R5

Question 1

An S corporation has two shareholders who are also employees of the corporation.
Shareholder A owns 20 shares and shareholder B owns 90 shares. The total number of shares issued and outstanding is 2,000. The corporation pays the health insurance premiums for all its employees and families. The cost of family coverage is $5,300. The corporation pays for family coverage for both shareholders. Because the company paid for health insurance, which of the following amounts would be reported to Shareholder A as his income?

Answer 1

The value of fringe benefits such as health insurance is includable in the gross income of S corporation shareholders who own more than 2 percent of the S corporation’s stock (unless the S corporation does not deduct the cost of such benefits).

In this case, Shareholder A only owns 1 percent of the S corporation’s stock
(20 shares/2,000 shares = 1 percent).

Thus, Shareholder A is not required to include the value of the health insurance in his gross income

Question 2

The basis to a partner of property distributed “in kind” in complete liquidation of the partner’s interest is the

Answer 2

Adjusted basis of the partner’s interest reduced by any cash distributed to the partner in the same transaction.

Rule:
Upon dissolution, the “basis” of property distributed to a partner will be the
partner’s “adjusted basis” in the partnership, net of any cash distributions (not FMV of property distributed).

Question 3

Garner is a 25 percent partner in Classic General Partnership. On February 3, Garner’s tax basis in Classic was $10,000 when she received a nonliquidating distribution of $5,000 cash. Classic had no unrealized receivables, appreciated inventory, or properties that had been contributed by its partners. Classic reported the following for
the same year:

U.S. Treasury interest $ 30,000
Ordinary business income 120,000

What amount of income from Classic should Garner include in her gross income for that
year?

Answer 3

Garner’s 25 percent share of the partnership’s $120,000 ordinary
business income is $30,000.
Her 25 percent share of the partnership’s $30,000 U.S.
Treasury interest is $7,500.
These are both included in Garner’s gross income for the year.

A nonliquidating cash distribution is a nontaxable return of capital to the extent
that the partner has basis in his or her partnership interest. Because Garner’s basis in her partnership interest is more than the $5,000 cash distribution, the distribution is
nontaxable.

Garner’s total gross income for the year is $30,000 + $7,500 = $37,500

Question 4

S corporation status become effective?

Answer 4

An S corporation election made by the 15th day of the third month of the year can be retroactive to the beginning of the
year. Any election made subsequent to that date is effective as of the first day of the next year

Question 5

what does “Hot assets” of a partnership would include?

Answer 5

Hot assets are:
(1) Unrealized receivables and,
(2) Appreciated inventory.

As a general rule, a partner who sells or exchanges his or her partnership interest has a recognized capital gain or loss.

The capital gain or loss is measured by the difference between the amount realized for the sale and the adjusted basis of the partnership interest.

An exception to the capital gain treatment is on any gain that represents a partner’s
share of “hot assets”. Any gain that represents a partner’s share of hot assets is treated as ordinary income

Question 6

Turner, Reed, and Sumner are equal partners in TRS partnership. Turner contributed land with an adjusted basis of $20,000 and a fair market value (FMV) of $50,000. Reed contributed equipment with an adjusted basis of $40,000 and an FMV of $50,000. Sumner provided services worth $50,000. What amount of income is recognized as a result of the transfers?

Answer 6

Generally, no gain or loss is recognized on a contribution of property to a partnership in return for a partnership interest (note: when contributed property is subject to a liability, if the decrease in the contributing partner’s individual basis exceeds the partner’s partnership basis, the excess amount is treated like taxable boot and is a gain to that partner).

So, given the facts in this question, Turner and Reed will recognize no income or gain.

On the other hand, the value of a partnership acquired for services is ordinary income to the partner rendering those services. So, Summer must recognize $50,000 of ordinary income on account of Summer’s rendering to the partnership services in exchange for a partnership interest with a FMV of $50,000.

Question 7

Hunter contributed artwork in exchange for a partnership interest. The artwork had an
adjusted basis of $7,000,
a fair market value of $50,000,
subject to a loan of $5,000.

What is the partnership’s basis in the artwork?

Answer 7

The partnership’s basis in the artwork is $7,000.

A partnership’s basis in property contributed by a partner is the same as the partner’s adjusted basis in
the property.

Question 8

George and Martha are equal partners in G&M Partnership.
At the beginning of the current tax year, the adjusted basis of George’s partnership interest was $32,500,
which included his share of $40,000 of partnership liabilities.

During the tax year, the following
information applied to G&M:

Operating loss === 30,000
Interest and dividend income === 8,000
Partnership liabilities at end of year=24,000

What was the basis of George’s partnership interest at year-end?

Answer 8

A partner’s share of operating losses reduces that partner’s basis.

Likewise, a reduction in a partner’s share of liabilities reduces basis.

A partner’s basis will increase by that partner’s share of income such as dividends and interest.

Initial basis in partnership interest ==32,500
Equal share of interest and dividends 4,000
Equal share of operating loss ===== (15,000)
Share of decreased partnership liabilities at
year-end==== (8,000)
(George’s partnership interest was $32,500,
which included his share of $40,000 of partnership liabilities. which is supposed to be 20,000 from the 40k. Then year end liabilities of partnership is 24,000 and 12,000 is G’s share. Therefore 20,000-12,000 = 8000)

Basis of George’s partnership interest at year-end ==== 13,500

Question 9

Apply limitations in determining a partner’s deduction for the partner’s share of partnership losses?

Answer 9

1. AT - RISK
2. Passive losses

Question 10

S-corp Shareholders consent

Answer 10

All the shareholders must be agreed upon in writing for an S-corp election to be valid

Question 11

DomCo (a domestic corporation) owns 100 percent of ForCo (a foreign corporation),
which operates outside of the United States. Which of the following statements is
correct?

Answer 11

ForCo’s Subpart F income will generally be treated as deemed dividend subject to immediate recognition by DomCo.

Because ForCo is a CFC, certain types of income (e.g., passive investment income) earned are subject to immediate taxation

Question 12

Baker is a partner in BDT with a basis in his partnership interest of $60,000. BDT made a liquidating distribution of land with an adjusted basis of $75,000 and a fair market value of $40,000 to Baker. What amount of gain or loss should Baker report?

Ans == 0

Answer 12

In a complete liquidation of a partnership, a partner (Baker) recognizes gain only to the extent that money received (if any) exceeds the partner’s adjusted basis in the partnership interest immediately before the distribution.
In this question, there is no money distributed, so there is no gain recognized.

The partner recognizes loss if only money, unrealized receivables, or inventory are received and if the basis of the assets received is less than the partner’s basis in the partnership interest. In this question, there is no money, unrealized receivables, or inventory distributed, so there is no loss recognized, regardless of the partner’s basis in the partnership interest.

Even though the land has a $40,000 fair market value, Baker’s basis in the land is his $60,000 basis in the partnership interest, effectively giving him a $20,000 built-in loss that he can recognize by selling the land.

Question 13

Partnerships —-terminate

Answer 13

Partnerships terminate by cessation of partnership activities and liquidation, or when the partnership’s business activities no longer continue in partnership form, or when there are fewer than two partners. Changes in ownership do not terminate partnerships if at least two partners remain.

Question 14

A partner sold a 25 percent interest in a partnership for $400,000 cash plus assumption of the partner’s share of the partnership liabilities. The following additional information relates to the partnership activities:

Partner’s initial cash contribution $ 100,000
Partnership income during the partner’s ownership time period 1,000,000
Partnership liabilities at date of sale 60,000
Partner’s cash withdrawals 50,000

How much gain is recognized by the partner upon the sale of the partnership interest?

Answer 14

The gain recognized by the partner on the sale of the partnership interest is $100,000, which is the difference between the amount realized on the sale and the adjusted basis of the partnership interest at the date of the sale.

Amount realized:
Cash sales price $ 400,000
Relief from partnership liabilities
(60,000 × 25%) 15,000
$415,000

Adjusted basis in partnership interest:
Initial cash contribution $100,000
Share of partnership income
(1,000,000 × 25%) 250,000
Share of partnership liabilities
(60,000 × 25%) 15,000
Partnership distributions (50,000)
$315,000
Amount realized $415,000
Adjusted basis in partnership interest
(315,000)
Gain recognized on sale of partnership interest $100,000

Question 15

S-CORP - BUILT IN GAIN

Answer 15

The tax on BIG is a corporate level tax on the S Corp that dispose of assets that are

Appreciated while the company was a
C-CORP

Question 16

A partner received a partnership interest with a fair market value (FMV) of $55,000 in
exchange for the following items:
Basis FMV
Cash 20,000 20,000
Property 10,000 30,000
Services rendered 0 5,000

What is the partner’s basis in the partnership interest?

Answer 16

A partner’s basis in his partnership interest equals

the basis of assets contributed, === 20,000
+
the value of the partnership interest received in exchange for
services rendered. ==========10,000+5000

The partner’s basis is
($20,000 + $10,000 + $5,000). === $35,000

Question 17

On January 2, Year 1, Arch and Bean contribute cash equally to form the JK Partnership.
Arch and Bean share profits and losses in a ratio of 75% to 25%, respectively.
For Year 1, the partnership’s ordinary income was $40,000. A distribution of $5,000 was made to Arch during Year 1.

What is Arch’s share of taxable income for Year 1?

Answer 17

Partners are taxed on their share of partnership income whether distributed or not.

Arch must report 75% x $40,000, = $30,000

Question 18

On January 2, Year 1, Black acquired a 50% interest in New Partnership by contributing
property with an
adjusted basis of $7,000 and a
fair market value of $9,000,
subject to a mortgage of $3,000.

What was Black’s basis in New at January 2, Year 1?

Answer 18

basis of =7,000
Debt Relief
(3,000*50%) = 1,500

Basis = 5.500

Question 19

The adjusted basis of Vance’s partnership interest in Lex Associates was $180,000
immediately before receiving the following distribution in complete liquidation of Lex:

             Basis to Lex       FMV Cash         $100,000           $100,000 Real estate 70,000                 96,000

What is Vance’s basis in the real estate?

Answer 19

In a liquidating distribution, the $100,000 cash is applied first to the $180,000 partnership basis, reducing it to $80,000.

Even though the partnership’s
basis in the real estate is only $70,000, Vance’s basis in the real estate will be his
remaining basis in the partnership interest after the cash distributions ($80,000)
because this is the last asset distributed and it is a liquidating distribution (i.e., Vance’s
basis in his partnership interest must be reduced to zero).

Neither Vance nor the
partnership recognizes any gain or loss from the distribution.

Question 20

Bristol Corp. was formed as a C corporation on January 1, Year 1, and it elected S
corporation status on January 1, Year 3. At the time of the election, Bristol had
accumulated C corporation earnings and profits, which have not been distributed.
Bristol has had the same 25 shareholders throughout its existence. In Year 6, Bristol’s S Corporation election will terminate if it:

Answer 20

In Year 6, Bristol’s S Corporation election will terminate if it:

S corporations that are former C corporations with undistributed
C corporation earnings and profits are restricted in the amount of passive investment income they can realize without terminating their S election.

The restriction is 25 percent of total gross receipts from passive investment income.

The S election is terminated if the S corporation has passive investment income greater than 25 percent
of gross receipts for three consecutive years.

After three years with 90 percent of its
gross receipts from passive sources, Bristol will lose its S corporation status on the first
day of its Year 6 taxable year

Question 21

A C corporation made a proper S election and will be treated as an S corporation as of the first day of Year 2. In this case, the corporation is:

Answer 21

A C corporation that makes an S election is exempt from built-in gains tax if the sale of assets does not occur within five years of the first day that the S election is effective.

In this case, the sale does not occur within five years, so it is not subject to built-in gains tax.

Not subject to built-in gains tax if Year 7 is the first year it sells assets that it
held as a C corporation.

Question 22

when does The holding period of a partnership interest acquired in exchange for a contributed capital asset begins on the date:

Answer 22

The partner’s holding period of the capital asset began.

The holding period of a partnership interest acquired in exchange for a contributed
capital asset begins on the date the partner’s holding period of the capital asset began.

Question 23

Dale was a 50% partner in D&P Partnership. Dale contributed $10,000 in cash upon the formation of the partnership.

D&P borrowed $10,000 to purchase equipment.
During the first year of operations, D&P had $15,000 net taxable income,
$2,000 tax-exempt interest income, a $3,000 distribution to each partner, and a $4,000 reduction of debt.

At the end of the first year of operation, what amount would be Dale’s basis?

Answer 23

Rule: The partnership basis formula follows:
Basis = Capital account + Partner’s share of liabilities

Dale’s basis at the end of the first year of operations is calculated as follows

initial contribution at formation
10,000
Net taxable income
[$15,000 × 50%] == 7,500
Tax exempt income
[$2,000 × 50%] = 1,000
Distributions =(3,000) [to each partner]

Share of partnership debt
[$10,000 × 50%] = 5,000
Share of decrease in partnership debt
[$4,000 × 50%] =(2,000)
Basis at year-end = 18,500

Question 24

Ball and Baig are equal general partners in the firm of Games Associates. On January 1
of the current year, each partner’s basis in their
Games partnership interest was
$50,000. During the year,
Games borrowed $80,000, for which Ball and Baig are
personally liable.
Games sustained an ordinary business loss of $30,000 for the current year.

The basis of each partner’s interest in Games at the end of the current year is:

Answer 24

Beg. Basis = 50,000
Partner’s borrowings (80,00050%)
= 40,000
Ordinary Business loss (30,00050%)
=(15,000)

Ending Basis =75,0000