Partnership Taxation Test Preparation
Course Introduction
Partnership Taxation explores the federal income tax treatment of partnerships and their partners, including the formation, operation, and dissolution of partnerships. The course covers the allocation of income, deductions, and tax credits among partners, the treatment of contributions and distributions, partnership liabilities, sales of partnership interests, and special rules such as those governing family partnerships and publicly traded partnerships. Students will analyze relevant sections of the Internal Revenue Code, Treasury Regulations, and case law, developing a solid understanding of both the practical and theoretical aspects of partnership taxation.
Recommended Textbook Principles of Taxation for Business and Investment Planning 2019 22nd Edition by Sally Jones
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1798 Verified Questions
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Page 2
Chapter 1: Taxes and Taxing Jurisdictions
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Sample Questions
Q1) Which of the following statements concerning property taxes is false?
A) Property taxes are ad valorem taxes.
B) Property taxes are the primary source of revenue for local governments.
C) Property taxes can be levied on realty or personalty.
D) None of the above is false.
Answer: D
Q2) The majority of state governments raise revenue from both personal and corporate income taxes.
A)True
B)False Answer: True
Q3) Ad valorem property taxes are the major source of revenue for local governments.
A)True
B)False
Answer: True
Q4) The Internal Revenue Code is written by the Internal Revenue Service.
A)True
B)False Answer: False
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Chapter 2: Policy Standards for a Good Tax
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Sample Questions
Q1) The declining marginal utility of income across individuals can be measured empirically.
A)True
B)False
Answer: False
Q2) Jurisdiction P recently increased its income tax rate. A taxpayer who reacts to the increase by working harder to earn more income is demonstrating the income effect of the rate increase.
A)True
B)False
Answer: True
Q3) A static forecast of the incremental revenue from a tax rate increase presumes that:
A) The tax base will not change because of the rate increase.
B) The tax base will increase by the same proportion as the rate increase.
C) The tax base will decrease by the same proportion as the rate increase.
D) The tax rate and the tax base are correlated.
Answer: A
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4
Chapter 3: Taxes as Transaction Costs
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Sample Questions
Q1) Borden Company has the choice between two investments. Investment 1 will generate a $27,000 deductible loss this year (year 0), $15,000 taxable income in year 1, and $60,000 taxable income in year 2. Investment 2 will generate $16,000 taxable income in years 0, 1, and 2. Assume that income and loss reflect before-tax cash flow for Borden. Use Appendix A to determine which opportunity Borden should choose if it has a 35% marginal tax rate and uses a 7% discount rate to compute NPV?
Answer: Investment 1 has a $25,613 NPV ($17,550 after-tax cash outflow for year 0 [$27,000 loss + $9,450 tax savings from loss deduction] + $9,116 discounted after-tax cash flow for year 1 [$9,750 × 0.935] + $34,047 discounted after-tax cash flow for year 2 [$39,000 × 0.873]). Opportunity 2 has a $29,203 NPV ($10,400 after-tax cash flow for year 0 + $9,724 discounted after-tax cash flow for year 1[$10,400 × 0.935] + $9,079 discounted after-tax cash flow for year 2[$10,400 × 0.873]). Therefore, Borden should choose Investment 2.
Q2) Mr and Mrs Bing purchased a business from Ms. Clark in an arm's length transaction. This transaction occurred in a private market.
A)True
B)False
Answer: True
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Page 5
Chapter 4: Maxims of Income Tax Planning
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Sample Questions
Q1) A taxpayer should prefer to pay a $100 implicit tax rather than a $100 explicit tax.
A)True
B)False
Q2) Which of the following statements about tax strategies is false?
A) Tax planners should prefer a simple strategy over a complex strategy.
B) Tax planners should prefer a flexible strategy over an inflexible strategy.
C) Tax planners should consider the tax consequences of a strategy to all parties.
D) None of the above is false.
Q3) Both the individual and the corporate federal income tax rates are progressive.
A)True
B)False
Q4) Planning opportunities are created when the tax law applies differentially to alternative business transactions.
A)True
B)False
Q5) The assignment of income doctrine constrains tax deferral strategies.
A)True
B)False
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Chapter 5: Tax Research
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Sample Questions
Q1) The U.S. Supreme Court:
A) Typically hears hundreds of tax cases each year.
B) May deny certiorari for a tax case because the court believes that the case involves a significant principle of law.
C) May grant certiorari for a tax case because two or more appellate courts have rendered conflicting opinions on the proper resolution of a tax issue.
D) Does not hear cases on tax issues.
Q2) Which of the following primary authorities is least likely to provide a detailed description of facts to which a researcher can compare his or her client's fact pattern?
A) Internal Revenue Code section
B) Treasury regulation
C) Revenue ruling
D) Tax Court decision
Q3) A research memorandum is typically less detailed than a client letter in terms of discussing supporting legal authorities.
A)True
B)False
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Chapter 6: Taxable Income from Business Operations
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Sample Questions
Q1) Taxpayers may adopt the cash receipts and disbursements method, the accrual method, or a hybrid method of accounting for tax purposes.
A)True
B)False
Q2) The after-tax cost of a dollar of business meal expense is 79 cents for a taxpayer with a 21% marginal tax rate.
A)True
B)False
Q3) Which of the following methods of accounting is never permissible for computing taxable income?
A) Cash receipts and disbursements method
B) Accrual method
C) Hybrid method that combines the cash and accrual methods
D) All of the above are permissible methods of accounting.
Q4) Using a 21% rate, compute B&B's tax expense per books and tax payable.
A) Tax expense per books $2,000,899; tax payable $2,169,340.
B) Tax expense per books $2,169,340; tax payable $2,000,899.
C) Tax expense per books $2,169,340; tax payable $2,169,340.
D) Tax expense per books $2,000,899; tax payable $2,000,899.
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Chapter 7: Property Acquisitions and Cost Recovery
Deductions
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Sample Questions
Q1) The uniform capitalization rules generally allow many indirect costs that were capitalized to inventory for financial statement purposes to be expensed and deducted for tax purposes.
A)True
B)False
Q2) Selkie Inc. paid a $2 million lump sum to purchase a business. According to the contract, the seller of the business is prohibited from engaging in a similar business for 18 months. Selkie allocated $300,000 of the purchase price to this covenant not to compete. Selkie may amortize the $300,000 over 15 years.
A)True
B)False
Q3) Which of the following statements about tax basis is false?
A) The tax basis in an asset can never be negative.
B) Tax basis represents the taxpayer's unrecovered dollars invested in the asset.
C) Tax basis reflects the asset's fair market value.
D) Every asset owned by the taxpayer has a tax basis.
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Chapter 8: Property Dispositions
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Sample Questions
Q1) Mr Beck sold real property with a $140,000 adjusted basis for $255,000. The buyer paid $148,000 cash and assumed Mr Beck's $107,000 mortgage on the realty. Mr Beck's realized gain or loss on sale is:
A) $115,000 gain
B) $8,000 gain
C) $33,000 loss
D) $0 gain or loss
Q2) The same asset may be an ordinary asset in the hands of one taxpayer and a capital asset in the hands of a different taxpayer.
A)True
B)False
Q3) Rizzi Corporation sold a capital asset with a $692,000 book and tax basis for $650,000 cash. This was Rizzi's only asset sale during the year. The sale results in:
A) $42,000 unfavorable permanent book/tax difference
B) $42,000 unfavorable temporary book/tax difference
C) $42,000 favorable permanent book/tax difference
D) No book/tax difference
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Chapter 9: Nontaxable Exchanges
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Sample Questions
Q1) Compute OMG's gain recognized on the exchange and its tax basis in the property received from Babex.
A) $175,000 gain recognized; $514,500 basis in Babex property.
B) No gain recognized; $689,500 basis in Babex property.
C) No gain recognized; $514,500 basis in Babex property.
D) None of the choices are correct.
Q2) Vincent Company transferred business realty (FMV $2.3 million; adjusted tax basis $973,000) to Massur Inc. in exchange for Massur common stock. Which of the following statements is false?
A) If Vincent does not recognize gain on its exchange of property for stock, Vincent's tax basis in its Massur stock is $973,000.
B) If Vincent recognizes gain on its exchange of property for stock, Vincent's tax basis in its Massur stock is $2.3 million.
C) If Vincent is not in control of Massur immediately after the exchange, both Vincent and Massur must recognize a $1,327,000 gain.
D) If Vincent is in control of Massur immediately after the exchange, Massur's tax basis in the transferred realty is $973,000.
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Chapter 10: Sole Proprietorships
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Sample Questions
Q1) What is Cramer's tax basis in its partnership interest?
A) $500,000
B) $1,200,000
C) $850,000
D) $650,000
Q2) In applying the basis limitation on the deduction of S corporation losses, which of the following statements is true?
A) The basis of a shareholder's interest in an S corporation, for purposes of limiting deductibility of losses, is computed in the same manner as a partner's basis in a partnership interest.
B) A shareholder is permitted to deduct losses against basis in any debt obligation from the S corporation to the shareholder.
C) If a shareholder's tax basis in a debt obligation is reduced, any gain resulting from the repayment of that obligation is considered ordinary income.
D) All of the above statements are false.
Q3) The earnings of a C corporation are taxed only at the shareholder level.
A)True
B)False
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12
Chapter 11: The Corporate Taxpayer
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Sample Questions
Q1) Westside, Inc. owns 15% of Innsbrook's common stock. This year, Westside generated $50,000 operating income and received $20,000 dividends from Innsbrook. Westside's taxable income is:
A) $60,000
B) $70,000
C) $50,000
D) $40,000
Q2) Brace, Inc. owns 90% of West common stock. This year, Brace generated $50,000 operating income and received $10,000 dividends from West. Brace's taxable income is:
A) $53,000
B) $58,000
C) $50,000
D) $52,000
Q3) A corporation with a June 30 fiscal year earns $1 million for its tax year ended June 30, 2018. Regular tax liability on this income is $210,000.
A)True B)False
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13
Chapter 12: The Choice of Business Entity
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Sample Questions
Q1) Using Appendix A and a 10% discount rate, calculate the present value of expected tax savings and costs on the business earnings for the first 3 years of operations if the business does not make an S corporation election.
A) $52,910 total tax cost
B) $88,250 total tax cost
C) $94,350 total tax cost
D) $118,800 total tax cost
Q2) Owners of a small business typically minimize tax costs and maximize cash flow by operating as a passthrough entity.
A)True
B)False
Q3) For the current tax year, Cuddle Corporation's $500,000 of taxable income is all considered to be personal holding company income. The corporation did not pay dividends. Which of the following statements is true?
A) The corporation will owe a personal holding company tax of $105,000.
B) The corporation will owe a regular tax of $100,000.
C) The corporation's total tax liability will be $210,000.
D) The corporation's total tax liability will be $200,000.
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Page 14
Chapter 13: Jurisdictional Issues in Business Taxation
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Sample Questions
Q1) Global Corporation, a U.S. multinational, began operations this year. Global had pretax U.S. source income and foreign source income as follows. Corporate tax rate schedule.
U.S. source income
\(\quad\)\(\quad\)\(\quad\)\(\quad\)\(\quad\)\(\quad\)\(\quad\)$ 700,000 Foreign source income-Country X \(\quad\)\(\quad\)100,000
Total
\(\quad\)\(\quad\)\(\quad\)\(\quad\)\(\quad\)\(\quad\)\(\quad\)\(\quad\) \(\quad\)\(\quad\)\(\quad\)\(\quad\)$ 800,000
Global paid $15,000 income tax to Country X. What is Global's U.S. tax liability if it takes the foreign tax credit?
A) $153,000
B) $168,000
C) $147,000
D) $238,000
Q2) In the United States, corporations are subject only to taxes imposed by the federal government.
A)True
B)False
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Page 15
Chapter 14: The Individual Tax Formula
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Sample Questions
Q1) Only natural and adopted children or stepchildren can be a qualifying child for tax purposes.
A)True
B)False
Q2) Ms. Dolan, a divorced individual, invited her elderly uncle, Martin, to move into her home in January of this year. Martin's only income item was $2,390 of taxable interest on a savings account. Ms. Dolan provides over 90% of her uncle's financial support. What is Ms. Dolan's filing status for the year?
A) Single
B) Head of household
C) Married filing separately
D) None of the above
Q3) An individual's taxable income equals adjusted gross income less the greater of the standard deduction or itemized deductions less the Section 199A deduction.
A)True
B)False
Q4) Adjusted gross income equals total income less itemized deductions.
A)True
B)False
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Chapter 15: Compensation and Retirement Planning
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Sample Questions
Q1) Which of the following statements regarding the tax consequences of wages is false?
A) Cash basis employees must report wages in the year payment is actually or constructively received.
B) Employees may elect whether or not their employer withholds income and payroll taxes from their wages.
C) Whether wages are currently deductible by the employer depends on the type of services rendered by the employee.
D) Wages paid to business employees are either deductible by the employer or treated as a capitalized cost.
Q2) An employee who receives restricted stock as compensation from a corporate employer must include the stock's fair market value in gross income in the year of receipt, even though the employee's ownership rights in the stock are nonvested.
A)True B)False
Q3) Qualified withdrawals from both traditional and Roth IRAs are tax-exempt.
A)True
B)False
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Chapter 16: Investment and Personal Financial Planning
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Sample Questions
Q1) If an investor sells some of the securities in a block but can't identify which ones were sold, she is presumed to have sold the securities with the latest acquisition date.
A)True
B)False
Q2) Unrecaptured Section 1250 gain is taxed at a maximum rate of 28%.
A)True
B)False
Q3) Mr Lee made the following transfers this year. Which of the transfers are treated as gifts for federal tax purposes?
A) Political contribution to the Democratic party
B) Charitable contribution to the United Way
C) Payment to a hospital for the medical expenses of his 39-year old son
D) None of the above are treated as gifts.
Q4) Gift tax is based on the donor's adjusted tax basis in the transferred property.
A)True
B)False
Q5) All gratuitous transfers of property are subject to gift tax.
A)True
B)False
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Chapter 17: Tax Consequences of Personal Activities
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Q1) Gary is a successful architect who also sings at weddings. This year, he received $5,400 fees from his singing and spent $6,250 on singing lessons, sheet music, and travel to the weddings. If Gary considers this activity as a hobby for federal tax purposes, which of the following statements is true?
A) Gary is not required to include the $5,400 in gross income.
B) Gary is allowed to deduct $5,400 of his expenses as an above-the-line deduction.
C) Gary is not allowed to deduct any of his hobby expenses.
D) Gary is allowed to deduct $5,400 of his expenses as an itemized deduction.
Q2) On February 1, Alan, a single individual, purchased his first personal residence for $400,000. On July 1, Alan sold this residence for $460,000 because he accepted a new job in another state. Consequently, Alan occupied the home for only 150 days. How much gain must Alan recognize?
A) $0
B) $8,630
C) $30,000
D) $51,370
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Page 19
Chapter 18: The Tax Compliance Process
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Q1) Which of the following statements about the U.S. Tax Court is false?
A) Tax Court judges are experts who specialize in the tax law.
B) Individuals can request a jury trial in the Tax Court.
C) The Tax Court is one of three courts of original jurisdiction for tax cases.
D) Both individual and corporate taxpayers can take their case to the Tax Court.
Q2) Mr Braco is an enrolled agent who prepares tax returns for a living. In preparing Mr and Mrs Colter's Form 1040, Mr Braco claimed a deduction based on an unreasonable legal position. Mr Braco's compensation for the return was $3,800. What is the consequence to Mr Braco if the IRS disallows the deduction?
A) The IRS can terminate Mr. Braco's status as an enrolled agent.
B) The IRS can impose a $1,900 penalty on Mr. Braco.
C) The IRS can impose a negligence penalty on the Colters but can't penalize Mr. Braco.
D) The IRS can impose a civil fraud penalty on Mr. Braco.
Q3) Employees who deliberately have excess income tax withheld from their salaries in order to receive a tax refund are making an interest-free loan of the excess withholding to the government.
A)True
B)False
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