corporation's gross income is increased by $10,000 in the year of the sale of the property by the corporation.
C)If the entity is an S corporation,the S corporation's gross income is increased by $10,000 in the year of the sale of the property by the S corporation and Brenda's gross income is increased by $6,000 ($10,000 ´ 60%).
D)All of the above.
E)None of the above.
Q2) What is the major pitfall associated with attempting to reduce and/or avoid double taxation by a corporation not making distributions to shareholders?
Q3) 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) A deferred tax liability represents a current tax liability associated with income or expense to be reported in future year GAAP financial statements.
A)True B)False
Q2) A deferred tax liability represents a potential future tax benefit associated with income reported in the current year GAAP financial statements.
A)True B)False
Q3) Morrisson,Inc. ,earns book net income before tax of $500,000.In computing its book income,Morrisson deducts $50,000 more in warranty expense for book purposes than is allowed for tax purposes.Morrisson records no other temporary or permanent book-tax differences.Assuming that the U.S.tax rate is 35% and no valuation allowance is required,what is Morrisson's current income tax expense reported on its GAAP financial statements?
A)$192,500.
B)$175,000.
C)$157,500.
D)$17,500.
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Chapter 15: Exempt Entities
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Q1) Federal agencies exempt from Federal income tax under § 501(c)(1)are not subject to the unrelated business income tax (UBIT).
A)True
B)False
Q2) The income from a bingo game or a casino game conducted by an exempt organization may be unrelated business income.
A)True
B)False
Q3) Theater,Inc. ,an exempt organization,owns a printing company,Printers,Inc. ,which remits 85% of its profits to Theater,Inc.Since Printers remits at least 85% of its profits to Theater,neither Theater,Inc. ,nor Printers,Inc. ,must pay income tax on this $85,000 ($100,000 ´ 85%).
A)True B)False
Q4) Lemon,Inc. ,a private foundation,engages in a transaction with a disqualified person in the amount of $300,000.Calculate the tax on self-dealing.Assume that corrective action is taken so that the additional tax does not apply.
Q5) Define a private foundation.
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Chapter 16: Multistate Corporate Taxation
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Q1) An assembly worker earns a $30,000 salary and receives a fringe benefit package worth $15,000.The payroll factor assigns $30,000 for this employee.
A)True
B)False
Q2) Under P.L.86-272,which of the following transactions by itself would create nexus with a state?
A)Order solicitation for a plot of real estate,approved and filled from another state.
B)Order solicitation for a computer,approved and filled from another state.
C)Order solicitation for a machine,with credit approval from another state.
D)The conduct of a training seminar for sales personnel as to how to install and operate a new software product.
Q3) By making a water's edge election,the multinational taxpayer can limit the reach of unitary principles to the apportionment factors and income of its U.S.and E.U.affiliates.
A)True
B)False
Q4) The ____________________ tax usually is applied at the city or county level,as its main source of revenue.
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Chapter 17: Tax Practice and Ethics
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Q1) The tax preparer penalty for taking an unreasonable tax return position is the greater of $____________________ or ____________________ of the tax professional's income from preparing the return.
Q2) A taxpayer can take a dispute to the Small Cases Division of the Tax Court when the disputed amounts do not exceed $____________________. or
Q3) Keepert uses "two sets of books." She only reports one-half of her cash sales on the records that she uses to complete her Federal income tax return.The statute of limitations for Keepert's return is six years.
A)True
B)False
Q4) Does the tax preparer enjoy an "attorney-client privilege" of confidentiality with his or her clients?
Q5) Circular 230 requires that the tax practitioner use the "best practices" of the tax profession in carrying out a tax engagement.Specify what some of these best practices entail.
Q6) A taxpayer's return might be selected for audit on the basis of the ____________________ score that the IRS computes.
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Chapter 18: The Federal Gift and Estate Taxes
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Q1) For Federal estate tax purposes,the gross estate may include property the decedent does not own.
A)True
B)False
Q2) Pursuant to Corey's will,Emma (Corey's sister)inherits his property.Emma dies later.The estate tax attributable to the inclusion of the property in Corey's gross estate was $300,000.The estate tax attributable to the inclusion of the property in Emma's gross estate is $400,000.Emma's credit for the tax on prior transfers (under§ 2013)is:
A)$0 if Emma died 9 1/2 years after Corey.
B)$32,000 if Emma died 3 years after Corey.
C)$40,000 if Emma died 1 year after Corey.
D)$24,000 if Emma died 5 1/2 years after Corey.
E)None of the above amounts is correct.
Q3) Waldo is his mother's sole heir and is the designated executor of her estate.Although the alternate valuation date would yield a smaller gross estate and less estate tax liability,the § 2032 election is not made.Instead,Waldo files a Form 706 for his mother's estate using higher date of death values.Why?
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Chapter 19: Family Tax Planning
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Q1) In 2010,Sophia sold real estate (adjusted basis of $500,000)for $1,500,000.Under the terms of the sale,she received two notes of $750,000 each,with 9% interest provided.One note is due in 2011 and the other in 2012.She did not elect out of the installment method of recognizing gain.In 2011 and before the first note matures,Sophia gives both notes to her adult children.At this time,the notes are worth a total of $1,400,000.Disregarding the interest element,a tax result of these transactions is:
A)A gift to the children of $1,500,000.
B)Sophia recognizes no gain.
C)Sophia recognizes a gain of $900,000.
D)Sophia recognizes a gain of $1,000,000.
E)None of the above.
Q2) Passing installment notes by death will avoid any income tax on the deferred gain.
A)True
B)False
Q3) A disclaimer by a surviving spouse will generate additional estate tax since it reduces the amount of marital deduction allowed.
A)True
B)False
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Chapter 20: Income Taxation of Trusts and Estates
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Q1) The Ulrich Trust has distributable net income (DNI)for the year of $100,000 and no income from tax-exempt sources.Under the terms of the trust instrument,the trustee must distribute $60,000 to Roger and $60,000 to Sally.After paying these amounts,the trustee is empowered to make additional distributions at its discretion.Exercising this authority,the Ulrich trustee distributes an additional $15,000 to Roger and $15,000 to Sally.How much gross income from the trust must Roger recognize?
A)$15,000.
B)$50,000.
C)$60,000.
D)$75,000.
Q2) If the grantor of a trust retains the right to receive borrowed funds from the trust at a zero interest rate,the entity ____________________ (is,is not)treated as a grantor trust.
Q3) The tax rules regarding the income taxation of trusts and estates are included in which Subchapter of the Internal Revenue Code?
A)S.
B)K.
C)J.
D)C.
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