Taxation of Partnerships and Other Entities
Midterm Exam
Course Introduction
This course provides an in-depth exploration of the federal income tax treatment of partnerships, limited liability companies, and other pass-through entities. Students will examine the formation, operation, allocation of income, deductions, distributions, and liquidation of these entities, with a focus on understanding the unique tax rules applicable under Subchapter K of the Internal Revenue Code. The course also addresses the tax consequences of transactions between partners and partnerships, the impact of debt, and the treatment of non-partner entities. Case studies and practical examples illustrate complex concepts, preparing students for advanced work in tax practice or related business fields.
Recommended Textbook
South Western Federal Taxation 2019 Comprehensive 42nd Edition by David M. Maloney
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Page 2
Chapter 1: An Introduction to Taxation and Understanding
the Federal Tax Law
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Sample Questions
Q1) Tax credits for home improvements that conserve energy.
A)Economic considerations
B)Social considerations
C)Equity considerations
D)Both a. and b.
Answer: A
Q2) On occasion, Congress has to enact legislation that clarifies the tax law in order to change a result reached by the U.S. Supreme Court.
A)True
B)False
Answer: True
Q3) Sales made by mail order are not exempt from the application of a general sales (or use) tax.
A)True
B)False
Answer: True
Q4) In preparing a tax return, all questions on the return must be answered.
A)True
B)False
Answer: False
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Chapter 2: Working with the Tax Law
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Sample Questions
Q1) The Tax Cuts and Jobs Act of 2017 became part of the Internal Revenue Code of 1986.
A)True
B)False
Answer: True
Q2) How do treaties fit within tax sources?
Answer: The U.S signs certain tax treaties (sometimes called tax conventions) with foreign countries to render mutual assistance in tax enforcement and to avoid double taxation. Tax legislation enacted in 1988 provided that neither a tax law nor a tax treaty takes general precedence. Thus, when there is a direct conflict with the Internal Revenue Code and a treaty, the most recent item will take precedence. A taxpayer must disclose on the tax return any position where a treaty overrides a tax law. There is a $1,000 penalty per failure to disclose for individuals and a $10,000 per failure penalty for corporations.
Q3) Before a tax bill can become law, it must be approved (signed) by the President of the United States.
A)True
B)False
Answer: False
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Chapter 3: Computing the Tax
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Sample Questions
Q1) Clara, age 68, claims head of household filing status. If she has itemized deductions of $18,900 for 2018, she should claim the standard deduction.
A)True
B)False
Answer: True
Q2) Adjusted gross income (AGI) appears at the bottom of page 1 and at the top of page 2 of Form 1040.
A)True
B)False
Answer: True
Q3) Relationship test (for dependency exemption purposes) Answer: f
Q4) Derek, age 46, is a surviving spouse. If he has itemized deductions of $26,250 for 2018, Derek should not claim the standard deduction.
A)True
B)False
Answer: True
Q5) A cousin who does not live with taxpayer. Answer: d
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Chapter 4: Gross Income: Concepts and Inclusions
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Sample Questions
Q1) Paula transfers stock to her former spouse, Fred. The transfer is pursuant to a divorce agreement. Paula's cost of the stock was $75,000 and its fair market value on the date of the transfer is $95,000. Fred later sells the stock for $100,000. Fred's recognized gain from the sale of the stock is $5,000.
A)True
B)False
Q2) Jacob and Emily were co-owners of a personal residence. As part of their divorce agreement entered into in 2016, Emily paid Jacob cash for his interest in the personal residence. This cash payment results in a taxable gain to Jacob if he receives more cash than his share of the cost of the residence.
A)True
B)False
Q3) Mark is a cash basis taxpayer. He is a partner in the M&M partnership, and his share of the partnership's profits for 2018 is $90,000. Only $40,000 was distributed to him in January 2018, and this was his share of the 2017 partnership profits. None of the 2018 profits were distributed. Mark's gross income from the partnership for 2018 is $40,000.
A)True
B)False
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Chapter 5: Gross Income: Exclusions
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Sample Questions
Q1) Adam repairs power lines for the Egret Utilities Company. He is generally working on a power line during the lunch hour. He must eat when and where he can and still get his work done. He usually purchases something at a convenience store and eats in his truck. Egret reimburses Adam for the cost of his meals.
A) Adam must include the reimbursement in his gross income.
B) Adam can exclude the reimbursement from his gross income since the meals are provided for the convenience of the employer.
C) Adam can exclude the reimbursement from his gross income because he eats the meals on the employer's business premises (the truck).
D) Adam may exclude from his gross income the difference between what he paid for the meals and what it would have cost him to eat at home.
E) None of these.
Q2) For a person who is in the 35% marginal tax bracket, $1,000 of tax-exempt income is equivalent to $1,350 of income that is subject to tax.
A)True
B)False
Q3) What Federal income tax benefits are provided for college students?
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Page 7
Chapter 6: Deductions and Losses: In General
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Q1) Beulah's personal residence has an adjusted basis of $450,000 and a fair market value of $390,000. Beulah converts the property to rental use this year. The vacation home rules that limit the amount of the deduction to the rental income will apply and the adjusted basis for depreciation is $390,000.
A)True
B)False
Q2) Are there any circumstances under which lobbying expenditures are deductible?
Q3) During the year, Jim rented his vacation home for 200 days and lived in it for 19 days. During the remaining days, the vacation home was available for rental use. Is the vacation home subject to the limitation on the deductions of a personal/rental vacation home?
Q4) Jacques, who is not a U.S. citizen, makes a contribution to the campaign of a candidate for governor. Cassie, a U.S. citizen, also makes a contribution to the same campaign fund. If contributions by noncitizens are illegal under state law, the contribution by Cassie is deductible, while that by Jacques is not.
A)True
B)False
Q5) Under what circumstance can a bribe be deducted?
Q6) What losses are deductible by an individual taxpayer?
Page 8
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Chapter 7: Deductions and Losses: Certain Business
Expenses and Losses
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Sample Questions
Q1) The amount of a loss on insured personal use property is reduced by the insurance coverage if no claim is made against the insurer.
A)True
B)False
Q2) A business theft loss is taken in the year of the theft.
A)True
B)False
Q3) The cost of repairs to damaged property is not an acceptable measure of the loss in value of the property.
A)True
B)False
Q4) A bond held by an investor that is uncollectible will be treated as a worthless security and hence, produce a capital loss.
A)True
B)False
Q5) What are the three methods of handling research and experimental expenditures incurred in a trade or business?
Under what circumstances would you choose each?
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Chapter 8: Depreciation, Cost Recovery, Amortization, and Depletion
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Sample Questions
Q1) The § 179 limit for a sports utility vehicle with a GVW of 7,000 pounds will not apply if the sports utility vehicle is used as a taxi.
A)True
B)False
Q2) On July 17, 2018, Kevin places in service a used automobile that cost $25,000. The car is used 80% for business and 20% for personal use. In 2019, he used the automobile 40% for business and 60% for personal use. Determine the cost recovery recapture for 2019.
A) $0
B) $528
C) $2,000
D) $2,500
E) None of the above
Q3) On July 15, 2018, Mavis paid $275,000 for improvements on a commercial building she owns. Determine the maximum total cost recovery from the improvements in 2018.
Q4) Discuss the reason for the inclusion amount with respect to leased automobiles.
Q5) Discuss the tax consequences of listed property being used for the production of income compared to being used in a trade or business.
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Chapter 9: Deductions: Employee and
Self-Employed-Related Expenses
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Sample Questions
Q1) Statutory employees:
A) Report their expenses as miscellaneous itemized deductions.
B) Include common law employees.
C) Are subject to income tax withholdings.
D) Claim their expenses as deductions for AGI.
E) None of these.
Q2) Isabella is a dental hygienist who works for five different dentists. She spends one day a week (i.e., Monday through Friday) with each. All of the dentists except Dr. Stanki (the Wednesday assignment) treat her as an employee. Dr. Stanki, however, classifies her as being self-employed. Comment on this discrepancy in treatment.
Q3) The maximum annual contribution to a Roth IRA for an unmarried taxpayer who is age 35 is the smaller of $5,500 or the individual's compensation for the year in 2018.
A)True
B)False
Q4) Both traditional and Roth IRAs possess the advantage of tax-free accumulation of income within the plan.
A)True
B)False
Page 11
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Chapter 10: Deductions and Losses: Certain Itemized
Deductions
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Sample Questions
Q1) Linda, who has AGI of $120,000 in the current year, contributes stock in Mauve Corporation (a publicly traded corporation) to the Salvation Army, a qualified charitable organization. The stock is worth $65,000, and Linda acquired it as an investment four years ago at a cost of $50,000.
a. What is the total amount that Linda can deduct as a charitable contribution, assuming she carries over any disallowed contribution from the current year to future years?
b. Describe the restrictions that apply when calculating the deduction in the carryover years.
Q2) Contributions to public charities in excess of 50% of AGI may be carried back 3 years or forward for up to 5 years.
A)True
B)False
Q3) Charitable contributions that exceed the percentage limitations for the current year can be carried over for up to three years.
A)True
B)False
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Page 12
Chapter 11: Investor Losses
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Sample Questions
Q1) Melinda earns wages of $80,000, income from a limited partnership of $10,000, and a $30,000 passive activity loss from a real estate rental activity in which she actively participates. Her modified adjusted gross income is $80,000. Of the $30,000 loss, Melinda may deduct:
A) $0.
B) $10,000.
C) $25,000.
D) $30,000.
E) Some other amount.
Q2) Sandra acquired a passive activity three years ago. Until last year, the activity was profitable and her at-risk amount was $300,000. Last year, the activity produced a loss of $100,000, and in the current year, the loss is $50,000. Assuming Sandra has received no passive activity income in the current or prior years, her suspended passive activity loss from the activity is:
A) $90,000 from last year and $50,000 from the current year.
B) $100,000 from last year and $50,000 from the current year.
C) $0 from last year and $0 from the current year.
D) $50,000 from the current year.
E) None of the above.
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Page 13
Chapter 12: Tax Credits and Payments
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Q1) The maximum child tax credit under current law is $1,500 per qualifying child.
A)True
B)False
Q2) A small employer incurs $1,500 for consulting fees related to establishing a qualified retirement plan for its 75 employees. As a result, the employer may claim the credit for small employer pension plan startup costs for $750.
A)True
B)False
Q3) Kevin and Sue have two children, ages 8 and 14. They spend $6,200 per year on eligible employment related expenses for the care of their children after school. Kevin earned a salary of $20,000 and Sue earned a salary of $18,000. What is the amount of the credit for child and dependent care expenses?
A) $690
B) $713
C) $1,380
D) $1,426
Q4) How does the FICA tax compare to the self-employment tax? How are these two taxes similar and how do they differ?
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Page 14
Chapter 13: Property Transactions: Determination of Gain or
Loss, Basis Considerations, and Nontaxable Exchanges
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Sample Questions
Q1) If the alternate valuation date is elected by the executor in 2018, the total basis of inherited property will be more than what it would have been if the primary valuation date and amount had been used.
A)True
B)False
Q2) At a particular point in time, a taxpayer can have two principal residences for § 121 exclusion purposes.
A)True
B)False
Q3) A realized loss whose recognition is postponed results in the temporary recovery of more than the taxpayer's cost or other basis.
A)True
B)False
Q4) Realized gain or loss is measured by the difference between the amount realized from the sale or other disposition of property and the property's adjusted basis at the date of disposition.
A)True
B)False
Q5) Define an involuntary conversion.
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Chapter 14: Property Transactions: Capital Gains and
Losses, Section 1231, and Recapture Provisions
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Sample Questions
Q1) Hank inherited Green stock from his mother when she died. The mother had a tax basis of $366,000 for the Green stock when she died and the Green stock was worth $437,000 at the date of her death. Which of the statements below is correct?
A) Hank's holding period for the Green stock includes his mother's holding period for the stock.
B) Hank's holding period for the Green stock does not include his mother's holding period for the stock.
C) Hank's holding period for the Green stock is automatically long term.
D) b. and c.
E) None of the above.
Q2) Stanley operates a restaurant as a sole proprietorship. Which of the following items are capital assets in the hands of Stanley?
A) The restaurant's tables and chairs.
B) A portable sound system used to play "theme music" for the restaurant.
C) The restaurant building that is an asset of the sole proprietorship.
D) An interest-bearing savings account used to keep the restaurant's excess cash.
E) None of the above.
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Page 16
Chapter 15: Taxing Business Income
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Q1) For purposes of the qualified business income (QBI) deduction, qualified business income does not include certain types of investment income (e.g., capital gains or capital losses, dividends, and interest income (unless "properly allocable" to a trade or business, such as lending).
A)True
B)False
Q2) What are some of the issues remaining unresolved with the QBI deduction?
Q3) Instead of providing a special deduction to non-corporate owners of passthrough businesses, Congress could have applied a special rate to the business income to achieve a similar result.
A)True
B)False
Q4) How does property used in a qualified trade or business factor into the QBI deduction calculation? What types of property are considered for the QBI deduction?
Q5) The corporate marginal income tax rate is lower than the top individual tax rate.
A)True
B)False
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Chapter 16: Accounting Periods and Methods
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Q1) A C corporation's selection of a tax year, generally, is independent of the tax year of its principal shareholders.
A)True
B)False
Q2) John sold an apartment building for $600,000. His basis in the building was $360,000 and it was subject to $30,000 of depreciation recapture. John received $150,000 in the year of sale, the buyer assumed John's mortgage payable of $240,000, and the buyer gave John an 8% (the current Federal rate) note of $210,000 due in 5 years. The interest on the note was payable each June 30, beginning in the year following the year of the sale. John incurred $30,000 of selling expenses which he paid in the year of sale. Compute John's installment sales gain that should be reported in the year of sale.
Q3) The Seagull Partnership has three equal partners. Partner A's tax year ends June 30th, and Partners B and C use a calendar year. If the partnership uses the calendar year to report its income, Partner A is permitted to defer partnership income earned from July through December 2018 until he files his tax return for his year ending June 30, 2019.
A)True
B)False
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Chapter 17: Corporations: Introduction and Operating Rules
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Q1) Briefly discuss the current year requirements for the dividends received deduction.
Q2) During the current year, Woodchuck, Inc., a closely held personal service corporation, has $115,000 of net active income, $40,000 of portfolio income, and $135,000 of passive activity loss. What is Woodchuck's taxable income for the current year?
A) $0
B) $20,000
C) $40,000
D) $155,000
E) None of the above
Q3) Adrian is the president and sole shareholder of Pigeon Corporation. He also lends money and rents a building to the corporation. Discuss how these business relationships between Adrian and Pigeon Corporation can help avoid double taxation. What limitations are there on the use of such relationships?
Q4) No dividends received deduction is allowed unless the corporation has held the stock for more than 90 days.
A)True
B)False
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Chapter 18: Corporations: Organization and Capital Structure
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Q1) Similar to the like-kind exchange provision, § 351 can be partly justified under the wherewithal to pay concept.
A)True
B)False
Q2) Carl and Ben form Eagle Corporation. Carl transfers cash of $50,000 for 50 shares of stock of Eagle. Ben transfers proprietary information with a tax basis of zero and a fair market value of $50,000 for the remaining 50 shares in Eagle. Carl will have a tax basis of $50,000 in his stock in Eagle Corporation and Ben's basis in his stock will be zero.
A)True
B)False
Q3) In determining whether § 357(c) applies, assess whether the liabilities involved exceed the bases of all assets a shareholder transfers to the corporation.
A)True
B)False
Q4) A taxpayer may never recognize a loss on the transfer of property in a transaction subject to § 351.
A)True
B)False
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Chapter 19: Corporations: Distributions Not in Complete
Liquidation
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Q1) Purple Corporation has accumulated E & P of $100,000 on January 1, 2018. In 2018, Purple has current E & P of $130,000 (before any distribution). On December 31, 2018, the corporation distributes $250,000 to its sole shareholder, Cindy (an individual). Purple Corporation's E & P as of January 1, 2019 is:
A) $0.
B) ($20,000).
C) $100,000.
D) $130,000.
E) None of the above.
Q2) A shareholder's basis in property acquired in a stock redemption is the property's fair market value as of the date of redemption.
A)True
B)False
Q3) How does the payment of a property dividend affect E & P?
Q4) Premiums paid on key employee life insurance policy (assume no increase in cash surrender value of policy) in 2018.
Q5) Briefly describe the rationale for the reduced tax rate on dividends for individual taxpayers.
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Chapter 20: Corporations: Distributions in Complete
Liquidation and an Overview of Reorganizations
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Q1) Pursuant to a complete liquidation, Lilac Corporation distributes the following assets to its unrelated shareholders: land held for three years as an investment (basis of $300,000, fair market value of $600,000), inventory (basis of $100,000, fair market value of $80,000), and marketable securities held for four years as an investment (basis of $200,000, fair market value of $240,000). What are the tax consequences to Lilac Corporation as a result of the liquidation?
A) Lilac Corporation would recognize no gain or loss on the liquidation.
B) Lilac Corporation would recognize a net capital gain of $320,000.
C) Lilac Corporation would recognize a net capital gain of $340,000 and an ordinary loss of $20,000.
D) Lilac Corporation would recognize a net capital gain of $340,000.
E) None of the above.
Q2) Sparrow Corporation purchased 90% of the stock of Warbler Corporation eight years ago for $1 million. In the current year, Sparrow liquidates Warbler and acquires assets with a basis to Warbler of $850,000 (fair market value of $1.2 million). Sparrow will have a basis in the assets of $850,000 (Warbler's basis in the assets), and no recognized gain or loss.
A)True
B)False
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Chapter 21: Partnerships
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Q1) Sarah contributed fully depreciated ($0 basis) property valued at $50,000 to the RSTU Partnership in exchange for a 25% interest in partnership capital and profits. During the first year of partnership operations, RSTU had net taxable income of $200,000 and tax exempt income of $4,000. The partnership distributed $10,000 cash to Sarah. Her share of partnership recourse liabilities on the last day of the partnership year was $20,000. What is Sarah's adjusted basis (outside basis) for her partnership interest at the end of the tax year?
Q2) Your client, Greg, contributed precontribution gain property to BIG LLC on December 31, 2018, in exchange for a 30% interest.
a. Describe two types of distributions that might result in some or all of this precontribution gain being recognized by Greg.
b. In general terms, what is the purpose of these rules?
Q3) The sum of the partners' ending basis amounts on all Schedules K-1 equals the partners' ending capital account balance shown on the partnership's Schedule L. A)True B)False
Q4) What are "syndication costs" and how are they treated for tax purposes?
Q5) Precontribution gain
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Chapter 22: S Corporations
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Q1) In the case of a complete termination of an S corporation interest, __________________ a tax year may occur.
Q2) Tax-exempt income at the corporate level flows through as exempt to S shareholders.
A)True
B)False
Q3) A capital loss allocated to a shareholder always reduces the Other Adjustments Account.
A)True
B)False
Q4) On January 2, 2018, David loans his S corporation $10,000. By the end of 2018 David's stock basis is zero and the basis in his note has been reduced to $8,000. During 2019, the company's operating income is $10,000. The company makes 2019 distributions to David of $11,000. David reports a(n):
A) $1,000 LTCG.
B) $3,000 LTCG.
C) $11,000 LTCG.
D) Loan basis of $10,000.
Q5) Some ____________________and taxation rules apply to an S corporation.
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Chapter 23: Exempt Entities
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Q1) Which of the following taxes can be imposed on private foundations?
A) Tax on self-dealing.
B) Tax on failure to distribute income.
C) Tax on excess business holdings.
D) Only a. and c.
E) All of the above.
Q2) For an exempt organization to be subject to the unrelated business income tax, the trade or business must not be substantially related to the exempt purpose of the organization.
A)True
B)False
Q3) The unrelated business income tax (UBIT) is calculated by multiplying unrelated business taxable income by the corporate tax rate.
A)True
B)False
Q4) Describe how an exempt organization can be eligible to make lobbying expenditures without losing its tax exemption.
Q5) Branded calendars
Q6) Private foundation
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Chapter 24: Multistate Corporate Taxation
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Q1) Sylvia spends time working at the offices of her employer as a consultant to clients who are located in three different U.S. states. To which state(s)' payroll factor(s) is Sylvia's compensation assigned? Apply the general UDITPA rules.
Q2) For most taxpayers, which of the traditional apportionment factors yields the greatest opportunities for tax reduction?
A) Payroll.
B) Property.
C) Sales (gross receipts).
D) Unitary.
Q3) Typically exempt from the sales/use tax base is the purchase of prescription medicines by an individual.
A)True
B)False
Q4) State income tax expense.
Q5) Allocation is a method under which a corporation's ________________ income is directly assigned to the specific states where the income is derived.
Q6) Federal general business credit.
Q7) Purchasing ads that show up on search-result screens for internet browsers.
Page 26
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Chapter 25: Taxation of International Transactions
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Q1) Which of the following income items does not represent Subpart F income if it is earned by a controlled foreign corporation in Fredonia? Purchase of inventory from the U.S. parent, followed by:
A) Sale to anyone outside Fredonia.
B) Sale to anyone inside Fredonia.
C) Sale to a related party outside Fredonia.
D) Sale to a non-related party outside Fredonia.
Q2) In year 1, George renounces his U.S. citizenship and moves to Fredonia, where income tax rates are very low.
George is a multimillionaire and says he "has had it" with high Federal income taxes on wealthy individuals like himself. In year 4, George's U.S.-source income is $1.5 million. That income escapes Federal income taxes.
A)True
B)False
Q3) An appropriate transfer price is one that considers the risks, assets, and functions of the persons to whom income is assigned.
A)True
B)False
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Chapter 26: Tax Practice and Ethics
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Q1) An IRS letter ruling might determine that an employee's compensation is unreasonable in amount.
A)True
B)False
Q2) Mikel prepared for compensation a Federal income tax return for Mona. Mona's return included an aggressive interpretation of the rules concerning the home office deduction of a sole proprietor. Mikel is not liable for a preparer penalty for taking an unreasonable tax return position if:
A) The tax reduction attributable to the disputed deduction did not exceed $5,000.
B) Mona is assessed her own penalty for an understatement of tax due to disregard of IRS rules.
C) The IRS found that the disputed deduction was frivolous, but Mona disclosed the position in an attachment to the return.
D) There was a reasonable basis for Mona's interpretation of the home office deduction rules, and Mona disclosed the position in an attachment to the return.
Q3) Negligence in filing a return.
Q4) Failure to file a tax return.
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Chapter 27: The Federal Gift and Estate Taxes
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141 Verified Questions
141 Flashcards
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Sample Questions
Q1) Decedent owned a policy on the life of his spouse with himself as the designated beneficiary. The spouse survives.
Q2) In determining whether a dividend issued on stock held by a decedent is included in the gross estate, the record date (rather than the declaration or payment dates) controls.
A)True
B)False
Q3) Under her father's will, Faith is to receive 10,000 shares of GE common stock. Eight months after her father's death, Faith disclaims the 10,000 shares.
Q4) Ben and Lynn are married and have four pre-teen grandchildren. They want to contribute to a § 529 plan on behalf of their education. For 2018, what is the maximum amount they can transfer to the plan without making a taxable gift?
Q5) Lila is the owner and beneficiary of a policy on the life of her husband, Austin. Upon Austin's death, the insurance proceeds paid to Lila do not qualify for the marital deduction.
A)True
B)False
Q6) Cash donation to the reelection campaign of a candidate for the U.S. Congress.
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Chapter 28: Income Taxation of Trusts and Estates
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161 Verified Questions
161 Flashcards
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Sample Questions
Q1) The Gibson Estate is responsible for collecting outstanding income amounts and paying the remaining obligations of Juanita Gibson, the deceased. How does Federal income tax law treat these items? Hint: Define and use the term income in respect of a decedent in your answer.
Q2) If provided for in the controlling agreement, a trust might terminate when the income beneficiary reaches age 35.
A)True
B)False
Q3) For a calendar-year entity, the Form 1041 has an unextended due date of April 15.
Q4) 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,________________ , (Dexter, Jena) and not the trust, is taxed on the amount of the distribution.
Q5) Under the Federal income tax rules for trusts and estates, a(n) ________________ generally must use a calendar tax year, but a(n)________________ can select any tax year-end.
Q6) The entity's AMT preferences and adjustments pass through to the income beneficiaries.
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