Tax II Final Exam
Sandra sold some equipment for $10,000 in cash, $1,000 of office products, the buyer assumption of her $1,500 loan, and incurred selling expenses of $500. What is the Sandra's amount realized in the transaction?
$12,000. The amount realized is everything of value received: $10,000 cash, plus $1,000 fair market value of office products, plus the $1,500 buyer's assumption of liabilities, less $500 selling costs.
Janey purchased machinery on April 8 th of the current year. The relevant costs for the year are as follows: machinery for $10,000, $800 shipping, $50 for delivery insurance, $500 for installation, $750 for sales tax, $150 for the annual tune up, and $200 of property taxes (an annual tax on business property). What is Janey's tax basis for the machinery?
$12,100. An asset's basis consists of all of the costs to purchase, install, and place the asset in service. The annual tune up is routine maintenance and the annual property tax is a general business expense. ($10,000 + $800 + $50 + $500 + $750)
Danny owns an electronics outlet in Dallas. This year he paid $600 to register for a four-day course in management in Chicago. Danny paid $800 in airfare and $1,000 for five nights lodging. After the course, Danny spent the last day sightseeing. During the trip, Danny also paid $140 a day for meals, and $80 a day for a rental car. What amount of these travel expenditures may Danny deduct as business expenses?
$2,800 = $600 + $800 + (4 nights × $200) + [4 × ($140 × ½)] + (4 × $80) The trip is primarily business so the airfare is completely deductible. Only four days cost can be deducted for the lodging, half the meals, and auto rental.
For book purposes, RadioAircast Inc. reported $15,000 of income from municipal bonds. It also expensed $12,000 of radio station filing fines paid to the FCC (a governmental agency) the same year. What is the total book-tax difference associated with these items? Is it favorable or unfavorable? What amount of the total adjustment is permanent and what amount is temporary?
$3,000, favorable book-tax difference. Entire difference is permanent book-tax difference. (15,000 -12,000)
Marilyn operates a day care center as a cash-method sole proprietorship. On August 1 st of this year Marilyn received a prepayment of $4,000 for child care services to be rendered evenly over the next 20 months. How much income must Marilyn recognize this year if she is attempting to minimize her tax burden?
$4,000 Prepayments are recognized as income in the year of receipt for cash method taxpayers. Cash method taxpayers must recognize all cash prepayments in the year received.
Netgate Corporation's gross regular tax liability for the year was $95,375. What was its taxable income? Note: New Corporate income tax rate has been mentioned as "21% on all taxable income" as per the recent change.
$454,167= $95,375/0.21.
Bull Run sold a computer for $1,200 on November 10th of the current year. The computer was purchased for $2,800. Bull Run had taken $1,000 of depreciation deductions. What is Bull Run's gain or loss realized on the computer?
$600 loss realized. The gain or loss realized is the $1,200 amount realized less the $1,800 ($2,800 - $1,000) adjusted basis.
Manassas purchased a computer several years ago for $2,200. On November 10 th of the current year, the computer was worth $800. If $1,000 of depreciation deductions had been taken, what is Manassas' tax adjusted basis for the computer?
1,200 The adjusted basis is the cost basis less cost recovery deductions. ($2,200 - $1,000).
Foreaker LLC sold a piece of land that it uses in its business for $52,000. Foreaker bought the land two years ago for $42,500. What is the amount and character of Foreaker's gain? a. $9,500 §1231. b. $9,500 §1250. c. $9,500 §1245. d. $9,500 §1221. e. None of the choices are correct.
A
How long after the initial exchange does a taxpayer have to identify replacement property in a like-kind exchange? a. The like-kind property to be received must be identified within 45 days. b. The like-kind property to be received must be identified within 180 days. c. The like-kind property to be received must be identified by the earlier of 45 days or the last day of the taxpayer's taxable year. d. There is no deadline for the identification of replacement property. e. All of the choices are correct.
A
The general rule regarding the exchanged basis in the new property received in a like-kind exchange is: a. The basis is equal to the adjusted basis of the old property. b. The basis is equal to the fair market value of the old property. c. The basis is equal to the fair market value of the new property. d. The basis is equal to the cost basis of the old property. e. All of the choices are correct.
A
Under which of the following circumstances will a partner recognize a gain from an operating distribution? a. 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. b. 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. c. 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. d. A partner will never recognize a gain from an operating distribution.
A
Which of the following requirements do not have to be met in a section 351 transaction? a. Each transferor of property must receive stock equal to at least 80 percent of the fair market value of the property transferred. b. Only property transferred to a corporation is eligible for deferral. c. In the aggregate, the transferors of property to the corporation must collectively control the corporation immediately after the transfers. d. All transfers of property to a corporation must be made simultaneously to qualify for deferral.
A
Which of the following statements is false concerning partnership liquidating distributions? a. A partner who receives a liquidating distribution can retain an interest in the partnership. b. Liquidating a single partner's interest is similar in concept to a corporate redemption of a shareholder's interest. c. A partnership agreement may restrict the sale of a partnership making a liquidating distribution the only way a partner can close out his interest in the partnership. d. None of these statements is false
A
Which of the following statements is false regarding consolidated tax returns? a. To file a consolidated tax return, one corporation must own at least 50% of the stock of another corporation. b. An affiliated group can file a consolidated tax return only if it elects to do so. c. For a group of corporations filing a consolidated tax return, losses from certain intercompany transactions are deferred until realized through a transaction outside of the group. d. For a group of corporations filing a consolidated tax return, an advantage is that losses of one group member may offset gains of another group member.
A
Which of the following statements is true regarding partnership operating distributions? a. Partners will never recognize a loss on an operating distribution. b. Partners receiving a distribution of property other than money will take a basis in the property equal to its fair market value. c. Partners will never recognize a gain on an operating distribution. d. None of the statements are true.
A
Which of the following statements is true when property is contributed in exchange for a partnership interest? a. The holding period for a partner's partnership interest depends upon the type of assets a partner contributes. b. Any contributed property in a partnership has a carryover basis, and the character of the property is determined by the way the contributing partner used the property. c. Services are not allowed to be contributed to a partnership in return for a partnership interest. d. The partnership's inside basis is typically increased by any gain the partner recognizes from the property contribution. e. All of the choices are true.
A
Which of the following statements regarding liquidating distributions is true? a. A partner will recognize a gain when the partnership distributes only money and the amount is greater than the partner's outside basis. b. A partner will recognize a gain when the partnership distributes only money and the amount is less than the partner's outside basis. c. 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. d. 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
Which of the following statements regarding the sale of a partnership interest is false? a. Hot assets change the character of a gain on the sale from ordinary income to capital gain. b. Any debt relief increases the amount the partner realizes from the sale. c. The seller's primary tax concern in a partnership interest sale is calculating the amount and character of gain or loss on the sale. d. The selling partner determines the gain or loss as the difference between the amount realized and her outside basis in the partnership.
A
Which of the following stock distributions would be nontaxable to the shareholder? a. A stock distribution of one common share for every common share owned by shareholders. b. "A stock distribution of one common share for every common share owned by shareholders" and "A stock distribution to all holders of preferred stock" are nontaxable to the shareholder. c. A stock distribution where the shareholder could choose between cash and stock. d. A stock distribution to all holders of preferred stock.
A
Which of the following would not result in an S election termination? a. Having excess passive investment income for two consecutive years. b. Issuing a second class of stock. c. Having 120 unrelated shareholders. d. Having a C corporation as a shareholder. e. None of the choices are correct.
A
Wildcat Corporation reports current E&P of negative $200,000 in year 1 and accumulated E&P at the beginning of the year of $100,000. Wildcat distributed $300,000 to its sole shareholder on December 31, year 1. How much of the distribution is treated as a dividend in year 1? a. $0. b. $100,000. c. $300,000. d. $200,000.
A
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 a FMV of $45,000, 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? a. $45,000. b. $42,500. c. $40,000. d. $37,500.
A [$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].
Sairra, LLC purchased only one asset during the current year (a full 12-month tax year). Sairra placed in service furniture (7-year property) on April 16 with a basis of $25,000. Calculate the maximum depreciation expense for the current year? (ignoring §179 and bonus depreciation). (Use MACRS Table 1) a. $3,573. b. $1,786. c. $4,463. d. $5,000.
A The asset's recovery period is 7 years and the half-year convention applies. The calculation is $25,000 × 0.1429 = $3,573.
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? a. $5,000 ordinary income. b. $2,500 capital gain and $2,500 ordinary income. c. $0. d. $5,000 capital gain.
A 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.
Oakland Corporation reported a net operating loss of $500,000 in year 1. Not included in the year 1 taxable income computation was a disallowed entertainment expense of $20,000, tax exempt income of $10,000, and deferred gain on an installment sale of $250,000. The corporation's current earnings and profits for year 1 would be: a. $(260,000). b. $(720,000). c. $(500,000). d. $(510,000).
A $(500,000) - $20,000 + $10,000 + $250,000 = $(260,000).
Gary and Laura decided to liquidate their jointly owned corporation, Amelia, Inc. After liquidating its remaining inventory and paying off its remaining liabilities, Amelia had the following tax accounting balance sheet. Tax Basis FMV Appreciation Cash 100,000 100,000 Building 150,000 200,000 50,000 Land 50,000 120,000 70,000 Total 300,000 420,000 120,000 Under the terms of the agreement, Gary will receive the $100,000 cash in exchange for his interest in Amelia. Gary's tax basis in his Amelia stock is $30,000. Laura will receive the building and land in exchange for her interest in Amelia. Laura's tax basis in her Amelia stock is $60,000. What amount of gain or loss does Amelia recognize in the complete liquidation?
Amelia has a taxable transaction and recognizes gain of $50,000 on the transfer of the building and gain of $70,000 on the transfer of the land. In a complete liquidation that is taxable to the shareholders, the liquidated corporation has a taxable transaction when gain is realized. Received @ FMV $200,000 Building Received @ FMV $100,000 Land Basis in stock $(100,000) Gain is $200,000 And Michelle will take the FMV as the basis in the property.
According to the Internal Revenue Code §162, deductible trade or business expenses must be one of the following? a. Minimized b. Ordinary and necessary c. Personal and justifiable d. Incurred for the production of invBill operates a proprietorship using the cash method of accounting, and this year he received the following payments:
B
WFO Corporation has gross receipts according to the following schedule: Year 1 $22 million Year 2 $24 million Year 3 $26 million Year 4 $24.5 million Year 5 $25 million Year 6 $27 million If WFO began business as a cash-method corporation in Year 1, in which year would it have first been required to use the accrual method? a. Year 4. b. Year 6. c. Year 3. d. Year 5. e. None of the choices are correct.
B
Which of the following is the correct order in which loss limitation rules are applied? a. Passive loss rules 1st, basis rules 2nd, at-risk rules 3rd. b. Basis rules 1st, at-risk rules 2nd, passive loss rules 3rd. c. Passive loss rules 1st, at-risk rules 2nd, basis rules 3rd. d. Basis rules 1st, passive loss rules 2nd, at-risk rules 3rd. e. None of the choices are correct.
B
Which of the following is true concerning a partner's basis in assets (other than money) distributed in an operating distribution? a. A partner's bases in the distributed assets will be equal to the partnership's bases in the assets. b. A partner's bases in the distributed assets will be less than or equal to the partnership's bases in the assets. c. A partner's bases in the distributed assets will be greater than the partnership's bases in the assets. d. None of the statements are true.
B
Which of the following is true regarding disallowed losses between related taxpayers? a. The holding period of the seller carries over to the buyer. b. The tax laws essentially treat related parties as the same taxpayer. c. The seller's realized loss is deferred until the buyer sells the assets. d. The related person always receives a carryover basis. e. None of the choices are correct.
B
Which of the following statements best describes the tax results to a shareholder in a section 351 transaction when liabilities on property transferred to the corporation are assumed by the corporation? a. Liabilities assumed by a corporation on a section 351 transfer are never treated as boot. b. Liabilities assumed by a corporation on a section 351 transfer are treated as boot if there is no business purpose for the assumption of the liabilities by the corporation. c. Liabilities assumed by a corporation on a section 351 transfer are always treated as boot. d. Liabilities assumed by a corporation on a section 351 transfer are treated as boot if the total liabilities assumed exceed the total basis of the assets transferred.
B
Daniela is a 25% 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? a. $4,000 capital loss. b. 0. c. $4,000 capital gain. d. $14,000 ordinary income.
B 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.
Poplock LLC purchased a warehouse and land during the current year for $350,000. The purchase price was allocated as follows: $275,000 to the building and $75,000 to the land. The property was placed in service on August 12. Calculate Poplock's maximum depreciation for this first year. (Use MACRS Table 5) (Round final answer to the nearest whole number.) a. $3,371. b. $2,648. c. $3,751. d. $4,774. e. None of the choices are correct.
B The mid-month convention applies. Non-residential property has a 39-year recovery period. The depreciation is $2,648 ($275,000 × 0.963%).
Tyson is a 25% 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? a. $10,000 inventory, $8,000 land A, $6,000 land B. b. $4,000 inventory, $2,000 land A, $1,000 land B. c. $0 inventory, $2,857 land A, $143 land B. d. $4,000 inventory, $12,000 land A, $4,000 land B.
B Tyson's bases in the distributed assets are $16,000 cash, $4,000 inventory, $2,000 land A and $1,000 land B. He first allocates his outside basis to the distributed assets in an amount equal to KT's basis ($16,000 cash, $4,000 inventory, $12,000 land A, and $4,000 land B). This results in a required decrease of $13,000 ($36,000 − $23,000). He reduces the basis in land A by the unrealized depreciation ($4,000), which leaves a required decrease of $9,000 that Tyson must allocate to the 2 parcels of land based on their relative adjusted bases. This results in an additional decrease to land A of $6,000 and a decrease to land B of $3,000.
Tyson is a 25% partner in the KT Partnership. On January 1, KT makes a proportionate 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 Tyson's basis in the distributed land? a. $8,000. b. $4,000. c. $0. d. $16,000.
B Tyson's basis in the distributed land is $4,000. He first allocates his outside basis to the distributed assets in an amount equal to KT's basis ($16,000 cash and $8,000 land). This results in a required decrease of $4,000. He reduces the basis in the land by the required decrease, which results in a basis of $4,000 to the land
Why does §1250 recapture generally no longer apply? a. §1245 recapture trumps §1250 recapture. b. Real property is depreciated using the straight-line method after 1986. c. Congress repealed the code section. d. Because unrecaptured §1250 gains now apply to all taxpayers instead. e. None of the choices are correct.
B §1250 only recaptures excess depreciation, the excess of accelerated over straight-line depreciation and depreciation taken on real property held one year or less.
How is the recovery period of an asset determined? a. Treasury regulation. b. Estimated useful life. c. Revenue Procedure 87-56. d. Revenue Ruling 97-56. e. None of the choices are correct.
C
The SSC Partnership balance sheet includes the following assets on December 31 of the current year: Basis FMV Cash $180,000 $180,000 Accounts receivable -0- 60,000 Equip (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)? a. Accounts receivable and land. b. Cash and land. c. Accounts receivable and inherent recapture under §1245 in the equipment. d. Cash and accounts receivable.
C
Under what conditions will a partner recognize a gain in a liquidating distribution? a. When a partnership distributes money, hot assets, and other property and the amount of the distribution exceeds the partner's outside basis. b. When a partnership distributes money, hot assets, and other property and the amount of the distribution is less than the partner's outside basis. c. When a partnership distributes only money and the amount of the distribution exceeds the partner's outside basis. d. When a partnership distributes only money and the amount of the distribution is less than the partner's outside basis.
C
Under which of the following circumstances will a partner recognize a loss from an operating distribution? a. 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. b. 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. c. A partner will never recognize a loss from an operating distribution. d. 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.
C
Unrealized receivables include accounts receivable for which of the following partnerships? a. Neither cash nor accrual method partnerships. b. Accrual method partnerships. c. Cash method partnerships. d. Both cash and accrual method partnerships.
C
What is the unextended due date of the tax return of a calendar-year corporation? a. March 15. b. February 15. c. April 15. d. October 15.
C
Which is not an allowable method under MACRS? a. Straight-line. b. 150 percent declining balance. c. Sum-of-the-years-digits. d. 200 percent declining balance. e. All of the choices are allowable methods under MACRS.
C
Which of the following is a requirement to be an S corporation? a. be a domestic or foreign corporation. b. have fewer than 75 shareholders. c. have only one class of stock. d. have at least one corporate shareholder. e. none of the choices are correct.
C
Which of the following is how gain or loss realized is calculated? a. Cash less selling costs. b. Cost basis less cost recovery. c. Amount realized less adjusted basis. d. Cash less cost recovery. e. None of the choices are correct.
C
Which of the following statements regarding a partner's basis adjustments is true? a. Relief of partnership debt increases a partner's tax basis. b. A partnership fine or penalty paid by the partnership does not affect a partner's basis. c. A partner's basis may never be reduced below zero. d. A partner must adjust his basis for ordinary income (loss) but not for separately stated items.
C
Which of the following statements regarding net operating losses is true? a. When a corporation applies a net operating loss carryover, it reports a favorable, permanent book-tax difference in the amount of the applied carryover. b. A corporations can carry a net operating loss incurred in 2017 forward indefinitely. c. A corporation can carry forward a net operating incurred in 2018 to 2019 but it may offset only 80 percent of taxable income (before the NOL deduction) in 2019. d. None of these is a true statement.
C
Which statement best describes the concept of the double taxation of corporate income? a. Corporate income is subject to two levels of taxation: the regular tax and the alternative minimum tax. b. Corporate income is taxed twice at the corporate level: first when earned and then a second time if appreciated property is distributed to a shareholder. c. Corporate income is taxed when earned by a C corporation and then a second time at the shareholder level when distributed as a dividend. d. Corporate income is subject to two levels of taxation: at the federal level and a second time at the state level.
C
iScope Inc. paid $3,000 in interest on a loan it used to purchase municipal bonds. What is the nature of the book-tax difference relating to this expense? a. Temporary; favorable. b. Temporary; unfavorable. c. Permanent; unfavorable. d. Permanent; favorable.
C
Suppose at the beginning of 2018, 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 2018, 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? a. $0 stock basis; $8,000 debt basis. b. $5,000 stock basis; $3,000 debt basis. c. $0 stock basis; $10,000 debt basis. d. $5,000 stock basis; $10,000 debt basis. e. None of the choices are correct.
C $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.
Jasmine started a new business in the current year. She incurred $10,000 of start-up costs. How much of the start-up costs can be immediately expensed (excluding amounts amortized over 180 months) for the year? a. $0. b. $10,000. c. $5,000. d. $2,500. e. None of the choices are correct.
C $5,000 of start-up expenses can be immediately expensed. The $5,000 maximum phases out dollar for dollar if more than $50,000 of start-up costs are incurred.
Which of the following sections recaptures or recharacterizes only corporate taxpayer's gains? a. §1245. b. Unrecaptured §1250 gains. c. §291. d. §1239. e. None of the choices are correct.
C For corporate taxpayers only, §291 recaptures 20 percent of the lesser of gain realized or accumulated depreciation on real property.
Bill operates a proprietorship using the cash method of accounting, and this year he received the following payments: $100 in cash from a customer for services rendered this year a promise to pay $200 from a customer for services rendered this year tickets to a football game worth $250 as payment for services performed last year a check for $170 for services rendered this year that Bill forgot to cash How much income should Bill realize on Schedule C? a. $300 b. $270 c. $520 d. $350 e. $100
C Income is realized as property is received but the promise to pay is not property ($100 + $250 + $170 = $520).
Clampett, Inc. has been an S corporation since its inception. On July 15, 2019, Clampett, Inc. distributed $50,000 to J. D. His basis in his Clampett, Inc. stock on January 1, 2019, was $45,000. For 2019, J. D. was allocated $10,000 of ordinary income from Clampett, Inc. and no separately stated items. What is J.D.'s basis in his Clampett, Inc. stock after all transactions in 2019? a. $20,000. b. $40,000. c. $5,000. d. $30,000. e. None of the choices are correct.
C 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).
Mike started a calendar year business on September 1 st of this year by paying 12 months of rent on his shop at $1,000 per month. What is the maximum amount of rent that Mike can deduct this year under each type of accounting method? a. $12,000 under the cash method and $12,000 under the accrual method. b. $4,000 under the cash method and zero under the accrual method. c. $12,000 under the cash method and $4,000 under the accrual method. d. $4,000 under the cash method and $12,000 under the accrual method. e. $4,000 under the cash method and $4,000 under the accrual method.
C. Mike can deduct 12 months of rent under the cash method by applying the 12-month rule whereas only 4 months of rent will accrue because economic performance occurs ratably.
Beaver Company reports current E&P of $100,000 in year 1 and accumulated E&P at the beginning of the year of $200,000. Beaver distributed $400,000 to its sole shareholder on January 1, year 1. The shareholder's tax basis in her stock in Beaver is $200,000. How is the distribution treated by the shareholder in year 1? a. $200,000 dividend and $200,000 nontaxable return of basis. b. $400,000 dividend. c. $100,000 dividend, $200,000 nontaxable return of basis, and $100,000 capital gain. d. $300,000 dividend and $100,000 nontaxable return of basis.
D
Brad operates a storage business on the accrual method. On July 1 Brad paid $48,000 for rent on his storage warehouse and $18,000 for insurance on the contents of the warehouse. The rent and insurance covers the next 12 months. What is Brad's deduction for the rent and insurance? a. $48,000 for the rent and $9,000 for the insurance. b. $24,000 for the rent and $9,000 for the insurance. c. $48,000 for the rent and $18,000 for the insurance. d. $24,000 for the rent and $18,000 for the insurance.
D
Clampett, Inc. converted to an S corporation on January 1, 2018. At that time, Clampett, Inc. 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, Inc.'s built-in gain or loss on January 1, 2018? a. $30,000 net built-in gain. b. $20,000 net built-in loss. c. $0 net built-in gain. d. $10,000 net built-in gain. e. None of the choices are correct.
D
If partnership debt is reduced and a partner is deemed to receive a cash distribution, what impact does the deemed distribution have on the partner if it is in excess of her tax basis? a. The partner will not be taxed on the distribution in excess of her basis until she sells her partnership interest. b. The partner will treat the distribution in excess of her basis as ordinary income. c. The partner will not ever be taxed on the distribution in excess of her basis. d. The partner will treat the distribution in excess of her basis as capital gain.
D
In which type of distribution may a partner recognize a loss on the distribution? a. Both operating and liquidating distributions. b. Neither operating nor liquidating distributions. c. Operating distributions. d.Liquidating distributions.
D
Robin transferred her 60 percent interest to Cardinal Company as part of a complete liquidation of the company. In the exchange she received land with a fair market value of $800,000. Robin's basis in the Cardinal stock was $900,000. The land had a basis to Cardinal Company of $1,000,000. What amount of loss does Cardinal recognize in the exchange and what is Robin's basis in the land she receives? The distribution was non pro rata to Robin, a related person. a. No loss recognized by Cardinal and a basis to Robin in the land of $1,000,000. b. $200,000 loss recognized by Cardinal and a basis to Robin in the land of $800,000. c. $200,000 loss recognized by Cardinal and a basis to Robin in the land of $1,000,000. d. No loss recognized by Cardinal and a basis to Robin in the land of $800,000.
D
The sale of machinery at a loss that was used in a trade or business and held for more than one year results in the following type of loss? a. §1245. b. §291. c. Capital. d. §1231. e. None of the choices are correct.
D
Tyson is a 25% 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? a. $12,000 ordinary income. b. $4,000 capital gain. c. $12,000 capital gain. d. $0.
D
What is the rationale for the specific rules partnerships must follow in determining a partnership's taxable year-end? a. To minimize the amount of aggregate tax deferral partners receive. b. To increase the amount of aggregate tax deferral partners receive. c. To spread the workload of tax practitioners more evenly over the year. d. Both to minimize the amount of aggregate tax deferral partners receive and to align the year-end of the partnership with the year-end of a majority of the partners. e. To align the year-end of the partnership with the year-end of a majority of the partners.
D
Which of the following assets would not be classified as hot assets? a. Depreciation recapture. b. Inventory. c. Accounts receivable for a cash method taxpayer. d. Cash.
D
Which of the following statements regarding capital gains and losses is false? a. In terms of tax treatment, corporations generally prefer capital gains to ordinary income. b. Corporations must apply capital loss carrybacks and carryovers in a particular order. c. Corporations can carryback net capital losses three years and they can carry them forward for five years. d. Like individuals, corporations can deduct $3,000 of net capital losses against ordinary income in a given year
D
The SSC Partnership balance sheet includes the following assets on December 31 of the current year: Basis FMV Cash $180,000 $180,000 Accounts receivable -0- 60,000 Land 90,000 120,000 Total $270,000 $360,000 Susan, a 1/3 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? a. $10,000 ordinary income; $20,000 capital gain. b. $30,000 capital gain. c. $30,000 ordinary income. d. $10,000 capital gain; $20,000 ordinary income.
D 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.
Jorge purchased a copyright for use in his business in the current year. The purchase occurred on July 15th and the purchase price was $75,000. If the copyright has a remaining life of 75 months, what is the total amortization expense Jorge may deduct during the current year? (Assume not in an asset acquisition to which §197 applies) a. $0. b. $12,000. c. $5,500. d. $6,000. e. None of the choices are correct.
D The amortization is $6,000 ($75,000/75) × 6. The amortization period on a purchased copyright is the asset's remaining useful life.
Sairra, LLC purchased only one asset during the current year (a full 12-month tax year). Sairra placed in service furniture (7-year property) on April 16 with a basis of $25,000. Calculate the maximum depreciation expense for the current year? (ignoring §179 and bonus depreciation). (Use MACRS Table 1) a. $4,463. b. $1,786. c. $5,000. d. $3,573. e. None of the choices are correct.
D The asset's recovery period is 7 years and the half-year convention applies. The calculation is $25,000 × 0.1429 = $3,573.
Zinc, LP was formed on August 1, 20X9. When the partnership was formed, Al contributed $10,000 in cash and inventory with a FMV and tax basis of $40,000. In addition, Bill contributed equipment with a FMV of $30,000 and adjusted basis of $25,000 along with accounts receivable with a FMV and tax basis of $20,000. Also, Chad contributed land with a FMV of $50,000 and tax basis of $35,000. Finally, Dave contributed a machine, secured by $35,000 of debt, with a 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? a. $165,000. b. $200,000. c. $175,000. d.$140,000.
D The partnership's total inside basis is equivalent to the partners' tax basis in all the assets they contributed. $140,000 ($10,000 + $40,000 + $25,000 + $20,000 + $35,000 + $10,000).
Which of the following assets are eligible for §179 expensing? a. Used office machinery. b. Qualified improvement property. c. Used office furniture. d. A new delivery truck. e. All of the choices are correct.
E
Which of the following is not a separately stated item for S corporations? a. Charitable contributions. b. Investment interest expense. c. Interest income. d. Dividends. e. All of the choices are separately stated items.
E
Which of the following is not usually included in an asset's tax basis? a. Purchase price. b. Installation costs. c. Sales tax. d. Shipping. e. All of the choices are included in an asset's tax basis.
E
Which of the following items will affect a partner's tax basis? a. Share of qualified nonrecourse debt. b. Share of nonrecourse debt. c. Share of recourse debt. d. Share of ordinary business income (loss). e. All of the choices will affect a partner's tax basis.
E
T/F All taxpayers may use the §179 immediate expensing election on certain property.
False
Mike and Michelle decided to liquidate their jointly owned corporation, Pennsylvania Corporation. After liquidating its remaining inventory and paying off its remaining liabilities, Pennsylvania had the following tax accounting balance sheet. FMV Tax Basis Appreciation Cash 200,000 200,000 Building 200,000 100,000 100,000 Land 100,000 150,000 (50,000) Total 500,000 450,000 50,000 Under the terms of the agreement, Mike will receive the $200,000 cash in exchange for his 40 percent interest in Pennsylvania. Mike's tax basis in his Pennsylvania stock is $50,000. Michelle will receive the building and land in exchange for her 60 percent interest in Pennsylvania. Her tax basis in the Pennsylvania stock is $100,000. What amount of gain or loss does Michelle recognize in the complete liquidation and what is her tax basis in the building and land after the complete liquidation?
Michelle recognizes gain of $200,000 on the transfer of her stock to Pennsylvania ($300,000 - $100,000) in complete liquidation of Pennsylvania. Her basis in the building is $200,000 and her basis in the land is $100,000. Distributions in complete liquidation to individual shareholders are taxable to the shareholders and noncash property received takes a basis equal to fair market value. Received @ FMV $200,000 Building Received @ FMV $100,000 Land Basis in stock $(100,000) Gain is $200,000 And Michelle will take the FMV as the basis in the property.
Parker is a 100% shareholder of Johnson Corp. (an S corporation). At the beginning of 2018, Parker's basis in his Johnson Corp. stock was $14,000. During 2018, Parker loaned $20,000 to Johnson Corp. and Johnson Corp. reported a $25,000 ordinary business loss and no separately stated items. In 2019, Johnson Corp. reported $8,000 of ordinary business income. a. How much of the $25,000 ordinary loss allocated to Parker clears the tax basis hurdle for deductibility in 2018? b. What is Parker's stock and debt basis at the end of 2018? c. What is Parker's stock and debt basis at the end of 2019?
Parts a and b: All $25,000 of the ordinary loss clears the tax basis hurdle for deductibility. The first $14,000 of the loss reduces his stock basis to $0 at the end of 2018 and the remaining $11,000 reduces his debt basis to $9,000 ($20,000 − $11,000). Part c: The $8,000 of ordinary income restores a portion of his Parker's debt basis. So, at the end of 2019, Parker's stock basis is $0 and his debt basis is $17,000 ($9,000 + $8,000).
T/F A fiscal tax year can end on the last day of any month other than December.
True
T/F Business activities are distinguished from personal activities in that business activities are motivated by the pursuit of profits.
True
T/F Only half the cost of a business meal is deductible even if the meal is associated with the active conduct of business.
True
T/F Real property is always depreciated using the straight-line method.
True
T/F Significant limits are placed on the depreciation of luxury automobiles.
True
Blackwell Manufacturing uses the accrual method and reports on a calendar year. This year a customer was injured when visiting the Blackwell factory. The customer sued the company for $500,000, and the case is still being litigated. However, Blackwell's attorney expects that the company will pay at least $250,000 to settle the claim. What amount, if any, can Blackwell deduct for the expected claim settlement this year?
Zero. Because tort liabilities such as this are payment liabilities, Blackwell will not be able to deduct any claim until it is paid.
Which of the following is not true regarding an asset's adjusted basis? a. Tax adjusted basis may change over time. b. Tax adjusted basis is usually less than book adjusted basis. c. Tax adjusted basis is usually greater than book adjusted basis. d. Adjusted basis is cost basis less cost recovery deductions.
c
T/F A corporation's "earnings and profits" account is equal to the company's "retained earnings" account on its balance sheet.
false
T/F Partners adjust their outside basis by adding non-deductible expenses and subtracting any tax-exempt income to avoid being double taxed.
false
T/F Partners must generally treat the value of profits interests they receive in exchange for services as ordinary income.
false
T/F The character of each separately stated item is determined at the partner level.
false
T/F §1231 assets include all assets used in a trade or business.
false
T/F A corporation generally will report a favorable, temporary book-tax difference when it deducts a charitable contribution carryover.
true
T/F An additional allocation of partnership debt or relief of partnership debt is considered to be a deemed cash contribution or cash distribution respectively.
true
T/F Assets held for investment and personal use assets are examples of capital assets.
true
T/F Corporations are not allowed to deduct charitable contributions in excess of 10% of the corporation's taxable income (before the charitable contribution and certain other deductions).
true
T/F If an S corporation never operated as a C corporation, it may earn passive investment income without fear of an involuntary S election termination.
true
T/F If an S corporation shareholder sells her stock to a nonresident alien, it will automatically terminate the S election.
true
T/F Like partnerships, S corporations generally determine their accounting periods and make accounting method elections at the entity level.
true
T/F Like partnerships, an S corporation shareholder's basis is dynamic and must be adjusted annually.
true
T/F Terrapin Corporation incurs federal income taxes of $250,000 in year 1. Terrapin deducts the federal income taxes in computing its current earnings and profits for year 1.
true
T/F The built-in gains tax does not apply to S corporations that never operated as C corporations.
true
T/F The method for tax amortization is always the straight-line method.
true
T/F Unrecaptured §1250 gains apply only to individuals.
true