1. Betty contributed property with a $40,000 basis and fair market value of $85,000 to the Rust Partnership in exchange for a 50% interest in partnership capital and profits. During the first year of partnership operations, Rust had net taxable income of $30,000 and tax-exempt income of $28,000. The partnership distributed $12,000 cash to Betty. Her share of partnership recourse liabilities on the last day of the partnership year was $16,000. Betty's adjusted basis (outside basis) for her partnership interest at year-end is:
a. $55,000.
b. $72,000.
c. $73,000.
d. $98,000.
e. Some other amount.
2. In the current year, Anderson formed an equal partnership with Camilla. Anderson contributed land with an adjusted basis of $50,000 and a fair market value of $225,000. Anderson also contributed $75,000 cash to the partnership. Camilla contributed land with an adjusted basis of $105,000 and a fair market value of $240,000. The land contributed by Anderson was encumbered by a $60,000 nonrecourse debt. Assume the partners share debt equally. Immediately after the formation, the basis of Anderson's partnership interest is:
a. $95,000.
b. $125,000.
c. $240,000.
d. $300,000.
e. None of the above.
3. Phyllis and Edith formed the Coral Partnership four years ago. Because they decided the company needed some expertise in computer networking, they offered Ophelia a 1/3 interest in partnership capital and profits if she would come to work for the partnership. On July 1 of the current year, the unrestricted partnership interest (fair market value of $50,000) was transferred to Ophelia. How should Ophelia treat the receipt of the partnership interest in the current year?
a. Nontaxable.
b. $50,000 of short-term capital gain.
c. $50,000 of long-term capital gain.
d. $50,000 of ordinary income.
e. None of the above.
4. Sandy and Teddy formed a partnership. Sandy received a 50% interest in partnership capital and profits in exchange for contributing land with a basis of $180,000 and a fair market value of $300,000. Teddy received a 50% interest in partnership capital and profits in exchange for contributing $300,000 of cash. Three years after the contribution date, the land contributed by Sandy is sold by the partnership to a third party for $380,000. How much taxable gain will Sandy recognize from the sale?
a. $100,000.
b. $120,000.
c. $160,000.
d. $200,000.
e. None of the above.
5. Monroe contributed $20,000 of cash in exchange for a 50% interest in the Salmon partnership capital and profits. During the first year of partnership operations, Salmon had net taxable income of $50,000. In addition Monroe received a $15,000 distribution of cash from the partnership and he has a 50% share in the $15,000 of partnership recourse liabilities on the last day of the partnership year. Monroe's adjusted basis (outside basis) for his partnership interest at year-end is:
a. $78,000.
b. $45,000.
c. $37,500.
d. $30,000.
e. None of the above.
6. Rosie is a partner in the Cardinal Partnership, which is not publicly traded. Her allocable share of Cardinal's passive ordinary losses from a nonrealty activity for the current year is ($100,000). Rosie has a $60,000 adjusted basis (outside basis) for her interest in Cardinal (before deduction of any of the passive losses). Her amount "at risk" under § 465 is $45,000 (before deduction of any of the passive losses). She also has $30,000 of passive income from other sources. How much of the $100,000 passive loss allocated to her can Rosie deduct on her current year's tax return?
a. $30,000
b. $45,000.
c. $60,000.
d. $100,000.
e. None of the above.
7. Kenneth receives a proportionate, nonliquidating distribution from the Fern Partnership. The distribution consists of $10,000 cash and property with an adjusted basis to the partnership of $40,000 and a fair market value of $58,000. Immediately before the distribution, Kenneth's adjusted basis for his partnership interest is $75,000. Kenneth's basis in the noncash property received is:
a. $25,000.
b. $40,000.
c. $58,000.
d. $65,000.
e. None of the above.
8. Chuck has an outside basis of $190,000 in the Forest Partnership as of December 31 of the current year. On that date the partnership liquidates and distributes to Chuck a proportionate distribution of $140,000 cash and inventory with an inside basis to the partnership of $10,000 and a fair market value of $30,000. In addition, Chuck receives a desk which has an inside basis and fair market value of $3,400 and $4,600, respectively. None of the distribution is for partnership goodwill. How much gain or loss will Chuck recognize on the distribution, and what basis will he take in the desk?
a. $36,600 loss; $3,400 basis.
b. $35,400 loss; $4,600 basis.
c. $15,400 loss; $4,600 basis.
d. $0 loss; $40,000 basis.
e. None of the above.
9. Larimer received $30,000 cash and a capital asset with a basis and fair market value of $55,000 in a proportionate liquidating distribution. His basis in his partnership interest was $100,000 prior to the distribution. How much gain or loss does Larimer recognize, and what is his basis in the capital asset received in the distribution?
a. $0 gain or loss; $55,000 basis.
b. $15,000 loss; $55,000 basis.
c. $15,000 gain; $55,000 basis.
d. $15,000 gain; $70,000 basis.
e. $0 gain or loss; $70,000 basis.
10. Cody contributed nondepreciable property with a basis of $45,000 and a fair market value of $56,000 to the Laurel Partnership in 2010 in exchange for a 40% interest in the partnership. In 2013, he receives a nonliquidating distribution from the partnership of other property with a basis to the partnership of $9,000 and a fair market value of $50,000. The basis in his partnership interest at the time of the distribution was $30,000. How much gain or loss does Cody recognize on the distribution? (Assume no other distributions have been made to Cody, the property he originally contributed is still owned by the partnership, and this is not a disguised sale transaction.)
a. $0 gain or loss.
b. $11,000 gain.
c. $20,000 gain.
d. $41,000 gain.
e. None of the above.
11. During 2013, an S corporation incurs the following transactions.
Net income from operations $60,000
Interest income from savings account 28,000
Long-term capital gain from sale of securities 54,000
Short-term capital loss from sale of securities 44,000
The corporation's passive investment income for 2013 is:
a. $28,000.
b. $38,000.
c. $82,000.
d. $142,000.
e. None of the above.
12. During 2013, Emerald Corporation incurs the following transactions.
Net income from operations $125,000
Long-term capital gain from sale of securities 55,000
Short-term capital loss from sale of securities 35,000
Emerald maintains a valid S election and does not distribute any dividends to its sole shareholder, Dakota. As a result, Dakota must recognize:
a. Ordinary income of $125,000 and long-term capital gain of $20,000.
b. Ordinary income of $125,000, long-term capital gain of $55,000, and $35,000 short-term capital loss.
c. Ordinary income of $125,000, long-term capital gain of $55,000, and $3,000 short-term capital loss.
d. Ordinary income of $125,000.
e. None of the above.
13. During the year, an S corporation incurs a $110,000 net operating loss. Eloise, the sole shareholder, has a $75,000 stock basis, and there is a $100,000 balance in AAA at the beginning of the year. Which statement is correct?
a. Eloise may show a $110,000 loss deduction on her Form 1040.
b. At the end of the year, there is a zero basis in both Eloise's stock basis and the AAA.
c. At the end of the year, Eloise has a zero basis in the stock, and there is a negative $10,000 balance in the AAA.
d. Eloise may deduct $100,000 of the loss.
e. None of the above statements is correct.
14. Neon, Inc., a calendar year S corporation, has an operating loss of $160,000 and a long-term capital loss of $40,000. Archie, an individual, owns 40% of the corporate stock and has a $60,000 basis in the stock. What is the amount of the NOL that flows through to Archie?
a. $16,000.
b. $48,000.
c. $64,000.
d. $60,000.
e. None of the above.
15. Beginning in 2013, the AAA of Hunter, Inc., an S corporation, has a balance of $225,000. During the year, the following items occur.
|
Operating income
|
$172,000
|
|
Interest income
|
6,000
|
|
Dividend income
|
14,050
|
|
Municipal bond interest income
|
6,000
|
|
Long-term capital loss from sale of investment land
|
7,000
|
|
Charitable contributions
|
19,000
|
|
Cash distributions to shareholders
|
57,000
|
Hunter's ending AAA balance is:
a. $353,150.
b. $334,050.
c. $327,650.
d. $326,750.
16. Apricot, Inc., has accumulated earnings and profits at the end of the year of $275,000. Apricot pays a salary and bonus of $200,000 to Donald, its CEO. Apricot's taxable income before the salary and bonus is $225,000. The IRS classifies $75,000 of the salary and bonus as unreasonable. Calculate Apricot's taxable income after the reclassification.
a. $25,000.
b. $100,000.
c. $125,000.
d. $225,000.
e. None of the above.
17. Gomez is the sole shareholder of Carrot, Inc. Carrot's taxable income before the payment of Gomez's salary is $200,000. Based on this, Gomez has the corporation pay him a salary of $175,000 and a bonus of $25,000. A reasonable salary and bonus would be $150,000. Which of the following is correct?
a. The taxable income of Carrot, Inc., is $0 ($200,000 - $200,000 salary and bonuses).
b. The taxable income of Carrot, Inc., is $25,000 ($200,000 - $175,000).
c. Gomez has salary and bonus income of $200,000.
d. Gomez has salary and bonus income of $150,000 and dividend income of $50,000.
e. None of the above.
18. Tangerine, Inc. has 2,000 shares of stock authorized and 1,000 shares outstanding. The shares are owned by Madison (700 shares) and Jessica (300 shares). Madison's adjusted basis for her stock is $100,000 and Jessica's adjusted basis for her stock is $50,000. Tangerine's earnings and profits are $100,000. Tangerine redeems 150 of Jessica's shares for $50,000. Determine the amount of Jessica's recognized gain (1) if she is Madison's mother and (2) if they are unrelated.
a. $0 and $0.
b. $50,000 and $50,000.
c. $50,000 and $-0-.
d. $50,000 and $25,000.
e. None of the above.
19. A taxpayer contributes property with an adjusted basis of $100,000 and a fair market value of $150,000 to her business entity. If the entity is a C corporation and the transaction qualifies under § 351, the corporation's basis for the asset and the corporation shareholder's basis for her stock are:
Asset Basis Stock Basis
a. $100,000 $150,000
b. $150,000 $100,000
c. $100,000 $100,000
d. $150,000 $150,000
e. None of the above.
20. A taxpayer contributes property with an adjusted basis of $60,000 and a fair market value of $100,000 to his business entity. If the entity is an S corporation and the transaction qualifies under § 351, the S corporation's basis for the asset and the shareholder's basis for his stock are:
Asset Basis Stock Basis
a. $60,000 $100,000
b. $100,000 $60,000
c. $60,000 $60,000
d. $100,000 $100,000
e. None of the above.
21. Shane contributes land with a fair market value of $450,000 and an adjusted basis of $400,000, and Gavin contributes $450,000 cash to form Shane & Gavin Company, a partnership. Shane and Gavin each own 50% of the partnership. One year later, Shane & Gavin, Inc. sells the land for $500,000. How much gain is recognized by each partner?
a. $100,000 to Shane, $0 to Gavin.
b. $75,000 to Shane, $25,000 to Gavin.
c. $50,000 to Shane, $50,000 to Gavin.
d. $25,000 to Shane, $25,000 to Gavin.
e. None of the above.
22. Citrine Corporation is subject to a corporate income tax only in State X. The starting point in computing X taxable income is Federal taxable income. Citrine's Federal taxable income is $400,000, which includes a $55,000 deduction for state income taxes. During the year, Citrine received $150,000 interest on Federal obligations and $65,000 of interest on State Z obligations. X does not allow a deduction for state income tax payments, but it does exclude interest earned on its own obligations.
Citrine's taxable income for X purposes is:
a. $315,000.
b. $370,000.
c. $410,000.
d. $510,000.
e. $520,000.
23. Harvest Corporation is subject to tax only in State A. Harvest generated the following income and deductions.
Federal taxable income $400,000
State A income tax expense 40,000
Depreciation allowed for Federal tax purposes 150,000
Depreciation allowed for state tax purposes 115,000
Federal taxable income is the starting point in computing State A taxable income and state income taxes are not deductible for state tax purposes. Harvest's State A taxable income is:
a. $365,000.
b. $400,000.
c. $440,000.
d. $475,000.
e. $505,000.
24. Jasmine Company sold an asset on the first day of the tax year for $400,000. Its regular tax basis was $250,000, and its basis for Federal AMT purposes was $220,000. Because of differences in cost recovery schedules, the state basis in the asset was $200,000. What adjustment, if any, should be made to Federal taxable income in determining the correct taxable income for the typical state?
a. ($20,000).
b. ($50,000).
c. $50,000.
d. $100,000.
e. Some other amount.
25. Straw Corporation realized $800,000 of taxable income from the sales of its products in States X and Z. Straw's activities in both states establish nexus for income tax purposes. Straw's sales, payroll, and property among the states include the following.
State X State Z Totals
Sales $6,000,000 $4,000,000 $10,000,000
Property 500,000 1,500,000 2,000,000
Payroll 2,000,000 2,000,000 4,000,000
Both states use a three-factor apportionment formula, however X utilizes a double-weighted sales factor in its three-factor apportionment formula. How much of Straw's taxable income is apportioned to Z?
a. $330,000.
b. $386,668.
c. $440,000.
d. $470,000.
e. None of the above.
26. Which of the following statements properly characterizes letter rulings?
a. They are different from determination letters.
b. They can be relied upon only by the taxpayer who requested it.
c. They are issued by the National Office of the IRS.
d. They are issued in regard to proposed transactions.
e. All of the above.
27. Which statement appearing below correctly describes the IRS letter ruling process?
a. The IRS will issue a ruling on all tax issues.
b. Some letter rulings are of such importance and general interest that they are later published (in anonymous form) as Regulations.
c. Letter rulings are frequently declared obsolete.
d. Letter rulings are private and not open to public inspection.
e. All of the above are correct.
28. With respect to the audit process which, if any, of the following statements is incorrect?
a. Upon advance request, a taxpayer must be allowed to make an audio recording during the audit conference.
b. Revenue agents and the Appeals Division of the IRS have the authority to settle tax disputes based on the hazards of litigation.
c. The issuance of a Revenue Agents Report (RAR) is usually not necessary when mathematical errors on a tax return understate a taxpayer's tax liability.
d. The IRS does not publish the factors it uses for audit selection purposes annually in the Commissioner's Report.
e. All of the above are correct.
29. Which of the following statements correctly reflects the rules governing interest on an individual's Federal tax deficiency and a claim for refund?
a. The IRS has full discretion in determining the rate that will apply.
b. The simple interest method for calculating interest is used.
c. For noncorporate taxpayers, the rate of interest for assessments is different than the rate of interest for refunds.
d. The IRS must adjust the rate of interest quarterly.
e. None of the above is correct.
30. Which of the following statements, if any, do not reflect the rules governing the negligence accuracy-related penalty?
a. The penalty rate is 20%.
b. The penalty is imposed only on the part of the deficiency attributable to negligence.
c. The penalty only applies to Federal income taxes, except when fraud is involved.
d. The penalty is waived if the taxpayer uses Form 8275 to disclose a return position that is reasonable though contrary to the IRS position.
e. All of the above are correct.