Advanced taxation exam #2

Separately stated items are tax items that are treated similarly for tax purposes as a shareholder's share of ordinary business income (loss).

False

To make an S election effective as of the beginning of the current year, an S corporation must file IRS Form 2553 within three and a half months after the beginning of the year.

False

The specific identification method is a method an S corporation may use to allocate its income across short tax years that result from an involuntary S election termination.

True

When an S corporation distributes appreciated property to its shareholders, the S corporation recognizes gain as though it had sold the appreciated property for its fair market value just prior to the distribution.

True

Sue and Andrew form SA general partnership. Each person receives an equal interest in the newly created partnership. Sue contributes $10,000 of cash and land with an FMV of $55,000. Her basis in the land is $20,000. Andrew contributes equipment with an FMV of $12,000 and a building with an FMV of $33,000. His basis in the equipment is $8,000, and his basis in the building is $20,000. How much gain must the SA general partnership recognize on the transfer of these assets from Sue and Andrew?

$0 General partnership does not recognize gain on transfer of property on formation of partnership. Explanation Partnerships don't recognize any gain on the receipt of contributed appreciated property. The built-in gain or built-in loss will be reported at the time of disposition of the asset. To ensure this result, the partnership's basis in the acquired property is a carryover basis.

Assume that Clampett, Incorporated, has $200,000 of sales, $150,000 of cost of goods sold, $60,000 of interest income, and $40,000 of dividends. Assume that Clampett, Incorporated, never operated as a C corporation and that the corporate tax rate is 21 percent. What is Clampett, Incorporated's excess net passive income tax?

$0 Explanation Clampett, Incorporated, is not subject to the excess net passive income tax because it never operated as a C corporation.

Daniela is a 25 percent partner in the JRD Partnership. On January 1, JRD makes a proportionate, liquidating distribution of $16,000 cash, inventory with a $16,000 fair value (inside basis $8,000), and accounts receivable with a fair value of $8,000 (inside basis of $12,000) to Daniela. JRD has no liabilities at the date of the distribution. Daniela's basis in her JRD Partnership interest is $20,000. What is the amount and character of Daniela's gain or loss from the distribution?

$0 Explanation Daniela will not recognize any gain or loss on the distribution. She will instead reduce the basis of the assets she receives in complete liquidation of her interest.

Daniela is a 25 percent partner in the JRD Partnership. On January 1, JRD makes a proportionate liquidating distribution of $20,000 cash and inventory with a $15,000 fair value (inside basis $5,000) to Daniela. JRD has no liabilities at the date of the distribution. Daniela's basis in her JRD Partnership interest is $21,000. What is the amount and character of Daniela's gain or loss from the distribution?

$0 Explanation Daniela will not recognize any gain or loss on the distribution. She will instead reduce the basis of the inventory she receives in complete liquidation of her interest.

Clampett, Incorporated, converted to an S corporation on January 1, 2021. At that time, Clampett, Incorporated, had cash ($40,000), inventory (FMV $60,000, basis $30,000), accounts receivable (FMV $40,000, basis $40,000), and equipment (FMV $60,000, basis $80,000). In 2022, Clampett, Incorporated, sells its entire inventory for $60,000 (basis $30,000). Assume the corporate tax rate is 21 percent and that Clampett, Incorporated, had a $20,000 net operating loss carryover from its prior C corporation years. How much built-in gains tax does Clampett, Incorporated, pay in 2022?

$0 Explanation The net built-in gain is limited to the net built-in gain at conversion ($10,000) and may be reduced by any net operating losses carried over from prior C corporation years ($20,000). Thus, Clampett, Incorporated, has no built-in gains tax liability.

Tyson is a 25 percent partner in the KT Partnership. On January 1, KT makes a proportionate, liquidating distribution of $16,000 cash and land with a $16,000 fair value (inside basis $8,000) to Tyson. KT has no liabilities at the date of the distribution. Tyson's basis in his KT Partnership interest is $20,000. What is the amount and character of Tyson's gain or loss from the distribution?

$0 Explanation Tyson is not required to recognize any gain or loss on the distribution. He will instead reduce the basis of the land he receives in complete liquidation of his interest.

Hilary had an outside basis in LTL General Partnership of $10,000 at the beginning of the year. LTL reported the following items on Hilary's K-1 for the year: ordinary business income of $5,000, a $10,000 reduction in Hilary's share of partnership debt, a cash distribution of $20,000, and tax-exempt income of $3,000. What is Hilary's adjusted basis at the end of the year?

$0 Hilary's basis is increased by her share of ordinary business income and tax-exempt income and then reduced by her actual cash distribution and deemed cash distribution from the reduction in her share of partnership debt. Because her actual and deemed cash distributions exceed her basis after increasing it by the positive adjustments for the year, Hilary must report $12,000 of capital gain, leaving her with a zero basis in her partnership interest. ($10,000 + $5,000 + $3,000 − $10,000 − $20,000 = ($12,000) + $12,000 = 0).

Sarah is a 50 percent partner in the SF Partnership and has an outside basis of $56,000 at the end of the year prior to any distributions. On December 31, Sarah receives a proportionate operating distribution of $20,000 cash. What is the amount and character of Sarah's recognized gain or loss and what is her basis in her partnership interest?

$0 gain, $36,000 basis Amount and character of Sarah's recognized gain or loss$ 0 Her basis in her partnership interest$ 36,000=56000-20000 (Outside basis before distribution - Distribution of cash ) Explanation Sarah does not recognize any gain or loss on the distribution. She reallocates her basis in SF to the cash in an amount equal to the distribution, $20,000. Her remaining basis is $36,000 ($56,000 − $20,000).

Riley is a 50 percent partner in the RF Partnership and has an outside basis of $56,000 at the end of the year prior to any distributions. On December 31, Riley receives a proportionate operating distribution of $6,000 cash and a parcel of land with a $14,000 fair value and an $8,000 basis to RF. What is the amount and character of Riley's recognized gain or loss and what is his basis in his partnership interest?

$0 gain, $42,000 basis Explanation Riley does not recognize any gain or loss on the distribution. He reduces his basis (56,000) in RF by the amount of cash received ($6,000) and by the basis assigned to the land (transferred basis of $8,000).

Suppose that at the beginning of 2021 Jamaal's basis in his S corporation stock is $1,000 and he has a $10,000 debt basis associated with a $10,000 loan he made to the S corporation. In 2021, Jamaal's share of S corporation income is $4,000, and he received a $7,000 distribution from the S corporation. What is Jamaal's stock and debt basis after these transactions?

$0 stock basis; $10,000 debt basis Explanation $1,000 (original stock basis) + $4,000 ordinary income − $7,000 distribution = $0 stock basis and a $2,000 distribution in excess of stock basis generating $2,000 of capital gain. Debt basis is not reduced by distributions.

Suppose that at the beginning of 2021 Jamaal's basis in his S corporation stock is $0, he has a $0 debt basis associated with a $10,000 loan he made to the S corporation, and he has a $5,000 suspended loss from the S corporation. In 2021, Jamaal contributed $8,000 to the S corporation, and the S corporation had ordinary income of $4,000. Assume that Jamaal owns 40 percent of the S corporation. What is Jamaal's stock and debt basis at the end of 2021?

$0 stock basis; $4,600 debt basis Explanation By rule, any net increase in basis for the year first restores the shareholder's debt basis (up to the outstanding debt amount) and then the shareholder's stock basis. Jamaal's debt basis is calculated as: $0 beginning-of-year basis + $8,000 contribution + $1,600 ($4,000 × 40%) share of S corporation income − $5,000 suspended loss = $4,600 at the end of 2021. Jamaal's stock basis remains at zero at the end of 2021 because his debt basis has not been restored to its outstanding debt amount, $10,000.

Jay has a tax basis of $14,000 in his partnership interest at the beginning of the partnership tax year. The following amounts of partnership debt were allocated to Jay and are included in his beginning-of-the-year tax basis: (1) recourse debt—$3,000, (2) qualified nonrecourse debt—$1,000, and (3) nonrecourse debt—$500. There were no changes to the debt allocated to Jay during the tax year. If Jay is allocated a $15,000 loss for the current year, how much of the loss will be suspended under the tax basis and at-risk limitations?

$1,000, $500 Jay's Tax basis in the partnership= 14,000 Loss Allocated to Jay in the current Year 15,000 So Loss suspensed due to Tax basis limitation= 1,000 Non recourse debt of Jay 500 So At risk amount =$14000-$500= 13,500 Remaining loss not suspended= 14,000 Explanation Jay would first apply the loss against his tax basis. Since his tax basis is only $14,000, $1,000 of his $15,000 loss is suspended due to the tax basis limitation. Because Jay's at-risk amount is only $13,500 ($14,000 − $500), an additional $500 of Jay's remaining $14,000 loss is suspended because of the at-risk limitation, leaving Jay with only $13,500 of loss that he could deduct currently.

Camille transfers property with a tax basis of $800 and a fair market value of $1,200 to a corporation in exchange for stock with a fair market value of $850 and $350 in cash in a transaction that qualifies for deferral under section 351. Camille also incurred selling expenses of $100. What is the amount realized by Camille in the exchange?

$1,100 fair market value of stock: 850 add : cash 350 Less : selling expense - 100 = 1,100 Explanation $850 fair market value of the stock received plus $350 cash received less $100 selling expenses.

Clampett, Incorporated, has been an S corporation since its inception. On July 15, 2022, Clampett, Incorporated, distributed $50,000 to J.D. His basis in his Clampett, Incorporated, stock on January 1, 2022, was $45,000. For 2022, J.D. was allocated $10,000 of ordinary income from Clampett, Incorporated, and no separately stated items. What is the total amount of income J.D. recognizes related to Clampett, Incorporated, in 2022?

$10,000 Explanation $10,000 share of ordinary income. The distribution is not taxable because J.D.'s basis is $55,000 prior to the distribution ($45,000 original basis + $10,000 increase in basis from distributive share of ordinary income).

The SSC, a cash-method partnership, has a balance sheet that includes the following assets on December 31 of the current year: Basis FMV Cash$ 180,000$ 180,000 A/R 0 60,000 Land 90,000 120,000 Total$ 270,000$ 360,000 Susan, a one-third partner, has an adjusted basis of $90,000 for her partnership interest. If Susan sells her entire partnership interest to Emma for $120,000 cash, how much capital gain and ordinary income must Susan recognize from the sale?

$10,000 capital gain; $20,000 ordinary income Explanation $10,000 capital gain; $20,000 ordinary income: Susan's share of unrealized receivables is $20,000 ($60,000 unrealized receivables × 1/3 interest). Susan will recognize $20,000 of ordinary income and a $10,000 capital gain, determined as the difference between the total gain of $30,000 and the ordinary income of $20,000. Susan's share of unrealized receivables is $20,000 ($60,000 unrealized receivables * 1/3 interest). Susan will recognize $20,000 of ordinary income and a $10,000 capital gain determined as the difference between the total gain of $30,000 and the ordinary income of $20,000.

The SSC, a cash-method partnership, has a balance sheet that includes the following assets on December 31 of the current year: Basis FMV Cash $ 180,000$ 180,000 A/R 0 60,000 Land 90,000 120,000 Total $ 270,000$ 360,000 Susan, a one-third partner, has an adjusted basis of $90,000 for her partnership interest. If Susan sells her entire partnership interest to Emma for $100,000 cash, what is the amount and character of Susan's gain or loss from the sale?

$10,000 capital loss; $20,000 ordinary income Explanation Total gain is $10,000 ($100,000 sales price minus $90,000 basis). Ordinary component is Susan's share of hot assets, $20,000. Capital loss of ($10,000) is the $10,000 total gain minus $20,000 ordinary income.

Clampett, Incorporated, converted to an S corporation on January 1, 2021. At that time, Clampett, Incorporated, had cash ($40,000), inventory (FMV $60,000, basis $30,000), accounts receivable (FMV $40,000, basis $40,000), and equipment (FMV $60,000, basis $80,000). What is Clampett, Incorporated's built-in gain or loss on January 1, 2021?

$10,000 net built-in gain Explanation $30,000 built-gain from inventory less $20,000 built-in loss from equipment.

Randolph is a 30 percent partner in the RD Partnership. On January 1, RD distributes $26,000 cash to Randolph in complete liquidation of his interest. RD has only capital assets and no liabilities at the date of the distribution. Randolph's basis in his RD Partnership interest is $37,000. What is the amount and character of Randolph's gain or loss on the distribution?

$11,000 capital loss Gain/loss = Cash distribution + Inventory distribution - Basis in RD RD distributing cash only and they are less than his basis in RD, Randolph is suffering capital loss $11,000 as below Cash Distribution$26,000Inventory Distribution$0Basis in RD($37,000)Gain/loss($11,000) LOSS Explanation Randolph recognizes a capital loss on the distribution of $11,000, representing the difference between his basis in RD of $37,000 and the cash distribution of $26,000. He recognizes a loss because he receives only cash in the distribution and the amount is less than his basis in his partnership interest.

Kathy purchases a one-third interest in the KDP Partnership from Paul for $60,000. Just prior to the sale, Paul's outside and inside bases in KDP are $48,000. KDP's balance sheet includes the following: Assets: Basis FMV Cash $ 48,000 $ 48,000 Land held for investment 96,000 132,000 Liabilities and Capital: Capital-Paul 48,000 Capital-Kristi 48,000 Capital-David 48,000 If KDP has a §754 election in place, what is Kathy's special basis adjustment?

$12,000 Kathy's special basis adjustment is the difference between her outside basis which is $60000 and inside basis which is $48000 = ($60000 - $48000) = $12000

Jessica is a 25 percent partner in the JRL Partnership. On January 1, JRL distributes $40,000 cash to Jessica. JRL has no hot assets or liabilities at the date of the distribution. Jessica's basis in her JRL partnership interest is $28,000. What is the amount and character of Jessica's gain or loss from the distribution?

$12,000 capital gain Explanation Jessica recognizes a $12,000 capital gain on the distribution because JRL distributes only money to her and the amount exceeds her outside basis in JRL. Total Amount Received $ 40,000.00 Add- Liability in Partnership $ - Less- Basis in Firm $ 28,000.00 Capital Gain $ 12,000.00

At the beginning of the year, Clampett, Incorporated, had $100,000 in its AAA and $60,000 of earnings and profits from prior C corporation years. During the year, Clampett, Incorporated, earned $50,000 of ordinary income and paid $200,000 in distributions to its shareholders. Assume that J.D. owns 25 percent of Clampett, Incorporated, his basis in Clampett, Incorporated, at the beginning of the year is $30,000, and his share of the distribution was $50,000. How much, if any, of the distribution is taxable as a dividend?

$12,500 Explanation Of the $200,000 distributed to shareholders, the first $150,000 is distributed from the AAA and the remaining $50,000 is distributed from prior C corporation earnings and profits. As a 25 percent shareholder, J.D.'s share of the dividend out of earnings and profits is $12,500 ($50,000 × 25%).

Zinc, LP was formed on August 1, 20X9. When the partnership was formed, Al contributed $10,000 in cash and inventory with an FMV and tax basis of $40,000. In addition, Bill contributed equipment with an FMV of $30,000 and adjusted basis of $25,000 along with accounts receivable with an FMV and tax basis of $20,000. Also, Chad contributed land with an FMV of $50,000 and tax basis of $35,000. Finally, Dave contributed a machine, secured by $35,000 of debt, with an FMV of $15,000 and a tax basis of $10,000. What is the total inside basis of all the assets contributed to Zinc, LP?

$140,000 Explanation The partnership's total inside basis is equivalent to the partners' tax basis in all the assets they contributed. ($10,000 + $40,000 + $25,000 + $20,000 + $35,000 + $10,000). = 140,000

At the beginning of the year, Clampett, Incorporated, had $100,000 in its AAA and $60,000 of earnings and profits from prior C corporation years. During the year, Clampett, Incorporated, earned $50,000 of ordinary income and paid $200,000 in distributions to its shareholders. Assume that J.D. owns 25 percent of Clampett, Incorporated, his basis in Clampett, Incorporated, at the beginning of the year is $10,000, and his share of the distribution was $50,000. How much, if any, of the distribution is taxable as a capital gain?

$15,000 Explanation Of the $200,000 distributed to shareholders, the first $150,000 is distributed from the AAA and the remaining $50,000 is distributed from prior C corporation earnings and profits. As a 25 percent shareholder, J.D.'s share of the distribution out of AAA is $37,500 ($150,000 × 25%). This distribution is nontaxable to the extent of J.D.'s basis ($10,000 + $12,500 distributive share of ordinary income [$50,000 × 25%]), and the excess is taxable as capital gain. Thus, J.D. has $37,500 − $22,500 = $15,000 of capital gain on the distribution.

Katarina transferred her 10 percent interest to Spartan Company as part of a complete liquidation of the company. In the exchange, she received land with a fair market value of $200,000. Katarina's basis in the Spartan stock was $100,000. The land had a basis to Spartan Company of $50,000. What amount of gain does Spartan recognize in the exchange and what is Katarina's basis in the land she receives?

$150,000 gain recognized by Spartan and a basis in the land of $200,000 to Katarina The exchange made by spartan is taxable . It will recognize the full amount of gain of $150,000 (200,000-50,000)and the basis in the land which is equal to the land's fair market value.

Tom is talking to his friend Bob, who has an interest in Freedom, LLC, about purchasing his LLC interest. Bob's outside basis in Freedom, LLC, is $10,000. This includes his $2,500 one-fourth share of the LLC's debt. Bob's 704(b) capital account is $17,000. If Tom bought Bob's LLC interest for $17,000, what would Tom's outside basis be in Freedom, LLC?

$19,500 Tom's outside basis be in Freedom, LLC = Amount paid for interest + share of LLC's Debt =17,000+2500 =19,500 Explanation Tom's basis would equal the amount he paid for his LLC interest plus his share of the LLC debt. Thus, he would have a starting basis of $17,000 + $2,500 of LLC debt, or $19,500.

Daniela is a 25 percent partner in the JRD Partnership. On January 1, JRD makes a proportionate distribution of $16,000 cash, inventory with a $16,000 fair value (inside basis $8,000), and accounts receivable with a fair value of $8,000 (inside basis of $12,000) to Daniela. JRD has no liabilities at the date of the distribution. Daniela's basis in her JRD Partnership interest is $20,000. What is Daniela's basis in the distributed inventory and accounts receivable?

$2,000 inventory, $2,000 accounts receivable Explanation Daniela's bases in the distributed assets are $16,000 cash, $2,000 inventory, and $2,000 accounts receivable. She first allocates her outside basis to the distributed assets in an amount equal to JRD's basis ($16,000 cash, 8,000 inventory, and $12,000 accounts receivable). This results in a required decrease of $16,000. She reduces the basis in the accounts receivable by the unrealized depreciation ($4,000). Finally, she reduces the basis of the inventory and accounts receivable by the remaining required decrease ($12,000) in proportion to their adjusted bases after considering the previous steps. This results in a decrease of $6,000 to the inventory and $6,000 to the accounts receivable.

Clampett, Incorporated, converted to an S corporation on January 1, 2021. At that time, Clampett, Incorporated, had cash ($40,000), inventory (FMV $60,000, basis $30,000), accounts receivable (FMV $40,000, basis $40,000), and equipment (FMV $60,000, basis $80,000). In 2022, Clampett, Incorporated, sells its entire inventory for $60,000 (basis $30,000). Assume the corporate tax rate is 21 percent. Clampett, Incorporated's taxable income in 2022 would have been $1,000,000 if it had been a C corporation. How much built-in gains tax does Clampett, Incorporated, pay in 2022?

$2,100 Particulars FMV Basis Differeces Inventory 60,000 30,000 30,000 A/R 40,000 40,0000 Equipment60,000 80,000 (20,000) Taxable gain 10,000 Tax rate 21% Built-in gains tax 2,100

Red Blossom Corporation transferred its 40 percent interest to Tea Company as part of a complete liquidation of the company. In the exchange, Red Blossom received land with a fair market value of $500,000. The corporation's basis in the Tea Company stock was $300,000. The land had a basis to Tea Company of $600,000. What amount of gain does Red Blossom recognize in the exchange and what is its basis in the land it receives?

$200,000 gain recognized and a basis in the land of $500,000 Explanation The exchange is taxable. Red Blossom recognizes the full amount of gain of $200,000 (500,000-300,000)and receives a basis in the land equal to the land's fair market value.

Assume that at the end of 2021, Clampett, Incorporated (an S corporation) distributes long-term capital gain property (fair market value of $40,000, basis of $25,000) to each of its four equal shareholders (aggregate distribution of $160,000). At the time of the distribution, Clampett, Incorporated, has no corporate earnings and profits and J.D. has a basis of $15,000 in his Clampett, Incorporated, stock. How much total income does J.D. recognize as a result of the distribution?

$25,000 Explanation $15,000 distributive share of the gain on the distribution ($40,000 − $25,000) plus $10,000 due to the $40,000 distribution exceeding J.D.'s $30,000 basis ($15,000 original basis + $15,000 increase in basis from gain from property distribution). so 15,000+10,000 =25,000

A partnership may use the cash method despite having a corporate partner when the partnership's average gross receipts for the prior three taxable years don't exceed _____.

$26,000,000

Assume Joe Harry sells his 25 percent interest in Joe's S Corporation, to Tyrone on January 29. Using the daily allocation method, how much income does Joe Harry report if Joe's S Corporation, earned $200,000 from January 1 to January 29 and a total of $1,460,000 from January 1 through December 31 (365 days)?

$29,000 Explanation ($1,460,000/365 days) × 29 days × 25% = $29,000.

Vanessa contributed $20,000 of cash and land with a fair market value of $100,000 and an adjusted basis of $40,000 to Cook, Incorporated (an S corporation) when it was formed. The land was encumbered by a $30,000 mortgage executed two years before. What is Vanessa's tax basis in her Cook, Incorporated, stock after formation?

$30,000 Explanation $20,000 cash + $40,000 land − $30,000 mortgage = $30,000.

Suppose that at the beginning of 2021 Jamaal's basis in his S corporation stock was $27,000 and Jamaal has directly loaned the S corporation $10,000. During 2021, the S corporation reported an $80,000 ordinary business loss and no separately stated items. How much of the ordinary loss is deductible by Jamaal if he owns 50 percent of the S corporation?

$37,000 Explanation Losses are limited to stock basis ($27,000) plus debt basis ($10,000).

Tyson is a 25 percent partner in the KT Partnership. On January 1, KT makes a proportionate distribution of $16,000 cash, inventory with a $10,000 fair value (inside basis $4,000), land A with a fair value of $8,000 (inside basis of $12,000), and land B with a fair value of $6,000 (inside basis of $4,000) to Tyson. KT has no liabilities at the date of the distribution. Tyson's basis in his KT Partnership interest is $23,000. What is Tyson's basis in the distributed inventory, land A, and land B?

$4,000 inventory, $2,000 land A, $1,000 land B We must decrease Tyson's basis by the amount that he received in cash = $23,000 - $16,000 = $7,000 Inventory's basis = $4,000 ( i.e. inside basis) land A's basis = $12,000 land B's basis = $4,000 total = $20,000, remaining basis is $7,000 so the basis must decrease by $20,000 - $7,000 = $13,000 Tyson's basis will be first reduced by the loss in value of land A = ($12,000 - $8,000). inventory's basis = $4,000 land A's basis = $12,000 - $4,000 = $8,000 land B's basis = $4,000 His basis still must decrease by $13000 -$4,000 = $9,000 that will be distributed between both land parcels. Land A will reduce by $6,000 = ($8,000/$12,000 x $9,000)and land B by$3,000 = ($4,000/$12,000 x $9,000). inventory's basis = $4,000 land A's basis = $8,000 - $6,000 = $2,000 land B's basis = $4,000 - $3,000 = $1,000

Marcella has a $65,000 basis in her 50 percent partnership interest in the JM Partnership before receiving any distributions. This year JM makes a proportionate operating distribution to Marcella of $10,000 cash and inventory with an $80,000 fair value and a $40,000 basis to JM. What is Marcella's basis in the inventory and her remaining basis in JM after the distribution?

$40,000 inventory basis, $15,000 JM basis Explanation Marcella takes a transferred basis in the inventory equal to $40,000. Her remaining basis in JM is $15,000, determined as: Pre-distribution basis in JM$ 65,000 Less: basis allocated to cash(10,000) basis allocated to inventory(40,000) Remaining basis in JM$ 15,000

Jamie transferred 100 percent of her stock in Fox Company to Otter Corporation in a Type A merger. In exchange, she received stock in Otter with a fair market value of $400,000 plus $600,000 in cash. Jamie's tax basis in the Fox stock was $600,000. What amount of gain does Jamie recognize in the exchange and what is her basis in the Otter stock she receives?

$400,000 gain recognized and a basis in Otter stock of $400,000 Explanation Gain recognized is $400,000, the lesser of gain realized of $400,000 or cash received. The stock basis is the carryover basis of $600,000 plus gain recognized of $400,000 less cash received of $600,000. If Jamie sells the stock for $400,000, she will not recognize additional gain because no gain was deferred in the transaction.

Erica and Brett decide to form their new motorcycle business as an LLC. Each will receive an equal profits (loss) interest by contributing cash, property, or both. In addition to the members' contributions, their LLC will obtain a $50,000 nonrecourse loan from First Bank at the time it is formed. Brett contributes cash of $5,000 and a building he bought as a storefront for the motorcycles. The building has an FMV of $45,000 and an adjusted basis of $30,000 and is secured by a $35,000 nonrecourse mortgage that the LLC will assume. What is Brett's outside tax basis in his LLC interest?

$45,000 5000+30000+(50%*50,000)+(35,000-30,000)+(30,000*50%)-35,000= 45,000 A contributing partner's outside basis initially consists of the basis of contributed property less any debt relief plus any partnership debt allocated to the partner. When allocating nonrecourse debt secured by the contributed property, any nonrecourse debt that exceeds the basis of the contributed property must be allocated solely to the partner that contributed the property. Any remaining nonrecourse debt is allocating according to the partners' profit-sharing ratios [$5,000 (cash) + $30,000 (basis of building) − $35,000 (debt on building) + $25,000 (50% profit-sharing ratio × $50,000 nonrecourse bank loan) + $5,000 (nonrecourse mortgage less basis of contributed property) + $15,000 (50% × $30,000 remaining mortgage on building) = $45,000

Assume that at the end of 2021, Clampett, Incorporated (an S corporation) distributes property (fair market value of $40,000, basis of $5,000) to each of its four equal shareholders (aggregate distribution of $160,000). At the time of the distribution, Clampett, Incorporated, has no corporate earnings and profits and J.D. has a basis of $50,000 in his Clampett, Incorporated, stock. What is J.D.'s stock basis after the distribution?

$45,000 Explanation Original basis of $50,000 + $35,000 distributive share of the gain on the distribution − $40,000 distribution = $45,000.

Jackson is a 30 percent partner in the JJM Partnership when he sells his entire interest to Rhonda for $112,000 cash. At the time of the sale, Jackson's basis in JJM is $64,000. JJM does not have any debt or hot assets. What is Jackson's gain or loss on the sale of his interest?

$48,000 capital gain When a partnership doesn't have hot assets. All gain on sale of partnership interest is to be recognised as capital gain or loss. So Sale price : $112,000 Partnership Basis: $64,000 Capital Gain : $112,000 - $64,000 = $48,000 Explanation Jackson recognizes a gain determined as the difference between the amount realized on the sale and his basis in the partnership interest. Because JJM has no hot assets, the gain will be characterized as capital.

Clampett, Incorporated, has been an S corporation since its inception. On July 15, 2022, Clampett, Incorporated, distributed $50,000 to J.D. His basis in his Clampett, Incorporated, stock on January 1, 2022, was $45,000. For 2022, J.D. was allocated $10,000 of ordinary income from Clampett, Incorporated, and no separately stated items. What is J.D.'s basis in his Clampett, Incorporated, stock after all transactions in 2022?

$5,000 Explanation J.D.'s basis is $5,000 ($45,000 original basis + $10,000 increase in basis from his distributive share of income − $50,000 distribution).

John, a limited partner of Candy Apple, LP, is allocated $30,000 of ordinary business loss from the partnership. Before the loss allocation, his tax basis is $20,000 and his at-risk amount is $10,000. John also has ordinary business income of $20,000 from Sweet Pea, LP, as a general partner and ordinary business income of $5,000 from Red Tomato as a limited partner. How much of the $30,000 loss from Candy Apple can John deduct currently?

$5,000 Explanation John would first compare the $30,000 loss to his tax basis of $20,000. As a result, John would have $10,000 of this loss suspended due to the tax basis limitation. Next, John would compare the remaining $20,000 loss with his $10,000 at-risk amount. Thus, an additional $10,000 of loss would be suspended due to the at-risk limitation, leaving $10,000 of loss. Because John is a limited partner in Candy Apple, this loss is a passive activity loss. $5,000 of John's $10,000 passive activity loss from Candy Apple can be used currently to offset his passive income from Red Tomato. The remaining $5,000 is suspended as a passive activity loss.

Suppose Clampett, Incorporated, terminated its S election on August 28, 2021. At the end of the S corporation's short tax year ending on August 28, J.D.'s stock basis and at-risk amounts were both zero (he has never had debt basis), and he had a suspended loss of $20,000. In 2022, J.D. made additional capital contributions of $5,000 on March 15 and $12,000 on September 20. How much loss may J.D. deduct in 2022?

$5,000 Explanation The post-transition termination period ends on September 15, 2022 (the extended due date of the final S corporation tax return). Thus, J.D. may only deduct losses to the extent of his $5,000 contribution on March 15.

The PW Partnership's balance sheet includes the following assets immediately before it liquidates: Basis FMV Cash $ 10,000 $ 10,000 Unrealized receivables 0 10,000 Total $ 10,000 $ 20,000 In complete liquidation, PW distributes the cash to Pamela and the unrealized receivables to Wade (equal partners). Pamela and Wade each have an outside basis in PW equal to $5,000. PW has no liabilities at the time of the liquidation. What is the amount and character of Pamela's recognized gain or loss?

$5,000 ordinary income Cash distribute to wade 10000 Less: outside basis in PW 5000 Amount and character of Wade's recognized gain or loss(ordinary income) =5000 Explanation This is a disproportionate distribution. In essence, Pamela is treated as having sold her share of the hot assets ($5,000) to the partnership in exchange for cold assets. This deemed sale generates ordinary income to Pamela equal to her share of the appreciation in the receivables. Pamela has a $5,000 basis in PW; therefore, she does not recognize any gain on the cash portion ($5,000) of the distribution.

Assume Joe Harry sells his 25 percent interest in Joe's S Corporation, to Tyrone on January 29. Using the specific identification allocation method, how much income does Joe Harry report if Joe's S Corporation, earned $200,000 from January 1 to January 29 and a total of $1,460,000 from January 1 through December 31 (365 days)?

$50,000 Explanation $200,000 × 25% = $50,000.

Jalen transferred his 10 percent interest to Wolverine Company as part of a complete liquidation of the company. In the exchange, he received land with a fair market value of $100,000. Jalen's basis in the Wolverine stock was $50,000. The land had a basis to Wolverine Company of $80,000. What amount of gain does Jalen recognize in the exchange and what is his basis in the land he receives?

$50,000 gain recognized and a basis in the land of $100,000 The exchange is taxable. Jalen recognizes the full amount of gain of $50,000 and receives a basis in the land equal to the land's fair market value.

Simone transferred 100 percent of her stock in Purple Company to Plum Corporation in a Type A merger. In exchange, she received stock in Plum with a fair market value of $500,000 plus $500,000 in cash. Simone's tax basis in the Purple stock was $200,000. What amount of gain does Simone recognize in the exchange and what is her basis in the Plum stock she receives?

$500,000 gain recognized and a basis in Plum stock of $200,000 Gain recognized is • Gain realized • Cash Received ; Whichever is less Gain realized = $500,000+$500,000 - $200,000 = 800,000 Cash received = 500,000 Gain recognized = 800,000 Basis in plum stock = 200,000 Explanation Gain recognized is $500,000, the lesser of gain realized of $800,000 or cash received. The stock basis is the carryover basis of $200,000 plus gain recognized less cash received. If Simone sells the stock for $500,000, she will recognize gain of $300,000, an amount equal to the gain deferred on the exchange.

Kristen and Harrison are equal partners in the KH Partnership. The partners formed the partnership five years ago by contributing cash. Prior to any distributions Harrison has a basis in his partnership interest of $44,000. On December 31, KH makes a proportionate operating distribution of $50,000 cash to Harrison. What is the amount and character of Harrison's recognized gain or loss and what is his remaining basis in KH?

$6,000 capital gain, $0 basis Explanation Harrison recognizes a gain equal to the difference between his basis in KH and the distribution because he receives only money in the distribution and the amount exceeds his basis in KH. (50,000-44,000 = 6,000). He allocates his entire basis in KH to the basis in the money received, resulting in $0 basis in KH after the distribution.

Jenny has a $54,000 basis in her 50 percent partnership interest in the JM Partnership before receiving any distributions. This year JM makes a proportionate operating distribution to Jenny of a parcel of land with an $80,000 fair value and a $64,000 basis to JM. The land is encumbered with a $30,000 mortgage (JM's only liability). What is Jenny's basis in the land and her remaining basis in JM after the distribution?

$64,000 land basis, $5,000 JM basis Explanation Jenny takes a transferred basis in the land equal to $64,000. Her remaining basis in JM is $5,000, determined as: Predistribution basis in JM$ 54,000 Plus: deemed contribution 15,000 Less: basis allocated to land(64,000) Remaining basis in JM$ 5,000

At the end of last year, Cynthia, a 20 percent partner in the five-person CYG partnership, has an outside basis of $30,000, including her $15,000 share of CYG debt. On January 1 of the current year, Cynthia sells her partnership interest to Roger for a cash payment of $22,500 and the assumption of her share of CYG's debt. CYG has no hot assets. What is the amount and character of Cynthia's recognized gain or loss on the sale?

$7,500 capital gain Explanation Cynthia's gain is the difference between the amount realized ($22,500 cash plus $15,000 debt relief) = 37,500 and her outside basis ($30,000) for a $7,500 gain. The gain is capital because CYG has no hot assets.

Gerald received a one-third capital and profit (loss) interest in XYZ Limited Partnership (LP). In exchange for this interest, Gerald contributed a building with an FMV of $30,000. His adjusted basis in the building was $15,000. In addition, the building was encumbered with a $9,000 nonrecourse mortgage that XYZ LP assumed at the time the property was contributed. What is Gerald's outside basis immediately after his contribution?

$9,000 Adjusted basis in building: 15,000 Less: Mortgage non recourse: 9,000 =6,000 Add his 1/3 share: (9000*1/3)= 3000 =9,000 Explanation A partner's outside basis consists of the basis of the contributed property less any debt relief the property received plus the portion of debt the partner assumes based upon the partner's interest in the partnership. In this case, the nonrecourse mortgage is allocated to the partners strictly according to their profit-sharing ratios because the mortgage does not exceed the basis in the contributed property [$15,000 − $9,000 + ($9,000 × 33%)].

On 12/31/X4, Zoom, LLC, reported a $60,000 loss on its books. The items included in the loss computation were $30,000 in sales revenue, $15,000 in qualified dividends, $22,000 in cost of goods sold, $50,000 in charitable contributions, $20,000 in employee wages, and $13,000 of rent expense. How much ordinary business income (loss) will Zoom report on its X4 return?

($25,000) Ordinary business income/loss is Sales Revenue 30,000 Less Cost of goods sold(22,000) Employee wages(20,000) Rent expense(13,000) Ordinary Business loss(25,000)

What is the correct order for applying the following three items to adjust a partner's tax basis in his partnership interest: (1) Increase for share of ordinary business income, (2) Decrease for share of separately stated loss items, and (3) Decrease for distributions?

1, 3, 2

Tristan transfers property with a tax basis of $900 and a fair market value of $1,200 to a corporation in exchange for stock with a fair market value of $900 and $200 in cash in a transaction that qualifies for deferral under section 351. The corporation assumed a liability of $100 on the property transferred. What is the corporation's tax basis in the property received in the exchange?

1,100 =900+200gain The corporation's basis in the property equals Tristan's tax basis of $900 (a carryover basis) plus gain recognized by Tristan of $200 (the lesser of the gain realized or the boot received). If the corporation sells the property for $1,200, it will recognize a gain of $100, an amount equal to the gain deferred on the transfer

Sarah, Sue, and AS Incorporated formed a partnership on May 1, 20X9, called SSAS, LP. Now that the partnership is formed, they must determine its appropriate year-end. Sarah has a 30 percent profits and capital interest while Sue has a 35 percent profits and capital interest. Both Sarah and Sue have calendar year-ends. AS Incorporated holds the remaining profits and capital interest in the LP, and it has a September 30 year-end. What tax year-end must SSAS, LP, use for 20X9, and which test or rule requires this year-end?

12/31, majority interest taxable year Explanation SSAS, LP uses the majority interest taxable year because all the calendar-year partners together own more than 50 percent of the profits and capital interests in the partnership.

Sybil transfers property with a tax basis of $5,000 and a fair market value of $6,000 to a corporation in exchange for stock with a fair market value of $3,000 and $2,000 in cash in a transaction that qualifies for deferral under §351. The corporation assumed a liability of $1,000 on the property transferred. What is Sybil's tax basis in the stock received in the exchange?

3,000 Fair value of stock received 3000 Add: cash boot rec 2,000 Add: liabilities 1,000 Less: Adjusted basis -5000 realied gain 1,000 Stock basis (5000) - liability (1,000) + gain (1,000)- cash boot (2,000) = 3,000 The shareholder's tax basis equals her tax basis in the property transferred of $5,000 (a substituted basis) plus gain recognized of $1,000 less boot received of $2,000 less the $1,000 liability assumed by the corporation. If Sybil sells the stock for $3,000, no gain or loss will be realized.

Ashley transfers property with a tax basis of $5,000 and a fair market value of $3,000 to a corporation in exchange for stock with a fair market value of $2,000 and $500 in cash in a transaction that qualifies for deferral under section 351. The corporation assumed a liability of $500 on the property transferred. What is Ashley's tax basis in the stock received in the exchange?

4,000 tax basis of property-boot received- liabilities assumed on property transferred =5,000-500-500 =4,000 The shareholder's tax basis equals her tax basis in the property transferred of $5,000 (a substituted basis) less boot received of $500 less the $500 liability assumed by the corporation. If Ashley sells the stock for $2,000, a $2,000 loss will be recognized, an amount equal to the loss deferred of $2,000.

XYZ, LLC, has several individual and corporate members. Abe and Joe, individuals with 4/30 year-ends, each have a 23 percent profits and capital interest. RST, Incorporated, a corporation with a 6/30 year-end, owns a 4 percent profits and capital interest, while DEF, Incorporated, a corporation with an 8/30 year-end, owns a 4.9 percent profits and capital interest. Finally, 30 other calendar year-end individual partners (each with less than a 2 percent profits and capital interest) own the remaining 45 percent of the profits and capital interests in XYZ. What tax year-end should XYZ use, and which test or rule requires this year-end?

4/30, principal partners test Explanation Under the principal partners test, the partnership must use the year-end of the principal partners if they all have the same tax year-end. A principal partner is a partner that holds 5 percent or more in partnership profits or capital. Under this definition, Abe and Joe are the only principal partners. Since both have the same tax year-end, XYZ must use their year-end, 4/30.

Antoine transfers property with a tax basis of $500 and a fair market value of $600 to a corporation in exchange for stock with a fair market value of $550 in a transaction that qualifies for deferral under section 351. The corporation assumed a liability of $50 on the property transferred. What is Antoine's tax basis in the stock received in the exchange?

450 =500-50 (sock basis - liabilities assumed on property transferred) =450 The shareholder's tax basis equals his tax basis in the property transferred (a substituted basis) less any liability assumed by the corporation. If Antoine sells the stock for $550, the gain recognized will be $100, an amount equal to the gain deferred of $100.

This year, HPLC, LLC, was formed by H Incorporated, P Incorporated, L Incorporated, and C Incorporated. Each member had an equal share in the LLC's capital. H Incorporated, P Incorporated, and L Incorporated each had a 30 percent profits interest in the LLC, with C Incorporated having a 10 percent profits interest. The members had the following tax year-ends: H Incorporated [1/31], P Incorporated [5/31], L Incorporated [7/31], and C Incorporated [10/31]. What tax year-end must the LLC use?

5/31 HPLC, LLC, does not have a majority interest taxable year, and the principal partners do not all have the same year-end. Thus, the least aggregate deferral test must be performed to determine what accounting period the partnership should use.

Roberta transfers property with a tax basis of $400 and a fair market value of $500 to a corporation in exchange for stock with a fair market value of $350 in a transaction that qualifies for deferral under section 351. The corporation assumed a liability of $150 on the property transferred. What is the amount realized by Roberta in the exchange?

500 fair market value of Stock Exchanged $ 350 Add: Liability on Property transfer $ 150 Amount realized in exchange $ 500 $350 fair market value of the stock received plus $150 from the liability assumed by the corporation.

Rachelle transfers property with a tax basis of $800 and a fair market value of $900 to a corporation in exchange for stock with a fair market value of $750 and $50 in cash in a transaction that qualifies for deferral under §351. The corporation assumed a liability of $100 on the property transferred. What is Rachelle's tax basis in the stock received in the exchange?

700 800+50-50-100 =700 The shareholder's tax basis equals her tax basis in the property transferred of $800 (a substituted basis) plus gain recognized of $50 less cash received of $50 less the $100 liability assumed by the corporation. If Rachelle sells the stock for $750, the gain recognized will be $50, an amount equal to the gain deferred of $50.

Under which of the following circumstances will a partner recognize a loss from an operating distribution? A partner will never recognize a loss from an operating distribution. A partner will recognize a loss from an operating distribution when the partnership distributes property other than money with an inside basis greater than the partner's basis in the partnership interest. A partner will recognize a loss from an operating distribution when the partnership distributes money in an amount that is less than the partner's basis in the partnership interest. A partner will recognize a loss from an operating distribution when the partnership distributes money in an amount that is greater than the partner's basis in the partnership interest.

A partner will never recognize a loss from an operating distribution.

Under which of the following circumstances will a partner recognize a gain from an operating distribution? A partner will never recognize a gain from an operating distribution. A partner will recognize a gain from an operating distribution when the partnership distributes money in an amount that is less than the partner's basis in the partnership interest. A partner will recognize a gain from an operating distribution when the partnership distributes money in an amount that is greater than the partner's basis in the partnership interest. A partner will recognize a gain from an operating distribution when the partnership distributes property other than money with an inside basis greater than the partner's basis in the partnership interest.

A partner will recognize a gain from an operating distribution when the partnership distributes money in an amount that is greater than the partner's basis in the partnership interest.

Which of the following statements regarding liquidating distributions is true? A partner will recognize a gain when the partnership distributes only money and hot assets and the inside bases of the distributed assets are greater than the partner's outside basis. A partner will recognize a gain when the partnership distributes only money and the amount is less than the partner's outside basis. A partner will recognize a gain when the partnership distributes only money and the amount is greater than the partner's outside basis. A partner will recognize a gain when the partnership distributes money, hot assets, and other property and the inside bases of the distributed assets are greater than the partner's outside basis.

A partner will recognize a gain when the partnership distributes only money and the amount is greater than the partner's outside basis.

The SSC Partnership, a cash-method partnership, has a balance sheet that includes the following assets on December 31 of the current year: Basis FMV Cash$ 180,000$ 180,000 A/R 0 60,000 Equipment (cost = $100,000)40,000 50,000 Land 90,000 120,000 Total $ 310,000$ 410,000 Which of SSC's assets are considered hot assets under §751(a)?

Accounts receivable and inherent recapture in the equipment under §1245 Hot assets are business assets that have the potential of built in ordinary income. In other words, these are assets that would generate ordinary income if sold. These three items are considered as hot assets-: Accounts receivables Inventory Section 1245 depreciation recapture Hence, in the question, accounts receivables and inherent recapture in the equipment under section 1245 are hot assets because inventory is not available.

TQK, LLC, provides consulting services and was formed on 1/31/X5. Aaron and ABC, Incorporated, each hold a 50 percent capital and profits interest in TQK. If TQK averaged $29,000,000 in annual gross receipts over the last three years, what accounting method can TQK use for X9?

Accrual method Explanation TQK does not meet the $26,000,000 average gross receipts exception that would allow it to qualify to use the cash method or hybrid method of accounting in X9. Thus, it must use the accrual method of accounting for X9.

Which of the following statements does not describe a tax consequence to shareholders in a complete liquidation? Complete liquidations are tax-deferred to corporate shareholders owning stock of the liquidated corporation representing 80 percent or more of voting power and value. Complete liquidations are taxable to all corporate shareholders owning stock of the liquidated corporation representing less than 80 percent or more of voting power and value. All complete liquidations are taxable to the shareholders. Complete liquidations are taxable to all individual shareholders.

All complete liquidations are taxable to the shareholders.

Which of the following is not a separately stated item for S corporations? All of the choices are separately stated items. Dividends Investment interest expense Charitable contributions Interest income Prev

All of the choices are separately stated items.

Which of the following classes of stock is not allowed to be used in a §351 transaction?

All of these classes of stock can be used in a §351 transaction.

Partnerships may maintain their capital accounts according to which of the following rules? GAAP Tax Any of the rules Only GAAP and 704(b) 704(b)

Any of the rules

Which of the following statements best describes the impact of receiving boot in a §351 transaction?

Boot received causes gain realized to be recognized, but not loss realized.

A partner's self-employment earnings (loss) may be affected by her share of ordinary business income (loss) and any guaranteed payments she receives. The impact of these amounts typically depends on the status of the partner. Which of the following statements correctly describes the effect these items have on the partner's self-employment earnings (loss)?

Both general partner—ordinary business income (loss) and guaranteed payments affect self-employment earnings (loss) and limited partner—only guaranteed payments affect self-employment earnings (loss)

Which of the following statements exemplifies the entity theory of partnership taxation?

Both partnerships determine the character of separately stated items at the partnership level and partnerships make the majority of the tax elections.

Which of the following statements does not describe a motivation by the buyer or seller in the acquisition or sale of a company?

Buyers generally prefer to buy stock because they can take a tax basis in the underlying assets of the company acquired equal to the assets' fair market value.

Which of the following is prohibited from being an S corporation shareholder? Foreign citizens that are U.S. residents U.S. citizens C corporations 51 unrelated individuals None of the choices are correct.

C corporations

Which of the following assets would not be classified as a hot asset? Depreciation recapture Inventory Accounts receivable for a cash-method taxpayer Cash

Cash Explanation Hot assets include all assets except for cash, capital assets, and §1231 assets.

Riley is a 50 percent partner in the RF Partnership and has an outside basis of $56,000 at the end of the year prior to any distributions. On December 31, Riley receives a proportionate operating distribution of $6,000 cash and a parcel of land with a $14,000 fair value and an $8,000 basis to RF. What is Riley's basis in the distributed property?

Cash $6,000, land $8,000 Explanation Riley takes a transferred basis in the distributed property. The cash has a basis equal to $6,000 and the land has a basis equal to $8,000 (RF's basis in the land).

Which of the following statements best describes the concept of control as it applies to a §351 transaction?

Control is defined as the ownership of 80 percent or more of a corporation's voting stock and 80 percent or more of the total number of shares of each class of nonvoting stock.

Which of the following statements regarding disproportionate distributions is false? A disproportionate distribution occurs when a partner receives less than his proportionate share of the partnership's hot assets. A disproportionate distribution occurs when a partner receives more than his proportionate share of the partnership's hot assets. Disproportionate distributions will only occur in liquidating distributions. The tax provisions related to disproportionate distributions attempt to preserve the partners' share of ordinary income potential.

Disproportionate distributions will only occur in liquidating distributions.

Which of the following does not represent a tax election available to either partners or partnerships?

Electing to expense a portion of syndication costs

An S corporation shareholder's allocable share of ordinary business income (loss) is classified as self-employment income for tax purposes.

False

For an S corporation shareholder to deduct an S corporation loss, the loss must clear three separate tax provision hurdles: (1) tax-basis, (2) at-risk amount, and (3) tax shelter rules.

False

What form does a partnership use when filing an annual informational return?

Form 1065

Which of the following statements best describes the tax consequences of a §338 election? Gain or loss is recognized by the acquired corporation on the deemed sale of its assets, and the buyer gets a carryover basis in the assets acquired. Gain or loss is recognized by the acquired corporation on the deemed sale of its assets, and the buyer gets a stepped-up basis in the assets acquired. Gain or loss is not recognized by the acquired corporation on the deemed sale of its assets, and the buyer gets a carryover basis in the assets acquired. Gain or loss is not recognized by the acquired corporation on the deemed sale of its assets, and the buyer gets a stepped-up basis in the assets acquired.

Gain or loss is recognized by the acquired corporation on the deemed sale of its assets, and the buyer gets a stepped-up basis in the assets acquired.

Which of the following statements best describes the tax law approach to recognizing gain or loss realized in an exchange?

Gain or loss realized is recognized unless specifically stated otherwise in the Internal Revenue Code.

Which of the following is a requirement to be an S corporation?

Have only one class of stock

Which of the following would not result in an S election termination? Having 120 unrelated shareholders Having a C corporation as a shareholder Issuing a second class of stock Having excess passive investment income for two consecutive yearsCorrect None of the choices are correct.

Having excess passive investment income for two consecutive years

Which of the following statements regarding hot assets for purposes of disproportionate distributions is false? Hot assets include substantially appreciated inventory. Hot assets include any inventory. Hot assets include unrealized receivables. The definition of hot assets for distributions and sales of partnership interests differs.

Hot assets include any inventory.

On March 15, 2021, J.D. sold his Clampett, Incorporated (an S corporation) shares to Ellie Mae, Incorporated (a C corporation), terminating Clampett, Incorporated's S election on March 15, 2021. Absent permission from the IRS, what is the earliest date Clampett, Incorporated, may again elect to be taxed as an S corporation?

January 1, 2026 Explanation This is the fifth tax year after the year in which the termination became effective.

Kathy is a 25 percent partner in the KDP Partnership and receives $120,000 cash in complete liquidation of her partnership interest. Kathy's outside basis immediately before the distribution is $160,000. KDP currently has a §754 election in effect and has no hot assets or liabilities. Which of the following statements is true?

KDP will decrease the basis of its assets by $40,000 and Kathy will recognize a $40,000 loss on the distribution. Explanation: Kathy received cash = $ 120,000 Kathy's outside basis = $ 160,000 Loss to Kathy = 160,000 (-) 120,000 = $ 40,000 This will reduce the basis of assets, or step down the basis of assets. Explanation Since Kathy receives only cash in a liquidating distribution and the amount is less than her outside basis, Kathy recognizes a loss of $40,000. KDP will then decrease the basis of the partnership assets by the amount of the loss recognized by Kathy.

In which type of distribution may a partner recognize a loss on the distribution?

Liquidating distributions

Which of the following would not be classified as a separately stated item? Charitable contributions MACRS depreciation expense Correct Guaranteed payments Short-term capital gains

MACRS depreciation expense

Suppose a calendar-year C corporation, NewCorp, Incorporated, was formed on January 1, 2021, and all of the shareholders (Hassell, Richie Cunningham, and Arnold's, Incorporated, a C corporation) filed a Form 2553 to elect S corporation status on April 14, 2021 When is the S election effective?

Never Explanation The election is not valid because S corporations cannot have corporations as shareholders (Arnold's, Incorporated).

Juan transferred 100 percent of his stock in Rosa Company to Azul Corporation in a Type B stock-for-stock exchange. In exchange, he received stock in Azul with a fair market value of $1,000,000. Juan's tax basis in the Rosa stock was $400,000. What amount of gain does Juan recognize in the exchange and what is his basis in the Azul stock he receives?

No gain recognized and a basis in Azul stock of $400,000 No gain is recognized and the Azul stock basis is the basis of the Rosa stock transferred. If Juan sells the stock for $1,000,000, he will recognize gain of $600,000, an amount equal to the gain deferred on the exchange.

Celeste transferred 100 percent of her stock in Supply Chain Company to Marketing Corporation in a Type A merger. In exchange, she received stock in Marketing with a fair market value of $500,000 plus $500,000 in cash. Celeste's tax basis in the Supply Chain stock was $1,200,000. What amount of loss does Celeste recognize in the exchange and what is her basis in the Marketing stock she receives?

No loss recognized and a basis in Marketing stock of $700,000 Explanation No loss is recognized because the exchange is tax-deferred. The stock basis is the carryover basis of $1,200,000 less cash received of $500,000. If Celeste sells the stock for $500,000, she will recognize loss of $200,000, an amount equal to the loss deferred. No loss will be recognized as the exchange is tax deferred. Stock basis = Carryover Basis - Cash received Stock Basis = 1200000 - 500000 = $700000.

Packard Corporation transferred its 100 percent interest to State Company as part of a complete liquidation of the company. In the exchange, Packard received land with a fair market value of $300,000. Packard's basis in the State stock was $600,000. The land had a basis to State Company of $500,000. What amount of loss does State recognize in the exchange and what is Packard's basis in the land it receives?

No loss recognized by State and a basis in the land of $500,000 to Packard Explanation State does not recognize the loss of $200,000 because the liquidation is tax-deferred to Packard. Packard's basis in the land is equal to State's basis in the land (a carryover basis).

Does adjusting a partner's basis for tax-exempt income prevent double taxation?

No, making this adjustment to the partner's basis prevents the tax-exempt income from being converted to taxable income.

Which of the following S corporations would be subject to the excess net passive income tax? An S corporation that never operated as a C corporation. An S corporation that has previously distributed all earnings and profits from prior C corporation years. An S corporation with no earnings and profits from prior C corporation years and with passive investment income that exceeds 30 percent of its gross receipts. An S corporation with $2,000 of earnings and profits from prior C corporation years and with passive investment income that equals 22 percent of its gross receipts. None of the choices are correct.

None of the choices are correct.

Clampett, Incorporated, has been an S corporation since its inception. On July 15, 2022, Clampett, Incorporated, distributed $50,000 to J.D. His basis in his Clampett, Incorporated, stock on January 1, 2022, was $45,000. For 2022, J.D. was allocated $10,000 of ordinary income from Clampett, Incorporated, and no separately stated items. How much capital gain does J.D. recognize related to Clampett, Incorporated, in 2022?

None of the choices are correct. Explanation $0. The distribution is not taxable because J.D.'s basis is $55,000 prior to the distribution ($45,000 original basis + $10,000 increase in basis from distributive share of ordinary income). Thus, J.D. has no capital gain.

On January 1, X9, Gerald received his 50 percent profits and capital interest in High Air, LLC, in exchange for $2,000 in cash and real property with a $3,000 tax basis secured by a $2,000 nonrecourse mortgage. High Air reported a $15,000 loss for its X9 calendar year. How much loss can Gerald deduct, and how much loss must he suspend if he only applies the tax basis loss limitation? $0, $4,000 $0, $7,500 $0, $15,000 $4,000, $0 None of the choices are correct.

None of the choices are correct. Explanation Gerald's initial tax basis is $4,000 [$2,000 + $3,000 − $2,000 + (50% × $2,000)]. Gerald would be allocated 50 percent of the $15,000 X9 loss, or $7,500. The amount Gerald could deduct currently is limited to his basis in High Air. Thus, Gerald could deduct $4,000 currently, and the remaining $3,500 loss would be suspended and carried forward indefinitely.

Clampett, Incorporated, has been an S corporation since its inception. On July 15, 2022, Clampett, Incorporated, distributed $50,000 to J.D. His basis in his Clampett, Incorporated, stock on January 1, 2022, was $30,000. For 2022, J.D. was allocated $10,000 of ordinary income from Clampett, Incorporated, and no separately stated items. What is J.D.'s basis in his Clampett, Incorporated, stock after all transactions in 2022?

None of the choices are correct. Explanation J.D.'s basis is $0 because the $50,000 distribution exceeds his basis of $40,000 prior to the distribution ($30,000 original basis + $10,000 increase in basis from his distributive share of income) and distributions cannot cause stock basis to drop below zero.

Suppose that at the beginning of 2021 Jamaal's basis in his S corporation stock was $27,000 and Jamaal has directly loaned the S corporation $10,000. During 2021, the S corporation reported an $80,000 ordinary business loss and no separately stated items. After any loss deductions this year, what is Jamaal's stock and debt basis at the end of the year if Jamaal is a 50 percent shareholder of the S corporation? $27,000 stock basis; $10,000 debt basis $0 stock basis; $10,000 debt basis $67,000 stock basis; $10,000 debt basis ($13,000) stock basis; $10,000 debt basis None of the choices are correct.

None of the choices are correct. Explanation $0 stock basis; $0 debt basis; the $40,000 loss first offsets stock basis and then debt basis. However, the loss may not cause either the stock basis or the debt basis to drop below zero.

Which of the following statements regarding the process for determining a partnership's tax year-end is true? Only the partners' profits interests are relevant when determining if a partnership has a majority interest taxable year. Under the principal partners test, a principal partner is defined as a partner having an interest of 3 percent or more in the profits or capital of the partnership. The least aggregate deferral test utilizes the partners' capital interests to measure the amount of aggregate deferral. A partnership is required to use a calendar year-end if it has a corporate partner. None of the choices are true.

None of the choices are true.

Which of the following rationales for adjusting a partner's basis is false? None of these rationales are false. To prevent partners from being double taxed when they receive cash distributions To ensure that partnership nondeductible expenses are never deductible To prevent partners from being double taxed when they sell their partnership interests To ensure that partnership tax-exempt income is not ultimately taxed

None of these rationales are false.

Which of the following statements regarding a partner's basis of inventory received in a liquidating distribution is true? Partners may either increase or decrease the basis in inventory distributed in a liquidating distribution. Partners may only increase the basis in inventory distributed in a liquidating distribution. Partners may only decrease the basis in inventory distributed in a liquidating distribution. None of these statements are true.

Partners may only decrease the basis in inventory distributed in a liquidating distribution

Which of the following statements regarding capital and profits interests received for services contributed to a partnership is false?

Partners receiving capital interests must recognize the liquidation value of their capital interests as capital gain.

Which of the following statements regarding partnership losses suspended by the tax basis limitation is true?

Partnership losses may be carried forward indefinitely.

Which statement best describes the concept of realization as it applies to gain or loss?

Realization is the result of an exchange of property rights in a transaction.

Under general circumstances, debt is allocated from the partnership to each partner in the following manner:

Recourse—to partners with the ultimate responsibility for paying the debt; nonrecourse—profit-sharing ratios.

Which requirement must be satisfied in order to specially allocate partnership income or losses to partners?

Special allocations must have economic effect.

Clampett, Incorporated (an S corporation) previously operated as a C corporation. Under general rules, distributions from Clampett, Incorporated, are deemed to be paid in the following order:

The AAA account, prior C corporation earnings and profit, shareholder's remaining stock basis

Which of the following statements best describes the application of the continuity of enterprise principle to a Type A tax-deferred reorganization?

The continuity of business enterprise principle must be satisfied for only the target corporation.

For S corporations without earnings and profits from prior C corporation years, the taxation of cash distributions to the shareholder is governed by rules very similar to the rules for partnerships.

True

Which of the following statements is true when property is contributed in exchange for a partnership interest?

The holding period for a partner's partnership interest depends upon the type of assets a partner contributes.

Which of the following statements does not describe a requirement that must be met in a tax-deferred forward triangular merger?

The target corporation shareholders must receive voting stock in the acquiring corporation.

An S corporation election may be voluntarily or involuntarily terminated.

True

Distributions to owners may not cause the AAA to go negative or to become more negative.

True

Regarding debt, S corporation shareholders are deemed at risk only for direct loans they make to their S corporation.

True

Under what conditions will a partner recognize a gain in a liquidating distribution?

When a partnership distributes only money and the amount of the distribution exceeds the partner's outside basis.