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  1. CHAPTER 10
  2. CHAPTER 10
  3. CHAPTER 10
  4.  
  5.  
  6. MULTIPLE CHOICE
  7.  
  8.         1.      A partnership will take a carryover basis in an asset it acquires when:
  9.        
  10.        
  11. c.      The partnership acquires the asset from a partner as a contribution to partnership capital under § 721(a).
  12.         2.      On January 1 of the current year, Sarah and Bart form an equal partnership. Sarah makes a cash contribution of $60,000 and a property contribution (adjusted basis of $160,000; fair market value of $140,000) in exchange for her interest in the partnership. Bart contributes property (adjusted basis of $120,000; fair market value of $200,000) in exchange for his partnership interest. Which of the following statements is true concerning the income tax results of this partnership formation?
  13.        
  14.        
  15.        
  16. d.      Bart has a $120,000 tax basis for his partnership interest.
  17.  
  18.         3.      Kevin, Chuck, and Greg contributed assets to form the equal KCG Partnership. Kevin contributed cash of $50,000 and land with a basis of $80,000 (fair market value of $50,000). Chuck contributed cash of $30,000 and land with a basis of $40,000 (fair market value of $70,000). Greg contributed cash of $60,000 and a fully depreciated property ($0 basis) valued at $40,000. Which of the following tax treatments is not correct?
  19.        
  20. b.      Chuck’s basis in his partnership interest is $100,000.
  21.  
  22.         4.      Alicia and Barry form the AB Partnership at the start of the current year with a land contribution by Barry and a cash contribution by Alicia. Barry’s contributed property is subject to a recourse mortgage assumed by the partnership. Immediately after formation, Barry has an 80% interest in AB’s profits and losses. The land has been held by Barry for the past 6 years as an investment. It will be used by AB as an operating asset in its parking lot business. Which of the following statements is correct?
  23.        
  24. b.      Immediately after formation, Alicia’s basis in the partnership equals the cash she contributed plus her share of the recourse debt contributed by Barry.
  25.  
  26.         5.      Tina and Randy formed the TR Partnership four years ago. Because they decided the company needed some expertise in multimedia presentations, they offered Susan a 1/3 interest in partnership capital and profits if she would come to work for the partnership. On July 1 of the current year, the unrestricted partnership interest (fair market value of $25,000) was transferred to Susan. How should Susan treat the receipt of the partnership interest in the current year?
  27.        
  28.        
  29.        
  30. d.      $25,000 ordinary income.
  31.  
  32.         6.      Partner Tom transferred property (basis of $20,000; fair market value of $50,000) to the TUV Partnership in exchange for a partnership interest. At a later date, when Tom's outside basis for his partnership interest was $70,000, Tom received a $50,000 cash distribution from the partnership. Which one of the following statements is not true?
  33.        
  34. b.      If the transaction is treated as a disguised sale, Tom's basis in the partnership interest will be $20,000.
  35.  
  36.         7.      When property is contributed to a partnership for a capital and profits interest, the holding period of the contributing partner’s interest:
  37. a.      May include the holding period of the contributed property.
  38.  
  39.         8.      Cheryl and Nina formed a partnership. Cheryl received a 40% interest in partnership capital and profits in exchange for contributing land with a basis of $60,000 and a fair market value of $80,000. Nina received a 60% interest in partnership capital and profits in exchange for contributing $120,000 of cash. Three years after the contribution date, the land contributed by Cheryl is sold by the partnership to a third party for $90,000. How much taxable gain will Cheryl recognize from the sale?
  40.        
  41.        
  42. c.      $24,000.
  43.  
  44.         9.      Jamie contributed fully depreciated ($0 basis) property valued at $30,000 to the JKLM Partnership in exchange for a 40% interest in partnership capital and profits. During the first year of partnership operations, JKLM had net taxable income of $80,000 and tax-exempt income of $10,000. The partnership distributed $20,000 cash to Jamie. Her share of partnership recourse liabilities on the last day of the partnership year was $13,000. Jamie’s adjusted basis (outside basis) for her partnership interest at year-end is:
  45.        
  46. b.      $29,000.
  47.  
  48.         10.     In the current year, the DOE Partnership received revenues of $100,000 and paid the following amounts: $20,000 in rent and utilities, a $30,000 guaranteed payment to 50% partner Don, $6,000 to partner Eugene for consulting services, and $10,000 as a distribution to partner Olivia. In addition, the partnership earned $4,000 of qualifying dividend income during the year. Don’s basis in his partnership interest was $35,000 at the beginning of the year, and includes a $10,000 share of partnership liabilities. At the end of the year, his share of partnership liabilities was $20,000. How much income must Don report for the tax year, and what is his basis in his partnership interest at the end of the year?
  49.        
  50.        
  51. c.      $22,000 ordinary income; $2,000 of qualifying dividends; $30,000 guaranteed payment; $69,000 basis.
  52.  
  53.         11.     Sharon and Sara are equal partners in the S&S Partnership. On January 1 of the current year, each partner’s adjusted basis in S&S was $50,000 (including each partner’s $15,000 share of the partnership’s $30,000 of liabilities). During the current year, S&S repaid the beginning liabilities and borrowed $20,000 for which Sharon and Sara are equally liable. In the current year ended December 31, S&S also sustained a net operating loss of $25,000 and earned $5,000 of interest and qualified dividend income from investments. If liabilities are shared equally by the partners, on January 1 of the next year each partner’s basis in her interest in S&S is:
  54. a.      $35,000.
  55.  
  56.         12.     Fern, Inc., Ivy Inc., and Jason formed a general partnership, each contributing equally. Fern, Inc. files its tax return on a July 1 - June 30 fiscal year; Ivy Inc. files on a September 1 - August 31 fiscal year; and Jason is a calendar year taxpayer. Which of the following statements is true regarding the taxable year the partnership can choose?
  57.        
  58.        
  59.        
  60. d.      The partnership can choose the taxable year that provides for the “least aggregate deferral” without obtaining IRS permission.
  61.         13.     In the current year, Greg formed an equal partnership with Melvin. Greg contributed land with an adjusted basis of $90,000 and a fair market value of $150,000. Greg also contributed $75,000 cash to the partnership. Melvin contributed land with an adjusted basis of $100,000 and a fair market value of $200,000. The land contributed by Greg was encumbered by a $50,000 nonrecourse debt. The land contributed by Melvin was encumbered by $25,000 of nonrecourse debt. Assume the partners share debt equally. Immediately after the formation, the basis of Melvin’s partnership interest is:
  62.        
  63.        
  64. c.      $112,500.
  65.  
  66.         14.     Richard made a contribution of property to the newly formed QRST Partnership. The property had a $30,000 adjusted basis to Richard and a $100,000 fair market value on the contribution date. The property was also encumbered by a $50,000 nonrecourse debt, which was transferred to the partnership on that date. Another partner, Sylvia, shares 1/3 of the partnership income, gain, loss, deduction, and credit. Under IRS regulations, Sylvia’s share of the nonrecourse debt for basis purposes is:
  67. a.      $10,000.
  68.  
  69.         15.     Jim and Marta created the JM Partnership by contributing $60,000 each. The $120,000 cash was used by the partnership to acquire a depreciable asset. The partnership agreement provides that the partners’ capital accounts will be maintained in accordance with Reg. § 1.704-1(b) (the “economic effect” Regulations) and that any partner with a deficit capital account will be required to restore that capital account when the partner’s interest is liquidated. The partnership agreement provides that MACRS will be allocated 10% to Jim and 90% to Marta. All other items of partnership income, gain, loss, deduction, and credit will be allocated equally between the partners. If the first year MACRS is $20,000 and no other operating transactions occur, which of the following statements satisfies the economic effect test of the Regulations?
  70. a.      If the property is sold at the end of the year for $100,000 and the partnership is liquidated immediately thereafter, cash will be distributed $58,000 to Jim and $42,000 to Marta.
  71.  
  72.         16.     René is a partner in the RST Partnership, which is not publicly traded. Her allocable share of RST’s passive ordinary losses from a nonrealty activity for the current year is ($60,000). René has a $40,000 adjusted basis (outside basis) for her interest in RST (before deduction of any of the passive losses). Her amount “at risk” under § 465 is $30,000 (before deduction of any of the passive losses). She also has $25,000 of passive income from other sources. How much of her ($60,000) allocable loss can René deduct on her current year’s tax return?
  73. a.      $25,000.
  74.  
  75.         17.     At the beginning of the tax year, Wick’s basis for his partnership interest and his amount at risk in the partnership was $30,000.  His share of partnership items for the year consisted of tax-exempt interest income of $2,000 and an ordinary loss of $44,000.  He also received a distribution from the partnership of $20,000 cash during the year.  For the tax year, Wick will report:
  76.        
  77.        
  78. c.      A nontaxable distribution of $20,000, an ordinary loss of $12,000, and a suspended loss carryforward of $32,000.
  79.  
  80.         18.     Meagan is a 40% general partner in the calendar year, cash basis MKK Partnership. The partnership received $100,000 income from services and paid the following other amounts:
  81.  
  82. Rent expense    $10,000
  83. Salary expense to employees     30,000
  84. Payment to Meagan for services, per the partnership agreement   20,000
  85. Distributions to partners, Kristin and Kaylyn   12,000
  86. Payment to 40% cash basis partner Kaylyn for tax and accounting services        8,000
  87.  
  88. How much is Meagan’s adjusted gross income increased as a result of the above items?
  89.        
  90.        
  91.        
  92. d.      $32,800.
  93.  
  94.         19.     Rachel uses a June 30 fiscal year. She owns a 50% profit and loss interest in a calendar year partnership. For the 2008 calendar year, the partnership’s taxable income (after guaranteed payments) was $40,000, and for the 2009 calendar year it was $50,000. During the 2008 calendar year, the partnership paid Rachel a guaranteed payment of $100 per month. During the 2009 calendar year, it paid Rachel a guaranteed payment of $200 per month. Rachel must report the following total amount of income from the partnership for her June 30, 2009, tax year.
  95.        
  96.        
  97.        
  98. d.      $21,200.
  99.  
  100.         20.     In computing the ordinary income of a partnership, a deduction is generally allowed for:
  101. a.      Guaranteed payments to partners.
  102.  
  103. CHAPTER 11
  104. CHAPTER 11
  105. CHAPTER 11
  106.  
  107.  
  108.         1.      Wendy receives a proportionate nonliquidating distribution from the WXY Partnership. The distribution consists of $75,000 cash and property with an adjusted basis to the partnership of $20,000 and a fair market value of $25,000. Immediately before the distribution, Wendy’s adjusted basis for her partnership interest is $90,000. Wendy’s basis in the noncash property received is:
  109.        
  110. b.      $15,000.
  111.  
  112.         2.      Carl receives a proportionate nonliquidating distribution when the basis of his partnership interest is $60,000. The distribution consists of $20,000 in cash and property with an adjusted basis to the partnership of $35,000 and a fair market value of $45,000. Carl’s basis in the noncash property and his remaining basis in the partnership interest are:
  113.        
  114.        
  115. c.      $35,000; $5,000.
  116.  
  117.         3.      Marilyn is a partner in a continuing partnership. At the end of the current year, the partnership distributed to Marilyn in a proportionate, nonliquidating distribution cash of $40,000, inventory with a basis to the partnership of $12,000 and a fair market value of $10,000, and a parcel of land with a basis to the partnership of $30,000 and a fair market value of $40,000. Marilyn’s basis in the partnership interest was $80,000 before the distribution. What basis does Marilyn take in the inventory and land, and what is her basis in the partnership interest following the distribution?
  118.        
  119.        
  120.        
  121.        
  122. e.      $12,000 basis in inventory; $28,000 basis in land; $0 basis in partnership.
  123.  
  124.  
  125. 4.      Marty receives a proportionate nonliquidating distribution when the basis of her partnership interest is $50,000. The distribution consists of $60,000 cash and noninventory property (adjusted basis to the partnership of $20,000; fair market value of $23,000). How much gain or loss does Marty recognize, and what is her basis in the distributed property and in her partnership interest following the distribution?
  126.        
  127.        
  128. c.      $10,000 capital gain; $0 basis in property; $0 basis in partnership interest.
  129.  
  130.         5.      Toni’s basis in her partnership interest was $60,000, including her $50,000 share of partnership liabilities. The partnership decides to liquidate, and after repaying all liabilities, distributes all remaining assets proportionately to the partners. Toni receives $20,000 cash and accounts receivable with a $12,000 basis and a $14,000 fair market value to the partnership. What gain or loss does Toni recognize, and what is her basis in the accounts receivable?
  131.        
  132.        
  133. c.      $10,000 gain; $0 basis.
  134.  
  135.         6.      Beth has an outside basis of $60,000 in the BBDE Partnership as of December 31 of the current year. On that date the partnership liquidates and distributes to Beth a proportionate distribution of $20,000 cash and inventory with an inside basis to the partnership of $18,000 and a fair market value of $22,000. In addition, Beth receives a desk (not inventory) which has an inside basis and fair market value of $200 and $350, respectively. None of the distribution is for partnership goodwill. How much gain or loss will Beth recognize on the distribution, and what basis will she take in the desk?
  136.        
  137.        
  138.        
  139. d.      $0 loss; $22,000 basis.
  140.        
  141. 7.      James received $42,000 cash and a capital asset (basis of $45,000 and fair market value of $54,000) in a proportionate liquidating distribution. His basis in his partnership interest was $90,000 prior to the distribution. How much gain or loss does James recognize and what is his basis in the asset received?
  142.        
  143. b.      $0 gain or loss; $48,000 basis.
  144.  
  145.         8.      Last year, Oscar contributed nondepreciable property with a basis of $40,000 and a fair market value of $50,000 to the Starling Partnership in exchange for a 25% interest in the partnership. In the current year, he receives a nonliquidating distribution from the partnership of other property with a basis to the partnership of $26,000 and a fair market value of $32,000. The basis in his partnership interest at the time of the distribution was $30,000. How much gain or loss does Oscar recognize on the distribution? (Assume no other distributions have been made to Oscar, the property he originally contributed is still owned by the partnership, and this is not a disguised sale transaction.)
  146.        
  147. b.      $2,000 gain.
  148.  
  149.         9.      The December 31, 2008, balance sheet of the DIP Partnership reads as follows.
  150.  
  151.         Basis   FMV
  152. Cash    $180,000        $180,000
  153. Receivables     -0-     60,000
  154. Capital assets      90,000        120,000
  155.    Total        $270,000        $360,000
  156.                
  157. Dana, capital   $  90,000       $120,000
  158. Ivan, capital   90,000  120,000
  159. Patty, capital      90,000        120,000
  160.    Total        $270,000        $360,000
  161.  
  162. Each partner shares in 1/3 of the partnership capital, income, gain, loss, deduction and credit. Capital is not a material income-producing factor to the partnership. On December 31, 2008, general partner Dana receives a distribution of $120,000 cash in liquidation of her partnership interest under § 736. If Dana’s outside basis for the partnership interest immediately before the distribution is $90,000, the recognized taxable gain and ordinary income from the distribution is:
  163.        
  164.        
  165. c.      $10,000 capital gain; $20,000 ordinary income.
  166.        
  167.  
  168.         10.     The December 31, 2008, balance sheet of the RST General Partnership reads as follows.
  169.  
  170.         Basis   FMV
  171. Cash    $  65,000       $  65,000
  172. Receivables     -0-     7,500
  173. Capital and § 1231 assets          55,000        100,000
  174.    Total        $120,000        $172,500
  175.                
  176. Roy, capital    $  40,000       $  57,500
  177. Sue, capital    40,000  57,500
  178. Ted, capital        40,000          57,500
  179.    Total        $120,000        $172,500
  180.  
  181. The partners share equally in partnership capital, income, gain, loss, deduction and credit. Ted’s adjusted basis for his partnership interest is $40,000. On December 31, 2008, he retires from the partnership, receiving a $60,000 cash payment in liquidation of his interest. The partnership agreement states that $2,500 of the payment is for goodwill. Which of the following statements about this distribution is false?
  182.        
  183.        
  184. c.      The payment for Ted’s share of goodwill will create $2,500 of ordinary income to him.
  185.  
  186.         11.     Barney, Bob, and Billie are equal partners in the BBB Partnership. The partnership balance sheet reads as follows on December 31 of the current year:
  187.  
  188.         Basis   FMV
  189. Cash    $  75,000       $  75,000
  190. Unrealized receivables  -0-     30,000
  191. Land        45,000          75,000
  192.    Total        $120,000        $180,000
  193.                
  194. Barney, capital $  40,000       $  60,000
  195. Bob, capital    40,000  60,000
  196. Billie, capital     40,000          60,000
  197.    Total        $120,000        $180,000
  198.  
  199. Partner Billie has an adjusted basis of $40,000 for her partnership interest. If Billie sells her entire partnership interest to new partner Janet for $60,000 cash, how much capital gain and ordinary income must Billie recognize from the sale?
  200.        
  201.        
  202. c.      $10,000 ordinary income; $10,000 capital gain.
  203.  
  204.         12.     The RBD Partnership balance sheet on August 31 of the current year is as follows:
  205.  
  206.         Basis   FMV
  207. Cash    $150,000        $150,000
  208. Receivables     -0-     90,000
  209. Capital assets    600,000         660,000
  210.         $750,000        $900,000
  211.                
  212. Nonrecourse debt        $150,000        $150,000
  213. Rachel, capital 200,000 250,000
  214. Barry, capital  200,000 250,000
  215. Dale, capital     200,000         250,000
  216.         $750,000        $900,000
  217.  
  218. On that date, Rachel sells her one-third partnership interest to Bill for $300,000, including cash and relief of Rachel’s share of the nonrecourse debt. The nonrecourse debt is shared equally among the partners. Rachel’s outside basis for her partnership interest is $250,000. How much capital gain and/or ordinary income will Rachel recognize on the sale?
  219. a.      $20,000 capital gain; $30,000 ordinary income.
  220.  
  221.  
  222. 13.     Which of the following statements about the transfer of a partnership interest is not true?
  223.        
  224.        
  225.        
  226. d.      With respect to a transfer of a partnership interest by gift, all partnership gain, loss, credit, etc., items are allocated to the donor.
  227.  
  228.         14.     Carla, Marla, and Yancy are equal partners in the CMY Partnership. The partnership balance sheet reads as follows on December 31 of the current year.
  229.  
  230.         Basis   FMV
  231. Cash    $  75,000       $  75,000
  232. Unrealized receivables  -0-     39,000
  233. Land        30,000          42,000
  234.    Total        $105,000        $156,000
  235.                
  236. Carla, capital  $  35,000       $  52,000
  237. Marla, capital  35,000  52,000
  238. Yancy, capital      35,000          52,000
  239.    Total        $105,000        $156,000
  240.  
  241. Partner Yancy has an adjusted basis of $35,000 for his partnership interest. If Yancy sells his entire partnership interest to new partner Paula for $60,000 cash, how much can the partnership step-up the basis of Paula’s share of partnership assets under §§ 754 and 743(b)?
  242.        
  243. b.      $25,000.
  244.  
  245.         15.     Partner Jordan received a distribution of $80,000 cash from the JKL Partnership in complete liquidation of his partnership interest. If Jordan’s outside basis immediately before the distribution was $90,000, and if the partnership has made (and not revoked) a § 754 election in a prior year, which of the following statements is true? (Assume the partnership owns no “hot assets.”)
  246. a.      The partnership will step-down the basis of its assets by $10,000.
  247.        
  248.        
  249. d.      Jordan will recognize a $10,000 capital loss on the distribution.
  250. e.      Both a. and d. are true.
  251.  
  252.  
  253. ANS:    E
  254.  
  255.         16.     The ABC Partnership makes a proportionate distribution of its assets to Charles, in complete liquidation of his partnership interest. The distribution consists of $30,000 in cash and capital assets with a basis to the partnership of $20,000 and a fair market value of $28,000. None of the payment is for partnership goodwill. At the time of the distribution, Charles’s partnership basis is $42,000 and the partnership has no liabilities and no “hot assets.” If the partnership makes an optional basis adjustment election on a timely filed return, it recognizes:
  256.        
  257.        
  258. c.      No gain or loss and increases the basis of its remaining assets by $8,000.
  259.  
  260.         17.     A partnership may make an optional election to adjust the basis of its property on a distribution to a partner which liquidates the partner’s entire interest in the partnership. If such an election is in effect, the partnership:
  261. a.      Generally applies the election to transfers that take place at any later date, unless the election is revoked.
  262.  
  263. 18.     Which of the following transactions will not result in termination of a partnership for Federal tax purposes?
  264.        
  265.        
  266. c.      Cash is distributed in liquidation of a 60% partner’s interest in a five-partner partnership.
  267.  
  268.         19.     On December 31 of last year, Pat gave his daughter, Joy, a gift of a 50% interest in a partnership in which capital is a material income-producing factor. For the current calendar year, the partnership’s ordinary income was $100,000. Pat and Joy were the only partners, and there were no guaranteed payments. Pat’s services performed for the partnership were worth $40,000, and Joy has never performed any services. What is Joy’s distributive share of partnership income for the current year?
  269.        
  270.        
  271. c.      $30,000.
  272.  
  273.         20.     Which of the following statements, if any, about an LLC is false?
  274. a.      An LLC is usually taxed like a partnership.
  275. b.      “Members” of an LLC generally have limited personal liability for debts of the LLC.
  276. c.      “Members” of an LLC can participate in management of the LLC unless the member agrees not to participate.
  277. d.      An LLC can specially allocate income items, as long as the substantial economic effect rules of § 704(b) are followed.
  278. e.      None of the above statements is false.
  279.  
  280.  
  281. ANS:    E
  282.  
  283.  
  284. CHAPTER 12
  285. CHAPTER 12
  286. CHAPTER 12
  287.  
  288.  
  289.  
  290.         1.      An S corporation may be subject to the following tax.
  291.        
  292. b.      Passive investment income tax.
  293.  
  294.         2.      Which statement is incorrect?
  295.        
  296. b.      S corporations for tax purposes are treated as partnerships.
  297.  
  298.         3.      An S corporation must possess the following characteristics.
  299.        
  300.        
  301.        
  302. d.      All of the above are required of an S corporation.
  303.        
  304.  
  305.         4.      Which corporation is eligible to make the S election?
  306.        
  307. b.      100% owned corporation.
  308.  
  309.         5.      Which could constitute a second class of stock?
  310. a.      Treasury stock.
  311. b.      Phantom stock.
  312. c.      Unexercised stock options.
  313. d.      Warrants.
  314. e.      None of the above.
  315.  
  316.  
  317. ANS:    E      
  318.  
  319.         6.      What statement is correct with respect to an S corporation?
  320.        
  321. b.      S corporation status allows shareholders to realize tax benefits from corporate losses immediately.
  322.         7.      What statement is correct with respect to an S corporation?
  323.        
  324. c.      An estate may be a shareholder.
  325.        
  326.         8.      Identify a disadvantage of an S corporation.
  327. a.      Generally, trusts cannot be shareholders.
  328.  
  329.         9.      Which, if any, of the following can be eligible shareholders of an S corporation?
  330. a.      A resident alien.
  331.  
  332.         10.     Which, if any, of the following can be eligible shareholders of an S corporation?
  333. a.      A child, age 10.
  334. b.      A resident alien.
  335. c.      A voting trust.
  336. d.      An estate of a deceased shareholder.
  337. e.      All of the above can own stock.
  338.  
  339.  
  340. ANS:    E      
  341.  
  342.         11.     Which statement is incorrect with respect to filing for an S election?
  343. a.      Form 2553 must be filed.
  344. b.      All shareholders must consent.
  345. c.      The election may be filed in the previous year.
  346. d.      An extension of time is available for filing Form 2553.
  347. e.      None of the above are incorrect.
  348.  
  349.  
  350. ANS:    E      
  351.  
  352.  
  353.         12.     Several individuals acquire assets on behalf of Skip Corporation on May 29, 2008, purchased assets on June 3, and begin doing business on June 11, 2008. They subscribe to shares of stock, file articles of incorporation for Skip, and become shareholders on June 21, 2008. The S election must be filed no later than 2 1/2 months after:
  354. a.      May 29, 2008.
  355.  
  356.         13.     The maximum number of S shareholders is:
  357.        
  358.        
  359.        
  360. d.      Indeterminable.
  361.  
  362.         14.     Which statement is incorrect with respect to an S shareholder’s consent?
  363. a.      An S election requires a consent from all corporate shareholders.
  364. b.      Both husband and wife must consent if one owns the stock as community property.
  365. c.      A consent extension is available only if Form 2553 is filed on a timely basis, reasonable cause is given, and the interests of the government are not jeopardized.
  366. d.      A consent must be in writing.
  367. e.      None of the above statements is incorrect.
  368.  
  369.  
  370. ANS:    E      
  371.  
  372.         15.     Which type of distribution from an S corporation is taxed at the 5/15% rate?
  373.        
  374.        
  375.        
  376. d.      AEP.
  377.  
  378.         16.     Which transaction affects the Other Adjustments Account on an S corporation’s Schedule M-2?
  379.        
  380.        
  381.        
  382. d.      Tax-exempt income.
  383.  
  384.         17.     Which transaction affects the Other Adjustments Account on an S corporation’s Schedule M-2?
  385. a.      Charitable contributions.
  386. b.      Unreasonable compensation.
  387. c.      Payroll tax penalty assessed.
  388. d.      Section 1245 income.
  389. e.      None of the above.
  390.  
  391.  
  392. ANS:    E      
  393.  
  394.         18.     If the beginning balance in OAA is zero, and the following transactions occur, what is the ending OAA balance?
  395.  
  396. Depreciation recapture  $21,000
  397. Payroll tax penalty     4,200
  398. Tax-exempt interest     5,300
  399. Nontaxable life insurance proceeds      4,100
  400. Insurance premiums paid (nondeductible) 2,800
  401.  
  402.        
  403. b.      $6,600.
  404.  
  405.         19.     Which transaction affects the Other Adjustments Account on an S corporation’s Schedule M-2?
  406.        
  407.        
  408. c.      Life insurance proceeds (nontaxable to the recipient S corporation).
  409.  
  410.         20.     Which, if any, of the following items decreases an S corporation’s AAA?
  411. a.      Long-term capital loss.
  412.  
  413.         21.     During 2008, Houston Nutt, the sole shareholder of a calendar year S corporation, received a distribution of $16,000. On December 31, 2007, his stock basis was $4,000. The corporation earned $11,000 ordinary income during the year. It has no accumulated E & P. Which statement is correct?
  414. a.      Nutt recognizes a $1,000 LTCG.
  415.  
  416.         22.     Beginning in 2008, the AAA of Amit, Inc., an S corporation, has a balance of $782,000. During the year, the following items occur.
  417.  
  418. Operating income        $472,000
  419. Interest income 6,500
  420. Dividend income 14,050
  421. Municipal bond interest income  6,000
  422. Long-term capital loss from sale of land        7,400
  423. Section 179 expense     6,000
  424. Charitable contributions        19,000
  425. Cash distributions      57,000
  426.  
  427. Amit’s ending AAA balance is:
  428.        
  429. b.      $1,185,150.
  430.  
  431.         23.     On January 1, 2008, Kinney, Inc., an electing S corporation, has $4,000 of AEP and a balance of $10,000 in AAA. Kinney has two shareholders, Erin and Maine, each of whom owns 500 shares of Kinney’s stock. Kinney’s 2008 taxable income is $5,000. Kinney distributes $6,000 to each shareholder on February 1, 2008, and distributes another $3,000 to each shareholder on September 1. How is Erin taxed on this distribution?
  432. a.      $500 dividend income.
  433. b.      $1,000 dividend income.
  434. c.      $1,500 dividend income.
  435.  
  436.         24.     Fred is the sole shareholder of an S corporation in Fort Deposit, Alabama. At a time when his stock basis is $10,000, the corporation distributes appreciated property worth $100,000 (basis of $10,000). There is no built-in gain. Fred’s taxable gain is:
  437.        
  438.        
  439. c.      $90,000.
  440.  
  441.         25.     Which, if any, of the following items has no effect on the stock basis of an S corporation shareholder?
  442. a.      Operating income.
  443. b.      Long-term capital gain.
  444. c.      Cost of goods sold.
  445. d.      Short-term capital loss.
  446. e.      All of the above affect stock basis.
  447.  
  448.  
  449. ANS:    E
  450.  
  451.         26.     You are given the following facts about a solely owned S corporation, and you are asked to prepare the shareholder’s ending stock basis.
  452.  
  453. Increase in AAA $32,000
  454. Increase in OAA 6,300
  455. Payroll tax penalty     2,140
  456. Beginning stock basis   39,800
  457. Stock purchases 22,000
  458. Tax-exempt insurance proceeds   4,800
  459. Insurance premiums paid (nondeductible) 2,700
  460.  
  461.        
  462. d.      $100,100.
  463.        
  464.        
  465.  
  466.         27.     Samantha owned 1,000 shares in Evita, Inc., an S corporation, that uses the calendar year.  On October 11, 2008, Samantha sells all of her Evita stock.  Her basis at the beginning of 2008 was $60,000.  Her share of the corporate income for 2008 was $22,000, and she receives a distribution of $37,000 between January 1 and October 11.  Her basis at the time of the sale is:
  467. a.      $45,000.
  468.  
  469.         28.     You are given the following facts about a 50% owner of an S corporation, and you are asked to prepare his ending stock basis.
  470.  
  471. Increase in AAA $32,000
  472. Increase in OAA 6,300
  473. Payroll tax penalty     2,140
  474. Ending PTI      6,125
  475. Beginning stock basis   39,800
  476. Tax-exempt interest income      4,800
  477. Insurance premiums paid (nondeductible) 2,700
  478. Stock purchases 22,000
  479.  
  480. a.      $80,950.
  481.  
  482.         29.     On January 2, 2007, David loans his S corporation $10,000, and by the end of 2007 David’s stock basis is zero and the basis in his note has been reduced to $8,000. During 2008, the company’s operating income is $10,000. The company also makes distributions to David of $11,000. Which statement is correct?
  483. a.      $1,000 LTCG.
  484.  
  485.         30.     On January 2, 2007, David loans his S corporation $10,000. By the end of 2007, David’s stock basis is zero, and the basis in his note has been reduced to $8,000. During 2008, the company’s operating income is $10,000. The company also makes distributions to David of $8,000. Which statement is correct?
  486. a.      Loan basis is now $10,000.
  487.  
  488.         31.     Randall owns 800 shares in Fabrication, Inc., an S corporation in Moss Hill, Texas. In 2008, his basis in his stock is $30,000, before the adjustment for this year’s losses. During 2008, Randall’s share of the corporation’s ordinary loss is $20,000 and his share of its capital loss is $15,000. How much can Randall deduct due to these losses?
  489.        
  490.        
  491. c.      $17,143 ordinary loss; $12,857 capital loss.
  492.  
  493.         32.     During 2008, an S corporation in Gainesville, Florida, incurs the following transactions.
  494.  
  495. Net income from operations      $110,000
  496. Interest income from savings account    8,000
  497. Long-term capital gain from sale of securities  11,000
  498. Short-term capital loss from sale of securities 4,000
  499.  
  500. The corporation’s passive investment income for 2008 is:
  501.        
  502. d.      $19,000.
  503.        
  504.        
  505.  
  506.  
  507.         33.     During 2008, Lion Corporation incurs the following transactions.
  508.  
  509. Net income from operations      $100,000
  510. Interest income from savings account    3,000
  511. Long-term capital gain from sale of securities  10,000
  512. Short-term capital loss from sale of securities 4,000
  513.  
  514. Lion maintains a valid S election and does not distribute any dividends to its sole shareholder, Penny. As a result, Penny must recognize:
  515.        
  516. b.      Ordinary income of $103,000, long-term capital gain of $10,000, and $4,000 short-term capital loss.
  517.  
  518.         34.     On January 1, Bobby and Alice own equally all of the stock of an electing S corporation called Prairie Dirt Delight. The dirt company has a $60,000 loss for a non-leap year. On the 219th day of the year, Bobby sells his one-half of the stock to his son, Paul. How much of the $60,000 loss, if any, is allocated to Bobby?
  519.        
  520. b.      $18,000.
  521.  
  522.         35.     On January 1, Bobby and Alice own equally all of the stock of an electing S corporation called Prairie Dirt Delight. The soil company has a $90,000 loss for a non-leap year. On the 219th day of the year, Bobby sells his one-half of the stock to his son, Naresh. How much of the $90,000 loss is allocated to Alice?
  523.        
  524.        
  525.        
  526. d.      $45,000.
  527.  
  528.  
  529.         36.     A calendar year C corporation has a $33,000 NOL in 2007, but elects S status for 2008 and generates an NOL of $30,000 in 2008.  At all times during 2008, the stock of the corporation was owned by the same 10 shareholders, each of whom owned 10% of the stock.  Kris, one of the 10 shareholders, has an adjusted stock basis of $2,200 at the beginning of 2008.  What amount of the loss, if any, is deductible by Kris in 2008?
  530.        
  531. b.      $2,200.
  532.  
  533.         37.     An S corporation in Lawrence, Kansas has a recognized built-in gain of $110,000 and taxable income of $90,000. The company has an $8,000 NOL carryforward from a C corporation year, and a $9,000 business credit carryforward from a C corporation year. The built-in gains tax liability is:
  534.        
  535. b.      $19,700.
  536.  
  537.         38.     A C corporation elects S status. The corporation may be subject to a built-in gains tax on which of the following assets?
  538. a.      Securities held for investment.
  539. b.      Goodwill.
  540. c.      Accounts receivables.
  541. d.      Investment land.
  542. e.      All of the above.
  543.  
  544.  
  545. ANS:    E
  546.  
  547.         39.     A cash basis calendar year C corporation in Athens, Georgia, has $100,000 of accounts receivable on the date of its conversion to an S corporation on February 14. By the end of the year, $60,000 of these receivables are collected. Calculate any built-in gains tax, assuming that there is sufficient taxable income.
  548.        
  549. b.      $21,000.
  550.  
  551.         40.     Lott Corporation in Macon, Georgia converts to S corporation status in 2008. Lott used the LIFO inventory method in 2007 and had a LIFO inventory of $420,000 (FIFO value of $550,000). How much tax must be added to the 2007 corporate tax liability, assuming that Lott is subject to a 35% tax rate.
  552.        
  553. b.      $11,375.
  554.  
  555.         41.     Apple, Inc., a cash basis S corporation in Orange, Texas, formerly was a C corporation. Apple has the following assets and liabilities on January 1, 2008, the date the S election is made.
  556.         Adjusted Basis  Fair Market Value
  557. Cash            $  200,000              $  200,000
  558. Accounts receivable             -0-             105,000
  559. Equipment                    110,000            100,000
  560. Land            1,800,000               2,500,000
  561. Accounts payable                -0-             110,000
  562.  
  563. During 2008, Apple collects the accounts receivable and pays the accounts payable. The land is sold for $3 million, and taxable income for the year is $590,000. What is Apple’s built-in gains tax?
  564.        
  565. b.      $206,500.
  566.  
  567.         42.     Pepper, Inc., an S corporation in Norfolk, Virginia, has revenues of $400,000, taxable interest of $380,000, operating expenses of $250,000, and deductions attributable to the interest income of $140,000. What is Pepper’s § 1375 penalty tax payable?
  568.        
  569. b.      $40,895.
  570.  
  571.  
  572.         43.     Excess net passive income of an S corporation is $40,000 and taxable income is $32,000. Assuming that there is $50,000 of accumulated earnings and profits from a C corporation year, calculate any passive income penalty tax.
  573. d.      $11,200.
  574.        
  575.        
  576.        
  577.  
  578.         44.     An S corporation may lose its S tax status:
  579.        
  580.        
  581.        
  582. d.      If any one of the shareholders transfers some of the stock to a nonqualified trust.
  583.  
  584.         45.     Which of the following items are increases on Schedule M-3 on the Form 1120S, for an S corporation with $230,000 in ordinary income?
  585. a.      An IRS agent’s determination of unreasonable compensation of $43,000.
  586. b.      Charitable contributions of $15,000.
  587. c.      Receipt of $220,000 in tax-exempt insurance proceeds.
  588. d.      Business gifts in excess of $25.
  589. e.      a and d
  590.  
  591.  
  592. ANS:    E
  593.  
  594.         46.     Edwards, Inc., an S corporation, distributes a machine to Mary, a majority shareholder. This asset has an adjusted basis of $30,000, but a fair market value of $80,000. Accumulated cost recovery deductions amount to $25,000. Edwards recognizes a gain of:
  595.        
  596.        
  597.        
  598. d.      $50,000.
  599.  
  600.         47.     An S corporation in Polly Beach, South Carolina, reports a recognized built-in gain of $95,000 and taxable income of $80,000. It holds a $7,000 NOL carryforward and a $9,000 business credit carryforward from a C corporation year. There are no earnings and profits from C corporation years. The built-in gains tax liability is:
  601.        
  602. b.      $16,550.
  603.  
  604.         48.     An S corporation with substantial AEP has operating revenues of $410,000, taxable interest income of $390,000, operating expenses of $260,000, and deductions attributable to the interest of $150,000. The possible investment income penalty tax payable is:
  605.        
  606. b.      $40,923.
  607.  
  608.         49.     At the end of 2008, Newt, an S corporation, has gross receipts of $190,000 and gross income of $170,000. Newt has AEP of $22,000 and taxable income of $30,000. There is passive investment income of $100,000, with $40,000 of expenses directly related to the production of passive investment income. Newt’s PII (§ 1375) penalty tax is:
  609.        
  610. b.      $10,500.
  611.  
  612.         50.     When Gail dies, she owns 100% of the stock of an S corporation, with an adjusted basis of $10,000 and FMV of $100,000. The AB and FMV of the assets inside the S corporation are the same amounts. Gail’s son Phil inherits all of the stock, but does not wish to continue the business. Therefore, the S corporation sells the assets, resulting in a $90,000 capital gain, and liquidates. Assuming that Phil is subject to a marginal tax rate of 30%, what taxes are due?
  613. a.      $0.
  614.  
  615.         51.     When an S corporation liquidates, which of its tax attributes disappear?
  616. a.      PTI.
  617. b.      AAA.
  618. c.      AEP.
  619. d.      Suspended losses.
  620. e.      All of the above.
  621.  
  622.  
  623. ANS:    E
  624.  
  625.         52.     An S corporation reports $10,000 DPGR and $7,500 of wages, and the S corporation’s QPAI is $2,500. Shelly has a 50% interest in the S corporation. All expenses that reduce DPGR are from wages, and all wages paid relate to DPGR. How much QPAI and wages are allocated to Shelly?
  626. a.      $1,250 QPAI and $3,750 wages.
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