REG

Question 1

To whom do the uniform capitalization rules not apply?

Answer 1

The uniform capitalization rules do not apply to producers and resellers (who maintain inventories) if the company’s average annual gross receipts (for the past 3 years) do not exceed $26 million.

Question 2

When more than one asset is purchased for a lump sum, how is the allocated cost of an individual asset calculated?

Answer 2

FMV of asset divided by the FMV of all assets purchased times Lump sum purchase price

Question 3

Describe the residual method to allocate the purchase price to individual assets in a group of assets acquired.

Answer 3

The residual method allocates purchase price to asset categories up to FMV in the following order:
1. Cash and cash equivalents
2. Near-cash items
3. Accounts receivable, mortgages, credit card receivables
4. Inventory
Assets not listed in 1. through 4. (e.g., equipment, building, land)
Section 197 intangibles
Goodwill and going-concern value

Question 4

What is the donee’s basis in a gifted property when, on the date of gift, the property’s fair market value is greater than the adjusted basis?

Answer 4

The donee’s basis is the donor’s basis (transferred basis), increased for any gift tax paid attributable to appreciation.

Question 5

What are the donee’s basis and gain or loss in a gifted property when, on the date of gift, the property’s fair market value is less than the adjusted basis?

Answer 5

The donee has a dual basis for the property:

1. Loss basis = the FMV at the date of the gift is used if the property is later transferred at a loss
2. Gain basis = the donor’s basis is used if the property is later transferred at a gain
3. If the property is later transferred for more than FMV at the date of the gift but for less than the donor’s basis at the date of the gift, no gain (loss) is recognized

Question 6

What is the depreciable basis of a gifted property if it is converted from personal to business use?

Answer 6

If converted from personal to business use, the basis is the lesser of

1. FMV on the date of conversion or
2. Transferor’s AB.

Question 7

What is the basis in and holding period of inherited property?

Answer 7

Basis is the FMV on the date of death or 6 months after if the executor elects the alternate valuation date for the estate tax return. Holding period is automatic Long Term.

Question 8

What are the recovery periods for (1) computers, office machinery, cars, trucks, and R&E equipment and (2) office furniture and equipment?

Answer 8

MACRS Recovery Period = 5 years @ 200% = Computers, office machinery, cars, trucks, R&E equipment
MACRS Recovery Period = 7 years @ 200% = Office furniture and equipment

Question 9

What is the mid-year convention?

Answer 9

Under the mid-year convention, personal property is treated as placed into service at the midpoint of
The year acquired and
The year disposed of.
NOTE: The IRS MACRS table incorporates the mid-year convention in the first year but not the year of disposal. Cost recovery in the first year is the product of cost basis and the factor. In the year of disposal, cost of recovery is half of that product.

Question 10

What is the mid-month convention?

Answer 10

Under the mid-month convention, real property is treated as placed into service at the midpoint of
The month acquired and
The month disposed of.
NOTE: The IRS table incorporates the mid-month convention in the first year but not the year of disposal. Cost recovery in the first year is the product of cost basis and the factor. In the year of disposal, cost of recovery is half of that product.

Question 11

What is the mid-quarter convention?

Answer 11

The mid-quarter convention applies when over 40% of all personal property is placed in service during the last quarter of the year.
It treats each asset as placed in service at the midpoint of the quarter in which it was placed in service.

Question 12

What is the recovery period if a property is placed in service and disposed of in the same year?

Answer 12

No depreciation is allowed (recovery period = 0).

Question 13

Describe the Section 179 expense.

Answer 13

Under Sec. 179, a taxpayer may elect to deduct all or part of the cost of personal property and qualified real property used in the active conduct of a trade or business.
The deduction is no more than

$1,050,000 (this amount is reduced dollar for dollar if the asset acquisitions for the year are over $2,620,000) or
Taxable income from the active conduct of any trade or business during the tax year.

Question 14

Generally, how are intangible assets amortized for tax purposes?

Answer 14

Over 15 years, using the straight-line method.

Question 15

How is the periodic depletion expense calculated under cost depletion?

Answer 15

AB in mineral property divided by Estimated mineral units available at year’s start times Mineral units sold during year

Question 16

How is the periodic depletion expense calculated under percentage depletion?

Answer 16

Percentage depletion is the lower of

1. Taxable income before depletion × 50% or
2. Gross income × Statute percentage

Question 17

How is the realized gain or loss from the disposition of property calculated?

Answer 17

Money received (or to be received)
\+ FMV of other property received
\+ Liability relief
– Money or other property given up
– Selling expenses
– Liabilities assumed
= Amount realized
– Adjusted basis
= Gain (loss) realized

Question 18

Describe the wash sales rule.

Answer 18

A wash sale occurs when substantially the same securities are purchased within 30 days before or after being sold at a loss.
When a wash sale occurs,

The realized loss is not recognized (disallowed).
The disallowed loss is added to the basis of the security purchased in the wash sale.
The holding period of the security sold is included in that of the security purchased.

Question 19

Simple Trust

Answer 19

A simple trust is formed under an instrument having the following characteristics:

1. Requires current distribution of all its income
2. Requires no distribution of the res (i.e., principal, corpus)
3. Provides for no charitable contributions by the trust

Question 20

Complex Trust

Answer 20

A complex trust can:

1. Accumulate income,
2. Provide charitable contributions
3. Distribute amounts other than income

Question 21

At the beginning of the year, Paul created a $200,000 trust and named his wife Angie as the sole income beneficiary. In addition, principal of $10,000 must be distributed annually to her. What type of trust was created?

Answer 21

A grantor trust is any trust to the extent the grantor is the effective beneficiary. By creating a trust and naming his spouse as the beneficiary, Paul is treated as the effective beneficiary of the trust.

Trust to the extent the grantor is the effective beneficiary

1. The income attributable to a trust principal that is treated as owned by the grantor is taxed to the grantor
2. The trust is disregarded
   a. when the grantor has greater than 5% reversionary interest.
   b. a grantor is treated as the owner of a trust
   c. taxed on income from a trust in which the income may be applied for the benefit of the grantor

Question 22

5.2 Exempt status - Excise tax

Answer 22

No substantial part of activities of an exempt organization operated exclusively for scientific purposes may be attempts to influence legislation or a political candidacy. However, most organizations can elect to replace the substantial part of activities with a lobbying expenditure limit. An organization that exceeds the lobbying expenditure limit will be subject to an excise tax of 25% of the excess amount. This scientific organization exceeded its $30,000 limit by $10,000 and is therefore subject to a $2,500 excise tax ($10,000 × 25%)

Question 23

Regarding deductibility of property taxes, when is it deductible if taxpayer is on cash-basis?

Answer 23

Deductible when paid

Question 24

Charitable contributions limit is normally what amount aside from years 2020 and 2021?

Answer 24

25% in 2020/2021 but all others are limitation is 10% of TI

Question 25

When must a Corporation’s income tax return be filed if its tax year ends October 30?

Answer 25

On or before the 15th day of the 4th month = February 15th following the close of the tax year

Question 26

Interest income received by an S corporation, whether taxable or nontaxable,

Answer 26

increases the basis of an S corporation shareholder’s stock

Question 27

How do you find the partners basis in noncash property received in complete partnership liquidation?

Answer 27

Take the AB of the partner less cash received

Question 28

Section 1202 Qualified Small Business Stock held for more than 5 years. Is the gain taxable?

Answer 28

100% no

Question 29

Under a plan of complete liquidation, Len Corporation distributed land, having an adjusted basis to Len of $26,000, to its sole shareholder. The land was subject to a liability of $38,000, which the shareholder assumed for legitimate business purposes. The fair market value of the land on the date of distribution was $35,000. What is the amount of Len Corporation’s recognized gain (or loss)?

Answer 29

Section 336(a) provides that a corporation should treat a complete liquidation as a sale using the fair market value. However, Sec. 336(b) requires that the fair market value used should not be less than any liability accepted by the distributee. Since Len is transferring property with a liability of $38,000, which is higher than the $35,000 FMV, the $38,000 is used as the new FMV. Therefore, Len Corporation recognizes a $12,000 gain ($38,000 new FMV – $26,000 adjusted basis).

Question 30

Bethel Corporation distributed $125,000 to its shareholders on December 31, 2021, the end of its taxable year. Bethel’s capital structure was as follows:
Capital stock - 5,000 shares issued and outstanding
$500,000
Current earnings and profits 1/1/21-12/31/21
15,000
Accumulated earnings and profits 3/1/17-12/31/20
75,000
Mr. Rutland held 200 shares of Bethel Corporation’s stock. His basis in the stock was $100 per share. How much of the Bethel Corporation distribution is a dividend to Mr. Rutland?

Answer 30

A corporate distribution is a dividend that must be included in the recipient’s gross income under Sec. 301(c)(1) to the extent it comes from accumulated or current E&P of a corporation. To the extent the distribution exceeds current and accumulated E&P, it is treated as a return of capital to the shareholder. Bethel Corporation distributed $25 per share ($125,000 ÷ 5,000 shares outstanding), Mr. Rutland received $5,000 ($25 × 200 shares) as his share of the distribution. Bethel distribution exceeded its E&P, so part of the dividend must be a return of capital. Only $18 of each dividend per share is deemed to have come from E&P ($90,000 E&P ÷ 5,000 shares outstanding). Therefore, Mr. Rutland’s taxable dividend income is $3,600 ($18 × 200 shares).

Question 31

Under the Secured Transactions Article of the UCC, which of the following statements is(are) correct regarding the filing of a financing statement?
I. A financing statement must be filed before attachment of the security interest can occur.
II. Once filed, a financing statement is effective for an indefinite period of time provided continuation statements are timely filed.

Answer 31

II only. Attachment of a security interest in collateral occurs when it is enforceable against the debtor. Attachment is not dependent on the filing of a financing statement. A duly filed financing statement is effective for 5 years from the filing date. A continuation statement extending perfection for 5 years may be filed during the last 6 months before expiration of this period. Accordingly, the filing of the financing statement is effective for an indefinite period until a continuation statement is not filed or a termination statement is filed.

Question 32

14.2 Morton was the sole shareholder for PAX Trades, an S corporation, for the past 9 years. Morton is planning a semi-retirement and decided to sell some of his shares. On March 1, Year 10, Morton sold 25% of his shares to Mark and on August 31, Year 10, Morton transferred 25% of his shares to Mary. PAX had $400,000 in net income in Year 10. What amount of income from PAX should Morton report on his return for Year 10 (a non-leap year)?

Answer 32

An S corporation shareholder’s pro-rata share of income from an S corporation is computed on a per-share, per-day basis.
Therefore, the amount of income allocated to Morton is $283,013 [($400,000 × 100% × 60/365) + ($400,000 × 75% × 183/365) + ($400,000 × 50% × 122/365)]

Question 33

15.2 A, B, and C formed a calendar-year partnership. Profits and losses are to be shared equally. A contributed a building to be used in the business that had an adjusted basis to A of $100,000 and a fair market value of $130,000. The partnership also assumed A’s $60,000 mortgage on the building. B and C each contributed $40,000 in cash to the partnership’s capital. What is the partnership’s basis for determining depreciation on the building?

Answer 33

Under Sec. 723, the partnership’s basis in the property is the contributing partner’s basis at the time of contribution. Therefore, the partnership’s basis in the building is A’s adjusted basis of $100,000. No adjustment on the basis of the building is made for the mortgage.

Question 34

16.3 Mr. Gorda, in the liquidation of his interest, receives Property #1. Mr. Gorda has a basis of $10,000 for his one-third interest in a partnership. The partnership assets are cash of $4,000, Property #1 with a basis of $11,000 and fair market value of $11,000, and Property #2 with a basis of $15,000 and fair market value of $18,000. The distributed property takes Mr. Gorda’s basis of $10,000 in his hands. If the partnership elects Sec. 754 optional basis adjustment, what is the basis of Property #2 retained by the partnership?

Answer 34

Although the partnership usually does not adjust its basis for its retained property when it distributes other property to a partner, under Sec. 754, the partnership may elect to increase the basis if the basis to the partnership of the distributed property exceeds the basis at which the distributee may take that property. In this case, the $1,000 that is “unused” on the basis of the distributed property may be added to the basis of Property #2 retained by the partnership. Thus, the basis of Property #2 is $16,000.

Question 34

Estimated tax - avoid penalty

Answer 34

A. 90% of current year tax
B. 100% of prior year’s tax liability
C. 110% of prior year’s tax liability if AGI > $150K

Question 35

Installment method formula

Answer 35

GROSS PROFIT / CONTRACT PRICE or SELLING PRICE x AB = GAIN

Question 36

KIDDIE TAX