REG Mini Exam 2 Flashcards
MCQ-10584 Farr made a gift of stock to her child, Pat. At the date of gift, Farr's stock basis was $10,000 and the stock's fair market value was $15,000. No gift taxes were paid. What is Pat's basis in the stock for computing gain? 1. $0 2. $15,000 3. $10,000 4. $5,000
Choice “3” is correct. Property acquired as a gift generally retains the rollover cost basis that it had in the hands of the donor at the time of the gift. Basis is increased by any gift tax paid that is attributable to the net appreciation in the value of the gift. Since there were no gift taxes paid, Pat’s basis for computing a gain is the rollover cost (basis), $10,000.
Choices “1”, “4”, and “2” are incorrect, per the explanation above.
MCQ-10513 Diana Kalyvas received a painting as a gift from her sister, Joanna, on April 1 of the current year. The painting had a fair market value of $5,000 at the date of gift, and Joanna had purchased the painting twenty years prior for an amount of $7,000. After holding the painting for three months, Diana realized that she would rather have the money for the value of the painting than the painting itself, so she sold the painting to her neighbor for $4,500 on July 4. On her current year income tax return, Diana should report: 1. A short-term capital loss of $2,500. 2. A long-term capital loss of $500. 3. A long-term capital loss of $2,000. 4. A short-term capital loss of $50
Choice “4” is correct. The basis of the painting depended upon what Diana eventually sold the painting for. The gain basis of $7,000 would have applied if Diana had sold the painting above $7,000, but that did not happen in this case. The basis of $5,000 (FMV at the date of gift) applied because Diana sold the painting for less than the FMV at the date of gift and at the date of the gift the FMV of the gift was less than the donor’s basis in the gift. Further, although the holding period for the donee typically includes the donor’s holding period, this case is an exception to the rule. The holding period starts with the gift date when the FMV at the date of gift is used as the basis. Therefore, the sale resulted in a short-term capital loss of $500.
Choice “1” is incorrect. Although the loss is a short-term capital loss, the basis of the painting on the date of sale was $5,000, not $7,000 (as discussed above).
Choice “2” is incorrect. The holding period began on April 1 because the fair market value at the date of the gift was used as the basis.
Choice “3” is incorrect. The holding period began on April 1. Also Diana’s basis in the painting was $5,000, due to the sale in the amount of $4,500. This answer incorrectly calculates the loss as the difference between Joanna’s purchase price (the gain basis) and the FMV at the date of gift.
MCQ-09988
Which of the following qualifies as a like-kind exchange?
1, Investment land for building to be used in a trade or business.
2. Inventory of a retail hardware store for inventory of a plumbing wholesaler.
3. General partnership interest for a limited partnership interest.
4. Rental house for a house to be used as a principal residence.
Choice “1” is correct. Investments in business assets such as land and building qualify for like-kind exchange treatment.
Choices “2” and “3” are incorrect. Like-kind business exchange is not available for inventory, investments in bonds, partnerships and corporation stock.
Choice “4” is incorrect. Personal use property is not eligible for the deferral that is part of a like-kind exchange.
MCQ-09989
Which of the following is not §1231 property?
1. A building used in a business and held more than 12 months.
2. Land used in a business and held more than 12 months.
3. Equipment used in a business and held more than 12 months.
4. Equipment used in a personal use activity and held more than 12 months.
Choice “4” is correct. Personal use property does not qualify as Section 1231 property.
Choices “3”, “2”, and “1” are incorrect. Depreciable personal and real property used in the taxpayer’s trade or business and held over 12 months qualifies as Section 1231 property.
MCQ-10512 Which of the following are capital assets? I. Interest in a partnership. II. Accounts receivable. III. Stocks and bonds. IV. Literary compositions held by the original artist. 1. II only. 2. I, II, and III. 3. Both I and III. 4. I, III, and IV
Choice “3” is correct. A capital asset includes property (real and personal) held by the taxpayer for investment or for personal use.
Capital assets include:
Personal automobile of the taxpayer.
Furniture and fixtures in the taxpayer’s home.
Stock and bonds.
Real and personal property not used in a trade or business.
Interest in a partnership.
Goodwill of a corporation.
Purchased (as opposed to created) copyrights, literary, musical, or artistic compositions.
Musical compositions held by the original artist.
Other assets held for investment.
Non-capital assets include:
Property normally included in inventory or held for sale.
Depreciable personal and real property used in a business.
Accounts and notes receivable arising from sales or services in a business.
Copyrights, literary, musical, or artistic compositions held by the original artist.
Treasury stock.
Choices “4”, “1”, and “2” are incorrect, based in the above information.
MCQ-10588
Among which of the following related parties are losses from sales and exchanges not
recognized for tax purposes?
1. Grandfather and granddaughter.
2. Brother-in-law and sister-in-law.
3. Ancestors, lineal descendants, and all in-laws.
4. Father-in-law and son-in-law.
Choice “1” is correct. Losses from sales and exchanges are not recognized for tax purposes between grandfather and granddaughter.
Rule: Losses are disallowed on sales between related parties. “Related” includes brothers and sisters, husband-wife, lineal descendants (father, son, grandfather), and entities that are more than 50% owned by individuals, corporations, trusts and/or partnerships.
Choices “4”, “2”, and “3” are incorrect, because losses from sales and exchanges are recognized for all “in-laws.”
MCQ-14756
White Company acquires a machine (seven-year property) on January 10 of the current year, at a cost of $1,950,000. It was the only purchase of machinery White made in the current year. White makes the election to expense the maximum amount under Section
179. No election is made to use the straight-line method. Determine the total Section 179 deduction related to the machine for the current year assuming White has taxable income of $1,700,000 and assuming the rules in effect for the year 2021:
1. $1,050,000
2. $0
3. $1,950,000
4. $1,700,000
Choice “1” is correct.
2021 maximum allowable Section 179 deduction
1,050,000
Reduction:
Purchases
1,950,000
2021 excess property phase-out threshold
(2,620,000)
Excess
0
Allowable Section 179 deduction
1,050,000
Choices “4”, “2”, and “3” are incorrect. The maximum Section 179 deduction is $1,050,000.
MCQ-10586 Clark and Hunt organized Jet Corp. with authorized voting common stock of $400,000. Clark contributed $60,000 cash. Both Clark and Hunt transferred other property in exchange for Jet stock as follows: Other property Adjusted basis Fair market value Percentage of Jet stock acquired Clark $50,000 $100,000 40% Hunt 120,000 240,000 60% What was Clark's basis in Jet stock? 1. $160,000 2. $110,000 3. $100,000 4. $0
Choice “2” is correct. The formation of a corporation under these conditions is a nontaxable event. Clark’s basis will be the $60,000 cash he contributed plus the $50,000 adjusted basis of the non-cash property for a total of $110,000.
Choice “1” is incorrect. When property is contributed to form a corporation, it is contributed at its adjusted basis, not at its fair market value.
Choice “3” is incorrect. The amount of cash that Clark contributed must also be considered in determining Clark’s basis in Jet stock.
Choice “4” is incorrect. Clark contributed both cash and property. Thus, Clark’s basis in Jet’s stock is greater than zero.
MCQ-10016
Swan, Inc. is an accrual basis taxpayer. Swan uses the aging approach to calculate the
reserve for bad debts. During the year, the following transactions associated with bad debts
occur:
Credit sales $200,000
Collections on credit sales 150,000
Amount added to the reserve 40,000
Beginning balance in the reserve 0
Bad debts written off during the year 30,000
The amount of the deduction for bad debt expense for Swan for the year is:
1. $70,000
2. $50,000
3. $30,000
4. $40,000
Choice “3” is correct. Only actual bad debts written off are deductible for tax purposes, as the allowance method or any other type of estimated bad debt method is not permissible.
Choice “1” is incorrect. This answer combines the actual write-offs with the increase in the reserve (estimated amounts). Only actual write-offs are deductible for tax purposes.
Choice “2” is incorrect. This answer is the difference between the credit sales and cash collected, not the actual bad debts written off during the year.
Choice “4” is incorrect. This is the amount added to the reserve during the year. Only actual amounts written off are deductible. The addition to the reserve is an estimate.
MCQ-09997
Emerald Corporation, an accrual basis taxpayer, was formed and began operations on July
1, Year 1. The following expenses were incurred during the first tax year (July 1 to
December 31, Year 1) of operations:
Expenses of temporary directors and of organizational meetings $5,000
Fee paid to the state of incorporation 600
Accounting services incident to organization 1,200
Legal services for drafting the corporate charter and bylaws 2,800
Expenses incident to the printing and sale of stock certificates 1,000
Assume Emerald Corporation makes an appropriate and timely election under §248(c) and
the related regulations. What is the maximum organizational expense Emerald may write-off
for the first tax year?
1. $960
2. $5,153
3. $153
4. $5,187
Choice “2” is correct.
Organizational meetings
5,000
State incorporation fees
600
Accounting for expenses incident to organization
1,200
Legal fees drafting bylaws
2,800
Qualified “start-up” expenses
9,600
Expensed immediately
(5,000)
Remainder
4,600
Amortization Period
÷ 180
months
Amortization expense/month
25.56
Months of operation (July − Dec.)
× 6
Total Amortization expense
153.36
Total write-off:
Expense maximum
5,000
Amortized amount
153
Total write-off
5,153
Organizational expenses are eligible for an immediate 5,000 deduction, with the remainder amortized over 180 months. (Note: The $5,000 is reduced as the total cost exceeds 50,000 for each item.)
Note that expenses related to the issuance of the corporation’s stock (the expenses for printing and sale of stock certificates, $1,000) are not amortizable.
Choice “1” is incorrect. This answer is derived by using the eligible expenses amortized over 60 months beginning with the month of starting business (old rule).
Choice “3” is incorrect. The amount of $153 only includes the amortization component of the write-off in the year. The expense of $5,000 is an additional write-off.
Choice “4” is incorrect. This answer applies the proper expensing/amortizing rules but includes the $1,000 for printing and sale of stock certificates as eligible expenses.
MCQ-14761
For 2019, Hammond Corporation reported book income of $2,300,000. Included in that amount was corporate bond interest income of $100,000, municipal bond interest income of $200,000, $80,000 for meals expense, $500,000 for corporate federal income tax expense,
$150,000 state income tax expense, $75,000 of rental expense, and $20,000 for life insurance premiums on an officer’s life (corporation is the beneficiary). Further, the company collected $50,000 in advance rents during the year. In Hammond’s Schedule M-1
of Form 1120 for the current year, which reconciles book income to taxable income, what amount should be reported as taxable income?
1. $2,670,000
2. $2,710,000
3. $2,860,000
4. $2,660,000
Choice “2” is correct. Taxable income of $2,710,000 is calculated as follows:
Book income
2,300,000
Additions:
Federal income tax expense
500,000
50% of meals
40,000
Life insurance premiums
20,000
Advance rents collected
50,000
Subtractions:
Municipal bond interest income
(200,000)
Taxable income
2,710,000
Choice “1” is incorrect. This amount fails to make an adjustment to increase book income by 50% of the meals expenses paid, which are only 50% deductible. Food and beverage provided by a restaurant is temporarily 100% deductible for 2021 and 2022.
Choice “3” is incorrect. This amount adds the state income tax paid back to the book income in error. State income taxes are deductible expenses on the federal corporate income tax return.
Choice “4” is incorrect. This amount neglects to include the $50,000 advance rents received as taxable income.
MCQ-10004 Which of the following types of income is not considered personal holding company income? 1. Interest. 2. Dividends. 3. Royalties. 4. Bonuses.
Choice “4” is correct. Bonuses are not considered personal holding company income.
Choices “2”, “1”, and “3” are incorrect. Dividends, interest, and royalties are considered personal holding company income.
MCQ-10523
Jordan Corporation has two stockholders. Jordan derives all of its income from investments in stocks and securities, and it regularly distributes 51% of its taxable income as dividends to its shareholders. Jordan is a:
1. Corporation subject to tax only on income not distributed to stockholders.
2. Personal holding company.
3. Regular investment company.
4. Personal service corporation subject to accumulated earnings tax.
Choice “2” is correct. Personal holding company status applies if a corporation is owned more than 50% by five or fewer individuals at any time during the last half of the tax year and at least 60% of the adjusted ordinary gross income for the tax year is personal holding company income (which would include income from investments in stocks and securities).
Choice “1” is incorrect. The corporation in the question is a personal holding company. The description of this option seems close to that of a personal holding company, but it is not exactly. A “C corporation” (of which a personal holding company is one) is subject to tax on all of its taxable income, regardless of whether it is distributed to its shareholders. However, in a personal holding company, if the income is then NOT distributed to the shareholders, the corporation is subject to an ADDITIONAL tax on personal holding company income not distributed (the tax is self-assessed).
Choice “3” is incorrect. A regular investment company is a corporation that is registered under the Investment Company Act of 1940 (also includes some venture capital companies). In order to qualify as a regular investment company, at least 90% of the corporation’s gross income must be qualified investment source income. It must distribute currently at least 90% of its dividend and interest income. The benefit of this type of corporation is that if all requirements are met, the corporation is not taxed on distributions to its shareholders.
Choice “4” is incorrect. The accumulated earnings tax is imposed on corporations whose accumulated (retained) earnings are in excess of $250,000 ($150,000 if the corporation is a personal service corporation) if improperly retained instead of being distributed as earnings to the shareholders. The corporation in the question is not a personal service corporation, which is a company that provides personal services (e.g., medical, accounting, legal, etc.) performed by the shareholder.
MCQ-10393
In the filing of a consolidated tax return for a corporation and its wholly owned subsidiaries, intercompany dividends between the parent and subsidiary corporations are:
1. Fully taxable.
2. Included in taxable income to the extent of 80%.
3. Included in taxable income to the extent of 20%.
4. Not taxable.
Choice “4” is correct. Dividends received from other group members are eliminated from the parent’s taxable income in consolidation; no dividends received deduction is allowed. Since the parent eliminates the subsidiary dividends in consolidation, they are effectively not taxable.
Choices “3”, “2”, and “1” are incorrect. The regulations require elimination of intercompany dividends in consolidation.
MCQ-10549
During the year, Bereft Corp., which is not a dealer in securities, realized taxable income of
$175,000 from its business operations. During the year, Bereft also sustained a capital loss of $52,000 from the sale of marketable securities it purchased 10 years ago. Bereft did not realize any other capital gains or losses in the current year or in past years. In Bereft’s
income tax return, what is the proper treatment of the $52,000 long-term capital loss?
1. Use $3,000 of the loss to reduce the current year taxable income, and carry $49,000 of the capital loss forward for 3 years.
2. Use $3,000 of the loss to reduce the current year taxable income, and carry $49,000 of the capital loss forward for 5 years.
3. Use the entire $52,000 capital loss in the current year to reduce taxable income to $123,000.
4. Carry the $52,000 capital loss carryforward for five years.
Choice “4” is correct. Capital gains are taxed at the same rate as ordinary income for corporations. However, capital losses can only be used to offset capital gains. Any capital loss not utilized in the year of generation is carried back 3 years to offset prior capital gains and then carried forward for 5 years. In this example the corporation has no net capital gains in any previous year. As such, no carryback period is available.
Choices “2” and “1” are incorrect. The $3,000 deduction for capital losses against ordinary income available for individuals is not available for corporations.
Choice “3” is incorrect. Corporate capital losses can only be used to offset capital gains.
MCQ-10001
Bluebird Corporation has a deficit in accumulated E&P of $180,000. For the current year, it has current E&P of $120,000. On July 1 of the current year, Bluebird Corporation distributes
$135,000 to its sole shareholder, Mike. Mike has a basis of $60,000 in his stock in Bluebird
Corporation. What is the effect to Mike?
1. Mike has no dividend income, reduces his stock basis to zero, and has a capital gain of $75,000.
2. Mike has dividend income of $135,000.
3. Mike has dividend income of $60,000 and reduces his stock basis to zero.
4. Mike has dividend income of $120,000 and reduces his stock basis to $45,000
Choice “4” is correct. Dividend income is determined by the amount of both current and accumulated (positive) E&P. The corporation had current E&P (by year end) of $120,000, even though the corporation has a deficit in accumulated E&P. Therefore, only $120,000 of the distribution is a dividend. The additional $15,000 distribution ($135,000 − $120,000) is a “return of capital” and reduces his basis from $60,000 to $45,000.
Choice “1” is incorrect. The first step in characterizing a distribution as a dividend is earnings and profits. This answer would be correct if the current and accumulated earnings of Bluebird were $0 or a deficit.
Choice “2” is incorrect. The entire amount would only be taxable as a dividend if Bluebird had earnings and profits (current and/or accumulated) of $135,000 or more.
Choice “3” is incorrect. The amount of the distribution to be characterized as a dividend is equal to all accumulated (positive) or current earnings and profits. Any amount in excess is then a return of basis.
MCQ-10627
Sky Corp. was a wholly-owned subsidiary of Jet Corp. Both corporations were domestic C
corporations. Jet received a liquidating distribution of property in cancellation of its Sky stock when Jet’s tax basis in Sky stock was $100,000. The distributed property had an adjusted basis of $135,000 and a fair market value of $250,000. What amount of taxable
gain did Jet, the parent corporation, recognize on the receipt of the property?
1. $250,000
2. $150,000
3. $35,000
4. $0
Choice “4” is correct. No gain is recognized by Jet Corporation, the parent, upon the liquidation of Sky Corporation.
Rule: No gain or loss is generally recognized in connection with the complete liquidation of a controlled subsidiary (e.g., Sky Corp.) into its parent corporation (e.g., Jet Corp.). (Note: In addition, any unused net operating loss carryovers or charitable contribution carryovers would be transferred to the successor parent corporation.)
Explanation: Sky Corporation was a wholly-owned subsidiary of Jet Corporation; therefore, it was a controlled subsidiary. This was a liquidating distribution in cancellation of Jet’s investment in Sky Corporation; therefore, it was a complete liquidation.
Choices “1”, “2”, and “3” are incorrect, per above rule and explanation.
MCQ-10920 Jane is the sole shareholder of Buttons Inc. Buttons has a deficit of $60,000 in accumulated earnings and profits (E&P) at the beginning of the current year. Current E&P is $35,000. If Buttons pays out a cash distribution to Jane during the current year of $50,000, how much is a taxable dividend to Jane? 1. $0 2. $35,000 3. $50,000 4. $85,000
Choice “2” is correct. The cash distribution is only a taxable dividend to the extent of current or accumulated E&P and is first applied against current E&P. That amount here is $35,000.
Choice “1” is incorrect. Zero is not correct, as $35,000 is a taxable dividend based on the current E&P.
Choice “3” is incorrect. $50,000 is the entire distribution. Only $35,000 is a taxable dividend based on current E&P. The remaining $15,000 is a nontaxable return of capital until basis is exhausted. Then it is a capital gain distribution.
Choice “4” is incorrect. $85,000 is the addition of the total distribution of $50,000 and the current E&P of $35,000.
MCQ-10629
Lincoln Corp., a calendar-year C corporation, made a nonliquidating cash distribution of $1,500,000 to its shareholders with respect to its stock. At that time, Lincoln’s current and
accumulated earnings and profits totaled $825,000 and its total paid in capital for tax
purposes was $10,000,000. Lincoln had no corporate shareholders. Which of the following statements is(are) correct regarding Lincoln’s cash distribution?
I. The distribution was taxable as $1,500,000 in ordinary income to its shareholders.
II. The distribution reduced its shareholders’ adjusted bases in Lincoln stock by
$675,000.
1. Neither I nor II.
2. II only.
3. I only.
4. Both I and II.
Choice “2” is correct. The distribution reduced the shareholders’ adjusted bases in Lincoln Corporation Stock by $675,000.
Rule: Non-liquidating cash distributions (deemed dividends) are ordinary dividends to the shareholder to the extent of current and accumulated earnings and profits (retained earnings). Any portion paid in excess of current and accumulated earnings and profits is considered a return of capital to the shareholder, to the extent of the shareholder’s basis (anything in excess of basis, which includes paid-in-capital and common stock, is capital gain to the shareholder).
Note: The distinction of whether the shareholders were corporate shareholders or individuals is a distractor for purposes of this question. It would make a difference for taxation of the dividends due to the corporate dividends received deduction, but this is not asked in the question.
Current and accumulated earnings and profits
825,000
Less: Non-liquidating cash distribution
(1,500,000)
Reduction in bases of shareholders
(675,000)
MCQ-10021
Burns Corp. has been a calendar-year S corporation since its inception on January 2, Year 1. On January 1, Year 5, Bob and Larry each owned 50% of the Burns stock, in which their respective tax bases were $15,000 and $12,000. For the year ended December 31, Year 5,
Burns had $78,000 in ordinary business income and $8,000 in tax-exempt income. Burns made a $47,000 cash distribution to each shareholder on December 31, Year 5. What was Bob’s tax basis in Burns after the distribution?
1. $15,000
2. $19,000
3. $7,000
4. $11,000
Choice “4” is correct. Bob’s basis is calculated as follows:
Beginning Basis
15,000
Add:
Share of ordinary income
39,000
Share of tax-exempt income
4,000
Subtotal
58,000
Less:
Distribution
(47,000)
Ending Basis
11,000
Note: The basis of S corporation stock is adjusted for undistributed earnings, including tax-exempt income, and for any distributions, just as it would in a partnership.
Choice “1” is incorrect. Bob’s basis must be adjusted for the yearly activity in the S corporation, including any distributions made to him.
Choice “2” is incorrect. The S corporation’s ordinary income and distributions affect the shareholder’s basis in an S corporation. This answer would result by only taking into account the shareholder’s share of the tax-exempt income.
Choice “3” is incorrect. This option would be the result if Bob’s share of the tax-exempt income had not been included.
MCQ-10572
The Scott Corporation, a calendar year S corporation, has four equal shareholders. For the current year ended December 31, Scott had income of $200,000, which included $100,000 from operations, $60,000 from municipal bond interest income, and $40,000 from a longterm capital gain on the sale of equipment. The corporation distributed $80,000 during the year to its shareholders. There were no other transactions that year. Each shareholder’s
basis in the stock of Scott will increase by:
1. $30,000
2. $15,000
3. $50,000
4. $20,000
Choice “1” is correct. A shareholder’s basis in S corporation stock is increased by income items (taxable and nontaxable) and shareholder contributions and decreased by loss and expense items and distributions to shareholders. The calculation of each shareholder’s increase in basis for the current year follows:
Income from operations
100,000
Income from municipal bond interest
60,000
Income from capital gain
40,000
Total income
200,000
Less: Distributions
(80,000)
Total basis increase
120,000
Divided by four shareholders
÷ 4
Individual basis increase
30,000
Choice “2” is incorrect. This amount excludes the effect of the nontaxable municipal bond interest income on the basis for each shareholder. As indicated above, both taxable and nontaxable income increase a shareholder’s basis (even though the shareholder will not pay income tax on the nontaxable income).
Choice “3” is incorrect. This amount excludes the effect of the distributions on the basis of each shareholder. As indicated above, a shareholder’s basis is decreased by distributions.
Choice “4” is incorrect. This amount excludes the effect of the capital gain on the basis for each shareholder. As indicated above, a shareholder’s basis in an S corporation is increased by income items (taxable and nontaxable), and capital gains are items of income.
MCQ-10571
Donner Corporation, an S corporation, had an ordinary loss of $73,000 for the current year ended December 31. At January 1 of the current year, Cracraft, an individual, owned 50%
of Donner’s stock. Cracraft held the stock for 90 days during the year before selling the entire 50% interest to an unrelated third party. Cracraft’s properly-calculated basis for the
stock on the date of sale was $20,000, and Cracraft sold the stock for $10,000. Cracraft was a full-time employee of Donner until the stock was sold. Cracraft’s share of Donner’s current year loss was:
$18,000
$9,000
$10,000
$36,500
Choice “2” is correct. If ownership interests in an S corporation change within the taxable year, the income and/or loss to be allocated among the various shareholders will be made on a “per share/per day” basis.
S corporation loss for the year
(73,000)
Divided by 365 days in a year
÷ 365
Losses per day during the year
(200)
Number of days Cracraft was a shareholder
× 90
Loss allocated to 90 days
(18,000)
Cracraft’s ownership interest
× 50%
Loss allocated to Cracraft for the year
( 9,000)
Choice “1” is incorrect. This amount represents 100% of Donner’s losses for the 90 days Cracraft held the stock. Cracraft only owned 50% of the stock for those 90 days.
Choice “3” is incorrect. This amount represents Cracraft’s capital loss on the sale of Donner’s stock [$10,000 selling price − $20,000 basis]. The allocated losses of $9,000 would already have been included in the basis calculation to arrive at the $20,000.
Choice “4” is incorrect. This amount represents 50% of Donner’s total loss for the year. Cracraft only held the stock for 90 days during the year, and the losses must be allocated based on the number of days he held the stock during the year (as well as the percentage ownership).
MCQ-10006
Martha contributed fully depreciated, zero ($0) basis property valued at $16,000 to the MB Partnership in exchange for a 50% interest in partnership capital and profits. During the first
year of partnership operations, MB had net taxable income of $5,000 and tax-exempt income of $6,000. The partnership distributed $4,000 cash to Martha. Her share of
partnership recourse liabilities on the last day of the partnership year was $1,500. Martha’s adjusted basis for her partnership interest at year end is:
1. $19,000
2. $8,500
3. $0
4. $3,000
Choice “4” is correct.
Beginning capital account
0
Additions:
Net taxable income
5,000
Tax-exempt
6,000
11,000
× 50%
5,500
Subtract:
Distributions
(4,000)
Ending capital account
1,500
Martha’s share of recourse liabilities
1,500
Ending basis
3,000
Choice “1” is incorrect. This answer assumes a partner’s basis in the partnership interest equals the fair market value of property contributed ($16,000). A partner’s basis in the partnership interest is the same basis as the property contributed.
Choice “2” is incorrect. This answer incorrectly assumes Martha is credited with a basis increase of 100% of net taxable income and tax-exempt income, not 50%.
Choice “3” is incorrect. A partner’s basis must be adjusted for her share of partnership income, separately stated items, distributions and her share of the partnership liabilities.
MCQ-10008
Edouard owns a 30% interest in the profits and losses of the EFG Partnership. Edouard
acquired his interest by contributing land to the partnership that had an adjusted basis of $30,000 and a fair market value of $65,000 on the contribution date. Soon after forming the
partnership, the land is sold by the partnership to a third party for $70,000. How much of the $40,000 tax gain from the sale will the partnership allocate to Edouard?
1. $3,500
2. $1,500
3. $36,500
4. $40,000
Choice “3” is correct.
FMV at date of contribution
65,000
Basis
( 30,000)
Gain allocable to Edouard
35,000
Sale by partnership
70,000
FMV at the date of contribution
(65,000)
Gain
5,000
Edouard share
× 30%
1,500
Total gain allocated to Edouard
36,500
Note: When a partner contributes property (which has a FMV that is higher or lower than the NBV) the built-in gain or loss with respect to that contributed property (when sold) must be allocated to the contributing partner. Any gain or loss in excess of that built-in amount would be shared by all partners.
Choice “1” is incorrect. This answer is the amount of gain allocated to the other partners.
Choice “2” is incorrect. This answer is Edouard’s 30% share of the $5,000 gain that is shared by all partners.
Choice “4” is incorrect. $40,000 is the total amount of the gain on the asset. Edouard would be allocated any built-in gain and his proportionate share of any additional gain, not the entire gain.
MCQ-10543
On January 1, Year 1, Marin, Riley, and Trevor form a general partnership in which they are
all equal partners for ownership and profit and loss allocation. Marin and Riley each contribute $100,000 in cash for their 1/3 interests and Trevor contributes land with a FMV of $100,000 and a tax basis prior to contribution of $25,000. At the end of the year, the partnership reported annual ordinary income of $120,000. It also sold the land on November 30, Year 1, for $130,000. What amount of income/gain would Trevor report on
his Year 1 income tax return?
1. Ordinary income of $40,000 and capital gain of $85,000.
2. Ordinary income of $40,000 and capital gain of $35,000.
3. Ordinary income of $75,000.
4. Ordinary income $50,000 and capital gain of $75,000.
Choice “1” is correct. Trevor will report 1/3 of the ordinary income earned by the partnership, or $40,000 [$120,000 × 1/3], plus a portion of the capital gain on the land, which includes 100% of the difference between the FMV and the basis at the date of contribution (“built-in gain”) plus 1/3 of the gain related to the increase in FMV subsequent to the date of contribution, or $85,000, calculated as follows:
Sales price of land
130,000
Basis of land
(25,000)
Capital gain to partnership
105,000
Allocated as follows:
FMV at date of contribution
100,000
Basis at date of contribution
(25,000)
100% of gain at date of contribution allocated to Trevor
75,000
Plus: 1/3 of remaining gain of $30,000
10,000
Trevor’s capital gain
85,000
Choice “2” is incorrect. This choice assumes that the capital gain of $105,000 is allocated equally to all partners (which is incorrect treatment) and that the ordinary income of $120,000 is allocated equally to all partners (which is correct treatment).
Choice “3” is incorrect. This choice assumes that the entire capital gain of $105,000 plus the ordinary income of $120,000 is divided by 3 and allocated as ordinary income to the partners, which is incorrect.
Choice “4” is incorrect. This choice assumes that the reported ordinary income includes 1/3 of the total ordinary income earned by the partnership plus 1/3 of the increase in FMV of the land from the date of contribution to the date of sale, or $40,000 + $10,000 = $50,000 and that the capital gain on the sale of the land is the portion related only to the difference between FMV and basis at the date of contribution, or $75,000 [$100,000 − $25,000].
MCQ-10542
Which of the following statements is/are correct?
I. Guaranteed payments represent taxable income to the receiving partner and are
reported separately on the partner’s form K-1.
II. Guaranteed payments are allowable tax deductions to the partnership, provided they
are payments for services rendered or the use of capital without regard to
partnership income or profit and loss sharing ratios.
1. Neither I nor II is correct.
2. Both I and II are correct.
3. I only is correct.
4. II only is correc
Choice “2” is correct. Guaranteed payments represent taxable income to the receiving partner and are reported separately on the partner’s form K-1 AND are allowable tax deductions to the partnership, provided they are payments for services rendered or the use of capital without regard to partnership income or profit and loss sharing ratios.
Choices “3”, “4”, and “1” are incorrect, based on the explanation above.
MCQ-10521
The personal service partnership of Dewey, Cheatum, & Howe had the following cash basis
balance sheet at December 31 of the current year:
Assets Liabilities and Equity
Accounts
Adjusted
Basis FMV Accounts
Adjusted
Basis FMV
Cash $306,00 $306,000Note payable $180,000 $180,000
A/R −− 1,260,000 Capital
accounts:
Dewey 42,000 462,000
Cheatum 42,000 462,000
Howe 42,000 462,000
Totals $306,000 $1,566,000 $306,000 $1,566,000
Cheatum, an equal partner, sold his partnership interest to Billings, an outsider, for
$462,000 cash on January 1 of the current year. In addition, Billings assumed Cheatum’s
share of the partnership’s liability.
What was the total amount realized by Cheatum on the sale of his partnership interest?
1. $420,000
2. $462,000
3. $522,000
4.$402,000
Choice “3” is correct. The amount realized by a partner on the sale of his partnership interest includes cash, fair market value of property received, and the proportionate share of liabilities assumed by the purchaser, if any:
Cash received
462,000
Liability assumed ($180,000 × 1/3)
60,000
Amount realized
522,000
Choices “4”, “1”, and “2” are incorrect, per the above calculation and explanation.
MCQ-10012
Bill received $15,000 cash and a capital asset with a basis and fair market value of $35,000 in a proportionate liquidating distribution. His basis in his partnership interest was $65,000
prior to the distribution. How much gain or loss does Bill recognize, and what is his basis in the capital asset received in the distribution?
1. $15,000 gain; $50,000 basis.
2. $15,000 loss; $35,000 basis.
3. $0 gain or loss; $50,000 basis.
4. $15,000 gain; $35,000 basis.
Choice “3” is correct. The general rule is that there is no gain or loss on the liquidation of a partnership interest.
The basis of the asset is calculated as follows:
Partnership basis
65,000
Less: Cash withdrawal
(15,000)
Remaining basis
50,000
Basis allocated to asset (zero out to get out)
50,000
Partnership basis
0
Choices “2”, “4”, or “1” are incorrect. Each of these choices calculates a gain or loss.
MCQ-10387
In which of the following situations will a controlled foreign corporation located in Ireland be deemed to have subpart F income?
1. Services are provided by an Irish company in England under a contract entered into
by its U.S. parent.
2. Property is produced in Ireland by the Irish company and sold outside its country of
incorporation.
3. Property is bought from the controlled foreign corporation’s U.S. parent and is sold by
an Irish company for use in an Irish manufacturing plant.
4. Services are performed in Ireland by the Irish company under a contract entered into
by its U.S. parent.
Choice “1” is correct. Subpart F income is taxable income includable by a U.S. taxpayer from a controlled foreign corporation. It generally includes income that has no economic connection to the country of origin. This choice describes subpart F income, because the contract is entered into by the U.S. parent and has no economic connection to Ireland.
Choices “2”, “4”, and “3” are incorrect, because all of these transactions do have an economic connection to Ireland.
