REG 7 Flashcards
(150 cards)
1
Q
In 2014, Best Corp., an accrual-basis calendar year C corporation, received $100,000 in dividend income from the common stock that it held in an unrelated domestic corporation.
The stock was not debt-financed, and was held for over a year. Best recorded the following information for 2014:
Loss from Best’s operations ($ 10,000)
Dividends received 100,000
Taxable income (before dividends-received deduction) $ 90,000
========
Best’s dividends-received deduction on its 2014 tax return was
A
If a C corporation owns less than 20 percent of a domestic corporation, 70 percent of dividends received or accrued from the corporation may be deducted.
A C corporation owning 20 percent or more but less than 80 percent of a domestic corporation may deduct 80 percent of the dividends received or accrued from the corporation. Similarly, C corporation owning 80 percent or more of a domestic corporation may deduct 100 percent of the dividends received or accrued from the corporation. However, the dividend received deduction is limited to a percentage of the taxable income of the corporation, unless the corporation sustains a net operating loss. If the corporation has a net operating loss, the dividend received deduction may be taken without limiting the deduction to a percentage of the corporation’s taxable income.
This response (63’000) uses the correct deduction percentage for Best Corp.’s ownership percentage and correctly limits the dividend received deduction to a percentage of the corporation’s taxable income. The limit is calculated by multiplying taxable income (before the dividend received deduction), i.e., $90,000, by the correct dividend received deduction percentage, i.e., 70 percent.
2
Q
Tapper Corp., an accrual basis calendar year corporation, was organized on January 2, 2014. During 2014, revenue was exclusively from sales proceeds and interest income.
The following information pertains to Tapper:
Taxable income before charitable contributions for the year ended December 31, 2014 $500,000
Tapper’s matching contribution to employee-designated qualified universities made during 2014 10,000
Board of Directors’ authorized contribution to a qualified charity (authorized December 1, 2014, made February 1, 2015) 30,000
What is the maximum allowable deduction that Tapper may take as a charitable contribution on its tax return for the year ended December 31, 2014?
A
A corporation’s charitable contributions are deductible in the tax year paid, subject to a 10 percent of taxable income limitation. For the charitable contributions deduction, taxable income is calculated absent deductions for charitable contributions, dividends received, net operating losses and capital loss carrybacks.
Hence, Tapper Corp.’s charitable contributions would be limited to 10 percent of its $500,000 in taxable income before the charitable contributions deduction or $50,000. However, Tapper Corp. would not be subject to the limitation and may only deduct $40,000 because it only has $40,000 in contributions to charitable contributions. Tapper Corp. may deduct the employee-designated charities as the employees are viewed as performing only an administrative duty.
3
Q
For year 2, Quest Corp., an accrual-basis calendar-year C corporation, had an $8,000 unexpired charitable contribution carryover from year 1. Quest’s year 2 taxable income before the deduction for charitable contributions was $200,000. On December 12, year 2, Quest’s board of directors authorized a $15,000 cash contribution to a qualified charity, which was made on January 6, year 3. What is the maximum allowable deduction that Quest may take as a charitable contribution on its year 2 income tax return?
A
Charitable contributions are limited to 10% of taxable income before the charitable contribution deduction, which is $20,000 ($200,000 x 10%). Total contributions are $15,000 + $8,000 = $23,000. The deduction is limited to $20,000 and $3,000 of the contribution from Year 1 is carried forward to Year 3.
4
Q
Robin, a C corporation, had revenues of $200,000 and operating expenses of $75,000. Robin also received a $20,000 dividend from a domestic corporation and is entitled to a $14,000 dividend-received deduction. Robin donated $15,000 to a qualified charitable organization in the current year. What is Robin’s contribution deduction?
A
Taxable income before dividends and contributions is $125,000 ($200,000 - $75,000). The 10% of taxable income limitation for C corporations uses taxable income BEFORE the dividends received deduction, which is $145,000. Thus, the charitable contribution limitation is $14,500 ($145,000 x 10%).
Taxable income before dividends $125,000
Dividends 20,000
Taxable income before special deductions $145,000
Charitable contributions (14,500)
Taxable income after charitable deduction $130.500
Dividends-received deduction (14,000)
Taxable income $116,500
5
Q
John Budd is the sole stockholder of Ral Corp., an accrual basis taxpayer engaged in wholesaling operations.
Ral’s retained earnings at January 1, 2014 amounted to $1,000,000.
For the year ended December 31, 2014, Ral’s book income, before federal income tax, was $300,000.
Included in the computation of this $300,000 were the following:
Dividends received on 500 shares of stock of a taxable domestic corporation that had 1,000,000 shares of stock outstanding (Ral had no portfolio indebtedness) $ 1,000
Loss on sale of investment in stock of unaffiliated corporation (this stock had been held for two years; Ral had no other capital gains or losses) (5,000)
Keyman insurance premiums paid on Budd’s life (Ral is the beneficiary of this policy) 3,000
Group term insurance premiums paid on $10,000 life insurance policies for each of Ral’s four employees (the employees’ spouses are the beneficiaries) 4,000
Amortization of cost of acquiring a perpetual dealer’s franchise (Ral paid $48,000 for this franchise on July 1, 2014, and is amortizing it over a 48-month period) 6,000
Contribution to a recognized, qualified charity (this contribution was authorized by Ral’s board of directors in December 2013, to be paid on January 31, 2014) 75,000
On December 1, 2014, Ral received advance rental of $27,000 from a tenant for a three-year lease commencing January 1, 2015 to cover rents for the years 2015, 2016, and 2017. In conformity with GAAP, Ral did not include any part of this rental in its income statement for the year ended December 31, 2014.
What portion of the dividend revenue should be included in Ral’s 2014 taxable income?
A
Since Ral Corp. owns less than 20 percent of the domestic corporation that paid the dividends (500 shares of 1,000,000 total shares), it may take a 70 percent dividend received deduction for the dividends.
Hence, Ral Corp. would include $300 of its dividend revenue in its taxable income. If Ral Corp. owned 20 or more but less than 80 percent of the domestic corporation, it could have deducted 80 percent of the dividends. Similarly, if 80 percent or more of the corporation was owned, 100 percent of the dividends would be deductible. Thus, this response is correct.
6
Q
When a corporation’s charitable contributions exceed the limitation for deductibility in a particular year (i.e., 10 percent of taxable income for the year), how may the excess be treated?
A
When a corporation’s charitable contributions exceed the limitation for deductibility in a particular year (i.e., 10 percent of taxable income for the year), the excess may be carried over and deducted for five years.
7
Q
Widget Corporation was formed in Year 1. Gross receipts for its first four years of operations are as follows
Year 1 $6,000,000
Year 2 $7,000,000
Year 3 $5,000,000
Year 4 $4,000,000
For each year, is Widget Corporation exempt from the AMT under the small corporation exemption?
A
In the first year of a corporation’s existence it is automatically exempt from the AMT (Yes). Widget’s first testing window to determine if it is subject to the AMT in Year 2 is just Year 1 gross receipts of $6,000,000. Since this exceeds the $5,000,000 threshold for the first three-year testing window (or portion thereof), Widget is NOT exempt from the AMT in Year 2. Once the small corporation exemption test is failed, then the corporation is NOT exempt for all future tax years, so the answer is NO for Years 3 and 4 also.
8
Q
What does The AMT prevent taxpayers with significant income to?
A
The amount that the tentative minimum tax exceeds the regular tax is the alternative minimum tax (AMT). This tax was enacted to ensure that taxpayers cannot avoid their fair share of the tax burden. The AMT prevents taxpayers with significant income from avoiding a similar tax liability. The AMT is payable in addition to the regular tax.
9
Q
Rona Corp.’s 2014 alternative minimum taxable income was $200,000.
The exempt portion of Rona’s 2014 alternative minimum taxable income was
A
When computing alternative minimum taxable income, corporations may take an exemption of $40,000 minus 25 percent of alternative minimum taxable income exceeding $150,000.
Thus, this exemption is equal to zero when alternative minimum taxable income is equal to or exceeds $310,000.
Rona Corp.’s exempt portion of its 2014 alternative minimum taxable income was $27,500 = $40,000 - [25 percent * ($200,000 - $150,000)].
10
Q
Tan Corporation calculated the following taxes for the year:
Regular tax liability $210,000
Tentative minimum tax 240,000
Personal Holding Company Tax 65,000
What is Tan’s total tax liability for the year?
A
A corporation must pay the alternative minimum tax (AMT) to the extent that the tentative minimum tax liability exceeds the regular tax liability. Therefore, Tan must pay an AMT of $30,000 ($240,000 - $210,000) in addition to the regular tax liability of $210,000. The personal holding company tax is an excise tax that penalizes companies who have excess investment income. The $65,000 PHC tax is in addition to the regular tax.
The total tax liability is $305,000 ($210,000 + $30,000 + $65,000).
11
Q
Kari Corp., a manufacturing company, was organized on January 2, 2014. Its 2014 federal taxable income was $400,000 and its federal income tax was $100,000.
What is the maximum amount of accumulated taxable income that may be subject to the accumulated earnings tax for 2014 if Kari takes only the minimum accumulated earnings credit?
A
The accumulated earnings tax is a penalty tax imposed on corporations that accumulates earnings and profits for the purpose of avoiding income tax for its shareholders. The accumulated earnings tax is equivalent to 15 percent of the corporation’s accumulated taxable income.
Accumulated taxable income is composed of taxable income adjusted downward for federal income and excess profits taxes, charitable deduction in excess of the ceiling, net capital gains and losses, and taxes of foreign countries and U.S. possessions and upward for certain corporate deductions, net operating loss deduction and capital loss carryback or carryover.
When calculating the accumulated earnings tax, corporations are given a credit, the accumulated earnings credit, of $250,000 ($150,000 for certain service corporations) plus dividends paid within the first 2 1/2 months of the corporation’s tax year less accumulated earnings and profits at the end of the preceding tax year.
Hence, the maximum amount of accumulated taxable income that may be subject to the accumulated earnings tax for 2014 if Kari Corp. takes only the minimum accumulated earnings credit is $50,000. This amount is composed of $400,000 in taxable income less both a downward adjustment of $100,000 for federal income taxes and the $250,000 accumulated earnings credit.
12
Q
Acme Corp. has two common stockholders. Acme derives all of its income from investments in stocks and securities, and it regularly distributes 51% of its taxable income as dividends to its stockholders. Acme is a
A
Domestic and foreign corporations satisfying the personal holding company stock ownership and income tests are personal holding companies. The stock ownership test is satisfied if, at some time during the corporation’s tax year, 50 percent or more of the corporation’s stock was directly or indirectly owned by five or fewer individuals. Acme Corp. only has two shareholders, satisfying the stock ownership test.
The income test is satisfied if 60 percent or more of the corporation’s adjusted ordinary gross income is personal holding company income. Personal holding company income consists of: dividends; interest; annuities; rents; mineral, oil and gas royalties; copyright and patent royalties; produced film rents; compensation for more than 25 percent use of corporate property by shareholders; amounts received under personal services contracts; and amounts received from estates and trusts.
Since all of Acme Corp.’s income comes from investments, all of the corporation’s income is considered personal holding company income and, as a result, the corporation satisfies the income test.
Since Acme Corp. satisfies the stock ownership and income tests, it is a personal holding company.
13
Q
The accumulated earnings tax can be imposed
A
The accumulated earnings tax is a tax imposed on corporations that accumulate earnings beyond reasonable amount. This tax was imposed to prevent corporations from accumulating earnings and profits with the purpose of avoiding income tax on its shareholders.
Any corporation accumulating earnings beyond the point of reasonable needs of the business is considered to have accumulated the earnings for the tax benefit of its shareholders, unless a preponderance of the evidence indicates otherwise. Only the shareholders of closely-held corporations would tend to have the power to retain corporate earnings for their benefit. As a result, the accumulated earnings tax tends to be applied more often to closely-held corporations.
However, the number of shareholders in a corporation is not a determining factor in imposing the tax. Hence, the accumulated earnings tax may be applied regardless of the number of shareholders in a corporation.
14
Q
Zero Corp. is an investment company authorized to issue only common stock.
During the last half of 2014, Edwards owned 450 of the 1,000 outstanding shares of stock in Zero. Another 350 shares of stock outstanding were owned, 10 shares each, by 35 shareholders who are neither related to each other nor to Edwards.
Zero could be a personal holding company if the remaining 200 shares of common stock were owned by
A
Domestic and foreign corporations satisfying the personal holding company stock ownership and income tests are personal holding companies. As such, the corporation will be subject a 15 percent penalty tax on undistributed personal holding company income. The stock ownership test is satisfied if, at some time during the corporation’s tax year, 50 percent or more of the corporation’s stock was directly or indirectly owned by five or fewer individuals.
An individual indirectly owns stock if it is owned by the individual’s family or partner. Family includes the individual’s brothers, sisters, spouse and lineal descendants and ancestors. An individual will not be considered to be the constructive owner of the stock owned by nephews, cousins, uncles, aunts, and any of his/hers spouses relatives. Constructive ownership also may exist if the individual is a partner in a partnership or the beneficiary of an estate that is a shareholder. The income test is satisfied if 60 percent or more of the corporation’s adjusted ordinary gross income is personal holding company income.
With 450 shares, Edwards already directly owns 45 percent of Zero Corp.’s outstanding stock. If an estate where Edwards is the beneficiary owns the remainder of the corporation’s 200 shares of stock, Edwards would directly or indirectly own 65 percent of the corporation. An ownership exceeding the 50 percent direct or indirect ownership percentage is needed to satisfy the stock ownership test.
Hence, Zero Corp. could be a personal holding company if the remaining 200 shares were owned by an estate where Edwards is the beneficiary. Each response given to this question satisfies the stock ownership test for a personal holding company because, in each response, 5 or fewer individuals would own more than 50 percent of the corporation’s stock. However, this response is the best as it concentrates over 50 percent ownership under the control of one individual.
15
Q
ParentCo, SubOne, and SubTwo have filed consolidated returns since their inception. The members reported the following taxable incomes (losses) for the year:
ParentCo $50,000
SubOne (60,000)
SubTwo (40,000)
No member reported a capital gain or loss or charitable contributions. What is the amount of the consolidated net operating loss?
A
On the consolidated tax return the income and losses of all the corporations are netted. Therefore, the net loss for the year is $50,000 ($100,000 of losses less $50,000 of income from ParentCo).
16
Q
Bank Corp. owns 80% of Shore Corp.’s outstanding capital stock. Shore’s capital stock consists of 50,000 shares of common stock issued and outstanding. Shore’s 2014 net income was $140,000. During 2014, Shore declared and paid dividends of $60,000.
In conformity with generally accepted accounting principles, Bank recorded the following entries in 2014:
Debit Credit Investment in Shore Corp. common stock $112,000 Equity in earnings of subsidiary $112,000 Cash 48,000 Investment in Shore Corp. common stock 48,000
In its 2014 consolidated tax return, Bank should report dividend revenue of
A
Bank Corp. should not report any dividend income from the Shore Corp.’s dividends. The corporations qualify as members of an affiliated group because Bank Corp. owns at least 80 percent of Shore Corp.’s total voting stock and 80 percent of the value of its stock. As Bank and Shore Corps. have done in this question, affiliated groups may file a consolidated tax return. The primary advantages are that: 1) intercompany dividends are excludable from taxable income; 2) losses of one affiliated member offset gains of another member; and 3) intercompany profits are deferred until realized. The journal entries are to eliminate the intercompany dividends and adjust the investment account for the consolidation process. There are certain tax advantages of filing a consolidated return.
Since the Bank and Shore Corps. are members of an affiliated group and, as a result, may file a consolidated return, the intercompany dividends are excluded from taxable income. This response correctly indicates that the dividends would be a nontaxable event.
17
Q
Jans, an individual, owns 80% and 100% of the total value and voting power of A and B Corps., which in turn own the following (both value and voting power):
Ownership Property A Corp B Corp C Corp 80% - D Corp - 100%
All companies are C corporations except B Corp., which had elected S status since inception. Which of the following statements is correct with respect to the companies’ ability to file a consolidated return?
A
A and C are an affiliated group because A owns at least 80% of C and A is the parent company. B and D may not file a consolidated return because S corporations are not eligible to be in an affiliated group.
18
Q
In 2014, Portal Corp. received $100,000 in dividends from Sal Corp., its 80%-owned subsidiary.
What net amount of dividend income should Portal include in its 2014 consolidated tax return?
A
A C corporation owning 80 percent or more of a domestic corporation may deduct 100 percent of the dividends received or accrued from the corporation. Owning 20 percent but less than 80 percent of a domestic corporation allows for an 80 percent deduction of dividends received or accrued from the corporation. An ownership percentage of less than 20 percent leads to a deduction of 70 percent of the dividends received. However, the dividend received deduction is limited to a percentage of the corporation’s taxable income, unless the corporation sustains a net operating loss. If the corporation has a net operating loss, the dividend received deduction may be taken without limiting the deduction to a percentage of the corporation’s taxable income.
Since Portal Corp. owns 80 percent of Sal Corp., Portal Corp. may deduct all of the dividends received from Sal Corp. and, as a result, have no dividend income.
19
Q
Tech Corp. files a consolidated return with its wholly-owned subsidiary, Dow Corp. During 2014, Dow paid a cash dividend of $20,000 to Tech.
What amount of this dividend is taxable on the 2014 consolidated return?
A
When filing a consolidated return the intercompany dividends between the parent and its subsidiaries are not taxable. To be permitted to file a consolidated return, the parent and its subsidiaries must be members of an affiliated group.
Corporations qualify as members of an affiliated group by having a common parent that directly owns at least 80 percent of the total voting stock and at least 80 percent of the total value of the stock in at least one other includible corporation. In addition, a minimum of one of the other includible corporations must own at least 80 percent in each of the remaining includible corporations. The primary advantages of filing a consolidated return are that:
1) intercompany dividends are excludable from taxable income;
2) losses of one affiliated member offset gains of another member; and
3) intercompany profits are deferred until realized.
20
Q
What is derivative suit
A
derivative suit is when the shareholder is suing on behalf of the corporation.
21
Q
Under the Secured Transactions Article of the UCC, is a secured party required to assign its security interest?
A
Under the Secured Transactions Article of the UCC, a secured party is not required to assign its security interest. The security interest is the right of the secured party, not the debtor, thus the debtor has no right to tell the secured party what to do with its security interest.
22
Q
Sheri received jewelry as a gift from her aunt, Amy. At the time of the gift, the jewelry had a fair market value of $54,000 and an adjusted basis of $19,000. This was the only gift that Sheri received from Amy during 2014. If Amy paid a gift tax of $8,000 on the transfer of the gift to Sheri, what tax basis will Sheri have for the jewelry?
A
This answer is correct. A donee’s basis for gift property is generally the same as the donor’s basis, increased by any gift tax paid that is attributable to the property’s net appreciation in value. The amount of gift tax that can be added is limited to the amount that bears the same ratio as the property’s net appreciation bears to the amount of taxable gift. For this purpose, the amount of gift is reduced by the $14,000 annual exclusion that is allowable with respect to the gift. Thus, Sheri’s basis is $19,000 + [$8,000 ($54,000 ? $19,000) / ($54,000 ? $14,000)] = $26,000.
23
Q
How is called a partnership without specified duration?
A
partnership at will is used to describe a partnership without a specified duration
24
Q
What happens when the only general partner withdraw?
A
the withdrawal of the only general partner will dissolve the partnership.
25
When determining his federal income tax, Curt had the following items for 2014:
Personal exemption $3,950
Itemized deduction for personal property taxes 2,500
Charitable contribution of capital gain property 1,500
Net long-term capital gain 1,000
Excess of MACRS depreciation on personal property over depreciation computed using the 150% declining-balance method 600
Tax-exempt interest from City of Chicago general obligation bonds 400
What is the total amount of adjustments to taxable income for purposes of computing Curt’s alternative minimum tax for 2014?
Curt’s adjustments consist of the $600 of excess depreciation, the $3,950 personal exemption and the personal property taxes of $2,500, a total of $7,050.
26
When the grantor of a trust retains substantial control over the trust, such as the power to revoke the trust or a discretionary power to have trust income distributed to the grantor or grantor's spouse, who will be taxed the income from the trust?
When the grantor of a trust retains substantial control over the trust, such as the power to revoke the trust or a discretionary power to have trust income distributed to the grantor or grantor's spouse, the income from the trust will be taxed to the grantor.
27
Brisk Corp. is an accrual-basis, calendar-year C corporation with one individual shareholder. At year-end, Brisk had $600,000 accumulated and current earnings and profits as it prepared to make its only dividend distribution for the year to its shareholder. Brisk could distribute either cash of $200,000 or land with an adjusted tax basis of $75,000 and a fair market value of $200,000. How would the taxable incomes of both Brisk and the shareholder change if land were distributed instead of cash?
This answer is correct. The requirement is to determine how the taxable incomes of Brisk Corp. and the shareholder would change if appreciated land were distributed instead of cash. If a corporation distributes appreciated property, it must recognize gain to the extent that the property’s fair market value exceeds its basis. Here, Brisk’s taxable income would increase because it would have to recognize a gain of $200,000 ? $75,000 = $125,000. On the other hand, the amount of distribution to a shareholder is measured by the amount of cash and fair market value of noncash property received. As a result, the taxable income of the shareholder would not change since receiving $200,000 of cash or alternatively receiving the land worth $200,000 would result in a $200,000 dividend to the shareholder.
28
To who is available a voluntary bankruptcy proceeding?
a voluntary bankruptcy proceeding is available to consumer debtors whose income does not exceed the monthly limits set forth in the Bankruptcy code, after certain monthly expenses are deducted
29
Is future consideration considered as executed value?
according to Article 3 of the UCC, in order for a holder to achieve holder in due course status, he must give executed value in exchange for the negotiable instrument. Future consideration is not considered to be adequate value in determining whether a person is a holder in due course. The consideration must be performed to qualify as executed value.
30
Simon, a C corporation, had a deficit in accumulated earnings and profits of $50,000 at the beginning of the year and had current earnings and profits of $10,000. At year end, Simon paid a dividend of $15,000 to its sole shareholder. What amount of the dividend is reported as income?
When accumulated E&P is negative and current E&P is positive, distributions are treated as dividends to the extent of current E&P. Thus, $10,000 is reported as dividend income and the other $5,000 is a return of capital.
31
Dahl Corp. was organized and commenced operations in 1930. At December 31, 2013, Dahl had accumulated earnings and profits of $9,000 before dividend declaration and distribution.
On December 31, 2013 Dahl distributed cash of $9,000 and a vacant parcel of land to Green, Dahl's only stockholder. At the date of distribution, the land had a basis of $5,000 and a fair market value of $40,000.
What was Green's taxable dividend income in 2013 from these distributions?
Corporate distributions to shareholders are taxed to shareholders as dividend income to the extent that the distribution does not exceed current and accumulated earnings and profits. Distributions in excess of current and accumulated earnings and profits are treated as returns of capital. The distribution of appreciated property increases a corporation's earnings and profits increase by the amount of the difference between the distributed property's fair market value and the corporation's adjusted basis in the distributed property.
Thus, while Dahl Corp. had earnings and profits totaling $9,000 before the dividend declaration and distribution, the corporation's earnings and profits increased by $35,000, the land's $40,000 fair market value less its adjusted basis of $5,000, to $44,000 due to the distribution of the land.
Green received $49,000 of property in the distribution - $9,000 in cash and land with a fair market value of $40,000. The amount of the distribution classified as dividend income is limited to the corporation's earnings and profits. Thus, Green would report $44,000 of dividend income from the distribution.
32
Brisk Corp. is an accrual-basis, calendar-year C corporation with one individual shareholder. At year end, Brisk had $600,000 accumulated and current earnings and profits as it prepared to make its only dividend distribution for the year to its shareholder. Brisk could distribute either cash of $200,000 or land with an adjusted tax basis of $75,000 and a fair market value of $200,000. How would the taxable incomes of both Brisk and the shareholder change if land were distributed instead of cash?
If Brisk distributes $200,000 cash the shareholder will have $200,000 of dividend income (since sufficient earnings and profits exist). It the land is distributed, the amount of the distribution is the land's fair market value of $200,000 so the shareholder would still have $200,000 of dividend income. Thus, there is no change for the shareholder's taxable income.
If Brisk distributes appreciated property as a dividend, it must recognize the appreciation in the property as income ($200,000 ? $75,000 = $125,000). Therefore, Brisk would have higher taxable income if the land was distributed in comparison to the cash.
33
This year ABC corporation, a calendar-year, accrual-basis corporation, made a nonliquidating cash distribution to its shareholders of $1,000,000 with respect to its stock. At that time ABC's current and accumulated E&P totaled $750,000 and its total paid-in capital for tax purposes was $10,000,000. Since ABC had no corporate shareholders, the distribution:
The $1,000,000 distribution is taxable as dividend income to the extent of ABC's earnings and profits of $750,000. The remaining $250,000 of the distribution reduces the shareholders' bases in their stock (which is substantial since there is $10,000,000 of paid-in-capital).
34
On January 1 of the current year, Locke Corp., an accrual-basis calendar-year C corporation, had $30,000 in accumulated earnings and profits. For the current year, Locke had current earnings and profits of $20,000, and made two $40,000 cash distributions to its shareholders, one in April and one in September. What amount of the distributions is classified as dividend income to Locke's shareholders?
When both accumulated and current E&P are positive, distributions are taxed as dividends to the extent of the sum of these amounts, or $50,000 ($30,000 + $20,000). The remaining $30,000 of the $80,000 distributions is treated as a return of capital.
35
At the beginning of the year, West Wind, a C corporation, had a deficit of $45,000 in accumulated earnings and profits. For the current year, West wind reported earnings and profits of $15,000. West wind distributed $12,000 during the year.
What was the amount of West Wind's accumulated earnings and profits at year-end?
(45,000) is E&P at beginning of the year, plus 15,000 earnings, less 12,000 distribution = ($42,000). Note that this distribution of $12,000 does not increase the deficit in E&P since there was $15,000 of earnings for the current year.
36
Fox, the sole shareholder in Fall, a C corporation, has a tax basis of $60,000. Fall has $40,000 of accumulated positive earnings and profits at the beginning of the year and $10,000 of current positive earnings and profits for the current year. At year end, Fall distributed land with an adjusted basis of $30,000 and a fair market value (FMV) of $38,000 to Fox. The land has an outstanding mortgage of $3,000 that Fox must assume. What is Fox's tax basis in the land?
For dividends, the amount distributed is the fair market value of the property received less any liabilities assumed by the shareholder, or $35,000 ($38,000 ? $3,000). Fox would have $35,000 of dividend income since earnings and profits is at least this amount. However, the basis in the property received as a taxable dividend is always the fair market value of the property, or $38,000.
37
Nyle Corp. owned 100 shares of Beta Corp. stock that it bought in 1993 for $9 per share. In 2014, when the fair market value of the Beta stock was $20 per share, Nyle distributed this stock to a noncorporate shareholder.
Nyle's recognized gain on this distribution was
Corporations recognize taxable gains but not losses from nonliquidating distribution of appreciable property to their shareholders. The transaction is viewed as if the corporation sold the property to its shareholders at its fair market value on the day of the distribution.
Hence, Nyle Corp. would recognize a gain of $1,100, the fair market value of the Beta stock (100 shares multiplied by $20 per share) less its basis in the stock (100 shares multiplied by $9 per share).
38
Webster, a C corporation, has $70,000 in accumulated and no current earnings and profits. Webster distributed $20,000 cash and property with an adjusted basis and fair market value of $60,000 to its shareholders. What amount should the shareholders report as dividend income?
Dividend income must be reported for the distribution to the extent of Webster's current and accumulated earnings and profits ($70,000). The amount of the distribution is the cash of $20,000 plus the fair market value ($60,000) of the property distributed, or $80,000. This distribution is taxed as $70,000 of dividend income with the remaining $10,000 treated as a return of the shareholders' bases in their stock.
39
On January 1, 2014, Kee Corp., a C corporation, had a $50,000 deficit in earnings and profits. For 2014 Kee had current earnings and profits of $10,000 and made a $30,000 cash distribution to its stockholders. What amount of the distribution is taxable as dividend income to Kee's stockholders?
Corporate distributions to shareholders are taxable to the shareholder as dividend income to the extent earnings and profits, current and accumulated. Distributions in excess of earnings and profits are treated as returns of capital that are nontaxable except to the extent that the distribution exceeds the shareholders basis in the property.
Since Kee Corp. had current earnings of $10,000, the shareholders would be viewed as receiving $10,000 in dividend income. The remaining $20,000 of the distribution would be treated as a return of capital. Distributions are deemed to be paid from current earnings and profits and then from accumulated earnings and profits.
40
Tank Corp., which had earnings and profits of $500,000, made a nonliquidating distribution of property to its shareholders in 2014 as a dividend in kind. This property, which had an adjusted basis of $20,000 and a fair market value of $30,000 at the date of distribution, did not constitute assets used in the active conduct of Tank's business.
How much gain did Tank recognize on this distribution?
When a corporation makes a nonliquidating distribution of appreciated property to its shareholders, the corporation recognizes a taxable gain. The property is viewed to have been sold to its shareholders for its fair market value at the date of the distribution. Corporations do not recognize losses from nonliquidating distributions of property. Since Tank Corp.'s basis in the property was $20,000 and the fair market value of the property was $30,000, the corporation must recognize a gain of $10,000.
41
What is the usual result to the shareholders of a distribution in complete liquidation of a corporation?
Capital gain or loss. Shareholders of a distribution in complete liquidation of a corporation receive capital gain or loss treatment just as if they hold their stock.
42
What is the usual result to the shareholders of a distribution in complete liquidation of a corporation?
Capital gain or loss. In a complete liquidation, shareholders generally recognize capital gains and losses from corporate distributions. The amount of assets received by a shareholder is treated as full payment in exchange for the stock.
The capital gain or loss recognized by a shareholder equals the total distribution less the shareholder's basis.
43
A corporation was completely liquidated and dissolved during 2014. The filing fees, professional fees, and other expenditures incurred in connection with the liquidation and dissolution are
Deductible in full by the dissolved corporation . Filing, professional fees (accounting and legal) and other expenditures incurred in connection with liquidations and dissolutions are fully deductible for the dissolving corporation.
44
How does a non-corporate shareholder treat the gain on a redemption of stock that qualifies as a partial liquidation of the distributing corporation?
Entirely as a capital gain. Non-corporate shareholders treat the gain on a redemption of stock that qualifies as a partial liquidation of the distributing corporation as a capital gain, just as if they had sold their stock. Corporate shareholders receive dividend treatment on a partial liquidation.
45
A corporation was completely liquidated and dissolved this year. The filing fees, professional fees, and other expenditures incurred in connection with the liquidation are:
Deducted in full by the dissolved corporation. Expenses related to a liquidation are deductible by the liquidating corporation.
46
Elm Corp. is an accrual-basis calendar-year C Corporation with 100,000 shares of voting common stock issued and outstanding as of December 28, 2014.
On Friday, December 29, 2014, Hall surrendered 2,000 shares of Elm stock to Elm in exchange for $33,000 cash. Hall had no direct or indirect interest in Elm after the stock surrender. Additional information follows:
Hall's adjusted basis in 2,000 shares of Elm on December 29, 2014 ($8 per share) $16,000
Elm's accumulated earnings and profits at January 1, 2014 25,000
Elm's 2014 net operating loss (7,000)
This answer is correctly calculated as follows: Cash received $33,000 less adjusted basis of $16,000 = $17,000 capital gain. Amounts received by a shareholder in a distribution in complete liquidation of a corporation shall be treated as in full payment in exchange for the stock. If property is received in a distribution in complete liquidation, and if gain or loss is recognized on receipt of such property, then the basis of the property in the hands of the distributee shall be the fair market value of such property at the time of the distribution.
47
S Corporation was a wholly-owned subsidiary of P Corporation. Both corporations were domestic C corporations. P received a liquidating distribution of property (worth $250 and a basis of $135) from S in cancellation of the stock. What amount of gain will P recognize if P had a basis of $100 in the S stock before the receipt of the property?
0. If stock of a subsidiary is liquidated by its parent company, any realized gain on the transaction is, in general, not recognized. The realized gain to parent is $150 ($250 property received - $100 basis). The recognized gain is zero.
48
P corporation acquired the assets of its wholly-owned subsidiary, S corporation, under a plan that qualified as a tax-free complete liquidation of S. Which of the following of S's unused carryovers may be transferred to P?
Excess charitable contributions and Net operating loss. Tax attributes of the subsidiary transfer to the parent after a tax-free liquidation of the subsidiary into the parent.
49
Pursuant to a plan of corporate reorganization adopted in July 2014, Gow exchanged 500 shares of Lad Corp. common stock that he had bought in January 2014 at a cost of $5,000 for 100 shares of Rook Corp. common stock having a fair market value of $6,000.
Gow's recognized gain on this exchange was
0. If taxpayer receives stocks or securities under a plan of reorganization from a corporation included in the reorganization, the taxpayer does not recognize a gain or loss from the transaction. However, if the taxpayer receives boot, the transaction is taxable up to the amount of the boot.
Since Gow received the Rook Corp. stock solely in exchange for his Lad Corp. stock under a plan of reorganization and did not receive any boot, the transaction would be tax-free for Gow.
50
ABC has 200 shares of voting common stock outstanding. XYZ has decided to acquire 90 percent of the ABC stock solely in exchange for 50 percent of its voting stock. ABC will become XYZ's subsidiary after the transaction. Which of the following statements is true?
The transaction is a reorganization. The 80% control test is met since 90% of ABC's voting stock is being acquired. XYZ is using its voting stock as required for B reorganizations.
51
Jaxson Corp. has 200,000 shares of voting common stock issued and outstanding. King Corp. has decided to acquire 90 percent of Jaxson's voting common stock solely in exchange for 50 percent of its voting common stock and retain Jaxson as a subsidiary after the transaction.
Which of the following statements is true?
The transaction will qualify as a tax-free reorganization. No gain or loss is recognized by a corporation that is a party to a qualified reorganization in which stock is exchanged solely for stock or securities of another corporation that is also a party to the reorganization.
As this reorganization is a Type B: Stock for Stock transaction, the reorganization is tax-free.
52
Corporations A and B combine in a qualifying reorganization, and form Corporation C, the only surviving corporation.
This reorganization is tax-free to the Sharholders or Corporation?
Corporate reorganizations generally are tax-free for both shareholders and the corporation.
In this case, the reorganization would be viewed as a Type A: Merger or Consolidation, which qualifies for tax-free treatment for both shareholders and the corporation.
This response correctly indicates that the transaction would be tax-free for both shareholders and the corporation and, therefore, it is correct.
53
Clock Corporation owns 80%, 90%, and 100%, respectively, of its three subsidiaries, Lamp, Chair, and Table. The corporations have elected to file a consolidated tax return for U.S. federal income tax. The corporations have nexus as follows:
```
Nexus
Clock States M and N
Lamp States M and N
Chair State N
Table States M and N
```
If a consolidated state income tax return is filed in State M, which corporations will be included in the return?
Clock, Lamp, and Table. Only affiliated corporations that have Nexus with State M will be included in the state consolidated income tax return for State M.
54
Machine Corporation buys a business van in State V and pays 6% sales tax. The van is used in State W by Machine. State W has a 9% sales tax. Because of this transaction, State W is likely to impose which of the following taxes on Machine?
Use tax. If property is purchased in one state but used in a different state, the state of use is likely to impose a use tax for the use of the property in its jurisdiction.
55
Which of the following types of income would likely be considered "business income" for state income tax purposes? Royalties from the licensing of a song that was produced as part of ordinary business operations.
Business income is generated from the business's regular operations, or from the sale of property that is an integral part of the business. Therefore, the royalty income could be business income
56
Woods Corporation's federal taxable income for the current year is $250,000 which includes the following:
$15,000 of deducted state income taxes
$25,000 of interest income on United States Treasury Bonds
Woods also had $10,000 of interest from state and local bonds that it owns. Federal depreciation in excess of that allowed for state purposes was $7,000. Woods operates exclusively in State F, which does not tax income earned on federal obligations, taxes all municipal bond interest, and disallows a deduction for state income taxes. What is Wood's state taxable income?
The starting point for computing state taxable income is $250,000. Adjustments are:
State income taxes + $15,000
Municipal interest income + $10,000
Excess federal depreciation + $ 7,000
U.S. Treasury interest income -$25,000
State taxable income $257,000
57
Callaway Company manufactures its products in State F and sells them in States F and G. Callaway's sales are as follows for the current year:
Sales shipped from State F to customers in State F $10,000
Sales shipped from State F to customers in State G 40,000
Assume that Callaway has nexus in both states F and G. What is Callaway's State F sales factor for the current year?
$10,000/($10,000 + $40,000) = 20%.
58
Which one of the following types of income is not U.S. source income? Income from the sale of land by a Japanese resident to a taxpayer whose residence is in the United States. Or Rents received from property located in the United States.
Income from the sale of personalty is determined based on the residence of the seller.
59
Which of the following statements is incorrect? Foreign currency exchange gains and losses resulting from personal transactions are capital. or Foreign currency exchange gains and losses resulting from the normal course of business operations are capital.
Foreign currency exchange gains and losses resulting from the normal course of business operations are ordinary, not capital.
60
ABC, Inc., has $120,000 U.S. source income, $80,000 of foreign source income, and $25,000 foreign taxes deemed paid. Assume that the U.S. income tax liability before the foreign tax credit is $61,250. ABC's foreign tax credit is
$25,000, but not to exceed the foreign tax credit limitation of $80,000/($120,000 + $80,000) x $61,250 = $24,500.
61
Mr. Travel is a U.S. citizen who has been a resident of Spain for five years. In 2014, he has the following income from Spanish sources:
Salary Interest Income
Gross amount $90,000 $20,000
Spanish income tax (20%) (18,000) (4,000)
Net cash received (80%) $72,000 $16,000
The interest income was from a Spanish money market account. Mr. Travel also was provided housing from his employer that had a fair market value of $30,000 (not subject to Spanish tax). Total U.S.-source earned income for Mr. Travel was $60,000. How much of the foreign taxes paid is eligible to be used in the foreign tax credit computation?
Since the $90,000 earned income was excludable from U.S. income the $18,000 in Spanish taxes is not eligible for the foreign tax credit. The $4,000 related to the interest income is eligible.
62
Mr. Travel is a U.S. citizen who has been a resident of Spain for five years. In 2014, he has the following income from Spanish sources:
Salary Interest Income
Gross amount $90,000 $20,000
Spanish income tax (20%) (18,000) (4,000)
Net cash received (80%) $72,000 $16,000
The interest income was from a Spanish money market account. Mr. Travel also was provided housing from his employer that had a fair market value of $30,000 (not subject to Spanish tax). Total U.S.-source earned income for Mr. Travel was $60,000. What is Mr. Travel's minimum includible United States gross income from these transactions? The housing exclusion is $13,888 and foreign earned income exclusion is $99,200 in 2014.
The $90,000 of salary is completely excluded. Foreign-earned income from personal services is limited to $99,200 in 2014.The housing is excludable to the extent it exceeds 16% × $99,200, or $15,872. This excess is $14,128 ($30,000 ? $15,872). However, the housing exclusion may never exceed $13,888 in 2014, so the includible housing income is $16,112 ($30,000 ? $13,888). The interest income is fully includible as is the U.S. source earned income of $60,000. Therefore, includible income is $16,112 + $20,000 + $60,000, or $96,112.
63
The private foundation status of an exempt organization will terminate if it
A. Becomes a public charity.
B. Is a foreign corporation.
C. Does not distribute all of its net assets to one or more public charities.
D. Is governed by a charter that limits the organization's exempt purposes.
A private foundation is a tax-exempt organization which receives less than one-third of its annual support from its members and the general public. Therefore, public charities that solicit broad public support do not meet this definition.
64
Hope is a tax-exempt religious organization. Which of the following activities is (are) consistent with Hope's tax-exempt status?
I. Conducting weekend retreats for business organizations.
II. Providing traditional burial services that maintain the religious beliefs of its members.
Conducting retreats for business organizations would not be considered an activity related to the tax-exempt purpose of a religious organization so this response is not correct. Providing burial services consistent with its religious beliefs would be related and therefore permissible.
65
The organizational test to qualify a public service charitable entity as tax exempt requires the articles of organization to
I. Limit the purpose of the entity to the charitable purpose.
II. State that an information return should be filed annually with the Internal Revenue Service.
The charitable entity must affirm that its activities will be limited to its charitable purposes.
66
Maple Avenue Assembly, a tax-exempt religious organization, operates an outreach program for the poor in its community. A candidate for the local city council has endorsed Maple's anti-poverty program. Which of the following activities is (are) consistent with Maple's tax-exempt status?
I. Endorsing the candidate to members.
II. Collecting contributions from members for the candidate.
Exempt organizations cannot endorse political candidates or provide support to them. Therefore, both of these statements are incorrect. None
67
Which of the following exempt organizations must file annual information returns?
A. Churches.
B. Internally supported auxiliaries.
C. Private foundations.
D. Those with gross receipts of $50,000 or less in each taxable year.
Private foundations must file Form 990-PF annually.
68
An organization that operates for the prevention of cruelty to animals will fail to meet the operational test to qualify as an exempt organization if
The organization engages in insubstantial nonexempt activities
The organization directly participates in any political campaign
Engaging in insubstantial nonexempt activities will not cause an exempt organization to lose its exempt status. However, exempt organizations are strictly prohibited from engaging in political campaigns and activities.
69
Which of the following activities conducted by a tax exempt organization will result in unrelated business income?
I. Selling articles made by handicapped persons as part of their rehabilitation, when the organization is involved exclusively in their rehabilitation.
II. Operating a grocery store almost fully staffed by emotionally handicapped persons as part of a therapeutic program.
Neither activity produces unrelated business income because the activities generating the revenue relate to the tax-exempt purpose of the organization. (Articles were made as part of the rehabilitation process and the store was being operated for the purpose of creating a therapeutic process for the participants.)
70
Kerr and Marcus form KM Partnership with a cash contribution of $80,000 from Kerr and a property contribution of land from Marcus. The land has a fair market value of $80,000 and an adjusted basis of $50,000 at the date of the contribution. Kerr and Marcus are equal partners.
What is Marcus's basis immediately after formation?
Marcus's basis in his partnership interest is equal to the basis of the property contributed, or $50,000.
71
Pert contributed land with a fair market value of $20,000 to a new partnership in exchange for a 50% partnership interest. The land had an adjusted basis to Pert of $12,000 and was subject to a $4,000 mortgage, which the partnership assumed. What is the adjusted basis of Pert's partnership interest?
A partner's initial basis in a partnership is equal to the amount of cash that the partner contributed plus the partner's adjusted basis for property when contributed. If the partnership assumes indebtedness from the contributed property, the contributing partner's basis is reduced by the amount of indebtedness assumed by the other partners.
Pert contributed land with an adjusted basis of $12,000. However, the land was subject to a mortgage of $4,000, which was assumed by the partnership.
Since Pert has a 50 percent interest, the other partners assumed $2,000 of the mortgage. Thus, Pert's adjusted basis in the partnership interest is $10,000, the $12,000 adjusted basis of the land contributed less the $2,000 of the mortgage assumed by the other partners.
72
In return for a 20% partnership interest, Skinner contributed $5,000 cash and land with a $12,000 basis and a $20,000 fair market value to the partnership. The land was subject to a $10,000 mortgage that the partnership assumed. In addition, the partnership had $20,000 in recourse liabilities that would be shared by partners according to their partnership interests. What amount represents Skinner's basis in the partnership interest?
Basis is determined as follows:
Cash $ 5,000
Basis of land 12,000
Mortgage assumed by partnership (10,000)
Skinner's share of mortgage (20%) 2,000
4,000
$13,000
73
On January 2, 2014, 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, 2014?
A partner's initial basis in a partnership is equal to the amount of cash that the partner contributed plus the partner's adjusted basis for property when contributed. If the partnership assumes indebtedness from the contributed property, the contributing partner's basis is reduced by the amount of indebtedness assumed by the other partners.
The property contributed by Black to New Partnership had an adjusted basis of $7,000. However, the property was subject to a mortgage of $3,000. Since Black was a 50 percent interest in the partnership, the other partners assumed half of the mortgage. Thus, Black's basis in New Partnership at January 2, 2014 was $5,500, the adjusted basis of the property, $7,000, less the amount of mortgage assumed by the other partners, $1,500.
74
Able and Baker are equal members in Apple, an LLC. Apple has elected not to be treated as a corporation. Able contributes $7,000 cash and Baker contributes a machine with a basis of $5,000 and a fair market value of $10,000, subject to a liability of $3,000. What is Apple's basis for the machine?
Upon a partnership formation the partnership's basis in the assets received from the contributing partners is the basis in the hands of the partner. Thus, Apple's basis is $5,000.
75
When a partner's share of partnership liabilities increases, that partner's basis in the partnership
When a partner's share of a partnership's liabilities increases, the increase is treated as a contribution to the partnership.
As a result of such a contribution, the partner's basis in the partnership would increase by a corresponding amount.
76
Strom acquired a 25 percent interest in Ace Partnership by contributing land having an adjusted basis of $16,000 and a fair market value of $50,000. The land was subject to a $24,000 mortgage, which was assumed by Ace. No other liabilities existed at the time of the contribution.
What was Strom's basis in Ace?
A partner's initial basis in a partnership is equal to the amount of cash that the partner contributed plus the partner's adjusted basis for property when contributed. If the partnership assumes indebtedness from the contributed property, the contributing partner's basis is reduced by the amount of indebtedness assumed by the other partners. Strom's basis in the contributed property was $16,000.
However, the property was subject to a $24,000 mortgage. Strom's partners assumed $18,000 of the mortgage, $24,000 multiplied by 75 percent (the percentage of the partnership not owned by Strom). Subtracting the $16,000 in liabilities assumed by the other partners, gives Strom a negative basis.
However, a partner's basis in the partnership's interest cannot be negative. Thus, Strom's basis in the partnership is zero.
77
Dean is a 25 percent partner in Target Partnership. Dean's tax basis in Target on January 1, 2014, was $20,000. At the end of 2014, Dean received a nonliquidating cash distribution of $8,000 from Target.
Target's 2014 accounts recorded the following items:
Municipal bond interest income $12,000
Ordinary income 40,000
What was Dean's tax basis in Target on December 31, 2014?
A partner's basis in the partnership interest is increased by:
1. additional contributions;
2. additional interest's purchased or inherited;
3. the partner's share of the partnership's income (including tax-exempt income); and
4. any increases in the partner's share of partnership liabilities. A partner's basis in the partnership interest is decreased by:
1. cash and the partnership's adjusted basis of property received by the partner in a nonliquidating distribution;
2. the adjusted basis allocable to any part of the partner's interest sold or transferred;
3. the partner's share of the partnership's losses; and
4. any decreases in the partner's share of partnership liabilities.
Thus, Dean's basis in the partner's interest would be increased by Dean's share of the partnership's income (including tax-exempt income) and decreased by the nonliquidating cash distribution. The partnership's income is $52,000, ordinary income of $40,000 plus municipal bond interest income of $12,000. Dean's 25 percent share is $13,000. Hence, adding the $13,000 in income and subtracting the $8,000 distribution to Dean's beginning tax basis in the partnership of $20,000, puts Dean's ending tax basis in the partnership at $25,000.
This response correctly added Dean's share of the tax-exempt income to and subtracts the nonliquidating distribution from the basis.
78
Eng contributed the following assets to a partnership in exchange for a 50% interest in the partnership's capital and profits:
Cash $50,000
Equipment:
Fair market value 35,000
Carrying amount (adjusted basis) 25,000
The basis for Eng's interest in the partnership is
A partner's initial basis in a partnership equals the amount of cash and the basis of any property contributed by the partner to the partnership. If the contributed property is subject any liabilities, the partner's basis is reduced by the amount of liabilities assumed by the other partners.
Eng contributed $50,000 in cash and property with an adjusted basis of $25,000, putting Eng's basis in the partnership at $75,000.
79
A $100,000 increase in partnership liabilities is treated in which of the following ways?
A. Increases each partner's basis in the partnership by $100,000.
B. Increases the partners' bases only if the liability is nonrecourse.
C. Increases each partner's basis in proportion to their ownership.
D. Does not change any partner's basis in the partnership regardless of whether the liabilities are recourse or nonrecourse.
Increases each partner's basis in proportion to their ownership. Partners increase their bases in their partnership interests by their respective share of the partnership's debt, both recourse and nonrecourse
80
The holding period of a partnership interest acquired in exchange for a contributed capital asset begins on the date
A. The partner is admitted to the partnership.
B. The partner transfers the asset to the partnership.
C. The partner's holding period of the capital asset began.
D. The partner is first credited with the proportionate share of partnership capital.
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.
81
Campbell acquired a 10% interest in Vogue Partnership by contributing a building with an adjusted basis of $40,000 and a fair market value of $90,000. The building was subject to a $60,000 mortgage that was assumed by Vogue. The other partners contributed cash only. The basis of Campbell's partnership interest in Vogue is
Basis in the partnership is computed as follows:
Adjusted basis of building contributed $ 40,000
Less: Debt assumed by partnership ( 60,000)
Plus: Campbell&s 10% share of debt 6,000
($ 14,000)
Gain recognized 14,000
Ending basis -0
The computation above reflects that Campbell transferred 90% of the debt to other partners. The $14,000 of gain is recognized because basis cannot be negative. Therefore, ending basis is zero.
82
At the beginning of 2014, Paul owned a 25% interest in Associates partnership.
During the year, a new partner was admitted and Paul's interest was reduced to 20%.
The partnership liabilities at January 1, 2014, were $150,000, but decreased to $100,000 at December 31, 2014. Paul's and the other partners' capital accounts are in proportion to their respective interests.
Disregarding any income, loss or drawings for 2014, the basis of Paul's partnership interest at December 31, 2014, compared to the basis of his interest at January 1, 2014 was
At January 1, 2014, Paul owned a 25 percent interest in Associates partnership and partnership's liabilities were $150,000, putting the value of Paul's interest at $37,500. During the year, a new partner was admitted and Paul's interest was reduced to 20%. The partnership's liabilities also were reduced, decreasing to $100,000. Paul's 20 percent interest puts his basis in the partnership interest on December 31, 2014 at $20,000.
Thus, the basis of Paul's partnership interest at December 31, 2014, compared to the basis of his interest at January 1, 2014, decreased by $17,500.
83
Which of the following should be used in computing the basis of a partner's interest acquired from another partner?
Cash paid by transferee to transferor
Transferee's share of partnership liabilities
A partner's basis in the partnership interest is increased by: 1.additional contributions;
2. additional interests purchased or inherited;
3. the partner's share of the partnership's income (including tax-exempt income); and
4. any increases in the partner's share of partnership liabilities.
A partner's basis in the partnership interest is decreased by: 1.cash and the partnership's adjusted basis of property received by the partner in a nonliquidating distribution;
2. the adjusted basis allocable to any part of the partner's interest sold or transferred;
3. the partner's share of the partnership's losses; and
4. any decreases in the partner's share of partnership liabilities.
This response correctly states that the transferee's share of the partnership liabilities should be used in computing the basis of a partner's interest acquired from another partner. This response also correctly states that cash paid by transferee to transferor should be included in the computation.
84
On June 1, 2014, Kelly received a 10% interest in Rock Co., a partnership, for services contributed to the partnership. Rock's net assets at that date had a basis of $70,000 and a fair market value of $100,000.
In Kelly's 2014 income tax return, what amount must Kelly include as income from transfer of partnership interest?
When an individual contributes services to a partnership for a capital interest in the partnership, the individual reports taxable income equal to the fair market value of the transferred capital interest.
Capital interests received are treated as guaranteed payments, which means the capital interest is viewed a salary payment and, as such, reported as ordinary income by the partner.
Since the fair market value of the partnership's net assets is $100,000 and Kelly contributed services for a 10 percent interest in the partnership, Kelly must recognize $10,000 of ordinary income.
85
Which one of the following statements regarding a partnership's tax year is correct?
A. A partnership formed on July 1 is required to adopt a tax year ending on June 30.
B. A partnership may elect to have a tax year other than the generally required tax year if the deferral period for the tax year elected does not exceed three months.
C. A "valid business purpose" can no longer be claimed as a reason for adoption of a tax year other than the generally required tax year.
D. Within 30 days after a partnership has established a tax year, a form must be filed with the IRS as notification of the tax year adopted.
A partnership may elect to have a tax year other than the generally required tax year if the deferral period for the tax year elected does not exceed three months. A partnership may elect to have a tax year other than the generally required tax year if the deferral period for the tax year elected does not exceed three months. In addition, the adoption of a tax year other than that generally required may be claimed, if there is a valid business purpose.
Thus, this response meets the first requirement and, therefore, is correct.
86
Under Section 444 of the Internal Revenue Code, certain partnerships can elect to use a tax year different from their required tax year. One of the conditions for eligibility to make a Section 444 election is that the partnership must
A. Be a limited partnership.
B. Be a member of a tiered structure.
C. Choose a tax year where the deferral period is no longer than three months.
D. Have less than 35 partners.
Choose a tax year where the deferral period is no longer than three months. Under Code Section 444, partnerships, S corporations and personal service companies may elect to have a tax year that differs from their required tax year, provided the tax year chosen does not have a deferral period of longer than three months.
Partnerships and S corporations making the election must approximate the amount of tax to partners and S corporations that is attributable to income earned in the short period and make required payments of that amount.
87
Strom acquired a 25 percent interest in Ace Partnership by contributing land having an adjusted basis of $16,000 and a fair market value of $50,000.
The land was subject to a $24,000 mortgage, which was assumed by Ace. No other liabilities existed at the time of the contribution.
What was Strom's basis in Ace?
0. A partner's initial basis in a partnership is equal to the amount of cash that the partner contributed plus the partner's adjusted basis for property when contributed. If the partnership assumes indebtedness from the contributed property, the contributing partner's basis is reduced by the amount of indebtedness assumed by the other partners.
Strom's basis in the contributed property was $16,000. However, the property was subject to a $24,000 mortgage. Strom's partners assumed $18,000 of the mortgage, $24,000 multiplied by 75 percent (the percentage of the partnership not owned by Strom). Subtracting the $18,000 in liabilities assumed by the other partners, gives Strom a negative basis. However, a partner's basis in the partnership's interest cannot be negative. Thus, Strom's basis in the partnership is zero. Note that Strom also recognizes a gain of $2,000 to insure that the basis is not negative.
88
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?
50% of the loss and income impacts George's basis. Partnership debt decreased by $16,000 ($40,000 - $24,000) during the year, so George's basis is decreased by 50% of the reduction, or $8,000. Ending basis is computed as follows:
```
Beginning basis $32,500
Operating loss (15,000)
Interest and dividend income 4,000
Partnership debt change ( 8,000)
Ending basis $13,500
```
89
The method used to depreciate partnership property is an election made by
A. The partnership and must be the same method used by the "principal partner."
B. The partnership and may be any method approved by the IRS.
C. The "principal partner."
D. Each individual partner.
The partnership and may be any method approved by the IRS. The partnership elects the method used to depreciate partnership property with the results passed through to the partners. This method may be any type approved by the IRS.
If any of the partners do not use the same treatment as the partnership and do not notify the IRS of the different treatment, the IRS may adjust the partner's return to conform to the return of the partnership with the additional tax being assessed.
90
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?
Turner and Reed do not recognize gain on the formation since they contributed property in return for their partnership interests. Sumner received her interest in return for services, so she must recognize $50,000 of wage income.
91
Juan contributed land with a basis of $10,000 and a fair market value of $15,000 to the Sounds Partnership. He also contributed services with a value of $25,000. In return, he received a partnership interest in Sounds with a value of $40,000.
What is Juan's basis in his partnership interest?
Juan receives basis in his partnership interest equal to the basis of the property contributed. He also must recognize $25,000 of wage income for receiving a portion of the partnership interest in return for services rendered. Therefore, he also receives $25,000 of basis for this income recognition. Thus, his total basis is $10,000 + $25,000, or $35,000.
92
A partnership had four partners. Each partner contributed $100,000 cash. The partnership reported income for the year of $80,000 and distributed $10,000 to each partner. What was each partner's basis in the partnership at the end of the current year?
Basis is computed as follows:
Contribution $100,000
25% of income 20,000
Distribution (10,000)
$110,000
93
Don Wolf became a general partner in Gata Associates on January 1, 2014 with a 5% interest in Gata's profits, losses, and capital.
Gata is a distributor of auto parts. Wolf does not materially participate in the partnership business. For the year ended December 31, 2014, Gata had an operating loss of $100,000. In addition, Gata earned interest of $20,000 on a temporary investment. Gata has kept the principal temporarily invested while awaiting delivery of equipment that is presently on order. The principal will be used to pay for this equipment.
Wolf's passive loss for 2014 is
Passive activity losses are the amount that total losses from passive activities exceed total gains from passive activities. The characterization of a partner's share of the partnership's income as passive or nonpassive depends on the partner's participation in the partnership's income earning activities.
Since Wolf did not materially participate in the partnership business, his share of the partnership's operating loss, $5,000, is considered a loss from a passive activity. Passive income does not include portfolio income.
As a result, Wolf's share of the $20,000 in interest income would not be passive. Therefore, since Wolf had no gains from passive activities to offset the loss from his share of the partnership's operating loss, Wolf would have a passive loss of $5,000, equal to his share of the partnership's operating loss.
94
What is the tax treatment of net losses in excess of the at-risk amount for an activity?
A. Any loss in excess of the at-risk amount is suspended and is deductible in the year in which the activity is disposed of in full.
B. Any losses in excess of the at-risk amount are suspended and carried forward without expiration and are deductible against income in future years from that activity.
C. Any losses in excess of the at-risk amount are deducted currently against income from other activities; the remaining loss, if any, is carried forward without expiration.
D. Any losses in excess of the at-risk amount are carried back two years against activities with income and then carried forward for 20 years.
Any losses in excess of the at-risk amount are suspended and carried forward without expiration and are deductible against income in future years from that activity.
95
Dale's distributive share of income from the calendar-year partnership of Dale & Eck was $50,000 in 2014. On December 15, 2014, Dale, who is a cash-basis taxpayer, received a $27,000 distribution of the partnership's 2014 income, with the $23,000 balance paid to Dale in May 2015.
In addition, Dale received a $10,000 interest-free loan from the partnership in 2014.
This $10,000 is to be offset against Dale's share of 2014 partnership income.
What total amount of partnership income is taxable to Dale in 2014?
Partners must report their share of the partnership's income, deductions and other items on the partner's income tax return in the calendar year in which the partnership's tax year ends. Dale's share of Dale and Eck's 2014 income was $50,000. Thus, Dale must report $50,000 of partnership income in 2014.
96
Which of the following limitations will apply in determining a partner's deduction for that partner's share of partnership losses?
At-risk
Passive loss
At-risk rules limit the amount of loss deductions from investment activities to the amount the taxpayer had at-risk. The amount that a taxpayer had at risk is the amount of cash and basis of property contributed to an activity. Borrowed amounts are considered to be at risk to the extent that the taxpayer is personally liable for repayment. At-risk rules do not apply to partnerships, but the rules do apply to the individual partners.
Passive activity rules prevent the offsetting of nonpassive income with passive losses and credits from passive activities. Passive activity rules do not apply to partnerships, but the rules do apply to the individual partners.
This response correctly indicates that at-risk and passive activity rules apply in determining a partner's deduction for that partner's share of partnership losses.
97
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?
Dale's basis is computed as follows:
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Cash contributed $10,000
Equipment debt (50%) 5,000
Taxable income (50%) 7,500
Tax-exempt income (50%) 1,000
Debt reduction (50%) (2,000)
Distribution (3,000)
Ending basis $18,500
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98
Alt Partnership, a cash basis calendar year entity, began business on October 1, 2014. Alt incurred and paid the following in 2014:
Legal fees to prepare the partnership agreement
$12,000
Accounting fees to prepare the representations in offering materials
15,000
Ignoring amortization, what was the maximum amount that Alt could expense on the 2014 partnership return?
$5,000 of organizational expenses may be deducted, but the $5,000 is reduced by the amount of expenditures incurred that exceed $50,000. Expenses not deducted must be capitalized and amortized over 180 months, beginning with the month that the corporation begins its business operations. Deductions are not allowed to the partnership or any partner for expenses incurred to sell partnership interests. Hence, $5,000 of the legal fees to prepare the partnership agreement may be deducted.
However, the accounting fees to prepare the representations in offering materials may not be expensed or amortized because these expenses are related to selling partnership interests.
99
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PDK, LLC had three members with equal ownership percentages. PDK elected to be treated as a partnership. For the tax year ending December 31, year 1, PDK had the following income and expense items:
Revenues $120,000
Interest income 6,000
Gain on sale of securities 8,000
Salaries 36,000
Guaranteed payments 10,000
Rent expense 21,000
Depreciation expense 18,000
Charitable contributions 3,000
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What would PDK report as nonseparately stated income for year 1 tax purposes?
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Non-separately stated income is the ordinary business income of the LLC, computed as follows:
Revenues $120,000
Salaries (36,000)
Guaranteed payments (10,000)
Rent expense (21,000)
Depreciation expense (18,000)
Ordinary income $35,000
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100
When the AQR partnership was formed, partner Acre contributed land with a fair market value of $100,000 and a tax basis of $60,000 in exchange for a one-third interest in the partnership. The AQR partnership agreement specifies that each partner will share equally in the partnership's profits and losses. During its first year of operation, AQR sold the land to an unrelated third party for $160,000. What is the proper tax treatment of the sale?
A. Each partner reports a capital gain of $33,333.
B. The entire gain of $100,000 must be specifically allocated to Acre.
C. The first $40,000 of gain is allocated to Acre, and the remaining gain of $60,000 is shared equally by the other two partners.
D. The first $40,000 of gain is allocated to Acre, and the remaining gain of $60,000 is shared equally by all the partners in the partnership.
The first $40,000 of gain is allocated to Acre, and the remaining gain of $60,000 is shared equally by all the partners in the partnership.
101
Guaranteed payments made by a partnership to partners for services rendered to the partnership, that are deductible business expenses under the Internal Revenue Code, are
I. Deductible expenses on the U.S. Partnership Return of Income, Form 1065, in order to arrive at partnership income (loss).
II. Included on schedules K-1 to be taxed as ordinary income to the partners.
Guaranteed payments from a partnership for the services of a partner are treated as salary payments and, as a result, receive similar treatment under the Internal Revenue Code. Therefore, in contrast to provisions applying to other withdrawals of assets from partnerships by partners, guaranteed payments are deductible by the partnership. The deduction for guaranteed payments may create an ordinary loss for the partnership. Guaranteed payments are required to be reported separately from the partner's share of the partnership's income on the partner's K-1.
Thus, guaranteed payments made by a partnership to partners for services rendered to the partnership, that are deductible business expenses under the Internal Revenue Code, are deductible expenses on the U.S. Partnership Return of Income, Form 1065, in order to arrive at partnership income (loss) and included on schedules K-1 to be taxed as ordinary income to the partners.
102
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Peters has a one-third interest in the Spano Partnership. During 2014, Peters received a $16,000 guaranteed payment, which was deductible by the partnership, for services rendered to Spano. Spano reported a 2014 operating loss of $70,000 before the guaranteed payment.
What is(are) the net effect(s) of the guaranteed payment?
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I. The guaranteed payment increases Peters's tax basis in Spano by $16,000.
II. The guaranteed payment increases Peters's ordinary income by $16,000.
Guaranteed payments are those made by a partnership to a partner that are determined without regard to the partnership's income. A partnership treats guaranteed payments for services, or for the use of capital, as if they were made to a person who is not a partner. This treatment is for purposes of determining gross income and deductible business expenses only.
103
Abe, Betsy, and Dan decide to form the equal ABD partnership at the beginning of Year One. Abe contributed depreciable assets that he has owned for five years that have a basis of $15,000 and a value of $20,000. Betsy contributed $20,000 cash. Dan contributed $12,000 in cash and land with a basis of $5,000 and a value of $8,000. How much income is allocated to Abe if the partnership sells the assets contributed by Abe for $18,000?
The realized gain on the sale of the assets is $3,000 ($18,000 ? $15,000 basis in assets). Abe's built in gain on the contribution is $5,000. The amount of gain allocated to Abe is the lower of the realized gain or built-in gain, so $3,000 is the allocation.
104
A guaranteed payment by a partnership to a partner for services rendered, may include an agreement to pay
I. A salary of $5,000 monthly without regard to partnership income.
II. A 25 percent interest in partnership profits.
Guaranteed payments from a partnership for the services of a partner are treated as salary payments and, as a result, are made without regard to the partner's share of the partnership's income.
Thus, a guaranteed payment by a partnership to a partner for services rendered may include an agreement to pay a salary of $5,000 monthly without regard to partnership income and may not include an agreement to pay 25 percent interest in partnership profits.
105
Under the Internal Revenue Code sections pertaining to partnerships, guaranteed payments are payments to partners for
A. Payments of principal on secured notes honored at maturity.
B. Timely payments of periodic interest on bona fide loans that are not treated as partners' capital.
C. Services or the use of capital without regard to partnership income.
D. Sales of partners' assets to the partnership at guaranteed amounts regardless of market values.
Under the Internal Revenue Code sections pertaining to partnerships, guaranteed payments are payments to partners for services or the use of capital without regard to partnership income.
Thus, guaranteed payments are treated similarly to salary payments to the partner, not as partnership distributions.
106
Evan, a 25% partner in Vista Partnership, received a $20,000 guaranteed payment in 2014 for deductible services rendered to the partnership. Guaranteed payments were not made to any other partner. Vista's 2014 partnership income consisted of:
Net business income before guaranteed payments $80,000
Net long-term capital gains 10,000
What amount of income should Evan report from Vista Partnership on her 2014 tax return?
Guaranteed payments from a partnership for the services of a partner are treated as salary payments and, as a result, are made without regard to the partner's share of the partnership's income. Thus, Evan would treat the $20,000 payment from the partnership for services rendered as income on her 2014 tax return. She also must report her share of the partnership's net income. Since the guaranteed payments qualify as a deductible expense, Vista's partnership income may be reduced by the amount of the expense. Hence, the partnership's income would be $70,000; $80,000 in net business income before guaranteed payments plus the $10,000 net long-term capital gain less the $20,000 guaranteed payment. Evan's 25 percent share of the partnership's income would be $17,500 (25 percent x $70,000). Thus, Evan would report $37,500 in income from the Vista Partnership on her 2014 tax return - the sum of the guaranteed payment ($20,000) and her share of the partnership's income ($17,500).
107
White has a one-third interest in the profits and losses of Rapid Partnership. Rapid's ordinary income for the 2014 calendar year is $30,000, after a $3,000 deduction for a guaranteed payment made to White for services rendered. None of the $30,000 ordinary income was distributed to the partners.
What is the total amount that White must include from Rapid as taxable income in his 2014 tax return?
Guaranteed payments to partners from their partnership for partnership services or capital are not treated as partnership distributions. Instead, the payments are treated as salary payments to employees or interest payments.
Hence, White would have to include the $3,000 guaranteed payment on his 2014 tax return. In addition, since partnerships are pass-through for tax purposes, White must include his share of the partnership's income on his tax return. White share of the partnership's income would be $10,000 (= $30,000 in partnership income multiplied by White's 1/3 share in profits and losses).
Therefore, the total amount that White must include from Rapid Partnership as taxable income in his 2014 tax return is $13,000, the sum of the $3,000 in guaranteed payments made to White and White's share of the partnership's income.
108
In computing the ordinary income of a partnership, a deduction is allowed for
A. Contributions to recognized charities.
B. The first $100 of dividends received from qualifying domestic corporations.
C. Short-term capital losses.
D. Guaranteed payments to partners.
Certain items are separately stated on a partnership's income tax return and, as a result, are not included in the ordinary income of a partnership. These items are directly passed through to the partners and included on the partners' income tax return.
The separately stated items are composed of: charitable contributions; dividends; short-term capital gains and losses; long-term capital gains and losses; Code Section 1231 gains and losses; income, gains, losses, deductions and credits specially allocated under the partnership agreement; nonbusiness production of income expenses; income, gains and losses from the sale of unrealized receivables and appreciated inventory; bad debt, prior taxes and delinquency amounts recovered; taxes of foreign nations and U.S. possessions eligible for the foreign tax credit; intangible drilling and development expenses; mining exploration expenses; and soil and water conservation expenses. Guaranteed payments to partners are treated as salary payments.
Thus, the payments are deductible from the partnership's ordinary income.
109
Under Chapter 11 of the Federal Bankruptcy Code, which of the action is necessary for the court to confirm a reorganization plan?
Under Chapter 11 of the Federal Bankruptcy Code, a business may be allowed to continue its operations and keep its business assets. The court-supervised reorganization plan provides for payment of all or part of the debts over an extended period. The claims are divided into classes of similar claims so that they can be treated equally. For the court to confirm the reorganization plan, it must provide for full payment of administration expenses.
110
Are property own by partner automatically partnership property?
A partner can use property she owns in the partnership without it automatically becoming partnership property.
111
How long is a trademark of a corporation valid under the law of the United States?
Trademarks last as long as they retain their distinctiveness. Therefore, they can last indefinitely. Trademarks are terminated by their actual abandonment or their constructive abandonment if the owner allows the trademark to lose its distinctiveness.
112
upon default, the secured party normally has the right to retain (or sell) the collateral to satisfy the obligation. However, the secured party cannot retain the collateral in which situation?
upon default, the secured party normally has the right to retain (or sell) the collateral to satisfy the obligation. However, the secured party cannot retain the collateral if it is consumer goods and the debtor has paid 60% or more of the obligation. In such a case, the debtor is entitled to a compulsory disposition of the goods. Control’s security interest is in equipment, not consumer goods, and Arrow has paid only 50% of the obligation. Thus, Arrow is not entitled to a compulsory disposition.
113
a company that is subject to SEC registration and continuing disclosure requirements must furnish its shareholders with audited financial statements how many years
a company that is subject to SEC registration and continuing disclosure requirements must furnish its shareholders with audited financial statements for the last 2 years when soliciting proxies on behalf of management for an annual meeting at which directors are to be elected. Thus, Rey Corp. must furnish its shareholders with an annual report containing audited balance sheets for the 2 most recent years.
114
What is the basis of the property if a decedent (Lynn) acquires appreciated property as a gift within 1 year of death and this property passes back to the donor (Edwin) or the donor’s spouse?
A special rule applies if a decedent (Lynn) acquires appreciated property as a gift within 1 year of death and this property passes back to the donor (Edwin) or the donor’s spouse. When this occurs, the beneficiary’s basis is the basis of the property in the hands of the decedent before death, rather than fair market value at date of death.
115
As a general partner in Greenland Associates, an individual's share of partnership income for the current tax year is $25,000 ordinary business income and a $10,000 guaranteed payment. The individual also received $5,000 in cash distributions from the partnership. What income should the individual report from the interest in Greenland?
The partner must report $25,000 of ordinary income and the $10,000 guaranteed payment. The distribution does not generate additional income since the partner has sufficient basis to absorb it.
116
The basis to a partner of property distributed "in kind" in complete liquidation of the partner's interest is the
A. Adjusted basis of the partner's interest increased by any cash distributed to the partner in the same transaction.
B. Adjusted basis of the partner's interest reduced by any cash distributed to the partner in the same transaction.
C. Adjusted basis of the property to the partnership.
D. Fair market value of the property.
Adjusted basis of the partner's interest reduced by any cash distributed to the partner in the same transaction. The basis to a partner of property distributed "in kind" in complete liquidation of the partner's interest is the adjusted basis of the partner's interest reduced by any cash distributed to the partner in the same transaction.
117
Stone's basis in Ace Partnership was $70,000 at the time he received a nonliquidating distribution of partnership capital assets. These capital assets had an adjusted basis of $65,000 to Ace, and a fair market value of $83,000.
Ace had no unrealized receivables, appreciated inventory, or properties which had been contributed by its partners.
What was Stone's recognized gain or loss on the distribution?
A partner receiving a distribution from a partnership usually does not recognize a gain or loss. Gains are recognized only to the extent the partner receives an amount of cash exceeding his/her adjusted basis in the partnership interest. Gains from property distributions other than cash are not recognized until the partner sells or disposes of the property. Therefore, Stone does not recognize any gain or loss from the distribution.
118
On June 30, 2014, Berk retired from his partnership.
At that time, his capital account was $50,000 and his share of the partnership's liabilities was $30,000. Berk's retirement payments consisted of being relieved of his share of the partnership liabilities and receipt of cash payments of $5,000 per month for 18 months, commencing July 1, 2014.
Assuming Berk makes no election with regard to the recognition of gain from the retirement payments, he should report income therefrom of
2014
2015
$13,333 $26,667
$20,000 $20,000
$40,000 -
- $40,000
Payments received by a retiring partner from the partnership in exchange for the partner's interest in the partnership receive similar treatment to the receipt of a liquidating distribution. Thus, the retiring partner recognizes income only to the extent that "money" received exceeds the partner's basis in the partnership interest. The assumption of a partner's liabilities is viewed as being a "money" payment.
Immediately before retiring from the partnership, Berk had a balance of $50,000 in his capital account and his share of the liabilities amounted to $30,000, putting his adjusted basis in the partnership interest at $80,000. Berk's retirement payments consisted of being relieved of his share of the partnership liabilities and receipt of cash payments of $5,000 per month for 18 months, commencing July 1, 2014. Thus, in 2014, Berk would receive $60,000 in distributions of "money," $30,000 in liabilities assumed and $30,000 in cash payments ($5,000 per month multiplied by 6 months). The payments made to Berk in 2015 are not recognized in 2014 because Berk had no right to receive the income until paid in 2015.
Since Berk's basis in the partnership interest, $80,000, is greater than the amount of "money'" received, $60,000, Berk would not recognize any income in 2014. This transaction would reduce Berk's basis in the partnership interest by the $60,000 of income not recognized, going from $80,000 immediately before Berk retired to $20,000 at the end of 2014. Berk received an additional $60,000 in cash payments ($5,000 per month multiplied by 12 months) in 2015. Of this amount, Berk would recognize $40,000 in 2015, the $60,000 in cash payments less the $20,000 in basis not absorbed at the end of 2014.
Thus, Berk should not report any income from the retirement payments received in 2014, but he should report $40,000 from the payments in 2015.
119
Curry's adjusted basis in Vantage Partnership was $5,000 at the time he received a nonliquidating distribution of land. The land had an adjusted basis of $6,000, and a fair market value of $9,000 to Vantage.
What was the amount of Curry's basis in the land?
A partner's basis in property received in a nonliquidating distribution is the same as the partnership's basis in the property immediately before the distribution. However, the partner's basis in the property may not exceed his/her basis in the partnership less any cash received in the distribution.
The partnership's basis in the land is $6,000. Curry would assume the partnership's basis in the land. However, Curry's basis in the partnership is less than the partnership's basis in the land so Curry's basis in the land would be limited to his/her basis in the partnership. Thus, Curry's basis in the land would equal his/her partnership basis of $5,000.
120
Hart's adjusted basis in Best Partnership was $9,000 at the time he received the following nonliquidating distributions of partnership property:
Cash $ 5,000
Land
Adjusted basis 7,000
Fair market value 10,000
What was the amount of Hart's basis in the land?
A partner's basis in property received in a nonliquidating distribution is the same as the partnership's basis immediately before the distribution. However, the partner's basis in the property may not exceed his/her basis in the partnership less any cash received in the distribution.
Hart received property with a basis of $12,000 ($5,000 in cash plus the partnership's basis in the land of $7,000). However, his basis in the partnership interest is $9,000, so the basis in the property distributed must be limited to this amount. Since the distribution included $5,000 in cash, Hart's basis in the land is $4,000 ($9,000 - 5,000).
121
Stone and Frazier decided to terminate the Woodwest Partnership as of December 31. On that date, Woodwest's balance sheet was as follows:
Cash $2,000
Equipment (adjusted basis) 2,000
Capital - Stone 3,000
Capital - Frazier 1,000
The fair market value of the equipment was $3,000. Frazier's outside basis in the partnership was $1,200. Upon liquidation, Frazier received $1,500 in cash. What gain should Frazier recognize?
Fraizer received cash of $1,500 less his basis in the partnership of $1,200 = gain of $300.
122
Gulde's tax basis in Chyme Partnership was $26,000 at the time Gulde received a liquidating distribution of $12,000 cash and land with an adjusted basis to Chyme of $10,000 and a fair market value of $30,000. Chyme did not have unrealized receivables, appreciated inventory, or properties that had been contributed by its partners. What was the amount of Gulde's basis in the land?
The basis in the partnership interest is first reduced to $14,000 for the cash distribution of $12,000 ($26,000 ? $12,000 = $14,000). Generally, the $14,000 basis is then reduced by the basis that the land has to the partnership ($10,000). However, since this is a liquidating distribution the ending basis in the partnership interest must be zero. Therefore, the basis in the partnership interest is reduced by $14,000, and this becomes Gulde's basis in the land.
123
In the current year, when Hoben's tax basis in Lynz Partnership interest was $10,000, Hoben received a liquidating distribution as follows:
Adjusted tax basis Fair market value
Marketable securities $ 5,000 $ 5,000
Land 25,000 27,000
Lynz had no appreciated inventory, unrealized receivables, or properties that had been contributed by its partners. What was Hoben's recognized gain on the distribution?
Gain is recognized on a partnership distribution ONLY if the cash distributed exceeds the basis in the partnership interest. In this case there was no cash distributed, so no gain is recognized.
124
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
Fair market value
Cash
$100,000
$100,000
Real estate
70,000
96,000
What is Vance's basis in the real estate?
A partner's basis in property distributed in a complete liquidation of the partner's partnership interest equals the partner's partnership interest less any cash distributed in the transaction.
Thus, Vance's basis in the real estate is $80,000, the adjusted basis of Vance's partnership interest in Lex Associates of $180,000 less cash received of $100,000.
125
While preparing a partnership tax return, the accountant discovered that ABC Partnership distributed property to Anne, a partner, in a nonliquidating transfer. No money was distributed to Anne during the year, the property was in the partnership for over five years, and no debt was attached to the property. Anne had a basis in her partnership interest of $10,000. The partnership had an adjusted basis of $20,000 in the property distributed to Anne. Which of the following are the tax consequences to Anne?
No gain is recognized since gain occurs only if cash distributed exceeds basis in the partnership interest. The basis in the partnership interest ($10,000), is reduced by the basis of the property distributed ($20,000) BUT not below zero. So, the basis in the partnership interest is reduced to zero. Since the basis in the partnership is reduced by only $10,000, Anne's basis in the property is $10,000.
126
Hart's adjusted basis of his interest in a partnership was $30,000. He received a nonliquidating distribution of $24,000 cash plus a parcel of land with a fair market value and partnership basis of $9,000.
Hart's basis for the land is
If a partner receives property from the partnership in a nonliquidating distribution, the partner assumes a basis in the property equal to the partnership's basis in the property immediately before the distribution. However, the basis assumed may not exceed the partner's interest in the partnership less any cash received in the distribution.
The partnership's basis in the land distributed to Hart was $9,000. However, Hart would not assume this amount as his basis in the land because it exceeds his interest in the partnership less any cash received in the distribution. Thus, Hart's basis would be limited to $6,000, his interest in the partnership of $30,000 less the $24,000 of cash received.
127
The adjusted basis of Jody's partnership interest was $50,000 immediately before Jody received a current distribution of $20,000 cash and property with an adjusted basis to the partnership of $40,000 and a fair market value of $35,000.
What is Jody's basis in the distributed property?
A partner's basis in property received in a nonliquidating distribution is the same as the partnership's basis immediately before the distribution. However, the partner's basis in the property may not exceed his/her basis in the partnership less any cash received in the distribution.
Thus, Jody's basis in the distributed property was $30,000, Jody's adjust basis in the partnership interest of $50,000 less the cash received of $20,000.
128
On December 31, 2014, after receipt of his share of partnership income, Clark sold his interest in a limited partnership for $30,000 cash and relief of all liabilities.
On that date, the adjusted basis of Clark's partnership interest was $40,000, consisting of his capital account of $15,000 and his share of the partnership liabilities of $25,000. The partnership has no unrealized receivables or substantially appreciated inventory.
What is Clark's gain or loss on the sale of his partnership interest?
If a partner sells his/her interest in the partnership, the partner recognizes a capital gain equal to the amount that the payment exceeds the partner's adjusted basis in the partnership.
Clark's adjusted basis in the partnership is $40,000 immediately before the sale. The assumption of Clark's share of the partnership's liabilities is viewed as a distribution to Clark. Thus, Clark's adjusted basis must be reduced by the assumption of his share of the partnership's liabilities, putting his adjusted basis at $15,000. The payment of $30,000 received by Clark exceeds his adjusted basis of $15,000 by the amount of $15,000. Hence, Clark must recognize a capital gain of $15,000.
129
Curry's sale of her partnership interest causes a partnership termination. The partnership's business and financial operations are continued by the other members. What is (are) the effect(s) of the termination?
I. There is a deemed distribution of assets to the remaining partners and the purchaser.
II. There is a hypothetical recontribution of assets to a new partnership.
For tax purposes, a partnership terminates when it stops doing business as a partnership or 50 percent or more interest in partnership capital and profits is exchanged within 12 months.
When the partnership's business and financial operations are continued by other members, there is a deemed distribution of assets to the remaining partners and the purchaser and a hypothetical recontribution of assets to a new partnership.
130
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"Hot assets" of a partnership would include which of the following?
A. Cash.
B. Unrealized receivables.
C. Section 1231 assets.
D. Capital assets.
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"Hot assets" for a partnership includes ONLY inventory and unrealized receivables.
131
The personal service partnership of Allen, Baker & Carr had the following cash basis balance sheet at December 31, 2013:
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Assets
Adjusted basis per book Market value
Cash $102,000 $102,000
Unrealized accounts receivable -- 420,000
_______ _______
Totals $102,000 $522,000
Liability and Capital
Note payable $ 60,000 $ 60,000
Capital accounts:
Allen 14,000 154,000
Baker 14,000 154,000
Carr 14,000 154,000
_______ _______
$102,000 $522,000
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Carr, an equal partner, sold his partnership interest to Dole, an outsider, for $154,000 cash on January 1, 2014. In addition, Dole assumed Carr's share of the partnerships liability. What was the total amount realized by Carr on the sale of his partnership interest?
In computing the amount realized from the sale of a partner's interest in the partnership, the partner must consider their share of the partnership's liabilities along with the cash or value of property received. Thus, Carr's share of the partnership's liabilities, $20,000 (= $60,000 in total liabilities multiplied by Carr's one-third interest in the partnership), must be included in determining the amount realized by Carr.
Therefore, the total amount realized by Carr on the sale of his partnership interest is $174,000, the sum of the $154,000 in cash received and Carr's $20,000 share of the partnership's liabilities.
132
The personal service partnership of Allen, Baker & Carr had the following cash basis balance sheet at December 31, 2013:
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Assets
Adjusted basis per book Market value
Cash $102,000 $102,000
Unrealized accounts receivable -- 420,000
_______ _______
Totals $102,000 $522,000
Liability and Capital
Note payable $ 60,000 $ 60,000
Capital accounts:
Allen 14,000 154,000
Baker 14,000 154,000
Carr 14,000 154,000
_______ _______
$102,000 $522,000
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Carr, an equal partner, sold his partnership interest to Dole, an outsider, for $154,000 cash on January 1, 2014. In addition, Dole assumed Carr's share of the partnerships liability. What amount of ordinary income should Carr report in his 2014 income tax return on the sale of his partnership interest?
If a partner sells or exchanges his/her partnership interest and the partnership has either unrealized receivables or substantially appreciated inventory, the partner recognizes an ordinary gain to the extent that the amount realized by the partner due to the unrealized receivables or substantially appreciated inventory is greater than the partner's basis in the items.
When Carr sold his partnership interest in Allen, Baker and Carr, the partnership had unrealized receivables. The amount realized by Carr due to the unrealized receivables was $140,000, the partnership's total unrealized receivables of $420,000 multiplied by Carr's one-third ownership interest.
Carr does not have any basis in the unrealized receivables (indicating that none of the receivables have been collected). Hence, Carr must report an ordinary gain of $140,000, the $140,000 realized by Carr due to the unrealized receivables less Carr's basis in the receivables, which is zero.
133
Partnership Abel, Benz, Clark & Day is in the real estate and insurance business. Abel owns a 40% interest in the capital and profits of the partnership while Benz, Clark, and Day each owns a 20% interest. All use a calendar year.
At November 1, 2014, the real estate and insurance business is separated, and two partnerships are formed: Partnership Abel & Benz takes over the real estate business, and Partnership Clark & Day takes over the insurance business.
Which one of the following statements is correct for tax purposes?
A. Partnership Abel & Benz is considered to be a continuation of Partnership Abel, Benz, Clark & Day.
B. In forming Partnership Clark & Day, partners Clark and Day are subject to a penalty surtax if they contribute their entire distributions from Partnership Abel, Benz, Clark & Day.
C. Before separating the two businesses into two distinct entities, the partners must obtain approval from the IRS.
D. Before separating the two businesses into two distinct entities, Partnership Abel, Benz, Clark & Day must file a formal dissolution with the IRS on the prescribed form.
When a partnership divides into two or more partnerships, the original partnership is continued in each of the new partnerships which contain partners that controlled 50 percent or more of the partnership interest in the original partnership.
Since Abel and Benz own 40 percent and 20 percent interests, respectively, in the capital and profits of Partnership Abel, Benz, Clark and Day, the new Partnership Abel and Benz is considered a continuation of Partnership Abel, Benz, Clark and Day. However, Clark and Day only own a combined 40 percent interest in the capital and profits of Partnership Abel, Benz, Clark and Day.
Hence, the Partnership Clark and Day is not considered a continuation of Partnership Abel, Benz, Clark and Day.
134
Cobb, Danver, and Evans each owned a one-third interest in the capital and profits of their calendar-year partnership.
On September 18, 2013, Cobb and Danver sold their partnership interests to Frank, and immediately withdrew from all participation in the partnership. On March 15, 2014, Cobb and Danver received full payment from Frank for the sale of their partnership interests.
For tax purposes, the partnership
A. Terminated on September 18, 2013.
B. Terminated on December 31, 2013.
C. Terminated on March 15, 2014.
D. Did not terminate.
For tax purposes, a partnership terminates when it no longer does business as a partnership or 50 percent or more interest in partnership capital and profits is exchanged within 12 months.
When the partnership's business and financial operations are continued by other members, there is a deemed distribution of assets to the remaining partners and the purchaser and a hypothetical recontribution of assets to a new partnership.
Hence, the partnership terminated on September 18, 2013, when Cobb and Danver sold their partnership interests to Frank, and immediately withdrew from all participation in the partnership.
135
On January 3, 2014, the partners' interests in the capital, profits, and losses of Able Partnership were:
% of capital, profits and losses
Dean 25%
Poe 30%
Ritt 45%
On February 4, 2014, Poe sold her entire interest to an unrelated party. Dean sold his 25% interest in Able to another unrelated party on December 20, 2014. No other transactions took place in 2013. For tax purposes, which of the following statements is correct with respect to Able?
A. Able terminated as of February 4, 2014.
B. Able terminated as of December 20, 2014.
C. Able terminated as of December 31, 2014.
D. Able did not terminate.
For tax purposes, a partnership terminates when it stops doing business as a partnership or 50 percent or more interest in partnership capital and profits is exchanged within 12 months. When the partnership's business and financial operations are continued by other members, there is a deemed distribution of assets to the remaining partners and the purchaser and a hypothetical recontribution of assets to a new partnership.
Since Poe sold her 30 percent interest on February 4, 2014, when Dean sold his 25% interest on December 20, 2014 over 50 percent of the partnership had been exchanged within 12 months. As a result, Able Partnership terminated on December 20, 2014, the date that over 50 percent of the partnership's interest had been exchanged within past twelve months.
136
Bristol Corp. was formed as a C corporation on January 1, 1980, and elected S corporation status on January 1, 1987. 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 2014 Bristol's S election will terminate if it
A. Increases the number of shareholders to 75.
B. Adds a decedent's estate as a shareholder to the existing shareholders.
C. Takes a charitable contribution deduction.
D. Has passive investment income exceeding 90% of gross receipts in each of the three consecutive years ending December 31, 2013.
Has passive investment income exceeding 90% of gross receipts in each of the three consecutive years ending December 31, 2013.
137
Which one of the following will render a corporation ineligible for S corporation status?
A. One of the stockholders is a decedent's estate.
B. One of the stockholders is a bankruptcy estate.
C. The corporation has both voting and nonvoting common stock issued and outstanding.
D. The corporation has 150 stockholders.
To be eligible for S corporation status, a corporation must have 100 or less shareholders. All members of a family and their estates are treated as a single shareholder.
138
Which of the following statements about qualifying shareholders of an S corporation is correct?
A. A general partnership may be a shareholder.
B. Only individuals may be shareholders.
C. Individuals, estates, and certain trusts may be shareholders.
D. Nonresident aliens may be shareholders.
Individuals, estates, and certain trusts may be shareholders in an S corporation.
139
Village Corp., a calendar year corporation, began business in 2002. Village made a valid S Corporation election on December 5, 2013, with the unanimous consent of its shareholders. The eligibility requirements for S status continued to be met throughout 2013 and 2014.
On what date did Village's S status become effective?
A. January 1, 2013
B. January 1, 2014.
C. December 5, 2013.
D. December 5, 2014.
An S Corporation election is effective for the current tax year, if made by the 15th day of the third month of the tax year. Since the election is after to March 15, 2013 it is effective for 2014.
140
A corporation that has been an S Corporation from its inception may
Have both passive and nonpassive income
Be owned by a bankruptcy estate
S corporations have both passive and nonpassive income. However, if an S corporation has excessive net passive income, a tax at the highest corporate rate is imposed on the excessive passive income. Excessive passive income is the amount that passive investment income exceeds 25 percent of the corporation's gross receipts.
An S corporation may have shareholders that are individuals, decedent's estates, bankruptcy estates, or trusts (charitable organizations and qualified plan trusts are included for post-97 tax years).
This response correctly states that an S corporation, from its inception, may have both passive and nonpassive income and a shareholder that is a bankruptcy estate.
141
Which of the following is an eligibility requirement in 2014 to file a valid election to be taxed as an S corporation?
A. Must have no more than 75 shareholders, and a husband and wife who each own stock are counted as two shareholders.
B. Must have no more than 100 shareholders, and a husband and wife who each own stock are counted as two shareholders.
C. Must have no more than 100 shareholders, and a husband and wife who each own stock are counted as one shareholder.
D. Must have no more 75 shareholders, and a husband and wife who each own stock are counted as one shareholder.
Must have no more than 100 shareholders, and a husband and wife who each own stock are counted as one shareholder. The shareholder limit is 100 and members of the same family count as one shareholder.
142
An S Corporation has 30,000 shares of voting common stock and 20,000 shares of non-voting common stock issued and outstanding. The S election can be revoked voluntarily with the consent of the shareholders holding, on the day of the revocation,
Shares of voting stock
Shares of nonvoting stock
0 20,000
7,500 5,000
10,000 16,000
20,000 0
A corporation's S election may be revoked voluntarily with the consent of the shareholders holding a majority of the corporation's issued and outstanding stock, including non-voting stock.
Since, in this case, the S corporation has 30,000 shares of voting common stock and 20,000 shares of non-voting common stock issued and outstanding, shareholders holding at least 25,001 shares of stock would be needed to have a majority and, as a result, the ability to revoke the corporation's S election.
This response correctly indicates that shareholders controlling 26,000 shares of stock (10,000 shares of voting and 16,000 shares of non-voting) would have the ability to voluntarily revoke the corporation's S election despite their not having a majority of the voting shares.
143
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After a corporation's status as an S corporation is revoked or terminated, how many years is the corporation required to wait before making a new S election, in the absence of IRS consent to an earlier election?
A. 1
B. 3
C. 5
D. 10
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5. Once a corporation's S status is revoked or terminated, the corporation must wait five years before making a new S election, in the absence of IRS consent to an earlier election.
144
On February 10, 2014, Ace Corp., a calendar year corporation, elected S corporation status and all shareholders consented to the election. There was no change in shareholders in 2014. Ace met all eligibility requirements for S status during the preelection portion of the year.
What is the earliest date on which Ace can be recognized as an S corporation?
A. February 10, 2015.
B. February 10, 2014.
C. January 1, 2015.
D. January 1, 2014.
Ace Corp.'s S election would be recognized as of January 1, 2014. An S election made by the 15th day of the 3rd month of the tax year is effective for that year. To be retroactive, the corporation had to be eligible on all days in the tax year prior to the day of the election and all persons that were shareholders before that day, but not on that day, must consent to the election.
145
Stahl, an individual, owns 100% of Talon, an S corporation. At the beginning of the year, Stahl's basis in Talon was $65,000. Talon reported the following items from operations during the current year:
Ordinary loss $10,000
Municipal interest income 6,000
Long-term capital gain 4,000
Short-term capital loss 9,000
What was Stahl's basis in Talon at year-end?
65,000 - 10,000 + 6,000 + 4,000 - 9,000 = 56,000. The question is asking who the municipal interest income effects basis as well as the effect of the net capital losses. Shareholder's tax basis is increased/decreased by:
1.Increases
1. Stock purchases
2. Capital contributions
3. Nonseparately stated income items
4. Separately stated income items
2.Decreases
1. Nonseparately stated computed loss
2. Separately stated loss and deduction items
3. Distributions not reported as income by shareholder
4. Nondeductible expenses of corporation
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3.Separately stated items.
?Tax-exempt income
?Capital gains and losses
?Section 1231 gains and losses
?Charitable contributions
?Passive gains, losses, and credits
?Portfolio income
?Foreign income
?Investment income and expense
?Depletion
?Section 179 expense
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146
An S corporation engaged in manufacturing has a year end of June 30. Revenue consistently has been more than $10 million under both cash and accrual basis of accounting. The stockholders would like to change the tax status of the corporation to a C corporation using the cash basis with the same year end. Which of the following statements is correct if it changes to a C corporation?
A. The year end will be December 31, using the cash basis of accounting.
B. The year end will be December 31, using the accrual basis of accounting.
C. The year end will be June 30, using the accrual basis of accounting.
D. The year end will be June 30, using the cash basis of accounting.
Once the S corporation completes the steps necessary to become a C corporation, it will be allowed to retain its June 30 year-end since C corporations are not subject to the tax-year limitations to which partnerships and S corporations are. However, C corporations cannot use the cash method of accounting unless their average annual gross receipts for the previous three years do not exceed $5,000,000. Once the $5,000,000 test is failed the accrual method must be used for all future tax years. Since this corporation has had revenues of more than $10 million it must use the accrual method of accounting.
147
Which of the following items must be separately stated on Form 1120S, U.S. Income Tax Return for a Corporation, Schedule K-1?
A. Mark-to-market income.
B. Unearned revenue.
C. Section 1245 Gain.
D. Gain or loss from the sale of collectibles.
Collectible gain is taxed at a maximum rate of 28% and can be offset with collectible losses, so it needs to be separately stated.
148
Zinco Corp. was a calendar year S corporation. Zinco's S status terminated on April 1, 2014, when Case Corp. became a shareholder. During 2014 (365-day calendar year), Zinco had nonseparately computed income of $310,250.
If no election was made by Zinco, what amount of the income, if any, was allocated to the S short year for 2014?
Since Case Corp. became a shareholder in Zinco Corp. and corporations are not permitted to be a shareholders in S corporations, Zinco Corp.'s S election would be terminated. The termination is effective as of the date the eligibility requirement is no longer met by the S corporation. Hence, Zinco Corp.'s S short year would be from January 1, 2014 to March 31, 2014. The amount of income allocated to Zinco Corp.'s S short year for 2014 is $76,500 ? (90 days divided by 365 days) multiplied by nonseparately computed income of $310,250.
This response incorrectly uses the period of April 1, 2014 to December 31, 2014 to calculate Zinco Corp.'s S short year income.
149
B Corporation has been a calendar-year S electing corporation since its inception. S1 and S2 each own half of the stock with a basis of $12 and $9, respectively. This year B reported ordinary income of $81 and $10 of tax-exempt income. B also made a $51 cash distribution to each shareholder at year end. What is S1's basis after the distribution?
S1's beginning basis is $12. It is increased by 50% of the taxable and tax-exempt income (($81 + $10) * 50% = $45.50) and decreased by the $51 distribution.
$12 + $45.50 - $51 = $6.50
150
Stone owns 100% of an S corporation and materially participates in its operations. The stock basis at the beginning of the year is $5,000. During the year, the corporation makes a distribution of $3,500 and passes through a loss from operations of $2,000 for the year. What loss can Stone deduct on Stone's personal tax return?
The ordering rules for adjusting basis at the end of the tax year for S corporation shareholders (and partners in a partnership) is to first increase basis for income, then reduce it for distributions, and then reduce it for losses. Losses can be reported on a shareholder's return only to the extent of basis, which is $1,500.
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Beginning stock basis $5,000
Distribution (3,500)
$1,500
Loss (limited to basis) (1,500)
Ending stock basis -0-
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