Partnerships, S Corps and Other Taxation Areas CRFF MCQ

Question 1

To determine the amount of a taxable estate, certain deductions are allowed for costs such as

Answer 1

ESTATE TAX RETURN

funeral expenses, 
debts,
administrative expenses, 
debts at death, and 
charitable bequests
bequests to a spouse 

no other personal bequests (even to a son or daughter) can be used as a deduction

no personal exemption

Question 2

Unrelated business income over a set limit is normally taxable to a tax-exempt organization, but a number of exceptions are available:

Answer 2

not taxed if

generated entirely by the work of volunteers
sales of donated merchandise,
rental of real property,
interest and dividend revenues (unless the result of investments obtained through debt financing), and
business carried on for the convenience of the organization (e.g.a student bookstore)

Question 3

Regardless of their mission and intent, an organization cannot simply assume that it has tax-exempt status unless

Answer 3

it is a church or very small organization with gross annual receipts not more than $5,000

Form 1023 by the end of 15 months from the end of the month of the organization’s inception to gain status

File an annual form (Form 990) to provide ongoing information.

Question 4

Being tax-exempt does not keep the organization from having to pay income taxes if

Answer 4

it generates unrelated business income over a maximum dollar limit (1,000 in recent years).

Question 5

Being tax-exempt allows donors to take a gift as tax deduction but only in certain cases.

Answer 5

a Section 501 (c)(3) tax-exempt organization (created for charitable, educational, or scientific purposes) offers this benefit

a Section 501 (c)(4) tax-exempt organization (an advocacy group) cannot be claimed by the donor as an itemized deduction

Question 6

amount can be deducted on estate income tax return as a personal exemption

Answer 6

ESTATE INCOME TAX RETURN

$600

Question 7

Treasury Circular 230 limits the authority of a RTRP to practice before the IRS, restricting such authority to

Answer 7

preparation and signing of returns and claims for refunds

representation of clients before IRS revenue agents or customer service agents for periods for which she has signed a tax return or claim for refund.

January 2013, the IRS suspended the RTRP program subject to appeal of a Federal court ruling.

Question 8

Under Circular 230, a RTRP may not represent clients

Answer 8

before IRS revenue officers,
appeals officers or
counsel,

January 2013, the IRS suspended the RTRP program subject to appeal of a Federal court ruling.

Question 9

Enrolled agents (EAs)

Answer 9

are granted the same privileges to practice before the IRS as CPAs and attorneys (although they cannot claim certification or an employee relationship with the IRS),

required to register with the IRS and obtain a PTIN

Question 10

paid preparers

Answer 10

may sign a return if there is a reasonable basis of tax positions contained therein (defined as at least 20% probability of the position being upheld under examination),

must advise his clients as to any penalties that could result if the uncertain positions are not upheld.

must advise the client of disclosures that could help avoid penalty and what these disclosures should include, but he is not required to write them into the return,

prohibited from signing a return with a frivolous position as well as advising clients as to how to impede IRS or federal tax law administration.

Question 11

covered a opinion

Answer 11

1) the primary purpose is tax avoidance,
2) tax avoidance is a significant purpose and the advise if considered a reliance opinion or other specified item, or
3) if it involves a so-called listed transaction that has been specifically identified by the IRS as being driven by tax avoidance

reliance opinion (which concludes a greater than 50% probability of a favorable client outcome in tax avoidance) is considered a covered opinion UNLESS the practitioner clearly states that it should not be used to avoid tax or tax penalties

Question 12

all other advice (not covered opinions)

Answer 12

other written tax advice subject to looser requirements

standard of reasonableness still applies

practitioner may not base advice on assumptions or client representations that are unreasonable

Question 13

Consideration in one client’s tax return of information obtained in preparation of another client’s return

Answer 13

responsibility under AICPA standards and Treasury Circular 230 to follow up on any information on a return that one has reason to believe is incomplete or incorrect

Question 14

The Internal Revenue Code contains detailed information for preparer penalties related to uncertain tax positions. The penalties are, in more detail,

Answer 14

the greater of dollar amounts listed or 50% of the preparer’s income obtained from preparation of the return or claim for refund in question.

An uncertain tax position lacking substantial authority (40% or higher probability of being upheld), but not undertaken with willful or reckless disregard for laws and regulations, may be subject to the lesser penalty unless

1) it is disclosed adequately,
2) has a reasonable basis (20% chance of being upheld), or
3) there was a reasonable cause for any understatement of tax liability.

Question 15

“more likely than not” (50% or greater probability of being upheld) threshold applies to

Answer 15

certain so-called “tax shelters” specifically identified by the IRS.

Question 16

Gramm-Leach Bliley (Financial Modernization) Act

Answer 16

protection of client information.

Tax return preparers included under the jurisdiction of the Federal Trade Commission (FTC).

FTC regulations require the development of a plan to safeguard client information.

Moreover, a financial institution maintains responsibility for the confidentiality of client information when services are outsourced.

Question 17

If a net loss results from the operations of the S corporation,

Answer 17

the owner can use that the appropriate portion of that loss to reduce taxable income up to the capital basis invested

Question 18

Partnerships can change small amounts of ownership without any tax impact. However, if too much of the ownership is changed, (sale or exchange of at least 50% of total interest in partnership income and capital in a 12-month period)

Answer 18

termination

assets are assumed to be distributed and then contributed back to the new partnership.

No tax effect UNLESS significant amounts of cash and distribution creates tax effects for partners

Question 19

Debts and at-risk basis for a partnership or S corporation

Answer 19

Partnership - increase at-risk basis because patners are ultimately responsible for the debts that are incurred. -

S corporation - do not increase at-risk basis

Question 20

P/S

if the basis to company of property distributed exceeds owner’s basis in the business,

Answer 20

basis of items received must be reduced to the owner’s basis

no gain is recorded UNLESS cash received exceeded owner’s basis – recognize gain for the excess and any additional property is recorded with a zero basis

Question 21

Basis to partner when basis of the property received is larger than the basis reported by the partner for the partnership as a whole. No cash is received.

Answer 21

No gain or loss is reported

Property moves from partnership to partner and the upper limit of recognition for the partner is the basis in the partnership.

Carryover basis.

Question 22

In a nonliquidating distribution from a partnership, the tax basis of the property

Answer 22

is normally retained and the partner’s basis in the partnership is reduced by the same amount so that no gain or loss is recognized.

A gain is only possible if the cash received exceeds the tax basis of the partnership.

Question 23

In a liquidating distribution, the tax basis of the partnership

Answer 23

is first removed from the records of the partner and the received property is then recorded at this same amount.

Cash received is recorded for at value to liquidated partner.

A gain is only possible if the cash received exceeds the tax basis of the partnership

Liquidated partner’s remaining basis in the partnership is recorded as the basis for the property received.

No gain or loss is recorded.

Question 24

Taxable income to C Corp s/h

Answer 24

% ownership x total distributions to the extent of net income (dividend income)

Question 25

Taxable income to Pship s/h

Answer 25

% ownership x total net operating income (ordinary income)

Question 26

Partnerships items that pass directly through the tax return of the individual partners.

Answer 26

rent and royalty income,
capital gains and losses,
dividend and interest revenue, and
charitable contributions

Total of remaining items is ordinary income that is also allocated to the individual partners.

Question 27

A guaranteed payment to a partner is

Answer 27

an expense of the business in determining the ordinary income for the year

and income for that specific partner

Question 28

In a partnership or S corporation, distributions to the owners are

Answer 28

reductions to the tax basis and, normally, do not have an income effect.

Question 29

In a partnership or S corporation, long-term capital gain

Answer 29

is a pass-through item so that each owner recognizes a portion of the gain

Question 30

What percentage of the stock of this S corporation must owners hold to terminate the S corporation status?

Answer 30

more than half of the shares of stock must consent to revocation

Question 31

A partner can deduct the ownership percentage of any partnership ordinary business loss but only up to the person’s “at-risk balance.”

Answer 31

The “at-risk balance” is the tax basis in the partnership plus any loans by that partner to the partnership plus their share of the debts of the business

Question 32

requirements to file a tax return as an S Corporation are

Answer 32

domestic corporation

allowable shareholders:
individuals, 
certain trusts 
estates 
NOT partnerships, corporations or non-resident aliens

no more than 100 shareholders

one class of stock

ineligible corporation:
certain financial institutions,
insurance companies, and
domestic international sales corporations

Question 33

transfer equipment and its debt in excess of basis to S Corp at inception of business

Answer 33

contributor recognizes gain for excess debt conveyed