Question 1: Which of the following statements is false?
A. When real estate is purchased in a lump sum, the cost allocation for the purchase of multiple assets usually is based upon the relative fair market values of the separate assets.
B. Because the rule for allocating costs based on relative fair markets values is conceptualy simple, it is usually easy to apply to specific situations.
C. An acceptable practice for determining relative fair market values is through appraisal by experts.
D. In some court cases, replacement cost was used to accurately measure relative fair market values.
E. All of the above statements are true.
Question 2: Which of the following statements is false?
A. Landscaping costs are part of the cost of land and can never be depreciated.
B. While the cost of land itself is not depreciable, various land improvements may be depreciable in certain circumstances.
C. In determining whether or not a particular item of property is tangible personal property rather than real estate, local law is NOT controlling.
D. Land improvements that do not permanently improve the land but improve it only for the use with a specific building are depreciable land improvements.
Question 3: Which of the following statements is false?
A. Wall to wall carpeting installed in an office building is deemed a structural part of the building because it is permanently affixed to the floor of the building and is not readily removable.
B. The distinction between structural components of a building and personal property has remained troublesome and often is a matter of dispute between taxpayers and the IRS.
C. One factor that is used to distinguish personal property from realty is whether the item is permanently affixed to the land or readily movable or designed to be moved.
D. The tax code transforms a cash basis taxpayer into essentially an accrual basis taxpayer for purposes of determining the amount of real estate taxes that are deductible in the year real estate is purchased or sold.
Question 4: Which of the following statements is true?
A. The purpose of the residual method of allocating a lump sum purchase price for multiple assets is to prevent amounts paid for amortizable goodwill to be allocated to long-lived assets such as depreciable
buildings.
B. One of the main purposes of the residual method of allocating costs is to determine the amount of the purchase price that is allocable to goodwill and going concern value.
C. A group of assets purchased for a lump sum constitutes a trade or business sale if more than one class of assets is included in the sale price (e.g. realty and personal property).
D. If real estate is sold as part of a sale of a complete trade or business (going-concern), the residual method of allocating the purchase price among the assets acquired is NOT required since the taxpayer may use any "reasonable method" to allocate the purchase price among the assets purchased.
E. All the above statements are false.
Question 5: Which of the following statements is false?
A. The tax code requires the buyer or his agent to withhold Federal income taxes from the sale proceeds
belonging to a foreign (non-resident alien) seller of US real estate unless the foreign person meets at least one of several possible narrow exemptions.
B. Failure by a purchaser to withhold taxes from a foreign person who sells US real estate may result in the purchaser being liable for any federal income tax owed by the foreign person.
C. Because interest paid on a loan to finance the construction of real property during the construction period (other than real estate that constitutes inventory) is for the forbearance of money and not a direct cost of constructing the building, it may be deducted currently in the year it is incurred if you are an accrual basis taxpayer.
D. While real estate is under construction, a taxpayer need not capitalize, and may deduct as an expense currently in the year incurred, research and development costs, as well as advertising and marketing expenses for the property.
Question 6: Which of the following legal entities gives the taxpayer the choice to be taxed either as a sole proprietorship, partnership, C corporation, or an S corporation, depending on the number of owners and tax elections made by the taxpayer?
A. Limited Partnerhship
B. Limited Liability Company
C. General Partnership
D. Sole Proprietorship
E. Corporation
F. None of the above entities gives the taxpayer that many choices.
Question 7: Which of the following statements is false?
A. While the selection of legal entity may have significant consequences concerning legal liability, the taxation of real estate is essentially similar regardless of what kind of entity owns the real estate.
B. The right to deduct depreciation on real estate does not depend entirely on who owns legal title to the property.
C. Even though partnerships are required to file a separate income tax return on Form 1065, as a general rule, partnerships are not taxpaying entities.
D. A financial investment in real estate without transfer of either possession or legal title may NOT be sufficient to allow a taxpayer to claim a depreciation deduction on that real estate.
Question 8: Which of the following is NOT a tax disadvantage for a C Corporation (regular corporation that has not made an S Election) owning investment real estate?
A. Possible double taxation when the corporation sells appreciated real estate at a gain.
B. Possible Assessment of Accumulated Earnings Tax.
C. The possibility of being classified as a personal holding company and thus being subject to a penalty tax on undistributed personal holding company income.
D. The inability of shareholders of the C corporation to deduct rental losses against their personal income.
E. All of the above are tax disadvantages of C corporations owning investment real estate.
Question 9: ALL OF THE FOLLOWING FACTORS ARE TAKEN INTO ACCOUNT BY THE COURTS IN DETERMINING WHETHER A TAXPAYER HAS MET THE BENEFITS AND BURDENS OF OWNERSHIP TEST FOR REAL PROPERTY EXCEPT:
A. Whether legal title has passed;
B. Whether an equity was acquired in the property;
C. Whether the taxpayer bears the risk of loss or damage to the property;
D. Whether the taxpayer has a vested right of possession in the property;
E. All of the above are factors considered by the Courts;
Question 10: Which of the following statements regarding individual and co-tenant ownership of real property is false?
A. Individual ownership is often the simplest and least costly way to own and operate real estate.
B. Co-ownership of property by joint tenancy or tenants in common is different from a partnership because co-tenants cannot act on behalf of each other without specific authorization by the other co- tenant. Partners, on the other hand may bind all other partners when one partner is acting with respect to partnership property.
C. Individual ownership's main disadvantage is unlimited liability arising out of ownership and operation of the property. This liability can be mitigated by liability insurance and careful management of the property.
D. Joint tenants of real property do NOT become partners merely because they carry on a trade or business with the intent to share profits.
E. All of the above statements are true.
Question 11: Which of the following statements is false?
A. In order to form a general partnership for federal income tax purposes, the partners must have a written partnership agreement.
B. All limited partnerships must have at least one general partner who is responsible for management of the partnership and who is personally liable for the obligations of the partnership.
C. The general partner of a limited partnership can be a corporation.
D. Limited partners may lose their limited partner status (and thus lose protection from legal liability in excess of their capital contribution) if they participate in management activities of the partnership
E. All of the above statements are true.
Question 12: When a taxpayer contributes real estate or other property to a partnership, the taxpayer must keep track of his or her adjusted basis in the partnership interest that is acquired. All of the following are important
tax reasons for taxpayers to account for their basis in their partnership interests except which of the following:
A. If a partner sells his partnership interest, the adjusted basis must be known to calculate the taxable gain or loss on the sale.
B. The partner's basis in the partnership interest is a ceiling on the amount of losses that can pass through to that partner in a given tax year.
C. The partner's basis in his partnership interest sets the limit on the amount of distributions from the partnership that partner may receive in a given tax year without creating a taxable event.
D. A partner's basis in his partnership interest determines the tax consequences to that partner when the partnership is liquidated.
E. All of the above are important reasons for tracking basis in the partnership interest
F. Only A, & B are important reasons for tracking basis in partnership interests.
Question 13: Please use the below facts to answer the next two quesrtions:
Partner X acquires a 50% interest in a real estate partnership by contributing a parcel of property to the partnership. At the date of the contribution, the parcel had a fair market value of $50,000 and an adjusted basis in the hands of the contributing partner of $20,000.
Based upon the above facts, what would Partner X's basis be in his partnership interest immediately after contributing the parcel of property?
A. $25,000
B. $20,000
C. $50,000
D. None of the above.
Question 14: Using the facts given in the previous question, what is partner X's basis in his partnership interest (immediately after the contribution of the property) assuming the parcel he contributed had a $10000 mortgage attached to it at the time Partner X contributed the property to the partnership?
A. $15000
B. $20000
C. $25000
D. $55000
E. None of the above.
Question 15: Which of the following statements is false?
A. If an attorney drafts a comprehensive partnership agreement in exchange for a 20% interest in his client's real estate partnership rather than charge his usual legal fee, because the lawyer's basis in his services is zero, the lawyer's basis in his partnership interest is also zero.
B. While generally a partner does not recognize income upon contributing property to a partnership in exchange for a partnership interest, there can be circumstances where the new partner will recognize gain when the property is contributed if there is a large mortgage on the contributed property.
C. While in general a partner does not have a taxable event upon receipt of a distribution from a partnership, gain is recognized by a partner if a distribution of money is received in excess of the partner's basis in the partnership.
D. Generally, guaranteed payments to a partner are tax-deductible by the partnership.
E. All of the above statements are true.
Question 16: Which of the following is a legal or tax advantage a general partnership has which an S corporation does not have?
A. Free transferability of ownership without termination of the existence of the entity.
B. Avoidance of double taxation-once at the entity level and again at the individual owner level.
C. Protection from legal liability arising out of the ownership and operation of the real estate by the entity.
D. Because a partner gets basis in his partnership interest for the partner's share of ALL partnership liabilities (including those of third parties. banks, etc) the partner often has larger basis in his partnership interest than a similarly situated S corporation shareholder who only gets basis for funds the shareholder personally lent the corporation.Thus losses that are passed through tend to be more
limited for an S corporation shareholder than a partner in a partnership.
E. None of the above.
Question 17: Which of the following is/are NOT requirement(s) to make and maintain a successful S election?
A. The S corporation may have only one class of stock (common stock).
B. The S corporation may not have more than 50 shareholders.
C. All shareholders must be either individuals, or certain qualifying trusts of estates, or charitable organizations.
D. The S corporation may not have any resident alien shareholders.
E. B & D are both not correct requirements to make and maintain an S election.
F. A through D are all valid requirements to make and maintain a valid S election.
Question 18: Which of the following statements is false?
A. Limited Partnerships do not need to file anything with the state to establish their legal existence because a partnership may be established by a verbal agreement among two or more persons to share profits from a trade or business.
B. Distributions of appreciated property by a C corporation generally produce immediate tax consequences to both the C corporation and its shareholders.
C. Distributions of appreciated property by a partnership to its partners generally are NOT an immediate taxable event to either the partnership nor the partners because the potential taxable gain is deferred through the basis mechanism until such time as the partner receiving the distribution sells the property.
D. Partnerships are more flexible than S corporations when a non-resident alien wants to own an interest in the entity.
Question 19: Which of the following statements is false?
A. C corporations can be more flexible than S corporations if the taxpayers wish to have both preferred and common stock issued by the corporation.
B. A useful strategy for a C Corporation to avoid double taxation is to pay its shareholders salary which can be deducted against the corporation's profits.
C. C corporations can be more useful than S corporations if one of the shareholders of the corporation has to be a non-resident alien.
D. The disadvantage of double taxation of C corporations can be mitigated to a some degree if the corporation reinvests all its profits back into the business and the corporation does not make any distributions of appreciated property to its shareholders.
E. A The stock basis of a C corporation shareholder is increased by corporate income.
Question 20: Which of the following statements are false?
A. A corporation's S election is automatically terminated upon the issuance of preferred stock.
B. A corporation's S election is automatically terminated if a non-resident alien inadvertently becomes a shareholder.
C. An S Corporation's shareholder agreement may give certain shareholders certain items of income or loss that are greater or less than their stock ownership percentage in the corporation so long as they have "substantial economic effect."
D. All of the above statements are true.
Question 21: Which of the following statements is false?
A. In order for a limited partnership to maintain limited liability for its limited partners, the limited partnership must have at least one general partner and the partnership cannot have more than 100 partners.
B. S corporations recognize gain when distributions of appreciated property are distributed to S Corporation shareholders to the extent the fair market value of the property exceeds the corporation's adjusted basis in the property. This rule is identical to the rule for C corporations.
C. There is no double taxation when an S corporation distributes appreciated property to its shareholders.
D. Both A & B are false.
Question 22: Which of the following statements is false?
A. Prepaid interest generally must be capitalized and amortized rateably over the term of the loan with exception of certain points paid on a taxpayer's principal residence mortgage.
B. Interest paid on a loan used by the taxpayer to finance the construction of a commercial building may be deducted in the year paid by a cash basis taxpayer.
C. Investment interest does not include debt allocable to rental real estate in which the taxpayer materially participates or interest covered under the passive activity loss rules.
D. Interest paid on loans to purchase vacant land held as an investment is classified as investment interest and is deductible only up to the amount of investment income the taxpayer has in the current year.
Question 23: Which of the following statements is false?
A. Deductibility of interest paid in a rental real estate activity is often limited by the passive activity loss rules.
B. An accrual basis taxpayer who borrowed funds for a trade or business from a related party cash-basis taxpayer may deduct interest on that loan when it is incurred.
C. The below-market rate loan rules are designed to recharacterize loans between related parties in accordance with their true nature as an arms-length transaction.
D. Below-market rate loans are deemed to have paid the lender "forgone interest" which the lender must report as income even though no interest was actually formally collected by the lender.
Question 24: Which of the following are considered below-market rate loans requiring the calculation of forgone interest that must be reported as interest income by the lender?
A. Demand Loans between a corporation and its sole shareholder.
B. Gift loans made between family members and other persons motivated by affection.
C. Loans made between an employer and employee in connection with the performance of services by the employee to the employer.
D. Only A & B above are below-market rate loans.requiring the calculation of forgone interest.
E. A, B, & C are ALL below-market rate loans requiring the calculation of forgone interest.
F. There is no such thing as "forgone interest" in the tax code.
Question 25: 1. Please fill in the amount (number) for your answer without dollar signs or punctuations of any kind! Please use these facts to answer the next 2 questions:
John is a 50% shareholder of an S corporation that owns rental real estate that generated a $30000 loss for the current tax year. The S corporation paid $90000 for the property it purchased. The corporation financed its purchase by John paying $1000 for his stock and lending the corporation $9000 from John's personal funds. The corporation borrowed $80000 from Bank of America which John guaranteed so the bank would lend the corporation the money. Thus the corporation collected $90000 total cash to buy the property (10K from John and 80k from the bank). The $30000 loss was financed by the other shareholder lending the corporation the money it needed to pay the business expenses.
How much can John deduct in this tax year as his pass-thru of loss from this S corporaation?
Question 26: Using the same facts as the previous question except John is a 50% partner in a partnership and John paid $10000 cash for his partnership interest. How much loss would pass through to John as a partner in this tax year?