TCP Flashcards

Question

A “qualified bingo game” is not considered to be unrelated business income that is taxable if:

Answer 1

the bingo game is legal in both the state and the locality. and commercial bingo games are not permitted in the locality.

Answer 2

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))

Answer 3

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.

Answer 4

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.

Answer 5

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.

Answer 6

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.

Answer 7

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).

Answer 8

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.

Answer 9

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.

Answer 10

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.

Answer 11

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.

Answer 12

All of the answer choices are correct.

Answer 13

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.

Answer 14

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.

Answer 15

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.

Answer 16

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.

Answer 17

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.

Answer 18

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

Answer 19

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.

Answer 20

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

Answer 21

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.

Answer 22

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.

Answer 23

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.

Answer 24

It is not essentially equivalent to a dividend. It is substantially disproportionate. It completely terminates the shareholder’s interest in the corporation.

Answer 25

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.

Answer 26

Current or accumulated earnings and profits are reported as dividend.

Answer 27

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.

Answer 28

The shareholder has a gain from the sale or exchange of property.

Answer 29

Adjusted basis of property contributed to S corporation $ 6,000 Less: Liability transferred to S corporation (12,000) Recognized gain $ 6,000* =======

Answer 30

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.

Answer 31

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.

Answer 32

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.

Answer 33

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.

Answer 34

$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.

Answer 35

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%.

Answer 36

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.

Answer 37

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.

Answer 38

All stock distributions are treated as property distributions.

Answer 39

Reasonable salary to both Rob and Jim

Answer 40

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.

Answer 41

$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

Answer 42

$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).

Answer 43

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.

Answer 44

A consolidated return, because Silver owns at least 80% of both the voting stock and FMV of Gold

Answer 45

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.

Answer 46

parent-subsidiary and brother-sister.

Answer 47

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.

Answer 48

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.

Answer 49

$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.

Answer 50

$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

Answer 51

Services are provided by an Irish company in England under a contract entered into by its U.S. parent.

Answer 52

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

Answer 53

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.

Answer 54

the earnings and profits of the corporation.

Answer 55

More than 50% of the total voting power or value of its stock must be owned by U.S. shareholders.

Answer 56

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.

Answer 57

True - $0 is recognized in gain by the corporation. A corporation never recognizes gain on the distribution of its own stock.

Answer 58

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.

Answer 59

Global Intangible Low-Taxed Income (GILTI) - to ensure a minimum tax on excessive profits that exceed a basic return on tangible assets of CFCs.

Answer 60

$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.

Answer 61

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.

Answer 62

$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)

Answer 63

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

Answer 64

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.

Answer 65

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

Answer 66

Loss on stock redemption is not recognized until liquidation is complete.

Answer 67

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.

Answer 68

decreases the shareholder's basis for the stock.

Answer 69

Therefore, losses that exceed a shareholder's basis are disallowed for that year.

Answer 70

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.

Answer 71

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).

Answer 72

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.

Answer 73

The corporation cannot issue more than one class of stock.

Answer 74

$40,000 Unlike P-Ships, Loans do not increase S-corp basis.

Answer 75

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

Answer 76

Carry forward the loss indefinitely for use if her basis in her stock is sufficiently restored.

Answer 77

both tax-exempt and taxable interest.

Answer 78

$3,000 as a capital gain. Debt provides basis for the purpose of deducting losses, it is not considered basis for purposes of distributions.

Answer 79

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.

Answer 80

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.

Answer 81

Taxable year and accounting method Cost recovery methods and assumptions Treatment of research and development costs Amortization of organization costs and start-up costs

Answer 82

Cost recovery methods and assumptions

Answer 83

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.

Answer 84

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.

Answer 85

$6,000 - His basis for the distributed property is limited to $6,000 ($10,000 − $4,000, the cash he receives).

Answer 86

Her basis for the property is $20,000.

Answer 87

$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

Answer 88

It is treated as a distribution of money to the partner.

Answer 89

$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

Answer 90

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.

Answer 91

Will's at $1,400 and Timmy's at $2,000

Answer 92

$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.

Answer 93

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.

Answer 94

Income from cancellation of debt elections

Answer 95

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.

Answer 96

Both A and B

Answer 97

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.

Answer 98

$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

Answer 99

$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.

Answer 100

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))).

Answer 101

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.

Answer 102

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

Answer 103

$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.

Answer 104

$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.

Answer 105

The grantor

Answer 106

Does not have tax-exempt income

Answer 107

A trust in which all net income must be distributed on an annual basis

Answer 108

High-interest unsecured loans

Answer 109

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.

Answer 110

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.

Answer 111

Insurance proceeds on building: Yes; Current mortgage interest payments: No

Answer 112

$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

Answer 113

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.

Answer 114

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.

Answer 115

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.

Answer 116

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.

Answer 117

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.

Answer 118

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.

Answer 119

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).

Answer 120

$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 =======

Answer 121

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

Answer 122

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

Answer 123

Taxable year and accounting method, cost recovery methods and assumptions, and treatment of research and development costs

Answer 124

ordinary income or loss.

Answer 125

$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.

Answer 126

$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.

Answer 127

$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.

Answer 128

$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).

Answer 129

$5,000. this loss is not deductible in Year 1.

Answer 130

1. Your spouse is entitled for life to all of the income from the entire interest. 2. The income is paid yearly or more often. 3. Your spouse has the unlimited power, while he or she is alive or by will, to appoint the entire interest in all circumstances. 4. No part of the entire interest is subject to another person's power of appointment (except to appoint it to your spouse).

Answer 131

$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

Answer 132

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.

Answer 133

$51,000 Cash contributed $45,000 Add: 50% of partnership debt 6,000 Initial basis $51,000 =======

Answer 134

Guaranteed payment

Answer 135

$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.

Answer 136

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.)

Answer 137

$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.

Answer 138

1. the trust instrument requires that all income must be distributed currently, 2. the trust instrument does not provide that any amounts are to be paid, permanently set aside, or used for charitable purposes, and 3. the trust does not distribute amounts allocated to the corpus of the trust.

Answer 139

There were no distributions of corpus in the current year.

Answer 140

$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.

Answer 141

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.

Answer 142

a distribution

Answer 143

distributive shares of partnership income or guaranteed payments.

Answer 144

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)

Answer 145

$500 capital loss

Answer 146

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.

Answer 147

A retiring partner is treated as a partner until his/her interest in the partnership has been completely liquidated.

Answer 148

$30,000 Note this is not a liquidation

Answer 149

Capital gain of $15,000

Answer 150

$5,000 + ($9,000 × (10 months ÷ 180 months)) = $5,500

Answer 151

November 30

Answer 152

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.

Answer 153

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).

Answer 154

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.

Answer 155

the partner’s basis is $35,000 ($20,000 + $10,000 + $5,000

Answer 156

a partner's share of accrued but unpaid expenses of a cash basis partnership.

Answer 157

Election of an inventory method

Answer 158

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

Answer 159

guaranteed payments to a partner cannot create a loss on the partnership return (IRS Form 1065).

Answer 160

Adjusted Basis $ 250,000 1/2 of mortgage assumed by the partnership - 300,000 Gain to be recognized by White $ 50,000 ==========

Answer 161

$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*

Answer 162

The trust is included in the gross estate of the grantor.

Answer 163

Remaindermen

Answer 164

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.

Answer 165

C corporations, estates, and tax-exempt entities.

Answer 166

Complex it is considered complex because it will distribute principal or corpus.

Answer 167

entirely by the individual taxpayer.

Answer 168

The NOL is carried forward only and can only be passed through in the final year of a trust.

Answer 169

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.

Answer 170

accumulate income. The trustee would not typically accumulate income because the income would then be taxed at a very high tax rate.

Answer 171

distributable net income.

Answer 172

$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.

Answer 173

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).

Answer 174

(DNI) is increased by the personal exemption, net tax-exempt interest, and net capital loss deduction.

Answer 175

$50,000 Mortgage payable 70,000 Land 20,000 Gain 50,000