TCP Flashcards
In regard to real estate rental losses from active and portfolio income, the MFJ or Single $25,000 (12,500 for MFS) deduction limit is reduced by __________________________________.
50% of the taxpayer’s AGI in excess of $100,000.
Step 1: Calculate the amount in excess of $100,000:
$120,000 (AGI) − $100,000 = $20,000
Step 2: Multiply the amount in excess of step 1 by 50%:
$20,000 × 50% = $10,000
Step 3: Subtract the maximum by the excess calculated in step 2:
$25,000 − $10,000 = $15,000
Rules limiting passive activity losses apply to:
S corporations.
partnerships.
widely held C corporations.
personal service corporations
personal service corporations
Passive loss rules apply to individuals, estates, trusts, personal service corporations, and certain closely held corporations. Limitations on passive activity losses apply to individuals as a result of a flow-through from S corporations and partnerships, but do not apply at the S corporation or partnership level.
Are future interests subject to the gift tax?
Yes, but without the annual exclusion or lifetime exemption
In determining passive loss, interest earned on a temporary investment is not considered. True or False
True
Loan amounts treated as not being at-risk:
loan secured by the property securing that debt. If other property not included in the loan secures the same debt it would be at-risk.
Active participation in rental real estate activities allows deduction up to _________.
$25,000 from nonpassive income. ($12,500 for MFS) This deduction is reduced by 50% of AGI in excess of $100,000.
Passive activity rules apply to __________, ____________, ___________, ______________, & ____________.
individuals, estates, trusts, personal service corporations, & closely held c corps.
Passive activity loss rules do not apply to _________, _________, or ___________.
Partnerships, widely held C corporations, or S Corporations.
Explain the ratable election for QTP.
If more than $17,000 is contributed to a qualified tuition program (QTP) on behalf of any one person, an election may be made to treat up to $85,000 (which is $17,000 multiplied by 5 years) of the contribution as if it had been made ratably over a 5-year period. This election allows the annual exclusion to apply to a portion of the contribution in each of the 5 years. zero taxable
For 2018–2025, the TCJA generally allows an interest deduction of up to $750,000 of mortgage debt incurred to buy or improve a first or second residence (so-called home acquisition debt). The deductible portion of the mortgage interest expense is computed as follows for a home valued at $937,500 and interest totaling $65,625:
($750,000 ÷ $937,500) × $65,625 = $52,500
Frank and Fiona live in a community property state. In 2023, they transferred $750,000 of property to an irrevocable trust that provides their son, Albert, age 33, a life estate and their daughter, Sally, age 29, the remainder. At the time of the gift, the relevant interest rate was 4.6%. What is the amount, if any, of the taxable gifts made by Frank to Sally and Albert, respectively?
$59,880 and $298,120 - First, value the remainder to Sally, which is worth $119,760 ($750,000 × 0.15968). The value of the remainder interest depends upon the time the property is held by the present interest (i.e., Albert), so you must use Albert’s age in Table S (Document #2), not Sally’s. Second, determine the value of Albert’s life estate, which is $630,240 ($750,000 − $119,760). Since the gift is from community property, half of the gift was made by each spouse; Frank and Fiona each made a gift of $59,880 ($119,760 × 50%) to Sally and $315,120 ($630,240 × 50%) to Albert. After applying the 2023 annual exclusion (Document #3) to the life estate (the remainder is a future interest and does not qualify for an annual exclusion), Frank (and Fiona) made taxable gifts of $59,880 and $298,120 ($315,120 − $17,000) to Sally and Albert, respectively.
In 2023, Steve placed $150,000 in trust with income to Tommy, age 34, for his life and the remainder to Allie, age 21 (or her estate). At the time of the gift, the prevailing interest rate was 6%. What is the amount, if any, of Steve’s taxable gift to Allie?
16, 040 - The value of the remainder interest to Allie depends upon the time the property is held by the present interest (i.e., Tommy), so the value is determined using Tommy’s age in Table S (Document #2). Since Allie’s remainder is a future interest, the value cannot be reduced by the annual exclusion. Steve made a taxable gift to Allie of $16,040, rounded ($150,000 × 0.10693).
If a traditional IRA invests in collectibles, the amount invested is considered distributed to the taxpayer in the year invested. The taxpayer may be required to pay a 10% additional tax on “early” distribution.
Collectibles for this purpose include:
stamps, coins, artworks, rugs, antiques, metals, gems, alcoholic beverages, and certain other tangible personal property
Morris, a single taxpayer is not covered by a qualified plan at his place of employment. He wishes to establish an IRA and contribute $6,000 for 20X2. An IRA may be invested in all of the following accounts, except:
a bank CD.
a mutual fund.
an annuity.
artwork.
artwork
Stock basis $12,000; $20,000 ordinary loss; $5,000 charitable contribution: If the shareholder’s pro rata share of the aggregate amount of losses and deductions is greater than the adjusted basis of the shareholder’s stock in the corporation, then the limitation on losses and deductions must be allocated among the shareholder’s pro rata share of each loss or deduction. The disallowed losses and deductions are carried forward from prior years. As such, Kevin may claim $9,600 ordinary loss and $2,400 contribution expense, calculated as follows:
Beginning Basis $12,000
Less: Contribution Expense 2,400 ($5,000 × $12,000, divided by the
sum of $5,000 and $20,000)
Subtotal $ 9,600
Allowable Loss $ 9,600 (loss of $20,000 limited to basis)
Upon receipt of the distribution, the retiring partner or successor in interest of a deceased partner will recognize gain only to the extent that any ______________________________.
money (and marketable securities treated as money) distributed is more than the partner’s adjusted basis in the partnership.
Upon receipt of the distribution, the retiring partner or successor in interest of a deceased partner will recognize a loss if _________________.
only if the distribution is in money, unrealized receivables, and inventory items. No loss is recognized if any other property is received.
Jay Bird is a partner in Soundview Partnership. The adjusted basis of his interest is $19,000, of which $15,000 represents his share of partnership liabilities. Jay’s share of the partnership’s unrealized receivables is $6,000. The partnership has no substantially appreciated inventory items. Jay sold his partnership interest for $28,000 cash plus $15,000 of his liability relief. What is the amount and character of his gain?
$6,000 ordinary income; $18,000 capital gain
The total gain on the sale of his partnership is $24,000 ($28,000 cash + $15,000 relief of his share of liabilities less basis of $19,000). Unrealized receivables of $6,000 are treated as ordinary income—the remaining $18,000 is capital gain.
The CSU partnership distributed to each partner cash of $4,000, inventory with a basis of $4,000 and a fair market value (FMV) of $6,000, and land with an adjusted basis of $5,000 and an FMV of $3,000 in a liquidating distribution. Partner Chang had an outside basis in Chang’s partnership interest of $12,000. In the second year after receiving the liquidating distribution, Chang sold the inventory for $5,000 and the land for $3,000. What income must Chang report upon the sale of these assets?
Assets distributed to Partner Chang:
Basis FMV Cash $ 4,000 $ 4,000 Land 5,000 3,000 Inventory 4,000 6,000
$13,000 $13,000
Allocation of basis to assets received by Partner Chang:
Outside basis $12,000
Less: Cash received (4,000)
Remaining basis $ 8,000
Less: Basis allocated to inventory (4,000)
Basis allocated to land $ 4,000
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Capital Gains treatment in a trust are typically _____________________.
taxable to the trust.
IDD - Income distribution deduction for trusts:
the trust or decedent’s estate is allowed this deduction and is limited to its DNI (distributable net income). IDD deducts tax-exempt income and capital gains from DNI.
a simple trust is one that ___________________________________________.
requires all income be distributed currently,
does not provide any amounts are to be paid, permanently set aside, or used for charitable purposes, and
does not distribute amounts allocated to the corpus of the trust.
adjusted total income of trust includes
interest & dividend income and capital gains. (deduct capital gains allocable to corpus to get IDD).
When a trust instrument is silent regarding a trustee’s powers, which of the following implied powers does a trustee generally have?
A. The power to make distributions of principal to income beneficiaries
B. The power to lease trust property to third parties
B. The power to lease trust property to third parties
When a trust instrument is silent regarding a trustee’s powers, the trustee has the implied power to lease trust property to third parties, but does not have the implied power to make distributions of principal to income beneficiaries. An implied power is the power a trustee needs to perform such acts as are necessary to achieve the objectives of the trust.
A “qualified bingo game” is not considered to be unrelated business income that is taxable if:
the bingo game is legal in both the state and the locality. and
commercial bingo games are not permitted in the locality.
With regard to consolidated tax returns:
Audited financial statements have nothing to do with filing consolidated returns.
Intercompany dividends are 100% excludable from taxable income on the consolidated return.
The common parent must directly own at least 80% of the total value of the stocks of at least one of the corporations included in the consolidated return and at least 80% of the stock of the other consolidated corporations must be owned directly by other includable corporations. (IRC Section 1504(a))
A corporation’s subsidiary in a foreign country is typically:
A subsidiary is a separate legal entity from its parent corporation, even if it is wholly owned by the parent. The existence of a subsidiary does not automatically mean the parent has a Permanent Establishment (PE) in that country. Instead, the activities and presence of the subsidiary are evaluated to determine PE status.
C Corp non-taxable exchange:
If one or more shareholders transfer money or property to a corporation in exchange for stock in that corporation, and immediately afterwards the shareholder(s) control the corporation, the exchange is usually not taxable. To be in control of a corporation, the shareholder(s) must own, immediately after the exchange, at least 80% of the total combined voting power of all classes of stock entitled to vote and at least 80% of the outstanding shares of each class of nonvoting stock.
C Corp taxable exchange:
If, in an otherwise nontaxable exchange of property for corporate stock, the shareholder also receives money or property other than stock, a gain may be recognized. The shareholder will only recognize gain up to the amount of money plus the fair market value of the other property received. If the corporation assumes any liabilities, the exchange generally is not treated as if money or other property was received by the shareholder.
U.S. source income (cash or property) is taxed to foreign shareholders foreign persons, including nonresident alien individuals, foreign entities, and governments:
If a tax treaty has been negotiated by the foreign country and the United States, a reduced tax rate may apply; if not, a tax of 30% is applied. No more than 30% is allowed to be applied. This tax is usually withheld from the payment to the foreign shareholder. The corporation that must withhold and the foreign shareholder will be liable for the tax, penalties, and interest if the tax is not withheld and sent to the payee.
Withholding must be calculated on the gross amount and cannot be reduced by any deductions.
When property is transferred to a corporation, the basis of any property received is _______________________________.
the fair market value (FMV) at the time of the transfer, unless the contribution qualifies for IRC Section 351 treatment, where the investor(s) receive control of the corporation under the 80% rule (80% of the total combined voting power of all classes of stock entitled to vote and at least 80% of the outstanding shares of each class of nonvoting stock).
In determining ending accumulated earnings and profits, why are excess charitable contribution carryforward and the excess capital loss carryforward are added back to taxable income?
Because both were deducted in a prior year to compute the beginning-of-the-year accumulated earnings and profits. This year, when the charitable contribution and capital loss are actually deducted on the tax return, they both must be added back to the calculation for accumulated earnings and profits.
Explain base erosion and anti-abuse tax (BEAT)
Base erosion payments include deductible related-party payments paid to foreign affiliates. Thus, the corporation paying its foreign parent for depreciable property is a related party payment paid to a foreign affiliate.
Which of the following statements is incorrect?
The deemed intangible income considers a routine 10% rate of return on the adjusted tax basis of its intangible assets.
Eligible income for FDII purposes does not include Subpart F income.
FDII is available to U.S. corporations that sell products on foreign markets.
The formula for FDII includes comparing the foreign portion of sales relative to the total amount of sales recorded at the company level.
The deemed intangible income considers a routine 10% rate of return on the adjusted tax basis of its intangible assets.
The statement “the deemed intangible income considers a routine 10% rate of return on the adjusted tax basis of its intangible assets” is false because the 10% rate of return is considered for the adjusted tax basis of fixed assets rather than intangible assets.
minimum accumulated earnings credit
**
The tax-free exchange of property for stock, however, does not apply when:
the corporation is an investment company,
the shareholder transfers the property in a bankruptcy or similar proceeding in exchange for stock used to pay creditors,
or
stock is received in exchange for the corporation’s debt or for interest on the corporation’s debt that accrued while the shareholder had held the debt.
Which of the following is an example of nonqualified preferred stock in an IRC Section 351 transaction?
The holder of the stock has the right to require the issuer or a related person to redeem or buy the stock.
The issuer of the stock is required to redeem or buy the stock.
The dividend rate on the stock varies with reference to interest rates, commodity process, or similar indices.
All of the answer choices are correct.
All of the answer choices are correct.
Following the Tax Cuts and Jobs Act (TCJA) of 2017, how did the treatment of Controlled Foreign Corporations (CFCs) change for U.S. corporations?
The TCJA introduced a new minimum tax on certain undistributed foreign earnings known as the Global Intangible Low-Taxed Income (GILTI).
The TCJA introduced the GILTI provision, which imposes a new minimum tax on certain foreign earnings that exceed a deemed return on the CFC’s tangible assets. It is designed to discourage the shifting of U.S. profits to low-tax jurisdictions and adds another layer to the U.S. taxation of foreign income.
Non-taxable exchange: To be in control of a corporation, the shareholder(s) must own, immediately after the exchange, _______________________.
at least 80% of the total combined voting power of all classes of stock entitled to vote and at least 80% of the outstanding shares of each class of nonvoting stock.
Explain GILTI Income.
Under GILTI, any U.S. shareholder who owns a 10% interest in a controlled foreign corporation must include in current income their pro-rata share of the GILTI income of the controlled foreign corporation. Thus, the GILTI inclusion can apply to a U.S. shareholder of a controlled foreign corporation.
Because GILTI only impacts controlled foreign corporations, it would not apply to a non-U.S. partner in a domestic partnership or a non-U.S. shareholder of a domestic corporation. GILTI does not apply to a U.S. partner in a foreign partnership as it only applies to corporations.
A corporation will recognize a gain on distribution of property to a shareholder if ______________________________.
the FMV of the property is more than its adjusted basis. Generally, this is the same treatment the corporation would receive if the property were sold. However, for this purpose, the FMV of the property is the greater of:
the actual FMV or
the amount of any liabilities the shareholder assumed in connection with the distribution of the property.
If, in an otherwise nontaxable exchange of property for corporate stock, the shareholder also receives money or property other than stock, a gain may be recognized.
The shareholder will only recognize gain up to the amount of money plus the fair market value of the other property received. Additionally, if the corporation assumes any liabilities, the exchange generally is not treated as if money or other property was received by the shareholder.
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.
Explain 80% or greater parent and gain or loss on the liquidation of a subsidiary corporation.
No recognition of gain: When the parent already owns 100% of the stock, then liquidating the subsidiary and passing the assets of the subsidiary to the parent does not change the economic position of the parent.
Mark owns 50% of an S corporation, Wick, Inc., and has a basis in that corporation of $3,000 at the beginning of 20X2. At the end of 20X2, Wick, Inc., reports ordinary income of $2,000 and makes a distribution to Mark of a truck with an adjusted basis of $5,000 and a fair market value of $7,000. How much income must Mark report on his personal 20X2 return from this distribution?
Therefore, Mark will have to report income of $3,000, determined as follows:
FMV of Property Received $7,000
Less Basis (lesser of FMV and ending
(basis; see calculation below) 5,000 Return of Capital
Remaining $2,000 Capital Gain
Plus Gain on Truck 1,000 (Capital or Ordinary)
Total Income Reported $3,000
Basis Calculation:
Beginning Basis $3,000
Plus Ordinary Income (50% of $2,000) 1,000
Plus Gain on Truck (50% of $2,000) 1,000
Ending Basis before truck dist. $5,000
What is a value-added tax (VAT)?
A form of consumption tax
A value-added tax is a tax passed on to the consumer and an estimated market value added onto a product or material at each stage of the manufacturing process. Unlike the sales tax, which is collected at the cash register, the VAT is imposed at each stage of the production process.
Orchid, Inc. and Yarrow, Inc. have filed consolidated tax returns for several calendar years. At the close of business on September 30, Orchid sold all of Yarrow’s stock to an unrelated party. For the current year, what portion of Yarrow’s corporate income should be included in the consolidated return, assuming that the income is earned evenly throughout the year?
0%
25%
75%
100%
Each subsidiary’s items are included for the part of the year the subsidiary was a member of the group. The subsidiary (Yarrow) is a member of the group for 9 of 12 months during the year (January through September), and thus 9/12, or 75%, of Yarrow’s income should be included in the consolidated return.
U.S. Co. is a 25% owner of an Irish corporation. The Irish corporation reported $8,500,000 in sales and $3,500,000 in general expenses. It paid $500,000 in taxes to the Irish government (10%). The adjusted taxable bases of the Irish company’s assets are $2,000,000. Assume U.S. Co. makes an election under Section 250. What is the tax liability associated with its GILTI inclusion for U.S. Co.?
The net U.S. tax liability is calculated as follows:
CFC’s net income = $8,500,000 sales − $3,500,000 expenses = $5,000,000
QBAI = 10% × $2,000,000 = $200,000
Indirect foreign tax credit available = 25% × ($500,000 × 80%) = $100,000
GILTI inclusion for U.S. Co. = 25% × ($5,000,000 − $200,000) = $1,200,000
GILTI inclusion after electing section 250 = $1,200,000 × 50% = $600,000
U.S. tax liability before indirect foreign tax credit = $600,000 × 21% = $126,000
Net U.S. tax liability = $126,000 – $100,000 Indirect foreign tax credit = $26,000
IRS Code Section 951(A) governs GILTI tax. Final and temporary regulations were issued on June 14, 2019.
Under Internal Revenue Code (IRC) Section 302, a stock redemption payment received by a C corporation shareholder is generally treated as a taxable dividend from the corporation’s earnings and profits, unless it meets one of the following criteria (in which case, the redemption is treated as a sale or exchange and thus receives capital gain/loss treatment):
It is not essentially equivalent to a dividend.
It is substantially disproportionate.
It completely terminates the shareholder’s interest in the corporation.
Which of the following best describes a Controlled Foreign Corporation (CFC)?
A CFC is defined as a foreign corporation where U.S. shareholders own more than 50% of the total combined voting power of all classes of its stock entitled to vote, or the total value of the stock of the corporation.
Which of the following is correct for purposes of determining whether a distribution from a corporation is taxable to a shareholder as a dividend?
Current or accumulated earnings and profits are reported as dividend.
Dividends that reduce the adjusted basis of the stock in the hands of the shareholder:
Any part of a distribution that is not from earnings and profits - To the extent the balance is more than the adjusted basis of the stock, the shareholder has a gain (usually capital gain) from the sale or exchange of property.
Which of the following statements is correct if a corporate distribution to a shareholder exceeds earnings and profits (both current and accumulated) and exceeds the shareholder’s basis in the corporate stock?
The shareholder has a gain from the sale or exchange of property.
The sole shareholder of an S corporation contributed equipment with a fair market value of $20,000 and a basis of $6,000 subject to $12,000 liability. What amount is the gain, if any, that the shareholder must recognize?
Adjusted basis of property contributed to S corporation $ 6,000
Less: Liability transferred to S corporation (12,000)
Recognized gain $ 6,000*
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What are the advantages of filing consolidated returns?
offsetting operating losses of one company against the profits of another,
offsetting capital losses of one company against the capital gains of another, and
avoidance of tax on intercompany distributions.
What are the requirements of an affiliated group?
The common parent directly owns 80% of the voting power of the stock of a corporation.
The common parent owns at least 80% of the value of all the stock of that corporation.
The stock may be owned directly by one or more of the other corporations in the group.
Form 5471 filers: A category 3 filer includes _________________________________.
a U.S. person who acquires stock in a foreign corporation which, when added to any stock owned on the date of the acquisitions, meets the 10% stock ownership requirement with respect to the foreign corporation.
Heron, Inc., made a distribution of real estate with an FMV of $100,000 to its only shareholder, Jennifer, on December 31, 20X2. Heron’s basis in the property was $60,000. Current-year earnings and profits of Heron (before the distribution) are $10,000 and it has accumulated $20,000 earnings and profits from prior years. Jennifer’s basis in her Heron stock is $5,000. What will be the tax effect to Jennifer?
FMV of Property Received $100,000
Less:
Current-Year E&P 50,000
Accumulated E&P 20,000
$70,000 $ 30,000 Remaining Amount
Less:
Basis 5,000 Return of Capital
Remaining $ 25,000 Capital Gain
Current-year E&P is derived from $10,000 as given in the problem plus $40,000 of gain the corporation must recognize upon distribution of appreciated property.
A C corporation is owned by two individual shareholders, who decided to liquidate the corporation. At the time of the liquidation, the corporation’s assets consisted of cash in the amount of $50,000, inventory worth $250,000 with an adjusted basis of $175,000, and land worth $300,000 with an adjusted basis of $25,000. The corporation has no debt. In the liquidation, the cash and inventory were distributed to one shareholder and the land was distributed to the other shareholder. How much ordinary income does the corporation recognize upon the liquidation?
$75,000
The corporation recognizes $75,000 in ordinary income from the gain recognized on the inventory in the amount of $250,000 (fair market value) less $175,000 (adjusted basis). The gain on the land is not an ordinary gain.
Rigg, Steele, and Urco Corps., all accrual-basis, calendar-year C corporations, have only voting common stock outstanding. Rigg owns 85% of Steele and 40% of Urco. Steele owns 50% of Urco. Which group of corporations qualifies as an affiliated group and may join in the filing of a consolidated federal income tax return?
Rigg, Steele, and Urco
Rigg owns 85% of Steel.
Rigg directly owns and has voting power of 40% of Urco plus 42.5% of the voting power of Urco, through Steele (85% Steele × 50% of Urco = 42.5%) = 82.5%.
Distributions of stock rights are generally tax-free to shareholders.
Distributions of stock and stock rights, however, are treated as property and therefore taxable distributions if any of the following apply:
Any shareholder has the choice to receive cash or other property instead of stock or stock rights.
The distribution gives cash or other property to some shareholders and an increase in the percentage interest in the corporation’s assets or earnings and profits to other shareholders.
The distribution is in convertible preferred stock and has the same result as in item (2).
The distribution gives preferred stock to some common stock shareholders and gives common stock to other common stock shareholders.
The distribution is on preferred stock.
The amount of a distribution is generally the amount of any money paid to the shareholder plus the fair market value (FMV) of any property transferred to the shareholder. However, this amount is reduced (but not below zero) by:
any liability of the corporation the shareholder assumes in connection with the distribution and
any liability to which the property is subject immediately before, and immediately after, the distribution.
The FMV of any property distributed to a shareholder becomes the shareholder’s basis in that property.
Which one of the following statements is incorrect with regard to property distributions?
All stock distributions are treated as property distributions.
Property distributions to shareholders are measured by their FMV on the distribution date adjusted for liabilities.
The distributing corporation treats the property distributed as though sold to the shareholder at FMV or the amount of liabilities the shareholder assumes, whichever is greater.
The shareholder’s basis in the property distributed is usually the FMV on the date of distribution.
All stock distributions are treated as property distributions.
James Corporation made various payments and transfers to and for its shareholders, Rob and Jim, during the year. Which of the following is not a reportable distribution? (Assume sufficient earnings and profits.)
Reasonable salary to both Rob and Jim
Which of the following statements regarding the election to file a consolidated tax return is correct?
Intercompany gains are eliminated.
The election may be revoked by the parent of the group at any time.
Each member of the consolidated group is liable only for its own tax liability.
Net operating losses arising after the election must first offset their income from separate return years.
Intercompany gains are eliminated.
To prepare a consolidated return, each corporate member’s separate taxable income is computed. Then all intercompany transactions are eliminated. Only when a sale is made to an outside third party is any gain or loss recognized.
Walnut, Inc., is a C corporation that was started 10 years ago. At the beginning of the current year, Walnut, Inc., has accumulated earnings and profits of $100,000. During the current year, Walnut makes a $5,000 distribution to its 100% shareholder in the 1st month of each quarter. At the end of the current year, Walnut had $150,000 in gross income and $140,000 in allowable expenses from ordinary business operations. Walnut also received $5,000 in fully tax-exempt interest from state bonds. What part of the 2nd-quarter distribution is treated as a distribution of accumulated earnings and profits?
$1,250.00
Quarterly Earnings and Profits:
Gross Income: $150,000
Plus: Tax-Exempt Income 5,000
Less: Allowable Expenses 140,000
Earnings $ 15,000
Per Quarter ($15,000/4) $ 3,750
Current Earnings and Profits $ 3,750 (See calculation above)
Accumulated Earnings and Profits 1,250
Dividend $ 5,000
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?
$38,000
Since Fox is the sole stockholder in the C corporation Fall, his basis in the land distributed to him will be equal to the fair market value of the asset ($38,000). The liability Fox assumes reduces the amount of taxable dividend. The amount of taxable dividend Fox received is $35,000 ($38,000 − $3,000).
For purposes of IRC Section 351, property does not include which of the following?
Services
Indebtedness of the corporation
Interest on that debt
All of the answer choices are correct.
All of the answer choices are correct.
Property includes cash, intangible assets such as stocks and patents, and tangible property such as buildings and equipment.
Property does not include services, indebtedness of the corporation, or interest on that debt.
On June 30, Gold and Silver are calendar-year C corporations. The corporations have merged, with Gold as a subsidiary of Silver. Silver owns 85% of Gold’s voting stock and fair market value (FMV). Which of the following tax return filings would be appropriate for the two companies?
Two separate returns, because Silver owns at least 80% of both the voting stock and FMV of Gold
Two separate returns, because the merger took place before the close of the second quarter
A consolidated return, because Silver owns at least 80% of both the voting stock and FMV of Gold
A consolidated return, because the merger took place before the close of the second quarter
A consolidated return, because Silver owns at least 80% of both the voting stock and FMV of Gold
What is included in property? What is/is not included in stock?
Property has generally been defined to mean any assets, except services rendered.
Stock does not include stock rights or any security (bonds). Stock includes both common stock and preferred stock.
There are two types of controlled groups:
parent-subsidiary and brother-sister.
If an acquiring corporation assumes a liability, when is the transfer of liability not considered boot for gain?
IRC Section 357(a) addresses the liability that is transferred to the new corporation along with the building. If an acquiring corporation assumes a liability in a Section 351 transfer, then the liability is not treated as boot and no gain will be recognized by the contributor.
How does a noncorporate shareholder treat the gain on the redemption of stock that qualifies as a partial liquidation of the distributing corporation?
Entirely as capital gain
A partial liquidation of a corporation is not equivalent to a dividend and therefore is treated as an exchange of stock for cash. The exchange should be considered a capital gain and should be treated as a capital gain for tax purposes.
In April, A and B formed X Corp. A contributed $50,000 cash and B contributed land worth $70,000 (with an adjusted basis of $40,000). B also received $20,000 cash from the corporation. A and B each received 50% of the corporation’s stock. What is the tax basis of the land to X Corp.?
$60,000
X Corp. received land with an adjusted basis of $40,000 from shareholder B. X Corp. paid B an additional $20,000 in cash. The tax basis of the land for X Corp. is $60,000, made up of the $40,000 in basis from B and the $20,000 paid to B.
The Charlie Corporation, a calendar-year, accrual-basis taxpayer, distributed shares of the David Corporation stock to Charlie’s employees in lieu of salaries. The salary expense would have been deductible as compensation if paid in cash. On the date of the payment, Charlie’s adjusted basis in David Corporation’s stock was $20,000 and the stock’s fair market value was $100,000. What is the tax effect to Charlie Corporation?
$100,000 deduction and $80,000 recognized gain
As a result of the distribution, the Charlie Corporation will have $100,000 deduction in salary expense and recognize a gain of $80,000, determined as follows:
FMV $100,000 (Salary expense)
Less:
Basis (20,000)
Recognized Gain $ 80,000
In which of the following situations will a controlled foreign corporation located in Ireland be deemed to have Subpart F income?
Services are provided by an Irish company in England under a contract entered into by its U.S. parent.
A consolidated group is one in which the common parent directly owns at least 80% of the total voting power and 80% of the total value of the stock in at least one other “includible” corporation.
“Includible corporations” are all corporations, except the following (10):
Tax-exempt organizations
Life insurance companies (Exception: Affiliated groups composed only of life insurance companies can file consolidated returns.)
Foreign corporations (Exception: Certain Mexican or Canadian subsidiaries of a U.S. parent can file consolidated returns.)
Corporations that have a possessions tax credit under IRC Section 936
Regulated investment companies
Real estate investment trusts
A DISC or former DISC
An S corporation
How is the income of a foreign corporation from U.S. operations generally treated for U.S. tax purposes?
It is subject to U.S. tax on income that is effectively connected with a U.S. trade or business.
This “effectively connected income” is typically taxed at the same rates as a U.S. corporation’s income.
Dividend income that is taxable to a corporate stockholder cannot exceed ____________________________.
the earnings and profits of the corporation.
What is the primary criterion for a foreign corporation to be classified as a Controlled Foreign Corporation (CFC)?
More than 50% of the total voting power or value of its stock must be owned by U.S. shareholders.
Non-deductible loss - If a shareholder has a loss from an exchange of property for stock _________________________________.
If a shareholder has a loss from an exchange of property for stock and owns, directly or indirectly, more than 50% of the corporation’s stock, the loss is nondeductible (IRS Publication 542). Therefore, there is no deductible loss on the transaction.
A corporation never recognizes gain on the distribution of its own stock. True or False?
True - $0 is recognized in gain by the corporation. A corporation never recognizes gain on the distribution of its own stock.
Which of the following types of income is typically subject to Subpart F and may be included in a U.S. shareholder’s taxable income?
Regular business operational income from the sale of goods
Dividends received from another unrelated foreign corporation
Income from certain passive activities, like interest and royalties
Salaries paid to CFC employees
Income from certain passive activities, like interest and royalties
Subpart F rules are designed to prevent U.S. taxpayers from deferring U.S. tax by using foreign corporations to earn passive income. As such, certain passive income, like interest, dividends, rents, and royalties, may be subject to these rules and included in the U.S. shareholder’s income.
Which provision of the U.S. tax code may require U.S. shareholders of a Controlled Foreign Corporation (CFC) to include certain income in their taxable income, even if it has not been distributed?
Global Intangible Low-Taxed Income (GILTI) - to ensure a minimum tax on excessive profits that exceed a basic return on tangible assets of CFCs.
Dole, the sole owner of Enson Corp., transferred a building to Enson. The building had an adjusted tax basis of $35,000 and a fair market value of $100,000. In exchange for the building, Dole received $40,000 cash and Enson common stock with a fair market value of $60,000. What amount of gain did Dole recognize?
$40,000 - The amount taxable is the lesser of the amount of cash received ($40,000) or the appreciation ($65,000), so Dole is taxed on $40,000.
Which corporations cannot be members of a consolidated group?
a tax-exempt corporation; an insurance company; foreign corporations, except for some Canadian or Mexican corporations; corporations electing the possessions tax credit; regulated investment companies; domestic international sales corporations (DISCs); and S corporations.
Philly Corp. distributed an office building to its 60% shareholder. The fair market value of the building on the date of the distribution was $300,000. Philly’s basis in the building was $200,000. The shareholder assumed the mortgage on the building that had a principal balance of $100,000 on the date of distribution. Current-year earnings and profits of Philly Corp. were $400,000. No other distributions were made during the year.
What should the shareholder report on his tax return for the year of the distribution?
$200,000 dividend -
FMV of Property Received $300,000
Less:
Liability Assumed (100,000)
Amount Received $200,000, which are dividends (there
are adequate earnings and
profits)
In a type B reorganization, as defined by the Internal Revenue Code:
the stock of the target corporation is acquired solely for the voting stock of either the acquiring corporation or its parent.
the acquiring corporation must have control of the target corporation immediately after the acquisition.
Both I and II
A type B reorganization effectively results in a parent-sub relationship. The requirements for a B reorganization (which is tax free) is the acquisition by one corporation of stock in a second (target) corporation in exchange solely for the acquiring corporation’s voting stock (or voting stock of its parent) if the acquiring corporation has control of the target immediately after the exchange
Which of the following statements regarding distributions from an S corporation is correct?
A distribution from the previously taxed income account is tax-free to the extent of a shareholder’s basis in his/her stock in the corporation.
Unless the corporation makes an election, property distributions (including cash) are applied in the following order:
Accumulated Adjustments Account (AAA)
Previously Taxed Income (PTI), also called Previously Taxed Earnings and Profits (PTEP)
Accumulated Earnings and Profits (AE & P)
Other Adjustments Account (OAA)
Any remaining Shareholder’s Equity Accounts
All of the following statements concerning liquidation of an S corporation are true except:
loss on stock redemption can be recognized prior to the complete liquidation of the corporation.
gain or loss will be recognized on the distribution of property in complete liquidation as if the property were sold at its FMV.
depreciable property under Section 1245 and 1250 is subject to the ordinary income recapture provisions.
the shareholders’ adjusted basis in the stock is subtracted from the FMV of the property received to determine the recognized gain or loss.
Loss on stock redemption is not recognized until liquidation is complete.
Explain corporate distribution to a shareholder:
Generally, a corporate distribution to a shareholder is treated as a distribution of earnings and profits (E&P). Distributions made from current or accumulated earnings and profits are reported as dividends to the shareholder(s). S corporations do not have E&P.
Unless the corporation operated as a C corporation at some time, it will not have E&P. Distributions will come first from the shareholder’s accumulated adjustments account (AAA), then will be treated as a recovery of the shareholder’s stock basis, and finally will be treated as capital gain from the sale or exchange of property.
If an S corporation has no accumulated adjustments account (AAA), the amount distributed to a shareholder:
decreases the shareholder’s basis for the stock.
A shareholder’s distributive share of a loss from an S corporation is limited to the shareholder’s stock basis in that corporation.
Therefore, losses that exceed a shareholder’s basis are disallowed for that year.
Stone Corp. has been an S corporation since inception. In each of Year 1, Year 2, and Year 3, Stone made distributions in excess of each shareholder’s basis. Which of the following statements is correct concerning these three years?
In all three years, the excess distributions are taxed as capital gains.
When there is no C corporation accumulated E&P (earnings and profits), all cash distributions are considered a return of capital until adjusted basis is reduced to zero, and then distributions in excess of basis are capital gain to the shareholder.
Paul Pappas owns all of the stock of an S corporation which had previously been a C corporation. The S corporation had the following balances at the beginning of its tax year:
Accumulated adjustments account $ 8,000
Accumulated earnings and profits 10,000
Paul’s stock basis was $20,000 at the beginning of the tax year. The S corporation made a distribution of $19,000 to Paul during the year. What is Paul’s stock basis at the end of the year?
Paul’s basis is reduced by the distribution from accumulated adjustments account, but not by the distribution from accumulated earnings and profits which is taxable income to Paul. The distribution in excess of $18,000 is a tax-free return of capital and reduces Paul’s basis ($20,000 - $8,000 - $1,000 = $11,000).
An S election may be revoked:
only with the consent of shareholders who hold more than 50% of the number of issued and outstanding shares of stock (including nonvoting stock) at the time revocation is made.
Or if the corporation derives more than 25% of its gross receipts from passive investment income during each of 3 (not 1) consecutive tax years.
Which of the following conditions must be satisfied for a corporation to qualify as an S corporation?
The corporation cannot have an estate as a shareholder.
The corporation must have less than 100 shareholders.
The corporation cannot issue more than one class of stock.
At least 80% of the shareholders must agree to the S corporation election.
The corporation cannot issue more than one class of stock.
Larry and Louise formed LL, Inc. as an S corporation. Each contributed $50,000 in exchange for 5 shares of corporate stock. In addition, LL obtained a $60,000 loan from a local bank that was still outstanding at the end of the year. In LL’s first year of operation, it reported a loss of $20,000 and did not make any distributions to the shareholders. What is Larry’s basis in his LL shares at the beginning of the second year?
$40,000
Unlike P-Ships, Loans do not increase S-corp basis.
The sole shareholder of an S corporation had a basis for her stock of $30,000 and a basis for a loan to the S corporation of $15,000. In Year 6, the S corporation operated at a loss of $39,000. What is the shareholder’s basis in the stock and loan on December 31, Year 6?
The loss reduces the shareholder’s stock basis first. The remaining loss ($39,000 − $30,000) of $9,000 is deducted from the loan basis.
Stock Loan Total Beg. Basis $30,000 $15,000 $45,000 Less: Loss ( 30,000) ( 9,000) ( 39,000) Ending Basis: $ 0 $ 6,000 $ 6,000
Mary is a 50% shareholder in an S corporation, which suffered a $100,000 loss for the tax year ending December 31, 20X1. Mary’s basis in her stock as of December 31, 20X1, was $25,000 before recording the loss. What can Mary do with the disallowed loss of $25,000?
Carry forward the loss indefinitely for use if her basis in her stock is sufficiently restored.
A shareholder’s basis in the stock of an S corporation is increased by the shareholder’s pro rata share of income from:
both tax-exempt and taxable interest.
In Year 8, Clyde formed an S corporation by contributing $5,000 for stock and $10,000 in loans. In Year 8, the corporation had a net loss of $5,000 leaving Clyde with no stock basis and $10,000 in debt basis. Clyde expects the S corporation to have a small loss in Year 9 also. Although Clyde knows he has a debt basis he still decides to take a $3,000 distribution in Year 9. Clyde will have to report:
$3,000 as a dividend.
$3,000 as a capital gain.
$5,000 as a capital loss.
$2,000 as a capital loss.
$3,000 as a capital gain. Debt provides basis for the purpose of deducting losses, it is not considered basis for purposes of distributions.
Explain loan basis and distributions in S-corp:
Although debt provides basis for the purpose of deducting losses, it is not considered basis for purposes of distributions. The $3,000 will be treated as a capital gain because Clyde had no stock basis. Had the $3,000 been treated as a debt repayment, instead of as a distribution, Clyde would have recognized no income.
Describe basis in an S-corp:
Basis can never be reduced below zero.
Debts owed by the corporation to third parties, even if personally guaranteed by the shareholder, cannot be added to the shareholder’s adjusted basis.
Nonseparately stated items of loss and deductions decrease basis.
The increase in basis in stock for corporate income is made only after any basis in loans that has been previously reduced is restored.
There are four elections that are made at the partnership level:
Taxable year and accounting method
Cost recovery methods and assumptions
Treatment of research and development costs
Amortization of organization costs and start-up costs
Which of the following elections are made at the partnership level?
Cost or percentage depletion for oil and gas wells
Cost recovery methods and assumptions
Reduction of basis of depreciable property when excluding income from discharge of indebtedness
Take a deduction or credit for foreign taxes paid
Cost recovery methods and assumptions
“Hot assets” of a partnership would include which of the following?
Cash
Unrealized receivables
Section 1231 assets
Capital assets
Unrealized receivables
The “hot assets” of a partnership include the unrealized receivables and inventory. These are the items that would generate ordinary income. Both Section 1231 assets and capital assets generate capital gains. Cash creates neither ordinary income nor capital gains.
Terrell has a 60% interest in the capital and profits of Bronco Partnership. He also owns a 65% interest in the capital and profits of STI Partnership. In the current year, Bronco Partnership sold land to STI for $35,000. At the time of the sale, the land had an adjusted basis to Bronco of $40,000. What is the amount of loss that Bronco can recognize this year?
Losses are not allowed from a sale or exchange of property (other than an interest in the partnership) directly or indirectly between a partnership and a person whose direct or indirect interest in the capital or profits of the partnership is more than 50%.
Terrell owns more than 50% interest in both partnerships. His basis in the partnership will be reduced by the amount of loss. When the property is sold, any gain will not be recognized up to the amount of the loss not allowed. In other words, the subsequent gain is reduced by the previously disallowed loss. The basis in the partnership will be increased by any gain not recognized.
Cline and Seaman form the CS Partnership as 50/50 partners. Cline contributes equipment that has a fair market value of $60,000 and an adjusted basis of $45,000. In addition, the equipment is subject to a $10,000 loan that CS Partnership is assuming. What amount represents Cline’s initial basis in the partnership?
$40,000
The adjusted basis of Steve’s partnership interest is $10,000. He receives a distribution of $4,000 cash and property that has an adjusted basis to the partnership of $8,000. What is his basis in the property distributed?
$6,000 - His basis for the distributed property is limited to $6,000 ($10,000 − $4,000, the cash he receives).
The adjusted basis of Emily’s partnership interest is $30,000. She receives a distribution of property that has an adjusted basis of $20,000 to the partnership and $4,000 in cash.
Her basis for the property is $20,000.
On June 30, Year 14, Berk retired from his partnership. At that time, his basis was $80,000, which included his share of the partnership’s liabilities of $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, Year 14. Assuming that Berk makes no election with regard to the recognition of gain from the retirement payments, he should report income of:
$40,000 in Year 15.
Since the debt relief and cash payments in Year 14 total $60,000 and Berk’s basis was $80,000, no gain is reported in Year 14.
Year 14: $80,000 basis - $60,000 debt relief and cash payment
= $20,000 remaining basis
Year 15: $20,000 basis - $60,000 cash payment
= $40,000 gain in Year 15
What is the consequence to the partner following the assumption of a partner’s personal liability?
It is treated as a distribution of money to the partner.
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?
$14,000
When a liquidating distribution is received by a partner, the adjusted basis of the partnership interest is first reduced by any cash received, then reduced by any “hot” assets (unrealized receivables and/or inventory) received, and finally the remaining basis is allocated to any other property received
Payments made by a partnership to a partner that are determined without regard to the partnership income are called:
guaranteed payments
Premiums for health insurance paid by a partnership on behalf of a partner for services as a partner are treated as guaranteed payments. Guaranteed payments are included in income in the partner’s tax year in which the partnership’s tax year ends.
Will and Timmy formed a new partnership. Will contributes property that has an adjusted basis of $1,400 and a fair market value of $2,000 to the partnership. Timmy contributes $2,000 in cash to the partnership. Each partner’s capital account as reflected on the partnership’s books is $2,000. What is the adjusted basis of each partner’s interest?
Will’s at $1,400 and Timmy’s at $2,000
Rafferty is a 50% partner in the RS partnership. Upon the formation of RS, Rafferty contributes land worth $30,000, which had a basis of $20,000. In year 1, RS sells the land for $38,000. What gain should Rafferty recognize on the sale of the land?
$14,000
Rafferty is allocated all of the built-in gain on the property upon contribution, which is the $30,000 FMV (fair market value) at contribution less the basis at contribution of $20,000, or $10,000. He is also allocated 50% of the remaining gain due to his ownership percentage, which is 50% × $8,000 (Total gain ($38,000 − $20,000 basis = $18,000)) less Built-in gain upon contribution of $10,000), or $4,000.
So, Rafferty is allocated $10,000 gain plus $4,000 gain, or $14,000 gain.
Explain Built in gain:
FMV - Basis to p-ship of property sold within a certain time period (this is allocated 100% to contributing partner). Then remaining gain is allocated pro rata share of pship.
With regard to a partnership computing its income, which of the following is determined by the individual partners and not the partnership?
Accounting methods
Amortization of certain organization fees and start-up costs
Income from cancellation of debt elections
Depreciation methods
Income from cancellation of debt elections
Belson and Forman decided to terminate North partnership. On the date of termination, North’s balance sheet was as follows:
Adjusted Basis Cash $2,000 Equipment (fair market value $4,000) 6,000 Capital - Belson 4,000 Capital - Forman 4,000 Forman's outside basis is $2,000. The partnership assets were distributed equally between the partners. What is Forman's tax basis in the property received?
Answer is $1,000
Since the partner’s basis is more than the cash received from the partnership, there would not be any gain to recognize on the liquidation. In that case, the basis in the property received would be the partner’s share of the fair market value (FMV) of the distributed property less any cash received in the liquidation. Forman’s distributive share of the property would be $2,000 less their share of the cash received ($1,000), which would give Forman a basis of $1,000 in the distributed property that they received from the liquidation of the partnership.
Which of the following should be used in computing the basis of a partner’s interest acquired from another partner?
A. Cash paid by transferee to transferor
B. Transferee’s share of partnership liabilities
Both A and B
Reid, Welsh, and May are equal partners in the RWM partnership. Reid’s basis in his partnership interest is $60,000. Reid receives a liquidating distribution of $61,000 cash and land with a fair market value of $14,000 and an adjusted basis of $12,000. What gain must Reid recognize upon the liquidation of his partnership interest? Answer is
$1,000
Although generally no gain or loss is recognized by a partner upon the liquidation of a partnership interest, there are exceptions:
Gain is recognized if cash distributed is in excess of the partner’s basis in the partnership interest.
Loss is recognized if no property other than cash, unrealized receivables, and inventory is distributed and the cash and basis of the unrealized receivables and inventory received are less than the partner’s basis in the partnership interest.
Reid’s cash distribution exceeded his basis in his partnership interest, so he recognizes gain computed as follows:
Liquidating cash distribution $61,000
Basis in partnership interest (60,000)
Gain on liquidation $ 1,000
Reid’s basis in the land is $0.
Sam MaGee became a limited partner in the Northern Lights Partnership by contributing $20,000 in cash on the formation of the partnership. The adjusted basis of his partnership interest at the end of the year is $40,000, which includes his $30,000 share of partnership liabilities. The partnership has no unrealized receivables or substantially appreciated inventory items. Sam sells his interest in the partnership for $20,000 in cash plus $30,000 liability relief. He had been paid his share of the partnership income for the tax year. How much should he report as a capital gain?
$10,000
When a partner sells his interest in a partnership, it is considered to be the sale of a capital asset. The $30,000 of liability relief is added to the cash of $20,000 for a total amount realized of $50,000.
The calculation is:
Amount realized $50,000
Basis 40,000
Capital gain $10,000
Max sold his 10% interest in the Ajax partnership for $60,000. Ajax had $150,000 of unrealized receivables. Max had an adjusted basis in the partnership of $40,000. As the result of the sale, Max should report:
$15,000 ordinary income, $5,000 capital gain.
Max must recognize $15,000 ordinary income under IRC Section 751 because Ajax had “hot assets” (unrealized receivables and inventory). Any gain in excess of that attributed to hot assets is a capital gain.
Abby sells her 50% interest in the ABC partnership to Marty for $1,000 cash. Her outside basis at that time is $775. The partnership has inventory and a capital asset with respective bases of $1,200 and $300 and respective fair market values of $1,500 and $450. Abby should properly recognize:
ordinary income of $150 and a capital gain of $75.
In this problem, Abby realizes $1,000 from the sale of her partnership interest (cash received). Her gain is determined as the difference between the amount realized and her outside basis or $1,000 less $775 equals $225. Once the amount of the gain has been determined, the character of the gain has to be calculated. Abby reports $150 as ordinary income (her share of unrealized receivables: 50% of ($1,500 – $1,200)) and $75 as capital gains (her share of capital assets (50% of ($450 – $300))).
Which of the following limitations will apply in determining a partner’s deduction for that partner’s share of partnership losses?
At-risk: Yes; Passive loss: Yes
A partner may deduct his share of partnership losses subject to three levels of limitations:
Level 1: Any deductible loss is limited to the adjusted basis of the partner’s interest in the partnership.
Level 2: If there is enough adjusted basis to deduct a loss, then the partner is only allowed to deduct the amount of loss for which he is at risk.
Level 3: If there is enough adjusted basis and enough at risk, then the partner applies the passive activity limits.
Marvin, a 50% partner in the XYZ Partnership, had a $4,000 basis at the beginning of the preceding year. During the preceding year, XYZ incurred a $12,000 loss. In the current year, XYZ reported $7,000 of ordinary income and made a $1,000 pro rata distribution. What is Marvin’s basis at the end of the current year?
$1,000
Marvin’s basis at the end of the current year is $1,000, computed as follows:
Beginning of preceding year basis $4,000
50% of $12,000 loss (6,000)
50% of current-year income 3,500
50% of pro rata $1,000 distribution (500)
Ending basis $1,000
On January 1, 20X2, Ben and Jerry each own 50% of the B&J Fudge partnership. B&J Fudge employs the cash method of accounting and receives $1,000 in interest income each month from an unrelated party loan receivable. On July 1, 20X2, Jerry purchased 50% of Ben’s partnership interest. There were no other changes in partnership interest for the remainder of the 20X2 year. How much does Ben report as his ratable share of the interest income for 20X2?
$4,500
There are two tricks in this question. The first trick is that Jerry purchases 50% of Ben’s 50% ownership, which results in Ben owning 25% and Jerry owning 75% for the second half of the year. The second trick is the question pertains to Ben and not Jerry.
For property contributed to a partnership after June 8, 1997, a partnership must hold contributed property how long before distributing it to avoid precontribution gain being taxed to the contributing partner?
7 years
Pearl and Kate formed a partnership in which they share income and losses equally. Kate contributes land on which there is a recourse mortgage of $18,000. The land has an adjusted basis to Kate of $15,000 and a fair market value of $20,000 at the time of the contribution. Pearl contributes $2,000 to the partnership in cash. What amount of gain should Kate recognize as a result of the contribution of property?
$0.00
Generally, neither the partner nor the partnership recognizes a gain or loss when property is contributed to the partnership in exchange for a partnership interest.
The grantor of Trust A retained the right to the income of the trust and to determine the timing and amount of distributions. Who pays the tax on the income if the grantor distributes the income to his daughter?
The grantor
Internal Revenue Code Section 651 defines a simple trust as one that meets three conditions during the year. Which of the following is not one of those conditions?
Distributes all income currently
Does not distribute from trust corpus
Does not deduct charitable contributions
Does not have tax-exempt income
Does not have tax-exempt income
Which of the following describes a simple trust?
A trust in which all net income must be distributed on an annual basis
Which of the following investments generally will be a violation of a trustee’s fiduciary duty to the trust?
Secured first mortgages on land
High-interest unsecured loans
Tax-exempt municipal bonds
Guaranteed savings certificates
High-interest unsecured loans
A trust in which the beneficiaries are given a future right to trust income or corpus and the $17,000 gift tax exclusion is retained is termed a:
reversionary trust.
Crummey trust.
gift-leaseback.
throwback trust.
Crummey trust.
A Crummey trust is a “safe harbor” rule that allows the annual gift tax exclusion on gifts to a trust. The gift of a future interest provision does not apply to gifts to a Crummey trust if trust assets go to the beneficiaries on or before age 21. Giving the right to the trust income (only up to $17,000 per donee, per year in 2023) meets the requirement even though the beneficiaries do not actually withdraw the funds.
Which of the following statements is correct concerning a grantor type trust?
It is a legal entity under federal law.
Since the grantor has relinquished complete control over the trust, it is recognized as a separate taxable entity for income tax purposes.
All of the income and deductions are treated as belonging directly to the grantor of a grantor trust (not the trust).
All of the answer choices are correct.
All of the income and deductions are treated as belonging directly to the grantor of a grantor trust (not the trust).
A grantor type trust is a legal trust under applicable state law (not federal law) that is not recognized as a separate taxable entity for income tax purposes if the grantor retains certain powers or ownership benefits.
Which of the following would ordinarily be distributed to a trust income beneficiary?
- Royalties
- Stock received in a stock split
- Cash dividends
- Settlements of claims for damages to trust property
I and III
Jay properly created an inter vivos trust naming Kroll as trustee. The trust’s sole asset is a fully rented office building. Rental receipts exceed expenditures. The trust instrument is silent about the allocation of items between principal and income. Among the items to be allocated by Kroll during the year are insurance proceeds received as a result of fire damage to the building and the mortgage interest payments made during the year. Which of the following items is properly allocable to principal?
Insurance proceeds on building: Yes; Current mortgage interest payments: No
The Large Trust is a simple trust. Bert Little is the sole beneficiary of the trust. Capital gains are allocable to corpus. Based on the following information, what is the trust’s distribution deduction?
Interest $1,700
Dividend 300
Capital gains 2,000
Fiduciary fee 1,000
$1,000
Interest Income $1,700
Ordinary Dividends 300
Less:
Fiduciary Fee (1,000)
Distributable Net Income $1,000
Distribution Deduction $1,000, which is limited to DNI
If not expressly granted, which of the following implied powers would a trustee have?
Power to sell trust property
Power to borrow from the trust
Power to pay trust expenses
I and III
A trustee will have the power to sell trust property and the power to pay trust expenses if not expressly granted. A trustee has implied powers to carry out the extent of the trust. The trustee may sell property and pay expenses, but unless expressly granted, the trustee cannot borrow from the trust.
Mason’s will created a testamentary trust for the benefit of Mason’s spouse. Mason’s sister and Mason’s spouse were named as co-trustees of the trust. The trust provided for discretionary principal distributions to Mason’s spouse. It also provided that, on the death of Mason’s spouse, any remaining trust property was to be distributed to Mason’s children. Part of the trust property consisted of a very valuable coin collection. After Mason’s death, which of the following statements would be correct?
Mason’s spouse may not be a co-trustee because the spouse is also a beneficiary of the trust.
Mason’s sister may delegate her duties as co-trustee to the spouse and thereby not be liable for the administration of the trust.
Under no circumstances could the spouse purchase the coin collection from the trust without breaching fiduciary duties owed to the trust and Mason’s children.
The co-trustees must use the same degree of skill, judgment, and care in managing the trust assets as reasonably prudent persons would exercise in managing their own affairs.
The co-trustees must use the same degree of skill, judgment, and care in managing the trust assets as reasonably prudent persons would exercise in managing their own affairs.
Trustees have a fiduciary duty to the trust regardless if they are beneficiaries or not.
An irrevocable trust that contains no provision for change or termination can be changed or terminated only by the:
courts.
income beneficiaries.
remaindermen.
grantor.
courts
An irrevocable trust is a trust that is set up and the funds or property are transferred to a trustee. Once the person signs the trust, he or she has surrendered his or her control over the funds or property. Since the trust is conclusive, it cannot be changed except by the courts.
Which of the following types of entities is entitled to the net operating loss deduction?
Partnerships
S corporations
Not-for-profit organizations
Trusts and estates
Trusts and estates
As pass-through (conduit) entities, both partnerships and S corporations are denied a net operating loss deduction in determination of taxable income. Trusts and estates are allowed a net operating loss deduction under federal income tax law. Not-for-profit organizations are generally denied net-operating-loss deductions except in calculating any unrelated business income tax.
To which of the following trusts would the rule against perpetuities not apply?
Charitable
Spendthrift
Totten
Constructive
The rule against perpetuities does not apply to charitable trusts. The rule was created to restrict the grantor’s power to perpetually control the funds or property in the trust after death plus 21 years and to ensure transferability of the funds or property.
Which of the following is correct if you are the beneficiary of a trust that must distribute all its income currently?
The beneficiary must report its share of the DNI if the beneficiary did not actually receive it or the beneficiary’s proportionate share of the DNI if the distributed amount exceeds the DNI.
The beneficiary must report the amount the beneficiary actually received, not the beneficiary’s share of the DNI.
The beneficiary must report the amount that exceeds the DNI amount only.
The trust must pay the tax on the beneficiary’s distributive share of income.
The beneficiary must report its share of the DNI if the beneficiary did not actually receive it or the beneficiary’s proportionate share of the DNI if the distributed amount exceeds the DNI.
To what extent is the fee paid to a trustee of a trust deductible on IRS Form 1041?
Deductible to the extent of ratio of taxable income to total income
Indirect expenses of a trust such as trustee fees are considered to apply to all income. The ratio of taxable income to total income (not including income allocated to corpus) is used to determine the deduction.
For example, if a trust had total income of $20,000, of which $15,000 was taxable and $5,000 was tax-exempt interest, then 75% of the trustee fees would be deductible ($15,000 taxable ÷ $20,000 total = 0.75).
RR Trust had a long-term capital gain of $3,000 (allocated to corpus), taxable interest of $2,000 and nontaxable interest of $2,000. The trustee’s fee was $400. The trust distributed $1,600 to beneficiaries. RR Trust is a simple trust. The trust’s taxable income is:
$3,700 - The trust’s taxable income is computed as follows:
Capital gain $ 3,000
Taxable interest 2,000
Trustee fee (1/2) - 200
Distribution (1/2) - 800
Exemption - 300
Taxable income $ 3,700
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In a sale or exchange of a partner’s interest in a partnership, which of the following partnership assets is treated as unrealized receivables?
Franchises
Trademarks
Mining property for which exploration expenses were deducted
All of the answer choices are correct.
All of the answers
Mining property for which exploration expenses were deducted
Stock in a domestic international sales corporation (DISC)
Certain farmland for which expenses for soil and water conservation or land clearing were deducted
Franchises, trademarks, or trade names
Oil, gas, or geothermal property, for which tangible drilling and development costs were deducted
Stock of certain controlled foreign corporations
Market discount bonds and short-term obligations
Property subject to recapture of depreciation under IRC Sections 1245 and 1250
Which of the following elections are made at the partner level?
Taxable year and accounting method
Cost or percentage depletion for oil and gas wells
Cost recovery methods and assumptions
Treatment of research and development costs
Cost or percentage depletion for oil and gas wells.
There are three elections that are made at the partner level:
Cost or percentage depletion for oil and gas wells
Reduction of basis of depreciable property when excluding income from discharge of indebtedness
Take a deduction or credit for foreign taxes paid
What elections are made at the partnership level?
Taxable year and accounting method, cost recovery methods and assumptions, and treatment of research and development costs
If a partner receives money or property inventory in exchange for any part of a partnership interest, the amount due to his/her share of the partnership’s inventory items results in:
capital gain or loss.
ordinary income or loss.
ordinary income or capital loss.
capital gain or ordinary loss.
ordinary income or loss.
Rock’s basis in Face 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 Face and a fair market value of $83,000. Face had no unrealized receivables, appreciated inventory, or properties which had been contributed by its partners. What was Rock’s recognized gain or loss on the distribution?
$0
Olson, Wayne, and Hogan are equal partners in the OWH partnership. Olson’s basis in the partnership interest is $70,000. Olson receives a liquidating distribution of $10,000 cash and land with a fair market value of $63,000, and a basis of $58,000. What is Olson’s basis in the land?
$60,000
Olson’s basis in partnership interest $70,000
Cash liquidating distribution (10,000)
Basis in property liquidating distribution (land) $60,000
If this was a nonliquidating distribution, different rules would apply for determining basis in the land.
A taxpayer has a $78,000 adjusted basis in an interest in a partnership prior to any distributions. At the end of the year, the partnership distributed cash of $35,000 and mutual fund shares with a fair market value of $28,000 and a basis of $19,000 in a nonliquidating distribution to the taxpayer. What amount of gain, if any, is the taxpayer required to recognize on the distribution?
$0
The taxpayer begins the year with a basis in the partnership of $78,000. The $35,000 cash distribution and $19,000 basis in mutual fund shares would reduce the partner’s basis in the partnership down to $78,000 − $35,000 − $19,000, or $24,000.
If this calculation had led to a negative number, this would indicate a gain would need to be recognized, as basis can never go below zero.
Berry’s adjusted basis in Vintage 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 Vintage. What was the amount of Berry’s basis in the land?
$5,000
An individual taxpayer has ownership interests in three separate passive activities. In year 2, the passive activities generated the following income or losses: Activity 1, $(40,000) loss; Activity 2, $90,000 income; Activity 3, $(80,000) loss; and net passive loss, $(30,000). What amount of the net passive loss, if any, is allocated to Activity 3 as a suspended passive activity loss?
$20,000
$90,000 × ($80,000 ÷ $120,000), or $60,000 of the passive activity income is allocated to Activity 3. The total Activity 3 loss of $80,000 less the $60,000 passive activity income allocated leaves the taxpayer with $20,000 carryforward passive activity loss related to Activity 3.
A sole shareholder’s initial investment in an S corporation’s stock was $30,000 and no increases in basis have occurred since. Losses incurred since inception of the corporation have totaled $50,000. The stockholder sold the stock for $20,000 in the current year. What is the amount and character of the shareholder’s gain or loss on the stock sale?
$20,000 capital gain
The shareholder’s initial basis in the S corporation stock would have been $30,000 (the amount of the initial investment). The $50,000 total losses would have lowered the shareholder’s basis to zero (as basis cannot go below zero).
Don Wolf became a general partner in Gata Associates on January 1, Year 1, 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 Year 1, 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 Year 1 is:
$5,000.
this loss is not deductible in Year 1.
In general, on Form 709, you can claim a marital deduction for gifts to your spouse. Generally, you cannot take the marital deduction if the gift to your spouse is a terminal interest.
You may elect to deduct a gift of a terminal interest (QTIP) if it meets four requirements.
- Your spouse is entitled for life to all of the income from the entire interest.
- The income is paid yearly or more often.
- Your spouse has the unlimited power, while he or she is alive or by will, to appoint the entire interest in all circumstances.
- No part of the entire interest is subject to another person’s power of appointment (except to appoint it to your spouse).
Lundy, an individual, controls 55% capital interest in a partnership and contributed six acres of land to the partnership. The property had a fair market value of $41,000. Lundy’s basis in the property was $35,000. Two years later, the partnership sold the land to an unrelated party for $44,000. What amount of gain on the sale should be allocated to Lundy?
$7,650
Lundy’s gain:
Fair market value (FMV) when
transferred to the corporation $41,000
Basis before transfer 35,000
Deferred gain $ 6,000
Sale price outside of the company $44,000
Basis to the company 41,000
Gain to the company $ 3,000
Amount of Lundy’s gain on company sale: $3,000 × 0.55 = $1,650
Total of Lundy’s gain: $6,000 + $1,650 = $7,650
The at-risk limitation provisions of the Internal Revenue Code (IRC) may limit:
I. a partner’s deduction for his or her distributive share of partnership losses.
II. a partnership’s net operating loss carryover.
I. a partner’s deduction for his or her distributive share of partnership losses.
A partnership is not allowed a deduction for net operating losses (NOLs). NOL is determined at the partner level, taking into account all of the partner’s applicable items of income and expense.
The adjusted basis of Smith’s interest in the EVA partnership was $230,000 immediately before receiving the following distribution in complete liquidation of EVA:
Basis Fair
to EVA Market Value Cash $150,000 $150,000 Real estate 120,000 146,000 What is Smith's basis in the real estate?
$80,000
Smith and Berry formed Minor Partnership as equal partners by contributing the following assets:
Adjusted Fair
Asset Basis Market Value Smith Cash $45,000 $45,000 Berry Land 30,000 57,000 The land was held by Berry as a capital asset, subject to a $12,000 mortgage, that was assumed by Minor.
What was Smith’s initial basis in the partnership interest?
$51,000
Cash contributed $45,000
Add: 50% of partnership debt 6,000
Initial basis $51,000
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Kemp and Targus form KT Partnership with a cash contribution of $80,000 from Kemp and a property contribution of land from Targus. The land has a fair market value of $80,000 and an adjusted basis of $50,000 at the date of the contribution. Kemp and Targus are equal partners. What is Targus’s basis immediately after formation?
$50,000
Anne and Bart formed AB, LLC, a limited liability company, and elected to treat it as a partnership for tax purposes. Anne contributed $10,000 cash, and Bart contributed $5,000 cash, but Bart had a special skill that the partnership needed to be successful. The partnership agreement stated that Anne and Bart would both have a 50% interest in the LLC and that all profits and losses would be divided evenly between them. The LLC paid Bart $5,000 in year 1 for Bart’s services to the partnership. The $5,000 would generally be reported to Bart as which of the following?
Guaranteed payment
Baker is a partner in BDT with a partnership basis of $60,000. BDT made a liquidating distribution of land with an adjusted basis of $75,000 and a fair market value of $40,000 to Baker. What amount of gain or loss should Baker report?
$0
Generally, no gain or loss is recognized by the partnership on a distribution of money or other property to a partner. A partner realizes a gain only if the cash received exceeds the basis of the partnership interest. Where the partner receives property other than cash, unrealized receivables, and inventory, no loss is recognized.
Since Baker did not receive cash, no gain is recognized. Since Baker received only land, no loss is recognized.
If property contributed to a partnership is distributed to a partner other than the contributing partner within seven years of its contribution to the partnership, all of the following will apply except:
the contributing partner will be required to recognize the built-in gain or loss at the time of the disqualified distribution.
gain or loss is calculated as if the property was sold for the lesser of its basis or FMV at the date of distribution.
the contributing partner’s gain recognized is limited to the gain that would be recognized by the partnership.
the basis in the property and partnership interests will be adjusted for the gain or loss recognized.
gain or loss is calculated as if the property was sold for the lesser of its basis or FMV at the date of distribution.
Gain or loss is calculated as if the property was sold for its Fair Market Value at the date of the distribution. (For property contributed to a partnership prior to June 9, 1997, these rules had a shorter 5-year lookback.)
The standard deduction for a trust in the fiduciary income tax return is:
$0.
There is no standard deduction for a trust or an estate (IRC Section 63(c)(6)(D)). Instead, the personal exemption for a simple trust is $300 and for a complex trust is $100.
A trust will qualify as a simple trust if:
- the trust instrument requires that all income must be distributed currently,
- the trust instrument does not provide that any amounts are to be paid, permanently set aside, or used for charitable purposes, and
- the trust does not distribute amounts allocated to the corpus of the trust.
The Tom Trust requires that all trust income be distributed at least annually. There are no provisions for charitable contributions. To be treated as a simple trust, what must also be true?
Trust income can consist of interest and dividends only.
There were no distributions of corpus in the current year.
All beneficiaries must be U.S. citizens or resident aliens.
All of the answer choices are correct.
There were no distributions of corpus in the current year.
In 20X2, Exeter Trust had taxable interest of $2,000, capital gains of $6,000, and a fiduciary fee of $1,000. The trust instrument allocates capital gains to income. At the end of 20X2, the fiduciary retains $3,000 and distributes $4,000. What is the distributable net income (DNI) of Exeter Trust for 20X2?
$7,000
More specific to the issue in this question, when calculating the DNI for a simple trust, any amounts allocable to the corpus are disregarded in determining the adjusted total income amount. However, the capital gains here are allocated to income.
Which of the following is a requirement for a simple trust?
The trust must not have a charitable beneficiary.
The trust must distribute its entire corpus currently.
The trust must adopt the cash method of accounting.
The trust must make no distribution of its income currently.
The trust must not have a charitable beneficiary.
A trust is a simple trust if:
the trust document requires the trust to distribute all accounting income currently (i.e., in the year received),
the trust has no charitable beneficiaries, and
the trust did not distribute principal in the tax year.
Payments made by a partnership in liquidation of the interest of a retiring partner in exchange for his/her interest in the partnership property are treated as:
a distribution
Other payments made by the partnership to a retiring partner or successor in interest of a deceased partner that are not made in exchange for an interest in partnership property are treated as:
distributive shares of partnership income or guaranteed payments.
Steve and Sue each have a 50% interest in Denali Partnership. The partnership and the individuals file on a calendar-year basis. For its Year 4 tax year, Denali had a $30,000 loss. Steve’s adjusted basis in the partnership interest on January 1, Year 4, was $8,000. In Year 5, Denali partnership had a profit of $28,000. Assuming that there were no other adjustments to Steve’s basis in the partnership in Year 4 and Year 5, what amount of partnership income (loss) would Steve show on his Year 4 and Year 5 individual income tax returns?
Year 4 Year 5
Steve’s share of profit(loss) at 50% ($15,000) $14,000
Basis 8,000 (restored) 7,000
Limited loss (carryover) ($ 7,000) $ 7,000
Taxable income(loss) allowed ($ 8,000) ($ 7,000)
Albert is a partner with a one-third interest in a partnership. The partnership reported the following balance sheet information at December 31, year 2:
Cash $25,000
Capital, Albert 8,000
Capital, Crane 9,000
Capital, Barry 8,000
Albert’s tax basis in the partnership interest is $8,000. If the partnership distributed $7,500 cash in complete liquidation of Albert’s partnership interest on December 31, year 2, what amount would Albert recognize as a gain or loss?
$500 capital loss
What are the tax consequences (generally) when a partner liquidates her interest?
No gain or loss is recognized by the partnership on the distribution of money.
Generally, no gain or loss is recognized by the partnership or the partner on distribution of property to a partner. Per section 731 of the U.S. Tax Code (IRC Section 731), a “gain shall not be recognized to such partner, except to the extent that any money distributed exceeds the adjusted basis of such partner’s interest.” With respect to losses, generally no “loss shall not be recognized to such partner.” There are exceptions to these gain and loss rules identified. However, the general rule is that no gain or loss is recognized by either the partner or partnership in liquidation.
Fern received $30,000 in cash and an automobile with an adjusted basis and market value of $20,000 in a proportionate liquidating distribution from EF Partnership. Fern’s basis in the partnership interest was $60,000 before the distribution. What is Fern’s basis in the automobile received in the liquidation?
$30,000
When payments are made to a retiring partner, or successor in interest of a deceased partner, for an interest in the partnership property, which of the following is correct?
Payments that are based on partnership income are not taxable as a distributive share of partnership income but for the interest in the partnership.
A retiring partner is treated as a partner until his/her interest in the partnership has been completely liquidated.
Payments made for a retiring partner’s share of the partnership’s unrealized receivables are treated as made in exchange for partnership property if capital is not a material income-producing factor and the retiring partner was a general partner.
If the amount of the payment is based on partnership income, the payment is treated as a guaranteed payment.
A retiring partner is treated as a partner until his/her interest in the partnership has been completely liquidated.
The adjusted basis in Carol’s partnership interest is $50,000. She receives a distribution of $10,000 cash and land that has an adjusted basis of $30,000 and an FMV of $50,000. What is Carol’s adjusted basis in the land?
$30,000
Note this is not a liquidation
Bart’s adjusted basis in West 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 Bart’s basis in the land?
$4,000
On December 31, 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?
Capital gain of $15,000
Sharon’s basis in S & P partnership is $185,000. In a complete liquidation of Sharon’s interest in S & P, Sharon received the following:
S and P's Basis Fair Market Value Cash $ 5,000 $ 5,000 Building 50,000 100,000 Land 40,000 50,000 What is Sharon's basis in the building?
$120,000
Neu Partnership, a cash-basis calendar-year entity, began business on March 1 of the current year. Neu incurred and paid the following this year, prior to March 1:
Legal fees to prepare the partnership
agreement $14,000
Accounting fees to prepare the
representations in offering materials 15,000
NEU elected to amortize costs. What was the maximum amount that Neu could deduct on the current-year partnership return?
$5,000 + ($9,000 × (10 months ÷ 180 months)) = $5,500
Coffee, Inc. and Tea, Inc., unrelated domestic corporations, decided to form a new partnership. Coffee has a December 31 year-end and will own 75% of the new partnership. Tea has a June 30 year-end and will own the remaining 25%. The new partnership wants to elect a fiscal tax year for business purposes. The new partnership may elect which of the following as its tax year-end?
February 28
June 30
August 31
November 30
November 30
When the PWX partnership was formed, partner Pack contributed land with a fair market value of $100,000 and a tax basis of $60,000 in exchange for a 1/3rd interest in the partnership. The PWX partnership agreement specifies that each partner will share equally in the partnership’s profits and losses. During its first year of operation, PWX sold the land to an unrelated third party for $160,000. What is the proper tax treatment of the sale?
The first $40,000 of gain is allocated to Pack, and the remaining gain of $60,000 is shared equally by all the partners in the partnership.
Margaret contributed property with an adjusted basis of $100,000 and a fair market value of $134,000 to the partnership. As a result of the contribution, Margaret recognized a gain of $12,000. What is the partnership’s basis for determining depreciation and gain or loss on the disposition of the property?
In this case, the partnership would have a basis in the property of $112,000, which is the sum of $100,000 (adjusted basis) and $12,000 (recognized gain by Margaret). If there was no gain for Margaret to recognize, her basis would have been the adjusted basis of the property contributed (i.e., $100,000).
On January 3, Year 5, 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, Year 5, Poe sold her entire interest to an unrelated party. Dean sold his 25% interest in Able to another unrelated party on December 20, Year 5. No other transactions took place in Year 5. For tax purposes, which of the following statements is correct with respect to Able?
Able terminated as of February 4, Year 5.
Able terminated as of December 20, Year 5.
Able terminated as of December 31, Year 5.
Able did not terminate
Able did not terminate
The technical termination provision under IRC Section 708 has been repealed. A partnership now only terminates when it ceases business; therefore, Able did not terminate.
A partner received a partnership interest with a fair market value (FMV) of $55,000 in exchange for the following items:
Basis FMV Cash $20,000 $20,000 Property 10,000 30,000 Services rendered 0 5,000 What is the partner's basis in the partnership interest?
the partner’s basis is $35,000 ($20,000 + $10,000 + $5,000
A partner’s basis in a partnership interest includes the partner’s share of a partnership liability in all of the following, except:
a liability that creates or increases the partnership’s basis in any of its assets.
a partner’s share of accrued but unpaid expenses of a cash basis partnership.
a liability that is a nondeductible, noncapital expense of the partnership.
a liability that gives rise to a current deduction to the partnership.
a partner’s share of accrued but unpaid expenses of a cash basis partnership.
Which of the following elections must be made at the partnership level?
Exclusion of income from discharge of indebtedness
Election for foreign taxes paid
Election of an inventory method
Cost or percentage depletion for oil and gas wells
Election of an inventory method
Jackson, an individual, has a 50% interest in XYZ Partnership. Jackson’s adjusted basis at the beginning of the year was $14,000. The partnership’s ordinary income for the current year was $6,000. Jackson received a nonliquidating distribution of $8,000 cash, and property with an adjusted basis of $12,000 and a fair market value of $15,000. What is the basis of the distributed property, other than cash, to Jackson?
$9,000
Two partners each have a 50% interest in the partnership’s capital and profits. The December 31, year 3, balance sheet for the partnership is listed below.
Adjusted Basis Fair Market Value Cash $ 25,000 $ 25,000 Land 75,000 375,000 Total assets $100,000 $400,000
Adjusted Basis Fair Market Value Capital A $ 50,000 $200,000 Capital D 50,000 200,000 Total capital $100,000 $400,000 On January 1, year 4, one partner purchased half of the other partner's interest in the partnership for $100,000. A valid IRC Section 754 election is in place. What is the adjusted tax basis of the partnership's assets after this transaction?
The adjusted tax basis of the partnership’s assets is $175,000. IRC Section 754 allows a partnership to step up basis when either partner transfers their interests or distributes certain property. Pursuant to IRC Section 743(b)(1), such transfer shall “increase the adjusted basis of the partnership property by the excess of the basis to the transferee partner of his interest in the partnership over his proportionate share of the adjusted basis of the partnership property.”
Therefore, the basis is increased by the excess paid over the partner’s proportionate share.
If D purchased half of A’s interest, the excess would be calculated as follows:
$100,000 amount paid − $25,000 = $75,000. If A’s proportionate share of the partnership inside basis was $50,000, half of it would be $25,000.
The $75,000 would be added to the land’s existing basis of $75,000 for a total of $150,000.
Since the fair market value of cash stays the same, the entire increase in fair market value is attributable to land. Therefore, total assets (cash and land) would amount to $175,000. The updated balance sheet would be:
Adjusted Basis Fair Market Value
Cash $ 25,000 $ 25,000
Land 150,000 375,000
Total assets $175,000 $400,000
Adjusted Basis Fair Market Value Capital A $ 25,000 $100,000 Capital D 150,000 300,000 Total capital $175,000 $400,000
All of the following are true statements describing guaranteed payments, except:
payments made to a partner without regard to the partnership’s income.
guaranteed payments are included in income in the partner’s tax year in which the partnership’s tax year ends.
premiums for health insurance paid by a partnership on behalf of a partner for services as a partner are treated as guaranteed payments.
guaranteed payments to a partner cannot create a loss on the partnership return (IRS Form 1065).
guaranteed payments to a partner cannot create a loss on the partnership return (IRS Form 1065).
Gain is sometimes recognized when property is contributed for pship interest. Example:
White acquires a 50% interest in a partnership with an adjusted basis of $250,000. The property is encumbered by a mortgage with a balance of $600,000.
Adjusted Basis $ 250,000
1/2 of mortgage assumed by
the partnership - 300,000
Gain to be recognized by White $ 50,000
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When two or more partnerships merge, the resulting partnership is a continuation of that prior partnership whose members own more than _______ of the capital and profits in the resulting partnership.
50%
The Wilder Trust is a complex trust with a controlling instrument that specifically allocates capital transactions to the corpus of the trust. The instrument goes on to state that $2,000 will be set aside out of gross income for charitable purposes and that $10,000 in income is required to be distributed each year. At the end of 20X2, the Wilder Trust had $20,000 in gross income, which included $5,000 in capital gains. If there was no other information to consider, what would the Wilder Trust’s income distribution deduction be for 20X2?
$10,000
Thus, given that DNI (see calculation below) is more than the amount required to be distributed, the income distribution deduction for 20X2 is $10,000, which is the lesser of amount distributed ($10,000) or DNI ($13,000).
Gross income $20,000
Less:
Charitable contribution (2,000)
Adjusted total income $18,000
Less:
Capital gains (5,000)
Distributable net income $13,000*
What is a disadvantage of a revocable trust?
The trust is included in the gross estate of the grantor.
Andi Corp. issued $1,000,000 face amount of bonds in Year 1 and established a sinking fund to pay the debt at maturity. The bondholders appointed an independent trustee to invest the sinking fund contributions and to administer the trust. In Year 6, the sinking fund earned $60,000 in interest on bank deposits and $8,000 in net long-term capital gains. All of the trust income is accumulated with Andi’s periodic con¬tributions so that the aggregate amount will be sufficient to pay the bonds when they mature. What amount of trust income was taxable to Andi in Year 6?
$68,000
Absent specific directions, which of the following parties will ordinarily receive the assets of a terminated trust?
Remaindermen
Which kind of fiduciary entities are required to use the calendar year as their taxable period for income tax purposes?
Trusts (except those that are exempt)
Trusts, partnerships, S corporations, and personal service corporations generally must conform their tax years to the tax years of their owners or a calendar year, unless the entity can establish a business purpose for having a different tax year.
Only three entities are permitted to freely select a fiscal year:
C corporations, estates, and tax-exempt entities.
Brown transfers property to a trust. A local bank was named trustee. Brown retained no powers over the trust. The trust instrument provides that current income and $6,000 of principal must be distributed annually to the beneficiary. What type of trust was created?
Simple
Grantor
Complex
Revocable
Complex
it is considered complex because it will distribute principal or corpus.
At the close of the prior year, an individual taxpayer transferred assets into an irrevocable trust, retaining the right to the income from the trust for life. During the year, the assets earned ordinary dividends and interest income. The tax liability on the income earned will be paid:
entirely by the individual taxpayer.
The Ray Irrevocable Trust incurred an NOL from normal business operations in 20X2, which is during its 4th, non-final year of existence. Ray’s children are the income beneficiaries of the trust. Which of the following statements is correct concerning the NOL?
The NOL is carried forward only and can only be passed through in the final year of a trust.
Christopher wants to create a revocable grantor trust that will own all of his stocks and rental properties. Which statement regarding income of the trust is true?
Christopher will be taxed on all income of the trust, regardless of distributions
In general, a grantor trust is ignored for tax purposes and all of the income, deductions, etc. are treated as belonging directly to the grantor.
In a written trust containing no specific powers, the trustee will have all of the following implied powers except:
sell trust property.
pay management expenses.
accumulate income.
employ a CPA to prepare trust tax returns.
accumulate income.
The trustee would not typically accumulate income because the income would then be taxed at a very high tax rate.
The income distribution deduction allowable to trusts for amounts paid, credited, or required to be distributed to beneficiaries is limited to:
adjusted total income.
distributable net income.
the lesser of adjusted total income or distributable net income.
the greater of adjusted total income or distributable net income.
distributable net income.
The ABC Trust has only nondisabled beneficiaries. The trust is not required to distribute its net income to its beneficiaries, but it does make discretionary distributions. From the information below, determine the amount of taxable income that will be taxed to the trust on its 20X2 return (deduct the exemption amount before selecting the answer).
Adjusted total income $70,000
Distribution deduction 40,000
Exemption ?
$29,900
A trust whose governing instrument requires that all income be distributed currently is allowed a $300 exemption, even if it distributed amounts other than income during the tax year. A qualified disability trust is allowed a $4,400 exemption for 20X2. This amount is not subject to phaseout. All other trusts are allowed a $100 exemption.
Distributable net income (DNI) is basically the trust’s taxable income before the distribution deduction. DNI is decreased by which of the following?
The personal exemption
Net tax-exempt interest
Net capital loss deduction
Net capital gains taxable to the entity
Net capital gains taxable to the entity
It is decreased by net capital gains taxable to the entity, as well as dividends allocable to corpus (for simple trusts only).
Distributable net income (DNI) is basically the trust’s taxable income before the distribution deduction. DNI is increased by which of the following?
(DNI) is increased by the personal exemption, net tax-exempt interest, and net capital loss deduction.
A corporation distributed land with a basis of $20,000 and a fair market value of $60,000 but was subject to a nonrecourse liability of $70,000 to its sole shareholder. What amount represents the corporation’s recognized gain?
$50,000
Mortgage payable 70,000
Land 20,000
Gain 50,000
