Final Review Dec 2023 Flashcards
James Elton received a 25% capital interest in Bredbo Associates, a partnership, in return for services rendered, plus a contribution of assets with a basis to Elton of $25,000 and a fair market value of $40,000. The fair market value of Elton’s 25% interest was $50,000. How much is Elton’s basis for his interest in Bredbo?
A. $50,000
B. $35,000
C. $40,000
D. $25,000
B. $35,000
A partner’s basis in a partnership is his or her adjusted basis in the property contributed, plus income recognized by the partner for receiving the interest in exchange for services. The value of a partnership interest received as compensation for services is income to the partner (FMV of the interest received). The fair market value of Elton’s services is $10,000 ($50,000 FMV of the interest – $40,000 FMV of assets contributed).
Which of the following statements is false regarding the formation of a principal-agent relationship?
A. An agency must have a legal purpose.
B. An agency may be implied in law, even if the principal did not intend to grant authority.
C. The test for agency is objective.
D. Each element of a contract must be present for the relationship to exist.
D. Each element of a contract must be present for the relationship to exist.
An agency relationship need not be contractual. But if the agency arises by contract, each element of a contract must be present.
George Black is single and files Form 1040 for 2023. He received the following income in 2023:
George also received Social Security benefits during 2023. Form SSA-1099 shows $5,980 in box 5, Net Benefits for 2023. How much of George’s Social Security is taxable?
A. $4,700
B. $5,980
C. $2,990
D. $6,980
C. $2,990
If the sum of the “modified” adjusted gross income plus one-half of Social Security benefits exceeds $25,000 but does not exceed $34,000, part of the Social Security benefits will be included in gross income. Modified adjusted gross income equals adjusted gross income plus tax-exempt interest. The includible portion of Social Security benefits is the lesser of one-half of the Social Security benefits or one-half of the excess as noted above. George would include $2,990 since it is less than one-half of the excess.
In 2019, Ross was granted an incentive stock option (ISO) by his employer as part of an executive compensation package. Ross exercised the ISO in 2021 and sold the stock in 2023 at a gain. Ross’s profit was subject to the income tax for the year in which the
A. Employer claimed a compensation deduction for the ISO.
B. ISO was exercised.
C. Stock was sold.
D. ISO was granted.
C. Stock was sold.
According to the Internal Revenue Code, an employee will have no income tax consequences on the grant date or the exercise date of an incentive stock option if that employee meets two requirements. First, the employee cannot dispose of the stock within 2 years after the grant date or within 1 year after the exercise date. Second, the employee must be employed by the company on the grant date until 3 months prior to the exercise date. Since Ross meets these requirements, he is not subject to any tax on the grant or exercise dates. Ross did, however, recognize a capital gain when he sold the stock in 2023.
In general, which of the following statements is true with respect to a limited partnership?
A. A limited partner has the right to obtain from the general partner(s) financial information and tax returns of the limited partnership.
B. A limited partner may hire employees on behalf of the partnership.
C. A limited partnership can be formed with limited liability for all partners.
D. A limited partner may not also be a general partner at the same time.
A. A limited partner has the right to obtain from the general partner(s) financial information and tax returns of the limited partnership.
Both general and limited partners have the right to inspect and copy the books of the partnership at any time. Thus, they can obtain financial information and tax returns of the limited partnership.
The Social Security Act provides for the imposition of taxes and the disbursement of benefits. Which of the following is a true statement regarding these taxes and disbursements in the current year?
A. A deduction for federal income tax purposes is allowed the employee for Social Security taxes paid.
B. Social Security benefits are fully includible in gross income for federal income tax purposes unless they are disability benefits.
C. As between an employer and its employee, the tax rates are the same.
D. Only those who have contributed to Social Security are eligible for benefits.
C. As between an employer and its employee, the tax rates are the same.
Under the Federal Insurance Contributions Act (FICA), the tax rate for employers and employees is the same (7.65% for 2023). This requirement of shared responsibility has been followed since the Social Security Act was enacted in 1935.
After a successful first year, Arctic Savings and Loan had the following expenses: $18,000 of promotional materials (water bottles, coffee mugs, and t-shirts) imprinted with its company name and given to over 5,000 customers, $12,500 for 100 holiday food baskets sent to its top customers, and $27,000 in employee educational expenses. Given a net book income of $900,000, what is Arctic’s taxable income for the year?
A. $913,500
B. $900,000
C. $910,000
D. $930,500
C. $910,000
A deduction for business gifts is allowable only to the extent of $25 per donee per year; thus, the deduction for gift baskets is limited to $2,500 ($25 × 100 holiday food baskets). Therefore, the $10,000 nondeductible portion of the gift baskets must be added back to the $900,000 book income. Promotional materials costing less than $4 that have a permanent imprint of the donor’s name are not gifts and are deductible for business purposes. An employer’s expenditures for employee education are deductible as a business expense.
Which of the following rights does one cosurety generally have against another cosurety?
A. Contribution.
B. Exoneration.
C. Subrogation.
D. Reimbursement.
A. Contribution.
Contribution is the right of a cosurety who has paid more than his or her proportionate or agreed-to share to proceed against the other cosureties.
Which of the following statements about the Sec. 199A deduction is false?
A. Net income is decreased by interest income attributable to working capital.
B. The Sec. 199A deduction is not available to C corporations.
C. The Sec. 199A deduction does not reduce adjusted gross income.
D. The Sec. 199A deduction is taken on Schedule C.
D. The Sec. 199A deduction is taken on Schedule C.
The Sec. 199A deduction is taken at the top of page 2 of Form 1040, not on Schedule C or business returns; thus, it does not reduce self-employment income.
A corporation’s taxable income for the current year was reported as $70,000. Items of interest on the return include the following:
What are the corporation’s earnings and profits (E&P) at year end?
A. $58,200
B. $68,800
C. $71,200
D. $63,400
B. $68,800
Positive adjustments to taxable income include exempt income, deductions, and deferred income. Examples include the dividends-received deduction and NOL carryovers. Negative adjustments include some nondeductible items for taxable income and recognized deferred income. Examples include life insurance premiums, penalties and fines, and municipal bond expense. Therefore, the corporation’s E&P at year end are $68,800 ($70,000 + $2,700 + $5,300 – $3,600 – $4,500 – $1,100).
A valid limited partnership
A. May have an unlimited number of partners.
B. Is exempt from all Securities and Exchange Commission regulations.
C. Must designate in its certificate the name, address, and capital contribution of each general partner and each limited partner.
D. Cannot be treated as an “association” for federal income tax purposes.
A. May have an unlimited number of partners.
A valid limited partnership has no maximum limit on the number of partners (limited or general). The only requirement is that it have at least one limited and one general partner. In contrast, S corporations currently have a limit of 100 shareholders.
Trio Corporation was formed in 2010 by Jordan, Karen, and Lois. These three shareholders have owned all of the corporation’s stock as follows: Jordan owns 500 shares, Karen owns 100 shares, and Lois owns 100 shares. In 2023, Jordan contributed property worth $90,000 to the corporation in exchange for an additional 300 shares. Jordan’s basis in the contributed property was $20,000. Jordan will recognize
A. Gain on the exchange because he received only 30% of the stock outstanding after the exchange.
B. No gain because transfers to a corporation by a shareholder in exchange for a stock interest are nontaxable regardless of the transferor’s stock ownership.
C. No gain because he has sufficient stock ownership after the exchange.
D. Gain because the transfer is not to a newly formed corporation.
C. No gain because he has sufficient stock ownership after the exchange.
Section 351 states that no gain or loss is recognized when property is transferred to a corporation in exchange for the corporation’s stock if the person(s) transferring the property is(are) in control of the corporation immediately after the transfer. “Control” is defined by the Code as at least 80% ownership of the corporation’s voting and nonvoting stock. Because Jordan meets the control test, he recognizes no gain on the receipt of the Trio Corporation stock.
Flax, a sole proprietor, has been petitioned involuntarily into bankruptcy under the Federal Bankruptcy Code’s liquidation provisions. Simon & Co., CPAs, has been appointed trustee of the bankruptcy estate. If Simon also wishes to act as the tax return preparer for the estate, which of the following statements is true?
A. Although Simon may serve as both trustee and preparer, it is entitled to receive a fee only for the services rendered as a preparer.
B. Although Simon may serve as both trustee and preparer, its fee for services in each capacity is determined solely by the size of the estate.
C. Simon may employ itself to prepare tax returns if authorized by the court and may receive a separate fee for services in each capacity.
D. Simon is prohibited from serving as both trustee and preparer. Serving in a dual capacity is a conflict of interest.
C. Simon may employ itself to prepare tax returns if authorized by the court and may receive a separate fee for services in each capacity.
The trustee in bankruptcy is either appointed or elected by the creditors to administer most of the bankruptcy proceeding. Primary duties include collecting estate property and liquidating it. The trustee has authority, with court approval, to employ professionals such as attorneys or accountants to perform services requiring expertise. If (s)he has appropriate qualifications, the trustee may employ himself or herself to perform a professional service, with court approval. Professionals employed by the trustee are entitled to reasonable compensation for their services out of the bankruptcy estate.
The selection of an accounting method for tax purposes by a newly incorporated C corporation
A. Must first be approved by the company’s board of directors.
B. Is made by filing a request for a private letter ruling from the IRS.
C. Is made on the initial tax return by using the chosen method.
D. Must be disclosed in the company’s organizing documents.
C. Is made on the initial tax return by using the chosen method.
A newly incorporated C corporation makes its initial accounting method selection simply by using the chosen method on their initial return. This is a form of an election.
