Partnership Taxation Exam Preparation Guide
Course Introduction
Partnership Taxation covers the federal income tax laws and principles applicable to entities taxed as partnerships, including general partnerships, limited partnerships, and limited liability companies (LLCs). The course explores the formation, operation, and dissolution of partnerships, examining the allocation of income, losses, deductions, and credits among partners. Topics include contributions of property and services to partnerships, distributions of cash and property, sales and exchanges of partnership interests, and the effects of liabilities. Students will gain a foundation in applying the Internal Revenue Code and Treasury Regulations to common partnership transactions and develop skills in identifying and resolving tax issues that arise in a partnership context.
Recommended Textbook
South Western Federal Taxation 2009 Corporations Partnerships Estates and Trusts 32nd Edition
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Page 2
Chapter 1: Understanding and Working With the Federal Tax Law
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Q1) Under the concept of revenue neutrality,one taxpayer's increased tax liability can be another's tax savings.
A)True
B)False
Answer: True
Q2) Which citation is considered to be a legislative citation?
A)Ltr. Rul. 199952058.
B)Ann. 94-5, 1994-2 I.R.B. 39.
C)Reg. § 1.1014-1(c)(1).
D)§ 7519(c).
E)None of the above.
Answer: D
Q3) The Federal tax laws allow a taxpayer to claim a deduction for state and local income taxes.
A)True
B)False Answer: True
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Chapter 2: Corporations: Introduction and Operating Rules
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Q1) Schedule M-1 is used to reconcile net income as computed for financial accounting purposes with taxable income reported on the corporation's income tax return.
A)True
B)False
Answer: True
Q2) C corporations can elect fiscal years that are different from those of their shareholders,but personal service corporations (PSCs)are subject to substantial restrictions in the choice of a fiscal year.Why are the fiscal year choices of PSCs limited? Answer: The shareholder-employees in a PSC are largely responsible for generating the earnings of the entity.If the entity is not incorporated,there is no opportunity for tax deferral through election of different fiscal years for the owners and the entity.However,tax deferral for shareholder-employees would be possible if PSCs were not restricted in their choice of a fiscal year.
Q3) A corporation with no taxable income need not file a Form 1120.
A)True
B)False
Answer: False
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Chapter 3: Corporations: Special Situations
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Q1) Percentage depletion claimed in excess of the adjusted bases of property can be a tax preference item.
A)True
B)False
Answer: True
Q2) The AMT NOL deduction is limited to 80%.
A)True
B)False
Answer: False
Q3) Arlene,an advertising executive,pays a contractor to build a lodge on property she owns in Colorado.If Arlene sells the lodge,the proceeds (less the cost of the land)will be DPGR.
A)True
B)False
Answer: False
Q4) The percentage applicable for computing DPAD will ultimately increase to 9%.
A)True
B)False
Answer: True
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Chapter 4: Corporations: Organization and Capital Structure
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Sample Questions
Q1) Carmen and Carlos form White Corporation. Carmen transfers cash of $100,000 for 100 shares in White. Carlos transfers property (basis of $20,000 and fair market value of $80,000)and agrees to serve as manager of White Corporation for one year; in return,Carlos receives 100 shares in White. The value of Carlos's services is $20,000. White Corporation can deduct $20,000 as compensation expense for the value of the services Carlos will render.
A)True
B)False
Q2) Leonard transfers equipment (basis of $40,000 and fair market value of $100,000)for additional stock in Green Corporation. After the transfer,Leonard owns 90% of the stock. Leonard had claimed depreciation of $50,000 on the equipment prior to transferring it to Green Corporation. With respect to the transfer:
A)Leonard has ordinary income of $50,000.
B)Leonard has ordinary income of $50,000 and a § 1231 gain of $10,000.
C)Green Corporation has ordinary income of $50,000.
D)Green Corporation has a basis of $40,000 in the equipment and it will have no depreciation recapture if it later disposes of the equipment in a taxable transaction.
E)None of the above.
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Chapter 5: Corporations: Earnings and Profits and Dividend
Distributions
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Q1) During the year,Aqua Corporation distributes land to its sole shareholder.If the fair market value of the land is more than its adjusted basis,Aqua will recognize gain on the distribution.
A)True
B)False
Q2) Proceeds of life insurance received upon the death of a key employee (policy had no cash surrender value).
Q3) Rust Corporation has accumulated E & P of $30,000 on January 1,2008.In 2008,Rust Corporation had an operating loss of $40,000.It distributed cash of $20,000 to Andre,its sole shareholder,on December 31,2008.Rust Corporation's balance in its E & P account as of January 1,2009,is:
A)$30,000 deficit.
B)$10,000 deficit.
C)$0.
D)$30,000.
E)None of the above.
Q4) Federal income tax paid.
Q5) Loss on sale between related parties in 2008.
Q6) State income taxes paid in 2008.
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Chapter 6: Corporations: Redemptions and Liquidations
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Q1) Corbin sold 100 shares of § 306 stock (basis of $4,000)in Owl Corporation to Linda (an unrelated individual)for $20,000.When the § 306 stock was issued to Corbin,the stock had a value of $20,000,and Owl's E & P was $500,000.At the time of the stock sale to Linda,Owl has E & P of $600,000,and Corbin has 600 shares of common stock (basis of $76,000)in Owl.With respect to the § 306 stock sale:
A)Corbin's basis in the common stock after the sale is $76,000.
B)Owl Corporation reduces its E & P by $20,000.
C)Corbin has a $16,000 capital gain.
D)Corbin's basis in the common stock after the sale is $80,000.
E)None of the above.
Q2) Swan Corporation incurred $15,000 of accounting and legal fees in the redemption of stock from its shareholders.Swan can deduct the redemption expenditures as trade or business expenses under § 162.
A)True
B)False
Q3) Explain why the antistuffing rules were enacted to limit the deductibility of losses realized by a corporation upon liquidation.
Q4) Describe the requirements for and tax consequences of a § 338 election.
Q5) Discuss when stock is treated as § 306 stock.
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Chapter 7: Corporations: Reorganizations
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Q1) Corporate reorganizations must have economic consequences that are germane to the businesses that go beyond mere ____________________ ____________________.This judicial doctrine is called the ____________________ test.
Q2) In a ___________________ reorganization,liabilities can be treated as other property when the acquiring corporation does not use solely ___________________ as consideration.
Q3) Target liabilities assumed by the acquiring corporation in a "Type C" reorganization are considered boot when cash or other property is exchanged by the acquiring corporation. This is likely to destroy the tax-free treatment.
A)True B)False
Q4) The _________________________ ____________________ ____________________ ____________________ doctrine provides that if a shareholder has substantially the same investment after the restructuring as before,the transaction is not a taxable event.
Q5) The face amount of the bond received in a qualified reorganization is greater than the face amount of the bond exchanged.
Page 9
Q6) Define the different divisive "Type D" reorganizations.
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Chapter 8: Consolidated Tax Returns
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Sample Questions
Q1) Interest income received from U.S.Treasury bills
Q2) Consolidated group members each can use a different tax year end. A)True
B)False
Q3) If there is a balance in the excess loss account when a subsidiary's stock is sold,the balance is recognized as ____________________ ____________________.
Q4) The right to file on a consolidated basis is available to a group of corporations when they constitute a parent-subsidiary controlled group.
A)True
B)False
Q5) Congress is the chief source of the consolidated return rules. A)True B)False
Q6) How many consolidated tax returns are filed annually? What types of taxpayer do they represent?
Q7) Charitable contribution
Q8) Summarize how the SRLY rules limit the consolidated group's deduction of member NOLs.
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Q9) The § 382 NOL limitation rules override the ____________________ limits.
Chapter 9: Taxation of International Transactions
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Q1) The transfer of the assets of a foreign branch (of a U.S.corporation)to a newly formed foreign corporation is always tax deferred under § 351.
A)True
B)False
Q2) The presence of foreign losses that offset U.S.-source income in prior years can reduce the allowed FTC for the year by reducing the FTC limitation.
A)True
B)False
Q3) U.S.income tax treaties:
A)Provide for primary taxation with a tax credit for income sourced in one country and earned by a resident of the other treaty country.
B)Provide for taxation exclusively by the source country.
C)Provide that the country with the highest tax rate will be allowed exclusive tax collection.
D)Provide for taxation exclusively by the country of residence.
E)None of the above.
Q4) Tax rules governing U.S.taxation of foreign persons disposing of U.S.real property.
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Chapter 10: Partnerships: Formation, operation, and Basis
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Sample Questions
Q1) Susan and Sarah form a partnership by each making contributions of $30,000 cash to partnership capital.The partnership purchases an asset for $200,000,using the cash and financing the rest with a $140,000 recourse note.Susan is allocated 75% of partnership profits and losses until the date when the total partnership profits exceed total partnership losses.After that date,the profits and losses are shared equally between the two partners.The partners expect the partnership to have losses for the first three years of operations and profits thereafter.How will the recourse debt be shared between the partners for basis purposes immediately after the property is acquired?
Q2) Precontribution gain
Q3) Start-up costs
Q4) Julie is a real estate developer and owns property that is treated as inventory (not a capital asset)in her business.She contributed a parcel of this land (basis $60,000; fair market value $58,000)to a partnership,which will also hold it as inventory.After three years,the partnership sells the land for $56,000.The partnership will recognize a $4,000 ordinary loss on sale of the property.
A)True
B)False
Q5) Entity concept
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Chapter 11: Partnerships: Distributions, transfer of Interests, and Terminations
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Sample Questions
Q1) Land held by the partnership for investment purposes.
Q2) Your client has operated a sole proprietorship for several years,and is now interested in raising capital for expansion.He is considering forming either a C corporation or an LLC.
a.Describe the treatment of an LLC and discuss any advantages the LLC offers over the C corporation.
b.Assume instead the client has previously operated as a C corporation. Describe the tax consequences of converting to an LLC.
Q3) Liquidating distribution
Q4) Payment to a general partner for $10,000 of goodwill,where goodwill is provided for in the partnership agreement,and the partnership derives most of its income from services.
Q5) Inventory
Q6) Payment of $60,000 cash for a partner's share of unrealized receivables where the partner is a general partner,and most of the partnership's income is derived from services.
Q7) Marketable securities (not held as inventory).
Q8) Limited partner
Q9) Ordering rules Page 13
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Page 14
Chapter 12: S Corporations
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Sample Questions
Q1) Chris,the sole shareholder of Taylor,Inc.,elects during 2008 to terminate the S election,effective January 1,2009.As of the end of 2008,Taylor,Inc.,has AAA of $120,000 and OAA of $13,000.Chris receives a cash dividend of $130,000 on January 15,2009.If his stock basis is $220,000 before the distribution,calculate Chris' taxable amount and his ending stock basis.
Q2) 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:
A)$0.
B)$25,000.
C)$30,000.
D)$50,000.
E)Some other amount.
Q3) Which statement is incorrect?
A)S corporations are treated as corporations under state law.
B)S corporations for tax purposes are treated as partnerships.
C)Distributions of appreciated property are taxable to the S corporation.
D)The accumulated earnings tax does not apply to an S corporation.
E)None of the above.
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Chapter 13: Comparative Forms of Doing Business
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Sample Questions
Q1) Aaron purchases a building for $500,000 which is going to be used by his wholly-owned corporation.Which of the following statements are correct?
A)If Aaron contributes the building to the corporation, there will be no recognition under § 351 and a carryover basis of $500,000.
B)If Aaron leases the building to the corporation, lease-rental payments of $30,000 per year to Aaron will result in a $30,000 deduction for the corporation.
C)If Aaron leases the building to the corporation, lease-rental payments of $30,000 per year to Aaron will result in $30,000 of gross income for Aaron.
D)Leasing the building to the corporation will contribute to the tax avoidance objective of minimizing double taxation.
E)All of the above are correct.
Q2) Partnerships.
Q3) Lime,Inc.,has taxable income of $320,000.If Lime is a C corporation,its tax liability must be $108,050 [($50,000 * 15%)+ ($25,000 * 25%)+ ($25,000 * 34%)+ ($220,000 * 39%)].
A)True B)False
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Chapter 14: Exempt Entities
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Sample Questions
Q1) Bingo games
Q2) Arbor,Inc.,an exempt organization,leases land,building,and machinery to a tenant for a 5-year period.The rent income for the land and building is $400,000 per year and that from the related machinery is $80,000 per year.Expenses incurred by Arbor for the land and building during the year are $60,000 and those for the machinery are $36,000.Net unrelated business income,which includes the above rental income and expenses,is $800,000.Calculate Arbor's unrelated business taxable income.
Q3) Form 2758
Q4) Nice,Inc.,a § 501(c)(3)organization,inherited 100% of the stock of Aggressive,Inc.,a for-profit entity,at the beginning of the year.Although Nice plans on selling the stock of Aggressive,a buyer has not yet been located.Aggressive's taxable income for the year is $900,000.Aggressive distributed a dividend of $525,000 to Nice at the beginning of December.Determine the tax consequences for the taxable income and the dividend payment:
a.To Aggressive, Inc.
b.To Nice, Inc.
Q5) Corporate sponsorship payments
Q6) What are intermediate sanctions and to what types of exempt organizations do they apply?
Page 17
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Chapter 15: Multistate Corporate Taxation
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Q1) Indicate for each transaction whether a sales (S)or use (U)applies,or whether the transaction is nontaxable (N).Where the laws vary among various states,assume that the most common rules apply.All taxpayers are individuals.
a. A resident of State A purchases a computer in A.
b. A resident of State A purchases prescription medicine in A.
c. A resident of State B purchases a computer in A.
d. A church purchases office supplies in A.
e. A State A retailer purchases in B an item that will be in the inventory of its business.
Q2) Out-of-state sales that are not subject to tax in the destination state are pulled back into the origination state if that state has adopted a(n)____________________
Q3) ____________________ describe(s)the degree of business activity that must be present before a taxing jurisdiction has the right to impose a tax on an entity's income.
Q4) Typically exempt from the sales/use tax base is the purchase of seed and feed by a farmer.
A)True
B)False
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Page 18
Chapter 16: Tax Practice and Ethics
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Q1) Who are the top two personnel within the IRS? What are their chief responsibilities?
Q2) Fraudulent failure to file
Q3) If a taxpayer is audited by the IRS and is unwilling to accept the findings of the agent,how does the taxpayer's audit strategy change when the dispute is taken to the IRS Appeals Division? Hint: What are the "hazards of litigation?"
Q4) A CPA and a taxpayer can keep a document confidential from the IRS unless it relates to a ____________________ proceeding against the taxpayer.
Q5) The general statute of limitations extends for ____________________ years,while it is ____________________ years if a substantial understatement of income is found,and ____________________ years with respect to worthless securities.
Q6) Negligence in filing a return
Q7) One of the four operating divisions of the IRS deals exclusively with the largest corporations and partnerships.
A)True
B)False
Q8) Misstatement of withholding allowances
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Chapter 17: The Federal Gift and Estate Taxes
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Q1) Community property
Q2) The election of the alternate valuation date does include any income earned by the property after the date the deceased owner died.
A)True
B)False
Q3) Two brothers,Sam and Bob,acquire real estate as equal tenants in common.Of the purchase price of $100,000,Sam furnished $40,000 while Bob provided the balance.If Bob dies five years later when the real estate is worth $300,000,his estate includes $180,000 as to the property.
A)True
B)False
Q4) George leaves his share of the community property to Eva,his wife.Since the bequest involves community property,it does not qualify George's estate for a marital deduction. A)True
B)False
Q5) Using his own funds,Horace establishes a savings account designating ownership as follows: "Horace and Nadine as joint tenants with right of survivorship." Nadine predeceases Horace.
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Chapter 18: Family Tax Planning
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Q1) Surviving owners agree to purchase withdrawing owner's interest.
Q2) Neither the transfer by gift or by death avoids the recognition (for income tax purposes)of any deferred interest on U.S.savings bonds.
A)True
B)False
Q3) If depreciable property is transferred by gift,any recapture potential carries over to the donee.
A)True
B)False
Q4) No step-up in basis at death.
Q5) A donee's income tax basis in property received as a gift includes any gift tax paid by the donor.
A)True
B)False
Q6) Purchased a straight life annuity from an insurance company.
Q7) Purchased real estate designating herself and her children as equal tenants in common.
Q8) Purchased insurance policy that pays all funeral expenses.
Q9) A gift causes income tax consequences to the donor.
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Chapter 19: Income Taxation of Trusts and Estates
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Q1) The regular due date for a calendar-year trust to file its Form 1041 is April 15.
A)True
B)False
Q2) Entity accounting income is determined by the SEC.
Q3) The Eagleton Trust generated distributable net income (DNI)this year of $120,000,one-third of which was portfolio income,and the balance of which was exempt interest.Under the terms of the trust,Clara Eagleton is to receive an annual income distribution of $40,000.At the discretion of the trustee,additional distributions can be made to Clara or to Clark Eagleton III.This year,the trustee's distributions to Clara totaled $50,000.Clark received $100,000.How much of the trust's DNI is assigned to Clara?
A)$60,000.
B)$50,000.
C)$47,273.
D)$40,000.
Q4) The first step in deriving the fiduciary's taxable income is to determine its
Q5) Are estates and trusts taxed like individuals? Corporations? Partnerships? Explain.
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